ITEM 2. Management’s Discussion and Analysis of Results of Operation and Financial Condition
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 of December 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 ended September 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 ended December 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;
•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;
•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
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 (“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 in Bryn Mawr, Pennsylvania, a western suburb of Philadelphia. 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 of September 30, 2021, 39 banking locations, seven wealth management offices and two insurance and risk management locations in the following counties: Montgomery, Chester, Delaware, Philadelphia, and Dauphin Counties in
Pennsylvania; New Castle County in Delaware; and Mercer and Camden Counties in New Jersey. The common stock of BMBC 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. BMBC and its subsidiaries are regulated by many agencies including the Securities and Exchange Commission (“SEC”), NASDAQ, Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Bank of Philadelphia (the “FRB”) 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.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Corporation conform to U.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, the World 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 in Southeastern Pennsylvania, Southern and Central New Jersey, and Delaware, 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 the U.S., in March and April 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 the Small 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 in August 2020 and $284 billion expiring March 31, 2021.
On April 9, 2020, the Federal 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, the Federal Reserve took other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on the Federal Reserve’s discount window, and implemented programs to promote liquidity in certain securities markets. The Federal Reserve, along with other U.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.
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 of September 30, 2021, 4 consumer loans in an aggregate amount of $462 thousand were within a deferral period under the program. As of December 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 borrowers who 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 borrower who 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 of September 30, 2021 5 commercial loans in an aggregate amount of $13.1 million were within a deferral period under the program. As of December 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 borrowers who 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 of December 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 ended September 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 of September 30, 2021 as compared to September 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 ended September 30, 2021, as compared to the same period in 2020, and the changes in its financial condition as of September 30, 2021 as compared to December 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 ended September 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 ended September 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 $160 thousand, or 0.5%, to $35.0 million for the three months ended September 30, 2021, as compared to $35.1 million for the same period in 2020.
•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.
•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 $36.8 million for the three months ended September 30, 2021 increased $1.6 million, from $35.2 million for the same period in 2020.
Nine Month Results of Operations
•Net income attributable to the Corporation for the nine months ended September 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 ended September 30, 2021 as compared to $0.85 for the same period in 2020.
•ROAE and ROAA for the nine months ended September 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 $3.9 million, or 3.5%, to $105.2 million for the nine months ended September 30, 2021, as compared to $109.1 million for the same period in 2020.
•PCL for the nine months ended September 30, 2021 was a recovery of $15.0 million, a decrease of $57.9 million from the $42.9 million PCL recorded for the same period in 2020.
•Noninterest income of $63.4 million for the nine months ended September 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 ended September 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 ended September 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 ended September 30, 2021 increased $5.9 million, from $104.1 million for the same period in 2020. Included in noninterest expense for the three months ended September 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 $4.88 billion as of September 30, 2021 decreased $552.9 million from $5.43 billion as of December 31, 2020.
•Total shareholders’ equity of $654.8 million as of September 30, 2021 increased $32.5 million from $622.3 million as of December 31, 2020.
•Total portfolio loans and leases as of September 30, 2021 were $3.62 billion, a decrease of $10.5 million from $3.63 billion as of December 31, 2020.
•Total non-performing loans and leases of $8.0 million represented 0.22% of portfolio loans and leases as of September 30, 2021 as compared to $5.3 million, or 0.15% of portfolio loans and leases as of December 31, 2020.
•The $36.5 million ACL on loans and leases, as of September 30, 2021, represented 1.01% of portfolio loans and leases, as compared to $53.7 million or 1.48% of portfolio loans and leases as of December 31, 2020.
•Total deposits of $3.82 billion as of September 30, 2021 decreased $560.7 million from $4.38 billion as of December 31, 2020.
•Wealth assets under management, administration, supervision and brokerage as of September 30, 2021 were $21.39 billion, an increase of $2.41 billion from $18.98 billion as of December 31, 2020.
Key Performance Ratios
Key financial performance ratios for the three and nine months ended September 30, 2021 and 2020 are shown in the table below:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2021
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2020
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2021
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2020
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Return on average equity
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11.17
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%
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8.60
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%
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11.93
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%
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3.74
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%
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Return on average assets
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1.49
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1.02
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1.54
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0.45
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Tax-equivalent net interest margin
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3.15
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3.03
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3.16
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3.21
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Equity to assets ratio
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13.32
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11.81
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12.90
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11.98
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Basic earnings per share
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$
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0.92
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$
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0.66
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$
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2.86
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$
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0.85
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Diluted earnings per share
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0.92
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0.66
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2.83
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0.85
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Dividends paid or accrued per share
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0.28
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0.27
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0.82
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0.79
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Dividends paid or accrued per share to net income per basic common share
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30.4
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%
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40.9
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%
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28.7
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%
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92.9
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%
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The following table presents certain key period-end balances and ratios as of September 30, 2021 and December 31, 2020:
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(dollars in millions, except per share amounts)
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September 30,
2021
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December 31,
2020
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Book value per share
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$
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32.90
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$
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31.18
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ACL on loans and leases as a percentage of portfolio loans and leases
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1.01
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%
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1.48
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%
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Tier I capital to risk weighted assets
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12.90
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11.86
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Loan to deposit ratio
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94.8
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82.9
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Wealth assets under management, administration, supervision and brokerage
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$
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21,386.7
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$
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18,976.5
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Portfolio loans and leases
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3,617.9
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3,628.4
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Total assets
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4,879.1
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5,432.0
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Total shareholders’ equity
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654.8
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622.3
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The following sections discuss, in greater detail, the Corporation’s results of operations for the three and nine months ended September 30, 2021, as compared to the same period in 2020, and the changes in its financial condition as of September 30, 2021 as compared to December 31, 2020.
Other Matters
Effective November 1, 2021, the Corporation suspended its Dividend Reinvestment and Stock Purchase Plan. Consequently, any dividends that are paid following November 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 the Court of Common Pleas of Montgomery 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. On May 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% from December 1, 2006. The matter was appealed, and on March 18, 2020, the Superior 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 of Mr. 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.
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 ended September 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 September 30, 2021 Compared to the Same Period in 2020
For the three months ended September 30, 2021, tax-equivalent net interest income decreased $160 thousand, or 0.5%, to $35.0 million, as compared to $35.1 million for the same period in 2020.
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 ended September 30, 2021 as compared to the same period in 2020.
Tax-equivalent interest and fees earned on loans and leases for the three months ended September 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 ended September 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 ended September 30, 2021 as compared to same period in 2020.
Interest expense on deposits for the three months ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 30, 2021 as compared to the same period in 2020.
Nine Months Ended September 30, 2021 Compared to the Same Period in 2020
For the nine months ended September 30, 2021, tax-equivalent net interest income decreased $3.9 million, or 3.5%, to $105.2 million, as compared to $109.1 million for the same period in 2020.
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.
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
|
(dollars in thousands)
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Rates
Earned/
Paid
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Rates
Earned/
Paid
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks
|
$
|
67,665
|
|
|
$
|
20
|
|
|
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
|
$
|
2,111,767
|
|
|
$
|
276
|
|
|
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 ended September 30, 2021 and 2020, respectively.
(4)Tax rate used for tax-equivalent calculations is 21% for 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2021
|
|
|
2020
|
(dollars in thousands)
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Rates
Earned/
Paid
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Rates
Earned/
Paid
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks
|
$
|
88,181
|
|
|
$
|
58
|
|
|
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 ended September 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 ended September 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 Compared to 2020
|
(dollars in thousands)
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
increase/(decrease)
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks
|
$
|
(88)
|
|
|
$
|
23
|
|
|
$
|
(65)
|
|
|
$
|
(128)
|
|
|
$
|
(47)
|
|
|
$
|
(175)
|
|
Investment securities - taxable
|
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 ended September 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 ended September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
Interest-
Earning
Asset Yield
|
|
Interest-
Bearing
Liability Cost
|
|
Net Interest
Spread
|
|
Effect of Noninterest Bearing Sources
|
|
Net Interest
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”).
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 the Twelve Months Beginning After September 30, 2021
|
|
Change in Net Interest Income Over the Twelve Months Beginning After 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
$
|
39.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
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
|
|
|
$
|
2,029.4
|
|
|
$
|
1,718.9
|
|
|
$
|
—
|
|
|
$
|
1,718.9
|
|
Cumulative earning assets as a % of cumulative interest-bearing liabilities
|
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.
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 ended September 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 of September 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 of December 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 of September 30, 2021 as compared to December 31, 2020. Net recoveries for the three months ended September 30, 2021 were $140 thousand and net charge-offs for the 9 months ended September 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
|
(dollars in thousands)
|
ACL
|
|
% Loans and Leases to Total Loans and Leases
|
|
ACL
|
|
% Loans and Leases to Total 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 of September 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 of December 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 ended September 30, 2021. All nonperforming loans are evaluated for impairment and charged-off to net realizable value, when necessary.
As of September 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 from December 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 of September 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 of December 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 of September 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
and leases, as of December 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 of September 30, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
September 30,
2021
|
|
December 31,
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
|
|
|
$
|
8,783
|
|
|
|
|
|
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 September 30, 2021 Compared to the Same Period in 2020
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. 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 September 30, 2021 Compared to the Same Period in 2020
Noninterest income of $63.4 million for the nine months ended September 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 between September 30, 2021 and September 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 ended September 30, 2021 as compared to the same period in 2020.
The following table provides details of other operating income for the three and nine months ended September 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
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
Three Months Ended
September 30,
|
|
As of or for the
Nine Months Ended
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
|
|
|
$
|
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:
|
Fee Basis
|
September 30,
2021
|
|
June 30,
2021
|
|
March 31,
2021
|
|
December 31,
2020
|
|
September 30,
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Wealth Assets as of:
|
Fee Basis
|
September 30,
2021
|
|
June 30,
2021
|
|
March 31,
2021
|
|
December 31,
2020
|
|
September 30,
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:
|
Fee Basis
|
September 30,
2021
|
|
June 30,
2021
|
|
March 31,
2021
|
|
December 31,
2020
|
|
September 30,
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 of Fees for Wealth Management for the Three Months Ended:
|
Fee Basis
|
September 30,
2021
|
|
June 30,
2021
|
|
March 31,
2021
|
|
December 31,
2020
|
|
September 30,
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 September 30, 2021 Compared to the Same Period in 2020
Noninterest expense of $36.8 million for the three months ended September 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, and Pennsylvania 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 September 30, 2021 Compared to the Same Period in 2020
Noninterest expense of $110.0 million for the nine months ended September 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
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 September 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
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 of September 30, 2021 decreased $552.9 million from $5.43 billion as of December 31, 2020. The following sections detail the balance sheet changes:
Loans and Leases
The table below compares the portfolio loans and leases outstanding at September 30, 2021 to December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
|
Change
|
(dollars in thousands)
|
Balance
|
|
Percent of
Portfolio
|
|
Balance
|
|
Percent of
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 of September 30, 2021 decreased $560.7 million from December 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-term U.S. Treasury securities included on the balance sheet as of December 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 September 30, 2021 and December 31, 2020 were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
|
Change
|
(dollars in thousands)
|
Balance
|
|
Percent of
Deposits
|
|
Balance
|
|
Percent of
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, 2021 and December 31, 2020 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
|
Change
|
(dollars in thousands)
|
Balance
|
|
Percent of
Borrowings
|
|
Balance
|
|
Percent of
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
|
%
|
Capital
Consolidated shareholders' equity of the Corporation was $654.8 million, or 13.4% of total assets, as of September 30, 2021, as compared to $622.3 million, or 11.5% of total assets, as of December 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 of September 30, 2021 and December 31, 2020:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Minimum to be Well
Capitalized
|
(dollars in thousands)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
September 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2020, the U.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 the U.S. banking agencies in March 2020. The September 30, 2021 and December 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.
Unused availability is detailed on the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Available
Funds as of
September 30, 2021
|
|
Percent of
Total
Borrowing
Capacity
|
|
Available
Funds as of
December 31, 2020
|
|
Percent of Total
Borrowing
Capacity
|
|
Dollar
Change
|
|
Percent
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 of September 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 at September 30, 2021 were $955.8 million, as compared to $924.5 million at December 31, 2020.
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 at September 30, 2021 amounted to $22.0 million, as compared to $21.1 million at December 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 September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Total
|
|
Less Than
1 Year
|
|
1 - 3
Years
|
|
3 - 5
Years
|
|
More Than
5 Years
|
Deposits without a stated maturity
|
$
|
3,570,789
|
|
|
$
|
3,570,789
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 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.