10-Q 1 d749251d10q.htm 10-Q 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 June 30, 2014

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)

 

WSFS Bank Center, 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 August 1, 2014.

 

Common Stock, par value $.01 per share   8,926,544
(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 and Six Months Ended June 30, 2014 and 2013

     3   
 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013

     4   
 

Consolidated Statements of Condition as of June 30, 2014 and December 31, 2013

     5   
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

     6   
 

Notes to the Consolidated Financial Statements for the Three and Six Months Ended June 30, 2014 and 2013

     7   
Item 2.  

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

     36   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     47   
Item 4.  

Controls and Procedures

     48   
PART II. Other Information   
Item 1.  

Legal Proceedings

     48   
Item 1A.  

Risk Factors

     48   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     48   
Item 3.  

Defaults upon Senior Securities

     48   
Item 4.  

Mine Safety Disclosure

     48   
Item 5.  

Other Information

     48   
Item 6.  

Exhibits

     49   
Signatures        50   
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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Interest income:

           

Interest and fees on loans

   $ 33,319      $ 32,108      $ 65,521      $ 63,560  

Interest on mortgage-backed securities

     3,564        3,117        6,813        6,506  

Interest on reverse mortgage related assets

     1,368        324        2,594        907  

Interest and dividends on investment securities

     814        311        1,606        453  

Other interest income

     348        22        664        47  
  

 

 

    

 

 

    

 

 

    

 

 

 
     39,413        35,882        77,198        71,473  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     1,714        1,821        3,370        3,840  

Interest on Federal Home Loan Bank advances

     661        451        1,187        894  

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

     265        245        515        494  

Interest on trust preferred borrowings

     330        337        656        666  

Interest on senior debt

     941        944        1,883        1,887  

Interest on bonds payable

     —          —          15        —    

Interest on other borrowings

     25        28        51        56  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,936        3,826        7,677        7,837  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     35,477        32,056        69,521        63,636  

Provision for loan losses

     50        1,680        2,680        3,911  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     35,427        30,376        66,841        59,725  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Credit/debit card and ATM income

     6,010        6,189        11,776        11,857  

Deposit service charges

     4,346        4,216        8,615        8,230  

Investment management and fiduciary revenue

     4,287        4,059        8,121        7,787  

Mortgage banking activities, net

     1,025        1,193        1,837        1,930  

Loan fee income

     556        487        940        982  

Security gains, net

     365        906        943        2,550  

Bank owned life insurance income

     143        48        282        88  

Other income

     2,891        2,441        5,473        4,189  
  

 

 

    

 

 

    

 

 

    

 

 

 
     19,623        19,539        37,987        37,613  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries, benefits and other compensation

     18,671        17,455        37,145        35,438  

Occupancy expense

     3,569        3,401        7,298        6,784  

Professional fees

     2,345        899         3,695        1,846   

Equipment expense

     1,860        2,117         3,547        3,946  

Data processing and operations expenses

     1,531        1,394        3,002        2,743  

Loan workout and OREO expenses

     716        770        1,255        940  

FDIC expenses

     692        942        1,345        2,108  

Marketing expense

     464        608        963        1,125  

Other operating expense

     5,670        5,566        11,446        10,592  
  

 

 

    

 

 

    

 

 

    

 

 

 
     35,518        33,152        69,696        65,522  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     19,532        16,763        35,132        31,816  

Income tax provision

     6,807        5,855        5,496        11,168  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     12,725        10,908        29,636        20,648  

Dividends on preferred stock and accretion of discount

     —          609        —          1,301  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocable to common stockholders

   $ 12,725      $ 10,299      $ 29,636      $ 19,347  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 1.43      $ 1.17      $ 3.33      $ 2.20  

Diluted

   $ 1.39      $ 1.16      $ 3.24      $ 2.18  

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
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (Unaudited)  
     (In Thousands)  

Net Income

   $ 12,725     $ 10,908     $ 29,636     $ 20,648  

Other comprehensive income (loss):

        

Net change in unrealized gains (losses) on investment securities available-for-sale:

        

Net Unrealized gains (losses) arising during the period, net of tax expense (benefit) of $5,932, ($11,840), $11,536 and ($14,738), respectively

     9,678       (19,316     18,824       (24,143

Less: reclassification adjustment for net losses (gains) on sales realized in net income, net of tax (benefit) expense of $139, $344, $358 and $969, respectively

     (226     (562     (585     (1,581
  

 

 

   

 

 

   

 

 

   

 

 

 
     9,452       (19,878     18,239       (25,724

Net change in unfunded pension liability:

        

Change in unfunded pension liability related to unrealized loss, prior service cost and transition obligation, net of tax expense of $36, $0, $36 and $0, respectively

     60       —         60       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     9,512       (19,878     18,299       (25,724
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 22,237     $ (8,970   $ 47,935     $ (5,076
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     June 30,
2014
    December 31,
2013
 
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Assets

    

Cash and due from banks

   $ 107,169     $ 94,734  

Cash in non-owned ATMs

     367,870       389,360  

Interest-bearing deposits in other banks

     150       332  
  

 

 

   

 

 

 

Total cash and cash equivalents

     475,189       484,426  

Investment securities, available-for-sale

     841,706       817,115  

Loans held-for-sale

     35,188       31,491  

Loans, net of allowance for loan losses of $41,381 at June 30, 2014 and $41,244 at December 31, 2013

     2,993,361       2,904,976  

Reverse mortgage related assets

     32,543       37,328  

Bank-owned life insurance

     63,467       63,185  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     37,587       35,869  

Assets acquired through foreclosure

     4,451       4,532  

Accrued interest receivable

     11,004       10,798  

Premises and equipment

     33,606       35,178  

Goodwill

     32,100       32,235  

Intangible assets

     6,195       6,743  

Other assets

     46,693       51,887  
  

 

 

   

 

 

 

Total assets

   $ 4,613,090     $ 4,515,763  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 709,186     $ 650,256  

Interest-bearing demand

     643,061       638,403  

Money market

     748,099       887,715  

Savings

     401,049       383,731  

Time

     232,241       236,965  

Jumbo certificates of deposit – customer

     219,234       221,145  
  

 

 

   

 

 

 

Total customer deposits

     2,952,870       3,018,215  

Brokered deposits

     200,459       168,727  
  

 

 

   

 

 

 

Total deposits

     3,153,329       3,186,942  

Federal funds purchased and securities sold under agreements to repurchase

     86,000       97,000  

Federal Home Loan Bank advances

     758,400       638,091  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     55,000       55,000  

Other borrowed funds

     18,455       24,739  

Reverse mortgage trust bonds payable

     —         21,990  

Accrued interest payable

     2,381       838  

Other liabilities

     40,559       41,102  
  

 

 

   

 

 

 

Total liabilities

     4,181,135       4,132,713  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock $0.01 par value, 20,000,000 shares authorized; issued 18,504,996 at June 30, 2014 and 18,476,003 at December 31, 2013

     185       185  

Capital in excess of par value

     181,582       178,477  

Accumulated other comprehensive loss

     (2,995     (21,294

Retained earnings

     501,463       473,962  

Treasury stock at cost, 9,580,569 shares at June 30, 2014 and December 31, 2013

     (248,280     (248,280
  

 

 

   

 

 

 

Total stockholders’ equity

     431,955       383,050  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,613,090     $ 4,515,763  
  

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six months ended June 30,  
     2014     2013  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 29,636     $ 20,648  

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

    

Provision for loan losses

     2,680       3,911  

Depreciation of premises and equipment

     2,982       2,754  

Amortization, net

     5,098       5,573  

Increase in accrued interest receivable

     (206     (655

Decrease in other assets

     220        5,178  

Origination of loans held-for-sale

     (105,844     (122,826

Proceeds from sales of loans held-for-sale

     101,976       122,934  

Gain on mortgage banking activities, net

     (1,837     (1,930

Gain on sale of securities, net

     (943     (2,550

Stock-based compensation expense

     2,242       1,646  

Excess tax benefits from share-based payment arrangements

     (478     (112

Increase in accrued interest payable

     1,543       1,573  

Decrease in other liabilities

     (788     (5,351

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

     56       (190

Deferred income tax (benefit) expense

     (5,722     1,664   

Increase in value of bank-owned life insurance

     (282     (88

Increase in capitalized interest for reverse mortgages, net

     (2,785     (520
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 27,548     $ 31,659  
  

 

 

   

 

 

 

Investing activities:

    

Maturities and Calls of investment securities

     2,305       310  

Sale of investment securities available-for-sale

     141,439       220,331  

Purchase of investment securities available-for-sale

     (168,454     (213,302

Repayments of investment securities available-for-sale

     27,177       44,422  

Repayments on reverse mortgages

     8,235       —    

Disbursements for reverse mortgages

     (665     (35

Net increase in loans

     (93,558     (82,146

Net increase in stock of Federal Home Loan Bank of Pittsburgh

     (1,718     (8,167

Sales of assets acquired through foreclosure, net

     3,222       4,178  

Investment in premises and equipment, net

     (1,388     (1,505
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

   $ (83,405   $ (35,914
  

 

 

   

 

 

 

Financing activities:

    

Net decrease in demand and saving deposits

     (65,036     (122,920

Decrease in time deposits

     (6,635     (92,226

Increase in brokered deposits

     31,732       2,117  

Increase in loan payable

     40       —    

Repayment of reverse mortgage trust bonds payable

     (21,990     —    

Receipts from FHLB advances

     57,176,960       11,058,000  

Repayments of FHLB advances

     (57,056,651     (11,069,000

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

     12,259,350       21,576,204  

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

     (12,270,350     (21,288,714

Dividends paid

     (2,141     (3,425

Issuance of common stock and exercise of common stock options

     863       739  

Redemption of preferred stock

     —         (19,997

Excess tax benefits from share-based payment arrangements

     478       112  
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

   $ 46,620     $ 40,890  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (9,237     36,635  

Cash and cash equivalents at beginning of period

     484,426       500,887  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 475,189     $ 537,522  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 6,134     $ 6,264  

Cash paid for income taxes, net

     12,231       9,607  

Loans transferred to assets acquired through foreclosure

     3,196       6,475  

Loans transferred to portfolio from HFS

     2,169       —    

Other comprehensive income (loss)

     18,299       (25,724

Non-Cash Goodwill Adjustment, Net

     135       —    

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 AND SIX MONTHS ENDED JUNE 30, 2014

(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 Cypress Capital Management, LLC (“Cypress”). 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”).

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. Lending activities are funded primarily with customer deposits and borrowings. In addition, we offer a variety of wealth management and trust services to personal and corporate customers through our Trust and Wealth Management division. The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 52 offices located in Delaware (42), Pennsylvania (8), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. 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, reverse mortgage related assets, income taxes and other-than-temporary impairments (“OTTI”). 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 that would be required in audited financial statements. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2014. 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, 2013 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the FASB issued ASU No. 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323) - Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” The ASU permits an entity to make an accounting policy election to account for its investment in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportionate amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The decision to apply the proportionate amortization method of accounting should be applied consistently to all qualifying affordable housing project investments. A reporting entity that uses the effective yield or other method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply such method to those preexisting investments. The amendments are effective for annual and interim periods beginning after December 15, 2014. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the

 

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creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU includes amendments that change the requirements for reporting discontinued operations and disposals of components of an entity. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on the organization’s operations and financial results should be presented as discontinued operations. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. These amendments are effective prospectively for fiscal years and interim reporting periods within those years, beginning after December 15, 2014. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The ASU introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its Consolidated Financial Statements.

2. BUSINESS COMBINATIONS

First Wyoming Financial Corporation

On November 25, 2013, the Company announced an Agreement and Plan of Reorganization, with First Wyoming Financial Corporation, the parent company of The First National Bank of Wyoming (“First Wyoming”), pursuant to which First Wyoming Financial Corporation will merge with the company in a cash and stock transaction valued at approximately $64 million. As of December 31, 2013, First Wyoming operated 6 banking offices in Kent County, Delaware with $302.8 million in total assets and $244.5 million in total deposits. This business combination has received required regulatory and stockholder approvals and is expected to close in September 2014.

Array Financial Group, Inc. and Arrow Land Transfer Company Acquisition

On July 31, 2013, WSFS Bank completed the purchase of Array Financial Group, Inc. (Array), a Delaware Valley mortgage banking company, specializing in a variety of residential mortgage and refinancing solutions, and Arrow Land Transfer Company (Arrow), an abstract and title company that is a related entity to Array. All Array and Arrow employees are now WSFS Associates.

These companies were acquired through an asset purchase transaction for the purchase price of $8.0 million (including a $1.4 million payment for the working capital of the two companies), $4.0 million of which can be earned through a five-year earn out based on achieved earnings contribution targets, the fair value of which is $2.6 million at June 30, 2014. Operating results of Array and Arrow are included in the Consolidated Financial Statements since the date of acquisition.

The transaction was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess of consideration paid over the fair value of net assets acquired was recorded as goodwill, which will not be amortizable for book purposes, however will be deductible for tax purposes. We allocated the total balance of goodwill to our WSFS Bank segment. We also recognized $2.4 million in intangible assets which will be amortized over 7 years utilizing the straight-line method.

 

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The following table details the effect on goodwill from the changes in the derivative assets and liabilities relating to the loan commitment pipeline at acquisition from the amounts originally reported on the Form 10-K for the year ended December 31, 2013.

 

(In Thousands)       

Goodwill resulting from acquisition of Array and Arrow reported on Form 10-K for the year ended December 31, 2013

   $ 4,089  

Effect of adjustments to:

  

Other assets

     (338

Other liabilities

     203  
  

 

 

 

Adjusted goodwill resulting from acquisition of Array & Arrow as of June 30, 2014

   $ 3,954  
  

 

 

 

The fair values listed above are estimates and are subject to adjustment. However, while they are not expected to be materially different than those shown, any material adjustments to the estimates will be reflected retroactively as of the date of the transaction.

3. EARNINGS PER SHARE

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

 

     For the three months ended
June 30,
     For the six months ended
June 30,
 
     2014      2013      2014      2013  
     (In Thousands, Except Per Share Data)  

Numerator:

           

Net income allocable to common stockholders

   $ 12,725      $ 10,299      $ 29,636      $ 19,347  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Denominator for basic earnings per share - weighted average shares

     8,915        8,802        8,910        8,792  

Effect of dilutive employee stock options and warrants

     228        95        230        89  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     9,143        8,897        9,140        8,881  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic:

           

Net income allocable to common stockholders

   $ 1.43      $ 1.17      $ 3.33      $ 2.20  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income allocable to common stockholders

   $ 1.39      $ 1.16      $ 3.24      $ 2.18  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     44        548        44        637  

 

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4. INVESTMENT SECURITIES

The following tables detail the amortized cost and the estimated fair value of our available-for-sale investment securities. None of our investment securities is classified as trading or held-to-maturity.

 

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

Available-for-sale securities:

          

June 30, 2014:

          

State and political subdivisions

   $ 111,256      $ 2,484      $ (1,159   $ 112,581  

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

     36,986        55        (20     37,021  

Collateralized Mortgage Obligation (“CMO”)

     163,781        482        (2,185     162,078  

Federal National Mortgage Association (“FNMA”) Mortgage-Backed Securities (“MBS”)

     321,960        735        (3,371     319,324  

Federal Home Loan Mortgage Corporation MBS (“FHLMC”)

     127,454        244        (1,406     126,292  

Government National Mortgage Association MBS (“GNMA”)

     84,436        499        (525     84,410  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 845,873      $ 4,499      $ (8,666   $ 841,706  
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

State and political subdivisions

   $ 105,354      $ 257      $ (5,426   $ 100,185  

GSE

     32,082        93        (17     32,158  

CMO

     103,064        28        (5,535     97,557  

FNMA MBS

     382,909        20        (15,801     367,128  

FHLMC MBS

     129,460        29        (4,994     124,495  

GNMA MBS

     97,830        743        (2,981     95,592  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 850,699      $ 1,170      $ (34,754   $ 817,115  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The scheduled maturities of investment securities available-for-sale at June 30, 2014 and December 31, 2013 were as follows:

 

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

June 30, 2014

     

Within one year

   $ 23,178      $ 23,224  

After one year but within five years

     38,821         39,376  

After five years but within ten years

     235,509         233,595  

After ten years

     548,365         545,511  
  

 

 

    

 

 

 
   $ 845,873      $ 841,706  
  

 

 

    

 

 

 

December 31, 2013

     

Within one year

   $ 16,319      $ 16,378  

After one year but within five years

     19,761        19,986  

After five years but within ten years

     229,033        217,911  

After ten years

     585,586        562,840  
  

 

 

    

 

 

 
   $ 850,699      $ 817,115  
  

 

 

    

 

 

 

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 June 30, 2014, investment securities with market values aggregating $504.7 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 $11.0 million of FHLB pledged investment securities at June 30, 2014.

During the first six months of 2014, we sold $140.9 million of investment securities during the period categorized as available-for-sale for net gains of $943,000 (no losses were incurred). In the first six months of 2013, we sold $220.3 million of investment securities available-for-sale which resulted in net gains of $2.5 million.

As of June 30, 2014, our investment securities portfolio had remaining unamortized premiums of $23.1 million and $220,000 of unaccreted discounts.

 

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The tables below show our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at June 30, 2014 and December 31, 2013.

 

     Less than 12 months      12 months or longer      Total  
June 30, 2014    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
     (In Thousands)  

Available-for-sale

                 

State and political subdivisions

   $ 5,727      $ 19      $ 44,075      $ 1,140      $ 49,802      $ 1,159  

GSE

     10,951        20        —          —          10,951        20  

CMO

     16,488        23        73,140        2,162        89,628        2,185  

FNMA MBS

     27,205        234        195,763        3,137        222,968        3,371  

FHLMC MBS

     3,798        6        96,077        1,400        99,875        1,406  

GNMA MBS

     —          —          52,020        525        52,020        525  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 64,169      $ 302      $ 461,075      $ 8,364      $ 525,244      $ 8,666  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 months or longer      Total  
December 31, 2013    Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
     (In Thousands)  

Available-for-sale

                 

State and political subdivisions

   $ 83,036      $ 5,426      $ —         $ —         $ 83,036      $ 5,426  

GSE

     3,972        13        2,001        4        5,973        17  

CMO

     73,109        4,173        21,590        1,362        94,699        5,535  

FNMA MBS

     346,266        14,386        17,800        1,415        364,066        15,801  

FHLMC MBS

     116,732        4,548        7,307        446        124,039        4,994  

GNMA MBS

     57,076        1,897        18,829        1,084        75,905        2,981  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 680,191      $ 30,443      $ 67,527      $ 4,311      $ 747,718      $ 34,754  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All securities were AAA-rated at the time of purchase and remained at investment grade at both June 30, 2014 and December 31, 2013. All securities were re-evaluated for OTTI at June 30, 2014. The result of this evaluation showed no OTTI during the first six months of 2014. The weighted average duration of MBS was 5.2 years at June 30, 2014.

At June 30, 2014, we owned investment securities totaling $525.2 million in which the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $8.7 million at June 30, 2014. At December 31, 2013, we owned investment securities totaling $747.7 million in which the amortized cost basis exceeded fair value. Total unrealized loss at December 31, 2013 on those securities was $34.8 million. 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.

5. 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 allowance for loan losses in accordance with guidance provided in the SEC’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 our allowance for loan losses:

 

    Specific reserves for impaired loans

 

    Allowances for pools of homogenous loans based on historical net loss experience

 

    Adjustments for qualitative and environmental factors allocated to pools of homogenous loans

 

    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. During the six months ended June 30, 2014, net charge-offs totaled $2.5 million or 0.17% of average loans annualized, compared to $6.3 million, or 0.45%, of average loans during the six months ended June 30, 2013. We charge loans off when they are deemed to be uncollectible.

 

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Table of Contents

Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical net loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled into the 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 16 quarters. Loss severity is calculated as the actual loan losses (net of recoveries) on impaired loans in the respective pool during the same time frame. Retail loans are pooled into the 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 net 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 and are allocated among loan types and take into consideration the following:

 

    Assessment of current underwriting policies, staff, and portfolio mix

 

    Internal trends of delinquency, nonaccrual 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. During the quarter ended June 30, 2014 the allowance methodology was updated to reflect a loss emergence period (“LEP”) of nine quarters based on the generally improving economic conditions. Industry and historical data indicates that the LEP lengthens in an improving economy as the length of time between an adverse financial event and subsequent loss is extended. In addition, a 10 basis point consideration was given to the C&I loan portfolio due to the assessment of qualitative factors on three lending relationships.

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 review the qualitative estimates of valuation factors quarterly and management uses its judgement to make adjustments based on current trends.

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 our allowance for loan losses and loan balances for the three and six months ended June 30, 2014 and 2013:

 

     Commercial     Owner -
Occupied
Commercial
    Commercial
Mortgages
    Construction     Residential     Consumer     Estimation/
Complexity
Risk (1)
     Total  
     (in thousands)  

Three months ended June 30, 2014

                 

Allowance for loan losses

                 

Beginning balance

   $ 12,404      $ 8,789      $ 7,363      $ 2,716      $ 2,765      $ 6,249      $ 1,042       $ 41,328   

Charge-offs

     (382     (124     —         —         (163     (490     —          (1,159

Recoveries

     483       161       2       177       25       314       —          1,162  

Provision (credit)

     841       (840     252       (574     132       226       13        50  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 13,346      $ 7,986      $ 7,617      $ 2,319      $ 2,759      $ 6,299      $ 1,055       $ 41,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six months ended June 30, 2014

                 

Allowance for loan losses

                 

Beginning balance

   $ 12,751      $ 7,638      $ 6,932      $ 3,326      $ 3,078      $ 6,494      $ 1,025       $ 41,244   

Charge-offs

     (1,495     (321     (160     (88     (527     (1,723     —          (4,314

Recoveries

     807        167       39       184       43        531        —          1,771   

Provision (credit)

     1,283        502       806       (1,103     165       997        30        2,680  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 13,346      $ 7,986      $ 7,617      $ 2,319      $ 2,759      $ 6,299      $ 1,055       $ 41,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Period-end allowance allocated to:

                 

Loans individually evaluated for impairment

   $ 1,881      $ 1,157      $ 307      $ —        $ 872      $ 184      $ —         $ 4,401   

Loans collectively evaluated for impairment

     11,465       6,829       7,310       2,319       1,887       6,115       1,055        36,980  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 13,346      $ 7,986      $ 7,617      $ 2,319      $ 2,759      $ 6,299      $ 1,055       $ 41,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Period-end loan balances evaluated for:

                 

Loans individually evaluated for impairment

   $ 4,109      $ 4,928      $ 13,483      $ —        $ 17,743      $ 5,577      $ —         $ 45,840  (2) 

Loans collectively evaluated for impairment

     853,245       773,329       749,607       119,333       193,180       306,943       —        $ 2,995,637   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 857,354      $ 778,257      $ 763,090      $ 119,333      $ 210,923      $ 312,520      $ —         $ 3,041,477  (3) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     Commercial     Owner -
Occupied
Commercial
    Commercial
Mortgages
    Construction     Residential     Consumer     Estimation/
Complexity
Risk (1)
    Total  
     (in thousands)  

Three months ended June 30, 2013

                

Allowance for loan losses

                

Beginning balance

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

Charge-offs

     (883     (36     (24     (1,321     (255     (1,516     —         (4,035

Recoveries

     401       33       106       70       23       268       —         901  

Provision (credit)

     681       1,714       (930     (1,582     181       1,644       (28     1,680  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,967      $ 8,049      $ 6,345      $ 3,952      $ 3,230      $ 6,137      $ 814      $ 41,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2013

                

Allowance for loan losses

                

Beginning balance

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

Charge-offs

     (1,139     (37     (1,721     (1,340     (695     (2,810     —         (7,742

Recoveries

     627       45       109       85       41       496       —         1,403  

Provision (credit)

     (184     1,933       (122     (1,249     760       2,820       (47     3,911  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,967      $ 8,049      $ 6,345      $ 3,952      $ 3,230      $ 6,137      $ 814      $ 41,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

                

Loans individually evaluated for impairment

   $ 2,171      $ 977      $ 1,995      $ —        $ 1,006      $ 12      $ —        $ 6,161   

Loans collectively evaluated for impairment

     10,796       7,072       4,350       3,952       2,224       6,125       814       35,333  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,967      $ 8,049      $ 6,345      $ 3,952      $ 3,230      $ 6,137      $ 814      $ 41,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

                

Loans individually evaluated for impairment

   $ 6,048      $ 12,681      $ 10,791      $ 646      $ 16,961      $ 4,925      $ —        $ 52,052  (2) 

Loans collectively evaluated for impairment

     733,581       755,261       677,442       124,892       216,755       280,314       —         2,788,245  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 739,629      $ 767,942      $ 688,233      $ 125,538      $ 233,716      $ 285,239      $ —        $ 2,840,297  (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 June 30, 2014, represents accruing troubled debt restructured (“TDR”) loans which are considered to be impaired loans.
(3) Ending loan balances do not include deferred costs.

 

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Nonaccrual and Past Due Loans

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

 

June 30, 2014

(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

  $ 560      $ —        $ —        $ 560      $ 853,283      $ 3,511      $ 857,354   

Owner-Occupied commercial

    1,953       —         —         1,953       771,376       4,928       778,257  

Commercial mortgages

    —         —         —         —         749,699       13,391       763,090  

Construction

    —         —         —         —         119,333       —         119,333  

Residential

    2,395        41       —         2,436        200,002       8,485       210,923  

Consumer

    616       134       —         750       308,024       3,746       312,520  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,524      $ 175      $ —        $ 5,699      $ 3,001,717      $ 34,061      $ 3,041,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

    0.18     0.01     —       0.19     98.69     1.12     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

December 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

  $ 1,447      $ —        $ —        $ 1,447      $ 805,132      $ 4,303      $ 810,882   

Owner-Occupied commercial

    538       —         —         538       780,625       5,197       786,360  

Commercial mortgages

    83       1,049       —         1,132       715,496       8,565       725,193  

Construction

    —         —         —         —         104,916       1,158       106,074  

Residential

    1,952       1,348       533       3,833       209,255       8,432       221,520  

Consumer

    1,095       177       —         1,272       297,669       3,293       302,234  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $  5,115      $ 2,574      $ 533      $    8,222      $ 2,913,093      $    30,948      $ 2,952,263   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

    0.17     0.09     0.02     0.28     98.67     1.05     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impaired Loans

The following tables provide an analysis of our impaired loans at June 30, 2014 and December 31, 2013:

 

June 30, 2014

(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

   $ 4,109       $ 1,592       $ 2,517       $ 1,881       $ 5,131       $ 5,115   

Owner-Occupied commercial

     4,928         2,615         2,313         1,157         5,718         8,338  

Commercial mortgages

     13,483         8,210         5,273         307         18,268         11,523  

Construction

     —           —           —           —           —           630  

Residential

     17,743         10,090         7,653         872         20,220         17,666  

Consumer

     5,577         4,399         1,178         184         6,348         5,170  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 45,840       $ 26,906       $ 18,934       $ 4,401       $ 55,685       $ 48,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 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

   $ 5,003       $ 2,362       $ 2,641       $ 1,781       $ 13,013       $ 5,347   

Owner-Occupied commercial

     5,197        5,184        12        12        8,293        11,542  

Commercial mortgages

     8,661        2,784        5,877        1,987        16,566        10,444  

Construction

     1,158        1,158        —           —           1,563        968  

Residential

     17,852        9,750        8,103        989        20,153        18,047  

Consumer

     5,411        4,767        644        134        6,056        5,455  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 43,282       $ 26,005       $ 17,277       $ 4,903       $ 65,644       $ 51,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reflects loan balances at or written down to their remaining book balance.

Interest income of $393,000 and $747,000 was recognized on impaired loans during the three and six months ended June 30, 2014, respectively. Interest income of $235,000 and $473,000 was recognized on impaired loans during the three and six months ended June 30, 2013, respectively.

Credit Quality Indicators

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

Pass. These borrowers presently show no current or potential problems and their loans are considered fully collectible.

Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, for example, 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.

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.

 

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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 on nonaccrual status.

 

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Table of Contents

The following tables provide an analysis of loans by credit risk profile using internally assigned risk ratings, as of June 30, 2014 and December 31, 2013

 

    Commercial     Owner-Occupied
Commercial
    Commercial
Mortgages
    Construction     Total
Commercial
 
      June 30,
2014
    December 31,
2013
 
(in thousands)   June 30,
2014
    Dec. 31
2013
    June 30,
2014
    Dec. 31
2013
    June 30,
2014
    Dec. 31
2013
    June 30,
2014
    Dec. 31
2013
     
                  Amount     %     Amount     %  

Risk Rating:

                       

Special mention Substandard:

  $ 10,037      $ 12,566      $ 7,186      $ 4,747      $ 9,249      $ 2,092      $ 300      $ 226      $ 26,772        $ 19,631     

Accrual

    63,462       56,806       45,524       45,181       13,881       8,146       2,130       3,599       124,997         113,732    

Nonaccrual

    1,592       2,362       2,615       5,185       8,210       2,784       —         1,158       12,417         11,489    

Doubtful / Nonaccrual

    2,517       2,641       2,313       12       5,273       5,877       —         —         10,103         8,530    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Special Mention, Substandard and Doubtful

    77,608       74,375       57,638       55,125       36,613       18,899       2,430       4,983       174,289       7     153,382      

Pass

    779,746       736,507       720,619       731,235       726,477       706,294       116,903       101,091       2,343,745       93     2,275,127       94  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial Loans

  $ 857,354      $ 810,882      $ 778,257      $ 786,360      $ 763,090      $ 725,193      $ 119,333      $ 106,074      $ 2,518,034        100   $ 2,428,509        100 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Consumer credit exposure credit risk profile based on payment activity:

 

     Residential      Consumer      Total Residential and Consumer  
     June 30,
2014
     Dec. 31
2013
     June 30,
2014
     Dec. 31
2013
     June 30, 2014     December 31, 2013  
(in thousands)                Amount      Percent     Amount      Percent  

Nonperforming (1)

   $ 17,743       $ 17,852       $ 5,577       $ 5,411       $ 23,320         4   $ 23,263        

Performing

     193,180        203,668        306,943        296,823        500,123        96     500,491        96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 210,923       $ 221,520       $ 312,520       $ 302,234       $ 523,443         100   $ 523,754         100 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

(1) Includes $11.1 million as of June 30, 2014 and $11.5 million as of December 31, 2013 of troubled debt restructured mortgages and home equity installment loans that are 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 June 30, 2014 and December 31, 2013 was $26.2 million and $27.6 million, respectively. The balance at June 30, 2014 included approximately $14.4 million in nonaccrual status and $11.8 million in accrual status compared to $15.3 million in nonaccrual status and $12.3 million in accrual status at December 31, 2013. Approximately $2.3 million and $4.1million in related reserves have been established for these loans at June 30, 2014 and December 31, 2013, respectively.

A modification is classified as a TDR if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty. Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

During the six months ended June 30, 2014, the terms of 13 loans were modified in TDRs, Comprising of one commercial loan with the remaining being 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 six months ended June 30, 2014 and 2013:

 

(In Thousands)

  Three Months Ended
June 30, 2014
    Three Months Ended
June 30, 2013
    Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
 

Commercial

  $ 121      $ 24      $ 121      $ 24   

Commercial mortgages

    —         826       —         1,061  

Residential

    1,565       173       1,844       599  

Consumer

    152       44       515       717  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,838      $ 1,067      $ 2,480      $ 2,401   
 

 

 

   

 

 

   

 

 

   

 

 

 

The TDRs set forth in the table above increased our allowance for loan losses by $130,000 through allocation of a related reserve, and resulted in charge-offs of $41,000 during the six months ended June 30, 2014, compared a $28,000 increase and charge-offs of $363,000 for the same period in 2013.

6. REVERSE MORTGAGE AND RELATED ASSETS

Reverse mortgage related assets include reverse mortgage loans as of June 30, 2014. In addition, prior to the clean-up call discussed below, the SASCO 2002-RM’s Class “O” certificates and the BBB-rated tranche of this reverse mortgage security were also included.

Reverse mortgage loans are contracts in which a homeowner borrows against the equity in his/her home and receives cash in one lump sum payment, a line of credit, fixed monthly payments for either a specific term or for as long as the homeowner lives in the home, or a combination of these options. Since reverse mortgages are nonrecourse obligations, the loan repayments are generally limited to the sale proceeds of the borrower’s residence and the mortgage balance consists of cash advanced, interest compounded over the life of the loan and some may include a premium which represents a portion of the shared appreciation in the home’s value, if any, or a percentage of the value of the residence.

In July 2011, we purchased 100% of SASCO 2002-RM1’s Class “O” certificates, representing equity ownership of a reverse mortgage securitization trust, for $2.5 million. This securitization was created in 2002 through the purchase of reverse mortgage loans owned by us, as well as an additional lender. As part of this securitization we retained the BBB rated tranche of this securitization and held this instrument as a trading asset.

 

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Table of Contents

During the third quarter of 2013, we obtained the right to execute a clean-up call on the underlying collateral. This event triggered us to consolidate the assets and liabilities of the securitization trust, SASCO 2002 RM-1, on our Consolidated Statement of Condition in accordance with ASC 810, Consolidation. As a result of consolidation of the reverse mortgage trust during the third quarter of 2013, a deferred tax asset (“DTA”) was recorded at that time. However, because the reverse mortgage trust was not able to be consolidated for income tax purposes, a full valuation allowance was also recorded at that time on the DTA due to the uncertainty of realizing this benefit. On January 27, 2014, WSFS completed the legal call of the reverse mortgage trust bonds and the redemption of the trust’s preferred stockholders, eliminating this uncertainty since the reverse mortgage trust’s assets have now been combined with the Bank’s for tax purposes. As a result, WSFS removed the valuation allowance, and recorded a tax benefit of approximately $6.7 million during the first quarter 2014.

Our existing investment in reverse mortgages has been combined with the consolidated reverse mortgage loans for a total of $32.5 million at June 30, 2014. The average age of the borrowers is 92 years old and there is currently significant overcollateralization in the portfolio, as the realizable collateral value (the lower of collectible principal and interest, or appraised value and annual broker price opinion of the home) of $55.5 million well exceeds the outstanding book balance at June 30, 2014.

The carrying value of the reverse mortgages is calculated by a model that uses the income approach as described in ASC 820-10-35-32. The model is a present value cash flow model, consistent with ASC 820-10-55-5 which describes the components of a present value measurement. The model incorporates the projected cash flows of the loans (includes payouts and collections) and then discounts these cash flows using the effective yield required on the life of the portfolio to reduce the net investment to zero at the time the final reverse mortgage contract is liquidated. The inputs to the model reflect our expectations of what other market participants would use in pricing this asset in a current transaction and therefore is consistent with ASC 820 that requires an exit price methodology for determining fair value.

To determine the carrying value of these reverse mortgages as of June 30, 2014, we used a proprietary model and actual cash flow information to estimate future cash flows. There are three main drivers of cash flows 1) move-out rates, 2) house price appreciation HPA forecasts and 3) internal rate of return.

 

  1) Move-out rates – The projections incorporate actuarial estimates of contract termination using mortality tables published by the Office of the Actuary of the United States Bureau of Census, adjusted for expected prepayments and relocations.

 

  2) House Price Appreciation – Consistent with other reverse mortgage analyses from various market sources, we forecast a 2.5% increase in housing prices during 2014 and a 2.0% increase in the following year and thereafter. We believe this forecast continues to be appropriate given the nature of reverse mortgage collateral and historical under-performance to the broad housing market.

 

  3) Internal Rate of Return – As of June 30, 2014, the internal rate of return (IRR) of 15.55% was the effective yield required on the life of the portfolio to reduce the net investment to zero at the time the final reverse mortgage contract is liquidated.

As of June 30, 2014, the Company’s actuarially estimated cash payments to reverse mortgagors are as follows:

 

(in thousands)       
Year Ending       

Remaining in 2014

   $ 416  

2015

     749  

2016

     599  

2017

     473  

2018

     371  

Years 2019 - 2023

     894  

Years 2024 - 2028

     198  

Years 2029 - 2033

     33  

Thereafter

     4  
  

 

 

 

Total (1)

   $ 3,737  
  

 

 

 

 

(1) This table does not take into consideration cash inflow including payments from mortgagors or payoffs based on contractual terms. These figures are stated values not discounted values.

The amount of the contract value that would be forfeited if the Company were not to make cash payments to reverse mortgagors in the future is $6.9 million.

 

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Table of Contents

The future cash flows depend on the HPA assumptions. If the future changes in collateral value were assumed to be zero, income would decrease by $344,000 for the quarter ended June 30, 2014 with an IRR of 14.21%. If the future changes in collateral value were assumed to be reduced by 1%, income would decrease by $193,000 with an IRR of 14.80%.

The net present value of the projected cash flow depends on the IRR used. If the IRR increased by 1%, the net present value would increase by $293,000. If the IRR decreased by 1%, the net present value would decrease by $291,000.

7. GOODWILL AND INTANGIBLES

In accordance with FASB ASC 805, Business Combinations, and FASB ASC 350, Intangibles—Goodwill and Other, all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value.

During the six months ended June 30, 2014 we determined there were no events or other indicators of impairment as it relates to goodwill or other intangibles.

The following table shows the allocation of goodwill to our reportable operating segments for purposes of goodwill impairment testing:

 

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

December 31, 2013

   $ 27,101     $ —        $ 5,134      $ 32,235  

Changes in goodwill

     (135     —          —          (135
  

 

 

   

 

 

    

 

 

    

 

 

 

June 30, 2014

   $ 26,966     $ —        $ 5,134      $ 32,100  
  

 

 

   

 

 

    

 

 

    

 

 

 

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)  

June 30, 2014

       

Core deposits

   $ 4,370      $ (2,878   $ 1,492  

Other

     6,669        (1,967     4,702  
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 11,039      $ (4,845   $ 6,194  
  

 

 

    

 

 

   

 

 

 

December 31, 2013

       

Core deposits

   $ 4,370      $ (2,605   $ 1,765  

Other

     6,625        (1,647     4,978  
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 10,995      $ (4,252   $ 6,743  
  

 

 

    

 

 

   

 

 

 

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 six months ended June 30, 2014, we recognized amortization expense on other intangible assets of $547,000.

 

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The following presents the estimated amortization expense of intangibles:

 

(In Thousands)    Amortization
of Intangibles
 

Remaining in 2014

   $ 555  

2015

     1,146  

2016

     889  

2017

     742  

2018

     722  

Thereafter

     2,140  
  

 

 

 

Total

   $ 6,194  
  

 

 

 

 

8. ASSOCIATE (EMPLOYEE) BENEFIT PLANS

Postretirement Benefits

We share certain costs of providing health and life insurance benefits to eligible retired Associates and their eligible dependents. Previously, all Associates were eligible for these benefits if they reached normal retirement age while working for us. Effective March 31, 2014, we changed the eligibility of this plan to include only those Associates who have achieved ten years of service with us as of March 31, 2014. The change will impact our net periodic benefit cost; however, this impact was partially offset by a change in the assumptions used to determine these costs (discount rate of 4.5% compared to 4% at December 31, 2013).

We account for our obligations under the provisions of FASB ASC 715, Compensation – Retirement Benefits (“ASC 715”). ASC 715 requires 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, 2014 and 2013:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014     2013      2014     2013  
(In Thousands)                          

Service cost

   $ 10     $ 86      $ 98     $ 172  

Interest cost

     42       44        98       88  

Prior service cost amortization

     (30     —          (30     —    

Net loss recognition

     30        20        44       40  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 52     $ 150      $ 210     $ 300  
  

 

 

   

 

 

    

 

 

   

 

 

 

9. 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 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.

As a result of the consolidation for accounting purposes of the SASCO reverse mortgage securitization trust during 2013, a deferred tax asset (“DTA”) of approximately $4.9 million was recorded. In addition we recorded a $1.8 million deferred tax liability associated with our original investment in SASCO. However, because SASCO was not consolidated for income tax purposes, a full valuation allowance was also recorded on this DTA due to the uncertainty of its realization, as realization is dependent on future taxable income. On January 27, 2014 the separate company SASCO tax structure was eliminated, which permits consolidation within the Bank’s tax return filings on a prospective basis. At this date, the uncertainty surrounding the realization of the DTA was eliminated. Accordingly, we removed the $4.9 million valuation allowance and eliminated the $1.8 million deferred tax liability, which resulted in an overall income tax benefit of $6.7 million in the quarter ended March 31, 2014.

 

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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 June 30, 2014. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2010 through 2013 tax years are subject to examination as of June 30, 2014. No federal or state income tax return examinations are currently in process. We do not expect to record or realize any material unrecognized tax benefits during 2014.

 

10. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

ASC 820-10, Fair Value Measurements and Disclosure, 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.

 

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The table below presents the balances of assets measured at fair value as of June 30, 2014 (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

   $ —         $ 162,078      $ —         $ 162,078  

FNMA

     —           319,324        —           319,325  

FHLMC

     —           126,292        —           126,292  

GNMA

     —           84,410        —           84,409  

U.S. Government and agencies

     —           37,021        —           37,020  

State and political subdivisions

     —           112,581        —           112,582  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 841,706      $ —         $ 841,706  

Assets Measured at Fair Value on a Nonrecurring Basis

           

Other real estate owned

   $ —         $ —         $ 4,451      $ 4,451  

Loans held-for-sale

   $ —         $ 35,188      $ —         $ 35,188  

Impaired loans (collateral dependent)

     —           —           41,439        41,439  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ 35,188       $ 45,890      $ 81,078  

The table below presents the balances of assets measured at fair value as of December 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

   $ —         $ 97,557      $ —         $ 97,557  

FNMA

     —           367,128        —           367,128  

FHLMC

     —           124,495        —           124,495  

GNMA

     —           95,592        —           95,592  

U.S. Government and agencies

     —           32,158        —           32,158  

State and political subdivisions

     —           100,185        —         $ 100,185  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 817,115      $ —         $ 817,115  

Assets Measured at Fair Value on a Nonrecurring Basis

           

Other real estate owned

   $ —         $ —         $ 4,532      $ 4,532  

Impaired loans

     —           —           38,379        38,379  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ —         $ 42,911      $ 42,911  

 

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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 June 30, 2014, securities classified as available for sale are reported at fair value using Level 2 inputs. As a result of the consolidation of the reverse mortgage trust, there were no securities with Level 3 inputs as of June 30, 2014. Included in the Level 2 total are approximately $37.0 million in Federal Agency debentures, $692.1 million in Federal Agency MBS and $112.6 million in municipal bonds. 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.

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 3 inputs based on appraisals obtained from third parties.

Loans held-for-sale. During the second quarter of 2014 we elected to record loans held-for-sale at their fair value. The fair value was estimated using Level 3 inputs based on value information provided by brokers.

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.

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a net amount of $41.4 million and $38.4 million at June 30, 2014 and December 31, 2013, respectively. The valuation allowance on impaired loans was $4.4 million as of June 30, 2014 and $4.9 million as of December 31, 2013.

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” in Note 10 to the Consolidated Financial Statements.

 

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Table of Contents

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.

Reverse Mortgage Related Assets: For additional information on these reverse mortgage related assets, see Note 6, Reverse Mortgage Related Assets, to the Consolidated Financial Statements.

Demand Deposits, Savings Deposits and Time Deposits: The fair value deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.

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

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.

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 not assignable by either us or the borrower, they only have value to us and the borrower.

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

 

     Fair Value    June 30, 2014      December 31, 2013  
     Measurement    Book Value      Fair Value      Book Value      Fair Value  
(In Thousands)                                 

Financial assets:

              

Cash and cash equivalents

   Level 1    $ 475,189      $ 475,189      $ 484,426      $ 484,426  

Investment securities

   See previous table      841,706        841,706        817,115        817,115  

Loans held for sale

   Level 3      35,188        35,188        31,491        31,491  

Loans, net

   Level 3      2,993,361        2,964,818        2,904,976        2,871,499  

Reverse mortgage loans

   Level 3      32,543        32,543        37,328        37,328  

Stock in Federal Home Loan Bank of Pittsburgh

   Level 2      37,587        37,587        35,869        35,869  

Accrued interest receivable

   Level 2      11,004        11,004        10,798        10,798  

Financial liabilities:

              

Deposits

   Level 2      3,153,329        2,962,149        3,186,942        2,982,420  

Borrowed funds

   Level 2      984,866        986,520        903,831        904,804  

Standby letters of credit

   Level 3      185        185        248        248  

Accrued interest payable

   Level 2      2,381        2,381        838        838  

The estimated fair value of our off-balance sheet financial instruments is as follows:

 

     June 30,
2014
     Dec. 31,
2013
 
(in thousands)              

Off-balance sheet instruments:

   $ —         $ —     

 

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Table of Contents
11. SEGMENT INFORMATION

In accordance with 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. 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. There is one segment for each of WSFS Bank, Cash Connect, and Trust and Wealth Management.

The WSFS Bank segment provides financial products to commercial and retail customers through its 52 offices located in Delaware (42), Pennsylvania (8) 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 Trust and Wealth Management division provides a broad array of fiduciary, investment management, credit and deposit products to clients through four business lines. 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 $646 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 $10.0 billion in assets under management and 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

Segment information for the three months and six months ended June 30, 2014 and 2013 follows:

For the three months ended June 30, 2014:

 

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

Statement of Operations

          

External customer revenues:

          

Interest income

   $ 37,480     $ —        $ 1,933      $ 39,413  

Noninterest income

     8,778       6,320        4,525        19,623  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total external customer revenues

     46,258       6,320        6,458        59,036  
  

 

 

   

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

          

Interest income

     834       —          1,342        2,176  

Noninterest income

     1,711       204        27        1,942  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,545       204        1,369        4,118  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total revenue

     48,803       6,524        7,827        63,154  
  

 

 

   

 

 

    

 

 

    

 

 

 

External customer expenses:

          

Interest expense

     3,831       —          105        3,936  

Noninterest expenses

     28,610       3,882        3,026        35,518  

Provision for loan loss

     (201     —          251        50  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total external customer expenses

     32,240       3,882        3,382        39,504  
  

 

 

   

 

 

    

 

 

    

 

 

 

Inter-segment expenses

          

Interest expense

     1,342       328        506        2,176  

Noninterest expenses

     231       593        1,118        1,942  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,573       921        1,624        4,118  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     33,813       4,803        5,006        43,622  
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 14,990     $ 1,721      $ 2,821      $ 19,532  

Provision for income taxes

             6,807  
          

 

 

 

Consolidated net income

           $ 12,725  
          

 

 

 

Capital expenditures

   $ 815     $ 33      $ —        $ 848  
  

 

 

   

 

 

    

 

 

    

 

 

 

As of June 30, 2014:

          

Statement of Condition

          

Cash and cash equivalents

   $ 89,284     $ 383,072      $ 2,833      $ 475,189  

Other segment assets

     3,941,531       2,401        193,969        4,137,901  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,030,815     $ 385,473      $ 196,802      $ 4,613,090  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the three months ended June 30, 2013:

 

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

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 33,961      $ —         $ 1,921      $ 35,882  

Noninterest income

     9,333        6,025        4,181        19,539  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     43,294        6,025        6,102        55,421  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     914        —           1,368        2,282  

Noninterest income

     1,701        223        28        1,952  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,615        223        1,396        4,234  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     45,909        6,248        7,498        59,655  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     3,693        —           133        3,826  

Noninterest expenses

     26,731        3,167        3,254        33,152  

Provision for loan loss

     1,535        —           145        1,680  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     31,959        3,167        3,532        38,658  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,368        405        509        2,282  

Noninterest expenses

     251        538        1,163        1,952  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,619        943        1,672        4,234  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     33,578        4,110        5,204        42,892  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 12,331      $ 2,138      $ 2,294      $ 16,763  

Provision for income taxes

              5,855  
           

 

 

 

Consolidated net income

            $ 10,908  
           

 

 

 

Capital expenditures

   $ 272      $ 277      $ —         $ 549  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013:

           

Statement of Condition

           

Cash and cash equivalents

   $ 73,017      $ 408,096      $ 3,313      $ 484,426  

Other segment assets

     3,838,525        1,965        190,847        4,031,337  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 3,911,542      $ 410,061      $ 194,160      $ 4,515,763  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the six months ended June 30, 2014:

 

     WSFS Bank      Cash Connect      Trust &
Wealth

Management
     Total  
     (In Thousands)  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 73,401      $ —        $ 3,797      $ 77,198  

Noninterest income

     17,173        12,334        8,480        37,987  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     90,574        12,334        12,277        115,185  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,665        —          2,763        4,428  

Noninterest income

     3,449        397        53        3,899  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     5,114        397        2,816        8,327  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     95,688        12,731        15,093        123,512  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     7,461        —          216        7,677  

Noninterest expenses

     56,222        7,432        6,042        69,696  

Provision for loan loss

     2,122        —          558        2,680  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     65,805        7,432        6,816        80,053  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     2,763        659        1,006        4,428  

Noninterest expenses

     450        1,179        2,270        3,899  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     3,213        1,838        3,276        8,327  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     69,018        9,270        10,092        88,380  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 26,670      $ 3,461      $ 5,001      $ 35,132  

Provision for income taxes

              5,496  
           

 

 

 

Consolidated net income

            $ 29,636  
           

 

 

 

Capital expenditures

   $ 1,293      $ 89      $ 3      $ 1,385  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2014:

           

Statement of Condition

           

Cash and cash equivalents

   $ 89,284      $ 383,072      $ 2,833      $ 475,189  

Other segment assets

     3,941,531        2,401        193,969        4,137,901  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,030,815      $ 385,473      $ 196,802      $ 4,613,090  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the six months ended June 30, 2013

 

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

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 67,561      $ —         $ 3,912      $ 71,473  

Noninterest income

     18,560        11,052        8,001        37,613  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     86,121        11,052        11,913        109,086  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,817        —           2,799        4,616  

Noninterest income

     3,351        423        54        3,828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     5,168        423        2,853        8,444  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     91,289        11,475        14,766        117,530  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     7,533        —           304        7,837  

Noninterest expenses

     53,161        6,159        6,202        65,522  

Provision for loan loss

     3,781        —           130        3,911  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     64,475        6,159        6,636        77,270  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     2,799        776        1,041        4,616  

Noninterest expenses

     477        1,088        2,263        3,828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     3,276        1,864        3,304        8,444  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     67,751        8,023        9,940        85,714  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

   $ 23,538      $ 3,452      $ 4,826      $ 31,816  

Provision for income taxes

              11,168  
           

 

 

 

Consolidated net income

            $ 20,648  
           

 

 

 

Capital expenditures

   $ 1,045      $ 460      $ —         $ 1,505  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013:

           

Statement of Condition

           

Cash and cash equivalents

   $ 73,017      $ 408,096      $ 3,313      $ 484,426  

Other segment assets

     3,838,525        1,965        190,847        4,031,337  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 3,911,542      $ 410,061      $ 194,160      $ 4,515,763  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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12. 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 GSEs such as FHLMC or to wholesale lenders. 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. Rate-locked loan commitments we intend to sell in the secondary market and related sales commitments are accounted for as derivatives under the guidance promulgated in FASB ASC Topic 815, Derivatives and Hedging.

We generally do not sell loans with recourse, except for 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 include our repurchase of the loans. Repurchases and losses have been rare and no provision is made for losses at the time of sale. There were two repurchases totaling $354,000 for the six months ended June 30, 2014.

Swap Guarantees. We entered into agreements with three unrelated 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. These swap guarantees are accounted for as credit derivatives under FASB ASC Topic 815, Derivatives and Hedging.

At June 30, 2014 there were 104 variable-rate swap transactions between third party financial institutions and our customers, compared to 101 at December 31, 2013. The initial notional aggregated amount was approximately $451.4 million at June 30, 2014 compared to $423.9 million at December 31, 2013. At June 30, 2014 maturities ranged from approximately one to eleven years. The aggregate market value of these swaps to customers was a liability of $20.9 million at June 30, 2014 and $17.8 million at December 31, 2013. We had reserves of $70,000 for the swap guarantees as of June 30, 2014 and December 31, 2013. The methodology to determine reserves for swap guarantees is consistent with the ALLL methodology as described in Note 5 to the Consolidated Financial Statements.

13. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) includes unrealized gains and losses on available-for-sale investments as well as unrecognized prior service costs, transition costs and actuarial gains and losses on defined benefit pension plans which reflects changes made to the post retirement benefit obligation for retiree health and life insurance. These changes were effective March 31, 2014 (see footnote 8 “Associate (Employee) Benefit Plans” for further information). Changes to other accumulated other comprehensive income (loss) 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.

 

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Changes to accumulated other comprehensive income (loss) by component are shown net of taxes in the following tables for the period indicated:

 

(in thousands)    Net unrealized
(losses) gains on
investment

securities
available-for-sale
    Net unrealized
losses on defined
benefit

pension plan
    Total  

Balance, March 31, 2014

   $ (12,035   $ (472   $ (12,507

Other comprehensive income (loss) before reclassifications

     9,678       60       9,738  

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

     (226     —         (226
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     9,452       60       9,512  
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ (2,583   $ (412   $ (2,995
  

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 7,569     $ (472   $ 7,097  

Other comprehensive income (loss) before reclassifications

     (19,316     —         (19,316

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

     (562     —         (562
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (19,878     —         (19,878
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ (12,309   $ (472   $ (12,781
  

 

 

   

 

 

   

 

 

 

 

(in thousands)    Net unrealized
(losses) gains on
investment
securities

available-for-sale
    Net unrealized
losses on
defined benefit
pension plan
    Total  

Balance, December 31, 2013

   $ (20,822   $ (472   $ (21,294

Other comprehensive income (loss) before reclassifications

     18,824       60       18,884  

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

     (585     —         (585
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     18,239       60       18,299  
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ (2,583   $ (412   $ (2,995
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

   $ 13,415     $ (472   $ 12,943  

Other comprehensive income (loss) before reclassifications

     (24,143     —         (24,143

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

     (1,581     —         (1,581
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (25,724     —       $ (25,724
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ (12,309   $ (472   $ (12,781
  

 

 

   

 

 

   

 

 

 

 

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

 

     Three Months Ended
June 30,
   

Affected line item in Statements of Operations

(in thousands)    2014     2013      

Securities available-for-sale:

      

Realized gains on securities transactions

   $ 365     $ 906     Securities gains, net

Income taxes

     (139     (344   Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 226     $ 562    

Amortization of Defined Benefit Pension Items:

      

Prior service costs

   $ 919     $ —      

Transition obligation

     245       —      

Actuarial losses

     (1,068     —      
  

 

 

   

 

 

   

Total before tax

   $ 96     $ —       Salaries, benefits and other compensation

Income taxes

     (36     —       Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 60     $ —      
  

 

 

   

 

 

   

Total reclassifications

   $ 166     $ 562    
  

 

 

   

 

 

   
     Six Months Ended
June 30,
   

Affected line item in Statements of Operations

     2014     2013      

Securities available-for-sale:

      

Realized gains on securities transactions

   $ 943     $ 2,550     Securities gains, net

Income taxes

     (358     (969   Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 585     $ 1,581    

Amortization of Defined Benefit Pension Items:

      

Prior service costs

   $ 919     $ —      

Transition obligation

     245       —      

Actuarial losses

     (1,068     —      
  

 

 

   

 

 

   

Total before tax

   $ 96     $ —       Salaries, benefits and other compensation

Income taxes

     (36     —       Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 60     $ —      
  

 

 

   

 

 

   

Total reclassifications

   $ 525     $ 1,581    
  

 

 

   

 

 

   

 

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14. LEGAL PROCEEDINGS

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

Based upon available information we believe the estimate of the aggregate range of reasonably possible losses for this legal proceeding was from approximately $0 to approximately $5.0 million at June 30, 2014. Costs of litigation were covered by insurance however, such costs have exceeded the limits of insurance coverage for this case.

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

ITEM 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, Wilmington Savings Fund Society, FSB, or 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 broad fiduciary powers. A fixture in the community, WSFS Bank has been in operation for more than 182 years. In addition to its focus on stellar customer service, WSFS 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 $2.5 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 52 offices located in Delaware (42), Pennsylvania (8), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches.

In July 2013 we added two new divisions to WSFS Bank with the purchase Array Financial Group, Inc., a mortgage banking company, and a related entity, Arrow Land Transfer Company, an abstract and title company. Additionally, during late 2013, we announced that we entered into an Agreement and Plan of Reorganization, with First Wyoming Financial Corporation, the parent company of The First National Bank of Wyoming (“First Wyoming”).This transaction has received all required regulatory and stockholder approvals and is expected to close in September 2014.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages more than $509 million in vault cash in over 15,000 ATMs nationwide and also provides online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates over 460 ATMs for WSFS Bank, which has, by far, the largest branded ATM network in Delaware.

 

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

The Trust and Wealth Management division provides a broad array of fiduciary, investment management, credit and deposit products to clients through four business lines. 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 $645 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 $10 billion in assets under management and 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 one consolidated subsidiary, WSFS Bank. We also have one unconsolidated affiliate, WSFS Capital Trust III, or the Trust. WSFS Bank has two wholly-owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services LLC, or Monarch.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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; additional loan losses and impairment of the collectability of loans; 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; rules and regulations issued by the Consumer Financial Protection Bureau or other regulators which might adversely impact our business model or products and services; stresses in the real estate markets, including 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; 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; changes in the speed of loan prepayments by our customers and loan origination or sales volumes; 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, 2013 and other documents filed by us with the Securities and Exchange Commission (“SEC”) from time to time. Forward looking statements are as of the date they are made, and we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of us.

 

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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 2014, 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.

See further discussion of these critical accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2013.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $97.3 million or 2.16% to $4.6 billion during the six months ended June 30, 2014. Included in this increase was a $92.1 million, or 3%, increase in net loans (including loans held for sale), and a $25.0 million increase in investment securities. Partially offsetting these increases was a $9.3 million decrease in cash and cash equivalents.

Total liabilities increased $48.4 million during the six months ended June 30, 2014 to $4.2 billion. This increase was primarily the result of an increase in Federal Home Loan Bank advances of $120.3 million, or 19%. Federal Home Loan Bank Advances were used to fund a $22.0 million decrease in reverse mortgage trust bonds payable related to the call of those bonds, a $33.6 million decrease in total deposits, mainly due to the purposeful decline in time and temporary trust deposits during the period and an $11.0 million decrease in Fed funds purchased and securities sold under agreements to repurchase. Excluding the effects of the temporary trust deposits at December 31, 2013, total deposits increased $81.4 million during the six months ended June 30, 2014.

Capital Resources

Stockholders’ equity increased $48.9 million between December 31, 2013 and June 30, 2014. This increase was primarily due to net income of $29.6 million during the six months ended June 30, 2014 combined with a $18.3 million increase (net of tax) in the value of our available for sale securities portfolio. Partially offsetting these increases were payments of dividends on our common stock of $2.1 million during the six months ended June 30, 2014. Tangible common equity (a non-GAAP financial measure) increased $49.6 million from $344.1 million at December 31, 2013 to $393.7 million at June 30, 2014.

Tangible common book value per share of common stock (a non-GAAP financial measure) was $44.11 at June 30, 2014, an increase of $5.43 or 14%, from $38.68 reported at December 31, 2013. Book value per share of common stock was $48.40 at June 30, 2014, an increase of $5.34 from $43.06 reported at December 31, 2013. See “Reconciliation of Non-GAAP Measurement to GAAP” in Item 2 of this quarterly report on Form 10-Q.

Below is a table comparing WSFS Bank’s consolidated capital position to the minimum regulatory requirements as of June 30, 2014:

 

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

Total Capital (to Risk-Weighted Assets)

   $ 536,655         14.68   $ 292,422         8.00   $ 365,528         10.00

Core Capital (to Adjusted Total Assets)

     494,460        10.82       182,842        4.00       228,552        5.00  

Tangible Capital (to Tangible Assets)

     494,460        10.82       68,566        1.50       N/A         N/A   

Tier 1 Capital (to Risk-Weighted Assets)

     494,460        13.53       146,211        4.00       219,317        6.00  

 

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Under guidelines issued by banking regulators, savings institutions such as WSFS 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.

The Federal Deposit Insurance Corporation Act (FDICIA), as well as other requirements, established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution’s capital tier depends upon its capital levels in relating to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.

At June 30, 2014, WSFS Bank was in compliance with regulatory capital requirements and was considered a “well-capitalized” institution. WSFS Bank’s core capital ratio of 10.82%, Tier 1 capital ratio of 13.53% and total risk based capital ratio of 14.68%, 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 $19.6 million in cash to support potential dividends, acquisitions and strategic growth plans.

Liquidity

We manage our liquidity 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.

We have ready access to several sources to fund growth and meet our liquidity needs. Among these are: net income (to the extent in cash), retail and commercial 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 MBS 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. We believe these sources are sufficient to maintain required and prudent levels of liquidity.

During the six months ended June 30, 2014, cash and cash equivalents decreased $9.2 million to $475 million. This decrease was primarily a result of: $92 million increase in net loans ,and a $33.6 million decrease in total deposits. Offsetting these decreases in cash were: $120.3 million from the net repayments of FHLB Advances and a $27.5 million increase in cash provided by operations.

 

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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 commercial, mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of 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.

 

     June 30,
2014
    December 31,
2013
 
     (In Thousands)  

Nonaccruing loans:

    

Commercial

   $ 3,511      $ 4,305  

Owner-occupied commercial

     4,928        5,197  

Consumer

     3,746        3,293  

Commercial mortgages

     13,391        8,565  

Residential mortgages

     8,485        8,432  

Construction

     —          1,158  
  

 

 

   

 

 

 

Total nonaccruing loans

     34,061        30,950  

Assets acquired through foreclosure

     4,451        4,532  

Troubled debt restructuring (accruing)

     11,779        12,332  
  

 

 

   

 

 

 

Total nonperforming assets

   $ 50,291      $ 47,814  
  

 

 

   

 

 

 

Past due loans (1):

    

Residential mortgages

     —          533  
  

 

 

   

 

 

 

Total past due loans

   $ —        $ 533  
  

 

 

   

 

 

 

Ratios:

    

Allowance for loan losses to total loans (2)

     1.36     1.40

Nonperforming assets to total asset

     1.09       1.06  

Nonaccruing loans to total loans (2)

     1.11       1.05  

Loan loss allowance to nonaccruing loans

     121.49       133.26  

Loan loss allowance to total nonperforming assets

     82.28       86.26  

 

(1)  Accruing Loans only; Nonaccruing TDR’s are included in their respective categories of nonaccruing loans.
(2)  Total loans exclude loans held for sale.

Nonperforming assets increased $2.5 million between December 31, 2013 and June 30, 2014. As a result, non-performing assets as a percentage of total assets increased from 1.06% at December 31, 2013 to 1.09% at June 30, 2014. New nonperforming loans increased by $2.4 million during the second quarter, increasing total new nonperforming loans to $17.1 million between December 31, 2013 and June 30, 2014. The addition of new nonperforming loans was offset by a significant $10.6 million improvement in collections and an additional $3.9 million written down or charged-off. As a result, nonperforming assets decreased by $5.1 million during the quarter.

 

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

 

     For the six
months ended
June 30, 2014
    For the year
ended
December 31, 2013
 
     (In Thousands)  

Beginning balance

   $ 47,814     $ 62,475  

Additions

     17,101       30,367  

Collections

     (10,613     (29,725

Transfers to accrual

     (96     (1,702

Charge-offs/write-downs, net

     (3,915     (13,601
  

 

 

   

 

 

 

Ending balance

   $ 50,291     $ 47,814  
  

 

 

   

 

 

 

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 RATE 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 June 30, 2014, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $0.7 million. Our interest-sensitive liabilities as a percentage of interest-sensitive assets within the one-year window increased from 94% at December 31, 2013 to 100.03% at June 30, 2014. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 0.01% at June 30, 2014 from -3.28% at December 31, 2013. The low level of sensitivity reflects our continuing efforts to effectively manage interest rate risk.

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 June 30, 2014 and December 31, 2013:

 

      June 30, 2014     December 31, 2013  
% 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        4     12.75     -1     11.78
  +200        1     12.88     -2     11.97
  +100        -2     12.79     -3     12.13
  —          0     12.73     —       12.25
  -100       -1     12.13     -1     11.92
  -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 June 30, 2014 given the low absolute level of interest rates at that time.

 

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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 AND SIX MONTHS ENDED JUNE 30, 2014

Results of Operations

We recorded net income of $12.7 million for the quarter ended June 30, 2014, a 17% increase over $10.9 million for the quarter ended June 30, 2013. Net income allocable to common shareholders (after preferred stock dividends) was $12.7 million, or $1.39 per diluted common share, for the quarter ended June 30, 2014, or a 20% increase in EPS compared to net income allocable to common stockholders of $10.3 million, or $1.16 per diluted common share, for the quarter ended June 30, 2013. Revenues grew at a strong pace with increases in net interest income and noninterest income. Net interest income increased $3.4 million reflecting the growth in our loan portfolio as well as the benefit from the consolidation of reverse mortgage assets late in the third quarter of 2013 and continued growth and improvement in our yield on investments. Noninterest income increased as growth in our fee business outpaced decreased securities gains. Provision for loan losses decreased $1.6 million when compared to the second quarter of 2013 as a result of improved credit quality. Noninterest expenses also grew in support of revenue growth for the second quarter of 2014 to $35.5 million compared to $33.2 million for the second quarter of 2013. Contributing to this increase was salaries and benefits expense due in part to the addition of Array & Arrow associates combined with increased legal and professional fees due to litigation and continued corporate development costs.

Net income for the first six months of 2014 was $29.6 million as compared to $20.6 million for the first six months of 2013. Net income allocable to common stockholders was $29.6 million, or $3.24 per diluted share of common stock, compared to net income allocable to common stockholders of $19.3 million, or $2.18 per diluted share of common stock, for the six months ended June 30, 2013, a 49% increase in EPS. For the first six months of 2014, we directly benefited from a one-time tax benefit of approximately $6.7 million due to the legal call of our reverse mortgage trust bonds which were previously consolidated on WSFS’ balance sheet. The remainder of the increase in net income for the first six months of 2014 was consistent with the quarterly results attributable to revenue growth that exceeded noninterest expenses.

 

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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 June 30,  
     2014     2013  
     Average
Balance
    Interest      Yield/
Rate (1)
    Average
Balance
    Interest      Yield/
Rate (1)
 
(Dollars In Thousands)                                       

Assets:

              

Interest-earning assets:

              

Loans (2) (3):

              

Commercial real estate loans

   $ 850,719     $ 9,585        4.51   $ 793,173     $ 9,340        4.71

Residential real estate loans (4)

     232,916       2,281        3.92       252,777       2,550        4.04  

Commercial loans

     1,632,784       18,001        4.39       1,505,390       16,892        4.48  

Consumer loans

     310,226       3,452        4.46       285,548       3,326        4.67  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     3,026,645       33,319        4.42       2,836,888       32,108        4.55  

Mortgage-backed securities (5) (6)

     714,551       3,564        2.00       719,548       3,117        1.68  

Investment securities (5) (6)

     146,139       814        3.35       83,870       311        2.00  

Reverse mortgages and related assets

     34,463       1,368        15.88       18,463       324        7.02  

Other interest-earning assets

     35,629       348        3.92       35,157       22        0.25  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     3,957,427       39,413        4.04       3,693,926       35,882        3.91  
  

 

 

   

 

 

      

 

 

   

 

 

    

Allowance for loan losses

     (42,332          (43,470     

Cash and due from banks

     78,476            78,747       

Cash in non-owned ATMs

     364,461            435,150       

Bank-owned life insurance

     63,374            62,971       

Other noninterest-earning assets

     127,708            118,174       
  

 

 

        

 

 

      

Total assets

   $ 4,549,114          $ 4,345,498       
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity:

              

Interest-bearing liabilities:

              

Interest-bearing deposits:

              

Interest-bearing demand

   $ 632,160     $ 148        0.09   $ 543,544     $ 128        0.09

Money market

     751,559       335        0.18       778,705       259        0.13  

Savings

     403,921       62        0.06       396,009       50        0.05  

Customer time deposits

     451,372       980        0.87       540,952       1,229        0.91  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing customer deposits

     2,239,012       1,525        0.27       2,259,210       1,666        0.30  

Brokered certificates of deposit

     230,366       189        0.33       183,163       155        0.34  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     2,469,378       1,714        0.28       2,442,373       1,821        0.30  

FHLB of Pittsburgh advances

     684,295       661        0.38       554,455       451        0.32  

Trust preferred borrowings

     67,011       330        1.95       67,011       337        1.99  

Reverse mortgage bonds payable

     —         —          —         —         —          —    

Senior Debt

     55,000       941        6.84       55,000       944        6.86  

Other borrowed funds (7)

     148,910       290        0.78       141,063       273        0.77  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     3,424,594       3,936        0.46       3,259,902       3,826        0.47  
  

 

 

   

 

 

      

 

 

   

 

 

    

Noninterest-bearing demand deposits

     671,384            633,467       

Other noninterest-bearing liabilities

     30,112            27,984       

Stockholders’ equity

     423,024            424,145       
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 4,549,114          $ 4,345,498       
  

 

 

        

 

 

      

Excess of interest-earning assets over interest-bearing liabilities

   $ 532,833          $ 434,024       
  

 

 

        

 

 

      

Net interest and dividend income

     $ 35,477          $ 32,056     
    

 

 

        

 

 

    

Interest rate spread

          3.58          3.44
       

 

 

        

 

 

 

Net interest margin

          3.64          3.50
       

 

 

        

 

 

 

 

(1) Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes residential mortgage loans HFS.
(5) Includes securities available-for-sale at fair value.
(6) Average Balances and related yield are calculated using the fair value of available-for-sale securities.
(7) Includes federal funds purchased and securities sold under agreement to repurchase.

 

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     Six Months Ended June 30,  
     2014     2013  
     Average
Balance
    Interest      Yield/
Rate (1)
    Average
Balance
    Interest      Yield/
Rate (1)
 
(Dollars In Thousands)                                       

Assets:

              

Interest-earning assets:

              

Loans (2) (3):

              

Commercial real estate loans

   $ 842,503     $ 18,871        4.48   $ 777,428     $ 18,266        4.70

Residential real estate loans (4)

     236,673       4,553        3.85       256,533       5,176        4.04  

Commercial loans

     1,617,284       35,221        4.36       1,497,242       33,443        4.47  

Consumer loans

     306,280       6,876        4.53       284,866       6,675        4.73  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans