10-K 1 d652063d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 0-16668

 

 

WSFS FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware   22-2866913

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

500 Delaware Avenue,

Wilmington, Delaware 19801

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (302) 792-6000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

6.25% Senior Notes Due 2019

  The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     YES   ¨    NO  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes   ¨    No  x

The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of the registrant’s common stock as quoted on NASDAQ as of June 30, 2013 was $451,284,893. For purposes of this calculation only, affiliates are deemed to be directors, executive officers and beneficial owners of greater than 10% of the outstanding shares.

As of March 6, 2014, there were issued and outstanding 8,911,334 Shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2014 are incorporated by reference in Part III hereof.

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

TABLE OF CONTENTS

 

         Page  
  Part I   
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     22   
Item 1B.  

Unresolved Staff Comments

     32   
Item 2.  

Properties

     33   
Item 3.  

Legal Proceedings

     37   
Item 4.  

Mine Safety Disclosures

     37   
  Part II   
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      37   
Item 6.  

Selected Financial Data

     39   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   
Item 7A.  

Quantitative and Qualitative Disclosure about Market Risk

     56   
Item 8.  

Financial Statements and Supplementary Data

     58   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     115   
Item 9A.  

Controls and Procedures

     115   
Item 9B.  

Other Information

     118   
  Part III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     118   
Item 11.  

Executive Compensation

     118   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      118   
Item 13.  

Certain Relationships and Related Transactions and Director Independence

     119   
Item 14.  

Principal Accounting Fees and Services

     119   
  Part IV   
Item 15.  

Exhibits, Financial Statement Schedules Signatures

     119   
  Signatures      122   


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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, and exhibits thereto, contains estimates, predictions, opinions, projections and other statements that may be interpreted as “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to our financial goals, management’s plans and objectives for future operations, financial and business trends, business prospects, and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. The words “anticipates,” “intends,” “seeks,” “believes,” “estimates,” “expects,” “projects,” “forecast,” “will,” “may,” “could,” “should,” “would,” “can” and similar expressions often signify forward-looking statements. Such forward-looking statements are based on various assumptions (some of which may be beyond our control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to:

 

   

difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the market areas in which we operate and in which our loans are concentrated, including the effects of declines in housing markets, elevated unemployment levels and slowdowns in economic growth;

 

   

our level of nonperforming assets and the costs associated with resolving any problem loans;

 

   

changes in market interest rates which may increase funding costs and reduce earning asset yields thus reducing margin;

 

   

the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of our investment securities portfolio;

 

   

the credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial and industrial loans in our loan portfolio;

 

   

possible additional loan losses and impairment of the collectability of loans;

 

   

the extensive state and federal regulation, supervision and examination governing almost all aspects of our operations;

 

   

changes in government regulation affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the rules and regulations being issued in accordance with this statute and potential expenses associated therewith;

 

   

possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations;

 

   

any impairment of our goodwill or other intangible assets;

 

   

failure of the financial and operational controls of our Cash Connect division;

 

   

the effects of problems encountered by other financial institutions that adversely affect us or the banking industry generally;

 

   

the success of our growth plans, including the successful integration of past and future acquisitions;

 

   

conditions in the financial markets may limit our access to additional funding to meet our liquidity needs;

 

   

our ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate liquidity internally or raise capital on favorable terms;

 

   

negative perceptions or publicity with respect to our trust and wealth management business;

 

   

system failure or cybersecurity breaches of our network security;

 

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our ability to recruit and retain key employees;

 

   

regulatory limits on our ability to receive dividends from our subsidiaries; and

 

   

the effects of any damage to our reputation resulting from developments related to any of the items identified above.

Such risks and uncertainties are discussed herein, including under the heading “Risk Factors,” and in other documents filed by us with the Securities and Exchange Commission from time to time. Forward looking statements are as of the date they are made, and we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of us.

 

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PART I

ITEM 1. BUSINESS

OUR BUSINESS

WSFS Financial Corporation (“WSFS,” the “Company” or “we”) is parent to Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”), the seventh oldest bank and trust company in the United States continuously operating under the same name. A fixture in Delaware and contiguous areas of neighboring states, WSFS Bank has been in operation for 182 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution that has grown to become the largest independent bank or thrift holding company headquartered and operating in the State of Delaware, one of the top commercial lenders in the state, the third largest bank in terms of Delaware deposits and among the top trust companies in the country. For the eighth consecutive year, our Associates (what we call our employees) ranked us a “Top Workplace” in Delaware and for the third year in a row the readers of the Delaware News Journal voted us the “Top Bank” in the state. We state our mission simply: We Stand For Service.

Our core banking business is commercial lending funded by customer-generated deposits. We have built a $2.4 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and by offering the high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through commercial relationships and retail deposits in our 52 offices located in Delaware (42), Pennsylvania (8), Virginia (1) and Nevada (1). We also offer a broad variety of consumer loan products, retail securities and insurance brokerage services through our retail branches and mortgage and title services through those branches and through Pennsylvania-based Array Financial Group, Inc., and Arrow Land Transfer Company, which we acquired in 2013.

We offer trust and wealth management services through Christiana Trust, Cypress Capital Management, LLC (Cypress), WSFS Investment Group brokerage and our Private Banking group. The Christiana Trust division of WSFS Bank provides investment, fiduciary, agency and commercial domicile services from locations in Delaware and Nevada and has $8.9 billion in assets under administration. These services are provided to individuals and families as well as corporations and institutions. Christiana Trust provides these services to customers locally, nationally and internationally. Cypress is an investment advisory firm that manages more than $600 million of portfolios for individuals, trusts, retirement plans and endowments. WSFS Investment Group, Inc. markets various investment and insurance products through the Bank’s retail banking system. Our Private Banking group offers credit and deposit products to high net-worth individuals, and partners with our other wealth management units to offer the most appropriate fee-based products to these clients.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages more than $476 million in vault cash in more than 15,000 ATMs nationwide. They also provide online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates over 450 ATMs for WSFS Bank. This is, by far, the largest branded ATM network in Delaware.

We announced late in 2013 that we entered into an Agreement to merge with First Wyoming Financial Corporation. Following the merger, The First National Bank of Wyoming (FNB of Wyoming), the wholly owned subsidiary of First Wyoming Financial Corporation, will be merged with and into WSFS Bank. FNB of Wyoming reported approximately $307.7 million in assets and $249.7 million in deposits as of September 30, 2013 and serves its customers from six branch locations. The merger is subject to approval by First Wyoming Financial Corporation shareholders, regulatory approval and other customary closing conditions.

 

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WSFS POINTS OF DIFFERENTIATION

While all banks offer similar products and services, we believe that WSFS, through its service model, has set itself apart from other banks in our market and the industry in general. In addition, community banks such as WSFS have been able to distinguish themselves from large national or international banks that fail to provide their customers with the service levels, responsiveness and local decision making they prefer. The following factors summarize what we believe are our points of differentiation:

Building Associate Engagement and Customer Advocacy

Our business model is built on a concept called Human Sigma, which we have implemented in our strategy of “Engaged Associates delivering Stellar Service growing Customer Advocates and value for our Owners”. The Human Sigma model, identified by Gallup, Inc., begins with Associates who have taken ownership of their jobs and therefore perform at a higher level. We invest significantly in recruitment, training, development and talent management as our Associates are the cornerstone of our model. This strategy motivates Associates and unleashes innovation and productivity to engage our most valuable asset, our Customers, by providing them with Stellar Service experiences. As a result, we build Customer Advocates, or Customers who have developed an emotional attachment to the Bank. Research studies continue to show a direct link between Associate engagement, customer advocacy and a company’s financial performance. Our success with this strategy creates a virtuous cycle, further building an environment of engagement and advocacy.

 

LOGO

Surveys conducted for us by Gallup, Inc. indicate:

 

   

Our Associate Engagement scores consistently rank in the top quartile of companies polled. In 2013 our engagement ratio was 10.8:1, which means there were 10.8 engaged Associates for every disengaged Associate. This compares to a 2.6:1 ratio in 2003 and a national average of 1.53:1. Gallup, Inc. defines “world-class” as 11.7:1.

 

   

Our customer advocacy scores rank in the top 11% of all companies. In 2013, 44% of our customers ranked us a “five” out of “five,” strongly agreeing with the statement “I can’t imagine a world without WSFS” and nearly 69% of our customers ranked us a “five” out of “five,” strongly agreeing with the statement “WSFS is the perfect bank for me.”

By fostering a culture of engaged and empowered Associates, we believe we have become the employer and bank of choice in our market. In 2013, for the fifth year in a row, we were recognized by The Wilmington News Journal as a “Top Work Place” for large corporations in the State of Delaware. Also in 2013, and for the third

 

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consecutive year, a News Journal survey of its readers also ranked us the “Top Bank” in Delaware, indicating the strength of our focus on customer service.

Community Banking Model

Our size and community banking model play a key role in our success. Our approach to business combines a service-oriented culture with a strong complement of products and services, all aimed at meeting the needs of our retail and business Customers. We believe the essence of being a community bank means that we are:

 

   

Small enough to offer Customers responsive, personalized service and direct access to decision makers.

 

   

Large enough to provide all the products and services needed by our target market customers.

As the financial services industry has consolidated, many independent banks have been acquired by national companies that have centralized their decision-making authority away from their customers and focused their mass-marketing to a regional or even national customer base. We believe this trend has frustrated smaller business owners who have become accustomed to dealing directly with their bank’s senior executives and discouraged retail customers who often experience deteriorating levels of service in branches and other service outlets. Additionally, it frustrates bank employees who are no longer empowered to provide good and timely service to their customers.

WSFS Bank offers:

 

   

One primary point of contact. Each of our relationship managers is responsible for understanding his or her Customers’ needs and bringing together the right resources in the Bank to meet those needs.

 

   

A customized approach to our Customers. We believe this gives us an advantage over our competitors who are too large or centralized to offer customized products or services.

 

   

Products and services that our Customers value. This includes a broad array of banking, cash management and trust and wealth management products, as well as a legal lending limit high enough to meet the credit needs of our Customers, especially as they grow.

 

   

Rapid response and a company that is easy to do business with. Our customers tell us this is an important differentiator from larger, in-market competitors.

Strong Market Demographics

Delaware is situated in the middle of the Washington, DC—New York corridor which includes the urban markets of Philadelphia and Baltimore. The state benefits from this urban concentration as well as from a unique political, legal, tax and business environment. Additionally, Delaware is one of only nine states with a AAA bond rating from the three predominant rating agencies. Delaware’s rate of unemployment, median household income and rate of population growth all compare favorably to national averages.

 

(Most recent available statistics)   
Delaware
    National
Average
 

Unemployment (For December 2013) (1)

     6.2     6.7

Median Household Income (2008-2012) (2)

   $ 60,119      $ 53,046   

Population Growth (2010-2013) (3)

     3.1     2.4

 

(1) Bureau of Labor Statistics, Economy at a Glance;
(2) U.S. Census Bureau, State & County Quick Facts; (3) U.S. Census Bureau, Population Estimates

 

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Balance Sheet Management

We put a great deal of focus on actively managing our balance sheet. This manifests itself in:

 

   

Prudent capital levels. Maintaining prudent capital levels is key to our operating philosophy. At December 31, 2013, our tangible common equity ratio was 7.69%. All regulatory capital levels for WSFS Bank maintained a meaningful cushion above well-capitalized levels. WSFS Bank’s Tier 1 capital ratio was 13.16% as of December 31, 2013, more than $250 million in excess of the 6% “well-capitalized” level, and our total risk-based capital ratio was 14.36%, more than $151 million above the “well-capitalized” level of 10.00%.

 

   

Disciplined Lending. We maintain discipline in our lending with a particular focus on portfolio diversification and granularity. Diversification includes limits on loans to one borrower as well as industry and product concentrations. We supplement this portfolio diversification with a disciplined underwriting process and the benefit of knowing our customers. We have also taken a proactive approach to identifying trends in our local economy and have responded to areas of concern. As a result we improved all criticized, classified and nonperforming loans to 29.7% of Tier 1 capital plus Allowance for Loan Losses (“ALLL”) from 52.5% at December 31, 2012. We diversify our loan portfolio to limit our exposure to any single type of credit. Such discipline supplements careful underwriting and the benefits of knowing our customers.

 

   

Focus on credit quality. We seek to control credit risk in our investment portfolio and use this portion of our balance sheet primarily to help us manage liquidity and interest rate risk, while providing marginal income and tax relief. Our philosophy and pre-purchase due diligence has allowed us to avoid the significant investment write-downs taken by many of our bank peers during the recent economic downturn (only $86,000 of other-than-temporary impairment charges recorded during this economic cycle).

Disciplined Capital Management

We understand that our capital (or stockholders’ equity) belongs to our stockholders. They have entrusted this capital to us with the expectation that it will earn an appropriate return relative to the risk we take. Mindful of this balance, we prudently, but aggressively, manage our capital.

Strong Performance Expectations and Alignment with Stockholder Priorities

We are focused on high-performing, long-term financial goals. We define “high-performing” as the top quintile of a relevant peer group in return on assets (ROA), return on tangible common equity (ROTCE) and earnings per share (EPS) growth. Management incentives are, in large part, based on driving performance in these areas. More details on management incentive plans are included in our proxy statement.

Following a period of strong investment in and building of our company from 2009 to 2011, we turned our focus to optimizing these ample investments and growing our bottom line, while continuing to improve asset quality. Our investment phase provides a platform for significant growth of our franchise through both our core banking and fee-based businesses and an opportunity to leverage investment to bottom line results for our stockholders.

During 2013, our performance reflected the early stages of this harvesting phase. In 2013, fully diluted earnings per share grew 56% from prior year levels. WSFS reported ROA of 1.07% and core ROA exceeding 1% for the year, and improving during the year so that core ROA stood at 1.05% in the final quarter of 2013.

Growth

Our successful long-term trend in lending and deposit gathering, along with the success of our Wealth Management Group at growing assets under administration and Cash Connect at growing its customer base and

 

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customer cross-sell, has been the result of a focused strategy that provides service, responsiveness and careful execution in a consolidating marketplace. We plan to continue to grow by:

 

   

Developing talented, service-minded Associates. We have successfully recruited Associates with strong ties to, and the passion to serve, their communities to enhance our service in existing markets and to provide a strong start in new communities. We also focus efforts on developing talent and leadership from our current Associate base to better equip those Associates for their jobs and prepare them for leadership roles at WSFS.

 

   

Embracing the Human Sigma concept. We are committed to building Associate Engagement and Customer Advocacy as a way to differentiate ourselves and grow our franchise.

 

   

Developing new products through innovation and utilization of new technologies.

 

   

Continuing strong growth in commercial lending by:

 

   

Offering local decision-making by seasoned banking professionals.

 

   

Executing our community banking model that combines Stellar Service with the banking products and services our business customers demand.

 

   

Adding seasoned lending professionals that have helped us win customers in our Delaware and southeastern Pennsylvania markets.

 

   

Aggressively growing deposits. We have energized our retail branch strategy by combining Stellar Service with an expanded and updated branch network. We plan to continue to grow deposits by:

 

   

Offering products through an expanded and updated branch network.

 

   

Providing a Stellar Service experience to our Customers.

 

   

Further expanding our commercial Customer relationships with deposit and cash management products.

 

   

Finding creative ways to build deposit market share such as targeted marketing programs.

 

   

Selectively opening new branches, including in preferred southeastern Pennsylvania locations.

 

   

Seeking strategic acquisitions. In 2013 we completed the acquisition of Array and Arrow, doubling our mortgage originations and leveraging our investments in southeastern Pennsylvania. Additionally, in November, we announced that we had entered a definitive agreement to merge with First Wyoming Financial Corporation, pursuant to which the First National Bank of Wyoming (DE) (“First Wyoming”) the wholly owned subsidiary of First Wyoming Financial Corporation, will merge with and into our Bank. We believe the merger will enhance our franchise in Kent County, Delaware, diversifying our revenues and improving core funding and liquidity. The First Wyoming merger is subject to customary closing conditions, including regulatory approval, and we expect to close this transaction in the third quarter of 2014. Both acquisitions are strategic for our company and financially attractive with earnings accretion expected in the first year following the acquisition. Over the next several years we expect our growth will be approximately 80% organic and 20% through acquisition, although each year’s growth will reflect the opportunities available to us at the time.

 

   

Exploring new niche businesses and continuing to expand existing niche businesses such as Cash Connect. We are an organization with an entrepreneurial spirit and are open to the risk/reward proposition that comes with such businesses.

Innovation

Our organization is committed to product and service innovation as a means to drive growth and to stay ahead of changing customer demands and emerging competition. Our organization has a focus on developing a strong “culture of innovation” that solicits, captures, prioritizes, and executes innovation initiatives, from product

 

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creation to process improvements. We intend to leverage technology and innovation to grow our business and to successfully execute on our strategy.

Values

Our values address integrity, service, accountability, transparency, honesty, growth and desire to improve. They are the core of our culture, they make us who we are and we live them every day.

At WSFS we:

 

   

Do the right thing.

 

   

Serve others.

 

   

Are open and candid.

 

   

Grow and improve.

Results

Our focus on these points of differentiation has allowed us to grow our core franchise and build value for our stockholders. Since 2008, our commercial loans have grown from $1.6 billion to $2.4 billion, a strong 7% compound annual growth rate (CAGR). Over the same period, customer funding has grown from $1.5 billion to $3.0 billion, a 12% CAGR. More importantly, over the last decade, stockholder value has increased at a far greater rate than our banking peers. An investment of $100 in WSFS stock in 2003 would be worth $189 at December 31, 2013. By comparison, $100 invested in the Nasdaq Bank Index in 2003 would be worth $114 at December 31, 2013.

SUBSIDIARIES

We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc. (“Montchanin”) and one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”).

WSFS Bank has two wholly owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services, LLC (“Monarch”). WSFS Investment Group, Inc., markets various third-party investment and insurance products such as single-premium annuities, whole life policies and securities, primarily through our retail banking system and directly to the public. Monarch offers commercial domicile services which include providing employees, directors, sublease of office facilities and registered agent services in Delaware and Nevada.

Montchanin provides asset management services and has one wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”). Cypress is a Wilmington-based investment advisory firm servicing high net-worth individuals and institutions with $614 million in assets under management at December 31, 2013.

The Trust is our unconsolidated subsidiary, and was formed in 2005 to issue $67.0 million aggregate principal amount of Pooled Floating Rate Capital Securities.

In addition to the subsidiaries listed above, as of December 31, 2013 we also had one consolidated variable interest entity (“VIE”), SASCO 2002-RM1 (“SASCO”), which is a reverse mortgage securitization trust.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY

Condensed average balance sheets for each of the last three years and analyses of net interest income and changes in net interest income due to changes in volume and rate are presented in “Results of Operations” included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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CREDIT EXTENSION ACTIVITIES

Over the past several years we have focused on growing the more profitable segments of our loan portfolio. Our current portfolio lending activity is concentrated on lending to small- to mid-sized businesses in the mid-Atlantic region of the United States, primarily in Delaware, contiguous counties in Pennsylvania, Maryland and New Jersey as well as in northern Virginia. Since 2009, our commercial and industrial (“C&I”) loans have increased by $476.4 million, or 43%. Our C&I loans, including owner-occupied commercial real estate loans, accounted for approximately 55% of our loan portfolio in 2013 compared to 45% in 2009. Based on current market conditions, we expect our focus on growing C&I loans to continue into 2014 and beyond.

The following table shows the composition of our loan portfolio at year-end for the last five years.

 

    At December 31,  
    2013     2012     2011     2010     2009  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in Thousands)  

Types of Loans

                   

Commercial real estate:

                   

Commercial mortgage

  $ 725,193       25.0   $ 631,365       23.2   $ 626,739       23.1   $ 625,379       24.2   $ 524,380       21.2

Construction

    106,074       3.6       133,375       4.9       106,268       3.9       140,832       5.5       231,625       9.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

    831,267       28.6       764,740       28.1       733,007       27.0       766,211       29.7       756,005       30.5  

Commercial (1)

    810,882       27.9       704,491       25.9       1,460,812       53.9       1,239,102       48.1       1,120,807       45.2  

Commercial — owner occupied (1)

    786,360       27.1       770,581       28.3       —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

    2,428,509       83.6       2,239,812       82.3       2,193,819       80.9       2,005,313       77.8       1,876,812       75.7  

Consumer loans:

                   

Residential real estate

    221,520       7.6       243,627       8.9       274,105       10.5       308,857       12.6       348,873       14.4  

Consumer

    302,234       10.4       289,001       10.6       290,979       10.7       309,722       12.0       300,648       12.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

    523,754       18.0       532,628       19.5       565,084       21.2       618,579       24.6       649,521       26.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross loans

  $ 2,952,263       101.6     $ 2,772,440       101.8     $ 2,758,903       102.1     $ 2,623,892       102.4     $ 2,526,333       102.2  

Less:

                   

Deferred fees (unearned income)

    6,043       0.2       4,602       0.2       3,234       0.1       2,185       0.1       2,098       0.1  

Allowance for loan losses

    41,244       1.4       43,922       1.6       53,080       2.0       60,339       2.3       53,446       2.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans (2)

  $ 2,904,976       100.0   $ 2,723,916       100.0   $ 2,702,589       100.0   $ 2,561,368       100.0   $ 2,470,789       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Prior to 2012, owner occupied commercial loans were included in commercial loan balances.
(2) Excludes $31,491; $12,758; $10,185; $14,522 and $8,366 of residential mortgage loans held-for-sale at December 31, 2013, 2012, 2011, 2010, and 2009, respectively.

 

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The following table shows the remaining time until our loans mature. The first table details the total loan portfolio by type of loan. The second table details the total loan portfolio by those with fixed interest rates and those with adjustable interest rates. The tables show loans by remaining contractual maturity. Loans may be pre-paid, so the actual maturity may be earlier than the contractual maturity. Prepayments tend to be highly dependent upon the interest rate environment. Loans having no stated maturity or repayment schedule are reported in the Less than One Year category.

 

     Less than
One Year
     One to
Five Years
     Over
Five Years
     Total  
     (In thousands)  

Commercial mortgage loans

   $ 78,415      $ 416,238      $ 230,540      $ 725,193  

Construction loans

     20,754        50,975        34,345        106,074  

Commercial loans

     288,816        316,936        205,130        810,882  

Commercial Owner Occupied loans

     80,799        276,302        429,259        786,360  

Residential real estate loans (1)

     4,866        3,779        212,875        221,520  

Consumer loans

     19,360        36,621        246,253        302,234  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 493,010      $ 1,100,851      $ 1,358,402      $ 2,952,263  
  

 

 

    

 

 

    

 

 

    

 

 

 

Rate sensitivity:

           

Fixed

   $ 63,024      $ 462,983      $ 471,060      $ 997,067  

Adjustable (2)

     429,986        637,868        887,342        1,955,196  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross loans

   $ 493,010      $ 1,100,851      $ 1,358,402      $ 2,952,263  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes loans held-for-sale.
(2) Includes hybrid adjustable-rate mortgages.

Commercial Real Estate, Construction and Commercial Lending.

Pursuant to section 5(c) of the Home Owners’ Loan Act (“HOLA”), federal savings banks are generally permitted to invest up to 400% of their total regulatory capital in nonresidential real estate loans and up to 20% of its assets in commercial loans. As a federal savings bank that was formerly chartered as a Delaware savings bank, we have certain additional lending authority.

Commercial, commercial mortgage and construction lending have higher levels of risk than residential mortgage lending. These loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and may be more subject to adverse conditions in the commercial real estate market or in the general economy. The majority of our commercial and commercial real estate loans are concentrated in Delaware, southeastern Pennsylvania (Chester and Delaware counties) and nearby areas.

We offer commercial real estate mortgage loans on multi-family properties and on other commercial real estate. Generally, loan-to-value ratios for these loans do not exceed 80% of appraised value at origination.

Our commercial mortgage portfolio was $725.2 million at December 31, 2013. Generally, this portfolio is diversified by property type, with no type representing more than 29% of the portfolio. The largest type is retail-related (shopping centers, malls and other retail) with balances of $202.2 million. The average loan size of a loan in the commercial mortgage portfolio is $773,000 and only 27 loans are greater than $5 million, with three loans greater than $10 million.

We offer commercial construction loans to developers. In some cases these loans are made as “construction/permanent” loans, which provides for disbursement of loan funds during construction with automatic conversion to mini-permanent loans (1-5 years) upon completion of construction. These construction loans are short-term, usually not exceeding two years, with interest rates indexed to our WSFS prime rate, the “Wall Street” prime rate or

 

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London InterBank Offered Rate (“LIBOR”), in most cases, and are adjusted periodically as these rates change. The loan appraisal process includes the same evaluation criteria as required for permanent mortgage loans, but also takes into consideration: completed plans, specifications, comparables and cost estimates. Prior to approval of each credit, these criteria are used as a basis to determine the appraised value of the subject property when completed. Our policy requires that all appraisals be reviewed independently from our commercial business development staff. At origination, the loan-to-value ratios for construction loans generally do not exceed 75%. The initial interest rate on the permanent portion of the financing is determined by the prevailing market rate at the time of conversion to the permanent loan. At December 31, 2013, $165.6 million was committed for construction loans, of which $106.1 million, or less than 4% of gross loans, was outstanding. Residential construction and land development (“CLD”), one of the hardest-hit sectors through the recent economic downturn, represented only $99.0 million, or 3%, of the loan portfolio and 20% of Tier 1 capital (Tier 1 + ALLL). Our commercial CLD portfolio was only $25.0 million, or 1%, of total loans, and our “land hold” loans, which are land loans not currently being developed, were only $24.0 million, or less than 1%, of total loans, at December 31, 2013.

Commercial and industrial and owner occupied commercial loans make up the remainder of our commercial portfolio and include loans for working capital, financing equipment and real estate acquisitions, business expansion and other business purposes. These loans generally range in amounts of up to $25 million (with a few relationships exceeding this level) with an average loan balance in the portfolio of $345,000 and terms ranging from less than one year to seven years. The loans generally carry variable interest rates indexed to our WSFS prime rate, national prime rate or LIBOR. As of December 31, 2013, our commercial and industrial and owner occupied commercial loan portfolios were $1.6 billion and represented 55% of our total loan portfolio. These loans are diversified by industry, with no industry representing more than 16% of the portfolio.

Federal law limits the extensions of credit to any one borrower to 15% of our unimpaired capital (approximately $76 million), or 25% if the difference is secured by collateral having a market value that can be determined by reliable and continually available pricing. Extensions of credit include outstanding loans as well as contractual commitments to advance funds, such as standby letters of credit, but do not include unfunded loan commitments. At December 31, 2013, no borrower had collective (relationship) outstandings exceeding these legal lending limits. Only eight commercial relationships, when all loans related to the relationship are combined, reach outstanding balances in excess of $25.0 million.

Residential Real Estate Lending.

Generally, we originate residential first mortgage loans with loan-to-value ratios of up to 80% and require private mortgage insurance for up to 35% of the mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. We do not have any significant concentrations of such insurance with any one insurer. On a very limited basis, we have originated or purchased loans with loan-to-value ratios exceeding 80% without a private mortgage insurance requirement. At December 31, 2013, the balance of all such loans was approximately $1.7 million.

Generally, our residential mortgage loans are underwritten and documented in accordance with standard underwriting criteria published by the FHLMC and other secondary market participants to assure maximum eligibility for subsequent sale in the secondary market. Typically, we sell only those loans originated specifically with the intention to sell on a “flow” basis.

To protect the propriety of our liens, we require title insurance be obtained. We also require fire, extended coverage casualty and flood insurance (where applicable) for properties securing residential loans. All properties securing our residential loans are appraised by independent, licensed and certified appraisers and are subject to review in accordance with our standards.

The majority of our adjustable-rate, residential real estate loans have interest rates that adjust yearly after an initial period. The change in rate for the first adjustment date could be higher than the typical limited rate change

 

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of two percentage points at each subsequent adjustment date. Adjustments are generally based upon a margin (currently 2.75% for U.S. Treasury index; 2.50% for LIBOR index) over the weekly average yield on U.S. Treasury securities adjusted to a constant maturity, as published by the Federal Reserve Board.

Usually, the maximum rate on these loans is six percent above the initial interest rate. We underwrite adjustable-rate loans under standards consistent with private mortgage insurance and secondary market underwriting criteria. We do not originate adjustable-rate mortgages with payment limitations that could produce negative amortization.

The adjustable-rate mortgage loans in our loan portfolio help mitigate our risk to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of re-pricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower. Further, although adjustable-rate mortgage loans allow us to increase the sensitivity of our asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on our adjustable-rate mortgages will adjust sufficiently to compensate for increases to our cost of funds during periods of extreme interest rate increases.

The original contractual loan payment period for residential loans is normally 10 to 30 years. Because borrowers may refinance or prepay their loans without penalty, these loans tend to remain outstanding for a substantially shorter period of time. First mortgage loans customarily include “due-on-sale” clauses. This provision gives us the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage. We enforce due-on-sale clauses through foreclosure and other legal proceedings to the extent available under applicable laws.

In general, loans are sold without recourse except for the repurchase right arising from standard contract provisions covering violation of representations and warranties or, under certain investor contracts, a default by the borrower on the first payment. We also have limited recourse exposure under certain investor contracts in the event a borrower prepays a loan in total within a specified period after sale, typically one year. The recourse is limited to a pro rata portion of the premium paid by the investor for that loan, less any prepayment penalty collectible from the borrower. We had no repurchases during the years ended December 31, 2013, 2012 and 2011.

We have a limited amount of loans originated as subprime loans, $7.6 million, at December 31, 2013 (less than 0.5% of total loans) and no negative amortizing loans or interest-only first mortgage loans.

Consumer Lending.

Our primary consumer credit products (excluding first mortgage loans) are home equity lines of credit and equity-secured installment loans. At December 31, 2013, home equity lines of credit outstanding totaled $193.3 million and equity-secured installment loans totaled $69.2 million. In total, these product lines represented 86.8% of total consumer loans. Some home equity products grant a borrower credit availability of up to 100% of the appraised value (net of any senior mortgages) of their residence. Maximum loan to value (“LTV”) limits are 89% for primary residences and 75% for all other properties. At December 31, 2013, we had $360.2 million in total commitments for home equity lines of credit. Home equity lines of credit offer customers potential Federal income tax advantages, the convenience of checkbook access, revolving credit features for a portion of the life of the loan and typically are more attractive in a low interest rate environment. Home equity lines of credit expose us to the risk that falling collateral values may leave us inadequately secured. The risk on installment products like home equity loans is mitigated as they amortize over time.

 

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The following table shows our consumer loans at year-end, for the last five years.

 

    At December 31,  
    2013     2012     2011     2010     2009  
    Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
    Amount     Percent of
Total
Consumer
Loans
 
    (Dollars in Thousands)  

Equity secured installment loans

  $ 69,230       22.9   $ 59,091       20.4   $ 74,721       25.7   $ 82,188       26.5   $ 102,727       34.2

Home equity lines of credit

    193,255       63.9       195,936       67.8       192,917       66.3       205,244       66.3       177,407       59.0  

Personal loans

    16,397       5.4       12,408       4.3       7,192       2.5       6,834       2.2       5,489       1.8  

Unsecured lines of credit

    13,147       4.4       9,197       3.2       8,378       2.9       7,758       2.5       7,246       2.4  

Other

    10,205       3.4       12,369       4.3       7,771       2.6       7,648       2.5       7,779       2.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

  $ 302,234       100.0   $ 289,001       100.0   $ 290,979       100.0   $ 309,722       100.0   $ 300,648       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan Originations, Purchases and Sales.

We engage in traditional lending activities primarily in Delaware, southeastern Pennsylvania, and contiguous areas of neighboring states. As a federal savings bank, however, we may originate, purchase and sell loans throughout the United States. We have purchased limited amounts of loans from outside our normal lending area when such purchases are deemed appropriate. We originate fixed-rate and adjustable-rate residential real estate loans through our banking offices.

During 2013, we originated $350.8 million of residential real estate loans. This compares to originations of $208.1 million in 2012. From time to time, we have purchased whole loans and loan participations in accordance with our ongoing asset and liability management objectives. In both 2013 and 2012, there were no such purchases. Residential real estate loan sales totaled $194.8 million in 2013 and $176.1 million in 2012. We sell certain newly originated mortgage loans in the secondary market as a means of generating fee income to control the interest rate sensitivity of our balance sheet and to manage overall balance sheet mix. We hold certain fixed-rate mortgage loans for investment, consistent with our current asset/liability management strategies.

At December 31, 2013, we serviced approximately $121.9 million of residential mortgage loans for others, compared to $144.0 million at December 31, 2012. We also serviced residential mortgage loans for our own portfolio totaling $258.9 million and $243.6 million at December 31, 2013 and 2012, respectively.

We originate commercial real estate and commercial loans through our commercial lending division. Commercial loans are made for working capital, financing equipment acquisitions, business expansion and other business purposes. During 2013, we originated $965.6 million of commercial and commercial real estate loans compared to $901.9 million in 2012. To reduce our exposure on certain types of these loans, and/or to maintain relationships within internal lending limits, at times we will sell a portion of our commercial loan portfolio, typically through loan participations. Commercial loan sales totaled $4.4 million and $1.0 million in 2013 and 2012, respectively. These amounts represent gross contract amounts and do not necessarily reflect amounts outstanding on those loans. We also periodically buy participations from other banks. Commercial loan participation purchases totaled $23.3 million and $43.1 million in 2013 and 2012, respectively.

Our consumer lending activity is conducted mainly through our branch offices and referrals from other parts of our business. We originate a variety of consumer credit products including home improvement loans, home equity lines of credit, automobile loans, unsecured lines of credit and other secured and unsecured personal installment loans.

We offer government-insured reverse mortgages to our customers. Our activity has been limited to acting as a correspondent originator for these loans. During 2013, we originated, and sold $3.2 million in reverse mortgages compared to $3.6 million during 2012.

 

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Any significant modification or additional exposure to one borrowing relationship exceeding $3.5 million must be approved by the Senior Management Loan Committee (“SLC”). The Executive Committee of the Board of Directors reviews the minutes of the SLC meetings. The Executive Committee also approves new credit exposures exceeding $10 million and new credit exposures in excess of $5 million for customers with higher risk profiles, larger existing relationship exposures, or multiple policy exceptions. Depending upon their experience and management position, individual officers of the Bank have the authority to approve smaller loan amounts. Our credit policy includes a $25 million “House Limit” to any one borrowing relationship. In rare circumstances, we will approve exceptions to the “House Limit”. Our policy allows for only fifteen such relationships with an aggregate exposure of 10% of Tier I Capital plus Allowance for Loan Losses (“ALLL”). Currently, we have eight relationships exceeding this limit. At December 31, 2013, the aggregate exposure over “House Limit” totaled 11.62% of Tier I Capital plus ALLL. Those eight relationships were approved to exceed the “House Limit” because the credit profile was deemed strong, or because of a long relationship history with the borrower(s).

During the third quarter of 2013, we obtained the right to execute a clean-up call on the underlying collateral of a reverse mortgage securitization. This event triggered a consolidation of the assets and liabilities of the securitization trust on our balance sheet in accordance with ASC 810-05-9, Consolidation of VIEs, which describes how to determine when a reporting entity should include the assets, liabilities, noncontrolling interest, and results of activities of a VIE in its consolidated financial statements. As a result, we consolidated $40.5 million of reverse mortgage loans, as well as other assets and liabilities. Our existing investment in reverse mortgages was combined with the consolidated reverse mortgage loans for a total of $37.3 million at December 31, 2013. See Note 6 to the Consolidated Financial Statements for more information on these loans.

Fee Income from Lending Activities.

We earn fee income from lending activities, including fees for originating loans, servicing loans and selling loan participations. We also receive fee income for making commitments to originate construction, residential and commercial real estate loans. Additionally, we collect fees related to existing loans which include prepayment charges, late charges, assumption fees and swap fees. In addition, as part of the loan application process, the borrower may pay us for out-of-pocket costs to review the application, whether or not the loan is closed.

Most loan fees are not recognized in our consolidated statements of operations immediately, but are deferred as adjustments to yield in accordance with U.S. generally accepted accounting principles (“GAAP”), and are reflected in interest income over the expected life of the loan. Those fees represented interest income of $2.5 million, $2.1 million, and $1.2 million during 2013, 2012, and 2011, respectively. Loan fee income was mainly due to fee accretion on new and existing loans (including the acceleration of the accretion on loans that paid early), loan growth and prepayment penalties. The overall increase in loan fee income was the result of the growth in certain loan categories during 2013 and 2012.

LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES

Our results of operations can be negatively impacted by nonperforming assets, which include nonaccruing loans, nonperforming real estate investments, assets acquired through foreclosure and restructured loans. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in our opinion, collection is doubtful, or when principal or interest is past due 90 days and collateral is insufficient to cover principal and interest payments. Interest accrued, but not collected at the date a loan is placed on nonaccrual status, is reversed and charged against interest income. In addition, the accretion of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on our assessment of the ultimate collectability of principal and interest.

 

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We endeavor to manage our portfolio to identify problem loans as promptly as possible and take immediate actions to minimize losses. To accomplish this, our Loan Administration and Risk Management Department monitors the asset quality of our loans and investments in real estate portfolios and reports such information to the Credit Policy, Audit and Executive Committees of the Board of Directors and the Bank’s Controller’s Department.

SOURCES OF FUNDS

We manage our liquidity risk and funding needs through our treasury function, Asset/Liability Committee and Investment Committee. Historically, we have had success in growing our loan portfolio. For example, during the year ended December 31, 2013, net loan growth resulted in the use of $207.0 million in cash. The loan growth was primarily due to our continued success increasing corporate and small business lending. We expect this trend to continue. As a result of increased deposit growth, our loan-to-total customer funding ratio at December 31, 2013 was 98%, exceeding our 2013 strategic goal of 100%. We have significant experience managing our funding needs through both borrowings and deposit growth.

As a financial institution, we have access to several sources of funding. Among these are:

 

   

Deposit growth

 

   

Brokered deposits

 

   

Borrowing from the Federal Home Loan Bank (“FHLB”)

 

   

Federal Reserve Discount Window access

 

   

Other borrowings such as repurchase agreements

 

   

Cash flow from securities and loan sales and repayments

 

   

Net income

Our branch expansion and renovation program has been focused on expanding our retail footprint in Delaware and southeastern Pennsylvania and attracting new customers in part to provide additional deposit growth. However, in recent years we have purposefully reduced reliance on higher-cost, typically single-service certificate of deposit (CD) accounts. Core customer deposit growth (deposits excluding CDs) was strong, equaling $67.0 million, or 3%, during 2013.

Deposits. WSFS is the largest independent full-service bank and trust institution headquartered and operating in Delaware. The Bank primarily attracts deposits through its retail branch offices and loan production offices, in Delaware’s New Castle, Sussex and Kent Counties, as well as nearby southeastern Pennsylvania and Annandale, Virginia.

We offer various deposit products to our customers, including savings accounts, demand deposits, interest-bearing demand deposits, money market deposit accounts and certificates of deposit. In addition, we accept “jumbo” certificates of deposit with balances in excess of $100,000 from individuals, businesses and municipalities in Delaware.

 

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The following table shows the maturities of certificates of deposit of $100,000 or more as of December 31, 2013:

 

Maturity Period

   December 31,
2013
 
     (In Thousands)  

Less than 3 months

   $ 93,486  

Over 3 months to 6 months

     39,141  

Over 6 months to 12 months

     29,990  

Over 12 months

     58,528  
  

 

 

 
   $ 221,145  
  

 

 

 

Federal Home Loan Bank Advances

As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), we are able to obtain FHLB advances. At December 31, 2013, we had $638.1 million in FHLB advances with a weighted average rate of 0.30%. Outstanding advances from the FHLB had rates ranging from 0.16% to 1.52% at December 31, 2013. Pursuant to collateral agreements with the FHLB, the advances are secured by qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB. We are required to purchase and hold shares of capital stock in the FHLB in an amount at least equal to 4.60% of our borrowings from them, plus 0.35% of our member asset value. As of December 31, 2013, our FHLB stock investment totaled $35.9 million.

We received no dividends from the FHLB during 2012 or 2011. However, in February 2012, the FHLB declared and began to pay a dividend on capital stock. For additional information regarding FHLB Stock, see Note 10 to the Consolidated Financial Statements.

The FHLB is rated AA+, has a very high degree of government support and was in compliance with all regulatory capital requirements as of December 31, 2013. Based on these and other factors, we have determined there was no other-than-temporary impairment related to our FHLB stock investment as of December 31, 2013.

Trust Preferred Borrowings

In 2005, the Trust issued $67.0 million aggregate principal amount of Pooled Floating Rate Securities at a variable interest rate of 177 basis points over the three-month LIBOR rate with a scheduled maturity of June 1, 2035.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

During 2013 and 2012, we purchased federal funds as a short-term funding source. At December 31, 2013, we had purchased $72.0 million in federal funds at an average rate of 0.28%, compared to $85.0 million in federal funds at a rate of 0.27% at December 31, 2012.

During 2013, we sold securities under agreements to repurchase as a funding source. At both December 31, 2013 and 2012, we had sold $25.0 million of securities sold under agreements to repurchase with a fixed rate of 2.98% and a scheduled maturity of January 1, 2015. The underlying securities were MBS with a book value of $33.6 million as of December 31, 2013.

Temporary Liquidity Guarantee Program Debt

In 2008, the Federal Deposit Insurance Corporation (“FDIC”) announced the Temporary Liquidity Guarantee Program (“TLGP”), to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts and certain holding companies, and by

 

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providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. In 2009, we completed an offering of $30.0 million of qualifying senior bank notes covered by the TLGP. These borrowings matured and were repaid in February 2012.

Senior Debt

In 2012, we issued and sold $55.0 million in aggregate principal amount of 6.25% Senior Notes due 2019 (the “Senior Debt”). The Senior Debt is an unsecured senior debt obligation and ranks equally with all of our other present and future unsecured, unsubordinated obligations. The Senior Debt is effectively subordinated to our secured indebtedness and structurally subordinated to the indebtedness of our subsidiaries. Interest payments on the Senior Debt are due quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. At our option, the Senior Debt is callable, in whole or in part, after 5 years at a price equal to the outstanding principal amount to be redeemed plus accrued and unpaid interest. The Senior Debt matures on September 1, 2019.

Reverse Mortgage Trust Bonds Payable

In conjunction with the aggregation of reverse mortgage related assets through the consolidation of a reverse mortgage securitization, mentioned earlier, we have also recognized the securitization bonds on our balance sheet. The bonds have a value of $21.9 million and carry a rate of 0.88%. We completed the legal call of the bonds on January 27, 2014.

PERSONNEL

As of December 31, 2013, we had 762 full-time equivalent Associates (employees). Our Associates are not represented by a collective bargaining unit. We believe our relationship with our Associates is very good, as evidenced by being named a “Top Workplace” by an independent survey of our Associates for the last eight years.

REGULATION

Overview

We are subject to extensive federal and state banking laws, regulations, and policies that are intended primarily for the protection of depositors, the FDIC’s Deposit Insurance Fund, and the banking system as a whole, not for the protection of our other creditors and stockholders. Historically, we and the bank have been examined, supervised and regulated primarily by the Office of Thrift Supervision (“OTS”). Effective July 21, 2011, portions of the OTS were merged into the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve. The OCC became the Bank’s primary regulator and the Federal Reserve became the Company’s primary regulator.

The statutes enforced by, and regulations and policies of, these agencies affect most aspects of our business, including prescribing permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of our activities and various other requirements.

Our deposits are insured by the FDIC to the fullest extent allowed by law. As an insurer of bank deposits, the FDIC promulgates regulations, conducts examinations, requires the filing of reports and generally supervises the operations of all institutions to which it provides deposit insurance.

Financial Reform Legislation

Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies.

 

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In 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The new law also established an independent federal consumer protection bureau within the Federal Reserve. The following discussion summarizes significant aspects of the new law that may affect us. Certain significant implementing regulations have not been finalized and therefore we cannot yet determine the full impact on our business and operations.

The following aspects of the Dodd-Frank Act are related to the operations of our Bank:

 

   

The OTS was merged into the OCC and the Federal Reserve and the federal savings association charter has been preserved under OCC jurisdiction.

 

   

An independent Consumer Financial Protection Bureau has been established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Depository institutions of less than $10 billion in total assets, like our Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

 

   

Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated, subject to various grandfathering and transition rules. Our trust preferred securities are currently grandfathered, but may not remain grandfathered under this legislation.

 

   

The prohibition on payment of interest on demand deposits has been repealed.

 

   

Field preemption of state laws applied to federal savings associations has been repealed. Now, state law is preempted with respect to federal savings associations to the same extent such laws would be preempted with respect to a national bank, that is, whenever the state law has a discriminatory intent or effect on a federal savings association compared to state-chartered institutions; the state law prevents or significantly interferes with a federal savings association’s federal powers; or the state law is preempted by a federal law other than the Home Owners Loan Act. The OCC must make a preemption determination on a case-by-case basis with respect to a particular state law or other state law with substantively equivalent terms. In addition, state laws are no longer preempted with respect to the activities of a federal savings association’s subsidiaries.

 

   

Deposit insurance had been permanently increased to $250,000 and unlimited deposit insurance for noninterest-bearing transaction accounts expired on December 31, 2012.

 

   

The deposit insurance assessment base has been changed to equal a depository institution’s total consolidated assets minus the sum of its average tangible equity during the assessment period.

 

   

The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35% of estimated annual insured deposits or assessment base. However, the FDIC was directed to offset the effect of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

The following aspects of the Dodd-Frank Act are related to the operations of our Company:

 

   

Authority over savings and loan holding companies has been transferred to the Federal Reserve.

 

   

Leverage capital requirements and risk-based capital requirements applicable to depository institutions and bank holding companies have been extended to savings and loan holding companies following a five year grace period.

 

   

The Federal Deposit Insurance Act (“FDIA”) was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.

 

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The Federal Reserve can require a grandfathered unitary savings and loan holding company that conducts commercial or manufacturing activities or other nonfinancial activities in addition to financial activities to conduct all or part of its financial activities in an intermediate savings and loan holding company. The Federal Reserve is required to promulgate rules setting forth the criteria for when a grandfathered unitary savings and loan holding company would be required to establish an intermediate holding company, but to date it has not yet proposed any such rules.

 

   

Public companies will be required to provide their shareholders with a nonbinding vote (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.

 

   

Additional provisions, including some not specifically aimed at savings associations and savings and loan holding companies, nonetheless may have an impact on us.

Some of these provisions have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. We expect that the Dodd-Frank Act will continue to increase our operating and compliance costs. Specific impacts of the Dodd-Frank Act on our current activities or new financial activities will become evident in the future, and our financial performance and the markets in which we operate will continue to depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act continue to be subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us, our customers, or the financial industry in general.

RECENT LEGISLATION

In July 2013, the Board of Governors of the Federal Reserve System, FDIC and the OCC approved final rules (the “Final Capital Rules”) implementing revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the Basel III international capital standards. Among other things, the Final Capital Rules establish a new capital ratio of common equity Tier 1 capital of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets; increase the minimum ratio of Tier 1 capital ratio from 4% to 6% and include a minimum leverage ratio of 4%; place an emphasis on common equity Tier 1 capital and implement the Dodd-Frank Act phase-out of certain instruments from Tier 1 capital; and change the risk weights assigned to certain assets. Failure to meet these standards would result in limitations on capital distributions as well as executive bonuses. The Final Capital Rules will be applicable to us on January 1, 2015 with conservation buffers phasing in over the subsequent 5 years.

While it is still too early to fully analyze the impact of all aspects of the new regulatory guidance, we currently have strong capital levels and are significantly above well-capitalized levels under the current guidelines.

On July 31, 2013, a Federal District Court judge ruled that the Federal Reserve inflated debit interchange fees when implementing the Durbin amendment of the Dodd-Frank Act in 2011. The judge ruled that the Federal Reserve erred in using criteria outside of the scope Congress intended to determine the fee cap, which the Federal Reserve set at 21 cents per transaction. The judge also ruled that the network options for both signature and PIN transactions were not set appropriately in accordance with the Dodd-Frank Act. The case is currently on appeal at the D.C. Circuit Court of Appeals, where oral arguments were heard on January 17, 2014. If not overturned on appeal, this ruling could significantly affect debit fees for the banking industry and for us. However, these developments are preliminary and the impact on us is not determinable at this time.

The many provisions of the Dodd-Frank Act are so extensive that implementation by regulators is still ongoing. Several of the key regulations included in the original law have been delayed since the law’s passing, making an assessment of the Dodd Frank Act’s full effect on us not possible at this time.

 

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Regulation of the Company

General. We are a registered savings and loan holding company and are subject to the regulation, examination, supervision and reporting requirements of the OCC.

We are also a public company subject to the reporting requirements of the United States Securities and Exchange Commission (the “SEC”). Certain reports that we file with or furnish to the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, are available free of charge on the investor relations page of our website at www.wsfsbank.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K.

Sarbanes-Oxley Act of 2002. In July 2002, Congress enacted the Sarbanes-Oxley Act of 2002, which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Section 404 of the Sarbanes-Oxley Act, and regulations adopted by the SEC, require us to include in our Annual Reports on Form 10-K a report stating management’s responsibility to establish and maintain adequate internal controls over financial reporting and management’s conclusion on the effectiveness of the internal controls at year end. Additionally, our independent registered public accounting firm is required to attest to and report on management’s evaluation of internal control over financial reporting.

Restrictions on Acquisitions. Federal law generally prohibits a savings and loan holding company, without prior regulatory approval, from acquiring control of all, or substantially all, of the assets of any other savings institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares of a savings institution or savings and loan holding company. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the Federal Reserve.

The Federal Reserve may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

We are a grandfathered unitary thrift holding company. Should we lose that status, we will be constrained in our ability to acquire companies or business lines that engage in non-banking activities, and may be required to divest any companies that we already own that engage in non-banking activities.

Safe and Sound Banking Practices. Savings and loan holding companies and their non-banking subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices or that constitute violations of laws or regulations. For example, for bank holding companies, the Federal Reserve Board’s Regulation Y requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a holding company could not impair its subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believed it not prudent to do so. The Federal Reserve Board can assess civil money penalties for activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1,000,000 for each day the activity continues.

 

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Source of Strength. In accordance with FDIA, we are expected to act as a source of financial and managerial strength to the Bank. Under this policy, the holding company is expected to commit resources to support its bank subsidiary, including at times when the holding company may not be in a financial position to provide it.

The Dodd-Frank Act has added additional guidance regarding the source of strength doctrine and has directed the regulatory agencies to promulgate regulations to increase the capital requirements for holding companies to a level that matches those of banking institutions.

Dividends. The principal source of the holding company’s cash is from dividends from the Bank. Our earnings and activities are affected by federal, state and local laws and regulations. For example, these include limitations on the ability of the Bank to pay dividends to the holding company and our ability to pay dividends to our stockholders. It is the policy of the Federal Reserve Board that holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that holding companies should not maintain a level of cash dividends that undermines the holding company’s ability to serve as a source of strength to its banking subsidiary. Consistent with such policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the Federal Reserve Board’s policy statement. The Federal Reserve Board’s Regulation LL also requires advance notice to the Federal Reserve Board before a bank may make a dividend payment.

In 2009, the Federal Reserve Board issued a supervisory letter providing greater clarity to its policy statement on the payment of dividends by holding companies. In this letter, the Federal Reserve Board stated that when a holding company’s board of directors is deciding on the level of dividends to declare, it should consider, among other things, the following factors: (i) overall asset quality, potential need to increase reserves and write down assets, and concentrations of credit; (ii) potential for unanticipated losses and declines in asset values; (iii) implicit and explicit liquidity and credit commitments, including off-balance sheet and contingent liabilities; (iv) quality and level of current and prospective earnings, including earnings capacity under a number of plausible economic scenarios; (v) current and prospective cash flow and liquidity; (vi) ability to serve as an ongoing source of financial and managerial strength to depository institution subsidiaries insured by the FDIC, including the extent of double leverage and the condition of subsidiary depository institutions; (vii) other risks that affect the holding company’s financial condition and are not fully captured in regulatory capital calculations; (viii) level, composition, and quality of capital; and (ix) ability to raise additional equity capital in prevailing market and economic conditions (the “Dividend Factors”). It is particularly important for a holding company’s board of directors to ensure that the dividend level is prudent relative to the organization’s financial position and is not based on overly optimistic earnings scenarios. In addition, a holding company’s board of directors should strongly consider, after careful analysis of the Dividend Factors, reducing, deferring, or eliminating dividends when the quantity and quality of the holding company’s earnings have declined or the holding company is experiencing other financial problems, or when the macroeconomic outlook for the holding company’s primary profit centers has deteriorated. The Federal Reserve Board further stated that, as a general matter, a holding company should eliminate, defer or significantly reduce its distributions if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition, or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Failure to do so could result in a supervisory finding that the holding company is operating in an unsafe and unsound manner.

Additionally, as discussed above, the Federal Reserve Board possesses enforcement powers over savings and loan holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices, or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by bank and savings and loan holding companies.

 

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Regulation of WSFS Bank

General. As a federally chartered savings institution, historically, the Bank was subject to regulation by the OTS. On July 21, 2011, regulation of the Bank shifted to OCC. The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The OCC periodically examines the Bank for compliance with regulatory requirements. The FDIC also has the authority to conduct special examinations of the Bank. The Bank must file reports with the OCC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board.

Transactions with Affiliates; Tying Arrangements. The Bank is subject to certain restrictions in its dealings with us and our affiliates. Transactions between savings associations and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act, with additional limitations found in Section 11 of the Home Owners’ Loan Act. An affiliate of a savings association, generally, is any company or entity which controls or is under common control with the savings association or any subsidiary of the savings association that is commonly controlled by an affiliate or a bank or savings association. In a holding company context, the parent holding company of a savings association (such as “the Company”) and any companies which are controlled by such parent holding company are affiliates of the savings association. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and several other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings association may (i) lend or otherwise extend credit to an affiliate that engages in any activity impermissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings association. The Home Owners’ Loan Act also prohibits the Bank or its subsidiaries from purchasing shares of an affiliate that is not a subsidiary or extending credit to an affiliate engaged in activities that are not permissible for bank holding companies.

Regulatory Capital Requirements. Under capital regulations, savings institutions must maintain “tangible” capital equal to 1.5% of adjusted total assets, “Tier 1” or “core” capital equal to 4% of adjusted total assets, and “total” capital (a combination of core and “supplementary” capital) equal to 8% of risk-weighted assets. In addition, regulations impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0%. For purposes of these regulations, Tier 1 capital has the same definition as core capital.

The capital rule defines Tier 1 or core capital as common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, and certain non-withdrawable accounts and pledged deposits of mutual savings associations less certain intangible assets and, subject to certain limitations, mortgage and non-mortgage servicing rights, purchased credit card relationships and credit-enhancing interest only strips, and deferred tax assets. Tangible capital is given the same definition as core capital but is reduced by the amount of all the savings institution’s intangible assets except for limited amounts of mortgage servicing assets. The capital rule requires that core and tangible capital be reduced by an amount equal to a savings institution’s debt and equity investments in “non-includable” subsidiaries engaged in activities not permissible to national banks, other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies. At December 31, 2013, the Bank was in compliance with both the core and tangible capital requirements.

The risk weights assigned by the risk-based capital regulation range from 0% for cash, U.S. government securities, and other assets to 100% for consumer and commercial loans, non-qualifying mortgage loans, assets

 

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more than 90 days past due and other assets. In determining compliance with the risk-based capital requirement, a savings institution may include both core capital and supplementary capital in its total capital, provided the amount of supplementary capital included does not exceed the savings institution’s core capital. Supplementary capital is defined to include certain preferred stock issues, non-withdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments, allowance for loan losses up to 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair values. Total capital is reduced by the amount of the institution’s reciprocal holdings of depository institution capital instruments and all equity investments. At December 31, 2013, the Bank was in compliance with the risk-based capital requirements.

Dividend Restrictions. OCC regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. A savings institution must file an application for OCC approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings institutions that are a subsidiary of a savings and loan holding company (as well as certain other institutions) must still file a notice with the OCC at least 30 days before the board of directors declares a dividend or approves a capital distribution.

An institution that either before or after a proposed capital distribution fails to meet its then-applicable minimum capital requirement or that has been notified that it needs more than normal supervision may not make any capital distributions without the prior written approval of the OCC. In addition, the OCC may prohibit a proposed capital distribution, which would otherwise be permitted by OCC regulations, if the OCC determines that such distribution would constitute an unsafe or unsound practice.

Under federal rules, an insured depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it is already undercapitalized. In addition, federal regulators have the authority to restrict or prohibit the payment of dividends for safety and soundness reasons. The FDIC also prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the FDIC. Our Bank is currently not in default in any assessment payment to the FDIC.

Insurance of Deposit Accounts. The Bank’s deposits are insured to the maximum extent permitted by the Deposit Insurance Fund. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OCC an opportunity to take such action.

Pursuant to the Dodd-Frank Act, the Federal Deposit Insurance Act was amended to increase the maximum deposit insurance amount from $100,000 to $250,000.

The FDIC has adopted a risk-based premium system that provides for quarterly assessments. In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize the predecessor to the Deposit Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019.

In 2011, the FDIC issued a final rule to implement changes to its assessment base used to determine risk-based premiums for insured depository institutions as required under the Dodd-Frank Act and also changed the

 

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risk-based pricing system necessitated by changes to the assessment base. These changes took effect for the quarter beginning April 1, 2011. Under the revised system, the assessment base was changed to equal average consolidated total assets less average tangible equity. Institutions other than large and highly complex institutions are placed in one of four risk categories.

The FDIC assessment rates range from approximately 5 basis points to 45 basis points (depending on applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio reaches 1.15% and the reserve ratio for the immediately prior assessment period is less than 2.0%, the applicable assessment rates may range from 3 basis points to 30 basis points (subject to applicable adjustments for unsecured debt and brokered deposits). If the prior assessment period is equal to or greater than 2.0% and less than 2.5%, the assessment rates may range from 2 basis points to 28 basis points and if the prior assessment period is greater than 2.5%, the assessment rates may range from 1 basis point to 25 basis points. The minimum reserve ratio of the Deposit Insurance Fund has increased to 1.35% of estimated annual insured deposits or assessment base, however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

Future changes in insurance premiums could have an adverse effect on the operating expenses and results of operations and we cannot predict what insurance assessment rates will be in the future.

The FDIC may terminate the deposit insurance of any insured depository institution, including us, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. Management is not aware of any existing circumstances that would result in termination of our deposit insurance.

Federal Reserve System. Pursuant to regulations of the Federal Reserve, a savings institution must maintain reserves against their transaction accounts. As of December 31, 2013, no reserves were required to be maintained on the first $12.4 million of transaction accounts, reserves of 3% were required to be maintained against the next $67.1 million of transaction accounts and a reserve of 10% against all remaining transaction accounts. This percentage is subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement may reduce the amount of an institution’s interest-earning assets.

ITEM 1A. RISK FACTORS

Investing in our securities involves risks. You should carefully consider the following risks, in addition to the other information in this report, before deciding to invest in our securities.

Risks Related to WSFS

Difficult market conditions and unfavorable economic trends could adversely affect our industry and our business.

We are particularly exposed to downturns in the Delaware, mid-Atlantic and overall U.S. economy and housing markets. Since 2007, declines in the housing market combined with a weak economy and elevated unemployment have negatively impacted the credit performance of mortgage, construction and other loans and have resulted in significant write-downs of assets by many financial institutions. In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. Unfavorable general economic trends, reduced availability of commercial credit and sustained high unemployment negatively impact the credit performance of commercial and consumer credit, resulting in increased write-downs. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and ability to access capital. A worsening

 

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of these conditions, such as a recession or economic slowdown, would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry. In particular, we may face the following risks in connection with these events:

 

   

An increase in the number of customers unable to repay their loans in accordance with the original terms, which could result in a higher level of loan losses and provision for loan losses;

 

   

Impaired ability to assess the creditworthiness of customers as the models and approaches we use to select, manage and underwrite our customers become less predictive of future performance;

 

   

Impaired ability to estimate the losses inherent in our credit exposure as the process we use, which requires difficult, subjective and complex judgments based on forecasts of economic or market conditions that might impair the ability of our customers to repay their loans, becomes less accurate and thus less reliable;

 

   

Increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to commercial credit;

 

   

Changes in the regulatory environment, including regulations promulgated or to be promulgated under the Dodd-Frank Act, also could influence recognition of loan losses and our allowance for loan losses;

 

   

Downward pressure on our stock price; and

 

   

Increased competition due to intensified consolidation of the financial services industry.

Significant increases of nonperforming assets from the current level, or greater than anticipated costs to resolve these credits, will have an adverse effect on our earnings.

Our nonperforming assets (which consist of nonaccrual loans, assets acquired through foreclosure and troubled debt restructurings), totaled $47.8 million at December 31, 2013. Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans and assets acquired through foreclosure. We must establish an allowance for loan losses which reserves for losses inherent in the loan portfolio that are both probable and reasonably estimable. From time to time, we also write down the value of properties in our portfolio of assets acquired through foreclosure to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to assets acquired through foreclosure. The resolution of nonperforming assets requires the active involvement of management, which can distract management from its overall supervision of operations and other income producing activities. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance for loan losses accordingly, which will have an adverse effect on our earnings.

Changes in interest rates and other factors beyond our control could have an adverse impact on our earnings.

Our operating income and net income depend to a significant extent on our net interest margin, which is the difference between the interest yields we receive on loans, securities and other interest-earning assets and the interest rates we pay on interest-bearing deposits and other liabilities. The net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental regulatory agencies, including the Federal Reserve.

We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest

 

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rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. The results of our interest rate sensitivity simulation models depend upon a number of assumptions which may prove to be not accurate. There can be no assurance that we will be able to successfully manage our interest rate risk. Increases in market rates and adverse changes in the local residential real estate market, the general economy or consumer confidence would likely have a significant adverse impact on our non-interest income, as a result of reduced demand for residential mortgage loans that we pre-sell.

The market value of our investment securities portfolio may be impacted by the level of interest rates and the credit quality and strength of the underlying collateral.

As of December 31, 2013, we owned investment securities classified as available-for-sale with an aggregate historical cost of $850.7 million and an estimated fair value of $817.1 million. Future changes in interest rates may reduce the market value of these and other securities.

Our net interest income varies as a result of changes in interest rates as well as changes in interest rates across the yield curve. When interest rates are low, borrowers have an incentive to refinance into mortgages with longer initial fixed rate periods and fixed rate mortgages, causing our securities to experience faster prepayments. Increases in prepayments on our portfolio will cause our premium amortization to accelerate, lowering the yield on such assets. If this happens, we could experience a decrease in interest income, which may negatively impact our results of operations and financial position.

In addition, our securities portfolio is subject to risk as a result of credit quality and the strength of the underlying issuers or their related collateral. Any decrease in the value of the underlying collateral will likely decrease the overall value of our securities, affecting equity and possibly impacting earnings.

Our loan portfolio includes a substantial amount of commercial real estate, construction and land development and commercial and industrial loans. The credit risk related to these types of loans is greater than the risk related to residential loans.

Our commercial loan portfolio, which includes commercial and industrial loans, commercial real estate loans and construction and land development loans, totaled $2.4 billion at December 31, 2013, comprising 84% of net loans. Commercial and industrial loans generally carry larger loan balances and involve a greater degree of risk of nonpayment or late payment than home equity loans or residential mortgage loans. Any significant failure to pay or late payments by our customers would adversely affect our earnings. The increased credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, and the effects of general economic conditions on income-producing properties. A portion of our commercial real estate, construction and land development and commercial and industrial loan portfolios includes a balloon payment feature. A number of factors may affect a borrower’s ability to make or refinance a balloon payment, including the financial condition of the borrower, the prevailing local economic conditions and the prevailing interest rate environment.

Furthermore, commercial real estate loans secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit.

Concentration of loans in our primary markets may increase our risk.

Our success depends primarily on the general economic conditions and housing markets in the State of Delaware, southeastern Pennsylvania and northern Virginia, as a large portion of our loans are to customers in

 

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these markets. This makes us vulnerable to a downturn in the local economy and real estate markets in these areas. Declines in real estate valuations in these markets would lower the value of the collateral securing those loans, which could cause us to realize losses in the event of increased foreclosures. Local economic conditions have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans. In addition, weakening in general economic conditions such as inflation, recession, unemployment, natural disasters or other factors beyond our control could negatively affect demand for loans, the performance of our borrowers and our financial results.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable or incurred losses in our loan portfolio, resulting in additions to our allowance. While we believe that our allowance for loan losses was appropriate at December 31, 2013, there is no assurance that it will be sufficient to cover future loan losses, especially if there is a significant deterioration in economic conditions. Material additions to our allowance could materially decrease our net income.

We are subject to extensive regulation which could have an adverse effect on our operations.

We are subject to extensive state and federal regulation, supervision and examination governing almost all aspects of our operations. The laws and regulations governing our business are intended primarily to protect depositors, our customers, the public, the FDIC’s Deposit Insurance Fund, and the banking system as a whole, not our noteholders or shareholders. Since July 21, 2011, the Federal Reserve has been the primary federal regulator for the Company and the OCC has been the Bank’s primary regulator. The banking laws, regulations and policies applicable to us govern a variety of matters, including certain debt obligations, changes in control, maintenance of adequate capital, and general business operations, including permissible types, amounts and terms of loans and investments, the amount of reserves held against deposits, restrictions on dividends, establishment of new offices and the maximum interest rate that may be charged by law. In addition, federal and state banking regulators have broad authority to supervise our banking business, including the authority to prohibit activities that represent unsafe or unsound banking practices or constitute violations of statute, rule, regulation or administrative order. Failure to appropriately comply with any such laws, regulations or regulatory policies could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could adversely affect our business, results of operations, financial condition or prospects.

We are subject to changes in federal and state banking statutes, regulations and governmental policies, and their interpretation or implementation Regulations affecting banks and other financial institutions in particular are undergoing continuous review and frequently change and the ultimate effect of such changes cannot be predicted. Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any changes in any federal and state law, as well as regulations and governmental policies could affect us in substantial and unpredictable ways, including ways that may adversely affect our business, results of operations, financial condition or prospects.

Regulation of the financial services industry has increased significantly since the financial crisis. The Dodd-Frank Act has resulted, or is likely to result, in new laws, regulations and regulatory supervisors that are expected to have an adverse impact on our operations, particularly through increased regulatory burden and compliance costs. Specifically, as a result of this legislation, we face the following changes, among others:

 

   

The Office of Thrift Supervision (“OTS”) has been eliminated. The OCC became our Bank’s primary regulator and the Federal Reserve Bank is our primary regulator.

 

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A new independent Consumer Financial Protection Bureau (“CFPB”) has been established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Smaller financial institutions, like our Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

 

   

Tier 1 capital treatment for “hybrid” capital items like trust preferred securities was eliminated, subject to various grandfathering and transition rules. Our trust preferred securities are currently grandfathered, but may not remain grandfathered under this legislation.

 

   

Deposit insurance has been permanently increased to $250,000.

 

   

Deposit insurance assessment base calculations equal a depository institution’s total consolidated assets minus the sum of its average tangible equity during the assessment period.

 

   

The minimum reserve ratio of the FDIC’s Deposit Insurance Fund increased to 1.35% of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

 

   

Leverage capital requirements and risk-based capital requirements applicable to depository institutions and bank holding companies have been extended to thrift holding companies following a five year grace period.

 

   

The Federal Deposit Insurance Act, referred to as the FDIA, was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.

 

   

The Federal Reserve can require a grandfathered unitary thrift holding company that conducts commercial or manufacturing activities or other nonfinancial activities in addition to financial activities to conduct all or part of its financial activities in an intermediate savings and loan holding company.

 

   

Additional provisions, including some not specifically aimed at thrifts and thrift holding companies, that will nonetheless have an impact on us.

Further, pursuant to the Dodd-Frank Act, the CFPB recently issued a final rule requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms, or to originate “qualified mortgages” that meet specific requirements with respect to terms, pricing and fees. The new rule also contains new disclosure requirements at mortgage loan origination and in monthly statements. These requirements will likely require significant personnel resources and could have a material adverse effect on our operations.

Some of the regulatory changes described above may have the consequence of increasing our expenses, decreasing our revenues and changing the activities in which we choose to engage. Many of these and other provisions of the Dodd-Frank Act remain subject to regulatory rulemaking and implementation, the effects of which are not yet known. We may be forced to invest significant management attention and resources to make any necessary changes related to the Dodd-Frank Act and any regulations promulgated thereunder, which may adversely affect our business, results of operations, financial condition or prospects. We cannot predict the specific impact and long-term effects the Dodd-Frank Act and the regulations promulgated thereunder will have on our financial performance, the markets in which we operate and the financial industry generally.

In addition to changes resulting from the Dodd-Frank Act, in July 2013, the Board of Governors of the Federal Reserve System, FDIC and the OCC approved final rules (the “Final Capital Rules”) implementing revised capital rules to reflect the requirements of the Dodd-Frank Act and the Basel III international capital standards. Among other things, the Final Capital Rules establish a new capital ratio of common equity Tier 1

 

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capital of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets; increase the minimum ratio of Tier 1 capital ratio from 4% to 6% and include a minimum leverage ratio of 4%; place an emphasis on common equity Tier 1 capital and implement the Dodd-Frank Act phase-out of certain instruments from Tier 1 capital; and change the risk weights assigned to certain instruments. The Final Capital Rules will be applicable to us on January 1, 2015 with conservation buffers phasing in over the subsequent 5 years.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports when appropriate. In addition to other bank regulatory agencies, the federal Financial Crimes Enforcement Network of the Department of the Treasury is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the state and federal banking regulators, as well as the U.S. Department of Justice, Consumer Financial Protection Bureau, Drug Enforcement Administration, and Internal Revenue Service.

We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control of the Department of the Treasury regarding, among other things, the prohibition of transacting business with, and the need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign policy or economy of the United States. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including any acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We may be required to pay significantly higher FDIC premiums, special assessments, or taxes that could adversely affect our earnings.

The high level of bank failures during the recent financial crisis significantly depleted the FDIC’s Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. As a result, we may be required to pay significantly higher premiums or additional special assessments or taxes that could adversely affect our earnings. The Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35%. The FDIC has adopted a plan under which it will meet this ratio by the statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the minimum reserve ratio on institutions with assets less than

 

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$10 billion. The FDIC has not announced how it will implement this offset. In addition to the minimum reserve ratio, the FDIC must set a designated reserve ratio. The FDIC has set a designated reserve ratio of 2.0%, which exceeds the minimum reserve ratio.

As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution’s total consolidated assets minus its tangible equity instead of its deposits. While our FDIC insurance premiums initially will be reduced by these regulations, it is possible that our future insurance premiums will increase under the final regulations. Any future increases or required prepayments in FDIC insurance premiums may materially adversely affect our results of operations.

The fiscal, monetary and regulatory policies of the federal government and its agencies could have a material adverse effect on our results of operations.

The Federal Reserve regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve policies and our regulatory environment generally are beyond our control, and we are unable to predict what changes may occur or the manner in which any future changes may affect our business, financial condition and results of operation.

Impairment of goodwill and/or intangible assets could require charges to earnings, which could negatively impact our results of operations.

Goodwill and other intangible assets arise when a business is purchased for an amount greater than the net fair value of its identifiable assets. We have recognized goodwill as an asset on the balance sheet in connection with several recent acquisitions. At December 31, 2013, we had $39.0 million of goodwill and intangible assets. We evaluate goodwill and intangibles for impairment at least annually by comparing fair value to carrying amount. Although we have determined that goodwill and other intangible assets were not impaired during 2013, a significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in impairment of goodwill or other intangible assets. If we were to conclude that a future write-down of the goodwill or intangible assets is necessary, then we would record the appropriate charge to earnings, which could be materially adverse to our results of operations and financial position.

Our Cash Connect division relies on multiple financial and operational controls to track and settle the cash it provides to its customers in the ATM industry.

The profitability of Cash Connect is reliant upon its ability to accurately and efficiently distribute, track, and settle large amounts of cash to its customers’ ATMs. This depends on the successful implementation and monitoring of a comprehensive series of financial and operational controls that are designed to help prevent, detect, and recover any potential loss of funds. These controls require the implementation and maintenance of complex proprietary software, the ability to track and monitor an extensive network of armored car companies, and the ability to settle large amounts of electronic funds transfer, or EFT, funds from various ATM networks. It is possible for those associated with armored car companies, ATM networks and processors, ATM operators, or other parties to misappropriate funds belonging to Cash Connect. Cash Connect has experienced such occurrences in the past. If our Cash Connect division’s established policies, procedures and controls are inadequate to prevent a misappropriation of funds, or if a misappropriation of funds is not insured or not fully covered through any insurance maintained by us, it could result in an adverse impact on our earnings.

 

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The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Such events may materially and adversely affect our results of operations.

Our recent business strategy included significant investment in growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth and investment in branch infrastructure effectively.

We have pursued a significant growth strategy for our business. Our growth initiatives have required us to recruit experienced personnel to assist in such initiatives. Accordingly, the failure to retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, as we expand our lending beyond our current market areas, we could incur additional risk related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.

A weak economy, low demand and competition for credit may impact our ability to successfully execute our growth plan and adversely affect our business, financial condition, results of operations, reputation and growth prospects. While we believe we have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.

We regularly evaluate potential acquisitions and expansion opportunities. If appropriate opportunities present themselves, we expect to engage in selected acquisitions or other business growth initiatives or undertakings. We may not successfully identify appropriate opportunities, may not be able to negotiate or finance such activities and such activities, if undertaken, may not be successful.

We have in the past and may in the future pursue acquisitions, which may disrupt our business and adversely affect our operating results, and we may fail to realize all of the anticipated benefits of our pending acquisition of First Wyoming.

We have historically pursued acquisitions, and may seek acquisitions in the future. We may not be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, complete proposed acquisitions, successfully integrate acquired businesses into the existing operations, or expand into new markets. Once integrated, acquired operations may not achieve levels of revenues, profitability, or productivity comparable with those achieved by our existing operations, or otherwise perform as expected.

Acquisitions involve numerous risks, including difficulties in the integration of the operations, technologies, services and products of the acquired companies, and the diversion of management’s attention from other business concerns. We may not properly ascertain all such risks prior to an acquisition or prior to such a risk impacting us while integrating an acquired company. As a result, difficulties encountered with acquisitions could have a material adverse effect on our business, financial condition, and results of operations.

Furthermore, we must generally receive federal regulatory approval before we can acquire a bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition, future prospects, including current and projected capital levels, the competence, experience, and integrity of management, compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the Community Reinvestment Act, and the effectiveness of the

 

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acquiring institution in combating money laundering activities. In addition, we cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. Consequently, we may not obtain regulatory approval for a proposed acquisition on acceptable terms or at all, in which case we would not be able to complete the acquisition despite the time and expenses invested in pursuing it.

The success of our pending acquisition of First Wyoming Financial Corporation, which we announced on November 25, 2013, will depend on, among other things, our ability to realize anticipated costs savings and to successfully combine our business with First Wyoming Financial Corporation in a manner that does not materially disrupt existing customer relationships or result in decreased revenues from our respective customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

If the merger is not consummated, we will have incurred substantial costs that may adversely affect our financial results and operations.

We have incurred and will continue to incur substantial costs in connection with the proposed merger. These costs are primarily associated with the fees of our financial advisor, accountants and attorneys. If the merger is not consummated, we will have incurred these costs from which we will have received little or no benefits.

We originate, sell, service and portfolio reverse mortgages, which subjects us to additional risks that could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.

We originate, sell, service and portfolio reverse mortgages. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. Generally, a reverse mortgage is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. No repayment of the mortgage is required until the borrower dies, moves out of the home or the home is sold. A decline in the demand for reverse mortgages may reduce the number of reverse mortgages we originate, and adversely affect our ability to sell reverse mortgages in the secondary market. Although foreclosures involving reverse mortgages generally occur less frequently than forward mortgages, loan defaults on reverse mortgages leading to foreclosures may occur if borrowers fail to maintain their property or fail to pay taxes or home insurance premiums. A general increase in foreclosure rates may adversely impact how reverse mortgages are perceived by potential customers and thus reduce demand for reverse mortgages. Finally, we could become subject to negative headline risk in the event that loan defaults on reverse mortgages lead to foreclosures or evictions of elderly homeowners. All of the above factors could have a material adverse effect on our business, reputation, liquidity, financial condition and results of operations.

We could experience an unexpected inability to obtain needed liquidity.

Liquidity is essential to our business, as we use cash to fund loans and investments, other interest-earning assets and deposit withdrawals that occur in the ordinary course of our business. We also are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Our principal sources of liquidity include customer deposits, FHLB borrowings, brokered certificates of deposit, sales of loans, repayments to the Bank from borrowers and paydowns and sales of investment securities. If our ability to obtain funds from these sources becomes limited or the costs to us of those funds increases, whether due to factors that affect us specifically, including our financial performance or the imposition of regulatory restrictions on us, or due to factors that affect the capital markets or other events, including weakening economic conditions or negative views and expectations about the prospects for the financial services industry as a whole, then our ability to meet our obligations or grow our banking business would be adversely affected and our financial condition and results of operations could be harmed.

 

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Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.

From time to time, and particularly in light of the recent economic downturn, and the negative sentiment towards banks, we have and may become party to various litigation claims and legal proceedings. Management evaluates these claims and proceedings to assess the likelihood of unfavorable outcomes and estimates, if possible, the amount of potential losses. We may establish a reserve, as appropriate, based upon our assessments and estimates in accordance with accounting policies. We base our assessments, estimates and disclosures on the information available to us at the time and rely on the judgment of our management with respect to those assessments, estimates and disclosures. Actual outcomes or losses may differ materially from assessments and estimates, which could adversely affect our reputation, financial condition and results of operations.

Our Trust and Wealth division is subject to a number of risks, including reputational risk.

Our Trust and Wealth division derives the majority of its revenue from noninterest income which consists of trust, investment and other servicing fees. Success in this business segment is highly dependent on reputation. Our ability to attract trust and wealth management clients is highly dependent upon external perceptions of this division’s level of service, trustworthiness, business practices and financial condition. Negative perceptions or publicity regarding these matters could damage the division’s and our reputation among existing customers and corporate clients, which could make it difficult for the Trust and Wealth division to attract new clients and maintain existing ones. Adverse developments with respect to the financial services industry may also, by association, negatively impact the division’s or our reputation, or result in greater regulatory or legislative scrutiny or litigation against us. Although we monitor developments for areas of potential risk to the division’s and our reputation and brand, negative perceptions or publicity could materially and adversely impact both revenue and net income.

System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.

Failure in or breach of our computer systems and network infrastructure, or those of our third party vendors or other service providers, including as a result of cyber attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and damage to our reputation, and may discourage current and potential customers from using our Internet banking services. As customer, public and regulatory expectations regarding operational and information security have increased, we have added additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection though these mitigation activities may not prevent future potential losses from system failures or cybersecurity breaches.

Threats to information security also exist in the processing of customer information through various other vendors and their personnel. The occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

 

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Key employees may be difficult to retain.

Our Associates are our most important resource and, in many areas of the financial services industry, competition for qualified personnel is intense. We invest significantly in recruitment, training, development and talent management as our Associates are the cornerstone of our model. If we were unable to continue to attract and retain qualified key employees to support the various functions of our businesses, our performance, including our competitive position, could be materially adversely affected. As economic conditions improve, we may face increased difficulty in retaining top performers and critical skilled employees. If key personnel were to leave us and equally knowledgeable or skilled personnel are unavailable within the Company or could not be sourced in the market, our ability to manage our business may be hindered or impaired.

Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends.

We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from our subsidiaries. These dividends are the principal source of funds to pay dividends on our Common Stock and interest and principal on our debt. Various federal and/or state laws and regulations limit the amount of dividends that our Bank and certain of our nonbank subsidiaries may pay us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Limitations on our ability to receive dividends from our subsidiaries could have a material adverse effect on our liquidity and on our ability to pay dividends on common stock. Additionally, if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our common stockholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

The following table sets forth the location and certain additional information regarding our offices and other material properties as of December 31, 2013:

 

Location

   Owned/
Leased
     Date Lease
Expires
     Net Book Value
of Property or
Leasehold
Improvements (1)
     Deposits  
                   (In Thousands)  

WSFS Bank Center Branch

     Leased         2025      $ 578       $ 946,855   

Main Office

           

500 Delaware Avenue

           

Wilmington, DE 19801

           

Union Street Branch

     Leased         2022        311        50,485  

211 North Union Street

           

Wilmington, DE 19805

           

Fairfax Shopping Center

     Leased         2048        1,004        79,998  

2005 Concord Pike

           

Wilmington, DE 19803

           

Prices Corner Shopping Center Branch

     Leased         2023        348        121,551  

3202 Kirkwood Highway

           

Wilmington, DE 19808

           

Pike Creek Shopping Center Branch

     Leased         2015        194        113,375  

4730 Limestone Road

           

Wilmington, DE 19808

           

University Plaza Shopping Center Branch

     Leased         2041        919        55,855  

100 University Plaza

           

Newark, DE 19702

           

College Square Shopping Center Branch

     Leased         2026        159        103,451  

115 College Square Drive

           

Newark, DE 19711

           

Airport Plaza Shopping Center Branch

     Leased         2018        427        76,887  

144 N. DuPont Hwy.

           

New Castle, DE 19720

           

Glasgow Branch

     Leased         2022        5        49,978  

2400 Peoples Plaza

           

Routes 40 & 896

           

Newark, DE 19702

           

Middletown Crossing Shopping Center

     Leased         2027        428        64,842  

400 East Main Street

           

Middletown, DE 19709

           

Dover Branch

     Leased         2060        351         14,948   

Dover Mart Shopping Center

           

290 South DuPont Highway

           

Dover, DE 19901

           

West Dover Loan Office (2)

     Leased         2014        3        N/A   

Greentree Office Center

           

160 Greentree Drive

           

Suite 103 & 105

           

Dover, DE 19904

           

Glen Mills Branch

     Leased         2040        1,306        22,634  

395 Wilmington-West Chester Pike

           

Glen Mills, PA 19342

           

 

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Location

   Owned/
Leased
     Date Lease
Expires
     Net Book Value
of Property or
Leasehold
Improvements (1)
     Deposits  
                   (In Thousands)  

Brandywine Branch

     Leased         2014      $ 2      $ 31,617  

Inside Safeway Market

           

2522 Foulk Road

           

Wilmington, DE 19810

           

Operations Center (3)

     Owned            N/A         N/A   

2400 Philadelphia Pike

           

Wilmington, DE 19703

           

Holly Oak Branch

     Leased         2015        4        37,691  

Inside Super Fresh

           

2105 Philadelphia Pike

           

Claymont, DE 19703

           

Hockessin Branch

     Leased         2030        445        87,670  

7450 Lancaster Pike

           

Wilmington, DE 19707

           

Lewes LPO

     Leased         2018        30        81,064  

Southpointe Professional Center

           

1515 Savannah Road, Suite 103

           

Lewes, DE 19958

           

Fox Run Shopping Center Branch

     Leased         2025        539        71,611  

210 Fox Hunt Drive

           

Route 40 & 72

           

Bear, DE 19701

           

Camden Town Center Branch

     Leased         2049        581         36,489   

4566 S. DuPont Highway

           

Camden, DE 19934

           

Rehoboth Branch

     Leased         2029        567        40,966  

Lighthouse Plaza

           

19335 Coastal Highway

           

Rehoboth, DE 19771

           

West Dover Branch

     Owned            1,983        35,762  

1486 Forest Avenue

           

Dover, DE 19904

           

Longneck Branch

     Leased         2026        861        34,621  

25926 Plaza Drive

           

Millsboro, DE 19966

           

Smyrna Branch

     Leased         2048        901        40,375  

Simon’s Corner Shopping Center

           

400 Jimmy Drive

           

Smyrna, DE 19977

           

Oxford, LPO

     Leased         2017        N/A         7,777  

59 South Third Street

           

Suite 1

           

Oxford, PA 19363

           

Greenville Branch

     Owned            1,739        489,693  

3908 Kennett Pike

           

Greenville, DE 19807

           

WSFS Bank Center (4)

     Leased         2025        2,130        N/A   

500 Delaware Avenue

           

Wilmington, DE 19801

           

 

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Location

   Owned/
Leased
     Date Lease
Expires
     Net Book Value
of Property or
Leasehold
Improvements (1)
     Deposits  
                   (In Thousands)  

Annandale, LPO

     Leased         2017        N/A       $ 4,017  

7010 Little River Tnpk.

           

Suite 330

           

Annandale, VA 22003

           

Oceanview Branch

     Leased         2024      $ 935        34,414  

69 Atlantic Avenue

           

Oceanview, DE 19970

           

Selbyville Branch

     Leased         2018        6        11,359  

38394 DuPont Boulevard

           

Selbyville, DE 19975

           

Lewes Branch

     Leased         2048        226        26,441  

34383 Carpenters Way

           

Lewes, DE 19958

           

Millsboro Branch

     Leased         2029        914        12,214  

26644 Center View Drive

           

Millsboro, DE 19966

           

Concord Square Branch

     Leased         2016        45         25,181   

4401 Concord Pike

           

Wilmington, DE 19803

           

Delaware City Branch

     Owned            32        12,047  

145 Clinton Street

           

Delaware City, DE 19706

           

West Newark Branch

     Leased         2040        1,366        48,924  

201 Suburban Plaza

           

Newark, DE 19711

           

Lantana Shopping Center Branch

     Leased         2050        322        23,208  

6274 Limestone Road

           

Hockessin, DE 19707

           

West Chester Branch

     Leased         2047        71        29,480  

400 East Market Street

           

West Chester, PA 19380

           

Edgmont Branch

     Leased         2040        1,108        12,222  

5000 West Chester Pike

           

Newtown Square, PA 19073

           

Branmar Branch

     Leased         2061        1,033        111,075  

1712 Foulk Road

           

Wilmington, DE 19810

           

Trolley Square

     Leased         2042        249        45,738  

9A Trolley Square

           

Wilmington, DE 19806

           

Milford

     Leased         2015        28        6,688  

688 North DuPont Highway

           

Milford, DE 19963

           

Seaford

     Leased         2036        74        5,427  

22820 Sussex Highway

           

Sussex Commons Shopping Center

           

Unit 19

           

Seaford, DE 19963

           

 

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Table of Contents

Location

   Owned/
Leased
     Date Lease
Expires
     Net Book Value
of Property or
Leasehold
Improvements (1)
     Deposits  
                   (In Thousands)  

Media

     Leased         2022      $ 93      $ 8,556  

100 East State Street

           

Media, PA 19063

           

Plymouth Meeting

     Leased         2016        21        13,829  

450 Plymouth Road

           

Suite 306

           

Plymouth Meeting, PA 19462

           

Midway Shopping Center

     Leased         2062        2,263         33,656   

4601 Kirkwood Highway

           

Wilmington, DE 19808

           

Kennett Square Branch

     Leased         2028        271        26,271  

100 Old Forge Lane

           

Kennett Square, PA 19348

           

Cash Connect

     Leased         2021        43        N/A   

White Clay Mill

           

500 Creek View Road

           

Suite 100

           

Newark, DE 19711

           

Operations Center

     Leased         2027        289        N/A   

Silverside — Carr Corporate Center

           

409 Silverside Road

           

Wilmington, DE 19809

           

Cypress Capital Management

     Leased         2014        N/A         N/A   

1220 Market Street

           

Suite 704

           

Wilmington, DE 19801

           

Greenville Wealth Management Center

     Leased         2032        363        N/A   

3801 Kennett Pike

           

Suite C-200

           

Greenville, DE 19807

           

Las Vegas Wealth Management Center (5)

     Leased         2013        N/A         N/A   

101 Convention Center Drive

           

Suite P109

           

Las Vegas, NV 89109

           

Array Financial Group/Arrow Land Transfer Co.

     Leased         2017        47        N/A   

510 West Lancaster Ave.

           

Haverford, PA 19041

           
        

 

 

    

 

 

 
         $ 25,614       $ 3,186,942   
        

 

 

    

 

 

 

 

(1) The net book value of all investments in premises and equipment totaled $35.2 million at December 31, 2013
(2) Location of Corporate Training Center.
(3) Building is for sale.
(4) Location of Corporate Headquarters.
(5) Month to month while negotiating a lease extension.

 

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Table of Contents

ITEM 3. LEGAL PROCEEDINGS

As initially disclosed in 2011, we were served with a complaint, filed in U.S. Bankruptcy Court for the Eastern District of Pennsylvania, by a bankruptcy trustee relating to a former WSFS Bank customer. The complaint challenges the Bank’s actions relating to the repayment of an outstanding loan and also seeks to avoid and recover the pre-bankruptcy repayment of that loan, approximately $5.0 million. The matter has been captioned Goldstein v. Wilmington Savings Fund Society, FSB (In re: Universal Marketing, Inc.), Chapter 7, Case No. 09-15404 (ELF), Adv. Pro. No. 11-00512. We believe we acted appropriately and we are vigorously defending ourselves against the complaint.

Based upon available information we believe the estimate of the aggregate range of reasonably possible losses for this legal proceeding was from approximately $250,000 to approximately $5.0 million at December 31, 2013.

There were no material changes or additions to other significant pending legal or other proceedings involving us other than those arising out of routine operations. Management does not anticipate that the ultimate liability, if any, arising out of such other proceedings will have a material effect on the Consolidated Financial Statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity and Related Stockholder Matters

Our Common Stock is traded on the NASDAQ Global Select Market under the symbol “WSFS”. At December 31, 2013, we had 896 registered common stockholders of record. The following table sets forth the range of high and low sales prices for the Common Stock for each full quarterly period within the two most recent fiscal years as well as the quarterly dividends paid.

The closing market price of our Common Stock at December 31, 2013 was $77.53

 

            Stock Price Range  
            Low      High      Dividends  

2013

     4th       $ 57.45      $ 79.85      $ 0.12  
     3rd         52.35         63.66         0.12  
     2nd         45.82         52.89         0.12  
     1st         42.19         49.72         0.12  
           

 

 

 
            $ 0.48  
           

 

 

 

2012

     4th       $ 40.46      $ 44.35      $ 0.12  
     3rd         38.49        44.90        0.12  
     2nd         35.98        41.03        0.12  
     1st         35.95        43.94        0.12  
           

 

 

 
            $ 0.48  
           

 

 

 

 

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Table of Contents

COMPARATIVE STOCK PERFORMANCE GRAPH

The graph and table which follow show the cumulative total return on our Common Stock over the last five years compared with the cumulative total return of the Dow Jones Total Market Index and the Nasdaq Bank Index over the same period as obtained from Bloomberg L.P. Cumulative total return on our Common Stock or the indices equals the total increase in value since December 31, 2008, assuming reinvestment of all dividends paid into the Common Stock or the index, respectively. The graph and table were prepared assuming $100 was invested on December 31, 2008 in our Common Stock and in each of the indexes. There can be no assurance that our future stock performance will be the same or similar to the historical stock performance shown in the graph below. We neither make nor endorse any predictions as to stock performance.

CUMULATIVE TOTAL SHAREHOLDER RETURN

COMPARED WITH PERFORMANCE OF SELECTED INDEXES

December 31, 2008 through December 31, 2013

 

LOGO

 

     Cumulative Total Return  
     2008      2009      2010      2011      2012      2013  

WSFS Financial Corporation

   $ 100      $ 54      $ 102      $ 78      $ 93      $ 171  

Dow Jones Total Market Index

     100        128        149        151        176        233  

Nasdaq Bank Index

     100        84        95        85        101        143  

 

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Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

 

     2013     2012     2011     2010     2009  
     (Dollars in Thousands, Except Per Share Data)  

At December 31,

          

Total assets

   $ 4,515,763     $ 4,375,148     $ 4,289,008     $ 3,953,518     $ 3,748,507  

Net loans (1)

     2,936,467       2,736,674       2,712,774       2,575,890       2,479,155  

Reverse mortgages related assets

     37,328       19,229        15,722        11,746        11,653   

Investment securities (2)

     132,343       50,203       43,215       53,137       46,048  

Other investments

     36,201       31,796       35,765       37,790       40,395  

Mortgage-backed securities (2)

     684,773       850,656        812,856        700,926        669,059   

Total deposits

     3,186,942       3,274,963       3,135,304       2,810,774       2,561,871  

Borrowings (3)

     759,830       515,255       656,609       680,595       787,798  

Trust preferred borrowings

     67,011       67,011       67,011       67,011       67,011  

Senior debt

     55,000       55,000       —         —         —    

Stockholders’ equity

     383,050       421,054       392,133       367,822       301,800  

Number of full-service branches

     39       41       40       36       37  

For the Year Ended December 31,

          

Interest income

   $ 146,922     $ 150,287     $ 158,642     $ 162,403     $ 157,730  

Interest expense

     15,334       23,288       32,605       41,732       53,086  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     131,588       126,999       126,037       120,671       104,644  

Noninterest income

     80,151       86,693       63,588       50,115       50,241  

Noninterest expenses

     132,929       133,345       127,476       109,332       108,504  

Provision (benefit) for income taxes

     24,756       16,984       11,475       5,454       (2,093

Net income

     46,882       31,311       22,677       14,117       663  

Dividends on preferred stock and accretion of discount

     1,633       2,770       2,770       2,770       2,590  

Net income (loss) allocable to common stockholders

     45,249       28,541       19,907       11,347       (1,927

Earnings (loss) per share allocable to common stockholders:

          

Basic

     5.13       3.28       2.31       1.48       -0.30  

Diluted

     5.06       3.25       2.28       1.46       -0.30  

Interest rate spread

     3.51     3.39     3.49     3.47     3.10

Net interest margin

     3.56       3.46       3.60       3.62       3.30  

Efficiency ratio

     62.42       62.19       66.85       63.61       69.56  

Noninterest income as a percentage of total revenue (4)

     37.64       40.43       33.34       29.16       32.21  

Return on average assets

     1.07       0.73       0.56       0.37       0.02  

Return on average equity

     11.60       7.66       5.96       4.21       0.24  

Return on tangible common equity (5)

     13.60       9.15       7.03       4.35       NM   

Average equity to average assets

     8.62       9.58       9.34       8.84       7.86  

Tangible equity to assets

     7.69       8.93       8.41       8.52       7.73  

Tangible common equity to assets

     7.69       7.72       7.18       7.18       6.31  

Ratio of nonperforming assets to total assets

     1.40       1.43       2.14       2.35       2.19  

 

(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances, securities sold under agreement to repurchase and other borrowed funds.
(4) Computed on a fully tax-equivalent basis.
(5) Not a meaningful calculation as there was a net loss for 2009.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a thrift holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, WSFS Bank, the seventh oldest bank continuously operating under the same name in the United States. As a federal savings bank, which was formerly chartered as a state mutual savings bank, we enjoy broader fiduciary powers than most other financial institutions. A fixture in the community, WSFS has been in operation for more than 182 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution that has grown to become the largest thrift holding company in the State of Delaware, one of the top commercial lenders in the state and the third largest bank in terms of Delaware deposits. We state our mission simply: “We Stand for Service.” Our strategy of “Engaged Associates delivering Stellar Service growing Customer Advocates and value for our Owners” focuses on exceeding customer expectations, delivering stellar service and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates.

Our core banking business is commercial lending funded by customer-generated deposits. We have built a $2.4 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and offering a high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through retail deposits and commercial relationships. We service our customers primarily from our 52 offices located in Delaware (42), Pennsylvania (8), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches.

In July 2013 we added two new business units to WSFS Bank with the asset purchase of Array Financial Group, Inc. (“Array”), a mortgage banking company specializing in a variety of residential mortgage and refinancing solutions, and a related entity, Arrow Land Transfer Company (“Arrow”), an abstract and title company.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages nearly $476 million in vault cash in nearly 15,000 ATMs nationwide and also provides online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates over 450 ATMs for the Bank, which has, by far, the largest branded ATM network in Delaware.

As a leading provider of ATM Vault Cash to the U.S. ATM industry, Cash Connect is exposed to substantial operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention and loss recovery strategies. Throughout its 13-year history, Cash Connect periodically has been exposed to theft from armored courier companies and consistently has been able to recover any losses through its risk management strategies.

The Wealth Management division provides a broad array of fiduciary, investment management, credit and deposit products to clients through four businesses. WSFS Investment Group, Inc. provides insurance and brokerage products primarily to our retail banking clients. Cypress Capital Management, LLC (“Cypress”) is a registered investment advisor with over $614 million in assets under management. Cypress’ primary market segment is high net worth individuals, and offers a ‘balanced’ investment style focused on preservation of capital and current income. Christiana Trust, with $8.9 billion in assets under administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, custodial and commercial domicile services to corporate and institutional clients. WSFS Private Banking serves high net worth clients by delivering credit and

 

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deposit products and partnering with Cypress, Christiana Trust and WSFS Investment Group to deliver investment management and fiduciary products and services.

We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc., or Montchanin. We also have one unconsolidated affiliate, WSFS Capital Trust III, or the Trust. WSFS Bank has two wholly-owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services LLC, or Monarch. Montchanin has one wholly-owned subsidiary, Cypress. In addition to the subsidiaries listed above, we also have one consolidated variable interest entity (“VIE”), SASCO 2002-RM1 (“SASCO”), which is a reverse mortgage securitization trust.

RESULTS OF OPERATIONS

We recorded net income of $46.9 million for the year ended December 31, 2013, a $15.6 million or 50% increase compared to $31.3 million for the year ended December 31, 2012, and a $24.2 million increase from $22.7 million for the year ended December 31, 2011. Income allocable to common stockholders (after preferred stock dividends) was $45.2 million, or $5.06 per diluted common share for the year ended December 31, 2013, compared to income allocable to common shareholders of $28.5 million, or $3.25 per diluted common share (a 55% increase in diluted EPS), and income of $19.9 million, or $2.28 per common share, for the years ended December 31, 2012 and 2011, respectively. Earnings for 2013 were impacted by a lower provision for loan losses which decreased $24.9 million to $7.2 million partially offset by securities gains which decreased by $17.9 million to $3.5 million. Net interest income increased during the year due to continued franchise loan growth and prudent balance sheet management. Additionally, we continue to have significant increases in wealth management income, credit/debit card and ATM income and mortgage banking activities. Noninterest expense decreased $416,000 when compared to December 31, 2012 due to management’s continued careful monitoring of operating expenses despite the growth in core revenue and corporate development costs. Salaries and benefits increased due to additional performance-driven incentive compensation costs, while loan workout and Other Real Estate Owned expenses continued to decrease due to our improved performance and the continued improvement in nonperforming assets and FDIC expenses from prior year levels.

Net Interest Income.  Net interest income increased $4.6 million, or 4%, to $131.6 million in 2013 from $127.0 million in 2012, while net interest margin increased 10 basis points to 3.56% in 2013 compared to 3.46% in 2012. The increase in net interest income was due to lending growth during 2013 and improvement in our balance sheet mix, combined with effective management of funding costs, such as the continued intentional reduction in higher-cost CDs and the prepayment of higher rate Federal Home Loan Bank (“FHLB”) borrowings in late 2012. In addition, net interest income and net interest margin have been favorably impacted by the consolidation of SASCO, a reverse mortgage securitization trust, in late 2013. Partially offsetting these increases in net interest income and net interest margin were the year-over-year reduced rates in our mortgage-backed securities (“MBS”) portfolio.

Net interest income increased $962,000, or 1%, to $127.0 million in 2012 from $126.0 million in 2011, while net interest margin decreased 14 basis points to 3.46% in 2012 compared to 3.60% in 2011. The increase in net interest income reflects lending growth during 2012 and was earned despite the impact of the successful completion of our Asset Strategies during the second quarter of 2012. Also favorably impacting net interest income was an improvement in our mix of loans combined with effective management of funding costs, both in deposit pricing and wholesale funding rates. The decrease in net interest margin was mainly due to significantly reduced rates in the MBS portfolio resulting from substantial sales and paydowns, with subsequent reinvestment at much lower market rates during 2012. During 2012 we completed our issuance of $55 million in aggregate principal amount of 6.25% Senior Notes due 2019 which also unfavorably impacted our net interest margin.

The following table provides certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is

 

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provided on the changes that are attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rates (change in rate multiplied by prior year volume on each category); and (iii) net change (the sum of the change in volume and the change in rate). Changes due to the combination of rate and volume changes (changes in volume multiplied by changes in rate) are allocated proportionately between changes in rate and changes in volume.

 

Year Ended December 31,

   2013 vs. 2012     2012 vs. 2011  
     Volume     Yield/Rate     Net     Volume     Yield/Rate     Net  
                 (In Thousands)              

Interest Income:

            

Commercial real estate loans

   $ 3,489     $ (1,756   $ 1,733     $ (410   $ 1,345     $ 935  

Residential real estate loans

     (944     (1,034     (1,978     (1,219     (1,093     (2,312

Commercial loans (1)

     3,608       (4,450     (842     6,180       (3,891     2,289  

Consumer loans

     106       (323     (217     (732     (698     (1,430

Loans held for sale

     72       (156     (84     61       61       122  

Mortgage-backed securities

     (2,207     (3,082     (5,289     2,755       (10,706     (7,951

Investment securities (2)

     463       731       1,194       77       263        (186

Reverse mortgages related assets

     67       1,720       1,787       1       133       134  

FHLB Stock and deposits in other banks

     4       327       331       (2     46       44  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Favorable (unfavorable)

     4,658       (8,023     (3,365     6,711       15,067        (8,355
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits:

            

Interest-bearing demand

     113       170       283       79       (238     (159

Money market

     34       (670     (636     151       (1,289     (1,138

Savings

     3       (217     (214     124       (1,158     (1,034

Customer time deposits

     (2,343     (2,476     (4,819     (821     (3,196     (4,017

Brokered certificates of deposits

     (340     (195     (535     277       41       318  

FHLB of Pittsburgh advances

     1,183       (5,561     (4,378     (1,516     (2,204     (3,720

Trust Preferred borrowings

     —         (138     (138     —         105       105  

Reverse mortgage bonds payable

     60       —         60       —         —         —    

Senior debt

     2,462       13       2,475       648       648       1,296  

Other borrowed funds

     70       (122     (52     (196     (772     (968
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unfavorable (favorable)

     1,242       (9,196     (7,954     (1,254     (8,063     (9,317
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change, as reported

   $ 3,416     $ 1,173      $ 4,589     $ 7,537     $ (6,575   $ 962  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The tax-equivalent income adjustment is related to commercial loans.
(2) The tax-equivalent income adjustment is related to municipal securities.

 

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The following table provides information regarding the average balances of, and yields/rates on, interest-earning assets and interest-bearing liabilities during the periods indicated:

 

Year Ended December 31,

  2013     2012     2011  

(Dollars in Thousands)

  Average
Balance
    Interest     Yield/
Rate  (1)
    Average
Balance
    Interest     Yield/
Rate (1)
    Average
Balance
    Interest     Yield/
Rate (1)
 

Assets

                 

Interest-earning assets:

                 

Loans (2) (3):

                 

Commercial real estate loans

  $ 797,384     $ 37,842       4.75   $ 733,999     $ 36,109       4.92   $ 742,692     $ 35,174       4.74

Residential real estate
loans

    235,803       9,492       4.03       258,699       11,470       4.43       294,103       14,057       4.78  

Commercial loans

    1,519,320       67,768       4.43       1,458,601       68,610       4.67       1,337,954       66,320       4.97  

Consumer loans

    288,658       13,445       4.66       285,625       13,662       4.78       300,703       15,092       5.02  

Loans held for sale (4)

    18,922       591       3.12       20,127       675       3.35       5,978       279       4.67  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total loans

    2,860,087       129,138       4.52       2,757,051       130,526       4.75       2,681,430       130,922       4.92  

Mortgage-backed securities (5)

    711,443        12,834        1.80        819,545        18,123        2.21        750,975        26,486        3.53   

Investment securities (5)

    95,795       1,692       2.50       51,333       498       1.07       44,923       683       1.52  

Reverse mortgage related assets

    25,777        2,867        11.12        16,505        1,080        6.54        13,557        535        3.95   

Other interest-earning assets

    34,516       391       1.13       32,617       60       0.18       36,707       16       0.04  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    3,727,618       146,922       3.97       3,677,051       150,287       4.11       3,527,592       158,642       4.53  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Allowance for loan losses

    (43,014         (48,485         (57,325    

Cash and due from banks

    81,301           86,320           65,147      

Cash in non-owned ATMs

    411,988           368,256           347,885      

Bank-owned life insurance

    63,012           63,311           63,971      

Other noninterest-earning assets

    124,484           120,905           123,626      
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 4,365,389         $ 4,267,358         $ 4,070,896      
 

 

 

       

 

 

       

 

 

     

 

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Year Ended December 31,

  2013     2012     2011  

(Dollars in Thousands)

  Average
Balance
    Interest     Yield/
Rate  (1)
    Average
Balance
    Interest     Yield/
Rate (1)
    Average
Balance
    Interest     Yield/
Rate (1)
 

Liabilities and Stockholders’ Equity

                 

Interest-bearing liabilities:

                 

Interest-bearing deposits:

                 

Interest-bearing demand

  $ 566,848     $ 529       0.09   $ 411,862     $ 246       0.06   $ 329,227     $ 405       0.12

Money market

    779,023       1,123       0.14       764,109       1,759       0.23       724,263       2,897       0.40  

Savings

    391,047       217       0.06       388,659       431       0.11       355,743       1,465       0.41  

Customer time deposits

    530,496       4,712       0.89       716,686       9,531       1.33       765,620       13,548       1.77  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing customer deposits

    2,267,414       6,581       0.29       2,281,316       11,967       0.52       2,174,853       18,315       0.84  

Brokered certificates of deposit

    177,396       599       0.34       269,682       1,134       0.42       201,618       816       0.40  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing deposits

    2,444,810       7,180       0.29       2,550,998       13,101       0.51       2,376,471       19,131       0.81  

FHLB advances

    573,989       1,874       0.32       466,243       6,252       1.32       561,117       9,972       1.75  

Trust preferred borrowings

    67,011       1,342       1.98       67,011       1,480       2.17       67,011       1,375       2.02  

Reverse mortgage trust bonds payable

    6,757       60       0.88       —         —         —         —         —         —    

Senior debt

    55,000       3,771       6.86       19,085       1,296       6.68       —         —         —    

Other borrowed funds (6)

    143,131       1,107       0.77       135,030       1,159       0.86       150,116       2,127       1.42  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    3,290,698       15,334       0.47       3,238,367       23,288       0.72       3,154,715       32,605       1.03  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing demand deposits

    638,397           586,173           508,613      

Other noninterest-bearing liabilities

    32,265           33,939           27,150      

Stockholders’ equity

    404,029           408,879           380,418      
 

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders’ equity

  $ 4,365,389         $ 4,267,358         $ 4,070,896      
 

 

 

       

 

 

       

 

 

     

Excess of interest-earning assets over interest-bearing liabilities

  $ 436,920         $ 438,684         $ 372,877      
 

 

 

       

 

 

       

 

 

     

Net interest and dividend income

    $ 131,588         $ 126,999         $ 126,037    
   

 

 

       

 

 

       

 

 

   

Interest rate spread

        3.51         3.39         3.49
     

 

 

       

 

 

       

 

 

 

Net interest margin

        3.56         3.46         3.60
     

 

 

       

 

 

       

 

 

 

 

(1) Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes loans held-for-sale in conjunction with our asset strategies undertaken in 2012.
(5) Includes securities available-for-sale at fair value.
(6) Includes federal funds purchased and securities sold under agreement to repurchase

 

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Provision for Loan Losses. We maintain an allowance for loan losses at an appropriate level based on our assessment of estimable and probable losses in the loan portfolio, pursuant to accounting literature, which is discussed further in “Nonperforming Assets”. Our evaluation is based upon a review of the portfolio and requires significant, complex and difficult judgments. For the year ended December 31, 2013, we recorded a provision for loan losses of $7.2 million compared to $32.1 million in 2012 and $28.0 million in 2011. This decrease was primarily due to a broad improvement in the portfolio credit quality as indicated through significantly improved credit metrics, offset in part by loan growth experienced in 2013.

Noninterest Income. Noninterest income decreased $6.5 million to $80.2 million in 2013 from $86.7 million in 2012. Excluding the non-routine and other one-time items listed in the table below, noninterest income increased $5.3 million, or 8%, to $68.7 million in 2013 from $63.5 million in 2012.

 

     Twelve months ended  
(In Thousands)    December 31,
2013
    December 31,
2012
    December 31,
2011
 

Noninterest income (GAAP)

   $ 80,151     $ 86,692     $ 63,588  

Less: Securities gains, net

     (3,516     (21,425     (4,878

Unanticipated BOLI income

     —         (1,007     (1,239

Billing change (Cash Connect) (1)

     (4,108     (797     —    

Reverse mortgage consolidation gain (2)

     (3,801     —         —    
  

 

 

   

 

 

   

 

 

 

Adjusted noninterest income (non-GAAP)

   $ 68,726     $ 63,463     $ 57,471  
  

 

 

   

 

 

   

 

 

 

 

(1) A change in the method of billing for armored car services by our Cash Connect division caused revenues and expenses for these services to be reported separately rather than netted together in our statement of operations beginning in the third quarter of 2012.
(2) During the third quarter of 2013, we obtained the right to execute a clean-up call on the underlying collateral for our pool of reverse mortgages. A non-routine gain resulted from this transaction.

Wealth management income grew $2.2 million, or 17%, in 2013 compared to 2012, reflecting the continued expansion of the corporate and personal trust business lines as well as an increase in Private Banking jumbo mortgage products provided by the Array / Arrow acquisition in 2013. Credit/debit card and ATM fees increased by $1.4 million, or 6%, in 2013 compared to 2012, mostly due to additional product and service offerings and ATM income from Cash Connect® our ATM division, which grew fees by 17%. Mortgage banking revenues increased $1.1 million, or 40%, in 2013 partially due to the purchase of Array / Arrow during the third quarter of 2013, refinance activity, and growth in our retail lending division. Deposit service charges were essentially flat in 2013, as growth was offset by changes in customer behavior due to new regulatory requirements in late 2012.

Noninterest income increased $23.1 million to $86.7 million in 2012 from $63.6 million in 2011. Excluding the impact of the reconciling items in the table above, noninterest income increased $6.0 million, or 10%, to $63.5 million in 2012 from $57.5 million in 2011. Credit/debit card and ATM fees increased by $1.9 million, or 9%, in 2012 compared to 2011, most of which came from growth in Cash Connect. Wealth management income grew $1.4 million, or 12%, in 2012 compared to 2011. Mortgage banking revenues increased $1.3 million, or 87%, in 2012 compared to 2011, primarily driven by refinance activity and growth in the retail lending division. Deposit service charges increased $762,000, or 5%, in 2012 compared to 2011, due to overall Bank growth.

 

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Noninterest Expenses. Noninterest expense in 2013 decreased $416,000 to $132.9 million from $133.3 million in 2012. Excluding the non-routine and other one-time items listed in the table below, noninterest expense decreased $782,000, or 1%, to $128.1 million in 2013 from $129.0 million in 2012.

 

     Twelve months ended  
(In Thousands)    December 31,
2013
    December 31,
2012
    December 31,
2011
 

Noninterest expenses (GAAP)

   $ 132,929     $ 133,345     $ 127,477  

Less: Billing change (Cash Connect) (1)

     (4,108     (797     —    

Corporate development costs (2)

     (717     —         (780

“Right Here” advertising campaign

     —         —         (961

Prepayment penalties on FHLB advances

     —         (3,662     —    
  

 

 

   

 

 

   

 

 

 

Adjusted noninterest expenses (non-GAAP)

   $ 128,104     $ 128,886     $ 125,736  
  

 

 

   

 

 

   

 

 

 

 

(1) A change in the method of billing for armored car services by our Cash Connect division caused revenues and expenses for these services to be reported separately rather than netted together in our statement of operations beginning in the third quarter of 2012.
(2) Corporate development costs were largely attributable to professional fees related to the Array Financial Group / Arrow Land Transfer Company acquisition that closed during the third quarter of 2013, the pending acquisition of First Wyoming Financial Corporation announced during the fourth quarter of 2013, and activities related to the calling and consolidating of the equity tranche SASCO of a 2002 reverse mortgage trust transaction.

In 2013, loan workout and REO related costs decreased by $4.3 million from the prior year due to broad improvement in our loan portfolio credit metrics. In addition, during 2013 we had lower regulatory costs, including a decrease in FDIC assessment fees of $2.2 million. Partially offsetting these decreases were higher salaries, benefits and other compensation, which increased $4.8 million, or 7%, mainly the result of higher performance-based compensation in 2013. Also, equipment expenses increased by $1.2 million, or 16%, mainly due to business growth.

Noninterest expense in 2012 increased $5.9 million, or 5%, to $133.3 million from $127.5 million in 2011. Excluding the reconciling items in the table above, noninterest expenses increased only 2% in 2012 compared to 2011. This increase reflected a full year of expenses related to branch expansion and renovation in 2011, and the relocation of our operation center in 2012. In addition, incentive costs increased by $1.2 million in 2012 compared to 2011, as a result of our improved performance in 2012. These increases were partially offset by expense management efforts including an expense management plan implemented in the second half of 2012.

Income Taxes. We recorded $24.8 million of tax expense for the year ended December 31, 2013 compared to tax expense of $17.0 million and $11.5 million for the years ended December 31, 2012 and 2011, respectively. The effective tax rates for the years ended December 31, 2013, 2012 and 2011 were 34.6%, 35.2% and 33.6%, respectively. The 2013, 2012 and 2011 income tax expenses reflect tax benefits of $0, $3,000 and $378,000, respectively, resulting from net reductions in unrecognized tax benefits for those years. Volatility in effective tax rates is impacted by the level of pretax income or loss, combined with the amount of tax-free income as well as the effects of unrecognized tax benefits. The provision for income taxes includes federal, state and local income taxes that are currently payable or deferred because of temporary differences between the financial reporting basis and the tax reporting basis of the assets and liabilities. Included in income taxes for 2013 was a deferred tax asset and corresponding valuation allowance recorded in connection with the consolidation of the reverse mortgage trust. During early 2014, this valuation allowance was removed. For additional information see Note 23 to the Consolidated Financial Statements.

FINANCIAL CONDITION

Total assets increased $140.6 million, or 3%, to $4.5 billion as of December 31, 2013 compared to $4.4 billion as of December 31, 2012. Included in this increase was a $199.8 million, or 7%, increase in net loans (including those held for sale) and a $18.1 million increase in reverse mortgage related assets. Total liabilities increased

 

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$178.6 million during the year to $4.1 billion at December 31, 2013. This increase was primarily the result of an increase in FHLB advances of $261.8 million as of December 31, 2013 compared to December 31, 2012 and was partially offset by a decrease in customer deposits of $86.1 million.

Cash in non-owned ATMs.    During 2013, cash in non-owned ATMs managed by Cash Connect, our ATM unit, decreased $17.3 million, or 4%. Cash Connect serviced nearly 15,000 ATMs at December 31, 2013, as well as more than 450 WSFS-owned ATMs to serve customers in our markets.

Investment Securities.    Investment securities decreased $83.7 million to $817.1 million during 2013. Our portfolio of available-for-sale MBS was comprised of all GSE as of December 31, 2013. Our MBS were predominantly of short duration with a weighted average duration of 5.3 years at December 31, 2013. We own no collateralized debt obligations, bank trust preferred securities, Agency preferred securities or equity securities in other FDIC insured banks or thrifts. During 2013, we purchased $94.6 million of municipal bonds. The purpose was to improve return, diversify our investment portfolio and reduce our effective tax rate.

In addition, we own 50,833 shares of Visa Class B stock. The shares are restricted until a group of four distinct legal cases known collectively as “the Covered Litigation” are resolved. Two of the four cases have been definitively resolved. Once the Covered Litigation is concluded the shares will convert to Class A shares at a conversion rate which currently stands at 0.4206 and subject to change as the Covered Litigation are resolved. As of December 31, 2013, the carrying value of these shares was $0 on our Consolidated Statement of Condition.

Loans, net.    Net loans (including those held for sale) increased $199.8 million, or 7%, during 2013. Loan growth included commercial and industrial loans increases of $121.4 million, or 8% as well as $93.1 million, or 15%, in commercial real estate loan growth. Partially offsetting these increases were construction loans which decreased by $27.4 million, or 21%.

Goodwill and Intangibles.    Goodwill and intangibles increased $5.7 million during 2013 due to the acquisition of Array and Arrow during 2013. As a result of this acquisition; we recorded goodwill of $4.1 million and other intangibles of $2.4 million.

Customer Deposits.    Customer deposits decreased $86.1 million, or 3%, during 2013 to $3.0 billion. This decrease consisted of a decrease in jumbo certificates of deposit of $73.1 million, or 25%, and a decrease in customer time deposits (CDs under $100,000), of $80.0 million, or 25%. Partially offsetting these decreases was an increase in core deposit relationships (demand deposits, money market and savings accounts) of $67.0 million, or 3%, during 2013.

The table below depicts the changes in customer deposits during the last three years:

 

     Year Ended December 31,  
     2013     2012      2011  
     (Dollars In Millions)  

Beginning balance

   $ 3,104     $ 2,847      $ 2,562  

Interest credited

     5       10        19  

Deposit (outflows) inflows, net

     (91     247        266  
  

 

 

   

 

 

    

 

 

 

Ending balance

   $ 3,018     $ 3,104      $ 2,847  
  

 

 

   

 

 

    

 

 

 

Reverse Mortgage Related Assets.    Reverse mortgage related assets include reverse mortgage loans, SASCO 2002-RM1’s Class “O” certificates and the BBB-rated tranche of this reverse mortgage security.

For additional information on these reverse mortgage related assets, see Note 6 to our Consolidated Financial Statements

 

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Borrowings and Brokered Deposits.    Borrowing and brokered deposits increased by $242.7 million during 2013. Included in the increase was $261.8 million of Federal Home Loan Bank Advances. Partially offsetting this increase was a decrease of $13.0 million in federal funds purchased and securities sold under agreements to repurchase, $4.2 million in other borrowed funds and $1.9 million in brokered deposits.

Stockholders’ Equity.    Stockholders’ equity decreased $38.0 million, or 9%, to $383.1 million at December 31, 2013 compared to $421.1 million at December 31, 2012. Capital in excess of par value decreased $44.5 million as a result of our redemption of preferred stock. In addition, other comprehensive income decreased $34.2 million during 2013, mainly due to a decrease in unrealized gains on available-for-sale securities. Partially offsetting these decreases was retained earnings which increased $40.7 million, or 9%, to $474.0 million during 2013, primarily as a result of earnings from the year less dividends paid.

ASSET/LIABILITY MANAGEMENT

Our primary asset/liability management goal is to optimize long term net interest income opportunities within the constraints of managing interest rate risk, ensuring adequate liquidity and funding and maintaining a strong capital base.

In general, interest rate risk is mitigated by closely matching the maturities or repricing periods of interest-sensitive assets and liabilities to ensure a favorable interest rate spread. We regularly review our interest-rate sensitivity, and use a variety of strategies as needed to adjust that sensitivity within acceptable tolerance ranges established by management and the Board of Directors. Changing the relative proportions of fixed-rate and adjustable-rate assets and liabilities is one of our primary strategies to accomplish this objective.

The matching of assets and liabilities may be analyzed using a number of methods including by examining the extent to which such assets and liabilities are “interest-rate sensitive” and by monitoring our interest-sensitivity gap. An interest-sensitivity gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing within a defined period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets repricing within a defined period.

For additional information related to interest rate sensitivity, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The repricing and maturities of our interest-rate sensitive assets and interest-rate sensitive liabilities at December 31, 2013 are shown in the following table:

 

     Less than
One Year
     One to
Five Years
     Over
Five Years
     Total  
(Dollars in Thousands)                            

Interest-rate sensitive assets:

           

Commercial loans (2)

   $ 1,195,746      $ 287,061      $ 67,152      $ 1,549,959  

Real estate loans (1) (2)

     723,867        210,829        118,088        1,052,784  

Mortgage-backed securities

     90,673        316,287        277,813        684,773  

Consumer loans (2)

     218,390        49,775        34,070        302,235  

Investment securities

     52,475        31,980        84,089        168,544  

Loans held-for-sale (2)

     31,491        —          —           31,491  

Reverse mortgage related assets

     4,627        12,919        20,162        37,708  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

     2,317,269        908,851        601,374        3,827,494  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Less than
One Year
    One to
Five Years
     Over
Five Years
    Total  
(Dollars in Thousands)                          

Interest-rate sensitive liabilities:

         

Money market and interest-bearing demand deposits

     1,068,283        —          457,835        1,526,118   

Retail certificates of deposit

     139,402        96,084         1,479       236,965   

FHLB advances

     615,925       22,166        —         638,091  

Savings accounts

     191,866        —          191,866        383,732   

Brokered certificates of deposit

     168,310       417        —         168,727  

Other borrowed funds

     96,739        25,000        —         121,739   

Jumbo certificates of deposit

     117,710       103,435         —         221,145   

Trust preferred securities

     67,011       —          —         67,011  

Senior notes

     —         —          55,000       55,000  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities

     2,465,246       247,102         706,180        3,418,528  
  

 

 

   

 

 

    

 

 

   

 

 

 

(Deficiency) excess of interest-rate sensitive assets over interest-rate liabilities (“interest-rate sensitive gap”)

   $ (147,977   $ 661,749       $ (104,806   $ 408,966  
  

 

 

   

 

 

    

 

 

   

 

 

 

One-year interest-rate sensitive assets/interest-rate sensitive liabilities

     94.00       

One-year interest-rate sensitive gap as a percent of total assets

     -3.28       

 

(1) Includes commercial mortgage, construction, and residential mortgage loans
(2) Loan balances exclude nonaccruing loans, deferred fees and costs

Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling rates, a positive gap would result in a decrease in net interest income while a negative gap would augment net interest income. However, the interest-sensitivity table does not provide a comprehensive representation of the impact of interest rate changes on net interest income. Each category of assets or liabilities will not be affected equally or simultaneously by changes in the general level of interest rates. Even assets and liabilities which contractually reprice within the rate period may not, reprice at the same price, at the same time or with the same frequency. It is also important to consider that the table represents a specific point in time. Variations can occur as we adjust our interest-sensitivity position throughout the year.

To provide a more accurate position of our one-year gap, certain deposit classifications are based on the interest-rate sensitive attributes and not on the contractual repricing characteristics of these deposits. For the purpose of this analysis, we estimate, based on historical trends of our deposit accounts, that 75% of our money market deposits, 50% of our interest-bearing demand deposits and 50% of our savings deposits are sensitive to interest rate changes. Accordingly, these interest-sensitive portions are classified in the “Less than One Year” category with the remainder in the “Over Five Years” category.

Deposit rates other than time deposit rates are variable. Changes in deposit rates are generally subject to local market conditions and our discretion and are not indexed to any particular rate.

NONPERFORMING ASSETS

Nonperforming assets include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure and restructured commercial, mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of

 

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the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are defined as loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection.

The following table shows our nonperforming assets and past due loans at the dates indicated:

 

At December 31,

   2013     2012     2011     2010     2009  
(Dollars in Thousands)                               

Nonaccruing loans:

          

Commercial

   $ 4,305     $ 4,861     $ 23,080     $ 21,577     $ 9,463  

Owner-occupied commercial (1)

     5,197       14,001       —         —         —    

Commercial mortgages

     8,565       12,634       15,814       9,490       1,021  

Construction

     1,158       1,547       22,124       30,260       44,680  

Residential mortgages

     8,432       9,989       9,057       11,739       9,959  

Consumer

     3,293       4,728       1,018       3,701       818  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonaccruing loans

     30,950       47,760       71,093       76,767       65,941  

Assets acquired through foreclosure

     4,532       4,622       11,695       9,024       8,945  

Restructured loans (2)

     12,332       10,093       8,887       7,107       7,274  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 47,814     $ 62,475     $ 91,675     $ 92,898     $ 82,160  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Past due loans:

          

Residential mortgages

   $ 533     $ 786     $ 887     $ 465     $ 1,221  

Commercial and commercial mortgages

     —         —         78       —   &