10-Q 1 d940405d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2015

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 001-35638

 

 

WSFS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-2866913
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   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 July 31, 2015.

 

Common Stock, par value $.01 per share

 

27,898,384

(Title of Class)   (Shares Outstanding)

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I. Financial Information

 

         Page  

Item 1.

  Financial Statements (Unaudited)   
 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014

     3   
 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014

     4   
 

Consolidated Statements of Condition as of June 30, 2015 and December 31, 2014

     5   
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

     6   
 

Notes to the Consolidated Financial Statements for the Three and Six Months Ended June 30, 2015 and 2014

     7   

Item 2.

 

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

     44   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      56   

Item 4.

  Controls and Procedures      56   
PART II. Other Information   

Item 1.

  Legal Proceedings      57   

Item 1A.

  Risk Factors      57   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      57   

Item 3.

  Defaults upon Senior Securities      57   

Item 4.

  Mine Safety Disclosure      57   

Item 5.

  Other Information      57   

Item 6.

  Exhibits      57   

Signatures

    

Exhibit 31.1

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

Exhibit 31.2

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

Exhibit 32

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

Exhibit 101.INS

  Instance Document   

Exhibit 101.SCH

  Schema Document   

Exhibit 101.CAL

  Calculation Linkbase Document   

Exhibit 101.LAB

  Labels Linkbase Document   

Exhibit 101.PRE

  Presentation Linkbase Document   

Exhibit 101.DEF

  Definition Linkbase Document   

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Interest income:

           

Interest and fees on loans

   $ 37,090      $ 33,319      $ 73,334      $ 65,521  

Interest on mortgage-backed securities

     3,523        3,564        6,956        6,813  

Interest and dividends on investment securities

     852        814        1,712        1,606  

Interest on reverse mortgage loans

     1,166        1,368        2,402        2,594  

Other interest income

     424        348        1,502        664  
  

 

 

    

 

 

    

 

 

    

 

 

 
     43,055        39,413        85,906        77,198  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     1,825        1,714        3,767        3,370  

Interest on Federal Home Loan Bank advances

     751        661        1,464        1,187  

Interest on trust preferred borrowings

     339        330        666        656  

Interest on senior debt

     941        941        1,883        1,883  

Interest on bonds payable

     —          —          —          15  

Interest on other borrowings

     109        290        219        566  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,965        3,936        7,999        7,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     39,090        35,477        77,907        69,521  

Provision for loan losses

     3,773        50        4,559        2,680  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     35,317        35,427        73,348        66,841  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Credit/debit card and ATM income

     6,462        6,010        12,489        11,776  

Deposit service charges

     4,099        4,346        8,004        8,615  

Investment management and fiduciary revenue

     5,707        4,287        10,800        8,121  

Mortgage banking activities, net

     1,590        1,025        3,293        1,837  

Loan fee income

     469        556        932        940  

Bank owned life insurance income

     179        143        382        282  

Security gains, net

     477        365        928        943  

Other income

     3,475        2,891        6,725        5,473  
  

 

 

    

 

 

    

 

 

    

 

 

 
     22,458        19,623        43,553        37,987  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries, benefits and other compensation

     20,345        18,668        41,355        37,142  

Occupancy expense

     3,637        3,569        7,515        7,298  

Equipment expense

     1,959        1,860        4,041        3,547  

Data processing and operations expenses

     1,459        1,531        2,881        3,002  

Professional fees

     1,753        2,215        3,225        3,321  

FDIC expenses

     687        692        1,356        1,345  

Loan workout and OREO expenses

     330        716        329        1,255  

Marketing expense

     1,007        442        1,591        941  

Corporate development expense

     686        158        1,282        412  

Other operating expenses

     6,791        5,373        13,992        10,845  
  

 

 

    

 

 

    

 

 

    

 

 

 
     38,654        35,224        77,567        69,108  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     19,121        19,826        39,334        35,720  

Income tax provision

     6,887        7,101        14,211        6,084  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 12,234      $ 12,725      $ 25,123      $ 29,636  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.43      $ 0.48      $ 0.89      $ 1.11  

Diluted

   $ 0.43      $ 0.46      $ 0.88      $ 1.08  

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     Six Months Ended  
   June 30,     June 30,  
     2015     2014     2015     2014  
     (Unaudited)     (Unaudited)  
     (In Thousands)     (In Thousands)  

Net Income

   $ 12,234     $ 12,725     $ 25,123     $ 29,636  

Other comprehensive income (loss):

        

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

        

Net unrealized (losses) gains arising during the period, net of tax expense (benefit) of ($3,692), $5,932, ($893) and $11,537, respectively

     (6,024     9,678       (1,457     18,824  

Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $181, $139, $352 and $358, respectively

     (296     (226     (576     (585
  

 

 

   

 

 

   

 

 

   

 

 

 
     (6,320     9,452       (2,033     18,239  

Net change in securities held-to-maturity

        

Amortization of unrealized gain on securities reclassified to held-to-maturity, net of tax benefit of ($120), $0, ($120), $0, respectively

     (37     —         (208     —    

Net change in unfunded pension liability

        

Change in unfunded pension liability related to unrealized (loss) gain, prior service cost and transition obligation, net of tax (benefit) expense of ($9), $36, ($18) and $36, respectively

     (15     60       (30     60  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (6,372     9,512       (2,271     18,299  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 5,862     $ 22,237     $ 22,852     $ 47,935  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     June 30,     December 31,  
     2015     2014  
(In Thousands, Except Per Share Data)    (Unaudited)  

Assets

  

 

Cash and due from banks

   $ 108,928     $ 93,717  

Cash in non-owned ATMs

     424,238       414,188  

Interest-bearing deposits in other banks

     525       134  
  

 

 

   

 

 

 

Total cash and cash equivalents

     533,691       508,039  

Investment securities, available-for-sale

     781,746       740,124  

Investment securities, held-to-maturity at cost

     120,697       126,168  

Loans held-for-sale at fair value

     48,099       28,508  

Loans, net of allowance for loan losses of $40,845 at June 30, 2015 and $39,426 at December 31, 2014

     3,295,471       3,156,652  

Reverse mortgage loans

     25,945       29,298  

Bank-owned life insurance

     76,891       76,509  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     31,832       23,278  

Assets acquired through foreclosure

     4,856       5,734  

Accrued interest receivable

     12,272       11,782  

Premises and equipment

     34,814       35,074  

Goodwill

     48,987       48,651  

Intangible assets

     8,057       8,942  

Other assets

     54,125       54,561  
  

 

 

   

 

 

 

Total assets

   $ 5,077,483     $ 4,853,320  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 875,955     $ 804,678  

Interest-bearing demand

     697,365       688,370  

Money market

     926,582       1,066,224  

Savings

     419,864       402,032  

Time

     223,541       253,302  

Jumbo certificates of deposit – customer

     199,526       247,671  
  

 

 

   

 

 

 

Total customer deposits

     3,342,833       3,462,277  

Brokered deposits

     183,622       186,958  
  

 

 

   

 

 

 

Total deposits

     3,526,455       3,649,235  

Federal funds purchased and securities sold under agreements to repurchase

     123,075       128,225  

Federal Home Loan Bank advances

     740,681       405,894  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     55,000       55,000  

Other borrowed funds

     15,133       11,645  

Accrued interest payable

     1,879       1,004  

Other liabilities

     47,874       46,255  
  

 

 

   

 

 

 

Total liabilities

     4,577,108       4,364,269  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Common stock $0.01 par value, 65,000,000 shares authorized; issued 55,888,833 at June 30, 2015 and 55,697,124 at December 31, 2014

     559       557  

Capital in excess of par value

     205,069       201,130  

Accumulated other comprehensive income

     1,229       3,500  

Retained earnings

     545,405       523,099  

Treasury stock at cost, 27,979,607 shares at June 30, 2015 and 27,489,288 shares at December 31, 2014

     (251,887     (239,235
  

 

 

   

 

 

 

Total stockholders’ equity

     500,375       489,051  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,077,483     $ 4,853,320  
  

 

 

   

 

 

 

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

 

     Six months ended  
   June 30,  
     2015      2014  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 25,123      $ 29,636  

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

    

Provision for loan losses

     4,559        2,680  

Depreciation of premises and equipment, net

     3,054        2,982  

Amortization of fees and discounts, net

     7,173        4,552  

Amortization of intangible assets

     787        546  

Increase in accrued interest receivable

     (490 )      (206

Decrease in other assets

     271        220  

Origination of loans held-for-sale

     (185,543 )      (105,844

Proceeds from sales of loans held-for-sale

     168,397        101,976  

Gain on mortgage banking activities, net

     (3,293 )      (1,837

Gain on sale of securities, net

     (928 )      (943

Stock-based compensation expense

     2,345        2,242  

Excess tax benefit from stock-based compensation

     (681 )      (478

Increase in accrued interest payable

     875        1,543  

Increase (decrease) in other liabilities

     1,582        (788

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

     201        56  

Deferred income tax expense (benefit)

     1,836        (5,722

Increase in value of bank-owned life insurance

     (430 )      (282

Increase in capitalized interest, net

     (2,405 )      (2,785
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 22,433      $ 27,548  
  

 

 

   

 

 

 

Investing activities:

    

Calls of investment securities held to maturity

     3,486        —    

Maturities of investment securities available for sale

     —          2,305  

Sale of investment securities available-for-sale

     84,529        141,439  

Purchases of investment securities available-for-sale

     (185,463 )      (168,454

Repayments of investment securities available-for-sale

     55,084        27,177  

Repayments on reverse mortgages

     6,196        8,235  

Disbursements for reverse mortgages

     (438 )      (665

Net increase in loans

     (149,214 )      (93,558

Net increase in stock of FHLB

     (8,554 )      (1,718

Sales of assets acquired through foreclosure, net

     3,081        3,222  

Investment in premises and equipment, net

     (2,884 )      (1,388
  

 

 

   

 

 

 

Net cash used for investing activities

   $ (194,177 )    $ (83,405
  

 

 

   

 

 

 

Financing activities:

    

Net decrease in demand and saving deposits

     (38,091 )      (65,036

Decrease in time deposits

     (77,906 )      (6,635

(Decrease) increase in brokered deposits

     (3,336 )      31,732  

Increase in loan payable

     41        40  

Repayment of reverse mortgage trust bonds payable

     —          (21,990

Receipts from FHLB advances

     14,455,050        57,176,960  

Repayments of FHLB advances

     (14,435,200 )      (57,056,651

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

     30,479,478        12,259,350  

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

     (30,169,691 )      (12,270,350

Dividends paid

     (2,823 )      (2,141

Issuance of common stock and exercise of common stock options

     1,845        863  

Purchase of treasury stock

     (12,652 )      —    

Excess tax benefit from stock-based compensation

     681        478  
  

 

 

   

 

 

 

Net cash provided by financing activities

   $ 197,396      $ 46,620  
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     25,652        (9,237

Cash and cash equivalents at beginning of period

     508,039        484,426  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 533,691      $ 475,189  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 7,124      $ 6,134  

Cash paid for income taxes, net

     10,471        12,231  

Loans transferred to assets acquired through foreclosure

     2,452        3,196  

Loans transferred to portfolio from held-for-sale at fair value

     171        2,169  

Net change in accumulated other comprehensive income

     (2,271 )      18,299  

Non-cash goodwill adjustments, net

     336        135  

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 SIX MONTHS ENDED JUNE 30, 2015

(UNAUDITED)

1. BASIS OF PRESENTATION

General

Our unaudited 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 three wholly-owned subsidiaries, WSFS Wealth Investments, 1832 Holdings, Inc. and Monarch Entity Services LLC (Monarch).

The acronyms and abbreviations below are used in the unaudited Notes to Consolidated Financial Statements as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer back to this page as you read this report.

 

AICPA: American Institute of Certified Public

   FASB: Financial Accounting Standards Board
   

Accountants

   FDIC: Federal Deposit Insurance Corporation
   

Allowance: Allowance for loan losses or ALLL

   Federal Reserve: Board of Governors of the Federal
   

Alliance: Alliance Bancorp Inc. of Pennsylvania

  

Reserve System

   

Array: Array Financial Group

   Monarch: Monarch Entity Services, LLC
   

Arrow: Arrow Land Transfer

   FHLB: Federal Home Loan Bank
   

ASC: Accounting standard codification

   FHLMC: Federal Home Loan Mortgage Corporation
   

Associate: Employee

   GAAP: U.S. Generally Accepted Accounting Principles
   

ASU: Accounting standard update

   GNMA: Government National Mortgage Association
   

BCBS: Basel Committee on Banking Supervision

   GSE: U.S. Government and government sponsored
   

C&I: Commercial & Industrial (loans)

   enterprises
   

CMO: Collateralized mortgage obligation

   HUD: U.S. Housing and Urban Development Agency
   

CRA: Community Reinvestment Act

   NPA: Nonperforming asset
   

Cypress: Cypress Capital Management, LLC

   NSFR: Net stable funding ratio
   

Dodd-Frank Act: Dodd-Frank Wall Street Reform

   MBS: Mortgage-backed securities
   

and Consumer Protection Act of 2010

   OCC: Office of the Comptroller of the Currency
   

DTA: Deferred tax asset

   OREO: Other real estate owned
   

EPS: Earnings per share

   OTTI: Other-than-temporary impairment
   

Exchange Act: Securities Exchange Act of 1934

   PCI: Purchased credit impaired

Overview

Founded in 1832, the Bank is the seventh oldest bank 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 Wealth Management segment. The FDIC insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 56 offices located in Delaware (45), Pennsylvania (9), 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.

 

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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 OTTI. Among other effects, changes to such estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment of the allowance and lending related commitments as well as increased post-retirement benefits expense.

Our accounting and reporting policies conform to GAAP, prevailing practices within the banking industry for interim financial information and Rule 10-01 of SEC Regulation S-X (Rule 10-01). Rule 10-01 does not require us to include all information and notes that would be required in audited financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2015. These unaudited, interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in our 2014 Annual Report on Form 10-K that was filed with the SEC on March 16, 2015 and is available at www.sec.gov or on our website at http://investors.wsfsbank.com/releases.cfm.

Whenever necessary, reclassifications have been made to the 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 2014 Annual Report on Form 10-K. There have not been any material changes in our significant accounting policies from those contained in our 2014 Annual Report on Form 10-K.

Common Stock Split

In March 2015, the Company’s Board of Directors adopted an amendment to the Company’s Certificate of Incorporation, to increase the number of shares of common stock the Company is authorized to issue from 20,000,000, par value $0.01 to 65,000,000, par value $0.01. This amendment to the Company’s Certificate of Incorporation was approved by the Company’s stockholders at the 2015 Annual Meeting held on April 30, 2015.

On May 18, 2015, the Company effected a three-for-one stock split in the form of a stock dividend to shareholders of record as of May 4, 2015. All share and per share information has been retroactively adjusted to reflect the stock split. We retroactively adjusted stockholders’ equity to reflect the stock split by reclassifying an amount equal to the par value, $0.01, of the additional shares arising from the split from capital in excess of par value to common stock, resulting in no net impact to stockholders’ equity on our consolidated statements of condition.

RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2015

In August 2014, the FASB issued ASU No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The objective of this guidance is to reduce diversity in practice related to how creditors classify government-guaranteed mortgage loans, including Federal Housing Administration or Veterans Affairs 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. The adoption of this accounting guidance does not have a material effect on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

 

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In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This 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. It 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 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 interim periods beginning after March 15, 2015. The adoption of this accounting guidance does not have a material effect on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (ASU 2014-04). The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs. 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. The adoption of this accounting guidance does not have a material effect on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

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). This 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). 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 adoption does not have a material effect on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition. For additional discussion on the adoption of this guidance refer to the Income Taxes section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Accounting Guidance Pending Adoption at June 30, 2015

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 is 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 does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

 

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In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU No. 2014-9 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. This ASU is effective for public entities for financial statement issued for fiscal years beginning after December 15, 2016, including interim periods. It can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Company does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

In April 2015, the FASB issued ASU No 2015-04 Compensation—Retirement Benefits (Topic 715). The Board is issuing the amendments in this update as part of its initiative to reduce complexity in accounting standards. It provides that an entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations. The amendments in this update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not anticipate a material impact on its Consolidated Statements of Operations or Consolidated Statements of Condition.

In April 2015, the FASB issued ASU No 2015-03, Interest- Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect the application of this guidance to have a material impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Condition.

In February 2015, the FASB issued ASU No 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This guidance provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity and also amends the criteria for consolidating such an entity. In addition, it amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a VIE primary beneficiary determination. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not anticipate a material impact on its consolidated financial statements or results of operations.

 

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2. BUSINESS COMBINATIONS

Alliance Bancorp, Inc. of Pennsylvania

On March 3, 2015 we announced the signing of a definitive agreement and plan of reorganization whereby we would acquire Alliance and its wholly owned bank subsidiary, Alliance Bank. Upon the closing of the transaction, Alliance will merge into the Company and Alliance Bank will merge into WSFS Bank. Alliance is a locally-managed institution with eight branch locations headquartered in Broomall, PA. It reported approximately $421 million in assets, $310 million in loans and $345 million in deposits as of December 31, 2014 and reported approximately $415 million in assets, $315 million in loans and $338 million in deposits as of June 30, 2015. We expect this acquisition to build our market share, expand our customer base and enhance our fee income. The acquisition has been approved by the shareholders of Alliance and is subject to regulatory approval and other customary closing conditions.

First Wyoming Financial Corporation

On September 5, 2014, the Company completed the merger of First Wyoming Financial Corporation (FNBW) into the Company and the merger of FNBW’s wholly-owned subsidiary, The First National Bank of Wyoming into the Bank. In accordance with the terms of the Agreement and Plan of Merger, dated November 25, 2013, holders of shares of FNBW common stock received, in aggregate, $32.0 million in cash and 1,357,983 shares (adjusted for our 3-for-1 stock split) of WSFS common stock. The transaction was valued at $64.9 million based on WSFS’ September 5, 2014 closing share price of $24.23 (adjusted for our 3-for-1 stock split) as quoted on NASDAQ. The results of the combined entity’s operations are included in our Consolidated Financial Statements since the date of the acquisition.

The acquisition of FNBW 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 fair values are preliminary estimates and are subject to adjustment during the one year measurement period after the acquisition. The excess of consideration paid over the preliminary fair value of net assets acquired was recorded as goodwill in the amount of $16.7 million, which will not be amortizable and is not deductible for tax purposes. The Company allocated the total balance of goodwill to its WSFS Bank segment. The Company also recorded $3.2 million in core deposit intangibles which are being amortized over ten years using an accelerated depreciation method. For additional information regarding this business combination, please see Note 2 in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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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)    Fair Value  

Consideration Paid:

  

Common shares issued (1,357,983)

   $ 32,908  

Cash paid to FNBW stockholders

     32,028  
  

 

 

 

Value of consideration

     64,936  

Assets acquired:

  

Cash and due from banks

     40,605  

Investment securities

     41,822  

Loans

     175,578  

Premises and equipment

     1,611  

Deferred income taxes

     3,139  

Bank owned life insurance

     12,576  

Core deposit intangible

     3,240  

Other Real Estate Owned

     1,593  

Other assets

     4,952  
  

 

 

 

Total assets

     285,116  

Liabilities assumed:

  

Deposits

     228,844  

FHLB advances

     5,052  

Other liabilities

     2,990  
  

 

 

 

Total liabilities

     236,886  

Net assets acquired:

     48,230  
  

 

 

 

Goodwill resulting from acquisition of FNBW

   $ 16,706  
  

 

 

 

The following table details the changes to goodwill:

  
(In Thousands)    Fair Value  

Goodwill resulting from the acquisition of FNBW reported as of December 31, 2014

   $ 16,370  

Effects of adjustments to:

  

Assets

     336  

Liabilities

     —    

Final purchase price

     —    
  

 

 

 

Adjusted goodwill resulting from the acquisition of FNBW as of June 30, 2015

   $ 16,706  
  

 

 

 

The adjustments made to goodwill during the first six months of 2015, reflect new or updated information that resulted from a change in the fair value of the loans acquired, accrued expenses, bank owned life insurance, computer equipment and OREO properties.

Direct costs related to the acquisition were expensed as incurred. During the three months ended June 30, 2015, the Company incurred $62,000 in integration expenses related to FNBW compared to the three months ended June 30, 2014 in which the Company incurred $157,000 in integration expenses. During the six months ended June 30, 2015, the Company incurred $97,000 in integration expense, compared to $412,000 during the same time period in 2014.

 

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3. EARNINGS PER SHARE

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

 

     Three Months Ended      Six Months Ended  
   June 30,      June 30,  
(In Thousands, Except Per Share Data)    2015      2014      2015      2014  

Numerator:

           

Net income

   $ 12,234      $ 12,725      $ 25,123      $ 29,636  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average basic shares

     28,171        26,745        28,194        26,730  

Dilutive potential common shares

     433        684        443        690  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average fully diluted shares

     28,604        27,429        28,637        27,420  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.43      $ 0.48      $ 0.89      $ 1.11  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.43      $ 0.46      $ 0.88      $ 1.08  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     184        131        184        131  

 

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4. INVESTMENT SECURITIES

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

 

            Gross      Gross         
(In Thousands)    Amortized      Unrealized      Unrealized      Fair  

Available-for-Sale Securities:

   Cost      Gain      Loss      Value  

June 30, 2015

           

GSE

   $ 29,033      $ 35      $ 15      $ 29,053  

CMO

     254,596        773        2,033        253,336  

FNMA MBS

     302,595        1,002        2,472        301,125  

FHLMC MBS

     134,161        354        621        133,894  

GNMA MBS

     63,922        594        178        64,338  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 784,307      $ 2,758      $ 5,319      $ 781,746  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

GSE

   $ 30,020      $ 14      $ 74      $ 29,960  

CMO

     193,672        874        1,614        192,932  

FNMA MBS

     291,606        2,053        1,106        292,553  

FHLMC MBS

     146,742        672        532        146,882  

GNMA MBS

     77,364        701        268        77,797  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 739,404      $ 4,314      $ 3,594      $ 740,124  
  

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
(In Thousands)    Cost      Gain      Loss      Value  

Held-to-Maturity Securities (a)

           

June 30, 2015

           

State and political subdivisions

   $ 120,697      $ 152      $ 2,045      $ 118,804  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

State and political subdivisions

   $ 126,168      $ 3      $ —        $ 126,171  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)  Held-to –maturity securities transferred from available-for-sale are included in held-to-maturity at fair value at the time of transfer. The amortized cost of held-to-maturity securities included net unrealized gains of $3.2 million and $3.6 million at June 30, 2015 and December 31, 2014, respectively, related to securities transferred, which are offset in Accumulated Other Comprehensive Income, net of tax.

 

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The scheduled maturities of investment securities available-for-sale and held-to-maturity at June 30, 2015 and December 31, 2014 are presented in the table below:

 

     Available-for-Sale  
(In Thousands)    Amortized      Fair  

June 30, 2015

   Cost      Value  

Within one year

   $ 3,000      $ 3,001  

After one year but within five years

     29,032         29,024  

After five years but within ten years

     181,317         179,384  

After ten years

     570,958         570,337  
  

 

 

    

 

 

 
   $ 784,307      $ 781,746  
  

 

 

    

 

 

 

December 31, 2014

      

Within one year

   $ 10,000      $ 10,014  

After one year but within five years

     20,020        19,946  

After five years but within ten years

     134,453        133,395  

After ten years

     574,931        576,769  
  

 

 

    

 

 

 
   $ 739,404      $ 740,124  
  

 

 

    

 

 

 
     Held-to-Maturity  
(In Thousands)    Amortized      Fair  

June 30, 2015

   Cost      Value  

Within one year

   $ 2,692      $ 2,694  

After one year but within five years

     3,016        2,967  

After five years but within ten years

     9,278        9,319  

After ten years

     105,711        103,824  
  

 

 

    

 

 

 
   $ 120,697      $ 118,804  
  

 

 

    

 

 

 

December 31, 2014

      

Within one year

   $ 3,608      $ 3,608  

After one year but within five years

     6,217        6,217  

After five years but within ten years

     9,733        9,736  

After ten years

     106,610        106,610  
  

 

 

    

 

 

 
   $ 126,168      $ 126,171  
  

 

 

    

 

 

 

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

Investment securities with fair market values aggregating $374.9 million and $470.4 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations as of June 30, 2015 and December 31, 2014, respectively. From time to time, investment securities are also pledged as collateral for FHLB borrowings. There were $3.0 million of FHLB pledged investment securities at June 30, 2015 and none pledged at December 31, 2014.

During the first six months of 2015 and 2014, we sold $88.2 million and $140.9 million of investment securities categorized as available-for-sale, for a gain of $928,000 and $943,000, respectively. No losses were incurred from sales that occurred during the first six months of 2015 and 2014.

As of June 30, 2015 and December 31, 2014, our investment securities portfolio had remaining unamortized premiums of $21.0 million and $22.4 million and unaccreted discounts of $136,000 and $188,000, respectively.

 

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For these investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at June 30, 2015 and December 31, 2014:

 

     Duration of Unrealized Loss Position                
     Less than 12 months      12 months or longer      Total  
(In Thousands)    Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
June 30, 2015    Value      Loss      Value      Loss      Value      Loss  

GSE

   $ 13,035      $ 15      $ —        $ —        $ 13,035      $ 15  

CMO

     123,638        1,244        28,247        789        151,885        2,033  

FNMA MBS

     184,403        2,472        —          —          184,403        2,472  

FHLMC MBS

     63,566        400        4,151        221        67,717        621  

GNMA MBS

     39,108        93        2,397        85        41,505        178  

State and political subdivisions

     97,355        2,045        —          —          97,355        2,045  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 521,105      $ 6,269      $ 34,795      $ 1,095      $ 555,900      $ 7,364  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2014                                          

GSE

   $ 19,945      $ 74      $ —        $ —        $ 19,945      $ 74  

CMO

     15,492        108        61,630        1,506        77,122        1,614  

FNMA MBS

     —          —          103,207        1,106        103,207        1,106  

FHLMC MBS

     23,901        54        58,267        478        82,168        532  

GNMA MBS

     —          —          48,312        268        48,312        268  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 59,338      $ 236      $ 271,416      $ 3,358      $ 330,754      $ 3,594  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no held-to-maturity investment securities in an unrealized loss position as of December 31, 2014.

All securities, with the exception of two, were AA-rated or better at the time of purchase and remained investment grade at June 30, 2015. In December 2014, we purchased a BBB- bond with a fair market value of $1.3 million as part of a financing transaction for an ongoing lending relationship. All securities were evaluated for OTTI at June 30, 2015 and December 31, 2014. The result of this evaluation showed no OTTI as of June 30, 2015 or December 31, 2014. The weighted average duration of MBS was 4.6 years at June 30, 2015.

At June 30, 2015, we owned investment securities totaling $550.9 million in which the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $7.4 million at June 30, 2015. 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 OTTI. This review includes analyzing the length of time and the extent to which the fair value has been lower than the amortized 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 full recovery of the unrealized loss. We evaluate our intent and ability to hold securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, we do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.

 

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5. LOANS

The following details our loan portfolio by category:

 

     June 30,      December 31,  
     2015      2014  
(In Thousands)              

Commercial

   $ 936,765      $ 920,072  

Owner occupied commercial

     793,062        788,598  

Commercial mortgages

     870,152        805,459  

Construction

     201,845        142,497  

Residential

     212,797        218,329  

Consumer

     328,884        327,543  
  

 

 

    

 

 

 
   $ 3,343,505      $ 3,202,498  

Less:

     

Deferred fees, net

   $ 7,189      $ 6,420  

Allowance for loan losses

     40,845        39,426  
  

 

 

    

 

 

 

Net loans

   $ 3,295,471      $ 3,156,652  
  

 

 

    

 

 

 

Acquired Credit Impaired Loans

The following table details the loans acquired through the FNBW merger on September 5, 2014 that are accounted for in accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30).

 

(In Thousands)    September 5, 2014  

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 following is the outstanding principal balance and carrying amounts for acquired credit impaired loans for which the company applies ASC 310-30 as of June 30, 2015:

 

(In Thousands)    June 30, 2015  

Outstanding principal balance

   $ 21,265  

Carrying amount

     14,108  

Allowance for Loan loss

     748  

The following table presents the changes in accretable yield on the acquired credit impaired loans for the following six month period:

 

     January 1, 2015  
(In Thousands)    through June 30, 2015  

Balance at beginning of period

   $ 1,498  

Accretion

     (449

Reclassification from nonaccretable difference

     2,194   

Additions/adjustments

     23   
  

 

 

 

Balance at the end of the period

   $ 3,220   
  

 

 

 

 

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6. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

We maintain an allowance for loan losses (allowance) 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) and FASB ASC 450, Contingencies (ASC 450). When we have reason to believe it is probable that we will not be able to collect all contractually due amounts of principal and interest, loans are evaluated for impairment on an individual basis and a specific allocation of the allowance is assigned in accordance with ASC 310-10. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition. 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

 

    An allowance for each pool of homogenous loans based on historical loss experience

 

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

 

    Allowance for model estimation and complexity risk

When it is probable that the Bank will be unable to collect all amounts due (interest and principal) in accordance with the contractual terms of the loan agreement, it assigns a specific reserve to that loan, if necessary. Unless loans are well-secured and collection is imminent, loans greater than 90 days past due are deemed impaired and their respective reserves are generally charged-off once the loss has been confirmed. Estimated specific reserves are based on collateral values, estimates of future cash flows or market valuations. We charge loans off when they are deemed to be uncollectible. During the six months ended June 30, 2015 net charge-offs totaled $3.1 million or 0.19% of average loans, compared to $2.5 million, or 0.17% of average loans annualized, during the six months ended June 30, 2014. A significant portion of the net charge-offs in 2015 was the result of one $9.1 million substandard C&I relationship previously classified as an accruing TDR that was placed in nonaccrual status during the second quarter of 2015. This relationship included a net charge-off of $1.9 million and an incremental increase in the allowance for loan losses of $3.6 million at June 30, 2015.

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: commercial, owner-occupied, commercial real estate and construction. 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. During the six months ended June 30, 2015, we increased the look-back period to 18 quarters from the 16 quarters used at December 31, 2014 and prior periods. This change in the look-back period resulted in an increase of $1.7 million to the total allowance at June 30, 2015. Loss severity upon default is calculated as the actual loan losses (net of recoveries) on impaired loans in their respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage, consumer secured and consumer unsecured loans. Pooled reserves for retail loans are calculated based solely on average net loss rates over the same 18 quarter look-back period.

Qualitative adjustment factors consider various current internal and external conditions which are allocated among loan types and take into consideration the following:

 

    Current underwriting policies, staff, and portfolio mix

 

    Internal trends of delinquency, nonaccrual and criticized loans by segment

 

    Risk rating accuracy, control and regulatory assessments/environment

 

    General economic conditions - locally and nationally

 

    Market trends impacting collateral values

 

    A competitive environment as it could impact loan structure and underwriting

 

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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 factor in our model can add or subtract to core reserves. A special adjustment factor of 10 basis points was created within consumer secured for incremental losses associated with the Home Equity Line of Credit End of Draw bubble not captured within the Bank’s loan loss histories. A special adjustment factor to address the absence of a default history for C&I loans, previously at 7.5 basis points, was eliminated as problem loans were remedied through refinance. Further, a special adjustment factor within the construction portfolio has been reduced from 92 basis points to 50 basis points as the portfolio continues to perform at a favorable level. These changes in adjustment factors resulted in a decrease of $2.5 million to the total allowance at June 30, 2015.

The allowance methodology uses a loss emergence period (LEP), which is the period of time between an event that triggers the probability of a loss and the confirmation of the loss. We estimate the commercial LEP to be 8 quarters as of June 30, 2015. During the six months ended June 30, 2015 we adjusted our model to reflect an LEP in the model calculation of eight quarters. Further, our residential mortgage and consumer LEP remained at four quarters as of June 30, 2015. We evaluate LEP quarterly for reasonableness and complete a detailed historical analysis of our LEP by commercial, commercial real estate, residential and consumer portfolios at least annually. The change in commercial LEP contributed $458,000 to the total allowance at June 30, 2015.

The final component of the allowance is a reserve for model estimation and complexity risk. The calculation of this reserve is generally quantitative; however, qualitative estimates of valuations and risk assessment, and methodology judgments are necessary. We review the qualitative estimates of valuation factors quarterly and management uses its judgment to make adjustments based on current trends. The model complexity risk factor was reduced to 3 basis points of total loans for June 30, 2015 and takes into consideration the model improvements made around effective LEP, as well as the continued sophistication and layering of estimates inherent in our model. This change in the model and complexity risk resulted in a decrease of $639,000 on the total allowance at June 30, 2015.

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 periodically review our loan ratings and allowance for loan losses and the Bank’s internal loan review department performs loan reviews.

 

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The following tables provide the activity of our allowance for loan losses and loan balances for three and six months ended June 30, 2015:

 

(In Thousands)

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

Three months ended June 30, 2015

               

Allowance for loan losses

               

Beginning balance

  $ 13,048     $ 7,039     $ 6,524     $ 2,952     $ 2,380     $ 6,026     $ 1,538     $ 39,507  

Charge-offs

    (1,903     (272     —         —         (147     (620     —         (2,942

Recoveries

    91       18       28       111       26       233       —         507  

Provision (credit)

    2,788       (80     50       249       448       149       (579     3,025  

Provision for acquired loans

    488       28       229       1       2       —         —         748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 14,512     $ 6,733     $ 6,831     $ 3,313     $ 2,709     $ 5,788     $ 959     $ 40,845  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2015

               

Allowance for loan losses

               

Beginning balance

  $ 12,837     $ 6,643     $ 7,266     $ 2,596     $ 2,523     $ 6,041     $ 1,520     $ 39,426  

Charge-offs

    (2,037     (597     (4     —         (267     (1,071     —         (3,976

Recoveries

    114       22       69       160       37       434       —         836  

Provision (credit)

    3,110       637       (729     556       414       384       (561   $ 3,811  

Provision for acquired loans

    488       28       229       1       2       —         —         748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 14,512     $ 6,733     $ 6,831     $ 3,313     $ 2,709     $ 5,788     $ 959     $ 40,845  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

               

Loans individually evaluated for impairment

  $ 4,819     $ 75     $ 177     $ 214     $ 1,178      $ 188     $ —       $ 6,651  

Loans collectively evaluated for impairment

    9,205       6,630       6,425       3,098       1,529        5,600       959       33,446  

Acquired loans evaluated for impairment

    488       28       229       1       2       —         —         748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 14,512     $ 6,733     $ 6,831     $ 3,313     $ 2,709     $ 5,788     $ 959     $ 40,845  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

               

Loans individually evaluated for impairment

  $ 9,938     $ 1,389      $ 7,329     $ 1,419     $ 15,198      $ 6,055      $ —       $ 41,328 (2)

Loans collectively evaluated for impairment

    893,774       750,514        827,381       188,251       181,169        316,213        —         3,157,302  

Acquired nonimpaired loans

    29,894       39,132       29,558       8,696       15,970       6,608       —         129,858  

Acquired impaired loans

    3,159       2,027       5,884       3,479       460        8       —         15,017   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 936,765     $ 793,062     $ 870,152     $ 201,845     $ 212,797     $ 328,884     $ —       $ 3,343,505 (3)
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table provides the activity of the allowance for loan losses and loan balances for the three and six months ended June 30, 2014:

 

(In Thousands)

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

Three months ended June 30, 2014

               

Allowance for loan losses

               

Beginning balance

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

Charge-offs

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

Recoveries

    483       161       2       177       25       314       —         1,162  

Provision (credit)

    841       (840     252       (574     132       226       13       50  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2014

               

Allowance for loan losses

               

Beginning balance

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

Charge-offs

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

Recoveries

    807       167       39       184       43       531       —         1,771  

Provision (credit)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

               

Loans individually evaluated for impairment

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

Loans collectively evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

               

Loans individually evaluated for impairment

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

Loans collectively evaluated for impairment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 represents accruing troubled debt restructured loans of $13.6 million and $11.8 million for the periods ending June 30, 2015 and June 30, 2014, respectively. Accruing troubled debt restructured loans are considered impaired loans.
(3)  Ending loan balances do not include deferred costs.

Nonaccrual and Past Due Loans

Nonaccruing loans are those on which the accrual of interest has ceased. We discontinue accrual of interest on originated loans after payments become more than 90 days past due or earlier if we do not expect the full collection of principal or interest in accordance with the terms of the loan agreement. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the accretion of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on our assessment of the ultimate collectability of principal and interest. Loans greater than 90 days past due and still accruing are defined as loans contractually past due 90 days or more as to principal or interest payments, but remain in accrual status because they are considered well secured and in the process of collection.

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

 

                Greater Than     Total
Past
                         
    30–59 Days     60–89 Days     90 Days     Due     Accruing     Acquired              
June 30, 2015   Past Due and     Past Due and     Past Due and     And Still     Current     Impaired     Nonaccrual     Total  

(In Thousands)

  Still Accruing     Still Accruing     Still Accruing     Accruing     Balances     Loans     Loans     Loans  

Commercial

  $ 135     $ —       $ —       $ 135     $ 923,924     $ 3,159     $ 9,547     $ 936,765  

Owner-Occupied commercial

    144       —         —         144       789,501       2,027       1,390       793,062  

Commercial mortgages

    390       86       —         476       856,549       5,884       7,243       870,152  

Construction

    —         —         —         —         198,366       3,479       —         201,845  

Residential

    2,706       933       153       3,792       201,878       460       6,667       212,797  

Consumer

    1,050       113       —         1,163       324,841       8       2,872       328,884  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (1)

  $ 4,425      $ 1,132      $ 153     $ 5,710      $ 3,295,059      $ 15,017      $ 27,719      $ 3,343,505  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

    0.13     0.03     0.01 %     0.17     98.55     0.45     0.83     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The balances of above include $129.9 million of acquired nonimpaired loans.

 

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                 Greater Than     Total Past                          
     30–59 Days     60–89 Days     90 Days     Due     Accruing     Acquired              
December 31, 2014    Past Due and     Past Due and     Past Due and     And Still     Current     Impaired     Nonaccrual     Total  

(In Thousands)

   Still Accruing     Still Accruing     Still Accruing     Accruing     Balances     Loans     Loans     Loans  

Commercial

   $ 715      $ —        $ —        $ 715      $ 913,382      $ 3,269      $ 2,706      $ 920,072  

Owner-occupied commercial

     393       —         —         393       783,466       2,264       2,475       788,598  

Commercial mortgages

     203       —         —         203       791,035       5,976       8,245       805,459  

Construction

     —         —         —         —         138,634       3,863       —         142,497  

Residential

     3,879       604       —         4,483       206,266       512       7,068       218,329  

Consumer

     1,241       342       4       1,587       322,390       9       3,557       327,543  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (1)

   $ 6,431      $ 946      $ 4      $ 7,381      $ 3,155,173      $ 15,893      $ 24,051      $ 3,202,498  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.20     0.03     0.00     0.23     98.52     0.50     0.75     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The balances of above include $107.3 million of acquired nonimpaired loans

Impaired Loans

Loans for which it is probable we will not collect all principal and interest due according to their contractual terms, which is assessed based on the credit characteristics of the loan and/or payment status, are measured for impairment in accordance with the provisions of SAB 102 and FASB ASC 310, Receivables (ASC 310). The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the fair value of collateral, if the loan is collateral dependent or (3) the loan’s observable market price. If the measure of the impaired loan is less than the recorded investment in the loan, a related allowance is allocated for the impairment.

The following tables provide an analysis of our impaired loans at June 30, 2015 and December 31, 2014:

 

     Ending      Loans with      Loans with             Contractual      Average  
June 30, 2015    Loan      No Related      Related      Related      Principal      Loan  

(In Thousands)

   Balances      Reserve (1)      Reserve      Reserve      Balances      Balances  

Commercial

   $ 10,590      $ 1,188      $ 9,402      $ 5,234      $ 13,089      $ 8,494  

Owner-occupied commercial

     2,313        1,314        999        103        3,251        2,931  

Commercial mortgages

     9,221         3,946         5,275        465        12,867        9,479  

Construction

     1,492         —          1,492        215        1,520        1,150  

Residential

     15,484         8,407        7,077        1,180        17,815        16,090  

Consumer

     6,057         4,838        1,219        190        6,648        6,155  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

   $ 45,157      $ 19,693      $ 25,464      $ 7,387      $ 55,190      $ 44,299  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Ending      Loans with      Loans with             Contractual      Average  
December 31, 2014    Loan      No Related      Related      Related      Principal      Loan  

(In Thousands)

   Balances      Reserve (1)      Reserve      Reserve      Balances      Balances  

Commercial

   $ 12,381      $ 580      $ 11,801      $ 3,034      $ 20,924      $ 5,952  

Owner-occupied commercial

     2,474        1,865        609        609        3,708        4,461  

Commercial mortgages

     8,335        4,732        3,603        319        14,383        11,005  

Construction

     1,419        —          1,419        334        1,419        1,013  

Residential

     15,666        7,068        8,598        790        18,967        17,296  

Consumer

     6,376        3,557        2,819        231        7,162        5,902  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,651      $ 17,802      $ 28,849      $ 5,317      $ 66,563      $ 45,629  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Reflects loan balances at or written down to their remaining book balance.
(2)  The above includes acquired impaired loans totaling $3.8 million in the ending loan balance and $5.2 million in the contractual principal balance.

Interest income of $449,000 and $921,000 was recognized on impaired loans during the three and six months ended June 30, 2015, respectively. Interest income of $393,000 and $747,000 was recognized on impaired loans during the three and six months ended June 30, 2014.

As of June 30, 2015, there were 32 residential loans and 15 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $3.4 million and $3.4 million, respectively. As of December 31, 2014, there were 36 residential loans and 12 commercial loans in the process of foreclosure. The total outstanding balance on the loans was $4.4 million and $1.1 million, respectively

 

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Reserves on Acquired Nonimpaired Loans

In accordance with FASB ASC 310-40, loans acquired by the Bank through its merger with FNBW are required to be reflected on the balance sheet at their fair values on the date of acquisition as opposed to their contractual values. Therefore, on the date of acquisition establishing an allowance for acquired loans is prohibited. After the acquisition date the Bank performs a separate allowance analysis on a quarterly basis to determine if an allowance for loan loss is necessary. Should the credit risk calculated exceed the purchased loan portfolio’s remaining credit mark, additional reserves will be added to the Bank’s allowance. When a purchased loan becomes impaired after its acquisition, it is evaluated as part of the Bank’s reserve analysis and a specific reserve is established to be included in the Bank’s allowance.

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.

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

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

Residential and Consumer Loans

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

 

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The tables below provide information about the credit quality of loans in our commercial and residential and consumer portfolios.

Commercial Credit Exposure

 

                Owner-Occupied     Commercial           Total  
(In Thousands)   Commercial     Commercial     Mortgages     Construction     Commercial(1)  
                                                    June 30,     Dec. 31,  
    June 30,     Dec. 31     June 30,     Dec. 31     June 30,     Dec. 31     June 30,     Dec. 31     2015     2014  
  2015     2014     2015     2014     2015     2014     2015     2014     Amount     %     Amount     %  

Risk Rating:

                       

Special mention

  $ 16,078     $ 4,744     $ 18,713     $ 6,989     $ 10,302     $ 9,065     $ —       $ —       $ 45,093       $ 20,798    

Substandard:

                       

Accrual

    35,061       42,377       15,567       14,436       4,515       9,167       1,205       1,085       56,348         67,065    

Nonaccrual

    4,742       1,225       1,314       1,865       7,066       7,927       —           13,122         11,017    

Doubtful/nonaccrual

    4,814       3,034       75       609       177       319       214       334       5,280         4,296    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Special and Substandard

    60,695       51,380       35,669       23,899       22,060       26,478       1,419       1,419       119,843       4     103,176       4

Acquired impaired

    3,159       3,269       2,027       2,264       5,884       5,976       3,479       3,863       14,549       1       15,372       —    

Pass

    872,911       865,423       755,366       762,435       842,208       773,005       196,947       137,215       2,667,432       95       2,538,078       96  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 936,765     $ 920,072     $ 793,062     $ 788,598     $ 870,152     $ 805,459     $ 201,845     $ 142,497     $ 2,801,824       100   $ 2,656,626       100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

(1)  Table includes $107.3 million and $119.8 million of acquired nonimpaired loans as of June 30, 2015 and December 31, 2014, respectively.

Residential and Consumer Credit Exposure

 

(In Thousands)    Residential      Consumer      Total Residential and Consumer(2)  
     June 30,      Dec. 31      June 30,      Dec. 31      June 30, 2015     Dec. 31, 2014  
     2015      2014      2015      2014      Amount      Percent     Amount      Percent  

Nonperforming(1)

   $ 15,198      $ 15,666      $ 6,055      $ 6,376      $ 21,253        4   $ 22,042        4

Acquired impaired Loans

     460        512        8        9        468        —         521        —    

Performing

     197,139        202,151        322,821        321,158        519,960        96       523,309        96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 212,797      $ 218,329      $ 328,884      $ 327,543      $ 541,681        100   $ 545,872        100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

(1)  Includes $11.7 million as of June 30, 2015 and $11.4 million as of December 31, 2014 of troubled debt restructured mortgages and home equity installment loans that are performing in accordance with the loans’ modified terms and are accruing interest.
(2) Total includes $22.6 million and $26.0 million in acquired nonimpaired loans as of June 30, 2015 and December 31, 2014, respectively.

Troubled Debt Restructurings (TDR)

TDRs are recorded in accordance with FASB ASC 310-40, Troubled Debt Restructuring by Creditors (ASC 310-40). The balance of TDRs at June 30, 2015 and December 31, 2014 was $33.0 million and $36.2 million, respectively. The balance at June 30, 2015 included approximately $19.4 million of TDRs in nonaccrual status and $13.6 million of TDRs in accrual status compared to $13.6 million in nonaccrual status and $22.6 million in accrual status at December 31, 2014. Approximately $6.4 million and $4.2 million in related reserves have been established for these loans at June 30, 2015 and December 31, 2014, respectively.

During the six months ended June 30, 2015, the terms of 18 loans were modified in TDRs. Twelve modifications were for consumer loans in which five had their maturity dates extended, six were discharged bankruptcies and one was a rate concession. Five were residential mortgages in which three were discharged bankruptcies, one was a forbearance agreement and one was a maturity date extension. One commercial loan received a maturity date extension. Our concessions on restructured loans typically consist of forbearance agreements, reduction in interest rates or extensions of maturities. Principal balances are generally not forgiven 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 and payment is reasonably assured.

The following table presents loans identified as TDRs during the three and six months ended June 30, 2015 and 2014:

 

     Three      Three      Six      Six  
     Months Ended      Months Ended      Months Ended      Months Ended  
     June 30,      June 30,      June 30,      June 30,  

(In Thousands)

   2015      2014      2015      2014  

Commercial

   $ 557      $ 121      $ 557      $ 121  

Residential

     197        1,565        409        1,844  

Consumer

     528        152        663        515  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,282      $ 1,838      $ 1,629      $ 2,480  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 2015 the TDRs set forth in the table above increased our allowance $13,000 through the allocation of a related reserve, and resulted in charge-offs of $69,000 compared to an increase in our allowance of $1.4 million and charge-offs of $41,000 for the same period of 2014.

 

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7. REVERSE MORTGAGE LOANS

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.

Our investment in reverse mortgages totaled $25.9 million at June 30, 2015. The portfolio consists of 102 loans with an average borrowers’ age of 93 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 $49.0 million exceeds the outstanding book balance at June 30, 2015. Interim broker price opinions are obtained when our quarterly review indicates that a home’s value has increased or decreased by at least 50% during any given period.

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

To determine the carrying value of these reverse mortgages as of June 30, 2015, we used the proprietary model described above 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 – We used the actuarial estimates of contract termination provided in the United States Mortality Rates published by the Office of the Actuary - Social Security in 2014, adjusted for expected prepayments and relocations which we adopted during 2014.

 

  2) House Price Appreciation – Consistent with other reverse mortgage analyses from various market sources, we forecast a 2.5% increase in housing prices during 2015 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. Annually, during the fourth quarter, housing price estimates are updated through broker price opinions.

 

  3) Internal Rate of Return – As of June 30, 2015, the internal rate of return (IRR) of 17.72% was the effective yield required on the life of the portfolio to reduce the net investment to zero at the time the final reverse mortgage contract is liquidated.

As of June 30, 2015, the Company’s actuarially estimated cash payments to reverse mortgagors are as follows:

 

(in thousands)       

Year Ending

      

Remaining in 2015

   $ 334  

2016

     563  

2017

     448  

2018

     354  

2019

     276  

Years 2020 - 2024

     651  

Years 2025 - 2029

     136  

Years 2030 - 2034

     21  

Thereafter

     2  
  

 

 

 

Total (1)

   $ 2,785  
  

 

 

 

 

(1) This table does not take into consideration cash inflow including payments from mortgagors or payoffs based on contractual terms.

 

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The amount of the contract value that would be forfeited if we were not to make cash payments to reverse mortgagors in the future is $6.0 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 $351,000 for the quarter ended June 30, 2015 with an IRR of 17.10%. If the future changes in collateral value were assumed to be reduced by 1%, income would decrease by $148,000 with an IRR of 17.46%.

The net present value of the projected cash flows depends on the IRR used. If the IRR increased by 1%, the net present value would increase by $664,000. If the IRR decreased by 1%, the net present value would decrease by $652,000.

 

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8. GOODWILL AND INTANGIBLES

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

During the six months ended June 30, 2015, we determined there were no events or other indicators of impairment as it relates to goodwill or other intangibles.

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

 

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

December 31, 2014

   $ 43,517      $ —         $ 5,134      $ 48,651  

Changes in goodwill

     336        —          —          336  
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2015

   $ 43,853      $ —        $ 5,134      $ 48,987  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The following table summarizes intangible assets:

 

     Gross             Net  
(In Thousands)    Intangible      Accumulated      Intangible  

June 30, 2015

   Assets      Amortization      Assets  

Core deposits

   $ 7,610      $ (3,838    $ 3,772  

CB&T intangibles

     3,142        (1,083      2,059  

Array and Arrow intangibles

     2,353        (672      1,681  

Mortgage servicing rights

     1,422        (877      545  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 14,527      $ (6,470    $ 8,057  
  

 

 

    

 

 

    

 

 

 

December 31, 2014

                    

Core deposits

   $ 7,610      $ (3,321    $ 4,289  

CB&T intangibles

     3,142        (985      2,157  

Array and Arrow intangibles

     2,353        (497      1,856  

Mortgage servicing rights

     1,455        (815      640  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 14,560      $ (5,618    $ 8,942  
  

 

 

    

 

 

    

 

 

 

Core deposits are amortized over their expected lives using the present value of the benefit of the core deposits, straight-line or accelerated methods of amortization. During the six months ended June 30, 2015, we recognized amortization expense on other intangible assets of $788,000.

The following presents the estimated amortization expense of intangibles:

 

     Amortization  
(In Thousands)    of Intangibles  

Remaining in 2015

   $ 935  

2016

     1,433  

2017

     1,216  

2018

     1,136  

2019

     965  

Thereafter

     2,372  
  

 

 

 

Total

   $ 8,057  
  

 

 

 

 

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9. ASSOCIATE 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 changes in the assumptions used to determine these costs. Compared to the prior year these changes included: a decrease in the discount rate of 100 basis points to 4%; a change in the future rates of participation from 50% to 15%; and a change to rely upon the mortality table issued by the Office of the Actuary of the United States Bureau of Census in October 2014.

We account for our obligations under the provisions of FASB ASC 715, Compensation - Retirement Benefits (ASC 715). ASC 715 requires that the costs of these benefits be recognized over an Associate’s active working career. Amortization of unrecognized net gains or losses resulting from experience different from that assumed and from changes in assumptions is included as a component of net periodic benefit cost over the remaining service period of active employees to the extent that such gains and losses exceed 10% of the accumulated postretirement benefit obligation, as of the beginning of the year.

The following are disclosures of the net periodic benefit cost components of postretirement benefits measured at January 1, 2015 and 2014.

 

     Three months ended      Six months ended  
     June 30,      June 30,  
(In Thousands)    2015      2014      2015      2014  

Service cost

   $ 14      $ 10      $ 29      $ 98  

Interest cost

     22        42        44        98  

Prior service cost amortization

     (19      (30      (38      (30

Net (gain) loss recognition

     (5      30        (10      44  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 12      $ 52      $ 25      $ 210  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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10. INCOME TAXES

We account for income taxes in accordance with FASB ASC 740, Income Taxes (ASC 740). ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods.

As a result of the consolidation for accounting purposes of the SASCO reverse mortgage securitization trust during 2013, a deferred tax asset (DTA) of approximately $4.9 million was recorded. In addition, we recorded a $1.8 million deferred tax liability associated with our original investment in SASCO. However, because SASCO was not consolidated for income tax purposes, a full valuation allowance was also recorded on this DTA due to the uncertainty of its realization, as the realization was dependent on future taxable income. On January 27, 2014 the separate company SASCO tax structure was eliminated, which permits tax 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 as well as 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.

ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations.

There were no unrecognized tax benefits as of June 30, 2015. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2011 through 2014 tax years are subject to examination as of June 30, 2015. No state income tax return examinations are currently in process. We do not expect to record or realize any material unrecognized tax benefits during 2015.

As a result of the adoption of ASU No. 2014-01, “Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects,” the amortization of our low-income housing credit investments has been reflected as income tax expense. Accordingly, $477,000 and $971,000 of such amortization has been reflected as income tax expense for the three and six months ended June 30, 2015, respectively, compared to $294,000 and $588,000 for the same periods in 2014.

The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the six months ended June 30, 2015 were $1.0 million, $971,000 and $146,000, respectively. The carrying value of the investment in affordable housing credits is $11.3 million at June 30, 2015, compared to $12.3 million at December 31, 2014.

 

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11. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

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

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy as of June 30, 2015 is set forth in the following table:

 

     Quoted
Prices in
Active
Markets for
Identical
Asset
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
     Total Fair  
(In Thousands)            

Description

   (Level 1)      (Level 2)      (Level 3)      Value  

Assets measured at fair value on a recurring basis

           

Collateralized mortgage obligations

   $ —        $ 253,336      $ —        $ 253,336  

FNMA

     —          301,125        —          301,125  

FHLMC

     —          133,894        —          133,894  

GNMA

     —          64,338        —          64,338  

U.S. Government and agencies

     —          29,053        —          29,053  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

$ —     $ 781,746   $ —     $ 781,746  

Assets measured at fair value on a nonrecurring basis

Other real estate owned

$ —     $ —     $ 4,856   $ 4,856  

Loans held-for-sale

  —       48,099     —       48,099  

Impaired loans (collateral dependent)

  —       —       38,080      38,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

$ —     $ 48,099   $ 42,936    $ 91,035   

There were no material liabilities measured at fair value as of June 30, 2015.

 

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The table below presents the balances of assets measured at fair value as of December 31, 2014:

 

     Quoted
Prices in
Active
Markets for
Identical
Asset
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
     Total  
(In Thousands)            

Description

   (Level 1)      (Level 2)      (Level 3)      Fair Value  

Assets measured at fair value on a recurring basis

           

Available-for-sale securities:

           

Collateralized mortgage obligations

   $ —        $ 192,932      $ —        $ 192,932  

FNMA

     —          292,553        —          292,553  

FHLMC

     —          146,882        —          146,882  

GNMA

     —          77,797        —          77,797  

U.S. Government and agencies

        29,960        —          29,960  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —        $ 740,124      $ —        $ 740,124  

Assets measured at fair value on a nonrecurring basis

           

Other real estate owned

   $ —        $ —        $ 5,734      $ 5,734  

Loans held-for sale

     —          28,508        —          28,508  

Impaired loans

     —          —          41,334        41,334  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ 28,508      $ 47,068      $ 75,576  

There were no material liabilities measured at fair value as of December 31, 2014.

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

Available-for-sale securities

As of June 30, 2015 securities classified as available-for-sale are reported at fair value using Level 2 inputs. Included in the Level 2 total are approximately $29.1 million in Federal Agency debentures, and $752.7 million in Federal Agency MBS. 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 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 2014 we elected to record loans held-for-sale at their fair value. The fair value of our loans held-for-sale is based upon estimates using Level 2 inputs. These inputs are based upon pricing information obtained from secondary markets and brokers.

 

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Impaired loans

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

Impaired loans, which are measured for impairment by either calculating the expected future cash flows discounted at the loan’s effective interest rate or determining the fair value of the collateral for collateral dependent loans has a gross amount of $45.2 million and $46.7 million at June 30, 2015 and December 31, 2014, respectively. The valuation allowance on impaired loans was $7.1 million as of June 30, 2015 and $5.3 million as of December 31, 2014, respectively.

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 cash equivalents

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

Investment securities

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 internally developed models, see “Fair Value of Financial Assets” in this note.

Loans held-for sale

Loans held-for- sale are carried at their fair 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.

 

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Reverse mortgage loans

For additional information on these reverse mortgage related assets, see Note 7, Reverse Mortgage Related Assets, to the unaudited Consolidated Financial Statements.

Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh

The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.

Other assets

WSFS holds 50,833 shares of Visa Class B stock. Following resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares (the current conversion rate is 1.6483 shares of Class A stock for each share of Class B stock). As our ownership is related to our prior participation in Visa’s network, while Visa operated as a cooperative, this ownership is recorded on our books with zero basis.

While only current owners of Class B shares are allowed to purchase other Class B shares, there have been several transactions between Class B shareholders. Based on these transactions we estimate the value of our Class B shares to be $5.0 million as of June 30, 2015.

Demand deposits, savings, deposits and time deposit

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.

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.

 

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

 

     Fair Value    June 30, 2015      December 31, 2014  
(In Thousands)    Measurement    Book Value      Fair Value      Book Value      Fair Value  

Financial assets:

              

Cash and cash equivalents

   Level 1    $ 533,691        533,691      $ 508,039      $ 508,039  

Investment securities available-for-sale

   See previous
table
     781,746        781,746        740,124        740,124  

Investment securities held-to-maturity

   See previous
table
     120,697        118,804        126,168        126,171  

Loans, held-for-sale

   See previous
table
     48,099        48,099        28,508        28,508  

Loans, net

   Level 2      3,295,471        3,255,521        3,156,652        3,121,855  

Reverse mortgage loans

   Level 3      25,945        25,945        29,298        29,298  

Stock in FHLB of Pittsburgh

   Level 2      31,832        31,832        23,278        23,278  

Accrued interest receivable

   Level 2      12,272        12,272        11,782        11,782  

Other assets

   Level 3      —          4,971        —          4,837  

Financial liabilities:

              

Deposits

   Level 2      3,526,455        3,324,400        3,649,235        3,461,218  

Borrowed funds

   Level 2      1,000,900        1,002,993        667,775        672,850  

Standby letters of credit

   Level 3      208        208        151        151  

Accrued interest payable

   Level 2      1,879        1,879        1,004        1,004  

At June 30, 2015 and December 31, 2014 we had no commitments to extend credit measured at fair value.

 

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12. SEGMENT INFORMATION

In accordance with FASB ASC 280, Segment Reporting (ASC 280) 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 unaudited Consolidated Financial Statements. We have three segments: WSFS Bank, Cash Connect, and Wealth Management.

The WSFS Bank segment provides financial products to commercial and retail customers through its 56 offices located in Delaware (45), Pennsylvania (9) Virginia (1) and Nevada (1). Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS. These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Because of these and other reasons, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment in accordance with ASC 280.

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

The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through four business lines. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress Capital Management, LLC is a registered investment advisor with approximately $655 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 providing for current income. Christiana Trust, with $8.86 billion in assets under management and administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy, 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 other business units to deliver investment management and fiduciary products and services.

 

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Segment information for the three months ended June 30, 2015 and 2014 follows:

For the three months ended June 30, 2015:

                             
(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 41,043      $ —        $ 2,012      $ 43,055  

Noninterest income

     9,482        7,068        5,908        22,458  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     50,525        7,068        7,920        65,513  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     876        —          1,638        2,514  

Noninterest income

     1,998        214        29        2,241  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,874        214        1,667        4,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     53,399        7,282        9,587        70,268  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     3,822        —          143        3,965  

Noninterest expenses

     29,921        4,350        4,383        38,654  

Provision for loan losses

     3,610        —          163        3,773  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     37,353        4,350        4,689        46,392  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses:

           

Interest expense

     1,638        389        487        2,514  

Noninterest expenses

     243        644        1,354        2,241  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,881        1,033        1,841        4,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     39,234        5,383        6,530        51,147  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 14,165      $ 1,899      $ 3,057      $ 19,121  

Income tax provision

              6,887  
           

 

 

 

Consolidated net income

            $ 12,234  
           

 

 

 

Capital expenditures

   $ 299      $ 2,570      $ 13      $ 2,882  

As of June 30, 2015:

           

Statement of Condition

           

Cash and cash equivalents

   $ 89,298      $ 442,229      $ 2,164      $ 533,691  

Goodwill

     43,853        —          5,134        48,987  

Other segment assets

     4,304,300        —          190,505        4,494,805  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,437,451      $ 442,229      $ 197,803      $ 5,077,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For the three months ended June 30, 2014:

 

(In Thousands)    WSFS Bank     Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

          

External customer revenues:

          

Interest income

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

Noninterest income

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

 

 

   

 

 

    

 

 

    

 

 

 

Total external customer revenues

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

 

 

   

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

Interest income

  834     —       1,342     2,176  

Noninterest income

  1,711     204     27     1,942  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

  2,545     204     1,369     4,118  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total revenue

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

 

 

   

 

 

    

 

 

    

 

 

 

External customer expenses:

Interest expense

  3,831     —       105     3,936  

Noninterest expenses

  28,316     3,882     3,026     35,224  

Provision for loan losses

  (201   —       251     50  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total external customer expenses

  31,946     3,882     3,382     39,210  
  

 

 

   

 

 

    

 

 

    

 

 

 

Inter-segment expenses:

Interest expense

  1,342     328     506     2,176  

Noninterest expenses

  231     593     1,118     1,942  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

  1,573     921     1,624     4,118  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

  33,519     4,803     5,006     43,328  
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before taxes

$ 15,284   $ 1,721   $ 2,821   $ 19,826  

Income tax provision

  7,101  
          

 

 

 

Consolidated net income

  12,725  
          

 

 

 

Capital expenditures

$ 815   $ 33   $ —     $ 848  

As of December 31, 2014:

Statement of Condition

Cash and cash equivalents

$ 73,395   $ 431,527   $ 3,117   $ 508,039  

Goodwill

  43,517     —       5,134     48,651  

Other segment assets

  4,107,212     2,006     187,412     4,296,630  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total segment assets

$ 4,224,124    $ 433,533   $ 195,663   $ 4,853,320  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Segment information for the six months ended June 30, 2015 and 2014 follows:

For the six months ended June 30, 2015:

 

(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

   $ 81,866      $ —        $ 4,040      $ 85,906  

Noninterest income

     18,671        13,707        11,175        43,553  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     100,537        13,707        15,215        129,459  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,747        —          3,085        4,832  

Noninterest income

     3,782        382        47        4,211  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     5,529        382        3,132        9,043  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     106,066        14,089        18,347        138,502  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     7,734        —          265        7,999  

Noninterest expenses

     61,000        8,525        8,042        77,567  

Provision for loan losses

     4,343        —          216        4,559  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     73,077        8,525        8,523        90,125  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses:

           

Interest expense

     3,085        762        985        4,832  

Noninterest expenses

     429        1,258        2,524        4,211  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     3,514        2,020        3,509        9,043  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     76,591        10,545        12,032        99,168  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 29,475      $ 3,544      $ 6,315      $ 39,334  

Income tax Provision

              14,211  
           

 

 

 

Consolidated net income

            $ 25,123  
           

 

 

 

Capital expenditures

   $ 1,116      $ 2,570      $ 13      $ 3,699  

As of June 30, 2015:

           

Statement of Condition

           

Cash and cash equivalents

   $ 89,298      $ 442,229      $ 2,164      $ 533,691  

Goodwill

     43,853        —          5,134        48,987  

Other segment assets

     4,304,300        —          190,505        4,494,805  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,437,451      $ 442,229      $ 197,803      $ 5,077,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the six months ended June 30, 2014:

 

(In Thousands)    WSFS Bank      Cash
Connect
     Wealth
Management
     Total  

Statement of Operations

           

External customer revenues:

           

Interest income

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

Noninterest income

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

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

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

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,665        —          2,763        4,428  

Noninterest income

     3,449        397        53        3,899  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     5,114        397        2,816        8,327  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

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

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     7,461        —          216        7,677  

Noninterest expenses

     55,634        7,432        6,042        69,108  

Provision for loan losses

     2,122        —          558        2,680  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     65,217        7,432        6,816        79,465  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses:

           

Interest expense

     2,763        659        1,006        4,428  

Noninterest expenses

     450        1,179        2,270        3,899  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

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

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     68,430        9,270        10,092        87,792  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 27,258      $ 3,461      $ 5,001      $ 35,720  

Income tax Provision

              6,084  
           

 

 

 

Consolidated net income

            $ 29,636  
           

 

 

 

Capital expenditures

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

As of December 31, 2014:

           

Statement of Condition

           

Cash and cash equivalents

   $ 73,395      $ 431,527      $ 3,117      $ 508,039  

Goodwill

     43,517        —          5,134        48,651  

Other segment assets

     4,107,212        2,006        187,412        4,296,630  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 4,224,124      $ 433,533      $ 195,663      $ 4,853,320  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

13. INDEMNIFICATIONS AND GUARANTEES

Secondary Market Loan Sales

Given the current interest rate environment, coupled with our desire not to hold these assets in our portfolio, we generally sell newly originated residential mortgage loans in the secondary market to mortgage loan aggregators and on a more limited basis, to GSEs such as FHLMC, FNMA, and the FHLB. Loans held-for-sale are reflected on our unaudited Consolidated Statements of Condition at fair value with changes in the value reflected in our unaudited Consolidated Statements of Cash Flows and Comprehensive Income. Gains and losses are recognized at the time of sale. We periodically retain the servicing rights on residential mortgage loans sold which result in monthly service fee income and are included in our intangible assets in our unaudited Consolidated Statements of Condition. Otherwise, we sell loans with servicing released on a nonrecourse basis. Rate-locked loan commitments that we intend to sell in the secondary market are accounted for as derivatives under the guidance promulgated in ASC 450.

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 for the six months ended June 30, 2015.

Swap Guarantees.

We entered into agreements with three unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) with customers referred to them by us. By the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows smaller financial institutions like us to provide access to interest rate swap transactions for our customers without creating the swap ourselves. These swap guarantees are accounted for as credit derivatives under ASC 450.

At June 30, 2015 there were 113 variable-rate swap transactions between third party financial institutions and our customers, compared to 101 at December 31, 2014. The initial notional aggregated amount was approximately $459.2 million at June 30, 2015 compared to $417.9 million at December 31, 2014. At June 30, 2015 maturities ranged from approximately one month to 10.5 years. The aggregate market value of these swaps to the customers was a liability of $16.2 million at June 30, 2015 and $16.5 million at December 31, 2014. There were no loss reserves for swap guarantees as of June 30, 2015.

 

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14. CHANGE IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

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

 

(In Thousands)    Net unrealized
gains (losses) on
investment
securities available-
for-sale
    Net change in
securities held-to-
maturity
    Net unrealized
gains (losses) on
defined benefit
plan
    Total  

Balance, March 31, 2015

   $ 6,940     $ (171   $ 832     $ 7,601  

Other comprehensive loss before reclassifications

     (6,024     —         (15     (6,039

Less: Amounts reclassified from accumulated other comprehensive income

     (296     —         —         (296

Amortization of unrealized gain on securities reclassified to held-to-maturity

     —          (37     —         (37
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive loss

     (6,320     (37     (15     (6,372
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 620     $ (208   $ 817     $ 1,229  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

   $ (12,035   $ —       $ (472   $ (12,507

Other comprehensive income before reclassifications

     9,678       —         60       9,738  

Less: Amounts reclassified from accumulated other comprehensive loss

     (226     —         —         (226
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     9,452       —         60       9,512  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ (2,583   $ —       $ (412   $ (2,995
  

 

 

   

 

 

   

 

 

   

 

 

 
(In Thousands)    Net unrealized
gains (losses) on
investment
securities  available-

for-sale
    Net change in
securities held-to-
maturity
    Net unrealized
gains (losses) on
defined benefit
plan
    Total  

Balance, December 31, 2014

   $ 2,653     $ —       $ 847     $ 3,500  

Other comprehensive loss before reclassifications

     (1,457     —         (30     (1,487

Less: Amounts reclassified from accumulated other comprehensive income

     (576     —         —         (576

Amortization of unrealized gain on securities reclassified to held-to-maturity

     —          (208     —         (208
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive loss

     (2,033     (208     (30     (2,271
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 620     $ (208   $ 817     $ 1,229  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

     (20,822   $ —       $ (472   $ (21,294

Other comprehensive income before reclassifications

     18,824       —         60       18,884  

Less: Amounts reclassified from accumulated other comprehensive loss

     (585     —         —         (585
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     18,239       —         60       18,299  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ (2,583   $ —       $ (412   $ (2,995
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Three Months Ended    

Affected line item in Statements of Operations

     June 30,    
(In Thousands)    2015     2014      

Securities available-for-sale:

      

Realized gains on securities transactions

   $ 477     $ 365     Security gains, net

Income taxes

     (181     (139   Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 296     $ 226    
  

 

 

   

 

 

   

Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:

      

Amortization of net unrealized gains to income during the period

   $ (157   $ —       Interest income on investment securities

Income taxes

     120       —       Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ (37   $ —      
  

 

 

   

 

 

   

Amortization of Defined Benefit Pension items:

      

Prior service (credits) costs

   $ (19   $ 919     Salaries, benefits and other compensation

Transition obligation

     —         245    

Actuarial (gains) losses

     (5     (1,068   Income tax provision
  

 

 

   

 

 

   

Total before tax

   $ (24   $ 96    

Income taxes

     (9     (36  
  

 

 

   

 

 

   

Net of tax

     (15     60    
  

 

 

   

 

 

   

Total reclassifications

   $ 274     $ 166    
  

 

 

   

 

 

   
     Six Months Ended    

Affected line item in Statements of Operations

     June 30,    
     2015     2014      

Securities available-for-sale:

      

Realized gains on securities transactions

   $ 928     $ 943     Security gains, net

Income taxes

     (352     (358   Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ 576     $ 585    
  

 

 

   

 

 

   

Net unrealized holding gains on securities transferred between available-for-sale and held-to-maturity:

      

Amortization of net unrealized gains to income during the period

   $ (328   $ —       Interest income on investment securities

Income taxes

     120       —       Income tax provision
  

 

 

   

 

 

   

Net of tax

   $ (208   $ —      
  

 

 

   

 

 

   

Amortization of Defined Benefit Pension items:

      

Prior service (credits) costs

   $ (37   $ 919     Salaries, benefits and other compensation

Transition obligation

     —         245    

Actuarial (gains) losses

     (10     (1,068   Income tax provision
  

 

 

   

 

 

   

Total before tax

   $ (47   $ 96    

Income taxes

     17       (36  
  

 

 

   

 

 

   

Net of tax

   $ (30   $ 60    
  

 

 

   

 

 

   

Total reclassifications

   $ 398     $ 525    
  

 

 

   

 

 

   

 

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15. LEGAL AND OTHER PROCEEDINGS

As initially disclosed in 2011, we were served with a complaint, filed in the 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 is from approximately $0 to approximately $5.0 million at June 30, 2015. Costs of litigation were initially covered by insurance; however, such costs have now exceeded the limits of insurance coverage for this case. Cross motions for summary judgment are currently pending before the court.

Four purported shareholder derivative and class action complaints relating to the pending merger with Alliance were filed during the quarter ended June 30, 2015. These actions were consolidated under the caption In re: Alliance Bancorp, Inc. of Pennsylvania Derivative and Class Action Litigation, Court of Common Pleas of Delaware County, Pennsylvania, Consol. Action Lead Case No. 2015-3606 (Civil Div.) (the “Alliance Action”). The complaint named as defendants Alliance Bancorp, Inc. of Pennsylvania, its directors and certain of its officers, and the Company (the “Defendants”).

On June 11, 2015, solely to avoid the costs, risks and uncertainties inherent in litigation, Alliance, WSFS and the other Defendants entered into a Memorandum of Understanding (the “MOU”) with the plaintiffs ( the “Plaintiffs”) regarding the settlement of the Alliance Action. Pursuant to the MOU, Alliance filed with the SEC and made publicly available to Alliance shareholders supplemental disclosures, and the Plaintiffs agreed to release Alliance, WSFS and the other Defendants from all claims related to the Merger Agreement and the proposed merger, subject to approval of the Court of Common Pleas of Delaware County (the “Court”). In the MOU, the parties agreed to negotiate in good faith to prepare a stipulation of settlement to be filed with the Court and other documentation as may be required to effectuate the settlement. There can be no assurance that the parties ultimately will enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. The proposed settlement contemplated by the MOU will become void in the event that the parties do not enter into such stipulation or the Court does not approve the settlement.

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

OVERVIEW

The Company is a thrift holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by the Company’s subsidiary, Wilmington Savings Fund Society, FSB, or WSFS Bank, the seventh oldest bank continuously operating under the same name in the United States. As a federal savings bank, which was formerly chartered as a state mutual savings bank, the Bank enjoys broader fiduciary powers than many other types of financial institutions. A fixture in the community, WSFS has been in operation for more than 183 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remains a leader in our community. We are a relationship-focused, locally-managed, community banking institution. 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 $2.79 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 56 offices located in Delaware (45), Pennsylvania (9), 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 and mortgage and title services through those branches and through Pennsylvania-based Array and Arrow. Array is a mortgage banking company specializing in a variety of residential mortgage and refinancing solutions, and the related entity, Arrow, is an abstract and title company.

On March 3, 2015 we announced the signing of a definitive agreement and plan of reorganization whereby we would acquire Alliance and its wholly-owned bank subsidiary, Alliance Bank. Upon the closing of the transaction, Alliance will merge into the Company, and Alliance Bank will merge into WSFS Bank. The transaction is expected to be completed in the fourth quarter of 2015, subject to the satisfaction of customary closing conditions, including regulatory approvals. On June 18, 2015, the agreement and the plan of reorganization received Alliance shareholders’ approval.

Our Cash Connect segment is a premier provider of ATM Vault Cash and related services in the United States. It manages over $557 million in vault cash in over 15,900 ATMs nationwide and provides related services such as, online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates approximately 450 ATMs for the Bank, which has the largest branded ATM network in Delaware.

As a 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 14-year history, Cash Connect periodically has been exposed to theft through theft from armored courier companies and consistently has been able to recover losses through its risk management strategies.

The Wealth Management segment provides a broad array of fiduciary, investment management, credit and deposit products to clients through four businesses. WSFS Wealth Investments provides insurance and brokerage products primarily to our retail banking clients. Cypress is a registered investment advisor with approximately $655 million in assets under management. Cypress’ primary market segment is high net worth individuals and offers a ‘balanced’ investment style focused on preservation of capital and providing for current income. Christiana Trust, with $8.86 billion in assets under administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, bankruptcy, 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 other business units to deliver investment management and fiduciary products and services.

The Company has two consolidated subsidiaries, WSFS Bank and Cypress, and one unconsolidated subsidiary, WSFS Capital Trust III. WSFS Bank has three wholly-owned subsidiaries, WSFS Wealth Investments, 1832 Holdings, Inc. and 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 the Company’s predictions or expectations of future business or financial performance as well as its goals 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 the Company’s 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 difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the market areas in which the Company operates and in which its loans are concentrated, including the effects of declines in housing markets, an increase in unemployment levels and slowdowns in economic growth; the Company’s level of nonperforming assets and the costs associated with resolving any problem loans including litigation and other costs; changes in market interest rates may increase funding costs and reduce earning asset yields thus reducing margin; the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of the Company’s investment securities portfolio; the credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial and industrial loans in our loan portfolio; the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company’s operations including the changes in regulations 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 associated with complying with such regulations; possible additional loan losses and impairment of the collectability of loans; the Company’s ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate liquidity internally or raise capital on favorable terms; possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations; any impairment of the Company’s goodwill or other intangible assets; failure of the financial and operational controls of the Company’s Cash Connect segment; conditions in the financial markets that may limit the Company’s access to additional funding to meet its liquidity needs; the success of the Company’s growth plans, including the successful integration of past and future acquisitions; the Company’s ability to successfully complete its planned acquisitions, including the acquisition of Alliance Bancorp, Inc. of Pennsylvania, and the timing thereof; negative perceptions or publicity with respect to the Company’s trust and wealth management business; system failure or cybersecurity breaches of the Company’s network security; the Company’s ability to recruit and retain key employees; the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally; the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks; possible changes in the speed of loan prepayments by the Company’s customers and loan origination or sales volumes; possible acceleration of prepayments of mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on prepayments on mortgage-backed securities due to low interest rates; regulatory limits on the Company’s ability to receive dividends from its subsidiaries and pay dividends to its shareholders; the effects of any reputational, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and the costs associated with resolving any problem loans, litigation and other risks and uncertainties, discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward looking statements are as of the date they are made, and the Company does 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 the Company.

 

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CRITICAL ACCOUNTING POLICIES

The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP, 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 used to determine the allowance for loan losses, investment in reverse mortgages, 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 2015, 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, 2014 and Note 1, Basis of Presentation, to the unaudited Consolidated Financial Statements.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $224.2 million, or 5%, to $5.08 billion during the six months ended June 30, 2015. Included in this increase was a $138.8 million, or 4%, increase in net loans and a $41.6 million increase in investment securities.

Total liabilities increased $212.8 million, or 5%, to $4.58 billion during the six months ended June 30, 2015. This increase was primarily the result of an increase in Federal Home Loans Bank advances of $334.8 million, or 82%. Partially offsetting this increase was a $119.4 million decrease in total customer deposits primarily due to the expected seasonal outflow of temporary trust-related money market deposits during the first quarter.

Capital Resources

During the third quarter of 2014, the WSFS Board of Directors approved a stock buyback program of up to 5% of total outstanding shares of common stock. We have repurchased the equivalent of 839,582 shares to date under this program and we have the authority to repurchase an additional 569,818 shares, or 2% of outstanding shares, under this current authorization.

During the first quarter of 2015, the WSFS Board of Directors declared a three-for-one stock split of our common stock in the form of a stock dividend. On May 4, 2015, stockholders approved an increase in the authorized shares of common stock from 20.0 million to 65.0 million. The stock dividend was paid on May 18, 2015 to stockholders on record as of May 4, 2015.

Stockholders’ equity increased $11.3 million between December 31, 2014 and June 30, 2015. This increase was primarily due to net income of $25.1 million during the six months ended June 30, 2015 which was partially offset by the repurchase of 455,402 shares of common stock at an average price of $25.81, or $11.8 million during the second quarter.

Tangible common book value per share of common stock (a non-GAAP financial measure) was $15.88 at June 30, 2015, an increase of $0.58, or 4%, from $15.30 reported at December 31, 2014. Book value per share of common stock was $17.93 at June 30, 2015, an increase from $17.34 reported at December 31, 2014.

 

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Below is a table comparing WSFS Bank’s consolidated capital position to the minimum regulatory requirements as of June 30, 2015:

 

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

Total Capital (to Risk-Weighted Assets)

   $ 565,898        13.58   $ 333,382        8.00   $ 416,727        10.00

Tier 1 Capital (to Risk-Weighted Assets)

     524,470        12.59       250,036        6.00       333,382        8.00  

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

     524,470        12.59       187,527        4.50       270,873        6.50  

Tier 1 Leverage Capital (to Risk-Weighted Assets)

     524,470        10.67       196,563        4.00       245,704        5.00  

Under new guidelines issued by banking regulators effective January 1, 2015, savings institutions such as WSFS Bank must maintain a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, a minimum ratio of total capital to risk-weighted assets of 8.0%, and a minimum Tier 1 leverage ratio of 4.0%. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on WSFS Bank’s financial statements. The Bank has chosen to opt-out of including Accumulated Other Comprehensive Income in regulatory capital.

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

At June 30, 2015, WSFS Bank was in compliance with regulatory capital requirements and all of its regulatory capital ratios exceeded “well-capitalized” regulatory benchmarks. WSFS Bank’s total risk based capital ratio was 13.58%, Tier 1 capital ratio was 12.59% and total common equity tier 1 capital was 12.59%. In addition, and not included in the WSFS Bank capital, WSFS separately held $43.3 million in cash to support share repurchases, potential dividends, acquisitions and strategic growth plans.

Liquidity

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

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

During the six months ended June 30, 2015, cash and cash equivalents increased $25.7 million to $533.7 million. This increase was primarily the result of a $138.8 million increase in loans, net of ALLL and a $41.6 million increase in investment securities, available-for-sale. Offsetting these increases in cash was a $334.8 million increase in FHLB advances and a $119.4 million decrease in customer deposits due to the seasonal withdrawal of temporary trust money.

 

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Table of Contents

NONPERFORMING ASSETS

NPAs include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure and restructured commercial, mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are defined as loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection.

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

 

     June 30,     December 31,  
(In Thousands)    2015     2014  

Nonaccruing loans:

    

Commercial

   $ 9,547     $ 2,706  

Owner-occupied commercial

     1,389       2,475  

Consumer

     2,872       3,557  

Commercial mortgages

     7,243       8,245  

Residential mortgages

     6,668       7,068  

Construction

     —         —    
  

 

 

   

 

 

 

Total nonaccruing loans

     27,719       24,051  

Assets acquired through foreclosure

     4,856       5,734  

Troubled debt restructuring (accruing)

     13,610       22,600  
  

 

 

   

 

 

 

Total nonperforming assets

   $ 46,185     $ 52,385  
  

 

 

   

 

 

 

Past due loans: (1)

    

Residential mortgages

   $ 153     $ —    

Consumer

     —         4  

Commercial and commercial mortgages

     —          —    
  

 

 

   

 

 

 

Total past due loans

   $ 153      $ 4  
  

 

 

   

 

 

 

Ratio of allowance for loan losses to total loans (2)

     1.22     1.23

Ratio of nonaccruing loans to total loans (2)

     0.84       0.75  

Ratio of NPA to total assets

     0.91       1.08  

Ratio of loan loss allowance to nonaccruing loans

     147.35       163.93  

Ratio of loan loss allowance to total nonperforming assets

     88.44       75.26  

 

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

Nonperforming assets decreased $6.2 million between December 31, 2014 and June 30, 2015. As a result, nonperforming assets as a percentage of total assets decreased from 1.08% at December 31, 2014 to 0.91% at June 30, 2015. This reduction included significant collections as well as a $1.9 million net charge-off on one $9.1 million substandard C&I relationship that was reclassed from an accruing TDR to nonaccrual during the second quarter of 2015.

The following table summarizes the changes in NPAs during the period indicated:

 

     For the Six      For the Year  
(In Thousands)    Months Ended      Ended  
     June 30, 2015      December 31, 2014  

Beginning balance

   $ 52,385      $ 47,814  

Additions

     4,534        38,322  

Collections

     (6,860      (25,111

Transfers to accrual

     —          (96

Charge-offs/write-downs, net

     (3,874      (8,544
  

 

 

    

 

 

 

Ending balance

   $ 46,185      $ 52,385  
  

 

 

    

 

 

 

 

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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. At June 30, 2015, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $31.3 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window remained unchanged from 101.2% at December 31, 2014. The one-year interest-sensitive gap as a percentage of total assets changed slightly to 0.62% at June 30, 2015 from 0.63% at December 31, 2014. 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 the equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets.

The following table shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at June 30, 2015 and December 31, 2014:

 

    June 30, 2015     December 31, 2014  

% Change in

Interest Rate

(Basis Points)

 

% Change in

Net Interest

Margin (1)

   

Economic

Value of

Equity (2)

   

% Change in

Net Interest

Margin (1)

   

Economic

Value of Equity (2)

 
       
+300     4     13.63     4     13.76
+200     1     13.66     2     13.81
+100     -1     13.45     -1     13.59
—       —       13.26     —       13.37
-100     -1     12.44     -2     12.51
    -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 (NMF) 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.

 

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COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

Results of Operations

We recorded net income of $12.2 million, or $0.43 per diluted common share, for the three months ended June 30, 2015, a $491,000, or 4%, decrease from the $12.7 million, or $0.46 per share, recorded for the three months ended June 30, 2014. The most significant cause for the decrease in net income is an increase in the provision for loan losses, due mainly to the $9.1 million C&I relationship discussed in detail earlier in note 5. In addition, noninterest expense increased $3.5 million from $35.2 million in the second quarter of 2014 to $38.7 million in the second quarter of 2015. Driving this increase are additional expenses incurred primarily from our organic growth and the September 2014 acquisition of FNBW. These expenses include an increase of $1.7 million in salaries, benefits and other compensation expense and a $1.4 million increase in other operating expenses. Also, contributing to the growth in noninterest expense was an increase of $565,000 in marketing expense due to franchise growth as well as the introduction of new products and services and higher corporate development costs of $528,000 in the second quarter of 2015, primarily due to the pending Alliance acquisition.

Net income for the first six months of 2015 was $25.1 million, or $0.88 per diluted common share, compared to $29.6 million, or $1.08 per share, for the first six months of 2014. The most significant cause for the decrease in net income was a one-time income tax benefit of approximately $6.7 million, or $0.73 in diluted earnings per share, during the first quarter of 2014 due to the legal call of our reverse mortgage trust bonds. Excluding this item, net income would have increased from $22.9 million, or $0.84 per share, for the six months ended June 30, 2014. Net interest income increased $8.4 million from the prior year as a result of growth in loan portfolio, due to organic growth and the September 2014 FNBW acquisition. Additionally, noninterest income increased $5.6 million from the prior period due to continued growth in our banking related businesses of Wealth and Cash Connect, as well as meaningful growth in our mortgage originations business. Partially offsetting these increases was an $8.5 million increase in noninterest expenses mainly due to growth in the Company and the related infrastructure. Also, contributing to the growth in noninterest expense was an increase in corporate development costs of $870,000 for the six months ended June 30, 2015, primarily due to the Alliance acquisition and an increase in marketing expense of $650,000 due to franchise growth as well as the introduction of new products and services.

 

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Net Interest Income

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

 

     Three Months Ended June 30,  
     2015     2014  
     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

   $ 1,002,843     $ 11,803        4.71   $ 850,719     $ 9,585        4.51

Residential real estate loans (4)

     255,302       2,510        3.93       232,916       2,281        3.92  

Commercial loans

     1,733,950       19,090        4.44       1,632,784       18,001        4.39  

Consumer loans

     327,581       3,687        4.51       310,226       3,452        4.46