GENERAL
WSFS Financial Corporation is parent to Wilmington Savings Fund Society, FSB
("WSFS Bank" or the "Bank"), one of the ten oldest banks continuously operating
under the same name in the United States. A permanent fixture in the community,
WSFS has been in operation for more than 180 years. In addition to its focus on
stellar customer service, the Bank has continued to fuel growth and remain a
leader in our community. We are a relationship-focused, locally-managed,
community banking institution that has grown to become the largest thrift
holding company in the State of Delaware, one of the top commercial lenders in
the state, the third largest bank in terms of Delaware deposits. We state our
mission simply: We Stand for Service and Strengthening Our Communities.
Our core banking business is commercial lending funded by customer-generated
deposits. We have built a $2.2 billion commercial loan portfolio by recruiting
the best seasoned commercial lenders in our markets and offering a high level of
service and flexibility typically associated with a community bank. We fund this
business primarily with deposits generated through commercial relationships and
retail deposits. We service our customers primarily from our 51 offices located
in Delaware (42), Pennsylvania (7), Virginia (1) and Nevada (1). We also offer a
broad variety of consumer loan products, retail securities and insurance
brokerage through our retail branches.
We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital
Management, Inc. ("Montchanin") and one unconsolidated affiliate, WSFS Capital
Trust III ("the Trust").
WSFS Bank has two wholly owned subsidiaries, WSFS Investment Group, Inc. and
Monarch Entity Services, LLC ("Monarch"). WSFS Investment Group, Inc., markets
various third-party investment and insurance products, such as single-premium
annuities, whole life policies and securities primarily through the Bank's
retail banking system and directly to the public. Monarch provides commercial
domicile services which include employees, directors, sublease of office
facilities and registered agent services in Delaware and Nevada.
Our Cash Connect division is a premier provider of ATM Vault Cash and related
services in the United States. Cash Connect manages nearly $437 million in vault
cash in nearly 13,000 ATMs nationwide and also provides online reporting and ATM
cash management, predictive cash ordering, armored carrier management, ATM
processing and equipment sales. Cash Connect also operates over 430 ATMs for
WSFS Bank, which has, by far, the largest branded ATM network in Delaware.
We offer trust and wealth management services through Christiana Trust, Cypress
Capital Management, LLC (Cypress), WSFS Investment Group brokerage and our
Private Banking group. The Christiana Trust division provides investment,
fiduciary, agency and commercial domicile services from locations in Delaware
and Nevada and has over $15 billion in assets under administration. These
services are provided to individuals and families as well as corporations and
institutions. The Christiana Trust division of WSFS Bank provides these services
to customers locally, nationally and internationally making use of the
advantages of its branch facilities in Delaware and Nevada. Cypress is an
investment advisory firm that manages over $600 million of portfolios for
individuals, trusts, retirement plans and endowments. WSFS Investment Group,
Inc. markets various third-party insurance products and securities through the
Bank's retail banking system.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, and exhibits thereto, contains estimates,
predictions, opinions, projections and other statements that may be interpreted
as "forward-looking statements" as that phrase is defined in the Private
Securities Litigation Reform Act of 1995. Such statements include, without
limitation, references to our financial goals, management's plans and objectives
for future operations, financial and business trends, business prospects, and
management's outlook or expectations for earnings, revenues, expenses, capital
levels, liquidity levels, asset quality or other future financial or business
performance, strategies or expectations. 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 the economic environment, particularly in the market areas
in
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which we operate, including an increase in unemployment levels; the volatility
of the financial and securities markets, including changes with respect to the
market value of financial assets; changes in market interest rates may increase
funding costs and reduce earning asset yields thus reducing margins, changes in
government regulation affecting financial institutions, including the Dodd-Frank
Wall Street Reform and Consumer Protection Act and the rules being issued in
accordance with this statute and potential expenses and elevated capital levels
associated therewith; possible additional loan losses, impairment of the
collectability of loans; possible changes in trade, monetary and fiscal
policies, laws and regulations and other activities of governments, agencies,
and similar organizations, may have an adverse effect on business; possible
regulations issued by the Consumer Financial Protection Bureau or other
regulators which might adversely impact our business model or products and
services; possible stresses in the real estate markets, including possible
continued deterioration in property values; our ability to expand into new
markets and to maintain profit margins in the face of competitive pressures; our
ability to effectively manage credit risk, interest rate risk market risk,
operational risk, legal risk, liquidity risk, reputational risk, and regulatory
and compliance risk; the effects of increased competition from both banks and
non-banks; the effects of geopolitical instability and risks such as terrorist
attacks; the effects of weather and natural disasters such as floods, droughts,
wind, tornados and hurricanes, and the effects of man-made disasters; possible
changes in the speed of loan prepayments by our customers and loan origination
or sales volumes; possible acceleration of prepayments of mortgage-backed
securities due to low interest rates, and the related acceleration of premium
amortization on those securities; and the costs associated with resolving any
problem loans, litigation and other risks and uncertainties, discussed in
documents filed by us with the Securities and Exchange Commission from time to
time. Forward looking statements are as of the date they are made, and 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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of operations
are based on the Consolidated Financial Statements, which are prepared in
conformity with U.S. generally accepted accounting principles. The preparation
of these Consolidated Financial Statements requires us to make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenue and
expenses. We regularly evaluate these estimates and assumptions including those
related to the allowance for loan losses, deferred taxes, fair value
measurements, goodwill and other intangible assets. We base our estimates on
historical experience and various other factors and assumptions that are
believed to be reasonable under the circumstances. These form the basis for
making judgments on the carrying value of assets and liabilities that are not
readily apparent from other sources. Although our current estimates contemplate
current economic conditions and how we expect them to change in the future, for
the remainder of 2012, 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.
The following are critical accounting policies that involve more significant
judgments and estimates. See further discussion of these critical accounting
policies in our 2011 Annual Report on Form 10-K.
Allowance for Loan Losses
We maintain allowances for loan losses and charge losses to these allowances
when realized. We consider the determination of the allowance for loan losses to
be critical because it requires significant judgment reflecting our best
estimate of impairment related to specifically evaluated impaired loans as well
as the inherent risk of loss for those in the remaining loan portfolio. Our
evaluation is based upon a continuing review of the portfolio, with
consideration given to evaluations resulting from examinations performed by
regulatory authorities.
Deferred Taxes
We account for income taxes in accordance with Financial Accounting Standards
Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes ("ASC
740"), which requires the recording of deferred income taxes that reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. We consider our accounting policies on deferred taxes to be
critical because we regularly assess the need for valuation allowances on
deferred income tax assets that may result from, among other things, limitations
imposed by Internal Revenue Code and uncertainties, including the timing of
settlement and realization of these differences. No valuation allowance is
required as of September 30, 2012.
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Fair Value Measurements
We adopted FASB ASC 820-10 Fair Value Measurements and Disclosures ("ASC 820"),
which defines fair value, establishes a framework for measuring fair value under
GAAP, and expands disclosures about fair value measurements. We consider our
accounting policies related to fair value measurements to be critical because
they are important to the portrayal of our financial condition and results, and
they require our subjective and complex judgment as a result of the need to make
estimates about the effects of matters that are inherently uncertain. See Note
7, Fair Value Disclosures of Financial Assets to our Consolidated Financial
Statements.
Goodwill and Other Intangible Assets
In accordance with FASB ASC 805, Business Combinations, and FASB ASC 350,
Intangibles-Goodwill and Other, all assets and liabilities acquired in purchase
acquisitions, including goodwill, indefinite-lived intangibles and other
intangibles are recorded at fair value. We consider our accounting policies
related to goodwill and other intangible assets to be critical because the
assumptions or judgment used in determining the fair value of assets and
liabilities acquired in past acquisitions are subjective and complex. As a
result, changes in these assumptions or judgment could have a significant impact
on our financial condition or results of operations.
For additional information regarding our goodwill and other intangible assets,
see Note 11 to the Consolidated Financial Statements.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Our total assets decreased $27.7 million, or less than 1%, to $4.3 billion
during the nine months ended September 30, 2012. Included in this decrease was a
$46.4 million, or 2%, decrease in net loans resulting from our second quarter
2012 Asset Strategies efforts, and a $20.9 million, or 4%, decrease in cash and
cash equivalents mainly due to the seasonal decrease in cash in non-owned ATMs
and the use of cash from other institutions in Cash Connect's ATM Vault Cash
business. Partially offsetting these decreases, investment securities increased
$50.7 million, or 6%, and loans held-for-sale increased by $10.7 million during
the nine months ended September 30, 2012.
Total liabilities decreased $53.3 million during the nine months ended
September 30, 2012 to $3.8 billion. This decrease was primarily the result of
decreased Federal Home Loan Bank advances of $145.8 million, or 27%, as a result
of net repayments. Partially offsetting these decreases was a $50.0 million
increase in federal funds purchased and a $50.1 million increase in total
customer deposits. Deposit growth included a $70.8 million increase in
noninterest-bearing demand accounts, a $23.5 million increase in interest
bearing demand accounts and a $20.5 million increase in savings accounts. These
core deposit account increases were partially offset the purposeful decreases of
$58.3 million in high-cost, non-core customer time accounts and a $25.6 million
decrease in brokered CDs.
Capital Resources
Stockholders' equity increased $25.7 million between December 31, 2011 and
September 30, 2012. This increase was mainly due to net income of $23.8 million
combined with an increase of $6.1 million in the value of our available-for-sale
securities portfolio. Partially offsetting these increases was the payment of
common and preferred dividends of $5.1 million during the nine months ended
September 30, 2012.
Book value per common share was $47.84 at September 30, 2012 an increase of
$2.65 from $45.19 reported at December 31, 2011. Tangible common book value per
common share (a non-GAAP measurement) was $37.99 at September 30, 2012, an
increase of $2.79, or 8% from $35.20 reported at December 31, 2011.
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Below is a table comparing the Bank's consolidated capital position to the
minimum regulatory requirements as of September 30, 2012:
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
% of % of % of
(Dollars in Thousands) Amount Assets Amount Assets Amount AssetsTotal Capital (to Risk-Weighted Assets) $ 458,242 14.28 % $ 256,771 8.00 % $ 320,964 10.00 %
Core Capital (to Adjusted Total Assets) 418,043 9.91 168,779 4.00
210,974 5.00
Tangible Capital (to Tangible Assets) 418,043 9.91 63,292 1.50
N/A N/A
Tier 1 Capital (to Risk-Weighted Assets) 418,043 13.02 128,386 4.00
192,578 6.00
Under guidelines issued by banking regulators, savings institutions such as the
Bank must maintain certain capital levels in order to be considered adequately
capitalized. The thresholds for being considered adequately capitalized are
outlined in the table above. Failure to meet minimum capital requirements can
initiate certain mandatory actions and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on our
bank's financial statements.
At September 30, 2012, the Bank was in compliance with regulatory capital
requirements and was considered a "well-capitalized" institution. The Bank's
core capital ratio of 9.91%, Tier 1 capital ratio of 13.02% and total risk based
capital ratio of 14.28%, all remain substantially in excess of
"well-capitalized" regulatory benchmarks, the highest regulatory capital rating.
In addition, and not included in Bank capital, the holding company held $61.2
million in cash to support dividends, acquisitions, 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.
As a financial institution, the Bank has ready access to several sources to fund
growth and meet its liquidity needs. Among these are: net income, retail deposit
generation, loan repayments, borrowing from the FHLB, repurchase agreements,
access to the Federal Reserve Discount Window, and access to the brokered
deposit market as well as other wholesale funding avenues. In addition, we have
a large portfolio of high-quality, liquid investments, primarily short-duration
mortgage-backed securities and government sponsored enterprises ("GSE") notes
that provide a near-continuous source of cash flow to meet current cash needs,
or can be sold to meet larger discrete needs for cash. Management believes these
sources are sufficient to maintain required and prudent levels of liquidity.
During the nine months ended September 30, 2012, cash and cash equivalents
decreased $20.9 million to $447.1 million. This decrease was primarily a result
of the following: cash used for $145.8 million for net repayments of FHLB
advances; $38.2 million increase in net loans; $28.3 million net increase in
investment securities available for sale and a $30.0 million repayment of
unsecured bank debt. Offsetting these decreases in cash were: $63.3 million
increase in cash provided by operating activities; $53.1 million increase from
the issuance of senior notes during the third quarter of 2012; $50.0 million
increase in cash provided through an increase in federal funds purchased; $42.1
million net increase in deposits and $11.8 million increase from the sales of
assets acquired through foreclosure.
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NONPERFORMING ASSETS
The following table shows our nonperforming assets and past due loans at the
dates indicated. Nonperforming assets include nonaccruing loans, nonperforming
real estate, assets acquired through foreclosure and restructured mortgage and
home equity consumer debt. Nonaccruing loans are those on which the accrual of
interest has ceased. Loans are placed on nonaccrual status immediately if, in
the opinion of management, collection is doubtful, or when principal or interest
is past due 90 days or more and the value of the collateral is insufficient to
cover principal and interest. Interest accrued but not collected at the date a
loan is placed on nonaccrual status is reversed and charged against interest
income. In addition, the amortization of net deferred loan fees is suspended
when a loan is placed on nonaccrual status. Subsequent cash receipts are applied
either to the outstanding principal balance or recorded as interest income,
depending on management's assessment of the ultimate collectability of principal
and interest. Past due loans are loans contractually past due 90 days or more as
to principal or interest payments but which remain on accrual status because
they are considered well secured and in the process of collection.
September 30, December 31,
2012 2011
(In Thousands)
Nonaccruing loans:
Commercial $ 3,579 $ 23,080
Owner-occupied commercial (1) 13,324 -
Consumer 5,188 1,018
Commercial mortgage 5,875 15,814
Residential mortgage 9,354 9,057
Construction 2,620 22,124
Total nonaccruing loans 39,940 71,093
Assets acquired through foreclosure 6,996 11,695
Troubled debt restructuring (accruing) 10,189 8,887
Total nonperforming assets $ 57,125 $ 91,675
Past due loans (2):
Residential mortgages - 887
Commercial and commercial mortgage 1,869 78
Total past due loans $ 1,869 $ 965
Ratios:
Allowance for loan losses to total loans (3) 1.69 % 1.92 %
Nonperforming assets to total assets 1.34 % 2.14 %
Nonaccruing loans to total loans (3) 1.48 % 2.58 %
Loan loss allowance to nonaccruing loans 114.17 % 74.66 %
Loan loss allowance to total nonperforming assets 79.82 % 57.9 %
(1) Prior to 2012, owner-occupied loans were included in commercial loan
balances.
(2) Past due loans are accruing loans which are contractually past due 90 days or
more as to principal or interest. These loans are well secured and in the
process of collection.
(3) Total loans exclude loans held for sale.
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Nonperforming assets decreased $34.6 million between December 31, 2011 and
September 30, 2012. As a result, non-performing assets as a percentage of total
assets decreased from 2.14% at December 31, 2011 to 1.34% at September 30, 2012.
This significant reduction was mainly due to the successful efforts of our
"Asset Strategies" during the second quarter of 2012. In addition, during the
third quarter a total of $8.0 million was collected or paid down through
additional note sales and ongoing asset management activities. Lastly, as the
result of recent OCC guidance, during the third quarter of 2012, $4.7 million of
loans were reclassified from performing loans to nonaccrual status (consisting
of $2.5 million of residential mortgages and $2.2 million of consumer loans).
For additional information on this reclass, see the "Allowance for Loan Losses"
section of this Management Discussion and Analysis.
The following table summarizes the changes in nonperforming assets during the
period indicated:
For the nine For the year
months ended ended
September 30, 2012 December 31, 2011
(In Thousands)
Beginning balance $ 91,675 $ 92,898
Additions 55,321 89,842
Collections (40,559 ) (40,695 )
Collections from loan dispositions (14,305 )
-
Transfers to accrual (552 )
(8,474 )
Charge-offs / write-downs, net (34,455 ) (41,896 )
Ending balance $ 57,125 $ 91,675
The timely identification of problem loans is a key element in our strategy to
manage our loan portfolio. Timely identification enables us to take appropriate
action and, accordingly, minimize losses. An asset review system established to
monitor the asset quality of our loans and investments in real estate portfolios
facilitates the identification of problem assets. In general, this system
utilizes guidelines established by federal regulation.
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest rate-sensitive
assets and liabilities to promote a favorable interest rate spread and mitigate
exposure to fluctuations in interest rates is our primary tool for achieving our
asset/liability management strategies. We regularly review our interest-rate
sensitivity and adjust the sensitivity within acceptable tolerance ranges
established by the Board of Directors. At September 30, 2012, interest-earning
assets exceeded interest-bearing liabilities that mature or reprice within one
year (interest-sensitive gap) by $133.3 million. Our interest-sensitive assets
as a percentage of interest-sensitive liabilities within the one-year window
increased from 102.8% at December 31, 2011, to 106.2% at September 30, 2012.
Likewise, the one-year interest-sensitive gap as a percentage of total assets
changed to 3.13% at September 30, 2012 from 1.54% at June 30, 2012. The change
in sensitivity since December 31, 2011 reflects our continuing effort to
effectively manage interest rate risk and positions us to improve our net
interest margin in a rising rate environment.
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 net portfolio value ratio. The economic
value of equity ratio is defined as the economic value of the estimated cash
flows from assets and liabilities as a percentage of economic value of cash
flows from total assets.
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The table below shows the estimated impact of immediate changes in interest
rates on our net interest margin and net portfolio value ratio at the specified
levels at September 30, 2012 and December 31, 2011:
September 30, 2012 December 31, 2011
% Change in % Change in Economic % Change in Economic
Interest Rate Net Interest Value of Net Interest Value of
(Basis Points) Margin (1) Equity (2) Margin (1) Equity (2)
+300 8% 12.38% 6% 11.17%
+200 3% 12.52% 3% 11.30%
+100 -2% 12.34% -2% 11.21%
- 0% 12.03% 0% 10.97%
-100 0% 11.23% 1% 10.19%
-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 in a stable interest rate environment and
the economic value of equity ratio as projected under the various rate change
environments.
(3) Sensitivity indicated by a decrease of 200 or 300 basis points is not deemed
meaningful at September 30, 2012 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. In addition, our Cash Connect's ATM
Vault Cash program generates bailment income that can also fluctuate with
changes in interest rates. These fluctuations are difficult to model and
estimate.
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012
Results of Operations
During the third quarter of 2012, we recorded net income of $10.0 million, or
$1.06 per diluted common share which was an increase of $3.2 million compared to
the third quarter 2011. Results for the quarter were positively impacted by
lower credit costs of $2.5 million from the third quarter 2011, reflecting the
improved credit quality of our loan portfolio. Additionally, noninterest income
increased $2.8 million due to franchise growth across all segments when compared
to the third quarter 2011. Also impacting net income was lower noninterest
expenses of $259,000 from the same period a year ago. Partially offsetting these
gains, net interest margin decreased 22 basis points from 3.63% in the third
quarter 2011 to 3.41% in the third quarter 2012 due to our second quarter 2012
Asset Strategies initiatives, our issuance of senior notes from the third
quarter of 2012, and the continued low, flat interest rate environment.
Net income for the first nine months of 2012 was $23.8 million, or $2.47 per
diluted common share; an increase of $7.3 million from the same period in 2011.
Earnings for the first nine months of 2012 were impacted by growth in
noninterest income of $18.9 million, which included $13.3 million of securities
gains from the second quarter Asset Strategies. The remaining increase in
noninterest income reflects continued growth across all segments of the
franchise. In addition, interest income increased by $1.9 million to $95.5
million during 2012, also reflecting the growth of the franchise and our
proactive interest rate management efforts. Offsetting these increases was a
$6.2 million increase in credit costs, which also included the impact of our
second quarter Assets Strategies. In addition, noninterest expenses increased by
$1.8 million during the year, mainly due to the final stages of our retail
branch expansion plan and the relocation of our operations center over the past
twelve months.
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Net Interest Income
The following tables provide information concerning the balances, yields and
rates on interest-earning assets and interest-bearing liabilities during the
periods indicated.
Three Months Ended September 30,
2012 2011
Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Rate (1) Balance Interest Rate (1)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans $ 718,046 $ 8,803 4.90 % $ 731,527 $ 8,556 4.68 %
Residential real estate loans (6) 276,681 2,980 4.31 293,800 3,454 4.70
Commercial loans 1,435,514 16,848 4.61 1,368,703 17,193 4.99
Consumer loans 283,704 3,372 4.73 296,709 3,737 5.00
Total loans 2,713,945 32,003 4.73 2,690,739 32,940 4.94
Mortgage-backed securities (4) 829,930 4,344 2.09 801,446 7,052 3.52
Investment securities (4) (5) 53,392 158 1.27 43,959 99 0.90
Other interest-earning assets 31,187 9 0.11 37,830 - -
Total interest-earning assets 3,628,454 36,514 4.03 3,573,974 40,091 4.52
Allowance for loan losses (46,808 ) (57,125 )
Cash and due from banks 70,366 65,997
Cash in non-owned ATMs 362,332 378,651
Bank-owned life insurance 63,315 63,463
Other noninterest-earning assets 118,330 119,888
Total assets $ 4,195,989 $ 4,144,848
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand $ 404,185 $ 53 0.05 % $ 324,367 $ 75 0.09 %
Money market 759,944 431 0.23 731,979 720 0.39
Savings 390,275 83 0.08 375,243 386 0.41
Customer time deposits 716,676 2,365 1.31 757,975 3,237 1.69
Total interest-bearing customer deposits 2,271,080 2,932
0.51 2,189,564 4,418 0.80
Brokered certificates of deposit 283,345 305 0.43 209,629 201 0.38
Total interest-bearing deposits 2,554,425 3,237 0.50 2,399,193 4,619 0.76
FHLB of Pittsburgh advances 389,745 1,403 1.41 610,253 2,484 1.59
Trust preferred borrowings 67,011 369 2.15 67,011 340 1.99
Senior debt 20,924 353 6.60 - - -
Other borrowed funds 129,293 259 0.80 142,725 468 1.31
Total interest-bearing liabilities 3,161,398 5,621 0.71 3,219,182 7,911 0.98
Noninterest-bearing demand deposits 590,133 516,257
Other noninterest-bearing liabilities 33,757 26,001
Stockholders' equity 410,701 383,408
Total liabilities and stockholders'
equity $ 4,195,989 $ 4,144,848
Excess of interest-earning assets over
interest-bearing liabilities $ 467,056 $ 354,792
Net interest and dividend income $ 30,893 $ 32,180
Interest rate spread 3.32 % 3.54 %
Net interest margin 3.41 % 3.63 %
(1) Weighted average yields have been computed on a tax-equivalent basis using a
35% effective tax rate.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
(5) Includes reverse mortgages.
(6) Includes loans held for sale arising during the normal course of business.
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Nine Months Ended September 30,
2012 2011
Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Rate (1) Balance Interest Rate (1)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans $ 729,599 $ 26,717 4.88 % $ 749,318 $ 26,434 4.70 %
Residential real estate loans (6) 276,400 9,211 4.44 303,371 11,009 4.84
Commercial loans 1,459,698 51,891 4.73 1,311,390 48,855 4.99
Consumer loans 285,701 10,244 4.79 302,732 11,401 5.04
Loans held for sale (7) 7,113 122 2.29 - - -
Total loans 2,758,511 98,185 4.76 2,666,811 97,699 4.93
Mortgage-backed securities (4) 817,253 14,953 2.44 749,961 20,962 3.73
Investment securities (4) (5) 50,152 335 0.99 43,164 396 1.22
Other interest-earning assets 33,208 27 0.11 36,990 - -
Total interest-earning assets 3,659,124 113,500 4.16 3,496,926 119,057 4.57
Allowance for loan losses (49,140 ) (58,435 )
Cash and due from banks 90,969 62,869
Cash in non-owned ATMs 363,497 342,345
Bank-owned life insurance 63,465 64,221
Other noninterest-earning assets 123,228 120,583
Total assets $ 4,251,143 $ 4,028,509
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand $ 395,081 $ 157 0.05 % $ 316,712 $ 301 0.13 %
Money market 754,942 1,357 0.24 712,404 2,293 0.43
Savings 388,894 361 0.12 348,967 1,215 0.47
Retail time deposits 739,073 7,886 1.43 769,528 10,491 1.82
Total interest-bearing retail deposits 2,277,990 9,761
0.57 2,147,611 14,300 0.89
Brokered certificates of deposit 283,169 891 0.42 190,395 576 0.40
Total interest-bearing deposits 2,561,159 10,652 0.56 2,338,006 14,876 0.85
FHLB of Pittsburgh advances 466,266 4,985 1.40 558,807 7,866 1.86
Trust preferred borrowings 67,011 1,114 2.18 67,011 1,015 2.00
Senior debt 7,026 353 6.60 - - -
Other borrowed funds 136,282 895 0.88 158,822 1,679 1.41
Total interest-bearing liabilities 3,237,744 17,999
0.74 3,122,646 25,436 1.09
Noninterest-bearing demand deposits 574,708 506,316
Other noninterest-bearing liabilities 33,922 22,744
Stockholders' equity 404,769 376,803
Total liabilities and stockholders'
equity $ 4,251,143 $ 4,028,509
Excess of interest-earning assets over
interest-bearing liabilities $ 421,380 $ 374,280
Net interest income $ 95,501 $ 93,621
Interest rate spread 3.42 % 3.48 %
Net interest margin 3.49 % 3.60 %
(1) Weighted average yields have been computed on a tax-equivalent basis using a
35% effective tax rate.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
(5) Includes reverse mortgages.
(6) Includes loans held for sale arising from the normal course of business.
(7) Includes loans held for sale in conjunction with asset disposition
strategies.
Net interest income for the third quarter 2012 declined $1.3 million, or 4%,
when compared to the third quarter 2011. The decrease in net interest income
reflects a decline in yields in our mortgage-backed securities portfolio due to
the impact of our second quarter 2012 Assets Strategies efforts, and the ongoing
impact of the historically low interest rate environment. In addition, the
increase in borrowing costs was mainly due to the issuance of $55.0 million of
6.25% senior notes during the third quarter of 2012. Offsetting these decreases
was our continued proactive rate management as evidenced by our 29 basis point
decrease in retail funding costs, while we had only a 21 basis point decrease in
overall loan yield during the same period.
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The net interest margin for the third quarter 2012 was 3.41%, a 22 basis point
decrease when compared to 3.63% for the third quarter 2011. The decrease
reflects the impact of our Assets Strategies efforts during the second quarter
2012, the issuance of $55 million of 6.25% senior notes during the third quarter
2012 and the impact of the historically low, flat interest rate environment,
particularly on our securities yields and loan pricing.
Net interest income for the nine months ended September 30, 2012 was $95.5
million compared to $93.6 million for the same period in 2011. This increase
reflects the favorable impact of the growth in our franchise and proactive
interest rate management in both customer and wholesale funding costs. However,
the net interest margin for the nine months ended September 30, 2012 was 3.49%,
down 11 basis points from the same period in 2011. Similar to the quarterly
discussion above this decrease was mainly due to: decreased MBS portfolio yields
over the prior year as a result of our Asset Strategies efforts, our $55.0
million senior note issuance; and the continued historically low interest rate
environment.
Allowance for Loan Losses
We maintain allowances for loan losses and charge losses to these allowances
when such losses are identified. The determination of the allowance for loan
losses requires significant judgment reflecting our best estimate of probable
loan losses 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.
We established our loan loss allowance in accordance with guidance provided in
the Securities and Exchange Commission's Staff Accounting Bulletin 102 ("SAB
102"). Its methodology for assessing the appropriateness of the allowance
consists of several key elements which include: specific allowances for
identified problem loans; formula allowances for commercial and commercial real
estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain impaired loans in cases where we
have identified significant conditions or circumstances related to a specific
credit that indicates that a loss is probable to occur.
The formula allowances for commercial, commercial real estate and construction
loans are calculated by applying estimates of default and loss severity to
outstanding loans based on the risk grade of loans. Default rates are determined
through a past twelve quarter migration analysis. Loss severity is based on a
three year historical analysis. As a result, changes in risk grades affect the
amount of the formula allowance.
Pooled loans are usually smaller, not-individually-graded and homogenous in
nature, such as consumer installment loans and residential mortgages. Loan loss
allowances for pooled loans are first based on a five-year net charge-off
history. The average loss allowance per homogenous pool is based on the product
of average annual historical loss rate and the homogeneous pool balances. These
separate risk pools are then assigned a reserve for losses based upon this
historical loss information.
Qualitative and environmental adjustment factors are taken into consideration
when determining above reserve estimates. These adjustment factors are based
upon our evaluation of various current conditions, including those listed below.
• General economic and business conditions affecting the Bank's key lending
areas,
• Credit quality trends,
• Recent loss experience in particular segments of the portfolio,
• Collateral values and loan-to-value ratios,
• Loan volumes and concentrations, including changes in mix,
• Seasoning of the loan portfolio,
• Specific industry conditions within portfolio segments,
• Bank regulatory examination results, and
• Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
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Our loan officers and risk managers meet at least quarterly to discuss and
review these conditions and risks associated with individual problem loans. In
addition, various regulatory agencies and loan review consultants periodically
review our loan ratings and allowance for loan losses.
During the first quarter of 2012, we made certain improvements to the method in
which we determine the allowance for loan loss. These improvements include:
• Used a three year loss migration analysis to determine the probability of
default
• Segregated the commercial loan segment to more specifically analyze the risks
associated with business, owner-occupied CRE, investor CRE and Construction
loan portfolios
• Improved the data used to determine qualitative adjustment factors
• Established a portion of the allowance for loan losses related to model and
complexity risk
• Revised our loan risk rating system based on recommendations from industry
experts
As a result of recent guidance provided by the OCC, during the third quarter of
2012 $4.7 million of loans were identified as troubled debt restructurings
because the borrower's obligation to us has been discharged in bankruptcy and
the borrower has not reaffirmed the debt. These loans were reclassified from
performing loans to nonaccrual status and consisted of $2.5 million of
residential mortgages and $2.2 million of consumer loans. Net loan charge-offs
of $1.3 million were recognized. As of September 30, 2012, less than 4% of the
loans within this category were 30 days or more past due and 88% of these loans
have been making payments for at least the past 12 consecutive months. Based on
this performance, we expect to recover a significant amount of these losses over
time as principal payments are received.
During the third quarter of 2012, the provision for loan losses was also
impacted by a higher level of estimated losses related to consumer loans [using
updated historical data as adjusted for the current periods charge-offs and
trends]. The third quarter adjustment was consistent with adjustments made in
the prior year and resulted in an increase from the estimate previously used.
The provision for loan losses was $3.8 million in the quarter ending
September 30, 2012 compared to $6.6 million in the same quarter of 2011. Total
credit costs (including the provision for loan losses, loan workout expense,
OREO expense and other credit reserves) decreased to $5.9 million from $8.4 in
the third quarter of 2011, reflecting the improved credit quality of our loan
portfolio.
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The table below represents a summary of the changes in the allowance for loan
losses during the periods indicated.
For the Nine Months Ended September 30,
2012 2011
(Dollars in Thousands)
Beginning balance $ 53,080 $ 60,339
Provision for loan losses 28,379 21,048
Charge-offs:
Residential real estate (1) 3,343 2,183
Commercial real estate 5,600 6,609
Construction 10,680 8,179
Commercial 11,920 7,641
Owner-occupied commercial (2) 3,012 -
Overdrafts 813 613
Consumer (1) 4,680 4,859
Total charge-offs 40,048 30,084
Recoveries:
Residential real estate 171 116
Commercial real estate 382 381
Construction 1,642 557
Commercial 1,482 409
Owner-occupied commercial (2) 13 -
Overdrafts 297 267
Consumer 200 155
Total recoveries 4,187 1,885
Net charge-offs 35,861 28,199
Ending balance $ 45,598 $ 53,188
Net charge-offs to average gross loans
outstanding, net of unearned income (3) 1.75 % 1.41 %
(1) Recent regulatory guidance regarding loans discharged in Chapter 7 bankruptcy
resulted in charge-offs of $1.0 million in consumer loans and $316K in
residential real estate for the nine months ending September 30, 2012.
(2) Prior to 2012, owner-occupied loans were included in commercial loan
balances.
(3) Ratios for the nine months ended September 30, 2012 and 2011 annualized.
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Noninterest Income
Noninterest income increased $2.8 million to $19.7 million for the quarter ended
September 30, 2012 from $16.9 million in the third quarter of 2011. Excluding
the effect of net securities gains in both periods and the unanticipated BOLI
income during the third quarter of 2012, noninterest income increased by $1.3
million, or 9%. Mortgage banking and loan fee income increased $753,000, or 87%.
Fiduciary and investment management income increased $271,000, or 9%, reflecting
growth in the trust and wealth management segment, and credit/ debit card and
ATM fees increased by $215,000, or 4%, reflecting growth in Cash Connect (our
ATM division).
For the nine months ended September 30, 2012 noninterest income increased $18.9
million to $65.5 million compared to the same period in 2011. Excluding the
effect of net securities gains in both periods and the unanticipated BOLI income
in both years, noninterest income increased by $4.2 million, or 10%. Similar to
the quarterly comparison, the increase in fee income was largely due to
continued growth across all of our segments. The increase includes $1.5 million,
or 10%, in credit/ debit card and ATM fees, $825,000, or 9%, increase in
fiduciary and investment management income and $779,000 or 27%, increase in
mortgage banking and loan fee income.
Noninterest Expense
Noninterest expenses decreased $260,000, or 1%, to $32.2 million in the third
quarter of 2012 compared to the same period in 2011. Excluding our "Right Here"
advertising campaign ($961,000) in the third quarter of 2011, expenses increased
$701,000 or only 2% over the same period in 2011. This increase reflects the
higher expenses associated with the prior years' retail branch expansion plan,
including the opening and renovation of four branches and the relocation of our
operations center in the second half of 2011 and increased compensation related
costs related to our improved performance in 2012 and changes in the timing of
the awards. These increases were largely mitigated by our expense management
efforts over the last year.
For the nine months ended September 30, 2012, noninterest expense increased $1.7
million, or 2%, to $96.2 million compared to the same period in 2011. Similar to
the quarterly comparison, contributing to the increase were expenses associated
with strategic investments, including the opening and renovation of four
branches and the relocation of our operations center in the second half of 2011
and completed in early 2012 and added compensation costs related to our improved
performance in 2012.
Income Taxes
We and our subsidiaries file a consolidated Federal income tax return and
separate state income tax returns. Income taxes are accounted for in accordance
with ASC 740, which requires the recording of deferred income taxes for tax
consequences of temporary differences. We recorded an income tax expense of $4.8
million and $12.7 million during the three months and nine months ended
September 30, 2012, respectively, compared to an income tax expense of $3.3
million and $8.2 million for the same periods in 2011.
The third quarter 2012 included the recognition of tax benefits related to $1.0
million of tax-free income from life insurance proceeds received from our BOLI
investment. The second quarter 2011 included $1.2 million of similar tax-free
BOLI income. The third quarter 2011 included tax benefits of $376,000 resulting
primarily from a decrease in our income tax reserve due to the expiration of the
statute of limitations on certain items. Our effective tax rate was 32.3% and
34.9% for the three and nine months ended September 30, 2012, respectively,
compared to 33.0% and 33.2% during the same periods in 2011. Excluding the
tax-free BOLI proceeds and statute of limitations related benefit, our effective
tax rates were 34.7% and 35.8% for the three and nine months ended September 30,
2012 compared to 36.7% and 36.3% during the same periods in 2011.
The effective tax rate reflects the recognition of certain tax benefits in the
financial statements including those benefits from tax-exempt interest income
(including a 50% interest income exclusion on a loan to an Employee Stock
Ownership Plan), federal low-income housing tax credits, and BOLI income. These
tax benefits are offset by the tax effect of stock-based compensation expense
related to incentive stock options and a provision for state income tax expense.
We frequently analyze our projections of taxable income and make adjustments to
our provision for income taxes accordingly.
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RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the FASB issued an update ("ASU" No. 2011-02, A Creditor's
Determination of Whether a Restructuring is a Troubled Debt Restructuring) which
clarifies when creditors should classify loan modifications as troubled debt
restructurings. The new guidance is effective for interim and annual periods
beginning on or after June 15, 2011, and applies retrospectively to
restructurings occurring on or after January 1, 2011. A provision in Update
2011-02 also ends the FASB's deferral of the additional disclosures about
troubled debt restructurings as required by Update 2010-20. The adoption of this
amendment did not have a material effect on our Consolidated Financial
Statements.
In April 2011, the FASB issued an update ("ASU" No. 2011-03, Reconsideration of
Effective Control in Repurchase Agreements) which removes from the assessment of
effective control the criterion related to the transferor's ability to
repurchase or redeem financial assets on substantially agreed terms, even in the
event of default by the transferee. In addition, this guidance also eliminates
the requirement to demonstrate that a transferor possesses adequate collateral
to fund substantially all the cost of purchasing replacement financial
assets. The new guidance is effective for interim and annual periods beginning
on or after December 15, 2011, and applies prospectively to transactions or
modifications of existing transactions occurring on or after the effective date.
The adoption of this amendment did not have a material effect on our
Consolidated Financial Statements.
In May 2011, the FASB issued an update ("ASU" No. 2011-04, Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS)
to achieve common fair value measurement and disclosure requirements between
U.S. and International accounting principles. While the overall guidance is
consistent with U.S. GAAP, the amendment includes additional fair value
disclosure requirements. The amendments in the guidance are effective for
interim and annual periods beginning after December 15, 2011. The adoption of
this amendment did not have a material effect on our Consolidated Financial
Statements; however, the adoption did have an impact on our fair value
disclosures.
In June 2011, the FASB issued an update ("ASU" No. 2011-05, Presentation of
Comprehensive Income) to eliminate the option to present the components of other
comprehensive income as part of the statement of changes in shareholder's
equity. The amendment requires that comprehensive income be presented in either
a single continuous statement or in two separate consecutive statements. This
amendment is effective for interim and annual periods beginning after
December 15, 2011. The adoption of this amendment did not have a material effect
on our Consolidated Financial Statements; however, the adoption did have an
impact on our presentation of comprehensive income.
In September 2011, the FASB issued an update ("ASU" No. 2011-08,
Intangibles-Goodwill and Other (Topic 350)-Testing Goodwill for Impairment) to
give entities the option to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that
it is more likely than not that the fair value of a reporting unit is less than
its carrying amount. If, after assessing the totality of events or
circumstances, an entity determines it is not more likely than not that the fair
value of a reporting unit is less than its carrying amount, then performing the
two-step impairment test is unnecessary. However, if an entity concludes
otherwise, then it is required to perform the first step of the two-step
impairment test by calculating the fair value of the reporting unit and
comparing the fair value with the carrying amount of the reporting unit. This
amendment is effective for interim and annual periods beginning after
December 15, 2011. The adoption of this amendment did not have a material effect
on our Consolidated Financial Statements.
In December 2011, the FASB issued an update ("ASU" No. 2011-11, Balance Sheet
(Topic 350)-Offsetting) to address balance sheet offsetting. An entity is
required to disclose information about offsetting and related arrangements so
that users of the financial statements can understand the effect of those
arrangements on its financial position. Entities are required to disclose both
gross information about both instruments and transactions eligible for offset in
the statement of financial position and instruments and transactions subject to
an agreement similar to a master netting agreement. The instruments and
transactions include derivatives, sale and repurchase agreements and reverse
sale and repurchase agreements, and securities borrowing and securities lending
arrangements. This amendment is effective for interim and annual reporting
periods beginning on or after January 1, 2013. We do not expect the adoption of
this guidance to have a material impact on our financial statements.
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In December 2011, the FASB issued an update ("ASU" No. 2011-12, Presentation of
Comprehensive Income: Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05) which under ASU
2011-05 defers the effective date pertaining to reclassification adjustments out
of other accumulated other comprehensive income (AOCI). Concerns were raised
that reclassifications of items out of AOCI would be costly for preparers and
may add unnecessary complexity to financial statements. All other requirements
in ASU 2011-05 are not affected by this Update. This amendment is effective for
interim and annual periods beginning after December 15, 2011. The adoption of
this amendment did not have a material effect on our Consolidated Financial
Statements.
In July 2012, the FASB issued an update ("ASU 2012-02, Intangibles-Goodwill and
Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment)
which permits entities to perform an optional qualitative assessment for
determining whether it is more likely than not that an indefinite-lived
intangible asset is impaired. The guidance is effective for annual and interim
impairment tests performed for fiscal years beginning after September 15,
2012. We are evaluating the impact of ASU 2012-02; however, we do not expect the
adoption of this guidance to have a material impact on our financial statements.
RECENT LEGISLATION
On July 21, 2010, the President signed the Dodd-Frank Act into law. This
legislation makes extensive changes to the laws regulating financial services
firms and requires significant rule-making. In addition, the legislation
mandates multiple studies, which could result in additional legislative or
regulatory action. While the full effects of the legislation on us cannot yet be
determined, this legislation was opposed by the American Bankers Association and
is generally perceived as negatively impacting the banking industry. This
legislation may result in higher compliance and other costs, reduced revenues
and higher capital and liquidity requirements, among other things, which could
adversely affect our business. There are many parts of the Dodd-Frank Act that
have yet to be determined and implemented however, as a direct result of the
Act, the following rulings have been adopted or will be adopted in the coming
years:
• On August 10, 2010 the Board of Directors of the FDIC adopted a final
ruling permanently increasing the standard maximum deposit insurance
amount from $100,000 to $250,000, which became effective on July 22, 2010.
• During January of 2011, an implementation plan for the phase out of the
Office of Thrift Supervision ("the OTS"), was announced by the joint
agencies, and it merged into the Office of the Comptroller of the
Currency. The provisions of the plan included a transition from the
quarterly Thrift Financial Report, to the Call Report, which began with
the March 2012 reporting period.
• On February 7, 2011, the Federal Reserve approved a final ruling the
changes the Deposit Insurance Fund ("DIF") assessment from domestic
deposits to average assets minus tangible equity. The changes went into
effect during the second quarter of 2011. It is the intent of the FDIC
that banks with over $10 billion in assets pay a larger share of the
assessments into the DIF.
• In June 2011, the Federal Reserve adopted the "Durbin Amendment" in which
debit interchange fees would be capped at 21 cents plus 5 basis points of
the transaction, with the possibility of an additional cent if the issuer
implements certain fraud-prevention standards. This rule directly affects
banks with $10 billion or more in assets.
• On July 21, 2011, the Federal Reserve repealed Federal prohibitions on the
payment of interest on demand deposits.
• On July 21, 2011, the Consumer Financial Protection Bureau ("CFPB") was
created to centralize responsibility for consumer financial protection.
The bureau has been given the responsibility for implementing, examining
and enforcing compliance with Federal consumer protection laws.
In June 2012, the Federal Reserve Board, the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation approved three proposals
that would amend the existing capital adequacy requirements of banks and bank
holding companies. The three proposals would, among other things, implement the
Basel III capital standards, as well as the Basel II standardized approach for
almost all banking organizations in the United States including us. The Basel
III proposal would increase the minimum levels of required capital, narrow the
definition of capital, and places greater emphasis on common equity. The Basel
II standardized proposal would modify the risk weights for various asset
classes. We are still in the process of assessing the impacts of these complex
proposals.
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