10-Q 1 d795904d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 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 November 1, 2014.

 

Common Stock, par value $.01 per share   9,398,662
(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 Nine Months Ended September 30, 2014 and 2013

     3   
  

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September  30, 2014 and 2013

     5   
  

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

     6   
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

     8   
  

Notes to the Consolidated Financial Statements for the Three and Nine Months Ended September  30, 2014 and 2013

     10   
Item 2.   

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

     42   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     54   
Item 4.   

Controls and Procedures

     54   
PART II. Other Information   
Item 1.   

Legal Proceedings

     54   
Item 1A.   

Risk Factors

     54   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     54   
Item 3.   

Defaults upon Senior Securities

     54   
Item 4.   

Mine Safety Disclosure

     54   
Item 5.   

Other Information

     54   
Item 6.   

Exhibits

     55   

Signatures

        56   
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 September 30,      Nine Months Ended September 30,  
     2014      2013      2014      2013  
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Interest income:

           

Interest and fees on loans

   $ 34,850      $ 32,708      $ 100,371      $ 96,268  

Interest on mortgage-backed securities

     3,317        3,159        10,130        9,665  

Interest on reverse mortgage related assets

     1,323        616        3,917        1,523  

Interest and dividends on investment securities

     837        546        2,443        999  

Other interest income

     472        87        1,136        134  
  

 

 

    

 

 

    

 

 

    

 

 

 
     40,799        37,116        117,997        108,589  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     1,823        1,673        5,193        5,513  

Interest on Federal Home Loan Bank advances

     663        482        1,850        1,376  

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

     268        244        783        738  

Interest on trust preferred borrowings

     332        339        988        1,005  

Interest on senior debt

     941        943        2,824        2,830  

Interest on bonds payable

     —          —          15        —    

Interest on other borrowings

     25        29        76        85  
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,052        3,710        11,729        11,547  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     36,747        33,406        106,268        97,042  

Provision for loan losses

     333        1,969        3,013        5,880  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     36,414        31,437        103,255        91,162  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Credit/debit card and ATM income

     6,219        6,374        17,995        18,231  

Deposit service charges

     4,477        4,407        13,092        12,637  

Investment management and fiduciary revenue

     4,332        3,836        12,453        11,623  

Reverse mortgage consolidation gain

     —          3,801        —          3,801  

Mortgage banking activities, net

     1,229        907        3,066        2,837  

Loan fee income

     466        419        1,406        1,401  

Bank owned life insurance income

     185        74        467        162  

Security gains, net

     36        306        979        2,856  

Other income

     3,360        2,618        8,833        6,807  
  

 

 

    

 

 

    

 

 

    

 

 

 
     20,304        22,742        58,291        60,355  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries, benefits and other compensation

     19,292        17,648        56,434        53,086  

Occupancy expense

     3,456        3,385        10,754        10,169  

Equipment expense

     2,063        2,044        5,610        5,808  

Data processing and operations expenses

     1,609        1,548        4,611        4,291  

Professional fees

     1,762        673        5,083        2,701  

FDIC expenses

     666        959        2,011        3,067  

Loan workout and OREO expenses

     664        492        1,919        1,432  

Marketing expense

     643        643        1,584        1,768  

Corporate development

     2,620        193        3,032        193  

Other operating expense

     6,682        5,224        18,115        15,816  
  

 

 

    

 

 

    

 

 

    

 

 

 
     39,457        32,809        109,153        98,331  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     17,261        21,370        52,393        53,186  

Income tax provision

     5,848        7,210        11,344        18,378  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     11,413        14,160        41,049        34,808  

Dividends on preferred stock and accretion of discount

     —          332        —          1,633  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocable to common stockholders

   $ 11,413      $ 13,828      $ 41,049      $ 33,175  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 1.26      $ 1.57      $ 4.58      $ 3.77  

Diluted

   $ 1.23      $ 1.54      $ 4.46      $ 3.72  

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (Unaudited)  
     (In Thousands)  

Net Income

   $ 11,413     $ 14,160     $ 41,049     $ 34,808  

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 ($490), ($1,795), $10,688 and ($16,532) respectively

     (778     (3,106     18,046       (27,249

Less: reclassification adjustment for net losses (gains) on sales realized in net income, net of tax benefit (expense) of ($13), ($116), ($371) and (1,085) respectively

     (23     (190     (608     (1,771
  

 

 

   

 

 

   

 

 

   

 

 

 
     (801     (3,296     17,438       (29,020

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 $3, $0, $39 and $0 respectively

     5       —         65       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (796     (3,296     17,503       (29,020
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 10,617     $ 10,864     $ 58,552     $ 5,788  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

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

Assets

    

Cash and due from banks

   $ 95,473     $ 94,734  

Cash in non-owned ATMs

     375,555       389,360  

Interest-bearing deposits in other banks

     273       332  
  

 

 

   

 

 

 

Total cash and cash equivalents

     471,301       484,426  

Investment securities, available-for-sale acquired and sold securities

     843,316       817,115  

Loans held-for-sale

     26,324       31,491  

Loans, net of allowance for loan losses of $39,484 at September 30, 2014 and $41,244 at December 31, 2013

     3,141,509       2,904,976  

Reverse mortgage related assets

     29,392       37,328  

Bank-owned life insurance

     76,276       63,185  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     29,782       35,869  

Assets acquired through foreclosure

     6,307       4,532  

Accrued interest receivable

     11,435       10,798  

Premises and equipment

     34,979       35,178  

Goodwill

     48,748       32,235  

Intangible assets

     9,428       6,743  

Other assets

     53,931       51,887  
  

 

 

   

 

 

 

Total assets

   $ 4,782,728     $ 4,515,763  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 814,203     $ 650,256  

Interest-bearing demand

     689,544       638,403  

Money market

     823,781       887,715  

Savings

     405,157       383,731  

Time

     263,365       236,965  

Jumbo certificates of deposit – customer

     264,893       221,145  
  

 

 

   

 

 

 

Total customer deposits

     3,260,943       3,018,215  

Brokered deposits

     243,167       168,727  
  

 

 

   

 

 

 

Total deposits

     3,504,110       3,186,942  

Federal funds purchased and securities sold under agreements to repurchase

     100,000       97,000  

Federal Home Loan Bank advances

     517,160       638,091  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     55,000       55,000  

Other borrowed funds

     18,068       24,739  

Reverse mortgage trust bonds payable

     —         21,990  

Accrued interest payable

     3,442       838  

Other liabilities

     41,613       41,102  
  

 

 

   

 

 

 

Total liabilities

     4,306,404       4,132,713  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock $0.01 par value, 20,000,000 shares authorized; issued 18,523,661 at September 30, 2014 and 18,476,003 at December 31, 2013

     185       185  

Capital in excess of par value

     204,673       178,477  

Accumulated other comprehensive loss

     (3,791     (21,294

Retained earnings

     511,804       473,962  

Treasury stock at cost, 9,127,908 shares at September 30, 2014 and 9,580,569 at December 31, 2013

     (236,547     (248,280
  

 

 

   

 

 

 

Total stockholders’ equity

     476,324       383,050  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,782,728     $ 4,515,763  
  

 

 

   

 

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine months ended
September 30,
 
     2014     2013  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 41,049     $ 34,808  

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

    

Provision for loan losses

     3,013       5,880  

Depreciation of premises and equipment

     4,436       4,329  

Amortization, net

     8,201       8,575  

Increase in accrued interest receivable

     (637     (181

Decrease (increase) in other assets

     835       (6,118

Origination of loans held-for-sale

     (174,469     (178,819

Proceeds from sales of loans held-for-sale

     180,794       191,831  

Gain on mortgage banking activities, net

     (3,066     (2,837

Gain on market-to-market adjustment on trading securities

     —         125  

Gain on sale of securities, net

     (979     (2,981

Reverse mortgage consolidation gain

     —         (3,801

Stock-based compensation expense

     3,637       2,294  

Excess tax benefits from share-based payment arrangements

     (551     (266

Increase in accrued interest payable

     2,373       2,155  

Decrease in other liabilities

     (2,324     (9,488

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

     91       203  

Deferred income tax (benefit) expense

     (5,198     (8 )

Increase in value of bank-owned life insurance

     (467     (162

Increase in capitalized interest for reverse mortgages, net

     (4,184     (802
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 52,554     $ 44,737  
  

 

 

   

 

 

 

Investing activities:

    

Maturities and Calls of investment securities

     2,335       510  

Sale of investment securities available-for-sale

     200,734       239,383  

Purchase of investment securities available-for-sale

     (217,617     (255,277

Repayments of investment securities available-for-sale

     54,328       64,369  

Repayments on reverse mortgages

     13,049       —    

Disbursements for reverse mortgages

     (929     (40

Net increase in loans

     (67,824     (121,589

Cash received in consolidation of reverse mortgage securitization trust

     —         5,833  

Acquisition of Array/Arrow, net of cash acquired

     —         (4,189

Acquisition of FNBW, net of cash acquired

     (25,590     —     

Net decrease (increase) in stock of Federal Home Loan Bank of Pittsburgh

     6,087       (2,711

Sales of assets acquired through foreclosure, net

     3,807       4,682  

Investment in premises and equipment, net

     (2,370     (1,948
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

   $ (33,990   $ (70,977
  

 

 

   

 

 

 

 

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Financing activities:

    

Net increase (decrease) in demand and saving deposits

     3,774       (46,072

Increase (decrease) in time deposits

     3,379       (103,062

Increase in brokered deposits

     74,440       4,958  

Increase in loan payable

     61       —    

Repayment of reverse mortgage trust bonds payable

     (21,990     —    

Receipts from FHLB advances

     68,802,762       29,071,254  

Repayments of FHLB advances

     (68,928,745     (28,847,129

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

     19,040,751       15,682,425  

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

     (19,037,751     (15,678,425

Dividends paid

     (3,213     (6,017

Issuance of common stock and exercise of common stock options

     1,376       2,223  

Reissuance of Treasury Stock for FNBW purchase, net

     32,916       —    

Redemption of preferred stock

     —         (52,623

Excess tax benefits from share-based payment arrangements

     551       266  
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

   $ (31,689   $ 27,798  
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (13,125     1,558  

Cash and cash equivalents at beginning of period

     484,426       500,887  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 471,301     $ 502,445  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 9,126     $ 9,392  

Cash paid for income taxes, net

     19,675       15,822  

Loans transferred to assets acquired through foreclosure

     3,633       7,427  

Loans transferred to portfolio from HFS

     2,169       —    

Other comprehensive income (loss)

     17,503       (29,021

Fair value of assets acquired, net of cash received

     245,910       12,817  

Fair value of liabilities assumed

     236,787       10,127  

Fair value of assets consolidated

     —         41,397  

Fair value of liabilities consolidated

     —         26,339  

Non-Cash Goodwill Adjustment, Net

     46       —    

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

 

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WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 55 offices located in Delaware (45), 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 nine months ended September 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.

The significant accounting policies used in preparation of our Consolidated Financial Statements are disclosed in our Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies from those contained in the 2013 Annual Report on Form 10-K other than the one described below, which was a result of the FNBW combination.

Loans

Loans are stated net of deferred fees and costs. Interest income on loans is recognized using the level yield method. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized over the life of the related loans using a level yield method over the period to maturity.

A loan is impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future discounted cash flows, the market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. In addition, all loans restructured in a troubled debt restructuring are considered to be impaired. Impaired loans include loans within our commercial (investor and owner-occupied), commercial mortgage, commercial construction, residential mortgages and consumer portfolios. Our policy for recognition of interest income on impaired loans is the same as for nonaccrual loans.

In addition to originating loans, we occasionally acquire loans through mergers or loan purchase transactions. Some of these acquired loans may exhibit deteriorated credit quality that has occurred since origination and we may not expect to collect all contractual payments. Accounting for these purchased credit-impaired loans is done in accordance with ASC 310-30. The loans are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on nonaccrual status and have no accretable yield.

 

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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 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 does not expect the application of this guidance to have a material impact on the Company’s 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.

In June 2014, the FASB issued ASU No. 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The amendments in the ASU also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for public companies for the first interim or annual period beginning after December 15, 2014. In addition, for public companies, the disclosure for certain transactions accounted for as a sale is effective for the first interim or annual reporting periods beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required to be presented for annual reporting periods beginning after December 15, 2014, and

 

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interim periods beginning after March 15, 2015. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The standard update resolves the diverse accounting treatment for these share-based payments by requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 will be effective for interim and annual reporting periods beginning after December 15, 2015. Early application is permitted. The Company is currently evaluating the new guidance to determine the impact it will have on its Consolidated Financial Statements.

In August 2014, the FASB issued ASU No. 2014-14, “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including FHA or VA guaranteed loans, upon foreclosure. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU No. 2014-14 is effective for interim and annual reporting 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.

2. BUSINESS COMBINATIONS

First Wyoming Financial Corporation

On September 5, 2014, the Company completed the merger of First Wyoming Financial Corporation (FNBW) into the Company (the “Merger”) and the merger of FNBW’s wholly owned subsidiary, The First National Bank of Wyoming (“First Wyoming”) into the Bank. In accordance with the terms of the Agreement and Plan of Merger, dated November 25, 2013, between the Company and FNBW (the “Merger Agreement”) holders of shares of FNBW common stock received, in aggregate, $32.0 million in cash and 452,769 shares of WSFS common stock. The transaction is valued at $64.9 million based on WSFS’ September 5, 2014 closing share price as listed on the NASDAQ stock market of $72.70. This in-market combination significantly bolsters our presence in Kent County and strengthens our position as the leading independent community bank in Delaware. The results of the combined entity’s operations are included in our unaudited Consolidated Statements of Operations for the period beginning on September 5, 2014, the date of the acquisition.

The acquisition of FNBW was accounted for 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 preliminary fair value of net assets acquired was recorded as goodwill in the amount of $16.5 million, which will not be amortizable and is not deductible for tax purposes. The Company allocated the total balance of goodwill to its Banking segment. The Company also recorded $3.2 million in core deposit intangibles which will be amortized over ten years using an accelerated depreciation method.

The fair values listed below are preliminary estimates and are subject to adjustment. While they are not expected to be materially different than those shown, any adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition.

 

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In connection with the merger, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table.

 

(In Thousands)       

Consideration Paid:

  

Common shares issued (452,769)

   $ 32,916  

Cash paid to FNBW stockholders

     32,029  
  

 

 

 

Value of consideration

     64,945  

Assets acquired:

  

Cash and due from banks

     39,355  

Investment securities

     41,825  

Loans

     175,966  

Premises and equipment

     1,877  

Deferred income taxes

     3,232  

Bank owned life insurance

     12,624  

Core deposit intangible

     3,240  

Other Real Estate Owned

     2,040  

Other assets

     5,106  
  

 

 

 

Total assets

     285,265  

Liabilities assumed:

  

Deposits

     228,844  

FHLB advances

     5,052  

Other liabilities

     2,891  
  

 

 

 

Total liabilities

     236,787  

Net assets acquired:

     48,478  
  

 

 

 

Goodwill resulting from acquisition of FNBW:

   $ 16,467  
  

 

 

 

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates.

Acquired loans are initially recorded at their fair value as of the acquisition date. The fair value is based on a discounted cash flow methodology that uses assumptions as to credit risk, default rates, collateral values, loss severity, along with estimated prepayment rates. Non-impaired acquired loans had gross contractual balance of $163.7 million and a fair value of $159.3 million. Loans that have deteriorated in credit quality since their origination, and for which it is probable that all contractual cash flows will not be received, are accounted for in accordance with ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The gross contractual balance of the impaired loans was $24.2 million. For additional information regarding purchased impaired loans, see Note 5 to the unaudited Consolidated Financial Statements.

The Company acquired FNBW’s investment portfolio with a fair value of $41.8 million, of which $31.5 million were sold at acquisition. The fair value of the investment portfolio was determined by taking into account market prices obtained from independent valuation source(s). For additional information regarding level 2 valuation, see Note 11 to the unaudited Consolidated Financial Statements.

The Company recorded a deferred income tax asset (DTA) of $3.2 million related to tax attributes of FNBW along with the effects of fair value adjustments resulting from acquisition accounting for the combination.

The fair value of savings and transaction deposit accounts acquired was assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates was then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. The valuation adjustment will be accreted or amortized to interest expense over the remaining maturities of the respective pools.

 

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The fair value of the FHLB advance was determined based on the prepayment penalties that would have been assessed as of September 5, 2014, by the FHLB for its redemption. The adjustment to the face value of the borrowing will be accreted to reduce interest expense over the remaining life of the advance.

Direct costs related to the acquisition were expensed as incurred. During the nine months ended September 30, 2014, the Company incurred $2.9 million in integration expenses, including $1.1 million in salary and benefits, $1.0 million in data processing expense, $495,000 in professional fees and $292,000 in marketing expense.

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.

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 $3.0 million at September 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.

The following table details the effect on goodwill from the changes in the derivative assets and liabilities relating to the loan commitment pipeline and changes in fair value of contingent consideration 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

Contingent Liabilities

     181  

Other liabilities

     203  
  

 

 

 

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

   $ 4,135  
  

 

 

 

 

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3. EARNINGS PER SHARE

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

 

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

Numerator:

     

Net income allocable to common stockholders

   $ 11,413      $ 13,828      $ 41,049      $ 33,175  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

     

Denominator for basic earnings per share - weighted average shares

     9,061        8,828        8,961        8,804  

Effect of dilutive employee stock options and warrants

     248        148        236        106  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     9,309        8,976        9,197        8,910  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

     

Basic:

     

Net income allocable to common stockholders

   $ 1.26      $ 1.57      $ 4.58      $ 3.77  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

     

Net income allocable to common stockholders

   $ 1.23      $ 1.54      $ 4.46      $ 3.72  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     44        402        44        557  

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:

          

September 30, 2014:

          

State and political subdivisions

   $ 121,080      $ 3,024      $ (595   $ 123,509  

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

     29,976        32        (37     29,971  

Collateralized Mortgage Obligation (“CMO”)

     189,488        195        (2,943     186,740  

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

     299,264        342        (3,734     295,872  

Federal Home Loan Mortgage Corporation MBS (“FHLMC”)

     128,395        104        (1,467     127,032  

Government National Mortgage Association MBS (“GNMA”)

     80,571        399        (778     80,192  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 848,774      $ 4,096      $ (9,554   $ 843,316  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

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

September 30, 2014

     

Within one year

   $ 25,616      $ 25,653  

After one year but within five years

     45,714         46,706  

After five years but within ten years

     219,861         217,843  

After ten years

     557,583         553,114  
  

 

 

    

 

 

 
   $ 848,774      $ 843,316  
  

 

 

    

 

 

 

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 September 30, 2014, investment securities with market values aggregating $502.4 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 $6.0 million of FHLB pledged investment securities at September 30, 2014.

During the first nine months of 2014, we sold $170.4 million of investment securities during the period categorized as available-for-sale for net gains of $978,600. In the first nine months of 2013, we sold $239.9 million of investment securities available-for-sale which resulted in net gains of $3.0 million.

As of September 30, 2014, our investment securities portfolio had remaining unamortized premiums of $22.1 million and $203,000 of unaccreted discounts compared to unamortized premiums of $25.3 million and unaccreted discounts of $63,000 as of December 31, 2013.

 

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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 September 30, 2014 and December 31, 2013.

 

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

Available-for-sale

           

State and political subdivisions

   $ 8,534      $ 19      $ 35,414      $ 575      $ 43,948      $ 594  

GSE

     8,948        37        —          —          8,948        37  

CMO

     66,891        229        71,569        2,714        138,460        2,943  

FNMA MBS

     95,007        522        134,877        3,212        229,884        3,734  

FHLMC MBS

     30,390        68        76,681        1,399        107,071        1,467  

GNMA MBS

     6,274        16        49,666        763        55,940        779  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 216,044      $ 891      $ 368,207      $ 8,663      $ 584,251      $ 9,554  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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 September 30, 2014 and December 31, 2013. All securities were re-evaluated for OTTI at September 30, 2014. The result of this evaluation showed no OTTI during the first nine months of 2014. The weighted average duration of MBS was 4.8 years at September 30, 2014.

At September 30, 2014, we owned investment securities totaling $584.3 million in which the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $9.6 million at September 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 ACQUIRED CREDIT IMPAIRED LOANS

On September 5, 2014 $24.2 million of impaired loans were acquired from FNBW. Loans that have deteriorated in credit quality since their origination, and for which it is probable that all contractual cash flows will not be received, are accounted for in accordance with (ASC 310-30) Loans and Debt Securities Acquired with Deteriorated Credit Quality. Under ASC 310-30, acquired loans are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when expected cash flows are reasonably estimable. Accordingly, acquired impaired loans that are contractually past due are still considered to be accruing and performing loans as long as the estimated cash flows are received as expected. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income may be recognized on a cash basis or as a reduction of the principal amount outstanding. At September 30, 2014, there were not any acquired impaired loans accounted for under ASC 310-30 classified as nonaccrual loans. There is no carry forward of allowance for loan losses on any of the acquired loans, because

 

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any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. Updates to expected cash flows for acquired impaired loans accounted for under ASC 310-30 may result in a provision for loan losses and the establishment of an allowance for loan losses to the extent the amount and timing of expected cash flows decrease compared to those originally estimated at acquisition.

The following table details the loans that are accounted for in accordance with ASC 310-30 as of September 5, 2014:

 

(in thousands)       

Contractually required principal and interest at acquisition

   $ 27,086   

Contractual cash flows not expected to be collected (nonaccretable difference)

     7,956  
  

 

 

 

Expected cash flows at acquisition

     19,130  

Interest component of expected cash flows (accretable yield)

     1,790  
  

 

 

 

Fair value of acquired loans accounted for under FASB ASC 310-30

   $ 17,340   
  

 

 

 

The outstanding principal balance and carrying amounts for acquired credit-impaired loans for which the Company applies ASC 310-30 as of September 30, 2014:

 

(in thousands)       

Outstanding principal balance

   $ 22,398   

Carrying amount

   $ 17,129   

Allowance for Loan Loss

     N/A   

The following table presents the changes in accretable yield on the acquired credit impaired loans:

 

     Accretable
Yield
 

Balance as of September 5, 2014

   $ 1,790   

Accretion

     (59

Reclassification from nonaccretable difference

     —    

Additions/adjustments

     —    

Disposals

     —    
  

 

 

 

Ending balance as September 30, 2014

   $ 1,731   
  

 

 

 

 

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6. 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. Loans are charged off when they are deemed to be uncollectible. During the nine months ended September 30, 2014, net charge-offs totaled $4.7 million or 0.21% of average loans annualized, compared to $8.4 million, or 0.39% of average loans annualized during the nine months ended September 30, 2013. We charge loans off when they are deemed to be uncollectible.

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 four years 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 in 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. In addition, a 15 basis point consideration was given to the C&I loan portfolio due to the assessment of qualitative factors on two 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 judgment 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 nine months ended September 30, 2014 and 2013:

 

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

Three months ended September 30, 2014

                

Allowance for loan losses

                

Beginning balance

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

Charge-offs

     (1,840     (272     (101     —         (147     (372     —         (2,732

Recoveries

     66       77       4       8       86       261       —         502  

Provision (credit)

     1,833       454       (1,097     (897     (6     56       (10     333  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,405      $ 8,245      $ 6,423      $ 1,430      $ 2,692      $ 6,244      $ 1,045      $ 39,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 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

     (3,335     (593     (261     (88     (674     (2,095     —         (7,046

Recoveries

     873       244       43       192       129       792        —         2,273  

Provision (credit)

     3,116       956       (291     (2,000     159       1,053       20       3,013  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,405      $ 8,245      $ 6,423      $ 1,430      $ 2,692      $ 6,244      $ 1,045      $ 39,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

                

Loans individually evaluated for impairment

   $ 1,573      $ 993      $ 240      $ —        $ 850      $ 211      $ —        $ 3,867   

Loans collectively evaluated for impairment

     11,832       7,252       6,183       1,430       1,842       6,033       1,045       35,617  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,405      $ 8,245      $ 6,423      $ 1,430      $ 2,692      $ 6,244      $ 1,045      $ 39,484   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

                

Loans individually evaluated for impairment

   $ 3,683      $ 3,390      $ 8,760      $ 1,419      $ 16,807      $ 6,610      $ —        $ 40,669  (2) 

Purchased credit impaired loans

     5,908        2,728        7,892        5,202        623        45        —          22,398   

Loans collectively evaluated for impairment

     872,679       802,139       777,260       141,595       211,791       319,131       —         3,124,595  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 882,270      $ 808,257      $ 793,912      $ 148,216      $ 229,221      $ 325,786      $ —        $ 3,187,662  (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 September 30, 2013

               

Allowance for loan losses

               

Beginning balance

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

Charge-offs

    (1,172     (31     (103     (4     (290     (1,343     —         (2,943

Recoveries

    273       55       333       21       10       219       —         911  

Provision (credit)

    594       (23     345       (380     364       1,071       (2     1,969  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 12,662      $ 8,050      $ 6,920      $ 3,589      $ 3,314      $ 6,084      $ 812      $ 41,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 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

    (2,311     (68     (1,824     (1,344     (985     (4,153     —         (10,685

Recoveries

    900       100       442       106       51       715       —         2,314  

Provision (credit)

    410       1,910       223       (1,629     1,124       3,891       (49     5,880  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 12,662      $ 8,050      $ 6,920      $ 3,589      $ 3,314      $ 6,084      $ 812      $ 41,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

               

Loans individually evaluated for impairment

  $ 2,004      $ 945      $ 1,995      $ —        $ 995      $ 12      $ —        $ 5,951   

Loans collectively evaluated for impairment

    10,658       7,105       4,925       3,589       2,319       6,072       812       35,480  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 12,662      $ 8,050      $ 6,920      $ 3,589      $ 3,314      $ 6,084      $ 812      $ 41,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

               

Loans individually evaluated for impairment

  $ 5,833      $ 12,568      $ 8,894      $ 274      $ 17,360      $ 4,400      $ —        $ 49,329  (2) 

Loans collectively evaluated for impairment

    748,106       777,297       704,895       102,347       211,595       283,645       —         2,827,885  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 753,939      $ 789,865      $ 713,789      $ 102,621      $ 228,955      $ 288,045      $ —        $ 2,877,214  (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 September 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 of $6.7 million for September 30, 2014 and $5.8 million for September 30, 2013.

 

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Table of Contents

Nonaccrual and Past Due Loans

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

 

September 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
    Acquired
Impaired
Loans
    Nonaccrual
Loans
    Total
Loans
 

Commercial

   $ 299      $ 10,765      $ —        $ 11,064      $ 862,223      $ 5,908      $ 3,075      $ 882,270   

Owner-Occupied commercial

     734       5,561       —         6,295       795,844       2,728       3,390       808,257  

Commercial mortgages

     17       81       —         98       777,252       7,892       8,670       793,912  

Construction

     60       —         —         60       142,954       5,202       —         148,216  

Residential

     2,756       937       678        4,371       216,279       623       7,948       229,221  

Consumer

     861       397       —         1,258       320,790       45       3,693       325,786  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,727      $ 17,741      $ 678      $ 23,146      $ 3,115,342      $      22,398      $ 26,776      $ 3,187,662   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.15     0.56     0.02     0.73     97.73     0.70     0.84     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 September 30, 2014 and December 31, 2013:

 

September 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

   $ 3,683       $ 1,480       $ 2,203       $ 1,573       $ 4,612       $ 4,642   

Owner-Occupied commercial

     3,390         1,857         1,533         993         4,338         6,480  

Commercial mortgages

     8,760         5,136         3,624         240         11,667         11,117  

Construction

     1,419         1,419         —           —           1,419         784  

Residential

     16,807         9,215         7,592         850         19,045         17,635  

Consumer

     6,610         5,228         1,382         211         7,332         5,507  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,669       $ 24,335       $ 16,334       $ 3,867       $ 48,413       $ 46,165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $401,000 and $1.1 million was recognized on impaired loans during the three and nine months ended September 30, 2014, respectively. Interest income of $234,000 and $706,000 was recognized on impaired loans during the three and nine months ended September 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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Table of Contents

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 greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.

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

Commercial Credit Exposure

 

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

Risk Rating:

                       

Special mention

  $ 10,363      $ 12,566      $ 13,247      $ 4,747      $ 12,141      $ 2,092      $ 1,073      $ 226      $ 36,824        $ 19,631     

Substandard:

                       

Accrual

    62,453        56,806       43,382       45,181       12,107        8,146       5,254        3,599       123,196         113,732    

Nonaccrual

    1,572        2,362       2,041        5,185       6,925        2,784       313        1,158       10,851          11,489    

Doubtful /

                       

Nonaccrual

    2,203       2,641       1,533       12       3,624       5,877       —         —         7,360         8,530    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Special Mention, Substandard and Doubtful

    76,591       74,375       60,203       55,125       34,797       18,899       6,640        4,983       178,231        6     153,382       6

Pass

    805,679       736,507       748,054       731,235       759,115       706,294       141,576       101,091       2,454,424       94     2,275,127       94  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial Loans

  $ 882,270      $ 810,882      $ 808,257      $ 786,360      $ 793,912      $ 725,193      $ 148,216      $ 106,074      $ 2,632,655        100   $ 2,428,509        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Consumer Credit Exposure

 

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

Nonperforming (1)

   $ 16,807       $ 17,852       $ 6,610       $ 5,411       $ 23,417         4   $ 23,263         4

Performing

     212,414        203,668        319,176        296,823        531,590        96     500,491        96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 229,221       $ 221,520       $ 325,786       $ 302,234       $ 555,007         100   $ 523,754         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

(1) Includes $12.1 million as of September 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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Troubled Debt Restructurings (TDR)

The balance of TDRs at September 30, 2014 and December 31, 2013 was $28.3 million and $27.6 million, respectively. The balance at September 30, 2014 included approximately $14.1 million in nonaccrual status and $14.2 million in accrual status compared to $15.3 million in nonaccrual status and $12.3 million in accrual status at December 31, 2013. Approximately $2.5 million and $4.1million in related reserves have been established for these loans at September 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 nine months ended September 30, 2014, the terms of 20 loans were modified in TDRs, comprised of 4 commercial loans and 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 three and nine months ended September 30, 2014 and 2013:

 

(In Thousands)

   Three
Months Ended
September 30,
2014
     Three
Months Ended
September 30,
2013
     Nine
Months Ended
September 30,
2014
     Nine
Months Ended
September 30,
2013
 

Commercial

   $ 88       $ 6,800       $ 209       $ 6,824   

Commercial mortgages

     3,430        108        3,430        1,169  

Construction

     1,419        —          1,419        —    

Residential

     72        207        1,916        806  

Consumer

     1,097        256        1,612        973  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,106       $ 7,371       $ 8,586       $ 9,772   
  

 

 

    

 

 

    

 

 

    

 

 

 

The TDRs set forth in the table above increased our allowance for loan losses by $395,000 through allocation of a related reserve, and resulted in charge-offs of $49,000 during the nine months ended September 30, 2014, compared to a $37,000 increase and charge-offs of $363,000 for the same period in 2013.

7. REVERSE MORTGAGE RELATED ASSETS

Reverse mortgage related assets include reverse mortgage loans as of September 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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During the third quarter of 2013, we obtained the right to execute a clean-up call on the underlying collateral. This event led 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 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 $29.4 million at September 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 $51.1 million well exceeds the outstanding book balance at September 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 September 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 residential 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 September 30, 2014, the internal rate of return (IRR) of 16.34% 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 September 30, 2014, the Company’s actuarially estimated cash payments to reverse mortgagors are as follows:

 

(in thousands)       
Year Ending       

Remaining in 2014

   $ 181  

2015

     690  

2016

     553  

2017

     439  

2018

     344  

Years 2019 - 2023

     835  

Years 2024 - 2028

     187  

Years 2029 - 2033

     32  

Thereafter

     4  
  

 

 

 

Total (1)

   $ 3,265  
  

 

 

 

 

(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.

 

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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 $7.1 million.

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 $502,000 for the quarter ended September 30, 2014 with an IRR of 14.83%. If the future changes in collateral value were assumed to be reduced by 1%, income would decrease by $230,000 with an IRR of 15.65%.

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 $384,000. If the IRR decreased by 1%, the net present value would decrease by $381,000.

8. 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 nine months ended September 30, 2014 we determined there were no events or other indicators of impairment as it relates to goodwill or other intangibles.

During the third quarter of 2014 we completed the acquisition of First National Bank of Wyoming, De (“FNBW”). As a result of this transaction, we have recognized core deposit intangible assets of $3.2 million and goodwill of $16.5 million. The fair values listed above are estimates and are subject to adjustment. 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.

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

     46        —          —          46  

Goodwill from business combinations

     16,467        —          —          16,467  
  

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2014

   $ 43,614      $ —        $ 5,134      $ 48,748  
  

 

 

    

 

 

    

 

 

    

 

 

 

FASB ASC 350 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)  

September 30, 2014

       

Core deposits

   $ 7,610      $ (3,074   $ 4,536  

Other

     7,021         (2,129     4,892  
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 14,631      $ (5,203   $ 9,428  
  

 

 

    

 

 

   

 

 

 

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  
  

 

 

    

 

 

   

 

 

 

 

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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 nine months ended September 30, 2014, we recognized amortization expense on other intangible assets of $879,000.

The following presents the estimated amortization expense of intangibles:

 

(In Thousands)    Amortization
of Intangibles
 

Remaining in 2014

   $ 378  

2015

     1,485  

2016

     1,229  

2017

     1,081  

2018

     1,062  

Thereafter

     4,193  
  

 

 

 

Total

   $ 9,428  
  

 

 

 

9. 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
September 30,
     Nine months ended
September 30,
 
     2014     2013      2014     2013  
(In Thousands)                          

Service cost

   $ 49     $ 86      $ 147     $ 258  

Interest cost

     48       44        146       132  

Prior service cost amortization

     (14     —          (44     —    

Net loss recognition

     22       20        66       60  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 105     $ 150      $ 315     $ 450  
  

 

 

   

 

 

    

 

 

   

 

 

 

10. 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.

 

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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.

As a result of the acquisition of the First National Bank of Wyoming, we recorded a net DTA of $3.2 million. Included in this DTA are $1.9 million of net operating loss carryovers and $300,000 of tax credit carryovers. We expect to fully utilize these tax attributes and, therefore, no valuation allowance has been recorded against the DTA.

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 September 30, 2014. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2011 through 2013 tax years are subject to examination as of September 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.

11. 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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Table of Contents

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

   $ —         $ 186,740      $ —         $ 186,740  

FNMA

     —           295,872        —           295,872  

FHLMC

     —           127,032        —           127,032  

GNMA

     —           80,192        —           80,192  

U.S. Government and agencies

     —           29,971        —           29,971  

State and political subdivisions

     —           123,509        —           123,509  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 843,316      $ —         $ 843,316  

Assets Measured at Fair Value on a Nonrecurring Basis

     

Other real estate owned

   $ —         $ —         $ 6,307      $ 6,307  

Loans held-for-sale

     —           26,324        —           26,324  

Impaired loans (collateral dependent)

     —           —           36,802        36,802  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ 26,324      $ 43,109      $ 69,433  

 

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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  

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 September 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 September 30, 2014. Included in the Level 2 total are approximately $29.9 million in Federal Agency debentures, $689.8 million in Federal Agency MBS and $123.5 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 2 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

 

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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 $36.8 million and $38.4 million at September 30, 2014 and December 31, 2013, respectively. The valuation allowance on impaired loans was $3.9 million as of September 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 unaudited Consolidated Financial Statements.

Loans held-for-sale: Loans held-for-sale are carried at fair market value.

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 unaudited 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.

 

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

Financial assets:

              

Cash and cash equivalents

   Level 1    $ 471,301      $ 471,301      $ 484,426      $ 484,426  

Investment securities

   See previous table      843,316        843,316        817,115        817,115  

Loans held for sale

   Level 3      26,324        26,324        31,491        31,491  

Loans, net

   Level 3      3,141,509        3,098,014        2,904,976        2,871,499  

Reverse mortgage loans

   Level 3      29,392        29,392        37,328        37,328  

Stock in Federal Home Loan Bank of Pittsburgh

   Level 2      29,782        29,782        35,869        35,869  

Accrued interest receivable

   Level 2      11,435        11,435        10,798        10,798  

Financial liabilities:

              

Deposits

   Level 2      3,504,110        3,295,795        3,186,942        2,982,420  

Borrowed funds

   Level 2      757,239        757,634        903,831        904,804  

Standby letters of credit

   Level 3      199        199        248        248  

Accrued interest payable

   Level 2      3,442        3,442        838        838  

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

 

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

Off-balance sheet instruments:

   $ —         $ —     

12. 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 55 offices located in Delaware (45), 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 $638 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 $8.7 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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Segment information for the three months and nine months ended September 30, 2014 and 2013 follows:

For the three months ended September 30, 2014:

 

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

External customer revenues:

           

Interest income

   $ 38,777      $ —        $ 2,022      $ 40,799  

Noninterest income

     9,161        6,640        4,503        20,304  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     47,938        6,640        6,525        61,103  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     880        —          1,361        2,241  

Noninterest income

     1,602        204        32        1,838  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,482        204        1,393        4,079  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     50,420        6,844        7,918        65,182  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     3,952        —          100        4,052  

Noninterest expenses

     32,327        3,993        3,137        39,457  

Provision for loan loss

     198        —          135        333  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     36,477        3,993        3,372        43,842  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,361        360        520        2,241  

Noninterest expenses

     236        509        1,093        1,838  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,597        869        1,613        4,079  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     38,074        4,862        4,985        47,921  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 12,346      $ 1,982      $ 2,933      $ 17,261  

Provision for income taxes

              5,848  
           

 

 

 

Consolidated net income

            $ 11,413  
           

 

 

 

Capital expenditures

   $ 914      $ 67      $ —        $ 981  
  

 

 

    

 

 

    

 

 

    

 

 

 
As of September 30, 2014:                            
Statement of Condition                            

Cash and cash equivalents

   $ 73,935      $ 393,977      $ 3,389      $ 471,301  

Goodwill

     43,614        —          5,134        48,748  

Other segment assets

     4,068,237        2,232        192,210        4,262,679  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,185,786      $ 396,209      $ 200,733      $ 4,782,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the three months ended September 30, 2013:

 

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

External customer revenues:

          

Interest income

   $ 35,171      $ —         $ 1,945     $ 37,116  

Noninterest income

     12,449        6,360        3,933       22,742  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer revenues

     47,620        6,360        5,878       59,858  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment revenues:

          

Interest income

     906        —          1,477       2,383  

Noninterest income

     1,689        222        28       1,939  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment revenues

     2,595        222        1,505       4,322  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     50,215        6,582        7,383       64,180  
  

 

 

    

 

 

    

 

 

   

 

 

 

External customer expenses:

          

Interest expense

     3,587        —          123       3,710  

Noninterest expenses

     26,510        3,470        2,829       32,809  

Provision for loan loss

     2,263        —          (294     1,969  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer expenses

     32,360        3,470        2,658       38,488  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment expenses

          

Interest expense

     1,477        400        506       2,383  

Noninterest expenses

     250        561        1,128       1,939  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment expenses

     1,727        961        1,634       4,322  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     34,087        4,431        4,292       42,810  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

   $ 16,128      $ 2,151      $ 3,091     $ 21,370  

Provision for income taxes

             7,210  
          

 

 

 

Consolidated net income

           $ 14,160  
          

 

 

 

Capital expenditures

   $ 460      $ 131      $ —       $ 591  
  

 

 

    

 

 

    

 

 

   

 

 

 
As of December 31, 2013:                           
Statement of Condition                           

Cash and cash equivalents

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

Goodwill

     27,101        —          5,134       32,235  

Other segment assets

     3,811,424        1,965        185,713       3,999,102  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment assets

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

 

 

    

 

 

    

 

 

   

 

 

 

 

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For the nine months ended September 30, 2014:

 

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

External customer revenues:

           

Interest income

   $ 112,178      $ —        $ 5,819      $ 117,997  

Noninterest income

     26,334        18,974        12,983        58,291  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     138,512        18,974        18,802        176,288  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     2,545        —          4,124        6,669  

Noninterest income

     5,041        601        85        5,727  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     7,586        601        4,209        12,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     146,098        19,575        23,011        188,684  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     11,413        —          316        11,729  

Noninterest expenses

     88,549        11,425        9,179        109,153  

Provision for loan loss

     2,320        —          693        3,013  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     102,282        11,425        10,188        123,895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     4,124        1,019        1,526        6,669  

Noninterest expenses

     686        1,688        3,353        5,727  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     4,810        2,707        4,879        12,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     107,092        14,132        15,067        136,291  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 39,006      $ 5,443      $ 7,944      $ 52,393  

Provision for income taxes

              11,344  
           

 

 

 

Consolidated net income

            $ 41,049  
           

 

 

 

Capital expenditures

   $ 2,207      $ 156      $ 3      $ 2,366  
  

 

 

    

 

 

    

 

 

    

 

 

 
As of September 30, 2014:                            
Statement of Condition                            

Cash and cash equivalents

   $ 73,935      $ 393,977      $ 3,389      $ 471,301  

Goodwill

     43,614        —          5,134        48,748  

Other segment assets

     4,068,237        2,232        192,210        4,262,679  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,185,786      $ 396,209      $ 200,733      $ 4,782,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the nine months ended September 30, 2013

 

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

External customer revenues:

          

Interest income

   $ 102,732      $ —        $ 5,857     $ 108,589  

Noninterest income

     31,009        17,412        11,934       60,355  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer revenues

     133,741        17,412        17,791       168,944  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment revenues:

          

Interest income

     2,723        —          4,276       6,999  

Noninterest income

     5,040        645        82       5,767  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment revenues

     7,763        645        4,358       12,766  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     141,504        18,057        22,149       181,710  
  

 

 

    

 

 

    

 

 

   

 

 

 

External customer expenses:

          

Interest expense

     11,120        —          427       11,547  

Noninterest expenses

     79,671        9,629        9,031       98,331  

Provision for loan loss

     6,044        —          (164     5,880  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer expenses

     96,835        9,629        9,294       115,758  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment expenses

          

Interest expense

     4,276        1,176        1,547       6,999  

Noninterest expenses

     727        1,649        3,391       5,767  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment expenses

     5,003        2,825        4,938       12,766  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     101,838        12,454        14,232       128,524  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before taxes

   $ 39,666      $ 5,603      $ 7,917     $ 53,186  

Provision for income taxes

             18,378  
          

 

 

 

Consolidated net income

           $ 34,808  
          

 

 

 

Capital expenditures

   $ 1,505      $ 591      $ —       $ 2,096  
  

 

 

    

 

 

    

 

 

   

 

 

 
As of December 31, 2013:                           
Statement of Condition                           

Cash and cash equivalents

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

Goodwill

     27,101        —          5,134       32,235  

Other segment assets

     3,811,424        1,965        185,713       3,999,102  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment assets

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

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

13. 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. 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 no such repurchases in the third quarter of 2014 and two repurchases totalling $354,000 for the nine months ended September 30, 2014.

Swap Guarantees. We entered into agreements with four 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 September 30, 2014 there were 100 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 $426.6 million at September 30, 2014 compared to $423.9 million at December 31, 2013. At September 30, 2014 maturities ranged from approximately one to eleven years. The aggregate market value of these swaps to customers was a liability of $15.5 million at September 30, 2014 and $17.8 million at December 31, 2013. Our analysis indicated there were no reserve requirements for the swap guarantees as of September 30, 2014 and $70,000 of reserves as of December 31, 2013. The methodology to determine reserves for swap guarantees is consistent with the ALLL methodology as described in Note 5 to the unaudited Consolidated Financial Statements.

14. 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 9 “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, June 30, 2014

   $ (2,583   $ (412   $ (2,995

Other comprehensive income (loss) before reclassifications

     (778     5       (773

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

     (23 )     —         (23 )
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (801     5       (796
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ (3,384   $ (407   $ (3,791
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ (12,309   $ (472   $ (12,781

Other comprehensive income (loss) before reclassifications

     (3,106     —         (3,106

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

     (190     —         (190
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (3,296     —         (3,296
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

   $ (15,605   $ (472   $ (16,077
  

 

 

   

 

 

   

 

 

 

 

(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

     18,046       65       18,111  

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

     (608 )     —         (608 )
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     17,438       65       17,503  
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ (3,384   $ (407   $ (3,791
  

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

   $ 13,415     $ (472   $ 12,943  

Other comprehensive income (loss) before reclassifications

     (27,249     —         (27,249

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

     (1,771     —         (1,771
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (29,020     —       $ (29,020
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

   $ (15,605   $ (472   $ (16,077
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

     Three Months Ended
September 30,
    Affected line item in Statements of Operations
(in thousands)    2014     2013      

Securities available-for-sale:

      

Realized gains on securities transactions

   $ 36     $ 306     Securities gains, net

Income taxes

     (13     (116   Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 23     $ 190    

Amortization of Defined Benefit Pension Items:

      

Prior service costs

   $ 22     $ —      

Transition obligation

     —         —      

Actuarial losses

     (14     —      
  

 

 

   

 

 

   

Total before tax

   $ 8     $ —       Salaries, benefits and other compensation

Income taxes

     (3     —       Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 5     $ —      
  

 

 

   

 

 

   

Total reclassifications

   $ 18     $ 190    
  

 

 

   

 

 

   

 

     Nine Months Ended
September 30,
    Affected line item in Statements of Operations
     2014     2013      

Securities available-for-sale:

      

Realized gains on securities transactions

   $ 979     $ 2,856     Securities gains, net

Income taxes

     (371     (1,085   Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 608     $ 1,771    

Amortization of Defined Benefit Pension Items:

      

Prior service costs

   $ 905     $ —      

Transition obligation

     245        —      

Actuarial losses

     (1,046     —      
  

 

 

   

 

 

   

Total before tax

   $ 104     $ —       Salaries, benefits and other compensation

Income taxes

     (39     —       Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 65     $ —      
  

 

 

   

 

 

   

Total reclassifications

   $ 543     $ 1,771    
  

 

 

   

 

 

   

 

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15. 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 September 30, 2014. Costs of litigation were covered by insurance; however, such costs have now exceeded the limits of insurance coverage for this case. Cross motions for summary judgement are currently pending before the court.

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

 

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

GENERAL

We are a thrift holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, 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 $2.6 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 55 offices located in Delaware (45), 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. On September 5, 2014 we completed the acquisition of First Wyoming Financial Corporation, the parent company of The First National Bank of Wyoming (“FNBW”). We expect this acquisition to build our market share, expand our customer base and enhance our fee income. The results of FNBW operations are included in our Consolidated Financial Statements since the date of the acquisition.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages more than $507 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 465 ATMs for WSFS Bank, which has, by far, the largest branded ATM network in Delaware.

As a leading provider of ATM Vault Cash to the U.S. ATM industry, Cash Connect is exposed to substantial operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention and loss recovery strategies. Throughout its 16-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 $638 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 $8.7 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.

 

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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.

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 and Note 1, Basis of Presentation, to the unaudited Consolidated Financial Statements.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $267.0 million or 6% to $4.8 billion during the nine months ended September 30, 2014. Included in this increase was a $231.4 million, or 8%, increase in net loans (including loans held for sale) which includes $176.0 million in net loans from the FNBW acquisition, and a $26.2 million increase in investment securities. Partially offsetting these increases was a $13.1 million decrease in cash and cash equivalents.

 

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Total liabilities increased $173.7 million during the nine months ended September 30, 2014 to $4.3 billion. This increase was primarily the result of an increase in customer deposits of $242.7 million, or 8% which includes $228.8 million of customer deposits added through the FNBW acquisition. Brokered Deposits also increased $74.4 million during the nine months ended September 30, 2014. Total deposit increases were used to fund growth in our assets, a $22.0 million decrease in reverse mortgage trust bonds payable related to the call of those bonds and a $120.9 million decrease in Federal Home Loan Bank Advances.

Capital Resources

Stockholders’ equity increased $93.3 million between December 31, 2013 and September 30, 2014. This increase was due in part to net income of $41.0 million during the nine months ended September 30, 2014. Also contributing to the increase in stockholders’ equity was the acquisition of FNBW which contributed approximately $32.9 million additional capital primarily due to stock issued in conjunction with the merger. Further, the (net of tax) increase in our available for sale securities portfolio was $17.5 million. Partially offsetting these increases were payments of dividends on our common stock of $3.2 million during the nine months ended September 30, 2014. Tangible common equity (a non-GAAP financial measure) increased $74.1 million from $344.1 million at December 31, 2013 to $418.1 million at September 30, 2014.

Tangible common book value per share of common stock (a non-GAAP financial measure) was $44.50 at September 30, 2014, an increase of $5.82 or 15%, from $38.68 reported at December 31, 2013. Book value per share of common stock was $50.70 at September 30, 2014, an increase of $7.64 from $43.06 reported at December 31, 2013. See “Reconciliation of Non-GAAP Measures to GAAP” below.

Below is a table comparing WSFS Bank’s consolidated capital position to the minimum regulatory requirements as of September 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)

   $ 559,837         14.70   $ 304,591         8.00   $ 380,738         10.00

Core Capital (to Adjusted Total Assets)

     519,600        11.01       188,837        4.00       236,046        5.00  

Tangible Capital (to Tangible Assets)

     519,600        11.01       70,814        1.50       N/A         N/A   

Tier 1 Capital (to Risk-Weighted Assets)

     519,600        13.65       152,295        4.00       228,443        6.00  

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 material effect on our bank’s financial statements.

The Federal Deposit Insurance Corporation Act, 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 September 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 11.01%, Tier 1 capital ratio of 13.65%, and total risk based capital ratio of 14.70%, 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 $20.4 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.

 

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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 nine months ended September 30, 2014, cash and cash equivalents decreased $13.1 million to $471.3 million. This decrease was primarily a result of: $231.4 million increase in net loans and $120.9 million from the net repayments of FHLB Advances. Partially offsetting these decreases in cash were a $242.7 million increase in customer deposits and a $74.4 million increase in brokered deposits.

NONPERFORMING ASSETS

Nonperforming assets include nonaccruing loans, 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, unless management believes the loan is adequately collateralized and in the process of collection. 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.

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

 

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

Nonaccruing loans:

  

Commercial

   $ 3,075     $ 4,305  

Owner-occupied commercial

     3,390       5,197  

Consumer

     3,693       3,293  

Commercial mortgages

     8,670       8,565  

Residential mortgages

     7,948       8,432  

Construction

     —         1,158  
  

 

 

   

 

 

 

Total nonaccruing loans

     26,776       30,950  

Assets acquired through foreclosure

     6,307       4,532  

Troubled debt restructuring (accruing)

     14,215       12,332  
  

 

 

   

 

 

 

Total nonperforming assets

   $ 47,298     $ 47,814  
  

 

 

   

 

 

 

Past due loans (1):

    

Residential mortgages

     678       533  
  

 

 

   

 

 

 

Total past due loans

   $ 678     $ 533  
  

 

 

   

 

 

 

Ratios:

    

Allowance for loan losses to total loans (2)

     1.24     1.40

Nonperforming assets to total assets

     0.99       1.06  

Nonperforming assets (excluding accruing TDR) to total assets

     0.69       0.79  

Nonaccruing loans to total loans (2)

     0.84       1.05  

Loan loss allowance to nonaccruing loans

     147.46       133.26  

 

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

 

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Nonperforming assets decreased $516,000 between December 31, 2013 and September 30, 2014. As a result, non-performing assets as a percentage of total assets decreased from 1.06% at December 31, 2013 to 0.99% at September 30, 2014. There were $27.3 million in new nonperforming loans during the first nine months of 2014, which was offset by $21.2 million in collections, REO sales or workouts and another $6.6 million in write-downs. All portfolio categories have slightly declined or remained relatively flat except for real estate owned (OREO), which increased by $1.8 million and accruing TDRs which increased $2 million. The OREO increase included $2.0 million in OREO as a result of the combination with FNBW, related to the fair value of 4 OREO properties assumed at the time of merger.

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

 

     For the nine
months ended
September 30, 2014
    For the year
ended
December 31, 2013
 
     (In Thousands)  

Beginning balance

   $ 47,814     $ 62,475  

Additions

     27,320       30,367  

Collections

     (21,166     (29,725

Transfers to accrual

     (96     (1,702

Charge-offs/write-downs, net

     (6,574     (13,601
  

 

 

   

 

 

 

Ending balance

   $ 47,298     $ 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 September 30, 2014, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $63.3 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 102.6% at September 30, 2014. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 1.32% at September 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.

 

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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 September 30, 2014 and December 31, 2013:

 

      September 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        6     13.77     -1     11.78
  +200        3     13.83     -2     11.97
  +100        -1     13.67     -3     12.13
  —          0     13.53     —       12.25
  -100       -1     12.85     -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 September 30, 2014 given the low absolute level of interest rates at that time.

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

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014

Results of Operations

Net income allocable to common stockholders (after preferred stock dividends) was $11.4 million, or $1.23 per diluted common share, for the quarter ended September 30, 2014, or a 20% decrease in EPS compared to net income allocable to common stockholders of $13.8 million, or $1.54 per diluted common share, for the quarter ended September 30, 2013. The quarterly comparison was impacted by several notable items, including corporate development costs in the third quarter of 2014 and a one-time reverse mortgage consolidation gain in the third quarter of 2013. Excluding these items, underlying trends were strong, driven by higher revenue growth and lower credit costs. Net interest income increased $3.3 million in the quarter ended September 30, 2014 as compared to the same period last year, 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 decreased by $2.4 million for the quarter ended September 30, 2014 compared to the same period last year as increases in investment management, fiduciary and mortgage banking revenues did not fully offset a one-time $3.8 million reverse consolidations gain recognized in the third quarter of 2013. Provision for loan losses decreased $1.6 million for the quarter ended September 30, 2014, when compared to the third quarter of 2013 as a result of improved credit quality. Noninterest expenses also grew reflecting added ongoing costs from acquisitions of Array/Arrow and FNBW, and added salary and benefit costs and other infrastructure to promote and support revenue growth. Expenses for the third quarter of 2014 were $39.5 million compared to $32.8 million for the third quarter of 2013, an increase of $6.7 million. Contributing to this increase was $2.6 million in corporate development, and higher legal costs.

Net income for the first nine months of 2014 was $41.0 million as compared to $34.8 million for the first nine months of 2013. Net income allocable to common stockholders was $41.0 million, or $4.46 per diluted share of common stock, compared to net income allocable to common stockholders of $33.2 million, or $3.72 per diluted share of common stock, for the nine months ended September 30, 2013, a 20% increase in EPS. For the first nine 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 compared to the $3.8 million consolidation gain recorded in the third quarter of 2013.

 

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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 September 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

   $ 885,953     $ 10,670        4.82   $ 818,361     $ 9,877        4.83

Residential real estate loans (4)

     245,085       2,345        3.83       249,476       2,455        3.94  

Commercial loans

     1,639,318       18,276        4.40       1,525,053       17,023        4.40  

Consumer loans

     317,053       3,559        4.45       287,555       3,353        4.63  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     3,087,409       34,850        4.53       2,880,445       32,708        4.56  

Mortgage-backed securities (5) (6)

     689,123       3,317        1.93       692,619       3,159        1.82  

Investment securities (5) (6)

     158,087       837        3.07       111,362       546         2.80  

Reverse mortgages and related assets

     31,435       1,323        16.83       19,915       616        12.37  

Other interest-earning assets

     34,535       472        5.42       38,054       87        0.90  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     4,000,589       40,799        4.13       3,742,395       37,116        4.01  
  

 

 

   

 

 

      

 

 

   

 

 

    

Allowance for loan losses

     (41,694          (42,315     

Cash and due from banks

     84,647            80,586       

Cash in non-owned ATMs

     377,879            424,125       

Bank-owned life insurance

     67,089            63,030       

Other noninterest-earning assets

     133,567            131,780       
  

 

 

        

 

 

      

Total assets

   $ 4,622,077          $ 4,399,601       
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity:

              

Interest-bearing liabilities:

              

Interest-bearing deposits:

              

Interest-bearing demand

   $ 640,401     $ 155        0.10   $ 563,409     $ 121        0.09

Money market

     783,561       374        0.19       764,973       238        0.12  

Savings

     400,049       58        0.06       388,132       50        0.05  

Customer time deposits

     472,853       1,031