BRYN MAWR BANK CORPORATION The following discussion describes the significant changes to the financial condition of the Corporation that have occurred during the first nine months of 2021 compared to the financial condition as ofDecember 31, 2020 . In addition, this discussion summarizes the significant factors affecting the results of operations, liquidity and cash flows of the Corporation for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements included in this report and our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 Annual Report"). Certain financial condition comparisons to the prior year and results of operations comparisons for the linked quarter are included for additional trend analysis.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements contained in this Quarterly Report on Form 10-Q 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 the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements may include financial and other projections as well as statements
regarding the Corporation's financial goals, future 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
"may," "might," "would," "should," "could," "will," "likely," "possibly,"
"expect," "anticipate," "intend," "indicate," "estimate," "target,"
"potentially," "promising," "probably," "outlook," "predict," "contemplate,"
"continue," "plan," "strategy," "forecast," "project," "annualized," "are
optimistic," "are looking," "are looking forward," and "believe" or other
similar expressions may identify statements that constitute forward-looking
statements. Persons reading this Quarterly Report on Form 10-Q are cautioned
that such statements are only predictions and may involve known and unknown
risks, uncertainties and other factors which may cause actual results,
performance or achievements of the Corporation to be materially different from
future results, performance or achievements expressed or implied by such
forward-looking statements.
Given the ongoing and dynamic nature of the COVID-19 pandemic, the ultimate
extent of the impacts on our business, financial position, results of
operations, liquidity, and prospects remain uncertain. Continued deterioration
in general business and economic conditions, including further increases in
unemployment rates, or turbulence in domestic or global financial markets could
adversely affect our revenues and the values of our assets and liabilities,
reduce the availability of funding, lead to a tightening of credit, and further
increase stock price volatility, which could result in impairment to our
goodwill in future periods. Changes to statutes, regulations, or regulatory
policies or practices as a result of, or in response to the COVID-19 pandemic,
could affect us in substantial and unpredictable ways, including the potential
adverse impact of loan modifications and payment deferrals implemented
consistent with recent regulatory guidance. In addition, 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:
•the possibility that the proposed merger with WSFS does not close when expected
or at all because required regulatory or other approvals and other conditions to
closing are not received or satisfied on a timely basis or at all;
•the delay in or failure to close the proposed merger for any other reason;
•changes in WSFS's share price before closing of the proposed merger;
•the outcome of any legal proceedings that have, or may in the future, be
instituted against WSFS or BMBC;
•the occurrence of any event, change or other circumstance that could give rise
to the right of one or both of WSFS and BMBC to terminate the merger agreement
providing for the merger;
•the risk that the businesses of WSFS and the Corporation will not be integrated
successfully;
•the possibility that the cost savings and any synergies or other anticipated
benefits from the proposed merger may not be fully realized or may take longer
to realize than expected;
•disruption from the proposed merger making it more difficult to maintain
relationships with employees, customers or other parties with whom WSFS or the
Corporation have business relationships;
•diversion of management time on merger-related issues;
•risks relating to the potential dilutive effect of the shares of WSFS common
stock to be issued in the proposed transaction;
•the reaction to the proposed transaction of the companies' customers, employees
and counterparties;
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•uncertainty as to the extent of the duration, scope, and impacts of the
COVID-19 pandemic on WSFS, BMBC and the proposed merger;
•local, regional, national and international economic conditions, their impact
on us and our customers, and our ability to assess those impacts;
•our need for capital;
•reduced demand for our products and services, and lower revenues and earnings
due to an economic recession;
•lower earnings due to 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, including those concerning banking,
securities. insurance or taxes, that adversely affect our business, the
financial services industry as a whole, the Corporation, or our subsidiaries
individually or collectively;
•changes in the level of non-performing assets and charge-offs;
•effectiveness of capital management strategies and activities;
•the accuracy of assumptions underlying the establishment of provisions for loan
and lease losses, estimates in the value of collateral, and various financial
assets and liabilities;
•the accuracy of assumptions underlying the establishment of provisions for loan
and lease losses, estimates in the value of collateral, and various financial
assets and liabilities;
•uncertainty relating to the LIBOR calculation process and potential phasing out
of LIBOR after 2021;
•the effect of changes in accounting policies and practices or accounting
standards, as may be adopted from time-to-time by bank regulatory agencies, the
SEC , the Public Company Accounting Oversight Board , the FASB or other accounting
standards setters, including ASU 2016-13 (Topic 326), "Measurement of Credit
Losses on Financial Instruments," commonly referenced as the CECL model, which
has changed how we estimate credit losses and may result in further increases in
the required level of our allowance for credit losses;
•inflation, securities market and monetary fluctuations, including changes in
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;
•changes in the value of our mortgage servicing rights;
•sources of liquidity and financial resources in the amounts, at the times, and
on the terms required to support our future business;
•possible credit-related impairments of securities held by us;
•results of examinations by the Board of Governors of the Federal Reserve System
(the "Federal Reserve") of the Corporation, including the possibility that such
regulator may, among other things, require us to increase our allowance for loan
losses or to write down assets, or restrict our ability to: engage in new
products or services; engage in future mergers or acquisitions; open new
branches; pay future dividends; or otherwise take action, or refrain from taking
action, in order to correct activities or practices that the Federal Reserve
believes may violate applicable law or constitute an unsafe or unsound banking
practice;
•variances in common stock outstanding and/or volatility in common stock price;
•fair value of and number of stock-based compensation awards to be issued in
future periods;
•the credit risks of lending activities and overall quality of the composition
of acquired loan, lease and securities portfolio;
•our success in continuing to generate new business in our existing markets, as
well as 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 or
introduce competitive new products and services on a timely, cost-effective
basis, including investment and banking products that meet customers' needs;
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•changes in consumer and business spending, borrowing and savings habits and
demand for financial services in the relevant market areas;
•extent to which products or services previously offered (including but not
limited to mortgages and asset back securities) require us to incur liabilities
or absorb losses not contemplated at their initiation or origination;
•rapid technological developments and changes;
•technological systems failures, interruptions and security breaches, internally
or through a third-party provider, could negatively impact our operations,
customers and/or reputation;
•competitive pressure and practices of 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;
•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, global health risks or
pandemics, acts of terrorism, wars or political conflicts), including the
COVID-19 pandemic, and the effects of the economic and business environments in
which we operate, including our credit quality and business operations, as well
as the continued impact on general economic and financial market conditions;
•ability to retain key employees and members of senior management;
•changes in relationships with employees, customers, and/or suppliers;
•the ability of key third-party providers to perform their obligations to us and
our subsidiaries;
•our need for capital, or our ability to control operating costs and expenses or
manage loan and lease delinquency rates;
•other material adverse changes in operations or earnings; 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 the factors, risks, and uncertainties
set forth in the foregoing cautionary statements, along with those set forth
under the caption titled "Risk Factors" beginning on page 14 of the
Corporation's 2020 Annual Report, as supplemented by those set forth under the
caption titled "Risk Factors" beginning on page 79 of this Quarterly Report
on Form 10-Q. All forward-looking statements included in this Quarterly Report
and the documents incorporated by reference herein are based upon the
Corporation's beliefs and assumptions as of the date of this Quarterly Report.
The Corporation assumes no obligation to update any forward-looking statement,
whether the result of new information, future events, uncertainties or
otherwise, as of any future date. In light of these risks, uncertainties and
assumptions, you should not put undue reliance on any forward-looking statements
discussed in this Quarterly Report or incorporated documents. For a complete
discussion of the assumptions, risks and uncertainties related to our business,
you are encouraged to review our filings with the SEC , including our 2020 Annual
Report, as updated by our quarterly or other reports subsequently filed with the
SEC .
Brief History of the Corporation
TheBryn Mawr Trust Company (the "Bank") received itsPennsylvania banking charter in 1889 and is a member of theFederal Reserve System . In 1986,Bryn Mawr Bank Corporation ("BMBC", and together with its subsidiaries, the "Corporation") was formed and the Bank became a wholly-owned subsidiary of BMBC.The Bank and BMBC are headquartered inBryn Mawr, Pennsylvania , a western suburb ofPhiladelphia . The Corporation offers a full range of personal and business banking services, consumer and commercial loans, equipment finance, mortgages, insurance and wealth management services, including investment management, trust and estate administration, retirement planning, custody services, and tax planning and preparation from, as ofSeptember 30, 2021 , 39 banking locations, seven wealth management offices and two insurance and risk management locations in the following counties:Montgomery ,Chester ,Delaware ,Philadelphia , andDauphin Counties in Page 57 -------------------------------------------------------------------------------- Table of ContentsPennsylvania ; New Castle County inDelaware ; andMercer andCamden Counties inNew Jersey . The common stock of BMBC trades on theNASDAQ 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. BMBC and its subsidiaries are regulated by many agencies including theSecurities and Exchange Commission ("SEC"), NASDAQ,Federal Deposit Insurance Corporation ("FDIC"), theFederal Reserve Bank of Philadelphia (the "FRB") and thePennsylvania Department of Banking and Securities . The goal of the Corporation is to become the preeminent community bank and wealth management organization in thePhiladelphia area.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Corporation conform toU.S. generally accepted accounting principles ("GAAP"). All significant intercompany balances and transactions are eliminated in consolidation and certain prior-period amounts have been reclassified when necessary in order to conform to current period 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. However, there are uncertainties inherent in making these estimates and actual results could differ from these estimates. The Corporation has identified certain areas that require estimates and assumptions, which include the allowance for credit losses ("ACL") on loans and leases, the ACL on Off-Balance Sheet ("OBS") Credit Exposures, the valuation of goodwill and intangible assets, the fair value of investment securities, the fair value of derivative financial instruments, and the valuation of mortgage servicing rights, deferred tax assets and liabilities, benefit plans and stock-based compensation. In addition, certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. As a result, management has identified the accounting policies and estimates related to the ACL on loans and leases that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate. For a further description of our accounting policies, see Note 1, "Summary of Significant Accounting Policies," in the Notes to the audited Consolidated Financial Statements in the 2020 Annual Report, as well as Note 1, "Basis of Presentation, Principles of Consolidation, and Significant Accounting Policies," in the accompanying Notes to Unaudited Consolidated Financial Statements.
Impact of COVID-19
In the first quarter of 2020, theWorld Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the spread and impact of COVID-19. Our banking products and services are delivered primarily inSoutheastern Pennsylvania , Southern andCentral New Jersey , andDelaware , each of which had a stay-at-home orders in place and had mandated closure all non-essential businesses during periods of 2020. To address the economic impact in theU.S. , in March andApril 2020 ,President Trump signed into law four economic stimulus packages to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). Among other measures, the CARES Act created funding for theSmall Business Administration ("SBA") Paycheck Protection Program ("PPP"), which provided forgivable loans to small businesses to help them keep their employees on payroll and to make other eligible payments. The first round of PPP funding allocated$349 billion to small businesses. This first round was followed by two subsequent rounds of PPP funding of$310 billion , expiring inAugust 2020 and$284 billion expiringMarch 31, 2021 . OnApril 9, 2020 , theFederal Reserve took additional steps to bolster the economy by providing additional funding sources for small and mid-sized businesses as well as for state and local governments as they worked through cash flow stresses caused by the COVID-19 pandemic. Additionally, theFederal Reserve took other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on theFederal Reserve's discount window, and implemented programs to promote liquidity in certain securities markets. TheFederal Reserve , along with otherU.S. banking regulators, also issued interagency guidance to financial institutions that are working with borrowers affected by the COVID-19 pandemic. To provide relief from the economic impacts of COVID-19, the Corporation has offered assistance to our commercial, consumer and small business clients by waiving fees for early CD redemptions, overdrafts, and minimum deposit balance requirements, as well as implemented consumer and commercial loan modification programs. Page 58 -------------------------------------------------------------------------------- Table of Contents The Corporation's modification program for consumer credit products includes a six-month deferral of principal and interest, with interest continuing to accrue on unpaid principal. Upon completion of the deferral period, resumed payments will be applied to the interest accrued during the deferral period, followed by principal and interest payments through the extended maturity date. As ofSeptember 30, 2021 , 4 consumer loans in an aggregate amount of$462 thousand were within a deferral period under the program. As ofDecember 31, 2020 , 66 consumer loans and leases in the amount of$7.3 million were within a deferral period under the program. Management is taking proactive measures and is working prudently with borrowerswho may be unable to meet their obligations due to continuing financial challenges caused by COVID-19. As a result, an additional deferral period may be extended to a borrowerwho is continuing to experience financial difficulties associated with the COVID-19 pandemic. The Corporation's modification programs for commercial loan and lease products include a three- or six-month deferral of principal and interest or a three- or six-month period of interest-only payments, with interest continuing to accrue on unpaid principal. Upon completion of the deferral period, resumed payments will be applied to the interest accrued during the deferral period, followed by principal and interest payments through the contractual maturity date. As ofSeptember 30, 2021 5 commercial loans in an aggregate amount of$13.1 million were within a deferral period under the program. As ofDecember 31, 2020 , 37 commercial loans in the amount of$67.7 million were within a deferral period under the program. Management is taking proactive measures and is working prudently with borrowerswho may be unable to meet their obligations due to continuing financial challenges caused by COVID-19. As a result, the Bank may enter into an additional modification in an effort to mitigate losses for the Bank and the borrower. Based on the provisions of the CARES Act, COVID-19 related modifications to consumer and commercial loans that were not more than 30 days past due as ofDecember 31, 2019 are exempt from TDR classification under GAAP. In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were less than 30 days past due as of the loan modification program implementation date are not considered TDRs. For more information, see Section F - Troubled Debt Restructurings of Note 5 - Loans and Leases, in the Notes to the Unaudited Consolidated Financial Statements. As discussed in more detail below, we recorded a recovery of PCL on loans and leases for the three and nine months endedSeptember 30, 2021 , driven by changes in the current and forward-looking economic impacts of the COVID-19 pandemic included in the estimation of expected credit losses on loans and leases as ofSeptember 30, 2021 as compared toSeptember 30, 2020 . Due to the high degree of continued uncertainty surrounding the COVID-19 pandemic, the full extent of COVID-19's effects on our business, operations or the economy as a whole remain unknown and may adversely affect our business, results of operations and financial condition in future fiscal periods. For more information on how the risks related to COVID-19, see the section titled Risk Factors in Part I, Item 1A of our 2020 Annual Report.
Executive Overview
The following items highlight the Corporation's results of operations for the three and nine months endedSeptember 30, 2021 , as compared to the same period in 2020, and the changes in its financial condition as ofSeptember 30, 2021 as compared toDecember 31, 2020 . More detailed information related to these highlights can be found in the sections that follow.
Three Month Results of Operations
•Net income attributable to the Corporation was$18.4 million , or$0.92 diluted earnings per share, for the three months endedSeptember 30, 2021 as compared to$13.2 million , or$0.66 diluted earnings per share for the same period in 2020. •Return on average equity ("ROAE") and return on average assets ("ROAA") for the three months endedSeptember 30, 2021 were 11.17% and 1.49%, respectively, as compared to ROAE and ROAA of 8.60% and 1.02%, respectively, for the same period in 2020.
•Tax-equivalent net interest income decreased
•The provision for credit losses ("PCL"), which includes the provision for
credit losses on loans and leases, off-balance sheet credit exposures, and
accrued interest receivable on COVID-19 deferrals, for the three months ended
September 30, 2021 was a recovery of $3.2 million , a decrease of $7.3 million
from the $4.1 million PCL recorded for the same period in 2020.
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•Noninterest income of $22.6 million for the three months ended September 30,
2021 increased $1.5 million as compared to $21.1 million for the same period in
2020. Fees for wealth management services of $13.6 million for the three months
ended September 30, 2021 increased $1.9 million as compared to the same period
in 2020. Capital markets revenue and insurance commissions of $2.8 million and
of $1.5 million , respectively, for the three months ended September 30, 2021
decreased $491 thousand and $158 thousand , respectively, as compared to the same
period in 2020.
•Noninterest expense of
Nine Month Results of Operations
•Net income attributable to the Corporation for the nine months endedSeptember 30, 2021 was$56.8 million , an increase of$39.8 million as compared to$17.0 million for the same period in 2020. Diluted earnings per share was$2.83 for the nine months endedSeptember 30, 2021 as compared to$0.85 for the same period in 2020. •ROAE and ROAA for the nine months endedSeptember 30, 2021 were 11.93% and 1.54%, respectively, as compared to 3.74% and 0.45%, respectively, for the same period in 2020.
•Tax-equivalent net interest income decreased
•PCL for the nine months ended
•Noninterest income of$63.4 million for the nine months endedSeptember 30, 2021 increased$3.4 million as compared to$60.0 million for the same period in 2020. Fees for wealth management services of$40.5 million for the nine months endedSeptember 30, 2021 increased$8.5 million as compared to the same period in 2020. Capital markets revenue and insurance commissions of$5.7 million and$4.2 million , respectively, for the nine months endedSeptember 30, 2021 decreased$2.9 million and$281 thousand as compared to the same period in 2020. •Noninterest expense of$110.0 million for the nine months endedSeptember 30, 2021 increased$5.9 million , from$104.1 million for the same period in 2020. Included in noninterest expense for the three months endedSeptember 30, 2021 are$1.9 million of due diligence and merger-related expenses related to the pending merger with WSFS. These expenses primarily consisted of legal fees and investment banker fees.
Changes in Financial Condition
•Total assets of
•Total shareholders' equity of
•Total portfolio loans and leases as of
•Total non-performing loans and leases of$8.0 million represented 0.22% of portfolio loans and leases as ofSeptember 30, 2021 as compared to$5.3 million , or 0.15% of portfolio loans and leases as ofDecember 31, 2020 .
•The
•Total deposits of
•Wealth assets under management, administration, supervision and brokerage as ofSeptember 30, 2021 were$21.39 billion , an increase of$2.41 billion from$18.98 billion as ofDecember 31, 2020 . Page 60 -------------------------------------------------------------------------------- Table of Contents Key Performance Ratios
Key financial performance ratios for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Return on average equity 11.17 % 8.60 % 11.93 % 3.74 %
Return on average assets 1.49 1.02 1.54 0.45
Tax-equivalent net interest margin 3.15 3.03 3.16 3.21
Equity to assets ratio 13.32 11.81 12.90 11.98
Basic earnings per share $ 0.92 $ 0.66 $ 2.86 $ 0.85
Diluted earnings per share 0.92 0.66 2.83 0.85
Dividends paid or accrued per share 0.28 0.27 0.82 0.79
Dividends paid or accrued per share to net income per basic
common share 30.4 % 40.9 % 28.7 % 92.9 %
The following table presents certain key period-end balances and ratios as of
September 30, December 31,
(dollars in millions, except per share amounts) 2021 2020
Book value per share $
32.90
ACL on loans and leases as a percentage of portfolio loans and leases
1.01 % 1.48 %
Tier I capital to risk weighted assets 12.90 11.86
Loan to deposit ratio 94.8 82.9
Wealth assets under management, administration, supervision and brokerage
$ 21,386.7 $ 18,976.5 Portfolio loans and leases 3,617.9 3,628.4 Total assets 4,879.1 5,432.0 Total shareholders' equity 654.8 622.3 The following sections discuss, in greater detail, the Corporation's results of operations for the three and nine months endedSeptember 30, 2021 , as compared to the same period in 2020, and the changes in its financial condition as ofSeptember 30, 2021 as compared toDecember 31, 2020 .
Other Matters
EffectiveNovember 1, 2021 , the Corporation suspended its Dividend Reinvestment and Stock Purchase Plan. Consequently, any dividends that are paid followingNovember 1, 2021 will be payable in cash.Crusader Servicing Corporation ("Crusader"), which was an 80% owned subsidiary of Royal Bank America that was acquired by the Bank in the RBPI Merger, along with the Bank as successor-in-interest to Royal Bank America, are defendants in the case captioned Snyder v.Crusader Servicing Corporation et al., Case No. 2007-01027, in theCourt of Common Pleas ofMontgomery County, Pennsylvania . The case involves claims brought by a former Crusader shareholder in 2007 against Crusader, its former directors and remaining shareholders related, among other things, to a purported failure to pay amounts allegedly due to Snyder for his shares of Crusader stock. OnMay 1, 2019 , the Court rendered a decision in favor of Snyder and ordered Crusader to pay Snyder the amount of$2,190,000 plus interest at the rate of 6% fromDecember 1, 2006 . The matter was appealed, and onMarch 18, 2020 , theSuperior Court of the Commonwealth of Pennsylvania returned an opinion reversing in part and affirming in part the trial court's judgment. The effect of this was to vacate the initial judgment awarded by the trial court, and instead to require an appraisal process in accordance with Crusader's Shareholders' Agreement to determine the value ofMr. Snyder's shares. The parties anticipate the appraisal to commence within the coming months. We do not believe that this ruling and any monetary award ultimately payable by Crusader will be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of the Corporation. Page 61
-------------------------------------------------------------------------------- Table of Contents 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 Credit Losses, or changes in the ACL on loans and leases, off-balance sheet credit exposures, and other financial assets measured at amortized cost; •Noninterest Income, which is made up primarily of wealth management revenue, capital markets 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; •Noninterest Expense, which consists primarily of salaries and employee benefits, occupancy, intangible asset amortization, professional fees, due diligence, merger-related and merger integration expenses, and other operating expenses; and •Income Tax Expense, which includes state and federal jurisdictions.
TAX-EQUIVALENT NET INTEREST INCOME
Net interest income is the primary source of the Corporation's revenue. The tables within "Management's Discussion and Analysis of Results of Operation and Financial Condition - Analyses of Interest Rates and Interest Differential" beginning at page 64 below present a summary, for the three and nine months endedSeptember 30, 2021 and 2020, of the Corporation's average balances and tax-equivalent yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The tax-equivalent net interest margin is the tax-equivalent net interest income as a percentage of average interest-earning assets. The tax-equivalent net interest spread is the difference between the weighted average tax-equivalent yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The effect of noninterest-bearing liabilities represents the effect on the net interest margin of net funding provided by noninterest-earning assets, noninterest-bearing liabilities and shareholders' equity.
Three Months Ended
For the three months ended
The decrease in tax-equivalent net interest income was driven by a decrease of$2.5 million in tax-equivalent interest and fees earned on loans and leases, partially offset by decreases of$2.2 million in interest paid on deposits and an increase of$93 thousand in tax-equivalent interest income on available for sale investment securities for the three months endedSeptember 30, 2021 as compared to the same period in 2020. Tax-equivalent interest and fees earned on loans and leases for the three months endedSeptember 30, 2021 decreased$2.5 million as compared to the same period in 2020. The tax-equivalent yield on average loans and leases for the three months endedSeptember 30, 2021 was 3.77%, a 20 basis point decrease as compared to the same period in 2020. Average loans and leases decreased$83.6 million for the three months endedSeptember 30, 2021 as compared to same period in 2020. Interest expense on deposits for the three months endedSeptember 30, 2021 decreased$2.2 million as compared to the same period in 2020. The rate paid on average interest-bearing deposits for the three months endedSeptember 30, 2021 was 0.13%, a 28 basis point decrease as compared to the same period in 2020. Average interest-bearing deposits for the three months endedSeptember 30, 2021 decreased$450.6 million as compared to the same period in 2020. Tax-equivalent interest income on available for sale investment securities for the three months endedSeptember 30, 2021 increased$93 thousand as compared to the same period in 2020. The tax-equivalent yield on average available for sale investment securities for the three months endedSeptember 30, 2021 was 1.53%, a 33 basis point decrease as compared to the same period in 2020. Average available for sale investment securities increased$140.0 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020.
Nine Months Ended
For the nine months ended
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The decrease in tax-equivalent net interest income was driven by a decrease of
$16.8 million in tax-equivalent interest and fees earned on loans and leases,
partially offset by decreases of $11.9 million and $662 thousand in interest
paid on deposits and interest expense on short-term borrowings, respectively,
for the nine months ended September 30, 2021 as compared to the same period in
2020.
Tax-equivalent interest and fees earned on loans and leases for the nine months
ended September 30, 2021 decreased $16.8 million as compared to the same period
in 2020. The tax-equivalent yield on average loans and leases for the nine
months ended September 30, 2021 was 3.84%, a 41 basis point decrease as compared
to the same period in 2020. Average loans and leases decreased $180.7 million
for the nine months ended September 30, 2021 as compared to same period in 2020.
Included in tax-equivalent interest and fees earned on loans and leases for the
nine months ended September 30, 2020 was the recognition of $1.8 million of net
deferred PPP loan origination fees.
Interest expense on deposits for the nine months ended September 30, 2021
decreased $11.9 million as compared to the same period in 2020. The rate paid on
average interest-bearing deposits for the nine months ended September 30, 2021
was 0.17%, a 52 basis point decrease as compared to the same period in 2020.
Average interest-bearing deposits for the nine months ended September 30, 2021
decreased $380.6 million as compared to the same period in 2020.
Interest expense on short-term borrowings for the nine months ended September
30, 2021 decreased $662 thousand as compared to the same period in 2020. The
decrease was primarily due to a $73.1 million decrease in average short-term
borrowings for the nine months ended September 30, 2021 as compared to the same
period in 2020, coupled with a 77 basis point decrease in the rate paid for the
nine months ended September 30, 2021 as compared to the same period in 2020.
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Analyses of Interest Rates and Interest Differential
The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields.
Three Months Ended September 30,
2021 2020
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(dollars in thousands) Balance Expense Paid Balance Expense Paid
Assets:
Interest-bearing deposits with banks
0.12 % $ 336,225 $ 85 0.10 %
Investment securities - available for sale:
Taxable 692,821 2,670 1.53 550,199 2,562 1.85
Tax-exempt(4) 1,109 8 2.86 3,690 23 2.48
Total investment securities - available for
sale 693,930 2,678 1.53 553,889 2,585 1.86
Investment securities - held to maturity 12,179 54 1.76 12,248 57
1.85
Investment securities - trading 8,262 21 1.01 7,957 21
1.05
Loans and leases(1)(2)(3)(4) 3,617,866 34,423 3.77 3,701,495 36,901
3.97
Total interest-earning assets 4,399,902 37,196 3.35 4,611,814 39,649 3.42 Cash and due from banks 9,799 16,557 ACL on loans and leases (39,218) (55,285) Other assets 530,362 584,502 Total assets$ 4,900,845 $ 5,157,588 Liabilities:
Savings, NOW, and market rate accounts
0.05 $ 2,282,591 $ 1,042 0.18
Wholesale deposits 73,497 74 0.40 223,527 465 0.83
Retail time deposits 255,815 458 0.71 385,534 1,460 1.51
Total interest-bearing deposits 2,441,079 808 0.13 2,891,652 2,967 0.41
Short-term borrowings 35,166 16 0.18 29,913 8 0.11
Long-term FHLB advances 33,795 173 2.03 44,849 234 2.08
Subordinated notes 98,993 1,022 4.10 98,815 1,094 4.40
Junior subordinated debt 22,051 198 3.56 21,859 207 3.77
Total interest-bearing liabilities 2,631,084 2,217 0.33 3,087,088 4,510 0.58
Noninterest-bearing deposits 1,439,672 1,220,570
Other liabilities 177,365 240,737
Total noninterest-bearing liabilities 1,617,037 1,461,307
Total liabilities 4,248,121 4,548,395
Shareholders' equity 652,724 609,193
Total liabilities and shareholders' equity $ 4,900,845 $ 5,157,588
Net interest spread 3.02 2.84
Effect of noninterest-bearing sources 0.13
0.19
Net interest income/margin on earning assets(4)$ 34,979 3.15$ 35,139
3.03
Tax-equivalent adjustment(4)$ 92 0.01 %$ 107 0.01 % (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 net accretion of deferred fees of$682 thousand and$267 thousand for the three months endedSeptember 30, 2021 and 2020, respectively. (4)Tax rate used for tax-equivalent calculations is 21% for 2021 and 2020. Page 64
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Nine Months Ended September 30,
2021 2020
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(dollars in thousands) Balance Expense Paid Balance Expense Paid
Assets:
Interest-bearing deposits with banks
0.09 % $ 194,652 $ 233 0.16 %
Investment securities - available for sale:
Taxable 723,357 8,532 1.58 527,837 8,402 2.13
Tax-exempt(4) 1,812 36 2.66 4,388 77 2.34
Total investment securities - available for
sale 725,169 8,568 1.58 532,225 8,479 2.13
Investment securities - held to maturity 13,300 176 1.77 12,854 217 2.26
Investment securities - trading 8,552 61 0.95 8,095 70 1.16
Loans and leases(1)(2)(3)(4) 3,612,225 103,827 3.84 3,792,969 120,578 4.25
Total interest-earning assets 4,447,427 112,690 3.39 4,540,795 129,577 3.81
Cash and due from banks 10,117 15,145
Allowance for loan and lease losses (46,611) (45,099)
Other assets 524,516 565,649
Total assets $ 4,935,449 $ 5,076,490
Liabilities:
Savings, NOW, and market rate accounts $ 2,147,989 $ 924 0.06 $ 2,264,407 $ 8,364 0.49
Wholesale deposits 89,885 407 0.61 240,571 1,928 1.07
Retail time deposits 286,280 1,859 0.87 399,799 4,788 1.60
Total interest-bearing deposits 2,524,154 3,190 0.17 2,904,777 15,080 0.69
Short-term borrowings 29,051 31 0.14 102,173 693 0.91
Long-term FHLB advances 37,868 581 2.05 46,110 633 1.83
Subordinated notes 98,949 3,100 4.19 98,770 3,383 4.58
Junior subordinated debt 22,003 595 3.62 21,814 731 4.48
Total interest-bearing liabilities 2,712,025 7,497 0.37 3,173,644 20,520 0.86
Noninterest-bearing deposits 1,407,802 1,080,837
Other liabilities 178,926 213,750
Total noninterest-bearing liabilities 1,586,728 1,294,587
Total liabilities 4,298,753 4,468,231
Shareholders' equity 636,696 608,259
Total liabilities and shareholders' equity $ 4,935,449 $ 5,076,490
Net interest spread 3.02 2.95
Effect of noninterest-bearing sources 0.14
0.26
Net interest income/margin on earning assets(4)$ 105,193 3.16$ 109,057 3.21 Tax-equivalent adjustment(4)$ 286 0.01 %$ 307 0.01 % (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$1.7 million and$887 thousand for the nine months endedSeptember 30, 2021 and 2020, respectively. (4)Tax rate used for tax-equivalent calculations is 21% for 2021 and 2020.
Rate/Volume Analysis (tax-equivalent basis)(1)
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 three and nine months endedSeptember 30, 2021 as compared to the same periods in 2020, allocated by rate and volume. The change in interest income and/or expense due to both volume and rate has been allocated to changes in volume. Page 65
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2021 Compared to 2020
Three Months Ended Nine Months Ended
(dollars in thousands) September 30, September 30,
increase/(decrease) Volume Rate Total Volume Rate Total
Interest Income:
Interest-bearing deposits with banks $ (88) $ 23
2,471 (2,366) 105 4,154 (4,074) 80
Investment securities -nontaxable (22) 7 (15) (48) 7 (41)
Loans and leases (779) (1,699) (2,478) (5,721) (11,030) (16,751)
Total interest income 1,582 (4,035)(2,453) (1,743) (15,144) (16,887) Interest expense: Savings, NOW and market rate accounts
(77) (689) (766) (433) (7,007) (7,440)
Wholesale deposits (312) (79) (391) (1,211) (310) (1,521)
Retail time deposits (490) (512) (1,002) (1,362) (1,567) (2,929)
Short-term borrowings 2 6 8 (495) (167) (662)
Long-term FHLB advances (57) (4) (61) (141) 89 (52)
Subordinated notes 13 (85) (72) 10 (293) (283)
Junior subordinated debt 11 (20) (9) 10 (146) (136)
Total interest expense (910) (1,383) (2,293) (3,622) (9,401) (13,023)
Interest differential $ 2,492 $ (2,652) $ (160) $ 1,879 $ (5,743) $ (3,864) (1) The tax rate used in the calculation of the tax-equivalent income is 21% for 2021 and 2020.
Tax-Equivalent Net Interest Margin
The tax-equivalent net interest margin of 3.15% for the three months endedSeptember 30, 2021 was a 12 basis point increase from 3.03% for the same period in 2020. The decrease in the tax-equivalent net interest margin was primarily due to the increase in interest rates during the three months endedSeptember 30, 2021 as compared to the same period in 2020.
The tax-equivalent net interest margin and related components for the past five consecutive quarters are shown in the table below:
Interest- Interest- Effect of
Earning Bearing Net Interest Noninterest Net Interest
Quarter Asset Yield Liability Cost Spread Bearing Sources Margin
3rd Quarter 2021 3.35% 0.33% 3.02% 0.13% 3.15%
2nd Quarter 2021 3.39 0.36 3.03 0.14 3.17
1st Quarter 2021 3.42 0.41 3.01 0.15 3.16
4th Quarter 2020 3.33 0.45 2.88 0.16 3.04
3rd Quarter 2020 3.42 0.58 2.84 0.19 3.03
Interest Rate Sensitivity
Management actively manages the Corporation's interest rate sensitivity
position. The objectives of interest rate risk management are to control
exposure of net interest income changes associated with interest rate movements
and to achieve sustainable growth in net interest income. The Corporation's
Asset Liability Committee ("ALCO"), using policies 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, and Insured Cash Sweep
("ICS").
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Management utilizes several tools to measure the effect of interest rate risk on
net interest income. These methods include gap analysis, market value of
portfolio equity analysis, and net interest income simulations under various
scenarios. Management compares the results of these analyses to limits
established by the Corporation's ALCO policies and makes adjustments as
appropriate if the results are outside the established limits.
The below 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 management'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. By definition, the simulation assumes static interest rates and does not incorporate forecasted changes in the yield curve. The changes to net interest income shown below are in compliance with the Corporation's policy guidelines.
Summary of Interest Rate Simulation
Change in Net Interest Income Over Change in Net Interest Income Over
the Twelve Months Beginning After the Twelve Months Beginning After
September 30, 2021 December 31, 2020
Amount Percentage Amount Percentage
+300 basis points $ 23,194 16.91 % $ 24,525 17.35 %
+200 basis points 14,581 10.63 15,172 10.73
+100 basis points 6,317 4.61 6,298 4.46
-100 basis points (2,435) (1.78) (2,262) (1.60)
The above interest rate simulation suggests that the Corporation's balance sheet
is asset sensitive as of September 30, 2021 in the +100 basis point scenario,
demonstrating that a 100 basis point increase in interest rates would have a
positive impact on net interest income over the next 12 months. The balance
sheet is slightly less asset sensitive in the +100 basis point scenario as of
September 30, 2021 than it was as of December 31, 2020 . The main contributing
factor in this decline is the reduction in loan yields and reduction in cash
equivalent balances.
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 economic environment and
emerging from an extended period of very low interest rates, the reliability of
management's assumptions in the interest rate simulation model is more uncertain
than in prior years. Actual customer behavior, as it relates to deposit
activity, may be significantly different than expected behavior, which could
cause an unexpected outcome and may result in lower net interest income than
that derived from the analysis referenced above.
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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: 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. Non-rate-sensitive assets and liabilities
are spread over time periods to reflect management's view of the maturity of
these funds.
Non-maturity deposits (demand deposits in particular) are recognized by the
industry to have different sensitivities to interest rate environments.
Consequently, it is an accepted practice to spread non-maturity deposits over
defined time periods 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 industry
practice has suggested distribution limits for non-maturity deposits. However,
management has taken a more conservative approach than these limits would
suggest by forecasting these deposit types with a shorter maturity. These
assumptions are also reflected in the above interest rate simulation.
The following table presents the Corporation's gap analysis as of September 30,
2021 :
0 to 90 91 to 365 1 - 5 Over Non-Rate
(dollars in millions) Days Days Years 5 Years Sensitive Total
Assets:
Interest-bearing deposits with banks
$ - $ - $ - $ 39.2
Investment securities(1) 119.1 112.7 312.1 132.2 - 676.1
Loans and leases(2) 1,942.1 294.6 1,038.7 343.1 - 3,618.5
ACL on loans and leases - - - - (36.5) (36.5)
Cash and due from banks - - - - 9.5 9.5
Operating lease right-of-use assets 0.6 1.9 9.4 21.2 - 33.1
Other assets - - - - 539.1 539.1
Total assets 2,101.0 409.2 1,360.2 496.5 512.1 4,879.0
Liabilities and shareholders' equity:
Demand, noninterest-bearing 41.0 123.1 425.2 854.3 - 1,443.6
Savings, NOW and market rate 103.2 309.3 889.4 785.8 - 2,087.7
Time deposits 75.1 120.0 43.5 - - 238.6
Wholesale non-maturity deposits 39.5 - - - - 39.5
Wholesale time deposits 0.5 0.4 5.2 - - 6.1
Short-term borrowings 96.9 - - - - 96.9
Long-term FHLB advances 25.0 - - - - 25.0
Subordinated notes 30.0 - 69.0 - - 99.0
Junior subordinated debentures 22.1 - - - - 22.1
Operating lease liabilities 0.7 2.2 11.0 24.8 - 38.7
Other liabilities - - - - 127.0 127.0
Shareholders' equity 23.5 70.1 374.1 187.1 - 654.8
Total liabilities and shareholders' equity 457.5 625.1 1,817.4 1,852.0 127.0 4,879.0
Interest-earning assets 2,100.4 407.3 1,350.8 475.3 - 4,333.8
Interest-bearing liabilities 392.3 429.7 1,007.1 785.8 - 2,614.9
Difference between interest-earning assets
and interest-bearing liabilities 1,708.1 (22.4) 343.7 (310.5) - 1,718.9
Cumulative difference between interest
earning assets and interest-bearing
liabilities $ 1,708.1 $ 1,685.7
535 % 305 % 211 % 166 %
(1) Investment securities include available for sale, held to maturity and trading. (2) Loans include portfolio loans and leases and loans held for sale.
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The table above indicates that the Corporation is asset-sensitive in the
immediate 90-day time frame and may experience an increase in net interest
income during that time period if rates rise. Conversely, if rates decline, net
interest income may decline. It should be noted that the gap analysis is only
one tool used to measure interest rate sensitivity and should be used in
conjunction with other measures such as the interest rate simulation discussed
above. The gap analysis measures the timing of changes in rate, but not the true
weighting of any specific component of the Corporation's balance sheet. The
asset-sensitive position reflected in this gap analysis is similar to the
Corporation's position at December 31, 2020 .
PROVISION FOR CREDIT LOSSES ON LOANS AND LEASES
For the three and nine months endedSeptember 30, 2021 , the Corporation recorded a recovery of PCL on loans and leases of$2.8 million and a recovery of PCL on loans and leases of$14.3 million , respectively, as compared to a PCL on loans and leases of$3.6 million and a PCL on loans and leases$40.3 million for the same respective periods in 2020. As ofSeptember 30, 2021 the ACL on loans and leases of$36.5 million was 1.01% of portfolio loans and leases, as compared to an ACL on loans and leases of$53.7 million , or 1.48% of portfolio loans and leases, as ofDecember 31, 2020 . The difference in ACL on loans and leases between the two periods was driven by the current and forward-looking economic impacts of the COVID-19 pandemic, as well as projected prepayments, included in the estimation of expected credit losses on loans and leases as ofSeptember 30, 2021 as compared toDecember 31, 2020 . Net recoveries for the three months endedSeptember 30, 2021 were$140 thousand and net charge-offs for the 9 months endedSeptember 30, 2021 were$2.9 million , as compared to net charge-offs of$2.2 million and$9.7 million for the same respective periods in 2020. The following table details the allocation of the ACL as of the dates indicated: Allocation of ACL September 30, 2021 December 31, 2020 % Loans and % Loans and Leases to Total Leases to Total (dollars in thousands) ACL Loans and Leases ACL Loans and Leases CRE - nonowner-occupied$ 11,382 40.5 %$ 19,382 39.6 % CRE - owner-occupied 3,859 14.9 6,982 15.9 Home equity lines of credit 955 4.1 1,406 4.7 Residential mortgage - 1st liens 4,375 15.5 7,782 17.1 Residential mortgage - junior liens 361 0.7 382 0.7 Construction 2,315 6.5 2,707 4.4 Commercial & Industrial 8,355 12.9 8,087 12.3 Consumer 433 1.3 325 1.1 Leases 4,511 3.7 6,656 4.2 Total ACL on loans and leases$ 36,546 100.0 %$ 53,709 100.0 %
Asset Quality and Analysis of Credit Risk
As ofSeptember 30, 2021 , total nonperforming loans and leases increased by$2.7 million to$8.0 million , representing 0.22% of portfolio loans and leases, as compared to$5.3 million , or 0.15% of portfolio loans and leases, as ofDecember 31, 2020 . The increase in nonperforming loans and leases was related to pay-offs and pay-downs of$2.4 million , charge-offs of$211 thousand and return to accrual status of$334 thousand . These decreases in nonperforming loans and leases were offset by the addition of$5.7 million of new nonperforming loans and leases during the nine months endedSeptember 30, 2021 . All nonperforming loans are evaluated for impairment and charged-off to net realizable value, when necessary. As ofSeptember 30, 2021 , the ACL on loans and leases of$36.5 million represented 1.01% of portfolio loans and leases, a decrease of 47 basis points fromDecember 31, 2020 . The decrease in coverage was driven by improving current and forecasted economic conditions, which determine the level of ACL required to absorb expected credit losses. As ofSeptember 30, 2021 , the Corporation had$9.3 million of TDRs, of which$4.5 million were in compliance with modified terms and excluded from non-performing loans and leases. As ofDecember 31, 2020 , the Corporation had$8.8 million of TDRs, of which$7.0 million were in compliance with modified terms, and were excluded from non-performing loans and leases. As ofSeptember 30, 2021 , 9 loans and leases in the amount of$13.6 million , comprising 0.4% of the Bank's portfolio loans and leases, were within a deferral period under the Bank's consumer and commercial loan and lease modification programs, as compared to 103 loans and leases in the amount of$75.0 million , comprising 2.1% of the Bank's portfolio loans Page 69 -------------------------------------------------------------------------------- Table of Contents and leases, as ofDecember 31, 2020 . For more information on our loan modification programs offered in response to the COVID-19 pandemic, which are not classified as TDRs, see Section F - Troubled Debt Restructurings of Note 5 - Loans and Leases, in the Notes to the Unaudited Consolidated Financial Statements. Management continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. Management believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.
Nonperforming Assets and Related Ratios
Nonperforming assets and related ratios as ofSeptember 30, 2021 andDecember 31, 2020 were as follows: September 30, December 31, (dollars in thousands) 2021 2020 Nonperforming Assets: Nonperforming loans and leases$ 8,047 $ 5,306 Other real estate owned - - Total nonperforming assets$ 8,047 $ 5,306 Troubled Debt Restructurings: TDRs included in non-performing loans$ 4,753 $ 1,737 TDRs in compliance with modified terms 4,532 7,046 Total TDRs $
9,285
Loan and Lease quality indicators: Allowance for credit losses on loans and leases to nonperforming loans and leases
454.2 % 1,012.2 %
Nonperforming loans and leases to total portfolio loans and leases
0.22 0.15
Allowance for credit losses on loans and leases to total portfolio loans and leases
1.01 1.48
Nonperforming assets to total loans and leases and OREO 0.22 0.15
Nonperforming assets to total assets 0.16 0.10
Total portfolio loans and leases $ 3,617,915 $ 3,628,411
Allowance for credit losses on loans and leases 36,546 53,709
NONINTEREST INCOME
Three Months Ended
Noninterest income of$22.6 million for the three months endedSeptember 30, 2021 increased$1.5 million as compared to$21.1 million for the same period in 2020. The increase was driven by increases of$1.9 million and$512 thousand in fees for wealth management services and net gain on sale of investment securities available for sale, respectively, partially offset by decreases of$491 thousand ,$350 thousand , and$158 thousand in capital markets revenue, net gain on sale of loans, and insurance commissions, respectively.
Nine Months Ended
Noninterest income of$63.4 million for the nine months endedSeptember 30, 2021 increased$3.4 million as compared to$60.0 million for the same period in 2020. The increase was primarily due to increases of$8.5 million and$1.6 million in fees for wealth management services and other operating income, respectively, partially offset by decreases of$3.5 million and$2.9 million in net gain on sale of loans and capital markets revenue, respectively. The increase in fees for wealth management services was driven by the lack of non-recurring costs associated with the wind-down of BMT Investment Advisers, which had a$2.2 million impact on fees for wealth management services in the second quarter of 2020, as well as the$4.14 billion increase in wealth assets under management, administration, supervision and brokerage betweenSeptember 30, 2021 andSeptember 30, 2020 . The decrease in net gain on sale of loans was driven by a$2.4 million gain on the sale of approximately$292.1 million of PPP loans in the second quarter of 2020. The decrease in capital markets revenue was primarily due to the decreased volume and size of interest rate swap transactions with commercial loan customers for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. Page 70
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The following table provides details of other operating income for the three and
nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Visa debit card income $ 714 $ 753 $ 2,109 $ 1,927
BOLI income 271 343 871 993
Commissions and fees 337 339 1,043 907
Safe deposit box rentals 102 106 257 268
Other investment income 173 13 531 52
Rental income 5 11 15 28
(Loss) gain on trading investments (21) 357 416 396
Miscellaneous other income 578 290 1,892 985
Other operating income $ 2,159 $ 2,212 $ 7,134 $ 5,556 The following table provides supplemental information regarding mortgage loan originations and sales:
As of or for the As of or for the
Three Months Ended Nine Months Ended
September 30 , September 30 ,(dollars in thousands) 2021 2020 2021 2020 Mortgage originations$ 19,370 $ 37,621 $ 75,790 $ 105,755 Mortgage loans sold: Servicing retained - - - - Servicing released 5,614 33,487 31,274 80,370 Total mortgage loans sold$ 5,614 $ 33,487 $ 31,274 $ 80,370 Percentage of originated mortgage loans sold 29.0 % 89.0 % 41.3 % 76.0 % Servicing retained % - - - - Servicing released % 100.0 100.0 100.0 100.0
Residential mortgage loans serviced for others
$ 277,380 $ 407,781 Mortgage servicing rights 2,057 2,881 2,057 2,881 Gain on sale of mortgage loans 159 986 720 2,199 Loan servicing and other fees 327 373 1,028 1,286 Amortization of MSRs 116 413 521 970 (Impairment) recovery of MSRs - (146) (48) (599)
Wealth Assets Under Management, Administration, Supervision and Brokerage ("Wealth Assets")
Wealth Asset accounts are categorized into two groups. The first account group
consists predominantly of clients whose fees are determined based on the market
value of the assets held in their accounts ("Market Value" basis). The second
account group consists predominantly of clients whose fees are set at fixed
amounts ("Fixed Fee" basis), and, as such, are not affected by market value
changes.
The following tables detail the composition of Wealth Assets as it relates to
the calculation of fees for wealth management services:
(dollars in thousands) Wealth Assets as of:
September 30, June 30, March 31, December 31, September 30,
Fee Basis 2021 2021 2021 2020 2020
Market value $ 7,607,235 $ 7,614,127 $ 7,258,019 $ 7,121,474 $ 6,557,898
Fixed fee 13,779,447 13,015,941 12,801,352 11,855,070 10,686,409
Total $ 21,386,682 $ 20,630,068 $ 20,059,371 $ 18,976,544 $ 17,244,307
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Percentage of Wealth Assets as of:
September 30, June 30, March 31, December 31, September 30,
Fee Basis 2021 2021 2021 2020 2020
Market value 35.6 % 36.9 % 36.2 % 37.5 % 38.0 %
Fixed fee 64.4 % 63.1 % 63.8 % 62.5 % 62.0 %
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
The following tables detail the composition of fees for wealth management services for the periods indicated: (dollars in thousands)
For the Three Months Ended:
September 30, June 30, March 31, December 31, September 30,
Fee Basis 2021 2021 2021 2020 2020
Market value $ 10,047 $ 9,463 $ 9,232 $ 8,572 $ 8,344
Fixed fee 3,571 4,568 3,604 4,016 3,363
Total $ 13,618 $ 14,031 $ 12,836 $ 12,588 $ 11,707
Percentage ofFees for Wealth Management for the Three Months Ended:
September 30, June 30, March 31, December 31, September 30,
Fee Basis 2021 2021 2021 2020 2020
Market value 73.8 % 67.4 % 71.9 % 68.1 % 71.3 %
Fixed fee 26.2 % 32.6 % 28.1 % 31.9 % 28.7 %
Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Customer Derivatives
To accommodate the risk management needs of qualified commercial customers, the
Bank enters into financial derivative transactions consisting of interest rate
swaps, options, risk participation agreements and foreign exchange contracts.
Derivative financial instruments involve, to varying degrees, interest rate,
market and credit risk. Market risk exposure from customer derivative positions
is managed by simultaneously entering into matching transactions with
institutional dealer counterparties that offset customer contracts in notional
amount and term. Derivative contracts create counterparty credit risk with both
the Bank's customers and with institutional dealer counterparties. The
Corporation manages customer counterparty credit risk through its credit policy,
approval processes, monitoring procedures and by obtaining adequate collateral,
when appropriate. The Bank seeks to minimize dealer counterparty credit risk by
establishing credit limits and collateral agreements through industry standard
agreements published by the International Swaps and Derivatives Association
(ISDA) and associated credit support annex (CSA) agreements. None of the Bank's
outstanding derivative contracts associated with the customer derivative program
is designated as a hedge and none is entered into for speculative purposes. The
interest rate swaps with both the customers and third parties are not designated
as hedges under FASB ASC 815 and are marked to market through earnings. As the
interest rate swaps are structured to offset each other, changes to the
underlying benchmark interest rates considered in the valuation of these
instruments do not result in an impact to earnings; however, there may be fair
value adjustments related to credit quality variations between counterparties,
which may impact earnings as required by FASB ASC 820. As of September 30, 2021 ,
there were no fair value adjustments related to credit quality.
NONINTEREST EXPENSE
Three Months Ended
Noninterest expense of$36.8 million for the three months endedSeptember 30, 2021 increased$1.6 million as compared to$35.2 million for the same period in 2020. The increase was primarily driven by increases of$1.4 million ,$705 thousand , and$423 thousand in other operating expenses, professional fees, andPennsylvania bank shares tax expense, respectively, were partially offset by decreases of$541 thousand ,$450 thousand , and$193 thousand in occupancy and bank premises expense, salaries and wages, and advertising expenses, respectively.
Nine Months Ended
Noninterest expense of$110.0 million for the nine months endedSeptember 30, 2021 increased$5.9 million as compared to$104.1 million for the same period in 2020. Increases of$3.5 million ,$1.9 million ,$1.7 million , and$824 thousand in other operating expenses, merger-related expenses,Pennsylvania bank shares tax expense, and professional fees, respectively, were Page 72 -------------------------------------------------------------------------------- Table of Contents partially offset by decreases of$1.1 million and$835 thousand in occupancy and bank premises expense and salaries and wages, respectively.
The following table provides details of other operating expenses for the three
and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in thousands) 2021 2020 2021 2020
Amortization expense of capitalized costs for
cloud computing arrangements $ 511 $ 90 $ 1,354 $ 270
Contributions - 396 240 1,364
Deferred compensation expense 244 129 1,050 (312)
Director fees 119 152 358 456
Dues and subscriptions 276 401 1,098 1,285
FDIC insurance 291 627 1,007 1,450
Insurance 307 237 916 778
Loan processing 99 90 399 372
Miscellaneous other expenses 3,015 1,304 6,890 3,775
MSR amortization and impairment 116 559 569 1,569
Other taxes 7 5 27 29
Outsourced services - 62 92 187
Wealth custodian fees 91 105 317 334
Postage 124 138 418 452
Stationary and supplies 57 100 196 324
Telephone and data lines 392 426 1,328 1,292
Temporary help and recruiting 516 41 1,022 175
Travel and entertainment 136 8 247 268
Other operating expenses $ 6,301 $ 4,870 $ 17,528 $ 14,068
INCOME TAXES
Income tax expense for the three months ended September 30, 2021 was $5.6
million , an increase of $1.9 million as compared to $3.7 million for the same
period in 2020. The effective tax rate for the third quarter of 2021 increased
to 23.4% as compared to 22.0% for the third quarter of 2020.
Income tax expense for the nine months ended September 30, 2021 was $16.6
million , an increase of $11.8 million as compared to $4.8 million for the same
period in 2020. Income before income taxes increased $51.6 million for the nine
months ended September 30, 2021 as compared for the same period in 2020. The
effective tax rate for the nine months ended September 30, 2021 increased to
22.7% as compared to 21.9% for the same period in 2020.
BALANCE SHEET ANALYSIS
Total assets of$4.88 billion as ofSeptember 30, 2021 decreased$552.9 million from$5.43 billion as ofDecember 31, 2020 . The following sections detail the balance sheet changes: Page 73
-------------------------------------------------------------------------------- Table of Contents Loans and Leases
The table below compares the portfolio loans and leases outstanding at
September 30, December 31,
2021 2020 Change
Percent of Percent of
(dollars in thousands) Balance Portfolio Balance Portfolio Amount Percent
CRE - nonowner-occupied $ 1,464,534 40.5 % $ 1,435,575 39.6 % $ 28,959 2.0 %
CRE - owner-occupied 537,488 14.9 578,509 15.9 (41,021) (7.1)
Home equity lines of credit 146,752 4.1 169,337 4.7 (22,585) (13.3)
Residential mortgage - 1st liens 559,946 15.5 621,369 17.1 (61,423) (9.9)
Residential mortgage - jr. liens 24,424 0.7 23,795 0.7 629 2.6
Construction 235,418 6.5 161,308 4.4 74,110 45.9
Commercial & Industrial 467,979 12.9 446,438 12.3 21,541 4.8
Consumer 46,428 1.3 39,683 1.1 6,745 17.0
Leases 134,946 3.7 152,397 4.2 (17,451) (11.5)
Total portfolio loans and leases 3,617,915 100.0 % 3,628,411 100.0 % (10,496) (0.3)
Loans held for sale 634 6,000 (5,366) (89.4)
Total loans and leases $ 3,618,549 $ 3,634,411 $ (15,862) (0.4) %
Investment Securities
Investment securities available for sale as of September 30, 2021 totaled $656.5
million , a decrease of $446.2 million as compared to $1.17 billion as of
December 31, 2020 . The decrease was primarily due to the maturing, in January
2021 , of $500.0 million of short-term U.S. Treasury securities included on the
balance sheet as of December 31, 2020 . During the third quarter of 2021, U.S.
government agency securities, mortgage-backed securities, and state and
political subdivision securities with book values of $8.8 million , $5.6 million ,
and $2.2 million , respectively, were sold for gains of $338 thousand , $164
thousand , and $10 thousand , respectively. All securities sold during the third
quarter of 2021 were sold at a gain.
Deposits
Deposits of$3.82 billion as ofSeptember 30, 2021 decreased$560.7 million fromDecember 31, 2020 . The decrease was primarily driven by decreases of$235.5 million ,$204.2 million ,$92.9 million ,$42.5 million , and$29.9 million in wholesale non-maturity deposits, interest-bearing demand accounts, retail time deposits, money market accounts, and wholesale time deposits, respectively, offset by increases of$41.8 million and$2.5 million in noninterest-bearing deposits and savings accounts, respectively. The decrease in wholesale non-maturity deposits was primarily due to a decrease of approximately$200.0 million of wholesale deposits in the first quarter of 2021, which was used to partially fund the purchase of$500.0 million of short-termU.S. Treasury securities included on the balance sheet as ofDecember 31, 2020 . The decrease in interest-bearing demand deposits was primarily driven by management's active management of excess liquidity in this current interest rate environment.
Deposits as of
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September 30, December 31,
2021 2020 Change
Percent of Percent of
(dollars in thousands) Balance Deposits Balance Deposits Amount Percent
Interest-bearing demand $ 681,560 17.9 % $ 885,802 20.2 % $ (204,242) (23.1) %
Money market 1,121,155 29.3 1,163,620 26.6 (42,465) (3.6)
Savings 284,875 7.5 282,406 6.5 2,469 0.9
Retail time deposits 238,597 6.3 331,527 7.6 (92,930) (28.0)
Wholesale non-maturity deposits 39,538 1.0 275,011 6.3 (235,473) (85.6)
Wholesale time deposits 6,146 0.2 36,045 0.8 (29,899) (82.9)
Interest-bearing deposits 2,371,871 62.2 2,974,411 68.0 (602,540) (20.3)
Noninterest-bearing deposits 1,443,661 37.8 1,401,843 32.0 41,818 3.0
Total deposits $ 3,815,532 100.0 % $ 4,376,254 100.0 % $ (560,722) (12.8) %
Borrowings
Borrowings as of
September 30, December 31,
2021 2020 Change
Percent of Percent of
(dollars in thousands) Balance Borrowings Balance Borrowings Amount Percent
Short-term borrowings $ 96,965 39.9 % $ 72,161 31.0 % $ 24,804 34.4 %
Long-term FHLB advances 25,000 10.3 39,906 17.1 (14,906) (37.4)
Subordinated notes 99,017 40.7 98,883 42.5 134 0.1
Junior subordinated debentures 22,079 9.1 21,935 9.4 144 0.7
Total borrowed funds $ 243,061 100.0 % $ 232,885 100.0 % $ 10,176 4.4 %
Page 75-------------------------------------------------------------------------------- Table of Contents Capital Consolidated shareholders' equity of the Corporation was$654.8 million , or 13.4% of total assets, as ofSeptember 30, 2021 , as compared to$622.3 million , or 11.5% of total assets, as ofDecember 31, 2020 . The following table presents BMBC's and the Bank's regulatory capital ratios and the minimum capital requirements for the Bank to be considered "Well Capitalized" by regulators as ofSeptember 30, 2021 andDecember 31, 2020 : Minimum to be Well Actual Capitalized (dollars in thousands) Amount Ratio Amount RatioSeptember 30, 2021 Total capital to risk weighted assets: BMBC$ 602,036 16.08 %$ 374,404 10.00 % Bank 523,001 13.98 374,198 10.00 Tier I capital to risk weighted assets: BMBC 482,866 12.90 299,523 8.00 Bank 490,848 13.12 299,358 8.00 Common equity Tier I risk weighted assets: BMBC 461,692 12.33 243,362 6.50 Bank 490,848 13.12 243,229 6.50 Tier I leverage ratio (Tier I capital to total quarterly average assets): BMBC 482,866 10.27 234,978 5.00 Bank 490,848 10.45 234,818 5.00 December 31, 2020 Total capital to risk weighted assets: BMBC 583,057 15.55 375,045 10.00 Bank 477,792 12.75 374,758 10.00 Tier I capital to risk weighted assets: BMBC 444,640 11.86 300,036 8.00 Bank 432,258 11.53 299,807 8.00 Common equity Tier I risk weighted assets: BMBC 423,475 11.29 243,779 6.50 Bank 432,258 11.53 243,593 6.50 Tier I leverage ratio (Tier I capital to total quarterly average assets): BMBC 444,640 9.04 246,002 5.00 Bank 432,258 8.79 245,837 5.00 InSeptember 2020 , theU.S. banking agencies issued a final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period. This final rule is consistent with the interim final rule issued by theU.S. banking agencies inMarch 2020 . TheSeptember 30, 2021 andDecember 31, 2020 ratios reflect the Corporation's election of the five-year transition provision.
Liquidity
BMBC's liquidity position is managed on a daily basis as part of the daily
settlement function and continuously as part of the formal asset liability
management process. The Bank's liquidity is maintained by managing its core
deposits as the primary source, purchasing federal funds, selling loans in the
secondary market, borrowing from the FHLB and the FRB, maintaining a highly
liquid investment portfolio, and issuing wholesale certificates of deposit as
its secondary sources.
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Unused availability is detailed on the following table:
Available Percent of Available
Funds as of Total Funds as of Percent of Total
September 30, Borrowing December 31, Borrowing Dollar Percent
(dollars in millions) 2021 Capacity 2020 Capacity Change Change
FHLB of Pittsburgh $ 1,641.3 94.0 % $ 1,696.9 95.9 % $ (55.6) (3.3) %
FRB of Philadelphia 117.8 100.0 127.7 100.0 (9.9) (7.8)
Fed Funds Lines (six banks) 74.0 100.0 74.0 100.0 - -
Total $ 1,833.1 94.6 $ 1,898.6 96.3 $ (65.5) (3.4)
Quarterly, the ALCO reviews the Corporation's liquidity position and reports its findings to BMBC's Board of Directors.
The Corporation has an agreement with Insured Network Deposits to provide up to$40 million , excluding accrued 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$39.5 million in balances as ofSeptember 30, 2021 under this program. Management continually evaluates its borrowing capacity and sources of liquidity. Management currently believes that it has sufficient capacity to fund expected short- and long-term earning asset growth with wholesale sources, along with deposit growth from its internal branch and wealth products.
Discussion of Segments
The Corporation has two principal segments as defined by FASB ASC 280, "Segment
Reporting." The segments are Banking and Wealth Management (see Note 23 in the
accompanying Notes to Unaudited Consolidated Financial Statements).
The Wealth Management segment recorded a pre-tax segment profit ("PTSP") of $6.3
million and $18.2 million for the three and nine months ended September 30,
2021 , as compared to a PTSP of $4.9 million and $10.7 million for the same
periods in 2020. Fees for wealth management services increased $1.9 million and
$8.5 million for the three and nine months ended September 30, 2021 as compared
to the same periods in 2020. The increase in fees for wealth management services
was driven by the lack of non-recurring costs associated with the wind-down of
BMT Investment Advisers, which had a $2.2 million impact on fees for wealth
management services in the second quarter of 2020, as well as the $4.14 billion
increase in wealth assets under management, administration, supervision and
brokerage between September 30, 2021 and September 30, 2020 . Insurance
commissions decreased $158 thousand and $281 thousand for the three and nine
months ended September 30, 2021 as compared to the same periods in 2020.
Effective January 1, 2020 , the business of Lau Associates LLC was transitioned
into the Wealth Management Division of the Bank, also reported in the Wealth
Management segment.
The Banking segment recorded a PTSP of $17.5 million and $55.1 million for the
three and nine months ended September 30, 2021 , as compared to a PTSP of $11.9
million and $11.1 million for the nine months ended September 30, 2020 . The
increases in PTSP were primarily driven by decreases of $7.3 million and $57.9
million in provision for credit losses for the three and nine months ended
September 30, 2021 as compared to the same periods in 2020. The difference in
provision for credit losses between the two periods was driven by changes in the
current and forward-looking economic impacts of the COVID-19 pandemic included
in the estimation of expected credit losses on loans and leases as of September
30, 2021 as compared to September 30, 2020 . The effect of the decreases in
provision for credit losses on PTSP was partially offset by decreases of $145
thousand and $3.8 million in net interest income for the three and nine months
ended September 30, 2021 as compared to the same periods in 2020, decreases of
$297 thousand and $4.9 million in noninterest income for the three and nine
months ended September 30, 2021 as compared to the same periods in 2020, and
increases in noninterest expense of $1.2 million and $5.1 million for the three
and nine months ended September 30, 2021 as compared to the same periods in
2020.
Off Balance Sheet Arrangements
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. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit atSeptember 30, 2021 were$955.8 million , as compared to$924.5 million atDecember 31, 2020 . Page 77 -------------------------------------------------------------------------------- Table of Contents 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 Bank's obligation under standby letters of credit atSeptember 30, 2021 amounted to$22.0 million , as compared to$21.1 million atDecember 31, 2020 . Estimated fair values of the Corporation's off-balance sheet arrangements are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet arrangements.
Contractual Cash Obligations of the Corporation as of
Less Than 1 - 3 3 - 5 More Than
(dollars in thousands) Total 1 Year Years Years 5 Years
Deposits without a stated maturity
$ - $ - $ - Wholesale and retail time deposit 244,743 194,960 38,053 10,788 942 Short-term borrowings 96,965 96,965 - - - Long-term FHLB Advances 25,000 25,000 - - - Subordinated Notes 100,000 - - 30,000 70,000 Junior subordinated debentures 25,800 - - - 25,800 Operating lease liabilities 49,490 4,261 7,785 7,569 29,875 Purchase obligations 14,127 3,885 4,369 2,835 3,038 Total$ 4,126,914 $ 3,895,860 $ 50,207 $ 51,192 $ 129,655 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.
Effects of Government Monetary Policies
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies ofthe United States government and its agencies. An important function of theFederal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations inUnited 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 theFederal Reserve System and, therefore, the policies and regulations of theFederal 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.
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