UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2015
☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the transition period from to
Commission file number 001-35746.
BRYN MAWR BANK CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
(State of other jurisdiction of Incorporation or Organization)
801 Lancaster Avenue, Bryn Mawr, Pennsylvania
(Address of principal executive offices)
23-2434506
(I.R.S. Employer Identification Number)
19010
(Zip Code)
(Registrant’s telephone number, including area code) (610) 525-1700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock ($1 par value)
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (& 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer ☐
Non-Accelerated Filer ☐
Indicate by checkmark whether the Registrant is a shell company (as defined by Rule 126-2 of the Exchange Act): Yes ☐ No ☒
The aggregate market value of shares of common stock held by non-affiliates of Registrant (including fiduciary accounts administered by
affiliates) was $528,844,200 on June 30, 2015 based on the price at which our common stock was last sold on that date.*
As of March 2, 2016, there were 16,788,558 shares of common stock outstanding.
Documents Incorporated by Reference: Portions of the Definitive Proxy Statement of Registrant to be filed with the Commission
pursuant to Regulation 14A with respect to the Registrant’s Annual Meeting of Shareholders to be held on April 28, 2016 (“2016 Proxy
Statement”), as indicated, are incorporated into this Form 10-K by reference.
*
Registrant does not admit by virtue of the foregoing that its officers and directors are “affiliates” as defined in Rule 405.
☒
Accelerated Filer
Smaller Reporting Company ☐
Form 10-K
Bryn Mawr Bank Corporation
Index
Item No.
Page
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
Part I
Business .............................................................................................................................................................
Risk Factors .......................................................................................................................................................
Unresolved Staff Comments ..............................................................................................................................
Properties ...........................................................................................................................................................
Legal Proceedings .............................................................................................................................................
Mine Safety Disclosures ....................................................................................................................................
1
11
19
20
21
21
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ......................................................................................................................................................
21
Selected Financial Data .....................................................................................................................................
24
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) .........
25
Quantitative and Qualitative Disclosures about Market Risk ............................................................................
50
50
Financial Statements and Supplementary Data .................................................................................................
Change in and Disagreements with Accountants on Accounting and Financial Disclosure.............................. 118
Controls and Procedures .................................................................................................................................... 118
Other Information .............................................................................................................................................. 121
Part III
Directors and Executive Officers of the Registrant ........................................................................................... 121
Executive Compensation ................................................................................................................................... 121
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......... 121
Certain Relationships and Related Transactions ............................................................................................... 122
Principal Accountant Fees and Services ............................................................................................................ 122
Part IV
15.
Exhibits and Financial Statement Schedules ..................................................................................................... 122
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements contained in this report and the documents incorporated by reference herein may constitute
forward-looking statements for the purposes of the Securities Act of 1933, as amended and the Securities Exchange Act of
1934, as amended, and may involve known and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements of the Bryn Mawr Bank Corporation (the “Corporation”) to be materially different
from future results, performance or achievements expressed or implied by such forward-looking statements. These forward-
looking statements include statements with respect to the Corporation’s financial goals, business plans, business prospects,
credit quality, credit risk, reserve adequacy, liquidity, origination and sale of residential mortgage loans, mortgage
servicing rights, the effect of changes in accounting standards, and market and pricing trends loss. The words The words
“may”, “would”, “could”, “will”, “likely”, “expect,” “anticipate,” “intend”, “estimate”, “plan”, “forecast”, “project”
and “believe” and similar expressions are intended to identify such forward-looking statements. The Corporation’s actual
results may differ materially from the results anticipated by the forward-looking statements due to a variety of factors,
including without limitation:
•
local, regional, national and international economic conditions and the impact they may have on us and our
customers and our assessment of that impact;
• our need for capital;
•
•
•
lower demand for our products and services and lower revenues and earnings could result from an economic
recession;
lower earnings could result from other-than-temporary impairment charges related to our investment securities
portfolios or other assets;
changes in monetary or fiscal policy, or existing statutes, regulatory guidance, legislation or judicial decisions
that adversely affect our business, including changes in federal income tax or other tax regulations;
•
changes in the level of non-performing assets and charge-offs;
•
changes in estimates of future reserve requirements based upon the periodic review thereof under relevant
regulatory and accounting requirements;
• other changes in accounting requirements or interpretations;
•
the accuracy of assumptions underlying the establishment of provisions for loan and lease losses and estimates
in the value of collateral, and various financial assets and liabilities;
•
inflation, securities market and monetary fluctuations;
•
changes in the securities markets with respect to the market values of financial assets and the stability of
particular securities markets;
•
•
•
•
changes in interest rates, spreads on interest-earning assets and interest-bearing liabilities, and interest rate
sensitivity;
prepayment speeds, loan originations and credit losses;
sources of liquidity and financial resources in the amounts, at the times and on the terms required to support
our future business;
legislation or other governmental action affecting the financial services industry as a whole, us or our
subsidiaries individually or collectively, including changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) with which we must comply;
•
results of examinations by the Federal Reserve Board, including the possibility that such regulator may, among
other things, require us to increase our allowance for loan losses or to write down assets;
•
our common stock outstanding and common stock price volatility;
•
fair value of and number of stock-based compensation awards to be issued in future periods;
• with respect to mergers and acquisitions, our business and the acquired business will not be integrated
successfully or such integration may be more difficult, time-consuming or costly than expected;
•
revenues following the completion of a merger or acquisition may be lower than expected;
• deposit attrition, operating costs, customer loss and business disruption following a merger or acquisition,
including, without limitation, difficulties in maintaining relationships with employees, may be greater than
expected;
• material differences in the actual financial results of our merger and acquisition activities compared with
expectations, such as with respect to the full realization of anticipated cost savings and revenue enhancements
within the expected time frame;
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our success in continuing to generate new business in our existing markets, as well as their success in
identifying and penetrating targeted markets and generating a profit in those markets in a reasonable time;
our ability to continue to generate investment results for customers and the ability to continue to develop
investment products in a manner that meets customers’ needs;
changes in consumer and business spending, borrowing and savings habits and demand for financial services
in the relevant market areas;
rapid technological developments and changes;
the effects of competition from other commercial banks, thrifts, mortgage companies, finance companies, credit
unions, securities brokerage firms, insurance companies, money-market and mutual funds and other institutions
operating in our market areas and elsewhere including institutions operating locally, regionally, nationally and
internationally together with such competitors offering banking products and services by mail, telephone,
computer and the internet;
our ability to continue to introduce competitive new products and services on a timely, cost-effective basis and
the mix of those products and services;
containing costs and expenses;
protection and validity of intellectual property rights;
reliance on large customers;
technological, implementation and cost/financial risks in contracts;
the outcome of pending and future litigation and governmental proceedings;
any extraordinary events (such as natural disasters, acts of terrorism, wars or political conflicts);
ability to retain key employees and members of senior management;
the ability of key third-party providers to perform their obligations to us and our subsidiaries; and
• Our success in managing the risks involved in the foregoing.
All written or oral forward-looking statements attributed to the Corporation are expressly qualified in their entirety
by use of the foregoing cautionary statements. All forward-looking statements included in this Report and the documents
incorporated by reference herein are based upon the Corporation’s beliefs and assumptions as of the date of this Report.
The Corporation assumes no obligation to update any forward-looking statement. In light of these risks, uncertainties and
assumptions, the forward-looking statements discussed in this Report or incorporated documents might not occur and you
should not put undue reliance on any forward-looking statements.
ITEM 1.
BUSINESS
GENERAL
PART I
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 26 full-service branches, eight
limited-hour retirement community branches, five wealth offices and a full-service insurance agency throughout Montgomery, Delaware,
Chester, Philadelphia and Dauphin counties of Pennsylvania and New Castle County in Delaware. The Corporation’s common stock
trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.
The goal of the Corporation is to become the preeminent community bank and wealth management organization in the
Philadelphia area. The Corporation’s strategy to achieve this goal includes investing in foundational strength to support its growth,
leveraging the strength of its brand, building out its core franchise and targeting high potential markets, basing its sales strategy on high
performing relationships, concentrating on core product solutions and broadening the scope of its product offerings, using the
Corporation’s human resources as a strategic advantage, engaging in inorganic growth by strategically acquiring small to mid-sized
banks, insurance brokerages, wealth management companies, and advisory and planning services firms, and lifting out high-performing
teams where strategically advantageous.
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”), the
Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania and Delaware Departments of Banking.
WEBSITE DISCLOSURES
The Corporation files with the Securities and Exchange Commission (the “SEC”) and makes available, free of charge, through its
website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after the reports are electronically filed with the SEC. These reports can be obtained on the
Corporation’s website at www.bmtc.com by following the link, “About Us,” followed by “Investor Relations.” The information contained
on or connected to our website is not incorporated by reference into this Annual Report on Form 10-K. Further copies of these reports are
located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public
Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and
information statements, and other information regarding our filings, at www.sec.gov.
OPERATIONS
• Bryn Mawr Bank Corporation
The Corporation has no active staff as of December 31, 2015. The Corporation is the sole shareholder of the stock of the Bank.
Additionally, the Corporation performs several functions including shareholder communications, shareholder recordkeeping, the
distribution of dividends and the periodic filing of reports and payment of fees to NASDAQ, the SEC and other regulatory agencies.
As of December 31, 2015, the Corporation and its subsidiaries had 488 full time and 42 part time employees, totaling 509 full time
equivalent staff.
ACTIVE SUBSIDIARIES OF THE CORPORATION
The Corporation has three active subsidiaries which provide various services as described below:
•
Lau Associates
Lau Associates LLC is a nationally recognized independent, family wealth office serving high net worth individuals and families,
with special expertise in planning intergenerational inherited wealth. Lau Associates employed 13 full time employees as of December
31, 2015, and are included in the Corporation’s employment numbers. Lau Associates LLC is a wholly-owned subsidiary of the
Corporation.
1
•
The Bryn Mawr Trust Company of Delaware
The Bryn Mawr Trust Company of Delaware (“BMTC-DE”) is a limited-purpose trust company located in Greenville, DE and has
the ability to be named and serve as a corporate fiduciary under Delaware law. BMTC-DE employed five full-time and two part time
employees as of December 31, 2015. BMTC-DE employees are included in the Corporation’s employment numbers. Being able to serve
as a corporate fiduciary under Delaware law is advantageous as Delaware statutes are widely recognized as being favorable with respect
to the creation of tax-advantaged trust structures, LLCs and related wealth transfer vehicles for families and individuals throughout the
United States. BMTC-DE is a wholly-owned subsidiary of the Corporation.
•
The Bryn Mawr Trust Company
The Bank is engaged in commercial and retail banking business, providing basic banking services, including the acceptance of
demand, time and savings deposits and the origination of commercial, real estate and consumer loans and other extensions of credit
including leases. The Bank also provides a full range of wealth management services including trust administration and other related
fiduciary services, custody services, investment management and advisory services, employee benefit account and IRA administration,
estate settlement, tax services, financial planning and brokerage services. As of December 31, 2015, the market value of assets under
management, administration, supervision and asset management/brokerage by the Bank’s Wealth Management Division was $8.365
billion.
The Bank presently has 26 full-service branch offices, eight limited-hour retirement community branches, three wealth
management offices and a full-service insurance agency. See the section titled “COMPETITION” later in this item for additional
information.
ACTIVE SUBSIDIARIES OF THE BANK
The Bank has three active subsidiaries providing various services as described below:
• Key Capital Mortgage, Inc.
Key Capital Mortgage, Inc. (“KCMI”) is a wholly-owned subsidiary of the Bank, located in Media, Pennsylvania, which was
established on October 1, 2015. KCMI specializes in providing non-traditional commercial mortgage loans to small businesses
throughout the United States. As of December 31, 2015, KCMI employed five full-time employees which are included in the
Corporation’s employment numbers above.
•
Powers Craft Parker & Beard, Inc.
Powers Craft Parker & Beard, Inc. (“PCPB”) is a wholly-owned subsidiary of the Bank, headquartered in Rosemont,
Pennsylvania. On October 1, 2014, the Bank acquired 100% of the stock of PCPB and merged the entity with and into its existing full-
service insurance agency, Insurance Counsellors of Bryn Mawr, Inc. (“ICBM”). The surviving entity operates under the PCPB name. On
April 1, 2015, the Bank acquired the Robert J. McAllister Agency, Inc. (“RJM”), an insurance brokerage headquartered in Rosemont,
Pennsylvania. RJM was subsequently merged into PCPB. PCPB is a full-service insurance agency, through which the Bank offers
insurance and related products and services to its customer base. This includes casualty, property and allied insurance lines, as well as
life insurance, annuities, medical insurance and accident and health insurance for groups and individuals.
As of December 31, 2015, PCPB employed 15 full-time employees, of which 14 are licensed insurance agents, along with three
part-time employees, of which two are licensed insurance agents. PCPB employees are included in the Corporation’s employment
numbers above.
• Bryn Mawr Equipment Finance, Inc.
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 servicing customers nationwide from its Bryn Mawr
location. BMEF had nine employees as of December 31, 2015. BMEF employees are included in the Corporation’s employment numbers
above.
2
BUSINESS COMBINATIONS
The Corporation and its subsidiaries engaged in the following business combinations since January 1, 2010:
• 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 and five contingent cash payments, not to
exceed $100 thousand each, will be payable on each of March 31, 2016, 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 “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 acquisition of 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 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 addition enabled the Corporation to offer a full range of insurance products to both
individual and business clients.
•
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
Delaware (“FBD”), by the Corporation was completed. The consideration paid by the Corporation totaled $10.6 million cash, paid
at closing. 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 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 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 consideration paid by the Corporation was $18.4 million, consisting of $8.1 million in cash and
322,101 unregistered shares of the BMBC common stock, valued at $6.7 million, was paid at closing, and $3.6 million in cash was
placed in escrow to be paid in three equal installments on the 6-, 12- and 18-month anniversaries of February 17, 2011, the date
preceding the date of the definitive stock purchase agreement, subject to certain post-closing contingencies relating to the assets
under management. As of December 31, 2012, the full amount of cash held in escrow had been released. 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 and allowed the Corporation to establish a presence in central Pennsylvania by
maintaining the former PWMG offices in Hershey, Pennsylvania.
3
•
First Keystone Financial, Inc.
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 29, 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 2013, 2014 or 2015.
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 29, Segment Information in the Notes to Consolidated Financial Statements.
COMPETITION
The Corporation and its subsidiaries, including the Bank, compete for deposits, loans, 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 26 full-service branches, eight limited-hour retirement community offices, and five wealth management offices.
The markets in which the Corporation competes are highly competitive. The Corporation’s direct competition in attracting
business is mainly from commercial banks, investment management companies, savings and loan associations, trust companies and
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, full product line, and its competitive rates and fees. However, there are several negative factors which can hinder
the Corporation’s ability to compete with large institutions such as its limited number of locations, smaller advertising budget, lower
technology budget, inability to spread out fixed costs and other lack-of-scale-type disadvantages.
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 of
Delaware by establishing a full-service branch along the Route 202 corridor.
The acquisition of FKF in 2010 expanded the Corporation’s footprint significantly into Delaware County, Pennsylvania, and the
acquisition of 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.
4
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 Federal Reserve Board policy, a bank holding company is expected to act 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 its “source of strength” policy 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 Regulations
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.
5
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 2015 net income plus its net retained earnings for the previous two years.
As of December 31, 2015, this amount was $14.7 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 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 2015 was an
annual rate of 0.58 basis points. Payments of the FICO assessment during the twelve months ended December 31, 2015 totaled $155
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.
6
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: The risk-based guidelines require all banks to maintain two “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%. 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%. 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.
On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules
applicable 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 changes 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.
7
The rules include new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and 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:
(i)
(ii)
(iii)
(iv)
a new common equity Tier 1 capital ratio of 4.5%;
a Tier 1 capital ratio of 6% (increased from 4%);
a total capital ratio of 8% (unchanged from current rules); and
a Tier 1 leverage ratio of 4% for all institutions.
The final rules also establish 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 be 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)
(ii)
(iii)
a common equity Tier 1 capital ratio of 7.0%;
a Tier 1 capital ratio of 8.5%; and
a total capital ratio of 10.5%.
Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary
bonuses if its capital level falls 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 regulators 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 countercyclical buffer to be applied only 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 final rules also 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 be 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) 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 on the Call Report filed after January 1, 2015.
(i)
The final rules set forth certain changes for the calculation of risk-weighted assets, which we were 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:
(i)
(ii)
(iii)
(iv)
an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act;
revisions to recognition of credit risk mitigation;
rules for risk weighting of equity exposures and past due loans;
revised capital treatment for derivatives and repo-style transactions; and disclosure requirements for top-tier banking
organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that apply to
banks with greater than $250 billion in consolidated assets.
The adoption of the final rules did not have a material impact on the level of capital ratios for the Bank or the Corporation. Both the Bank
and the Corporation remain well-capitalized based on regulatory guidelines.
8
● Prompt Corrective Action
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 in place prior to
January 1, 2015, an institution will be deemed to be “adequately capitalized” or better if it exceeds the minimum Federal regulatory
capital requirements. However, it will be deemed “undercapitalized” if it fails to meet the minimum capital 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 equity to total assets that is
equal to or less than 2.0%.
The July 2, 2013 Federal Reserve 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 of weakness. These revisions
took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation
buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as
“well capitalized:”
(i)
(ii)
(iii)
(iv)
a new common equity Tier 1 capital ratio of 6.5%;
a Tier 1 capital ratio of 8% (increased from 6%);
a total capital ratio of 10% (unchanged from current rules); and
a Tier 1 leverage ratio of 5% (increased from 4%).
The rules require an undercapitalized institution 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 26 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.
9
• 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 have 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.
• Sarbanes-Oxley Act
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.
• Patriot Act of 2001
The 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 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.
• Dodd-Frank Wall Street Reform and Consumer Protection Act
10
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 was enacted by Congress on July 15,
2010, and was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act 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.
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 Dodd-Frank Act requires the Federal Reserve Bank ("FRB") 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
be 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. Those 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 the 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.
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 of the provisions of the Dodd-Frank Act are not yet effective, and the Dodd-Frank Act requires various federal agencies to
promulgate numerous and extensive implementing regulations over the next several years. 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.
11
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 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, 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.
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, 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, 2015 represented approximately 19.0% of total
funding compared to 21.5% at December 31, 2014 and 16.2% at December 31, 2013. 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.
12
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;
•
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
•
Regulatory changes we are required to comply with;
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 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. These negative events may cause us to incur losses and may adversely affect our capital, liquidity,
and financial condition.
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 and the Pennsylvania Department of Banking and Securities.
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, 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.
13
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 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.
14
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.
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.
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.
15
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 $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.
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.
16
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;
using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect
to the target institution or assets;
•
potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
•
the time and expense required to integrate the operations and personnel of the combined businesses;
•
experiencing higher operating expenses relative to operating income from the new operations;
•
creating an adverse short-term effect on our results of operations;
17
•
losing key employees and customers as a result of an acquisition that is poorly received;
•
risk of significant problems relating to the conversion of the financial and customer data of the entity being acquired
into the Corporation’s financial and customer product systems; and,
•
potential impairment of intangible assets created in business acquisitions.
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.
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, 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—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.
18
Downgrades in U.S. government 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.
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:
Rumors or erroneous information;
•
Inability to hire or retain key professionals, management and staff;
• Changes in securities analysts’ estimates of financial performance;
• Volatility of stock market prices and volumes;
•
• Changes in market values of similar companies;
• New developments in the banking industry;
• Variations in quarterly or annual operating results;
• New litigation or changes in existing litigation;
• Regulatory actions;
• Restructuring of government-sponsored enterprises such as Fannie Mae and Freddie Mac;
•
Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or
other regulatory agencies.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
19
ITEM 2.
PROPERTIES
As of December 31, 2015, the Corporation owns or leases 26 full-service branch locations, eight limited-hour retirement
community branches, five wealth management offices, one insurance agency and six other office properties which serve as administrative
offices.
The following table details the Corporation’s properties and deposits as of December 31, 2015:
Owned/Leased
Total Deposits as of
December 31, 2015
(dollars in thousands)
Owned
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
$
$
758,376
99,735
21,883
26,040
96,672
55,408
33,776
22,755
65,377
44,560
62,525
75,661
91,727
27,627
71,116
26,012
61,582
66,671
68,967
56,677
43,257
128,103
51,241
53,649
44,065
41,808
23,109
2,679
5,308
3,997
7,044
3,266
10,071
1,981
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
2,252,725
Property Address
Full Service Branches (Banking Segment):
801 Lancaster Ave., Bryn Mawr, PA 19010*
50 W. Lancaster Ave., Ardmore, PA 19003
5000 Pennell Rd., Aston, PA 19014
135 E. City Avenue, Bala Cynwyd, PA 19004
599 Skippack Pk., Blue Bell, PA 19422
3218 Edgemont Ave., Brookhaven, PA 19015
US Rts. 1 and 100, Chadds Ford, PA 19317
23 E. Fifth St., Chester, PA 19013
31 Baltimore Pk., Chester Heights, PA 19017
528 Fayette St., Conshohocken, PA 19428
113 W. Germantown Pk., East Norriton, PA 19401
237 N. Pottstown Pk., Exton, PA 19341
18 W. Eagle Rd., Havertown, PA 19083
106 E. Street Rd., Kennett Square, PA 19348
197 E. DeKalb Pk., King of Prussia, PA 19406
33 W. Ridge Pk., Limerick, PA 19468
22 W. State St., Media, PA 19063
3601 West Chester Pk., Newtown Square, PA 19073
39 W. Lancaster Ave., Paoli, PA 19301
7133 Ridge Ave., Philadelphia, PA 19128
330 Dartmouth Ave., Swarthmore, PA 19081
330 E. Lancaster Ave., Wayne, PA 19087
849 Paoli Pk., West Chester, PA 19380
One Tower Bridge, West Conshohocken, PA 19428
436 Egypt Rd., West Norriton, PA 19428
1000 Rocky Run Parkway, Wilmington, DE 19803
Life Care Community Offices (Banking Segment):
10000 Shannondell Dr., Audubon, PA 19403
404 Cheswick Pl., Bryn Mawr, PA 19010
601 N. Ithan Ave., Bryn Mawr, PA 19010
1400 Waverly Rd, Gladwyne, PA 19035
3300 Darby Rd., Haverford, PA 19041
11 Martins Run, Media, PA 19063
535 Gradyville Rd., Newtown Square, PA 19073
1615 E. Boot Rd., West Chester, PA 19380
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**
620 W. Germantown Pk, Plymouth Mtg, PA 19462**
20 North Waterloo Rd, Devon PA 19380***
Powers Craft Parker & Beard Inc., 15 Garrett Ave, Rosemont, PA 19010****
Subsidiary Offices (Wealth Management Segment):
Lau Associates - 20 Montchanin Rd, Suite 110, Greenville, DE 19087
BMTC-DE - 20 Montchanin Rd, Suite 100 Greenville, DE 19807
Total:
*Corporate headquarters and executive offices
**Lending office
***Wealth Management office
****Insurance Agency
20
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 legal
proceedings other than ordinary routine litigation incidental 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, 2015,
there were 614 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.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
High
31.42 $
31.77 $
31.48 $
31.32 $
$
$
$
$
2015
Low
Dividend
Declared
High
2014
Low
Dividend
Declared
28.50 $
28.52 $
27.95 $
27.85 $
0.19 $
0.19 $
0.20 $
0.20 $
30.44 $
30.44 $
30.98 $
31.76 $
26.48 $
26.50 $
28.33 $
27.44 $
0.18
0.18
0.19
0.19
The information regarding dividend restrictions is set forth in Note 25 – “Dividend Restrictions” in the accompanying Notes to
Consolidated Financial Statements in this Annual Report on Form 10-K.
21
• 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, 2015, with (1) the Total Return of the NASDAQ Market Index; (2) the Total Return of
the NASDAQ Community Bank Index; (3) the Total Return of the SNL Bank and Thrift Index; and (4) the Total Return of the SNL Mid-
Atlantic Bank Index. This comparison assumes $100.00 was invested on December 31, 2010, 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.
Bryn Mawr Bank Corporation
Total Return Performance
Bryn Mawr Bank Corporation
NASDAQ Community Bank Index
NASDAQ Market Index
SNL Bank and Thrift
SNL Mid-Atlantic Bank
220
200
180
160
140
120
100
80
e
u
l
a
V
x
e
d
n
I
60
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Bryn Mawr Bank Corporation $
NASDAQ Community Bank
Index
NASDAQ Market Index
SNL Bank and Thrift
SNL Mid-Atlantic Bank
$
$
$
$
Five Year Cumulative Return Summary
2010
2011
As of December 31,
2013
2012
2014
2015
100.00 $
115.21 $
135.66 $
188.93 $
201.00 $
189.41
100.00 $
100.00 $
100.00 $
100.00 $
93.47 $
99.21 $
77.76 $
75.13 $
110.03 $
116.82 $
104.42 $
100.64 $
155.89 $
163.75 $
142.97 $
135.65 $
163.15 $
188.08 $
159.60 $
147.79 $
178.73
201.40
162.83
153.33
22
• Equity Compensation Plan Information
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 19 – “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 2015:
Shares Repurchased in the 4th Quarter of 2015
Period:
Oct. 1, 2015
Nov. 1, 2015
Dec. 1, 2015
Total
- Oct. 31, 2015
- Nov. 30, 2015
- Dec. 31, 2015
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
57,600
47,500
64,500
169,600
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the Plan
or Programs(1)
588,000
540,500
476,000
Total Number
of Shares
Purchased
Average Price
Paid per Share
30.73
29.70
29.01
29.78
57,600 $
49,487(2) $
64,500 $
171,587 $
(1) On August 6, 2015, the Corporation announced a stock repurchase program (the “2015 Program”) under which the Corporation
may repurchase up to 1,200,000 shares of the Corporation’s common stock, at an aggregate purchase price not to exceed $40
million. The 2015 Program became effective upon the completion of the Corporation’s prior stock repurchase program in August
2015. There is no expiration date on the 2015 Program and the Corporation has no plans for an early termination of the 2015
Program. All share repurchases under the 2015 Program were accomplished in open market transactions. As of December 31,
2015, the maximum number of shares remaining authorized for repurchase under the 2015 Program was 476,000.
(2) Between November 3, 2015 and November 15, 2015, 1,987 shares were purchased to cover statutory tax withholding requirements
on vested stock awards for certain officers of the Corporation.
23
ITEM 6.
SELECTED FINANCIAL DATA
Earnings
(dollars in thousands)
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease
$
losses
Non-interest income
Non-interest expense
Income before income taxes
Income taxes
Net Income
Per Share Data
Weighted-average shares outstanding
Dilutive potential Common Stock
Adjusted weighted-average shares
Earnings per common share:
Basic
Diluted
Dividends declared
Dividends declared per share to net income per basic
common share
Shares outstanding at year end
Book value per share
Tangible book value per share
Profitability Ratios
Tax-equivalent net interest margin
Return on average assets
Return on average equity
Non-interest expense to net-interest income and non-
interest income
Non-interest income to net-interest income and non-
interest income
Average equity to average total assets
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,
As of or for the Twelve Months Ended December 31,
2013
2012
2014
2015
108,542 $
8,415
100,127
4,396
95,731
55,960
125,765
25,926
9,172
16,754 $
$
82,906 $
6,078
76,828
884
75,944
48,322
81,418
42,848
15,005
27,843 $
78,417 $
5,427
72,990
3,575
69,415
48,355
80,740
37,030
12,586
24,444 $
73,323 $
8,588
64,735
4,003
60,732
46,386
74,901
32,217
11,070
21,147 $
2011
74,562
11,661
62,901
6,088
56,813
34,059
61,729
29,143
9,541
19,602
17,488,325 13,566,239 13,311,215 13,090,110 12,659,824
82,313
17,756,291 13,861,040 13,571,610 13,241,846 12,742,137
294,801
151,736
260,395
267,966
$
$
$
0.96 $
0.94 $
0.78 $
2.05 $
2.01 $
0.74 $
1.84 $
1.80 $
0.69 $
1.62 $
1.60 $
0.64 $
1.55
1.54
0.60
81.3%
36.1%
37.5%
39.5%
38.7%
17,071,523 13,769,336 13,650,354 13,412,690 13,106,353
14.07
$
10.81
$
17.83 $
13.59 $
16.84 $
13.02 $
15.18 $
11.08 $
21.42 $
13.89 $
3.75%
0.57%
4.49%
3.93%
1.32%
11.56%
3.98%
1.23%
11.53%
3.85%
1.15%
10.91%
3.96%
1.13%
11.10%
80.6%
65.1%
66.5%
67.4%
63.7%
35.9%
12.68%
38.6%
11.38%
39.9%
10.63%
41.7%
10.58%
35.1%
10.19%
229,898
365,711
245,474
$ 3,030,997 $ 2,246,506 $ 2,061,665 $ 2,035,885 $ 1,773,373
2,665,286 2,001,032 1,831,767 1,832,321 1,588,994
184,379
2,755,506 2,092,164 1,905,398 1,879,412 1,629,607
2,268,988 1,652,257 1,547,185 1,398,456 1,295,392
275,258
24,689
18,014
2,252,725 1,688,028 1,591,347 1,634,682 1,382,369
183,158
233,473
35,502
22,998
352,916
104,765
23,903
318,061
32,897
21,998
289,245
32,843
19,365
283,970
216,535
170,718
378,509
203,564
supervision and brokerage
8,364,805 7,699,908 7,268,273 6,663,212 4,831,631
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 leases
8.17%
10.72%
12.61%
8.55%
12.00%
12.87%
8.84%
11.57%
12.55%
7.50%
11.02%
12.02%
8.19%
11.16%
13.74%
0.70%
0.88%
1.00%
1.03%
0.98%
0.45%
0.61%
0.68%
1.06%
1.11%
Information related to accounting changes may be found under the caption “New Accounting Pronouncements” at Note 1-X in the
accompanying Notes to Consolidated Financial Statements found in this Annual Report on Form 10-K.
24
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OPERATIONS (“MD&A”)
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 26 full-service branches, eight limited-hour,
retirement community offices and five wealth offices located throughout Montgomery, Delaware, Chester and Dauphin counties of
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.
Since January 1, 2010, the Corporation and Bank completed the following seven acquisitions:
● Robert J. McAllister Agency, Inc. (“RJM”) – April 1, 2015
● Continental Bank Holdings, Inc. (“CBH”) – January 1, 2015 (the “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
For a more complete discussion regarding these acquisitions, see Item 1 – Business at page 1 in this Form 10-K.
25
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
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' 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 Allowance for Loan and Lease Losses (the “Allowance”)
The Allowance involves a higher degree of judgment and complexity than other significant accounting policies. The Allowance is
estimated 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. 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, 2015, 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,
2015, 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
titled Asset Quality and Analysis of Credit Risk for additional information.
26
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, 2015, the majority of the Corporation’s investment portfolio was comprised
of investment securities classified as available for sale. A small portion was classified as trading securities related to deferred
compensation trusts.
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. There was no goodwill impairment recorded during the twelve month periods ended
December 31, 2015, 2014 or 2013. 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 Merger. Subsequent to the 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, 2014 or 2013. There can be no
assurance that future impairment assessments or tests will not result in a charge to earnings.
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.
Overview of General Economic, Regulatory and Governmental Environment
Headlines during the final quarter of 2015 were dominated by the economic environment in China, the beginning of the Federal
Reserve’s monetary tightening campaign, and the supply/demand dynamics affecting oil prices. U.S. equity markets seemed to shrug off
macro concerns and closed out the fourth quarter with solid gains.
During the third quarter of 2015, the U.S. GDP grew 2.0% (quarter over quarter, Seasonally Adjusted Annual Rate). Personal
Consumption Expenditures, the largest component of the U.S. economy, more than offset weakness within Gross Private Domestic
Investment. The labor market continued to show signs of strength, given the decline in the unemployment rate and favorable readings
across most broad-based measures of employment activity.
These general indicators of economic health demonstrate that expansion, which began in June 2009, remains intact. That said, the growth
rate during this expansionary phase has been somewhat tepid relative to prior economic expansions.
Further, more recent economic data releases from the end of last year and in early 2016 have, for the most part, fallen below consensus
expectations – an indication of softening demand. However, the U.S. economy has had “growth scares” on multiple occasions over the
past several years, and such events did not signify a recession.
There has also been a clear divergence between the services and manufacturing components of the broad economy, a trend that has
persisted since the beginning of 2015. Any further weakness in the services sector could be a sign that this economic expansion is
stalling, or a foreshadowing of a more prolonged slowdown.
Against this backdrop, the Federal Reserve initiated its “tightening” campaign, and commodity prices – especially crude oil – declined
precipitously. The Federal Reserve, as was widely anticipated, raised the federal funds rate in mid-December 2015, suggesting an
increased confidence that economic activity would expand at a moderate pace. Financial markets have reacted in a manner that casts
some doubt about future interest rate hikes.
27
Executive Overview
The following Executive Overview provides a summary-level review of the results of operation for 2015 compared to 2014 and 2014
compared to 2013 as well as a comparison of the December 31, 2015 balance sheet as compared to the December 31, 2014 balance sheet.
More detailed information regarding these comparisons can be found in the sections that follow.
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 were the result of the 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 $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. Return on average equity ("ROE")
and return on average assets ("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 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,
2015, as compared to the same period in 2014, was attributed to the $424.2 million of portfolio loans acquired in the Merger, in addition
to the $192.5 million of organic loan growth experienced during 2015. Average loans increased by $551.4 million for the twelve months
ended December 31, 2015, as compared to the same period in 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 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, 2015, the Provision of $4.4 million was an increase of $3.5 million from the $884 thousand
for the same period in 2014. Net loan and lease charge offs for the twelve months ended December 31, 2015 totaled $3.1 million, an
increase of $1.3 million from the same period in 2014.
Non-interest income for the twelve months ended December 31, 2015 was $56.0 million, a $7.6 million increase from the same period in
2014. Increases of $2.6 million in wealth management revenue, $1.3 million in gain on sale of loans, $1.8 million in other operating
income and $767 thousand in dividends on Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stocks contributed
to the increase.
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. Largely contributing to the increase was the $17.4 million loss on settlement of the pension plan, a $4.3 million
increase in due diligence, merger-related and merger integration costs as well as increases in nearly all other expense lines as a result of
the increased staffing and facilities added in the Merger.
Balance Sheet
Asset quality as of December 31, 2015 remained stable with nonperforming loans and leases comprising 0.45% of portfolio loans as
compared to 0.61% of portfolio loans as of December 31, 2014. The Allowance of $15.9 million was 0.70% of portfolio loans and leases,
as of December 31, 2015, as compared to $14.6 million, or 0.88% of portfolio loans and leases, at December 31, 2014. The decrease in
the Allowance, as a percentage of portfolio loans, as of December 31, 2015, as compared to December 31, 2014, is primarily related to
the increase in portfolio loans from the Merger. In accordance with GAAP, acquired loans are recorded at fair value with no carryover of
Allowance. The recorded fair value of the acquired loans assumes an estimate of expected lifetime losses and therefore relieves the
immediate need for an Allowance on the loans as of the date of the Merger.
28
Total portfolio loans and leases of $2.27 billion as of December 31, 2015 increased $616.7 million, as compared to $1.65 billion as of
December 31, 2014. In addition to the $424.2 million of loans acquired in the Merger, portfolio loans increased an additional $192.5
million during the twelve months ended December 31, 2015.
The Corporation’s available for sale investment portfolio at December 31, 2015 had a fair market value of $349.0 million, as compared
to $229.6 million at December 31, 2014. Available for sale investments acquired in the Merger totaled $181.8 million, of which $60.0
million were sold during the first quarter of 2015.
Deposits of $2.25 billion, as of December 31, 2015, increased $564.7 million from December 31, 2014. Deposits assumed in the Merger
totaled $481.7 million, of which $93.9 million were non-interest-bearing. As of December 31, 2015, non-interest-bearing deposits
comprised 27.8% of total deposits, up from 26.5% as of December 31, 2014.
Wealth Assets
Wealth assets under management, administration, supervision and brokerage increased to $8.36 billion as of December 31, 2015, an
increase of $664.9 million from $7.70 billion as of December 31, 2014.
2014 Compared to 2013
Income Statement
The Corporation reported net income of $27.8 million or $2.01 diluted earnings per share for the twelve months ended December 31,
2014, as compared to $24.4 million, or $1.80 diluted earnings per share, for the same period in 2013. Return on average equity ("ROE")
and return on average assets ("ROA") for the twelve months ended December 31, 2014, were 11.56% and 1.32%, respectively, as
compared to 11.53% and 1.23%, respectively, for the same period in 2013. The increase in net income for the twelve months ended
December 31, 2014, as compared to the same period in 2013, was related to a $3.8 million increase in net interest income and a $2.7
million decrease in Provision. Partially offsetting these improvements were increases of $678 thousand in non-interest expense and $2.4
million in income tax expense for the twelve months ended December 31, 2014, as compared to the same period in 2013.
The $3.8 million, or 5.2%, increase in the Corporation’s tax-equivalent net interest income for the twelve months ended December 31,
2014, as compared to the same period in 2013, was largely attributed to the $153.9 million increase in average portfolio loans between
the periods. In addition to this increase in average interest-earning assets, average interest-bearing liabilities increased by $68.7 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% for the same period in 2013.
For the twelve months ended December 31, 2014, the Provision of $884 thousand was a decrease of $2.7 million from the $3.6 million
for the same period in 2013. Net loan and lease charge offs for the twelve months ended December 31, 2014 totaled $1.8 million, a
decrease of $672 thousand from the same period in 2013.
Non-interest income for the twelve months ended December 31, 2014 was $48.3 million, a slight decrease of $33 thousand as compared
to the same period in 2013. An increase of $1.6 million in wealth management revenue along with increases of $479 thousand, $475
thousand and $559 thousand in net gain on sale of investment securities available for sale, net gain on sale of other real estate owned, and
insurance commissions, respectively, were offset by a $2.4 million decrease in net gain on sale of residential mortgages between the
periods.
Non-interest expense for the twelve months ended December 31, 2014, was $81.4 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.
29
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 2015 as
compared to 2014, and 2014 as compared to 2013, 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)
increase/(decrease)
Interest Income:
Volume
2015 Compared to 2014
Rate
Total
Volume
2014 Compared to 2013
Rate
Total
Interest-bearing deposits with banks
Investment securities - taxable
Investment securities –nontaxable
Loans and leases
$
Total interest income
Interest expense:
Savings, NOW and market rate accounts
Wholesale deposits
Retail time deposits
Borrowed funds – short-term
Borrowed funds – long-term
Subordinated notes
Total interest expense
Interest differential
$
183 $
1,324
76
27,151
28,734
427
198
604
24
391
601
2,245
26,489 $
33 $
107
71
(3,225)
(3,014)
216
(53)
(78)
7
—
—
92
(3,106) $
216 $
1,431
147
23,926
25,720
643
145
526
31
391
601
2,337
23,383 $
36 $
(347)
(24)
5,527
5,192
1
160
(167)
—
653
—
647
4,545 $
(1) $
198
30
(926)
(699)
(83)
228
—
(10)
(131)
—
4
(703) $
35
(149)
6
4,601
4,493
(82)
388
(167)
(10)
522
—
651
3,842
* The tax rate used in the calculation of the tax-equivalent income is 35%.
30
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:
2015
Interest
Income/
Expense
Average
Rates
Earned/
Paid
For the Year Ended December 31,
2014
Interest
Income/
Expense
Average
Rates
Earned/
Paid
Average
Balance
Average
Balance
2013
Interest
Income/
Expense
Average
Rates
Earned/
Paid
Average
Balance
(dollars in thousands)
Assets:
Interest-bearing deposits
with banks
$
161,032 $
409
0.25% $
83,163 $
193
0.23% $
67,124 $
158
0.24%
Investment securities -
available for sale:
Taxable
Tax –Exempt
Total investment
securities – available
for sale
Investment securities –
315,741
39,200
5,124
741
1.62%
1.89%
233,054
34,689
3,740
594
1.60%
1.71%
282,978
37,890
3,849
588
1.36%
1.55%
354,941
5,865
1.65%
267,743
4,334
1.62%
320,868
4,437
1.38%
80
2,160,628 102,707
3,881
2.06%
3,591
4.75% 1,609,220
33
78,781
0.92%
2,106
4.90% 1,455,284
73
74,180
3.47%
5.10%
2,680,482 109,061
17,615
4.07% 1,963,717
12,730
83,341
4.24% 1,845,382
12,946
78,848
4.27%
(15,099)
259,515
$ 2,942,513
(15,836)
154,871
$ 2,115,482
(14,800)
150,972
$ 1,994,500
$ 1,249,567
130,773
255,961
2,318
772
1,122
0.19% $
0.59%
0.44%
958,129
99,059
126,097
1,675
627
596
0.17% $
0.63%
0.47%
955,977
55,774
162,397
1,757
238
763
bearing deposits 1,636,301
36,010
Short-term borrowings
FHLB advances and other
4,212
48
0.26% 1,183,285
15,960
0.13%
2,898
17
0.24% 1,174,148
16,457
0.11%
2,758
25
borrowings
Subordinated notes
Total interest-
254,828
12,013
3,554
601
1.39%
5.00%
227,137
—
3,163
—
1.39%
167,089
—
2,644
—
bearing liabilities 1,939,152
8,415
0.43% 1,426,382
6,078
0.43% 1,357,694
5,427
0.40%
0.18%
0.43%
0.47%
0.23%
0.15%
1.58%
trading
Loans and leases(1)(2)(3)
Total interest-
earning assets
Cash and due from banks
Allowance for loan and
lease losses
Other assets
Total assets
Liabilities:
Savings, NOW, and market
rate accounts
Wholesale deposits
Time deposits
Total interest-
426,274
22,048
448,322
1,874,704
240,778
400,254
24,502
424,756
1,782,450
212,050
Non-interest-bearing
deposits
Other liabilities
Total non-interest-
594,122
36,151
bearing liabilities
630,273
2,569,425
373,088
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’
equity
Net interest spread
Effect of non-interest-
bearing sources
Net interest income/margin
on earning assets
Tax-equivalent adjustment
(tax rate 35%)
$ 2,942,513
$ 2,115,482
$ 1,994,500
3.64%
0.11%
3.81%
0.12%
3.87%
0.11%
$ 100,646
3.75%
$ 77,263
3.93%
$ 73,421
3.98%
$
519
0.02%
$
435
0.02%
$
431
0.02%
(1) Non-accrual loans have been included in average loan balances, but interest on non-accrual loans has not been included for purposes
of determining interest income.
(2) Includes portfolio loans and leases and loans held for sale.
(3) Interest on loans and leases includes deferred fees of $424, $248 and $109 for the years ended December 31, 2015, 2014 and 2013,
respectively.
31
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 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 Merger. The 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 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 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-Equivalent Net Interest Income and Margin - 2014 Compared to 2013
The tax-equivalent net interest margin decreased 5 basis points to 3.93% for the twelve months ended December 31, 2014, as compared
to 3.98%, for the same period in 2013.
Tax-equivalent net interest income for the twelve months ended December 31, 2014 of $77.3 million, was $3.8 million, or 5.2%, higher
than the tax-equivalent net interest income of $73.4 million for the same period in 2013. Largely responsible for the increase was the
$153.9 million increase in average loans and leases between the periods, with commercial real estate, commercial and industrial,
construction and residential mortgages primarily contributing to the growth. Partially offsetting the increase in average loans and leases
was a $68.7 million increase in interest-bearing liabilities comprised primarily of a $60.0 million increase in long-term FHLB advances
and other borrowings. The increased funds from the borrowings along with the cash inflows from the investment portfolio helped to fund
the strong loan demand. The tax-equivalent yield earned on portfolio loans for the twelve months ended December 31, 2014 decreased by
20 basis points, while the tax-equivalent rate paid on interest-bearing deposits increased by 1 basis point, as compared to the same period
in 2013. The accretion of the fair value marks related to loans acquired in the First Keystone Financial, Inc. (“FKB”) and FBD
transactions increased the tax-equivalent net interest margin by 14 basis points for the twelve months ended December 31, 2014, as
compared to 17 basis points for the same period in 2013. The effect of the decline in tax-equivalent yield earned on loans and leases was
compensated for by the increase in the volume of loans and leases between the periods.
Tax-Equivalent Net Interest Margin – Quarterly Comparison
The tax-equivalent net interest margin and related components for the past five quarters are shown in the table below:
Earning-Asset
Yield
Interest-
Bearing
Liability Cost
Net Interest
Spread
Effect of Non-
Interest-
Bearing Sources
Tax-Equivalent
Net Interest
Margin
4.07 %
3.97 %
4.10 %
4.09 %
4.14 %
0.43%
0.45 %
0.40 %
0.40 %
0.43 %
3.64 %
3.52 %
3.70 %
3.69 %
3.71 %
0.11 %
0.13 %
0.11 %
0.10 %
0.13 %
3.75 %
3.65 %
3.81 %
3.79 %
3.84 %
Quarter
4th
3rd
2nd
1st
4th
Year
2015
2015
2015
2015
2014
Interest Rate Sensitivity
The Corporation actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control
exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income.
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
32
Institutional Deposit Corporation (“IDC”)), Insured Cash Sweep (“ICS”) and Pennsylvania Local Government Investment Trust
(“PLGIT”).
The Corporation uses several tools to manage its interest rate risk including gap analysis, market value of portfolio equity analysis,
interest rate 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
+300 basis points
+200 basis points
+100 basis points
-100 basis points
Change in Net Interest Income
Over the Twelve Months
Beginning After
December 31, 2015
Amount
Percentage
Change in Net Interest Income
Over the Twelve Months
Beginning After
December 31, 2014
Amount
Percentage
$
$
$
$
3,128
1,637
210
(2,490)
3.09% $
1.62% $
0.21% $
(2.46)% $
5,144
2,812
755
(1,983)
6.65%
3.64%
0.98%
(2.56)%
The above interest rate simulation suggests that the Corporation’s balance sheet is slightly asset sensitive as of December 31, 2015 in the
+100 basis point scenario, demonstrating that a 100 basis point increase in interest rates would have a small, but positive impact on net
interest income over the next 12 months. It should be noted, however, that the balance sheet is less asset sensitive, in a rising-rate
environment, as of December 31, 2015 than it was as of December 31, 2014. This decrease in sensitivity is related to the decline in cash
balances, and was partially offset by the addition of the fixed-to-floating rate subordinated notes in August 2015.
The interest rate simulation is an estimate based on assumptions, which are derived from past behavior of customers, along with
expectations of future behavior relative to interest rate changes. In today’s uncertain economic environment and the current extended
period of very low interest rates, the reliability of the Corporation’s assumptions in the interest rate simulation model is more uncertain
than in other periods. Actual customer behavior may be significantly different than expected behavior, which could cause an unexpected
outcome and may result in lower net interest income.
Gap Analysis
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.
33
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, 2015:
(dollars in millions)
0 to 90
Days
91 to 365
Days
1 - 5
Years
Over
5 Years
Non-Rate
Sensitive
Total
Assets:
Interest-bearing deposits with
$
banks
Investment securities(1)
Loans and leases(2)
Allowance
Cash and due from banks
Other assets
Total assets
$
Liabilities and shareholders’
equity:
Demand, non-interest-bearing $
Savings, NOW and market
rate
Time deposits
Wholesale non-maturity
deposits
Wholesale time deposits
Short-term borrowings
FHLB advances and other
borrowings
Subordinated notes
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Interest-earning assets
Interest-bearing liabilities
Difference between interest-
earning assets and interest-
bearing liabilities
Cumulative difference between
interest earning assets and
interest bearing liabilities
$
$
$
$
Cumulative earning assets as a %
of cumulative interest bearing
liabilities
119.6
33.2
729.5
—
—
—
882.3
$
$
5.0
52.1
247.5
—
—
—
304.6
$
$
—
184.8
964.0
—
—
—
1,148.8
$
$
—
82.9
337.0
—
—
—
419.9
$
$
— $
—
—
(15.9)
18.5
272.8
275.4 $
124.6
353.0
2,278.0
(15.9)
18.5
272.8
3,031.0
39.0
$
116.8
$
166.1
$
304.8
$
— $
626.7
91.4
72.3
67.7
6.7
94.2
75.0
—
—
13.1
274.2
110.5
—
5.4
—
45.0
—
—
39.2
625.0
45.9
—
41.1
—
134.9
29.5
—
208.7
285.2
0.6
—
—
—
—
—
—
104.7
$
$
459.4
882.3
407.3
$
$
591.1
304.6
435.1
1,251.2
1,148.8
876.4
$
$
$
$
695.3
419.9
285.8
—
—
—
—
—
—
—
34.0
—
34.0 $
— $
—
1,275.8
229.3
67.7
53.2
94.2
254.9
29.5
34.0
365.7
3,031.0
2,755.6
2,004.6
475.0
$
(130.5)
$
272.4
$
134.1
$
— $
751.0
475.0
$
344.5
$
616.9
$
751.0
$
— $
751.0
217%
141%
136%
137%
(1)
(2)
Investment securities include available for sale and trading.
Loans include portfolio loans and leases and loans held for sale.
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.
Provision for Loan and Lease Losses
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,
34
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:
● Specific Loan Evaluation Component – Loans and leases for which management has reason to believe it is probable that it
will not be able to collect all contractually due amounts of principal and interest are evaluated for impairment on an individual
basis and a specific allocation of the Allowance is assigned, if necessary.
● Historical Charge-Off Component – Homogeneous pools of loans are evaluated to determine average historic charge-off
rates. Management applies a rolling, twenty quarter charge-off history as a look-back period to determine these average
charge-off rates. Management evaluates the length of this look-back period in order to determine its appropriateness. In
addition, management develops an estimate of a loss emergence period for each segment of the loan portfolio. The loss
emergence period estimates the time between the occurrence of a loss event for a borrower and an actual charge-off of a loan.
● Qualitative Factors Component – Various qualitative factors are considered as they relate to the different homogeneous loan
pools in order to adjust the historic charge-off rates so that they reflect current economic conditions that may not be accurately
reflected in the historic charge-off rates. These factors include delinquency trends, economic conditions, loan terms, credit
grades, concentrations of credit, regulatory environment and other relevant factors. The resulting adjustments are combined
with the historic charge-off rates and result in an allocation rate for each homogeneous loan pool.
● Unallocated Component – This amount represents the margin of imprecision inherent in the underlying assumptions used in
the methodologies for estimating the specific, historical, and qualitative losses in the portfolio discussed above. There are
many factors considered, such as the inherent delay in obtaining information regarding a customer’s financial information or
changes in their business condition, the judgmental nature of loan and lease evaluations, the delay in interpreting economic
trends, and the judgmental nature of collateral assessments.
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:
● 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 well-defined weaknesses that may jeopardize the liquidation
of the collateral and repayment 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. Loan balances classified as doubtful have been reduced by partial charge-offs and
are carried at their net realizable values.
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:
● Commercial mortgage
● Home equity lines and loans
● Residential mortgage
● Construction
● Commercial and industrial
● Consumer
35
● Leases
Refer to Note 5 in the Notes to Consolidated Financial Statements and page 42 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:
●
●
●
the Present Value of Future Cash Flow Method;
the Fair Value of Collateral Method;
the Observable Market Price of a Loan Method.
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 TDRs in
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 - The Corporation’s charge-off policy is that, on a periodic basis, not less often than quarterly, delinquent and non-
performing loans that exceed the following limits are considered for full or partial charge-off:
● Open-ended consumer loans exceeding 180 days past due.
● Closed-ended consumer loans exceeding 120 days past due.
● All commercial/business purpose loans exceeding 180 days past due.
● All leases exceeding 120 days past due.
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.
36
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. Refer to Notes
5-F and 5-H in the Notes to Consolidated Financial Statements for a more information regarding the Corporation's impaired loans and
leases.
Asset Quality and Analysis of Credit Risk
As of December 31, 2015, total non-performing loans and leases were $10.2 million, representing 0.45% of portfolio loans and leases, as
compared to $10.1 million, or 0.61% of portfolio loans and leases, as of December 31, 2014. The $148 thousand increase in non-
performing loans and leases was comprised of increases of $1.7 million, $966 thousand and $161 thousand in commercial and industrial
loans, home equity lines and loans, and commercial mortgages, respectively. These increases were largely offset by decreases of $2.5
million and $229 thousand in residential mortgages and construction loans, respectively.
The Provision for each of the twelve month periods ended December 31, 2015, 2014 and 2013 was $4.4 million, $884 thousand and $3.6
million, respectively. The $3.5 million increase in Provision from 2014 to 2015 was partially related the level of charge-off activity
recorded during 2015 and to the growth in the loan portfolio during the year. Allowance was provided to segments of the loan portfolio
based on the balance of each segment, in addition to the quantitative and qualitative factors associated with each segment. The increase in
Provision due to the increases in the portfolio segment balances was partially offset by reductions in the quantitative factors and
qualitative factors associated with each segment. Historic charge-off rates during the look-back period, which form the basis for the
quantitative factors, improved, as did many of the qualitative factors which reflect the credit quality of the portfolio. This, coupled with
improvements in external factors reflective of an improving economy, helped to offset the Allowance increase associated with loan
volume increases. As of December 31, 2015, the Allowance of $15.9 million represents 0.70% of portfolio loans and leases, as compared
to the Allowance as of December 31, 2014 of $14.6 million, which represented 0.88% of portfolio loans and leases as of that date. The
decrease in the Allowance, as a percentage of portfolio loans and leases, from December 31, 2015 to December 31, 2014, is largely
related to the increase in the loan portfolio in connection with the Merger, as the loans acquired from CBH were recorded at fair value
with no associated Allowance. In addition, however, the credit quality of the originated loan portfolio remains stable, and as such, the
quantitative and qualitative factors that determine the Allowance requirements reflect this stability.
As of December 31, 2015, the Corporation had other real estate owned (“OREO”) valued at $2.6 million, as compared to $1.1 million as
of December 31, 2014. The increase was related to the additions to OREO, during the 2015, of six single-family residential properties
totaling $2.3 million as well as six OREO properties acquired in the Merger which totaled $390 thousand, offset by the sale of nine
single-family residential properties totaling $1.1 million. The properties comprising the balance as of December 31, 2015 include six
single-family residential properties. All properties are recorded at their estimated fair values less costs to sell.
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
for six months or greater, and hence, excluded from non-performing loans and leases. As of December 31, 2014, the Corporation had
$8.5 million of TDRs, of which $4.2 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, 2015, the Corporation had $14.5 million of impaired loans and leases, as compared to impaired loans
and leases of $13.7 million as of December 31, 2014. Refer to Note 5-H in the Notes to Consolidated Financial Statements for more
information regarding the Corporation's impaired loans and leases.
37
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, TDRs and Related Ratios as of or for the Twelve Months Ended December 31,
(dollars in thousands)
Non-accrual loans and leases
Loans 90 days or more past due and still accruing
Total non-performing loans and leases
Other real estate owned
Total non-performing assets
Troubled debt restructurings included in non-performing
assets
TDRs in compliance with modified terms
Total TDRs
$
$
$
$
Allowance for loan and lease losses to non-performing loans
and leases
Non-performing loans and leases to total loans and leases
Allowance for loan losses to total portfolio loans and leases
Non-performing assets to total assets
Period end portfolio loans and leases
Average portfolio loans and leases
Allowance for loan and lease losses
Interest income that would have been recorded on impaired
$
$
$
loans if the loans had been current in accordance with their
original terms and had been outstanding throughout the
period or since origination
Interest income on impaired loans included in net income for
the period
$
$
2015
2014
2013
2012
2011
10,244
—
10,244
2,638
12,882
$
$
10,096
—
10,096
1,147
11,243
$
$
10,530
—
10,530
855
11,385
$
$
14,040
728
14,768
906
15,674
$
$
14,315
—
14,315
549
14,864
1,935* $
4,880
6,815
$
4,315
4,157
8,472
$
$
1,699
7,277
8,976
$
$
3,106
8,008
11,114
$
$
4,300
7,166
11,466
154.8%
0.45%
0.70%
0.43%
$
$
$
2,268,988
2,153,542
15,857
144.5 %
0.61 %
0.88 %
0.50 %
$
$
$
1,652,257
1,608,248
14,586
147.3 %
0.68 %
1.00 %
0.55 %
$
$
$
1,547,185
1,453,555
15,515
97.7%
1.06%
1.03%
0.77%
$
$
$
1,398,456
1,307,140
14,425
89.1%
1.11%
0.98%
0.84%
1,295,392
1,250,071
12,753
1,100
$
533
$
1,074
$
1,417
$
1,445
513
$
341
$
365
$
507
$
550
*the decrease in TDRs included in non-performing loans and leases from 2014 to 2015 was largely related to the default of $2.2 million
previously modified loans
As of December 31, 2015, 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
(dollars in thousands)
Balance, January 1
Charge-offs:
Consumer
Commercial and industrial
Real estate
Construction
Leases
Total charge-offs
Recoveries:
Consumer
Commercial and industrial
Real estate
Construction
Leases
Total Recoveries
Net charge-offs
2015
2014
2013
2012
2011
$
14,586 $
15,515 $
14,425 $
12,753 $
10,275
(177)
(1,220)
(1,615)
—
(442)
(3,454)
29
35
160
4
101
329
(3,125)
4,396
15,857 $
(144 )
(415 )
(1,231 )
—
(410 )
(2,200 )
17
98
47
60
165
387
(1,813 )
884
14,586 $
(194 )
(781 )
(891 )
(737 )
(376 )
(2,979 )
10
65
105
24
290
494
(2,485 )
3,575
15,515 $
(96)
(458)
(818)
(1,131)
(364)
(2,867)
7
143
79
15
292
536
(2,331)
4,003
14,425 $
(92)
(633)
(1,732)
(1,174)
(1,017)
(4,648)
11
307
190
—
530
1,038
(3,610)
6,088
12,753
Provision for loan and lease losses
Balance, December 31
Ratio of net charge-offs to average portfolio loans
$
outstanding
0.15%
0.11 %
0.17 %
0.18%
0.29%
38
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.
2015
2014
December 31,
2013
2012
2011
%
Loans
to
Total
Loans
%
Loans
to
Total
Loans
%
Loans
to
Total
Loans
%
Loans
to
Total
Loans
%
Loans
to
Total
Loans
(dollars in thousands)
Allowance at end of period
applicable to:
Commercial mortgage
Home equity lines and
$ 5,199 42.5% $ 3,948 41.8% $ 3,797 40.4% $ 3,907 39.1% $ 3,165 32.4%
loans
1,307
9.2
1,740 17.9
Residential mortgage
Construction
4.0
1,324
Commercial and industrial 5,609 23.1
1.0
Consumer
2.3
Leases
18 —
Unallocated
142
518
1,917 11.0
1,736 19.0
1,367
4.0
4,533 20.3
1.1
238
2.8
468
379 —
2,204 12.3
2,446 19.4
845
3.0
5,011 21.2
1.1
259
2.6
604
349 —
1,857 13.9
2,024 20.6
1,019
1.9
4,637 20.9
1.3
189
2.3
493
299 —
1,707 16.0
1,592 23.7
1,384
4.1
3,816 20.6
0.9
119
2.3
532
438 —
Total
$ 15,857 100.0% $ 14,586 100.0% $ 15,515 100.0% $ 14,425 100.0% $ 12,753 100.0%
Non-Interest Income
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 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
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.
2014 Compared to 2013
Non-interest income for the twelve months ended December 31, 2014 was $48.3 million, a slight decrease of $33 thousand as compared
to the same period in 2013. An increase of $1.6 million in wealth management revenue along with increases of $479 thousand, $475
thousand and $559 thousand in net gain on sale of investment securities available for sale, net gain on sale of other real estate owned, and
insurance commissions, respectively, were offset by a $2.4 million decrease in net gain on sale of residential mortgages between the
periods.
The increase in wealth management services revenue is the result of the success of the Wealth Management Division’s strategic
initiatives, market appreciation and other new business between the dates, which helped increase the division’s assets under management,
administration, supervision and brokerage by $432 million, to $7.7 billion as of December 31, 2014 from $7.3 billion as of December 31,
2013.
39
The decrease in the gain on sale of residential mortgage loans was the result of the decline in the volume of residential mortgage loans
originated for resale. For the twelve months ended December 31, 2014, the Corporation originated $55.6 million of residential mortgage
loans for resale, as compared to $129.0 million for the same period in 2013. The decrease in the volume of residential mortgage loan
originations was primarily the result of rising interest rates, which substantially curtailed the refinancing boom that had wound down by
the second quarter of 2013.
The increase in the gain on sale of available for sale investment securities was related to the Corporation’s effort to reduce the duration of
its portfolio in anticipation of the acquisition of the CBHI portfolio, which will have a longer duration. The sale of $23.9 million of
available for sale investment securities resulted in a net gain on sale of $471 thousand for the twelve months ended December 31, 2013,
as compared to a net loss on sale of $8 thousand for the same period in 2013.
The increase in net gain on sale of other real estate owned was the result of the sale of seven bank-owned properties during the twelve
months ended December 31, 2014 for which the Corporation recorded net gain on sale of $175 thousand, an increase of $475 thousand
from the $300 thousand loss recorded in 2013.
The $559 thousand increase in insurance commission income was a direct result of the October 1, 2014 acquisition of PCPB and reflects
only one quarter of revenue from this new subsidiary.
Non-Interest Expense
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 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 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 Merger.
These categories include salaries and wages, employee benefits and occupancy and bank premises.
2014 Compared to 2013
Non-interest expense for the twelve months ended December 31, 2014 was $81.4 million, an increase of $678 thousand, as compared to
the same period in 2013. The increase was comprised of increases of $443 thousand and $531 thousand in occupancy and furniture,
fixtures and equipment expense, respectively. The increases in these two categories were related to certain infrastructure improvement
projects, including systems upgrades, which were completed and placed into service during 2014, as well as the newly acquired offices of
PCPB. In addition, due diligence and merger-related expenses increased by $488 thousand for the twelve months ended December 31,
2014 as compared to the same period in 2013, related to the October 2014 PCPB transaction and the CBHI merger, which was completed
on January 1, 2015. Professional fees for 2014 increased by $561 thousand, as the Corporation engaged the services of consultants
related to the development and implementation of various systems upgrades. These cost increases were partially offset by a $264
thousand decrease in amortization of mortgage servicing rights, related to the slow-down in mortgage refinancing activity and a $347
thousand decrease in costs associated with early extinguishment of debt that occurred in 2013. A $767 thousand increase in salaries and
wages for twelve months ended December 31, 2014, as compared to the same period in 2013 was related to the additional staff from
PCPB as well as annual increases. The $690 thousand gain on curtailment of nonqualified pension plan that occurred in 2013 was not
repeated in 2014. Offsetting these increases was a $1.5 million decrease in employee benefits expense related to reduced pension costs.
In addition, other operating expense decreased by $1.1 million during the twelve months ended December 31, 2014, as compared to the
same period in 2013. Refer to Note 21 in the Notes to Consolidated Financial Statements for further details regarding the decrease in
other operating expenses between the periods.
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, 2015, there were no pending or unsettled
loan repurchase demands. No repurchase demands were received during the twelve months ended December 31, 2015.
40
Income Taxes
Income taxes for the twelve months ended December 31, 2015 were $9.2 million as compared to $15.0 million and $12.6 million for the
same periods in 2014 and 2013, respectively. The effective tax rates for the twelve month periods ended December 31, 2015, 2014 and
2013 were 35.4%, 35.0% and 34.0%, respectively. The increase in effective tax rate for 2015 as compared to 2014 was related to
increases in state income taxes, partially offset by increases in tax-free income from BOLI, tax-free loans and municipal investments.
The increase in effective tax rate for 2014 as compared to 2013 was related to the non-tax-deductibility of certain due diligence and
merger-related expenses incurred during 2014. For more information related to income taxes, refer to Note 18 in the Notes to
Consolidated Financial Statements.
Balance Sheet Analysis
Asset Changes
Total assets as of December 31, 2015 increased to $3.03 billion from $2.25 billion as of December 31, 2014. The $784.5 million increase
was largely attributable to the $743.2 million assets acquired in the Merger. The following pro forma balance sheet details the changes in
balance sheet items, excluding the effect of the Merger from December 31, 2014 to December 31, 2015:
Bryn Mawr
Bank
Corporation
December 31,
2014
(Actual)
Continental
Bank
Holdings, Inc.
January 1,
2015
Bryn Mawr
Bank
Corporation
January 1,
2015
(Acquired)
(Pro forma)
Bryn Mawr
Bank
Corporation
December 31,
2015
(Actual)
Change from
January 1,
2015
Pro Forma to
December 31,
2015
($)
Change from
January 1,
2015
Pro Forma to
December 31,
2015
(%)
(dollars in thousands)
Assets
Cash and due from banks
Interest-bearing deposits with banks
$
Cash and cash equivalents
Investment securities available for sale
Investment securities, trading
Loans held for sale
Portfolio loans and leases
Less: Allowance for loan and lease
losses
Net portfolio loans and leases
Premises and equipment, net
Accrued interest receivable
Deferred income taxes
Mortgage servicing rights
Bank-owned life insurance
FHLB stock
Goodwill
Intangible assets
Other investments
Other assets
Total assets
Liabilities
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
$
$
Short-term borrowings
FHLB advances and other borrowings
Subordinated notes
Accrued interest payable
Other liabilities
Total liabilities
Shareholders’ equity
Common stock
Paid-in capital in excess of par value
Common stock in treasury, at cost
Accumulated other comprehensive loss,
net of tax benefit
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’
16,717 $
202,552
219,269
229,577
3,896
3,882
1,652,257
(14,586 )
1,637,671
33,748
5,560
7,209
4,765
20,535
11,523
35,781
22,521
5,226
5,343
2,246,506 $
446,903 $
1,241,125
1,688,028
23,824
260,146
—
1,040
27,994
2,001,032
16,742
100,486
(31,642 )
(11,704 )
171,592
245,474
5,818 $
10,791
16,609
181,838
—
507
424,230
—
424,230
9,037
2,094
7,684
—
12,054
4,981
68,352
4,915
50
10,849
743,200 $
93,852 $
387,822
481,674
108,609
19,726
—
295
9,162
619,466
3,878
119,856
—
—
—
123,734
22,535 $
213,343
235,878
411,415
3,896
4,389
2,076,487
(14,586)
2,061,901
42,785
7,654
14,893
4,765
32,589
16,504
104,133
27,436
5,276
16,192
2,989,706 $
540,755 $
1,628,947
2,169,702
132,433
279,872
—
1,335
37,156
2,620,498
20,620
220,342
(31,642)
(11,704)
171,592
369,208
18,452 $
124,615
143,067
348,966
3,950
8,987
2,268,988
(15,857 )
2,253,131
45,339
7,869
11,137
5,142
38,371
12,942
104,765
23,903
9,460
13,968
3,030,997 $
626,684 $
1,626,041
2,252,725
94,167
254,863
29,479
1,851
32,201
2,665,286
20,931
228,814
(58,144 )
(412 )
174,522
365,711
(4,083)
(88,728)
(92,811)
(62,449)
54
4,598
192,501
(1,271)
191,230
2,554
215
(3,756)
377
5,782
(3,562)
632
(3,533)
4,184
(2,224)
41,291
85,929
(2,906)
83,023
(38,266)
(25,009)
29,479
516
(4,955)
44,788
311
8,472
(26,502)
11,292
2,930
(3,497)
(18.1 )%
(41.6 )%
(39.3 )%
(15.2 )%
1.4 %
104.8 %
9.3 %
8.7 %
9.3 %
6.0 %
2.8 %
(25.2 )%
7.9 %
17.7 %
(21.6 )%
0.6 %
(12.9 )%
79.3 %
(13.7 )%
1.4 %
15.9 %
(0.2 )%
3.8 %
(28.9 )%
(8.9 )%
100.0 %
38.7 %
(13.3 )%
1.7 %
1.5 %
3.8 %
83.8 %
(96.5 )%
1.7 %
(0.9 )%
equity
$
2,246,506 $
743,200 $
2,989,706 $
3,030,997 $
41,291
1.4 %
As of both December 31, 2015 and December 31, 2014, the Corporation’s investment securities held in trading accounts were comprised
of a deferred compensation trust which is invested in marketable securities whose diversification is at the discretion of the deferred
compensation plan participants.
41
The following table details the maturity and weighted average yield (3) of the available for sale investment portfolio (2) as of December 31,
2015:
(dollars in thousands)
U.S. Treasury securities:
Amortized cost
Weighted average yield
Obligations of the U.S. government and agencies:
Amortized cost
Weighted average yield
State and political subdivisions(3):
Amortized cost
Weighted average yield
Mortgage-related securities(1):
Amortized cost
Weighted average yield
Other investment securities:
Amortized cost
Weighted average yield
Total amortized cost
Weighted average yield
Maturing
From
2017
Through
2020
Maturing
From
2021
Through
2025
Maturing
After
2025
Maturing
During
2016
$
— $
101 $
1.03 %
— $
— $
Total
101
1.03%
2,000
0.38%
29,456
1.23 %
48,982
2.15 %
20,904
2.71
101,342
1.96%
6,570
0.94%
31,110
1.30 %
4,212
1.57 %
—
41,892
1.27%
—
9,903
1.94 %
47,479
2.28 %
129,796
2.27%
187,178
2.26%
$
1,000
1.40%
9,570 $
0.87%
700
1.38 %
71,270 $
1.36 %
—
—
100,673 $
2.19 %
150,700 $
2.33%
1,700
1.39%
332,213
2.04%
(1) Mortgage-related securities are included in the above table based on their contractual maturity. However, mortgage-related
securities, by design, have scheduled monthly principal payments which are not reflected in this table.
(2) Excluded from the above table is the Corporation’s investment in bond mutual funds with an amortized cost of $15.6 million, which
have no stated maturity or constant stated yield.
(3) Weighted average yields on tax-exempt obligations have not been computed on a tax-equivalent basis.
The following table details the amortized cost of the available for sale investment portfolio as of the dates indicated:
(dollars in thousands)
Obligations of the U.S. government and agencies
Obligations of the U.S. Treasury
Obligations of state and political subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Other investments
Total amortized cost
Portfolio Loans and Leases
Amortized Cost as of December 31,
2014
2013
2015
$
$
101,342 $
101
41,892
157,422
29,756
17,263
347,776 $
66,881 $
102
28,955
79,498
34,618
17,499
227,553 $
71,097
102
37,140
119,044
44,463
15,281
287,127
The table below details the loan portfolio as of the dates indicated:
(dollars in thousands)
Commercial mortgage
Home equity lines & loans
Residential mortgage
Construction
Commercial & industrial
Consumer
Leases
Total portfolio loans and leases
Loans held for sale
Total
2015
2014
December 31,
2013
2012
2011
964,259 $
209,473
406,404
90,421
524,515
22,129
51,787
2,268,988
8,987
2,277,975 $
689,528 $
182,082
313,442
66,267
335,645
18,480
46,813
1,652,257
3,882
1,656,139 $
625,341 $
189,571
300,243
46,369
328,459
16,926
40,276
1,547,185
1,350
1,548,535 $
546,358 $
194,861
288,212
26,908
291,620
17,666
32,831
1,398,456
3,412
1,401,868 $
419,130
207,917
306,478
52,844
267,204
11,429
30,390
1,295,392
1,588
1,296,980
$
$
42
The following table summarizes the loan maturity distribution and interest rate sensitivity as of December 31, 2015. Excluded from the
table are residential mortgage, home equity lines and loans and consumer loans:
(dollars in thousands)
Loan portfolio maturity:
Commercial and industrial
Construction
Commercial mortgage
Leases
Total
Interest sensitivity on the above loans:
Loans with predetermined rates
Loans with adjustable or floating rates
Total
Maturing
During
2016
Maturing
From
2017
Through
2020
Maturing
After
2020
Total
$
$
$
$
234,213 $
55,290
37,854
3,537
330,894 $
72,597 $
258,297
330,894 $
165,254 $
34,806
369,051
48,250
617,361 $
487,132 $
130,229
617,361 $
125,048 $
325
557,354
—
682,727 $
524,515
90,421
964,259
51,787
1,630,982
226,550 $
456,177
682,727 $
786,279
844,703
1,630,982
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 page 42 of this MD&A under the heading Portfolio Loans and
Leases for further details.
● Portfolio Loans and Leases – The Corporation’s $2.27 billion loan and lease portfolio is predominantly based in the
Corporation’s traditional market areas of Chester, Delaware and Montgomery counties in Pennsylvania, New Castle county in
Delaware, and in the greater Philadelphia area, none of which has experienced the real estate price appreciation and
subsequent decline that many other areas of the country have experienced over the last ten years. The loans acquired in the
Merger increased the volume of loans in Montgomery County, Pennsylvania, as CBH’s footprint was primarily in that region.
● Concentrations – The Corporation has a significant portion of its portfolio loans (excluding leases) in real estate-related
loans. As of December 31, 2015, loans secured by real estate were $1.67 billion or 73.6% of the total loan portfolio of
$2.27 billion. A predominant percentage of the Corporation’s real estate exposure, both commercial and residential, is within
Pennsylvania. The Corporation is aware of this concentration and mitigates this risk to the extent possible in many ways,
including the underwriting and assessment of the borrower’s capacity to repay, equity in the underlying real estate collateral
and a review of a borrower’s global cash flows. The Corporation has recourse against a substantial portion of the loans in the
real estate portfolio.
In addition to loans secured by real estate, commercial and industrial loans comprise 23.1% of the total loan portfolio as of
December 31, 2015.
● Construction – The construction portfolio of $90.4 million accounts for 4.0% of the total loan and lease portfolio at
December 31, 2015, an increase of $24.2 million from December 31, 2014. The construction loan segment of the portfolio,
which consists of residential site development loans, commercial construction loans and loans for construction of individual
homes, had no delinquency on performing loans, as of both December 31, 2015 and 2014. Nonperforming construction loans
comprised 0.04% of the construction segment of the portfolio as of December 31, 2015, as compared to 0.40% as of
December 31, 2014.
● Residential Mortgages – Residential mortgage loans were $406.4 million as of December 31, 2015, an increase of $93.0
million from December 31, 2014. The portfolio increased primarily due to the loans acquired in the Merger, in addition to the
strategic mortgage banking initiatives. The residential mortgage segment accounts for 17.9% of the total loan and lease
portfolio as of December 31, 2015. The residential mortgage segment of the portfolio had a delinquency rate on performing
loans, as of December 31, 2015, of 0.50%, as compared to 0.16% as of December 31, 2014. Nonperforming residential
mortgage loans comprised 0.79% of the residential mortgage segment of the portfolio as of December 31, 2015, as compared
to 1.82% as of December 31, 2014. The Corporation believes it is well protected with its collateral position on this portfolio.
43
● Commercial Mortgages – Commercial mortgages were $964.3 million as of December 31, 2015, an increase of $274.7
million from December 31, 2014, partially as a result of the loans acquired in the Merger. The Corporation has also made a
concerted effort, over several operating cycles, to attract strong commercial real estate entrepreneurs in its primary trade area.
The commercial mortgage segment accounts for 42.5% of the total loan and lease portfolio as of December 31, 2015. The
commercial mortgage segment of the portfolio had a delinquency rate on performing loans, as of December 31, 2015, of
0.14%, as compared to 0.18% as of December 31, 2014. Nonperforming commercial mortgage loans comprised 0.09% of the
commercial mortgage segment of the portfolio as of December 31, 2015, as compared to 0.10% as of December 31, 2014. The
borrowers comprising this segment of the portfolio generally have strong, global cash flows, which have remained stable in
this tough economic environment.
● Commercial and Industrial – Commercial and industrial loans were $524.5 million as of December 31, 2015, an increase of
$188.9 million from December 31, 2014. The commercial and industrial segment accounts for 23.1% of the total loan and
lease portfolio as of December 31, 2015. The commercial and industrial segment of the portfolio had a delinquency rate on
performing loans, as of December 31, 2015, of 0.03%, as compared to 0.12% as of December 31, 2014. Nonperforming
commercial and industrial loans comprised 0.79% of the commercial and industrial segment of the portfolio as of December
31, 2015, as compared to 0.71% as of December 31, 2014. The commercial and industrial segment of the portfolio consists of
loans to privately held institutions, family businesses, non-profit institutions and private banking relationships. While certain
of these loans are collateralized by real estate, others are collateralized by non-real estate business assets, including accounts
receivable and inventory.
● Home Equity Loans and Lines of Credit – Home equity loans and lines of credit were $209.5 million as of December 31,
2015, an increase of $27.4 million from December 31, 2014. The home equity loans and lines of credit segment accounts for
9.2% of the total loan and lease portfolio as of December 31, 2015. The home equity loans and lines of credit segment of the
portfolio had a delinquency rate on performing loans, as of December 31, 2015, of 0.78%, as compared to 0.01% as of
December 31, 2014. Nonperforming home equity loans and lines of credit comprised 0.97% of the home equity loans and
lines of credit segment of the portfolio as of December 31, 2015, as compared to 0.58% as of December 31, 2014. The
Corporation originates the majority of its home equity loans and lines of credit through its branch network.
● Consumer loans – Consumer loans were $22.1 million as of December 31, 2015, an increase of $3.6 million from December
31, 2014. The consumer loan segment accounted for 1.0% of the total loan and lease portfolio as of December 31, 2015. The
consumer loan segment of the portfolio had a delinquency rate on performing loans, as of December 31, 2015, of 0.12%, as
compared to 0.12% as of December 31, 2014. There were no nonperforming consumer loans as of either December 31, 2015
or December 31, 2014.
● Leasing – Leases totaled $51.8 million as of December 31, 2015, an increase of $5.0 million from December 31, 2014. The
lease segment of the portfolio accounted for 2.3% of the total loan and lease portfolio as of December 31, 2015. The lease
segment of the portfolio had a delinquency rate on performing leases, as of December 31, 2015, of 0.96%, as compared 0.07%
as of December 31, 2014. Nonperforming leases comprised 0.02% of the leasing segment of the portfolio as of December 31,
2015, as compared to 0.04% as of December 31, 2014.
Goodwill and Other Intangible Assets – Goodwill as of December 31, 2015 increased by $69.0 million from December 31, 2014 as a
result of the Merger and the acquisition of RJM. In addition, the Merger and the RJM acquisition added $4.9 million and $681 thousand,
respectively, in other intangible assets. See Notes 2 and 3 in the Notes to Consolidated Financial Statements for additional details.
FHLB Stock - The Corporation’s investment in stock issued by the FHLB as of December 31, 2015 increased by $1.4 million, from
December 31, 2014. The Corporation must purchase, or the FHLB must redeem, its stock based on the Corporation’s borrowings balance
with the FHLB.
Mortgage Servicing Rights (“MSRs”) - MSRs increased $377 thousand to $5.1 million as of December 31, 2015 from $4.8 million as
of December 31, 2014. This increase was the result of $1.0 million of MSRs recorded during the twelve months ended December 31,
2015, reduced by amortization of $590 thousand and impairment of $70 thousand during the period.
44
The following table details activity related to mortgage servicing rights for the periods indicated:
(dollars in thousands)
Mortgage originations
Mortgage loans sold:
Servicing retained
Servicing released
Total mortgage loans sold
Percentage of originated mortgage loans sold
Servicing retained %
Servicing released %
Residential mortgage loans serviced for others
Mortgage servicing rights
Gain on sale of mortgage loans
Loans servicing and other fees
Amortization of MSRs
Impairment of MSRs
Liability Changes
$
$
$
$
$
$
$
$
$
For the Twelve Months Ended or as of December 31,
2013
2014
2015
231,049
$
117,257
$
197,787
$
107,351
29,630
136,981
$
59.3%
78.4%
21.6%
$
$
$
$
$
$
601,939
5,142
2,501
2,087
590
70
$
54,859
783
55,642
$
47.5%
98.6%
1.4%
$
$
$
$
$
$
590,660
4,765
1,772
1,755
476
56
127,914
1,067
128,981
65.2%
99.2%
0.8%
607,272
4,750
4,117
1,845
740
3
Total liabilities as of December 31, 2015 increased $664.3 thousand, to $2.67 billion from December 31, 2014. The increase was largely
related to the Merger.
Deposits - Deposits of $2.25 billion, as of December 31, 2015, increased $564.7 million from December 31, 2014. The 27.8% increase
was primarily the result of the addition of $481.7 million of deposits assumed in the Merger.
The following table details deposits as of the dates indicated:
(dollars in thousands)
Interest-bearing checking
Money market
Savings
Wholesale – non-maturity
Wholesale – time deposits
Time deposits
Interest-bearing deposits
Non-interest-bearing deposits
Total deposits
2015
2014
As of December 31,
2013
$
$
$
338,861 $
749,726
187,299
67,717
53,185
229,253
1,626,041 $
626,684
2,252,725 $
277,228 $
566,354
138,992
66,693
73,458
118,400
1,241,125 $
446,903
1,688,028 $
266,787 $
544,310
135,240
42,936
34,640
140,794
1,164,707 $
426,640
1,591,347 $
2012
270,279 $
559,470
129,091
45,162
12,421
218,586
1,235,009 $
399,673
1,634,682 $
2011
233,562
393,729
130,613
65,173
23,550
209,333
1,055,960
326,409
1,382,369
The following table summarizes the maturities of certificates of deposit of $100,000 or greater at December 31, 2015:
(dollars in thousands)
Three months or less
Three to six months
Six to twelve months
Greater than twelve months
Total
Retail
Wholesale
$
$
46,515 $
27,216
15,475
16,933
106,139 $
6,482
—
5,230
41,138
52,850
45
For more information regarding deposits, including average amount of deposits and average rate paid, refer to page 31 of this MD&A.
Borrowings - Short-term borrowings as of December 31, 2015, which include repurchase agreements, a repurchase agreement with a
correspondent bank, overnight FHLB advances and federal funds from correspondent banks increased $70.3 million from December 31,
2014. As of December 31, 2015, long-term FHLB advances decreased $5.3 million from December 31, 2014. See the Liquidity Section
of this MD&A on page 47 for further details on the Corporation’s FHLB available borrowing capacity.
Subordinated Notes – Subordinated notes, as of December 31, 2015, totaled $29.5 million and were comprised of 10-year 4.75% fixed-
to-floating notes which were originated in August 2015.
Discussion of Segments
The Corporation has two operating segments: Wealth Management and Banking. These segments are discussed below. Detailed segment
information appears in Note 29 in the Notes to Consolidated Financial Statements.
Wealth Management Segment Activity
The Wealth Management segment reported a pre-tax segment profit (“PTSP”) for the twelve months ended December 31, 2015 of $15.7
million, a $289 thousand, or 1.9%, increase from the same period in 2014. Fees for wealth management services for 2015 increased by
$120 thousand from the amount recorded in 2014. The relatively small increase in fees, year over year, despite the $664.9 million
increase in wealth assets from December 31, 2014 to December 31, 2015, was related a shift, during 2015, in the composition of the
wealth portfolio. Much of the increase in wealth assets during 2015 was comprised of accounts with flat-fee arrangements, rather than
market-based fees. The insurance division, which is reported as part of the Wealth Management segment, showed a $2.5 million increase
in revenue for the twelve months ended December 31, 2015 as compared to the same period in 2014. The increase in insurance revenue
was the result of the PCPB and RJM acquisitions in October 2014 and April 2015, respectively.
The Wealth Management segment reported a pre-tax segment profit (“PTSP”) for the twelve months ended December 31, 2014 of $15.4
million, a $2.3 million, or 17.5%, increase from the same period in 2013. The increase in PTSP was due to a $1.6 million increase in fees
for wealth management services and a $1.2 million increase in insurance commissions. Prior to 2014, the Corporation’s insurance
activity was reported under the Banking segment. With the October 2014 acquisition of PCPB, Bank’s insurance subsidiary has become
the responsibility of the Wealth Management Division. The Wealth Management Division’s assets under management, administration,
supervision and brokerage increased by $431.6 million to $7.7 billion, as of December 31, 2014.
The following table shows the Corporation’s wealth management assets under management, administration, supervision and brokerage as
of the dates indicated:
(dollars in millions)
Total wealth assets under management, administration, supervision and
2015
As of December 31,
2014
2013
brokerage
Banking Segment Activity
$
8,364.8 $
7,699.9 $
7,268.3
Banking segment data as presented in Note 29 in the Notes to Consolidated Financial Statements indicates a PTSP of $10.2 million in
2015, $27.4 million in 2014 and $23.9 million in 2013. See “Components of Net Income” on page 30 of this document for a discussion
of the Banking Segment.
Capital and Regulatory Capital Ratios
Consolidated shareholders’ equity of the Corporation was $365.7 million, or 12.1% of total assets, as of December 31, 2015, as
compared to $245.5 million, or 10.9% of total assets, as of December 31, 2014.
46
In March 2015, the Corporation filed a shelf registration statement on Form S-3 (the “Shelf Registration Statement”) to replace its 2012
Shelf Registration Statement, which was set to expire in April 2015. The Shelf Registration Statement allows the Corporation to raise
additional capital through offers and sales of registered securities consisting of common stock, debt securities, warrants to purchase
common stock, stock purchase contracts and units or units consisting of any combination of the foregoing securities. Using the
prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, the Corporation may sell, from time to
time, in one or more offerings, such securities in a dollar amount up to $200 million, in the aggregate.
In addition, the Corporation has in place under its Shelf Registration Statement a Dividend Reinvestment and Stock Purchase Plan (the
“Plan”), which allows it to issue up to 1,500,000 shares of registered common stock. The Plan allows for the grant of a request for waiver
(“RFW”) above the Plan’s maximum investment of $120 thousand per account per year. An RFW is granted based on a variety of
factors, including the Corporation’s current and projected capital needs, prevailing market prices of the Corporation’s common stock and
general economic and market conditions.
For the twelve months ended December 31, 2015, the Corporation issued 663 shares and raised $20 thousand through the Plan. No RFWs
were approved during the twelve months ended December 31, 2015. No other sales of securities were executed under the Shelf
Registration Statement during the twelve months ended December 31, 2015.
Accumulated other comprehensive loss (“AOCL”), as of December 31, 2015 was $412 thousand, a decrease of $11.3 million from
December 31, 2014. The primary cause of this decrease in AOCL was the settlement of the pension plan, which resulted in the previously
unrealized losses of $17.3 million on the pension plan becoming recognized in the income statement. The decision to settle the pension
plan, which was approved by the Board of Directors, was carried out in order to eliminate the earnings volatility associated with a
defined-benefit plan. Recent changes in mortality tables along with low interest rates posed a challenging outlook for the pension plan
and the Corporation felt it would be prudent to take a one-time charge to settle the pension plan as opposed to exposing it to further
market volatility.
As detailed in Note 26-E in the Notes to Consolidated Financial Statements, both the Corporation’s and the Bank’s Tier 1 capital ratio to
risk weighted assets declined significantly from December 31, 2014 to December 31, 2015 as the previously excluded unrealized loss on
the pension plan was realized in earnings. The decline in the Corporation’s Tier II capital ratio from December 31, 2014 to December 31,
2015 indicated only a slight decline as the $29.5 million of subordinated notes issued in August 2015 by the Corporation offset the effect
of the pension plan settlement at the Corporation level.
The Corporation’s and Bank’s regulatory capital ratios and the minimum capital requirements to be considered “Well Capitalized” by
banking regulators can be found in Note 25-E in the Notes to Consolidated Financial Statements. Both the Corporation and the Bank
exceeded the required capital levels to be considered “Well Capitalized” by their respective regulators at the end of each period
presented.
Liquidity
The Corporation has significant sources and availability of liquidity at December 31, 2015. The liquidity position is managed on a daily
basis as part of the daily settlement function and on a monthly basis as part of the asset liability management process. The Corporation’s
primary liquidity is maintained by managing its deposits along with the utilization of borrowings from the FHLB, purchased federal
funds and utilization of other wholesale funding sources. Secondary sources of liquidity include the sale of investment securities and
certain loans in the secondary market.
Other wholesale funding sources include certificates of deposit from brokers, generally available in blocks of $1.0 million or more.
Funds obtained through these programs totaled $53.2 million as of December 31, 2015.
As of December 31, 2015, the maximum borrowing capacity with the FHLB was $1.14 billion, with an unused borrowing availability of
$824.6 million. Borrowing availability at the Federal Reserve was $131.0 million, and overnight Fed Funds lines, consisting of lines
from six banks, totaled $34.0 million. On a monthly basis, the Corporation’s Asset Liability Committee reviews the Corporation’s
liquidity needs. This information is reported to the Risk Management Committee of the Board of Directors on a quarterly basis.
As of December 31, 2015, the Corporation held $12.9 million of FHLB stock as required by the borrowing agreement between the FHLB
and the Corporation.
The Corporation has an agreement with CDC to provide up to $5 million, plus interest, of money market deposits at an agreed upon rate
currently at 0.45%. The Corporation had $2.7 million in balances as of December 31, 2015 under this program. The Corporation can
request an increase in the agreement amount as it deems necessary. In addition, the Corporation has an agreement with IND to provide up
to $40 million, plus interest, of money market and NOW funds at an agreed upon interest rate equal to the current Fed Funds rate plus 20
basis points. The Corporation had $39.9 million in balances as of December 31, 2015 under this program.
The Corporation’s available for sale investment portfolio of $349.0 million as of December 31, 2015 was 11.5% of total assets. Some of
these investments were in short-term, high-quality, liquid investments to earn more than the 25 basis points currently earned on Fed
Funds. The Corporation’s policy is to maintain its investment portfolio at a minimum level of 10% of total assets. The portion of the
investment portfolio that is not already pledged against borrowings from the FHLB or other funding sources, provides the Corporation
with the ability to utilize the securities to borrow additional funds through the FHLB, Federal Reserve or through other repurchase
agreements.
47
The Corporation continually evaluates its borrowing capacity and sources of liquidity. The Corporation believes that it has sufficient
capacity to fund expected 2016 earning asset growth with wholesale sources, along with deposit growth from its expanded branch
system.
Off Balance Sheet Risk
The Corporation becomes party to financial instruments 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 and create off-balance sheet risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
loan agreement.
Standby letters of credit are conditional commitments issued by the Bank to a customer for a third party. Such standby letters of credit
are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that
involved in granting loan facilities to customers.
The following chart presents the off-balance sheet commitments of the Corporation as of December 31, 2015, listed by dates of funding
or payment:
(dollars in millions)
Unfunded loan commitments
Standby letters of credit
Total
Total
Within
1 Year
2 - 3
Years
4 - 5
Years
After
5 Years
$
$
634.2 $
14.6
648.8 $
312.7 $
11.3
324.0 $
132.4 $
3.0
135.4 $
26.6 $
0.3
26.9 $
162.5
—
162.5
Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into
similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Collateral
requirements for off-balance sheet items are generally based upon the same standards and policies as booked loans. Since fees and rates
charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the
estimated fair value of off-balance sheet instruments.
Contractual Cash Obligations of the Corporation as of December 31, 2015
Total
Within
1 Year
2 - 3
Years
4 - 5
Years
After
5 Years
$
1,970.3 $
1,970.3 $
— $
— $
282.4
94.2
254.9
58.7
8.1
2,668.6 $
193.8
94.2
75.0
4.2
2.3
2,339.8 $
75.2
—
139.1
8.7
2.9
225.9 $
13.4
—
40.8
8.3
2.9
65.4 $
—
—
—
—
37.5
—
37.5
(dollars in millions)
Deposits without a stated maturity
Wholesale and retail certificates of
deposit
Short-term borrowings
FHLB advances and other borrowings
Operating leases
[Purchase obligations]
Total
$
Other Information
Effects of Inflation
Inflation has some impact on the Corporation’s operating costs. Unlike many industrial companies, however, substantially all of the
Corporation’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s
performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction
or in the same magnitude as prices of goods and services.
48
Effect of Government Monetary Policies
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the
United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and
interest rates. Among the instruments used to implement those objectives are open market operations in United States government
securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to
influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or
paid for deposits.
The Corporation is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board
have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to
affect the Corporation’s operations in the future. The effect of such policies and regulations upon the future business and earnings of the
Corporation cannot be predicted.
49
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 7A is incorporated by reference to information appearing in the MD&A Section of this
Annual Report on Form 10-K, more specifically in the sections entitled “Interest Rate Sensitivity,” “Summary of Interest Rate
Simulation,” and “Gap Analysis” beginning on page 32.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K
on the following pages:
Report of Independent Registered Public Accounting Firm ......................................................................................................
Consolidated Balance Sheets .....................................................................................................................................................
Consolidated Statements of Income ...........................................................................................................................................
Consolidated Statements of Comprehensive Income .................................................................................................................
Consolidated Statements of Cash Flows ....................................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity ..................................................................................................
Notes to Consolidated Financial Statements ..............................................................................................................................
Page
51
52
53
54
55
56
57
50
Report of 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 its subsidiaries as of December 31,
2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity
for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of
Bryn Mawr Bank Corporation and its subsidiaries’ management. Our responsibility is to express an opinion on these consolidated financial
statements 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 audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bryn
Mawr Bank Corporation and its subsidiaries as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bryn Mawr
Bank Corporation and its subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 11, 2016 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control
over financial reporting.
Philadelphia, Pennsylvania
March 11, 2016
(signed) KPMG LLP
51
Consolidated Balance Sheets
(dollars in thousands)
Assets
Cash and due from banks
Interest bearing deposits with banks
Cash and cash equivalents
Investment securities available for sale, at fair value (amortized cost of $347,776 and $227,553
as of December 31, 2015 and December 31, 2014 respectively)
Investment securities, trading
Loans held for sale
Portfolio loans and leases, originated
Portfolio loans and leases, acquired
Total portfolio loans and leases
Less: Allowance for originated loan and lease losses
Less: Allowance for acquired loan and lease losses
Total allowance for loans and lease losses
Net portfolio loans and leases
Premises and equipment, net
Accrued interest receivable
Deferred income taxes
Mortgage servicing rights
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Intangible assets
Other investments
Other assets
Total assets
Liabilities
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Long-term FHLB advances
Subordinated notes
Accrued interest payable
Other liabilities
Total liabilities
$
$
$
Shareholders' equity
Common stock, par value $1; authorized 100,000,000 shares; issued 20,931,416 and 16,742,135
shares as of December 31, 2015 and December 31, 2014, respectively, and outstanding of
17,071,523 and 13,769,336 as of December 31, 2015 and December 31, 2014, respectively
Paid-in capital in excess of par value
Less: Common stock in treasury at cost - 3,859,893 and 2,972,799 shares as of December 31,
2015 and December 31, 2014, respectively
Accumulated other comprehensive loss, net of tax benefit
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$
The accompanying notes are an integral part of the consolidated financial statements.
52
December 31, December 31,
2015
2014
18,452 $
124,615
143,067
348,966
3,950
8,987
1,883,869
385,119
2,268,988
(15,857)
-
(15,857)
2,253,131
45,339
7,869
11,137
5,142
38,371
12,942
104,765
23,903
9,460
13,968
3,030,997 $
626,684 $
1,626,041
2,252,725
94,167
254,863
29,479
1,851
32,201
2,665,286
16,717
202,552
219,269
229,577
3,896
3,882
1,535,004
117,253
1,652,257
(14,500)
(86)
(14,586)
1,637,671
33,748
5,560
7,209
4,765
20,535
11,523
35,781
22,521
5,226
5,343
2,246,506
446,903
1,241,125
1,688,028
23,824
260,146
-
1,040
27,994
2,001,032
20,931
228,814
16,742
100,486
(58,144)
(412)
174,522
365,711
3,030,997 $
(31,642)
(11,704)
171,592
245,474
2,246,506
Consolidated Statements of Income
(dollars in thousands, except per share data)
Interest income:
Interest and fees on loans and leases
Interest on cash and cash equivalents
Interest on investment securities:
Taxable
Non-taxable
Dividends
Total interest income
Interest expense on:
Deposits
Short-term borrowings
FHLB advances and other borrowings
Subordinated notes
Total interest expense
Net interest income
Provision for loan and lease losses
Twelve Months Ended December 31,
2014
2015
2013
$
102,432 $
409
5,018
497
186
108,542
4,212
48
3,554
601
8,415
100,127
4,396
78,541 $
193
3,596
399
177
82,906
2,898
17
3,163
-
6,078
76,828
884
73,941
158
3,799
396
123
78,417
2,758
25
2,644
-
5,427
72,990
3,575
Net interest income after provision for loan and lease losses
95,731
75,944
69,415
Non-interest income:
Fees for wealth management services
Insurance commissions
Service charges on deposits
Loan servicing and other fees
Net gain on sale of loans
Net gain (loss) on sale of investment securities available for sale
Net gain (loss) on sale of other real estate owned ("OREO")
Dividends on FHLB and FRB stock
Other operating income
Total non-interest income
Non-interest expenses:
Salaries and wages
Employee benefits
Loss on pension plan settlement
Net gain on curtailment of nonqualified pension plan
Occupancy and bank premises
Branch lease termination expense
Furniture, fixtures, and equipment
Advertising
Amortization of intangible assets
Impairment of intangible assets
Due diligence, merger-related and merger integration expenses
Professional fees
Pennsylvania bank shares tax
Information technology
Other operating expenses
Total non-interest expenses
Income before income taxes
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
Dividends declared per share
Weighted-average basic shares outstanding
Dilutive shares
Adjusted weighted-average diluted shares
36,894
3,745
2,927
2,087
3,022
931
123
1,382
4,849
55,960
44,575
10,205
17,377
-
10,305
929
6,841
2,102
3,827
387
6,670
3,353
1,253
3,443
14,498
125,765
25,926
9,172
16,754 $
0.96 $
0.94 $
0.78 $
36,774
1,099
2,578
1,755
1,772
471
175
615
3,083
48,322
37,113
7,340
-
-
7,305
-
4,508
1,504
2,659
-
2,373
3,017
1,256
2,771
11,572
81,418
42,848
15,005
27,843 $
2.05 $
2.01 $
0.74 $
35,184
651
2,445
1,845
4,117
(8 )
(300 )
250
4,171
48,355
36,346
8,832
-
(690 )
6,862
-
3,977
1,526
2,633
-
1,885
2,456
942
2,876
13,095
80,740
37,030
12,586
24,444
1.84
1.80
0.69
17,488,325
267,996
17,756,321
13,566,239
294,801
13,861,040
13,311,215
260,395
13,571,610
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
53
Consolidated Statements of Comprehensive Income
(dollars in thousands)
Twelve Months Ended December 31,
2014
2015
2013
Net income
$
16,754 $
27,843 $
24,444
Other comprehensive income (loss):
Net change in unrealized (losses) gains on investment securities
available for sale:
Net unrealized (losses) gains arising during the period, net of tax
(benefit) expense of $(618), $1,335 and $(2,168), respectively
Less: reclassification adjustment for net (gains) losses on sales realized
in net income, net of tax (expense) benefit of $(326), $(165), and $3,
respectively
Unrealized investment (losses) gains, net of tax (benefit) expense of
$(292), $1,170 and $(2,165), respectively
Net change in fair value of derivative used for cash flow hedge:
Net unrealized (losses) gains arising during the period, net of tax
(benefit) expense of $(228), $(413) and $412, respectively
Less: realized loss on cash flow hedge reclassified to earnings, net of tax
benefit of $214, $0, and $0, respectively
Change in fair value of hedging instruments, net of tax expense (benefit)
of $14, $(413) and $412, respectively
Net change in unfunded pension liability:
Change in unfunded pension liability related to unrealized loss, prior
service cost and transition obligation, net of tax expense (benefit) of
$264, $(4,063) and $3,442, respectively
Change in unfunded pension liability related to settlement of pension
plan, net of tax expense of $6,082, $0 and $0
Change in unfunded pension liability related to curtailment, net of tax
expense of $0, $0, and $741, respectively
Total change in unfunded pension liability, net of tax expense (benefit)
of $6,346, $(4,063) and $4,183, respectively
Total other comprehensive income (loss)
(1,147)
1,867
(4,026 )
(605)
(306 )
5
(542)
2,173
(4,021 )
(422)
(768 )
397
25
-
(768 )
766
-
766
514
(7,544 )
6,391
11,295
-
11,809
11,292
-
-
(7,544 )
(6,139 )
-
1,377
7,768
4,513
Total comprehensive income
$
28,046 $
21,704 $
28,957
The accompanying notes are an integral part of the consolidated financial statements.
54
Consolidated Statements of Cash Flows
(dollars in thousands)
Operating activities:
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses
Depreciation of fixed assets
Net amortization of investment premiums and discounts
Net loss on settlement of pension plan
Net (gain) loss on sale of investment securities available for sale
Net gain on sale of loans
Stock based compensation cost
Amortization and net impairment of mortgage servicing rights
Net accretion of fair value adjustments
Amortization of intangible assets
Impairment of intangible assets
Impairment of other real estate owned ("OREO")
Net (gain) loss on sale of OREO
Net increase in cash surrender value of bank owned life insurance ("BOLI")
Other, net
Loans originated for resale
Proceeds from loans sold
(Benefit) provision for deferred income taxes
Excess tax benefit from stock-based compensation
Change in income taxes payable/receivable
Change in accrued interest receivable
Change in accrued interest payable
Net cash provided by operating activities
Investing activities:
Purchases of investment securities available for sale
Proceeds from maturity of investment securities and paydowns of mortgage-related securities
Proceeds from sale of investment securities available for sale
Net change in FHLB stock
Proceeds from calls of investment securities
Proceeds from sale of other investments
Net change in other investments
Net portfolio loan and lease originations
Purchases of premises and equipment
Purchases of BOLI
Acquisitions, net of cash acquired
Capitalize costs to OREO
Proceeds from sale of OREO
Net cash used in investing activities
Financing activities:
Change in deposits
Change in short-term borrowings
Dividends paid
Change in FHLB advances and other borrowings
Payment of contingent consideration for business combinations
Net proceeds from issuance of subordinated notes
Excess tax benefit from stock-based compensation
Net (purchase of) proceeds from sale of treasury stock for deferred compensation plans
Net purchase of treasury stock
Proceeds from issuance of common stock
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Cash paid during the year for:
Income taxes
Interest
Non-cash information:
Change in other comprehensive loss
Change in deferred tax due to change in comprehensive income
Transfer of loans to other real estate owned
Issuance of shares and options for acquisitions
Acquisition of noncash assets and liabilities:
Assets acquired
Liabilities assumed
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
55
2015
Twelve Months Ended December 31,
2014
2013
$
16,754 $
27,843 $
24,444
4,396
4,925
3,280
17,377
(931)
(3,022)
1,441
661
(4,942)
3,827
387
90
(123)
(782)
1,049
(141,578)
138,964
(2,834)
(783)
(529)
(215)
516
37,928
(176,034)
66,209
64,851
3,562
104,240
-
(4,184)
(194,066)
(7,611)
(5,000)
16,129
-
1,215
(130,689)
83,784
(38,128)
(13,837)
(24,883)
(542)
29,456
783
(128)
(26,418)
20
6,452
16,559
(76,202)
219,269
143,067 $
11,703 $
7,604 $
11,292 $
6,068 $
2,283 $
123,734 $
727,908 $
620,303 $
884
3,486
2,299
-
(471 )
(1,772 )
1,256
532
(2,757 )
2,659
-
-
(175 )
(315 )
2,822
(58,173 )
56,866
2,350
(831 )
808
168
199
37,678
(45,199 )
40,801
24,394
131
37,750
342
(789 )
(105,918 )
(5,455 )
-
(4,125 )
-
1,646
(56,422 )
96,704
12,933
(10,189 )
54,623
-
-
831
79
(947 )
72
2,836
156,942
138,198
81,071
219,269 $
11,831 $
5,879 $
(9,446 ) $
(3,306 ) $
1,763 $
- $
10,005 $
5,880 $
3,575
2,833
4,003
-
8
(4,117 )
1,004
743
(3,490 )
2,633
-
-
300
(358 )
1,253
(126,920 )
132,097
1,195
(708 )
1,551
227
(392 )
39,881
(97,517 )
62,643
14,942
(893 )
40,287
-
(91 )
(148,102 )
(3,571 )
-
-
(485 )
1,089
(131,698 )
(42,986 )
1,488
(9,297 )
44,479
(2,100 )
-
708
764
-
176
3,970
(2,798 )
(94,615 )
175,686
81,071
9,775
5,819
6,943
2,430
853
-
-
-
Consolidated Statements of Changes in Shareholders' Equity
(dollars in thousands, except per share information)
For the Years Ended December 31, 2013, 2014 and 2015
Shares of
Common
Stock
Issued
Common
Stock
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Shareholders'
Equity
16,390,608 $
-
-
16,390 $
-
-
89,137 $
-
-
(30,745) $
-
-
(10,078) $ 138,860 $
24,444
(9,347)
-
-
203,564
24,444
(9,347)
Balance December 31, 2012
Net income
Dividends declared, $0.69 per share
Other comprehensive income, net of tax
expense of $2,430
Stock based compensation
Tax benefit from stock-based
compensation
Retirement of treasury stock
Net sale of treasury stock from stock
-
-
-
(4,517)
-
-
-
(4)
-
1,004
708
(41)
-
-
-
45
award and deferred compensation plans
-
-
828
(64)
Common stock issued:
Dividend Reinvestment and Stock
Purchase Plan
Share-based awards and options
exercises
7,455
7
169
203,323
204
3,868
-
-
4,513
-
-
-
-
-
-
-
-
-
-
-
-
-
4,513
1,004
708
-
764
176
4,072
Balance December 31, 2013
16,596,869 $
16,597 $
95,673 $
(30,764) $
(5,565) $ 153,957 $
229,898
Net income
Dividends declared, $0.74 per share
Other comprehensive loss, net of tax
benefit of $3,307
Stock based compensation
Tax benefit from stock-based
compensation
Retirement of treasury stock
Net purchase of treasury stock from stock
award and deferred compensation plans
Issuance costs - S-4 filing
Common stock issued:
Dividend Reinvestment and Stock
Purchase Plan
Share-based awards and options
exercises
-
-
-
-
-
(3,512)
-
-
-
-
-
-
-
(3)
-
-
-
-
-
1,256
831
(32)
45
(147)
2,517
2
70
146,261
146
2,790
-
-
-
-
-
35
(913)
-
-
-
-
-
27,843
(10,208)
(6,139)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
27,843
(10,208)
(6,139)
1,256
831
-
(868)
(147)
-
72
2,936
Balance December 31, 2014
16,742,135 $
16,742 $ 100,486 $
(31,642) $
(11,704) $ 171,592 $
245,474
Net income
Dividends declared, $0.78 per share
Other comprehensive income, net of tax
expense of $6,080
Stock based compensation
Excess tax benefit from stock-based
compensation
Retirement of treasury stock
Cancellation of forfeited restricted stock
awards
Net purchase of treasury stock
Shares issued in acquisitions
Options assumed in acquisitions
Common stock issued:
Dividend Reinvestment and Stock
Purchase Plan
Share-based awards and options
exercises
-
-
-
-
-
(4,418)
(27,375)
-
3,878,304
-
-
-
-
-
-
(4)
(27)
-
-
-
-
1,441
783
(40)
27
3,878 117,513
2,343
-
663
1
19
342,107
341
6,242
-
-
-
-
-
44
-
(26,546)
-
-
-
-
-
-
16,754
(13,824)
11,292
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
16,754
(13,824)
11,292
1,441
783
-
-
(26,546)
121,391
2,343
20
6,583
Balance December 31, 2015
20,931,416 $
20,931 $ 228,814 $
(58,144) $
(412) $ 174,522 $
365,711
The accompanying notes are an integral part of the consolidated financial statements.
56
Notes to 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, community banking, residential mortgage
lending, insurance and business banking services to its customers through 26 full service branches, eight retirement community offices,
five wealth offices and an insurance agency located throughout Montgomery, Delaware, Chester, Dauphin and Philadelphia counties in
Pennsylvania and New Castle county in Delaware. In 2008, the Corporation opened the Bryn Mawr Trust Company of Delaware, a
limited-purpose trust company in Greenville, Delaware, to further its long-term growth strategy, and diversify its asset base and client
accounts. The common stock of the Corporation trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol BMTC.
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 and five contingent
cash payments, not to exceed $100 thousand each, will be payable on each of March 31, 2016, 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 “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.
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 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 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.
57
Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible
that in 2016, 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 $11.7 million and $987 thousand at
December 31, 2015 and December 31, 2014, 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 2015, 2014 or 2013.
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.
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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.
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 subsection H 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 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, 2015, 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,
2015, 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.
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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 and Federal Home Loan Bank Stock
Other investments include Community Reinvestment Act (“CRA”) investments and equity stocks without a readily determinable fair
market value. The Corporation’s investments in equity stocks include those issued by the Federal Home Loan Bank of Pittsburgh
(“FHLB”), the Federal Reserve Bank 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, 2015, the carrying value of the Corporation’s FHLB stock was $12.9 million.
Ownership of FHLB 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 Plans
The Corporation has 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.
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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. 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 is based on their market value on the grant date, while the fair value
of the performance-based stock awards is based on their grant-date market value adjusted for the likelihood of attaining certain pre-
determined performance goals calculated by utilizing a Monte Carlo Simulation model.
Q. Earnings per 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.
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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, 2015, 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, or when events occur or
circumstances change that would more likely than not reduce the fair value of the acquisition or investment. 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, 2015, 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 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.
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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, 2015.
Adopted Pronouncements:
FASB ASU 2015-03 (Subtopic 835-30), “Simplifying the Presentation of Debt Issuance Costs.”
Issued in April 2015, ASU 2015-03 requires entities to present debt issuance costs related to a recognized debt liability on the balance
sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. Entities will no longer record the cost of
issuing debt as a separate asset, except when the cost is incurred before receipt of the funding from the associated debt liability. The ASU
is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.
Early adoption is permitted for financial statements that have not been previously issued. The Corporation has elected to early-adopt this
guidance, and it is reflected in the presentation on the balance sheet of the subordinated notes issued during the year ended December 31,
2015.
FASB ASU 2015-01, “Income Statement: Extraordinary and Unusual Items.”
Issued in January 2015, ASU 2015-01 eliminates from GAAP the concept of extraordinary items and the associated disclosure
requirements. Subtopic 225-20, “Income Statement—Extraordinary and Unusual Items” required that an entity separately classify,
present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual
activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. Paragraph 225-20-45-2
includes the following two criteria that must both be met for extraordinary classification: (i) unusual in nature, and (ii) infrequency of
occurrence. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the
extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income
from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-
share data applicable to the extraordinary item. The amendments in this Update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the
beginning of the fiscal year of adoption. The Corporation has elected to early-adopt the guidance and has determined that it does not have
a material impact on its consolidated financial statements.
FASB ASU 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to Maturity Transactions, Repurchase Financings, and
Disclosures.”
Issued in June 2014, ASU 2014 aligns the accounting for repurchase-to-maturity transactions and repurchase financing arrangements
with the accounting for other typical repurchase agreements, i.e., these transactions will be accounted for as secured borrowings. The
ASU also requires additional disclosures about repurchase agreements and similar transactions. For public business entities, the
accounting changes and certain disclosure requirements are effective for interim or annual periods beginning after December 15, 2014.
Other disclosure requirements are effective for annual periods beginning after December 15, 2014, and for interim periods beginning
after March 15, 2015. Early application is prohibited. The Corporation has evaluated the effect of the adoption of this guidance and has
determined that it does not have a significant impact on the presentation of the Corporation’s consolidated financial statements.
FASB ASU 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the
FASB Emerging Issues Task Force).”
Issued in August 2014, ASU 2014-14 requires creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to
recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the
guarantee and the receivable as a single unit of account. The standard is effective for public business entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2014. An entity can elect a prospective or a modified
retrospective transition method, but must use the same transition method that it elected under FASB ASU No. 2014-04, Reclassification
of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Early adoption, including adoption in an interim
period, is permitted if the entity already adopted ASU 2014-04. The Corporation has evaluated the impact of the adoption of this
guidance and has determined that it does not have a significant impact on its consolidated financial statements.
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FASB ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of
Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues
Task Force).”
Issued in January 2014, ASU 2014-04 clarifies when an “in substance repossession or foreclosure” occurs, that is, when a creditor should
be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, such that
all or a portion of the loan should be derecognized and the real estate property recognized. ASU 2014-04 states that a creditor is
considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either
the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveying all
interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or
through a similar legal agreement. The amendments of ASU 2014-04 also require interim and annual disclosure of both the amount of
foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by
residential real estate property that are in the process of foreclosure. The amendments of ASU 2014-04 are effective for interim and
annual periods beginning after December 15, 2014, and may be applied using either a modified retrospective transition method or a
prospective transition method as described in ASU 2014-04. The adoption of ASU 2014-04 is a change in presentation only, for the
newly required disclosures, and does not have a significant impact to the Corporation’s consolidated financial statements.
FASB ASU 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified
Affordable Housing Projects.”
Issued in January 2014, ASU 2014-01 provides guidance on accounting for investments by a reporting entity in flow-through limited
liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments
in this update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable
housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method,
an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net
investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified
affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an
equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this update should be
applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in
qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting
investments. The amendments in this update are effective for public business entities for annual periods and interim reporting periods
within those annual periods, beginning after December 15, 2014. The Corporation has evaluated the effect of the adoption of this
guidance and has determined that it is does not have an impact on the presentation of the Corporation’s consolidated financial statements.
Pronouncements Not Yet Effective:
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.
FASB ASU 2015-16 (Topic 805), “Simplifying the Accounting for Measurement-Period Adjustments.”
Issued in September 2015, ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust the financial statements for
measurement-period adjustments that occur in periods after a business combination is consummated. The ASU is effective for public
business entities for annual and interim periods in fiscal years beginning after December 15, 2015. Early adoption is permitted. The
Corporation has evaluated the impact of this guidance and has determined that it will not have a material impact on its consolidated
financial statements.
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FASB ASU 2015-14 (Topic 606), “Revenue from Contracts with Customers: Deferral of the Effective Date
Issued in August 2015, ASU 2015-14 amends the effective dates of ASU 2014-09, Revenue from Contracts with Customers. The
requirements are effective for annual periods and interim periods within fiscal years beginning after December 15, 2017, for public
business entities, certain employee benefit plans, and certain not-for-profit entities applying U.S. GAAP. Earlier application is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
Issued in May 2014, ASU No. 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S.
GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. The
Corporation is evaluating the effect that ASU 2014-09 and ASU 2014-14 will have on its consolidated financial statements and related
disclosures. The Corporation has not yet selected a transition method nor has it determined the effect of the standard on its ongoing
financial reporting.
FASB ASU 2015-05, “Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting
for Fees Paid in a Cloud Computing Arrangement.”
Issued in April 2015, ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software
license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element
of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a
software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a
customer’s accounting for service contracts. For public business entities, the amendments in this update will be effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all
entities. The Corporation is currently evaluating the impact of this guidance and does not anticipate a material impact on its consolidated
financial statements.
FASB ASU 2015-02, “Consolidation.”
Issued in February 2015, ASU 2015-02 responds to concerns about the current accounting for consolidation of certain legal entities.
Entities expressed concerns that current generally accepted accounting principles might require a reporting entity to consolidate another
legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the
reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal
entity’s economic benefits or obligations. Financial statement users asserted that in certain of those situations in which consolidation is
ultimately required, deconsolidated financial statements are necessary to better analyze the reporting entity’s economic and operational
results. Previously, the FASB issued an indefinite deferral for certain entities to partially address those concerns. However, the
amendments in this update rescind that deferral and address those concerns by making changes to the consolidation guidance. The
amendments in this update impact all reporting entities involved with limited partnerships or similar entities and require reporting entities
to re-evaluate these entities for consolidation. In some cases, consolidation conclusions may change. In other cases, a reporting entity will
need to provide additional disclosures if an entity that currently isn’t considered a variable interest entity is considered a variable interest
entity under the new guidance. For public business entities, the guidance is effective for annual and interim periods beginning after
December 15, 2015. Early adoption is permitted. The Corporation is currently evaluating the impact of this guidance and does not
anticipate a material impact on its consolidated financial statements.
65
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 by the Corporation was $1.0 million, of which $500 thousand was paid at closing and five contingent cash payments,
not to exceed $100 thousand each, will be payable on each of March 31, 2016, 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 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:
(dollars in thousands)
Consideration paid:
Cash paid at closing
Contingent payment liability
Value of consideration
Assets acquired:
Cash operating accounts
Intangible assets – trade name
Intangible assets – customer relationships
Intangible assets – non-competition agreements
Other assets
Total assets
Liabilities assumed:
Deferred tax liability
Other liabilities
Total liabilities
Net assets acquired
Original
Estimates
Adjustments to
Estimates
Final
Valuation
$
500 $
500
1,000
— $
—
—
—
(129 )
—
—
—
(129 )
(45 )
—
(45 )
(84 )
84 $
500
500
1,000
20
—
424
257
4
705
291
46
337
368
632
20
129
424
257
4
834
336
46
382
452
548 $
Goodwill resulting from acquisition of RJM
$
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 are final.
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 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 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.
66
In connection with the 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:
Original
Estimates
Adjustments to
Estimates
Final
Valuation
(dollars in thousands)
Consideration paid:
Common shares issued (3,878,304)
Cash in lieu of fractional shares
Cash-out of certain warrants
Fair value of options assumed
Value of consideration
Assets acquired:
Cash and due from banks
Investment securities available for sale
Loans*
Premises and equipment
Deferred income taxes
Bank-owned life insurance
Core deposit intangible
Favorable lease asset
Other assets
Total assets
Liabilities assumed:
Deposits
FHLB and other long-term borrowings
Short-term borrowings
Unfavorable lease liability
Other liabilities
Total liabilities
$
121,391 $
2
1,323
2,343
125,059
17,934
181,838
426,601
9,037
6,288
12,054
4,191
792
18,085
676,820
481,674
19,726
108,609
2,884
4,706
617,599
— $
—
—
—
—
—
—
(1,864)
—
1,396
—
—
(68)
(111)
(647)
—
—
—
—
1,867
1,867
121,391
2
1,323
2,343
125,059
17,934
181,838
424,737
9,037
7,684
12,054
4,191
724
17,974
676,173
481,674
19,726
108,609
2,884
6,573
619,466
56,707
68,352
Net assets acquired
59,221
(2,514)
Goodwill resulting from the Merger
$
65,838 $
2,514 $
*includes $507 thousand in 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 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 Merger are final.
67
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:
$
(dollars in thousands)
Consideration paid:
Cash paid at closing
Contingent payment disbursed
Contingent payment liability
Value of consideration
Assets acquired:
Cash operating accounts
Other investments
Premises and equipment
Intangible assets – customer relationships
Intangible assets – non-competition agreements
Intangible assets – trade name
Other assets
Total assets
Liabilities assumed:
Deferred tax liability
Other liabilities
Total liabilities
Net assets acquired
Goodwill resulting from acquisition of PCPB
$
As of December 31, 2014, the Corporation had finalized its fair value estimates related to the acquisition of PCPB.
5,399
542
1,083
7,024
1,274
302
100
3,280
1,580
955
850
8,341
2,437
1,818
4,255
4,086
2,938
68
Pro Forma Income Statements (unaudited)
The following pro forma income statements for the twelve months ended December 31, 2013, 2014 and 2015 present the pro forma
results of operations of the combined institution (CBH and the Corporation) had the merger occurred on January 1, 2013, January 1, 2014
and January 1, 2015, 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 periods ended December 31, 2013 and 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.
(dollars in thousands)
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Per share data*:
Weighted-average basic shares outstanding
Dilutive shares
Adjusted weighted-average diluted shares
Basic earnings per common share
Diluted earnings per common share
Twelve Months Ended
December 31,
2014
2015
2013
100,127 $
4,396
95,731
55,960
125,765
25,926
9,172
16,754 $
100,609 $
2,041
98,568
51,836
100,011
50,393
17,673
32,720 $
94,467
5,225
89,242
57,547
103,201
43,588
14,571
29,017
17,488,325
267,996
17,756,321
0.96 $
0.94 $
17,444,543
373,384
17,817,927
1.88 $
1.84 $
17,189,519
338,978
17,528,497
1.69
1.66
$
$
$
$
* Assumes that the shares of CBH common stock outstanding as of December 31, 2014 were outstanding for the full twelve month
periods ended December 31, 2013 and 2014, and therefore equal the weighted average shares of common stock outstanding for the
twelve months periods ended December 31, 2013 and 2014. The merger conversion of 8,618,629 shares of CBH common stock equals
3,878,304 shares of Corporation common stock (8,618,629 times 0.45, minus 79 fractional shares paid in cash).
69
Due Diligence, Merger-Related and Merger Integration Expenses
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:
(dollars in thousands)
Advertising
Employee benefits
Furniture, fixtures and equipment
Information technology
Professional fees
Salaries and wages
Other
$
Total due diligence and merger-related expenses
$
Note 3 - Goodwill & Other Intangible Assets
Twelve Months Ended December 31,
2014
2015
2013
162 $
258
159
1,168
2,471
1,868
584
6,670 $
10 $
23
9
44
1,340
346
601
2,373 $
1
2
4
727
616
243
292
1,885
The Corporation completed an annual impairment test for goodwill and other intangibles as of December 31, 2014 and 2015. There was
no goodwill impairment and no material impairment to identifiable intangible assets recorded during 2014 or 2015. 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, 2015 and 2014 are as follows:
(dollars in thousands)
Goodwill – Wealth
reporting unit
Goodwill – Banking
reporting unit
Goodwill – Insurance
reporting unit
Total
Core deposit intangible
Customer relationships
Non-compete agreements
Trade name
Favorable lease asset
Total
Grand total
(dollars in thousands)
Goodwill – Wealth
reporting unit
Goodwill – Banking
reporting unit
Goodwill – Insurance
reporting unit
Total
Core deposit intangible
Customer relationships
Non-compete agreements
Trade name
Total
Grand total
$
$
$
$
$
$
$
$
Beginning
Balance
12/31/14
Additions/
Adjustments
Amortization/
Impairment
Ending
Balance
12/31/15
Initial
Amortization
Period
$
20,412 $
— $
12,431
68,352
2,938
35,781 $
1,066 $
15,562
3,728
2,165
—
22,521 $
632
68,984 $
4,191 $
424
257
—
724
5,596 $
— $
—
—
— $
(985) $
(1,602)
(1,053)
—
(574)
(4,214) $
20,412
Indefinite
80,783
Indefinite
3,570
104,765
4,272
14,384
2,932
2,165
150
23,903
Indefinite
10 years
10 to 20 years
5 to 10 years
Indefinite
17 to 75 months
58,302 $
74,580 $
(4,214) $
128,668
Beginning
Balance
12/31/13
Additions/
Adjustments
Amortization
Ending
Balance
12/31/14
Amortization
Period
$
20,412 $
12,431
—
32,843 $
1,342 $
13,595
3,218
1,210
19,365 $
— $
—
2,938
2,938 $
— $
3,280
1,580
955
5,815 $
— $
—
—
— $
(276) $
(1,313)
(1,070)
—
(2,659) $
52,208 $
8,753 $
(2,659) $
70
20,412
Indefinite
12,431
Indefinite
Indefinite
10 years
10 to 20 years
5 to 10 years
Indefinite
2,938
35,781
1,066
15,562
3,728
2,165
22,521
58,302
Note 4 - Investment Securities
The amortized cost and fair value of investments, which were classified as available for sale, are as follows:
As of December 31, 2015
(dollars in thousands)
U.S. Treasury securities
Obligations of the U.S. government and agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Other investments
Total
As of December 31, 2014
(dollars in thousands)
U.S. Treasury securities
Obligations of the U.S. government and agencies
Obligations of state and political subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Other investments
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
101 $
101,342
41,892
157,422
29,756
17,263
347,776 $
— $
470
123
1,482
166
38
2,279 $
Fair Value
100
101,495
41,966
158,689
29,799
16,917
348,966
(1) $
(317)
(49)
(215)
(123)
(384)
(1,089) $
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
102 $
66,881
28,955
79,498
34,618
17,499
227,553 $
— $
171
137
1,914
299
173
2,694 $
Fair Value
100
66,762
29,045
81,382
34,797
17,491
229,577
(2) $
(290)
(47)
(30)
(120)
(181)
(670) $
The following table shows the amount of securities that were in an unrealized loss position at December 31, 2015:
(dollars in thousands)
U.S. Treasury securities
Obligations of the U.S. government
and agencies
Obligations of state and political
subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Other investments
Total
$
Less than 12
Months
12 Months
or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
100 $
(1) $
— $
— $
100 $
(1)
49,759
(317)
—
—
49,759
(317)
18,725
55,763
6,407
3,945
134,699 $
(46)
(215)
(85)
(238)
(902) $
2,016
—
2,436
11,810
16,262 $
(3)
—
(38)
(146)
(187) $
20,741
55,763
8,843
15,755
150,961 $
(49)
(215)
(123)
(384)
(1,089)
71
The following table shows the amount of securities that were in an unrealized loss position at December 31, 2014:
(dollars in thousands)
U.S. Treasury securities
Obligations of the U.S. government
and agencies
Obligations of state and political
subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Other investments
Total
$
Less than 12
Months
12 Months
or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
— $
— $
100 $
(2) $
100 $
(2)
16,822
(28)
22,691
(262)
39,513
4,777
2,289
3,274
13,717
40,879 $
(19)
(14)
(22)
(181)
(264) $
4,060
3,814
9,507
—
40,172 $
(28)
(16)
(98)
—
(406) $
8,837
6,103
12,781
13,717
81,051 $
(290)
(47)
(30)
(120)
(181)
(670)
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, 2015, securities having a fair value of $128.9 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 of investment and mortgage-related securities as of December 31, 2015 and 2014, 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.
(dollars in thousands)
Investment securities*:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
Mortgage-related securities
Total
December 31, 2015
Amortized
Cost
Fair
Value
$
$
9,570 $
61,368
53,193
20,904
145,035
187,178
332,213 $
9,574
61,467
53,070
21,141
145,252
188,488
333,740
*Included in the investment portfolio, but not in the table above, are mutual funds with an amortized cost and fair value, as of December
31, 2015, of $15.6 million and $15.2 million, respectively, which have no stated maturity.
72
(dollars in thousands)
Investment securities*:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
Mortgage-related securities
Total
December 31, 2014
Amortized
Cost
Fair
Value
$
$
15,254 $
59,433
23,151
—
97,838
114,116
211,954 $
15,277
59,463
23,067
—
97,807
116,179
213,986
*Included in the investment portfolio, but not in the table above, are mutual funds with both an amortized cost and fair value, as of
December 31, 2014, of $15.6 million, which have no stated maturity.
Proceeds from the sale of available for sale investment securities totaled $64.9 million, $24.4 million and $14.9 million for the twelve
months ended December 31, 2015, 2014 and 2013, respectively. 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. Net loss on sale of available for sale
investment securities for the twelve months ended December 31, 2013 totaled $8 thousand.
As of December 31, 2015 and December 31, 2014, the Corporation’s investment securities held in trading accounts totaled $4.0 million
and $3.9 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 for originated and acquired loans.
A. The table below details all portfolio loans and leases as of the dates indicated:
Loans held for sale
Real estate loans:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Total real estate loans
Commercial and industrial
Consumer
Leases
Total portfolio loans and leases
Total loans and leases
Loans with fixed rates
Loans with adjustable or floating rates
Total loans and leases
Net deferred loan origination (fees) costs included in the above loan table
December 31,
2015
December 31,
2014
$
$
$
$
$
$
8,987 $
3,882
964,259 $
209,473
406,404
90,421
1,670,557
524,515
22,129
51,787
2,268,988
2,277,975 $
1,103,622 $
1,174,353
2,277,975 $
(70) $
689,528
182,082
313,442
66,267
1,251,319
335,645
18,480
46,813
1,652,257
1,656,139
927,009
729,130
1,656,139
324
73
The table below details the Corporation’s originated portfolio loans and leases as of the dates indicated:
Loans held for sale
Real estate loans:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Total real estate loans
Commercial and industrial
Consumer
Leases
Total portfolio loans and leases
Total loans and leases
Loans with fixed rates
Loans with adjustable or floating rates
Total originated loans and leases
Net deferred loan origination (fees) costs included in the above loan table
The table below details the Corporation’s acquired portfolio loans as of the dates indicated:
Real estate loans:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Total real estate loans
Commercial and industrial
Consumer
Total portfolio loans and leases
Total loans and leases
Loans with fixed rates
Loans with adjustable or floating rates
Total acquired loans and leases
December 31,
2015
December 31,
2014
$
$
$
$
$
8,987 $
3,882
772,571 $
171,189
316,487
87,155
1,347,402
462,746
21,934
51,787
1,883,869
1,892,856 $
932,575 $
960,281
1,892,856 $
(70)
637,100
164,554
276,596
66,206
1,144,456
325,263
18,471
46,813
1,535,003
1,538,885
856,203
682,682
1,538,885
324
December 31,
2015
December 31,
2014
$
$
$
$
191,688 $
38,284
89,917
3,266
323,155
61,769
195
385,119
385,119 $
171,047 $
214,072
385,119 $
52,428
17,528
36,846
61
106,863
10,382
9
117,254
117,254
70,806
46,448
117,254
B. Components of the net investment in leases are detailed as follows:
(dollars in thousands)
Minimum lease payments receivable
Unearned lease income
Initial direct costs and deferred fees
Total
December 31,
2015
December 31,
2014
$
$
58,422 $
(8,919)
2,284
51,787 $
53,131
(8,546)
2,228
46,813
74
C. Non-Performing Loans and Leases(1)
The following table details all non-performing portfolio loans and leases as of the dates indicated:
(dollars in thousands)
Non-accrual loans and leases:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Leases
Total
December 31,
2015
December 31,
2014
$
$
829 $
2,027
3,212
34
4,133
—
9
10,244 $
668
1,061
5,693
263
2,390
—
21
10,096
(1) Purchased credit-impaired loans, which have been recorded at their fair values at acquisition, and which are performing, are
excluded from this table, with the exception of $661 thousand and $572 thousand of purchased credit-impaired loans as of
December 31, 2015 and December 31, 2014, respectively, which became non-performing subsequent to acquisition.
The following table details non-performing originated portfolio loans and leases as of the dates indicated:
(dollars in thousands)
Non-accrual originated loans and leases:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Leases
Total
December 31,
2015
December 31,
2014
$
$
279 $
1,788
1,964
34
3,044
—
9
7,118 $
—
904
4,662
263
1,583
—
21
7,433
The following table details non-performing acquired portfolio loans(1) as of the dates indicated:
(dollars in thousands)
Non-accrual acquired loans and leases:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Total
December 31,
2015
December 31,
2014
$
$
550 $
239
1,248
—
1,089
—
3,126 $
668
157
1,031
—
807
—
2,663
(1) Purchased credit-impaired loans, which have been recorded at their fair values at acquisition, and which are performing, are
excluded from this table, with the exception of $661 thousand and $572 thousand of purchased credit-impaired loans as of
December 31, 2015 and December 31, 2014, respectively, which became non-performing subsequent to acquisition.
75
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:
(dollars in thousands)
Outstanding principal balance
Carrying amount(1)
December 31,
2015
December 31,
2014
$
$
24,879 $
16,846 $
12,491
9,045
(1)
Includes $699 thousand and $105 thousand of purchased credit-impaired loans as of December 31, 2015 and December 31,
2014, respectively, for which the Corporation could not estimate the timing or amount of expected cash flows to be collected at
acquisition, and for which no accretable yield is recognized. Additionally, the table above includes $661 thousand and $572
thousand of purchased credit-impaired loans as of December 31, 2015 and December 31, 2014, respectively, which became
non-performing subsequent to acquisition, which are disclosed in Note 5C, above, and which also have no accretable yield.
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, 2015:
(dollars in thousands)
Balance, December 31, 2014
Accretion
Reclassifications from nonaccretable difference
Additions/adjustments
Disposals
Balance, December 31, 2015
E. Age Analysis of Past Due Loans and Leases
The following tables present an aging of all portfolio loans and leases as of the dates indicated:
Accruing Loans and Leases
Accretable
Discount
5,357
(2,684)
649
3,132
(339)
6,115
$
$
(dollars in thousands)
As of December 31, 2015
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Leases
(dollars in thousands)
As of December 31, 2014
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Leases
$
$
1,126 $
1,596
1,923
—
99
20
375
5,139 $
211 $
15
74
—
39
—
123
462 $
71 $
26
381
—
390
19
18
905 $
1,185 $
—
123
—
–
3
17
1,328 $
30 – 59
Days
60 – 89 Over 89
Days
Past Due Past Due Past Due
$
Days
Total Past
Due
Total
Accruing
Nonaccrual
Loans and Loans and
Leases
Current Leases
1,337 $ 962,093 $ 963,430 $
207,446
1,611
205,835
403,192
1,997
401,195
90,387
—
90,387
520,382
138
520,244
22,129
20
22,109
51,778
498
51,280
5,601 $ 2,253,143 $ 2,258,744 $
Accruing Loans and Leases
30 – 59
Days
60 – 89 Over 89
Days
Past Due Past Due Past Due
$
Days
Total Past
Due
Total
Accruing
Nonaccrual
Loans and Loans and
Leases
Current Leases
1,256 $ 687,604 $ 688,860 $
181,021
180,995
307,749
307,245
66,004
66,004
333,255
332,865
18,480
18,458
46,792
46,757
2,233 $ 1,639,928 $ 1,642,161 $
26
504
—
390
22
35
Total
Loans
and
Leases
829 $ 964,259
209,473
406,404
90,421
524,515
22,129
51,787
10,244 $ 2,268,988
2,027
3,212
34
4,133
—
9
Total
Loans
and
Leases
668 $ 689,528
182,082
313,442
66,267
335,645
18,480
46,813
10,096 $ 1,652,257
1,061
5,693
263
2,390
—
21
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
76
The following tables present an aging of originated portfolio loans and leases as of the dates indicated:
Accruing Loans and Leases
Total
(dollars in thousands)
As of December 31, 2015
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Leases
(dollars in thousands)
As of December 31, 2014
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Leases
30 – 59
Days
60 – 89 Over 89
Days
Past Due Past Due Past Due
$
Days
Total Past
Due
Accruing Nonaccrual
Loans and Loans and
Leases
1,016 $
1,445
1,475
—
—
20
375
4,331 $
155 $
—
9
—
—
—
123
287 $
— $
19
218
—
119
19
18
393 $
1,185 $
—
123
—
—
3
17
1,328 $
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
Current Leases
1,171 $ 771,121 $ 772,292 $
169,401
1,445
167,956
314,523
1,484
313,039
87,121
—
87,121
459,702
—
459,702
21,934
20
21,914
51,778
498
51,280
4,618 $ 1,872,133 $ 1,876,751 $
Current Leases
1,185 $ 635,915 $ 637,100 $
163,650
163,631
271,934
271,593
65,943
65,943
323,680
323,561
18,471
18,449
46,792
46,757
1,721 $ 1,525,849 $ 1,527,570 $
19
341
—
119
22
35
Accruing Loans and Leases
Total
30 – 59
Days
60 – 89 Over 89
Days
Past Due Past Due Past Due
$
Days
Total Past
Due
Accruing Nonaccrual
Loans and Loans and
Leases
Total
Loans
and
Leases
279 $ 772,571
171,189
316,487
87,155
462,746
21,934
51,787
7,118 $ 1,883,869
1,788
1,964
34
3,044
—
9
Total
Loans
and
Leases
— $ 637,100
164,554
276,596
66,206
325,263
18,471
46,813
7,433 $ 1,535,003
904
4,662
263
1,583
—
21
The following tables present an aging of acquired portfolio loans and leases as of the dates indicated:
Accruing Loans and Leases
Total
(dollars in thousands)
As of December 31, 2015
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
(dollars in thousands)
As of December 31, 2014
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
30 – 59
Days
60 – 89 Over 89
Days
Past Due Past Due Past Due
$
Days
Total Past
Due
Accruing Nonaccrual
Loans and Loans and
Current Leases
Leases
110 $
151
448
—
99
—
808 $
56 $
15
65
—
39
—
175 $
— $
—
—
—
—
—
— $
166 $ 190,972 $ 191,138 $
38,045
166
37,879
88,669
513
88,156
3,266
—
3,266
60,680
138
60,542
195
—
195
983 $ 381,010 $ 381,993 $
Total
Loans
and
Leases
550 $ 191,688
38,284
239
89,917
1,248
3,266
—
61,769
1,089
195
—
3,126 $ 385,119
Accruing Loans and Leases
Total
30 – 59
Days
60 – 89 Over 89
Days
Past Due Past Due Past Due
$
Days
Total Past
Due
71 $
7
163
—
271
—
512 $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
Accruing Nonaccrual
Loans and Loans and
Leases
Total
Loans
and
Leases
71 $
7
163
—
271
—
Current Leases
51,760 $
51,689 $
17,371
17,364
35,815
35,652
61
61
9,575
9,304
9
9
512 $ 114,079 $ 114,591 $
668 $
157
1,031
—
807
—
52,428
17,528
36,846
61
10,382
9
2,663 $ 117,254
$
$
$
$
77
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, 2015:
Home
Equity
Lines
and
Loans
Commercial
Mortgage
Residential
Mortgage Construction
Commercial
and
(dollars in thousands)
Balance, December 31, 2014
Charge-offs
Recoveries
Provision for loan and lease losses
Balance, December 31, 2015
$
$
3,948 $ 1,917 $
(774)
(50)
98
27
1,274
66
5,199 $ 1,307 $
1,736 $
(791)
35
760
1,740 $
Industrial Consumer Leases Unallocated Total
379 $14,586
238 $ 468 $
— (3,454)
(442)
(177)
329
—
101
29
(361) 4,396
391
52
18 $15,857
142 $ 518 $
4,533 $
(1,220)
35
2,261
5,609 $
1,367 $
—
4
(47 )
1,324 $
The following table details the roll-forward of the Allowance for the twelve months ended December 31, 2014:
Home
Equity
Lines
and
Loans
Commercial
Mortgage
Residential
Mortgage Construction
Commercial
and
(dollars in thousands)
Balance, December 31, 2013
Charge-offs
Recoveries
Provision for loan and lease losses
Balance December 31, 2014
$
$
3,797 $ 2,204 $
(736)
19
430
3,948 $ 1,917 $
(34)
6
179
2,446 $
(461)
22
(271)
1,736 $
Industrial Consumer Leases Unallocated Total
349 $15,515
259 $ 604 $
— (2,200)
(410)
(144)
387
—
165
17
884
106
30
109
379 $14,586
238 $ 468 $
5,011 $
(415)
98
(161)
4,533 $
845 $
—
60
462
1,367 $
The following table details the allocation of the Allowance for all portfolio loans and leases by portfolio segment based on the
methodology used to evaluate the loans and leases for impairment as of December 31, 2015 and December 31, 2014:
(dollars in thousands)
As of December 31, 2015
Allowance on loans and leases:
Home
Equity
Lines
and
Loans
Commercial
Mortgage
Residential
Mortgage Construction
Industrial Consumer Leases Unallocated Total
Commercial
and
Individually evaluated for impairment $
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
$
— $ 115 $
5,199 1,192
— —
5,199 $ 1,307 $
54 $
1,686
—
1,740 $
— $
1,324
—
1,324 $
519 $
5,090
—
5,609 $
5 $ — $
137 518
— —
142 $ 518 $
— $
693
18 15,164
— —
18 $15,857
As of December 31, 2014
Allowance on loans and leases:
Individually evaluated for impairment $
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
$
— $
4 $
3,948 1,913
— —
3,948 $ 1,917 $
184 $
1,552
—
1,736 $
— $
1,366
1
1,367 $
448 $
4,085
—
4,533 $
32 $ — $
206 468
— —
238 $ 468 $
— $
668
379 13,917
—
1
379 $14,586
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
78
The following table details the carrying value for all portfolio loans and leases by portfolio segment based on the methodology used to
evaluate the loans and leases for impairment as of December 31, 2015 and December 31, 2014:
(dollars in thousands)
As of December 31, 2015
Carrying value of loans and leases:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
As of December 31, 2014
Carrying value of loans and leases:
Individually evaluated for impairment
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
Home
Equity
Commercial
Mortgage
Lines and
Loans
Residential
Mortgage Construction
Industrial Consumer Leases
Total
Commercial
and
$
$
$
$
349 $
1,980 $
7,754 $
952,448 207,378
398,635
15
115
11,462
964,259 $ 209,473 $ 406,404 $
33 $
89,625
763
90,421 $
4,240 $
515,784
4,491
524,515 $
97 $
1,155 $
680,820 180,912
15
8,642 $
304,773
27
689,528 $ 182,082 $ 313,442 $
8,611
264 $
65,942
61
66,267 $
3,460 $
331,854
331
335,645 $
— $
30 $
22,099
—
14,386
51,787 2,237,756
16,846
22,129 $ 51,787 $ 2,268,988
—
— $
31 $
18,449
—
13,649
46,813 1,629,563
9,045
18,480 $ 46,813 $ 1,652,257
—
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following table details the allocation of the Allowance for originated portfolio loans and leases by portfolio segment based on the
methodology used to evaluate the loans and leases for impairment as of December 31, 2015 and December 31, 2014:
(dollars in thousands)
As of December 31, 2015
Allowance on loans and leases:
Home
Equity
Lines
and
Loans
Commercial
Mortgage
Residential
Mortgage Construction
Industrial Consumer Leases Unallocated Total
Commercial
and
Individually evaluated for impairment $
Collectively evaluated for impairment
$
Total
— $
115 $
5,199 1,192
5,199 $ 1,307 $
54 $
1,686
1,740 $
— $
1,324
1,324 $
519 $
5,090
5,609 $
5 $ — $
518
518 $
137
142 $
693
— $
18 15,164
18 $ 15,857
As of December 31, 2014
Allowance on loans and leases:
Individually evaluated for impairment $
Collectively evaluated for impairment
$
Total
— $
4 $
3,948 1,851
3,948 $ 1,855 $
184 $
1,551
1,713 $
— $
1,366
1,366 $
448 $
4,085
4,533 $
32 $ — $
468
206
468 $
238 $
— $
668
379 13,854
379 $ 14,500
The following table details the carrying value for originated portfolio loans and leases by portfolio segment based on the methodology
used to evaluate the loans and leases for impairment as of December 31, 2015 and December 31, 2014:
(dollars in thousands)
As of December 31, 2015
Carrying value of loans and leases:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
As of December 31, 2014
Carrying value of loans and leases:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Home
Equity
Commercial
Mortgage
Lines and
Loans
Residential
Mortgage Construction
Industrial Consumer Leases
Total
Commercial
and
$
$
$
$
279 $
4,394 $
1,832 $
772,292 169,357
312,093
772,571 $ 171,189 $ 316,487 $
33 $
87,122
87,155 $
3,229 $
459,517
462,746 $
— $
9,797
30 $
21,904
51,787 1,874,072
21,934 $ 51,787 $ 1,883,869
— $
7,211 $
998 $
637,100 163,556
269,385
637,100 $ 164,554 $ 276,596 $
264 $
65,942
66,206 $
2,632 $
322,631
325,263 $
— $
11,136
31 $
18,440
46,813 1,523,867
18,471 $ 46,813 $ 1,535,003
79
The following table details the allocation of the Allowance for acquired portfolio loans and leases by portfolio segment based on the
methodology used to evaluate the loans and leases for impairment as of December 31, 2015 and December 31, 2014:
(dollars in thousands)
As of December 31, 2015
Allowance on loans and leases:
Commercial
Mortgage
Home
Equity
Lines
and
Loans
Residential
Mortgage Construction
Commercial
and
Industrial Consumer Leases Unallocated Total
Individually evaluated for impairment $
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
$
— $ — $
— —
— —
— $ — $
As of December 31, 2014
Allowance on loans and leases:
Individually evaluated for impairment $
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
$
— $ — $
—
62
— —
62 $
— $
— $
—
—
— $
22 $
1
—
23 $
— $
—
—
— $
— $
—
1
1 $
— $
—
—
— $
— $
—
—
— $
— $ — $
— —
— —
— $ — $
— $ —
— —
— —
— $ —
— $ — $
— —
— —
— $ — $
— $
—
—
— $
22
63
1
86
(1) Purchased credit-impaired loans are evaluated for impairment on an individual basis.
The following table details the carrying value for acquired portfolio loans and leases by portfolio segment based on the methodology
used to evaluate the loans and leases for impairment as of December 31, 2015 and December 31, 2014:
(dollars in thousands)
As of December 31, 2015
Home
Equity
Lines
and
Loans
Residential
Mortgage Construction
Commercial
Mortgage
Commercial
and
Industrial Consumer Leases
Total
Carrying value of loans and leases:
Individually evaluated for impairment $
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
$
As of December 31, 2014
Carrying value of loans and leases:
Individually evaluated for impairment $
Collectively evaluated for impairment
Purchased credit-impaired(1)
Total
$
70 $
180,156
11,462
191,688 $
148 $
38,021
115
38,284 $
3,360 $
86,542
15
89,917 $
— $
2,503
763
3,266 $
1,011 $
56,265
4,491
61,769 $
— $
195
—
195 $
— $
4,589
— 363,684
—
16,846
— $ 385,119
97 $
43,720
8,611
52,428 $
157 $
17,356
15
17,528 $
1,431 $
35,388
27
36,846 $
— $
—
61
61 $
828 $
9,223
331
10,382 $
— $
9
—
9 $
— $
2,513
— 105,696
—
9,045
— $ 117,254
(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.
80
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 of all portfolio loans and leases by portfolio segment based on the credit quality indicators
used to determine the Allowance as of December 31, 2015 and December 31, 2014:
Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)
Commercial Mortgage
Construction
Commercial and
Industrial
Total
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
Pass
Special Mention
Substandard
Total
$ 946,887 $ 683,549 $
4,364
1,615
$ 964,259 $ 689,528 $
7,029
10,343
88,653 $
—
1,768
90,421 $
December
31, 2015
December
31, 2014
December
31, 2014
66,004 $ 510,040 $ 329,299 $ 1,545,580 $ 1,078,852
5,513
1,149
7,075
5,197
66,267 $ 524,515 $ 335,645 $ 1,579,195 $ 1,091,440
December
31, 2015
1,123
13,352
8,152
25,463
—
263
Credit Risk Profile by Payment Activity
Home Equity Lines
and Loans
Consumer
Leases
Total
December
31, 2014
$ 403,192 $ 307,749 $ 207,446 $ 181,021 $ 22,129 $ 18,480 $ 51,778 $ 46,792 $ 684,545 $ 554,042
December
31, 2014
December
31, 2014
December
31, 2015
December
31, 2014
December
31, 2014
December
31, 2015
December
31, 2015
December
31, 2015
(dollars in
thousands) Residential Mortgage
December
31, 2015
Performing
Non-
performing
Total
3,212
6,775
—
$ 406,404 $ 313,442 $ 209,473 $ 182,082 $ 22,129 $ 18,480 $ 51,787 $ 46,813 $ 689,793 $ 560,817
5,693
2,027
5,248
1,061
—
21
9
The following tables detail the carrying value of originated portfolio loans and leases by portfolio segment based on the credit quality
indicators used to determine the Allowance as of December 31, 2015 and December 31, 2014:
Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)
Commercial Mortgage
Construction
Commercial and
Industrial
Total
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
Pass
Special Mention
Substandard
Total
$ 758,240 $ 631,911 $
4,364
825
$ 772,571 $ 637,100 $
7,029
7,302
86,065 $
—
1,090
87,155 $
December
31, 2015
December
31, 2014
December
31, 2014
65,943 $ 454,454 $ 319,723 $ 1,298,759 $ 1,017,577
5,513
1,149
5,479
4,391
66,206 $ 462,746 $ 325,263 $ 1,322,472 $ 1,028,569
December
31, 2015
8,044
15,669
1,015
7,277
—
263
Credit Risk Profile by Payment Activity
Home Equity Lines
and Loans
Consumer
Leases
Total
December
31, 2014
$ 314,523 $ 271,933 $ 169,401 $ 163,650 $ 21,934 $ 18,471 $ 51,778 $ 46,792 $ 557,636 $ 500,846
December
31, 2014
December
31, 2014
December
31, 2015
December
31, 2014
December
31, 2014
December
31, 2015
December
31, 2015
December
31, 2015
(dollars in
thousands) Residential Mortgage
December
31, 2015
Performing
Non-
performing
Total
1,964
5,588
—
$ 316,487 $ 276,596 $ 171,189 $ 164,554 $ 21,934 $ 18,471 $ 51,787 $ 46,813 $ 561,397 $ 506,434
1,788
3,761
4,663
904
—
21
9
81
The following tables detail the carrying value of acquired portfolio loans and leases by portfolio segment based on the credit quality
indicators used to determine the Allowance as of December 31, 2015 and December 31, 2014:
Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)
Commercial Mortgage
Construction
Commercial and
Industrial
Total
December
31, 2014
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
December
31, 2015
Pass
Special Mention
Substandard
Total
December
31, 2015
$ 188,647 $
—
3,041
$ 191,688 $
51,638 $
—
790
52,428 $
2,588 $
—
678
3,266 $
61 $
—
—
61 $
55,586 $
108
6,075
61,769 $
Credit Risk Profile by Payment Activity
9,576 $ 246,821 $
108
9,794
10,382 $ 256,723 $
—
806
December
31, 2014
61,275
—
1,596
62,871
(dollars in thousands)
Residential Mortgage
Home Equity Lines
and Loans
Consumer
Total
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
December
31, 2015
Performing
Non-performing
Total
$
$
88,669 $
1,248
89,917 $
35,816 $
1,030
36,846 $
38,045 $
239
38,284 $
17,371 $
157
17,528 $
195 $
—
195 $
G. Troubled Debt Restructurings (“TDRs”)
9 126,909 $
—
1,487
9 128,396 $
December
31, 2014
53,196
1,187
54,383
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:
(dollars in thousands)
TDRs included in nonperforming loans and leases
TDRs in compliance with modified terms
Total TDRs
December 31,
2015
December 31,
2014
$
$
1,935 $
4,880
6,815 $
4,315
4,157
8,472
The following table presents information regarding loan and lease modifications categorized as TDRs for the twelve months ended
December 31, 2015:
For the Twelve Months Ended December 31, 2015
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
$
$
2,181 $
22
66
2,269 $
2,181
22
66
2,269
Number of
Contracts
4
1
2
7
(dollars in thousands)
Residential
Home equity lines and loans
Leases
Total
82
The following table presents information regarding the types of loan and lease modifications made for the twelve months ended
December 31, 2015:
Interest
Rate
Change
Loan Term
Extension
Number of Contracts
Interest Rate
Change and
Term
Extension
Interest Rate
Change
and/or
Interest-Only
Period
Contractual
Payment
Reduction
(Leases only)
Forgiveness
of Interest
Residential
Home equity lines and loans
Leases
Total
—
—
—
—
—
—
—
—
2
—
—
2
2
1
—
3
—
—
2
2
—
—
—
—
The following table presents information regarding loan and lease modifications granted during the twelve months ended December 31,
2014 that were categorized as TDRs:
(dollars in thousands)
Residential
Commercial and industrial
Home equity lines and loans
Total
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
7 $
1
1
9 $
3,448 $
249
69
3,766 $
3,461
249
69
3,779
The following table presents information regarding the types of loan and lease modifications made for the twelve months ended
December 31, 2014:
Number of Contracts
Interest
Rate
Change
Loan Term
Extension
Interest Rate
Change and
Term
Extension
Interest-Only
Period
Contractual
Payment
Reduction
(Leases only)
Forgiveness
of Interest
Residential
Commercial and industrial
Home equity lines and loans
Total
—
—
—
—
2
—
1
3
5
1
—
6
—
—
—
—
—
—
—
—
—
—
—
—
The following table presents information regarding defaults of loans during the twelve months ended December 31, 2015 that had
previously been modified:
Home equity lines and loans
Residential mortgage
Total
Number of
Contracts
Amount
Charged Off
Amount Added
to OREO
1 $
1
2 $
130 $
198
328 $
—
1,882
1,882
83
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, 2015, 2014 and 2013 (purchased
credit-impaired loans are not included in the tables):
(dollars in thousands)
As of or for the Twelve Months
Ended December 31, 2015
Impaired loans with related
allowance:
Home equity lines and loans
Residential mortgage
Commercial and industrial
Consumer
Total
Impaired loans* without related
Recorded
Investment**
Principal
Balance
Related
Allowance
Average
Principal
Balance
Cash-Basis
Interest
Income
Recognized
Interest
Income
Recognized
$
115 $
515
2,011
30
2,671
115 $
527
2,002
30
2,674
115 $
54
519
5
693
125 $
531
2,215
31
2,902
4 $
23
49
1
77
—
—
—
—
—
allowance:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
—
—
—
—
—
—
—
—
*The table above does not include the recorded investment of $77 thousand of impaired leases without a related allowance for loan and
lease losses.
358
2,447
8,166
996
3,089
15,056
349
1,865
7,239
33
2,229
11,715
361
2,605
8,085
1,087
4,985
17,123
9
46
257
—
124
436
—
—
—
—
—
—
Grand total
14,386 $
17,730 $
20,025 $
693 $
513 $
Total
$
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been
applied to principal.
(dollars in thousands)
As of or for the Twelve Months
Ended December 31, 2014
Impaired loans with related
allowance:
Home equity lines and loans
Residential mortgage
Commercial and industrial
Consumer
Total
Impaired loans* without related
Recorded
Investment**
Principal
Balance
Related
Allowance
Average
Principal
Balance
Interest
Income
Recognized
Cash-Basis
Interest
Income
Recognized
$
111 $
3,273
2,069
31
5,484
198 $
3,260
2,527
32
6,017
4 $
184
448
32
668
197 $
3,289
2,577
32
6,095
— $
112
49
1
162
—
—
—
—
—
allowance:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
—
—
—
—
—
—
—
—
*The table above does not include the recorded investment of $32 thousand of impaired leases without a related allowance for loan and
lease losses.
103
1,251
6,210
1,427
1,430
10,421
97
1,137
5,794
1,225
1,403
9,656
97
1,044
5,369
264
1,391
8,165
4
12
152
—
11
179
—
—
—
—
—
—
Grand total
13,649 $
15,673 $
16,516 $
668 $
341 $
Total
$
**Recorded investment equals principal balance less partial charge-offs and interest payments on non-performing loans that have been
applied to principal.
84
(dollars in thousands)
As of or for the Twelve Months
Ended December 31, 2013
Impaired loans with related
allowance:
Home equity lines and loans
Residential mortgage
Commercial and industrial
Consumer
Total
Impaired loans* without related
Recorded
Investment**
Principal
Balance
Related
Allowance
Average
Principal
Balance
Interest
Income
Recognized
Cash-Basis
Interest
Income
Recognized
$
277 $
5,297
2,985
52
8,611
279 $
5,312
3,100
54
8,745
121 $
814
532
52
1,519
308 $
5,343
3,210
49
8,910
6 $
95
82
3
186
—
—
—
—
—
allowance:
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
—
—
—
—
—
—
—
—
*The table above does not include the recorded investment of $63 thousand of impaired leases without a related allowance for loan and
lease losses.
283
1,252
5,177
3,452
1,979
12,143
237
1,159
4,911
2,134
1,954
10,395
236
1,151
4,563
1,172
1,773
8,895
—
6
123
27
23
179
—
—
—
—
—
—
Grand total
21,053 $
19,140 $
17,506 $
1,519 $
365 $
Total
$
**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. Loans
acquired in the Merger had outstanding principal balances of $440.6 million, which were marked to fair value by recording a loan mark
of $16.4 million, reducing the recorded investment in portfolio loans acquired in the Merger to $424.2 million.
The following tables detail, for acquired loans, the outstanding principal, remaining loan mark, and recorded investment, by portfolio
segment, as of the dates indicated:
(dollars in thousands)
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Total
(dollars in thousands)
Commercial mortgage
Home equity lines and loans
Residential mortgage
Construction
Commercial and industrial
Consumer
Total
Outstanding
Principal
As of December 31, 2015
Remaining Loan
Mark
Recorded
Investment
197,532 $
40,258
93,230
3,807
67,181
220
402,228 $
(5,844) $
(1,974)
(3,313)
(541)
(5,412)
(25)
(17,109) $
191,688
38,284
89,917
3,266
61,769
195
385,119
Outstanding
Principal
As of December 31, 2014
Remaining Loan
Mark
Recorded
Investment
56,605 $
18,106
37,742
85
11,128
9
123,675 $
(4,177) $
(578)
(896)
(24)
(747)
—
(6,422) $
52,428
17,528
36,846
61
10,381
9
117,253
$
$
$
$
85
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, 2015 the balance of OREO is comprised of six 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:
(dollars in thousands)
Balance January 1
Additions
Capitalized cost
Impairments
Sales
Balance December 31
December 31,
2015
2014
1,147 $
2,673
—
(89 )
(1,093 )
2,638 $
855
1,763
—
—
(1,471)
1,147
$
$
Included in “Additions” in the table above for the twelve months ended December 31, 2015 is $390 thousand of OREO acquired in the
Merger.
Note 7 - Premises and Equipment
A. A summary of premises and equipment is as follows:
(dollars in thousands)
Land
Buildings
Furniture and equipment
Leasehold improvements
Construction in progress
Less: accumulated depreciation
Total
December 31,
2015
2014
5,306 $
24,820
34,758
24,596
500
(44,641)
45,339 $
5,306
23,997
27,485
15,217
1,328
(39,585)
33,748
$
$
Depreciation and amortization expense related to the assets detailed in the above table for the years ended December 31, 2015, 2014, and
2013 amounted to $5.1 million, $3.6 million, and $3.0 million, respectively.
B. Future minimum cash rent commitments under various operating leases as of December 31, 2015 are as follows:
(dollars in thousands)
2016
2017
2018
2019
2020
2021 and thereafter
Total
$
$
4,221
4,338
4,411
4,110
4,139
37,522
58,741
Rent expense on leased premises and equipment for the years ended December 31, 2015, 2014 and 2013 amounted to $5.1 million, $3.3
million, and $2.7 million, respectively.
86
Note 8 - Mortgage Servicing Rights (“MSR”s)
A. The following summarizes the Corporation’s activity related to MSRs for the years ended December 31:
(dollars in thousands)
Balance, January 1
Additions
Amortization
Impairment
Balance, December 31
Fair value
Residential mortgage loans serviced for others
2015
2014
2013
4,765 $
1,037
(590)
(70)
5,142 $
5,726 $
601,939 $
4,750 $
547
(476 )
(56 )
4,765 $
5,456 $
590,660 $
4,491
1,002
(740 )
(3 )
4,750
5,733
607,272
$
$
$
$
B. The following summarizes the Corporation’s activity related to changes in the impairment valuation allowance of MSRs for
the years ended December 31:
(dollars in thousands)
Balance, January 1
Impairment
Recovery
Balance, December 31
2015
2014
2013
(1,604) $
(123)
53
(1,674) $
(1,548 ) $
(97 )
41
(1,604 ) $
(1,545 )
(126 )
123
(1,548 )
$
$
C. Other MSR Information – At December 31, 2015, key economic assumptions and the sensitivity of the current fair value of MSRs
to immediate 10 and 20 percent adverse changes in those assumptions are as follows:
(dollars in thousands)
Fair value amount of MSRs
Weighted average life (in years)
Prepayment speeds (constant prepayment rate)*
Impact on fair value:
10% adverse change
20% adverse change
Discount rate
Impact on fair value:
10% adverse change
20% adverse change
$
$
$
$
$
5,726
6.4
10.2%
(198)
(384)
10.5%
(224)
(431)
* Represents the weighted average prepayment rate for the life of the MSR asset.
At December 31, 2015, 2014 and 2013, the fair value of the MSRs was $5.7 million, $5.5 million, and $5.7 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.
87
Note 9 - Deposits
A. The following table details the components of deposits:
(dollars in thousands)
Savings
NOW accounts*
Market rate accounts*
Time deposits, less than $100
Time deposits, $100 or more
Wholesale time deposits
Total interest-bearing deposits
Non-interest-bearing deposits
Total deposits
*
Includes wholesale deposits.
As of December 31,
2015
2014
187,299 $
339,366
816,938
123,113
106,140
53,185
1,626,041
626,684
2,252,725 $
138,992
278,609
631,666
74,497
43,903
73,458
1,241,125
446,903
1,688,028
$
$
The aggregate amount of deposit and mortgage escrow overdrafts included as loans as of December 31, 2015 and 2014 were $840
thousand and $534 thousand, respectively.
B. The following tables detail the maturities of retail time deposits:
(dollars in thousands)
Maturing during:
2016
2017
2018
2019
2020 and thereafter
Total
C. The following tables detail the maturities of wholesale time deposits:
(dollars in thousands)
Maturing during:
2016
2017
2018
Total
As of December 31, 2015
$100
or more
Less than
$100
89,206 $
9,200
3,149
3,346
1,239
106,140 $
92,541
15,738
6,000
5,780
3,054
123,113
As of December 31, 2015
$100
or more
Less than
$100
11,712 $
35,152
5,986
52,850 $
335
—
—
335
$
$
$
$
Note 10 - Short-Term Borrowings and Long-Term FHLB Advances
A. Short-term borrowings – As of December 31, 2015 and 2014, the Corporation had $94.2 million and $23.8 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:
(dollars in thousands)
Repurchase agreements* – commercial customers
Repurchase agreement** – correspondent bank
Short-term FHLB advances
Overnight federal funds
Total short-term borrowings
* overnight repurchase agreements with no expiration date
** overnight repurchase agreement, expiring January 2016
88
As of December 31,
2015
2014
$
$
29,156 $
5,011
30,000
30,000
94,167 $
23,824
—
—
—
23,824
The following table sets forth information concerning short-term borrowings:
(dollars in thousands)
Balance at period-end
Maximum amount outstanding at any month end
Average balance outstanding during the period
Weighted-average interest rate:
As of the period-end
Paid during the period
As of or Twelve Months Ended
December 31,
2015
2014
$
$
$
94,167
94,167
36,010
$
$
$
0.56%
0.13%
23,824
28,017
15,602
0.10%
0.11%
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-term FHLB Advances:
As of December 31, 2015 and 2014, the Corporation had $254.9 million and $260.1 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:
(dollars in thousands)
Within one year
Over one year through five years
Over five years through ten years
Total
As of December 31,
2015
2014
$
$
75,000 $
179,863
—
254,863 $
25,535
227,111
7,500
260,146
The following table presents rate and maturity information on FHLB advances and other borrowings:
Description
Fixed amortizing**
Bullet maturity – fixed rate
Bullet maturity – variable rate
Convertible-fixed
Total
Maturity Range*
From
To
N/A
N/A
02/23/16 12/09/20
01/04/16 11/28/17
01/03/18 08/20/18
Weighted
Average
Coupon Rate
Balance at
December 31,
Rate
From
To
2015
2014
N/A
1.46 %
0.53 %
2.94 %
0.58 %
0.43 %
2.58 %
$
— $
535
2.41% 198,612 193,240
45,000
35,000
0.62%
21,371
21,251
3.50%
$ 254,863 $ 260,146
*Maturity range and interest rates refers to December 31, 2015 balances
**Loans from correspondent banks other than FHLB
Included in the table above as of December 31, 2015 and 2014 are $21.3 million and $21.4 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, 2015, substantially all the FHLB advances with this
convertible feature are subject to conversion in fiscal 2016. 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 $12.9 million at December 31, 2015, and $11.5 million at December 31, 2014. 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.
89
The Corporation had a maximum borrowing capacity (“MBC”) with the FHLB of $1.14 billion as of December 31, 2015 of which the
unused capacity was $824.6 million. In addition there were $34.0 million in overnight federal funds line and $131.0 million of Federal
Reserve Discount Window capacity.
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 December 31, 2015, the Corporation held no
derivative positions.
The following table details the Corporation’s derivative positions as of the December 31, 2014:
(dollars in thousands)
Notional
Amount
Trade
Date
Effective
Date
Maturity
Date
Receive (Variable)
Index
Current
Projected
Receive
Rate
Pay Fixed
Swap Rate
$
15,000 12/13/2012 11/30/2015 11/28/2022 US 3-Month LIBOR
2.335%
2.376% $
Fair Value of
Asset
(Liability)
(39)
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 and 2013, there were no reclassifications of the Swap’s fair value from other comprehensive income to earnings.
90
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 by the Corporation. Appraised and reported values may be discounted
based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or
management’s expertise and knowledge of the client and the client’s business.
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.
91
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.
Subordinated Notes
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.
92
The carrying amount and fair value of the Corporation’s financial instruments are as follows:
(dollars in thousands)
Financial assets:
Cash and cash equivalents
Investment securities - available for sale
Investment securities - trading
Loans held for sale
Net portfolio loans and leases
Mortgage servicing rights
Other assets
Total financial assets
Financial liabilities:
Deposits
Short-term borrowings
FHLB advances and other borrowings
Subordinated notes
Other liabilities
Total financial liabilities
As of December 31,
2015
2014
Fair Value
Hierarchy
Level*
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
$
Level 1
See Note 14
See Note 14
Level 2
Level 3
Level 3
Level 3
143,067 $
348,966
3,950
8,987
2,253,131
5,142
30,271
219,269
229,577
3,896
3,882
1,666,052
5,456
22,309
$ 2,793,514 $ 2,814,914 $ 2,121,369 $ 2,150,441
219,269 $
229,577
3,896
3,882
1,637,671
4,765
22,309
143,067 $
348,966
3,950
8,987
2,273,947
5,726
30,271
Level 2
Level 2
Level 2
Level 2
Level 2
$ 2,252,725 $ 2,251,703 $ 1,688,028 $ 1,687,409
23,824
259,826
—
29,034
$ 2,665,286 $ 2,662,160 $ 2,001,032 $ 2,000,093
23,824
260,146
—
29,034
94,167
254,863
29,479
34,052
94,156
254,796
27,453
34,052
*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.
93
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, 2015 and 2014 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, 2015:
(dollars in millions)
Investment securities (available for sale and trading):
U.S. Treasury securities
Obligations of U.S. government & agencies
Obligations of state & political subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Mutual funds
Other debt securities
Total assets measured on a recurring basis at fair value
Total
Level 1
Level 2
Level 3
$
$
0.1 $
101.5
42.0
158.7
29.8
19.2
1.6
352.9 $
0.1 $
—
—
—
—
19.2
—
19.3 $
— $
101.5
42.0
158.7
29.8
—
1.6
333.6 $
—
—
—
—
—
—
—
—
Fair value of assets measured on a non-recurring basis as of December 31, 2015:
(dollars in millions)
Mortgage servicing rights
Impaired loans and leases
OREO
Total
Level 1
Level 2
Level 3
$
5.7 $
13.8
2.6
— $
—
—
— $
—
—
5.7
13.8
2.6
Total assets measured at fair value on a non-recurring basis
$
22.1 $
— $
— $
22.1
Fair value of assets measured on a recurring basis as of December 31, 2014:
(dollars in millions)
Investment securities (available for sale and trading):
Obligations of U.S. government & agencies
Obligations of state & political subdivisions
Mortgage-backed securities
Collateralized mortgage obligations
Mutual funds
Other debt securities
Total assets measured on a recurring basis at fair value
Total
Level 1
Level 2
Level 3
$
$
66.9 $
29.0
81.4
34.8
19.5
1.9
233.5 $
— $
—
—
—
19.5
—
19.5 $
66.9 $
29.0
81.4
34.8
—
1.9
214.0 $
—
—
—
—
—
—
—
Fair value of assets measured on a non-recurring basis as of December 31, 2014:
(dollars in millions)
Mortgage servicing rights
Impaired loans and leases
OREO
Total
Level 1
Level 2
Level 3
$
5.5 $
13.0
1.1
— $
—
—
— $
—
—
5.5
13.0
1.1
Total assets measured at fair value on a non-recurring basis
$
19.6 $
— $
— $
19.6
For the twelve months ended December 31, 2015, a net increase of $448 thousand in the Allowance was recorded and for the twelve
months ended December 31, 2014, a net decrease of $434 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, 2015.
94
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 $920 thousand, $846 thousand and $803 thousand in 2015, 2014 and 2013, 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 $1.3 million, $1.1 million and $1.0 million,
for the twelve months ended December 31, 2015, 2014 and 2013, respectively.
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, 2015, 2014 and 2013 was $164 thousand, $239 thousand and $221 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. The settlement of the QDBP eliminates the future earnings volatility associated with this defined-benefits plan.
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:
Discount rate
Rate of increase for future
compensation
Expected long-term rate of return on
plan assets
QDBP
2015
2014
SERP I and SERP II
2014
2015
PRBP
2015
2014
N/A
3.70 %
3.90%
3.70%
3.90%
3.70%
N/A
N/A
N/A
3.50%
N/A
N/A
7.50 %
N/A
N/A
N/A
N/A
N/A
95
C. Changes in Benefit Obligations and Plan Assets:
(dollars in thousands)
Change in benefit obligations
$
Benefit obligation at January 1
Service cost
Interest cost
Plan participants contribution
Actuarial loss (gain)
Settlements
Benefits paid
Benefit obligation at
QDBP
2015
2014
SERP I & SERP II
2014
2015
PRBP
2015
2014
44,092 $
—
1,589
—
(2,978)
(40,625)
(1,909)
36,366 $
—
1,640
—
8,629
—
(2,543)
5,079 $
—
184
—
(178)
—
(255)
4,008 $
61
177
—
979
—
(146)
540 $
—
18
46
27
—
(138)
688
—
29
41
(72)
—
(146)
December 31
$
169 $
44,092 $
4,830 $
5,079 $
493 $
540
Change in plan assets
Fair value of plan assets at
January 1
$
Actual return on plan assets
Settlements
Excess assets transferred to
defined contribution plan
Employer contribution
Plan participants’ contribution
Benefits paid
Fair value of plan assets at
December 31
Funded status at year end (plan
assets less benefit obligations)
$
$
43,874 $
1,140
(40,625)
45,573 $
844
—
(2,311)
—
—
(1,909)
—
—
—
(2,543)
— $
—
—
—
254
—
(254)
— $
—
—
—
146
—
(146)
— $
—
—
—
92
46
(138)
—
—
—
—
105
41
(146)
169 $
43,874 $
— $
— $
— $
—
— $
(218 ) $
(4,830) $
(5,079) $
(493) $
(540)
As indicated in the table above, the excess assets remaining in the settled QDBP were transferred to the Corporation’s defined
contribution plan and will serve to defray some of the future costs to fund this plan.
QDBP
SERP I & SERP II
For the Twelve Months Ended December 31,
PRBP
Amounts included in the consolidated
balance sheet as other assets
(liabilities) and accumulated other
comprehensive income including the
following:
Prepaid benefit cost/(accrued
2015
2014
2015
2014
2015
2014
$
liability)
Net actuarial loss
Prior service cost
Unrecognized net initial
obligation
— $
—
—
—
17,662 $
(17,880)
—
(3,266 ) $
(1,564)
—
(3,274) $
(1,805)
—
(197) $
(296 )
—
(234)
(306)
—
—
—
—
—
—
Net included in Other Liabilities in
the Consolidated Balance Sheets
$
— $
(218) $
(4,830) $
(5,079) $
(493) $
(540)
96
D. The following tables provide the components of net periodic pension costs for the periods indicated:
QDBP Net Periodic Pension Cost
(dollars in thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Recognition of net actuarial loss
Recognition of net actuarial loss due to settlement
Net periodic pension cost (benefit)
SERP I and SERP II Periodic Pension Cost
(dollars in thousands)
Service cost
Interest cost
Gain on curtailment
Amortization of prior service cost
Recognition of net actuarial loss
Net periodic pension cost (benefit)
PRBP Net Periodic Pension Cost
(dollars in thousands)
Service cost
Interest cost
Settlement
Amortization of transition obligation
Amortization of prior service cost
Recognition of net actuarial loss
Net periodic pension cost
For the Twelve Months Ended December 31,
2013
2014
2015
— $
1,589
(3,217)
—
1,913
17,377
17,662 $
— $
1,640
(3,348 )
—
391
—
(1,317 ) $
—
1,484
(2,981 )
—
1,724
—
227
For the Twelve Months Ended December 31,
2013
2014
2015
— $
184
—
—
63
247 $
61 $
177
—
14
(33 )
219 $
For the Twelve Months Ended December 31,
2014
2015
2013
— $
18
—
—
—
37
55 $
— $
29
—
—
—
61
90 $
71
188
(690 )
31
78
(322 )
—
29
—
—
—
76
105
$
$
$
$
$
$
For the Twelve Months Ended December 31,
2015
2013
2014
Discount Rate Used in the Calculation of Periodic Pension Costs
3.70 %
4.60 %
3.70%
E. Plan Assets:
The information in this section pertains to the assets of the QDBP. The PRBP, SERP I and SERP II are unfunded plans and, as such, have
no related plan assets.
97
As of December 31, 2015, with the exception of $169 thousand to be disbursed in January 2016 to QDBP participants already receiving
benefits, all assets of the QDBP were distributed to the participants either in the form of an annuity or as a lump sum payment. The
following table details the asset allocation and the QDBP’s policy asset allocation range as of the December 31, 2014:
Asset Category
Equity securities(1) (2)
Fixed-income investments
Alternative investments
Cash reserves(2)
Total
2014 Plan Policy Asset
Allocation
Range
50% to 65%
10% to 30%
0% to 30%
1% to 5%
Percentage of
QDBP Plan
Assets as of
December 31,
2014
70%
18%
4%
8%
100%
(1)Includes Bryn Mawr Bank Corporation common stock in the amount of $986 thousand, or 2.3%.
(2)Asset categories that fell outside the asset allocation range prescribed by the plan policy were outside the range on a short-term basis
and were often related to the timing of plan funding and subsequent investment. Reallocation was done in order to adhere to the plan’s
asset allocation policy
The investment strategy of the QDBP is detailed above. The target ranges were periodically reviewed based on the prevailing market
conditions. Any modification to the investment strategy were ratified by the Wealth Management Committee of the Corporation’s Board
of Directors. The QDBP was allowed to retain approximately 2.5% of Bryn Mawr Bank Corporation common stock.
The Corporation’s overall investment strategy was to achieve a mix of approximately 60% investments for long-term growth and 40%
for production of current income. The target allocations for the QDBP were 60% equity securities comprised of a number of mutual
funds managed with differing objectives and styles. The plan also held shares of the Corporation’s common stock. Fixed income
obligations included corporate obligations, U.S. Treasury and Agency securities, along with fixed income mutual funds.
In addition, the QDBP invested in alternative investments whose definition is quite broad. Examples of strategies that were deployed
included: long/short, global macro, managed futures, event driven, tactical absolute return, master limited partnerships, REITs, etc.
The following table summarizes the fair value of the assets of the QDBP as of December 31, 2014. The fair values were determined by
using three broad levels of inputs. See Note 14 for description of these input levels.
The fair value of the QDBP assets measured on a recurring basis as of December 31, 2014:
(dollars in thousands)
Cash and cash equivalents
Alternative investments*
Common stocks
Equity mutual funds
Bond mutual funds
Total assets measured on a recurring basis at fair value
*Alternative investments include exchange-traded products which are considered Level 1 and hedge fund investments which are
considered Level 2.
3,590 $
2,747
986
29,546
7,005
43,874 $
3,590 $
850
986
29,546
7,005
41,977 $
— $
1,897
—
—
—
1,897 $
Level 1
Level 2
Total
$
$
Level 3
—
—
—
—
—
—
98
F. Cash Flows
The following benefit payments, which reflect expected future service, are expected to be paid over the next ten years:
(dollars in thousands)
Fiscal year ending
2016
2017
2018
2019
2020
2021-2024
QDBP
SERP I &
SERP II
PRBP
$
$
$
$
$
$
169 $
— $
— $
— $
— $
— $
258 $
256 $
255 $
254 $
252 $
1,577 $
95
82
71
60
52
151
Although the QDBP was settled as of December 31, 2015, there remained $169 thousand of assets in the plan as of December 31, 2015.
These assets represent the benefits to be distributed to retirees already receiving benefit distributions for the month of January 2016.
Retirees who had begun to receive benefit payments prior to the settlement had an annuity established for the continuation of benefit
payments. Due to the timing of the settlement of the QDBP, the newly-established annuities were not able to begin disbursing benefit
payments until February 2016.
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 2016 expected contribution for the SERP I and SERP II is $258 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, 2015 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.
99
Note 17 – Accumulated Other Comprehensive Loss
The following table details the components of accumulated other comprehensive (loss) income for the twelve months ended December
31, 2015, 2014 and 2013:
(dollars in thousands)
Balance, December 31, 2012
Net change
Balance, December 31, 2013
Balance, December 31, 2013
Net change
Balance, December 31, 2014
Balance, December 31, 2014
Net change
Balance, December 31, 2015
Net Change
in Unrealized
Gains on
Available-
for-Sale
Investment
Securities
Net Change
in Fair Value
of Derivative
Used for
Cash Flow
Hedge
Net Change
in Unfunded
Pension
Liability
Accumulated
Other
Comprehensive
Loss
$
$
$
$
$
$
3,164 $
(4,021 )
(857 ) $
(857 ) $
2,173
1,316 $
1,316 $
(542 )
774 $
(23 ) $
766
743 $
743 $
(768 )
(25 ) $
(25 ) $
25
— $
(13,219) $
7,768
(5,451) $
(5,451) $
(7,544)
(12,995) $
(12,995) $
11,809
(1,186) $
(10,078 )
4,513
(5,565 )
(5,565 )
(6,139 )
(11,704 )
(11,704 )
11,292
(412 )
100
The following tables detail the amounts reclassified from each component of accumulated other comprehensive loss for the twelve month
periods ended December 31, 2015, 2014 and 2013:
Description of Accumulated Other
Comprehensive Loss Component
Net unrealized gain on investment
securities available for sale:
Realization of gain (loss) on sale of
investment securities available for sale $
Cash flow hedge:
Realized loss on cash flow hedge
$
$
Unfunded pension liability:
Amortization of net loss included in net
periodic pension costs
$
Settlement of pension plan settlement
Amortization of prior service cost
Amount Reclassified from Accumulated Other
Comprehensive Loss
For The Twelve Months Ended
December 31,
2015
2014
2013
931 $
(326)
605 $
(611) $
214
(397)
471 $
(165)
306 $
— $
—
—
Affected Income Statement
Category
Net gain (loss) on sale of available
(8)
for sale investment securities
3 Less: income tax (expense) benefit
Net of income tax
(5)
—
—
—
Other operating expenses
Less: income tax benefit
Net of income tax
2,013 $
17,377
419 $
—
1,878
—
Employee benefits
Loss on pension plan settlement
—
Gain on curtailment of SERP II
included in net periodic pension costs*
Employee benefits
Net gain on curtailment of
nonqualified pension plan
Total expense before income tax
benefit
Less: income tax benefit
Net of income tax
*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.
19,390
6,787
12,603 $
433
152
281 $
1,219
427
792
—
—
14
(690)
31
$
101
Note 18 - Income Taxes
A. Components of Net Deferred Tax Asset:
(dollars in thousands)
Deferred tax assets:
Loan and lease loss reserve
Other reserves
Net operating loss carry-forward
Alternative minimum tax credits
Unrealized depreciation of derivative used for cash flow hedge
Defined benefit plans
Total deferred tax asset
Deferred tax liabilities:
Other reserves
QDBP
Originated MSRs
Amortizing fair value adjustments
Unrealized appreciation of available for sale securities
Total deferred tax liability
Total net deferred tax asset
December 31,
2015
2014
5,872 $
5,509
927
567
—
1,851
14,726
461
—
1,800
911
417
3,589
11,137 $
5,445
788
1,384
567
14
8,227
16,425
363
6,182
1,668
294
709
9,216
7,209
$
$
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, 2015, 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 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:
(dollars in thousands)
Current
Deferred
Total
2015
2014
2013
$
$
12,006 $
(2,834)
9,172 $
12,655 $
2,350
15,005 $
11,391
1,195
12,586
102
C. Applicable income taxes differed from the amount derived by applying the statutory federal tax rate to income as follows:
(dollars in thousands)
Computed tax expense at statutory federal rate $
Tax-exempt income
State tax (net of federal tax benefit)
Non-deductible merger expense
Other, net
Total income tax expense
$
2015
Tax
Rate
9,074
(622)
299
105
316
9,172
35.0% $
(2.4)
1.2
0.4
1.2
35.4% $
2014
14,997
(401)
215
105
89
15,005
Tax
Rate
35.0% $
(0.9)
0.5
0.2
0.2
35.0% $
2013
12,960
(414)
218
—
(178)
12,586
Tax
Rate
35.0%
(1.1)
0.6
—
(0.5)
34.0%
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, 2015, 2014 or 2013.
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 2012.
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 2015.
As of December 31, 2015, the Corporation has net operating loss carry-forwards for federal income tax purposes of $2.6 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, 2015, 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 issuance of 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. The only difference between a stock award and a stock unit is 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.
103
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.
The equity awards are authorized to be in the form of, among others, options to purchase the Corporation’s common stock, restricted
stock awards or units (“RSAs” or “RSUs”) and performance stock awards or units (“PSAs” or “PSUs”).
RSAs and RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related
performance criteria. The fair value of the RSAs and RSUs is based on the closing price on the day preceding the date of the grant.
The PSAs and PSUs also have a restriction based on the passage of time, but also have a restriction based on performance criteria related
to the Corporation’s total shareholder return relative to the performance of the community bank index for the respective period. The
amount of PSAs or PSUs earned will not exceed 100% of the PSAs or PSUs awarded. The fair value of the PSAs and PSUs is calculated
using the Monte Carlo Simulation method.
In connection with the Merger, 181,256 fully vested options which had been granted to former CBH employees and directors were
assumed by the Corporation.
The following table summarizes the remaining shares authorized to be granted for options, RSAs and PSAs:
Balance, December 31, 2012
Grants of RSUs
Grants of PSUs
Expiration of unexercised options
Forfeitures of RSAs and RSUs
Forfeitures of PSAs and PSUs
Balance, December 31, 2013
Shares authorized for grant under non-shareholder approved plans
Grants of RSUs
Grants of PSUs
Expiration of unexercised options
Forfeitures of RSAs and RSUs
Forfeitures of PSAs and PSUs
Balance, December 31, 2014
Shares authorized for grant under shareholder approved plans
Grants of RSUs
Grants of PSUs
Expiration of unexercised options
Non-vesting PSAs*
Forfeitures of PSAs and PSUs
Balance, December 31, 2015
Shares
Authorized for
Grant
292,781
(6,665 )
(75,367 )
900
3,681
1,575
216,905
47,368
(16,456 )
(71,184 )
1,750
2,560
1,900
182,843
500,000
(24,514 )
(92,474 )
3,180
25,929
22,801
617,765
* Non-vesting PSAs represent PSAs that did not meet their performance criteria, and were therefore cancelled and are available
for future grant.
104
B. Fair Value of Options Granted
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants issued during:
Expected dividend yield
Expected volatility of Corporation’s stock
Risk-free interest rate
Expected life in years
Weighted average fair value of options granted
*no options were granted in 2015 or 2014
2015*
2014*
2013
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A $
2.6%
24.0%
3.7%
7.0
4.83
The expected dividend yield is based on the company’s annual dividend amount as a percentage of the average stock price at the time of
the grant. Expected life is equal to the mid-point of the average time to vest and the contractual term. Expected volatility of the
Corporation’s stock is based on the historic volatility of the Corporation’s stock price. The risk-free interest rate is based on the zero-
coupon U.S. Treasury interest rate ranging from one month to ten years and a period commensurate with the expected life of the option.
C. Other Stock Option Information – The following table provides information about options outstanding:
2015
For the Twelve Months Ended December 31,
2014
2013
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Grant
Date
Fair
Value
Weighted
Average
Grant
Date
Fair
Value
Weighted
Average
Exercise
Price
Shares
Shares
Weighted
Average
Grant
Date
Fair
Value
Weighted
Average
Exercise
Price
Options outstanding,
beginning of period
Granted
Assumed in the Merger
Forfeited
Expired
Exercised
Options outstanding, end
447,966 $
— $
181,256 $
— $
(3,180) $
(335,189) $
20.94 $
— $
17.73 $
— $
21.33 $
19.25 $
4.75 591,086 $
— $
—
— $
—
— $
—
4.84
(1,750) $
4.62 (141,370) $
20.73 $
— $
— $
— $
22.31 $
20.06 $
4.70 783,476 $
— 12,225 $
—
— $
(650) $
—
4.99
(250) $
4.51 (203,715) $
20.40 $
21.28 $
— $
19.65 $
22.00 $
19.49 $
4.62
4.83
—
4.62
4.90
4.39
of period
290,853 $
20.88 $
4.85 447,966 $
20.94 $
4.75 591,086 $
20.73 $
4.70
The following table provides information related to options as of December 31, 2015:
Options Outstanding
Range of Exercise
Prices
Options
Outstanding
Remaining
Contractual
Life (years)
Shares
Exercisable
Options Exercisable
Remaining
Contractual
Life (years)
Weighted Average
Exercise
Price*
$10.36 to $17.95
$17.96 to $18.30
$18.31 to $21.87
$21.88 to $22.03
$22.04 to $23.97
$23.98 to $24.27
16,256
100,157
15,113
72,250
7,563
79,514
290,853
*price of exercisable options
2.88
3.64
6.74
1.66
1.55
2.63
2.94
16,256
100,157
15,113
72,250
7,563
79,514
290,853
2.88 $
3.64 $
6.74 $
1.66 $
1.55 $
2.63 $
2.94 $
16.09
18.27
18.92
22.00
23.19
24.27
20.88
105
The following table provides information about unvested options:
2015
For the Twelve Months Ended December 31,
2014
2013
Unvested options, beginning of period
Granted
Assumed in Merger
Vested
Forfeited
Unvested options, end of period
Weighted
Average
Grant Date
Fair Value
—
—
12.94
12.94
—
—
Shares
— $
— $
181,256 $
(181,256) $
— $
— $
Weighted
Average
Grant Date
Fair Value
Shares
Shares
30,146 $
— $
— $
(30,146) $
— $
— $
4.42
—
—
4.42
—
—
80,756 $
12,225 $
— $
(62,185) $
(650) $
30,146 $
Weighted
Average
Grant Date
Fair Value
4.65
4.83
—
4.80
4.62
4.42
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows:
(dollars in thousands)
Proceeds from strike price of value of options exercised
Related tax benefit recognized
Proceeds of options exercised
Intrinsic value of options exercised
For the Twelve Months Ended December 31,
2013
2014
2015
$
$
$
6,452 $
515
6,967 $
2,836 $
378
3,214 $
3,615 $
1,288 $
3,970
376
4,346
1,215
The following table provides information about options outstanding and exercisable options:
Number
Weighted average exercise price
Aggregate intrinsic value
Weighted average contractual term
$
$
(years)
As of December 31,
2014
2013
2015
Options
Outstanding
Exercisable
Options
290,853
20.88 $
290,853
20.88 $
2,280,288 $ 2,280,288 $
447,966
20.94 $
4,640,917 $ 4,640,917 $
Exercisable
Options
Options
Outstanding
447,966
20.94 $
Exercisable
Options
Options
Outstanding
591,086
20.73 $
560,940
20.87
5,583,266 $ 5,224,227
2.9
2.9
2.7
2.7
3.2
3.1
For the twelve months ended December 31, 2015, the Corporation recognized $3 thousand of expense related to stock options assumed in
the Merger. As of December 31, 2015, 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 with Rule 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, 2015, the Corporation recognized $440 thousand of expense related to the Corporation’s
RSAs and RSUs. As of December 31, 2015, there was $853 thousand of unrecognized compensation cost related to RSAs. This cost will
be recognized over a weighted average period of 2.3 years.
106
The following table details the RSAs for the twelve month periods ended December 31, 2015, 2014 and 2013:
Twelve Months Ended
December 31, 2015
Twelve Months Ended
December 31, 2014
Twelve Months Ended
December 31,2013
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Number of
Shares
Beginning balance
Granted
Vested
Forfeited
Ending balance
PSAs and PSUs
46,281 $
24,514 $
(27,993) $
— $
42,802 $
23.17
29.83
20.73
—
28.58
54,156 $
16,456 $
(21,771 ) $
(2,560 ) $
46,281 $
19.36
28.88
18.21
21.48
23.17
Weighted
Average
Grant Date
Fair Value
19.05
22.50
19.20
20.38
19.36
60,287 $
6,665 $
(9,115) $
(3,681) $
54,156 $
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 first grant of 40,000 PSUs in February 2015, included expected
volatility of 22.81% a risk free rate of interest of 1.03% and a correlation co-efficient of 0.6868. The second grant of 52,474 PSUs in
August 2015, assumed expected volatility of 21.43% a risk free rate of interest of 1.08% and a correlation co-efficient of 0.6677.
The Corporation recognized $998 thousand of expense related to the PSAs and PSUs for the twelve months ended December 31, 2015.
As of December 31, 2015, there was $1.8 million of unrecognized compensation cost related to PSAs and 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, 2015, 2014 and 2013:
Twelve Months Ended
December 31, 2015
Twelve Months Ended
December 31, 2014
Twelve Months Ended
December 31, 2013
Beginning balance
Granted
Vested
Non-vesting*
Forfeited
Ending balance
Weighted
Average
Grant Date
Fair Value
13.41
16.42
11.80
11.80
14.75
15.07
Number
of
Shares
204,980 $
71,184 $
(56,946) $
— $
(1,900) $
217,318 $
Weighted
Average
Grant Date
Fair Value
11.90
15.05
10.07
—
12.32
13.41
Number
of
Shares
186,113 $
75,367 $
(54,925) $
— $
(1,575) $
204,980 $
Weighted
Average
Grant Date
Fair Value
10.62
13.38
9.64
—
10.77
11.90
Number of
Shares
217,318 $
92,474 $
(44,242) $
(25,929) $
(22,801) $
216,820 $
* 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.
107
Note 20 - Earnings per Share
The calculation of basic earnings per share and diluted earnings per share is presented below:
(dollars in thousands,
except per share data)
Numerator - Net income available to common shareholders
Denominator for basic earnings per share – Weighted average shares
outstanding*
Effect of dilutive potential common shares
Denominator for diluted earnings per share – Adjusted weighted
average shares outstanding
Basic earnings per share
Diluted earnings per share
Antidilutive shares excluded from computation of average dilutive earnings
$
$
per share
*excludes restricted stock
Year Ended December 31,
2014
2015
2013
$
16,754 $
27,843 $
24,444
17,488,325
267,996
13,566,239
294,801
13,311,215
260,395
17,756,321
0.96 $
0.94 $
13,861,040
2.05 $
2.01 $
13,571,610
1.84
1.80
—
—
—
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:
(dollars in thousands)
Merchant interchange fees
Bank owned life insurance income
Commissions and fees
Safe deposit box rentals
Other investment income
Title insurance income
Rent income
Miscellaneous other income
Other operating income
2015
2014
2013
1,238 $
783
867
384
248
—
175
1,154
4,849 $
934 $
315
637
389
142
—
164
502
3,083 $
814
358
578
387
98
192
202
1,542
4,171
$
$
108
Note 22 - Other Operating Expense
Components of other operating expense for the indicated years ended December 31 include:
(dollars in thousands)
Telephone and data lines
FDIC insurance
Temporary help and recruiting
Loan processing
Debt prepayment penalty
Travel and entertainment
Insurance
MSR amortization and impairment
Stationary and supplies
Director fees
Postage
Outsourced services
Contributions
Dues and subscriptions
Portfolio maintenance
Other taxes
Deferred compensation expense
Miscellaneous other expense
Other operating expense
Note 23 - Related Party Transactions
2015
2014
2013
1,704 $
1,447
1,362
1,285
1,131
868
770
660
623
568
540
508
468
441
385
80
15
1,643
14,498 $
1,332 $
1,046
1,171
723
526
725
759
532
445
443
471
432
403
368
389
51
266
1,490
11,572 $
1,378
1,063
1,624
966
347
630
689
743
508
452
515
457
355
394
366
65
906
1,637
13,095
$
$
In the ordinary course of business, the Bank granted loans to principal officers, directors and their affiliates. Loan activity during 2015
and 2014 was as follows:
(dollars in thousands)
Loan balances, beginning of year
Additions
Amounts collected
Loan balances as end of year
2015
2014
$
$
2,874 $
9,115
(603)
11,386 $
3,032
—
(158)
2,874
Related party deposits amounted to $3.6 million and $2.8 million at December 31, 2015 and 2014, respectively.
109
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, 2015 were $634.2 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, 2015 was $14.6 million. There were no outstanding bankers’
acceptances as of December 31, 2015.
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, 2015 and 2014, there were no
make-whole requests presented to or settled by the Corporation. For the twelve months ended December 31, 2013, the Corporation
settled two make-whole requests from the secondary market totaling $278 thousand. As of December 31, 2015, there are no pending
make-whole requests.
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, 2015, the Corporation had no loans sold with recourse outstanding.
110
Note 25 - Dividend Restrictions
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, 2014 and 2015 was a deficit of $2.1 million. During the twelve months ended December 31, 2015, the Bank issued
dividends to the Corporation totaling $33.3 million. Accordingly, the dividend payable by the Bank to the Corporation beginning on
January 1, 2016 is limited to net income not yet earned in 2016 less $2.1 million. The amount of dividends paid by the Bank may not
exceed a level that reduces capital levels to below levels that would cause the Bank to be considered less than adequately capitalized as
detailed in Note 26 – “Regulatory Capital Requirements”.
Note 26 - Regulatory Capital Requirements
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 began to be phased in. For more information, refer
to the “Other Information” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this
Annual Report on Form 10-K.
B. S-3 Shelf Registration Statement and Offerings Thereunder
In March 2015, the Corporation filed a shelf registration statement on Form S-3 (the “Shelf Registration Statement”) to replace its 2012
Shelf Registration Statement, which was set to expire in April 2015. The Shelf Registration Statement allows the Corporation to raise
additional capital through offers and sales of registered securities consisting of common stock, debt securities, warrants to purchase
common stock, stock purchase contracts and units or units consisting of any combination of the foregoing securities. Using the
prospectus in the Shelf Registration Statement, together with applicable prospectus supplements, the Corporation may sell, from time to
time, in one or more offerings, such securities in a dollar amount up to $200 million, in the aggregate.
In addition, the Corporation has in place under its Shelf Registration Statement a Dividend Reinvestment and Stock Purchase Plan (the
“Plan”), which allows it to issue up to 1,500,000 shares of registered common stock. The Plan allows for the grant of a request for waiver
(“RFW”) above the Plan’s maximum investment of $120 thousand per account per year. An RFW is granted based on a variety of
factors, including the Corporation’s current and projected capital needs, prevailing market prices of the Corporation’s common stock and
general economic and market conditions.
For the twelve months ended December 31, 2015, the Corporation issued 663 shares and raised $20 thousand through the Plan. No RFWs
were approved during the twelve months ended December 31, 2015. No other sales of securities were executed under the Shelf
Registration Statement during the twelve months ended December 31, 2015.
C. Shares Issued in Mergers and Acquisitions
In connection with the acquisition of CBH, the Corporation issued 3,878,304 common shares, valued at $121.4 million, to former
shareholders of CBH. These shares were registered on an S-4 registration statement filed by the Corporation in July 2014.
D. Share Repurchases
For the twelve months ended December 31, 2015, the Corporation repurchased 862,500 shares of Corporation stock 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.
111
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. As of December 31, 2015 and 2014, the Corporation and the Bank had met all capital adequacy
requirements to which they were subject. Federal banking regulators have defined specific capital categories, and categories range from a
best of “well capitalized” to a worst of “critically under-capitalized.” Both the Corporation and the Bank were classified as “well
capitalized” as of December 31, 2015 and 2014.
The Corporation’s and the Bank’s capital amounts and ratios as of December 31, 2015 and 2014 are presented in the following table:
(dollars in thousands)
December 31, 2015
Total (Tier II) capital to risk weighted assets:
Corporation
Bank
Tier I capital to risk weighted assets:
Corporation
Bank
Tier I capital to average assets:
Corporation
Bank
Common equity Tier I to risk weighted assets
Corporation
Bank
December 31, 2014
Total (Tier II) capital to risk weighted assets:
Corporation
Bank
Tier I capital to risk weighted assets:
Corporation
Bank
Tier I capital to average assets:
Corporation
Bank
Actual
Minimum
to be Well
Capitalized
Amount
Ratio
Amount
Ratio
$
$
$
$
$
$
$
$
$
$
$
$
$
$
302,236
257,716
12.61% $
10.78% $
239,680
239,069
10.00%
10.00%
256,900
241,859
10.72% $
10.12% $
191,716
191,193
256,900
241,859
9.02% $
8.51% $
185,127
184,734
256,900
241,859
10.72% $
10.12% $
119,823
119,496
8.00%
8.00%
6.50%
6.50%
5.00%
5.00%
217,371
207,680
12.86% $
12.32% $
169,071
168,557
10.00%
10.00%
202,734
193,043
11.99% $
11.45% $
101,442
101,134
202,734
193,043
9.54% $
9.09% $
106,306
106,173
6.00%
6.00%
5.00%
5.00%
112
Note 27 - Selected Quarterly Financial Data (Unaudited)
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Other income
Other expense
Income (loss) before income taxes
Tax expense
Net income (loss)
Basic earnings (loss) per common share*
Diluted earnings per common share*
Dividend declared
(dollars in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Other income
Other expense
Income before income taxes
Tax expense
Net income
Basic earnings per common share*
Diluted earnings per common share*
Dividend declared
2015
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
27,766
$
2,337
25,429
1,777
13,668
46,951
(9,631)
(3,276)
(6,355)
(0.37)
(0.37)
0.20
26,754 $
1,959
24,795
569
14,765
27,429
11,562
4,068
7,494 $
0.43 $
0.42 $
0.19 $
26,993 $
1,923
25,070
850
14,177
25,982
12,415
4,296
8,119 $
0.46 $
0.45 $
0.19 $
27,029 $
2,196
24,833
1,200
13,350
25,403
11,580
4,084
7,496 $
0.43 $
0.42 $
0.20 $
$
$
$
$
2014
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
21,055
$
1,568
19,487
(316
12,883
21,932
10,754
3,710
7,044
0.52
0.51
0.19
20,161 $
1,438
18,723
750
11,139
18,899
10,213
3,524
6,689 $
0.50 $
0.49 $
0.18 $
20,941 $
1,499
19,442
(100)
12,757
20,626
11,673
4,069
7,604 $
0.56 $
0.55 $
0.18 $
20,749 $
1,573
19,176
550
11,543
19,961
10,208
3,702
6,506 $
0.48 $
0.47 $
0.19 $
$
$
$
$
*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.
113
Note 28 - Parent Company-Only Financial Statements
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
(dollars in thousands)
Assets:
Cash
Investment securities
Investments in subsidiaries, as equity in net assets
Premises and equipment, net
Goodwill
Other assets
Total assets
Liabilities and shareholders’ equity:
Borrowings
Subordinated notes
Other liabilities
Total liabilities
December 31,
2015
2014
$
$
$
$
37,992 $
404
354,148
2,386
245
1,704
396,879 $
— $
29,479
1,689
31,168 $
5,269
420
236,586
2,484
245
1,791
246,795
—
—
1,321
1,321
Common stock, par value $1, authorized 100,000,000 shares issued 20,931,416 shares and
16,742,135 shares as of December 31, 2015 and 2014, respectively, and outstanding
17,071,523 shares and 13,769,336 shares as of December 31, 2015 and 2014,
respectively
$
Paid-in capital in excess of par value
Less common stock in treasury, at cost – 3,859,893 shares and 2,972,799 shares as of
December 31, 2015 and 2014, respectively
Accumulated other comprehensive loss, net of deferred income taxes benefit
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
B. Condensed Statements of Income
$
$
20,931 $
228,814
16,742
100,486
(58,144 )
(31,642)
(412 )
174,522
365,711 $
396,879 $
(11,704)
171,592
245,474
246,795
(dollars in thousands)
Dividends from subsidiaries
Interest and other income
Total operating income
Expenses
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Income before income taxes
Income tax expense
Net income
Twelve Months Ended December 31,
2014
2015
2013
$
$
34,234 $
2,128
36,362
2,140
34,222
(17,427)
16,795
41
16,754 $
12,160 $
2,156
14,316
1,849
12,467
15,480
27,947
104
27,843 $
8,165
2,062
10,227
1,996
8,231
16,236
24,467
23
24,444
114
C. Condensed Statements of Cash Flows
(dollars in thousands)
Operating activities:
Net Income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed income of subsidiaries
Depreciation and amortization
Stock-based compensation cost
Other, net
Net cash provided by operating activities
Investing Activities:
Proceeds from sale of available for sale securities
Acquisitions, net of cash acquired
Net cash provided by investing activities
Financing activities:
Dividends paid
Change in other borrowings
Proceeds from issuance of subordinated notes
Proceeds from sale of treasury stock….
Repurchase of treasury stock
Proceeds from issuance of common stock
Payment of contingent consideration for business combinations
Excess tax benefit from stock-based compensation
Proceeds from exercise of stock options
Net cash used by financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Note 29 - Segment Information
Twelve Months Ended December 31,
2014
2015
2013
$
16,754 $
27,843 $
24,444
17,427
121
1,441
508
36,251
16
128
144
(13,837)
—
29,456
—
(26,546)
20
—
783
6,452
(3,672)
32,723
5,269
37,992 $
(15,480 )
98
1,256
485
14,202
—
—
—
(10,189 )
(7,050 )
—
79
(947 )
72
—
831
2,836
(14,368 )
(166 )
5,435
5,269 $
(16,236 )
98
1,004
(1,138 )
8,172
—
—
—
(9,297 )
(2,350 )
—
1,317
(553 )
176
(2,100 )
708
3,970
(8,129 )
43
5,392
5,435
$
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.
115
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 into PCPB, the Wealth Management Division assumed responsibility for all insurance services of the Corporation. Prior to
the PCPB and RJM acquisitions, the Bank’s previous insurance subsidiary, ICBM, was reported through the Banking segment. Any
adjustments to prior year figures are immaterial and are not reflected in the table below.
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:
(dollars in
thousands)
Net interest
income
Less: loan loss
provision
Net interest
income after
loan loss
provision
Other income:
Fees for wealth
management
services
2015
Wealth
As of or for the Twelve Months Ended December 31,
2014
Wealth
2013
Wealth
Banking
Management Consolidated
Banking
Management Consolidated
Banking
Management Consolidated
$ 100,124 $
3 $
100,127
$ 76,825 $
3 $
76,828
$ 72,987 $
3 $
72,990
4,396
—
4,396
884
—
884
3,575
—
3,575
95,728
3
95,731
75,941
3
75,944
69,412
3
69,415
—
36,894
36,894
—
36,774
36,774
—
35,184
35,184
Service charges on
deposit accounts
2,927
2,087
3,022
—
—
—
2,927
2,578
2,087
1,755
3,022
1,772
—
—
—
2,578
2,445
1,755
1,845
1,772
4,117
—
—
—
2,445
1,845
4,117
Loan servicing and
other fees
Net gain on sale of
loans
Net gain (loss) on
sale of available
for sale
securities
Net gain (loss) on
sale of other real
estate owned
Insurance
commissions
Other operating
income
Total other income
Other expenses:
Salaries & wages
Employee benefits
Loss on pension
plan settlement
Occupancy and
bank premises
Amortization of
other intangible
assets
Professional fees
Other operating
expenses
Total other
expenses
Segment profit
Intersegment
(revenues)
expenses*
Pre-tax segment
profit after
eliminations
% of segment pre-
tax profit after
eliminations
Segment assets
(dollars in
millions)
931
—
931
471
—
471
(8)
—
(8)
123
—
123
175
—
175
(300)
—
3,745
3,745
—
1,210
1,210
651
—
—
6,082
15,172
149
40,788
6,231
55,960
3,419
10,170
168
38,152
3,587
48,322
4,253
13,003
168
35,352
(300)
651
4,421
48,355
30,391
7,298
14,184
2,907
44,575
10,205
24,612
4,306
12,501
3,034
37,113
7,340
24,210
5,942
12,136
2,890
36,346
8,832
17,377
—
17,377
—
—
—
—
—
—
8,662
1,643
10,305
5,753
1,552
7,305
5,357
1,505
6,862
1,172
3,227
2,655
126
3,827
3,353
276
2,923
2,383
94
2,659
3,017
312
2,246
2,321
210
2,633
2,456
32,150
3,973
36,123
20,457
3,527
23,984
20,080
3,531
23,611
100,277
10,623
25,488
15,303
125,765
25,926
58,327
27,784
23,091
15,064
81,418
42,848
58,147
24,268
22,593
12,762
80,740
37,030
(422 )
422
—
(372)
372
—
(372)
372
—
$ 10,201 $
15,725 $
25,926
$ 27,412 $
15,436 $
42,848
$ 23,896 $
13,134 $
37,030
39.3 %
60.7%
100.0%
64.0%
36.0%
100.0%
64.5%
35.5%
100.0%
$ 2,983.2 $
47.8 $
3,031.0
$ 2,197.8 $
48.7 $
2,246.5
$ 2,020.7 $
41.0 $
2,061.7
●
Intersegment revenues consist of rental payments, deposit interest and management fees.
116
Other segment information:
Wealth Management Segment Information
Assets under management, administration, supervision and brokerage
$
8,364.8 $
7,699.9
(dollars in millions)
December 31,
2015
December 31,
2014
117
ITEM 9.
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
• Evaluation of Disclosure Controls and Procedures
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management,
including the Corporation’s Chief Executive Officer, Francis J. Leto, and Chief Financial Officer, Michael W. Harrington, of the
effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2015 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures as of December 31, 2015 are effective.
• 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 2015 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 design and effectiveness
of our internal controls for the fiscal year ended December 31, 2015, and a report from our independent registered public accounting firm
attesting to the effectiveness of our internal controls:
118
Management’s Report on Internal Control Over Financial Reporting
The Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included
in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have
been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are
based on Management’s best estimates and judgments.
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, 2015, in relation to
the criteria for effective control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, Management concludes that, as
of December 31, 2015, the Corporation’s system of internal control over financial reporting is effective.
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
below.
119
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Bryn Mawr Bank Corporation:
We have audited Bryn Mawr Bank Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2015, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Bryn Mawr Bank Corporation and its subsidiaries’ management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
Bryn Mawr Bank Corporation and its subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
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, Bryn Mawr Bank Corporation and its subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2015, based on Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Bryn Mawr Bank Corporation and its subsidiaries as of December 31, 2015 and 2014, and the related
consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity for each of the years in the
three-year period ended December 31, 2015 and our report dated March 11, 2016 expressed an unqualified opinion on those consolidated
financial statements.
Philadelphia, Pennsylvania
March 11, 2016
(signed) KPMG LLP
120
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2016 Proxy Statement.
ITEM 11.
EXECUTIVE COMPENSATION
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 2016 Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 2016 Proxy Statement.
121
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for Item 13 is incorporated by reference to sections titled “Transactions with Related Persons” and
“Corporate Governance – Director Independence” in the 2016 Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required for Item 14 is incorporated by reference to the sections “Independent Registered Public Accounting
Firm” and “Audit and Non-Audit Fees” in the 2016 Proxy Statement.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Item 15(a) (1 & 2) Financial Statements and Schedules
PART IV
The financial statements listed in the accompanying index to financial statements are filed as part of this Annual Report.
Report of Independent Registered Public Accounting Firm ......................................................................................................
Consolidated Balance Sheets .....................................................................................................................................................
Consolidated Statements of Income ...........................................................................................................................................
Consolidated Statements of Comprehensive Income .................................................................................................................
Consolidated Statements of Cash Flows ....................................................................................................................................
Consolidated Statement of Changes in Shareholders’ Equity ....................................................................................................
Notes to Consolidated Financial Statements ..............................................................................................................................
Page
51
52
53
54
55
56
57
Item 15(a) (3) and (b) — Exhibits
Exhibit No.
2.1
Description and References
Stock Purchase Agreement, dated as of February 18, 2011, by and between Bryn Mawr Bank Corporation and
Hershey Trust Company, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed with SEC on
February 18, 2011
2.2
Amendment to Stock Purchase Agreement, dated as of May 27, 2011, by and between Hershey Trust Company and
Bryn Mawr Bank Corporation, incorporated by reference to Exhibit 2.2 of the Corporation’s 8-K filed with the SEC
on May 27, 2011
2.3
2.4
2.5
2.6
2.7
Assignment and Assumption Agreement, dated as of May 27, 2011, by and between Hershey Trust Company and
PWMG Bank Holding Company Trust, incorporated by reference to Exhibit 2.3 of the Corporation’s 8-K filed with
the SEC on May 27, 2011
Stock Purchase Agreement, dated as of February 3, 2012, by and among Bryn Mawr Bank Corporation, Davidson
Trust Company, Boston Private (PA) Corporation, Bruce K. Bauder, Ernest E. Cecilia, Joseph J. Costigan, William S.
Covert, James M. Davidson, Steven R. Klammer, N. Ray Sague, Malcolm C. Wilson, Boston Private Financial
Holdings, Inc., and Alvin A. Clay III, incorporated by reference to Exhibit 2. 1 of the Corporation’s 8-K filed with the
SEC on February 7, 2012
Purchase and Assumption Agreement, dated as of April 27, 2012, by and between The Bryn Mawr Trust Company
and First Bank of Delaware, incorporated by reference to Exhibit 2. 1 of the Corporation’s 8-K filed with the SEC on
May 2, 2012
Amendment to Stock Purchase Agreement, dates as of May 15, 2012, by and among Bryn Mawr Bank Corporation,
Davidson Trust Company, Boston Private (PA) Corporation, Bruce K. Bauder, Ernest E. Cecilia, Joseph J. Costigan,
William S. Covert, James M. Davidson, Steven R. Klammer, N. Ray Sague, Malcolm C. Wilson, Boston Private
Financial Holdings, Inc., and Alvin A. Clay III, incorporated by reference to Exhibit 2. 1 of the Corporation’s 8-K
filed with the SEC on May 18, 2012
Amendment to Purchase and Assumption Agreement, dated as of October 12, 2012, by and between The Bryn Mawr
Trust Company and First Bank of Delaware, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K filed
with the SEC on October 18, 2012
122
2.8
2.9
2.10
2.11
2.12
3.1
3.2
4.1
4.2
4.3
4.4
10.1*
10.2**
Amendment to Purchase and Assumption Agreement, dated as of November 14, 2012, by and between The Bryn
Mawr Trust Company and First Bank of Delaware, incorporated by reference to Exhibit 2.1 of the Corporation’s 8-K
filed with the SEC on November 19, 2012
Agreement and Plan of Merger, dated as of May 5, 2014, by and between Bryn Mawr Bank Corporation and
Continental Bank Holdings, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed with
the SEC on May 5, 2014
Amendment to Agreement and Plan of Merger, dated as of October 23, 2014, between Bryn Mawr Bank Corporation
and Continental Bank Holdings, Inc., incorporated by reference to Exhibit 2.1 to the Corporation’s Form 8-K filed
with the SEC on October 23, 2014
Stock Purchase Agreement, dated as of August 21, 2014, by and among The Bryn Mawr Trust Company, Donald W.
Parker, Edward F. Lee, and Powers Craft Parker & Beard, Inc., incorporated by reference to Exhibit 2.1 to the
Corporation’s Form 10-Q filed with the SEC on November 7, 2014
Amendment to Stock Purchase Agreement, dated as of October 1, 2014, by and among The Bryn Mawr Trust
Company, Donald W. Parker, Edward F. Lee, and Powers Craft Parker and Beard, Inc., incorporated by reference to
Exhibit 2.1 to the Corporation’s Form 8-K filed with the SEC on October 3, 2014
Amended and Restated By-Laws, effective November 20, 2007, incorporated by reference to Exhibit 3.2 of the
Corporation’s Form 8-K filed with the SEC on November 21, 2007
Amended and Restated Articles of Incorporation, effective November 21, 2007, incorporated by reference to Exhibit
3.1 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007
Amended and Restated By-Laws, effective November 20, 2007, incorporated by reference to Exhibit 3.2 of the
Corporation’s Form 8-K filed with the SEC on November 21, 2007
Amended and Restated Articles of Incorporation, effective November 21, 2007, incorporated by reference to Exhibit
3.1 of the Corporation’s Form 8-K filed with the SEC on November 21, 2007
Indenture, dated August 6, 2015, by and between Bryn Mawr Bank Corporation and U.S. Bank National Association,
as trustee, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on August 7, 2015
Forms of 4.75% Subordinated Note due 2025 (included as Exhibit A-1 and Exhibit A-2 to the Indenture filed as
Exhibit 4.1), incorporated by reference to the Corporation’s Form 8-K filed with the SEC on August 7, 2015
Amended and Restated Supplemental Employee Retirement Plan of the Bryn Mawr Bank Corporation, effective
January 1, 1999, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 10-K filed with the SEC on
March 13, 2008
Form of Restricted Stock Agreement for Employees (Service/Performance Based) Subject to the 2010 Long Term
Incentive Plan, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 10-K filed with the SEC on
March 16, 2011
123
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9**
10.10*
10.11*
10.12**
10.13**
10.14**
10.15**
10.16**
10.17*
10.18**
Amended and Restated Deferred Bonus Plan for Executives of Bryn Mawr Bank Corporation, effective January 1,
2008 incorporated by reference to Exhibit 10.4 of the Corporation’s Form 10-K filed with the SEC on March 16, 2009
Amended and Restated Deferred Payment Plan for Directors of Bryn Mawr Bank Corporation, effective January 1,
2008 incorporated by reference to Exhibit 10.5 of the Corporation’s Form 10-K filed with the SEC on March 16, 2009
Amended and Restated Deferred Payment Plan for Directors of The Bryn Mawr Trust Company, effective January 1,
2008 incorporated by reference to Exhibit 10.6 of the Corporation’s Form 10-K filed with the SEC on March 16, 2009
Employment Letter Agreement, dated as of April 25, 2014, between the Corporation and Francis J. Leto, incorporated
by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed with the SEC on April 25, 2014
Amendment to 2012 Restricted Stock Agreement, dated August 20, 2014, between Bryn Mawr Bank Corporation and
Fredrick C. Peters, II, incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed with the SEC on
August 21, 2014
Amendment to 2013 Restricted Stock Unit Agreement, dated August 20, 2014, between Bryn Mawr Bank Corporation
and Fredrick C. Peters, II, incorporated by reference to Exhibit 10.2 to the Corporation’s Form 8-K filed with the SEC
on August 21, 2014
Bryn Mawr Bank Corporation 2004 Stock Option Plan, incorporated by reference to Appendix A of the Corporation’s
Proxy Statement dated March 10, 2004 filed with the SEC on March 8, 2004
Executive Change-of-Control Amended and Restated Severance Agreement, dated May 21, 2004, between the Bryn
Mawr Trust Company and Alison E. Gers, incorporated by reference to Exhibit 10.M of the Corporation’s Form 10-K
filed with the SEC on March 15, 2007
Executive Change-of-Control Amended and Restated Severance Agreement, dated May 21, 2004, between the Bryn
Mawr Trust Company and Joseph G. Keefer, incorporated by reference to Exhibit 10.N of the Corporation’s Form 10-
K filed with the SEC on March 15, 2007
Form of Key Employee Non-Qualified Stock Option Agreement, incorporated by reference to Exhibit 10.3 of the
Corporation’s Form 10-Q filed with the SEC on May 10, 2005
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors, incorporated by reference to Exhibit
10.2 of the Corporation’s Form 10-Q filed with the SEC on May 10, 2005
Form of Restricted Stock Unit Agreement for Employees (Service/Performance Based) – Multi-Year Vesting,
incorporated by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed with the SEC on September 17, 2014
2007 Long Term Incentive Plan, effective April 25, 2007, incorporated by reference to Exhibit 10.1 of the
Corporation’s Form 10-Q filed with the SEC May 10, 2007
Bryn Mawr Bank Corporation Supplemental Employee Retirement Plan for Select Executives, executed December 8,
2008, incorporated by reference to Exhibit 10.20 of the Corporation’s Form 10-K filed with the SEC on March 16,
2009
Executive Change-of-Control Amended and Restated Severance Agreement, dated November 2, 2009, between the
Bryn Mawr Trust Company and Francis J. Leto, incorporated by reference to Exhibit 10.1 of the Corporation’s 8-K
filed with the SEC on November 6, 2009
Bryn Mawr Bank Corporation Amended and Restated Dividend Reinvestment and Stock Purchase Plan with Request
for Waiver Program, effective April 27, 2012, incorporated by reference to the prospectus supplement filed with the
SEC on April 27, 2012 pursuant to Rule 424(b)(2) of the Securities Act
10.19**
Bryn Mawr Bank Corporation 2010 Long-Term Incentive Plan, effective April 28, 2010, incorporated by reference to
Exhibit 10.24 of the Corporation’s Form 10-Q filed with the SEC on May 10, 2010
124
10.20**
10.21*
10.22**
10.23
10.24**
10.25**
10.26*
10.27*
10.28*
10.29*
10.30*
10.31**
10.32**
10.33**
10.34
First Keystone Financial, Inc. Amended and Restated 1998 Stock Option Plan, as assumed by Bryn Mawr Bank
Corporation, incorporated by reference to Exhibit 10.1 of the Corporation’s Post-Effective Amendment No.1 to Form
S-4 on Form S-3, filed with the SEC on July 9, 2010
Executive Change-of-Control Amended and Restated Severance Agreement, dated September 27, 2010, between the
Bryn Mawr Trust Company and Geoffrey L. Halberstadt, incorporated by reference to Exhibit 10.29 of the
Corporation’s Form 10-K filed with the SEC on March 16, 2011
Restricted Stock Agreement for Employees (Service/Performance Based) Subject to the 2010 Long Term Incentive
Plan, dated as of January 10, 2011, for Francis J. Leto, incorporated by reference to Exhibit 10.30 of the Corporation’s
Form 10-K filed with the SEC on March 16, 2011
Amendment No. 2 to Stock Purchase Agreement by and between PWMG Bank Holding Company Trust and Bryn
Mawr Bank Corporation dated September 29, 2011, incorporated by reference to Exhibit 2.1 of the Corporation's
Form 8-K filed with the SEC on October 4, 2011
Form of Restricted Stock Agreement for Employees (Service/Performance Based) Subject to the 2010 Long Term
Incentive Plan, incorporated by reference to Exhibit 10.32 of the Corporation’s Form 10-Q filed with the SEC on
November 9, 2011
Form of Restricted Stock Agreement for Directors (Service/Performance Based) Subject to the 2010 Long Term
Incentive Plan, incorporated by reference to Exhibit 10.33 of the Corporation’s Form 10-Q filed with the SEC on
November 9, 2011
Amendment No. 1 to Amended and Restated Deferred Bonus Plan for Executives of Bryn Mawr Bank Corporation,
effective as of January 1, 2013, incorporated by reference to Exhibit 10.29 of the Corporation’s Form 10-K filed with
the SEC on March 15, 2013
Amendment No. 2 to Amended and Restated Deferred Bonus Plan for Executives of Bryn Mawr Bank Corporation,
effective as of January 1, 2013, incorporated by reference to Exhibit 10.30 of the Corporation’s Form 10-K filed with
the SEC on March 15, 2013
Form of Letter Agreement entered into with certain executive officers of the Corporation in connection with the
curtailment of benefits under the Bryn Mawr Bank Corporation Supplemental Employee Retirement Plan for Select
Executives, executed December 8, 2008 (SERP II), incorporated by reference to Exhibit 10.1 of the Corporation’s
Form 8-K filed with the SEC on April 4, 2013
Bryn Mawr Bank Corporation Executive Deferred Compensation Plan, effective January 1, 2013, incorporated by
reference to Exhibit 10.32 of the Corporation’s Form 10-K filed with the SEC on March 14, 2014
Retention Bonus Agreement, dated as of June 10, 2013, by and between The Bryn Mawr Trust Company and Francis
J. Leto, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed with the SEC on June 14, 2013
Form of Restricted Stock Unit Agreement for Employees (Service/Performance Based), incorporated by reference to
Exhibit 10.4 to the Corporation’s Form 10-Q filed with the SEC on November 7, 2014
Form of Restricted Stock Unit Agreement for Directors (Service/Performance Based), incorporated by reference to
Exhibit 10.5 to the Corporation’s Form 10-Q filed with the SEC on November 7, 2014
Form of Restricted Stock Unit Agreement – Inducement Grant, incorporated by reference to Exhibit 10.6 to the
Corporation’s Form 10-Q filed with the SEC on November 7, 2014
Second Amended and Restated Dividend Reinvestment and Stock Purchase Plan, effective April 30, 2015,
incorporated by reference to the Corporation’s prospectus supplement filed with the SEC on May 1, 2015 pursuant to
Rule 424 (b) under the Securities Act of 1933, as amended
125
10.35
10.36
10.37
10.38*
10.39*
10.40**
10.41**
10.42
Letter Agreement and General Release, dated July 17, 2015, by and among Bryn Mawr Bank Corporation, The Bryn
Mawr Trust Company and J. Duncan Smith, incorporated by reference to the Corporation’s Form 8-K filed with the
SEC on July 17, 2015
Form of Subordinated Note Purchase Agreement, dated August 6, 2015, by and among Bryn Mawr Bank Corporation
and the Purchasers identified therein, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on
August 7, 2015
Form of Registration Rights Agreement, dated August 6, 2015, by and among Bryn Mawr Bank Corporation and
Purchasers identified therein, incorporated by reference to the Corporation’s Form 8-K filed with the SEC on August
7, 2015
Employment Letter Agreement, dated September 8, 2015, by and among Bryn Mawr Bank Corporation, The Bryn
Mawr Trust Company and Michael W. Harrington, incorporated by reference to Exhibit 10.1 of the Corporation’s
Form 8-K filed with the SEC on September 9, 2015
Executive Change-of-Control Severance Agreement, dated as of September 8, 2015, by and between The Bryn Mawr
Trust Company and Michael W. Harrington, incorporated by reference to Exhibit 10.2 to the Corporation’s Form 8-K
filed with the SEC on September 9, 2015
Amended and Restated Bryn Mawr Bank Corporation 2010 Long-Term Incentive Plan, effective April 30, 2015,
incorporated by reference to Appendix A of the Corporation’s Proxy Statement on Definitive Schedule 14A filed with
the SEC on March 20, 2015
Form of Restricted Stock Unit Agreement for Employees (Time-Based Cliff Vesting), incorporated by reference to
Exhibit 10.2 to the Corporation’s Form 10-Q filed with the SEC on August 7, 2015
Continental Bank Holdings, Inc. Amended and Restated 2005 Stock Incentive Plan, incorporated by reference to
Exhibit 4.3 of the Corporation’s Form S-8 filed with the SEC on January 22, 2015
21.1
List of Subsidiaries, filed herewith
23.1
Consent of KPMG LLP, filed herewith
31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
32.1
32.2
99.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, filed herewith
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, filed herewith
Corporation’s Proxy Statement for 2016 Annual Meeting to be held on April 28, 2016, expected to be filed with the
SEC on or about March 18, 2016
101.INS XBRL
Instance Document, filed herewith
101.SCH XBRL Taxonomy Extension Schema Document, filed herewith
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith
101.DEF XBRL Taxonomy Extension Definition Linkbase Document, filed herewith
101.LAB XBRL Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith
*
**
Management contract or compensatory plan arrangement.
Shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the
Corporation.
Item 15(c) — Not Applicable
126
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.
SIGNATURES
Bryn Mawr Bank Corporation
By: /s/ Michael W. Harrington
Michael W. Harrington
Chief Financial Officer
Date: March 11, 2016
127
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.
NAME
/s/ Britton H. Murdoch
Britton H. Murdoch
/s/ Francis J. Leto
Francis J. Leto
/s/ Michael W. Harrington
Michael W. Harrington
/s/ Michael J. Clement
Michael J. Clement
/s/ Andrea F. Gilbert
Andrea F. Gilbert
/s/ Wendell F. Holland
Wendell F. Holland
/s/ Scott M. Jenkins
Scott M. Jenkins
/s/ Jerry L. Johnson
Jerry L. Johnson
/s/ David E. Lees
David E. Lees
/s/ A. John May, III
A. John May, III
/s/ Lynn B. McKee
Lynn B. McKee
/s/ Frederick C. Peters II
Frederick C. Peters
TITLE
DATE
Chairman and Director
March 11, 2016
President and Chief Executive Officer
(Principal Executive Officer) and Director
March 11, 2016
Chief Financial Officer
(Principal Financial Officer)
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
Director
March 11, 2016
128
Exhibit No.
Description and References
EXHIBIT INDEX
21.1
23.1
31.1
List of Subsidiaries, filed herewith
Consent of KPMG LLP, filed herewith
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, filed herewith
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, filed herewith
99.1
Corporation’s Proxy Statement for 2016 Annual Meeting to be held on April 28, 2016, expected to be filed with
the SEC on or about March 18, 2016, and incorporated herein by reference
101.INS XBRL
Instance Document, filed herewith
101.SCH XBRL
Taxonomy Extension Schema Document, filed herewith
101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document, filed herewith
101.DEF XBRL
Taxonomy Extension Definition Linkbase Document, filed herewith
101.LAB XBRL
Taxonomy Extension Label Linkbase Document, filed herewith
101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document, filed herewith
129
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