10-Q 1 d508343d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 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 Number)

500 Delaware Avenue,

Wilmington, Delaware

  19801
(Address of principal executive offices)   (Zip Code)

(302) 792-6000

Registrant’s telephone number, including area code:

 

 

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 12 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 such shorter period that the registrant was required to submit and post such files),    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 3, 2013:

 

Common Stock, par value $.01 per share

 

8,793,920

(Title of Class)   (Shares Outstanding)

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I. Financial Information

 

         Page  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012

     1   
 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012

     2   
 

Consolidated Statements of Condition as of March 31, 2013 and December 31, 2012

     3   
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012

     4   
 

Notes to the Consolidated Financial Statements for the Three Months Ended March 31, 2013 and 2012

     5   

Item 2.

 

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

     31   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4.

 

Controls and Procedures

     44   

PART II.

Other
Information

    

Item 1.

 

Legal Proceedings

     45   

Item 1A.

 

Risk Factors

     45   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     45   

Item 3.

 

Defaults upon Senior Securities

     45   

Item 4.

 

[Reserved]

     45   

Item 5.

 

Other Information

     45   

Item 6.

 

Exhibits

     45   

Signatures

       46   

Exhibit 12

 

Ratio of Earnings to Fixed Charges and Preferred Dividends

  

Exhibit 31.1

 

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 31.2

 

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 32

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

Exhibit 101.INS

 

Instance Document

  

Exhibit 101.SCH

 

Schema Document

  

Exhibit 101.CAL

 

Calculation Linkbase Document

  

Exhibit 101.LAB

 

Labels Linkbase Document

  

Exhibit 101.PRE

 

Presentation Linkbase Document

  

Exhibit 101.DEF

 

Definition Linkbase Document

  


Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended March 31,  
     2013      2012  
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Interest income:

     

Interest and fees on loans

   $ 31,452      $ 33,395  

Interest on mortgage-backed securities

     3,729        5,718  

Interest on reverse mortgages

     243        (29

Interest and dividends on investment securities

     142        130  

Other interest income

     25        9  
  

 

 

    

 

 

 
     35,591        39,223  
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits

     2,019        4,015  

Interest on Federal Home Loan Bank advances

     443        1,937  

Interest on federal funds purchased and securities sold under agreements to repurchase

     249        247  

Interest on trust preferred borrowings

     329        375  

Interest on senior debt

     943        —    

Interest on other borrowings

     28        119  
  

 

 

    

 

 

 
     4,011        6,693  
  

 

 

    

 

 

 

Net interest income

     31,580        32,530  

Provision for loan losses

     2,231        8,245  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     29,349        24,285  
  

 

 

    

 

 

 

Noninterest income:

     

Credit/debit card and ATM income

     5,668        5,422  

Deposit service charges

     4,014        4,014  

Investment management and fiduciary revenue

     3,728        3,031  

Securities gains, net

     1,644        2,036  

Mortgage banking activities, net

     737        516  

Loan fee income

     495        610  

Bank owned life insurance income

     40        185  

Other income

     1,748        944  
  

 

 

    

 

 

 
     18,074        16,758  
  

 

 

    

 

 

 

Noninterest expense:

     

Salaries, benefits and other compensation

     17,983        16,235  

Occupancy expense

     3,383        3,048  

Equipment expense

     1,829        1,667  

Data processing and operations expense

     1,349        1,322  

FDIC expenses

     1,166        1,437  

Professional Fees

     947        1,164  

Marketing Expense

     517        779  

Loan workout and OREO expense

     170        836  

Other operating expense

     5,026        4,501  
  

 

 

    

 

 

 
     32,370        30,989  
  

 

 

    

 

 

 

Income before taxes

     15,053        10,054  

Income tax provision

     5,313        3,610  
  

 

 

    

 

 

 

Net income

     9,740        6,444  

Dividends on preferred stock and accretion of discount

     692        692  
  

 

 

    

 

 

 

Net income allocable to common stockholders

   $ 9,048      $ 5,752  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 1.03      $ 0.66  

Diluted

   $ 1.02      $ 0.66  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three months ended
March 31,
 
     2013     2012  
     (Unaudited)  
     (In Thousands)  

Net Income

   $ 9,740     $ 6,444  

Other comprehensive income (loss):

    

Unrealized (losses) gains on securities available for sale

     (7,725     540  

Tax expense

     2,898       (224
  

 

 

   

 

 

 

Net of tax amount

     (4,827     316  

Reclassification adjustment for gains included in net income

     (1,644     (2,036

Tax expense

     625       774  
  

 

 

   

 

 

 

Net of tax amount

     (1,019     (1,262

Total other comprehensive loss

     (5,846     (946
  

 

 

   

 

 

 

Total comprehensive income

   $ 3,894     $ 5,498  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CONDITION

 

     Mar 31,
2013
    Dec 31,
2012
 
    
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Assets

    

Cash and due from banks

   $ 75,379     $ 93,629  

Cash in non-owned ATMs

     454,955       406,627  

Interest-bearing deposits in other banks

     278       631  
  

 

 

   

 

 

 

Total cash and cash equivalents

     530,612       500,887  

Investment securities, available-for-sale

     829,341       907,498  

Investment securities, trading

     12,590       12,590  

Loans held-for-sale

     16,825       12,758  

Loans, net of allowance for loan losses of $42,948 at March 31, 2013 and $43,922 at December 31, 2012

     2,739,892       2,723,916  

Bank owned life insurance

     62,955       62,915  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     31,527       31,165  

Assets acquired through foreclosure

     6,522       4,622  

Accrued Interest receivable

     10,028       9,652  

Premises and equipment

     37,836       38,257  

Goodwill

     28,146       28,146  

Intangible assets

     4,988       5,174  

Other assets

     43,381       37,568  
  

 

 

   

 

 

 

Total assets

   $ 4,354,643     $ 4,375,148  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 626,751     $ 631,026  

Interest-bearing demand

     560,394       538,195  

Money market

     848,966       933,901  

Savings

     401,453       389,977  

Time

     297,689       316,986  

Jumbo certificates of deposit

     264,600       294,237  
  

 

 

   

 

 

 

Total customer deposits

     2,999,853       3,104,322  

Brokered deposits

     188,666       170,641  
  

 

 

   

 

 

 

Total deposits

     3,188,519       3,274,963  

Federal funds purchased and securities sold under agreements to repurchase

     95,000       110,000  

Federal Home Loan Bank advances

     455,262       376,310  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     55,000       55,000  

Other borrowed funds

     33,895       28,945  

Accrued interest payable

     1,874       1,099  

Other liabilities

     33,813       40,766  
  

 

 

   

 

 

 

Total liabilities

     3,930,374       3,954,094  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 52,625 at March 31, 2013 and December 31, 2012

   $ 1     $ 1  

Common stock $.01 par value, 20,000,000 shares authorized; issued 18,373,873 at March 31, 2013 and 18,354,055 at December 31, 2012

     184       184  

Capital in excess of par value

     224,045       222,978  

Accumulated other comprehensive income

     7,097       12,943  

Retained earnings

     441,222       433,228  

Treasury stock at cost, 9,580,569 shares at March 31, 2013 and December 31, 2012

     (248,280     (248,280
  

 

 

   

 

 

 

Total stockholders’ equity

     424,269       421,054  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,354,643     $ 4,375,148  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

 

     Three months ended
March 31,
 
      2013     2012  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 9,740     $ 6,444  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     2,231       8,245  

Depreciation of premises and equipment

     1,370       1,256  

Amortization, net

     3,571       2,732  

(Increase) decrease in accrued interest receivable

     (376     161  

Increase in other assets

     (3,225     (1,401

Origination of loans held-for-sale

     (53,177     (30,406

Proceeds from sales of loans held-for-sale

     49,802       33,205  

Gain on mortgage banking activities, net

     (737     (516

Security gains, net

     (1,644     (2,036

Stock-based compensation expense

     877       608  

Excess tax benefits from share-based payment arrangements

     (83 )     (7

Increase in accrued interest payable

     775       1,907  

Decrease in other liabilities

     (7,359     (1,827

Loss on sale of assets acquired through foreclosure and valuation adjustments, net

     9       595  

Increase in value of bank-owned life insurance

     (40     (185

Decrease in capitalized interest, net

     (253     (165
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 1,481     $ 18,610  
  

 

 

   

 

 

 

Investing activities:

    

Maturities of investment securities

     —         4,524  

Sale of investment securities available for sale

     139,249       84,808  

Purchase of investment securities available-for-sale

     (91,368     (162,404

Repayments of investment securities available-for-sale

     21,008       40,376  

Disbursements for reverse mortgages

     (32     (17

Net increase in loans

     (21,047     (33,311

Net decrease in stock of Federal Home Loan Bank of Pittsburgh

     (362     1,788  

Sales of assets acquired through foreclosure, net

     364       7,310  

Investment in premises and equipment, net

     (956     (1,933
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

   $ 46,856     $ (58,859
  

 

 

   

 

 

 

Financing activities:

    

Net (decrease) increase in demand and saving deposits

     (50,178     41,052  

(Increase) Decrease in time deposits

     (48,934     (956

Increase in brokered deposits

     18,025       9,244  

Receipts from FHLB advances

     15,642,397       4,349,754  

Repayments of FHLB advances

     (15,563,445     (4,360,463

Receipts from federal funds purchased and securities sold under agreement to repurchase

     5,865,000       3,765,000  

Repayments of federal funds purchased and securities sold under agreement to repurchase

     (5,880,000     (3,740,000

Repayment of unsecured debt

     —         (30,000

Dividends paid

     (1,711     (1,700

Issuance of common stock and exercise of common stock options

     151       (11

Excess tax benefits from share-based payment arrangements

     83       7  
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

   $ (18,612   $ 31,927  
  

 

 

   

 

 

 

(Decrease) increase cash and cash equivalents

     29,725       (8,322

Cash and cash equivalents at beginning of period

     500,887       468,017  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 530,612     $ 459,695  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 3,236     $ 4,786  

Cash paid for income taxes, net

     5,416       4,221  

Loans transferred to assets acquired through foreclosure

     2,273       2,918  

Net change in other comprehensive income

     (5,846     (946

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

(UNAUDITED)

1. BASIS OF PRESENTATION

Our Consolidated Financial Statements include the accounts of WSFS Financial Corporation (“the Company”, “our Company”, “we”, “our” or “us”), Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”) and Montchanin Capital Management, Inc. (“Montchanin”). We also have one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”). WSFS Bank has two fully-owned subsidiaries, WSFS Investment Group, Inc. (“WIG”) and Monarch Entity Services LLC (“Monarch”) and Montchanin has one wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”).

Founded in 1832, the Bank is one of the ten oldest banks continuously operating under the same name in the United States. We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. In addition, we offer a variety of wealth management and trust services to personal and corporate customers through our Wealth Management division. Lending activities are funded primarily with customer deposits and borrowings. The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 51 offices located in Delaware (42), Pennsylvania (7), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report.

Amounts subject to significant estimates are items such as the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, investment in reverse mortgage, income taxes and other-than-temporary impairments. Among other effects, changes to such estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment of allowances for loan losses and lending related commitments as well as increased post-retirement benefits expense.

Our accounting and reporting policies conform with U.S. generally accepted accounting principles and prevailing practices within the banking industry for interim financial information and Rule 10-01 of the Securities and Exchange Commission (“SEC”) Regulation S-X. Rule 10-01 of Regulation S-X does not require us to include all information and notes for complete financial statements and prevailing practices within the banking industry. Operating results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC.

Whenever necessary, reclassifications have been made to prior period Consolidated Financial Statements to conform to the current period’s presentation. All significant intercompany transactions were eliminated in consolidation.

 

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Accounting for Stock-Based Compensation

Stock-based compensation is accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Stock Compensation. After stockholder approval in 2005, the 1997 Stock Option Plan (“1997 Plan”) was replaced by the 2005 Incentive Plan (“2005 Plan”). No future awards may be granted under the 1997 Plan; however, we still have options outstanding under the 1997 Plan for our officers, directors and Associates. The 2005 Plan will terminate on the tenth anniversary of its effective date, after which no awards may be granted. We have stock options outstanding under the 1997 Plan and the 2005 Plan (collectively, “Stock Incentive Plans”). The number of shares reserved for issuance under the 2005 Plan is 1,197,000. At March 31, 2013, there were 49,175 shares available for future grants under the 2005 Plan.

The Stock Incentive Plans provide for the granting of incentive stock options as defined in Section 422 of the Internal Revenue Code as well as non-incentive stock options (collectively, “Stock Options”). Additionally, the 2005 Plan provides for the granting of stock appreciation rights, performance awards, restricted stock and restricted stock unit awards, deferred stock units, dividend equivalents, other stock-based awards and cash awards. All Stock Options are to be granted at not less than the market price of our common stock on the date of the grant. All Stock Options granted during 2013 and 2012 vest in 25% per annum increments, start to become exercisable one year from the grant date and expire five years from the grant date. Generally, all awards become exercisable immediately in the event of a change in control, as defined within the Stock Incentive Plans. In addition, the Black-Scholes option-pricing model is used to determine the grant date fair value of stock options.

Stock Options

The following table provides information about our stock options outstanding for the three months ended March 31, 2013 and 2012:

 

     March 31, 2013      March 31, 2012  
     Shares     Weighted-
Average
Exercise
Price
     Shares     Weighted-
Average
Exercise
Price
 

Stock Options:

         

Outstanding at beginning of period

     335,730     $ 42.14        416,886     $ 43.52  

Granted

     122,357       47.50        32,830       40.89  

Exercised

     (22,283     31.36        (1,815     24.94  
  

 

 

      

 

 

   

Outstanding at end of period

     435,804       44.19        447,901       43.41  

Exercisable at end of period

     197,943     $ 44.52        337,764     $ 45.00  

Weighted-average fair value of awards granted

   $ 10.32        $ 12.38    

 

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The following table provides vesting information about our stock options outstanding for the three months ended March 31, 2013 and 2012:

 

     March 31, 2013      March 31, 2012  
     Shares     Weighted-
Average
Exercise
Price
     Shares     Weighted-
Average
Exercise
Price
 

Stock Options:

         

Unvested at beginning of period

     157,298     $ 38.57        112,258     $ 36.08  

Granted

     122,357       47.50        32,830       40.89  

Vested

     (41,794     34.30        (34,951     32.89  
  

 

 

      

 

 

   

Unvested at end of period

     237,861     $ 43.92        110,137     $ 38.53  

The total amount of compensation cost to be recognized relating to non-vested stock options as of March 31, 2013 was $1.6 million. The weighted-average period over which it is expected to be recognized is 2.7 years. We issue new shares upon the exercise of options.

Restricted Stock

We issued 11,357 restricted stock awards during the first quarter of 2013. These awards vest over a four year period. The total amount of compensation cost to be recognized relating to non-vested restricted stock as of March 31, 2013, was $1.9 million. The weighted-average period over which it is expected to be recognized is 2.3 years.

Performance Stock Awards

The Board approved a plan in which Marvin N. Schoenhals, Chairman of the Board, was granted 22,250 shares of restricted stock effective January 3, 2011, with a five-year performance vesting schedule starting at the end of the second year. These awards are based on acquiring new business relationships in which Mr. Schoenhals has played a meaningful role in helping us establish the new business. These shares are subject to vesting in whole or in part based on the role Mr. Schoenhals plays in establishing new business relationships that, over a two year period of time, achieve at least a 50% return on the investment of restricted stock cost. We recognized compensation expense of $69,000 related to this award during the first quarter of 2013 compared to $103,000 during the first quarter of 2012. Based on Mr. Schoenhals performance during 2012; 5,563 shares of restricted stock vested during the first quarter of 2013.

For the three months ended March 31, 2013, the effect of stock-based compensation, including stock options, restricted stock, and performance stock, on salaries, benefits and other compensation was $946,000 pre-tax ($804,000 after tax) or $0.09 per share. This compares to $711,000 pre-tax ($545,000 after tax) or $0.06 per share during the three months ended March 31, 2012. During the first quarter of 2013, we recorded approximately $521,000 of stock option expense (primarily related to options granted to retirement eligible Associates); which was an increase from the first quarter 2012 expenses as a majority of the 2012 retirement eligible expenses were recorded during the second quarter.

Subsequent Events

Non-Plan Stock Option Agreement and Other Awards

On April 25, 2013, stockholders’ approved a change in the future compensation of Mark A. Turner our CEO. As result, Mr. Turner was granted 250,000 non-statutory stock options. Further Mr. Turner will no longer be eligible for any new equity awards for the next five years beginning with 2013. These options have an exercise price of $49.52 and expire in seven years with vesting to occur over five years, with a longer and slower vesting schedule than our standard options (40% vesting after the second year and 20% vesting in each of the following three years). As a result of this approval, 150,000 incentive stock options also were issued to certain Executives of the Company with the same exercise price, expiration and vesting schedule as the non-plan stock option awards.

The total amount of compensation cost to be recognized relating to these non-statutory stock options is $3.7 million, which will be reduced based on Mr. Turner’s ineligibility for new equity awards. The total amount of compensation cost to be recognized relating to other Executive awards is $2.2 million. The weighted-average period over which these awards are expected to be recognized is five years. Because these awards were subject to approval by our stockholders’, the grants are accounted for at the time of stockholder approval.

 

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2. EARNINGS PER SHARE

The following table shows the computation of basic and diluted earnings per share:

 

      For the three months
ended

March 31,
 
      2013      2012  
     (In Thousands, Except
Per Share Data)
 

Numerator:

     

Net income allocable to common stockholders

   $ 9,048      $ 5,752  
  

 

 

    

 

 

 

Denominator:

     

Denominator for basic earnings per share — weighted average shares

     8,781        8,687  

Effect of dilutive employee stock options and warrants

     92        73  
  

 

 

    

 

 

 

Denominator for diluted earnings per share — adjusted weighted average shares and assumed exercise

     8,873        8,760  
  

 

 

    

 

 

 

Earnings per share:

     

Basic:

     

Net income allocable to common shareholders

   $ 1.03      $ 0.66  
  

 

 

    

 

 

 

Diluted:

     

Net income allocable to common shareholders

   $ 1.02      $ 0.66  
  

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     265        480  

 

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3. INVESTMENT SECURITIES

The following tables detail the amortized cost and the estimated fair value of our investment securities held-to-maturity and securities available-for-sale (which include reverse mortgages):

 

     Amortized
Cost
    Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (In Thousands)  

Available-for-sale securities:

         

March 31, 2013:

         

Reverse mortgages

   $ (425   $ —         $ —        $ (425

U.S. Government and government sponsored enterprises (“GSE”)

     46,707       218        (2     46,923  

State and political subdivisions

     23,883       144        (450     23,577  

Federal National Mortgage Association (“FNMA”)

     361,501       6,588        (755     367,334  

Collateralized Mortgage Obligation (“CMO”) (1)

     172,137       4,530        (583     176,084  

Government National Mortgage Association (“GNMA”)

     123,454       2,741        (534     125,661  

Federal Home Loan Mortgage Corporation (“FHLMC”)

     89,986       498        (297     90,187  
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 817,243     $ 14,719      $ (2,621   $ 829,341  
  

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2012:

         

Reverse mortgages

   $ (457   $ —         $ —        $ (457

GSE

     46,726       266        (2     46,990  

State and political subdivisions

     3,120       89        —          3,209  

FNMA

     396,910       9,588        (243     406,255  

CMO (1)

     251,848       7,849        (301     259,396  

GNMA

     129,288       3,221        (54     132,455  

FHLMC

     58,596       1,171        (117     59,650  
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 886,031     $ 22,184      $ (717   $ 907,498  
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading securities

         

March 31, 2013:

         

CMO

   $ 12,590     $ —         $ —        $ 12,590  
  

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2012:

         

CMO

   $ 12,590     $ —         $ —        $ 12,590  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes agency CMO and SASCO 2002 RM-1 Class O securities classified as available-for-sale

 

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The scheduled maturities of investment securities available-for-sale at March 31, 2013 and December 31, 2012 were as follows:

 

     Available-for-Sale  
     Amortized
Cost
     Fair
Value
 
     (In Thousands)  

March 31, 2013

     

Within one year (1)

   $ 18,567      $ 18,647  

After one year but within five years

     29,547        29,771  

After five years but within ten years

     276,659        281,321  

After ten years

     492,470        499,602  
  

 

 

    

 

 

 
   $ 817,243      $ 829,341  
  

 

 

    

 

 

 

December 31, 2012

     

Within one year (1)

   $ 18,544      $ 18,658  

After one year but within five years

     28,855        29,034  

After five years but within ten years

     321,103        329,580  

After ten years

     517,529        530,226  
  

 

 

    

 

 

 
   $ 886,031      $ 907,498  
  

 

 

    

 

 

 

 

(1) Reverse mortgages do not have contractual maturities. We have included reverse mortgages in maturities within one year.

The portfolio of available-for-sale MBS includes 143 securities with an amortized cost of $747.1 million. All securities were AAA-rated at the time of purchase. All securities were re-evaluated for other-than-temporary-impairment (“OTTI”) at March 31, 2013. The result of this evaluation showed no OTTI for 2013. The weighted average duration of the MBS portfolio was 5.4 years at March 31, 2013.

MBS have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty.

At March 31, 2013, investment securities with market values aggregating $443.6 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations. From time to time, investment securities are also pledged as collateral for FHLB borrowings. There were no FHLB pledged investment securities at March 31, 2013.

During the first three months of 2013, we sold $139.2 million of investment securities categorized as available-for-sale for net gains of $1.6 million. In the first quarter of 2012, proceeds from the sale of investment securities available-for-sale were $84.8 million and resulted in net gains of $2.0 million. During the first quarter of 2013, the objectives were to complete the deleveraging that began in the fourth quarter of 2012, reduce the duration of the portfolio, and monetize premiums at risk due to faster prepayments. The cost basis of all investment securities sales is based on the specific identification method.

As of March 31, 2013, our investment securities portfolio had remaining unamortized premiums of $22.6 million. In addition, at March 31, 2013, we had $138,000 of unaccreted discounts related to our investment securities portfolio.

At March 31, 2013, we owned investment securities totaling $238.8 million in which the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $2.6 million at March 31, 2013. The temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Our investment portfolio is reviewed each quarter for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. We evaluate our intent and ability to hold securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, we do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.

 

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During the first three months of 2013, we purchased $17.6 million of municipal bonds. The purpose was to improve return and reduce the effective tax rate.

For these investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at March 31, 2013.

 

      Less than 12 months      12 months or longer      Total  
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
     (In Thousands)  

Available-for-sale

                 

U.S Government and agencies

   $ —         $ —         $ 2,006      $ 2      $ 2,006      $ 2  

State and political subdivisions

     18,603        450        —           —           18,603        450  

FNMA

     79,795        755        —           —           79,795        755  

CMO

     58,170        568        835        15        59,005        583  

GNMA

     61,140        534        —           —           61,140        534  

FHLMC

     18,263        297        —           —           18,263        297  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 235,971      $ 2,604      $ 2,841      $ 17      $ 238,812      $ 2,621  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For these investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2012.

 

     Less than 12 months      12 months or longer      Total  
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
     (In Thousands)  

Available-for-sale

                 

U.S Government and agencies

   $ 2,008      $ 2      $ —         $ —         $ 2,008      $ 2  

State and political subdivisions

     —           —           —           —           —           —     

FNMA

     43,696        243        —           —           43,696        243  

CMO

     40,358        268        1,364        33        41,722        301  

GNMA

     10,029        54        —           —           10,029        54  

FHLMC

     13,884        117        —           —           13,884        117  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 109,975      $ 684      $ 1,364      $ 33      $ 111,339      $ 717  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We own $12.6 million par value of SASCO RM-1 2002 class B securities which are classified as trading. We expect to recover all principal and interest due to seasoning and excess collateral. Based on FASB ASC 320, Investments – Debt and Equity Securities (“ASC 320”) when these securities were acquired they were classified as trading because it was our intent to sell them in the near term. We use the guidance under ASC 320 to provide a reasonable estimate of fair value. We estimated the value of these securities based on the pricing of BBB+ securities that have an active market through a technique which estimates the fair value of this asset using the income approach as of March 31, 2013.

During 2011, we purchased 100% of SASCO 2002-RM1 Class O certificates for $2.5 million. As of March 31, 2013, the market value of the SASCO 2002-RM1 O securities was determined in accordance with FASB ASC 820-10, Fair Value Measurement to be $6.1 million. These securities have been included in our available-for-sale CMO since their purchase.

 

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4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

We maintain an allowance for loan losses and charge losses to this allowance when such losses are realized. We established our loan loss allowance in accordance with guidance provided in the Securities and Exchange Commission’s Staff Accounting Bulletin 102 (“SAB 102”). The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based upon a continuing review of these portfolios. The following are included in Allowance for Loan Losses:

 

   

Specific reserves for impaired loans

 

   

Allowances for pools of homogenous loans based on historical loss experience

 

   

Adjustments for qualitative and environmental factors

 

   

Allowance for model estimation and complexity risk

Specific reserves are established for impaired loans where we have identified significant conditions or circumstances related to specific credits that indicate losses are probable. Unless loans are well-secured and collection is imminent, all loans that are 90 days past due are deemed impaired. Reserves for impaired loans are generally charged-off within 90 days of impairment recognition. Estimated losses are based on collateral values, estimates of future cash flows, or market valuations.

Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and consumer loan pools. Commercial loans are pooled into following segments: Business Loans (Commercial and Industrial Loans), Commercial Real Estate – Owner-Occupied, Commercial Real Estate – Investor, and Construction Loans. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. Probability of default is calculated based on the historical rate of migration to impaired status during the last three years. Loss severity is calculated as the actual loan losses (net of recoveries) on impaired loans in the respective pool during the last three years. Retail loans are pooled into following segments: residential mortgage loans, home equity secured loans, and all other consumer loans. Pooled reserves for retail loans are calculated based solely on the previous three year average loss rate.

Qualitative and environmental adjustment factors are taken into consideration when determining the above reserve estimates or core reserves. These adjustment factors are based upon our evaluation of various current internal and external conditions including:

 

   

Assessment of current underwriting policies, staff, and portfolio mix

 

   

Internal trends of delinquency, non-accrual and criticized loans by segment

 

   

Assessment of risk rating accuracy, control and regulatory assessments/environment

 

   

General economic conditions — locally and nationally

 

   

Market trends impacting collateral values

 

   

Competitive environment as it could impact loan structure and underwriting

The above factors are based on their relative standing compared to the period which historic losses are used in core reserve estimates and current directional trends. Each individual qualitative and environmental factor in our model can add or subtract to core reserves. As of March 31, 2013, these factors, in aggregate, increased core reserves by 7.6%.

The final component of the allowance is a reserve for model estimation and complexity risk. The calculation of reserves is generally quantitative; however, qualitative estimates of valuations and risk assessment are necessary. We currently increase our calculated reserves by 2% to account for model estimation and complexity risk.

 

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Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies and loan review consultants periodically review our loan ratings and allowance for loan losses.

 

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Table of Contents

The following tables provide the activity of the allowance for loan losses and loan balances for the three months ended on March 31, 2013 and 2012:

 

     Commercial     Owner
Occupied
Commercial
    Commercial
Mortgages
    Construction     Residential     Consumer     Complexity
Risk(1)
    Total  
     (In Thousands)  

Three months ended March 31, 2013

                

Allowance for loan losses

                

Beginning balance

   $ 13,663      $ 6,108      $ 8,079      $ 6,456      $ 3,124      $ 5,631      $ 861      $ 43,922   

Charge-offs

     (256     (1     (1,697     (19     (440     (1,294     —         (3,707

Recoveries

     226       12       3       15       18       228       —         502  

Provision

     (865     219       808       333       579       1,176       (19     2,231  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,768      $ 6,338      $ 7,193      $ 6,785      $ 3,281      $ 5,741      $ 842      $ 42,948   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

                

Loans individually evaluated for impairment

   $ 868      $ 47      $ 2,000      $ —        $ 922      $ 12      $ —        $ 3,849   

Loans collectively evaluated for impairment

     11,900       6,291       5,193       6,785       2,359       5,729       842       39,099  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,768      $ 6,338      $ 7,193      $ 6,785      $ 3,281      $ 5,741      $ 842      $ 42,948   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

                

Loans individually evaluated for impairment

   $ 4,991      $ 13,263      $ 11,240      $ 1,216      $ 19,578      $ 6,210      $ —        $ 56,498 (2) 

Loans collectively evaluated for impairment

     727,831     $ 752,961        622,510       132,265       218,276       277,096       —         2,730,939   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 732,822      $ 766,224      $ 633,750      $ 133,481      $ 237,854      $ 283,306      $ —        $ 2,787,437 (3) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Commercial     Owner
Occupied
Commercial
    Commercial
Mortgages
    Construction     Residential     Consumer     Complexity
Risk(1)
     Total  
     (In Thousands)  

Three months ended March 31, 2012

                 

Allowance for loan losses

                 

Beginning balance

   $ 15,067      $ 9,235      $ 7,556      $ 4,074      $ 6,544      $ 10,604      $ —         $ 53,080   

Charge-offs

     (2,331     (502     (190     (1,506     (324     (1,229     —           (6,082

Recoveries

     53        6        313        28        25        130        —           555   

Provision

     (1,164     (1,734     2,851        6,321        155        748        1,068         8,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,625      $ 7,005      $ 10,530      $ 8,917      $ 6,400      $ 10,253      $ 1,068       $ 55,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Period-end allowance allocated to:

                 

Loans individually evaluated for impairment

   $ 1,615      $ 2,191      $ 1,156      $ 2,750      $ 869      $ 96      $ —         $ 8,677   

Loans collectively evaluated for impairment

     10,010        4,814        9,374        6,167        5,531        10,157        1,068         47,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,625      $ 7,005      $ 10,530      $ 8,917      $ 6,400      $ 10,253      $ 1,068       $ 55,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Period-end loan balances evaluated for:

                 

Loans individually evaluated for impairment

   $ 6,526      $ 21,760      $ 11,625      $ 24,246      $ 15,723      $ 2,912      $ —         $ 82,792 (2) 

Loans collectively evaluated for impairment

     792,293        665,180        605,601        99,937        251,310        282,548        —           2,696,869   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 798,819      $ 686,940      $ 617,226      $ 124,183      $ 267,033      $ 285,460      $ —         $ 2,779,661 (3) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
(1) Represents the portion of the allowance for loan losses established to account for the inherent complexity and uncertainty of estimates.
(2) The difference between this amount and nonaccruing loans at March 31, 2013, represents accruing troubled debt restructured loans.
(3) Ending loan balances do not include deferred costs.

 

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Table of Contents

Non-Accrual and Past Due Loans

The following tables show our nonaccrual and past due loans at the dates indicated:

 

March 31, 2013

(In Thousands)

   30–59 Days
Past Due and
Still Accruing
    60–89 Days
Past Due and
Still Accruing
    Greater Than
90 Days

Past Due and
Still Accruing
    Total Past
Due

And Still
Accruing
    Accruing
Current
Balances
    Nonaccrual
Loans
    Total
Loans
 

Commercial

   $ 900      $ 223      $ 103      $ 1,226      $ 726,605      $ 4,991      $ 732,822   

Owner occupied commercial

     511        —         —         511        752,450       13,263       766,224  

Commercial mortgages

     —         —         —         —         622,510       11,240       633,750  

Construction

     —         —         —         —         132,265       1,216       133,481  

Residential

     2,925       315       297       3,537       223,507       10,810       237,854  

Consumer

     627       167       —         794       278,311       4,201       283,306  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,963      $ 705      $ 400      $ 6,068      $ 2,735,648      $ 45,721      $ 2,787,437   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.18     0.03     0.01     0.22     98.14     1.64     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

(In Thousands)

   30–59 Days
Past Due and
Still Accruing
    60–89 Days
Past Due and
Still Accruing
    Greater Than
90 Days

Past Due and
Still Accruing
    Total Past
Due

And Still
Accruing
    Accruing
Current
Balances
    Nonaccrual
Loans
    Total
Loans
 

Commercial

   $ 1,214      $ —        $ —        $ 1,214      $ 698,416      $ 4,861      $ 704,491   

Owner occupied commercial

     1,264       —         —         1,264       755,316       14,001       770,581  

Commercial mortgages

     —         —         —         —         618,731       12,634       631,365  

Construction

     269       70       —         339       131,489       1,547       133,375  

Residential

     5,383       606       786       6,775       226,863       9,989       243,627  

Consumer

     971       526       —         1,497       282,776       4,728       289,001  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 9,101      $ 1,202      $ 786      $ 11,089      $ 2,713,591      $ 47,760      $ 2,772,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.33     0.04     0.03     0.40     97.88     1.72     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impaired Loans

The following tables provide an analysis of our impaired loans at March 31, 2013 and December 31, 2012:

 

March 31, 2013

(In Thousands)

   Ending
Loan
Balances
     Loans with
No Specific
Reserve (1)
     Loans with
Specific
Reserve
     Related
Specific
Reserve
     Contractual
Principal
Balances
     Average
Loan
Balances
 

Commercial

   $ 4,991       $ 1,691       $ 3,300       $ 868       $ 12,162       $ 4,795   

Owner-Occupied Commercial

     13,263        12,171        1,092        47        15,592        16,066  

Commercial mortgages

     11,240        5,130        6,110        2,000        21,777        9,319  

Construction

     1,216        1,216        —          —          17,377        7,057  

Residential

     19,578        11,834        7,744        922        22,059        17,588  

Consumer

     6,210        5,554        656        12        7,025        5,232   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 56,498       $ 37,596       $ 18,902       $ 3,849       $ 95,992       $ 60,057   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

(In Thousands)

   Ending
Loan
Balances
     Loans with
No Specific
Reserve (1)
     Loans with
Specific
Reserve
     Related
Specific
Reserve
     Contractual
Principal
Balances
     Average
Loan
Balances
 

Commercial

   $ 4,861       $ 1,598       $ 3,263       $ 2,100       $ 12,060       $ 4,993   

Owner-Occupied Commercial

     14,001        13,827        174        1        18,658        16,856  

Commercial mortgages

     12,634        5,422        7,212        1,887        22,192        10,233  

Construction

     1,547        1,172        375        28        17,711        11,239  

Residential

     18,483        11,053        7,430        919        20,771        16,917  

Consumer

     6,329        5,635        694        16        7,265        4,514  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,855       $ 38,707       $ 19,148       $ 4,951       $ 98,657       $ 64,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reflects loan balances at their remaining book balance.

Interest income of $238,000 was recognized on impaired loans during the three months ended March 31, 2013 compared to $93,000 during the three months ended March 31, 2012.

Credit Quality Indicators

Commercial Loans

Below is a description of each of our risk ratings for all commercial loans including commercial mortgages:

Pass. These borrowers presently show no current or potential problems and their loans are considered fully collectible. We further segment Pass ratings into six classifications ranging from Substantially Risk Free (secured by marketable securities within margin and cash secured) to Acceptable Risk.

Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, e.g.: declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses.

 

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Substandard. Borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial worth and paying capacity of the obligor or the collateral pledged on the loan, if any. The distinct possibility exists that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Borrowers have well-defined weaknesses inherent in the Substandard category with the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. A doubtful asset has some pending event that may strengthen the asset that defers the loss classification. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan.

Loss. Borrowers are uncollectible or of such negligible value that continuance as a bankable asset is not supportable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical to defer writing off this asset even though partial recovery may be recognized sometime in the future.

Residential and Consumer Loans

The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed in nonaccrual status.

 

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The following tables provide an analysis of problem loans as of March 31, 2013 and December 31, 2012:

Commercial credit exposure credit risk profile by internally assigned risk rating (in thousands):

 

     Commercial      Owner-Occupied
Commercial
     Commercial Mortgages      Construction      Total Commercial  
     Mar 31,
2013
     Dec. 31,
2012
     Mar 31,
2013
     Dec. 31,
2012
     Mar 31,
2013
     Dec. 31,
2012
     Mar 31,
2013
     Dec. 31,
2012
     March 31, 2013     December 31, 2012  
                             Amount      Percent     Amount      Percent  

Risk Rating:

                                  

Special mention

   $ 9,091       $ 14,611       $ 26,906       $ 27,398       $ 14,908       $ 29,267       $ 2,318       $ 2,453       $ 53,223         $ 73,729      

Substandard:

                                  

Accrual

     66,483        63,074        45,129        44,899        6,078        6,222        5,990        5,755        123,680          119,950     

Nonaccrual

     1,691        1,598        12,171        13,827        5,130        5,422        1,216        1,172        20,208          22,019     

Doubtful/ Nonaccrual

     3,300        3,263        1,092        174        6,110        7,212        —          375        10,502          11,024     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total Special Mention and Substandard

     80,565        82,546        85,298        86,298        32,226        48,123        9,524        9,755        207,613        9     226,722        10

Pass

     652,257        621,945        680,926        684,283        601,524        583,242        123,957        123,620        2,058,664        91       2,013,090        90  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Commercial Loans

   $ 732,822       $ 704,491       $ 766,224       $ 770,581       $ 633,750       $ 631,365       $ 133,481       $ 133,375       $ 2,266,277         100   $ 2,239,812         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Consumer credit exposure credit risk profile based on payment activity (in thousands):

 

     Residential      Consumer      Total Residential and Consumer  
     Mar 31, 2013     Dec. 31,
2012
     Mar 31, 2013     Dec. 31,
2012
     March 31, 2013     December 31, 2012  
               Amount      Percent     Amount      Percent  

Nonperforming

   $ 19,578 (1)    $ 18,483       $ 6,210 (1)    $ 6,329       $ 25,788         5   $ 24,812         5

Performing

     218,276       225,144        277,096       282,672        495,372        95       507,816        95  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 237,854      $ 243,627       $ 283,306      $ 289,001       $ 521,160         100   $ 532,628         100
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

      

 

 

    

 

(1) Includes $10.8 million of troubled debt restructured mortgages and home equity installment loans performing in accordance with modified terms and are accruing interest

 

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Table of Contents

Troubled Debt Restructurings (TDR)

The balance of TDRs at March 31, 2013 and December 31, 2012 was $22.8 million and $22.0 million, respectively. The balances at March 31, 2013 include approximately $12.0 million of TDRs in nonaccrual status and $10.8 million of TDRs in accrual status compared to $11.9 million of TDRs in nonaccrual status and $10.1 million of TDRs in accrual status at December 31, 2012. Approximately $1.9 million and $936,000 in related reserves have been established for these loans at March 31, 2013 and December 31, 2012, respectively.

During the first quarter of 2013, the terms of three loans were modified in TDR’s one of which was a commercial loan that had already been placed on nonaccrual. The remaining loans represented residential and consumer loans. Our concessions on restructured loans consisted mainly of forbearance agreements, reduction in interest rates or extensions of maturities. Principal balances are generally not forgiven by us when a loan is modified as a TDR. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, typically six months.

The following table presents loans identified as TDRs during the three months ended March 31, 2013 and 2012:

 

(In Thousands)

   Three
Months
Ended
March 31,
2013
     Three
Months
Ended
March 31,
2012
 

Commercial

   $ —         $ 9,276   

Commercial mortgages

     235        —    

Construction

     —          378  

Residential

     —          451  

Consumer

     474        —    
  

 

 

    

 

 

 

Total

   $ 709       $ 10,105   
  

 

 

    

 

 

 

The TDRs described did not have a related allowance for loan losses through allocation of a related reserve, and resulted in charge offs of $119,000 during the three months ending March 31, 2013, compared to increased reserves of $38,000 and charge-off’s of $795,000 for the same period of 2012.

There were no TDR’s that defaulted (defined as past due 90 days) during the three months ended March 31, 2013.

5. TAXES ON INCOME

We account for income taxes in accordance with FASB ASC 740, Income Taxes (“ASC 740”) (Formerly SFAS No. 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty In Income Taxes, an Interpretation of FASB Statement 109). ASC 740 requires the recording of deferred income taxes that reflect the net tax

 

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effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. No valuation allowance has been recorded on our deferred tax assets due to our history of prior earnings along with our expectations of future income. ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations.

There were no unrecognized tax benefits as of March 31, 2013 and December 31, 2012. We record interest and penalties on potential income tax deficiencies as income tax expense. Our Federal and state tax returns for the 2009 through 2012 tax years are subject to examination as of March 31, 2013. Our 2010 federal tax return is currently being audited by the IRS. No state income tax return examinations are currently in process.

6. SEGMENT INFORMATION

Under the definition of FASB ASC 280, Segment Reporting (“ASC 280”) (Formerly SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information) we discuss our business in three segments. There is one segment for each of WSFS Bank, Cash Connect, (the ATM division of WSFS Bank), and Trust and Wealth Management. Trust and Wealth Management is comprised of Montchanin, Christiana Trust, Private Banking and WSFS Investment Group, Inc. in a single reportable segment because each has similar economic characteristics, products, customers and distribution methods. As required by ASC 280, all prior years’ information has been updated to reflect this presentation.

The WSFS Bank segment provides financial products to commercial and retail customers through its 51 offices located in Delaware (42), Pennsylvania (7) and Virginia (1) and Nevada (1). Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS. These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Because of these and other reasons, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment in accordance with ASC 280.

Cash Connect provides turnkey ATM services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. The balance sheet category “Cash in non-owned ATMs” includes cash from which fee income is earned through bailment arrangements with customers of Cash Connect.

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 is a registered investment advisor with over $624 million in assets under management. Cypress’ primary market segment is high net worth individuals, offering a ‘balanced’ investment style focused on preservation of capital and current income. Christiana Trust, with $16.4 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 deposit products and partnering with Cypress, Christiana and WSFS Investment Group to deliver investment management and fiduciary products and services.

 

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Table of Contents

An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on pretax ordinary income relative to resources used, and allocate resources based on these results. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Segment information for the three months ended March 31, 2013 and 2012 follows:

For the three months ended March 31, 2013

 

     WSFS Bank      Cash Connect      Trust &
Wealth
Management
    Total  
     (In Thousands)  

External customer revenues:

          

Interest income

   $ 33,600      $ —         $ 1,991     $ 35,591  

Noninterest income

     9,227        5,027        3,820       18,074  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer revenues

     42,827        5,027        5,811       53,665  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment revenues:

          

Interest income

     903        —           1,431       2,334  

Noninterest income

     1,650        200        26       1,876  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment revenues

     2,553        200        1,457       4,210  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     45,380        5,227        7,268       57,875  
  

 

 

    

 

 

    

 

 

   

 

 

 

External customer expenses:

          

Interest expense

     3,840        —           171       4,011  

Noninterest expenses

     26,430        2,992        2,948       32,370  

Provision for loan loss

     2,246        —           (15     2,231  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer expenses

     32,516        2,992        3,104       38,612  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment expenses

          

Interest expense

     1,431        371        532       2,334  

Noninterest expenses

     226        550        1,100       1,876  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment expenses

     1,657        921        1,632       4,210  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     34,173        3,913        4,736       42,822  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

   $ 11,207      $ 1,314      $ 2,532     $ 15,053  

Provision for income taxes

             5,313  
          

 

 

 

Consolidated net income

           $ 9,740  
          

 

 

 

As of March 31, 2013

          

Cash and cash equivalents

   $ 53,517      $ 474,842      $ 2,253     $ 530,612  

Other segment assets

     3,640,122        2,943        180,966       3,824,031  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment assets

   $ 3,693,639      $ 477,785      $ 183,219     $ 4,354,643  
  

 

 

    

 

 

    

 

 

   

 

 

 

Capital expenditures

   $ 773      $ 183      $ —       $ 956  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

For the three months ended March 31, 2012

 

     WSFS Bank      Cash Connect      Trust & Wealth
Management
    Total  
     (In Thousands)  

External customer revenues:

          

Interest income

   $ 37,036      $ —        $ 2,187     $ 39,223  

Noninterest income

     9,528        4,074        3,156       16,758  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer revenues

     46,564        4,074        5,343       55,981  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment revenues:

          

Interest income

     960        —           1,227       2,187  

Noninterest income

     2,061        173        —         2,234  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment revenues

     3,021        173        1,227       4,421  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     49,585        4,247        6,570       60,402  
  

 

 

    

 

 

    

 

 

   

 

 

 

External customer expenses:

          

Interest expense

     6,475        —           218       6,693  

Noninterest expenses

     26,338        1,972        2,679       30,989  

Provision for loan loss

     8,296        —           (51     8,245  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer expenses

     41,109        1,972        2,846       45,927  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment expenses

          

Interest expense

     1,227        334        626       2,187  

Noninterest expenses

     173        525        1,536       2,234  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment expenses

     1,400        859        2,162       4,421  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     42,509        2,831        5,008       50,348  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before taxes

   $ 7,076      $ 1,416      $ 1,562     $ 10,054  

Provision for income taxes

             3,610  
          

 

 

 

Consolidated net income

        .         $ 6,444  
          

 

 

 

As of December 31, 2012

          

Cash and cash equivalents

   $ 68,419      $ 430,382      $ 2,086     $ 500,887  

Other segment assets

     3,683,073        1,605        189,583       3,874,261  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment assets

   $ 3,751,492      $ 431,987      $ 191,669     $ 4,375,148  
  

 

 

    

 

 

    

 

 

   

 

 

 

Capital expenditures

   $ 1,713      $ 156      $ 64     $ 1,933  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

7. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS

FAIR VALUE OF FINANCIAL ASSETS

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The table below presents the balances of assets measured at fair value as of March 31, 2013 (there are no material liabilities measured at fair value):

 

Description

   Quoted
Prices in
Active
Markets for
Identical
Asset
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
    Total
Fair Value
 
     (in Thousands)  

Assets Measured at Fair Value on a Recurring Basis

          

Available-for-sale securities:

          

Collateralized mortgage obligations

   $ —         $ 169,961      $ 6,123     $ 176,084  

FNMA

     —           367,334        —          367,334  

FHLMC

     —           90,187        —          90,187  

GNMA

     —           125,661        —          125,661  

U.S. Government and agencies

     —           46,923        —          46,923  

State and political subdivisions

     —           23,577        —        $ 23,577  

Reverse mortgages

     —           —           (425     (425

Trading Securities

     —           —           12,590       12,590  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 823,643      $ 18,288     $ 841,931  

Assets Measured at Fair Value on a Nonrecurring Basis

          

Other real estate owned

   $ —         $ —         $ 6,522     $ 6,522  

Impaired Loans

     —           —           52,649       52,649  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ —         $ 59,171     $ 59,171  

 

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Table of Contents

The table below presents the balances of assets measured at fair value as of December 31, 2012 (there are no material liabilities measured at fair value):

 

Description

   Quoted
Prices in
Active
Markets for
Identical
Asset
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
    Total
Fair Value
 
     (in Thousands)  

Assets Measured at Fair Value on a Recurring Basis

          

Available-for-sale securities:

          

Collateralized mortgage obligations

   $ —         $ 252,300      $ 7,096     $ 259,396  

FNMA

     —           406,255        —          406,255  

FHLMC

     —           59,650        —          59,650  

GNMA

     —           132,455        —          132,455  

U.S. Government and agencies

     —           46,990        —          46,990  

State and political subdivisions

     —           3,209        —        $ 3,209  

Reverse mortgages

     —           —           (457     (457

Trading Securities

     —           —           12,590       12,590  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 900,859      $ 19,229     $ 920,088  

Assets Measured at Fair Value on a Nonrecurring Basis

          

Other real estate owned

   $ —         $ —         $ 4,622     $ 4,622  

Impaired Loans

     —           —           52,904       52,904  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ —         $ 57,526     $ 57,526  

Fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Available- for-sale securities. As of March 31, 2013, securities classified as available for sale are reported at fair value using both Level 2 and Level 3 inputs. Included in the Level 2 total are approximately $46.9 million in Federal Agency debentures, $753.1 million in Federal Agency MBS, and $23.6 million in municipal bonds. Agency and MBS securities are predominately AAA-rated. We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 as, with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Included in the Level 3 total is a small equity traunche of a reverse mortgage security purchased on July 15, 2011. This security is Level 3 because there is no active market for this security and no

 

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observable inputs that reflect quoted prices for identical assets in active markets (Level 1) or inputs other than quoted prices that are observable for the asset through corroboration with observable market data (Level 2). In order to establish the fair value for a Level 3 asset a “mark-to-model” has been developed using the income approach described in ASC 820-10-35-32 and is similar to the methodology used to value our trading securities described below.

Trading securities. The amount included in the trading securities category represents the fair value of a BBB-rated traunche of a reverse mortgage security. There has never been an active market for these securities. As such, we classify these trading securities as Level 3 under ASC 820-10. As prescribed by ASC 820-10 management used various observable and unobservable inputs to develop a range of likely fair value prices where this security would be exchanged in an orderly transaction between market participants at the measurement date. The unobservable inputs reflect management’s assumptions about the assumptions that market participants would use in pricing this asset. Included in these inputs were the median of a selection of other BBB-rated securities as well as quoted market prices from higher rated traunches of this asset class. The unobservable inputs consist of prepayments, house price appreciation and interest rates. Management has completed a sensitivity analysis at March 31, 2013, which showed any increase or decrease in these inputs would not have a significant impact on the fair value of these assets. As a result, the value assigned to this security is determined primarily through a discounted cash flow analysis. All of these assumptions require a significant degree of management judgment.

Reverse Mortgages. The amount of our investment in reverse mortgages represents the estimated value of future cash flows of the reverse mortgages at a rate deemed appropriate for these mortgages, based on the market rate for similar collateral. The projected cash flows depend on assumptions about life expectancy of the mortgagor and the future changes in collateral values. Due to the significant amount of management judgment and the unobservable input calculations, these reverse mortgages have been classified as Level 3.

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:

 

     Trading
Securities
     Reverse
Mortgages
    Available-
for-sale
Securities
    Total  
(In Thousands)                          

Balance at December 31, 2011

   $ 12,432      $ (646   $ 3,936     $ 15,722  

Total net income (losses) for the period included in net income

     33        12       —          45  

Purchases, sales, issuances, and settlements, net

     —           177       —          177  

Mark-to-market adjustment

     125        —          3,160       3,285  
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

   $ 12,590      $ (457   $ 7,096     $ 19,229  

Total net income (losses) for the period included in net income

     —          243       1,227       1,470  

Purchases, sales, issuances, and settlements, net

     —           (211     —          (211

Mark-to-market adjustment

     —          —          (2,200     (2,200
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ 12,590      $ (425   $ 6,123     $ 18,288  
  

 

 

    

 

 

   

 

 

   

 

 

 

Other real estate owned. Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of our real estate owned was estimated using Level 2 inputs based on appraisals obtained from third parties.

Impaired loans. We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% — 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

 

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Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross amount of $52.6 million and $52.9 million at March 31, 2013 and December 31, 2012, respectively. The valuation allowance on impaired loans was $3.8 million as of March 31, 2013 and $5.0 million as of December 31, 2012.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments: For cash and short-term investments, including due from banks, federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.

Investments and Mortgage-Backed Securities: Since quoted market prices are not available, fair value is estimated using quoted prices for similar securities, which we obtain from a third party vendor. We utilize one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by us to validate the vendor’s methodology. The fair value of our investment in reverse mortgages is based on the net present value of estimated cash flows, which have been updated to reflect recent external appraisals of the underlying collateral. For additional discussion of our mortgage-backed securities-trading or our internally developed models, see Fair Value of Financial Assets, to the Consolidated Financial Statements.

Loans held-for-sale: Loans held-for-sale are carried at the lower of cost or market of the aggregate, or in some cases, individual loans.

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available. This technique does not contemplate an exit price.

Bank-Owned Life Insurance: The estimated fair value approximates the book value for this investment.

Stock in the Federal Home Loan Bank of Pittsburgh: The fair value of FHLB stock is assumed to be essentially equal to its cost basis, since the stock is non-marketable but redeemable at its par value.

Demand Deposits, Savings Deposits and Time Deposits: The fair value of demand deposits and savings deposits is determined by projecting future cash flows using an estimated economic life based on account characteristics. The resulting cash flow is discounted using rates available on alternative funding sources. The fair value of time deposits is estimated using the rate and maturity characteristics of the deposits to estimate their cash flow. The cash flow is discounted at rates for similar term wholesale funding.

Borrowed Funds: Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Off-Balance Sheet Instruments: The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, approximates the recorded net deferred fee amounts, which are not significant. Because commitments to extend credit and letters of credit are generally unassignable by either us or the borrower they only have value to us and the borrower.

 

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The book value and estimated fair value of our financial instruments are as follows:

 

     Fair Value
Measurement
   March 31, 2013      December 31, 2012  
        Book Value      Fair Value      Book Value      Fair Value  
(In Thousands)                                 

Financial assets:

              

Cash and cash equivalents

   Level 1    $ 530,612      $ 530,612      $ 500,887      $ 500,887  

Investment securities

   See Footnote 7      841,931         841,931         920,088        920,088  

Loans held for sale

   Level 3      16,825        16,825        12,758        12,758  

Loans, net

   Level 3      2,739,892        2,755,066         2,723,916        2,746,001  

Stock in Federal Home Loan Bank of Pittsburgh

   Level 2      31,527        31,527        31,165        31,165  

Accrued interest receivable

   Level 2      10,028        10,028        9,652        9,652  

Financial liabilities:

              

Deposits

   Level 2      3,188,519        3,055,822         3,274,963        3,174,907  

Borrowed funds

   Level 2      706,168        706,988         637,266        638,375  

Standby letters of credit

   Level 3      167        167        224        224  

Accrued interest payable

   Level 2      1,874        1,874        1,099        1,099  

 

8. INDEMNIFICATIONS AND GUARANTEES

Secondary Market Loan Sales. Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire not to hold these assets in our portfolio, we generally sell newly originated fixed rate conventional, 15 to 30 year loans in the secondary market to government sponsored enterprises such as FHLMC or to wholesale lenders. Loans held-for-sale are carried at the lower of cost or market of the aggregate. Gains and losses on sales of loans are recognized at the time of the sale. We sometimes retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. Otherwise, we sell loans with servicing released on a nonrecourse basis.

We generally do not sell loans with recourse except to the extent arising from standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances first payment default by the borrower. These are customary repurchase provisions in the secondary market for conforming mortgage loan sales. These indemnifications may require our repurchase of the loans. Repurchases and losses are rare, and no provision is made for losses at the time of sale. There were no such repurchases for the three months ended March 31, 2013 or March 31, 2012.

Swap Guarantees. We entered into agreements with three unaffiliated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) with customers referred to them by us. By the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows smaller financial institutions like us to provide access to interest rate swap transactions for our customers without creating the swap ourselves.

 

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At March 31, 2013 there were 97 variable-rate swap transactions between the third party financial institutions and our customers, compared to 95 at December 31, 2012. The initial notional amount aggregated approximately $367.6 million at March 31, 2013 compared with $381.7 million at December 31, 2012. At March 31, 2013 maturities ranged from approximately five months to 12.5 years. The aggregate market value of these swaps to the customers was a liability of $31.5 million at March 31, 2013 and $35.5 million at December 31, 2012.

9. ASSOCIATE (EMPLOYEE) BENEFIT PLANS

Postretirement Benefits

We share certain costs of providing health and life insurance benefits to retired Associates (and their eligible dependents). Substantially all Associates may become eligible for these benefits if they reach normal retirement age while working for us.

We account for our obligations under the provisions of FASB ASC 715, Compensation — Retirement Benefits (“ASC 715”). ASC 715 requires that the costs of these benefits be recognized over an Associate’s active working career. Disclosures are in accordance with ASC 715.

The following disclosures of the net periodic benefit cost components of postretirement benefits were measured at January 1, 2013 and 2012:

 

      Three months ended
March 31,
 
      2013      2012  
(In Thousands)              

Service cost

   $ 86      $ 72  

Interest cost

     44        44  

Amortization of transition obligation

     —          15  

Net loss recognition

     20        17  
  

 

 

    

 

 

 

Net periodic benefit cost

   $ 150      $ 148  
  

 

 

    

 

 

 

10. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income includes unrealized gain and losses on available-for-sale investments, unrealized gains and losses on interest only strip, and unrecognized prior service costs on BOLI. Changes to other accumulated other comprehensive income are presented net of tax effect as a component of equity. Reclassification out of accumulated other comprehensive is recorded on the statement of operations either as a gain or loss.

Changes to accumulated other comprehensive income by components are shown in the following tables for the period indicated:

 

     Net unrealized
gains on
investment
securities
available for sale
    Net unrealized
losses on defined
benefit pension
plan
    Total  

Balance, December 31, 2012

   $ 13,415      $ (472 )    $ 12,943   

Other comprehensive income (loss) before reclassifications

     (4,827     —         (4,827

Less: Amounts reclassified from accumulated other comprehensive income (loss)

     (1,019     —         (1,019
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (5,846     —         (5,846
  

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 7,569      $ (472 )    $ 7,097   
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 11,674      $ (472 )    $ 11,202   

Other comprehensive income (loss) before reclassifications

     316       —         316  

Less: Amounts reclassified from accumulated other comprehensive income (loss)

     (1,262     —         (1,262
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (946     —         (946
  

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

   $ 10,728      $ (472 )    $ 10,256   
  

 

 

   

 

 

   

 

 

 

The statement of operations line items impacted by components of other comprehensive income are presented in the table below.

 

     Three Months
Ended March 31,
    Affected line item
in Statements of
Operations
     2013      2012       

Securities available for sale:

      

Realized gains on securities transactions

   $ 1,644      $ 2,036      Securities
gains, net

Income taxes

     (625 )      (774   Income tax
provision
  

 

 

   

 

 

   

Net of tax

   $ 1,019      $ 1,262     
  

 

 

   

 

 

   

 

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11. GOODWILL AND INTANGIBLES

Our goodwill and other intangible assets were accounted for in accordance with the accounting guidance in FASB ASC Topic 350 Intangibles — Goodwill and Other.

At December 31, 2012, we completed the Step One test of the analysis to determine potential goodwill impairment of the WSFS Bank and Trust and Wealth Management reporting units. The valuation incorporated a market-based analysis and indicated the fair values of our WSFS Bank and Trust and Wealth Management reporting units were above their carrying amounts. Therefore, in accordance with FASB ASC 350-20-35-6, the Step Two analysis was not required at that time. During the three months ended March 31, 2013 we determined there were no events or other indicators of impairment as it relates to goodwill or other intangibles.

FASB ASC 350, also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

The following table summarizes other intangible assets:

 

     Gross
Intangible
Assets
     Accumulated
Amortization
    Net
Intangible
Assets
 
     (In Thousands)  

March 31, 2013

       

Core deposits

   $ 4,370      $ (2,166   $ 2,204  

Other

     4,503        (1,719     2,784  
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 8,873      $ (3,885   $ 4,988  
  

 

 

    

 

 

   

 

 

 

December 31, 2012

       

Core deposits

   $ 4,370      $ (2,020   $ 2,350  

Other

     4,464        (1,640     2,824  
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 8,834      $ (3,660   $ 5,174  
  

 

 

    

 

 

   

 

 

 

Core deposits are amortized over their expected lives using the present value of the benefit of the core deposits and straight-line methods of amortization. During the three months ended March 31, 2013, we recognized amortization expense on other intangible assets of $204,000.

The following presents the estimated amortization expense of intangibles:

 

(In Thousands)    Amortization
of Intangibles
 

Remaining in 2013

   $ 679  

2014

     832  

2015

     801  

2016

     477  

2017

     332  

Thereafter

     1,867  
  

 

 

 

Total

   $ 4,988  

 

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12. LEGAL & OTHER PROCEEDINGS

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.

 

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Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We are a thrift holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, WSFS Bank, one of the ten oldest banks 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 181 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 $2.3 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 commercial relationships and retail deposits. We service our customers primarily from our 51 offices located in Delaware (42), Pennsylvania (7), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages nearly $520 million in vault cash in nearly 14,000 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 nearly 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 12-year history, Cash Connect periodically has been exposed to theft through 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 is a registered investment advisor with over $624 million in assets under management. Cypress’ primary market segment is high net worth individuals, offering a ‘balanced’ investment style focused on preservation of capital and current income. Christiana Trust, with $16.4 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 deposit products and partnering with Cypress, Christiana 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 (“Montchanin”). We also have one unconsolidated affiliate, WSFS Capital Trust III (“the trust”). WSFS Bank has two fully-owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services LLC (“Monarch”) and Montchanin has one fully-owned subsidiary, Cypress.

 

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and exhibits thereto, contains estimates, predictions, opinions, projections and other “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. 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, those related to the economic environment, particularly in the market areas in which we operate, including an increase in unemployment levels; our level of nonperforming assets; the volatility of the financial and securities markets, including changes with respect to the market value of financial assets; changes in market interest rates which may increase funding costs and reduce earning asset yields thus reducing margin; increases in benchmark rates would also increase debt service requirements for customers whose terms include a variable interest rate, which may negatively impact the ability of borrowers to pay as contractually obligated; changes in government regulation affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations being issued in accordance with this statute and potential expenses and elevated capital levels associated therewith; possible additional loan losses and impairment of the collectability of loans; possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations, may have an adverse effect on business; possible rules and regulations issued by the Consumer Financial Protection Bureau or other regulators which might adversely impact our business model or products and services; possible stresses in the real estate markets, including possible continued deterioration in property values that affect the collateral value underlying our real estate loans; our ability to expand into new markets, develop competitive new products and services in a timely manner, and to maintain profit margins in the face of competitive pressures; possible changes in consumer and business spending and saving habits could affect our ability to increase assets and to attract deposits; our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk, reputational risk, and regulatory and compliance risk; the effects of increased competition from both banks and non-banks; the effects of geopolitical instability and risks such as terrorist attacks; the effects of weather and natural disasters such as floods, droughts, wind, tornados and hurricanes, and the effects of man-made disasters; possible changes in the speed of loan prepayments by our customers and loan origination or sales volumes; possible acceleration of prepayments of mortgage-backed securities (“MBS”) due to low interest rates, and the related acceleration of premium amortization on prepayments on MBS due to low interest rates; and the costs associated with resolving any problem loans, litigation and other risks and uncertainties. Such risks and uncertainties are discussed herein, including under the heading “Risk Factors,” and in our Form 10-K for the year ended December 31, 2012 and 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.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity with GAAP. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for loan losses, deferred taxes, fair value measurements, goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2013, it is reasonably possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.

 

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The following are critical accounting policies that involve more significant judgments and estimates. See further discussion of these critical accounting policies in the 2012 Annual Report on Form 10-K.

Allowance for Loan Losses

We maintain allowances for loan losses and charge losses to these allowances when realized. We consider the determination of the allowance for loan losses to be critical because it requires significant judgment reflecting our best estimate of impairment related to specifically evaluated impaired loans as well as the inherent risk of loss for those in the remaining loan portfolio. Our evaluation is based upon a continuing review of the portfolio, with consideration given to evaluations resulting from examinations performed by regulatory authorities.

Deferred Taxes

We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes (“ASC 740”), which requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We consider our accounting policies on deferred taxes to be critical because we regularly assess the need for valuation allowances on deferred income tax assets that may result from, among other things, limitations imposed by Internal Revenue Code and uncertainties, including the timing of settlement and realization of these differences. No valuation allowance is required as of March 31, 2013.

Fair Value Measurements

We adopted FASB ASC 820-10 Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. We consider our accounting policies related to fair value measurements to be critical because they are important to the portrayal of our financial condition and results, and they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. See Note 7, Fair Value Disclosures of Financial Assets to our Consolidated Financial Statements.

Goodwill and Other Intangible Assets

Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill and other intangible assets. Goodwill is not amortized and is subject to at least annual assessments for impairment by applying a fair value based test. We review goodwill annually and again at any quarter-end if a material event occurs during the quarter that may affect goodwill. This review evaluates potential impairment by determining if our fair value has fallen below carrying value.

Other intangible assets consist mainly of core deposits and covenants not to compete obtained through acquisitions and are amortized over their estimated lives using the present value of the benefit of the core deposits and straight-line methods of amortization. Core deposit intangibles are evaluated for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets decreased $20.5 million to $4.4 billion as of March 31, 2013. Included in this decrease was a $78.2 million, or 9%, decrease in investment securities, available-for sale, and an $18.3 million, or 19%, decrease in cash and due from banks. The decrease in investment securities reflects the deleverage strategy we began in the fourth quarter of 2012 and completed during the first quarter of 2013. Partially offsetting these decreases, cash in non-owned ATMs increased $48.3 million, or 12%, due to growth in our Cash Connect division, and net loans increased $16.0 million during the quarter reflecting our continued success winning market share.

Total liabilities decreased $23.7 million during the quarter to $3.9 billion as of March 31, 2013. This decrease was primarily the result of decreased customer deposits of $104.5 million, or 3%. The decrease is mainly due to a net decrease in temporary trust accounts (temporary deposits collected through our Wealth Management Division that are expected to remain on deposit for only a short period of time), the intentional decrease of high-cost time deposits, and a decrease in money market accounts due to normal seasonal decreases in public fund accounts. Partially offsetting these decreases, Federal Home Loan Bank advances increased $79.0 million, or 21%, interest-bearing demand accounts increased $22.2 million, or 4 %, brokered deposits increased $18.0 million, or 11%, and savings accounts increased $11.5 million, or 3%, during the quarter.

 

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Capital Resources

Stockholders’ equity increased $3.2 million between December 31, 2012 and March 31, 2013. This increase was mainly due to net income of $9.7 million. Partially offsetting this increase was a decrease of $5.8 million in the value of our available-for-sale securities portfolio combined with the payment of common and preferred dividends of $1.7 million during the three months ended March 31, 2013.

Book value per common share was $48.25 at March 31, 2013 an increase of $0.26 from $47.99 reported at December 31, 2012. Tangible common book value per common share (a non-GAAP measurement) was $38.51 at March 31, 2013, an increase of $0.30, from $38.21 reported at December 31, 2012. See “Reconciliation of Non-GAAP Measurements to GAAP” for a reconciliation of tangible common book value per common share to common book value per common share, the most directly comparable GAAP measurement. We believe this measure is important to management and investors to better understand and assess changes from period to period in stockholders’ equity exclusive of changes in intangible assets.

On April 9, 2013, we requested approval from our primary regulators to redeem our outstanding $52,625,000 Fixed-Rate Cumulative Perpetual Preferred Stock, Series A. These shares were originally issued to the U.S. Treasury as part of the Troubled Asset Reduction Plan (“TARP”) Capital Purchase Plan (“CPP”). As of March 31, 2013, we held $61.0 million in available cash at the parent holding company.

Below is a table comparing the Bank’s consolidated capital position to the minimum regulatory requirements as of March 31, 2013:

 

     Consolidated
Bank Capital
    For Capital
Adequacy Purposes
    To be Well-Capitalized
Under Prompt Corrective
Action Provisions
 
            % of            % of            % of  
(Dollars in Thousands)    Amount      Assets     Amount      Assets     Amount      Assets  

Total Capital (to Risk-Weighted Assets)

   $ 477,182         14.52   $ 262,876         8.00   $ 328,595         10.00

Core Capital (to Adjusted Total Assets)

     436,069        10.12       172,384        4.00       215,480        5.00   

Tangible Capital (to Tangible Assets)

     436,069        10.12       64,644        1.50       N/A         N/A   

Tier 1 Capital (to Risk-Weighted Assets)

     436,069        13.27       131,438        4.00       197,157        6.00   

Under guidelines issued by banking regulators, savings institutions such as the Bank must maintain “tangible” capital equal to 1.5% of adjusted total assets, “core” capital equal to 4.0% of adjusted total assets, “Tier 1” capital equal to 4.0% of risk weighted assets and “total” or “risk-based” capital (a combination of core and “supplementary” capital) equal to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our bank’s financial statements.

At March 31, 2013, the Bank was in compliance with regulatory capital requirements and was considered a “well-capitalized” institution. The Bank’s core capital ratio of 10.12%, Tier 1 capital ratio of 13.27% and total risk based capital ratio of 14.52%, all remain substantially in excess of “well-capitalized” regulatory benchmarks, the highest regulatory capital rating. In addition, and not included in Bank capital, the holding company held $61.0 million in cash to support dividends, acquisitions, strategic growth plans.

Liquidity

We manage our liquidity risk and funding needs through our Treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators.

 

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As a financial institution, the Bank has ready access to several sources to fund growth and meet its liquidity needs. Among these are: net income, retail deposit programs, loan repayments, borrowing from the FHLB, repurchase agreements, access to the Federal Reserve Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities and government sponsored enterprises (“GSE”) notes that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. Management believes these sources are sufficient to maintain required and prudent levels of liquidity.

During the three months ended March 31, 2013, cash and cash equivalents increased $29.7 million to $530.6 million. This increase was primarily a result of the following: $79.0 million from the net proceeds from FHLB advances; $68.9 million from the sale and maturities (net of purchases) of available for sale securities; $18.0 million increase in brokered deposits and $1.6 million increase in cash provided by operating activities. Offsetting these increases in cash were: a $99.1 million reduction in cash due to decreases in demand, savings, and time deposits and a $15.0 million reduction in cash due to the decrease in federal funds purchased and securities sold under repurchase agreements.

 

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NONPERFORMING ASSETS

The following table shows our nonperforming assets and past due loans at the dates indicated. Nonperforming assets include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure and restructured 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 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 loans contractually past due 90 days or more as to principal or interest payments but which remain on accrual status because they are considered well secured and in the process of collection.

 

     March 31,     December 31,  
     2013     2012  
     (In Thousands)  

Nonaccruing loans:

    

Commercial

   $ 4,991     $ 4,861  

Owner-occupied commercial

     13,263       14,001  

Consumer

     4,201       4,728  

Commercial mortgage

     11,240       12,634  

Residential mortgage

     10,810       9,989  

Construction

     1,216       1,547  
  

 

 

   

 

 

 

Total nonaccruing loans

     45,721       47,760  

Assets acquired through foreclosure

     6,522       4,622  

Troubled debt restructuring (accruing)

     10,777       10,093  
  

 

 

   

 

 

 

Total nonperforming assets

   $ 63,020     $ 62,475  
  

 

 

   

 

 

 

Past due loans (1):

    

Residential Mortgages

     297       786  

Commercial and commercial mortgages

     103       —    
  

 

 

   

 

 

 

Total past due loans

   $ 400     $ 786  
  

 

 

   

 

 

 

Ratios:

    

Allowance for loan losses to total loans (2)

     1.54     1.58

Nonperforming assets to total assets

     1.45     1.43

Nonaccruing loans to total loans (2)

     1.64     1.73

Loan loss allowance to nonaccruing loans

     93.93     91.96

Loan loss allowance to total nonperforming assets

     68.15     70.30

 

(1)

Past due loans are accruing loans which are contractually past due 90 days or more as to principal or interest. These loans are well secured and in the process of collection.

(2)

Total loans exclude loans held for sale.

Nonperforming assets increased $545,000 between December 31, 2012 and March 31, 2013. As a result, nonperforming assets as a percentage of total assets increased slightly from 1.43% at December 31, 2012 to 1.45% at March 31, 2013. There were a total of $5.3 million in new loans transitioned to nonperforming. However, this was off-set by $1.5 million in collections and $3.4 million of nonperforming assets written down of which one loan was written down by $1.3 million. We have transferred $2.2 million into Other Real Estate Owned (“OREO”).

 

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The following table summarizes the changes in nonperforming assets during the period indicated:

 

     For the three     For the year  
     months ended     ended  
     March 31, 2013     December 31, 2012  
     (In Thousands)  

Beginning balance

   $ 62,475     $ 91,675  

Additions

     6,041       73,170  

Collections

     (1,510     (46,514

Collections from loan dispositions

     —         (14,305

Transfers to accrual

     (498     (552

Charge-offs / write-downs, net

     (3,488     (40,999
  

 

 

   

 

 

 

Ending balance

   $ 63,020     $ 62,475  
  

 

 

   

 

 

 

The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Timely identification enables us to take appropriate action and, accordingly, minimize losses. An asset review system established to monitor the asset quality of our loans and investments in real estate portfolios facilitates the identification of problem assets. In general, this system utilizes guidelines established by federal regulation.

INTEREST SENSITIVITY

The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest-rate sensitivity and adjust the sensitivity within acceptable tolerance ranges established by the Board of Directors. At March 31, 2013, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $8.2 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window increased from 98.09% at December 31, 2012, to 100.35% at March 31, 2013. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 0.19% at March 31, 2013 from -1.02% at December 31, 2012. The change in sensitivity since December 31, 2012 reflects the current interest rate environment and our continuing effort to effectively manage interest rate risk.

 

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Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, required to be performed by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets. The table below shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at March 31, 2013 and December 31, 2012:

 

      March 31, 2013     December 31, 2012  

% Change in
Interest Rate
(Basis Points)

    % Change in
Net Interest
Margin (1)
    Economic
Value of
Equity (2)
    % Change in
Net Interest
Margin (1)
    Economic
Value of
Equity (2)
 
  +300        5     13.46     4     12.49
  +200        2     13.43     1     12.62
  +100        -2     13.26     -3     12.54
  —         0     12.95     0     12.31
  -100       -1     12.08     -1     11.56
  -200 (3)      NMF        NMF        NMF        NMF   
  -300 (3)      NMF        NMF        NMF        NMF   

 

(1) The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.
(2) The economic value of equity ratio of the Company in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.
(3) Sensitivity indicated by a decrease of 200 or 300 basis points is not deemed meaningful at March 31, 2013 given the low absolute level of interest rates at that time.

We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2013

Results of Operations

We recorded net income of $9.7 million for the quarter ended March 31, 2013, a 51% increase over $6.4 million for the quarter ended March 31, 2012. Income allocable to common stockholders’ (after preferred stock dividends) was $9.0 million, or $1.02 per diluted common share, for the quarter ended March 31, 2013, or a 55% increase in EPS compared to income allocable to common shareholders’ of $5.6 million, or $0.66 per diluted common share, for the quarter ended March 31, 2012.

The increase in earnings for the first quarter of 2013 reflected strong growth in noninterest income (8%), despite decreased net gains from sale of investment securities, and lower provision for loan losses, offset by a 4% increase in noninterest expenses and a slight decline in net interest income. The increase in noninterest income reflects continued growth in our Wealth Management division (23%) and our Cash Connect ATM division (8%), as well as increases in most other categories. The decrease in the provision for loan losses over the previous year was the result of continued broad improvement in credit quality resulting from prudent credit management and active problem asset disposition efforts in 2012. The increase in noninterest expenses was due to higher salaries, benefits and other compensation as a result of increased incentive costs related to performance and the timing of certain retirement eligible stock option expenses in the first quarter of 2013, while similar expenses in 2012 were lower and were spread between the first and second quarters.

 

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Net Interest Income

The following tables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated.

 

     Three Months Ended March 31,  
     2013     2012  
     Average