Bryn Mawr Equipment Finance, Inc. (“BMEF”), a wholly-owned subsidiary of the Bank, is a Delaware corporation registered to do business in Pennsylvania. BMEF is a small-ticket equipment financing company servicingcompanyservicing customers nationwide from its Bryn MawrMontgomery County, Pennsylvania location. BMEF is a wholly-owned subsidiary of the Bank and had eightnine employees as of December 31, 2014.2016. BMEF employees are included in the Corporation’s employment numbers above.
BUSINESS COMBINATIONS
The Corporation and its subsidiaries engaged in the following business combinations since January 1, 20092012:
● | Royal Bancshares of Pennsylvania, Inc. (pending) |
On January 30, 2017, the Corporation entered into a definitive Agreement and Plan of Merger to acquire Royal Bancshares of Pennsylvania, Inc.
● | Robert J. McAllister Agency, Inc. |
On April 1, 2015, the acquisition of RJM, an insurance brokerage headquartered in Rosemont, Pennsylvania, was completed. Consideration paid totaled $1.0 million, of which $500 thousand was paid at closing, one contingent payment of $85 thousand (out of a maximum of $100 thousand) was paid during the second quarter of 2016 and four remaining contingent cash payments, not to exceed $100 thousand each, will be payable on each of March 31, 2017, March 31, 2018, March 31, 2019, and March 31, 2020, subject to the attainment of certain revenue targets during the related periods. The acquisition enhanced PCPB’s ability to offer comprehensive insurance solutions to both individual and business clients.
● | Continental Bank Holdings, Inc. |
On January 1, 2015, the merger of Continental Bank Holdings, Inc. (“CBH”) with and into the Corporation (the “CBH Merger”), and the merger of Continental Bank with and into the Bank, were completed. Consideration paid totaled $125.1 million, comprised of 3,878,383 shares (which included fractional shares paid in cash) of the Corporation’s common stock, the assumption of options to purchase Corporation common stock valued at $2.3 million and $1.3 million for the cash-out of certain warrants. The Merger initially added $424.7 million of loans, $181.8 million of investments, $481.7 million of deposits and ten new branches. The acquisition of CBH enabled the Corporation to expand its footprint into a significant portion of Montgomery County, Pennsylvania.
● | Powers Craft Parker and Beard, Inc. |
On October 1, 2014, the Bank acquired Powers Craft Parker & Beard, Inc. (“PCPB”), a full-serviceacquisition of PCPB, an insurance agencybrokerage headquartered in Rosemont, Pennsylvania.Pennsylvania, was completed. The consideration paid by the BankCorporation was $7.0 million, of which $5.4 million was paid at closing and two of three contingent cash payments, of $542 thousand each, were paid during the fourth quarter of which shall2015 and 2016. The remaining $542 thousand consists of one contingent payment, not to exceed $542 thousand, will be payable on eachthousand. The payment is subject to the attainment of September 30, 2015, September 30, 2016certain revenue targets during the applicable period. The addition enabled the Corporation to offer a full range of insurance products to both individual and September 30, 2017, based upon revenues for the related periods.business clients.
● | First Bank of Delaware |
On November 17, 2012, the Corporation acquiredacquisition of $70.3 million of deposits, $76.6 million of loans and a branch location from First Bank of Delaware (“FBD”)., by the Corporation was completed. The cash consideration paid by the Corporation totaled $10.6 million cash, paid at closing. The transaction, which was $10.6 million.accounted for as a business combination, enabled the Corporation to expand its banking arm into the Delaware market by opening its first full-service branch there, complementing its existing wealth management operations in the state.
● | Davidson Trust Company |
On May 25,15, 2012, the Corporation acquired theacquisition of Davidson Trust Company (“DTC”) by the Corporation was completed. The consideration paid by the Corporation totaled $10.5 million, of which $8.4 million was paid in cash, at closing and the remaining $2.1 million was paid in equal installments on November 14, 2012, May 14, 2013 and November 14, 2013. The transaction was accounted for cash and contingent cash consideration of $10.5 million.as a business combination. The acquisition of DTC initially increased the Corporation’Corporation’s wealth management division assets under management by approximately $1.0 billion. The structure of the Corporation’s existing wealth management segment allowed for the immediate integration of DTC and was able to take advantage of the various synergies that exist between the two companies.
Table of
On May 27, 2011, the Corporation acquired the Private Wealth Management Group of the Hershey Trust Company (“PWMG”) for stock, cash and contingent cash consideration of $18.4 million. The acquisition of DTC increased the Corporation’ wealth management assets under management by approximately $1.1 billion.
On July 1, 2010, the merger of First Keystone Financial, Inc. (“FKF”) with and into the Corporation and the two step merger of FKF’s wholly-owned subsidiary, First Keystone Bank with and into the Bank, were completed. The 85% stock and 15% cash transaction was valued at $31.3 million and increased the assets of the Corporation by $490 million.
SOURCES OF THE CORPORATION’S REVENUE
Continuing Operations
See Note 28, Segment29, “Segment Information,” in the Notes to the Consolidated Financial Statements located in this Annual Report on Form 10-K for additional information. The Corporation had no discontinued operations in 2012, 20132014, 2015 or 2014.
FINANCIAL INFORMATION ABOUT SEGMENTS
The financial information concerning the Corporation’s business segments is incorporated by reference to this Annual Report on Form 10-K in the section captioned Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Note 28, Segment29, “Segment Information,” in the Notes to Consolidated Financial Statements.
COMPETITION
The Corporation and its subsidiaries, including the Bank, compete for deposits, loans, and wealth management and insurance services in Delaware, Montgomery, Chester, Dauphin and Philadelphia counties in Pennsylvania and New Castle County in Delaware. The Corporation has a significant presence in the affluent Philadelphia suburbs along the Route 30 corridor, also known as the “Main Line”. The Corporation has 1925 full-service branches, eight limited-hour retirement community offices, one limited-service branch, one insurance agency and seven Life Care Communityfive wealth management offices.
The markets in which the Corporation competes are highly competitive. The Corporation’s direct competition in attracting deposits, loans and wealth management services comebusiness is mainly from commercial banks, investment management companies, savings and loan associations, trust companies and trust companies.insurance agencies. The Corporation also competes with credit unions, on-line banking enterprises, consumer finance companies, mortgage companies, insurance companies, stock brokerage companies, investment advisory companies and other entities providing one or more of the services and products offered by the Corporation.
The Corporation is able to compete with the other firms because of its consistent level of customer service, excellent reputation, professional expertise, fullcomprehensive product line, and its competitive rates and fees. However, there are several negative factors relative towhich can hinder the Corporation’s ability to compete with large institutions such as its limited number of locations, smaller advertising budget, lowerand technology budget, abilitybudgets, and a general inability to spread out fixed costs and other lack-of-scale type disadvantages.scale its operating platform, due to its size.
The acquisition of Lau Associates in July 2008 and the formation of BMTC-DE allowed the Corporation to establish a presence in the State of Delaware, where it competes for wealth management business. The November 2012 acquisition of certain loan and deposit accounts and a branch location from First Bank of Delaware enabled the Corporation to further expand its banking segment in the state ofgreater Wilmington, Delaware by establishing a full-service branch along the Route 202 corridor.area.
The acquisition of FKFFirst Keystone Financial, Inc. (“FKF”) in 2010 expanded the Corporation’s footprint significantly into Delaware County, Pennsylvania, and the acquisition the Private Wealth Management Group of PWMGthe Hershey Trust Company (“PWMG”) in 2011 enabled the Wealth Management Division to extend into central Pennsylvania by continuing to operate the former PWMG offices located in Hershey, Pennsylvania. The May 2012 acquisition of DTC allowed the Corporation to further expand its range of services and bring deeper market penetration in our core market area. The October 2014 acquisition of PCPB and the April 2015 acquisition of RJM enabled the Bank to expand its range of insurance solutions to both individuals as well as business clients. The January 2015 merger with CBH expanded the Corporation’s reach well into Montgomery County Pennsylvania, and gave the Bank the opportunity to have a branch office in the City of Philadelphia.
The Bank’s newest subsidiary, KCMI, which was established on October 1, 2015 enables the Corporation to compete on a national level for the specialized lending market that focuses on non-traditional small business borrowers with well-established businesses. In addition, BMEF competes on a national level for its equipment leasing customers.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The geographic information required by Item 101(d) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended, is impracticable for the Corporation to calculate; however, the Corporation does not believe that a material amount of revenues in any of the last three years was attributable to customers outside of the United States, nor does it believe that a material amount of its long-lived assets, in any of the past three years, was located outside of the United States.
SUPERVISION AND REGULATION
The Corporation and its subsidiaries, including the Bank, are subject to extensive regulation under both federal and state law. To the extent that the following information describes statutory provisions and regulations which apply to the Corporation and its subsidiaries, it is qualified in its entirety by reference to those statutory provisions and regulations:
Bank Holding Company Regulation
The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the “Act”). The Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. The Corporation and its non-bank subsidiaries are subject to the supervision of the Federal Reserve Board and the Corporation is required to file, with the Federal Reserve Board, an annual report and such additional information as the Federal Reserve Board may require pursuant to the Act and the regulations which implement the Act. The Federal Reserve Board also conducts inspections of the Corporation and each of its non-banking subsidiaries.
The Act requires each bank holding company to obtain prior approval by the Federal Reserve Board before it may acquire (i) direct or indirect ownership or control of more than 5% of the voting shares of any company, including another bank holding company or a bank, unless it already owns a majority of such voting shares, or (ii) all, or substantially all, of the assets of any company.
The Act also prohibits a bank holding company from engaging in, or from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or to managing or controlling banks as to be appropriate. The Federal Reserve Board has, by regulation, determined that certain activities are so closely related to banking or to managing or controlling banks, so as to permit bank holding companies, such as the Corporation, and its subsidiaries formed for such purposes, to engage in such activities, subject to obtaining the Federal Reserve Board’s approval in certain cases.
Under the Act, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension or provision of credit, lease or sale of property or furnishing any service to a customer on the condition that the customer provide additional credit or service to the bank, to its bank holding company or any other subsidiaries of its bank holding company or on the condition that the customer refrain from obtaining credit or service from a competitor of its bank holding company. Further, the Bank, as a subsidiary bank of a bank holding company, such as the Corporation, is subject to certain restrictions on any extensions of credit it provides to the Corporation or any of its non-bank subsidiaries, investments in the stock or securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower.
In addition, the Federal Reserve Board may issue cease-and-desist orders against bank holding companies and non-bank subsidiaries to stop actions believed to present a serious threat to a subsidiary bank. The Federal Reserve Board also regulates certain debt obligations and changes in control of bank holding companies.
Under the Federal Reserve Board policy,Deposit Insurance Act, as amended by the Dodd-Frank Act, a bank holding company is expectedrequired to actserve as a source of financial strength to each of its subsidiary banks and to commit resources, including capital funds during periods of financial stress, to support each such bank. Consistent with itsthis “source of strength” policyrequirement for subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the company’s capital needs, asset quality and overall financial condition.
Federal law also grants to federal banking agencies the power to issue cease and desist orders when a depository institution or a bank holding company or an officer or director thereof is engaged in or is about to
engage in unsafe and unsound practices. The Federal Reserve Board may require a bank holding company, such as the Corporation, to discontinue certain of its activities or activities of its other subsidiaries, other than the Bank, or divest itself of such subsidiaries if such activities cause serious risk to the Bank and are inconsistent with the Bank Holding Company Act or other applicable federal banking laws.
Federal Reserve Board and Pennsylvania Department of Banking and Securities RegulationsRegulation
The Corporation’s Pennsylvania state chartered bank, The Bryn Mawr Trust Company, is regulated and supervised by the Pennsylvania Department of Banking and Securities (the “Department of Banking”) and subject to regulation by The Federal Reserve Board and the FDIC. The Department of Banking and the Federal Reserve Board regularly examine the Bank’s reserves, loans, investments, management practices and other aspects of its operations and the Bank must furnish periodic reports to these agencies. The Bank is a member of the Federal Reserve System.
The Bank’s operations are subject to certain requirements and restrictions under federal and state laws, including requirements to maintain reserves against deposits, limitations on the interest rates that may be paid on certain types of deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. These regulations and laws are intended primarily for the protection of the Bank’s depositors and customers rather than holders of the Corporation’s stock.
The regulations of the Department of Banking restrict the amount of dividends that can be paid to the Corporation by the Bank. Payment of dividends is restricted to the amount of the Bank’s 20152016 net income plus its net retained earnings for the previous two years. As of December 31, 2014,2016, this amount was approximately $32.4 million plus net income to be earned in 2015.$15.9 million. However, the amount of dividends paid by the Bank cannot reduce capital levels below levels that would cause the Bank to be less than adequately capitalized. The payment of dividends by the Bank to the Corporation is the source on which the Corporation currently depends to pay dividends to its shareholders.
As a bank incorporated under and subject to Pennsylvania banking laws and insured by the FDIC, the Bank must obtain the prior approval of the Department of Banking and the Federal Reserve Board before establishing a new branch banking office. Depending on the type of bank or financial institution, a merger of the Bank with another institution is subject to the prior approval of one or more of the following: the Department of Banking, the FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency and any other regulatory agencies having primary supervisory authority over any other party to the merger. An approval of a merger by the appropriate bank regulatory agency would depend upon several factors, including whether the merged institution is a federally insured state bank, a member of the Federal Reserve System, or a national bank. Additionally, any new branch expansion or merger must comply with branching restrictions provided by state law. The Pennsylvania Banking Code permits Pennsylvania banks to establish branches anywhere in the state.
On October 24, 2012, Pennsylvania enacted three new laws known as the “Banking Law Modernization Package,” all of which became effective on December 24, 2012. The intended goal of the new law, which applies to the Bank, is to modernize Pennsylvania’s banking laws and to reduce regulatory burden at the state level where possible, given the increased regulatory demands at the federal level as described below.
The new law also permits banks as well as the Department of Banking to disclose formal enforcement actions initiated by the Department of Banking, clarifies that the Department of Banking has examination and enforcement authority over subsidiaries as well as affiliates of regulated banks and bolsters the Department of Banking’s enforcement authority over its regulated institutions by clarifying its ability to remove directors, officers and employees from institutions for violations of laws or orders or for any unsafe or unsound practice or breach of fiduciary duty. Changes to existing law also allow the Department of Banking to assess civil money penalties of up to $25,000 per violation.
The new law also sets a new standard of care for bank officers and directors, applying the same standard that exists for non-banking corporations in Pennsylvania. The standard is one of performing duties in good faith, in a manner reasonably believed to be in the best interests of the institutions and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. Directors may rely in good faith on information, opinions and reports provided by officers, employees, attorneys, accountants, or committees of the board, and an officer may not be held liable simply because he or she served as an officer of the institution.
Deposit Insurance Assessments
The deposits of the Bank are insured by the FDIC up to the limits set forth under applicable law and are subject to deposit insurance premium assessments. The FDIC imposes a risk based deposit premium assessment system, under which the amount of FDIC assessments paid by an individual insured depository institution, such as the Bank, is based on the level of risk incurred in its activities.
In addition to deposit insurance assessments, banks are subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. The FDIC sets the Financing Corporation assessment rate every quarter. The Financing Corporation assessment for the fourth quarter of 20142016 was an annual rate of 0.600.56 basis points, which resulted in a $115 thousandpoints. Payments of the FICO assessment payment byduring the Bank in 2014.twelve months ended December 31, 2016 totaled $154 thousand.
Government Monetary Policies
The monetary and fiscal policies of the Federal Reserve Board and the other regulatory agencies have had, and will probably continue to have, an important impact on the operating results of the Bank through their power to implement national monetary policy in order to, among other things, curb inflation or combat a recession. The monetary policies of the Federal Reserve Board may have a major effect upon the levels of the Bank’s loans, investments and deposits through the Federal Reserve Board’s open market operations in United States government securities, through its regulation of, among other things, the discount rate on borrowing of depository institutions, and the reserve requirements against depository institution deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
The earnings of the Bank and, therefore, of the Corporation are affected by domestic economic conditions, particularly those conditions in the trade area as well as the monetary and fiscal policies of the United States government and its agencies.
Safety and Soundness
The Federal Reserve Board also has authority to prohibit a bank holding company from engaging in any activity or transaction deemed by the Federal Reserve Board to be an unsafe or unsound practice. The payment of dividends could, depending upon the financial condition of the Bank or Corporation, be such an unsafe or unsound practice and the regulatory agencies have indicated their view that it generally would be an unsafe and unsound practice to pay dividends except out of current operating earnings. The ability of the Bank to pay dividends in the future is presently and could be further influenced, among other things, by applicable capital guidelines discussed below or by bank regulatory and supervisory policies. The ability of the Bank to make funds available to the Corporation is also subject to restrictions imposed by federal law. The amount of other payments by the Bank to the Corporation is subject to review by regulatory authorities having appropriate authority over the Bank or Corporation and to certain legal limitations.
Capital Adequacy
Federal and state banking laws impose on banks certain minimum requirements for capital adequacy. Federal banking agencies have issued certain “risk-based capital” guidelines, and certain “leverage” requirements on member banks such as the Bank. By policy statement, the Banking Department also imposes those
requirements on the Bank. Banking regulators have authority to require higher minimum capital ratios for an individual bank or bank holding company in view of its circumstances.
Minimum Capital Ratios.Ratios: The risk-based guidelines require all banks to maintain twothree “risk-weighted assets” ratios. The first is a minimum ratio of total capital (“Tier 1” and “Tier 2” capital) to risk-weighted assets equal to 8.00%; the second is a minimum ratio of “Tier 1” capital to risk-weighted assets equal to 4.00%6.00%; and the third is a minimum ratio of “Common Equity Tier 1” capital to risk-weighted assets equal to 4.5%. Assets are assigned to five risk categories, with higher levels of capital being required for the categories perceived as representing greater risk. In making the calculation, certain intangible assets must be deducted from the capital base. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.
The risk-based capital rules also account for interest rate risk. Institutions with interest rate risk exposure above a normal level would be required to hold extra capital in proportion to that risk. A bank’s exposure to declines in the economic value of its capital due to changes in interest rates is a factor that the banking agencies will consider in evaluating a bank’s capital adequacy. The rule does not codify an explicit minimum capital charge for interest rate risk. The Corporation currently monitors and manages its assets and liabilities for interest rate risk, and believes its interest rate risk practices are prudent and are in-line with industry standards. The Corporation is not aware of any new or proposed rules or standards relating to interest rate risk that would materially adversely affect our operations.
The “leverage” ratio rules require banks which are rated the highest in the composite areas of capital, asset quality, management, earnings, liquidity and sensitivity to market risk to maintain a ratio of “Tier 1” capital to “adjusted total assets” (equal to the bank’s average total assets as stated in its most recent quarterly Call Report filed with its primary federal banking regulator, minus end-of-quarter intangible assets that are deducted from Tier 1 capital) of not less than 3.00%4.00%. For banks which are not the most highly rated, the minimum “leverage” ratio will range from 4.00% to 5.00%, or higher at the discretion of the bank’s primary federal regulator, and is required to be at a level commensurate with the nature of the level of risk of the bank’s condition and activities.
For purposes of the capital requirements, “Tier 1” or “core” capital is defined to include common stockholders’ equity and certain noncumulative perpetual preferred stock and related surplus. “Tier 2” or “qualifying supplementary” capital is defined to include a bank’s allowance for loan and lease losses up to 1.25% of risk-weighted assets, plus certain types of preferred stock and related surplus, certain “hybrid capital instruments” and certain term subordinated debt instruments. “Common Equity Tier 1” capital is defined as the sum of common stock instruments and related surplus net of treasury stock, retained earnings, accumulated other comprehensive income, and qualifying minority interests.
On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable
In addition to the Corporation and the Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012 and implement the “Basel III” regulatory capital reforms and changesrequirements discussed above, banks are required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to the Corporation and the Bank under the final rules are:
The final rules also establishmaintain a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital.
The capital conservation buffer will beis being phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019:
(i) | a common equity Tier 1 capital ratio of 7.0%; |
(ii) | a Tier 1 capital ratio of 8.5%; and |
(iii) | a total capital ratio of 10.5%. |
Under the final rules, institutions
Institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if itstheir capital level fallslevels fall below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Basel III provided discretion for
The Bank’s and the Corporation’s regulators have the power to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclicalthis buffer to be appliedis only applicable to “advanced approach banks” ( i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Corporation and the Bank. The finalcapital requirement rules, alsowhich were finalized in July 2013 implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will beare being phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Corporation) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
In addition, the final rules provide for smaller banking institutions (less than $250 billion in consolidated assets) were granted an opportunity to make a one-time election to opt out of including most elements of accumulated other comprehensive income in regulatory capital. Importantly, the opt-out excludes from regulatory capital not only unrealized gains and losses on available-for-sale debt securities, but also accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit postretirement plans. The Corporation elected to opt-out, and indicated its election must be elected on the first Call Report filed after January 1, 2015.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs
● | Prompt Corrective Action |
The final rules set forth certain changes for the calculation of risk-weighted assets, which we are required to utilize as of January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses:
Federal banking law mandates certain “prompt corrective actions,” which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a Federally regulated depository institution falls. Regulations have been adopted by the Federal bank regulatory agencies setting forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution that is not adequately capitalized.
Under the rules, an institution will be deemedprompt corrective action requirements, which are designed to be “adequately capitalized” or better if it exceedscomplement the minimum Federal regulatory capital requirements. However, it will be deemed “undercapitalized” if it failsconservation buffer, insured depository institutions are required to meet the minimumfollowing capital level requirements “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%, and “critically undercapitalized” if the institution has a ratio of tangible equityin order to total assets that is equal to or less than 2.0%. The rules require anqualify as “well capitalized:”
(i) | a new common equity Tier 1 capital ratio of 6.5%; |
(ii) | a Tier 1 capital ratio of 8% (increased from 6%); |
(iii) | a total capital ratio of 10% (unchanged from current rules); and |
(iv) | a Tier 1 leverage ratio of 5% (increased from 4%). |
An undercapitalized institution is required to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on the payment of dividends, a limitation on asset growth and expansion, and in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person”. Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership. The Bank is currently regarded as “well capitalized” for regulatory capital purposes. See Note 2526 in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding the Bank’s and Corporation’s regulatory capital ratios.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (“GLB Act”) repealed provisions of the Glass-Steagall Act, which prohibited commercial banks and securities firms from affiliating with each other and engaging in each other’s businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated.
The GLB Act amended the Glass-Steagall Act to allow new “financial holding companies” (“FHC”) to offer banking, insurance, securities and other financial products to consumers. Specifically, the GLB Act amends section 4 of the Act in order to provide for a framework for the engagement in new financial activities. A bank holding company may elect to become a financial holding company if all its subsidiary depository institutions are well-capitalized and well-managed. If these requirements are met, a bank holding company may file a certification to that effect with the Federal Reserve Board and declare that it elects to become a FHC. After the certification and declaration is filed, the FHC may engage either de novo or through an acquisition in any activity that has been determined by the Federal Reserve Board to be financial in nature or incidental to such financial activity. Bank holding companies may engage in financial activities without prior notice to the Federal Reserve Board if those activities qualify under the new list in section 4(k) of the Act. However, notice must be given to the Federal Reserve Board, within 30 days after the FHC has commenced one or more of the financial activities. The Corporation has not elected to become an FHC at this time.
Under the GLB Act, a bank subject to various requirements is permitted to engage through “financial subsidiaries” in certain financial activities permissible for affiliates of FHC’s. However, to be able to engage in such activities a bank must continue to be “well-capitalized” and well-managed and receive at least a “satisfactory” rating in its most recent Community Reinvestment Act examination.
Community Reinvestment Act
The Community Reinvestment Act requires banks to help serve the credit needs of their communities, including providing credit to low and moderate income individuals and areas. Should the Bank fail to serve adequately the communities it serves, potential penalties may include regulatory denials to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions.
Privacy of Consumer Financial Information
The GLB Act also contains a provision designed to protect the privacy of each consumer’s financial information in a financial institution. Pursuant to the requirements of the GLB Act, the financial institution regulators haveConsumer Financial Protection Bureau has promulgated final regulations intended to better protect the privacy of a consumer’s financial information maintained in financial institutions. The regulations are designed to prevent financial institutions, such as the Bank, from disclosing a consumer’s nonpublic personal information to third parties that are not affiliated with the financial institution.
However, financial institutions can share a customer’s personal information or information about business and corporations with their affiliated companies. The regulations also provide that financial institutions can disclose nonpublic personal information to nonaffiliated third parties for marketing purposes but the financial institution must provide a description of its privacy policies to the consumers and give the consumers an opportunity to opt-out of such disclosure and, thus, prevent disclosure by the financial institution of the consumer’s nonpublic personal information to nonaffiliated third parties.
These privacy regulations will affect how consumer’s information is transmitted through diversified financial companies and conveyed to outside vendors. The Bank does not believe the privacy regulations will have a material adverse impact on its operations in the near term.
Consumer Protection Rules – Sale of Insurance Products
In addition, as mandated by the GLB Act, the regulators have published consumer protection rules which apply to the retail sales practices, solicitation, advertising or offers of insurance products, including annuities, by depository institutions such as banks and their subsidiaries.
The rules provide that before the sale of insurance or annuity products can be completed, disclosures must be made that state (i) such insurance products are not deposits or other obligations of or guaranteed by the FDIC or any other agency of the United States, the Bank or its affiliates; and (ii) in the case of an insurance product that involves an investment risk, including an annuity, that there is an investment risk involved with the product, including a possible loss of value.
The rules also provide that the Bank may not condition an extension of credit on the consumer’s purchase of an insurance product or annuity from the Bank or its affiliates or on the consumer’s agreement not to obtain or a prohibition on the consumer obtaining an insurance product or annuity from an unaffiliated entity.
The rules also require formal acknowledgement from the consumer that such disclosures have been received. In addition, to the extent practical, the Bank must keep insurance and annuity sales activities physically separate from the areas where retail banking transactions are routinely accepted from the general public.
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) addresses, among other matters, increased disclosures; audit committees; certification of financial statements by the principal executive officer and the principal financial officer; evaluation by management of our disclosure controls and procedures and our internal control over financial reporting; auditor reports on our internal control over financial reporting; forfeiture of bonuses and profits made by directors and senior officers in the twelve (12) month period covered by restated financial statements; a prohibition on insider trading during Corporation stock blackout periods; disclosure of off-balance sheet transactions; a prohibition applicable to companies, other than federally insured financial institutions, on personal loans to their directors and officers; expedited filing of reports concerning stock transactions by a company’s directors and executive officers; the formation of a public accounting oversight board; auditor independence; and increased criminal penalties for violation of certain securities laws.
USA PATRIOT Act of 2001
The PatriotUSA PATRIOT Act of 2001, which was enacted in the wake of the September 11, 2001 attacks, includes provisions designed to combat international money laundering and advance the U.S. government’s war against terrorism. The PatriotUSA PATRIOT Act and the regulations which implement it contain many obligations which must be satisfied by financial institutions, including the Bank. Those regulations impose obligations on financial institutions, such as the Bank, to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. The failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the financial institution.
Government Policies and Future Legislation
As the enactment of the GLB Act and the Sarbanes-Oxley Act confirm, from time to time various laws are passed in the United States Congress as well as the Pennsylvania legislature and by various bank regulatory authorities which would alter the powers of, and place restrictions on, different types of banks and financial organizations. It is impossible to predict whether any potential legislation or regulations will be adopted and the impact, if any, of such adoption on the business of the Corporation or its subsidiaries, especially the Bank.
With the 2016 U.S. presidential election resulting in a new President and a new political party controlling the Executive Branch of the Federal Government, the new administration may bring changes to the U.S. financial services industry that we cannot now predict. Public comments by President Donald J. Trump may suggest his intent to change policies and regulations that implement current federal law, including those implementing the Dodd-Frank Wall Street Reform and Consumer Protection ActAct. At this point we are unable to determine what impact the Trump Administration’s policy changes might have on the Corporation or the Bank.
The federal government is considering a variety of reforms related to banking and the financial industry. Among those reforms is the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), that
The Dodd-Frank Act was enactedpassed by Congress on July 15, 2010, and was signed into law by President Obama on July 21, 2010. The Dodd-Frank ActIt is intended to promote financial stability in the U.S., reduce the risk of bailouts and protect against abusive financial services practices by improving accountability and transparency in the financial system and ending the concept of “too big to fail” institutions by giving regulators the ability to liquidate large financial institutions. It is the broadest overhaul of the U.S. financial system since the Great Depression and the overall impact on the Corporation and its subsidiaries is unknown at this time.a general increase in costs related to compliance with the Dodd-Frank Act.
The Dodd-Frank Act has significantly changed the current bank regulatory structure and will affect into the immediate future the lending and investment activities and general operations of depository institutions and their holding companies.
The
As discussed earlier, the Dodd-Frank Act requires the FRBFederal Reserve Board to establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository institutions; the components of Tier 1 capital would beare restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred securities are excluded from Tier 1 capital unless (i) such securities are issued by bank holding companies with assets of less than $500 million or (ii) such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to implement and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks, among other things, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the enforcement authority of, their prudential regulators.
The Dodd-Frank Act made many other changes in banking regulation. ThoseThese include allowing depository institutions, for the first time, to pay interest on business checking accounts, requiring originators of securitized loans to retain a percentage of the risk for transferred loans, establishing regulatory rate-setting for certain debit card interchange fees and establishing a number of reforms for mortgage originations. Effective October 1, 2011, the debit-card interchange fee was capped at $0.21 per transaction, plus an additional 5 basis point charge to cover fraud losses. These fees are much lower than the current market rates. Although theThe regulation only impacts banks with assets above $10.0 billion, we believe that the provisions could result in a reduction in interchange revenue in the future.billion.
The Dodd-Frank Act also broadened the base for FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that it is based on the average consolidated total assets less tangible equity capital of an insured institution instead of deposits. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.
All
Although many of the provisions of the Dodd-Frank Act are notcurrently effective, there remain some regulations yet effective, and the Dodd-Frank Act requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years.be implemented. It is therefore difficult to predict at this time what impact the Dodd-Frank Act and implementing regulations will have on the Corporation and the Bank. The changes resulting from the Dodd-Frank Act could limit our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise materially and adversely affect us. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements could also materially and adversely affect us.
ITEM 1A. | RISK FACTORS |
Investment in the Corporation’s Common Stock involves risk. The market price of the Corporation’s Common Stock may fluctuate significantly in response to a number of factors including those that follow. The following list contains certain risks that may be unique to the Corporation and to the banking industry. The following list of risks should not be viewed as an all-inclusive list or in any particular order.
Increases in FDIC insurance premiums may adversely affect theThe Corporation’s earnings
In response to the impact of economic conditions since 2008 on banks generallyperformance and on the FDIC deposit insurance fund, the FDIC changed its risk-based assessment system and increased base assessment rates. On November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted insurance fund. In February 2011, as required under the Dodd-Frank Act, the FDIC issued a ruling pursuant to which the assessment base against which FDIC assessments for deposit insurance are made will change. Instead of FDIC insurance assessments being based upon an insured bank’s deposits, FDIC insurance assessments are now generally based on an insured bank’s total average assets minus average tangible equity. With this change, the Corporation expects that its overall FDIC insurance cost will decline. However, a change in the risk categories applicable to the Corporation’s bank subsidiaries, further adjustments to base assessment rates and any special assessments could have a material adverse effect on the Corporation.
The Dodd-Frank Act also requires that the FDIC take steps necessary to increase the level of the Deposit Insurance Fund to 1.35% of total insured deposits by September 30, 2020. In October 2010, the FDIC adopted a Restoration Plan to achieve that goal. Certain elements of the Restoration Plan are left to future FDIC rulemaking, as are the potential for increases to the assessment rates, which may become necessary to achieve the targeted level of the DIF. Future FDIC rulemaking in this regard may have a material adverse effect on the Corporation.
The steadiness of other financial institutions could have detrimental effects on our routine funding transactions
Routine funding transactionscondition may be adversely affected by the actionsregional economic conditions and soundness of other financial institutions. Financial service institutionsreal estate values
The Bank’s loan and deposit activities are interrelated as a result of trading, clearing, lending, borrowing or other relationships. Transactions are executed on a daily basis with different industries and counterparties, and routinely executed with counterpartieslargely based in the financial services industry.eastern Pennsylvania. As a result, the Corporation’s consolidated financial performance depends largely upon economic conditions in this eastern Pennsylvania region. This region experienced deteriorating local economic conditions during 2008 through 2011, and a rumor, default or failures within the financial services industry could lead to market-wide liquidity problems which in turn could materially impact the financial conditionresumption of the Corporation.
The Corporation may need to raise additional capitalthis deterioration in the future and such capital may not be available when needed or at all
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations and may need to raise additional capital in the future to provide us with sufficient capital resources to meet our regulatory and business needs. We cannot assure you that such capital will be available to us on acceptable terms or at all. If the Corporation is unable to generate sufficient additional capital though its earnings, or other sources, it would be necessary to slow earning asset growth and or pass up possible acquisition opportunities, which may result in a reduction of future net income growth. Further, an inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations.
Financial turmoil may increase our other-than-temporary-impairment (“OTTI”) charges
If the Corporation incurs OTTI charges that result in its falling below the “well capitalized” regulatory requirement, the it may need to raise additional capital.
If sufficient wholesale funding to support earning asset growth is unavailable, the Corporation’s net income may decrease
The Corporation recognizes the need to grow both wholesale and non-wholesale funding sources to support earning asset growth and to provide appropriate liquidity. The Corporation’s asset growth over the past few years has been funded with various forms of wholesale funding which is defined as wholesale deposits (primarily certificates of deposit) and borrowed funds (FHLB advances, Federal advances and Federal fund line borrowings). Wholesale funding at December 31, 2014 represented approximately 21.5% of total funding compared to 16.2% at December 31, 2013 and 12.1% at December 31, 2012. Wholesale funding is subject to certain practical limits such as the FHLB’s Maximum Borrowing Capacity and the Corporation’s liquidity targets. Additionally, regulators might consider wholesale funding beyond certain points to be imprudent and might suggest that future asset growth be reduced or halted.
In the absence of wholesale funding sources, the Corporation might need to reduce earning asset growth through the reduction of current production, sale of assets, and/or the participating out of future and current loans or leases. This in turn might reduce future net income of the Corporation.
The amount loaned to us is generally dependent on the value of the collateral pledged and the Corporation’s financial condition. These lenders could reduce the percentages loaned against various collateral categories, eliminate certain types of collateral and otherwise modify or even terminate their loan programs, particularly to the extent they are required to do so because of capital adequacy or other balance sheet concerns, or if disruptions
in the capital markets occur. Any change or termination of our borrowings from the FHLB, the Federal Reserve or correspondent banks may have an adverse effect on our liquidity and profitability.
The capital and credit markets are volatile and could cause the price of our stock to fluctuate
The capital and credit markets periodically experience volatility. In some cases, the markets may produce downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength. Market volatility may result in a material adverse effect on our business, financial condition and results of operations and/or our ability to access capital. Several factors could cause the market price for our common stock to fluctuate substantially in the future, including without limitation:
A return to recessionary conditions or status quo in the current economic environment could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.
Falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in 2008 that followed a national home price peak in mid-2006, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines inregional real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and a return to high unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
Previously enacted and potential future legislation, including legislation to reform the U.S. financial regulatory system,market could adversely affect our business
Market conditions have resulted in creation of various programs by the United States Congress, the Treasury, the Federal Reserve and the FDIC that were designed to enhance market liquidity and bank capital. As these programs expire, are withdrawn or reduced, the impact on the financial markets, banks in general and their customers is unknown. This could have the effect of, among other things, reducing liquidity, raising interest rates, reducing fee revenue, limiting the ability to raise capital, all of which could have an adverse impact on the financial condition of the Bank and the Corporation.
Additionally, the federal government has passed a variety of other reforms related to banking and the financial industry including, without limitation, the Dodd-Frank Act. The Dodd-Frank Act imposes significant regulatory and compliance changes. Effects of the Dodd-Frank Act on our business include:
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds, commonly referred to as the Volker Rule. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.
Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act could limit our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise materially and adversely affect us. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements could also materially and adversely affect us.
The Consumer Financial Protection Bureau (“CFPB”) may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive practices, which may directly impact the business operations of depository institutions offering consumer financial products or services including the Bank.
The CFPB has broad rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service (“UDAP authority”). The potential reach of the CFPB’s broad new rulemaking powers and UDAP authority on the operations of financial institutions offering consumer financial products or services including the Bank is currently unknown.
Potential losses incurred in connection with possible repurchases and indemnification payments related to mortgages that we have sold into the secondary market may require us to increase our financial statement reserves in the future.
We engage in the origination and sale of residential mortgages into the secondary market. In connection with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. These representations and warranties vary based on the nature of the transaction and the purchaser’s or insurer’s requirements but generally pertain to the ownership of the mortgage loan, the real property securing the loan and
compliance with applicable laws and applicable lender and government-sponsored entity underwriting guidelines in connection with the origination of the loan. While we believe our mortgage lending practices and standards to be adequate, we have settled a small number of claims we consider to be immaterial; however we may receive requests in the future, which could be material in volume. If that were to happen, we could incur losses in connection with loan repurchases and indemnification claims, and any such losses might exceed our financial statement reserves, requiring us to increase such reserves. In that event, any losses we might have to recognize and any increases we might have to make to our reserves could have a material adverse effect on our business, financial position, results of operations or cash flows.
Accounting standards periodically change and the application of our accounting policies and methods may require the Corporation to make estimates about matters that are uncertain
The regulatory bodies that establish accounting standards, including, among others, the Financial Accounting Standards Board and the SEC, periodically revise or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial statements. The effect of such revised or new standards on our financial statements can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
In addition, the Corporation must exercise judgment in appropriately applying many of our accounting policies and methods so they comply with generally accepted accounting principles. In some cases, the Corporation may have to select a particular accounting policy or method from two or more alternatives. In some cases, the accounting policy or method chosen might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a different policy or method. Accounting policies are critical to fairly presentingharm our financial condition and results of operations because of the geographic concentration of loans within this regional area and because a large percentage of our loans are secured by real property. If there is further decline in real estate values, the collateral for the Corporation’s loans will provide less security. As a result, the Corporation’s ability to recover on defaulted loans by selling the underlying real estate will be diminished, and the Bank will be more likely to suffer losses on defaulted loans.
Additionally, a significant portion of the Corporation’s loan portfolio is invested in commercial real estate loans. Often in a commercial real estate transaction, repayment of the loan is dependent on rental income. Economic conditions may affect the tenant’s ability to make rental payments on a timely basis, and may requirecause some tenants not to renew their leases, each of which may impact the Corporationdebtor’s ability to make difficult, subjective or complex judgments about matters that are uncertain.loan payments. Further, if expenses associated with commercial properties increase dramatically, the tenant’s ability to repay, and therefore the debtor’s ability to make timely loan payments, could be adversely affected.
All of these factors could increase the amount of the Corporation’s non-performing loans, increase its provision for loan and lease losses and reduce the Corporation’s net income.
Rapidly changing interest rate environment could reduce the Corporation’s net interest margin, net interest income, fee income and net income
Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a significant part of the Corporation’s net income. Interest rates are key drivers of the Corporation’s net interest margin and subject to many factors beyond the control of the Corporation. As interest rates change, net interest income is affected. Rapidly increasing interest rates in the future could result in interest expense increasing faster than interest income because of divergence in financial instrument maturities and/or competitive pressures. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth. Decreases or increases in interest rates could have a negative effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. Also, changes in interest rates might also impact the values of equity and debt securities under management and administration by the Wealth Management Division which may have a negative impact on fee income. See the section captioned “Net Interest Income” in the MD&A section of this Annual Report on Form 10-K for additional details regarding interest rate risk.
Economic troubles may negatively affect our leasing business
The Corporation’s leasing business which began operations in September 2006, consists of nation-wide leasing various types of equipment to businesses with an average original equipment cost of approximately $24 thousand per lease. Continued economic sluggishness may result in higher credit losses than we would experience in our traditional lending business, as well as potential increases in state regulatory burdens such as state income taxes, personal property taxes and sales and use taxes.
A general economic slowdown could impact Wealth Management Division revenues
A general economic slowdown could decrease the value of Wealth Management Division assets under management and administration resulting in lower fee income, and clients potentially seeking alternative investment opportunities with other providers, which could result in lower fee income to the Corporation.
If we fail to comply with legal standards, we could incur liability to our clients or lose clients, which could negatively affect our earnings.
Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and applicable laws is important to client satisfaction, which in turn is important to the earnings and growth of our investment businesses. Failure to comply with these standards, adequately manage these risks or manage the differing interests often involved in the exercise of fiduciary responsibilities could also result in liability.
Provision for loan and lease losses and level of non-performing loans may need to be modified in connection with internal or external changes
All borrowers carry the potential to default and our remedies to recover may not fully satisfy money previously loaned. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which represents the Corporation’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of the Corporation, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan losses reflects the Corporation’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic conditions; and unidentified losses inherent
in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments different than those of the Corporation. An increase in the allowance for loan losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations.
The design of the allowance for loan loss methodology is a dynamic process that must be responsive to changes in environmental factors. Accordingly, at times the allowance methodology may be modified in order to incorporate changes in various factors including, but not limited to, levels and trends of delinquencies and charge-offs, trends in volume and types of loans, national and economic trends and industry conditions.
The Corporation’s controls and procedures may fail or be circumvented
The Corporation diligently reviews and updates the its internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any failure or undetected circumvention of these controls could have a material adverse impact on our financial condition and results of operations.
Decreased residential mortgage origination, volume and pricing decisions of competitors could affect our net income
The Corporation originates, sells and services residential mortgage loans. Changes in interest rates and pricing decisions by our loan competitors affect demand for the Corporation’s residential mortgage loan products, the revenue realized on the sale of loans and revenues received from servicing such loans for others, ultimately reducing the Corporation’s net income. New regulations, increased regulatory reviews, and/or changes in the structure of the secondary mortgage markets which the Corporation utilizes to sell mortgage loans may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination business.
The Corporation’s performance and financial condition may be adversely affected by regional economic conditions and real estate values
The Bank’s loan and deposit activities are largely based in eastern Pennsylvania. As a result, the Corporation’s consolidated financial performance depends largely upon economic conditions in this eastern Pennsylvania region. This region experienced deteriorating local economic conditions during 2008 through 2011, and a continued downturn in the regional real estate market could harm our financial condition and results of operations because of the geographic concentration of loans within this regional area and because a large percentage of our loans are secured by real property. If there is further decline in real estate values, the collateral for the Corporation’s loans will provide less security. As a result, the Corporation’s ability to recover on defaulted loans by selling the underlying real estate will be diminished, and the Bank will be more likely to suffer losses on defaulted loans.
Additionally, a significant portion of the Corporation’s loan portfolio is invested in commercial real estate loans. Often in a commercial real estate transaction, repayment of the loan is dependent on rental income. Economic conditions may affect the tenant’s ability to make rental payments on a timely basis, and may cause some tenants not to renew their leases, each of which may impact the debtor’s ability to make loan payments. Further, if expenses associated with commercial properties increase dramatically, the tenant’s ability to repay, and therefore the debtor’s ability to make timely loan payments, could be adversely affected.
All of these factors could increase the amount of the Corporation’s non-performing loans, increase its provision for loan and lease losses and reduce the Corporation’s net income.
Economic troubles may negatively affect our leasing business
The Corporation’s leasing business which began operations in September 2006, consists of nation-wide leasing various types of equipment to businesses with an average original equipment cost of approximately $23 thousand per lease. Continued economic sluggishness may result in higher credit losses than we would experience in our traditional lending business, as well as potential increases in state regulatory burdens such as state income taxes, personal property taxes and sales and use taxes.
A general economic slowdown could impact Wealth Management Division revenues
A general economic slowdown could decrease the value of Wealth Management Division assets under management and administration resulting in lower fee income, and clients potentially seeking alternative investment opportunities with other providers, which resulting in lower fee income to the Corporation.
Our ability to realize our deferred tax asset may be reduced, which may adversely impact results of operations
Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. The deferred tax asset may be reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax asset. If it is determined that a valuation allowance of its deferred tax asset is necessary, the Corporation may incur a charge to earnings.
Environmental risk associated with our lending activities could affect our results of operations and financial condition
A significant portion of our loan portfolio is secured by real property. In the course of our business, we may own or foreclose and take title to real estate and could become subject to environmental liabilities with respect to these properties. We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. If we were to become subject to significant environmental liabilities, it could have a material adverse effect on our results of operations and financial condition.
Technological systems failures, interruptions and security breaches could negatively impact our operations
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, and our loans. While we have established policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, any compromise of our security systems could deter customers from using our web site and our online banking service, which involve the transmission of confidential information. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource certain of our data processing to third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any systems failure, interruption, or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to civil litigation and possible financial liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
Additionally, financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so on our part could have a material adverse impact on our business and therefore on our financial condition and results of operations.
The Corporation is subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, results of operations and financial condition.
Potential acquisitions may disrupt the Corporation’s business and dilute shareholder value
We regularly evaluate opportunities to strengthen our current market position by acquiring and investing in banks and in other complementary businesses, or opening new branches. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short and long-term liquidity. Our acquisition activities could be material to us. For example, we could issue additional shares of common stock in a purchase transaction, which could dilute current shareholders’ ownership interest. These activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Any potential charges for impairment related to goodwill would not directly impact cash flow or tangible capital.
Our acquisition activities could involve a number of additional risks, including the risks of:
incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in the Corporation’s attention being diverted from the operation of our existing business;
There is no assurance that we will be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions. Our inability to overcome these risks could have an adverse effect on our levels of reported net income, ROE and ROA, and our ability to achieve our business strategy and maintain our market value.
Decreased residential mortgage origination, volume and pricing decisions of competitors could affect our net income.
The Corporation originates, sells and services residential mortgage loans. Changes in interest rates and pricing decisions by our loan competitors affect demand for the Corporation’s residential mortgage loan products, the revenue realized on the sale of loans and revenues received from servicing such loans for others, ultimately reducing the Corporation’s net income. New regulations, increased regulatory reviews, and/or changes in the structure of the secondary mortgage markets which the Corporation utilizes to sell mortgage loans may be introduced and may increase costs and make it more difficult to operate a residential mortgage origination business.
Ourmortgage servicing rights could become impaired, which may require us to take non-cash charges.
Because we retain the servicing rights on many loans we sell in the secondary market, we are required to record a mortgage servicing right asset, which we test quarterly for impairment. The value of mortgage servicing rights is heavily dependent on market interest rates and tends to increase with rising interest rates and decrease with falling interest rates. If we are required to record an impairment charge, it would adversely affect our business, financial condition and results of operations.
Declines in asset values may result in impairment charges and may adversely affect the value of the Company’s results of operations, financial condition and cash flows.
A majority of the Corporation’s investment portfolio is comprised of securities which are collateralized by residential mortgages. These residential mortgage-backed securities include securities of U.S. government agencies, U.S. government-sponsored entities, and private-label collateralized mortgage obligations. The Corporation’s securities portfolio also includes obligations of U.S. government-sponsored entities, obligations of states and political subdivisions thereof, and equity securities. The fair value of investments may be affected by factors other than the underlying performance of the issuer or composition of the obligations themselves, such as rating downgrades, adverse changes in the business climate and a lack of liquidity for resale of certain investment securities. Quarterly, the Corporation evaluates investments and other assets for impairment indicators in accordance with U.S. GAAP. A decline in the fair value of the securities in our investment portfolio could result in an other-than temporary impairment (“OTTI”) write-down that would reduce our earnings. Further, given the significant judgments involved, if we are incorrect in our assessment of OTTI, this error could have a material adverse effect on our results of operation, financial condition, and cash flows. If the Corporation incurs OTTI charges that result in its falling below the “well capitalized” regulatory requirement, it may need to raise additional capital.
Accounting standards periodically change and the application of our accounting policies and methods may require the Corporation to make estimates about matters that are uncertain
The regulatory bodies that establish accounting standards, including, among others, the Financial Accounting Standards Board and the SEC, periodically revise or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial statements. The effect of such revised or new standards on our financial statements can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
In addition, the Corporation must exercise judgment in appropriately applying many of our accounting policies and methods so they comply with generally accepted accounting principles. In some cases, the Corporation may have to select a particular accounting policy or method from two or more alternatives. In some cases, the accounting policy or method chosen might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a different policy or method. Accounting policies are critical to fairly presenting our financial condition and results of operations and may require the Corporation to make difficult, subjective or complex judgments about matters that are uncertain.
The FASB’s recently adopted ASU 2016-13 will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations.
In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss model, or CECL. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan and lease losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
The new CECL standard will become effective for the Corporation for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.
A return to recessionary conditions or a large and unexpected rise in interest rates could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.
Falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in 2008 that followed a national home price peak in mid-2006, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. A return of recessionary conditions and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and a return to higher unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. A large or unexpected rise in interest rates could materially impact consumer and business ability to repay, thus increasing our level of non performing loans and reducing demand for loans. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
Increases in FDIC insurance premiums may adversely affect the Corporation’s earnings
In response to the impact of economic conditions since 2008 on banks generally and on the FDIC Deposit Insurance Fund (the “DIF”), the FDIC changed its risk-based assessment system and increased base assessment rates. On November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted insurance fund. In February 2011, as required under the Dodd-Frank Act, the FDIC issued a ruling pursuant to which the assessment base against which FDIC assessments for deposit insurance are made will change. Instead of FDIC insurance assessments being based upon an insured bank’s deposits, FDIC insurance assessments are now generally based on an insured bank’s total average assets minus average tangible equity. With this change, the Corporation expects that its overall FDIC insurance cost will decline. However, a change in the risk categories applicable to the Corporation’s bank subsidiaries, further adjustments to base assessment rates and any special assessments could have a material adverse effect on the Corporation.
The Dodd-Frank Act also requires that the FDIC take steps necessary to increase the level of the DIF to 1.35% of total insured deposits by September 30, 2020. In October 2010, the FDIC adopted a Restoration Plan to achieve that goal. Certain elements of the Restoration Plan are left to future FDIC rulemaking, as are the potential for increases to the assessment rates, which may become necessary to achieve the targeted level of the DIF. Future FDIC rulemaking in this regard may have a material adverse effect on the Corporation.
The stability of other financial institutions could have detrimental effects on our routine funding transactions
Routine funding transactions may be adversely affected by the actions and soundness of other financial institutions. Financial service institutions are interrelated as a result of trading, clearing, lending, borrowing or other relationships. Transactions are executed on a daily basis with different industries and counterparties, and routinely executed with counterparties in the financial services industry. As a result, a rumor, default or failures within the financial services industry could lead to market-wide liquidity problems which in turn could materially impact the financial condition of the Corporation.
The Corporation may need to raise additional capital in the future and such capital may not be available when needed or at all
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations and may need to raise additional capital in the future, whether in the form of debt or equity, to provide us with sufficient capital resources to meet our regulatory and business needs. We cannot assure you that such capital will be available to us on acceptable terms or at all. Our ability to raise additional capital will depend on, among other things, conditions in the capital markets at the time, which are outside of our control, and our financial condition. If the Corporation is unable to generate sufficient additional capital though its earnings, or other sources, including sales of assets, it would be necessary to slow earning asset growth and or pass up possible acquisition opportunities, which may result in a reduction of future net income growth. Further, an inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations.
If sufficient wholesale funding to support earning-asset growth is unavailable, the Corporation’s net income may decrease
The Corporation recognizes the need to grow both wholesale and non-wholesale funding sources to support earning asset growth and to provide appropriate liquidity. The Corporation’s asset growth over the past few years has been funded with various forms of wholesale funding which is defined as wholesale deposits (primarily certificates of deposit) and borrowed funds (FHLB advances, Federal advances and Federal fund line borrowings). Wholesale funding at December 31, 2016 represented approximately 18.0% of total funding compared to 17.9% at December 31, 2015 and 21.5% at December 31, 2014. Wholesale funding is subject to certain practical limits such as the FHLB’s Maximum Borrowing Capacity and the Corporation’s liquidity targets. Additionally, regulators might consider wholesale funding beyond certain points to be imprudent and might suggest that future asset growth be reduced or halted.
In the absence of wholesale funding sources, the Corporation might need to reduce earning asset growth through the reduction of current production, sale of assets, and/or the participating out of future and current loans or leases. This in turn might reduce future net income of the Corporation.
The amount loaned to us is generally dependent on the value of the collateral pledged and the Corporation’s financial condition. These lenders could reduce the percentages loaned against various collateral categories, eliminate certain types of collateral and otherwise modify or even terminate their loan programs, particularly to the extent they are required to do so because of capital adequacy or other balance sheet concerns, or if disruptions in the capital markets occur. Any change or termination of our borrowings from the FHLB, the Federal Reserve or correspondent banks may have an adverse effect on our liquidity and profitability.
The capital and credit markets are volatile and could cause the price of our stock to fluctuate
The capital and credit markets periodically experience volatility. In some cases, the markets may produce downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength. Market volatility may result in a material adverse effect on our business, financial condition and results of operations and/or our ability to access capital. Several factors could cause the market price for our common stock to fluctuate substantially in the future, including without limitation:
announcements of developments related to our business, any of our competitors or the financial services industry in general;
fluctuations in our results of operations;
sales of substantial amounts of our securities into the marketplace;
general conditions in our markets or the worldwide economy;
a shortfall in revenues or earnings compared to securities analysts’ expectations;
changes in analysts’ recommendations or projections;
our announcement of new acquisitions or other projects; and
compliance with regulatory changes.
Any failure of the Corporation and the Bank to comply with federal and state regulatory requirements could adversely affect our business.
The Corporation and the Bank are supervised by the Federal Reserve Bank, the Pennsylvania Department of Banking and Securities and the State of Delaware. Accordingly, the Corporation, the Bank and our subsidiaries are subject to extensive federal and state legislation, regulation and supervision that govern almost all aspects of our business operations, which are primarily designed to protect consumers, depositors and the government's deposit insurance funds, and to accomplish other governmental policy objectives such as combating terrorism. That regulatory framework is not designed to protect shareholders. We are required to comply with a variety of laws and regulations, including the Bank Secrecy Act, the USA PATRIOT Act, the Gramm Leach Bliley Act, the Equal Credit Opportunity Act, real estate-secured consumer lending regulations (such as Truth-in-Lending), Real Estate Settlement Procedures Act regulations, and licensing and registration requirements for mortgage originators. Recent and potential future changes in laws and regulations, escalating regulatory expectations and heightened regulatory attention to mortgage and foreclosure-related activities and exposures and other business practices require that we devote substantial management attention and resources to regulatory compliance. While the Corporation has policies and procedures designed to ensure compliance with regulatory requirements, there is risk that the Corporation and the Bank may be determined not to have complied with applicable requirements. Any failure by the Corporation or the Bank to comply with these requirements, even if such failure was unintentional or inadvertent, could result in adverse action to be taken by regulators, including through formal or informal supervisory enforcement actions, and could result in the assessment of fines and penalties. In some circumstances, additional negative consequences also may result from regulatory action, including restrictions on the Corporation’s business activities, acquisitions and other growth initiatives. The occurrence of one or more of these events may have a material adverse effect on our business and reputation.
Previously enacted and potential future legislation, including legislation to reform the U.S. financial regulatory system, could adversely affect our business
Market conditions have resulted in the creation of various programs by the United States Congress, the Treasury, the Federal Reserve and the FDIC that were designed to enhance market liquidity and bank capital. As these programs expire, are withdrawn or reduced, the impact on the financial markets, banks in general and their customers is unknown. This could have the effect of, among other things, reducing liquidity, raising interest rates, reducing fee revenue, limiting the ability to raise capital, all of which could have an adverse impact on the financial condition of the Bank and the Corporation.
Additionally, the federal government has passed a variety of other reforms related to banking and the financial industry including, without limitation, the Dodd-Frank Act. The Dodd-Frank Act imposes significant regulatory and compliance changes. Effects of the Dodd-Frank Act on our business include:
● | changes to regulatory capital requirements; |
● | exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from tier 1 capital; |
● | creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products); |
● | potential limitations on federal preemption; |
● | changes to deposit insurance assessments; |
● | regulation of debit interchange fees we earn; |
● | changes in retail banking regulations, including potential limitations on certain fees we may charge; and |
● | changes in regulation of consumer mortgage loan origination and risk retention. |
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds, commonly referred to as the Volker Rule. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.
Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act could limit our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise materially and adversely affect us. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements could also materially and adversely affect us.
The Consumer Financial Protection Bureau (“CFPB”) may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive practices, which may directly impact the business operations of depository institutions offering consumer financial products or services including the Bank.
The CFPB has broad rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service (“UDAP authority”). The potential reach of the CFPB’s broad rulemaking powers and UDAP authority on the operations of financial institutions offering consumer financial products or services including the Bank is currently unknown.
Governmental discretionary policies may impact the operations and earnings of the Corporation and its Subsidiaries
The operations of the Corporation and its subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve Board regulates monetary policy and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of all financial institutions in the past and may continue to do so in the future.
With the 2016 U.S. presidential election resulting in a new President and a new political party controlling the Executive Branch of the Federal Government, the new administration may bring changes to the U.S. financial services industry that we cannot now predict. Public comments by President Donald J. Trump may suggest his intent to change policies and regulations that implement current federal law, including those implementing the Dodd-Frank Act. At this point we are unable to determine what impact the Trump Administration’s policy changes might have on the Corporation or its subsidiaries.
Potential losses incurred in connection with possible repurchases and indemnification payments related to mortgages that we have sold into the secondary market may require us to increase our financial statement reserves in the future.
We engage in the origination and sale of residential mortgages into the secondary market. In connection with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. These representations and warranties vary based on the nature of the transaction and the purchaser’s or insurer’s requirements but generally pertain to the ownership of the mortgage loan, the real property securing the loan and compliance with applicable laws and applicable lender and government-sponsored entity underwriting guidelines in connection with the origination of the loan. While we believe our mortgage lending practices and standards to be adequate, we have settled a small number of claims we consider to be immaterial; however we may receive requests in the future, which could be material in volume. If that were to happen, we could incur losses in connection with loan repurchases and indemnification claims, and any such losses might exceed our financial statement reserves, requiring us to increase such reserves. In that event, any losses we might have to recognize and any increases we might have to make to our reserves could have a material adverse effect on our business, financial position, liquidity, results of operations or cash flows.
Our ability to realize our deferred tax asset may be reduced, which may adversely impact results of operations
Realization of a deferred tax asset requires us to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. The deferred tax asset may be reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax asset. If it is determined that a valuation allowance of its deferred tax asset is necessary, the Corporation may incur a charge to earnings.The value of our deferred tax asset is directly related to effective income tax rates in effect at the time of uses. With the recent changes in Congress and the White House, there is a likelihood that corporate income tax rates will be reduced. This would cause a write-down of our deferred tax asset resulting in a charge to earnings.
Environmental risk associated with our lending activities could affect our results of operations and financial condition
A significant portion of our loan portfolio is secured by real property. In the course of our business, we may own or foreclose and take title to real estate and could become subject to environmental liabilities with respect to these properties. We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. If we were to become subject to significant environmental liabilities, it could have a material adverse effect on our results of operations and financial condition.
Technological systems failures, interruptions and security breaches could negatively impact our operations and reputation
Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, and our loans. While we have established policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, any compromise of our security systems could deter customers from using our web site and our online banking service, which involve the transmission of confidential information. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource certain of our data processing to third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any systems failure, interruption, or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to civil litigation and possible financial liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
Failure to meet customer expectations for technology-driven products and services could reduce demand for bank and wealth services
Financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so on our part could significantly reduce the number of new wealth and bank customers resulting in a material adverse impact on our business and therefore on our financial condition and results of operations.
The Corporation is subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. The Corporation diligently reviews and updates its internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, results of operations and financial condition.
Attractive acquisition opportunities may not be available to us in the future which could limit the growth of our business
We may not be able to sustain a positive rate of growth or be able to expand our business. We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals for a transaction, we will not be able to consummate such transaction which we believe to be in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Other factors, such as economic conditions and legislative considerations, may also impede or prohibit our ability to expand our market presence. If we are not able to successfully grow our business, our financial condition and results of operations could be adversely affected.
The financial services industry is very competitive, especially in the Corporation’s market area, and such competition could affect our operating results
The Corporation faces competition in attracting and retaining deposits, making loans, and providing other financial services such as trust and investment management services throughout the Corporation’s market area. The Corporation’s competitors include other community banks, larger banking institutions, trust companies and a wide range of other financial institutions such as credit unions, registered investment advisors, financial planning firms, leasing companies, government-sponsored enterprises, on-line banking enterprises, mutual fund companies, insurance companies and other non-bank businesses. Many of these competitors have substantially greater resources than the Corporation. This is especially evident in regards to advertising and public relations spending. For a more complete discussion of our competitive environment, see “Business – “Business—Competition” in Item 1 above. If the Corporation is unable to compete effectively, the Corporation may lose market share and income from deposits, loans, and other products may be reduced.
Additionally, increased competition among financial services companies due to consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies may adversely affect our ability to market our products and services.
The Corporation’s common stock is subordinate to all of our existing and future indebtedness; regulatory and contractual restrictions may limit or prevent us from paying dividends on our common stock; and we are not limited on the amount of indebtedness we and our subsidiaries may incur in the future
Our common stock ranks junior to all indebtedness, including our outstanding subordinated debentures, and other non-equity claims on the Corporation with respect to assets available to satisfy claims on the Corporation, including in a liquidation of the Corporation. Additionally, unlike indebtedness, where principal and interest
would customarily be payable on specified due dates, in the case of our common stock, dividends are payable only when, as and if authorized and declared by our Board of Directors and depend on, among other things, our results of operations, financial condition, debt service requirements, other cash needs and any other factors our Board of Directors deems relevant. Under Pennsylvania law we are subject to restrictions on payments of dividends out of lawfully available funds. Also, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
In addition, we are not limited by our common stock in the amount of debt or other obligations we or our subsidiaries may incur in the future. Accordingly, we and our subsidiaries may incur substantial amounts of additional debt and other obligations that will rank senior to our common stock or to which our common stock will be structurally subordinated.
There may be future sales of additional common stock or other dilution of our equity, which may adversely affect the market price of our common stock
We are not restricted from issuing additional common stock or other securities. Additionally, our shareholders may in the future approve the authorization of additional classes or series of stock which may have distribution or other rights senior to the rights of our common stock, or may be convertible into or exchangeable for, or may represent the right to receive, common stock or substantially similar securities. The future issuance of shares of our common stock or any other such future equity classes or series could have a dilutive effect on the holders of our common stock. Additionally, the market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or any future class or series of stock in the market or the perception that such sales could occur.
Downgrades in U.S. governmentgovernment and federal agency securities could adversely affect the Corporation
In addition to causing economic and financial market disruptions, any downgrades in U.S. government and federal agency securities, or failures to raise the U.S. debt limit if necessary in the future, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms, as well as have other material adverse effects on the operation of our business and our financial results and condition. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect profitability. Also, the adverse consequences as a result of the downgrade could extend to the borrowers of the loans the bank makes and, as a result, could adversely affect its borrowers’ ability to repay their loans.
The Corporation is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Corporation’s operations and prospects.
The Corporation currently depends on the services of a number of key management personnel. The loss of key personnel could materially and adversely affect the results of operations and financial condition. The Corporation’s success also depends in part on the ability to attract and retain additional qualified management personnel. Competition for such personnel is strong and the Corporation may not be successful in attracting or retaining the personnel it requires.
Additional risk factors also include the following all of which may reduce revenues and/or increase expenses and/or pull the Corporation’s attention away from core banking operations which may ultimately reduce the Corporation’s net income:
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
As of December 31, 2014,2016, the Corporation owns or leases 1925 full-service branch locations, seveneight limited-hour retirement community branches, one limited-service Life Care Community branchesbranch location, five wealth management offices, one insurance agency and eightsix other office properties which serve as administrative offices.
The following table details the Corporation’s properties and deposits as of December 31, 2014:2016:
Property Address | Owned/Leased | Net Book Value as of December 31, 2014 (dollars in thousands) | Total Deposits as of December 31, 2014 (dollars in thousands) | |||||||||
Full Service Branches (Banking Segment): | ||||||||||||
801 Lancaster Ave., Bryn Mawr, PA 19010* | Owned | $ | 5,055 | $ | 708,796 | |||||||
50 W. Lancaster Ave., Ardmore, PA 19003 | Leased | 2,087 | 96,017 | |||||||||
5000 Pennell Rd., Aston, PA 19014 | Leased | 383 | 24,541 | |||||||||
135 E. City Avenue, Bala Cynwyd, PA 19004 | Leased | 2,343 | 20,781 | |||||||||
3218 Edgemont Ave., Brookhaven, PA 19015 | Owned | 705 | 58,657 | |||||||||
US Rts. 1 and 100, Chadds Ford, PA 19317 | Leased | 19 | 33,833 | |||||||||
23 E. Fifth St., Chester, PA 19013 | Leased | 61 | 20,631 | |||||||||
31 Baltimore Pk., Chester Heights, PA 19017 | Leased | 402 | 57,391 | |||||||||
237 N. Pottstown Pk., Exton, PA 19341 | Leased | 719 | 55,265 | |||||||||
18 W. Eagle Rd., Havertown, PA 19083 | Owned | 931 | 86,212 | |||||||||
106 E. Street Rd., Kennett Square, PA 19348 | Leased | 476 | 28,129 | |||||||||
22 W. State St., Media, PA 19063 | Owned | 3,216 | 63,346 | |||||||||
3601 West Chester Pk., Newtown Square, PA 19073 | Leased | 1,008 | 57,522 | |||||||||
39 W. Lancaster Ave., Paoli, PA 19301 | Owned | 1,371 | 68,963 | |||||||||
330 Dartmouth Ave., Swarthmore, PA 19081 | Owned | 697 | 45,464 | |||||||||
849 Paoli Pk., West Chester, PA 19380 | Leased | 1,263 | 42,085 | |||||||||
330 E. Lancaster Ave., Wayne, PA 19087 | Owned | 1,572 | 132,044 | |||||||||
One Tower Bridge, West Conshohocken, PA 19428 | Leased | 3 | 29,024 | |||||||||
1000 Rocky Run Parkway, Wilmington, DE 19803 | Leased | 416 | 26,092 | |||||||||
Life Care Community Offices (Banking Segment): | ||||||||||||
601 N. Ithan Ave., Bryn Mawr, PA 19010 | Leased | — | 5,630 | |||||||||
1400 Waverly Rd, Gladwyne, PA 19035 | Leased | — | 3,633 | |||||||||
3300 Darby Rd., Haverford, PA 19041 | Leased | — | 5,440 | |||||||||
11 Martins Run, Media, PA 19063 | Leased | — | 4,038 | |||||||||
535 Gradyville Rd., Newtown Square, PA 19073 | Leased | 16 | 10,412 | |||||||||
404 Cheswick Pl., Bryn Mawr, PA 19010 | Leased | — | 2,957 | |||||||||
1615 E. Boot Rd., West Chester, PA 19380 | Leased | — | 1,125 | |||||||||
Property Address | Owned/Leased | Total Deposits (dollars in thousands) | ||||
Full Service Branches (Banking Segment): | ||||||
801 Lancaster Ave., Bryn Mawr, PA 19010* | Owned | $ | 864,074 | |||
50 W. Lancaster Ave., Ardmore, PA 19003 | Leased | 120,853 | ||||
5000 Pennell Rd., Aston, PA 19014 | Leased | 21,834 | ||||
135 E. City Avenue, Bala Cynwyd, PA 19004 | Leased | 36,408 | ||||
599 Skippack Pk., Blue Bell, PA 19422 | Leased | 103,641 | ||||
3218 Edgemont Ave., Brookhaven, PA 19015 | Owned | 69,294 | ||||
US Rts. 1 and 100, Chadds Ford, PA 19317 | Leased | 42,227 | ||||
23 E. Fifth St., Chester, PA 19013 | Leased | 19,317 | ||||
31 Baltimore Pk., Chester Heights, PA 19017 | Leased | 76,328 | ||||
528 Fayette St., Conshohocken, PA 19428 | Leased | 99,203 | ||||
113 W. Germantown Pk., East Norriton, PA 19401 | Leased | 58,007 | ||||
237 N. Pottstown Pk., Exton, PA 19341 | Leased | 95,723 | ||||
Property Address Other Administrative Offices (Banking and Wealth Management Segments) 2, 6 S. Bryn Mawr Ave., Bryn Mawr, PA 19010 10 S. Bryn Mawr Ave., Bryn Mawr, PA 19010*** 4093 W. Lincoln Hwy., Exton, PA 19341** 16 Campus Blvd., Newtown Square, PA 19073** 322 E. Lancaster Ave., Wayne, PA 19087 1 West Chocolate Avenue, Hershey, PA 17033*** 20 Montchanin Rd, Suite 185 Greenville, DE 19807** 20 North Waterloo Rd, Devon PA 19380*** Subsidiary Offices (Wealth Management Segment): Powers Craft Parker & Beard Inc., 15 Garrett Avenue, Rosemont, PA 19010 Lau Associates – 20 Montchanin Rd, Suite 110, Greenville, DE 19087 BMTC-DE – 20 Montchanin Rd, Suite 100 Greenville, DE 19807 Total: Owned/Leased Net Book
Value as of
December 31,
2014 (dollars
in thousands) Total Deposits as
of December 31,
2014 (dollars in
thousands) Leased 401 Not applicable Owned 667 Not applicable Leased — Not applicable Leased — Not applicable Owned 2,050 Not applicable Leased 8 Not applicable Leased 27 Not applicable Leased 167 Not applicable Leased 180 Not applicable Leased 166 Not applicable Leased 31 Not applicable $ 26,440 $ 1,688,028
18 W. Eagle Rd., Havertown, PA 19083 | Owned | 104,000 | ||||
106 E. Street Rd., Kennett Square, PA 19348 | Leased | 33,128 | ||||
197 E. DeKalb Pk., King of Prussia, PA 19406 | Leased | 69,299 | ||||
33 W. Ridge Pk., Limerick, PA 19468 | Leased | 28,161 | ||||
22 W. State St., Media, PA 19063 | Owned | 69,467 | ||||
3601 West Chester Pk., Newtown Square, PA 19073 | Leased | 76,455 | ||||
39 W. Lancaster Ave., Paoli, PA 19301 | Owned | 119,477 | ||||
7133 Ridge Ave., Philadelphia, PA 19128 | Leased | 51,294 | ||||
330 Dartmouth Ave., Swarthmore, PA 19081 | Owned | 51,975 | ||||
330 E. Lancaster Ave., Wayne, PA 19087 | Owned | 131,645 | ||||
849 Paoli Pk., West Chester, PA 19380 | Leased | 55,549 | ||||
436 Egypt Rd., West Norriton, PA 19428 | Leased | 52,224 | ||||
1000 Rocky Run Parkway, Wilmington, DE 19803 | Leased | 72,068 | ||||
Life Care Community Offices (Banking Segment): | ||||||
10000 Shannondell Dr., Audubon, PA 19403 | Leased | 25,114 | ||||
404 Cheswick Pl., Bryn Mawr, PA 19010 | Leased | 2,819 | ||||
601 N. Ithan Ave., Bryn Mawr, PA 19010 | Leased | 5,374 | ||||
1400 Waverly Rd, Gladwyne, PA 19035 | Leased | 4,169 | ||||
3300 Darby Rd., Haverford, PA 19041 | Leased | 6,804 | ||||
11 Martins Run, Media, PA 19063 | Leased | 2,899 | ||||
535 Gradyville Rd., Newtown Square, PA 19073 | Leased | 9,136 | ||||
1615 E. Boot Rd., West Chester, PA 19380 | Leased | 1,709 | ||||
Total Deposits: | $ | 2,579,675 | ||||
Other Administrative Offices (Banking and Wealth Management Segments) | ||||||
2, 6 S. Bryn Mawr Ave., Bryn Mawr, PA 19010 | Leased | Not applicable | ||||
10 S. Bryn Mawr Ave., Bryn Mawr, PA 19010*** | Owned | Not applicable | ||||
4093 W. Lincoln Hwy., Exton, PA 19341** | Leased | Not applicable | ||||
16 Campus Blvd., Newtown Square, PA 19073** | Leased | Not applicable | ||||
322 E. Lancaster Ave., Wayne, PA 19087 | Owned | Not applicable | ||||
1 West Chocolate Avenue, Hershey, PA 17033*** | Leased | Not applicable | ||||
20 Montchanin Rd, Suite 185 Greenville, DE 19807** | Leased | Not applicable | ||||
620 W. Germantown Pk, Plymouth Mtg, PA 19462** | Leased | Not applicable | ||||
20 North Waterloo Rd, Devon PA 19380*** | Leased | Not applicable | ||||
Powers Craft Parker & Beard Inc., 15 Garrett Ave, Rosemont, PA 19010**** | Leased | Not applicable | ||||
Subsidiary Offices (Wealth Management | ||||||
Lau Associates - 20 Montchanin Rd, Suite 110, Greenville, DE 19087 | Leased | Not applicable | ||||
BMTC-DE - 20 Montchanin Rd, Suite 100 Greenville, DE 19807 | Leased | Not applicable | ||||
*Corporate headquarters and executive offices
**Lending office
*** Wealth Management office
**** Insurance Agency
ITEM 3. | LEGAL PROCEEDINGS |
Neither the Corporation nor any of its subsidiaries is a party to, nor is any of their property the subject of, any material pending legal proceedings other than ordinary routine litigation incidentincidental to their businesses.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
PART II
ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Corporation’s common stock is traded on the NASDAQ Stock Market under the symbol BMTC. As of December 31, 2014,March 2, 2017 there were 590582 holders of record of the Corporation’s common stock.
The following table sets forth the range of high and low sales prices for the common stock for each full quarterly period within the two most recent fiscal years as well as the quarterly dividends paid.
| 2014 | 2013 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||||||||||||
| High | Low | Dividend Declared | High | Low | Dividend Declared | High | Low | Dividend Declared | High | Low | Dividend Declared | |||||||||||||||||||||||||||||||||||||
1st Quarter | $ | 30.44 | $ | 26.48 | $ | 0.18 | $ | 23.64 | $ | 21.78 | $ | 0.17 | $ | 29.06 | $ | 24.17 | $ | 0.20 | $ | 31.42 | $ | 28.50 | $ | 0.19 | ||||||||||||||||||||||||
2nd Quarter | $ | 30.44 | $ | 26.50 | $ | 0.18 | $ | 24.06 | $ | 22.28 | $ | 0.17 | $ | 30.32 | $ | 24.95 | $ | 0.20 | $ | 31.77 | $ | 28.52 | $ | 0.19 | ||||||||||||||||||||||||
3rd Quarter | $ | 30.98 | $ | 28.33 | $ | 0.19 | $ | 28.33 | $ | 23.97 | $ | 0.17 | $ | 32.45 | $ | 28.34 | $ | 0.21 | $ | 31.48 | $ | 27.95 | $ | 0.20 | ||||||||||||||||||||||||
4th Quarter | $ | 31.76 | $ | 27.44 | $ | 0.19 | $ | 31.76 | $ | 25.13 | $ | 0.18 | $ | 42.15 | $ | 30.40 | $ | 0.21 | $ | 31.32 | $ | 27.85 | $ | 0.20 | ||||||||||||||||||||||||
Comparison of Cumulative Total Return Chart
The following chart compares the yearly percentage change in the cumulative shareholder return on the Corporation’s common stock during the five years ended December 31, 2014,2016, with (1) the Total Return forof the NASDAQ MarketCommunity Bank Index; (2) the Total Return Index forof the NASDAQ Market Index; (3) the Total Return of the SNL Bank and Thrift Index; and (3)(4) the Total Return Index forof the SNL Mid-Atlantic Bank Index .Index. This comparison assumes $100.00 was invested on December 31, 2009,2011, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends.
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Five Year Cumulative Return Summary | Five Year Cumulative Return Summary | |||||||||||||||||||||||||||||||||||||||||||||||
Five Year Cumulative Total Return Summary | ||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||||||||||||||||||||||||||
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||||||||||||||||||||||||||||||
Bryn Mawr Bank Corporation | $ | 100.00 | $ | 119.51 | $ | 137.69 | $ | 162.12 | $ | 225.79 | $ | 240.21 | $ | 100.00 | $ | 117.74 | $ | 163.98 | $ | 174.46 | $ | 164.40 | $ | 248.25 | ||||||||||||||||||||||||
NASDAQ Community Bank Index | $ | 100.00 | $ | 117.71 | $ | 166.78 | $ | 174.55 | $ | 191.21 | $ | 265.34 | ||||||||||||||||||||||||||||||||||||
NASDAQ Market Index | $ | 100.00 | $ | 118.15 | $ | 117.22 | $ | 138.02 | $ | 193.47 | $ | 222.16 | $ | 100.00 | $ | 117.45 | $ | 164.57 | $ | 188.84 | $ | 201.98 | $ | 219.89 | ||||||||||||||||||||||||
SNL Bank and Thrift | $ | 100.00 | $ | 111.64 | $ | 86.81 | $ | 116.57 | $ | 159.61 | $ | 178.18 | $ | 100.00 | $ | 134.28 | $ | 183.86 | $ | 205.25 | $ | 209.39 | $ | 264.35 | ||||||||||||||||||||||||
SNL Mid-Atlantic Bank | $ | 100.00 | $ | 116.66 | $ | 87.64 | $ | 117.4 | $ | 158.25 | $ | 172.41 | $ | 100.00 | $ | 133.96 | $ | 180.57 | $ | 196.72 | $ | 204.10 | $ | 259.43 | ||||||||||||||||||||||||
Equity Compensation Plan Information
Equity
The information set forth under the caption “Equity Plan Compensation Information” in the 2017 Proxy Statement is incorporated by reference herein. Additionally, equity compensation plan information is incorporated by reference to Item 12 of this Annual Report on Form 10-K. Additional information regarding the Corporation’s equity compensation plans can be found at Note 1819 – “Stock Based Compensation” in the accompanying Notes to Consolidated Financial Statements found in this Annual Report on Form 10-K.
Issuer Purchases of Equity Securities
The following tables present the repurchasing activity of the Corporation during the fourth quarter of 2014:2016:
Shares Repurchased in the 4th Quarter of 20142016
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(2) | ||||||||||||
Oct. 1, 2014 – Oct. 31, 2014 | 870 | (1) | $ | 29.80 | — | 195,705 | ||||||||||
Nov. 1, 2014 – Nov. 30, 2014 | — | — | — | 195,705 | ||||||||||||
Dec. 1, 2014 – Dec. 31, 2014 | — | — | — | 195,705 | ||||||||||||
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Total | 870 | $ | 29.80 | — | ||||||||||||
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Period: | TotalNumber of | AveragePrice Paid | Total Number of Shares | Maximum Number of | ||||||||||||||
Oct. 1, 2016 | – | Oct. 31, 2016 | 1,147 | (2)(3) | $ | 31.54 | — | 189,300 | ||||||||||
Nov. 1, 2016 | – | Nov. 30, 2016 | — | — | — | 189,300 | ||||||||||||
Dec. 1, 2016 | – | Dec. 31, 2016 | 448 | (3) | $ | 42.06 | — | 189,300 | ||||||||||
Total | 1,595 | $ | 34.50 | — | 189,300 | |||||||||||||
(1) | On |
(2) | On October |
(3) | OnOctober 4, 2016 and December 29, 2016,537 shares and 448 shares, respectively, were purchasedby the Corporation’s deferred compensation |
ITEM 6. | SELECTED FINANCIAL DATA |
| Earnings | As of or for the Twelve Months Ended December 31, | As of or for theTwelve MonthsEnded December 31, | ||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||
Interest income | $ | 82,906 | $ | 78,417 | $ | 73,323 | $ | 74,562 | $ | 64,897 | $ | 116,991 | $ | 108,542 | $ | 82,906 | $ | 78,417 | $ | 73,323 | ||||||||||||||||||||
Interest expense | 6,078 | 5,427 | 8,588 | 11,661 | 12,646 | 10,755 | 8,415 | 6,078 | 5,427 | 8,588 | ||||||||||||||||||||||||||||||
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Net interest income | 76,828 | 72,990 | 64,735 | 62,901 | 52,251 | 106,236 | 100,127 | 76,828 | 72,990 | 64,735 | ||||||||||||||||||||||||||||||
Provision for loan and lease losses | 884 | 3,575 | 4,003 | 6,088 | 9,854 | 4,326 | 4,396 | 884 | 3,575 | 4,003 | ||||||||||||||||||||||||||||||
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Net interest income after provision for loan and lease losses | 75,944 | 69,415 | 60,732 | 56,813 | 42,397 | 101,910 | 95,731 | 75,944 | 69,415 | 60,732 | ||||||||||||||||||||||||||||||
Non-interest income | 48,322 | 48,355 | 46,386 | 34,059 | 29,299 | 54,039 | 55,960 | 48,322 | 48,355 | 46,386 | ||||||||||||||||||||||||||||||
Non-interest expense | 81,418 | 80,740 | 74,901 | 61,729 | 58,206 | 101,745 | 125,765 | 81,418 | 80,740 | 74,901 | ||||||||||||||||||||||||||||||
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Income before income taxes | 42,848 | 37,030 | 32,217 | 29,143 | 13,490 | 54,204 | 25,926 | 42,848 | 37,030 | 32,217 | ||||||||||||||||||||||||||||||
Income taxes | 15,005 | 12,586 | 11,070 | 9,541 | 4,444 | 18,168 | 9,172 | 15,005 | 12,586 | 11,070 | ||||||||||||||||||||||||||||||
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Net Income | $ | 27,843 | $ | 24,444 | $ | 21,147 | $ | 19,602 | $ | 9,046 | $ | 36,036 | $ | 16,754 | $ | 27,843 | $ | 24,444 | $ | 21,147 | ||||||||||||||||||||
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Per Share Data | ||||||||||||||||||||||||||||||||||||||||
Weighted-average shares outstanding | 13,566,239 | 13,311,215 | 13,090,110 | 12,659,824 | 10,680,377 | 16,859,623 | 17,488,325 | 13,566,239 | 13,311,215 | 13,090,110 | ||||||||||||||||||||||||||||||
Dilutive potential Common Stock | 294,801 | 260,395 | 151,736 | 82,313 | 12,312 | 168,499 | 267,966 | 294,801 | 260,395 | 151,736 | ||||||||||||||||||||||||||||||
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Adjusted weighted-average shares | 13,861,040 | 13,571,610 | 13,241,846 | 12,742,137 | 10,692,689 | 17,028,122 | 17,756,291 | 13,861,040 | 13,571,610 | 13,241,846 | ||||||||||||||||||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 2.05 | $ | 1.84 | $ | 1.62 | $ | 1.55 | $ | 0.85 | $ | 2.14 | $ | 0.96 | $ | 2.05 | $ | 1.84 | $ | 1.62 | ||||||||||||||||||||
Diluted | $ | 2.01 | $ | 1.80 | $ | 1.60 | $ | 1.54 | $ | 0.85 | $ | 2.12 | $ | 0.94 | $ | 2.01 | $ | 1.80 | $ | 1.60 | ||||||||||||||||||||
Dividends declared | $ | 0.74 | $ | 0.69 | $ | 0.64 | $ | 0.60 | $ | 0.56 | $ | 0.82 | $ | 0.78 | $ | 0.74 | $ | 0.69 | $ | 0.64 | ||||||||||||||||||||
Dividends declared per share to net income per basic common share | 36.1 | % | 37.5 | % | 39.5 | % | 38.7 | % | 65.9 | % | 38.3 | % | 81.3 | % | 36.1 | % | 37.5 | % | 39.5 | % | ||||||||||||||||||||
Shares outstanding at year end | 13,769,336 | 13,650,354 | 13,412,690 | 13,106,353 | 12,181,247 | 16,939,715 | 17,071,523 | 13,769,336 | 13,650,354 | 13,412,690 | ||||||||||||||||||||||||||||||
Book value per share | $ | 17.83 | $ | 16.84 | $ | 15.18 | $ | 14.07 | $ | 13.14 | $ | 22.50 | $ | 21.42 | $ | 17.83 | $ | 16.84 | $ | 15.18 | ||||||||||||||||||||
Tangible book value per share | $ | 13.59 | $ | 13.02 | $ | 11.08 | $ | 10.81 | $ | 11.11 | $ | 15.11 | $ | 13.89 | $ | 13.59 | $ | 13.02 | $ | 11.08 | ||||||||||||||||||||
Profitability Ratios | ||||||||||||||||||||||||||||||||||||||||
ProfitabilityRatios | ||||||||||||||||||||||||||||||||||||||||
Tax-equivalent net interest margin | 3.93 | % | 3.98 | % | 3.85 | % | 3.96 | % | 3.79 | % | 3.76 | % | 3.75 | % | 3.93 | % | 3.98 | % | 3.85 | % | ||||||||||||||||||||
Return on average assets | 1.32 | % | 1.23 | % | 1.15 | % | 1.13 | % | 0.61 | % | 1.16 | % | 0.57 | % | 1.32 | % | 1.23 | % | 1.15 | % | ||||||||||||||||||||
Return on average equity | 11.56 | % | 11.53 | % | 10.91 | % | 11.10 | % | 6.72 | % | 9.75 | % | 4.49 | % | 11.56 | % | 11.53 | % | 10.91 | % | ||||||||||||||||||||
Non-interest expense to net-interest income and non-interest income | 65.1 | % | 66.5 | % | 67.4 | % | 63.7 | % | 71.4 | % | ||||||||||||||||||||||||||||||
Non-interest income to net-interest income and non-interest income | 38.6 | % | 39.9 | % | 41.7 | % | 35.1 | % | 35.9 | % | ||||||||||||||||||||||||||||||
Non-interest expense to net interest income and non-interest income | 63.5 | % | 80.6 | % | 65.1 | % | 66.5 | % | 67.4 | % | ||||||||||||||||||||||||||||||
Non-interest income to net interest income and non-interest income | 33.7 | % | 35.9 | % | 38.6 | % | 39.9 | % | 41.7 | % | ||||||||||||||||||||||||||||||
Average equity to average total assets | 11.38 | % | 10.63 | % | 10.58 | % | 10.19 | % | 9.02 | % | 11.90 | % | 12.68 | % | 11.38 | % | 10.63 | % | 10.58 | % | ||||||||||||||||||||
Financial Condition | ||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 3,421,530 | $ | 3,030,997 | $ | 2,246,506 | $ | 2,061,665 | $ | 2,035,885 | ||||||||||||||||||||||||||||||
Total liabilities | 3,040,403 | 2,665,286 | 2,001,032 | 1,831,767 | 1,832,321 | |||||||||||||||||||||||||||||||||||
Total shareholders’ equity | 381,127 | 365,711 | 245,474 | 229,898 | 203,564 | |||||||||||||||||||||||||||||||||||
Interest-earning assets | 3,153,015 | 2,755,506 | 2,092,164 | 1,905,398 | 1,879,412 | |||||||||||||||||||||||||||||||||||
Portfolio loans and leases | 2,535,425 | 2,268,988 | 1,652,257 | 1,547,185 | 1,398,456 | |||||||||||||||||||||||||||||||||||
Investment securities | 573,763 | 352,916 | 233,473 | 289,245 | 318,061 | |||||||||||||||||||||||||||||||||||
Goodwill | 104,765 | 104,765 | 35,502 | 32,843 | 32,897 | |||||||||||||||||||||||||||||||||||
Intangible assets | 20,405 | 23,903 | 22,998 | 19,365 | 21,998 | |||||||||||||||||||||||||||||||||||
Deposits | 2,579,675 | 2,252,725 | 1,688,028 | 1,591,347 | 1,634,682 | |||||||||||||||||||||||||||||||||||
Borrowings | 423,425 | 378,509 | 283,970 | 216,535 | 170,718 | |||||||||||||||||||||||||||||||||||
Wealth assets under management, administration, supervision and brokerage | 11,328,457 | 8,364,805 | 7,699,908 | 7,268,273 | 6,663,212 | |||||||||||||||||||||||||||||||||||
Capital Ratios | ||||||||||||||||||||||||||||||||||||||||
Ratio of tangible common equity to tangible assets | 7.76 | % | 8.17 | % | 8.55 | % | 8.84 | % | 7.50 | % | ||||||||||||||||||||||||||||||
Tier 1 capital to risk weighted assets | 10.51 | % | 10.72 | % | 12.00 | % | 11.57 | % | 11.02 | % | ||||||||||||||||||||||||||||||
Total regulatory capital to risk weighted assets | 12.35 | % | 12.61 | % | 12.87 | % | 12.55 | % | 12.02 | % | ||||||||||||||||||||||||||||||
Asset quality | ||||||||||||||||||||||||||||||||||||||||
Allowance as a percentage of portfolio loans and leases | 0.69 | % | 0.70 | % | 0.88 | % | 1.00 | % | 1.03 | % | ||||||||||||||||||||||||||||||
Non-performing loans and leases as a % of portfolio loans and leases | 0.33 | % | 0.45 | % | 0.61 | % | 0.68 | % | 1.06 | % | ||||||||||||||||||||||||||||||
Financial Condition Total assets Total liabilities Total shareholders’ equity Interest-earning assets Portfolio loans and leases Investment securities Goodwill Intangible assets Deposits Borrowings Wealth assets under management, administration, supervision and brokerage Capital Ratios Ratio of tangible common equity to tangible assets Tier 1 capital to risk weighted assets Total regulatory capital to risk weighted assets Asset quality Allowance as a percentage of portfolio loans and leases Non-performing loans and leases as a percentage of portfolio loans and leasesEarnings As of or for the Twelve Months Ended December 31, (dollars in thousands) 2014 2013 2012 2011 2010 $ 2,246,506 $ 2,061,665 $ 2,035,885 $ 1,773,373 $ 1,730,388 2,001,032 1,831,767 1,832,321 1,588,994 1,570,350 245,474 229,898 203,564 184,379 160,038 2,092,164 1,905,398 1,879,412 1,629,607 1,600,125 1,652,257 1,547,185 1,398,456 1,295,392 1,196,717 233,473 289,245 318,061 275,258 320,047 35,502 32,843 32,897 24,689 17,659 22,998 21,998 18,014 7,064 5,421 1,688,028 1,634,682 1,382,369 1,341,432 937,887 283,970 170,718 183,158 204,724 169,388 7,699,908 6,663,212 4,831,631 3,412,890 2,871,143 8.61 % 7.60 % 8.19 % 7.93 % 7.51 % 12.00 % 11.02 % 11.16 % 11.21 % 9.41 % 12.87 % 12.02 % 13.74 % 13.62 % 12.53 % 0.88 % 1.03 % 0.98 % 0.86 % 1.18 % 0.61 % 1.06 % 1.11 % 0.79 % 0.78 %
Information related to accounting changes may be found under the caption “New Accounting Pronouncements” at Note 1-W1-X in the accompanying Notes to Consolidated Financial Statements found in this Annual Report on Form 10-K.
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS (“MD&A”) |
Brief History
Management’s Discussion and Analysis of the CorporationFinancial Condition and Results of Operations
Brief History of the Corporation |
The Bryn Mawr Trust Company (the “Bank”) received its Pennsylvania banking charter in 1889 and is a member of the Federal Reserve System. 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, Pennsylvania, a western suburb of Philadelphia. The Corporation and its subsidiaries offer a full range of personal and business banking services, consumer and commercial loans, equipment leasing, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from 1925 full-service branches, seveneight limited-hour retirement community offices, andone limited-service branch, five wealth management offices and a full-service insurance agency located throughout Montgomery, Delaware, Chester, Dauphin and DauphinPhiladelphia counties ofin Pennsylvania and New Castle county in Delaware. The common stock of the Corporation trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.
The Corporation operates 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 agencies including the Securities and Exchange Commission (“SEC”), NASDAQ, Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania Department of Banking and Securities. The goal of the Corporation is to become the preeminent community bank and wealth management organization in the Philadelphia area.
During the five years ended December 31, 2014,
Since January 1, 2010, the Corporation and Bank completed the following five transactions:seven acquisitions:
Powers Craft Parker and Beard, Inc.
● | Robert J. McAllister Agency, Inc. (“RJM”) – April 1, 2015 |
On October 1, 2014, the acquisition of
● | Continental Bank Holdings, Inc. (“CBH”) – January 1, 2015 (the “CBH Merger”) |
● | Powers Craft Parker and Beard, Inc. (“PCPB”) – October 1, 2014 |
● | First Bank of Delaware (“FBD”) – November 17, 2012 |
● | Davidson Trust Company (“DTC”) – May 15, 2012 |
● | The Private Wealth Management Group of the Hershey Trust Company (“PWMG”) – May 11, 2011 |
● | First Keystone Financial, Inc. (“FKB”) – July 1, 2010 |
In addition, on January 30, 2017, the Corporation entered into a definitive Agreement and Plan of Merger to acquire Royal Bancshares of Pennsylvania, Inc. (“PCPB”RBPI”), a full-service insurance brokerage headquartered in Rosemont, Pennsylvania, was completed. The consideration paid by theparent company of Royal Bank was $7.0 million, of which $5.4 million was paid at closing and three contingent cash payments, not exceed $542 thousand each, will be payable on each of September 30, 2015, September 30, 2016 and September 30, 2017, subject to the attainment of certain revenue targets during the related periods. The acquisition will enable the Bank to offer a comprehensive line of insurance solutions to both individual and business clients. The transaction was accounted for as a business combination.
First Bank of Delaware
On November 17, 2012, the acquisition of $70.3 million of deposits, $76.6 million of loans and a branch location from First Bank of DelawareAmerica (“FBD”RBA”), byin a transaction with an aggregate value of $127.7 million (the “Acquisition”). In connection with the Corporation was completed. The transaction, which was accounted for as a business combination, enabled the Corporation to expand its banking arm into the Delaware market by opening its first full-service branch there, complementing its existing wealth management operations in the state.
Davidson Trust Company
On May 15, 2012, the acquisition of Davidson Trust Company (“DTC”) by the Corporation was completed. The transaction was accounted for as a business combination. The acquisition of DTC initially increased the Corporation’s wealth management division assets under management by $1.0 billion. The structure of the Corporation’s existing wealth management segment allowed for the immediate integration of DTC and was able to take advantage of the various synergies that exist between the two companies.
The Private Wealth Management Group of The Hershey Trust Company
On May 27, 2011, the acquisition of the Private Wealth Management Group of the Hershey Trust Company (“PWMG”) by the Corporation was completed. The transaction was accounted for as a business combination.
The acquisition of PWMG initially increased the Corporation’s wealth management division assets under management by $1.1 billion. The acquisition of PWMG allowed the Corporation to establish a presence in central Pennsylvania by maintaining the former PWMG offices in Hershey, Pennsylvania.
First Keystone Financial, Inc.
On July 1, 2010, the merger of First Keystone Financial, Inc. (“FKF”)Acquisition, RBPI will merge with and into the Corporation and the two step merger of FKF’s wholly-owned subsidiary, First Keystone BankRBA will merge with and into the Bank, were completed.
Bank. The transaction was accounted forAcquisition, which is expected to add approximately $602 million in loans and $630 million in deposits (based on unaudited December 31, 2016 financial information), strengthens the Corporation’s position as a business combination. The merger with FKF, a federally chartered thrift institution with assets of approximately $480 million, enabled the Corporation to increase its regional footprint withlargest community bank in Philadelphia’s western suburbs and, based on deposits, ranks it as the addition of eight full service branch locations, primarilyeighth largest community bank headquartered in Delaware County, Pennsylvania. The geographic locationsAcquisition, which will expand the Corporation's distribution network by providing entry into the new markets of the acquired branches were such that it was not necessaryNew Jersey and Berks County, Pennsylvania, and a new physical presence in Philadelphia County, Pennsylvania is expected to close anyduring the third quarter of the former FKF branches. By expanding into2017.
For a more complete discussion regarding these new areas within Delaware County, Pennsylvania, the Corporation has been able to extend its successful sales culture as well as offer its reputable wealth management products and other value-added services to a wider segment of the region’s population.acquisitions, see Item 1 – Business at page 1 in this Form 10-K.
Subsequent Period Acquisition
On January 1, 2015, the Corporation completed its previously announced merger with Continental Bank Holdings, Incorporated, (“CBHI”) which increased the Corporation’s assets by approximately $678 million. For more information on the transaction, please refer to Note 29, Subsequent Events, in the accompanying Notes to Consolidated Financial Statements.
Results of Operations
The following is management’s discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements. The Corporation’s consolidated financial condition and results of operations are comprised primarily of the Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future. For more information on the factors that could affect performance, see “Special Cautionary Notice Regarding Forward Looking Statements” immediately following the index at the beginning of this document.
Critical Accounting Policies, Judgments and Estimates
Critical Accounting Policies, Judgments and Estimates |
The accounting and reporting policies of the Corporation and its subsidiaries conform to U.S. generally accepted accounting principles (“GAAP”). All inter-company transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous years’years' financial statements to the current year’s presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates.
The AllowanceAllowance for LoanLoan and Lease Losses (theLeaseLosses(the “Allowance”)
The Allowance involves a higher degree of judgment and complexity than other significant accounting policies. The Allowance is calculatedestimated with the objective of maintaining a reserve level believed by the Corporation to be sufficient to absorb estimated credit losses present in the loan portfolio as of the reporting date. The Corporation’s determination of the adequacy of the allowance is based on frequent evaluations of the loan and lease portfolio and other relevant factors. However,Consideration is given to a variety of factors in establishing the estimate. Quantitative factors in the form of historical charge-off history by portfolio segment are considered. In connection with these quantitative factors, management establishes what it deems to be an adequate look-back period (“LBP”) for the charge-off history. As of December 31, 2016, the Corporation utilized a five-year LBP, which it believes adequately captures the trends in charge-offs. In addition, management develops an estimate of a loss emergence period (“LEP”) for each segment of the loan portfolio. The LEP estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan. As of December 31, 2016, the Corporation utilized a two-year LEP for its commercial loan segments and a one-year LEP for its consumer loan segments based on analyses of actual charge-offs tracked back in time to the triggering event for the eventual loss. In addition, various qualitative factors are considered, including specific terms and conditions of loans and leases, underwriting standards, delinquency statistics, industry concentration, overall exposure to a single customer, adequacy of collateral, the dependence on collateral, and results of internal loan review, including a borrower’s perceived financial and management strengths, the amounts and timing of the present value of future cash flows, and the access to additional funds. It should be noted that this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, the amounts and timing of expected cash flows on impaired loans and leases, the value of collateral, estimated losses on consumer loans and residential
mortgages and the relevance of historical loss experience. The process also considers economic conditions and inherent risks in the loan and lease portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from the Corporation’s estimates, additional provision for loan and lease losses (the “Provision”) may be required that would adversely impact earnings in future periods. See the section of this document titledAsset Quality and Analysis of Credit Risk for additional information.
Other significant accounting policies are presented in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements. The Corporation’s accounting policies have not substantively changed any aspect of its overall approach in the application of the foregoing policies.
Fair Value Measurement of Investment Securities Available-for-Sale and Assessment for Impairment of Certain Investment Securities
The Corporation may designate its investment securities as held-to-maturity, available-for-sale or trading. Each of these designations affords different treatment for changes in the fair market values of investment securities in the Corporation’s financial statements that are otherwise identical. Should evidence emerge which indicates that management’s intent or ability to maintain the securities as originally designated is not supported, reclassifications among the three designations may be necessary and, as a result, may require adjustments to the Corporation’s financial statements. As of December 31, 2016, the Corporation’s investment portfolio was primarily comprised of investment securities classified as available for sale.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets have been recorded on the books of the Corporation in connection with its acquisitions. The Corporation completes a goodwill impairment analysis at least on an annual basis, or more often if events and circumstances indicate that there may be impairment. The Corporation also completes an annual impairment test for other intangible assets, or more often, if events and circumstances indicate a possible impairment. During 2016, the Corporation made a voluntary change in the method of applying an accounting principle related to the timing of the annual goodwill impairment assessment from December 31st to October 31st. Management made this decision based on the time-intensive nature of the goodwill impairment assessment. Management does not consider this change in impairment testing date to be a material change in application of an accounting principle. There was no goodwill impairment and no material impairment to identifiable intangibles recorded during 2014the twelve month periods ended December 31, 2016, 2015 or 2013.2014. During the twelve months ended December 31, 2015, impairment of $387 thousand was recorded related to a favorable lease asset that had been recorded in connection with the CBH Merger. Subsequent to the CBH Merger, a decision was made to terminate the lease of the former CBH headquarters, which resulted in the favorable lease asset impairment charge. There was no impairment of identifiable intangible assets during the twelve month periods ended December 31, 2016 or 2015. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Overview
Other significant accounting policies are presented in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements. The U.S. has been a bastionCorporation’s accounting policies have not substantively changed any aspect of both economic growth and currency strength and stability onits overall approach in the global stage throughout 2014 and as we enterapplication of the early days of 2015. foregoing policies.
Overview of General Economic, Regulatory and Governmental Environment |
Real GDP growth came in atfor the fourth quarter of 2016 indicated a veryquarter-over-quarter increase of 1.9%, below the 2.2% consensus forecast and showed a deceleration from the robust 5% in3.5% pace of the third quarter of 2014, after registering strong growth2016. For the full year of 4.6% in the second quarter. The resiliency of the U.S. economy is very notable, given the fact that the first quarter came in2016, Real GDP grew at a negative 2.1%1.6% pace, down from the 2015 growth rate dueof 2.6%. One clear area of GDP strength has been that of consumer, where strong spending and confidence data have been largely supported by job growth and an improving wage growth picture. Measures of consumer confidence are reaching levels not seen in more than 10 years. The Conference Board Consumer Confidence Index had jumped to 113.3 in December 2016, a 15-year high, before retreating modestly in January to 111.8.
The Federal Open Market Committee met on January 26-27, 2017 leaving short term interest rates unchanged. The Committee’s statement included the unusually severe winter weather. Third quarter growth was driven by afollowing: “The stance of monetary policy remains accommodative, thereby supporting further improvement in consumerlabor market conditions and a return to 2 percent inflation.”
The focus of attention has now moved from the presidential and congressional elections that took place in November 2016, to implementation expectations for fiscal stimulus measures and regulatory relief.
We acknowledge that there are plenty of geopolitical risks present that could alter the economic landscape as we progress through 2017. That said, a combination of lower taxes, less regulation, and increased infrastructure spending (+3.2%), non-residential fixed investment (+8.9%), federal government spending (+9.9%)could stimulate economic growth and exports (+4.5%).prolong this economic expansion, which is long by historic standards.
Consumer spending, which represents about two-thirds
ExecutiveOverview |
The following Executive Overview provides a summary-level review of domestic GDP, was aided bythe results of operation for 2016 compared to 2015 and 2015 compared to 2014 as well as a numbercomparison of factors, including a better jobs picture. The civilian unemployment rate droppedthe December 31, 2016 balance sheet as compared to 5.6% inthe December 2014, from a high of 7.0% earlier in 2014. Non-farm payroll employment growth accelerated through the course of 2014, registering an average gain of 246,000 new jobs31, 2015 balance sheet. More detailed information regarding these comparisons can be found in the fourth calendar quarter. According to Bureau of Labor Statistics data, average hourly earnings remain subdued, but some acceleration is expected in 2015.sections that follow.
Consumer spending has been aided by the dramatic decline in energy prices, primarily crude oil, since June of 2014. The decline in the price of crude has led to the drop in the price of refined petroleum products, such as gasoline, jet fuel and heating oil. As of January 24, 2015, the national average for the price of regular unleaded gasoline had dropped to $2.04 per gallon, according to the Automobile Association of America. It is believed that the majority of savings from lower gas prices will be spent by households, which should further enhance the consumer-based U.S. economy.
Executive Overview
20142016 Compared to 20132015
Income Statement
The Corporation reported net income of $27.8$36.0 million or $2.01$2.12 diluted earnings per share for the twelve months ended December 31, 2014,2016, as compared to $24.4$16.8 million, or $1.80$0.94 diluted earnings per share, for the same period in 2013.2015. Return on average equity (“ROE”("ROE") and return on average assets (“ROA”("ROA") for the twelve months ended December 31, 2014,2016, were 11.56%9.75% and 1.32%1.16%, respectively, as compared to 11.53%4.49% and 1.23%0.57%, respectively, for the same period in 2013.2015. The increase in net income for the twelve months ended December 31, 2014,2016, as compared to the same period in 2013,2015, was largely related to the $17.4 million pre-tax loss on the settlement of the corporate pension plan, which was recorded for the twelve months ended December 31, 2015. In addition to the absence of the pension settlement charge, net interest income for the twelve months ended December 31, 2016 increased by $6.1 million and due diligence, merger-related and merger integration expenses decreased by $6.7 million from the same period in 2015.
The $6.2 million increase in the Corporation’s tax-equivalent net interest income for the twelve months ended December 31, 2016, as compared to the same period in 2015, was related to a $3.8$268.8 million increase in net interest income andaverage loans offset by a $2.7$117.8 million decrease in Provision.interest-earning deposits with other banks. This redeployment of low-yielding cash on deposit with other banks to higher yielding loans resulted in an $8.2 million increase in tax-equivalent interest income. The tax-equivalent yield earned on loans for the twelve months ended December 31, 2016 was 4.57%, while the tax-equivalent yield earned on interest-earning deposits with other banks was only 0.39%. Partially offsetting these improvements were increasesthe increase in average loans, average interest-bearing deposits increased by $86.4 million, accompanied by an 8 basis point increase in rate paid on deposits. Average long-term Federal Home Loan Bank (“FHLB”) advances and other borrowings decreased by $29.0 million between the twelve month periods ended December 31, 2015 and 2016 as the inflow of $678deposits during 2016 alleviated the need to increase borrowings to support loan growth.
For the twelve months ended December 31, 2016, the Provision of $4.3 million was virtually unchanged from the $4.4 million recorded for the same period in 2015. Net loan and lease charge offs for the twelve months ended December 31, 2016 totaled $2.7 million, a decrease of $428 thousand from the same period in 2015.
Non-interest income for the twelve months ended December 31, 2016 was $54.0 million, a $1.9 million decrease from the same period in 2015. Decreases of $1.0 million in gain on sale of available for sale investment securities, $319 thousand in non-interest expensedividends on FHLB and $2.4 millionFederal Reserve Bank (“FRB”) stocks and $204 thousand in income taxfees for wealth management services were the primary contributors to this decrease.
Non-interest expense for the twelve months ended December 31, 2014,2016, was $101.7 million, a decrease of $24.0 million, as compared to the same period in 2013.2015. The primary causes of this decrease were the absences of the $17.4 million loss on settlement of the corporate pension and the $6.7 million in due diligence, merger-related and merger integration costs recorded in 2015. Partially offsetting these improvements were increases of $2.8 million and $679 thousand in salaries and wages and furniture, fixtures and equipment, respectively.
Balance Sheet
Asset quality as of December 31, 2016 is stable, with nonperforming loans and leases comprising 0.33% of portfolio loans as compared to 0.45% of portfolio loans as of December 31, 2015. The Allowance of $17.5 million was 0.69% of portfolio loans and leases as of December 31, 2016, as compared to $15.9 million, or 0.70% of portfolio loans and leases, at December 31, 2015. The relatively unchanged level of Allowance reflects the continued strength of credit quality in the loan portfolio.
Total portfolio loans and leases of $2.54 billion as of December 31, 2016 increased $266.4 million, or 11.7%, from $2.27 billion as of December 31, 2015.
The $3.8Corporation’s available for sale investment portfolio as of December 31, 2016 had a fair value of $567.0 million, as compared to $349.0 million at December 31, 2015. Largely responsible for the increase was the purchase, in December 2016, of $200 million of short-term treasury bills.
Deposits of $2.58 billion, as of December 31, 2016, increased $327.0 million from December 31, 2015. One third of the increase in deposits was in the non-interest-bearing segment of the portfolio.
Wealth Assets
Wealth assets under management, administration, supervision and brokerage increased to $11.33 billion as of December 31, 2016, an increase of $2.96 billion from $8.36 billion as of December 31, 2015. A significant portion of the increase was in flat- or fixed-fee accounts.
2015 Compared to 2014
Income Statement
It should be noted that much of the increase in income and expense for the twelve months ended December 31, 2015, as compared to the same period in 2014 was the result of the CBH Merger, which initially increased interest-earning assets by $617.4 million, interest-bearing liabilities by $516.2 million, and added ten new branch locations.
The Corporation reported net income of $16.8 million or 5.2%$0.94 diluted earnings per share for the twelve months ended December 31, 2015, as compared to $27.8 million, or $2.01 diluted earnings per share, for the same period in 2014. ROE and ROA for the twelve months ended December 31, 2015, were 4.49% and 0.57%, respectively, as compared to 11.56% and 1.32%, respectively, for the same period in 2014. The decrease in net income for the twelve months ended December 31, 2015, as compared to the same period in 2014 was a direct result of the $17.4 million pre-tax loss on the settlement of the pension plan. In addition to the loss on the pension plan settlement, there were increases in net interest income, non-interest income and non-interest expense which were all largely related to the CBH Merger.
The $23.4 million, or 30.3%, increase in the Corporation’s tax-equivalent net interest income for the twelve months ended December 31, 2014,2015, as compared to the same period in 2013,2014, was largely attributed to the $153.9$424.2 million increase in averageof portfolio loans betweenacquired in the periods. InCBH Merger, in addition to this increase in average interest-earning assets, average interest-bearing liabilitiesthe $192.5 million of organic loan growth experienced during 2015. Average loans increased by $68.7$551.4 million primarily related to a $60.0 million increase in long-term FHLB advances and other borrowings. The average rate paid on interest-bearing liabilities increased by 3 basis points while the average yield earned on interest-earning assets decreased by 3 basis points between the periods. The Corporation’s tax-equivalent net interest margin decreased by 5 basis points, to 3.93% for the twelve months ended December 31, 2014 from 3.98% for2015, as compared to the same period in 2013.2014. Partially offsetting this increase in average loans, average interest-bearing deposits increased by $453.0 million, related to the $387.8 million of interest-bearing deposits assumed in the CBH Merger. In addition, combined average short-term and long-term borrowings increased by $47.7 million and average subordinated notes, which were originated in August 2015, increased $12.0 million for the twelve months ended December 31, 2015 as compared to the same period in 2014. The tax-equivalent yield on interest-earning assets decreased 17 basis points, while the tax equivalent rate paid on interest-bearing liabilities remained unchanged for the twelve months ended December 31, 2015 as compared to the same period in 2014.
For the twelve months ended December 31, 2014,2015, the Provision of $884 thousand$4.4 million was a decreasean increase of $2.7$3.5 million from the $3.6 million$884 thousand for the same period in 2013.2014. Net loan and lease charge offs for the twelve months ended December 31, 20142015 totaled $1.8$3.1 million, a decreasean increase of $672 thousand$1.3 million from the same period in 2013.2014.
Non-interest income for the twelve months ended December 31, 20142015 was $48.3$56.0 million, a slight decrease of $33 thousand as compared to$7.6 million increase from the same period in 2013. An increase2014. Increases of $1.6$2.6 million in wealth management revenue, along with increases of $479 thousand, $475 thousand and $559 thousand$1.3 million in net gain on sale of investment securities available for sale, net gainloans, $1.8 million in other operating income and $767 thousand in dividends on sale of other real estate owned,FHLB and insurance commissions, respectively, were offset by a $2.4 million decrease in net gain on sale of residential mortgages betweenFRB stocks contributed to the periods.increase.
Non-interest expense for the twelve months ended December 31, 2014,2015, was $81.4$125.8 million, an increase of $678 thousand, as compared to the same period in 2013. Contributing to this increase were increases in occupancy and furniture, fixtures and equipment expense totaling $974 thousand and increases of $488 thousand and $561 thousand in due diligence and merger-related expenses and professional fees, respectively, between the periods. These cost increases were partially offset by a $1.1 million decrease in other operating expenses and a $347 thousand decrease in costs related to early extinguishment of debt.
Balance Sheet
Asset quality remained stable as of December 31, 2014. The Allowance of $14.6 million was 0.88% of portfolio loans and leases, as of December 31, 2014, as compared to $15.5 million, or 1.00% of portfolio loans and leases, at December 31, 2013. The decrease in the Allowance as of December 31, 2014, as compared to December 31, 2013, is reflective of improvements in various loan quality indicators as well as economic environment indicators as of December 31, 2014.
Total portfolio loans and leases of $1.65 billion at December 31, 2014 increased $105.1 million, or 6.8%, as compared to $1.55 billion at December 31, 2013. The loan growth was concentrated in the commercial mortgage, commercial and industrial, and construction segments of the portfolio.
The Corporation’s available for sale investment portfolio at December 31, 2014 had a fair market value of $229.6 million, as compared to $285.8 million at December 31, 2013, as cash inflows from maturities, calls and pay downs were utilized for loan origination.
Deposits of $1.69 billion, as of December 31, 2014, increased $96.7 million from December 31, 2013. The 6.1% increase was the result of a $62.6 million increase in wholesale deposits and a $56.5 million increase in core deposits. These increases were partially offset by a $22.4 million decrease in retail time deposits, as the Corporation continued its planned run-off of its higher-rate certificates of deposit. Non-interest-bearing deposits comprised 26.5% of deposits as of December 31, 2014, relatively unchanged from its December 31, 2013 level of 26.8%.
Wealth Assets
Wealth assets under management, administration, supervision and brokerage increased to $7.7 billion as of December 31, 2014, an increase of $432 million from $7.3 billion as of December 31, 2013.
2013 Compared to 2012
Income Statement
The Corporation reported net income of $24.4 million or $1.80 diluted earnings per share for the twelve months ended December 31, 2013, as compared to $21.1 million, or $1.60 diluted earnings per share, for the same period in 2012. ROE and ROA for the twelve months ended December 31, 2013, were 11.53% and 1.23%, respectively, as compared to 10.91% and 1.15%, respectively, for the same period in 2012. The increase in net income for the twelve months ended December 31, 2013, as compared to the same period in 2012, was largely related to an $8.3 million increase in net interest income, which reflected a 12.8% increase. A $2.0 million increase in non-interest income was offset by a $5.8 million increase in non-interest expense and a $1.5 million increase in income tax expense for the twelve months ended December 31, 2013 as compared to the same period in 2012.
The $8.3 million, or 12.8%, increase in the Corporation’s tax-equivalent net interest income for the twelve months ended December 31, 2013, as compared to the same period in 2012, was largely attributed to the $144.4 million increase in average portfolio loans between the periods, as the $76.6 million of loans acquired in the FBD transaction at the end of 2012 were supplemented by robust organic loan growth during 2013. In addition to this increase in average interest-earning assets, average interest-bearing liabilities also increased by $73.4 million, partially as the result of the deposits acquired from FBD. However, the average rate paid on interest-bearing liabilities declined by 27 basis points between the periods. The Corporation’s tax-equivalent net interest margin increased to 3.98% for the twelve months ended December 31, 2013 from 3.85% for the same period in 2012.
For the twelve months ended December 31, 2013, the provision for loan and lease losses of $3.6 million was a decrease of $428 thousand from the $4.0 million for the same period in 2012. Net loan and lease charge offs for the twelve months ended December 31, 2013 totaled $2.5 million, a $154 thousand decrease from the same period in 2012.
Non-interest income for the twelve months ended December 31, 2013 was $48.4 million, an increase of $2.0$44.3 million, as compared to the same period in 2012. Contributing2014. Largely contributing to the increase was the $17.4 million loss on settlement of the pension plan, a $5.4$4.3 million increase in wealth management revenue betweendue diligence, merger-related and merger integration costs as well as increases in nearly all other expense lines as a result of the periods. Partially offsetting this increase were decreases of $2.6 millionincreased staffing and $1.4 millionfacilities added in the gains on sale of residential mortgage loans and available for sale investment securities, respectively, between the periods.CBH Merger.
Non-interest expense for the twelve months ended December 31, 2013, was $80.7 million, an increase of $5.8 million, as compared to the same period in 2012. Contributing to this increase were a $3.9 million increase in salaries and employee benefits expense and a $1.2 million increase in occupancy and equipment expense between the periods, as the Corporation has implemented several infrastructure improvements during the year.
Components of Net Income |
Components of Net Income
Net income is comprised of five major elements:
● | Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds; |
● | Provision For Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases; |
● | Non-Interest Income, which is made up primarily of wealth management revenue, gains and losses from the sale of residential mortgage loans, gains and losses from the sale of available for sale investment securities and other fees from loan and deposit services; |
● | Non-Interest Expense, which consists primarily of salaries and employee benefits, occupancy, intangible asset amortization, professional fees and other operating expenses; and |
● | Income Taxes,which include state and federal jurisdictions. |
Net Interest Income
|
Rate/Volume Analyses (Tax-equivalent Basis)*
The rate volume analysis in the table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the years 2016 as compared to 2015, and 2015 as compared to 2014, allocated by rate and volume. The change in interest income / expense due to both volume and rate has been allocated to changes in volume.
Year Ended December 31, | ||||||||||||||||||||||||
| (dollars in thousands) | 2016 Compared to 2015 | 2015 Compared to 2014 | ||||||||||||||||||||||
increase/(decrease) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest Income: | ||||||||||||||||||||||||
Interest-bearing deposits with banks | $ | (300 | ) | $ | 59 | $ | (241 | ) | $ | 183 | $ | 33 | $ | 216 | ||||||||||
Investment securities - taxable | 213 | 373 | 586 | 1,324 | 107 | 1,431 | ||||||||||||||||||
Investment securities –nontaxable | (19 | ) | 20 | 1 | 76 | 71 | 147 | |||||||||||||||||
Loans and leases | 12,636 | (4,418 | ) | 8,218 | 27,151 | (3,225 | ) | 23,926 | ||||||||||||||||
Total interest income | 12,530 | (3,966 | ) | 8,564 | 28,734 | (3,014 | ) | 25,720 | ||||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Savings, NOW and market rate accounts | 167 | — | 167 | 427 | 216 | 643 | ||||||||||||||||||
Wholesale deposits | 192 | 276 | 468 | 198 | (53 | ) | 145 | |||||||||||||||||
Retail time deposits | 48 | 938 | 986 | 604 | (78 | ) | 526 | |||||||||||||||||
Borrowed funds – short-term | 1 | 44 | 45 | 24 | 7 | 31 | ||||||||||||||||||
Borrowed funds – long-term | (404 | ) | 203 | (201 | ) | 391 | — | 391 | ||||||||||||||||
Subordinated notes | 864 | 11 | 875 | 601 | — | 601 | ||||||||||||||||||
Total interest expense | 868 | 1,472 | 2,340 | 2,245 | 92 | 2,337 | ||||||||||||||||||
Interest differential | �� | $ | 11,662 | $ | (5,438 | ) | $ | 6,224 | $ | 26,489 | $ | (3,106 | ) | $ | 23,383 | |||||||||
* The tax rate used in the calculation of thetax-equivalent income is 35%.
Analysis of Interest Rates and Interest Differential
The table below presents the major asset and liability categories on an average daily basis for the periods presented, along with tax-equivalent interest income and expense and key rates and yields:
For the Year EndedDecember31, | ||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | Average | Interest | Average | Average | Interest | Average | Average | Interest | Average | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Interest-bearing deposits with banks | $ | 43,214 | $ | 168 | 0.39 | % | $ | 161,032 | $ | 409 | 0.25 | % | $ | 83,163 | $ | 193 | 0.23 | % | ||||||||||||||||||
Investment securities - available for sale: | ||||||||||||||||||||||||||||||||||||
Taxable | 329,161 | 5,784 | 1.76 | % | 315,741 | 5,124 | 1.62 | % | 233,054 | 3,740 | 1.60 | % | ||||||||||||||||||||||||
Tax –Exempt | 38,173 | 742 | 1.94 | % | 39,200 | 741 | 1.89 | % | 34,689 | 594 | 1.71 | % | ||||||||||||||||||||||||
Total investment securities – available for sale | 367,334 | 6,526 | 1.78 | % | 354,941 | 5,865 | 1.65 | % | 267,743 | 4,334 | 1.62 | % | ||||||||||||||||||||||||
Investment securities – held to maturity | 2,060 | 4 | 0.19 | % | — | — | — | — | — | — | ||||||||||||||||||||||||||
Investment securities – trading | 3,740 | 2 | 0.05 | % | 3,881 | 80 | 2.06 | % | 3,591 | 33 | 0.92 | % | ||||||||||||||||||||||||
Loans and leases(1)(2)(3) | 2,429,416 | 110,925 | 4.57 | % | 2,160,628 | 102,707 | 4.75 | % | 1,609,220 | 78,781 | 4.90 | % | ||||||||||||||||||||||||
Total interest-earning assets | 2,845,764 | 117,625 | 4.13 | % | 2,680,482 | 109,061 | 4.07 | % | 1,963,717 | 83,341 | 4.24 | % | ||||||||||||||||||||||||
Cash and due from banks | 16,317 | 17,615 | 12,730 | |||||||||||||||||||||||||||||||||
Allowance for loan and lease losses | (17,159 | ) | (15,099 | ) | (15,836 | ) | ||||||||||||||||||||||||||||||
Other assets | 260,728 | 259,515 | 154,871 | |||||||||||||||||||||||||||||||||
Total assets | $ | 3,105,650 | $ | 2,942,513 | $ | 2,115,482 | ||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||
Savings, NOW, and market rate accounts | $ | 1,292,228 | $ | 2,485 | 0.19 | % | $ | 1,249,567 | $ | 2,318 | 0.19 | % | $ | 958,129 | 1,675 | 0.17 | % | |||||||||||||||||||
Wholesale deposits | 163,724 | 1,240 | 0.76 | % | 130,773 | 772 | 0.59 | % | 99,059 | 627 | 0.63 | % | ||||||||||||||||||||||||
Time deposits | 266,772 | 2,108 | 0.79 | % | 255,961 | 1,122 | 0.44 | % | 126,097 | 596 | 0.47 | % | ||||||||||||||||||||||||
Total interest-bearing deposits | 1,722,724 | 5,833 | 0.34 | % | 1,636,301 | 4,212 | 0.26 | % | 1,183,285 | 2,898 | 0.24 | % | ||||||||||||||||||||||||
Short-term borrowings | 37,041 | 93 | 0.25 | % | 36,010 | 48 | 0.13 | % | 15,960 | 17 | 0.11 | % | ||||||||||||||||||||||||
FHLB advances and other borrowings | 225,815 | 3,353 | 1.48 | % | 254,828 | 3,554 | 1.39 | % | 227,137 | 3,163 | 1.39 | % | ||||||||||||||||||||||||
Subordinated notes | 29,503 | 1,476 | 5.00 | % | 12,013 | 601 | 5.00 | % | — | — | ||||||||||||||||||||||||||
Total interest-bearing liabilities | 2,015,083 | 10,755 | 0.53 | % | 1,939,152 | 8,415 | 0.43 | % | 1,426,382 | 6,078 | 0.43 | % | ||||||||||||||||||||||||
Non-interest-bearing deposits | 687,134 | 594,122 | 426,274 | |||||||||||||||||||||||||||||||||
Other liabilities | 33,904 | 36,151 | 22,048 | |||||||||||||||||||||||||||||||||
Total non-interest-bearing liabilities | 721,038 | 630,273 | 448,322 | |||||||||||||||||||||||||||||||||
Total liabilities | 2,736,121 | 2,569,425 | 1,874,704 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 369,529 | 373,088 | 240,778 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 3,105,650 | $ | 2,942,513 | $ | 2,115,482 | ||||||||||||||||||||||||||||||
Net interest spread | 3.60 | % | 3.64 | % | 3.81 | % | ||||||||||||||||||||||||||||||
Effect of non-interest-bearing sources | 0.16 | % | 0.11 | % | 0.12 | % | ||||||||||||||||||||||||||||||
Net interest income/margin on earning assets | $ | 106,870 | 3.76 | % | $ | 100,646 | 3.75 | % | $ | 77,263 | 3.93 | % | ||||||||||||||||||||||||
Tax-equivalent adjustment (tax rate 35%) | $ | 634 | 0.02 | % | $ | 519 | 0.02 | % | $ | 435 | 0.02 | % | ||||||||||||||||||||||||
(1) | Non-accrual loans have been included in
Tax-Equivalent Net Interest Income and Margin – 2016Compared to 2015 The tax-equivalent net interest margin increased 1 basis point to 3.76% for the twelve months ended December 31, 2016, as compared to 3.75%, for the same period in 2015. The effect on interest income of the $268.8 million increase in average loans between periods was partially offset by an 18 basis point decrease in tax-equivalent yield earned on loans and leases between periods. On the liability side, the $86.4 million increase in average interest-bearing deposits, accompanied by an 8 basis point increase in rate paid on deposits and the $29.0 million decrease in long-term FHLB advances and other borrowings whose rate paid increased by 9 basis points, combined to offset the margin improvement from the asset growth. Tax-equivalent net interest income for the twelve months ended December 31, 2016 of $106.9 million, was $6.2 million higher than the tax-equivalent net interest income of $100.6 million for the same period in 2015. The primary driver for the increase in tax-equivalent net interest income was the volume increase in average loans and leases, partially offset by a yield decrease, which added $8.2 million in interest income. The impact of this loan growth was partially offset by a volume increase and an increase in rate paid for interest-bearing deposits, which decreased tax-equivalent net interest income by $1.6 million. Tax-Equivalent Net Interest Income and Margin - 2015 Compared to 2014 The tax-equivalent net interest margin decreased 18 basis points to 3.75% for the twelve months ended December 31, 2015, as compared to 3.93%, for the same period in 2014. Largely contributing to the decline was the 15 basis point decrease in yield on loans and leases for 2015 as compared to 2014. Although the loans acquired in the CBH Merger contributed to the margin through the accretion of their loan marks, the lower-interest-rate environment in 2015 resulted in new loan volume being originated at lower yields than the yields in the portfolio as of December 31, 2014. The decrease in tax-equivalent yield on loans was partially offset by a 3 basis point increase in yield on available for sale investment securities. On the liability side, the 4.75% fixed-to-floating rate subordinated notes issued in August 2015 affected the tax-equivalent yield for 2015. The average balance of subordinated notes for the twelve months ended December 31, 2015 totaled $12.0 million at a rate of 5.00%. Also driving the tax equivalent yield down, to a lesser extent, the rate paid on interest-bearing deposits increased by 2 basis points, while rates paid on borrowings remained unchanged from 2014 to 2015. Tax-equivalent net interest income for the twelve months ended December 31, 2015 of $100.6 million, was $23.4 million, or 30.3%, higher than the tax-equivalent net interest income of $77.3 million for the same period in 2014. The primary driver for the increase in tax-equivalent net interest income was the volume of interest-earning assets and interest-bearing liabilities added in CBH Merger. The CBH Merger added $424.2 million of portfolio loans, while organic loan growth contributed another $192.5 million of portfolio loans. The average balance of loans increased by $551.4 million for the twelve months ended December 31, 2015, as compared to the same period in 2014. Interest-bearing deposits assumed in the CBH Merger totaled $387.8 million. Average interest-bearing deposits for the twelve months ended December 31, 2015 increased by $453.0 million as compared to the same period in 2014. In addition to the assets and liabilities acquired in the CBH Merger, the Corporation issued $30.0 million of 4.75% fixed-to-floating rate subordinated notes in August 2015. Of the $23.4 million increase in tax-equivalent net interest income between 2014 and 2015, volume increases of both interest-earning assets and interest-bearing liabilities accounted for a $26.5 million increase while decreases in yields on interest-earning assets and increases on rates paid on interest-bearing liabilities accounted for a $2.3 million decrease in tax-equivalent net interest income. Tax-EquivalentNet Interest Margin – Quarterly Comparison The tax-equivalent net interest margin and related components for the past five quarters are shown in the table below:
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. The Corporation’s Asset Liability Committee (“ALCO”), using policies and procedures approved by the Corporation’s Board of Directors, is responsible for the management of the Corporation’s interest rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities. This is accomplished through the management of the investment portfolio, the pricings of loans and deposit offerings and through wholesale funding. Wholesale funding is available from multiple sources including borrowings from the FHLB, the Federal Reserve Bank of Philadelphia’s discount window, federal funds from correspondent banks, certificates of deposit from institutional brokers, Certificate of Deposit Account Registry Service (“CDARS”), Insured Network Deposit (“IND”) Program, Charity Deposits Corporation (“CDC”) (formerly known as Institutional Deposit Corporation (“IDC”)), Insured Cash Sweep (“ICS”) and Pennsylvania Local Government Investment Trust (“PLGIT”). The Corporation uses several tools to measure the effect of interest rate risk on its net interest income. These methods include gap analysis, market value of portfolio equity analysis, net interest income simulations under various scenarios and tax-equivalent net interest margin reports. The results of these reports are compared to limits established by the Corporation’s ALCO policies and appropriate adjustments are made if the results are outside the established limits. The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “shock”, in the yield curve and subjective adjustments in deposit pricing, might have on the Corporation’s projected net interest income over the next 12 months. This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next twelve months. The changes to net interest income shown below are in compliance with the Corporation’s policy guidelines. Summary of Interest Rate Simulation
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of December 31, 2016 in the +100 basis point scenario, demonstrating that a 100 basis point increase in interest rates would have a positive impact on net interest income over the next 12 months. The balance sheet is more asset sensitive in a rising-rate environment as of December 31, 2016 than it was as of December 31, 2015. This increase in sensitivity is related to a decrease in cash balances, an increase in floating rate loans, and an increase in fixed rate certificates of deposit. The magnitude of the change in net interest income resulting from a 100 basis point decrease in rates as compared to the magnitude of the increase in net income accompanying a 100 basis point increase in rates is the result of the ability to decrease loan rates to more of a degree than deposits rates in a down 100 basis point rate shift. GapAnalysis The interest sensitivity, or gap analysis, identifies interest rate risk by showing repricing gaps in the Corporation’s balance sheet. All assets and liabilities are reflected based on behavioral sensitivity, which is usually the earliest of either: repricing, maturity, contractual amortization, prepayments or likely call dates. Non-maturity deposits, such as NOW, savings and money market accounts are spread over various time periods based on the expected sensitivity of these rates considering liquidity and the investment preferences of the Corporation. Non-rate-sensitive assets and liabilities are spread over time periods to reflect the Corporation’s view of the maturity of these funds. Non-maturity deposits (demand deposits in particular) are recognized by the Bank’s regulatory agencies to have different sensitivities to interest rate environments. Consequently, it is an accepted practice to spread non-maturity deposits over defined time periods in order to capture that sensitivity. Commercial demand deposits are often in the form of compensating balances, and fluctuate inversely to the level of interest rates; the maturity of these deposits is reported as having a shorter life than typical retail demand deposits. Additionally, the Bank’s regulatory agencies have suggested distribution limits for non-maturity deposits. However, the Corporation has taken a more conservative approach than these limits would suggest by forecasting these deposit types with a shorter maturity. The following table presents the Corporation’s gap analysis as of December 31, 2016:
(1)Investment securities include available for sale, held to maturity and trading. The table above indicates that the Corporation is asset sensitive and should experience an increase in net interest income in the near term, if interest rates rise. Accordingly, if rates decline, net interest income should decline. Actual results may differ from expected results for many reasons including market reactions, competitor responses, customer behavior and/or regulatory actions.
General Discussion of the Allowance for Loan and Lease Losses The balance of the allowance for loan and lease losses is determined based on the Corporation’s review and evaluation of the loan and lease portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including the Corporation’s assumptions as to future delinquencies, recoveries and losses. Increases to the Allowance are implemented through a corresponding Provision (expense) in the Corporation’s statement of income. Loans and leases deemed uncollectible are charged against the Allowance. Recoveries of previously charged-off amounts are credited to the Allowance. While the Corporation considers the Allowance to be adequate, based on information currently available, future additions to the Allowance may be necessary due to changes in economic conditions or the Corporation’s assumptions as to future delinquencies, recoveries and losses and the Corporation’s intent with regard to the disposition of loans. In addition, the Pennsylvania Department of Banking and the Federal Reserve Bank of Philadelphia, as an integral part of their examination processes, periodically review the Corporation’s Allowance. The Corporation’s Allowance is comprised of four components that are calculated based on various independent methodologies. All components of the Allowance are based on Management’s estimates. These estimates are summarized earlier in this document under the heading “Critical Accounting Policies, Judgments and Estimates.” The four components of the Allowance are as follows:
As part of the process of calculating the Allowance for the different segments of the loan and lease portfolio, management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house employees as well as an external loan review service. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
Consumer credit exposure, which includes residential mortgages, home equity lines and loans, leases and consumer loans, are assigned a credit risk profile based on payment activity (that is, their delinquency status). Refer to Note 5-F in the Notes to Consolidated Financial Statements for details regarding credit quality indicators associated with the Corporation’s loan and lease portfolio. Portfolio Segmentation – The Corporation’s loan and lease portfolio is divided into specific segments of loans and leases having similar characteristics. These segments are as follows:
Refer to Note 5 in the Notes to Consolidated Financial Statements and the section of this MD&A under the heading “Portfolio Loans and Leases” for details of the Corporation’s loan and lease portfolio, broken down by portfolio segment. Impairment Measurement –In accordance with guidance provided by ASC 310-10, "Receivables", the Corporation employs one of three methods to determine and measure impairment:
Loans and leases for which there is an indication that all contractual payments may not be collectible are evaluated for impairment on an individual basis. Loans that are evaluated on an individual basis include non-performing loans, troubled debt restructurings and purchased credit-impaired loans. Nonaccrual Loans –In general, loans and leases that are delinquent on contractually due principal or interest payments for more than 89 days are placed on nonaccrual status and any unpaid interest is reversed as a charge to interest income. When the loan resumes payment, all payments (principal and interest) are applied to reduce principal. After a period of six months of satisfactory performance, the loan may be placed back on accrual status. Any interest payments received during the nonaccrual period that had been applied to reduce principal are reversed and recorded as a deferred fee which accretes to interest income over the remaining term of the loan or lease. In certain cases, the Corporation may have information about a particular loan or lease that may indicate a future disruption or curtailment of contractual payments. In these cases, the Corporation will preemptively place the loan or lease on nonaccrual status. Troubled Debt Restructurings (“TDRs”) -The Corporation follows guidance provided by ASC 310-40, “Troubled Debt Restructurings by Creditors.” A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction of interest rate or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, the Corporation will make the necessary disclosures related to the TDR. In certain cases, a modification may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered to be a TDR. Once a loan or lease has been modified and is considered a TDR, it is reported as an impaired loan or lease. If the loan or lease deemed a TDR has performed for at least six months at the level prescribed by the modification, it is not considered to be non-performing; however, it will generally continue to be reported as impaired. Loans and leases that have performed for at least six months are reported as TDRsin compliance with modified terms. Refer to Note 5-G in the Notes to Consolidated Financial Statements for more information regarding the Corporation's TDRs. Charge-off Policy -
Any other loan or lease, for which the Corporation has reason to believe collectability is unlikely, and for which sufficient collateral does not exist, is also charged off. Refer to Note 5-F in the Notes to Consolidated Financial Statements for more information regarding the Corporation's charge-offs and factors which influenced Management’s judgment with respect thereto. Loans Acquired in Mergers and Acquisitions In accordance with GAAP, the loans acquired from FKB, FBD and CBH were recorded at their fair value with no carryover of the previously associated allowance for loan loss. Certain loans were acquired which exhibited deteriorated credit quality since origination and for which the Corporation does not expect to collect all contractual payments. Accounting for these purchased credit-impaired (“PCI”) loans is done in accordance with ASC 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality”. The loans were recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield. On a regular basis, at least quarterly, an assessment is made on PCI loans to determine if there has been any improvement or deterioration of the expected cash flows. If there has been improvement, an adjustment is made to increase the recognition of interest on the PCI loan, as the estimate of expected loss on the loan is reduced. Conversely, if there is deterioration in the expected cash flows of a PCI loan, a Provision is recorded in connection with the loan. Management evaluates PCI loans individually for further impairment as well as for improvements to expected cash flows. Loans acquired in mergers and acquisitions which do not exhibit deteriorated credit quality at the time of acquisition are accounted for under ASC 310-20 and receive a loan mark based on credit and interest-rate. The resulting discount or premium is accreted or amortized, respectively, to interest income over their remaining maturity. These non-impaired acquired loans, along with the balance of the Corporation's loan and lease portfolio are evaluated on either an individual basis or on a collective basis for impairment. For a more information regarding the Corporation's impaired loans and leases, refer to Notes 5-F and 5-H and for more information regarding loan marks, refer to Note 5-I in the Notes to Consolidated Financial Statements. Asset Quality and Analysis of Credit Risk As of December 31, 2016, total non-performing loans and leases were $8.4 million, representing 0.33% of portfolio loans and leases, as compared to $10.2 million, or 0.45% of portfolio loans and leases, as of December 31, 2015. The $1.9 million decrease in non-performing loans and leases was comprised of decreases of $1.2 million, $554 thousand and $509 thousand in commercial and industrial loans, residential mortgages, and commercial mortgages, respectively. These decreases were partially offset by increases of $262 thousand and $128 thousand in non-performing home equity lines and loans and leases, respectively. The Provision for the twelve month periods ended December 31, 2016, 2015 and 2014 was $4.3 million, $4.4 million and $884 thousand, respectively. The Provision recorded during any given period reflects an allocation related to net new loan volume and the replenishment of Allowance consumed by charge-offs of loans and leases for which the Corporation had not specifically reserved. Net loan charge-offs for the twelve months ended December 31, 2016 totaled $2.7 million as compared to $3.1 million for the same period in 2015. Total portfolio loans increased by $266.4 million during the twelve months ended December 31, 2016 as compared to $192.5 million (excluding loans acquired in the CBH Merger) for the same period in 2015. As of December 31, 2016, the Allowance of $17.5 million represents 0.69% of portfolio loans and leases, as compared to the Allowance as of December 31, 2015 of $15.9 million, which represented 0.70% of portfolio loans and leases as of that date. As of December 31, 2016, the Corporation had other real estate owned (“OREO”) valued at $1.0 million, as compared to $2.6 million as of December 31, 2015. The decrease was related to the sale, during 2016, of one residential property, carried at $1.8 million, which resulted in a $76 thousand loss on sale, partially offset by the addition of two residential properties totaling $355 thousand. In addition, $111 thousand in impairment was recorded on the OREO portfolio based on updated property appraisals or agreements of sale. The properties comprising the balance as of December 31, 2016 include seven single-family residential properties. All properties are recorded at their estimated fair values less costs to sell. As of December 31, 2016, the Corporation had $9.0 million of TDRs, of which $6.4 million were in compliance with the modified terms for six months or greater, and hence, excluded from non-performing loans and leases. As of December 31, 2015, the Corporation had $6.8 million of TDRs, of which $4.9 million were in compliance with the modified terms. Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest payments in accordance with the original terms of the loans and leases. Included in impaired loans and leases are non-accrual loans and leases and TDRs in compliance with modified terms. Purchased credit-impaired loans are not included in impaired loan and lease totals. As of December 31, 2016, the Corporation had $14.4 million of impaired loans and leases, as compared to impaired loans and leases of $14.5 million as of December 31, 2015. Refer to Note 5-H in the Notes to Consolidated Financial Statements for more information regarding the Corporation's impaired loans and leases. The Corporation continues to be diligent in its credit underwriting process and very proactive with its loan review process, including engaging the services of an independent outside loan review firm, which helps identify developing credit issues. These proactive steps include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. Management believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall losses. Non-Performing Assets, TDRsand Related Ratiosas of or for the Twelve Months Ended December 31,
As of December 31, 2016, the Corporation is not aware of any loan or lease, other than those disclosed in the table above, for which it has any serious doubt as to the borrower’s ability to pay in accordance with the terms of the loan. Summary of Changes in the Allowance for Loan and Lease Losses
Allocation of Allowance for Loan and Lease Losses The following table sets forth an allocation of the allowance for loan and lease losses by portfolio segment. The specific allocations in any particular portfolio segment may be changed in the future to reflect then-current conditions. Accordingly, the Corporation considers the entire allowance to be available to absorb losses in any portfolio segment.
Non-interest income for the twelve months ended December 31, 2016 was $54.0 million, a decrease of $1.9 million as compared to the same period in 2015. The decrease was related to a $1.0 million decrease in gain on sale of available for sale investment securities, a $319 thousand decrease in dividends on FHLB and FRB stocks and a $204 thousand decrease in fees for wealth management services. The decrease in gain on sale of available for sale investment securities resulted from the very limited sales during the twelve months ended December 31, 2016, which resulted in a loss on sale of $77 thousand as compared to the sale of $64.0 million of available for sale investment securities sold during the same period in 2015, which resulted in a gain on sale of $931 thousand. The majority of the investments sold in 2015 had been acquired in the CBH Merger and were strategically sold to shorten the duration of the portfolio. The $319 thousand decrease in dividends on FHLB and FRB stocks occurred due to the special dividend paid on FHLB stock in 2015 which was not repeated in 2016. The $204 thousand decrease in fees for wealth management services was related to the shift in the composition of the wealth management portfolio, with more of the portfolio being comprised of assets held in lower-yielding fixed-fee accounts as of December 31, 2016 as compared to December 31, 2015. 2015 Compared to 2014 Non-interest income for the twelve months ended December 31, 2015 was $56.0 million, an increase of $7.6 million as compared to the same period in 2014. The increase related to $2.6 million in insurance commissions, $1.8 million in other operating income, $1.3 million in net gain on sale of loans, $767 thousand in dividends on bank stocks and $450 thousand in gain on sale of available for sale investment securities. The $2.6 million increase in insurance commissions is related to the acquisitions of PCPB in October 2014 and RJM in April 2015. The two acquisitions have contributed a valuable source of noninterest income. The $1.8 million increase in other operating income (detailed in Note 21 of the Notes to Financial Statements) included a $468 thousand increase in bank owned life insurance (“BOLI”) income related to the $12.1 million of BOLI acquired in the CBH Merger and the $5.0 million of BOLI purchased in July 2015. Other components of other operating income related to loan, deposit and merchant fees increased as a result of the increased customer volume from the CBH Merger. The increase in gain on sale of loans resulted from the success of the mortgage banking initiative which began toward the end of 2014. The increase in dividends on bank stocks (FHLB and FRB) was primarily related to a special dividend received from the FHLB in the first quarter of 2015.
2016 Compared to 2015 Non-interest expense for the twelve months ended December 31, 2016 was $101.7 million, a decrease of $24.0 million, as compared to the same period in 2015. The primary driver for the decrease related to the $17.4 million loss on settlement of the corporate pension plan and the $6.7 million of due diligence, merger-related and merger integration expenses which had been recorded in the twelve months ended December 31, 2015 but not repeated in 2016. Decreases in several other noninterest expense categories also occurred as the efficiencies and cost-saves related to the CBH Merger began to be realized. Partially offsetting these decreases was a $2.8 million increase in salaries and wages related to annual salary increases, incentive increases and the hiring of several new senior and executive officers during 2016. 2015 Compared to 2014 Non-interest expense for the twelve months ended December 31, 2015 was $125.8 million, an increase of $44.3 million, as compared to the same period in 2014. The most significant item contributing to the increase in non-interest expense was the $17.4 million loss on settlement of the pension plan which had been frozen in March 2008. The decision to settle the pension plan was made in order to eliminate the earnings volatility associated with a defined benefit program. In addition, due diligence, merger-related and merger integration expenses increased $4.3 million for the twelve months ended December 31, 2015 as compared to the same period in 2014. The majority of the costs were related to the CBH Merger, which closed on January 1, 2015 and integration of CBH into the Corporation which was completed during the fourth quarter of 2015. Also, related to the CBH Merger, a $929 thousand lease termination penalty in connection with the former CBH headquarters along with the impairment of a favorable lease asset related to the same property were incurred. Many of the other increases in non-interest expense categories were related to the staff and facilities acquired in the CBH Merger. These categories include salaries and wages, employee benefits and occupancy and bank premises. Secondary Market Sold-Loan Repurchase Demands In the course of originating residential mortgage loans and selling those loans in the secondary market, the Corporation makes various representations and warranties to the purchasers of the mortgage loans. Each residential mortgage loan originated by the Corporation is evaluated by an automated underwriting application, which verifies the underwriting criteria and certifies the loan’s eligibility for sale to the secondary market. Any exceptions discovered during this process are remedied prior to sale. These representations and warranties also apply to underwriting the real estate appraisal opinion of value for the collateral securing these loans. Under the representations and warranties, failure by the Corporation to comply with the underwriting and appraisal standards could result in the Corporation’s being required to repurchase the mortgage loan or to reimburse the investor for losses incurred (make whole requests) if such failure cannot be cured by the Corporation within the specified period following discovery. As of December 31, 2016, there were no pending or unsettled loan repurchase demands. No repurchase demands were received during the twelve months ended December 31, 2016.
Asset Changes Total assets as of December 31, 2016 increased to $3.42 billion from $3.03 billion as of December 31, 2015. The $390.5 million increase was related to the $266.4 million increase in portfolio loans and the $218.0 million increase in investment securities available for sale. These increases were partially offset by a $92.3 million decrease in cash and cash equivalents. As of both December 31, 2016 and 2015, the majority of the Corporation’s investment securities were classified as available for sale. Investments held in trading accounts as of December 31, 2016 and 2015, which totaled $3.9 million and $4.0 million, respectively, and were comprised of deferred compensation trusts which are invested in marketable securities whose diversification is at the discretion of the deferred compensation plan participants. In addition, as of December 31, 2016, $2.9 million of investment securities were classified as held to maturity. The following table details the maturity and weighted average yield (3) of the available for sale investment portfolio (2) as of December 31, 2016:
The following table details the amortized cost of the available for sale investment portfolio as of the dates indicated:
Portfolio Loans and Leases The table below details the loan portfolio as of the dates indicated:
The following table summarizes the loan maturity distribution and interest rate sensitivity as of December 31, 2016. Excluded from the table are residential mortgage, home equity lines and loans and consumer loans:
The list below identifies certain key characteristics of the Corporation’s loan and lease portfolio. Refer to the loan and lease portfolio tables in Note 5 in the Notes to Consolidated Financial Statements and the section of this MD&A under the heading “Portfolio Loans and Leases” for further details.
In addition to loans secured by real estate, commercial and industrial loans comprise 22.9% of the total loan portfolio as of December 31, 2016.
Reportof Independent Registered Public Accounting Firm The Board of Directors and Shareholders Bryn Mawr Bank Corporation: We have audited the accompanying consolidated balance sheets of Bryn Mawr Bank Corporation and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. We also have audited Bryn Mawr Bank Corporation’s internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Bryn Mawr Bank Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bryn Mawr Bank Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Bryn Mawr Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established inInternal Control–Integrated Framework (2013) issued by COSO. (signed) KPMG LLP Philadelphia, Pennsylvania ConsolidatedBalance Sheets
The accompanying notes are an integral part of the consolidated financial statements. ConsolidatedStatements of Income
The accompanying notes are an integral part of the consolidated financial statements. ConsolidatedStatements of Comprehensive Income
The accompanying notes are an integral part of the consolidated financial statements. ConsolidatedStatements of Cash Flows
The accompanying notes are an integral part of the consolidated financial statements. ConsolidatedStatements of Changes in Shareholders' Equity (dollars in thousands, except per share information)
The accompanying notes are an integral part of the consolidated financial statements. Notesto Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies A. Nature of Business 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, Pennsylvania, located in the western suburbs of Philadelphia. The Corporation and its subsidiaries provide wealth management, commercial and community banking, residential mortgage lending, insurance and business banking services to its customers through 25 full service branches, eight limited-hour retirement community offices, one limited-service branch, five wealth offices and a full-service insurance agency located throughout Montgomery, Delaware, Chester, Dauphin and Philadelphia counties in Pennsylvania and New Castle county in Delaware. The common stock of the Corporation trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC. On January 30, 2017, the Corporation entered into a definitive Agreement and Plan of Merger to acquire Royal Bancshares of Pennsylvania, Inc. (“RBPI”), parent company of Royal Bank America (“RBA”), in a transaction with an aggregate value of $127.7 million (the “Acquisition”). In connection with the Acquisition, RBPI will merge with and into the Corporation and RBA will merge with and into the Bank. The Acquisition, which is expected to add approximately $602 million in loans and $630 million in deposits (based on unaudited December 31, 2016 financial information), strengthens the Corporation’s position as the largest community bank in Philadelphia’s western suburbs and, based on deposits, ranks it as the eighth largest community bank headquartered in Pennsylvania. The Acquisition, which will expand the Corporation's distribution network by providing entry into the new markets of New Jersey and Berks County, Pennsylvania, and a new physical presence in Philadelphia County, Pennsylvania is expected to close during the third quarter of 2017. On April 1, 2015, the acquisition of Robert J. McAllister Agency, Inc. (“RJM”), an insurance brokerage headquartered in Rosemont, Pennsylvania, was completed. Consideration paid totaled $1.0 million, of which $500 thousand was paid at closing, $85 thousand of the first annual payment not to exceed $100 thousand was paid during the second quarter of 2016 and four remaining contingent cash payments, not to exceed $100 thousand each, will be payable on each of March 31, 2017, March 31, 2018, March 31, 2019, and March 31, 2020, subject to the attainment of certain revenue targets during the related periods. The acquisition enhanced the Corporation’s ability to offer comprehensive insurance solutions to both individual and business clients. On January 1, 2015, the merger of Continental Bank Holdings, Inc. (“CBH”) with and into the Corporation (the “CBH Merger”), and the merger of Continental Bank with and into the Bank, were completed. Consideration paid totaled $125.1 million, comprised of 3,878,383 shares (which included fractional shares paid in cash) of the Corporation’s common stock, the assumption of options to purchase Corporation common stock valued at $2.3 million and $1.3 million for the cash-out of certain warrants. The CBH Merger initially added $424.7 million of loans, $181.8 million of investments, $481.7 million of deposits and ten new branches. The acquisition of CBH enabled the Corporation to expand its footprint into a significant portion of Montgomery County, Pennsylvania. On October 1, 2014, the acquisition of Powers Craft Parker and Beard, Inc. (“PCPB”), an insurance brokerage headquartered in Rosemont, Pennsylvania, was completed. The consideration paid by the Corporation was $7.0 million, of which $5.4 million was paid at closing and the first two of three contingent payments, of $542 thousand each, were paid during the fourth quarters of 2015 and 2016. The remaining $542 thousand represents one contingent payment, not to exceed $542 thousand. The payment is subject to the attainment of certain revenue targets during the applicable period. The addition enabled the Corporation to offer a full range of insurance products to both individual and business clients. The Corporation operates 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 Commission (“SEC”), Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania Department of Banking. B. Basis of Presentation The accounting policies of the Corporation conform to U.S. generally accepted accounting principles (“GAAP”). The Consolidated Financial Statements include the accounts of the Corporation and its wholly owned subsidiaries. The Corporation’s consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. All inter-company transactions and balances have been eliminated. In preparing the Consolidated Financial Statements, the Corporation is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that in 2017, actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Amounts subject to significant estimates are items such as the allowance for loan and lease losses and lending related commitments, goodwill and intangible assets, pension and post-retirement obligations, the fair value of financial instruments and other-than-temporary impairments. Among other effects, such changes could result in future impairments of investment securities, goodwill and intangible assets and establishment of allowances for loan losses and lending-related commitments as well as increased pension and post-retirement expense. C. Cash and Cash Equivalents Cash and cash equivalents include cash, interest-bearing and non-interest bearing amounts due from banks, and federal funds sold. Cash balances required to meet regulatory reserve requirements of the Federal Reserve Board amounted to $10.4 million and $11.7 million at December 31, 2016 and December 31, 2015, respectively. D. Investment Securities Investment securities which are held for indefinite periods of time, which the Corporation intends to use as part of its asset/liability strategy, or which may be sold in response to changes in credit quality of the issuer, interest rates, changes in prepayment risk, increases in capital requirements, or other similar factors, are classified as available for sale and are carried at fair value. Net unrealized gains and losses for such securities, net of tax, are required to be recognized as a separate component of shareholders’ equity and excluded from determination of net income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for the amortization of premiums and accretion of discounts, using the specific identification method. The Corporation follows ASC 370-10-65-1 “Recognition and Presentation of Other-Than-Temporary Impairments” that provides guidance related to accounting for recognition of other-than-temporary impairment for debt securities and expands disclosure requirements for other-than-temporarily impaired debt and equity securities. Companies are required to record other-than-temporary impairment charges through earnings if they have the intent to sell, or will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. In addition, companies are required to record other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s cash flows and its amortized cost basis. Non-credit-related write-downs to fair value must be recorded as decreases to accumulated other comprehensive income as long as the Corporation has no intent or it is more likely than not that the Corporation would not be required to sell an impaired security before a recovery of its amortized cost basis. The Corporation did not have any other-than-temporary impairments for 2016, 2015 or 2014. Investments for which the Corporation has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at their amortized cost on the balance sheet. No adjustment for market value fluctuations are recorded related to the held to maturity portfolio. Investment securities held in trading accounts consist solely of deferred compensation trust accounts which are invested in listed mutual funds whose diversification is at the discretion of the deferred compensation plan participants. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income. E. Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized temporary losses, if any, are recognized through a valuation allowance by charges to income. F. Portfolio Loans and Leases The Corporation originates construction, commercial and industrial, commercial mortgage, residential mortgage, home equity and consumer loans to customers primarily in southeastern Pennsylvania as well as small-ticket equipment leases to customers nationwide. Although the Corporation has a diversified loan and lease portfolio, its debtors’ ability to honor their contracts is substantially dependent upon the real estate and general economic conditions of the region. Loans and leases that the Corporation has the intention and ability to hold for the foreseeable future or until maturity or pay-off, generally are reported at their outstanding principal balance adjusted for charge-offs, the allowance for loan and lease losses and any deferred fees or costs on originated loans and leases. Interest income is accrued on the unpaid principal balance. Loan and lease origination fees and loan and lease origination costs are deferred and recognized as an adjustment to the related yield using the interest method. The accrual of interest on loans and leases is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans and leases are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on nonaccrual status or charged-off, is charged against interest income. All interest accrued, but not collected, on leases that are placed on nonaccrual status is not charged against interest income until the lease becomes 120 days delinquent, at which point it is charged off. The interest received on these nonaccrual loans and leases is applied to reduce the carrying value of loans and leases. Loans and leases are returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for at least six months and future payments are reasonably assured. Once a loan returns to accrual status, any interest payments collected during the nonaccrual period which had been applied to the principal balance are reversed and recognized as interest income over the remaining term of the loan. Certain loans which have reached maturity and have been approved for extension or renewal, but for which all required documents have not been fully executed as of the reporting date, are classified as Administratively Delinquent and are not considered to be delinquent. These loans are reported as current in all disclosures. Loans acquired in mergers are recorded at their fair values. The difference between the recorded fair value and the principal value is accreted to interest income over the contractual lives of the loans in accordance with ASC 310-20. Certain acquired loans which were deemed to be credit impaired at acquisition are accounted for in accordance with ASC 310-30, as discussed below, in subsectionH of this footnote. G. Allowance for Loan and Lease Losses The allowance for loan and lease losses (the “Allowance”) is established through a provision for loan and lease losses (the “Provision”) charged as an expense. The principal balances of loans and leases are charged against the Allowance when the Corporation believes that the principal is uncollectible. The Allowance is maintained at a level that the Corporation believes is sufficient to absorb estimated potential credit losses. The Corporation’s determination of the adequacy of the Allowance is based on guidance provided in ASC 450 – Contingencies and ASC 310 - Receivables, and involves the periodic evaluations of the loan and lease portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires significant estimates by the Corporation. Consideration is given to a variety of factors in establishing these estimates. Quantitative factors in the form of historical net charge-off rates by portfolio segment are considered. In connection with these quantitative factors, management establishes what it deems to be an adequate look-back period (“LBP”) for the charge-off history. As of December 31, 2016, the Corporation utilized a five-year LBP, which it believes adequately captures the trends in charge-offs. In addition, management develops an estimate of a loss emergence period (“LEP”) for each segment of the loan portfolio. The LEP estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan. As of December 31, 2016, the Corporation utilized a two-year LEP for its commercial loan segments and a one-year LEP for its consumer loan segments based on analyses of actual charge-offs tracked back in time to the triggering event for the eventual loss. In addition, various qualitative factors are considered, including the specific terms and conditions of loans, changes in underwriting standards, delinquency statistics, industry concentrations and overall exposure of a single customer. In addition, consideration is given to the adequacy of collateral, the dependence on collateral, and the results of internal loan reviews, including a borrower’s financial strengths, their expected cash flows, and their access to additional funds. As part of the process of calculating the Allowance for the different segments of the loan and lease portfolio, the Corporation considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as external third-party loan review specialists. The result of these reviews is reflected in the risk grade assigned to each loan. For the consumer segments of the loan portfolio, the indicator of credit quality is reflected by the performance/non-performance status of a loan. The evaluation process also considers the impact of competition, current and expected economic conditions, national and international events, the regulatory and legislative environment and inherent risks in the loan and lease portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from the Corporation’s estimates, an additional Provision may be required that might adversely affect the Corporation’s results of operations in future periods. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the adequacy of the Allowance. Such agencies may require the Corporation to record additions to the Allowance based on their judgment of information available to them at the time of their examination. H. Impaired Loans and Leases A loan or lease is considered impaired when, based on current information, it is probable that the Corporation will be unable to collect the contractually scheduled payments of principal or interest. When assessing impairment, the Corporation considers various factors, which include payment status, realizable value of collateral and the probability of collecting scheduled principal and interest payments when due. Loans and leases that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Corporation determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. For loans that indicate possible signs of impairment, which in most cases is based on the performance/non-performance status of the loan, an impairment analysis is conducted based on guidance provided by ASC 310-10. Impairment is measured by (i) the fair value of the collateral, if the loan is collateral-dependent, (ii) the present value of expected future cash flows discounted at the loan’s contractual effective interest rate, or (iii), less frequently, the loan’s obtainable market price. In addition to originating loans, the Corporation occasionally acquires loans through mergers or loan purchase transactions. Some of these acquired loans may exhibit deteriorated credit quality that has occurred since origination and, as such, the Corporation may not expect to collect all contractual payments. Accounting for these purchased credit-impaired (“PCI”) loans is done in accordance with ASC 310-30. The loans are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral-dependent, with the timing of the sale of loan collateral indeterminate, remain on nonaccrual status and have no accretable yield. On a regular basis, at least quarterly, an assessment is made on PCI loans to determine if there has been any improvement or deterioration of the expected cash flows. If there has been improvement, an adjustment is made to increase the recognition of interest on the PCI loan, as the estimate of expected loss on the loan is reduced. Conversely, if there is deterioration in the expected cash flows of a PCI loan, a Provision is recorded in connection with the loan. I. Troubled Debt Restructurings (“TDR”s) A TDR occurs when a creditor, for economic or legal reasons related to a borrower’s financial difficulties, modifies the original terms of a loan or lease or grants a concession to the borrower that it would not otherwise have granted. A concession may include an extension of repayment terms, a reduction in the interest rate or the forgiveness of principal and/or accrued interest. If the debtor is experiencing financial difficulty and the creditor has granted a concession, the Corporation will make the necessary disclosures related to the TDR. In certain cases, a modification or concession may be made in an effort to retain a customer who is not experiencing financial difficulty. This type of modification is not considered a TDR. J. Other Real Estate Owned (“OREO”) OREO consists of assets that the Corporation has acquired through foreclosure, by accepting a deed in lieu of foreclosure, or by taking possession of assets that were used as loan collateral. The Corporation reports OREO on the balance sheet as part of other assets, at the lower of cost or fair value less cost to sell, adjusted periodically based on current appraisals. Costs relating to the development or improvement of assets, as well as the costs required to obtain legal title to the property, are capitalized, while costs related to holding the property are charged to expense as incurred. K. Other Investments andEquityStocksWithout aReadilyDeterminableFairValue Other investments include Community Reinvestment Act (“CRA”) investments and equity stocks without a readily determinable fair value. The Corporation’s investments in equity stocks include those issued by the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Federal Reserve Bank (“FRB”) and Atlantic Central Bankers Bank.The Corporation is required to hold FHLB stock as a condition of its borrowing funds from the FHLB. As of December 31, 2016, the carrying value of the Corporation’s FHLB stock was $17.3 million. In addition, the Corporation is required to hold FRB stock based on the Corporation’s capital. As of December 31, 2016, the carrying value of the Corporation’s FRB stock was $6.9 million. Ownership of FHLB and FRB stock is restricted and there is no market for these securities. For further information on the FHLB stock, see Note 10 – “Short-Term Borrowings and Long-Term FHLB Advances”. L. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation and predetermined rent are recorded using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the expected lease term or the estimated useful lives, whichever is shorter. M. Pension and Postretirement Benefit Plan As of December 31, 2016, the Corporation had two non-qualified defined-benefit supplemental executive retirement plans and a postretirement benefit plan as discussed in Note 16 – “Pension and Postretirement Benefit Plans”. Net pension expense related to the defined-benefit consists of service cost, interest cost, return on plan assets, amortization of prior service cost, amortization of transition obligations and amortization of net actuarial gains and losses. Prior to December 31, 2015, the Corporation had a qualified pension plan which was settled on December 31, 2015. As it relates to the costs associated with the post-retirement benefit plan, the costs are recognized as they are incurred. N. Bank Owned Life Insurance (“BOLI”) BOLI is recorded at its cash surrender value. Income from BOLI is tax-exempt and included as a component of non-interest income. O. Derivative Financial Instruments The Corporation recognizes all derivative financial instruments on its balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative has qualified as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings immediately. To determine fair value, the Corporation uses valuations obtained from a third party which utilizes a pricing model that incorporates assumptions about market conditions and risks that are current as of the reporting date. Management reviews, annually, the inputs utilized by its independent third-party valuation organization. The Corporation may use interest-rate swap agreements to modify the interest rate characteristics from variable to fixed or fixed to variable in order to reduce the impact of interest rate changes on future net interest income. If present, the Corporation accounts for its interest-rate swap contracts in cash flow hedging relationships by establishing and documenting the effectiveness of the instrument in offsetting the change in cash flows of assets or liabilities that are being hedged. To determine effectiveness, the Corporation performs an analysis to identify if changes in fair value or cash flow of the derivative correlate to the equivalent changes in the forecasted interest receipts or payments related to a specified hedged item. Recorded amounts related to interest-rate swaps are included in other assets or liabilities. The change in fair value of the ineffective part of the instrument would need to be charged to the Statement of Income, potentially causing material fluctuations in reported earnings in the period of the change relative to comparable periods. In a fair value hedge, the fair value of the interest rate swap agreements and changes in the fair value of the hedged items are recorded in the Corporation’s consolidated balance sheets with the corresponding gain or loss being recognized in current earnings. The difference between changes in the fair values of interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in net interest income in the Statement of Income. The Corporation performs an assessment, both at the inception of the hedge and quarterly thereafter, to determine whether these derivatives are highly effective in offsetting changes in the value of the hedged items. In December 2012, the Corporation entered into a $15 million forward-starting interest rate swap in order to hedge the cash flows of a $15 million floating-rate FHLB borrowing. On November 30, 2015, the start date of the swap, the Corporation elected to terminate the swap. P. Accounting for Stock-Based Compensation 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. All share-based payments, including grants of stock options, restricted stock awards and performance-based stock awards, are recognized as compensation expense in the statement of income at their fair value. The fair value of stock option grants is determined using the Black-Scholes pricing model which considers the expected life of the options, the volatility of stock price, risk-free interest rate and annual dividend yield. The fair value of the restricted stock awards and performance-based awards whose performance is measured based on an internally produced metric is based on their closing price on the grant date, while the fair value of the performance-based stock awards which use an external measure, such as total stockholder return, is based on their grant-date fair value adjusted for the likelihood of attaining certain pre-determined performance goals and is calculated by utilizing a Monte Carlo Simulation model. Q. Earningsper Common 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 that would occur if in-the-money stock options were exercised and converted into common shares and restricted stock awards and performance-based stock awards were vested. Proceeds assumed to have been received on options exercises are assumed to be used to purchase shares of the Corporation’s common stock at the average market price during the period, as required by the treasury stock method of accounting. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. R. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Corporation recognizes the benefit of a tax position only after determining that the Corporation would more-likely-than-not sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Corporation applies these criteria to tax positions for which the statute of limitations remains open. S. Revenue Recognition With the exception of nonaccrual loans and leases, the Corporation recognizes all sources of income on the accrual method. Additional information relating to wealth management fee revenue recognition follows: The Corporation earns wealth management fee revenue from a variety of sources including fees from trust administration and other related fiduciary services, custody, investment management and advisory services, employee benefit account and IRA administration, estate settlement, tax service fees, shareholder service fees and brokerage. These fees are generally based on asset values and fluctuate with the market. Some revenue is not directly tied to asset value but is based on a flat fee for services provided. For many of our revenue sources, amounts are not received in the same accounting period in which they are earned. However, each source of wealth management fees is recorded on the accrual method of accounting. The most significant portion of the Corporation’s wealth management fees is derived from trust administration and other related services, custody, investment management and advisory services, and employee benefit account and IRA administration. These fees are generally billed monthly, in arrears, based on the market value of assets at the end of the previous billing period. A smaller number of customers are billed in a similar manner, but on a quarterly or annual basis and some revenues are not based on market values. The balance of the Corporation’s wealth management fees includes estate settlement fees and tax service fees, which are recorded when the related service is performed and asset management and brokerage fees on non-depository investment products, which are received one month in arrears, based on settled transactions, but are accrued in the month the settlement occurs. Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected. Insurance revenue is primarily related to commissions earned on insurance policies and is recognized over the related policy coverage period. T. Mortgage Servicing A portion of the residential mortgage loans originated by the Corporation is sold to third parties; however the Corporation often retains the servicing rights related to these loans. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received in return for these services. Gains on the sale of these loans are based on the specific identification method. An intangible asset, referred to as mortgage servicing rights (“MSR”s) is recognized when a loan’s servicing rights are retained upon sale of a loan. These MSRs amortize to non-interest expense in proportion to, and over the period of, the estimated future net servicing life of the underlying loans. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is determined by stratifying the MSRs by predominant characteristics, such as interest rate and terms. Fair value is determined based upon discounted cash flows using market-based assumptions. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount for the stratum. A valuation allowance is utilized to record temporary impairment in MSRs. Temporary impairment is defined as impairment that is not deemed permanent. Permanent impairment is recorded as a reduction of the MSR and is not reversed. U. Statement of Cash Flows The Corporation’s statement of cash flows details operating, investing and financing activities during the reported periods. V. Goodwill and Intangible Assets The Corporation accounts for goodwill and other intangible assets in accordance with ASC 350, “Intangibles – Goodwill and Other.” The goodwill and intangible assets as of December 31, 2016, other than MSRs in Note 1-T above, are related to the acquisitions of Lau Associates, The Private Wealth Management Group of the Hershey Trust Company (“PWMG”), Davidson Trust Company (“DTC”), PCPB and RJM which are components of the Wealth Management segment, and First Keystone Financial, Inc. (“FKF”), First Bank of Delaware (“FBD”) and CBH, which are components of the Banking segment. The amount of goodwill initially recorded is based on the fair value of the acquired entity at the time of acquisition. Goodwill impairment tests are performed annually, as of October 31, or when events occur or circumstances change that would more likely than not reduce the fair value of the acquisition or investment. Prior to October 31, 2016, the Corporation had performed the goodwill impairment testing as of December 31. During 2016, the Corporation made a voluntary change in the method of applying an accounting principle related to the timing of the annual goodwill impairment assessment from December 31st to October 31st. Management made this decision based on the time intensive nature of the goodwill impairment assessment. Management does not consider this change in impairment testing date to be a material change in application of an accounting principle. Goodwill impairment is tested on a reporting unit level. The Corporation currently has three reporting units: Banking, Wealth Management and Insurance. As of December 31, 2016, the Insurance reporting unit did not meet the quantitative thresholds for separate disclosure as an operating segment and is therefore reported as a component of the Wealth Management segment, based on its internal reporting structure. While the Insurance reporting unit did not meet the threshold for reporting as a separate operating segment, for goodwill and intangible testing, the Insurance segment was tested for impairment. An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available The Corporation’s impairment testing methodology is consistent with the methodology prescribed in ASC 350. Other intangible assets include core deposit intangibles, which were acquired in the FKF merger, the FBD transaction, and the CBH Merger, customer relationships, trade name and non-competition agreements acquired in connection with the acquisitions of DTC, PWMG, Lau Associates, PCPB and RJM. The customer relationships, non-competition agreement and core deposit intangibles are amortized over the estimated useful lives of the assets. The trade name intangibles have indefinite lives and are evaluated for impairment annually. W. Reclassifications Certain prior year amounts have been reclassified to conform to the current year’s presentation. X. Recent Accounting Pronouncements The following recent accounting pronouncements are divided into pronouncements which have been adopted by the Corporation and those which are not yet effective and have been evaluated or are currently being evaluated by the Corporation as of December 31, 2016. Adopted Pronouncements: FASB ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” Issued on August 15, 2014, ASU 2014-15 describes how an entity should assess its ability to meet obligations and sets disclosure requirements for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used with existing auditing standards. The new standard applies to all entities for the first annual period ending after December 15, 2016, and interim periods thereafter. As of December 31, 2016, the adoption of FASB ASU 2014-15 has not had an impact on our consolidated financial statements. FASB ASU 2016-09 (Topic 718), “Improvements to Employee Share-Based Payment Accounting” In March 2016, the FASB issued ASU No. 2016-09, which changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits and Deficiencies, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. The standard is effective for public business entities in annual and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted if the entire standard is adopted. If an entity early adopts the standard in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Corporation early-adopted ASU 2016-09 during the three months ended September 30, 2016. As a result of the adoption, the Corporation recognized a $565 thousand tax benefit in the Consolidated Statements of Income for the twelve months ended December 31, 2016. The impact of the income tax benefit or expense related to ASU 2016-09 is treated as a discrete item in the calculation of the year-to-date income tax expense. Also, in accordance with the provisions of ASU 2016-09, the Corporation presents excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows using a retrospective transition method. Adoption of all other changes did not have an impact on our consolidated financial statements. Pronouncements Not Yet Effective: FASB ASU No. 2014-09(Topic 606),“Revenue from Contracts with Customers” Issued in May 2014, ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016- 08, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers and 2016-12, Narrow-Scope Improvements and Practical Expedients, both of which provide additional clarification of certain provisions in Topic 606. These Accounting Standards Codification (“ASC”) updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or retrospectively with the cumulative effect transition method. The Corporation is currently in the process of evaluating all revenue streams, accounting policies, practices and reporting to identify and understand any impact on the Corporation’s Consolidated Financial Statements. Our preliminary evaluation suggests that adoption of this guidance is not expected to have a material effect on our Consolidated Financial Statements. FASB ASU 2017-04 (Topic 350), “Intangibles – Goodwill and Others” Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. The Corporation is evaluating the effect that ASU 2017-04 will have on its consolidated financial statements and related disclosures. FASB ASU 2017-01 (Topic 805), “Business Combinations” Issued in January 2017, ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017 including interim periods within those periods. The Corporation is evaluating the effect that ASU 2017-01 will have on its consolidated financial statements and related disclosures. FASB ASU 2016-15 (Topic 320), “Classification of Certain Cash Receipts andCash Payments” Issued in August 2016, ASU 2016-15 provides guidance on eight specific cash flow issues and their disclosure in the consolidated statements of cash flows. The issues addressed include debt prepayment, settlement of zero-coupon debt, contingent consideration in business combinations, proceeds from settlement of insurance claims, proceeds from settlement of BOLI, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the Predominance principle. 2016-15 is effective for the annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted. The Corporation is currently evaluating the impact of this guidance and does not anticipate a material impact on its consolidated financial statements. FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments” Issued in June 2016, ASU 2016-13 significantly changes how companies measure and recognize credit impairment for many financial assets. The new current expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The ASU also makes targeted amendments to the current impairment model for available-for-sale debt securities. ASU 2016-13 is effective for the annual and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The Corporation is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures. FASB ASU 2016-02 (Topic 842), “Leases” Issued in February 2016, ASU 2016-02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016-02 is effective for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. The standard is required to be adopted using the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Corporation is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures. FASB ASU 2016-01 (Subtopic 825-10), “Financial Instruments – Overall, Recognition and Measurement of Financial Assets and Financial Liabilities” Issued in January 2016, ASU 2016-01 provides that equity investments will be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument-specific credit risk. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. The Corporation is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures. Note 2 - Business Combinations Robert J. McAllister Agency, Inc. The acquisition of RJM, an insurance brokerage headquartered in Rosemont, Pennsylvania, was completed on April 1, 2015. The consideration paid totaled $1.0 million, of which $500 thousand was paid at closing, $85 thousand of the first annual payment not to exceed $100 thousand was paid during the second quarter of 2016 and four remaining contingent cash payments, not to exceed $100 thousand each, will be payable on each of March 31, 2017, March 31, 2018, March 31, 2019, and March 31, 2020, subject to the attainment of certain revenue targets during the related periods. The $15 thousand difference between the first maximum payment of $100 thousand and the $85 thousand that was actually paid was recognized as other non-interest income. The acquisition will enhance the Corporation’s ability to offer comprehensive insurance solutions to both individual and business clients. In connection with the RJM acquisition, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition and subsequent adjustments, during the measurement period, to the fair value of the assets acquired, liabilities assumed and the resulting goodwill recorded:
An adjustment was made which eliminated the value initially placed on the trade name (and its associated deferred tax liability), as the entity was immediately merged into PCPB. As of December 31, 2015, the estimates of fair values of the assets acquired and liabilities assumed in the acquisition of RJM were finalized. Continental Bank Holdings, Inc. On January 1, 2015, the previously announced merger of CBH with and into the Corporation, and the merger of Continental Bank with and into the Bank, as contemplated by the Agreement and Plan of Merger, by and between CBH and the Corporation, dated as of May 5, 2014 (as amended by the Amendment to Agreement and Plan of Merger, dated as of October 23, 2014, the “Agreement”), were completed. In accordance with the Agreement, the aggregate share consideration paid to CBH shareholders consisted of 3,878,383 shares (which included fractional shares paid in cash) of the Corporation’s common stock. Shareholders of CBH received 0.45 shares of Corporation common stock for each share of CBH common stock they owned as of the effective date of the CBH Merger. Holders of options to purchase shares of CBH common stock received options to purchase shares of Corporation common stock, converted at the same ratio of 0.45. In addition, $1.3 million was paid to certain warrant holders to cash-out certain warrants. In accordance with the acquisition method of accounting, assets acquired and liabilities assumed were preliminarily adjusted to their fair values as of the date of the CBH Merger. The excess of consideration paid above the fair value of net assets acquired was recorded as goodwill. This goodwill is not amortizable nor is it deductible for income tax purposes. In connection with the CBH Merger, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition and the subsequent adjustments, during the measurement period, to the fair value of the assets acquired, liabilities assumed and the resulting goodwill recorded:
*includes $507 thousand of loans held for sale For the twelve months ended December 31, 2015, adjustments to the fair value of the assets acquired and liabilities assumed were related to circumstances that existed prior to the CBH Merger date, but that were not known to the Corporation. The adjustments included reductions in the fair value of certain loans, unrecorded liabilities of CBH, and an immaterial adjustment to the calculation of a favorable lease asset, which reduced its value, along with the associated deferred tax items. As of December 31, 2015, the estimates of fair values of the assets acquired and liabilities assumed in the CBH Merger were finalized. Powers Craft Parker and Beard, Inc. The acquisition of PCPB, an insurance brokerage headquartered in Rosemont, Pennsylvania, was completed on October 1, 2014. The consideration paid by the Corporation was $7.0 million, of which $5.4 million was paid at closing and the first of three contingent payments, of $542 thousand, was paid during the fourth quarter of 2015. The remaining $1.1 million consists of two contingent payments, with each payment not to exceed $542 thousand. Each payment is subject to the attainment of certain revenue targets during the applicable periods. The measurement periods for the two remaining contingent payments are the twelve month periods ending September 30, 2016 and 2017. The acquisition of PCPB has enabled the Corporation to offer a comprehensive line of insurance solutions to both individual and business clients. In connection with the PCPB acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:
As of December 31, 2014, the Corporation had finalized its fair value estimates related to the acquisition of PCPB. Pro Forma Income Statements (unaudited) The following pro forma income statements for the twelve months ended December 31, 2014, 2015 and 2016 present the pro forma results of operations of the combined institution (CBH and the Corporation) as if the merger occurred on January 1, 2014, January 1, 2015 and January 1, 2016, respectively. The pro forma income statement adjustments are limited to the effects of fair value mark amortization and accretion and intangible asset amortization. No cost savings or additional merger expenses have been included in the pro forma results of operations for the twelve month period ended December 31, 2014. Due to the immaterial contribution to net income of the PCPB and RJM acquisitions, which occurred during the three year period shown in the table, the pro forma effects of the PCPC acquisition and the RJM acquisition are excluded.
*Assumesthat the shares of CBH common stock outstandingas ofDecember 31, 2014 were outstanding forthefulltwelvemonth periods endedDecember 31, 2013 and 2014,andthereforeequal the weighted averageshares of common stock outstanding for thetwelvemonthsperiodsendedDecember 31,2013 and2014. The merger conversion of 8,618,629shares ofCBH commonstock equals 3,878,304shares of Corporation commonstock (8,618,629 times 0.45, minus 79 fractional shares paid in cash). Due Diligence, Merger-Related and Merger IntegrationExpenses Due diligence, merger-related and merger integration expenses include consultant costs, investment banker fees, contract breakage fees, retention bonuses for severed employees, salary and wages for redundant staffing involved in the integration of the institutions and bonus accruals for members of the merger integration team. The following table details the costs identified and classified as due diligence, merger-related and merger integration costs for the periods indicated:
Note 3 -Goodwill & Other Intangible Assets The Corporation completed an annual impairment test for goodwill and other intangibles as of December 31, 2015 and October 31, 2016. During 2016, the Corporation made a voluntary change in the method of applying an accounting principle related to the timing of the annual goodwill impairment assessment from December 31st to October 31st. Management made this decision based on the time intensive nature of the goodwill impairment assessment. Management does not consider this change in impairment testing date to be a material change in application of an accounting principle. Future impairment testing will be conducted each October 31, unless a triggering event occurs in the interim that would suggest possible impairment, in which case it would be tested as of the date of the triggering event. There was no goodwill impairment and no material impairment to identifiable intangible assets recorded during 2015 or 2016. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings. The Corporation’s goodwill and intangible assets related to the acquisitions of Lau Associates in July 2008, FKF in July 2010, PWMG in May 2011, DTC in May 2012, FBD in November 2012, PCPB in October 2014, CBH in January 2015 and RJM in April 2015 for the years ended December 31, 2016 and 2015 are as follows:
Note 4 - Investment Securities The amortized cost and fair value of investments, which were classified asavailable for sale, are as follows: As ofDecember 31, 2016
As ofDecember 31, 2015
The following table shows the amount ofavailable for sale investment securities that were in an unrealized loss position at December 31, 2016:
The following table shows the amount ofavailable for sale investment securities that were in an unrealized loss position at December 31, 2015:
Management evaluates the Corporation’s investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. The investment portfolio includes debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state and local municipalities and other issuers. All fixed income investment securities in the Corporation’s investment portfolio are rated as investment-grade or higher. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, interest rates and the bond rating of each security. The unrealized losses presented in the tables above are temporary in nature and are primarily related to market interest rates rather than the underlying credit quality of the issuers or collateral. Management does not believe that these unrealized losses are other-than-temporary. The Corporation does not have the intent to sell these securities prior to their maturity or the recovery of their cost bases and believes that it is more likely, than not, that it will not have to sell these securities prior to their maturity or the recovery of their cost bases. At December 31, 2016, securities having a fair value of $119.4 million were specifically pledged as collateral for public funds, trust deposits, the FRB discount window program, FHLB borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB. The amortized cost and fair value ofavailable for sale investment and mortgage-related securities available for sale as of December 31, 2016 and 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
*Included in the investment portfolio, but not in the table above, are mutual funds with an amortized cost and fair value, as ofDecember 31, 2016, of$15.3 million and$15.2 million,respectively,which have no stated maturity.
*Included in the investment portfolio, but not in the table above, are mutual funds with an amortized cost and fair value, as ofDecember 31, 2015, of$15.6 million and$15.2 million,respectively,which have no stated maturity. Proceeds from the sale ofavailable for sale investment securities totaled $276 thousand, $64.9 million and $24.4 million for the twelve months ended December 31, 2016, 2015 and 2014, respectively. Net loss on sale of available for sale investment securities for the twelve months ended December 31, 2016 totaled $77 thousand. Net gain on sale of available for sale investment securities for the twelve months ended December 31, 2015 and 2014 totaled $931 thousand and $471 thousand, respectively. The amortized cost and fair value of investment securitiesheld to maturity as of December 31, 2016 are as follows: As ofDecember 31, 2016
The following table shows the amount ofheld to maturitysecurities that were in an unrealized loss position at December 31, 2015:
The amortized cost and fair value ofheld to maturity investment securities as of December 31, 2016, by contractual maturity, are shown below:
1Expected maturities of mortgage-related securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. As of December 31, 2015, there were no investmentsheld to maturity. As of December 31, 2016 and December 31, 2015, the Corporation’s investment securities held intrading accounts totaled $3.9 million and $4.0 million, respectively, and consist solely of deferred compensation trust accounts which are invested in listed mutual funds whose diversification is at the discretion of the deferred compensation plan participants. Investment securities held in trading accounts are reported at fair value, with adjustments in fair value reported through income. Note 5 - Loans and Leases The loan and lease portfolio consists of loans and leases originated by the Corporation, as well as loans acquired in mergers and acquisitions. These mergers and acquisitions include the January 2015 acquisition of CBH, the November 2012 transaction with First Bank of Delaware and the July 2010 acquisition of First Keystone Financial, Inc. Many of the tables in this footnote are presented for all loans as well as supplemental tables fororiginatedandacquired loans. A. The table below detailsallportfolioloans and leases as of the dates indicated:
The table below details the Corporation’soriginated portfolio loans and leases as of the dates indicated:
The table below details the Corporation’sacquired portfolio loans as of the dates indicated:
B. Components of the net investment in leases are detailed as follows:
C. Non-Performing Loans and Leases(1) The following table detailsall non-performing portfolio loans and leases as of the dates indicated:
The following table details non-performingoriginated portfolio loans and leases as of the dates indicated:
The following table details non-performingacquired portfolio loans(1) as of the dates indicated:
D. Purchased Credit-Impaired Loans The outstanding principal balance and related carrying amount of credit-impaired loans, for which the Corporation applies ASC 310-30,Accounting for Purchased Loans with Deteriorated Credit Quality, to account for the interest earned, as of the dates indicated, are as follows:
The following table presents changes in the accretable discount on purchased credit-impaired loans, for which the Corporation applies ASC 310-30, for the twelve months ended December 31, 2016:
E. Age Analysis of Past Due Loans and Leases The following tables present an aging ofall portfolio loans and leases as of the dates indicated:
*included as “current” are $15.3 million and $10.5 million of loans and leases as of December 31, 2016 and 2015, respectively, which are classified as Administratively Delinquent. An Administratively Delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. The Corporation does not consider these loans to be delinquent. The following tables present an aging oforiginated portfolio loans and leases as of the dates indicated:
*included as “current” are $13.5 million and $10.1 million of loans and leases as of December 31, 2016 and 2015, respectively, which are classified as Administratively Delinquent. An Administratively Delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. The Corporation does not consider these loans to be delinquent. The following tables present an aging ofacquired portfolio loans and leases as of the dates indicated:
*included as “current” are $1.8 million and $418 thousand of loans and leases as of December 31, 2016 and 2015, respectively, which are classified as Administratively Delinquent. An Administratively Delinquent loan is one which has been approved for a renewal or extension but has not had all the required documents fully executed as of the reporting date. The Corporation does not consider these loans to be delinquent. F. Allowance for Loan and Lease Losses (the “Allowance”) The following tables detail the roll-forward of the Allowance for the twelve months ended December 31, 2016:
The following table details the roll-forward of the Allowance for the twelve months ended December 31, 2015:
The following table details the allocation of the Allowance forall portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2016 and December 31, 2015:
The following table details the carrying value forall portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2016 and December 31, 2015:
The following table details the allocation of the Allowance fororiginated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2016 and December 31, 2015:
The following table details the carrying value fororiginated portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2016 and December 31, 2015:
The following table details the allocation of the Allowance foracquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2016 and December 31, 2015:
The following table details the carrying value foracquired portfolio loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2016 and December 31, 2015:
(1)Purchased credit-impaired loans are evaluated for impairment on an individual basis. As part of the process of determining the Allowance for the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by both in-house staff as well as external loan reviewers. The result of these reviews is reflected in the risk grade assigned to each loan. These internally assigned grades are as follows: Pass – Loans considered satisfactory with no indications of deterioration. Special mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard - Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. In addition, for the remaining segments of the loan and lease portfolio, which include residential mortgage, home equity lines and loans, consumer, and leases, the credit quality indicator used to determine this component of the Allowance is based on performance status. The following tables detail the carrying value ofall portfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of December 31, 2016 and December 31, 2015:
The following tables detail the carrying value oforiginatedportfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of December 31, 2016 and December 31, 2015:
The following tables detail the carrying value ofacquiredportfolio loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of December 31, 2016 and December 31, 2015:
G. Troubled Debt Restructurings (“TDRs”) The restructuring of a loan is considered a “troubled debt restructuring” if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal. The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender. The following table presents the balance of TDRs as of the indicated dates:
The following table presents information regarding loan and lease modifications categorized as TDRs for the twelve months ended December 31, 2016:
The following table presents information regarding the types of loan and lease modifications made for the twelve months ended December 31, 2016:
The following table presents information regarding loan and lease modifications categorized as TDRs for the twelve months ended December 31, 2015:
The following table presents information regarding the types of loan and lease modifications made for the twelve months ended December 31, 2015:
During the twelve months ended December 31, 2016, there were no defaults of loans that had received troubled debt restructurings in 2015. H. Impaired Loans The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related allowance for loan and lease losses and interest income recognized for the twelve months ended December 31, 2016, 2015 and 2014 (purchased credit-impaired loans are not included in the tables):
*The table above does not include the recorded investmentof $240 thousand of impaired leases without a related allowance for loan and lease losses. **Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
*The table above does not include the recorded investmentof $77 thousand of impaired leases without a related allowance for loan and lease losses. **Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal.
*The table above does not include the recorded investment of $32 thousand of impaired leases without a related allowance for loan and lease losses. **Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been applied to principal. I.Loan Mark Loans acquired in mergers and acquisitions are recorded at fair value as of the date of the transaction. This adjustment to the acquired principal amount is referred to as the “Loan Mark”. With the exception of purchased credit impaired loans, for which the Loan Mark is accounted under ASC 310-30, the Loan Mark is amortized or accreted as an adjustment to yield over the lives of the loans. The following tables detail, foracquired loans, the outstanding principal, remaining loan mark, and recorded investment, by portfolio segment, as of the dates indicated:
Note 6 - Other Real Estate Owned Other real estate owned consists of properties acquired as a result of foreclosures or deeds in-lieu-of foreclosure. Properties or other assets are classified as OREO and are reported at the lower of carrying value or fair value, less estimated costs to sell. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. As of December 31, 2016 the balance of OREO is comprised of seven single-family residential properties. The summary of the change in other real estate owned, which is included as a component of other assets on the Corporation's Consolidated Balance Sheets, is as follows:
Note 7 - Premises and Equipment A. A summary of premises and equipment is as follows:
Depreciation and amortization expense related to the assets detailed in the above table for the years ended December 31, 2016, 2015, and 2014 amounted to $5.8 million, $5.1 million, and $3.6 million, respectively. B. Future minimum cash rent commitments under various operating leases as of December 31, 2016 are as follows:
Rent expense on leased premises and equipment for the years ended December 31, 2016, 2015 and 2014 amounted to $4.6 million, $5.1 million, and $3.3 million, respectively. Note 8 - Mortgage Servicing Rights (“MSR”s) A. The following summarizes the Corporation’s activity related to MSRs for the years ended December 31:
B. The following summarizes the Corporation’s activity related to changes in the impairment valuation allowance of MSRs for the years ended December 31:
C. Other MSR Information – At December 31, 2016, 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:
At December 31, 2016, 2015 and 2014, the fair value of the MSRs was $6.2 million, $5.7 million, and $5.5 million, respectively. The fair value of the MSRs for these dates was determined using values obtained from a third party which utilizes a valuation model which calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers are forecasted to repay their mortgage loan principal and is based on historical experience. The discount rate is used to determine the present value of future net servicing income. Another key assumption in the model is the required rate of return the market would expect for an asset with similar risk. These assumptions can, and generally will, change quarterly valuations as market conditions and interest rates change. Management reviews, annually, the process utilized by its independent third-party valuation experts. These assumptions and sensitivities are hypothetical and should be used with caution. As the figures indicate, 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. Note 9 - Deposits A. The following table details the components of deposits:
The aggregate amount of deposit and mortgage escrow overdrafts included as loans as of December 31, 2016 and 2015 were $818 thousand and $840 thousand, respectively.
B. The following tables detail the maturities of retail time deposits:
C. The following tables detail the maturities of wholesale time deposits:
Note 10 - Short-Term Borrowings and Long-Term FHLB Advances
A. Short-term borrowings –As of December 31, 2016 and 2015, the Corporation had $204.2 million and $94.2 million of short-term borrowings (original maturity of one year or less), respectively, which consisted of funds obtained from overnight repurchase agreements with commercial customers, an overnight repurchase agreement with a correspondent bank, short-term FHLB advances and overnight federal funds. A summary of short-term borrowings is as follows:
* overnight repurchase agreements with no expiration date The following table sets forth information concerning short-term borrowings:
Average balances outstanding during the year represent daily average balances and average interest rates represent interest expense divided by the related average balance. B.Long-termFHLB Advances: As of December 31, 2016 and 2015, the Corporation had $189.7 million and $254.9 million, respectively, of long-term FHLB advances (original maturities exceeding one year). The following table presents the remaining periods until maturity of the long-term FHLB advances:
The following table presents rate and maturity information on FHLB advances and other borrowings:
*Maturity range and interest ratesrefers toDecember 31, 2016 balances Included in the table above as of December 31, 2016 and 2015 are $21.1 million and $21.3 million, respectively, of long-term FHLB advances whereby the FHLB has the option, at predetermined times, to convert the fixed interest rate to an adjustable interest rate indexed to the London Interbank Offered Rate (“LIBOR”). The Corporation has the option to prepay these advances, without penalty, if the FHLB elects to convert the interest rate to an adjustable rate. As of December 31, 2016, substantially all the FHLB advances with this convertible feature are subject to conversion in fiscal 2017. These advances are included in the periods in which they mature, rather than the period in which they are subject to conversion. C. Other Information –In connection with its FHLB borrowings, the Corporation is required to hold the capital stock of the FHLB. The amount of capital stock held was $17.3 million at December 31, 2016, and $12.9 million at December 31, 2015. The carrying amount of the FHLB stock approximates its redemption value. The level of required investment in FHLB stock is based on the balance of outstanding loans the Corporation has from the FHLB. Although FHLB stock is a financial instrument that represents an equity interest in the FHLB, it does not have a readily determinable fair value. FHLB stock is generally viewed as a long-term investment. Accordingly, when evaluating FHLB stock for impairment, its value should be determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Corporation had a maximum borrowing capacity (“MBC”) with the FHLB of $1.22 billion as of December 31, 2016 of which the unused capacity was $886.0 million. In addition there were $79.0 million in overnight federal funds line, $117.3 million of Federal Reserve Discount Window capacity and $5.0 million in a correspondent bank line of credit. Note 11 – Subordinated Notes On August 6, 2015, the Corporation completed the issuance of $30 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the "Notes") due 2025 in a private placement transaction to institutional accredited investors. The net proceeds of the offering, which totaled $29.5 million, increased Tier 2 regulatory capital and the Corporation intends to use the net proceeds for general corporate purposes including share repurchases, possible acquisitions and organic growth. The debt issuance costs are included as a direct deduction from the debt liability and the costs are amortized to interest expense using the effective interest method. The Notes bear interest at an annual fixed rate of 4.75% from the date of issuance until August 14, 2020, with the first interest payment on the Notes occurring on February 15, 2016 and semi-annually thereafter each August 15 and February 15 through August 15, 2020. Thereafter, the Notes will bear interest at a variable rate that will reset quarterly to a level equal to the then-current three-month LIBOR rate plus 3.068% until August 15, 2025, or any early redemption date, payable quarterly on November 15, February 15, May 15 and August 15 of each year. Beginning with the interest payment date of August 15, 2020, and on any scheduled interest payment date thereafter, the Corporation has the option to redeem the Notes in whole or in part at a redemption price equal to 100% of the principal amount of the redeemed Notes, plus accrued and unpaid interest to the date of the redemption. In conjunction with the issuance, the Corporation engaged the Kroll Bond Rating Agency (“KBRA”) to assign a senior unsecured long-term debt rating, a subordinated debt rating and a short-term rating to the Corporation. As a result of their evaluation, KBRA assigned the Corporation a senior unsecured debt rating of A-, a subordinated debt rating of BBB+ and a short-term debt rating of K2. Note 12 - Derivatives and Hedging Activities In December 2012, the Corporation entered into a forward-starting interest rate swap (the “Swap”) to hedge the cash flows of a $15 million floating-rate FHLB borrowing. The Swap involves the exchange of the Corporation’s floating rate interest payments on the underlying principal amount. The Swap was designated, and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in the periods in which the hedged forecasted transaction affects earnings. On November 30, 2015, the Corporation elected to terminate the Swap and as a result, as of both December 31, 2016 and 2015, the Corporation held no derivative positions. The following table details the Corporation’s derivative positions as of the December 31, 2014:
For the twelve months ended December 31, 2015, the tax-effected accumulated other comprehensive loss associated with the Swap increased by $372 thousand. For the twelve months ended December 31, 2015, the Corporation reclassified $611 thousand, net of income tax benefit of $214 thousand from accumulated other comprehensive loss into earnings. During the twelve month periods ended December 31, 2014, there were no reclassifications of the Swap’s fair value from other comprehensive income to earnings. Note 13 - Disclosure about Fair Value of Financial Instruments FASB ASC 825, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Corporation. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. Investment Securities Fair values for investment securities are generally determined by the Corporation including the use of an independent third party based on market data, utilizing pricing models that vary by asset and incorporate available trade, bid and other market information. The Corporation reviews, annually, the process utilized by its independent third-party valuation service provider. On a quarterly basis, the Corporation tests the validity of the prices provided by the third party by selecting a representative sample of the portfolio and obtaining actual trade results, or if actual trade results are not available, competitive broker pricing. On an annual basis, the Corporation evaluates, for appropriateness, the methodology utilized by the independent third-party valuation service provider. Loans Held for Sale The fair value of loans held for sale is based on pricing obtained from secondary markets. Net Portfolio Loans and Leases For variable rate loans that reprice frequently and which have no significant change in credit risk, estimated fair values are based on carrying values. Fair values of certain fixed rate mortgage loans and consumer loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and is indicative of an entry price. The estimated fair value of nonperforming loans is based on discounted estimated cash flows as determined by the internal loan review of the Bank or the appraised market value of the underlying collateral, as determined by independent third party appraisers. This technique does not reflect an exit price. Impaired Loans The Corporation evaluates and values impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired
Discount Rate Used in the Calculation of Periodic Pension Costs
Other Real Estate Owned Other real estate owned consists of properties acquired as a result of foreclosures and deeds in-lieu-of foreclosure. Properties are classified as OREO and are reported at the lower of cost or fair value less cost to sell, and are classified as Level 3 in the fair value hierarchy. Mortgage Servicing Rights The fair value of the MSRs for these periods was determined using a proprietary third-party valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates. Due to the proprietary nature of the valuation model used and the lack of observable inputs, the Corporation classifies the value of MSRs as using Level 3 inputs. Other Assets Due to their short-term nature, the carrying amounts of accrued interest receivable, income taxes receivable and other investments approximate their fair value. Deposits The fair values disclosed for non-interest-bearing demand deposits, savings, NOW accounts, and market rate accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on the certificates of deposit. FASB Codification 825 defines the fair value of demand deposits as the amount payable on demand, as of the reporting date, and prohibits adjusting estimated fair value from any value derived from retaining those deposits for an expected future period of time. Short-term borrowings Due to their short-term nature, the carrying amount of short-term borrowings, which include overnight repurchase agreements approximate their fair value. FHLB Advances and Other Borrowings The fair value of FHLB advances and other borrowings is established using a discounted cash flow calculation that applies interest rates currently being offered on mid-term and long term borrowings. SubordinatedNotes The fair value of the Notes is estimated by discounting the principal balance using the FHLB yield curve for the term to the call date as the Corporation has the option to call the Notes. The Notes are classified within Level 2 in the fair value hierarchy. Other Liabilities The carrying amounts of accrued interest payable and other accrued payables approximate fair value. The fair value of the interest-rate swap derivative is derived from quoted prices for similar instruments in active markets and is classified as using Level 2 inputs. Off-Balance Sheet Instruments The fair values of the Corporation’s commitments to extend credit, standby letters of credit and financial guarantees are not included in the table below as their carrying values generally approximate their fair values. These instruments generate fees that approximate those currently charged to originate similar commitments. The carrying amount and fair value of the Corporation’s financial instruments are as follows:
*see Note 14 in the Notes to Consolidated Financial Statements for a description of hierarchy levels. Note 14 - Fair Value Measurement FASB ASC 820, “Fair Value Measurement” establishes a fair value hierarchy based on the nature of data inputs for fair value determinations, under which the Corporation is required to value each asset using assumptions that market participants would utilize to value that asset. When the Corporation uses its own assumptions it is required to disclose additional information about the assumptions used and the effect of the measurement on earnings or the net change in assets for the period. The value of the Corporation’s available for sale investment securities, which include obligations of the U.S. government and its agencies, mortgage-backed securities issued by U.S. government- and U.S. government sponsored agencies, obligations of state and political subdivisions, corporate bonds, other debt securities, as well as bond mutual funds are determined by the Corporation, including the use of an independent third party. The Corporation performs tests to assess the validity of these third-party values. The third party’s evaluations are based on market data. They utilize pricing models that vary by asset and incorporate available trade, bid and other market information. For securities that do not trade on a daily basis, their pricing models apply available information such as benchmarking and matrix pricing. The market inputs normally sought in the evaluation of securities include benchmark yields, reported trades, broker/dealer quotes (only obtained from market makers or broker/dealers recognized as market participants), issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data. For certain securities, additional inputs may be used or some market inputs may not be applicable. Inputs are prioritized differently on any given day based on market conditions. U.S. Government agencies are evaluated and priced using multi-dimensional relational models and option adjusted spreads. State and municipal securities are evaluated on a series of matrices including reported trades and material event notices. Mortgage-backed securities are evaluated using matrix correlation to treasury or floating index benchmarks, prepayment speeds, monthly payment information and other benchmarks. Other available-for-sale investments are evaluated using a broker-quote based application, including quotes from issuers. The value of the investment portfolio is determined using three broad levels of inputs: Level 1 – Quoted prices in active markets for identical securities. Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 – Instruments whose significant value drivers are unobservable. These levels are not necessarily an indication of the risks or liquidity associated with these investments. The following tables summarize the assets at December 31, 2016 and 2015 that are recognized on the Corporation’s balance sheet using fair value measurement determined based on the differing levels of input. Fair value of assets measured on a recurring basis as of December 31, 2016:
Fair value of assets measured on a non-recurring basis as of December 31, 2016:
Fair value of assets measured on a recurring basis as of December 31, 2015:
Fair value of assets measured on a non-recurring basis as of December 31, 2015:
For the twelve months ended December 31, 2016, a net decrease of $607 thousand in the Allowance was recorded and for the twelve months ended December 31, 2015, a net increase of $448 thousand in the Allowance was recorded as a result of adjusting the carrying value and estimated fair value of the impaired loans in the above tables. As it relates to the fair values of assets measured on a recurring basis, there have been no transfers between levels during the twelve months ended December 31, 2016. Note 15 - 401(K) Plan and Other Defined Contribution Plans The Corporation has a qualified defined contribution plan (the “401(K) Plan”) for all eligible employees, under which the Corporation matches employee contributions up to a maximum of 3.0% of the employee’s base salary. The Corporation’s expenses for the 401(K) Plan were $1.0 million, $920 thousand and $846 thousand in 2016, 2015 and 2014, respectively. In addition to the matching contribution above, the Corporation provides a discretionary, non-matching employer contribution to the 401(K) Plan. The Corporation’s expense for the non-matching discretionary contribution was $126 thousand, $1.3 million and $1.1 million, for the twelve months ended December 31, 2016, 2015 and 2014, respectively. In connection with the December 31, 2015 settlement of the Qualified Defined Benefit Plan, $2.3 million of excess assets weretransferred to the Corporation’s 401(K) plan. As a result, the expense recorded for the non-matching discretionary contribution was significantly lower for 2016, as compared to the previous two years. On June 28, 2013, the Corporation adopted the Bryn Mawr Bank Corporation Executive Deferred Compensation Plan (the “EDCP”), a non-qualified defined-contribution plan which was restricted to certain senior officers of the Corporation. The intended purpose of the EDCP is to provide deferred compensation to a select group of employees. The Corporation’s expense for the EDCP, for the twelve months ended December 31, 2016, 2015 and 2014 was $272 thousand, $164 thousand and $239 thousand, respectively. Note 16 - Pension and Postretirement Benefit Plans A. General Overview – Prior to December 31, 2015, the Corporation had three defined-benefit pension plans comprised of a qualified defined benefit plan (the “QDBP”) which covered all employees over age 20 1/2 who met certain service requirements, and two non-qualified defined-benefit supplemental executive retirement plans (“SERP I” and “SERP II”) which are restricted to certain senior officers of the Corporation. On May 29, 2015, by unanimous consent, the Board of Directors of the Corporation voted to settle the QDBP. On June 2, 2015, notices were sent to participants informing them of the settlement. Final distributions to participants were completed by December 31, 2015. As a result of the settlement of the QDBP, a loss on pension settlement of $17.4 million was recorded for the twelve months ended December 31, 2015. SERP I provides each participant with the equivalent pension benefit provided by the QDBP on any compensation and bonus deferrals that exceed the IRS limit applicable to the QDBP. On February 12, 2008, the Corporation amended the QDBP and SERP I to freeze further increases in the defined benefit amounts to all participants, effective March 31, 2008. On April 1, 2008, the Corporation added SERP II, a non-qualified defined benefit plan which was restricted to certain senior officers of the Corporation. Effective March 31, 2013, the Corporation curtailed SERP II, as further increases to the defined benefit amounts to over 20% of the participants were frozen. The Corporation also has a postretirement benefit plan (“PRBP”) that covers certain retired employees and a group of current employees. The PRBP was closed to new participants in 1994. In 2007, the Corporation amended the PRBP to allow for settlement of obligations to certain current and retired employees. Certain retired participant obligations were settled in 2007 and current employee obligations were settled in 2008. The following table provides information with respect to our QDBP, SERP, and PRBP, including benefit obligations and funded status, net periodic pension costs, plan assets, cash flows, amortization information and other accounting items. B. Actuarial Assumptions used to determine benefit obligations as of December 31 of the years indicated:
C. Changes in Benefit Obligations and Plan Assets:
As indicated in the table above, the excess assets remaining in the settled QDBP as of December 31, 2015 were transferred to the Corporation’s defined contribution plan and serve to defray some of the future costs to fund this plan.
D. The following tables provide the components of net periodic pension costs for the periods indicated:
E. Plan Assets: As of December 31, 2015, with the exception of $169 thousand disbursed in January 2016 to QDBP participants already receiving benefits, all assets of the QDBP had been distributed to the participants either in the form of an annuity or as a lump sum payment. F. Cash Flows The following benefit payments, which reflect expected future service, are expected to be paid over the next ten years:
G. Other Pension and Post Retirement Benefit Information In 2005, the Corporation placed a cap on the future annual benefit payable through the PRBP. This cap is equal to 120% of the 2005 annual benefit. H. Expected Contribution to be Paid in the Next Fiscal Year The 2017 expected contribution for the SERP I and SERP II is $259 thousand. I. Actuarial Losses As indicated in section C of this footnote, the Corporation’s pension plans had cumulative actuarial losses as of December 31, 2016 that will result in an increase in the Corporation’s future pension expense because such losses at each measurement date exceed 10% of the greater of the projected benefit obligation or the market-related value of the plan assets. In accordance with GAAP, net unrecognized gains or losses that exceed that threshold are required to be amortized over the expected service period of active employees, and are included as a component of net pension cost. Amortization of these net actuarial losses has the effect of increasing the Corporation’s pension costs as shown on the table in section D of this footnote. Note 17 – Accumulated Other Comprehensive Loss
The following tables detail the amounts reclassified from each component of accumulated other comprehensive loss for the twelve month periods ended December 31, 2016, 2015 and 2014:
*Accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 16 - Pension and Other Post-Retirement Benefit Plans. Note18 – Income Taxes A.Components of Net Deferred Tax Asset:
Not included in the table above is a $157 thousand deferred tax asset for state taxes related to net operating losses of our leasing subsidiary as of December 31, 2016, for which we have recorded a 100% valuation allowance. These state net operating losses will expire between 2023 and 2035. As a result of the CBH Merger, deferred tax assets were increased by $7.2 million related to purchase accounting adjustments and net deferred tax assets carried over from CBH. B. The provision(benefit)for income taxes consists of the following:
C. Applicable income taxes differed from the amount derived by applying the statutory federal tax rate to income as follows:
D. Other Income Tax Information In accordance with the provisions of ASC 740, “Accounting for Uncertainty in Income Taxes”, the Corporation recognizes the financial statement benefit of a tax position only after determining that the Corporation would more likely than not sustain the position following an examination. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement with the relevant tax authority. The Corporation applied these criteria to tax positions for which the statute of limitations remained open. There were no reserves for uncertain tax positions recorded during the twelve months ended December 31, 2016, 2015 or 2014. The Corporation is subject to income taxes in the U.S. federal jurisdiction, and in multiple state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examination by tax authorities for the years before 2013. The Corporation’s policy is to record interest and penalties on uncertain tax positions as income tax expense. No interest or penalties were accrued in 2016. As of December 31, 2016, the Corporation has net operating loss carry-forwards for federal income tax purposes of $1.3 million, related to the FKF merger, which are available to offset future federal taxable income through 2030. In addition, the Corporation has alternative minimum tax credits of $567 thousand, which are available to reduce future federal regular income taxes over an indefinite period. The Corporation has determined that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset related to these amounts. As a result of the July 1, 2010 merger with FKF, the Corporation succeeded to certain tax bad debt reserves that existed at FKF as of June 30, 2010. As of December 31, 2016, the Corporation had unrecognized deferred income taxes of $2.5 million with respect to these reserves. These reserves could be recognized as taxable income and create a current and/or deferred tax liability at the income tax rates then in effect if one of the following conditions occurs: (1) the Bank’s retained earnings represented by this reserve are used for distributions, in liquidation, or for any other purpose other than to absorb losses from bad debts; (2) the Bank fails to qualify as a bank, as provided by the Internal Revenue Code; or (3) there is a change in federal tax law. Note 19 - Stock –Based Compensation A. General Information The Corporation permits the issuanceof stock options, dividend equivalents, performance stock awards, stock appreciation rights and restricted stock awards to employees and directors of the Corporation under several plans. The performance awards and restricted awards may be in the form of stock awards or stock units. Stock awards and stock units differ in that for a stock award, shares of restricted stock are issued in the name of the grantee, whereas a stock unit constitutes a promise to issue shares of stock upon vesting. The accounting for awards and units is identical. The terms and conditions of awards under the plans are determined by the Corporation’s Compensation Committee. Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved the Corporation’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of the Corporation’s common stock were made available for award grants. On April 28, 2010, the shareholders approved the Corporation’s “2010 Long Term Incentive Plan” (the “2010 LTIP”) under which a total of 445,002 shares of the Corporation’s common stock were made available for award grants. In addition to the shareholder-approved plans mentioned in the preceding paragraph, the Corporation periodically authorizes grants of stock-based compensation as inducement awards to new employees. This type of award does not require shareholder approval in accordance with Rule 5635(c)(4) of the Nasdaq listing rules. RSAs and RSUs have a restriction based on the passage of time. The grant date fair value of the RSAs and RSUs is based on the closing price on the date of the grant. PSAs and PSUs have a restriction based on the passage of time and also have a restriction based on a performance criteria. The performance criteria may be a market-based criteria measured by the Corporation’s total shareholder return (“TSR”) relative to the performance of the community bank index for the respective period. The fair value of the PSAs and PSUs based on the Corporation’s TSR relative to the performance of the community bank index is calculated using the Monte Carlo Simulation method. The performance criteria may also be based on a non-market-based criteria such as return on average equity. The grant date fair value of these PSUs and PSAs is based on the closing price of the Corporation’s stock on the date of the grant. PSU and PSA grants may have a vesting percent ranging from 0% to 150%. The following table summarizes the remaining shares authorized to be granted for options, RSAs and PSAs:
B. Fair Value of Options Granted In connection with the CBH Merger, 181,256 fully vested options, with a value of $2.3 million which had been granted to former CBH employees and directors, were assumed by the Corporation. No other stock options were granted or assumed during the twelve month periods ended December 31, 2016, 2015 and 2014. C. Other Stock Option Information – The following table provides information about options outstanding:
The following table provides information related to options as of December 31, 2016:
*price of exercisable options The following table provides information about unvested options:
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows:
The following table provides information about options outstanding and exercisable options:
As of December 31, 2016, all compensation expense related to stock options has been recognized. D. Restricted Stock and Performance Stock Awards and Units The Corporation has granted RSAs, RSUs, PSAs and PSUs under the 2007 LTIP and 2010 LTIP and in accordance withRule 5635(c)(4) of the Nasdaq listing standards. RSAs and RSUs The compensation expense for the RSAs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight line basis over the vesting period. For the twelve months ended December 31, 2016, the Corporation recognized $590 thousand of expense related to the Corporation’s RSAs and RSUs. As of December 31, 2016, there was $1.2 million of unrecognized compensation cost related to RSAs and RSUs. This cost will be recognized over a weighted average period of 2.2 years. The following table details the RSAs for the twelve month periods ended December 31, 2016, 2015 and 2014:
PSAs and PSUs The compensation expense for PSAs and PSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulation and is recognized on a straight-line basis over the vesting period. For the twelve months ended December 31, 2015, there were two separate grants of PSUs. The grant date fair value of each grant was determined independently using the Monte Carlo Simulation. Assumptions used in the Monte Carlo Simulation for the grant of 23,675 PSUs, whose performance is based on TSR, in August 2016, included expected volatility of 21.87% a risk free rate of interest of 0.82% and a correlation co-efficient of 0.4505. The Corporation recognized $1.1 million of expense related to the PSUs for the twelve months ended December 31, 2016. As of December 31, 2016, there was $2.0 million of unrecognized compensation cost related to PSUs. This cost will be recognized over a weighted average period of 2.0 years. The following table details the PSAs and PSUs for the twelve month periods ending December 31, 2016, 2015 and 2014:
__________________________ * Non-vesting PSAs represent PSAs that did not meet their performance criteria, and were therefore cancelled. The associated expense, however, was incurred over the vesting period. Note 20 - Earnings per Share The calculation of basic earnings per share and diluted earnings per share is presented below:
*excludes restricted stock 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. See Note 1-Q – “Summary of Significant Accounting Policies: Earnings per Common Share” for a discussion on the calculation of earnings per share. Note 21 - Other Operating Income Components of other operating income for the indicated years ended December 31 include:
Note 22 - Other Operating Expense Components of other operating expense for the indicated years ended December 31 include:
Note 23 - Related Party Transactions In the ordinary course of business, the Bank granted loans to principal officers, directors and their affiliates. Loan activity during 2016 and 2015 was as follows:
Related party deposits amounted to $6.0 million and $3.6 million at December 31, 2016 and 2015, respectively. Note 24 - Financial Instruments with Off-Balance Sheet Risk, Contingencies and Concentration of Credit Risk 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. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument of commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments. Commitments to extend credit, which include unused lines of credit and unfunded commitments to originate loans, are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Some of the commitments are expected to expire without being drawn upon, and the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at December 31, 2016 were$675.4 million. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on a credit evaluation of the counterparty. Collateral varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, residential real estate, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credits are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in extending loan facilities to customers. The collateral varies, but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and residential real estate for those commitments for which collateral is deemed necessary. The Corporation’s obligation under standby letters of credit as of December 31, 2016 was $12.7 million. There were no outstanding bankers’ acceptances as of December 31, 2016. Contingencies Legal Matters In the ordinary course of business, the Corporation is subject to litigation, claims, and assessments that involve claims for monetary relief. Some of these are covered by insurance. Based upon information presently available to the Corporation and its counsel, it is the Corporation’s opinion that any legal and financial responsibility arising from such claims will not have a material, adverse effect on its results of operations, financial condition or capital. Indemnifications In general, the Corporation does not sell loans with recourse, except to the extent that it arises from standard loan-sale contract provisions. These provisions cover violations of representations and warranties and, under certain circumstances, first payment default by borrowers. These indemnifications may include the repurchase of loans by the Corporation, and are considered customary provisions in the secondary market for conforming mortgage loan sales. For the twelve months ended December 31, 2016, 2015 and 2014, Concentrations of Credit Risk The Corporation has a material portion of its loans in real estate-related loans. A predominant percentage of the Corporation’s real estate exposure, both commercial and residential, is in the Corporation’s primary trade area which includes portions of Delaware, Chester, Montgomery and Philadelphia counties in Southeastern Pennsylvania. The Corporation is aware of this concentration and attempts to mitigate this risk to the extent possible in many ways, including the underwriting and assessment of borrower’s capacity to repay. See Note 5 – “Loans and Leases” for additional information. As of December 31, Note The Bank is subject to the Pennsylvania Banking Code of 1965 (the “Code”), as amended, and is restricted in the amount of dividends that can be paid to its sole shareholder, the Corporation. The Code restricts the payment of dividends by the Bank to the amount of its net income during the current calendar year and the retained net income of the prior two calendar years, unless the dividend has been approved by the Board of Governors of the Federal Reserve System. The Bank’s total retained net income for the combined two years ended December 31, Note A. General Regulatory Capital Information Both the Corporation and the Bank are subject to various regulatory capital requirements, administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if taken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Beginning in 2015, new regulatory capital reforms, known as Basel III, issued as part of the Dodd-Frank Act B. S-3 Shelf Registration Statement and Offerings Thereunder In
In addition, the Corporation has in place under its Shelf Registration Statement a Dividend Reinvestment and Stock Purchase Plan (the “Plan”), which
For the twelve months ended December 31, C. Shares Issued in Mergers and Acquisitions In connection with the acquisition of
D. Share Repurchases For the twelve month periods ended December 31, 2015 and 2016, the Corporation repurchased 862,500 shares and 286,700 shares of Corporation stock, respectively, through its announced repurchase programs. In addition, it is the Corporation’s practice to retire shares to its treasury account upon the vesting of stock awards to certain officers, in order to cover the statutory income tax withholdings related to such vesting. E. Regulatory Capital Ratios As set forth in the following table, quantitative measures have been established to ensure capital adequacy ratios required of both the Corporation and the Bank. Both the Corporation’s and the Bank’s Tier II capital ratios are calculated by adding back a portion of the loan loss reserve to the Tier I capital. The Corporation’s and the Bank’s
Note
*Earnings per share is computed independently for each period shown. As a result, the sum of the quarters may not equal the total earnings per share for the year. Note The condensed financial statements of the Corporation (parent company only) are presented below. These statements should be read in conjunction with the Notes to the Consolidated Financial Statements. A. Condensed Balance Sheets
B. Condensed Statements of Income
C. Condensed Statements of Cash Flows
Note FASB Codification 280 – “Segment Reporting” identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations. The Corporation’s Banking segment consists of commercial and retail banking. The Banking segment is evaluated as a single strategic unit which generates revenues from a variety of products and services. The Banking segment generates interest income from its lending (including leases) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale in available for sale investment securities, gains on the sale of residential mortgage loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income and interchange revenue associated with its Visa Check Card offering. The Wealth Management segment has responsibility for a number of activities within the Corporation, including trust administration, other related fiduciary services, custody, investment management and advisory services, employee benefits and IRA administration, estate settlement, tax services and brokerage. Bryn Mawr Trust of Delaware and Lau Associates are included in the Wealth Management segment of the Corporation since they have similar economic characteristics, products and services to those of the Wealth Management Division of the Corporation. In addition, with the October 1, 2014 acquisition of PCPB and the April 1, 2015 acquisition of RJM, which was merged The accounting policies of the Corporation are applied by segment in the following tables. The segments are presented on a pre-tax basis. The following table details the Corporation’s segments:
Other segment information: Wealth Management Segment Information
Note On January
None.
Evaluation of Disclosure Controls and The Corporation carried out an evaluation, under the supervision and Changes in Internal Control over Financial Reporting There were no changes in the Corporation’s internal control over financial reporting during the fourth quarter of 2016 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. Design and Evaluation of Internal Control Over Financial Reporting Pursuant to Section 404 of Sarbanes-Oxley, the following is a report of management’s assessment of the
Management’s Report on Internal Control Over Financial Reporting
The Corporation’s Management is responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; provide a reasonable assurance that receipts and expenditures of the Corporation are only being made in accordance with authorizations of Management and directors of the Corporation; and provide a reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by Management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are noted. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, assessed the Corporation’s system of internal control over financial reporting as of December 31, KPMG, LLP, which is the independent registered public accounting firm that audited the financial statements in this Annual Report on Form 10-K, has issued an attestation report on the Corporation’s internal control over financial reporting, which can be found
None. PART III
The information required for Item 10 is incorporated by reference to the sections titled “Our Board of Directors,” “Information About our Directors,” “Information About our Executive Officers,” “Corporate Governance,” “Audit Committee Report” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the
The information required for Item 11 is incorporated by reference to section titled “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the
The information required for Item 12 is incorporated by reference to the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the
The information required for Item 13 is incorporated by reference to sections titled “Transactions with Related Persons” and “Corporate Governance – Director Independence” in the
The information required for Item 14 is incorporated by reference to the PART IV
Item 15(a) (1 & 2) Financial Statements and Schedules The financial statements listed in the accompanying index to financial statements are filed as part of this Annual Report.
Item 15(a) (3) and(b)
________________
Item 15(c) SIGNATURES Pursuant to the requirements of section 13 or 15d of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Bryn Mawr Bank Corporation
Date: March Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Corporation and in the capacities and on the date indicated.
EXHIBIT INDEX
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