Bryn Mawr Bank Corporation Reports Fourth Quarter Earnings Impacted by $15.2 Million One-Time Income Tax Charge Related to the Tax Cuts and Jobs Act, Declares $0.22 Dividend, Completes Royal Bank Merger

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BRYN MAWR, Pa., Jan. 29, 2018 (GLOBE NEWSWIRE) — H.R. 1, originally known as the “Tax Cuts and Jobs Act” (“Tax Reform”), signed into law on December 22, 2017, reduced the top federal corporate income tax rate from 35% to 21%. As a result, Bryn Mawr Bank Corporation (NASDAQ:BMTC) (the “Corporation”), parent of The Bryn Mawr Trust Company (the “Bank”) was required to re-measure its net deferred tax asset to this lower rate, resulting in a one-time income tax charge of $15.2 million, or $0.85 diluted earnings per share. Additionally, the Corporation incurred after-tax due diligence and merger-related expenses of $2.3 million during the fourth quarter of 2017. As a result, the Corporation today reported a net loss of $6.2 million and diluted earnings per share of ($0.35) for the three months ended December 31, 2017, as compared to net income of $10.7 million, or $0.62 diluted earnings per share, for the three months ended September 30, 2017, and $9.4 million, or $0.55 diluted earnings per share, for the three months ended December 31, 2016. For the twelve months ended December 31, 2017, the Corporation posted net income of $23.0 million, or $1.32 diluted earnings per share, as compared to $36.0 million, or $2.12 diluted earnings per share for the same period in 2016.

On a non-GAAP basis, core net income, which excludes this one-time income tax charge, due diligence and merger-related expenses and certain other non-core income and expense items, as detailed in the appendix to this earnings release, was $11.3 million, or $0.63 diluted earnings per share, for the three months ended December 31, 2017 as compared to $11.2 million, or $0.65 diluted earnings per share, for the three months ended September 30, 2017 and $9.4 million, or $0.55 diluted earnings per share, for the three months ended December 31, 2016. For the twelve months ended December 31, 2017, core net income was $42.1 million, or $2.42 per share, as compared to $36.1 million, or $2.12 diluted earnings per share for the same period in 2016. Management believes the core net income measure is important in evaluating the Corporation’s performance on a more comparable basis between periods. A reconciliation of this and other non-GAAP to GAAP performance measures is included in the appendix to this earnings release.

“We were pleased to finish the year on a strong note with core net income at record levels for both the quarter and full year,” commented Frank Leto, President and Chief Executive Officer.

“The fourth quarter was an excellent period for BMT, as we continued to benefit from our focus on new business development, as evidenced by the Wealth Division’s reaching almost $13 billion in AUM, while also issuing $70 million of subordinated notes, which will qualify for Tier 2 regulatory capital, and successfully completing our merger with Royal Bank with minimal disruption to normal operations. As the merger was a mid-December close, the full impact of the business combination on the Corporation’s results will not be evident until the first quarter of 2018,” added Mr. Leto.

“The income tax charge related to Tax Reform was experienced by many throughout the industry. While we expect to recoup this expense in less than two years, we are also analyzing how to deploy the increased after-tax earnings within a framework that is focused on improving long-term shareholder value while also continuing to serve the communities in which we do business,” Mr. Leto concluded.

The Board of Directors of the Corporation declared a quarterly dividend of $0.22 per share, payable March 1, 2018 to shareholders of record as of February 9, 2018.

SIGNIFICANT ITEMS OF NOTE

Results of Operations – Fourth Quarter 2017 Compared to Third Quarter 2017

  • A net loss of $6.2 million, or $(0.35) diluted earnings per share, for the three months ended December 31, 2017, as compared to net income of $10.7 million, or $0.62 diluted earnings per share, for the three months ended September 30, 2017 was primarily the result of a one-time income tax charge related to the re-measurement of the Corporation’s net deferred tax asset, triggered by Tax Reform, which was enacted on December 22, 2017. The Corporation’s net deferred tax asset on December 22, 2017, the date of the Tax Reform enactment, amounted to $39.0 million and included the Corporation’s legacy net deferred tax asset and the remainder of the net deferred tax asset acquired in the merger with Royal Bancshares of Pennsylvania, Inc. (the “Merger”). In accordance with GAAP, the combined remaining net deferred tax asset was re-measured, reducing it by $15.2 million, with a corresponding charge to income tax expense. In addition to this one-time income tax charge, the excess tax benefit related to the vesting of stock-based compensation decreased by $598 thousand from the third quarter to the fourth quarter of 2017. Other factors impacting net income included a $2.7 million increase in due diligence and merger-related expenses for the fourth quarter of 2017 as compared to the third quarter of 2017.

  • On a non-GAAP basis, core net income, which excludes the above Tax Reform-related income tax charge, due diligence and merger-related expenses and other non-core income and expense items, as detailed in the appendix to this earnings release, was $11.3 million or $0.63 per diluted share for the three months ended December 31, 2017 as compared to $11.2 million or $0.65 per diluted share for the third quarter 2017. Management believes the core net income measure is important in evaluating the Corporation’s performance on a more comparable basis between periods. A reconciliation of this and other non-GAAP to GAAP performance measures is included in the appendix to this earnings release.
  • Net interest income for the fourth quarter of 2017 increased $883 thousand, or 3.0%, over the prior quarter. The provision for loan and lease losses (the “Provision”) decreased $256 thousand, or 19.2%, from the prior quarter. Non-interest income remained flat at $15.5 million and $15.6 million for the fourth and third quarters of 2017, respectively. Non-interest expense increased $2.9 million on a linked-quarter basis and, as noted above, was primarily due to a $2.7 million increase in due diligence and merger-related costs. Income tax expense, excluding the Tax Reform-related charge, remained flat at $4.7 million and $4.8 million for the fourth and third quarters of 2017, respectively. However, the effective tax rate excluding the one-time Tax Reform-related income tax charge, increased from 30.7% for the three months ended September 30, 2017 to 34.5% for the three months ended December 31, 2017 primarily due to excess tax benefits from equity compensation transactions recorded during the third quarter of 2017.

  • Tax-equivalent net interest income for the three months ended December 31, 2017 was $30.5 million, an increase of $873 thousand over the linked quarter. The interest-earning assets and interest-bearing liabilities acquired in the December 15, 2017 Merger contributed approximately $1.1 million to tax-equivalent net interest income. This increase was partially offset by a $433 thousand decrease in the accretion of purchase accounting adjustments between the third and fourth quarters of 2017.
  • Tax-equivalent interest and fees on loans and leases for the three months ended December 31, 2017 increased $1.3 million over the linked quarter. Average loans and leases for the fourth quarter increased $124.9 million over the third quarter 2017 and experienced a two basis point decrease in tax-equivalent yield. The increase in average loans between the third and fourth quarters of 2017 was largely related to the loans acquired in the Merger which added $105.3 million in average loans and leases and contributed approximately $1.4 million in tax-equivalent interest and fee income for the fourth quarter of 2017.

    Average available for sale investment securities increased by $35.7 million over the linked quarter, and experienced a four basis point tax-equivalent yield increase. The increase in volume and yield on available for sale investment securities resulted in a $227 thousand increase in tax-equivalent interest income for the fourth quarter of 2017 as compared to the third quarter of 2017. The majority of the Royal Bank investment portfolio was sold immediately following the Merger and did not impact interest income from available for sale investment securities.

    Interest expense on deposits for the three months ended December 31, 2017 increased $541 thousand over the linked quarter. Average interest-bearing deposits increased $159.7 million accompanied by a six basis point increase in the rate paid on deposits. The increase in average interest-bearing deposits was largely related to the deposits acquired in the Merger which added $91.4 million to the average balance of interest-bearing deposits for the fourth quarter of 2017 and accounted for approximately $209 thousand in interest expense during the fourth quarter of 2017.

    Average subordinated notes for the three months ended December 31, 2017 increased $14.3 million over the linked quarter with the rate paid decreasing by 28 basis points to 4.69%. In addition to the $70 million of 4.25% fixed-to- floating subordinated notes issued on December 13, 2017, the Corporation also acquired $21.4 million of floating rate junior subordinated debentures currently at a 4.61% in connection with the Merger. The volume increase in both borrowing types and rate decrease in the subordinated notes in the fourth quarter of 2017 resulted in a $194 thousand increase in interest expense on subordinated notes and junior subordinated debentures on a linked-quarter basis.

  • The tax-equivalent net interest margin was 3.62% for the fourth quarter and 3.71% for the third quarter of 2017. Adjusting for the impact of the accretion of purchase accounting adjustments, the adjusted tax-equivalent net interest margin was 3.58% and 3.62% for the fourth and third quarters of 2017, respectively.

  • Noninterest income for the three months ended December 31, 2017 of $15.5 million remained relatively unchanged from the third quarter of 2017. Increases of $323 thousand and $137 thousand in fees for wealth management services and insurance revenue, respectively, were offset by decreases of $243 thousand and $306 thousand in capital markets revenue and net gain on sale of loans, respectively.
  • Noninterest expense for the three months ended December 31, 2017 increased $2.9 million, to $31.1 million, as compared to $28.2 million for the third quarter of 2017. The increase on a linked quarter basis was largely related to the $2.7 million increase in due diligence and merger-related expenses. The balance of the increase in noninterest expense on the linked- quarter basis was related to the addition of the Royal Bank operations, which accounted for approximately $215 thousand of noninterest expense for the second half of December 2017.
  • For the three months ended December 31, 2017, net loan and lease charge-offs totaled $556 thousand, as compared to $728 thousand for the third quarter of 2017. The Provision for the three months ended December 31, 2017 was $1.1 million, a $256 thousand decrease from $1.3 million for the third quarter of 2017. The credit quality of the loan and lease portfolio remains stable, with the increase in the allowance for loan and lease losses (the “Allowance”) largely related to the growth of the portfolio. During the fourth quarter, there was a $4.1 million increase in nonperforming loans related to a small number of well collateralized residential and commercial real estate loans which became nonaccrual.
  • Income tax expense for the fourth quarter of 2017 increased $15.2 million as compared to the third quarter of 2017. As discussed previously, this increase was primarily related to the re-measurement of the Corporation’s legacy and acquired net deferred tax asset as a result of Tax Reform enacted on December 22, 2017. Excluding this one-time charge to income tax expense, the effective tax rate for the fourth quarter of 2017 was 34.5%, as compared to 30.7% for the third quarter of 2017. The 374 basis point increase in the effective tax rate (excluding the one-time Tax Reform-related charge) over the linked quarter was primarily the result of nondeductible merger expenses in the fourth quarter of 2017 and a $598 thousand decrease in excess tax benefits associated with the vesting of stock-based compensation between the third and fourth quarters of 2017.

Results of Operations –Fourth Quarter 2017 Compared to Fourth Quarter 2016

  • As noted above, the net loss of $6.2 million for the three months ended December 31, 2017, as compared to net income of $9.4 million for the same period in 2016 was primarily the result of a one-time income tax charge related to the re-measurement of the Corporation’s net deferred tax asset, triggered by Tax Reform enacted on December 22, 2017. Other factors impacting net income included a $3.5 million increase in due diligence and merger-related expenses, a $1.8 million increase in salaries and wages and a $580 thousand increase in employee benefits for the fourth quarter of 2017 as compared to the same period in 2016. These expense increases were more than offset by a $3.3 million increase in net interest income and increases of $647 thousand, $795 thousand and $600 thousand in fees for wealth management services, insurance revenues and capital markets revenue, respectively.

  • Tax-equivalent net interest income for the three months ended December 31, 2017 was $30.5 million, an increase of $3.3 million over the same period in 2016. Tax-equivalent net interest income from the assets and liabilities acquired in the December 15, 2017 Merger contributed approximately $1.1 million to this increase. This increase was partially offset by a $471 thousand decrease in the accretion of purchase accounting adjustments between the fourth quarters of 2017 and 2016.

    Tax-equivalent interest and fees on loans and leases increased $4.0 million for the three months ended December 31, 2017 as compared to the same period in 2016. Average loans and leases for the fourth quarter of 2017 increased $287.3 million from the same period in 2016 and experienced a ten basis point increase in tax-equivalent yield. Excluding the effect of the accretion of purchase accounting adjustments on loans and leases, the adjusted tax-equivalent yield on loans and leases increased by 18 basis points. The increases in the prime rate during 2017 contributed to the increase in tax-equivalent yield on loans. The increase in average loans and leases for the fourth quarter of 2017 as compared to the same period in 2016 was largely related to the loans and leases acquired in the Merger which increased average loans and leases by $105.3 million and contributed approximately $1.4 million in interest and fee income on loans and leases for the fourth quarter of 2017.

    Average available for sale investment securities increased by $108.1 million for the three months ended December 31, 2017 as compared to the same period in 2016, and experienced a 30 basis point tax-equivalent yield increase. The increase in volume and yield on available for sale investment securities resulted in an $848 thousand increase in tax-equivalent interest income on available for sale investment securities for the fourth quarter of 2017 as compared to the same period in 2016.

    Partially offsetting the effect on interest income associated with the increase in average loans and leases and available for sale investment securities was a $959 thousand increase in interest expense on deposits for the fourth quarter of 2017 as compared to the same period in 2016. Average interest-bearing deposits increased by $221.9 million and were accompanied by a 14 basis point increase in rate paid between the fourth quarters of 2017 and 2016.

    In addition to the increased interest expense on deposits, a $586 thousand increase in interest expense on borrowings between the periods was attributed a $94.5 million increase in average borrowings coupled with a 19 basis point increase in rate paid on borrowings for the three months ended December 31, 2017 as compared to the same period in 2016.

    Average subordinated notes for the three months ended December 31, 2017 increased $14.3 million as compared to the same period in 2016 with the rate paid decreasing by 30 basis points to 4.69% for the three months ended December 31, 2017. In addition to the $70 million of 4.25% fixed-to-floating subordinated notes issued on December 13, 2017, the Corporation also acquired $21.4 million of floating-rate junior subordinated debentures currently at a 4.61% in connection with the Merger. The volume increase in both borrowing types and rate decrease in the subordinated notes in the fourth quarter of 2017 resulted in a $194 thousand increase in interest expense on subordinated notes and junior subordinated debentures for the three months ended December 31, 2017 as compared to the same period in 2016.

  • The tax-equivalent net interest margin was 3.62% for the three months ended December 31, 2017 as compared to 3.65% for the same period in 2016. Adjusting for the impact of the accretion of purchase accounting, the adjusted tax-equivalent net interest margin was 3.58% and 3.54% for three months ended December 31, 2017 and 2016, respectively.

  • Noninterest income for the three months ended December 31, 2017 increased by $2.3 million, to $15.5 million, from the same period in 2016. An increase of $647 thousand in fees for wealth management services resulted as wealth assets under management, administration, supervision and brokerage increased $1.64 billion from December 31, 2016 to December 31, 2017. Insurance revenue increased $795 thousand for the fourth quarter of 2017 as compared to the same period in 2016, largely due to the May 2017 acquisition of Hirshorn Boothby. In addition, revenue from our Capital Markets initiative, which was launched in the second quarter of 2017, contributed $600 thousand to noninterest income.
  • Noninterest expense for the three months ended December 31, 2017 increased $6.0 million, to $31.1 million, from the same period in 2016. The increase was largely related to a $3.5 million increase in due diligence and merger-related expenses and a $1.8 million increase in salary and wages due to staffing increases from our Capital Markets initiative, the Hirshorn Boothby acquisition and the Princeton wealth management office, annual salary and wage increases and increases in incentive compensation.
  • For the three months ended December 31, 2017, the Provision was $1.1 million, which was unchanged from the same period in 2016. Net charge-offs for the fourth quarter of 2017 were $556 thousand as compared to $1.3 million for the same period in 2016.

Financial Condition – December 31, 2017 Compared to December 31, 2016

  • Total portfolio loans and leases of $3.29 billion as of December 31, 2017 increased by $750.4 million from December 31, 2016. Largely contributing to this increase were the $570.4 million of loans and leases acquired in the Merger. Excluding the loans and leases acquired in the Merger, the $180.0 million increase in portfolio loans and leases represents a 7.1% increase for the twelve months ended December 31, 2017.

  • The Allowance as of December 31, 2017 was $17.5 million, or 0.53% of portfolio loans as compared to $17.5 million, or 0.69% of portfolio loans and leases as of December 31, 2016. In addition to the ratio of Allowance to portfolio loans and leases, management also calculates two non-GAAP measures: the Allowance as a percentage of originated loans and leases, which was 0.70% as of December 31, 2017, as compared to 0.78% as of December 31, 2016, and the Allowance plus the remaining loan mark as a percentage of gross loans, which was 1.48% as of December 31, 2017, as compared to 1.17% as of December 31, 2016. A reconciliation of these and other non-GAAP to GAAP performance measures is included in the appendix to this earnings release. The decrease in the ratio of Allowance to portfolio loans and leases was primarily related to the addition of $570.4 million of loans and leases acquired in the Merger.
  • Available for sale investment securities as of December 31, 2017 totaled $689.2 million, an increase of $122.2 million from December 31, 2016. The increase in available for sale investment securities was related to purchases of investment securities during 2017 in anticipation of the Merger. The majority of the available for sale investment securities acquired in the Merger were sold immediately after the closing of the transaction; no gain or loss was recognized on the sales.
  • Total assets as of December 31, 2017 were $4.45 billion, an increase of $1.03 billion from December 31, 2016. The Merger added $859.4 million to total assets. Organic increases in portfolio loans and leases accounted for much of the balance of the increase.
  • Wealth assets under management, administration, supervision and brokerage totaled $12.97 billion as of December 31, 2017, an increase of $1.64 billion from December 31, 2016. The increase in wealth assets was comprised of a $582 million increase in account balances whose fees are based on market value, and a $1.06 billion increase in fixed rate flat-fee account types.

  • Deposits of $3.37 billion as of December 31, 2017 increased $794.1 million from December 31, 2016. The Merger accounted for the addition of $593.2 million of the increase.
  • Borrowings of $496.8 million as of December 31, 2017 increased $73.4 million from December 31, 2016. The increase was comprised of a $33.7 million increase in short-term borrowings, a $68.9 million increase subordinated notes, and a $21.4 million increase in junior subordinated debentures, which were assumed in the Merger. Partially offsetting these increases was a $50.6 million decrease in long-term FHLB advances.

  • The capital ratios for the Bank and the Corporation, as of December 31, 2017, as shown in the attached tables, indicate levels above the regulatory minimum to be considered “well capitalized.” In addition to the capital issued in the Merger, during the fourth quarter of 2017, regulatory capital increases at the Corporation included the issuance of $70.0 million of subordinated notes, which qualify as Tier 2 capital and the acquisition of $21.4 million of junior subordinated debentures, which are carried in Tier 1 capital. On the Bank level, the Corporation down-streamed $15.0 million of capital to the Bank, increasing its Tier 1 capital balance.

Organic Loan and Lease Growth – September 30, 2017 to December 31, 2017

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