UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 0-16668
WSFS FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
22-2866913
(I.R.S. Employer
Identification No.)
500 Delaware Avenue,
Wilmington, Delaware 19801
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (302) 792-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
6.25% Senior Notes Due 2019
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. YES ‘ NO È
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. YES ‘ NO È
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 twelve 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 È 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 for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ‘
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer ‘
Non-accelerated filer ‘
È
Accelerated filer
Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ‘ No È
The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of the registrant’s
common stock as quoted on NASDAQ as of June 30, 2012 was $320,580,531. For purposes of this calculation only, affiliates are deemed
to be directors, executive officers and beneficial owners of greater than 10% of the outstanding shares.
As of March 7, 2013, there were issued and outstanding 8,782,933 Shares of the registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 25, 2013 are incorporated by
reference in Part III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Part I
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Signatures
Part IV
Page
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FORWARD-LOOKING STATEMENTS
institutions,
levels associated therewith; possible additional
This Annual Report on Form 10-K, 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 our control) and are subject
to risks and uncertainties (which change over time) and other factors which could cause actual results to differ
materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, those
related to the economic environment, particularly in the market areas in which we operate, including an increase
in unemployment levels; our level of nonperforming assets; the volatility of the financial and securities markets,
including changes with respect to the market value of financial assets; changes in market interest rates which
may increase funding costs and reduce earning asset yields thus reducing margin; increases in benchmark rates
would also increase debt service requirements for customers whose terms include a variable interest rate, which
may negatively impact the ability of borrowers to pay as contractually obligated; changes in government
regulation affecting financial
including the Dodd-Frank Wall Street Reform and Consumer
Protection Act and the rules and regulations being issued in accordance with this statute and potential expenses
and elevated capital
loan losses and impairment of the
collectability of loans; possible changes in trade, monetary and fiscal policies, laws and regulations and other
activities of governments, agencies, and similar organizations, may have an adverse effect on business; possible
rules and regulations issued by the Consumer Financial Protection Bureau or other regulators which might
adversely impact our business model or products and services; possible stresses in the real estate markets,
including possible continued deterioration in property values that affect the collateral value underlying our real
estate loans; our ability to expand into new markets, develop competitive new products and services in a timely
manner, and to maintain profit margins in the face of competitive pressures; possible changes in consumer and
business spending and saving habits could affect our ability to increase assets and to attract deposits; our ability
to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk,
reputational risk, and regulatory and compliance risk; the effects of increased competition from both banks and
non-banks; the effects of geopolitical instability and risks such as terrorist attacks; the effects of weather and
natural disasters such as floods, droughts, wind, tornados and hurricanes, and the effects of man-made disasters;
possible changes in the speed of loan prepayments by our customers and loan origination or sales volumes;
possible acceleration of prepayments of mortgage-backed securities (“MBS”) due to low interest rates, and the
related acceleration of premium amortization on prepayments on MBS due to low interest rates, and the related
acceleration of premium amortization on those securities; and the costs associated with resolving any problem
loans, litigation and other risks and uncertainties. Such risks and uncertainties are discussed herein, including
under the heading “Risk Factors,” and in other documents filed by us with the Securities and Exchange
Commission from time to time. Forward looking statements are as of the date they are made, and we do not
undertake to update any forward-looking statement, whether written or oral, that may be made from time to time
by or on behalf of us.
ITEM 1. BUSINESS
OUR BUSINESS
PART I
WSFS Financial Corporation (“WSFS,” the “Company” or “we”) is parent to Wilmington Savings Fund
Society, FSB (“WSFS Bank” or the “Bank”), the seventh oldest bank and trust company in the United States
continuously operating under the same name. A fixture in Delaware and contiguous areas of neighboring states
community, WSFS Bank has been in operation for 181 years. In addition to its focus on stellar customer service,
the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused,
1
locally-managed, community banking institution that has grown to become the largest independent bank or thrift
holding company headquartered and operating in the State of Delaware, one of the top commercial lenders in the
state, the third largest bank in terms of Delaware deposits and among the top trust companies in the country. For
the seventh year in a row, our Associates (what we call our employees) ranked us a “Top Workplace” in
Delaware and for the second year in a row the Delaware News Journal’s readers voted us the “Top Bank” in the
state. We state our mission simply: We Stand For Service.
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 in 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 services through our retail branches.
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 of WSFS Bank provides investment, fiduciary, agency and commercial domicile services from locations
in Delaware and Nevada and has over $17 billion in assets under administration. These services are provided to
individuals and families as well as corporations and institutions. Christiana Trust provides these services to
customers locally, nationally and internationally taking advantage of its branch facilities in Delaware and
Nevada. Cypress is an investment advisory firm that manages nearly $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.
Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the
United States. Cash Connect manages more than $444 million in vault cash in more than 13,000 ATMs
nationwide. They also provide online reporting and ATM cash management, predictive cash ordering, armored
carrier management, ATM processing and equipment sales. Cash Connect also operates over 440 ATMs for
WSFS Bank, which owns by far, the largest branded ATM network in Delaware.
WSFS POINTS OF DIFFERENTIATION
While all banks offer similar products and services, we believe that WSFS, through its service model, has
set itself apart from other banks in our market and the industry in general. In addition, community banks such as
WSFS have been able to distinguish themselves from large national or international banks that fail to provide
their customers with the service levels, responsiveness and local decision making they want. The following
factors summarize what we believe are our points of differentiation.
Building Associate Engagement and Customer Advocacy
Our business model is built on a concept called Human Sigma, which we have implemented in our strategy
of “Engaged Associates delivering Stellar Service growing Customer Advocates and value for our Owners”. The
Human Sigma model, identified by Gallup, Inc., begins with Associates who have taken ownership of their jobs
and therefore perform at a higher level. We invest significantly in recruitment, training, development and talent
management as our Associates are the cornerstone of our model. This strategy motivates Associates, and
unleashes innovation and productivity to engage our most valuable asset, our customers, by providing them with
Stellar Service experiences. As a result, we build Customer Advocates, or customers who have developed an
2
emotional attachment
engagement, customer advocacy and a company’s financial performance.
to the Bank. Research studies continue to show a direct
link between Associate
Engaged
Associates
Delivering
Stellar
Service
Growing
Customer
Advocates
Building
Shareholder
Value
Surveys conducted for us by Gallup, Inc. indicate:
• Our Associate Engagement scores consistently rank in the top quartile of companies polled. In 2012
our engagement ratio was 17.3:1, which means there were 17.3 engaged Associates for every
disengaged Associate. This compares to a 2.6:1 ratio in 2003 and a national average of 1.53:1. Gallup,
Inc. defines “world-class” as 8.8:1.
• Our customer advocacy scores rank in the top 10% of companies. In 2012, 48% of our customers
ranked us a “five” out of “five,” strongly agreeing with the statement “I can’t imagine a world without
WSFS” and nearly 71% of our customers ranked us a “five” out of “five,” strongly agreeing with the
statement “WSFS is the perfect bank for me.”
By fostering a culture of engaged and empowered Associates, we believe we have become the employer and
bank of choice in our market. In 2012, for the fourth year in a row, we were recognized by The Wilmington News
Journal as a “Top Work Place” for large corporations in the State of Delaware. Also in 2012, a News Journal
survey of its readers also ranked us the “Top Bank” in Delaware, indicating the strength of our focus on
customer service.
Community Banking Model
Our size and community banking model play a key role in our success. Our approach to business combines a
service-oriented culture with a strong complement of products and services, all aimed at meeting the needs of our
retail and business customers. We believe the essence of being a community bank means that we are:
•
Small enough to offer customers responsive, personalized service and direct access to decision makers.
• Large enough to provide all the products and services needed by our target market customers.
As the financial services industry has consolidated, many independent banks have been acquired by national
companies that have centralized their decision-making authority away from their customers and focused their
mass-marketing to a regional or even national customer base. We believe this trend has frustrated smaller
business owners who have become accustomed to dealing directly with their bank’s senior executives and
discouraged retail customers who often experience deteriorating levels of service in branches and other service
outlets. Additionally, it frustrates bank employees who are no longer empowered to provide good and timely
service to their customers.
WSFS Bank offers:
• One point of contact. Each of our relationship managers is responsible for understanding his or her
customers’ needs and bringing together the right resources in the Bank to meet those needs.
• A customized approach to our clients. We believe this gives us an advantage over our competitors who
are too large or centralized to offer customized products or services.
3
•
Products and services that our customers value. This includes a broad array of banking, cash
management and trust and wealth management products, as well as a legal lending limit high enough to
meet the credit needs of our customers, especially as they grow.
• Rapid response and a company that is easy to do business with. Our customers tell us this is an
important differentiator from larger, in-market competitors.
Strong Market Demographics
Delaware is situated in the middle of the Washington, DC—New York corridor which includes the urban
markets of Philadelphia and Baltimore. The state benefits from this urban concentration as well as from a unique
political, legal, tax and business environment. Additionally, Delaware is one of only eight states with a AAA
bond rating from the three predominant rating agencies. Delaware’s rate of unemployment, median household
income and rate of population growth all compare favorably to national averages.
(Most recent available statistics)
Unemployment (For December 2012) (1)
Median Household Income (2007-2011) (2)
Population Growth (2010-2012) (3)
Delaware
National
Average
6.9%
7.8%
$59,317
$52,762
2.1%
1.7%
(1) Bureau of Labor Statistics, Economy at a Glance;
(2) U.S. Census Bureau, State & County Quick Facts;
(3) U.S. Census Bureau, Population Estimates
Balance Sheet Management
We put a great deal of focus on actively managing our balance sheet. This manifests itself in:
•
Prudent capital levels. Maintaining prudent capital levels is key to our operating philosophy. At
December 31, 2012, our tangible common equity ratio was 7.72%. All regulatory capital levels for
WSFS Bank maintained a meaningful cushion above well-capitalized levels. WSFS Bank’s Tier 1
capital ratio was 13.04% as of December 31, 2012, more than $229 million in excess of the 6% “well-
capitalized” level, and our total risk-based capital ratio was 14.29%, more than $140 million above the
“well-capitalized” level of 10.00%.
• Disciplined lending. We maintain discipline in our lending, including planned portfolio diversification.
Additionally, we take a proactive approach to identifying trends in our business and lending market and
have responded to areas of concern. In 2010, we increased our portfolio monitoring and reporting
sophistication and hired additional senior credit administration and asset disposition professionals to
manage our portfolio. As a result we improved all criticized, classified and nonperforming loans to
52.5% Tier 1 capital plus ALLL from 84.8% at December 31, 2011. We diversify our loan portfolio to
limit our exposure to any single type of credit. Such discipline supplements careful underwriting and
the benefits of knowing our customers.
•
Focus on credit quality. We seek to minimize credit risk in our investment portfolio and use this
portion of our balance sheet primarily to help us manage liquidity and interest rate risk, while
providing some marginal income. Our investment securities portfolio consists of nearly all AAA-rated
credits. Our philosophy and pre-purchase due diligence has allowed us to avoid the significant
investment write-downs taken by many of our bank peers (only $86,000 of other-than-temporary
impairment charges recorded during this economic cycle).
However, we have been subject to many of the same pressures facing the banking industry. The extended
recession negatively impacted our customers and, as a result, impacted our credit quality and our interest rates. In
a time where interest rates are declining we increased wealth management income, lending growth and customer
4
funding growth. During 2012, we successfully completed our asset strategies associated with improving our asset
quality, which we refer to as our Asset Strategies, which included a bulk sale of $42.7 million of problem loans.
This was in addition to numerous other asset disposition efforts accomplished throughout the year. As a result,
we have seen continued asset quality stabilization and improvement in key asset quality indicators.
Disciplined Capital Management
We understand that our capital (or stockholders’ equity) belongs to our stockholders. They have entrusted
this capital to us with the expectation that it will earn an appropriate return relative to the risk we take. Mindful
of this balance, we prudently, but aggressively, manage our capital.
Strong Performance Expectations and Alignment with Shareholder Priorities
We are focused on high-performing, long-term financial goals. We define “high-performing” as the top
quintile of a relevant peer group in return on assets (ROA), return on equity (ROE) and earnings per share (EPS)
growth. Management incentives are, in large part, based on driving performance in these areas. More details on
management incentive plans are included in our proxy statement.
During 2009 to 2011 in particular, we invested in building our company in the wake of significant local
market disruption. During these years we increased commercial lenders by 40%, added, relocated or renovated
over 40% of our branch network and successfully completed the acquisition of Christiana Bank & Trust. This
enhanced our franchise and provided significant growth opportunities. However, the rate of our earnings growth
was also impacted. As we entered into 2012, we reached the end of this strategic investment stage and have
turned our focus to optimizing these ample investments and growing our bottom line, while continuing to
improve asset quality.
Growth
Our successful long-term trend in lending and deposit gathering, along with the success of our Wealth
Management Group at growing assets under administration, has been the result of a focused strategy that
provides the service, responsiveness and careful execution in a consolidating marketplace. We plan to continue to
grow by:
• Developing talented, service-minded Associates. We have successfully recruited Associates with
strong ties to, and the passion to serve, their communities to enhance our service in existing markets
and provide a strong start in new communities. We also focus efforts on developing talent and
leadership from our current Associate base to better equip those Associates for their jobs and prepare
them for leadership roles at WSFS.
• Embracing the Human Sigma concept. We are committed to building Associate Engagement and
Customer Advocacy as a way to differentiate ourselves and grow our franchise.
• Development of new products through innovation and utilization of new technologies.
• Continuing strong growth in commercial lending by:
• Offering local decision making by seasoned banking professionals.
• Executing of our community banking model that combines Stellar Service with the banking
products and services our business customers’ demand.
• Adding seasoned lending professionals that have helped us win customers in our Delaware and
southeastern Pennsylvania markets.
5
• Aggressively growing deposits. We have energized our retail branch strategy by combining Stellar
Service with an expanded and updated branch network. We plan to continue to grow by:
• Offering products through an expanded and updated branch network.
•
•
•
•
Providing a Stellar Service experience to our customers.
Further expanding our commercial customer relationships with deposit and cash management
products.
Finding creative ways to build deposit market share such as targeted marketing programs.
Selectively opening new branches, including in specific southeastern Pennsylvania locations.
•
Seeking strategic acquisitions. Over the next several years we expect our growth will be approximately
80% organic and 20% through acquisition, although each year’s growth will reflect the opportunities
available to us at the time.
• Exploring new niche businesses and continuing to expand existing niche businesses such as Cash
Connect. We are an organization with an entrepreneurial spirit and are open to the risk/reward
proposition that comes with such businesses.
Values
Our values address integrity, service, accountability, transparency, honesty, growth and desire to
improve. They are the core of our culture, they make us who we are and we live them every day.
At WSFS we:
• Do the right thing.
•
Serve others.
• Are open and candid.
• Grow and improve.
Results
Our focus on these points of differentiation has allowed us to grow our core franchise and build value for
our stockholders. Since 2007, our commercial loans have grown from $1.6 billion to $2.2 billion, a strong 9%
compound annual growth rate (CAGR). Over the same period, customer funding has grown from $1.5 billion to
$3.1 billion, a 20% CAGR. More importantly, over the last decade, stockholder value has increased at a far
greater rate than our banking peers. An investment of $100 in WSFS stock in 2002 would be worth $128 at
December 31, 2012. By comparison, $100 invested in the Nasdaq Bank Index in 2002 would be worth $84 at
December 31, 2012.
SUBSIDIARIES
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 our
retail banking system and directly to the public. Monarch offers commercial domicile services which include
providing employees, directors, sublease of office facilities and registered agent services in Delaware and
Nevada.
6
Montchanin provides asset management services and has one wholly owned subsidiary, Cypress Capital
Management, LLC (“Cypress”). Cypress is a Wilmington-based investment advisory firm servicing high net-
worth individuals and institutions with $597 million in assets under management at December 31, 2012.
The Trust is our unconsolidated subsidiary, and was formed in 2005 to issue $67.0 million aggregate
principal amount of Pooled Floating Rate Capital Securities.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY
Condensed average balance sheets for each of the last three years and analyses of net interest income and
changes in net interest income due to changes in volume and rate are presented in “Results of Operations”
included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
INVESTMENT ACTIVITIES
At December 31, 2012, our total available-for-sale securities portfolio had a fair value of $907.5 million.
Our strategy has been to minimize credit risk in our securities portfolio.
The portfolio is comprised of:
•
•
$47.0 million in federal agency debt securities with maturities of five years or less.
$857.8 million of government sponsored entity (“GSE”) MBS. Of these, $259.4 million are
collateralized mortgage obligations (“CMOs”) and $598.4 million are GSE MBS with 10 to 30 year
original final maturities.
• With the exception of two bonds, all bonds purchased are senior class and were rated AAA at purchase.
Our short-term investment portfolio is intended to keep our funds fully employed at a reasonable after-tax
return, while maintaining acceptable credit, market and interest-rate risk limits, and providing the appropriate
level of liquidity. In addition, our short-term taxable investments provide collateral for various Bank obligations.
Our short-term municipal securities provide for a portion of our Community Reinvestment Act “CRA”
7
investment program compliance. The amortized cost of investment securities and short-term investments by
category stated in dollar amounts and as a percent of total assets, follow:
Held-to-Maturity:
State and political subdivisions
Available-for-Sale:
Reverse mortgages (obligation)
U.S. government and agencies
State and political subdivisions
Collaterlized mortgage obligations (1)
Federal National Mortgage Association (“FNMA”)
Federal Home Loan Mortgage Corporation
(“FHLMC”)
Government National Mortgage Association
At December 31,
2012
2011
2010
Percent
of
Assets
Amount
Percent
of
Assets
Amount
Percent
of
Assets
Amount
(Dollars in Thousands)
$ — — % $ — — % $
219 — %
(457) —
1.0
0.1
5.8
9.1
46,726
3,120
251,848
396,910
(646) —
0.9
0.1
7.6
7.5
38,776
4,159
323,980
320,019
(686) —
1.2
0.1
12.4
2.3
49,691
2,879
490,946
89,226
58,596
1.3
93,305
2.2
43,970
1.1
1.7
(“GNMA”)
129,288
3.0
60,991
1.4
65,849
Trading:
Collateralized mortgage obligations
Short-term investments:
Interest-bearing deposits in other banks
(1)
Includes GSE CMOs available-for-sale
886,031
20.3
840,584
19.7
741,875
18.8
12,590
0.3
12,432
0.3
12,183
0.3
631 —
9 —
254 —
$899,252
20.6% $853,025
20.0% $754,312
19.1%
During 2012, $770.0 million of investment securities classified as available-for-sale were sold for a net gain
on sale of $21.3 million. A portion of these sales were the result of the completion of the Asset Strategies
undertaken during the second quarter and were mainly due to maintaining the capital and earnings neutrality of
these efforts. In 2011, $335.9 million of investment securities classified as available-for-sale were sold for a net
gain on sale of $4.9 million. In 2010, proceeds from the sale of investment securities totaled $154.7 million with
a net gain on sale of $782,000. In 2012, investment securities totaling $475,000 were called by their issuers, all
of which were obligations of state and political subdivisions. Investment securities totaling $719,000 were called
by their issuers in 2011 and investment securities totaling $720,000 were called by their issuers in 2010, and,
again, were all obligations of state and political subdivisions. The cost basis for each investment security sale
was based on the specific identification method. At December 31, 2012, MBS with a fair value of $440.0 million
were pledged as collateral, mainly for retail customer repurchase agreements and municipal deposits.
8
The following table shows the terms to maturity and related weighted average yields of investment
securities and short-term investments at December 31, 2012. Substantially all of the related interest and
dividends represent taxable income.
Available-for-Sale:
Reverse Mortgages (2):
Within one year
State and political subdivisions (3):
Within one year
After one but within five years
After five but within ten years
U.S. Government and agencies:
Within one year
After one but within five years
MBS:
After five but within ten years
Over ten years
Total debt securities, available-for-sale
Trading:
Over ten years
Total debt securities
At December 31, 2012
Weighted
Average
Yield (1)
Amount
(Dollars in Thousands)
$
(457)
N/A
435
695
1,990
3,120
18,566
28,160
46,726
319,113
517,529
836,642
886,031
12,590
898,621
4.20%
4.30
2.11
2.89
0.96
0.63
0.76
2.15
2.01
2.21
1.95
3.10
2.08
Short-term investments:
Interest-bearing deposits in other banks
Total debt securities and short-term investments
631
$899,252
0.17
2.08%
(1) Reverse mortgages have been excluded from weighted average yield calculations because income can vary significantly from reporting
period to reporting period due to the volatility of factors used to value the portfolio.
(2) Reverse mortgages do not have contractual maturities. We have included reverse mortgages in maturities within one year.
(3) Yields on obligations of state and political subdivisions are not calculated on a tax-equivalent basis since the effect would be immaterial.
CREDIT EXTENSION ACTIVITIES
Over the past several years we have focused on growing the more profitable segments of our loan portfolio.
Our current lending activity is concentrated on lending to small- to mid-sized businesses in the mid-Atlantic
region of the United States, primarily in Delaware, contiguous counties in Pennsylvania, Maryland and
New Jersey and Virginia. Since 2008, our commercial and industrial (“C&I”) loans have increased by
$532.2 million, or 56%. Our C&I loans, including owner-occupied commercial real estate loans, accounted for
9
approximately 54% of our loan portfolio in 2012 compared to 39% in 2008. Based on current market conditions,
we expect our focus on growing C&I loans to continue into 2013 and beyond.
The following table shows the composition of our loan portfolio at year-end for the last five years.
2012
2011
2010
2009
2008
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in Thousands)
At December 31,
Types of Loans
Commercial real estate:
Commercial mortgage
Construction
$ 631,365
133,375
23.2% $ 626,739
106,268
4.9
23.1% $ 625,379
140,832
3.9
24.2% $ 524,380
231,625
5.5
21.2% $ 558,979
251,508
9.3
22.9%
10.3
33.2
38.6
733,007
1,460,812
27.0
53.9
766,211
1,239,102
29.7
48.1
756,005
1,120,807
30.5
45.2
810,487
942,920
—
—
—
2,193,819
80.9
2,005,313
77.8
1,876,812
75.7
1,753,407
71.8
274,105
290,979
565,084
10.5
10.7
21.2
308,857
309,722
618,579
12.6
12.0
24.6
348,873
300,648
649,521
14.4
12.1
26.5
422,743
296,728
719,471
17.4
12.1
29.5
Total commercial real estate
Commercial
Commercial — owner
occupied (1)
764,740
704,491
770,581
Total commercial loans
2,239,812
28.1
25.9
28.3
82.3
8.9
10.6
19.5
243,627
289,001
532,628
Consumer loans:
Residential real estate
Consumer
Total consumer loans
Gross loans
Less:
Deferred fees (unearned
income)
Allowance for loan losses
$2,772,440
101.8
$2,758,903
102.1
$2,623,892
102.4
$2,526,333
102.2
$2,472,878
101.3
4,602
43,922
0.2
1.6
3,234
53,080
0.1
2.0
2,185
60,339
0.1
2.3
2,098
53,446
0.1
2.1
129
31,189
—
1.3
Net loans (2)
$2,723,916
100.0% $2,702,589
100.0% $2,561,368
100.0% $2,470,789
100.0% $2,441,560
100.0%
(1) Prior to 2012 owner occupied commercial loans were included in commercial loan balances.
(2) Excludes $12,758, $10,185, $14,522, $8,366 and $2,275 of residential mortgage loans held-for-sale at December 31, 2012, 2011, 2010, 2009, and
2008, respectively.
The following table shows the remaining time until our loans mature. The first table details the total loan
portfolio by type of loan. The second table details the total loan portfolio by those with fixed interest rates and
those with adjustable interest rates. The tables show loans by remaining contractual maturity. Loans may be pre-
paid, so the actual maturity may be earlier than the contractual maturity. Prepayments tend to be highly
dependent upon the interest rate environment. Loans having no stated maturity or repayment schedule are
reported in the Less than One Year category.
Commercial mortgage loans
Construction loans
Commercial loans
Residential real estate loans (1)
Consumer loans
Rate sensitivity:
Fixed
Adjustable (2)
Gross loans
(1) Excludes loans held-for-sale.
(2)
Includes hybrid adjustable-rate mortgages.
Less than
One Year
One to
Five Years
Over
Five Years
Total
(In thousands)
$135,032
52,304
451,351
15,902
37,220
$ 351,075
59,377
676,564
35,412
46,953
$145,258
21,694
347,157
192,313
204,828
$ 631,365
133,375
1,475,072
243,627
289,001
$691,809
$1,169,381
$911,250
$2,772,440
$117,474
574,335
$ 436,722
732,659
$214,956
696,294
$ 769,152
2,003,288
$691,809
$1,169,381
$911,250
$2,772,440
10
Commercial Real Estate, Construction and Commercial Lending.
Pursuant to section 5(c) of the Home Owners’ Loan Act (“HOLA”), federal savings banks are generally
permitted to invest up to 400% of their total regulatory capital in nonresidential real estate loans and up to 20%
of its assets in commercial loans. As a federal savings bank that was formerly chartered as a Delaware savings
bank, we have certain additional lending authority.
Commercial, commercial mortgage and construction lending have higher levels of risk than residential
mortgage lending. These loans typically involve larger loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans secured by income-producing
properties is typically dependent on the successful operation of the related real estate project and may be more
subject to adverse conditions in the commercial real estate market or in the general economy. The majority of our
commercial and commercial real estate loans are concentrated in Delaware and nearby areas.
We offer commercial real estate mortgage loans on multi-family properties and on other commercial real
estate. Generally, loan-to-value ratios for these loans do not exceed 80% of appraised value at origination.
Our commercial mortgage portfolio was $631.4 million at December 31, 2012. This portfolio is generally
diversified by property type, with no type representing more than 30% of the portfolio. The largest type is retail-
related (shopping centers, malls and other retail) with balances of $189.6 million. The average loan size of a loan
in the commercial mortgage portfolio is $756,000 and only 25 loans are greater than $5 million, with two loans
greater than $10 million. Management continues to monitor this portfolio closely through this economic cycle.
We offer commercial construction loans to developers. In some cases these loans are made as “construction/
permanent” loans, which provides for disbursement of loan funds during construction with automatic conversion
to mini-permanent loans (1-5 years) upon completion of construction. These construction loans are made on a
short-term basis, usually not exceeding two years, with interest rates indexed to our WSFS prime rate, the “Wall
Street” prime rate or London InterBank Offered Rate (“LIBOR”), in most cases, and are adjusted periodically as
these rates change. The loan appraisal process includes the same evaluation criteria as required for permanent
mortgage loans, but also takes into consideration: completed plans, specifications, comparables and cost
estimates. Prior to approval of each credit, these criteria are used as a basis to determine the appraised value of
the subject property when completed. Our policy requires that all appraisals be reviewed independently from our
commercial business development staff. At origination, the loan-to-value ratios for construction loans generally
do not exceed 75%. The initial interest rate on the permanent portion of the financing is determined by the
prevailing market rate at the time of conversion to the permanent loan. At December 31, 2012, $174.1 million
was committed for construction loans, of which $133.4 million, or less than 5% of gross loans, was outstanding.
Residential construction and land development (“CLD”), one of the hardest-hit sectors through this economic
cycle, represented only $54.2 million or 2% of the loan portfolio. Our commercial CLD portfolio was only
$28.3 million, or 1% of total loans, and our “land hold” loans, which are land loans not currently being
developed, were only $25.4 million, or less than 1% of total loans, at December 31, 2012.
Commercial and industrial and owner occupied commercial loans make up the remainder of our commercial
portfolio and include loans for working capital, financing equipment and real estate acquisitions, business
expansion and other business purposes. These loans generally range in amounts of up to $25 million (with a few
loans higher) with an average balance in the portfolio of $354,000 and terms ranging from less than one year to
seven years. The loans generally carry variable interest rates indexed to our WSFS prime rate, national prime rate
or LIBOR, at the time of closing.
As of December 31, 2012, our commercial and industrial and owner occupied commercial loan portfolios
were $1.5 billion and represented 53% of our total loan portfolio. These loans are diversified by industry, with no
industry representing more than 10% of the portfolio. There has been some weakness in this portfolio, primarily
from smaller credits with most of these loans well below $1 million. This weakness was mainly in the small
business sector which has been affected by the prolonged economic downturn.
11
Federal
law limits the extensions of credit
to any one borrower to 15% of our unimpaired capital
(approximately $70.7 million), or 25% if the difference is secured by collateral having a market value that can be
determined by reliable and continually available pricing. Extensions of credit include outstanding loans as well as
contractual commitments to advance funds, such as standby letters of credit, but do not include unfunded loan
commitments. At December 31, 2012, no borrower had collective outstandings exceeding these legal lending
limits. Only seven commercial relationships, when all loans related to the relationship are combined, reach
outstanding balances in excess of $25.0 million.
Residential Real Estate Lending.
Generally, we originate residential first mortgage loans with loan-to-value ratios of up to 80% and require
private mortgage insurance for up to 35% of the mortgage amount for mortgage loans with loan-to-value ratios
exceeding 80%. We do not have any significant concentrations of such insurance with any one insurer. On a very
limited basis, we originate or purchase loans with loan-to-value ratios exceeding 80% without a private mortgage
insurance requirement. At December 31, 2012, the balance of all such loans was approximately $2.5 million.
Generally, our residential mortgage loans are underwritten and documented in accordance with standard
underwriting criteria published by the Federal Home Loan Mortgage Corporation (“FHLMC”) and other
secondary market participants to assure maximum eligibility for subsequent sale in the secondary market.
Typically, we sell only those loans originated specifically with the intention to sell on a “flow” basis.
To protect the propriety of our liens, we require title insurance be obtained. We also require fire, extended
coverage casualty and flood insurance (where applicable) for properties securing residential loans. All properties
securing our residential loans are appraised by independent, licensed and certified appraisers and are subject to
review in accordance with our standards.
The majority of our adjustable-rate, residential real estate loans have interest rates that adjust yearly after an
initial period. Typically, the change in rate is limited to two percentage points at each adjustment date.
Adjustments are generally based upon a margin (currently 2.75% for U.S. Treasury index; 2.50% for LIBOR
index) over the weekly average yield on U.S. Treasury securities adjusted to a constant maturity, as published by
the Federal Reserve Board.
Usually, the maximum rate on these loans is six percent above the initial interest rate. We underwrite
adjustable-rate loans under standards consistent with private mortgage insurance and secondary market
underwriting criteria. We do not originate adjustable-rate mortgages with payment limitations that could produce
negative amortization.
The adjustable-rate mortgage loans in our loan portfolio help mitigate our risk to changes in interest rates.
However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result
of re-pricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of
default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the
borrower. Further, although adjustable-rate mortgage loans allow us to increase the sensitivity of our asset base
to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest
rate adjustment limitations. Accordingly, there can be no assurance that yields on our adjustable-rate mortgages
will adjust sufficiently to compensate for increases to our cost of funds during periods of extreme interest rate
increases.
The original contractual loan payment period for residential loans is normally 10 to 30 years. Because
borrowers may refinance or prepay their loans without penalty, these loans tend to remain outstanding for a
substantially shorter period of time. First mortgage loans customarily include “due-on-sale” clauses. This
provision gives us the right to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage. We enforce due-on-sale clauses through
foreclosure and other legal proceedings to the extent available under applicable laws.
12
In general, loans are sold without recourse except for the repurchase right arising from standard contract
provisions covering violation of representations and warranties or, under certain investor contracts, a default by
the borrower on the first payment. We also have limited recourse exposure under certain investor contracts in the
event a borrower prepays a loan in total within a specified period after sale, typically one year. The recourse is
limited to a pro rata portion of the premium paid by the investor for that loan, less any prepayment penalty
collectible from the borrower. We had no repurchases during the years ended December 31, 2012, 2011 and
2010.
We have a limited amount of loans originated as subprime loans, $8.9 million, at December 31, 2012 (less
than 0.5% of total loans) and no negative amortizing loans or interest-only first mortgage loans.
Consumer Lending.
Our primary consumer credit products (excluding 1st mortgage loans) are home equity lines of credit and
equity-secured installment
loans. At December 31, 2012, home equity lines of credit outstanding totaled
$195.9 million and equity-secured installment loans totaled $59.1 million. In total, these product lines represent
88.2% of total consumer loans. Some home equity products grant a borrower credit availability of up to 100% of
the appraised value (net of any senior mortgages) of their residence. Maximum loan to value (“LTV”) limits are
80% for primary residences and 75% for all other properties. At December 31, 2012, we had total commitments
to extend $342.7 million in home equity lines of credit. Home equity lines of credit offer customers potential
Federal income tax advantages, the convenience of checkbook access, revolving credit features for a portion of
the loan’s life and are typically more attractive in the current low interest rate environment. Home equity lines of
credit expose us to the risk that falling collateral values may leave us inadequately secured. The risk on products
like home equity loans is mitigated as they amortize over time.
Prior to 2009, we had not observed any significant adverse experience on home equity lines of credit or
equity-secured installment loans but delinquencies and net charge-offs on these products have increased over the
past few years, mainly as a result of the deteriorating economy, job losses and declining home values.
The following table shows our consumer loans at year-end, for the last five years.
At December 31,
2012
2011
2010
2009
2008
Percent of
Total
Consumer
Loans
Amount
Amount
Percent of
Total
Consumer
Loans
Amount
Percent of
Total
Consumer
Loans
(Dollars in Thousands)
Percent of
Total
Consumer
Loans
Amount
Percent of
Total
Consumer
Loans
Amount
$ 59,091
195,936
1,450
9,197
23,327
20.4% $ 74,721
67.8
192,917
0.5
1,011
3.2
8,378
8.1
13,952
25.7% $ 82,188
205,244
66.3
1,097
0.3
7,758
2.9
13,435
4.8
26.5% $102,727
177,407
66.3
1,135
0.4
7,246
2.5
12,133
4.3
34.2% $131,550
141,678
59.0
1,134
0.4
6,779
2.4
15,587
4.0
44.3%
47.8
0.4
2.3
5.2
Equity secured installment
loans
Home equity lines of credit
Automobile
Unsecured lines of credit
Other
Total consumer loans
$289,001
100.0% $290,979
100.0% $309,722
100.0% $300,648
100.0% $296,728
100.0%
Loan Originations, Purchases and Sales.
We engage in traditional lending activities primarily in Delaware and contiguous areas of neighboring
states. As a federal savings bank, however, we may originate, purchase and sell
the
United States. We have purchased limited amounts of loans from outside our normal lending area when such
purchases are deemed appropriate. We originate fixed-rate and adjustable-rate residential real estate loans
through our banking offices.
loans throughout
13
During 2012, we originated $208.1 million of residential real estate loans. This compares to originations of
$238.8 million in 2011. From time to time, we have purchased whole loans and loan participations in accordance
with our ongoing asset and liability management objectives. In 2012 there were no such purchases. During 2011,
purchases of residential real estate loans from correspondents and brokers, primarily in the mid-Atlantic region
totaled $2.3 million. Residential real estate loan sales totaled $176.1 million in 2012 and $107.4 million in 2011.
We sell certain newly originated mortgage loans in the secondary market primarily to control the interest rate
sensitivity of our balance sheet and to manage overall balance sheet mix. We hold certain fixed-rate mortgage
loans for investment, consistent with our current asset/liability management strategies.
At December 31, 2012, we serviced approximately $144.0 million of residential mortgage loans for others,
compared to $176.1 million at December 31, 2011. We also serviced residential mortgage loans for our own
portfolio totaling $243.6 million and $274.1 million at December 31, 2012 and 2011, respectively.
We originate commercial real estate and commercial loans through our commercial lending division.
Commercial loans are made for working capital, financing equipment acquisitions, business expansion and other
business purposes. During 2012, we originated $901.9 million of commercial and commercial real estate loans
compared to $897.6 million in 2011. To reduce our exposure on certain types of these loans, and/or to maintain
relationships within internal lending limits, at times we will sell a portion of our commercial real estate loan
portfolio, typically through loan participations. Commercial real estate loan sales totaled $1.0 million and
$4.6 million in 2012 and 2011, respectively. These amounts represent gross contract amounts and do not
necessarily reflect amounts outstanding on those loans.
Our consumer lending activity is conducted mainly through our branch offices. We originate a variety of
consumer credit products including home improvement loans, home equity lines of credit, automobile loans,
unsecured lines of credit and other secured and unsecured personal installment loans.
During 2006, we began to offer government insured reverse mortgages to our customers. Our activity has
been limited to acting as a correspondent originator for these loans. During 2012 we originated, and sold,
$3.6 million in reverse mortgages compared to $8.8 million during 2011.
All
loans to one borrowing relationship exceeding $3.5 million must be approved by the Senior
Management Loan Committee (“SLC”). The Executive Committee of the Board of Directors reviews the minutes
of the SLC meetings. They also approve individual loans exceeding $5 million for customers with less than one
year of significant loan history with the Bank and loans in excess of $7.5 million for customers with established
borrowing relationships. Depending upon their experience and management position, individual officers of the
Bank have the authority to approve smaller loan amounts. Our credit policy includes a “House Limit” to one
borrowing relationship of $25 million. In rare circumstances, we will approve exceptions to the “House Limit”
and our policy allows for only ten such relationships. Currently we have seven relationships exceeding this limit.
Those seven relationships were approved to exceed the “House Limit” because of a combination of: the
relationship contained several loans/borrowers that have no economic relationship (typically real estate investors
with amounts diversified across a number of properties); the credit profile was deemed strong; and a long
relationship history with the borrower(s).
Fee Income from Lending Activities.
We earn fee income from lending activities, including fees for originating loans, servicing loans and selling
loan participations. We also receive fee income for making commitments to originate construction, residential
and commercial real estate loans. Additionally, we collect fees related to existing loans which include
prepayment charges, late charges, assumption fees and swap fees. In addition, as part of the loan application
process, the borrower may pay us for out-of-pocket costs to review the application, whether or not the loan is
closed.
Most loan fees are not recognized in our consolidated statements of operations immediately, but are deferred
as adjustments to yield in accordance with U.S. generally accepted accounting principles (“GAAP”), and are
14
reflected in interest income over the expected life of the loan. Those fees represented interest income of
$2.1 million, $1.2 million, and $671,000 during 2012, 2011, and 2010, respectively. Fee income was mainly due
to fee accretion on new and existing loans (including the acceleration of the accretion on loans that paid early),
loan growth and prepayment penalties. The overall increase in fee income was the result of the growth in certain
loan categories during 2012 and 2011.
LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
Our results of operations can be negatively impacted by nonperforming assets, which include nonaccruing
loans, nonperforming real estate investments, assets acquired through foreclosure and restructured loans.
Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in our opinion, collection is doubtful, or when principal or interest is past due 90 days or more
and 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 our assessment of the
ultimate collectability of principal and interest.
We endeavor to manage our portfolio to identify problem loans as promptly as possible and take immediate
actions to minimize losses. To accomplish this, our Loan Administration and Risk Management Department
monitors the asset quality of our loan and investment in real estate portfolios and reports such information to the
Credit Policy Committee, the Audit Committee and Executive Committee of the Board of Directors and the
Bank’s Controller’s Department.
SOURCES OF FUNDS
We manage our liquidity risk and funding needs through our treasury function, Asset/Liability Committee
and Investment Committee. Historically, we have had success in growing our loan portfolio. For example, during
the year ended December 31, 2012, net loan growth resulted in the use of $110.6 million in cash. The loan
growth was primarily due to our continued success increasing corporate and small business lending. We expect
this trend to continue. While our loan-to-deposit ratio had been well above 100% for many years, during the past
three years we made significant progress in decreasing this ratio through increased deposit growth. As a result of
this growth, our loan-to-total customer funding ratio at December 31, 2012 was 87%, exceeding our 2012
strategic goal of 100%. We have significant experience managing our funding needs through both borrowings
and deposit growth.
As a financial institution, we have access to several sources of funding. Among these are:
• Deposit growth
• Brokered deposits
• Borrowing from the Federal Home Loan Bank (“FHLB”)
•
Federal Reserve Discount Window access
• Other borrowings such as repurchase agreements
• Cash flow from securities and loan sales and repayments
• Net income
Our recent branch expansion and renovation program has been focused on expanding our retail footprint in
Delaware and southeastern Pennsylvania and attracting new customers in part to provide additional deposit
growth. Customer deposit growth (deposits excluding brokered CDs) was strong, equaling $256.8 million, or 9%,
during 2012.
15
Deposits
WSFS is the largest independent full-service bank and trust institution headquartered and operating in
Delaware. The Bank primarily attracts deposits through its retail branch offices and loan production offices, in
Delaware’s New Castle, Sussex and Kent Counties, as well as nearby southeastern Pennsylvania and Annandale,
Virginia.
We offer various deposit products to our customers, including savings accounts, demand deposits, interest-
bearing demand deposits, money market deposit accounts and certificates of deposits. In addition, we accept
“jumbo” certificates of deposit with balances in excess of $100,000 from individuals, businesses and
municipalities in Delaware.
The following table shows the maturities of certificates of deposit of $100,000 or more as of December 31,
2012:
Maturity Period
Less than 3 months
Over 3 months to 6 months
Over 6 months to 12 months
Over 12 months
December 31,
2012
(In Thousands)
$119,576
45,819
63,095
65,747
$294,237
Federal Home Loan Bank Advances
As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), we are able to obtain FHLB
advances. Outstanding advances from the FHLB of Pittsburgh had rates ranging from 0.17% to 4.45% at
December 31, 2012. Pursuant to collateral agreements with the FHLB, the advances are secured by qualifying
first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit
account with the FHLB. We are required to purchase and hold shares of capital stock in the FHLB of Pittsburgh
in an amount at least equal to 4.60% of our borrowings from them, plus 0.35% of our member asset value. As of
December 31, 2012, our FHLB stock investment totaled $31.2 million.
At December 31, 2012, we had $376.3 million in FHLB advances with a weighted average rate of 0.57%.
During December 2012 we prepaid $125 million in FHLB advances with an average rate of 2.63% and recorded
a prepayment penalty of $3.7 million.
We received no dividends from the FHLB of Pittsburgh during 2011 or 2010. However the FHLB
repurchased $1.8 million of its capital stock in both 2011 and 2010. Additionally, in February of 2012 the FHLB
of Pittsburgh declared and began to pay a dividend on capital stock. The FHLB also approved additional
repurchases of capital stock during the first quarter of 2012. At December 31, 2012, repurchases totaled
$4.6 million.
The FHLB of Pittsburgh is rated AA+, has a very high degree of government support and was in compliance
with all regulatory capital requirements as of December 31, 2012. Based on these and other factors, we have
determined there was no other-than-temporary impairment related to our FHLB stock investment as of
December 31, 2012.
Trust Preferred Borrowings
In 2005, the Trust issued $67.0 million aggregate principal amount of Pooled Floating Rate Securities at a
variable interest rate of 177 basis points over the three-month LIBOR rate with a scheduled maturity of June 1,
2035.
16
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
During 2012 and 2011, we purchased federal funds as a short-term funding source. At December 31, 2012,
we had purchased $85.0 million in federal funds at an average rate of 0.27%, compared to $25.0 million in
federal funds at a rate of 0.38% at December 31, 2011.
During 2012, we sold securities under agreements to repurchase as a funding source. At both December 31,
2012 and 2011, we had sold $25.0 million of securities sold under agreements to repurchase with a fixed rate of
2.98% and a scheduled maturity of January 1, 2015. The underlying securities were MBS with a book value of
$41.1 million as of December 31, 2012.
Temporary Liquidity Guarantee Program Debt
In 2008,
the Federal Deposit Insurance Corporation (“FDIC”) announced the Temporary Liquidity
Guarantee Program (“TLGP”), to strengthen confidence and encourage liquidity in the banking system by
guaranteeing newly issued senior unsecured debt of banks, thrifts and certain holding companies, and by
providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. In
2009, we completed an offering of $30.0 million of qualifying senior bank notes covered by the TLGP. These
borrowings matured and were repaid in February 2012.
Senior Debt
On August 27, 2012, we completed the issuance and sale of $55.0 million aggregate principal amount of
6.25% Senior Notes due 2019 (the “Senior Debt”) at a price to the public of 100% of the aggregate principal
amount. The Senior Debt is an unsecured senior debt obligation and ranks equally with all of our other present
and future unsecured, unsubordinated obligations. Interest payments on the Senior Debt are due quarterly in
arrears on March 1, June 1, September 1 and December 1 of each year, and began on December 1, 2012.
PERSONNEL
As of December 31, 2012, we had 763 full-time equivalent Associates (employees). Our Associates are not
represented by a collective bargaining unit. We believe our relationship with our Associates is very good, as
evidenced by being named a “Top Workplace” by an independent survey of our Associates for the last seven
years.
REGULATION
Overview
We are subject to extensive federal and state banking laws, regulations, and policies that are intended
primarily for the protection of depositors, the FDIC’s Deposit Insurance Fund, and the banking system as a
whole, not for the protection of our other creditors and stockholders. Historically, we and the bank have been
examined, supervised and regulated primarily by the Office of Thrift Supervision (“OTS”). Effective July 21,
2011, portions of the OTS were merged into the Office of the Comptroller of the Currency (“OCC”) and the
Federal Reserve. The OCC became the Bank’s primary regulator and the Federal Reserve became the Company’s
primary regulator.
The statutes enforced by, and regulations and policies of, these agencies affect most aspects of our business,
including prescribing permissible types of loans and investments, the amount of required reserves, requirements
for branch offices, the permissible scope of our activities and various other requirements.
Our deposits are insured by the FDIC to the fullest extent allowed. As an insurer of bank deposits, the FDIC
issues regulations, conducts examinations, requires the filing of reports and generally supervises the operations of
all institutions to which it provides deposit insurance.
17
Financial Reform Legislation
Proposals to change the laws and regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory agencies.
In 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”). The Dodd-Frank Act
imposed new restrictions and an expanded framework of
regulatory oversight for financial institutions, including depository institutions. The new law also established an
federal consumer protection bureau within the Federal Reserve. The following discussion
independent
summarizes significant aspects of the new law that may affect us. Certain significant implementing regulations
have not been finalized and therefore we cannot yet determine the full impact on our business and operations.
The following aspects of the Dodd-Frank Act are related to the operations of our Bank:
• The OTS was merged into the OCC and the Federal Reserve and the federal savings association charter
has been preserved under OCC jurisdiction.
• An independent Consumer Financial Protection Bureau has been established within the Federal
Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect
to both new and existing consumer financial protection laws. Depository institutions of less than
$10 billion in total assets, like our Bank, are subject to the supervision and enforcement of their
primary federal banking regulator with respect to the federal consumer financial protection laws.
• Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated, subject to
various grandfathering and transition rules. Our trust preferred securities are grandfathered under this
legislation.
• The prohibition on payment of interest on demand deposits has been repealed.
•
State law is preempted only if it would have a discriminatory effect on a federal savings association or
is preempted by any other federal law. The OCC must make a preemption determination on a case-by-
case basis with respect to a particular state law or other state law with substantively equivalent terms.
• Deposit insurance had been permanently increased to $250,000 and unlimited deposit insurance for
noninterest-bearing transaction accounts expired on December 31, 2012.
• The deposit insurance assessment base has been changed to equal a depository institution’s total assets
minus the sum of its average tangible equity during the assessment period.
• The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35% of estimated annual
insured deposits or assessment base. However, the FDIC was directed to offset the effect of the
increased reserve ratio for insured depository institutions with total consolidated assets of less than
$10 billion.
The following aspects of the Dodd-Frank Act are related to the operations of our Company:
• Authority over savings and loan holding companies has been transferred to the Federal Reserve.
• Leverage capital requirements and risk-based capital requirements applicable to depository institutions
and bank holding companies have been extended to savings and loan holding companies following a
five year grace period.
• The Federal Deposit Insurance Act (“FDIA”) was amended to direct federal regulators to require
depository institution holding companies to serve as a source of strength for their depository institution
subsidiaries.
• The Federal Reserve can require a grandfathered unitary savings and loan holding company that
conducts commercial or manufacturing activities or other nonfinancial activities in addition to financial
activities to conduct all or part of its financial activities in an intermediate savings and loan holding
company.
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•
Public companies will be required to provide their shareholders with a nonbinding vote (i) at least once
every three years on the compensation paid to executive officers, and (ii) at least once every six years
on whether they should have a “say on pay” vote every one, two or three years.
• Additional provisions, including some not specifically aimed at savings associations and savings and
loan holding companies, nonetheless may have an impact on us.
Some of these provisions have the consequence of increasing our expenses, decreasing our revenues, and
changing the activities in which we choose to engage. We expect that the Dodd-Frank Act will continue to
increase our operating and compliance costs. Specific impacts of the Dodd-Frank Act on our current activities or
new financial activities will become evident in the future, and our financial performance and the markets in
which we operate will continue to depend on the manner in which the relevant agencies develop and implement
the required rules and the reaction of market participants to these regulatory developments. Many aspects of the
Dodd-Frank Act continue to be subject to rulemaking and will take effect over several years, making it difficult
to anticipate the overall financial impact on us, our customers, or the financial industry in general.
Proposed Changes to Regulatory Capital Requirements
In June 2012, the federal banking agencies issued a global series of proposed rules to conform U.S.
regulatory capital rules with the international regulatory standards agreed to by the Basel Committee on Banking
Supervision in the accord referred to as “Basel III.” The proposed revisions, if adopted, would establish new
higher capital ratio requirements, narrow the definitions of capital, impose new operating restrictions on banking
organizations with insufficient capital buffers and increase the risk weighting of certain assets. The proposed new
capital requirements would apply to all banks, savings associations, bank holding companies with more than
$500 million in assets and all savings and loan holding companies regardless of asset size. It is unclear whether,
if, or in what form Basel III will be adopted. A summary of the proposed regulatory changes is described below.
• New and Increased Capital Requirements. The proposed rules would establish a new capital measure
called “Common Equity Tier I Capital” consisting of common stock and related surplus, retained
earnings, accumulated other comprehensive income and, subject to certain adjustments, minority
common equity interests in subsidiaries. Unlike the current rules which exclude unrealized gains and
losses on available-for-sale debt securities from regulatory capital, the proposed rules would generally
require accumulated other comprehensive income to flow through to regulatory capital. Depository
institutions and their holding companies would be required to maintain Common Equity Tier I Capital
equal to 4.5% of risk-weighted assets by 2015. Additionally, the proposed regulations would increase
the required ratio of Tier I Capital to risk-weighted assets from the current 4% to 6% by 2015. Tier I
Capital would consist of Common Equity Tier I Capital plus Additional Tier I Capital which would
include non-cumulative perpetual preferred stock. Neither cumulative preferred stock (other than
certain preferred stock issued to the U.S. Treasury) nor trust preferred securities would qualify as
Additional Tier I Capital but could be included in Tier II Capital along with qualifying subordinated
debt. The proposed regulations would also require a minimum Tier I leverage ratio of 4% for all
institutions. The minimum required ratio of total capital to risk-weighted assets would remain at 8%.
• Capital Buffer Requirement. In addition to increased capital requirements, depository institutions and
their holding companies may be required to maintain a capital buffer of at least 2.5% of risk-weighted
assets over and above the minimum risk-based capital requirements. Institutions that do not maintain
the required capital buffer would be subject
limitations on the
percentage of earnings that can be paid out in dividends or used for stock repurchases and on the
payment of discretionary bonuses to senior executive management. The capital buffer requirement
would be phased in over a four-year period beginning in 2016. The capital buffer requirement
effectively raises the minimum required risk-based capital ratios to 7% Common Equity Tier I Capital,
8.5% Tier I Capital and 10.5% Total Capital on a fully phased-in basis.
to progressively more stringent
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• Changes to Prompt Corrective Action Capital Categories. The Prompt Corrective Action rules would
be amended to incorporate a Common Equity Tier I Capital requirement and to raise the capital
requirements for certain capital categories. In order to be adequately capitalized for purposes of the
prompt corrective action rules, a banking organization would be required to have at least an 8% Total
Risk-Based Capital Ratio, a 6% Tier I Risk-Based Capital Ratio, a 4.5% Common Equity Tier I Risk
Based Capital Ratio and a 4% Tier I Leverage Ratio. To be well capitalized, a banking organization
would be required to have at least a 10% Total Risk-Based Capital Ratio, an 8% Tier I Risk-Based
Capital Ratio, a 6.5% Common Equity Tier I Risk-Based Capital Ratio and a 5% Tier I Leverage Ratio.
• Additional Deductions from Capital. Banking organizations would be required to deduct goodwill and
certain other intangible assets, net of associated deferred tax liabilities, from Common Equity Tier I
Capital. Deferred tax assets arising from temporary timing differences that could not be realized
through net operating loss (“NOL”) carrybacks would continue to be deducted but deferred tax assets
that could be realized through NOL carrybacks would not be deducted but would be subject to 100%
risk weighting. Defined benefit pension fund assets, net of any associated deferred tax liability, would
be deducted from Common Equity Tier I Capital unless the banking organization has unrestricted and
unfettered access to such assets. Reciprocal cross-holdings of capital instruments in any other financial
institutions would now be deducted from capital, not just holdings in other depository institutions. For
this purpose, financial institutions are broadly defined to include securities and commodities firms,
hedge and private equity funds and non-depository lenders. Banking organizations would also be
required to deduct non-significant investments (less than 10% of outstanding stock) in other financial
institutions to the extent these exceed 10% of Common Equity Tier I Capital subject to a 15% of
Common Equity Tier I Capital cap. Greater than 10% investments must be deducted if they exceed
10% of Common Equity Tier I Capital. If the aggregate amount of certain items excluded from capital
deduction due to a 10% threshold exceeds 17.65% of Common Equity Tier I Capital, the excess must
be deducted.
• Changes in Risk-Weightings. The proposed rules would apply a 250% risk-weighting to mortgage
servicing rights, deferred tax assets that cannot be realized through NOL carrybacks and significant
(greater than 10%) investments in other financial institutions. The proposal would also change the risk-
weighting for residential mortgages and would create a new 150% risk-weighting category for “high
volatility commercial real estate loans” which are credit facilities for the acquisition, construction or
development of real property other than one- to four-family residential properties or commercial real
projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards;
and (ii) the borrower has contributed capital equal to not less than 15% of the real estate’s “as
completed” value before the loan was made.
Regulation of the Company
General. We are a registered savings and loan holding company and historically have been subject to the
regulation, examination, supervision and reporting requirements of the OTS. As result of the Dodd-Frank Act,
effective July 21, 2011, all of the regulatory functions related to us, as a savings and loan holding company that
had been under the jurisdiction of the OTS, transferred to the Federal Reserve.
We are also a public company subject to the reporting requirements of the United States Securities and
Exchange Commission (the “SEC”). The filings we make with the SEC,
including Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those
reports, are available on the investor relations page of our website at www.wsfsbank.com.
Sarbanes-Oxley Act of 2002. The SEC has promulgated regulations pursuant to the Sarbanes-Oxley Act of
2002 (the “Act”). The passage of the Act and the regulations implemented by the SEC subject publicly-traded
companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act
and corresponding regulations has increased our expenses.
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Restrictions on Acquisitions. Federal law generally prohibits a savings and loan holding company, without
prior regulatory approval, from acquiring control of all, or substantially all, of the assets of any other savings
institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the
voting shares of a savings institution or savings and loan holding company. These provisions also prohibit,
among other things, any director or officer of a savings and loan holding company, or any individual who owns
or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings
institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the
Federal Reserve.
The Federal Reserve may not approve any acquisition that would result in a multiple savings and loan
holding company controlling savings institutions in more than one state, subject to two exceptions: (1) the
approval of interstate supervisory acquisitions by savings and loan holding companies; and (2) the acquisition of
a savings institution in another state if the laws of the state of the target savings institution specifically permit
such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company
acquisitions.
Safe and Sound Banking Practices. Savings and loan holding companies and their non-banking
subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices or
that constitute violations of laws or regulations. For example, the Federal Reserve Board’s Regulation Y requires
a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities if the consideration to be paid, together with the consideration paid for any repurchases in the
preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board
may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or
would violate any law or regulation. As another example, a holding company could not impair its subsidiary
bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the
Federal Reserve believed it not prudent to do so. The Federal Reserve Board can assess civil money penalties for
activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $1,000,000 for each day the activity continues.
Source of Strength. In accordance with FDOA, we are expected to act as a source of financial and
managerial strength to the Bank. Under this policy, the holding company is expected to commit resources to
support its bank subsidiary, including at times when the holding company may not be in a financial position to
provide it.
The Dodd-Frank Act has added additional guidance regarding the source of strength doctrine and has
directed the regulatory agencies to promulgate regulations to increase the capital requirements for holding
companies to a level that matches those of banking institutions.
Dividends. The principal source of the holding company’s cash is from dividends from the Bank. Our
earnings and activities are affected by federal, state and local laws and regulations. For example, these include
limitations on the ability of the Bank to pay dividends to the holding company and our ability to pay dividends to
our stockholders. It is the policy of the Federal Reserve Board that holding companies should pay cash dividends
on common stock only out of income available over the past year and only if prospective earnings retention is
consistent with the organization’s expected future needs and financial condition. The policy provides that holding
companies should not maintain a level of cash dividends that undermines the holding company’s ability to serve
as a source of strength to its banking subsidiary. Consistent with such policy, a banking organization should have
comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches
for maintaining a strong capital position and achieving the objectives of the Federal Reserve Board’s policy
statement.
In 2009, the Federal Reserve Board issued a supervisory letter providing greater clarity to its policy
statement on the payment of dividends by holding companies. In this letter, the Federal Reserve Board stated that
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when a holding company’s board of directors is deciding on the level of dividends to declare, it should consider,
among other things, the following factors: (i) overall asset quality, potential need to increase reserves and write
down assets, and concentrations of credit; (ii) potential for unanticipated losses and declines in asset values;
(iii) implicit and explicit liquidity and credit commitments, including off-balance sheet and contingent liabilities;
(iv) quality and level of current and prospective earnings, including earnings capacity under a number of
plausible economic scenarios; (v) current and prospective cash flow and liquidity; (vi) ability to serve as an
ongoing source of financial and managerial strength to depository institution subsidiaries insured by the FDIC,
including the extent of double leverage and the condition of subsidiary depository institutions; (vii) other risks
that affect the holding company’s financial condition and are not fully captured in regulatory capital calculations;
(viii) level, composition, and quality of capital; and (ix) ability to raise additional equity capital in prevailing
market and economic conditions (the “Dividend Factors”). It is particularly important for a holding company’s
board of directors to ensure that the dividend level is prudent relative to the organization’s financial position and
is not based on overly optimistic earnings scenarios. In addition, a holding company’s board of directors should
strongly consider, after careful analysis of the Dividend Factors, reducing, deferring, or eliminating dividends
when the quantity and quality of the holding company’s earnings have declined or the holding company is
experiencing other financial problems, or when the macroeconomic outlook for the holding company’s primary
profit centers has deteriorated. The Federal Reserve Board further stated that, as a general matter, a holding
company should eliminate, defer or significantly reduce its distributions if: (i) its net income is not sufficient to
fully fund the dividends, (ii) its prospective rate of earnings retention is not consistent with its capital needs and
overall current and prospective financial condition, or (iii) it will not meet, or is in danger of not meeting, its
minimum regulatory capital adequacy ratios. Failure to do so could result in a supervisory finding that the
holding company is operating in an unsafe and unsound manner.
Additionally, as discussed above, the Federal Reserve Board possesses enforcement powers over savings
and loan holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or
unsound practices, or violations of applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by bank and savings and loan holding companies.
Regulation of WSFS Bank
General. As a federally chartered savings institution, historically, the Bank was subject to regulation by the
OTS. On July 21, 2010, regulation of the Bank shifted to OCC. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements. The OCC periodically examines the Bank
for compliance with regulatory requirements. The FDIC also has the authority to conduct special examinations of
the Bank. The Bank must file reports with the OCC describing its activities and financial condition. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve Board.
Transactions with Affiliates; Tying Arrangements. The Bank is subject to certain restrictions in its dealings
with us and our affiliates. Transactions between savings associations and any affiliate are governed by Sections
23A and 23B of the Federal Reserve Act, with additional limitations found in Section 11 of the Home Owners’
Loan Act. An affiliate of a savings association, generally, is any company or entity which controls or is under
common control with the savings association or any subsidiary of the savings association that is commonly
controlled by an affiliate or a bank or savings association. In a holding company context, the parent holding
company of a savings association (such as “the Company”) and any companies which are controlled by such
parent holding company are affiliates of the savings association. Generally, Sections 23A and 23B (i) limit the
extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one
affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and limit the aggregate of all
such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require
that all such transactions be on terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions. In addition to the restrictions
imposed by Sections 23A and 23B, no savings association may (i) lend or otherwise extend credit to an affiliate
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that engages in any activity impermissible for bank holding companies, or (ii) purchase or invest in any stocks,
bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the
savings association. The Home Owners’ Loan Act also prohibits the Bank or its subsidiaries from purchasing
shares of an affiliate that is not a subsidiary or extending credit to an affiliate engaged in activities that are not
permissible for bank holding companies.
Regulatory Capital Requirements. Under capital regulations, savings institutions must maintain “tangible”
capital equal to 1.5% of adjusted total assets, “Tier 1” or “core” capital equal to 4% of adjusted total assets, and
“total” capital (a combination of core and “supplementary” capital) equal to 8% of risk-weighted assets. In
addition, regulations impose certain restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital
to adjusted total assets of less than 4.0%. For purposes of these regulations, Tier 1 capital has the same definition
as core capital.
The capital rule defines Tier 1 or core capital as common stockholders’ equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain non-withdrawable accounts and pledged deposits of mutual institutions and
“qualifying supervisory goodwill,” less intangible assets other than certain supervisory goodwill and, subject to
certain limitations, mortgage and non-mortgage servicing rights, purchased credit card relationships and credit-
enhancing interest only strips. Tangible capital is given the same definition as core capital but does not include
qualifying supervisory goodwill and is reduced by the amount of all the savings institution’s intangible assets
except for limited amounts of mortgage servicing assets. The capital rule requires that core and tangible capital
be reduced by an amount equal to a savings institution’s debt and equity investments in “non-includable”
subsidiaries engaged in activities not permissible to national banks, other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or
their holding companies. At December 31, 2012, the Bank was in compliance with both the core and tangible
capital requirements.
The risk weights assigned by the risk-based capital regulation range from 0% for cash and U.S. government
securities to 100% for consumer and commercial loans, non-qualifying mortgage loans, property acquired
through foreclosure, assets more than 90 days past due and other assets. In determining compliance with the risk-
based capital requirement, a savings institution may include both core capital and supplementary capital in its
total capital, provided the amount of supplementary capital included does not exceed the savings institution’s
core capital. Supplementary capital is defined to include certain preferred stock issues, non-withdrawable
accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments, general loan loss allowances up to 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily determinable fair values. Total capital is
reduced by the amount of the institution’s reciprocal holdings of depository institution capital instruments and all
equity investments. At December 31, 2012, the Bank was in compliance with the risk-based capital requirements.
Dividend Restrictions. OCC regulations govern capital distributions by savings institutions, which include
cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to
make capital distributions. A savings institution must file an application for OCC approval of the capital
distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the
institution’s net income for that year to date plus the institution’s retained net income for the preceding two
least adequately capitalized following the distribution, (3) the
years, (2) the institution would not be at
distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition, or (4) the
institution is not eligible for expedited treatment of its filings. If an application is not required to be filed, savings
institutions that are a subsidiary of a savings and loan holding company (as well as certain other institutions)
must still file a notice with the OCC at least 30 days before the board of directors declares a dividend or approves
a capital distribution.
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An institution that either before or after a proposed capital distribution fails to meet its then-applicable
minimum capital requirement or that has been notified that it needs more than normal supervision may not make
any capital distributions without the prior written approval of the OCC. In addition, the OCC may prohibit a
proposed capital distribution, which would otherwise be permitted by OCC regulations, if the OCC determines
that such distribution would constitute an unsafe or unsound practice.
Under federal rules, an insured depository institution may not pay any dividend if payment would cause it to
become undercapitalized or if it is already undercapitalized. In addition, federal regulators have the authority to
restrict or prohibit the payment of dividends for safety and soundness reasons. The FDIC also prohibits an
insured depository institution from paying dividends on its capital stock or interest on its capital notes or
debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets
while it remains in default in the payment of any assessment due the FDIC. Our Bank is currently not in default
in any assessment payment to the FDIC.
Insurance of Deposit Accounts. The Bank’s deposits are insured to the maximum extent permitted by the
Deposit Insurance Fund. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting
by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by
regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OCC an opportunity to take such action.
Pursuant to the Dodd-Frank Act, the Federal Deposit Insurance Act was amended to (i) increase the
maximum deposit insurance amount from $100,000 to $250,000, and (ii) extend the unlimited deposit insurance
coverage for noninterest-bearing transaction accounts through December 31, 2012.
On December 31, 2012, prior to its expiration, all funds in a noninterest-bearing transaction account were
insured in full by the FDIC from December 27, 2010, through December 31, 2012. This temporary unlimited
coverage was in addition to, and separate from, the coverage of at least $250,000 available to depositors under
the FDIC’s general deposit insurance rules.
The FDIC has adopted a risk-based premium system that provides for quarterly assessments. In addition, all
institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on
bonds issued by the Financing Corporation, a mixed-ownership government corporation established to
recapitalize the predecessor to the Deposit Insurance Fund. These assessments will continue until the Financing
Corporation bonds mature in 2019.
In 2011, the FDIC issued a final rule to implement changes to its assessment base used to determine risk-
based premiums for insured depository institutions as required under the Dodd-Frank Act and also changed the
risk-based pricing system necessitated by changes to the assessment base. These changes took effect for the
quarter beginning April 1, 2011. Under the revised system, the assessment base was changed to equal average
consolidated total assets less average tangible equity. Institutions other than large and highly complex institutions
are placed in one of four risk categories.
The FDIC assessment rates range from approximately 5 basis points to 35 basis points (depending on
applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio
equals 1.15%. Once the FDIC’s reserve ratio reaches 1.15% and the reserve ratio for the immediately prior
assessment period is less than 2.0%, the applicable assessment rates may range from 3 basis points to 30 basis
points (subject to applicable adjustments for unsecured debt and brokered deposits). If the prior assessment
period is equal to or greater than 2.0% and less than 2.5%, the assessment rates may range from 2 basis points to
28 basis points and if the prior assessment period is greater than 2.5%, the assessment rates may range from
1 basis point to 25 basis points.
Future changes in insurance premiums could have an adverse effect on the operating expenses and results of
operations and we cannot predict what insurance assessment rates will be in the future.
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The FDIC may terminate the deposit insurance of any insured depository institution, including us, if it
determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any
condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution has no tangible capital. Management
is not aware of any existing circumstances that would result in termination of our deposit insurance.
Federal Reserve System. Pursuant to regulations of the Federal Reserve, a savings institution must maintain
reserves against their transaction accounts. As of December 31, 2012, no reserves were required to be maintained
on the first $12.4 million of transaction accounts, reserves of 3% were required to be maintained against the next
$67.1 million of transaction accounts and a reserve of 10% against all remaining transaction accounts. This
percentage is subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the
form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement may reduce the amount of an institution’s interest-earning assets.
ITEM 1A. RISK FACTORS
Investing in our securities involves risks. You should carefully consider the following risks, in addition to
the other information in this report, before deciding to invest in our securities.
Risks Related to WSFS
The prolonged deep recession, difficult market conditions and economic trends have adversely affected our
industry and our business and may continue to do so.
We are particularly exposed to downturns in the Delaware, mid-Atlantic and overall U.S. economy and
housing markets. Continued declines in the housing market combined with a weak economy and elevated
unemployment, have negatively impacted the credit performance of mortgage, construction and other loans and
have resulted in significant write-downs of assets by many financial institutions. In addition, the values of real
estate collateral supporting many loans have declined and may continue to decline. General flat to downward
economic trends, reduced availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. The
resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets
may adversely affect our business, financial condition, results of operations and debt service capability. A
worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on
us and others in the industry. In particular, we may face the following risks in connection with these events:
• There could be an increase in the number of borrowers unable to repay their loans in accordance with
the original terms.
• Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit
exposure is made more complex by these difficult market and economic conditions.
• We may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as
more restricted access to funds.
Our nonperforming assets and problem loans are at an elevated level. Significant increases from the current
level, or greater than anticipated costs to resolve these credits, will have an adverse effect on our earnings.
Our nonperforming assets (which consist of nonaccrual loans, assets acquired through foreclosure and
troubled debt restructurings), totaled $62.5 million at December 31, 2012, which is a decrease of $29.2 million,
or 32%, from the $91.7 million in nonperforming assets at December 31, 2011, primarily the result of the asset
sales we executed in the second quarter of 2012. Our nonperforming assets adversely affect our net income in
various ways. We do not record interest income on nonaccrual loans and assets acquired through foreclosure. We
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must establish an allowance for loan losses which reserves for losses inherent in the loan portfolio that are both
probable and reasonably estimable. From time to time, we also write down the value of properties in our portfolio
of assets acquired through foreclosure to reflect changing market values. Additionally, there are legal fees
insurance and
associated with the resolution of problem assets as well as carrying costs such as taxes,
maintenance related to assets acquired through foreclosure. The resolution of nonperforming assets requires the
active involvement of management, which can distract management from its overall supervision of operations
and other income producing activities. Finally, if our estimate of the allowance for loan losses is inadequate, we
will have to increase the allowance for loan losses accordingly, which will have an adverse effect on our
earnings.
Concentration of loans in our primary market area, which has recently experienced an economic downturn,
may increase risk.
Our success depends primarily on the general economic conditions in the State of Delaware, southeastern
Pennsylvania and northern Virginia, as a large portion of our loans are to customers in this market. Accordingly,
the local economic conditions in these markets have a significant impact on the ability of borrowers to repay
loans as well as our ability to originate new loans. As such, a continuation of the decline in real estate valuations
in these markets would lower the value of the collateral securing those loans. In addition, weakening in general
economic conditions such as inflation, recession, unemployment or other factors beyond our control could
negatively affect demand for loans, the performance of our borrowers and our financial results.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the
repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans
and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect,
our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio,
resulting in additions to our allowance. Material additions to our allowance could materially decrease our net
income.
Our loan portfolio includes a substantial amount of commercial real estate, construction and land
development and commercial and industrial loans. The credit risk related to these types of loans is greater
than the risk related to residential loans.
Our commercial loan portfolio, which includes commercial and industrial loans, commercial real estate
loans and construction and land development loans, totaled $2.2 billion at December 31, 2012, comprising 82%
of net loans. Commercial and industrial loans generally carry larger loan balances and involve a greater degree of
risk of nonpayment or late payment than home equity loans or residential mortgage loans. Any significant failure
to pay or late payments by our customers would hurt our earnings. The increased credit risk associated with these
types of loans is a result of several factors, including the concentration of principal in a limited number of loans
and borrowers, the size of loan balances, and the effects of general economic conditions on income-producing
properties. A significant portion of our commercial real estate, construction and land development and
commercial and industrial loan portfolios includes a balloon payment feature. A number of factors may affect a
borrower’s ability to make or refinance a balloon payment, including the financial condition of the borrower, the
prevailing local economic conditions and the prevailing interest rate environment.
Furthermore, commercial real estate loans secured by owner-occupied properties are dependent upon the
successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales
volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by
properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property
may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a
completed project in a timely fashion and at a profit.
26
We are subject to extensive regulation which could have an adverse effect on our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and
regulations that are intended primarily to protect depositors, the public, the FDIC’s Deposit Insurance Fund, and
the banking system as a whole, not our noteholders or shareholders. Historically, we had been subject to the
regulation and supervision of the Office of Thrift Supervision, referred to as the OTS. The Federal Reserve
became the primary federal regulator for the Company and the OCC, became the Bank’s primary regulator
effective July 21, 2011. The banking laws, regulations and policies applicable to us govern matters ranging from
the regulation of certain debt obligations, changes in the control of us and the maintenance of adequate capital to
the general business operations conducted by us, including permissible types, amounts and terms of loans and
investments, the amount of reserves held against deposits, restrictions on dividends, establishment of new offices
and the maximum interest rate that may be charged by law.
We are subject to changes in federal and state banking statutes, regulations and governmental policies, and
the interpretation or implementation of them. Regulations affecting banks and other financial institutions in
particular are undergoing continuous review and frequently change and the ultimate effect of such changes
this risk is particularly heightened with us.
cannot be predicted. Since we recently changed regulators,
Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any
changes in any federal and state law, as well as regulations and governmental policies could affect us in
substantial and unpredictable ways, including ways that may adversely affect our business, results of operations,
financial condition or prospects. In addition, federal and state banking regulators have broad authority to
supervise our banking business, including the authority to prohibit activities that represent unsafe or unsound
banking practices or constitute violations of statute, rule, regulation or administrative order. Failure to
appropriately comply with any such laws, regulations or regulatory policies could result in sanctions by
regulatory agencies, civil money penalties or damage to our reputation, all of which could adversely affect our
business, results of operations, financial condition or prospects.
Recent legislative and regulatory actions may have a significant adverse effect on our operations. The Dodd-
Frank Act has and will continue to result in sweeping changes in the regulation of financial institutions. As a
result of this legislation, we face the following changes, among others:
• The OTS has been eliminated and the OCC became our Bank’s primary regulator. The federal thrift
charter has been preserved under OCC jurisdiction.
• A new independent Consumer Financial Protection Bureau (“CFPB”) has been established within the
Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with
respect to both new and existing consumer financial protection laws. Smaller financial institutions, like
our Bank, will be subject to the supervision and enforcement of their primary federal banking regulator
with respect to the federal consumer financial protection laws.
• Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated, subject to
various grandfathering and transition rules. Our trust preferred securities may not remain grandfathered
under this legislation.
•
•
Prior federal prohibitions on the payment of interest on demand deposits have been repealed, thereby
generally permitting depository institutions to pay interest on all deposit accounts which could increase
our interest expense.
State law is preempted if it would have a discriminatory effect on a federal savings association or is
preempted by any other federal law. The OCC must make a preemption determination on a case-by-
case basis with respect to a particular state law or other state law with substantively equivalent terms.
• Deposit insurance has been permanently increased to $250,000.
• Deposit insurance assessment base calculations equal a depository institution’s total assets minus the
sum of its average tangible equity during the assessment period.
27
• The minimum reserve ratio of the deposit insurance fund increased to 1.35% of estimated annual
insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the
increased reserve ratio for insured depository institutions with total consolidated assets of less than
$10 billion.
• Authority over savings and loan holding companies has been transferred to the Federal Reserve.
• Leverage capital requirements and risk-based capital requirements applicable to depository institutions
and bank holding companies have been extended to thrift holding companies following a five year
grace period.
• The Federal Deposit Insurance Act, referred to as the FDIA, was amended to direct federal regulators
to require depository institution holding companies to serve as a source of strength for their depository
institution subsidiaries.
• The Federal Reserve can require a grandfathered unitary thrift holding company that conducts
commercial or manufacturing activities or other nonfinancial activities in addition to financial activities
to conduct all or part of its financial activities in an intermediate savings and loan holding company.
• The SEC is authorized to adopt rules requiring public companies to make their proxy materials
available to shareholders for nomination of their own candidates for election to the board.
•
Public companies will be required to provide their shareholders with a nonbinding vote (i) at least once
every three years on the compensation paid to executive officers, and (ii) at least once every six years
on whether they should have a “say on pay” vote every one, two or three years.
• Additional provisions, including some not specifically aimed at thrifts and thrift holding companies,
will nonetheless have an impact on us.
•
Pursuant to the Dodd-Frank Act, the CFPB recently issued a final rule requiring mortgage lenders to
make a reasonable and good faith determination based on verified and documented information that a
consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms,
or to originate “qualified mortgages” that meet specific requirements with respect to terms, pricing and
fees. The new rule also contains new disclosure requirements at mortgage loan origination and in
monthly statements. These requirements will likely require significant personnel resources and could
have a material adverse effect on our operations.
Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues
and changing the activities in which we choose to engage. Many of these and other provisions of the Dodd-Frank
Act remain subject to regulatory rulemaking and implementation, the effects of which are not yet known. We
may be forced to invest significant management attention and resources to make any necessary changes related to
the Dodd-Frank Act and any regulations promulgated thereunder, which may adversely affect our business,
results of operations, financial condition or prospects. We cannot predict the specific impact and long-term
effects the Dodd-Frank Act and the regulations promulgated thereunder will have on our financial performance,
the markets in which we operate and the financial industry generally.
In addition to changes resulting from the Dodd-Frank Act, recent proposals published by the Basel
Committee on Banking Supervision, or the Basel Committee, if adopted, could lead to significantly higher capital
requirements, higher capital charges and more restrictive leverage and liquidity ratios. In July and December
2009, the Basel Committee published proposals relating to enhanced capital requirements for market risk and
new capital and liquidity risk requirements for banks. On September 12, 2010, the Basel Committee announced
an agreement on additional capital reforms that increases required Tier 1 capital and minimum Tier 1 common
equity capital and requires banks to maintain an additional capital conservation buffer during times of economic
prosperity. In addition, on June 4, 2012, the Federal Reserve proposed new capital requirements that are
consistent with Basel III and, if adopted, could affect our business. If adopted as proposed, the rules will require,
among other things, a minimum common equity Tier 1 capital ratio of 4.5%, net of regulatory deductions, and
28
establish a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets above the
regulatory minimum capital requirement, establishing a minimum common equity Tier 1 ratio plus capital
conservation buffer at 7%. In addition, the proposed rules increase the minimum Tier 1 capital requirement from
4% to 6% of risk-weighted assets. The proposed rules also specify that a bank with a capital conservation buffer
of less than 2.5% would potentially face limitations on capital distributions and bonus payments to executives.
The proposed rules would require a phase-out over a 10-year period of the inclusion of trust preferred securities
as a component of Tier 1 capital beginning in 2013. If the proposed rules are adopted as proposed, it could lead to
limitations on the dividend payments to us by the Bank or restrict our ability to grow during favorable market
conditions or require us to raise additional capital, including through sales of common stock or other securities
that may be dilutive to our shareholders. As a result, our business, results of operations, financial condition or
prospects could be adversely affected.
We may be required to pay significantly higher FDIC premiums, special assessments, or taxes that could
adversely affect our earnings.
Market developments significantly depleted the Deposit Insurance Fund and reduced the ratio of reserves to
insured deposits. As a result, we may be required to pay significantly higher premiums or additional special
assessments or taxes that could adversely affect our earnings. The Dodd-Frank Act increased the minimum
reserve ratio from 1.15% to 1.35%. The FDIC has adopted a plan under which it will meet this ratio by the
statutory deadline of September 30, 2020. The Dodd-Frank Act requires the FDIC to offset the effect of the
increase in the minimum reserve ratio on institutions with assets less than $10 billion. The FDIC has not
announced how it will implement this offset. In addition to the minimum reserve ratio, the FDIC must set a
designated reserve ratio. The FDIC has set a designated reserve ratio of 2.0%, which exceeds the minimum
reserve ratio.
As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance
premiums are based on an institution’s total assets minus its tangible equity instead of its deposits. While our
FDIC insurance premiums initially will be reduced by these regulations, it is possible that our future insurance
premiums will increase under the final regulations. Any future increases or required prepayments in FDIC
insurance premiums may materially adversely affect our results of operations.
The repeal of federal prohibitions on payment of interest on demand deposits could increase our interest
expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts
were repealed as part of the Dodd-Frank Act, which was signed into law in 2010. As a result, beginning on
July 21, 2011, financial institutions could commence offering interest on demand deposits to compete for clients.
Our interest expense will increase and our net interest margin will decrease if we begin offering interest on
demand deposits to attract additional customers or maintain current customers. Consequently, our business,
results of operations, financial condition or prospects may be materially and adversely affected.
The fiscal, monetary and regulatory policies of the federal government and its agencies could have a material
adverse effect on our results of operations.
The Federal Reserve regulates the supply of money and credit in the United States. Its policies determine in
large part the cost of funds for lending and investing and the return earned on those loans and investments, both
of which affect the net interest margin. Its policies also can adversely affect borrowers, potentially increasing the
risk that they may fail to repay their loans. Changes in Federal Reserve policies and our regulatory environment
generally are beyond our control, and we are unable to predict what changes may occur or the manner in which
any future changes may affect our business, financial condition and results of operation.
We are subject to liquidity risk.
Liquidity is essential to our business, as we use cash to fund loans and investments, other interest-earning
assets and deposit withdrawals that occur in the ordinary course of our business. Our principal sources of
29
liquidity include customer deposits, Federal Home Loan Bank borrowings, brokered certificates of deposit, sales
of loans, repayments to the Bank from borrowers and paydowns and sales of investment securities. If our ability
to obtain funds from these sources becomes limited or the costs to us of those funds increases, whether due to
factors that affect us specifically, including our financial performance or the imposition of regulatory restrictions
on us, or due to factors that affect the capital markets or other events, including weakening economic conditions
or negative views and expectations about the prospects for the financial services industry as a whole, then our
ability to meet our obligations or grow our banking business would be adversely affected and our financial
condition and results of operations could be harmed.
The market value of our investment securities portfolio may be impacted by the level of interest rates and the
credit quality and strength of the underlying collateral.
As of December 31, 2012, we owned investment securities classified as available-for-sale with an aggregate
historical cost of $886.0 million and an estimated fair value of $907.5 million. Future changes in interest rates
may reduce the market value of these and other securities.
Our net interest income varies as a result of changes in interest rates as well as changes in interest rates
across the yield curve. When interest rates are low, borrowers have an incentive to refinance into mortgages with
longer initial fixed rate periods and fixed rate mortgages, causing our securities to experience faster prepayments.
Increases in prepayments on our portfolio will cause our premium amortization to accelerate, lowering the yield
on such assets. If this happens, we could experience a decrease in interest income, which may negatively impact
our results of operations and financial position.
In addition, our securities portfolio is subject to risk as a result of credit quality and the strength of the
underlying issuers or their related collateral. Any decrease in the value of the underlying collateral will likely
decrease the overall value of our securities, affecting equity and possibly impacting earnings.
Changes in interest rates and other factors beyond our control could have an adverse impact on our earnings.
Our operating income and net income depend to a significant extent on our net interest margin, which is the
difference between the interest yields we receive on loans, securities and other interest-earning assets and the
interest rates we pay on interest-bearing deposits and other liabilities. The net interest margin is affected by
changes in market interest rates, because different types of assets and liabilities may react differently, and at
different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly
than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could reduce net interest income. These rates are highly sensitive to many factors beyond our
control,
including competition, general economic conditions and monetary and fiscal policies of various
governmental regulatory agencies, including the Federal Reserve.
We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity,
repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest
rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could
have an adverse effect on our net interest margin and results of operations. The results of our interest rate
sensitivity simulation models depend upon a number of assumptions which may prove to be not accurate. There
can be no assurance that we will be able to successfully manage our interest rate risk. Increases in market rates
and adverse changes in the local residential real estate market, the general economy or consumer confidence
would likely have a significant adverse impact on our non-interest income, as a result of reduced demand for
residential mortgage loans that we pre-sell.
Our Cash Connect Division relies on multiple financial and operational controls to track and settle the cash it
provides to its customers in the ATM industry.
The profitability of Cash Connect is reliant upon its ability to accurately and efficiently distribute, track, and
settle large amounts of cash to its customers’ ATMs. This depends on the successful implementation and
30
monitoring of a comprehensive series of financial and operational controls. These controls are designed to help
prevent, detect, and recover any potential
loss of funds. These controls require the implementation and
maintenance of complex proprietary software, the ability to track and monitor an extensive network of armored
car companies, and to settle large amounts of electronic funds transfer, or EFT, funds from various ATM
networks. It is possible for those associated with armored car companies, ATM networks and processors, ATM
operators, or other parties to misappropriate funds belonging to Cash Connect. Cash Connect has experienced
such occurrences in the past. It is possible Cash Connect would not have established proper policies, controls or
insurance and, as a result, any misappropriation of funds could result in an adverse impact to our earnings.
Our recent business strategy included significant investment in growth plans, and our financial condition and
results of operations could be negatively affected if we fail to grow or fail to manage our growth and
investment in branch infrastructure effectively.
We have pursued a significant growth strategy for our business. Our growth initiatives have required us to
recruit experienced personnel to assist in such initiatives. Accordingly, the failure to retain such personnel would
place significant limitations on our ability to successfully execute our growth strategy. In addition, as we expand
our lending beyond our current market areas, we could incur additional risk related to those new market areas.
We may not be able to expand our market presence in our existing market areas or successfully enter new
markets.
The weak economy, low demand and competition for credit may impact our ability to successfully execute
our growth plan. It could adversely affect our business, financial condition, results of operations, reputation and
growth prospects. While we believe we have the executive management resources and internal systems in place
to successfully manage our future growth, there can be no assurance growth opportunities will be available or
that we will successfully manage our growth.
themselves, we expect
We regularly evaluate potential acquisitions and expansion opportunities. If appropriate opportunities
present
to engage in selected acquisitions or other business growth initiatives or
undertakings. We may not successfully identify appropriate opportunities, may not be able to negotiate or finance
such activities and such activities, if undertaken, may not be successful.
Our Trust and Wealth division derives the majority of its revenue from noninterest income which consists of
trust, investment and other servicing fees. This business unit is subject to a number of risks which could
impact its earnings or our capital, including operational, compliance, reputational, fiduciary, business and
strategic risks.
Our Trust and Wealth division derives the majority of its revenue from noninterest income which consists of
trust, investment and other servicing fees. It faces a number of risks. Operational or compliance risk entails
inadequate or failed internal processes, people and systems or changes driven by external events. Success in this
business segment is highly dependent on reputation. Damage to the division’s or our reputation from negative
opinion in the marketplace could adversely impact both revenue and net income. Such results could also be
improper
affected by the adverse effects of business decisions made by management or
implementation of business decisions by management or unexpected external events. Unforeseen or
unrecognized developments in the marketplace in which it operates could also negatively affect results.
the board,
This business segment is also subject to many other risks and uncertainties including:
• The health of the national and global economies, soundness of financial
institutions and other
counterparties with which the division conducts business, changes in trading volumes or in the
financial markets in general, including the debt and equity markets or in client portfolios whose values
directly impact revenue, the effect of governmental actions on the division, its competitors and
counterparties and financial markets such as changes in the regulatory environment and changes in tax
laws, accounting requirements or interpretations that affect the division or its clients.
31
• Changes in the nature and activities of division’s competition, success in maintaining existing business,
success generating new business, identifying and penetrating targeted markets, complying with legal,
tax and regulatory requirements, maintaining a business mix with acceptable margins, the continuing
ability to generate investment results that satisfy its clients and attract prospective clients, success in
recruiting and retaining the necessary personnel to support business growth and maintain sufficient
expertise to support complex products and services and management’s ability to effectively address
risk management practices and controls, address operating risks including human errors or omissions,
pricing or valuation of securities, fraud, system performance, systems interruptions or breakdowns in
processes or internal controls, and success in controlling expenses all may have negative impact on
operating results.
Impairment of goodwill and/or intangible assets could require charges to earnings, which could negatively
impact our results of operations.
Goodwill and other intangible assets arise when a business is purchased for an amount greater than the net
fair value of its identifiable assets. We have recognized goodwill as an asset on the balance sheet in connection
with several recent acquisitions. At December 31, 2012, we had $33.3 million of goodwill and intangible assets.
We evaluate goodwill and intangibles for impairment at least annually by comparing fair value to carrying
amount. Although we have determined that goodwill and other intangible assets were not impaired during 2012,
a significant and sustained decline in our stock price and market capitalization, a significant decline in our
expected future cash flows, a significant adverse change in the business climate, slower growth rates or other
factors could result in impairment of goodwill or other intangible assets. If we were to conclude that a future
write-down of the goodwill or intangible assets is necessary, then we would record the appropriate charge to
earnings, which could be materially adverse to our results of operations and financial position.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and
commercial soundness of other financial institutions. Defaults by, or even rumors or questions about, one or
more financial services institutions, or the financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by us or by other institutions. Such events may materially and
adversely affect our results of operations.
We may elect or need to seek additional capital in the future, but that capital may not be available when
needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support
our operations. In the future, we may elect to or need to raise additional capital. Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and
on our financial performance. Accordingly, we may not be able to raise additional capital if needed on acceptable
terms, or at all. If we cannot raise additional capital when needed, our ability to expand our operations through
internal growth could be materially impaired.
Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.
From time to time, and particularly in light of the recent economic downturn, and the negative sentiment
towards banks, we have and may become party to various litigation claims and legal proceedings. Management
evaluates these claims and proceedings to assess the likelihood of unfavorable outcomes and estimates, if
possible, the amount of potential losses. We may establish a reserve, as appropriate, based upon our assessments
and estimates in accordance with accounting policies. We base our assessments, estimates and disclosures on the
information available to us at the time and rely on the judgment of our management with respect to those
assessments, estimates and disclosures. Actual outcomes or losses may differ materially from assessments and
estimates, which could adversely affect our reputation, financial condition and results of operations.
32
System failure or cybersecurity breaches of our network security could subject us to increased operating costs
as well as litigation and other potential losses.
The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and
cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against
damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure
that causes an interruption in our operations could have an adverse effect on our financial condition and results of
operations. In addition, our operations are dependent upon our ability to protect the computer systems and
network infrastructure utilized by us, including our Internet banking activities, against damage from physical
break-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such
computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted
through our computer systems and network infrastructure, which may result in significant liability to us, damage
to our reputation and discourage current and potential customers from using our Internet banking services. Each
year, we add additional security measures to our computer systems and network infrastructure to mitigate the
possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost
effective measures as well as insurance protection though these mitigation activities may not prevent future
potential losses from system failures or cybersecurity breaches.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
33
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional information regarding our offices and other
material properties as of December 31, 2012:
Location
Owned/
Leased
Date Lease
Expires
Net Book Value
of Property or
Leasehold
Improvements (1)
Deposits
(In Thousands)
WSFS Bank Center Branch
Leased
2025
$ 614
$900,100
Main Office
500 Delaware Avenue
Wilmington, DE 19801
Union Street Branch
211 North Union Street
Wilmington, DE 19805
Fairfax Shopping Center
2005 Concord Pike
Wilmington, DE 19803
Leased
2013
395
52,437
Leased
2048
1,057
85,505
Prices Corner Shopping Center Branch
Leased
2023
395
93,137
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch
Leased
2015
304
117,809
4730 Limestone Road
Wilmington, DE 19808
University Plaza Shopping Center Branch
Leased
2041
999
58,268
100 University Plaza
Newark, DE 19702
College Square Shopping Center Branch
Leased
2026
217
107,841
115 College Square Drive
Newark, DE 19711
Airport Plaza Shopping Center Branch
Leased
2013
450
83,083
144 N. DuPont Hwy.
New Castle, DE 19720
Stanton Branch
Inside ShopRite
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Branch
2400 Peoples Plaza
Routes 40 & 896
Newark, DE 19702
Leased
2016
Leased
2022
Middletown Crossing Shopping Center
Leased
2027
Leased
2060
20
23
519
374
37,533
44,848
67,869
18,423
400 East Main Street
Middletown, DE 19709
Dover Branch
Dover Mart Shopping Center
290 South DuPont Highway
Dover, DE 19901
West Dover Loan Office (2)
Greentree Office Center
160 Greentree Drive
Suite 103 & 105
Dover, DE 19904
Leased
2019
6
N/A
34
Location
Glen Mills Branch
395 Wilmington-West Chester Pike
Glen Mills, PA 19342
Brandywine Branch
Inside Safeway Market
2522 Foulk Road
Wilmington, DE 19810
Operations Center (3)
2400 Philadelphia Pike
Wilmington, DE 19703
Longwood Branch
826 East Baltimore Pike
Suite 7
Kennett Square, PA 19348
Holly Oak Branch
Inside Super Fresh
2105 Philadelphia Pike
Claymont, DE 19703
Hockessin Branch
7450 Lancaster Pike
Wilmington, DE 19707
Lewes LPO
Southpointe Professional Center
1515 Savannah Road, Suite 103
Lewes, DE 19958
Owned/
Leased
Date Lease
Expires
Net Book Value
of Property or
Leasehold
Improvements (1)
Deposits
(In Thousands)
Leased
2040
$1,430
$20,273
Leased
2014
8
34,860
Owned
N/A
N/A
Leased
2015
63
25,776
Leased
2015
11
36,927
Leased
2030
463
93,634
Leased
2018
43
62,971
Fox Run Shopping Center Branch
Leased
2025
604
83,410
210 Fox Hunt Drive
Route 40 & 72
Bear, DE 19701
Camden Town Center Branch
4566 S. DuPont Highway
Camden, DE 19934
Rehoboth Branch
Lighthouse Plaza
19335 Coastal Highway
Rehoboth, DE 19771
West Dover Branch
1486 Forest Avenue
Dover, DE 19904
Longneck Branch
25926 Plaza Drive
Millsboro, DE 19966
Smyrna Branch
Simon’s Corner Shopping Center
400 Jimmy Drive
Smyrna, DE 19977
Oxford, LPO
59 South Third Street
Suite 1
Oxford, PA 19363
Leased
2049
661
39,999
Leased
2029
639
47,081
Owned
2,019
29,310
Leased
2026
934
36,592
Leased
2048
967
44,115
Leased
2017
2
8,624
35
Location
Greenville Branch
3908 Kennett Pike
Greenville, DE 19807
WSFS Bank Center (4)
500 Delaware Avenue
Wilmington, DE 19801
Annandale, LPO
7010 Little River Tnpk.
Suite 330
Annandale, VA 22003
Oceanview Branch
69 Atlantic Avenue
Oceanview, DE 19970
Selbyville Branch
38394 DuPont Boulevard
Selbyville, DE 19975
Lewes Branch
34383 Carpenters Way
Lewes, DE 19958
Millsboro Branch
26644 Center View Drive
Millsboro, DE 19966
Concord Square Branch
4401 Concord Pike
Wilmington, DE 19803
Delaware City Branch
145 Clinton Street
Delaware City, DE 19706
West Newark Branch
201 Suburban Plaza
Newark, DE 19711
Owned/
Leased
Date Lease
Expires
Owned
Net Book Value
of Property or
Leasehold
Improvements (1)
Deposits
(In Thousands)
$1,863
$558,463
Leased
2025
2,170
N/A
Leased
2017
8
8,225
Leased
2024
1,031
36,572
Leased
2013
17
11,034
Leased
2048
Leased
2029
Leased
2016
Owned
245
981
54
46
26,140
13,542
29,176
12,144
Leased
2040
1,407
55,724
Lantana Shopping Center Branch
Leased
2050
336
18,933
6274 Limestone Road
Hockessin, DE 19707
West Chester Branch
400 East Market Street
West Chester, PA 19380
Edgmont Branch
5000 West Chester Pike
Newtown Square, PA 19073
Branmar Branch
1712 Foulk Road
Wilmington, DE 19810
Trolley Square
9A Trolley Square
Wilmington, DE 19806
Milford
688 North DuPont Highway
Milford, DE 19963
Leased
2047
75
30,055
Leased
2040
1,193
12,272
Leased
2061
1,088
120,121
Leased
2042
259
47,527
Leased
2015
44
21,747
36
Location
Seaford
22820 Sussex Highway
Sussex Commons Shopping Center
Unit 19
Seaford, DE 19963
Media
100 East State Street
Media, PA 19063
Plymouth Meeting
450 Plymouth Road
Suite 306
Plymouth Meeting, PA 19462
Midway Shopping Center
4601 Kirkwood Highway
Wilmington, DE 19808
Cash Connect
White Clay Mill
500 Creek View Road
Suite 100
Newark, DE 19711
Operations Center
Silverside — Carr Corporate Center
409 Silverside Road
Wilmington, DE 19809
Owned/
Leased
Date Lease
Expires
Leased
2036
Net Book Value
of Property or
Leasehold
Improvements (1)
Deposits
(In Thousands)
106
$
$
5,160
Leased
2022
Leased
2016
128
20
10,443
2,812
Leased
2062
2,315
24,448
Leased
2021
52
N/A
Leased
2027
350
N/A
Cypress Capital Management
Leased
2013
1
N/A
1220 Market Street
Suite 704
Wilmington, DE 19801
Greenville Wealth Management Center
Leased
2032
219
N/A
3801 Kennett Pike
Suite C-200
Greenville, DE 19807
Las Vegas Wealth Management Center
Leased
2013
N/A
N/A
101 Convention Center Drive
Suite P109
Las Vegas, NV 89109
$27,225
$3,274,963
(1) The net book value of all investments in premises and equipment totaled $38.3 million at December 31, 2012.
(2) Location of Corporate Training Center.
(3) Building is for sale and is classified as OREO. Net book value at December 31, 2012 was $691,000.
(4) Location of Corporate Headquarters.
37
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed in 2011, we were served with a complaint filed in U.S. Bankruptcy Court by a
bankruptcy trustee relating to a former WSFS Bank customer. The complaint challenges the Bank’s actions in
exercising its rights concerning an outstanding loan and also seeks to avoid and recover the pre-bankruptcy
repayment of that loan. There were no material changes regarding this complaint in 2012 and management of the
Bank believes it acted appropriately and continues to vigorously defend itself against the complaint. No litigation
reserve has been recorded as it is not yet possible to establish the probability of, or reasonably estimate, a
potential loss.
We previously reported that in September 2012, we received a “30 day letter” from the IRS proposing an
approximate $14 million to $18 million adjustment to a 2006 trust tax return relating to a trust for which the
Bank is trustee. Subsequently, the IRS delivered a “No Change Report” that indicated the IRS completed its
review of the trust’s 2006 tax return and did not propose any changes. The IRS’s decision to end its inquiry into
the trust tax return is subject to the Area Director’s approval, which has not yet been issued.
There were no material changes or additions to other significant pending legal or other proceedings
involving us other than those arising out of routine operations. Management does not anticipate that the ultimate
liability, if any, arising out of such other proceedings will have a material effect on the Consolidated Financial
Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant’s Common Equity and Related Stockholder Matters
Our Common Stock is traded on the NASDAQ Global Select Market under the symbol WSFS. At
December 31, 2012, we had 964 registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly period within the two most
recent fiscal years as well as the quarterly dividends paid.
The closing market price of our Common Stock at December 31, 2012 was $42.25.
2012
2011
Stock Price Range
Low
High
Dividends
4th
3rd
2nd
1st
4th
3rd
2nd
1st
$40.46
38.49
35.98
35.95
$29.90
30.23
36.00
39.00
$44.35
44.90
41.03
43.94
$42.20
44.51
48.07
50.19
$0.12
0.12
0.12
0.12
$0.48
$0.12
0.12
0.12
0.12
$0.48
38
COMPARATIVE STOCK PERFORMANCE GRAPH
The graph and table which follow show the cumulative total return on our Common Stock over the last five
years compared with the cumulative total return of the Dow Jones Total Market Index and the Nasdaq Bank
Index over the same period as obtained from Bloomberg L.P. Cumulative total return on our Common Stock or
the indices equals the total increase in value since December 31, 2007, assuming reinvestment of all dividends
paid into the Common Stock or the index, respectively. The graph and table were prepared assuming $100 was
invested on December 31, 2007 in our Common Stock and in each of the indexes. There can be no assurance that
our future stock performance will be the same or similar to the historical stock performance shown in the graph
below. We neither make nor endorse any predictions as to stock performance.
CUMULATIVE TOTAL SHAREHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
December 31, 2007 through December 31, 2012
200
150
s
r
a
l
l
o
D
100
50
0
2007
2008
2009
2010
2011
2012
WSFS Financial Corporation
Dow Jones Total Market Index
Nasdaq Bank Index
WSFS Financial Corporation
Dow Jones Total Market Index
Nasdaq Bank Index
Cumulative Total Return
2007
2008
2009
2010
2011
2012
$100
100
100
$96
61
76
$51
77
62
$95
89
69
$72
88
61
$ 84
100
70
39
ITEM 6. SELECTED FINANCIAL DATA
At December 31,
Total assets
Net loans (1)
Investment securities (2) (3)
Other investments
Mortgage-backed securities (2)
Total deposits
Borrowings (4)
Trust preferred borrowings
Senior Debt
Stockholders’ equity
Number of full-service branches
For the Year Ended December 31,
Interest income
Interest expense
Net interest income
Noninterest income
Noninterest expenses
Provision (benefit) for income taxes
Net Income
Dividends on preferred stock and accretion
2012
2011
2010
2009
2008
(Dollars in Thousands, Except Per Share Data)
$4,375,148
2,736,674
49,746
31,796
870,342
3,274,963
515,255
67,011
55,000
421,054
41
$4,289,008
2,712,774
42,569
35,765
829,225
3,135,304
656,609
67,011
—
392,133
40
$3,953,518
2,575,890
52,232
37,790
713,358
2,810,774
680,595
67,011
—
367,822
36
$3,748,507
2,479,155
45,517
40,395
681,242
2,561,871
787,798
67,011
—
301,800
37
$3,432,560
2,443,835
49,688
39,521
498,205
2,122,352
999,734
67,011
—
216,635
35
$ 150,287
23,288
$ 158,642
32,605
$ 162,403
41,732
$ 157,730
53,086
$ 166,477
77,258
126,999
86,693
133,345
16,983
31,311
126,037
63,588
127,477
11,475
22,677
120,671
50,115
109,332
5,454
14,117
104,644
50,241
108,504
(2,093)
663
89,219
45,989
89,098
6,950
16,136
of discount
2,770
2,770
2,770
2,590
—
Net income (loss) allocable to common
stockholders
Earnings (loss) per share allocable to
common stockholders:
Basic
Diluted
Interest rate spread
Net interest margin
Efficiency ratio
Noninterest income as a percentage of total
revenue (5)
Return on average assets
Return on average equity
Average equity to average assets
Tangible equity to assets
Tangible common equity to assets
Ratio of nonperforming assets to total assets
28,541
19,907
11,347
(1,927)
16,136
3.28
3.25
3.39%
3.46
62.19
40.43
0.73
7.66
9.58
8.93
7.72
1.43
2.31
2.28
3.49%
3.60
66.85
33.34
0.56
5.96
9.34
8.41
7.18
2.14
1.48
1.46
3.47%
3.62
63.61
29.16
0.37
4.21
8.84
8.52
7.18
2.35
(0.30)
(0.30)
3.10%
3.30
69.56
32.21
0.02
0.24
7.86
7.73
6.31
2.19
2.62
2.57
2.94%
3.13
65.36
33.74
0.50
7.30
6.86
5.88
5.88
1.04
Includes loans held-for-sale.
Includes securities available-for-sale and trading.
Includes investments in reverse mortgages.
(1)
(2)
(3)
(4) Borrowings consist of FHLB advances, securities sold under agreement to repurchase and other borrowed funds.
(5) Computed on a fully tax-equivalent basis.
40
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a thrift holding company headquartered in Wilmington, Delaware. Substantially all of our assets are
held by our subsidiary, WSFS Bank, one of the ten oldest banks continuously operating under the same name in
the United States. As a federal savings bank, which was formerly chartered as a state mutual savings bank, we
enjoy broader fiduciary powers than most other financial institutions. A fixture in the community, WSFS has
been in operation for more than 181 years. In addition to its focus on stellar customer service, the Bank has
continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed,
community banking institution that has grown to become the largest thrift holding company in the State of
Delaware, one of the top commercial lenders in the state and the third largest bank in terms of Delaware deposits.
We state our mission simply: “We Stand for Service.” Our strategy of “Engaged Associates delivering Stellar
Service growing Customer Advocates and value for our Owners” focuses on exceeding customer expectations,
delivering stellar service and building customer advocacy through highly-trained, relationship-oriented, friendly,
knowledgeable and empowered Associates.
Our core banking business is commercial lending funded by customer-generated deposits. We have built a
$2.2 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.
Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the
United States. Cash Connect manages nearly $444 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 440 ATMs for the Bank,
which has, by far, the largest branded ATM network in Delaware.
As a leading provider of ATM Vault Cash to the U.S. ATM industry, Cash Connect is exposed to substantial
operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as
general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated
tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention
and loss recovery strategies. Throughout its 12-year history, Cash Connect periodically has been exposed to theft
through theft from armored courier companies and consistently has been able to recover any losses through its
risk management strategies.
We offer trust and wealth management services through Christiana Trust, Cypress, WSFS Investment Group
brokerage and our Private Banking group. The Trust and Wealth division provides investment, fiduciary, agency
and commercial domicile services from locations in Delaware and Nevada and has $17.0 billion in fiduciary
assets. These services are provided to individuals and families as well as corporations and institutions. The Trust
and Wealth division of WSFS Bank provides these services to customers locally, nationally and internationally
taking advantage of its branch facilities in Delaware and Nevada. Cypress is an investment advisory firm that
manages over $597 million of portfolios for individuals, trusts, retirement plans and endowments.
We have two consolidated subsidiaries, WSFS Bank and Montchanin. We also have one unconsolidated
affiliate, the Trust. WSFS Bank has two fully-owned subsidiaries, WSFS Investment Group, Inc. and Monarch.
WSFS Investment Group, Inc. markets various third-party insurance products and securities through the Bank’s
retail banking system and Monarch provides commercial domicile services which include employees, directors,
subleases and registered agent services in Delaware and Nevada.
41
Montchanin has one consolidated subsidiary, Cypress. Cypress is a Wilmington-based investment advisory
firm serving high net-worth individuals and institutions.
RESULTS OF OPERATIONS
We recorded net income of $31.3 million for the year ended December 31, 2012, a 38% increase compared
to $22.7 million for the year ended December 31, 2011, and an increase from $14.1 million for the year ended
December 31, 2010. Income allocable to common stockholders’
(after preferred stock dividends) was
$28.5 million, or $3.25 per diluted common share (a 43% increase in diluted EPS), for the year ended
December 31, 2012, compared to income allocable to common shareholders’ of $19.9 million, or $2.28 per
diluted common share, and income of $11.3 million, or $1.46 per common share, for the years ended
December 31, 2011 and 2010, respectively. Earnings for 2012 included the impact of our Asset Strategies
completed during the year, which resulted in net securities gains of $13.3 million, $14.2 million in additional
provision for loan losses and $600,000 in other credit costs related to the asset dispositions. Excluding the impact
of Asset Strategies, we still had significant increases in noninterest income, reflecting growth in all segments,
including increases in wealth management income, mortgage banking activities and credit/debit card and ATM
income. In addition, net interest income increased during the year despite margin pressure, assets disposition
efforts and the impact of the early-stages of our deleveraging strategy (completed in early 2013). Offsetting these
favorable variances was an increase in noninterest expenses, reflecting the full year impact of our recent growth
phase which included opening of new or renovated branches, the relocation of our operations center and the
hiring of additional relationship managers undertaken from 2009 until early 2012, as well as additional
compensation costs, related to the improvement in performance during 2012. Credit costs were also higher
during 2012 and reflect ongoing asset disposition efforts undertaken during the year.
Net Interest Income. Net interest income increased $962,000, or 1%, to $127.0 million in 2012 from
$126.0 million in 2011, while net interest margin decreased 14 basis points to 3.46% in 2012 compared to 3.60%
in 2011. The increase in net interest income reflects lending growth during 2012 and was earned despite the
impact of the successful completion of our Asset Strategies during the second quarter of 2012. Also favorably
impacting net interest income was an improvement in our mix of loans combined with effective management of
funding costs, both in deposit pricing and wholesale funding rates. The decrease in net interest margin was
mainly due to significantly reduced rates in the MBS portfolio resulting from substantial sales and paydowns
with subsequent reinvestment at much lower market rates during 2012. During 2012 we completed our issuance
of $55 million of 6.25% Senior Notes which also unfavorably impacted our net interest margin.
Net interest income increased $5.3 million, or 4%, to $126.0 million in 2011 from $120.7 million in 2010,
while the net interest margin remained essentially flat at 3.60% in 2011 compared to 3.62% in 2010. The increase
in net interest income was mainly due to $145.3 million of growth in loans which increased to $2.7 billion in
2011. During 2011 we continued our active deposit pricing management which decreased our average cost of
deposits by 24 basis points to 0.81% in 2011 compared to 1.05% in 2010. In addition, Federal Home Loan Bank
Advance rates decreased 92 basis points to 1.75% from 2.67% in 2010. The favorable impact of these items was
partially offset by the decrease in our mortgage-backed securities portfolio yield of 119 basis points to 3.55% in
2011 compared to 4.74% in 2010. The decrease in MBS yields were primarilty attributable to high prepayments
and significant sales combined with the continued low rate environment. The yield on interest-earning assets
declined by 33 basis points (0.33%), including loan yields which declined only 10 basis points (0.10%), while the
rate on interest-bearing liabilities declined by 36 basis points (0.36%), including the rate on customer deposits
which declined 29 basis points (0.29%).
The following table provides certain information regarding changes in net interest income attributable to
changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the
periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is
provided on the changes that are attributable to: (i) changes in volume (change in volume multiplied by prior year
rate); (ii) changes in rates (change in rate multiplied by prior year volume on each category); and (iii) net change
42
(the sum of the change in volume and the change in rate). Changes due to the combination of rate and volume
changes (changes in volume multiplied by changes in rate) are allocated proportionately between changes in rate
and changes in volume.
Year Ended December 31,
Interest Income:
Commercial real estate loans
Residential real estate loans
Commercial loans (1)
Consumer loans
Loans held for sale
Mortgage-backed securities
Investment securities (2)
FHLB Stock and deposits in other banks
Favorable (unfavorable)
Interest expense:
Deposits:
Interest-bearing demand
Money market
Savings
Customer time deposits
Brokered certificates of deposits
FHLB of Pittsburgh advances
Trust Preferred borrowings
Senior debt
Other borrowed funds
Unfavorable (favorable)
Net change, as reported
2012 vs. 2011
Yield/Rate
Volume
2011 vs. 2010
Yield/Rate
Net
Net
Volume
(In Thousands)
$ (410) $ 1,345
(1,093)
(1,219)
(3,891)
6,180
(698)
(732)
61
61
(10,325)
2,359
(83)
46
46
(2)
$
935
(2,312)
2,289
(1,430)
122
(7,966)
(37)
44
$
267
(2,143)
8,992
312
—
1,038
(48)
—
$
147
(894)
(2,487)
381
—
(9,093)
(243)
10
$
414
(3,037)
6,505
693
—
(8,055)
(291)
10
6,283
(14,638)
(8,355)
8,418
(12,179)
(3,761)
79
151
124
(821)
277
(1,516)
—
648
(196)
(238)
(1,289)
(1,158)
(3,196)
41
(2,204)
105
648
(772)
(159)
(1,138)
(1,034)
(4,017)
318
(3,720)
105
1,296
(968)
(1,254)
(8,063)
(9,317)
90
608
324
96
(502)
431
—
—
(506)
541
(120)
(2,012)
647
(2,618)
(479)
(5,211)
(15)
—
140
(30)
(1,404)
971
(2,522)
(981)
(4,780)
(15)
—
(366)
(9,668)
(9,127)
$ 7,537
$ (6,575) $
962
$ 7,877
$ (2,511) $ 5,366
(1) The tax-equivalent income adjustment is related to commercial loans.
(2) The tax-equivalent income adjustment is related to municipal securities.
43
The following table provides information regarding the average balances of, and yields/rates on, interest-
earning assets and interest-bearing liabilities during the periods indicated:
Year Ended December 31,
2012
2011
2010
Average
Balance
Interest
Yield/
Rate (1)
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 $ 733,999 $ 36,109
Residential real estate
4.92%$ 742,692 $ 35,174
4.74%$ 737,050 $ 34,760
4.72%
loans (4)
Commercial loans
Consumer loans
Loans held for sale (5)
Total loans
Mortgage-backed securities (6)
Investment securities (6) (7)
Other interest-earning assets
Total interest-earning
assets
Allowance for loan losses
Cash and due from banks
Cash in non-owned ATMs
Bank-owned life insurance
Other noninterest-earning
assets
Total assets
273,500
1,458,601
285,625
5,326
2,757,051
836,567
50,816
32,617
12,023
68,610
13,662
122
130,526
19,191
510
60
4.40
4.67
4.78
2.29
4.75
2.29
1.10
0.18
300,081
1,337,954
300,703
—
2,681,430
765,027
44,428
36,707
14,335
66,321
15,092
4.78
4.97
5.02
— —
130,922
27,157
547
16
4.92
3.55
1.23
0.04
344,140
1,160,692
294,288
—
2,536,170
742,482
47,255
39,790
17,372
59,816
14,399
5.05
5.18
4.89
— —
126,347
35,212
838
6
5.02
4.74
1.77
0.02
3,677,051
150,287
4.11
3,527,592
158,642
4.53
3,365,697
162,403
4.86
(48,485)
86,320
368,256
63,311
120,905
$4,267,358
(57,325)
65,147
347,885
63,971
123,626
$4,070,896
(61,104)
59,900
262,832
60,880
107,961
$3,796,166
44
Year Ended December 31,
2012
2011
2010
Average
Balance
Interest
Yield/
Rate (1)
Average
Balance
Interest
Yield/
Rate (1)
Average
Balance
Interest
Yield/
Rate (1)
(Dollars in Thousands)
Liabilities and Stockholders’
Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand
Money market
Savings
Customer time deposits
$ 411,862 $
764,109
388,659
716,686
246
1,759
431
9,531
0.06%$ 329,227
0.23
724,263
0.11
355,743
1.33
765,620
405
2,897
1,465
13,548
0.12%$ 264,790
625,470
0.40
240,871
0.41
761,010
1.77
435
4,301
494
16,070
0.16%
0.69
0.21
2.11
Total interest-bearing customer
deposits
2,281,316
11,967
0.52
2,174,853
18,315
0.84
1,892,141
21,300
1.13
Brokered certificates of
deposit
Total interest-bearing deposits
FHLB of Pittsburgh advances
Trust preferred borrowings
Senior debt
Other borrowed funds
Total interest-bearing
liabilities
Noninterest-bearing demand
deposits
Other noninterest-bearing
liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Excess of interest-earning
assets over interest-bearing
liabilities
Net interest and dividend
income
Interest rate spread
Net interest margin
269,682
1,134
2,550,998
466,243
67,011
19,085
135,030
13,101
6,252
1,480
1,296
1,159
0.42
0.51
1.32
2.17
6.68
0.86
201,618
816
0.40
304,397
1,797
0.59
2,376,471
561,117
67,011
—
150,116
19,131
9,972
1,375
0.81
1.75
2.02
— —
1.42
2,127
2,196,538
544,317
67,011
—
185,756
23,097
14,752
1,390
1.05
2.67
2.05
— —
1.34
2,493
3,238,367
23,288
0.72
3,154,715
32,605
1.03
2,993,622
41,732
1.39
586,173
33,939
408,879
508,613
27,150
380,418
439,155
27,829
335,560
$4,267,358
$4,070,896
$3,796,166
$ 438,684
$ 372,877
$ 372,075
$126,999
$126,037
$120,671
3.39%
3.46%
3.49%
3.60%
3.47%
3.62%
(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)
(5)
(6)
(7)
Includes loans held-for-sale arising from the normal course of business.
Includes loans held-for-sale in conjunction with our asset strategies undertaken in 2012.
Includes securities available-for-sale at fair value.
Includes reverse mortgages.
45
Provision for Loan Losses. We maintain an allowance for loan losses at an appropriate level based on our
assessment of the estimable and probable losses in the loan portfolio, pursuant to accounting literature, which is
discussed further in “Nonperforming Assets”. Our evaluation is based upon a review of the portfolio and requires
significant judgment. For the year ended December 31, 2012, we recorded a provision for loan losses of
$32.1 million compared to $28.0 million in 2011 and $41.9 million in 2010. This increase was primarily due to
the successful completion of our Asset Strategies in the second quarter of 2012, which resulted in an additional
$14.2 million in the provision for loan losses during the year. Also impacting the provision for loan losses for
2012 was additional asset disposition efforts undertaken in 2012 aimed at improving asset quality.
Noninterest Income. Noninterest
income increased $23.1 million to $86.7 million in 2012 from
$63.6 million in 2011. Excluding the impact of net securities gains in both periods, and $1.2 million
unanticipated bank-owned life insurance (“BOLI”) income in 2011 and $1.0 million in 2012, noninterest income
increased $6.8 million, or 12% in 2012 compared to 2011. Credit/debit card and ATM fees increased by
$1.9 million, or 9% in 2012 compared to 2011, most of which came from growth in Cash Connect (our ATM
division). Wealth management income grew $1.4 million, or 12%, in 2012 compared to 2011, signifying
continued growth in our trust and wealth management segment. Mortgage banking activities increased
$1.3 million or 87% in 2012 compared to 2011, primarily driven by refinance activity and growth in the retail
lending division as we strive to become Delaware’s premier consumer lending bank. Deposit service charges
increased $762,000, or 5%, in 2012 compared to 2011, due to overall bank growth.
Noninterest income increased to $63.6 million in 2011 from $50.1 million in 2010. Excluding the impact of
net securities gains in both periods, and $1.2 million in unanticipated BOLI income in 2011, noninterest income
increased by $8.5 million, or 17% in 2011 compared to 2010. Noninterest income increased $7.1 million in
wealth management income in 2011 compared to 2010, primarily from the December 2010 acquisition of
Christiana Bank & Trust (“CB&T”). In addition, increases in credit/debit card and ATM fees and deposit service
charges, resulting from increased volume and franchise growth and exceeded year-over-year declines in
mortgage banking revenues.
Noninterest Expenses. Noninterest expense in 2012 increased $5.9 million, or 5%, to $133.3 million from
$127.5 million in 2011. Excluding the “Right Here” advertising campaign in 2011 ($961,000) and the
prepayment penalties on FHLB advances in 2012 ($3.7 million), noninterest expenses increased only 2% in 2012
compared to 2011. This increase reflected a full year of expenses related to branch expansion (1 branch opened in
2010, 5 branches opened in 2011, 2 branches opened in early 2012), the renovation of several branches, and the
relocation of our operation center. In addition, incentive costs increased by $1.2 million in 2012 compared to
2011, as a result of our improved performance in 2012. These increases were partially offset by our expense
management efforts including and expense management plan implemented in the second half of 2012.
Noninterest expense increased to $127.5 million in 2011 from $109.3 million in 2010. Excluding the CB&T
integration costs of $780,000 in 2011 and $1.7 million in 2010, noninterest expenses increased by $19.0 million,
or 18%, in 2011 compared to 2010. During 2011, loan workout and other real estate owned (“OREO”) expenses
increased $2.4 million compared to 2010 and included the impact from bulk sales of OREO. Marketing expenses
also increased by $1.1 million in 2011, mainly due to our “Right Here” marketing campaign in the third quarter
of 2011. The remaining increase in expenses in 2011 compared to 2010 was the result of normal ongoing
operational costs related to the CB&T acquisition, organic franchise growth including the opening, relocation and
renovation of eight branches, the hiring of additional commercial relationship managers (and the full year of
impact for 2010 adds to staff) and related infrastructure and support costs.
Income Taxes. We recorded $17.0 million of tax expense for the year ended December 31, 2012 compared
to tax expense of $11.5 million and $5.5 million for the years ended December 31, 2011 and 2010, respectively.
The effective tax rates for the years ended December 31, 2012, 2011 and 2010 were 35.2%, 33.6% and 27.9%,
respectively. The 2012, 2011 and 2010 income tax expenses reflect tax benefits of $3,000, $378,000 and
$882,000, respectively, resulting from net reductions in unrecognized tax benefits for those years. Volatility in
46
effective tax rates is impacted by the level of pretax income or loss, combined with the amount of tax-free
income as well as the effects of unrecognized tax benefits. The provision for income taxes includes federal, state
and local income taxes that are currently payable or deferred because of temporary differences between the
financial reporting basis and the tax reporting basis of the assets and liabilities.
FINANCIAL CONDITION
Total assets increased $86.1 million, or 2%, to $4.4 billion as of December 31, 2012 compared to
$4.3 billion as of December 31, 2011. Included in this increase was a $48.3 million, or 6%, increase in
investment securities, and a $32.9 million increase in cash and cash equivalents. In addition, we had a
$23.9 million, or 1%, increase in net loans as of December 31, 2012 compared to December 31, 2011. Total
liabilities increased $57.2 million during the year to $4.0 billion at December 31, 2012. This increase was
primarily the result of an increase in customer deposits of $256.8 million, or 9% as of December 31, 2012
compared to December 31, 2011.
Cash in non-owned ATMs. During 2012, cash in non-owned ATMs managed by Cash Connect, our ATM
unit, increased $9.5 million, or 2%. Cash Connect serviced nearly 13,000 ATMs at December 31, 2012, as well
as 440 WSFS-owned ATMs to serve customers in our markets.
Investment Securities.
Investment securities increased $48.3 million to $920.1 million during 2012. Our
portfolio of available-for-sale MBS was comprised of all GSE as of December 31, 2012. Our MBS were
predominantly of short duration with a weighted average duration of 5.0 years at December 31, 2012. We own no
collateralized debt obligations, bank trust preferred securities, Agency preferred securities or equity securities in
other FDIC insured banks or thrifts.
Loans, net. Net loans (including those held for sale) increased $23.9 million, or 1%, during 2012. Loan
growth included construction loans increases of $27 million, or 26% as well as $14.5 million, or 1%, in
commercial and industrial loan growth. Partially offsetting these increases were residential mortgage loans which
decreased by $28.1 million, or 10%, mainly due to our strategy to originate then sell these loans in the secondary
market to generate fee income. The completion in the second quarter of 2012 of our Asset Strategies resulted in
bulk loan sales of $42.7 million in recorded balances.
Goodwill and Intangibles. Goodwill and intangibles remained essentially flat during 2012.
Customer Deposits. Customer deposits increased $256.8 million, or 9%, during 2012 to $3.1 billion. Core
deposit relationships (demand deposits, money market and savings accounts) increased $404.2 million, or 19%,
during 2012. Partially offsetting these decreases were jumbo certificates of deposits which decreased
$52.3 million, or 15%, and customer time deposits (CDs under $100,000), which decreased $95.0 million, or
23%, in 2012 (vs. a $23.4 million decrease in 2011 and a $39.5 million increase in 2010). The table below
depicts the changes in customer deposits during the last three years:
Year Ended December 31,
2012
2011
2010
Beginning balance
Interest credited
Deposit inflows, net
Ending balance
(Dollars In Millions)
$2,562
19
266
$2,215
20
327
$2,847
10
247
$3,104
$2,847
$2,562
Borrowings and Brokered Deposits. Borrowing and brokered deposits decreased by $203.6 million during
2012. Included in the decrease was $162.4 million of Federal Home Loan Bank Advances, $117.2 million, in
brokered deposits and $40.0 million, in other borrowed funds. Partially offsetting these decreases was an increase
of $60.0 million, in federal funds purchased and securities sold under agreements to repurchase, and the issuance
of $55 million of 6.25% Senior Notes during 2012.
47
Stockholders’ Equity. Stockholders’ equity increased $28.9 million, or 7%,
to $421.1 million at
December 31, 2012 compared to $392.1 million at December 31, 2011. Retained earnings increased
$24.4 million, or 6%, to $433.2 million during 2012, primarily as a result of earnings from the year less
dividends paid. In addition, other comprehensive income increased $1.7 million, or 16%, during 2012, mainly
due to an increase in unrealized gains on available-for-sale securities.
ASSET/LIABILITY MANAGEMENT
Our primary asset/liability management goal is to optimize long term net interest income opportunities
within the constraints of managing interest rate risk, ensuring adequate liquidity and funding and maintaining a
strong capital base.
In general, interest rate risk is mitigated by closely matching the maturities or repricing periods of interest-
sensitive assets and liabilities to ensure a favorable interest rate spread. We regularly review our interest-rate
sensitivity, and use a variety of strategies as needed to adjust that sensitivity within acceptable tolerance ranges
established by management and the Board of Directors. Changing the relative proportions of fixed-rate and
adjustable-rate assets and liabilities is one of our primary strategies to accomplish this objective.
The matching of assets and liabilities may be analyzed using a number of methods including by examining
the extent to which such assets and liabilities are “interest-rate sensitive” and by monitoring our interest-
sensitivity gap. An interest-sensitivity gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a defined period, and is considered
negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
For additional information related to interest rate sensitivity, see Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.
The repricing and maturities of our interest-rate sensitive assets and interest-rate sensitive liabilities at
December 31, 2012 are shown in the following table:
(Dollars in Thousands)
Interest-rate sensitive assets:
Commercial loans (2)
Real estate loans (1) (2)
Mortgage-backed securities
Consumer loans (2)
Investment securities
Loans held-for-sale (2)
Less than
One Year
One to
Five Years
Over
Five Years
Total
$1,153,809
740,738
139,216
217,240
19,620
$198,546
171,458
478,521
41,844
28,745
$ 74,100
96,171
252,605
29,918
33,177
$1,426,455
1,008,367
870,342
289,002
81,542
12,850
—
—
12,850
2,283,473
919,114
485,971
3,688,558
48
(Dollars in Thousands)
Interest-rate sensitive liabilities:
Money market and interest-bearing demand deposits
Savings deposits
Retail certificates of deposits
IRA certificates of deposit
Jumbo certificates of deposit
Brokered certificates of deposit
FHLB advances
Trust preferred borrowings
Senior debt
Other borrowed funds
Less than
One Year
One to
Five Years
Over
Five Years
Total
1,038,513
195,218
276,093
42,156
111,356
165,471
318,249
67,011
—
113,945
—
—
140,671
29,813
2,655
5,170
58,061
—
—
25,000
433,583
194,759
709
7,770
—
—
—
—
55,000
—
1,472,096
389,977
417,473
79,739
114,011
170,641
376,310
67,011
55,000
138,945
Total Interest Sensitive Liabilities
2,328,012
261,370
691,821
3,281,203
(Deficiency) excess of interest-rate sensitive assets over
interest-rate liabilities (“interest-rate sensitive gap”)
One-year interest-rate sensitive assets/interest-rate sensitive
liabilities
One-year interest-rate sensitive gap as a percent of total
assets
$ (44,539) $657,744
$(205,850) $ 407,355
98.09%
-1.02%
Includes commercial mortgage, construction, and residential mortgage loans
(1)
(2) Loan balances exclude nonaccruing loans, deferred fees and costs
The table shows a deficiency of interest-rate sensitive assets over interest-rate liabilities for “less than one
year” which reflects the early-stages of a program to deleverage our balance sheet by $125.0 million in MBS,
which began during the fourth quarter of 2012. As of December 31, 2012, we had completed only approximately
$55.0 million of the MBS reduction, with the remainder completed during the first quarter of 2013. We currently
have a preference towards a neutral to slightly asset sensitive one year gap position at this time.
Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest
income while a negative gap would adversely affect net interest income. Conversely, during a period of falling
rates, a positive gap would result in a decrease in net interest income while a negative gap would augment net
interest income. However, the interest-sensitivity table does not provide a comprehensive representation of the
impact of interest rate changes on net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates. Even assets and liabilities which
contractually reprice within the rate period may not, reprice at the same price, at the same time or with the same
frequency. It is also important to consider that the table represents a specific point in time. Variations can occur
as we adjust our interest-sensitivity position throughout the year.
To provide a more accurate position of our one-year gap, certain deposit classifications are based on the
interest-rate sensitive attributes and not on the contractual repricing characteristics of these deposits. For the
purpose of this analysis, we estimate, based on historical trends of our deposit accounts, that 75% of our money
market deposits, 50% of our interest-bearing demand deposits and 50% of our savings deposits are sensitive to
interest rate changes. Accordingly, these interest-sensitive portions are classified in the “Less than One Year”
category with the remainder in the “Over Five Years” category.
Deposit rates other than time deposit rates are variable. Changes in deposit rates are generally subject to
local market conditions and our discretion and are not indexed to any particular rate.
49
REVERSE MORTGAGES
We hold an investment in reverse mortgages of ($457,000) at December 31, 2012 representing a second-lien
participation in 14 reverse mortgages with a third party. These loans were originated in the early 1990s.
These reverse mortgage loans are contracts that require the lender to make monthly advances throughout
each borrower’s life or until each borrower relocates, prepays or the home is sold, at which time the loan
becomes due and payable. Reverse mortgages are nonrecourse obligations, which means that the loan repayments
are generally limited to the net sale proceeds of the borrower’s residence.
We account for our investment in reverse mortgages by estimating the value of the future cash flows on the
reverse mortgages at a rate deemed appropriate for these mortgages, based on the market rate for similar
collateral. Actual cash flows from these mortgage loans can result in volatility in the recorded value of reverse
mortgage assets. As a result, income varies significantly from reporting period to reporting period. For the year
ended December 31, 2012, we recorded a positive $12,000 in interest income on reverse mortgages as compared
to a negative $137,000 in 2011 and a negative $287,000 in 2010. The results for 2012 reflect an improvement in
housing prices during the year. The decrease in the prior two years were due to the drop in the property values
securing these mortgages, which were based on annual re-evaluation and are generally consistent with the
decrease in home values over the past three years.
The projected cash flows depend on assumptions about life expectancy of the mortgagees and the future
changes in collateral values. Projecting the changes in collateral values is one of the factors affecting the
volatility of reverse mortgage values. The current assumptions include a short-term annual depreciation rate of
zero in the first year, and a long-term annual appreciation rate of 0.5% in future years. If the long-term
appreciation rate was increased or decreased by 1%, the impact on income would not be material.
We also hold $12.6 million fair value in BBB+ rated MBS classified as trading securities. Further, we own
Class “O” Certificates issued in connection with securities consisting of a portfolio of reverse mortgages we
previously owned. As of December, 31 2012, the market value of these securities was $6.7million. Third-party
model uses the income approach as described in ASC 820-10-35-32. The model is a present value cash flow
model, consistent with ASC 820-10-55-5 which describes the components of a present value measurement. The
model incorporates the projected cash flows of the notes and then discounts these cash flows using a rate that is
commensurate with the risk adjusted rate. 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
sets out an exit price methodology for determining fair value.
NONPERFORMING ASSETS
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 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.
50
The following table shows our nonperforming assets and past due loans at the dates indicated:
At December 31,
(Dollars in Thousands)
Nonaccruing loans:
Commercial
Owner-occupied Commercial (1)
Commercial mortgages
Construction
Residential mortgages
Consumer
Total nonaccruing loans
Assets acquired through foreclosure
Restructured loans (2)
Total nonperforming assets
Past due loans:
Residential mortgages
Commercial and commercial mortgages
Consumer
Total past due loans
Ratio of nonaccruing loans to total loans (3)
Ratio of allowance for loan losses to gross loans (3)
Ratio of nonperforming assets to total assets
Ratio of loan loss allowance to nonaccruing loans
2012
2011
2010
2009
2008
$ 4,861
14,001
12,634
1,547
9,989
4,728
47,760
4,622
10,093
$23,080
—
15,814
22,124
9,057
1,018
71,093
11,695
8,887
$21,577
—
9,490
30,260
11,739
3,701
76,767
9,024
7,107
$ 9,463
—
1,021
44,680
9,959
818
65,941
8,945
7,274
$
986
—
5,748
16,595
4,753
352
28,434
4,471
2,855
$62,475
$91,675
$92,898
$82,160
$35,760
$
$
786
—
—
786
$
$
887
78
—
965
$
$
465
—
—
465
$ 1,221
105
97
$ 1,313
—
26
$ 1,423
$ 1,339
1.73% 2.58%
1.58
1.43
91.96
1.92
2.14
74.66
2.93%
2.30
2.35
78.60
2.61%
2.12
2.19
81.05
1.15%
1.26
1.04
109.69
(1) Prior to 2012, owner-occupied commercial loans were included in commercial loans.
(2) Accruing Loans only; Nonaccruing TDRs are included in their respective categories of nonaccruing loans.
(3) Total loans exclude loans held-for-sale.
Nonperforming assets decreased $29.2 million between December 31, 2011 and December 31, 2012. As a
result, nonperforming assets as a percentage of total assets decreased to 1.43% at December 31, 2012 from 2.14%
at December 31, 2011. This significant reduction was bolstered by the successful efforts of our Asset Strategies
during the second quarter of 2012. This strategy included a bulk loan sale which resulted in the sale of
$42.7 million of problem loans,
including $22.5 million of nonperforming loans. In addition, another
$10.9 million was collected or paid-down through additional note sales and ongoing asset management activities
during 2012. Lastly and partially offsetting these decreases, as the result of recent OCC guidance regarding
Chapter 7 bankruptcy loans during 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).
The following table provides an analysis of the change in the balance of nonperforming assets during the
last three years:
Year Ended December 31,
(In Thousands)
Beginning balance
Additions
Collections
Collections from loan dispositions
Transfers to accrual
Charge-offs/write-downs
Ending balance
2012
2011
2010
$ 91,675
73,170
(46,514)
(14,305)
(552)
(40,999)
$ 92,898
89,842
(40,695)
—
(8,474)
(41,896)
$ 82,160
89,876
(38,459)
—
(1,077)
(39,602)
$ 62,475
$ 91,675
$ 92,898
51
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.
At December 31, 2012, we did not have a material amount of loans which had not been classified as non-
accrual, 90 days past due or restructured but where known information about possible credit problems of
borrowers caused us to have serious concerns as to the ability of the borrowers to comply with present loan
repayment terms and may result in disclosure as non-accrual, 90 days past due or restructured.
As of December 31, 2012, we had $120.0 million of loans which, although performing at that date, required
increased supervision and review. They may, depending on the economic environment and other factors, become
nonperforming assets in future periods. The amount of such loans at December 31, 2011 was $133.7 million. The
majority of these loans are secured by commercial real estate, with others being secured by residential real estate,
inventory and receivables.
Allowance for Loan Losses. We maintain an allowance for loan losses and charge losses to this allowance
when such losses are realized. We established our loan loss allowance in accordance with guidance provided in
the Securities and Exchange Commission’s Staff Accounting Bulletin 102 (“SAB 102”). The determination of
the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to
specifically identified impaired loans as well as probable loan losses in the remaining loan portfolio. Our
evaluation is based upon a continuing review of these portfolios. For additional information regarding the
allowance for loan losses, see Note 5 to the Consolidated Financial Statements.
The allowance for loan losses of $43.9 million at December 31, 2012 decreased $9.2 million from
$53.1 million at December 31, 2011. In addition, the ratio of allowance to loan losses to total gross loans was
1.58% at December 31, 2012, compared to 1.92% at December 31, 2011. These decreases reflect the following
items:
• A decrease in problem loans (all criticized, classified and nonperforming loans)
• Total problem loans improved to 52.5% of Tier 1 capital plus the allowance for loan losses at
December 31, 2012, compared to 84.8% at December 31, 2011, reflecting:
•
•
•
Favorable risk-rating migration,
Problem asset disposition efforts, and
Prudent credit management.
• A higher level of charge-offs during 2012, including:
•
•
$16.4 million from charge-offs related to our Asset Strategies,
$1.3 million from charge-offs related to regulatory guidance during 2012 on loans discharged
under Chapter 7 bankruptcy, and
• The impact of additional asset disposition efforts taken throughout the year.
•
Improved credit metrics of the loan portfolio:
• Nonperforming assets decreased from $91.7 million at December 31, 2011 to $62.5 million at
December 31, 2012,
• Total loan delinquency decreased from $68.3 million, or 2.48% of total loans at December 31,
2011, to $45.0 million, or 1.62% of total loans at December 31, 2012, with performing loan
delinquency a very low 0.40% of total loans at December 31, 2012 compared to 0.61% of total
loans at December 31, 2011, and
52
• Our construction loan portfolio, a portfolio that experienced significant losses over the last several
years and typically has a higher loss content, has improved substantially:
• Nonperforming construction loans improved from $22.1 million at December 31, 2011 to
only $1.5 million at December 31, 2012 and
• Delinquent construction loans improved from $23.7 million at December 31, 2011 to only
$825,000 at December 31, 2012.
During 2012, net charge-offs were $41.2 million or 1.49%, of average loans (including $16.4 million related
to our Asset Strategies). This compares to net charge-offs for the year ended December 31, 2011 of $35.3 million
or 1.32% of average loans.
The table below represents a summary of changes in the allowance for loan losses during the periods
indicated:
Year Ended December 31,
(Dollars in Thousands)
Beginning balance
Provision for loan losses
Charge-offs:
Commercial Mortgage
Construction
Commercial
Owner-occupied Commercial (1)
Residential real estate
Consumer
Overdrafts
Total charge-offs (2)
Recoveries:
Commercial Mortgage
Construction
Commercial
Owner-occupied Commercial (1)
Residential real estate
Consumer
Overdrafts
Total recoveries
Net charge-offs
Ending balance
2012
2011
2010
2009
2008
$53,080
32,053
$60,339
27,996
$53,446
41,883
$31,189
47,811
$25,252
23,024
6,517
10,820
12,806
5,076
3,857
5,613
1,113
45,802
405
1,761
1,536
13
176
337
363
4,591
7,446
11,602
9,419
—
3,165
5,332
869
3,902
14,972
9,458
—
2,241
5,974
1,019
1,453
14,479
5,796
—
1,164
2,458
1,216
1,421
10,774
1,992
—
628
1,697
1,327
37,833
37,566
26,566
17,839
334
582
897
—
211
206
348
2,578
126
1,495
375
—
26
179
375
2,576
4
375
150
—
38
65
380
1,012
—
12
100
—
7
249
384
752
41,211
35,255
34,990
25,554
17,087
$43,922
$53,080
$60,339
$53,446
$31,189
Net charge-offs to average gross loans outstanding, net of
unearned income
1.49% 1.32%
1.39%
1.01%
0.74%
(1) Prior to 2012, owner-occupied loans were included in commercial loan balances.
(2) Total Charge-Offs for 2012 include $16.4 million related to our Asset Strategies completed during 2012.
The allowance for loan losses is allocated by major portfolio type. As these portfolios have seasoned, they
have become a source of historical data in projecting delinquencies and loss exposure. However, such allocations
are not a guarantee of when future losses may occur and/or the actual amount of losses. While we have allocated
the allowance for loan losses by portfolio type in the following table, the entire reserve is available for any loan
category to utilize. The allocation of the allowance for loan losses by portfolio type at the end of each of the last
53
five years, and the percentage of outstanding loans in each category to total gross outstanding at such dates
follow:
At December 31,
2012
2010
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
2008
2009
2011
(Dollars in Thousands)
Commercial mortgage
Construction
Commercial
Owner-Occupied
Commercial (1)
Residential real estate
Consumer
Complexity Risk
$ 8,079
6,456
13,663
22.6% $ 7,556
4.8% 4,074
25.5% 24,302
22.6% $10,564
3.8% 10,019
53.0% 26,556
23.8% $ 6,160
5.4% 10,922
47.2% 24,834
20.7% $ 7,353
9.2% 3,303
44.4% 12,510
6,108
3,124
5,631
27.8%
—
8.8% 6,544
10.5% 10,604
—
— %
—
10.0% 3,952
10.6% 9,248
—
— %
— %
—
11.8% 4,073
11.8% 7,457
—
— %
— %
—
13.8% 2,480
11.9% 5,543
—
— %
861 — %
22.6%
10.2%
38.1%
— %
17.1%
12.0%
— %
Total
$43,922 100.0% $53,080 100.0% $60,339 100.0% $53,446 100.0% $31,189 100.0%
(1) Prior to 2012, owner-occupied commercial loans were included in commercial loan balances
LIQUIDITY
We manage our liquidity risk and funding needs through our treasury function and our Asset/Liability
Committee. Historically, we have had success in growing our loan portfolio. For example, during the year ended
December 31, 2012, net loan growth resulted in the use of $110.6 million in cash. Loan growth was primarily the
result of our continued success increasing corporate and small business lending. We expect this trend to continue
and have significant experience managing our funding needs through borrowings and deposit growth.
As a financial institution, we have ready access to several sources of funding. Among these are:
• Core deposits
• Brokered deposits
• Borrowing from the FHLB
•
Federal Reserve Discount Window access
• Other borrowings such as repurchase agreements
• Cash flow from securities, loan sales and repayments
• Net income
Our branch expansion and renovation program over the last few years has been focused on expanding our
retail footprint in Delaware and the surrounding area and attracting new customers in part to provide additional
deposit growth. Customer deposit growth (deposits excluding brokered CDs) increased $256.8 million, or 9%,
from December 31, 2011 to December 31, 2012. All of this growth was in core deposit accounts and was
partially offset by a decrease in customer time and sweep accounts.
Our portfolio of high-quality liquid investments, primarily MBS and GSE securities also provide a source of
cash flow to meet current cash needs in addition to normal cash flows from paydowns in these securities. If
needed, portions of this portfolio, as well as portions of the loan portfolio, could be sold to provide cash to fund
new loans. In addition, during the year ended December 31, 2012, $85.9 million in cash was provided by
operating activities.
We have a policy that separately addresses liquidity, and we monitor our adherence to policy limits. As part
of the liquidity management process, we also monitor our available wholesale funding capacity. At December 31,
54
2012, we had $745.2 million in funding capacity at the Federal Home Loan Bank of Pittsburgh. During late 2012
we prepaid $125 million of FHLB advances with an average rate of 2.63%. Also, liquidity risk management is a
primary area of examination by the banking regulators.
We have not used, and have no intention of using, any significant off balance sheet financing arrangement
for liquidity management purposes. Our financial
instruments with off balance sheet risk are limited to
obligations to fund loans to customers pursuant to existing commitments, obligations of letters of credit and swap
guarantees. In addition, we have not had, and have no intention of having, any significant
transactions,
arrangements or other relationships with any unconsolidated, limited purpose entities that could materially affect
our liquidity or capital resources.
CAPITAL RESOURCES
Under guidelines issued by banking regulators, savings institutions such as the Bank must maintain
“tangible” capital equal to 1.5% of adjusted total assets, “core” capital equal to 4.0% of adjusted total assets,
“Tier 1” capital equal to 4.0% of risk weighted assets and “total” or “risk-based” capital (a combination of core
and “supplementary” capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital
requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on our financial statements. In light of the current
economic conditions, we hold a capital cushion well in excess of these limits.
The Federal Deposit Insurance Corporation Improvement 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 leverage and risk-based capital measures and
certain other factors. Depository institutions that are not classified as well-capitalized are subject to various
restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and
other operating activities.
At December 31, 2012, we were classified as well-capitalized, the highest regulatory defined level, and in
compliance with all regulatory capital requirements. Additional information concerning our regulatory capital
compliance is included in Note 9 to the Consolidated Financial Statements.
Since 1996, the Board of Directors has approved several stock repurchase programs to acquire common
stock outstanding. We did not acquire any shares in 2012 or 2011. At December 31, 2012, we held 9.6 million
shares of our common stock as treasury shares. At December 31, 2012, we had 506,000 shares remaining under
our current share repurchase authorization.
In 2009, under the U.S. Treasury’s Capital Purchase Plan (“CPP”), we issued and sold 52,625 shares of
senior preferred stock to the U.S. Treasury, having a liquidation amount equal
to $1,000 per share, or
$52.6 million, as well as a 10-year warrant to purchase 175,105 shares of common stock at an exercise price of
$45.08. In 2012, the Treasury held a public auction where it sold its entire preferred stock holding in us. In
September, 2012 we entered into an agreement with the U.S. Treasury pursuant to which we repurchased the
warrant for $1.8 million. Additional information concerning the CPP is included in Note 18 to the Consolidated
Financial Statements.
We completed a private placement to Peninsula Investment Partners, L.P. (Peninsula) in 2009, pursuant to
which we issued and sold 862,069 shares of common stock for a total purchase price of $25.0 million, and a
10-year warrant to purchase 129,310 shares of our common stock at an exercise price of $29.00 per share.
Additional information concerning the Peninsula transaction is included in Note 18 to the Consolidated Financial
Statements.
In August of 2010, we completed an underwritten public offering of 1,370,000 shares of common stock, and
raised $47.1 million, net of $2.9 million of costs.
55
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements that currently have, or are reasonably likely to have, a material
future effect on our financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS
At December 31, 2012, we had contractual obligations relating to operating leases, long-term debt, data
processing and credit obligations. These obligations are summarized below. See Notes 6, 8 and 13 to the
Consolidated Financial Statements for further discussion.
(In Thousands)
Operating lease obligations
Long-term debt obligations
Data processing contracts
Credit obligations
Total
Total
Less than
One Year
One to
Three Years
Three to
Five Years
Over
5 Years
$ 197,895
376,310
9,549
729,012
$
7,937
318,249
3,748
729,012
$15,283
58,061
5,064
—
$14,681
—
737
—
$159,994
—
—
—
$1,312,766
$1,058,946
$78,408
$15,418
$159,994
IMPACT OF INFLATION AND CHANGING PRICES
Our Consolidated Financial Statements have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical dollars without consideration of the
changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected
in the increased costs of our operations. Unlike most industrial companies, nearly all of our assets and liabilities
are monetary. As a result, interest rates have a greater impact on our performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same direction or the same extent as the price of
goods and services.
RECENT LEGISLATION
In 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, a timeframe and preliminary implementation plan for the phase out of the
Office of Thrift Supervision (“the OTS”), one of our current banking regulators was announced by the
joint agencies, and its merger into the Office of the Comptroller of the Currency. The provisions of the
plan included a transition from the Thrift Financial Report, to the Call Report, and began with the
March 2012 reporting period.
56
• 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 and were payable at the end of September. 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
if the issuer implements certain fraud-prevention standards. This rule affects banks with
cent
$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.
On June 7, 2012, the Federal Reserve approved proposed rules that would substantially amend the
regulatory risk-based capital rules applicable to the Company and the Bank. The FDIC and the OCC
subsequently approved these proposed rules on June 12, 2012. The proposed rules implement the “Basel III”
regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative
documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in
December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank
capital, leverage and liquidity requirements. The proposed rules received extensive comments during a comment
period that ran through October 2012. In November 2012, the federal bank regulatory agencies jointly stated that
they do not expect any of the proposed rules to become effective on the original target date of January 1, 2013.
Further guidance from the bank regulatory agencies is expected in early 2013.
The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013
to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The
proposed new minimum capital level requirements applicable to the Company and the Bank under the proposals
would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from
4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all
institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new
regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and
would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1
capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement
would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that
amount each year until fully implemented in January 2019. An institution would be subject to limitations on
paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below
the buffer amount. These limitations would establish a maximum percentage of eligible retained income that
could be utilized for such actions.
Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of
up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of
excessive credit growth. However, the proposed rules permit the countercyclical buffer to be applied only to
“advanced approach banks” ( i.e. , banks with $250 billion or more in total assets or $10 billion or more in total
foreign exposures), which currently excludes the Company and the Bank. The proposed rules also implement
revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital,
including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify
as Tier 1 capital, some of which would be phased out over time.
57
The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework,
which is designed to place restrictions on insured depository institutions, including the Bank, if their capital
levels begin to show signs of weakness. These revisions would take effect January 1, 2015. Under the prompt
corrective action requirements, which are designed to complement the capital conservation buffer, insured
depository institutions would be required to meet the following increased capital level requirements in order to
qualify as “well capitalized:” (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of
8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1
leverage ratio of 5% (increased from 4%).
The proposed rules set forth certain changes for the calculation of risk-weighted assets, which we would be
required to utilize beginning January 1, 2015. The standardized approach proposed rule utilizes an increased
number of credit risk exposure categories and risk weights, and also addresses: (i) a proposed alternative standard
of creditworthiness consistent with Section 939A of the Dodd-Frank Act Act; (ii) revisions to recognition of
credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital
treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking
organizations with $50 billion or more in total assets that are not subject to the “advance approach rules” that
apply to banks with greater than $250 billion in consolidated assets.
Based on our current capital composition and levels, we believe that we would be in compliance with the
requirements as set forth in the proposed rules if they were presently in effect.
On December 31, 2012, unlimited FDIC insurance on certain noninterest-bearing transaction accounts under
the Transaction Account Guarantee program expired. Under this program, prior to its expiration, all funds in a
noninterest-bearing transaction account were insured in full by the FDIC from December 31, 2010, through
December 31, 2012. This temporary unlimited coverage was in addition to, and separate from, the coverage of at
least $250,000 available to depositors under the FDIC’s general deposit insurance rules.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of operations are based on the
Consolidated Financial Statements, which are prepared in conformity with GAAP. The preparation of these
Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts
of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including
those related to the allowance for loan losses, deferred taxes, fair value measurements, goodwill and other
intangible assets. We base our estimates on historical experience and various other factors and assumptions that
are believed to be reasonable under the circumstances. These form the basis for making judgments on the
carrying value of assets and liabilities that are not readily apparent from other sources. 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. For
additional information on these policies, see Note 1 to the Consolidated Financial Statements.
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.
58
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 was required as of December 31, 2012.
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 14, Fair Value of Financial Assets to our Consolidated Financial Statements.
Goodwill and Other Intangible Assets
Intangible assets resulting from acquisitions under the purchase method of accounting consist of goodwill
and other intangible assets. Goodwill is not amortized and is subject to at least annual assessments for
impairment by applying a fair value based test. We review goodwill annually and again at any quarter-end if a
material event occurs during the quarter that may affect goodwill. This review evaluates potential impairment by
determining if our fair value has fallen below carrying value.
Other intangible assets consist mainly of core deposits and covenants not to compete obtained through
acquisitions and are amortized over their estimated lives using the present value of the benefit of the core
deposits and straight-line methods of amortization. Core deposit intangibles are evaluated for impairment when
events or changes in circumstances indicate that the carrying amount may not be recoverable.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
59
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. We chose to adopt the two separate consecutive
statements presentation, which did not have a material effect on our Consolidated Financial Statements.
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. For the year ended
December 31, 2012, we completed a full analysis of our goodwill for impairment; therefore 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.
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 prepares 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.
In January 2013, the FASB issued an update (“ASU 2013-01, Balance Sheet (Topic 210): Clarifying the
Scope of Disclosures about Offsetting Assets and Liabilities”). The ASU amends Update 2011-11 to clarify that
the scope applies to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and
lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject
to master netting or similar arrangements. Other types of financial assets and liabilities subject to master netting
60
or similar arrangements are not subject to the disclosure requirements in Update 2011-11. The amendments are
effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods.
We are evaluating the impact of ASU 2013-01; however, we do not expect the adoption of this guidance to have
a material impact on our financial statements.
In January 2013,
the FASB issued an update (“ASU 2013-02, Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”). The ASU requires an
entity to provide information about the amounts reclassified out of accumulated other comprehensive income by
component. In addition, an entity is required to present, either on the face of the statement where net income is
presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the
respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be
reclassified to net
income in its entirety in the same reporting period. The amendments are effective
prospectively for reporting periods beginning after December 15, 2012. We are evaluating the impact of
ASU 2013-01; however, we do not expect the adoption of this guidance to have a material impact on our
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 our acceptable tolerance ranges. At December 31, 2012 interest-earning liabilities exceeded
interest-bearing assets that mature or reprice within one year (interest-sensitive gap) by approximately
$45 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within one-year
decreased from 102.8% at December 31, 2011 to 98.1% at December 31, 2012. Likewise, the one-year interest-
sensitive gap as a percentage of total assets changed to -1.02% at December 31, 2012 from 1.54% at
December 31, 2011. The change in sensitivity since December 31, 2011 was the result of the current interest rate
environment and our continuing effort 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. The following table is the estimated impact of immediate
changes in interest rates on our net interest margin and economic value of equity at the specified levels at
December 31, 2012 and December 31, 2011.
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)
December 31, 2012
December 31, 2011
300
200
100
—
-100
-200 (3)
-300 (3)
4%
1%
-3%
— %
-1%
NMF
NMF
12.49%
12.62%
12.54%
12.31%
11.56%
NMF
NMF
6%
3%
-2%
— %
1%
NMF
NMF
11.17%
11.30%
11.21%
10.97%
10.19%
NMF
NMF
(1) The percentage difference between net interest income 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 projected under the various rate
change environments.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points is deemed not meaningful (NMF) given the low absolute level of interest
rates at that time.
61
Our primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest
rates on net interest income and capital, while maximizing the yield/cost spread on our asset/liability structure.
We rely primarily on our asset/liability structure to control interest rate risk.
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.
62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
WSFS Financial Corporation:
We have audited the accompanying consolidated statements of condition of WSFS Financial Corporation
and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2012. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of WSFS Financial Corporation and subsidiaries as of December 31, 2012 and 2011, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), WSFS Financial Corporation’s internal control over financial reporting as of December 31, 2012,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 18, 2013 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 18, 2013
63
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
(Dollars in Thousands, Except Per Share Data)
Interest Income
Interest and fees on loans
Interest on mortgage-backed securities
Interest and dividends on investment securities
Interest on reverse mortgages
Other interest income
Interest Expense
Interest on deposits
Interest on Federal Home Loan Bank advances
Interest on federal funds purchased and securities sold under agreements to repurchase
Interest on trust preferred borrowings
Interest on senior debt
Interest on other borrowings
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Credit/debit card and ATM income
Securities gains, net
Deposit service charges
Wealth management income
Mortgage banking activities, net
Loan fee income
Bank-owned life insurance income
Other income
Noninterest Expense
Salaries, benefits and other compensation
Occupancy expense
Equipment expense
Loan workout and OREO expense
FDIC expenses
Data processing and operations expense
Professional fees
Debt extinguishment
Marketing expense
Acquisition costs
Other operating expense
Income before taxes
Income tax provision
Net income
Dividends on preferred stock and accretion of discount
Net income allocable to common stockholders
Basic
Diluted
2012
2011
2010
$130,526
19,191
498
12
60
150,287
$130,922
27,158
683
(137)
16
158,642
$126,347
35,212
1,125
(287)
6
162,403
13,101
6,252
757
1,480
1,296
402
23,288
126,999
32,053
94,946
22,935
21,425
17,133
13,310
2,846
2,340
1,544
5,160
86,693
66,047
13,081
7,163
6,855
5,658
5,581
4,109
3,662
2,656
—
18,533
133,345
19,131
9,972
1,197
1,375
—
930
32,605
126,037
27,996
98,041
21,026
4,878
16,371
11,881
1,524
2,460
2,035
3,413
63,588
59,823
12,054
6,915
8,896
5,949
5,340
5,829
—
4,302
780
17,589
127,477
23,097
14,752
1,514
1,390
—
979
41,732
120,671
41,883
78,788
18,947
1,031
16,239
4,761
2,256
3,042
732
3,107
50,115
49,790
9,748
6,422
6,544
7,016
4,588
5,460
—
3,193
1,677
14,894
109,332
48,294
16,983
31,311
2,770
$ 28,541
34,152
11,475
22,677
2,770
$ 19,907
19,571
5,454
14,117
2,770
$ 11,347
$
$
3.28
3.25
$
$
2.31
2.28
$
$
1.48
1.46
The accompanying notes are an integral part of these Consolidated Financial Statements.
64
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In Thousands)
Net Income
Other comprehensive income:
Unrealized gains on securities available for sale
Tax expense
Net of tax amount
Reclassification adjustment for gains included in net income
Tax benefit
Net of tax amount
Actuarial loss reclassified to periodic cost
Tax benefit
Net of tax amount
Transition obligation reclassified to periodic cost
Tax expense
Net of tax amount
Total other comprehensive income
Total comprehensive income
2012
2011
2010
$ 31,311
$22,677
$14,117
24,114
(9,090)
12,373
(4,671)
15,071
(5,727)
15,024
7,702
9,344
(21,425)
8,142
(4,878)
1,854
(1,261)
479
(13,283)
(3,024)
—
—
—
—
—
—
—
—
—
—
—
—
(782)
(349)
295
(54)
61
(23)
38
1,741
4,678
8,546
$ 33,052
$27,355
$22,663
The accompanying notes are an integral part of these Consolidated Financial Statements.
65
CONSOLIDATED STATEMENT OF CONDITION
Year Ended December 31,
(Dollars in Thousands, Except Per Share Data)
Assets
Cash and due from banks
Cash in non-owned ATMs
Interest-bearing deposits in other banks
Total cash and cash equivalents
Investment securities, available-for-sale
Investment securities, trading
Loans held-for-sale
Loans, net of allowance for loan losses of $43,922 at December 31, 2012 and $53,080 at
December 31, 2011
Bank-owned life insurance
Stock in Federal Home Loan Bank of Pittsburgh, at cost
Assets acquired through foreclosure
Accrued interest receivable
Premises and equipment
Goodwill
Intangible assets
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand
Interest-bearing demand
Money market
Savings
Time
Jumbo certificates of deposit
Total customer deposits
Brokered deposits
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Federal Home Loan Bank advances
Trust preferred borrowings
Senior debt
Other borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 52,625 at December 31,
2012 and December 31, 2011
Common stock $.01 par value, 20,000,000 shares authorized; issued 18,354,055 at December 31,
2012 and 18,258,714 at December 31, 2011
Capital in excess of par value
Accumulated other comprehensive income
Retained earnings
Treasury stock at cost, 9,580,569 shares at December 31, 2012 and December 31, 2011
Total stockholders’ equity
Total liabilities and stockholders’ equity
2012
2011
$
93,629
406,627
631
500,887
907,498
12,590
12,758
$
70,889
397,119
9
468,017
859,362
12,432
10,185
2,723,916
62,915
31,165
4,622
9,652
38,257
28,146
5,174
37,568
2,702,589
63,392
35,756
11,695
11,743
35,964
28,146
6,139
43,588
$4,375,148
$4,289,008
$ 631,026
538,195
933,901
389,977
316,986
294,237
$ 525,444
389,495
805,570
368,390
412,027
346,568
3,104,322
170,641
3,274,963
110,000
376,310
67,011
55,000
28,945
1,099
40,766
2,847,494
287,810
3,135,304
50,000
538,682
67,011
—
67,927
1,910
36,041
3,954,094
3,896,875
1
1
184
222,978
12,943
433,228
(248,280)
182
220,163
11,202
408,865
(248,280)
421,054
392,133
$4,375,148
$4,289,008
The accompanying notes are an integral part of these Consolidated Financial Statements.
66
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Preferred
Stock
Common
Stock
Capital in
Excess of
Par Value
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Treasury
Stock
(In Thousands)
Balance, December 31, 2009
Net income
Other comprehensive income
Cash dividend, $0.48 per share
Issuance of common stock,
including proceeds from
exercise of common stock
options
Stock-based compensation
expense
Issuance of restricted stock
Tax benefit from exercises of
common stock options (1)
Preferred stock cash dividends
Preferred stock discount accretion
Balance, December 31, 2010
Net income
Other comprehensive income
Cash dividend, $0.48 per share
Issuance of common stock,
including proceeds from
exercise of common stock
options
Stock-based compensation
expense
Issuance of restricted stock
Tax benefit from exercises of
common stock options (1)
Preferred stock cash dividends
Preferred stock discount accretion
Balance, December 31, 2011
Net income
Other comprehensive income
Cash dividend, $0.48 per share
Issuance of common stock
including proceeds from
exercise of common stock
options (1)
Stock-based compensation
expense
Tax benefit from exercises of
common stock options
Preferred stock cash dividends
Preferred stock discount
accretion
Repurchase of warrant
$ 1
—
—
—
—
—
—
—
—
—
$ 1
—
—
—
—
—
—
—
—
—
$ 1
—
—
—
—
—
—
—
—
—
$166
—
—
—
$166,627
—
—
—
$ (2,022)
—
8,546
—
$385,308
14,117
—
(3,575)
14
48,749
—
—
—
—
—
—
$ 6,524
—
4,678
—
—
—
—
—
—
—
$11,202
—
1,741
—
269
192
341
—
138
$216,316
—
—
—
1,122
1,343
470
776
—
136
$220,163
—
—
—
2,501
1,577
399
—
138
(1,800)
—
—
—
—
—
—
—
—
—
—
—
$180
—
—
—
2
—
—
—
—
—
$182
—
—
—
2
—
—
—
—
—
—
—
—
—
(2,631)
(138)
$393,081
22,677
—
(4,126)
—
—
—
—
(2,631)
(136)
$408,865
31,311
—
(4,179)
—
—
—
(2,631)
(138)
—
Total
Stockholders’
Equity
$301,800
14,117
8,546
(3,575)
48,763
269
192
341
(2,631)
—
$367,822
22,677
4,678
(4,126)
1,124
1,343
470
776
(2,631)
—
$392,133
31,311
1,741
(4,179)
2,503
1,577
399
(2,631)
—
(1,800)
$(248,280)
—
—
—
—
—
—
—
—
—
$(248,280)
—
—
—
—
—
—
—
—
—
$(248,280)
—
—
—
—
—
—
—
—
—
Balance, December 31, 2012
$
1
$184
$222,978
$12,943
$433,228
$(248,280)
$421,054
(1) Net of deferred tax adjustments for expired options
The accompanying notes are an integral part of these Consolidated Financial Statements.
67
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2012
2011
2010
(In Thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses
Depreciation of premises and equipment
Amortization, net
Decrease in accrued interest receivable
Decrease (increase) in other assets
Origination of loans held-for-sale
Proceeds from sales of loans held-for-sale
Gain on mortgage banking activity, net
Gain on mark to market adjustment on trading securities
Gain on sale of securities, net
Stock-based compensation expense
Excess tax benefits from share based payment arrangements
Decrease in accrued interest payable
Increase in other liabilities
Loss on sale of premises and equipment
Loss on sale of assets acquired through foreclosure and valuation
adjustments, net
Decrease in value of bank-owned life insurance
Deferred income tax (benefit) expense
(Increase) decrease in capitalized interest, net
Net cash provided by operating activities
Investing activities:
Maturities and calls of investment securities
Sales of investment securities available for sale
Purchases of investment securities available for sale
Repayments of investment securities available for sale
Repayments on reverse mortgages
Disbursements for reverse mortgages
Proceeds from loan disposition
Purchase of Christiana Bank and Trust, net cash received
Net increase in loans
Payments from bank-owned life insurance
Net decrease in stock of Federal Home Loan Bank of Pittsburgh
Sales of assets acquired through foreclosure, net
Proceeds from the sale of premises and equipment
Investment in premises and equipment
$ 31,311
$ 22,677
$ 14,117
32,053
5,139
12,261
2,091
2,491
(190,961)
222,369
(2,846)
(125)
(21,300)
1,976
(399)
(811)
4,763
—
3,701
(1,544)
3,591
(728)
27,996
5,015
6,123
22
(3,076)
(97,883)
104,133
(1,524)
—
(4,878)
1,810
(776)
(1,407)
13,152
115
4,049
(2,035)
2,978
(143)
41,883
4,979
1,685
959
2,996
(138,624)
134,560
(2,257)
(249)
(782)
796
(341)
(1,038)
2,150
—
3,766
(732)
(2,183)
287
103,032
76,348
61,972
9,039
769,982
(941,376)
131,212
—
(189)
—
—
(96,435)
2,021
4,591
14,016
—
(8,111)
11,943
335,959
(621,138)
175,691
264
(441)
—
—
(189,701)
2,886
1,780
11,611
824
(10,494)
12,380
154,644
(393,175)
204,414
62
(193)
3,775
40,332
(43,062)
—
1,965
8,887
—
(5,732)
Net cash used for investing activities
(115,250)
(280,816)
(15,703)
(continued on next page)
68
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year Ended December 31,
2012
2011
2010
(In Thousands)
Financing Activities:
Net increase in demand and savings deposits
Net (decrease) increase in time deposits
(Decrease) increase in brokered deposits
Increase in Loan payable
Receipts from federal funds purchased and securities sold
under agreement to repurchase
Repayments of federal funds purchased and securities sold
under agreement to repurchase
Receipts from FHLB advances
Repayments of FHLB advances
Repayment of unsecured debt
Issuance of Senior Debt
Dividends paid
Issuance of common stock and exercise of common stock options
Repurchase of common stock warrants
Excess tax benefits from share-based payment arrangements
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosure of Cash Flow Information:
Cash paid in interest during the year
Cash paid for income taxes, net
Loans transferred to assets acquired through foreclosure
Loans transferred from portfolio to held-for-sale
Net change in accumulated other comprehensive income
Fair value of assets acquired, net of cash received
Fair value of liabilities assumed
Settlement of pending sale of premises and equipment
Non-cash goodwill adjustments, net
$
$
393,493
(147,372)
(117,361)
1,727
$
285,398
(23,381)
38,804
—
169,381
20,336
(99,689)
—
19,027,675
13,350,000
18,470,000
(18,967,675)
39,981,624
(40,143,996)
(30,000)
52,681
(6,810)
2,503
(1,800)
399
45,088
32,870
468,017
(13,400,000)
14,046,295
(13,996,572)
(18,470,000)
25,128,164
(25,252,349)
—
—
(6,718)
1,124
—
776
295,726
91,258
376,759
—
—
(6,206)
48,763
—
341
8,741
55,010
321,749
500,887
$
468,017
$
376,759
$
24,099
13,806
9,953
31,987
1,741
—
—
—
—
$
34,012
3,150
18,331
—
4,678
—
—
—
1,401
42,655
10,520
12,732
—
8,546
121,735
177,942
6,515
—
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation (“the Company,” “our Company,” “WSFS”, “we,” “our” or “us”) is a savings
and loan holding company organized under the laws of the State of Delaware. Our principal wholly-owned
subsidiary, Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”), is a federal savings bank
organized under the laws of the United States which, at December 31, 2012, served customers from our
51 offices located in Delaware (42), Pennsylvania (7), Virginia (1), and Nevada (1).
In preparing the Consolidated Financial Statements, we are required to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. Although our estimates contemplate
current conditions and how we expect them to change in the future, it is reasonably possible that, in 2013, actual
conditions could be worse than anticipated in those estimates, which could materially affect our results of
operations and financial condition. Amounts subject to significant estimates are items such as the allowance for
loan losses and lending-related commitments, goodwill and intangible assets, post-retirement obligations, the fair
income taxes and other-than-temporary
value of financial
impairments. Among other effects, such changes could result in future impairments of investment securities,
goodwill and intangible assets and establishment of allowances for loan losses and lending-related commitments
as well as increased post-retirement expense.
in reverse mortgage,
instruments,
investment
Basis of Presentation
The Consolidated Financial Statements include the accounts of the parent company and its wholly owned
subsidiaries, WSFS Bank and Montchanin Capital Management, Inc (“Montchanin”).
WSFS Bank has two wholly-owned subsidiaries, including WSFS Investment Group, Inc. (“WIG”) and
Monarch Entity Services LLC (“Monarch”). WIG markets various third-party insurance and securities products
to Bank customers through the Bank’s retail banking system. Monarch provides commercial domicile services
which include employees, directors, subleases and registered agent services in Delaware and Nevada.
Montchanin was formed to provide asset management products and services. Montchanin has one wholly
owned subsidiary, Cypress Capital Management, LLC (“Cypress”). Cypress is a Wilmington-based investment
advisory firm servicing high net worth individuals and institutions and has approximately $597 million in assets
under management at December 31, 2012.
WSFS Capital Trust III (“the Trust”) is our unconsolidated subsidiary, and was formed in 2005 to issue
$67.0 million aggregate principal amount of Pooled Floating Rate Capital Securities. The proceeds from this
issue were used to fund the redemption of $51.5 million of Floating Rate WSFS Capital Trust I Preferred
Securities (formerly, WSFS Capital Trust I). WSFS Capital Trust I invested all of the proceeds from the sale of
the Pooled Floating Rate Capital Securities in our Junior Subordinated Debentures.
Whenever necessary, reclassifications have been made to the prior years’ Consolidated Financial Statements
to conform to the current year’s presentation. All significant intercompany transactions were eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, cash in non-owned ATMs,
amounts due from banks, federal funds sold and securities purchased under agreements to resell.
70
Debt and Equity Securities
Investments in equity securities that have a readily determinable fair value and investments in debt
securities are classified into three categories and accounted for as follows:
• Debt securities with the positive intention to hold to maturity are classified as “held-to-maturity” and
reported at amortized cost.
• Debt and equity securities purchased with the intention of selling them in the near future are classified
as “trading securities” and reported at fair value, with unrealized gains and losses included in earnings.
• Debt and equity securities not classified in either of the above are classified as “available-for-sale
securities” and reported at fair value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders’ equity.
Debt and equity securities include mortgage-backed securities, municipal bonds, U.S. Government and
agency securities and certain equity securities. Premiums and discounts on debt and equity securities, held-to-
maturity and available-for-sale, are recognized in interest income using a level yield method over the period to
expected maturity. The fair value of debt and equity securities is primarily obtained from third-party pricing
services. Implicit in the valuation are estimated prepayments based on historical and current market conditions.
When we conclude an investment security is other-than-temporarily impaired (“OTTI”), a loss for the
difference between the investment security’s carrying value and its fair value may be recognized as a reduction to
non-interest income in the consolidated statement of operations. For an investment in a debt security, if we do not
intend to sell the investment security and conclude that it is not more likely than not we will be required to sell
the security before recovering the carrying value, which may be maturity, the OTTI charge is separated into
“credit” and “other” components. The “other” component of the OTTI is included in other comprehensive
income/loss, net of the tax effect, and the “credit” component of the OTTI is included as a reduction to non-
interest income in the consolidated statement of operations. We are required to use our judgment to determine
impairment in certain circumstances. The specific identification method is used to determine realized gains and
losses on sales of investment and mortgage-backed securities. All sales are made without recourse.
Investment in Reverse Mortgages
We account for our investment in reverse mortgages in accordance with the instructions provided by the
staff of the Securities and Exchange Commission (“SEC”) entitled “Accounting for Pools of Uninsured
Residential Reverse Mortgage Contracts,” which requires grouping the individual reverse mortgages into “pools”
and recognizing income based on the estimated effective yield of the pool. In computing the effective yield, we
must project the cash inflows and outflows of the pool including actuarial projections of the life expectancy of
the individual contract holder and changes in the collateral value of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of reverse mortgages. The effective
yield of each pool is recomputed and income is adjusted to reflect the revised rate of return. Because of this
highly specialized accounting, the recorded value of reverse mortgage assets can result in significant volatility
associated with estimations. As a result, income recognition can vary significantly from reporting period to
reporting period.
For additional detail regarding reverse mortgages, see Note 3 to the Consolidated Financial Statements.
Loans
Loans are stated net of deferred fees and costs. Interest income on loans is recognized using the level yield
method. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized
over the life of the related loans using a level yield method over the period to maturity.
71
A loan is impaired when, based on current information and events, it is probable we will be unable to collect
all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected future discounted cash flows, the market price of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. In addition, all loans restructured in a troubled debt
restructuring are considered to be impaired. Impaired loans include loans within our commercial, commercial
mortgage, commercial construction, residential mortgages and consumer portfolios. Our policy for recognition of
interest income on impaired loans is the same as for nonaccrual loans discussed below.
Past Due and Nonaccrual Loans
A loan is considered to be past due on the day after a principal or interest payment is due. Nonaccrual loans
are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in
our opinion, collection is doubtful, or when principal or interest is contractually past due 90 days or more.
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 or recorded as interest
income, depending on our assessment of the ultimate collectability of the loan. Loans are returned to an accrual
status when the borrower’s ability to make periodic principal and interest payments has returned to normal (i.e.
consistent repayment record, generally six consecutive payments, has been demonstrated) and the paying
capacity of the borrower or the underlying collateral is deemed sufficient to cover principal and interest in
accordance with our previously established loan-to-value policies.
Allowances for Loan Losses
We maintain allowances for loan losses and charge losses to these allowances when such losses are realized.
The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of
impairment related to specifically identified loans as well as probable loan losses in the remaining loan portfolio.
Our evaluation is based upon a continuing review of these portfolios.
We have established the loan loss allowance in accordance with guidance provided by the SEC’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 impaired loans, allowances for pools of
homogeneous loans, adjustments for qualitative and environmental factors and allowances for model estimation
and complexity risk. Impairment of troubled debt restructurings are measured at the present value of estimated
future cash flows using the loan’s effective rate at inception or the fair value of the underlying collateral if the
loan is collateral dependent. Troubled debt restructures consist of concessions granted to borrowers facing
financial difficulty.
For additional detail regarding the provision for loan losses, see Note 5 to the Consolidated Financial
Statements.
Assets Held-for-Sale
Assets held-for-sale includes loans held-for-sale and are carried at the lower of cost or fair value in the
aggregate or, in some cases, individual assets.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the recorded investment in the loans or
their fair value less estimated disposal costs. Costs subsequently incurred to improve the assets are included in
the carrying value provided that the resultant carrying value does not exceed fair value less estimated disposal
costs. Costs relating to holding or disposing of the assets are charged to expense in the current period. We write-
72
down the value of the assets when declines in fair value below the carrying value are identified. Loan workout
and OREO expenses include costs of holding and operating the assets, net gains or losses on sales of the assets
and provisions for losses to reduce such assets to fair value less estimated disposal costs. During 2012, we
recorded $4.3 million in additional charges (including write-downs and net losses on sales of assets) related to
assets acquired through foreclosure (REO). These charges were $5.9 million and $3.8 million for the years ended
December 31, 2011 and 2010, respectively.
Premises and Equipment
Premises and equipment is stated at cost less accumulated depreciation and amortization. Costs of major
replacements, improvements and additions are capitalized. Depreciation expense is computed on a straight-line
basis over the estimated useful lives of the assets or, for leasehold improvements, over the effective life of the
related lease if less than the estimated useful life. In general, computer equipment, furniture and equipment and
building renovations are depreciated over three, five and ten years, respectively.
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 17 to the
Consolidated Financial Statements.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
We enter into sales of securities under agreements to repurchase. Securities sold under agreements to
repurchase are treated as financings, with the obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements are assets. Generally, federal
funds are purchased for periods ranging up to 90 days.
Loss Contingency for Standby Letters of Credit
We maintain a loss contingency for standby letters of credit and charge losses to this contingency when such
losses are realized. The determination of the loss contingency for standby letters of credit requires significant
judgment reflecting management’s best estimate of probable losses related to standby letters of credit.
Loss Contingency for Unfunded Commitments
We maintain a loss contingency for unfunded commitments. The determination of the loss contingency for
unfunded commitments requires significant judgment reflecting managements best estimate of probable losses
related to unfunded commitments.
Income Taxes
The provision for income taxes includes federal, state and local income taxes currently payable and those
deferred because of temporary differences between the financial statement basis and tax basis of assets and
liabilities.
We account for income taxes in accordance with Financial Accounting Standard Board (“FASB”)
Accounting Standards Codification (“ASC”) 740, Income Taxes. ASC 740 prescribes a recognition threshold
73
and a measurement attribute for the financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. Benefits from tax positions are recognized in the financial statements only
when it is more-likely-than-not that the tax position will be sustained upon examination by the appropriate taxing
authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-
than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not
recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is
met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are
derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740
also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share:
Numerator:
Net income allocable to common shareholders
Denominator:
Denominator for basic earnings per share — weighted
average shares
Effect of dilutive employee stock options, restricted stock
and warrants
Denominator for diluted earnings per share — adjusted
2012
2011
2010
(In Thousands, Except Per Share Data)
$28,541
$19,907
$11,347
8,712
8,606
7,655
78
111
131
weighted average shares and assumed exercise
8,790
8,717
7,786
Earnings per share:
Basic:
Net income allocable to common shareholders
Diluted:
Net income allocable to common shareholders
Outstanding common stock equivalents having no
dilutive effect
$
$
3.28
$
2.31
$
1.48
3.25
$
2.28
$
1.46
276
534
602
74
2. INVESTMENT SECURITIES
The following table details the amortized cost and the estimated fair value of the Company’s investment
securities available-for-sale (which includes reverse mortgages):
Available-for-sale securities:
December 31, 2012:
Reverse mortgages
U.S. Government and government sponsored enterprises
(“GSE”)
State and political subdivisions
Collateralized Mortgage Obligation (“CMO”)(1)
Federal National Mortgage Association (“FNMA”) Mortgage-
Backed Securities (“MBS”)
Federal Home Loan Mortgage Corporation MBS (“FHLMC”)
Government National Mortgage Association MBS (“GNMA”)
December 31, 2011:
Reverse mortgages
GSE
State and political subdivisions
CMO(1)
FNMA
FHLMC
GNMA
Trading securities:
December 31, 2012
CMO
December 31, 2011
CMO
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In Thousands)
$
(457) $ — $ — $
(457)
46,726
3,120
251,848
396,910
58,596
129,288
266
89
7,849
9,588
1,171
3,221
(2)
—
(301)
(243)
(117)
(54)
46,990
3,209
259,396
406,255
59,650
132,455
$886,031
$22,184
$ (717) $907,498
$
(646) $ — $ — $
38,776
4,159
323,980
320,019
93,305
60,991
262
39
6,933
9,379
1,781
3,033
(13)
(8)
(2,527)
(44)
—
(57)
(646)
39,025
4,190
328,386
329,354
95,086
63,967
$840,584
$21,427
$(2,649) $859,362
$ 12,590
$ — $ — $ 12,590
$ 12,432
$ — $ — $ 12,432
(1)
Includes agency CMO and SASCO 2002 RM-1 Class O securities classified as available-for-sale.
At December 31, 2012, unrealized gains (net of unrealized losses) totaled $21.5 million compared to
$18.8 million at December 31, 2011, despite the recognition of $21.3 million in net securities gains during 2012.
75
The scheduled maturities of
December 31, 2011 were as follows:
investment
securities available-for-sale at December 31, 2012 and
2012
Within one year (1)
After one year but within five years
After five years but within ten years
After ten years
2011
Within one year (1)
After one year but within five years
After five years but within ten years
After ten years
Available-for Sale
Amortized
Cost
Fair
Value
(In Thousands)
$ 18,544
28,855
321,103
517,529
$ 18,658
29,034
329,580
530,226
$886,031
$907,498
$
7,916
32,225
129,597
670,846
$
7,966
32,465
135,649
683,282
$840,584
$859,362
(1) Reverse mortgages do not have contractual maturities. We have included reverse mortgages in maturities within one year.
The portfolio of available-for-sale MBS includes 156 securities with an amortized cost of $836.6 million
comprised of all GSE securities. All securities were AAA-rated at the time of purchase. All securities were re-
evaluated for OTTI at December 31, 2012. The result of this evaluation showed no OTTI for 2012. The weighted
average duration of the MBS portfolio was 5.0 years at December 31, 2012, and 3.6 years at December 31, 2011.
MBS have expected maturities that differ from their contractual maturities. These differences arise because
borrowers may have the right to call or prepay obligations with or without a prepayment penalty.
At December 31, 2012, investment securities with market values aggregating $486.9 million were pledged
as collateral for retail customer repurchase agreements, municipal deposits, and other obligations. From time to
time, investment securities are also pledged as collateral for FHLB borrowings. There were no FHLB pledged
investment securities at December 31, 2012.
During 2012, we sold $770.0 million of investment securities categorized as available-for-sale for net gains
of $21.3 million. In 2011, proceeds from the sale of investment securities available-for-sale were $335.9 million
and resulted in net gains of $4.9 million. A portion of these sales during 2012 were the result of the completion
of the Asset Strategies undertaken during the second quarter and were mainly due to maintaining the capital and
earnings neutrality of these efforts. Another portion of these gains were the result of a program to deleverage our
balance sheet by $125.0 million of MBS. The remaining sales were completed as part of our ongoing portfolio
management aimed at minimizing credit risk and decreasing prepayment/premium risk due to faster prepayments
caused by declining mortgage interest rates in this historically-low rate environment. The cost basis of all
investment securities sales are based on the specific identification method.
As of December 31, 2012, our investment securities portfolio had remaining unamortized premiums of
$23.5 million. In addition, at December 31, 2012 we had $197,000 of unaccreted discounts related to our
investment securities portfolio.
At December 31, 2012, we owned investment securities totaling $111.3 million in which the amortized cost
basis exceeded fair value. Total unrealized losses on those securities were $717,000 at December 31, 2012. The
76
temporary impairment is the result of changes in market interest rates subsequent to the purchase of the
securities. Our investment portfolio is reviewed each quarter for indications of impairment. This review includes
analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial
condition and near-term prospects of the issuer, including any specific events which may influence the operations
of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in the market. We evaluate our intent and ability to hold securities based upon our
investment strategy for the particular type of security and our cash flow needs, liquidity position, capital
adequacy and interest rate risk position. In addition, we do not have the intent to sell, nor is it more likely-than-
not we will be required to sell these securities before we are able to recover the amortized cost basis.
For these investment securities with unrealized losses, the table below shows our gross unrealized losses and
fair value by investment category and length of time that individual securities were in a continuous unrealized
loss position at December 31, 2012.
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(In Thousands)
Available-for-sale securities:
U.S. Government and agencies
State and political subdivisions
CMO
FNMA
FHLMC
GNMA
$
2,008
—
40,358
43,696
13,884
10,029
$
2
—
268
243
117
54
Total temporarily impaired investments
$109,975
$684
$ —
—
1,364
—
—
—
$1,364
$—
—
33
—
—
—
$
2,008
—
41,722
43,696
13,884
10,029
$
2
—
301
243
117
54
$ 33
$111,339
$717
For these investment securities with unrealized losses, the table below shows our gross unrealized losses and
fair value by investment category and length of time that individual securities were in a continuous unrealized
loss position at December 31, 2011.
Available-for-sale securities:
U.S. Government and agencies
State and political subdivisions
CMO
FNMA
FHLMC
GNMA
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(In Thousands)
$ 5,047
—
78,955
6,959
—
5,420
$
13
—
2,194
44
—
57
$ —
440
9,933
—
—
—
$—
$
8
333
—
—
—
5,047
440
88,888
6,959
—
5,420
$
13
8
2,527
44
—
57
Total temporarily impaired investments
$96,381
$2,308
$10,373
$341
$106,754
$2,649
We own $12.6 million par value of SASCO RM-1 2002 class B securities which are classified as trading, of
which, $1.5 million is interest paid in kind. We expect to recover all principal and interest due to seasoning and
excess collateral. Based on FASB ASC 320, Investments – Debt and Equity Securities (“ASC 320”) when these
securities were acquired they were classified as trading because it was our intent to sell them in the near term.
We use the guidance under ASC 320 to provide a reasonable estimate of fair value. We estimated the value of
these securities based on the pricing of BBB+ securities that have an active market through a technique which
estimates the fair value of this asset using the income approach as of December 31, 2012.
77
During 2011, we purchased 100% of SASCO 2002-RM1 Class O certificates for $2.5 million. As of
December 31, 2012, the market value of the SASCO 2002-RM1 O securities was determined in accordance with
FASB ASC 820-10, Fair Value Measurement (“ASC 820”), to be $7.1 million. These securities have been
included in our available-for-sale CMO portfolio since their purchase.
3. REVERSE MORTGAGES AND RELATED ASSETS
We hold an investment
in reverse mortgages of $(457,000) at December 31, 2012 representing a
participation in 14 reverse mortgages with a third party. These loans were originated in the early 1990s.
These reverse mortgage loans are contracts that require the lender to make monthly advances throughout
each borrower’s life or until each borrower relocates, prepays or the home is sold, at which time the loan
becomes due and payable. Reverse mortgages are nonrecourse obligations, which means that the loan repayments
are generally limited to the net sale proceeds of the borrower’s residence.
We account for our investment in reverse mortgages by estimating the value of the future cash flows on the
reverse mortgages at a rate deemed appropriate for these mortgages, based on the market rate for similar
collateral. Actual cash flows from these mortgage loans can result in volatility in the recorded value of reverse
mortgage assets. As a result, income varies significantly from reporting period to reporting period. For the year
ended December 31, 2012, we recorded a positive $12,000 in interest income on reverse mortgages as compared
to a negative $137,000 in 2011 and a negative $287,000 in 2010. The results for 2012 reflect an improvement in
housing prices during the year. The previous two years’ decreases were due to a decline in property values
securing these mortgages, which were based on annual re-evaluation and consistent with the decreases in home
values over those two years.
The projected cash flows depend on assumptions about life expectancy of the mortgagees and the future
changes in collateral values. Projecting the changes in collateral values is one of the factors affecting the
volatility of reverse mortgage values. The current assumptions include a short-term annual depreciation rate of
zero in the first year, and a long-term annual appreciation rate of 0.5% in future years. If the long-term
appreciation rate was increased or decreased by 1%, the impact on income would not be material.
We hold Class B (BBB+ rated) mortgage-backed securities classified as trading and 100% of Class O
Certificates issued in connection with securities consisting of a portfolio of reverse mortgages we previously
owned as available-for-sale. A third-party model uses the income approach as described in ASC 820-10-35-32.
The model is a present value cash flow model, consistent with ASC 820-10-55-5 which describes the components
of a present value measurement. The model incorporates the projected cash flows of the notes and then discounts
these cash flows using a rate that is commensurate with the risk adjusted rate. 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 sets out an exit price methodology for determining fair value.
To value these securities as of December 31, 2012 the Bank continued to use their proprietary model and
actual cash flow information as of the December 25, 2012 distribution date to provide estimated future cash
flows. This process is consistent with what was performed in determining the price. There are three main drivers
of cash flows: 1) Prepayments 2) House Price Appreciation (HPA) forecasts and 3) Interest Rates.
1.
Prepayments – “one year look back” comparing the actual cash flows to the forecasted cash flows
based on the assumptions used. Using 50% of the base case forecasted cash flows to actual cash flows
confirms the reasonableness of the prepayment assumption.
2. House Price Appreciation – Consistent with other reverse mortgage analysis the following forecasts
were obtained from various market sources. A 2% decline for year one and then a 2% recovery for year
2 continues to be appropriate given the nature of reverse mortgage collateral and historical under
performance to the broad housing market.
78
3.
Interest Rates – Lastly, the forward rates as of December 31, 2012 on one month LIBOR are consistent
with the assumptions used for future interest rates (one month LIBOR ramping up to 3% over ten
years).
4. LOANS
The following table details our loan portfolio by category:
December 31,
(In Thousands)
Commercial (1)
Owner-occupied commercial
Commercial Mortgage
Construction
Residential
Consumer
Less:
Deferred fees, net
Allowance for loan losses
Net loans
2012
2011
$ 704,491
770,581
631,365
133,375
243,627
289,001
$1,460,812
—
626,739
106,268
274,105
290,979
2,772,440
2,758,903
4,602
43,922
3,234
53,080
$2,723,916
$2,702,589
(1) Prior to 2012, owner-occupied commercial loans were included in commercial loan balances
Nonaccruing loans aggregated $47.8 million, $71.1 million and $76.8 million at December 31, 2012, 2011
and 2010, respectively. If interest on all such loans had been recorded in accordance with contractual terms, net
interest income would have increased by $1.6 million in 2012, $3.1 million in 2011, and $2.3 million in 2010.
The total amounts of loans serviced for others were $263.4 million, $308.1 million and $358.8 million at
December 31, 2012, 2011 and 2010, respectively, all of which were residential first mortgage loans. We received
fees from the servicing of loans of $359,000, $445,000 and $508,000 during 2012, 2011 and 2010, respectively.
We record mortgage-servicing rights on our mortgage loan-servicing portfolio. Mortgage servicing rights
represent the present value of the future net servicing fees from servicing mortgage loans we acquire or originate.
The value of these servicing rights was $240,000 and $216,000 at December 31, 2012 and 2011, respectively.
Mortgage loans serviced for others are not included in loans in the accompanying Consolidated Statement of
Condition. Changes in the valuation of these servicing rights resulted in net income of $24,000 during 2012 and
net expense of $70,000 during 2011. Revenues from originating, marketing and servicing mortgage loans as well
as valuation adjustments related to capitalized mortgage servicing rights are included in mortgage banking
activities, net in the Consolidated Statement of Operations.
Accrued interest receivable on loans outstanding was $7.6 million and $8.8 million at December 31, 2012
and 2011, respectively.
79
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
(In Thousands)
Beginning balance
Provision for loan losses
Loans charged-off (1)
Recoveries (2)
Ending balance
2012
2011
2010
$ 53,080
32,053
(45,802)
4,591
$ 60,339
27,996
(37,833)
2,578
$ 53,446
41,883
(37,566)
2,576
$ 43,922
$ 53,080
$ 60,339
(1) 2012, 2011 and 2010 includes $1.1 million, $869,000 and $1.0 million of overdraft charge-offs, respectively.
(2) 2012, 2011 and 2010 includes $363,000, $348,000 and $375,000 of overdraft recoveries, respectively.
These results included the impact of our Asset Strategies resulting in the bulk sale of $42.7 million of
problem loans. During 2012, net charge-offs totaled $41.2 million, or 1.49%, of average loans annualized
(including $14.2 million related to Asset Strategies), compared to $35.3 million, or 1.32%, of average loans in
2011. We charge loans off when they are deemed to be uncollectable.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES AND CREDIT QUALITY INFORMATION
Allowance for Loan Losses
We maintain an allowance for loan losses and charge losses to this allowance when such losses are realized.
We established our loan loss allowance in accordance with guidance provided in the Securities and Exchange
Commission’s Staff Accounting Bulletin 102 (“SAB 102”). The determination of the allowance for loan losses
requires significant
judgment reflecting our best estimate of impairment related to specifically identified
impaired loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based upon a
continuing review of these portfolios. The following are included in Allowance for Loan Losses:
•
Specific reserves for impaired loans
• Allowances for pools of homogenous loans based on historical loss experience
• Adjustments for qualitative and environmental factors
• Allowance for model estimation and complexity risk
Specific reserves are established for impaired loans where we have identified significant conditions or
circumstances related to specific credits that indicate losses are probable. Unless loans are well-secured and
collection is imminent, all loans that are 90 days past due are deemed impaired. Reserves for impaired loans are
generally charged-off within 90 days of impairment recognition. Estimated losses are based on collateral values,
estimates of future cash flows, or market valuations.
Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical loss
experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and
consumer loan pools. Commercial loans are pooled into following segments: Business Loans (Commercial and
Industrial Loans), Commercial Real Estate – Owner-Occupied, Commercial Real Estate – Investor, and
is further segmented by internally assessed risk ratings. Loan losses for
Construction Loans. Each pool
commercial loans are estimated by determining the probability of default and expected loss severity upon default.
Probability of default is calculated based on the historical rate of migration to impaired status during the last
three years. Loss severity is calculated as the actual loan losses (net of recoveries) on impaired loans in the
respective pool during the last three years. Retail loans are pooled into following segments: residential mortgage
loans, home equity secured loans, and all other consumer loans. Pooled reserves for retail loans are calculated
based on the previous three year average loss rate.
80
Qualitative and environmental adjustment factors are taken into consideration when determining the above
reserve estimates or core reserves. These adjustment factors are based upon our evaluation of various current
internal and external conditions including:
• Assessment of current underwriting policies, staff, and portfolio mix
•
Internal trends of delinquency, non-accrual and criticized loans by segment
• Assessment of risk rating accuracy, control and regulatory assessments/environment
• General economic conditions – locally and nationally
• Market trends impacting collateral values
• Competitive environment as it could impact loan structure and underwriting
The above factors are based on their relative standing compared to the period which historic losses are used
in core reserve estimates and current directional trends. Each individual qualitative and environmental factor in
our model can add or subtract to core reserves. As of December 31, 2012, these factors, in aggregate, added 5.9%
of core reserves to the allowance.
The final component of the allowance is a reserve for model estimation and complexity risk. The calculation
of reserves is generally quantitative; however, qualitative estimates of valuations and risk assessment are
necessary. We currently increase our calculated reserves to account for model estimation and complexity risk,
which was approximately 2% at December 31, 2012.
Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks
associated with individual problem loans. In addition, various regulatory agencies and loan review consultants
periodically review our loan ratings and allowance for loan losses.
During 2012, we continued to enhance and improve the methodology and data used for calculating our
allowance for loan losses. These enhancements and improvements were made over the course of the year and
included the following:
• Used a three year loss migration analysis to determine the probability of default. Previously, the probability
of default was determined using recent default activity and qualitative factors.
•
Segregated the commercial loan segment to more specifically analyze the risks associated with business,
owner-occupied CRE, investor CRE and construction loan portfolios,
• Qualitative adjustment factors expanded to mirror commercial loan segmentation,
• Established a portion of the allowance for loan losses related to model estimation and complexity risk,
• Conducted our annual updating of our risk migration analysis. Prospectively, we will update risk migration
quarterly,
• Calculated loss severity based solely on last three year historic loss rate by commercial loan segment pools.
Previously, loss severity considered attributes of individual loans and qualitative considerations.
•
Shortened the loss emergence period used for consumer loans. Historical loss rates are now based on the
past three years. Historical loss rates were previously calculated on the past five years and adjusted for loss
emergence qualitative considerations.
The combined impact of these changes was not significant to the total allowance for loan losses; however,
the allocation shifted among various loan pools. Commercial loan pools are allocated more reserves due to their
estimated higher loss severity and consumer loan pools are allocated less reserves due to shortening of their
estimated loss emergence periods. Our conclusion, as of December 31, 2011, that our total allowance for loan
losses of $53.1 million was sufficient to cover losses in the portfolio did not change as a result of implementing
our improved allowance for loan losses methodology.
81
The following tables provide an analysis of the allowance for loan losses and loan balances as of and for the
year ended December 31, 2012 and December 31, 2011:
Owner
Occupied
Commercial (1)
Commercial
Commercial
Mortgages Construction Residential Consumer
Complexity
Risk (2)
Total
(In Thousands)
Twelve months ended
December 31, 2012
Allowance for loan losses
Beginning balance
Charge-offs
Recoveries
Provision
$ 15,067
(12,806)
1,536
9,866
$
9,235
(5,076)
13
1,936
$
7,556
(6,517)
405
6,635
$
4,074
(10,820)
1,761
11,441
$
6,544
(3,857)
176
261
$ 10,604
(6,726)
700
1,053
Ending balance
$ 13,663
$
6,108
$
8,079
$
6,456
$
3,124
$
5,631
$—
—
—
861
$861
$
53,080
(45,802)
4,591
32,053
$
43,922
Period-end allowance allocated
to:
Loans individually evaluated for
impairment
$
2,100
$
1
$
1,887
$
28
$
919
$
16
$—
$
4,951
Loans collectively evaluated for
impairment
Ending balance
Period-end loan balances
evaluated for:
Loans individually evaluated for
11,563
6,107
6,192
6,428
2,205
5,615
$ 13,663
$
6,108
$
8,079
$
6,456
$
3,124
$
5,631
861
$861
38,971
$
43,922
impairment
$
4,861
$ 14,001
$ 12,634
$
1,547
$ 18,483
$
6,329
Loans collectively evaluated for
impairment
Ending balance
699,630
756,580
618,731
131,828
225,144
282,672
$704,491
$770,581
$631,365
$133,375
$243,627
$289,001
$—
—
$—
$
57,855(3)
2,714,585
$2,772,440
Twelve months ended December 31, 2011
Allowance for credit losses
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Period-end allowance allocated to:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Ending balance
Period-end loan balances evaluated for:
Loans individually evaluated for
impairment
Loans collectively evaluated for
impairment
Ending balance
Commercial
Commercial
Mortgages Construction Residential Consumer
Total
(In Thousands)
$
$
$
$
26,480
(9,419)
897
6,344
24,302
2,630
21,672
24,302
$ 10,564
(7,446)
334
4,104
$
$
$
7,556
295
7,261
7,556
$ 10,019
(11,602)
582
5,075
$
$
$
4,074
723
3,351
4,074
$
$
$
$
4,028
(3,165)
211
5,470
$
9,248
(6,201)
554
7,003
6,544
$ 10,604
964
5,580
6,544
$
101
10,503
$ 10,604
$
$
$
$
60,339
(37,833)
2,578
27,996
53,080
4,713
48,367
53,080
$
23,193
$ 15,814
$ 22,124
$ 16,227
$
2,621
$
79,979(3)
1,437,619
610,925
84,144
257,878
288,358
2,678,924
$1,460,812
$626,739
$106,268
$274,105
$290,979
$2,758,903
(1) Prior to 2012, owner occupied commercial loans were included in commercial loan balances.
(2) Represents the portion of the allowance for loan losses established to account for the inherent complexity and uncertainty of estimates.
(3) The difference between this amount and nonaccruing loans at December 31, 2012 and December 31, 2011, represents accruing troubled
debt restructured loans of $10.1 million and $8.9 million, respectively.
82
Non-Accrual 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 is probable. 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 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 which 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:
At Dec. 31, 2012
(In Thousands)
Commercial
Owner occupied
commercial (1)
Commercial mortgages
Construction
Residential
Consumer
30–59 Days
Past Due and
Still Accruing
60–89 Days
Past Due and
Still Accruing
Greater Than
90 Days
Past Due and
Still Accruing
Total Past
Due
And Still
Accruing
Accruing
Current
Balances
Nonaccrual
Loans
Total
Loans
$ 1,214
$ —
$ —
$ 1,214
$ 698,416
$ 4,861
$ 704,491
1,264
—
269
5,383
971
—
—
70
606
526
—
—
—
786
—
1,264
—
339
6,775
1,497
755,316
618,731
131,489
226,863
282,776
$14,001
12,634
1,547
9,989
4,728
770,581
631,365
133,375
243,627
289,001
Total
$ 9,101
$1,202
$ 786
$11,089
$2,713,591
$47,760
$2,772,440
% of Total Loans
0.33%
0.04%
0.03%
0.40%
97.88% 1.72%
100.00%
(1) Prior to 2012, owner-occupied commercial loans were included in commercial loan balances.
At Dec. 31, 2011
(In Thousands)
Commercial
Commercial mortgages
Construction
Residential
Consumer
Total
30–59 Days
Past Due and
Still Accruing
60–89 Days
Past Due and
Still Accruing
$ 1,087
479
3,727
5,501
2,783
$13,577
$
63
243
—
1,238
709
$2,253
Greater Than
90 Days
Past Due and
Still
Accruing
$ 78
—
—
887
—
$ 965
Total Past
Due
And Still
Accruing
$ 1,228
722
3,727
7,626
3,492
Accruing
Current
Balances
$1,436,504
610,203
80,417
257,422
286,469
Nonaccrual
Loans
Total
Loans
$23,080
15,814
22,124
9,057
1,018
$1,460,812
626,739
106,268
274,105
290,979
$16,795
$2,671,015
$71,093
$2,758,903
% of Total Loans
0.49%
0.08%
0.04%
0.61%
96.81%
2.58%
100.00%
83
Impaired Loans
Loans for which it is probable we will not collect all principal and interest due according to 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 FASB ASC 310, Receivables. 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 loan’s observable market price; or (3) the fair value of
collateral, if the loan is collateral dependent. 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 December 31, 2012 and December 31,
2011:
2012
(In Thousands)
Commercial
Owner-Occupied Commercial (2)
Commercial mortgages
Construction
Residential
Consumer
Total
2011
(In Thousands)
Commercial
Commercial mortgages
Construction
Residential
Consumer
Total
Ending
Loan
Balances
Loans with
No Related
Reserve (1)
$ 4,861
14,001
12,634
1,547
18,483
6,329
$ 1,598
13,827
5,422
1,172
11,053
5,635
Loan with
Related
Reserve
$ 3,263
174
7,212
375
7,430
694
Related
Reserve
$ 2,100
1
1,887
28
919
16
Contractual
Principal
Balance
Average
Loan
Balances
$ 12,060
18,658
22,192
17,711
20,771
7,265
$ 4,993
16,856
10,233
11,239
16,917
4,514
$ 57,855
$ 38,707
$ 19,148
$ 4,951
$ 98,657
$ 64,752
Ending
Loan
Balances
$ 23,193
15,814
22,124
16,227
2,621
Loans with
No Related
Reserve (1)
$ 19,353
13,602
14,166
9,649
1,336
Loan with
Related
Reserve
$ 3,840
2,212
7,958
6,578
1,285
Related
Reserve
$ 2,630
295
723
964
101
Contractual
Principal
Balance
$ 26,815
21,278
34,862
19,312
2,788
Average
Loan
Balances
$ 22,396
16,237
27,323
17,480
3,916
$ 79,979
$ 58,106
$ 21,873
$ 4,713
$105,055
$ 87,352
(1) Reflects loan balances at their net realizable value.
(2) Prior to 2012 owner occupied commercial loans were included in commercial loan balances.
The average impaired loan balanced as of December 31, 2010 was $77.6 million. Interest income of
$985,000, $395,000 and $287,000 was recognized on impaired loans during 2012, 2011 and 2010, respectively.
Credit Quality Indicators
Below is a description of each of our risk ratings for all commercial loans:
Pass. These borrowers presently show no current or potential problems and their loans are considered fully
collectible. We further segment Pass ratings into six classifications ranging from Substantially Risk Free (secured
by marketable securities within margin and cash secured) to Acceptable Risk.
Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in
this category may be experiencing adverse operating trends, e.g.: declining revenues or margins, high leverage,
tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential
negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose
the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be
experiencing significant management problems, pending litigation, or other structural credit weaknesses.
84
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.
In late 2011, we undertook a project to improve the precision of our loan rating system with a goal of
recalibrating our loan rating classifications to current Office of the Comptroller of Currency and Federal Reserve
Board standards and to better classify our Pass and Criticized loan categories. This resulted in the elimination of
our last Pass grade or our “pass/watch” grade. The result of this grade elimination resulted in $67 million of
previous “pass/watch” loans being reclassified to Criticized or Classified, with none going to nonaccrual status.
Residential and Consumer Loans
The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency
information and loan type as credit quality indicators. These credit quality indicators are assessed in the
aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally
considered nonperforming and placed in nonaccrual status.
The following tables provide an analysis of problem loans:
Commercial credit exposure credit risk profile by internally assigned risk rating at December 31,:
Commercial
Owner-
Occupied
Commercial (1)
Commercial
Mortgages
Construction
2012
2011
Total Commercial
(In Thousands)
2012
2011
2012
2011
2012
2011
2012
2011
Amount Percent Amount Percent
Risk Rating:
Special mention
Substandard:
Accrual
Nonaccrual
Doubtful/Nonaccrual
Total Special Mention and
Substandard
Pass
Total
$ 14,611 $
85,848 $ 27,398 $— $ 29,267 $ 50,044 $
2,453 $
9,747 $
73,729
$ 145,639
63,074
1,598
3,263
107,896
23,193
—
44,899 —
13,827 —
174 —
6,222
5,422
7,212
13,664
15,814
—
5,755
1,172
375
19,039
22,124
—
119,950
22,019
11,024
140,599
61,131
—
9,755
82,546
621,945 1,242,519 684,283 — 583,242 543,277 123,620
86,298 —
216,937
79,522
48,123
226,722
50,910
55,244 2,013,090
10% 347,369
90
1,841,040
16%
84
$704,491 $1,459,456 $770,581 $— $631,365 $622,799 $133,375 $106,154 $2,239,812
100% $2,188,409
100%
85
Consumer credit exposure credit risk profile based on payment activity (in thousands):
Residential
Consumer
2012
2011
2012
2011
2012
2011
Amount
Percent
Amount
Percent
Total Residential and Consumer
Nonperforming(2)
Performing
$ 18,483
225,144
$ 16,227
259,276
$
6,329
282,672
$
2,621
289,136
$ 24,812
507,816
5% $ 18,848
95
548,412
3%
97
Total
$243,627
$275,503
$289,001
$291,757
$532,628
100% $567,260
100%
(1) Prior to 2012, owner-occupied commercial loans were included in commercial loan balances.
(2)
Includes $10.1 million as of December 31, 2012 and $8.9 million as of December 31, 2011 of troubled debt restructured mortgages and
home equity installment loans that are performing in accordance with the loans modified terms and are accruing interest.
Troubled Debt Restructurings (TDR)
In 2011, we adopted the provisions of Accounting Standards Update No. 2011-02, A Creditor’s
Determination of Whether a Restructuring is a Troubled Debt Restructuring. As such, we reassessed all loan
modifications occurring in 2011 for identification as TDRs, resulting in no newly identified TDRs.
The balance of TDRs at December 31, 2012 and December 31, 2011 was $22.0 million and $27.7 million,
respectively. The balances at December 31, 2012 include approximately $11.9 million of TDRs in nonaccrual
status and $10.1 million of TDRs in accrual status compared to $18.8 million of TDRs in nonaccrual status and
$8.9 million of TDRs in accrual status at December 31, 2011. Approximately $936,000 and $1.3 million in
related reserves have been established for these loans at December 31, 2012 and December 31, 2011,
respectively.
During 2012, the terms of 112 loans were modified in TDRs, of which 18 were related to commercial loans
that were already placed on nonaccrual. Nonaccruing restructured loans remain in nonaccrual status until there
has been a period of sustained repayment performance, typically six months. Additionally, 81 of these TDRs
were related to recent regulatory guidance requiring loans discharged under Chapter 7 bankruptcy, and not
re-affirmed by the borrower, to be charged-off to their net realizable collateral values, to be considered TDRs and
to be placed on nonaccrual regardless of their delinquency status. As a result, $4.7 million of performing loans
(net of charge-offs) were reclassified to nonaccrual status and TDR status during 2012. Nonaccruing restructured
loans remain in nonaccrual status until there has been a period of sustained repayment performance, typically six
months. The remaining loans represented residential and consumer loans. Our concessions on restructured loans
consisted mainly of forbearance agreements, reduction in interest rates or extensions of maturities. Principal
balances are generally not forgiven by us when a loan is modified as a TDR.
The following table presents loans identified as TDRs during the twelve months ended December 31, 2012
and December 31, 2011:
(In Thousands)
Commercial
Commercial mortgages
Construction
Residential
Consumer
Twelve
Months Ended
December 31,
2012
Twelve
Months Ended
December 31,
2011
$10,235
—
378
5,217
2,386
$18,216
$ 2,914
11,536
13,909
2,824
146
$31,329
86
The TDRs described above increased the allowance for loan losses by $1.3 million through allocation of a
related reserve, and resulted in charge offs of $8.5 million during the twelve months ending December 31, 2012,
most of which had been previously identified and reserved for in prior periods, compared to an increase in
allowance for loan losses of $1.4 million and charge offs of $8.9 million during the twelve months ending
December 31, 2011.
There was one residential TDR in the amount of $84,000 which defaulted (defined as past due 90 days)
during the twelve months ended December 31, 2012 that was restructured within the last twelve months prior to
December 31, 2012.
6. PREMISES AND EQUIPMENT
Land, office buildings, leasehold improvements and furniture and equipment, at cost, are summarized by
major classifications:
December 31,
(In Thousands)
Land
Buildings
Leasehold improvements
Furniture and equipment
Less:
Accumulated depreciation
2012
2011
$ 1,362
4,020
35,011
35,912
$ 1,562
6,708
32,804
38,253
76,305
79,327
38,048
43,363
$38,257
$35,964
Depreciation expense is computed on a straight-line basis over the estimated useful lives of the assets or, for
leasehold improvements, over the effective life of the related lease if less than the estimated useful life. In
general, computer equipment, furniture and equipment and building renovations are depreciated over three, five
and ten years, respectively.
We occupy certain premises including some with renewal options, and operate certain equipment under
noncancelable leases with terms ranging primarily from 1 to 25 years. These leases are accounted for as
operating leases. Accordingly, lease costs are expensed as incurred in accordance with FASB ASC 840-20
Operating Leases. Rent expense was $9.0 million in 2012, $7.9 million in 2011 and $5.7 million in 2010 and
includes the costs related to our eight new branches since 2010, the relocation of our operations center in 2012
lease renewals during the period. Future minimum cash payments under these leases at
and additional
December 31, 2012 are as follows:
(In Thousands)
2013
2014
2015
2016
2017
Thereafter
Total future minimum lease payments
$
7,937
7,708
7,574
7,350
7,331
159,993
$197,893
87
7. DEPOSITS
The following is a summary of deposits by category, including a summary of the remaining time to maturity for
time deposits:
December 31,
(In Thousands)
Money market and demand:
Noninterest-bearing demand
Interest-bearing demand
Money market
Total money market and demand
Savings
Customer certificates of deposit by maturity:
Less than one year
One year to two years
Two years to three years
Three years to four years
Over four years
Total customer time certificates
Jumbo certificates of deposits, by maturity:
Less than one year
One year to two years
Two years to three years
Three years to four years
Over four years
Total jumbo certificates of deposit
Total customer deposits
Brokered deposits less than one year
Total deposits
Interest expense by category follows:
Year Ended December 31,
(In Thousands)
Interest-bearing demand
Money market
Savings
Time deposits
Total customer interest expense
Brokered deposits
2012
2011
$ 631,026
538,195
933,901
$ 525,444
389,495
805,570
2,103,122
1,720,509
389,977
368,390
202,604
45,955
60,879
5,894
1,654
316,986
234,716
20,581
36,561
2,031
348
294,237
261,000
86,097
3,219
60,267
1,444
412,027
254,583
52,753
2,935
36,196
101
346,568
3,104,322
2,847,494
170,641
287,810
$3,274,963
$3,135,304
2012
2011
2010
$
246
1,759
431
9,531
11,967
1,134
$
405
2,897
1,465
13,548
18,315
816
$
435
4,301
494
16,070
21,300
1,797
Total interest expense on deposits
$13,101
$19,131
$23,097
88
8. BORROWED FUNDS
The following is a summary of borrowed funds by type:
At or for the twelve months ended:
December 31, 2012
FHLB advances
Federal funds purchased and securities sold under
agreements to repurchase
Trust preferred borrowings
Senior Debt
Other borrowed funds
December 31, 2011
FHLB advances
Federal funds purchased and securities sold under
agreements to repurchase
Trust preferred borrowings
Other borrowed funds
Federal Home Loan Bank Advances
Weighted
Average
Interest
Rate
Maximum
Outstanding
at Month
End During
the Period
Average
Amount
Outstanding
During the
Period
Balance at
End of
Period
Weighted
Average
Interest
Rate
During
the
Period
$376,310
0.57% $588,052
$466,243
1.32%
(Dollars in Thousands)
110,000
67,011
55,000
28,945
0.90
2.08
6.25
0.09
125,000
67,011
55,000
64,599
101,106
67,011
19,085
33,924
0.99
2.17
6.68
0.41
$538,682
1.49% $676,093
$561,117
1.75%
50,000
67,011
67,927
1.68
2.30
1.26
100,000
67,011
74,859
78,685
67,011
71,431
1.50
2.02
1.30
Advances from the FHLB of Pittsburgh with rates ranging from 0.17% to 4.45% at December 31, 2012 are
due as follows:
2013
2014
2015
Weighted
Average
Rate
Amount
(Dollars in Thousands)
$318,249
35,895
22,166
0.53%
1.07
0.58
$376,310
0.58
Pursuant to collateral agreements with the FHLB, advances are secured by qualifying first mortgage loans,
qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB.
As a member of the FHLB of Pittsburgh, we are required to purchase and hold shares of capital stock in the
FHLB of Pittsburgh in an amount at least equal to 0.35% of our member asset value plus 4.60% of advances
outstanding. We were in compliance with this requirement with a stock investment in FHLB of Pittsburgh of
$31.2 million at December 31, 2012. This stock is carried on the accompanying Consolidated Statement of
Condition at cost, which approximates liquidation value.
At December 31, 2012 we had $31.2 million of FHLB stock compared to $35.8 million at December 31,
2011. In 2010, a limited repurchase of capital stock was reinstated and during 2011 net capital stock repurchases
from us totaled $1.8 million. We received no dividends from the FHLB of Pittsburgh during 2011 or 2010.
However, in February of 2012, the FHLB of Pittsburgh declared and began to pay a dividend on capital stock.
The FHLB also approved additional repurchases of capital stock during the first quarter 2012. At December 31,
2012, repurchases totaled $4.6 million. For additional information regarding FHLB Stock, see Note 14 to the
Consolidated Financial Statements.
89
At December 31, 2012, advances outstanding totaled $376.3 million, with a weighted average rate of 0.57%.
One $7.2 million advance with a rate of 4.45% was struck in January 2003 to match fund a commercial loan.
This advance matured in January 2013.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
During 2012 and 2011, we purchased federal funds as a short-term funding source. At December 31, 2012,
we had purchased $85.0 million in federal funds at an average rate of 0.27%. At December 31, 2011, we had
purchased $25.0 million in federal funds at a rate of 0.38%.
During 2012, we continued to have securities sold under agreements to repurchase as a funding source. At
December 31, 2012, securities sold under agreements to repurchase had a fixed rate of 2.98%. These repurchases
mature on January 1, 2015. The underlying securities are mortgage-backed securities with a book value of
$41.1 million at December 31, 2012. Securities sold under agreements to repurchase with the corresponding
carrying and market values of the underlying securities are due as follows:
(Dollars in Thousands)
2012
Over 90 days
2011
Over 90 days
Borrowing
Amount
Rate
Carrying
Value
Collateral
Fair
Value
Accrued
Interest
$25,000
2.98% $41,061
$41,714
$104
$25,000
2.98% $29,942
$30,961
$ 97
Trust Preferred Borrowings
In 2005, we issued $67.0 million of aggregate principal amount of Pooled Floating Rate Securities at a
variable interest rate of 177 basis points over the three-month LIBOR rate. The proceeds from this issuance were
used to fund the redemption of $51.5 million of Floating Rate Capital Trust I Preferred Securities.
Senior Debt
On August 27, 2012, we completed the issuance and sale of $55.0 million aggregate principal amount of
6.25% Senior Notes due 2019 (the “Senior Debt”). The Senior Debt is unsecured and ranks equally with all of
our other present and future unsecured unsubordinated obligations. At our option, the Senior Debt is callable, in
whole or in part, after 5 years.
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $28.9 million and $37.9 million at
December 31, 2012 and 2011 respectively, consisting of outstanding retail repurchase agreements, contractual
arrangements under which portions of certain securities are sold overnight to retail customers under agreements
to repurchase. Such borrowings were collateralized by mortgage-backed securities. The average rates on these
borrowings were 0.09% at both December 31, 2012 and 2011. In addition, during 2009 we issued $30.0 million
of unsecured debt under the FDIC Temporary Liquidity Guarantee Program with a rate of 2.74%. This debt
matured on February 15, 2012.
9. STOCKHOLDERS’ EQUITY
Under guidelines issued by banking regulators, savings institutions such as the Bank must maintain
“tangible” capital equal to 1.5% of adjusted total assets, “core” capital equal to 4.0% of adjusted total assets,
“Tier 1” capital equal to 4.0% of risk weighted assets and “total” or “risk-based” capital (a combination of core
90
and “supplementary” capital) equal
to 8.0% of risk weighted assets. Failure to meet minimum capital
requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on our bank’s financial statements. At December 31, 2012
and 2011, the Bank was in compliance with regulatory capital requirements and was deemed a “well-capitalized”
institution.
The following table presents our Bank capital position as of December 31, 2012 and 2011:
(In Thousands)
As of December 31, 2012:
Total Capital (to risk-weighted assets)
Core Capital (to adjusted tangible assets)
Tangible Capital (to tangible assets)
Tier 1 Capital (to risk-weighted assets)
As of December 31, 2011:
Total Capital (to risk-weighted assets)
Core Capital (to adjusted tangible assets)
Tangible Capital (to tangible assets)
Tier 1 Capital (to risk-weighted assets)
The Holding Company
Consolidated Bank
Capital
For Capital Adequacy
Purposes
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Amount
Percent
Amount
Percent
Amount
Percent
$466,924
426,019
426,019
426,019
$434,301
393,725
393,725
393,725
14.29% $261,440
173,273
9.83
64,977
9.83
130,720
13.04
8.00% $326,800
216,592
4.00
N/A
1.50
196,080
4.00
13.43% $258,688
169,518
9.29
63,569
9.29
129,344
12.18
8.00% $323,361
211,898
4.00
N/A
1.50
194,016
4.00
10.00%
5.00
N/A
6.00
10.00%
5.00
N/A
6.00
Our capital structure includes two classes of stock. One class of $0.01 par common stock outstanding, each
share having equal voting rights, and one class of $.01 par preferred stock.
In 2005, WSFS Capital Trust III, our unconsolidated subsidiary, issued $67.0 million of aggregate principle
of Pooled Floating Rate Securities at a variable interest rate of 177 basis points over the three-month LIBOR rate.
The proceeds were used to refinance the WSFS Capital Trust I issuance of $51.5 million of Trust Preferred
Securities which had a variable rate of 250 basis points over the three-month LIBOR rate. At December 31, 2012,
the coupon rate of the Capital Trust III securities was 2.08% with a scheduled maturity of June 1, 2035. The
effective rate will vary due to fluctuations in interest rates. The proceeds from the issue were invested in Junior
Subordinated Debentures we issued. These securities are treated as borrowings with interest included in interest
expense on the Consolidated Statement of Operations. The remaining proceeds were used primarily to extinguish
higher rate debt and for general corporate purposes.
When infused into the Bank, the Trust Preferred Securities issued in 2005 qualify as Tier 1 capital. We are
prohibited from paying any dividend or making any other capital distribution if, after making the distribution, we
would be undercapitalized within the meaning of the Prompt Corrective Action regulations.
At December 31, 2012, $62.2 million in cash remains at the holding company to support the parent
company’s needs.
Pursuant to federal laws and regulations, our ability to engage in transactions with affiliated corporations is
limited, and we generally may not lend funds to nor guarantee our indebtedness.
10. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Associate 401(k) Savings Plan
Certain subsidiaries of ours maintain a qualified plan in which Associates may participate. Participants in
the plan may elect to direct a portion of their wages into investment accounts that include professionally
managed mutual and money market funds and our common stock. Generally, the principal and related earnings
91
are tax deferred until withdrawn. We match a portion of the Associates’ contributions and, based on our
performance, periodically make discretionary contributions into the plan for the benefit of our Associates. As a
result, our total cash contributions to the plan on behalf of our Associates resulted in a an expense of
$2.4 million, $1.9 million, and $1.5 million for 2012, 2011, and 2010, respectively.
All contributions are invested in accordance with the Associates’ selection of investments. If Associates do
not designate how discretionary contributions are to be invested, 100% will be invested in a balanced fund.
Associates may make transfers to various other investment vehicles within the plan without any significant
restrictions. The plans net purchases for the WSFS fund were 2,000, 24,000, and 81,000 shares of our common
stock during 2012, 2011, and 2010, respectively.
Postretirement Benefits
We share certain costs of providing health and life insurance benefits to retired Associates (and their eligible
dependents). Substantially all Associates may become eligible for these benefits if they reach normal retirement
age while working for us.
We account for our obligations under the provisions of FASB ASC 715, Compensation – Retirement
Benefits (“ASC 715”). ASC 715 requires that the costs of these benefits be recognized over an Associate’s active
working career. 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.
ASC 715 requires that we recognize the funded status of our defined benefit postretirement plan in our
statement of financial position, with a corresponding adjustment to accumulated other comprehensive income,
net of tax. The adjustment
to accumulated other comprehensive income at adoption represented the net
unrecognized actuarial losses and unrecognized transition obligation remaining from the initial adoption of
ASC 715, all of which were previously netted against the plan’s funded status in our statement of financial
position pursuant to the provisions of ASC 715. These amounts will be subsequently recognized as net periodic
pension costs pursuant to our historical accounting policy for amortizing such amounts. Further, actuarial gains
and losses that arise in subsequent periods, and are not recognized as net periodic pension cost in the same
periods, will be recognized as a component of other comprehensive income. Those amounts will be subsequently
recognized as a component of net periodic pension cost on the same basis as the amounts recognized in
accumulated other comprehensive income at adoption of ASC 715.
In accordance with ASC 715, during 2013 we expect to recognize $78,000 in expense relating to the
amortization of the net actuarial loss, and none relating to the net transition obligation.
92
The following disclosures relating to postretirement benefits were measured at December 31:
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status:
Funded status
Recognized net loss
Net amount recognized
Components of net periodic benefit cost:
Service cost
Interest cost
Amortization of transition obligation
Net loss recognition
Net periodic benefit cost
Assumptions used to determine net periodic benefit
cost:
Discount rate
Health care cost trend rate
Sensitivity analysis of health care cost trends:
Effect of +1% on service cost plus interest cost
Effect of –1% on service cost plus interest cost
Effect of +1% on APBO
Effect of –1% on APBO
Assumptions used to value the Accumulated
Postretirement Benefit Obligation (APBO):
Discount rate
Health care cost trend rate
Ultimate trend rate
Year of ultimate trend rate
2012
2011
2010
$ 3,923
288
174
271
(178)
$ 3,088
207
166
623
(161)
$ 2,568
171
151
360
(162)
$ 4,478
$ 3,923
$ 3,088
$ —
178
(178)
$ —
161
(161)
$ —
162
(162)
$ —
$ —
$ —
$(4,478)
1,587
$(3,923)
1,444
$(3,088)
914
$(2,891)
$(2,479)
$(2,174)
$
$
$
288
174
61
67
590
$
$
207
166
61
32
466
4.50% 5.50%
5.00% 5.00%
(34)
12
(146)
142
$
(17)
13
(129)
100
$
$
$
171
151
61
12
395
6.00%
5.00%
(13)
10
(96)
76
4.00% 4.50%
5.00% 5.00%
5.00% 5.00%
2012
2011
5.50%
5.00%
5.00%
2010
93
Estimated future benefit payments:
The following table shows the expected future payments for the next ten years:
(In Thousands)
During 2013
During 2014
During 2015
During 2016
During 2017
During 2018 through 2022
$ 124
131
131
133
143
886
$1,548
We assume the average annual rate of increase for medical benefits will stabilize at an average increase of
5% per annum. The costs incurred for retirees’ health care are limited since certain current and all future retirees
are restricted to an annual medical premium cap indexed (since 1995) by the lesser of 4% or the actual increase
in medical premiums paid by us. For 2012, this annual premium cap amounted to $2,800 per retiree. We estimate
that we will contribute approximately $124,000 to the plan during fiscal 2013.
We have five additional plans which are no longer being provided to Associates. They are a Supplemental
Pension Plan with a corresponding liability of $350,000, an Early Retirement Window Plan with a corresponding
liability of $148,000, a Director’s Plan with a corresponding liability of $59,000, a Supplemental Executive
Retirement Plan with a corresponding liability of $950,000, and a Post-Retirement Medical Plan with a
corresponding liability of $175,000.
11. TAXES ON INCOME
We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns.
Our income tax provision consists of the following:
Year Ended December 31,
(In Thousands)
Current income taxes:
Federal taxes
State and local taxes
Deferred income taxes:
Federal taxes
State and local taxes
Total
2012
2011
2010
$11,136
2,256
$ 6,648
1,849
$ 8,192
(555)
3,591
—
2,978
—
(2,183)
—
$16,983
$11,475
$ 5,454
Current federal income taxes include taxes on income that cannot be offset by net operating loss carryforwards.
94
Deferred income taxes 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. The
following is a summary of the significant components of our deferred tax assets and liabilities as of
December 31, 2012 and 2011:
(In Thousands)
Deferred tax liabilities:
Unrealized gains on available-for-sale securities
Accelerated depreciation
Other
Prepaid expenses
Deferred loan costs
Intangibles
Total deferred tax liabilities
Deferred tax assets:
Allowance for loan losses
Reserves and other
Deferred gains
Total deferred tax assets
Net deferred tax asset
2012
2011
$ (8,053)
(2,115)
(397)
(1,590)
(1,866)
(1,256)
$ (7,105)
(912)
(395)
(1,428)
(1,680)
(795)
(15,277)
(12,315)
15,373
7,511
480
23,364
18,578
5,862
505
24,945
$ 8,087
$ 12,630
Included in the table above is the effect of certain temporary differences for which no deferred tax expense
or benefit was recognized. In 2012, such items consisted primarily of $8.1 million of unrealized gains on certain
investments in debt and equity securities accounted for under ASC 320 partially offset by $550,000 related to
postretirement benefit obligations accounted for under ASC 715. In 2011,
they consisted primarily of
$7.1 million of unrealized gains on certain investments in debt and equity securities, partially offset by $550,000
related to postretirement benefit obligations.
Based on our history of prior earnings and our expectations of the future, it is anticipated that operating
income and the reversal pattern of our temporary differences will, more likely than not, be sufficient to realize a
net deferred tax asset of $8.1 million at December 31, 2012. No federal or state net operating losses existed at
December 31, 2012.
A reconciliation showing the differences between our effective tax rate and the U.S. Federal statutory tax
rate is as follows:
Year Ended December 31,
Statutory federal income tax rate
State tax, net of federal tax benefit
Interest income 50% excludable
Tax-exempt interest
Bank-owned life insurance income
Incentive stock option and other nondeductible compensation
Settlement of prior year charitable donation
Federal tax credits
Other
Effective tax rate
95
2012
2011
2010
35.0% 35.0% 35.0%
3.0
(1.8)
3.4
(0.5)
(3.7)
(2.1)
(0.5)
(0.7)
(0.4)
(1.1)
(1.3)
(2.0)
0.6
0.9
0.8
—
(1.2) —
(1.4)
(0.5)
0.1
0.5
(1.1)
0.7
35.2% 33.6% 27.9%
We account for income taxes in accordance with FASB Accounting Standards Codification (“ASC”) 740,
Income Taxes (formerly Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income
Taxes and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109). ASC 740 prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Benefits
from tax positions are recognized in the financial statements only when it is more-likely-than-not that the tax
position will be sustained upon examination by the appropriate taxing authority that would have full knowledge
of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured
at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first
subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no
longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. ASC 740 also provides guidance on the accounting for
and disclosure of unrecognized tax benefits, interest and penalties.
Related to the move of our corporate headquarters, during 2007, we donated (to the local Historical Society,
for the purpose of community viewing) an N.C. Wyeth mural which was previously displayed in our former
headquarters. Pursuant to an appraisal by a nationally recognized art appraisal firm, the estimated fair value of
the mural was $6.0 million, which was recorded as a charitable contribution expense. We recognized a related
offsetting gain on the transfer of the asset during 2007. The expense and offsetting gain was shown net in our
Consolidated Financial Statements. As the gain on the transfer of the asset is permanently excludible from
taxation, the charitable contribution transaction results in a permanent deduction for income tax purposes. The
amount of the deduction represented an income tax uncertainty because it was subject to evaluation by the
Internal Revenue Service (“IRS”). The IRS did not audit our 2007 income tax return and the statute of limitations
on this tax year expired in 2011. Accordingly, we recorded a $416,000 tax benefit in 2011 related to the
resolution of this uncertainty.
We record interest and penalties on potential income tax deficiencies as income tax expense. Federal tax
years 2009 through 2012 remain subject to examination as of December 31, 2012, while tax years 2009 through
2012 remain subject to examination by state taxing jurisdictions. Our 2010 federal tax return is currently being
audited by the IRS. No state income tax return examinations are currently in process. We do not expect to record
or realize any material unrecognized tax benefits during 2013.
There are no longer any unrecognized tax benefits related to ASC 740 as of December 31, 2012. A
reconciliation of the total amounts of unrecognized tax benefits during 2012 and 2011 is as follows:
(In Thousands)
Unrecognized tax benefits at January 1
Tax positions taken during prior years
Tax positions taken during current year
Reductions relating to settlements with taxing authorities
Reductions as a result of a lapse of statutes of limitations
Unrecognized tax benefits at December 31
2012
2011
$ 88
(3)
—
(85)
—
$—
$ 967
96
—
—
(975)
$ 88
12. STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with FASB ASC 718, Stock Compensation. After
shareholder approval in 2005, the 1997 Stock Option Plan (“1997 Plan”) was replaced by the 2005 Incentive Plan
(“2005 Plan”). No future awards may be granted under the 1997 Plan, however, we still have options outstanding
under the plan for our officers, directors and Associates. The 2005 Plan will terminate on the tenth anniversary of
96
its effective date, after which no awards may be granted. We have stock options outstanding under both plans
(collectively, “Stock Incentive Plans”). The number of shares reserved for issuance under the 2005 Plan is
1,197,000. At December 31, 2012, there were 217,530 shares available for future grants under the 2005 Plan.
The Stock Incentive Plans provide for the granting of incentive stock options as defined in Section 422 of
the Internal Revenue Code as well as non-incentive stock options (collectively, “Stock Options”). Additionally,
the 2005 Plan provides for the granting of stock appreciation rights, performance awards, restricted stock and
restricted stock unit awards, deferred stock units, dividend equivalents, other stock-based awards and cash
awards. All Stock Options are to be granted at not less than the market price of our common stock on the date of
the grant. All Stock Options granted during 2012 vest in 25% per annum increments, start to become exercisable
one year from the grant date and expire five years from the grant date. Generally, all awards become exercisable
immediately in the event of a change in control, as defined within the Stock Incentive Plans.
Stock Options
A summary of the status of our Stock Incentive Plans as of December 31, 2012, 2011 and 2010,
respectively, and changes during those years are presented below:
Stock Options:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Expired
2012
2011
2010
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
416,886
88,307
(71,055)
—
(98,408)
$43.52
39.66
30.78
—
53.99
566,323
57,723
(85,379)
(12,666)
(109,115)
$42.84
44.15
18.94
40.85
59.85
733,468
27,889
(67,376)
(22,899)
(104,759)
$42.95
30.94
14.29
40.53
59.29
Outstanding at end of year
335,730
42.14
416,886
43.52
566,323
42.84
Exercisable at end of year
178,432
$45.28
304,628
$46.27
442,837
$45.04
Weighted-average fair value of awards
granted
$
12.50
$
14.06
$
9.51
In addition, at January 1, 2012 there were nonvested options with a $840,000 intrinsic value. Options that
vested during 2012 had an intrinsic value of $393,000. Also during 2012, there were options exercised with an
intrinsic value of $754,000. In addition, there were vested options that expired with no intrinsic value. The
exercisable options remaining at December 31, 2012, had an intrinsic value of $571,000 and an average
remaining contractual term of 1.4 years. At December 31, 2012 the outstanding options had an intrinsic value of
$1.2 million and an average remaining contractual term of 2.4 years.
97
The following table provides information about our unvested stock options outstanding at December 31,
2012, 2011 and 2010, respectively:
2012
Weighted-
Average
Exercise
Price
Weighted-
Average
Grant Date
Fair Value
2011
Weighted-
Average
Exercise
Price
Weighted-
Average
Grant Date
Fair Value
Shares
2010
Weighted-
Average
Exercise
Price
Weighted-
Average
Grant Date
Fair Value
Shares
Shares
Stock Options:
Unvested at beginning
of period
Granted
Vested
Forfeited
Unvested at end of
period
112,258
88,307
(43,267)
—
$36.08
39.66
34.32
$10.69
12.50
9.66
123,486 $34.94
44.15
57,723
40.77
(56,285)
40.85
(12,666)
$ 8.27
14.06
9.13
9.44
191,558 $41.31
30.94
27,889
48.38
(73,062)
40.53
(22,899)
$ 8.92
9.51
10.26
8.84
157,298
$38.57
$11.98
112,258 $36.08
$10.69
123,486 $34.94
$ 8.27
The total amount of unrecognized compensation cost related to nonvested stock options as of December 31,
2012 was $832,000. The weighted-average period over which it is expected to be recognized is 2.7 years. We
issue new shares upon the exercise of options.
During 2012, we granted 88,307 options with a five-year life and a four-year vesting period. The Black-
Scholes option-pricing model was used to determine the grant date fair value of options. Significant assumptions
used in the model included a weighted-average risk-free rate of return (zero coupon treasury yield) between 0.6%
and 0.7% in 2012; an expected option life of three years and nine months; and an expected stock price volatility
of 44.6% in 2012. For the purposes of this option-pricing model, a dividend yield of 1.2% was assumed.
The following table summarizes all stock options outstanding and exercisable for Option Plans as of
December 31, 2012, segmented by range of exercise prices:
Outstanding
Exercisable
Stock Options:
$20.71-$27.60
$27.61-$34.50
$34.51-$41.40
$41.41-$48.30
$48.31-$55.20
$55.21-$62.10
$62.11-$69.00
Total
Restricted Stock
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Life
Number
41,067
22,175
90,907
121,829
8,730
49,717
1,305
$23.31
31.10
39.63
44.68
51.19
58.83
62.50
335,730
$42.14
1.1 years
2.4 years
4.1 years
1.8 years
1.0 years
1.9 years
3.3 years
2.4 years
Weighted
Average
Exercise
Price
$23.28
30.93
38.54
44.54
51.19
58.83
62.50
Number
25,412
7,915
2,172
83,181
8,730
49,717
1,305
178,432
$45.28
During 2012, we issued 24,442 restricted stock units and awards. These awards vest over a four year period.
These stock awards were made to certain executive officers. The total amount of compensation cost to be
recognized relating to non-vested restricted stock as of December 31, 2012, was $992,000. The weighted-average
period over which it is expected to be recognized is 1.8 years.
Compensation costs related to these issuances are recognized over the lives of the restricted stock and
restricted stock units. We amortize the expense related to the restricted stock grants into salaries, benefits and
98
other compensation expense on an accrual basis over the requisite service period for the entire award. When we
award restricted stock to individuals from whom we may not receive services in the future, such as those who are
eligible for retirement, we recognize the expense of restricted stock grants when we make the award, instead of
amortizing the expense over the vesting period of the award.
Performance Stock Awards
Beginning in 2009,
the Long-Term Performance-Based Restricted Stock Unit program (“Long-Term
Program”) will award up to an aggregate of 77,800 shares of our stock to the remaining 14 participants, only after
the achievement of targeted levels of return on assets (“ROA”) in any year through 2011. In 2010, the Personnel
and Compensation Committee of the Board recommended, and the Board approved, the extension to 2013 and
the adjustment of the ROA performance levels. Under the terms of the revised plan, if an annual ROA
performance level of 1.00% is achieved, up to 39,000 shares will be awarded. If an annual ROA performance
level of 1.125% is achieved, up to 53,300 shares will be awarded. If an annual ROA performance level of 1.25%
or greater is achieved, up to 77,800 shares will be awarded. The awarded stock will vest in 25% increments over
four years. In addition, if a performance level is achieved and there are insufficient shares available for grant, we
have the option of granting the available shares with the remainder being paid in cash. We did not recognize any
compensation expense related to this program in 2012, 2011 or 2010. Compensation expense for the Long-Term
Program was based on the closing stock price as of May 28, 2008 and will begin to be recognized once the
achievement of target performance is considered probable.
The Board approved a plan in which Marvin N. Schoenhals, Chairman of the Board, was granted
22,250 shares of restricted stock effective January 3, 2011 with a five-year performance vesting schedule starting
at the end of the second year. These awards are based on acquiring new business relationships in which
Mr. Schoenhals has played a meaningful role in helping us establish the new business. These shares are subject to
vesting in whole or in part if pre-tax contributions achieved over a two year period result in at least a 50% return
on investment of the cost of the restricted stock. We recognized compensation expense of $275,000 related to
this award in 2012.
The impact of stock-based compensation for the year ended December 31, 2012 was $2.3 million pre-tax
($1.7 million after tax) to salaries, benefits and other compensation. This compares to $1.6 million pre-tax
($1.2 million after tax) in 2011 and $965,000 pre-tax ($745,000 after tax) in 2010.
13. COMMITMENTS AND CONTINGENCIES
Lending Operations
loan
At December 31, 2012, we had commitments to extend credit of $635.4 million. Commercial
commitments represented $317.7 million; commercial owner-occupied commitments represented $46.2 million
while commercial mortgage and construction commitments were $13.5 million and $44.6 million, respectively.
Outstanding letters of credit were $55.5 million. Consumer lines of credit totaled $135.1 million of which
$110.0 million was secured by real estate and outstanding commitments to make or acquire mortgage loans
aggregated $22.7 million; one was a variable rate loan at 3.13%; the rest were fixed rate loans ranging from
2.63% to 4.50%. Mortgage commitments generally have closing dates within a one-month period but can be
extended to six months in some cases.
99
Data Processing Operations
We have entered into contracts to manage our network operations, data processing and other related
services. The projected amounts of future minimum payments contractually due (in thousands) are as follows:
Year
2013
2014
2015
2016
2017
Amount
$3,748
2,831
1,462
769
736
$9,546
The expenses for data processing and operations for the year ending December 31, 2012 was $5.6 million.
Legal Proceedings
In the ordinary course of business, we are subject to legal actions that involve claims for monetary relief.
For additional information regarding legal proceedings, see Note 20 to the Consolidated Financial Statement.
Financial Instruments With Off-Balance Sheet Risk
We are a party to financial instruments with off-balance sheet risk in the normal course of business
primarily to meet the financing needs of our customers. To varying degrees, these financial instruments involve
elements of credit risk that are not recognized in the Consolidated Statement of Condition.
Exposure to loss for commitments to extend credit and standby letters of credit written is represented by the
contractual amount of those instruments. We generally require collateral to support such financial instruments in
excess of the contractual amount of those instruments and use the same credit policies in making commitments as
we do for on-balance sheet instruments.
The following represents a summary of off-balance sheet financial instruments at year-end:
December 31,
2012
2011
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments
Commercial mortgage loan commitments
Commercial loan commitments
Commercial owner-occupied commitments (1)
Commercial standby letters of credit
Residential mortgage loan commitments
Consumer loan commitments
$ 44,610
13,523
317,750
46,211
55,540
22,657
135,060
$ 50,099
7,503
349,213
—
55,697
10,806
123,669
(1) Prior to 2012, owner-occupied commercial commitments were included in commercial commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are expected to expire without being
completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a
third party. We evaluate each customer’s creditworthiness and obtain collateral based on our credit evaluation of
the counterparty.
100
Not reflected in the table above are commitments to sell residential mortgages of $55.2 million and
$33.5 million at December 31, 2012 and 2011, respectively
Indemnifications
Secondary Market Loan Sales. Given the current
interest rate environment and current customer
preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio,
we generally sell newly originated fixed rate conventional, 15 to 30 year loans in the secondary market to
government sponsored enterprises such as FHLMC or to wholesale lenders. Loans held-for-sale are carried at the
lower of cost or market of the aggregate, or in some cases, individual loans. We sometimes retain the servicing
rights on residential mortgage loans sold which results in monthly service fee income. We will, however, sell
select loans with servicing released on a nonrecourse basis. Gains and losses on sales of loans are recognized at
the time of the sale.
We generally do not sell loans with recourse except to the extent arising from standard loan sale contract
provisions covering violations of representations and warranties and, under certain circumstances first payment
default by the borrower. These are customary repurchase provisions in the secondary market for conforming
mortgage loan sales. These indemnifications may include our repurchase of the loans. Repurchases and losses are
rare, and no provision is made for losses at the time of sale. There were no such repurchases for the years ended
December 31, 2012 and 2011.
Swap Guarantees. We entered into agreements with three unaffiliated financial institutions whereby those
financial
institutions entered into interest rate derivative contracts (interest rate swap transactions) with
customers referred to them by us. By the terms of the agreements, those financial institutions have recourse to us
for any exposure created under each swap transaction in the event the customer defaults on the swap agreement
and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement
that allows financial institutions like us to provide access to interest rate swap transactions for our customers
without creating the swap ourselves.
At December 31, 2012, there were ninety-five variable-rate to fixed-rate swap transactions between the
third-party financial institutions and our customers with an initial notional amount aggregating approximately
$381.7 million, and with maturities ranging from eight months to thirteen years. The aggregate fair value of these
swaps to the customers was a liability of $35.5 million as of December 31, 2012, and of the ninety-five swaps, all
were in a paying position to a third party.
14. FAIR VALUE DISCLOSURES
Fair Value of Financial Assets
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a
fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three
levels:
Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities
in active markets. A quoted price in an active market provides the most reliable evidence of fair value and
shall be used to measure fair value whenever available.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active
markets; inputs to the valuation methodology include quoted prices for identical or similar assets or
liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally
from or can be corroborated by observable market data by correlation or other means.
Level 3: Inputs to the valuation methodology are unobservable and significant
to the fair value
measurement. Level 3 assets and liabilities include financial instruments whose value is determined using
101
discounted cash flow methodologies, as well as instruments for which the determination of fair value
requires significant management judgment or estimation.
A description of the valuation methodologies used for instruments measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
The table below presents the balances of assets measured at fair value as of December 31, 2012 (there are no
material liabilities measured at fair value):
Description
Assets Measured at Fair Value on a Recurring
Basis:
Available-for-sale securities:
Collateralized mortgage obligations
FNMA
FHLMC
GNMA
U.S. Government and agencies
State and political subdivisions
Reverse mortgages
Trading securities
Total assets measured at fair value on a
recurring basis
Assets Measured at Fair Value on a
Nonrecurring Basis:
Other real estate owned
Impaired loans (collateral dependent)
Total assets measured at fair value on a
nonrecurring basis
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
$—
—
—
—
—
—
—
—
$252,300
406,255
59,650
132,455
46,990
3,209
—
—
$ 7,096
—
—
—
—
—
(457)
12,590
$259,396
406,255
59,650
132,455
46,990
3,209
(457)
12,590
$—
$900,859
$19,229
$920,088
$—
—
$ —
—
$ 4,622
52,904
$
4,622
52,904
$—
$ —
$57,526
$ 57,526
102
The table below presents the balances of assets measured at fair value as of December 31, 2011 (there were no
material liabilities measured at fair value):
Description
Assets Measured at Fair Value on a Recurring Basis:
Available-for-sale securities:
Collateralized mortgage obligations
FNMA
FHLMC
GNMA
U.S. Government and agencies
State and political subdivisions
Reverse mortgages
Trading securities
Total assets measured at fair value on a recurring basis
Assets Measured at Fair Value on a Nonrecurring Basis:
Other real estate owned
Impaired loans (collateral dependent)
Total assets measured at fair value on a nonrecurring basis
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
$—
—
—
—
—
—
—
—
$—
$—
—
$—
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Fair Value
$324,450
329,354
95,086
63,967
39,025
4,190
—
—
$ 3,936
—
—
—
—
—
(646)
12,432
$328,386
329,354
95,086
63,967
39,025
4,190
(646)
12,432
$856,072
$15,722
$871,794
$ 11,695
74,562
$ 86,257
$ —
—
$ —
$ 11,695
74,562
$ 86,257
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 December 31, 2012, securities classified as available for sale are reported at
fair value using both Level 2 and Level 3 inputs. Included in the Level 2 total are approximately $47.0 million in
Federal Agency debentures, $850.7 million in Federal Agency MBS and $3.2 million in municipal bonds.
Agency and MBS securities are predominately AAA-rated. We believe that
this Level 2 designation is
appropriate for these securities under ASC 820-10 as, with almost all fixed income securities, none are exchange
traded, and all are priced by correlation to observed market data. For these securities we obtain fair value
measurements from an independent pricing service. The fair value measurements consider observable data that
may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading
levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms
and conditions, among other factors.
Included in the Level 3 total is a small equity traunche of a reverse mortgage security. This security is
Level 3 because there is no active market and no observable inputs that reflect quoted prices for identical assets
in active markets (Level 1) or inputs other than quoted prices that are observable for the asset through
corroboration with observable market data (Level 2). To establish the fair value for a Level 3 asset, a
103
“mark-to-model” has been developed using the income approach described in ASC 820-10-35-32 and is similar
to the methodology used to value our trading securities described below.
Trading Securities. The amount included in the trading securities category represents the fair value of a BBB-
rated traunche of a reverse mortgage security. There has never been an active market for these securities. As
such, we classify these trading securities as Level 3 under ASC 820-10. As prescribed by ASC 820-10
management used various observable and unobservable inputs to develop a range of likely fair value prices
where this security would be exchanged in an orderly transaction between market participants at
the
measurement date. The unobservable inputs reflect management’s assumptions about the assumptions that
market participants would use in pricing this asset. Included in these inputs were the median of a selection of
other BBB-rated securities as well as quoted market prices from higher rated traunches of this asset class. The
unobservable inputs consist of prepayments, house price appreciation and interest rates. Our sensitivity analysis
completed at December 31, 2012, showed that any increase or decrease in these inputs would not have a
significant impact on the fair value of these assets. The value assigned to this security therefore is determined
primarily through a discounted cash flow analysis. All assumptions required a significant degree of management
judgment.
Reverse Mortgages. The amount of our investment in reverse mortgages represents the estimated value of future
cash flows of the reverse mortgages at a rate deemed appropriate for these mortgages, based on the market rate
for similar collateral. The projected cash flows depend on assumptions about life expectancy of the mortgagor
and the future changes in collateral values. Due to the significant amount of management judgment and the
unobservable input calculations, these reverse mortgages have been classified as Level 3.
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Balance at December 31, 2010
Total net income (loss) for the year included in net
income
Contractual monthly advances of principal
Mark-to-market adjustment
Balance at December 31, 2011
Total net income for the year included in net
income
Contractual monthly advances of principal
Mark-to-market adjustment
Trading
Securities
Reverse
Mortgages
Available-
for-sale
Securities
Total
(In Thousands)
$12,432
$(686)
$ —
$11,746
—
—
—
(137)
177
—
265
2,755
916
128
2,932
916
$12,432
$(646)
$3,936
$15,722
33
—
125
12
177
—
—
—
3,160
45
177
3,285
Balance at December 31, 2012
$12,590
$(457)
$7,096
$19,229
Other Real Estate Owned. Other real estate owned consists of loan collateral which has been repossessed through
foreclosure or other measures. Initially, foreclosed assets are recorded as held for sale at the lower of the loan
balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are
updated periodically and the assets may be marked down further, reflecting a new cost basis. Due to the
continuing weakness in the real estate market, we utilize a more significant level of unobservable inputs and, as
such, have reclassified the hierarchical levels of both Other Real Estate Owned and Impaired Loans to Level 3
for 2012. The fair value of our real estate owned was estimated using Level 3 inputs based on appraisals obtained
from third parties.
Impaired Loans. We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair
values of such loans are estimated using Level 3 inputs in the fair value hierarchy. The collateral for each loan
104
has a unique appraisal and our discount of the value is based on the factors unique to each impaired loan. The
significant unobservable input in determining the fair value is our subjective discount on appraisals of the
collateral securing the loan, which ranges from 10%—50%. Collateral may consist of real estate and/or business
assets including equipment, inventory and accounts receivable. The value of these assets is determined based on
appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based
on our historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell,
and/or our expertise and knowledge of the customer and the customer’s business.
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent
loans, has a gross amount of $52.9 million and $75.3 million at December 31, 2012 and December 31, 2011,
respectively. The valuation allowance on impaired loans was $5.0 million as of December 31, 2012 and
$4.7 million as of December 31, 2011.
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 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 year-end or that will be realized in the
future.
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments. For cash and short-term investments, including due from banks, federal funds
sold, securities purchased under agreements to resell and interest-bearing deposits with other banks, the carrying
amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities. Since quoted market prices are not available, fair value is
estimated using quoted prices for similar securities, which we obtain from a third party vendor. We utilize one of
the largest providers of securities pricing in 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 external appraisals of the underlying collateral. For additional discussion of our
mortgage-backed securities trading, see Note 1 to the Consolidated Financial Statements.
Loans held-for-sale. Loans held-for-sale are carried at the lower of cost or market of the aggregate, or in some
cases, individual loans.
Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are
segregated by type: commercial, commercial mortgages, construction, residential mortgages, and consumer. For
loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans are
estimated by discounting expected cash flows using the current rates at which similar loans would be made to
borrowers with comparable credit ratings and for similar remaining maturities. The fair value of nonperforming
loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a
rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if
appraisals are not available. This technique does not contemplate an exit price.
Bank-Owned Life Insurance. The estimated fair value approximates the book value for this investment.
Stock in the Federal Home Loan Bank of Pittsburgh: The fair value of FHLB stock is assumed to be essentially
equal to its cost basis, since the stock is non-marketable but redeemable at its par value.
105
Demand Deposits, Savings Deposits, and Time Deposits. The fair value of demand deposits and savings deposits
is determined by projecting future cash flows using an estimated economic life based on account characteristics.
The resulting cash flow is discounted using rates available on alternative funding sources. The fair value of time
deposits is estimated using the rate and maturity characteristics of the deposits to estimate their cash flow. The
cash flow is discounted as rates for similar term wholesale funding.
Borrowed Funds. Rates currently available to us for debt with similar terms and remaining maturities are used to
estimate fair value of existing debt.
Off-Balance Sheet Instruments. The fair value of off-balance sheet instruments, including commitments to
extend credit and standby letters of credit, is estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflects the present creditworthiness of the counterparties.
The book value and estimated fair value of our financial instruments are as follows:
At December 31,
(In Thousands)
Financial assets:
Cash and cash equivalents
Investment securities
Loans, held-for-sale
Loans, net
Stock in Federal Home Loan Bank of
Pittsburgh
Accrued interest receivable
Financial liabilities:
Deposits
Borrowed funds
Standby letters of credit
Accrued interest payable
Fair Value
Measurement
2012
2011
Book Value
Fair Value
Book Value
Fair Value
Level 1
See previous
table
Level 3
Level 3
Level 2
Level 2
Level 2
Level 2
Level 3
Level 2
$ 500,887
$ 500,887
$ 468,017
$ 468,017
920,088
12,758
2,723,916
920,088
12,758
2,746,001
871,794
10,185
2,702,589
871,794
10,185
2,721,804
31,165
9,652
31,165
9,652
35,756
11,743
35,756
11,743
3,274,963
637,266
224
1,099
3,174,907
638,375
224
1,099
3,135,304
723,620
322
1,910
3,087,464
731,522
322
1,910
The estimated fair value of our off-balance sheet financial instruments is as follows:
December 31,
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit
15. RELATED PARTY TRANSACTIONS
2012
2011
$—
$—
We routinely enter into transactions with our directors and officers. Such transactions are made in the
ordinary course of business on substantially the same terms and conditions, including interest rates and collateral,
as those prevailing at the same time for comparable transactions with other customers. They do not, in the
opinion of management, involve more than the normal credit risk or present other unfavorable features. The
aggregate amount of loans to such related parties was $2.1 million and $1.8 million at December 31, 2012 and
2011, respectively. During 2012, new loans and credit line advances to such related parties amounted to
$956,000 and repayments amounted to $636,000.
106
16. SEGMENT INFORMATION
Under the definition of FASB ASC 280, Segment Reporting (“ASC 280”) (Formerly SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information) we discuss our business in three
segments. There is one segment for each of WSFS Bank, Cash Connect, (the ATM division of WSFS Bank), and
Trust and Wealth Management. Trust and Wealth Management was reorganized during 2011 and is comprised of
Montchanin, Christiana Trust, Monarch Entity Services LLC, Private Banking and WSFS Investment Group, Inc.
in a single reportable segment because each has similar economic characteristics, products, customers and
distribution methods. As required by ASC 280, all prior years’ information has been updated to reflect this
presentation.
The WSFS Bank segment provides financial products to commercial and retail customers through its
51 offices located in Delaware (42), Pennsylvania (7) and Virginia (1) and Nevada (1). Retail and Commercial
Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS.
These departments share the same regulator, the same market, many of the same customers and provide similar
products and services through the general infrastructure of the Bank. Because of these and other reasons, these
departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank
segment in accordance with ASC 280.
Cash Connect provides turnkey ATM services through strategic partnerships with several of the largest
networks, manufacturers and service providers in the ATM industry. The balance sheet category “Cash in non-
owned ATMs” includes cash from which fee income is earned through bailment arrangements with customers of
Cash Connect.
The Trust and Wealth Management segment is comprised of Christiana Trust, Monarch Entity Services
LLC, Montchanin, Private Banking and WSFS Investment Group, Inc. Christiana Trust was acquired in
December 2010 and WSFS’ Trust and Wealth Management business was consolidated into Christiana Trust.
Christiana Trust provides investment, fiduciary, and agency services from locations in Delaware and Nevada.
These services are provided to individuals and families as well as corporations and institutions. Monarch Entity
Services LLC provides commercial domicile services from locations in Delaware and Nevada. Montchanin has
one consolidated wholly owned subsidiary, Cypress Capital Management, LLC (Cypress). Cypress is a
Wilmington-based investment advisory firm serving high net-worth individuals and institutions. WSFS
Investment Group, Inc. markets various third-party insurance products and securities. Private Banking specializes
in meeting the needs of professionals and their practices, including deposit services and credit needs of existing
and start-up practices.
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
107
applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial
Statements. Segment information for the years ended December 31, 2012, 2011, and 2010 follows:
For the Year Ended December 31, 2012:
WSFS Bank
Cash
Connect
Trust &
Wealth
Management
Total
(In Thousands)
External customer revenues:
Interest income
Noninterest income
$ 141,986
54,225
$ —
18,749
Total external customer revenues
196,211
18,749
$
8,301
13,719
22,020
$ 150,287
86,693
236,980
Intersegment revenues:
Interest income
Noninterest income
Total intersegment revenues
Total revenue
External customer expenses:
Interest expense
Noninterest expenses
Provision for loan loss
Total external customer expenses
Intersegment expenses:
Interest expense
Noninterest expenses
Total intersegment expenses
Total expenses
Income before taxes
Income tax provision
Consolidated net income
Cash and cash equivalents
Other segment assets
4,032
8,563
12,595
208,806
22,397
112,071
32,222
166,690
5,719
884
6,603
—
779
779
5,719
105
5,824
19,528
27,844
—
9,549
—
9,549
1,368
2,219
3,587
891
11,725
(169)
12,447
2,664
6,344
9,008
173,293
13,136
21,455
$
35,513
$
6,392
$
6,389
9,751
9,447
19,198
256,178
23,288
133,345
32,053
188,686
9,751
9,447
19,198
207,884
48,294
16,983
31,311
$
$
$
68,419
3,683,073
$430,382
1,605
$
2,086
189,583
$ 500,887
3,874,261
Total segment assets at December 31, 2012
$3,751,492
$431,987
$191,669
$4,375,148
Capital expenditures
$
7,796
$
405
$
27
$
8,228
108
For the Year Ended December 31, 2011:
WSFS Bank
Cash
Connect
Trust &
Wealth
Management
Total
(In Thousands)
External customer revenues:
Interest income
Noninterest income
Total external customer revenues
Intersegment revenues:
Interest income
Noninterest income
Total intersegment revenues
Total revenue
External customer expenses:
Interest expense
Noninterest expenses
Provision for loan loss
Total external customer expenses
Intersegment expenses:
Interest expense
Noninterest expenses
Total intersegment expenses
Total expenses
Income before taxes
Income tax provision
Consolidated net income
Cash and cash equivalents
Other segment assets
$ 149,313
34,959
$ —
15,618
184,272
15,618
$
9,329
13,011
22,340
$ 158,642
63,588
222,230
4,414
7,447
11,861
196,133
31,345
108,061
26,641
166,047
6,122
867
6,989
—
724
724
6,122
143
6,265
10,536
8,314
18,850
16,342
28,605
241,080
—
7,883
—
7,883
1,235
1,578
2,813
1,260
11,533
1,355
14,148
3,179
5,869
9,048
32,605
127,477
27,996
188,078
10,536
8,314
18,850
173,036
10,696
23,196
206,928
$
23,097
$
5,646
$
5,409
$
$
34,152
11,475
22,677
$
48,107
3,618,744
$416,949
2,155
$
2,961
200,092
$ 468,017
3,820,991
Total segment assets at December 31, 2011
$3,666,851
$419,104
$203,053
$4,289,008
Capital expenditures
$
8,877
$
1,291
$
326
$
10,494
109
For the Year Ended December 31, 2010:
WSFS Bank
Cash
Connect
Trust &
Wealth
Management
Total
(In Thousands)
External customer revenues:
Interest income
Noninterest income
$ 154,790
31,849
$ —
13,231
$
7,613
5,035
$ 162,403
50,115
Total external customer revenues
186,639
13,231
12,648
212,518
Intersegment revenues:
Interest income
Noninterest income
Total intersegment revenues
Total revenue
External customer expenses:
Interest expense
Noninterest expenses
Provision for loan loss
Total external customer expenses
Intersegment expenses:
Interest expense
Noninterest expenses
Total intersegment expenses
Total expenses
Income (loss) before taxes
Income tax provision
Consolidated net income
Cash and cash equivalents
Other segment assets
3,988
6,652
10,640
197,279
40,629
95,580
40,084
176,293
3,914
755
4,669
180,962
—
755
755
3,914
—
3,914
13,986
16,562
—
5,956
—
5,956
930
1,534
2,464
8,420
1,103
7,796
1,799
10,698
3,058
5,118
8,176
18,874
$
16,317
$
5,566
$ (2,312)
7,902
7,407
15,309
227,827
41,732
109,332
41,883
192,947
7,902
7,407
15,309
208,256
19,571
5,454
14,117
$
$
$
46,803
3,350,338
$326,573
13,196
$
3,383
213,225
$ 376,759
3,576,759
Total segment assets at December 31, 2010
$3,397,141
$339,769
$216,608
$3,953,518
Capital expenditures
$
5,775
$
174
$
2
$
5,951
17. GOODWILL AND 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.
The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted
market prices or provided by other third-party sources, when available. When third-party information was not
available we made good-faith estimates primarily through the use of internal cash flow modeling techniques. The
assumptions used in the cash flow modeling are subjective and susceptible to significant changes.
Goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually
and charged to results of operations in periods in which the recorded value is more than the estimated fair value.
110
Intangible assets that have finite useful lives will continue to be amortized over their useful lives and are
periodically evaluated for impairment. Goodwill
totaled $28.1 million at both December 31, 2012 and
December 31, 2011. The majority of this goodwill, or $23.0 million, is in the WSFS Bank reporting unit and is
the result of a branch acquisition in 2008 and the acquisition of CB&T during 2010. The remaining $5.1 million
is in the Trust and Wealth Management reporting unit and is mainly the result of the acquisition of CB&T.
During 2011, ASU 2011-08, Intangibles—Goodwill and Other (Topic 350), was issued. Under the Update,
an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more
likely than not that its fair value is less than its carrying amount. Therefore, before the first step of the existing
guidance, the entity has the option to first assess qualitative factors to determine whether the existence of events
or circumstances leads to a determination that the fair value of goodwill is less than carrying value. The
qualitative assessment includes adverse events or circumstances identified that could negatively affect the
reporting units’ fair value as well as positive and mitigating events. 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 process is unnecessary. The entity has the option to bypass the
qualitative assessment step for any reporting unit in any period and proceed directly to the first step of the
existing two-step process. The entity can resume performing the qualitative assessment in any subsequent period.
We adopted the Update for the year ended December 31, 2011.
When required, the goodwill impairment test involves a two-step process. The first test is done by
comparing the reporting unit’s aggregate fair value to its carrying value. Absent other indicators of impairment, if
the aggregate fair value exceeds the carrying value, goodwill is not considered impaired and no additional
analysis is necessary. If the carrying value of the reporting unit were to exceed the aggregate fair value, a second
test would be performed to measure the amount of impairment loss, if any. To measure any impairment loss, the
implied fair value would be determined in the same manner as if the reporting unit were being acquired in a
business combination. If the implied fair value of goodwill is less than the recorded goodwill an impairment
charge would be recorded for the difference.
Fair value may be determined using market prices, comparison to similar assets, market multiples,
discounted cash flow analyses and other variables. Estimated cash flows extend five years into the future and, by
their nature, are difficult to estimate over such an extended period of time. Factors that may significantly affect
estimates include, but are not limited to, balance sheet growth assumptions, credit losses in our investment and
loan portfolios, competitive pressures in our market area, changes in customer base and customer product
preferences, changes in revenue growth trends, cost structure, changes in discount rates, conditions in the
banking sector and general economic variables.
As of December 31, 2012, we completed the Step One test of the analysis to determine potential goodwill
impairment of the WSFS Bank and Trust and Wealth Management reporting units. The valuation incorporated a
market-based analysis and indicated the fair values of our WSFS Bank and Trust and Wealth Management
reporting units were above their carrying amounts. Therefore, in accordance with FASB ASC 350-20-35-6, the
Step Two analysis was not required.
111
FASB ASC 350, also requires that an acquired intangible asset be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirer’s intent to do so. The following table summarizes other
intangible assets:
December 31, 2012
Core deposits
Other
Total other intangible assets
December 31, 2011
Core deposits
Other
Total other intangible assets
Gross
Intangible
Assets
Accumulated
Amortization
(In Thousands)
Net
Intangible
Assets
$4,370
4,464
$8,834
$4,370
4,865
$9,235
$(2,020)
(1,640)
$(3,660)
$(1,393)
(1,703)
$(3,096)
$2,350
2,824
$5,174
$2,977
3,162
$6,139
Core deposits are amortized over their expected lives using the present value of the benefit of the core
deposits and straight-line methods of amortization. We recognized amortization expense on other intangible
assets of $989,000, $1.2 million and $569,000 for the years ended December 31, 2012, 2011, and 2010.
The following presents the estimated amortization expense of intangibles:
(In Thousands)
2013
2014
2015
2016
2017
Thereafter
Total
Amortization
of Intangibles
$ 905
832
773
465
332
1,867
$5,174
At December 31, 2012, goodwill and other intangible assets were not considered impaired. Changing
economic conditions that may adversely affect our performance and stock price could result in impairment,
which could adversely affect earnings in the future.
18. STOCK AND COMMON STOCK WARRANTS
In 2010, we completed an underwritten public offering of 1,370,000 shares of common stock and raised
$47.1 million net of $2.9 million of costs.
In 2009 we completed a private placement of stock to Peninsula Investment Partners, L.P. (Peninsula),
pursuant
to which we issued and sold 862,069 shares of common stock for a total purchase price of
$25.0 million, and a 10-year warrant to purchase 129,310 shares of common stock at an exercise price of
$29.00 per share. The warrant is immediately exercisable. Total proceeds of $25.0 million were allocated, based
on the relative fair value of common stock and common stock warrants, to common stock for $23.5 million and
common stock warrants for $1.5 million.
In 2009, we entered into a purchase agreement with the U.S. Treasury (“Treasury”) pursuant to which we
issued and sold 52,625 shares of our fixed-rate cumulative perpetual preferred stock for a total purchase price of
112
$52.6 million, and a 10-year warrant to purchase 175,105 shares of common stock at an exercise price of
$45.08 per share. On March 28, 2012, the Treasury sold all 52,625 shares. Under the terms of the agreement, we
will continue to pay a five percent dividend annually for each of the first five years of the investment and a nine
percent dividend thereafter until the shares are redeemed. We have declared and paid $2.6 million of cash
dividends on the preferred stock during both 2012 and 2011.
Total proceeds of $52.6 million were allocated, based on the relative fair value of the preferred stock and
common stock warrants,
for
$693,000 respectively. The preferred stock discount is being accreted, on an effective yield method, over five
years. We have accreted $139,000 for the years ended December 31, 2012, 2011 and 2010. At December 31,
2012 there was approximately $150,000 of discount on preferred stock remaining.
to preferred stock for $51.9 million and common stock warrants
The preferred stock is nonvoting, except for class voting rights on certain matters that could adversely affect
the shares. They may be redeemed by us for the liquidation preference ($1,000 per share), plus accrued but
unpaid dividends. On September 12, 2012 we entered into a letter agreement with the Treasury pursuant to which
the Company repurchased the warrant for $1.8 million.
19. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
(In Thousands)
Assets:
Cash
Investment securities, available-for-sale
Investment in subsidiaries
Investment in Capital Trust III
Other assets
Total assets
Liabilities:
Trust Preferred
Senior Debt
Interest payable
Other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock
Common stock
Capital in excess of par value
Accumulated other comprehensive income
Retained earnings
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
2012
2011
$ 62,244
7,096
471,236
2,011
2,451
$ 13,046
3,936
439,989
2,011
886
$ 545,038
$ 459,868
$ 67,011
55,000
407
1,566
$ 67,011
—
133
591
123,984
67,735
1
184
222,978
12,943
433,228
(248,280)
1
182
220,163
11,202
408,865
(248,280)
421,054
392,133
$ 545,038
$ 459,868
113
Condensed Statement of Operations
Year Ended December 31,
(In Thousands)
Income:
Interest income
Noninterest income
Expenses:
Interest expense
Other operating expenses
(Loss) income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
Dividends on preferred stock and accretion of discount
2012
2011
2010
$ 1,853
139
$ 1,021
153
$ 2,207
120
1,992
1,174
2,327
2,776
(186)
2,590
(598)
31,909
31,311
(2,770)
1,375
419
1,794
(620)
23,297
22,677
(2,770)
1,390
656
2,046
281
13,836
14,117
(2,770)
Net income allocable to common stockholders
$ 28,541
$ 19,907
$ 11,347
Condensed Statement of Cash Flows
Year Ended December 31,
2012
2011
2010
(In Thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash used for operating activities:
Equity in undistributed income of subsidiaries
Increase in capitalized interest
Increase (decrease) in other assets
Increase in other liabilities
Net cash provided by (used for) operating activities
Investing activities:
Increase in investment in subsidiaries
Purchase of mortgage backed securities
Net cash used for investing activities
Financing activities:
Issuance of common stock
Proceeds from the issuance of long-term debt
Payments to repurchase stock warrants
Cash dividends paid
Net cash provided by (used for) financing activities
Increase (decrease) in cash
Cash at beginning of period
Cash at end of period
$ 31,311
$ 22,677
$ 14,117
(31,909)
(693)
3,531
384
(23,297)
(280)
(98)
32
(13,836)
—
(383)
24
2,624
(966)
(78)
—
—
—
—
(2,500)
(54,500)
—
(2,500)
(54,500)
2,503
52,681
(1,800)
(6,810)
46,574
49,198
13,046
3,709
—
—
(6,718)
49,565
—
—
(6,207)
(3,009)
43,358
(6,475)
19,521
(11,220)
30,741
$ 62,244
$ 13,046
$ 19,521
114
20. LEGAL AND OTHER PROCEEDINGS
As previously disclosed in 2011, we were served with a complaint filed in U.S. Bankruptcy Court by a
bankruptcy trustee relating to a former WSFS Bank customer. The complaint challenges the Bank’s actions in
exercising its rights concerning an outstanding loan and also seeks to avoid and recover the pre-bankruptcy
repayment of that loan. There were no material changes regarding this complaint in 2012 and management of the
Bank believes it acted appropriately and continues to vigorously defend itself against the complaint. No litigation
reserve has been recorded as it is not yet possible to establish the probability of, or reasonably estimate, a
potential loss.
We previously reported that in September 2012, we received a “30 day letter” from the IRS proposing an
approximate $14 million to $18 million adjustment to a 2006 trust tax return relating to a trust for which the
Bank is trustee. Subsequently, the IRS delivered a “No Change Report” that indicated the IRS completed its
review of the trust’s 2006 tax return and did not propose any changes. The IRS’s decision to end its inquiry into
the trust tax return is subject to the Area Director’s approval, which has not yet been issued.
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.
21. SUBSEQUENT EVENTS
On February 28, 2013, WSFS Bank received notification from the Office of the Comptroller of the
Currency, our Bank’s primary regulator, that the Bank’s informal Memorandum of Understanding (“MOU”) was
terminated. The MOU was entered into in December 2009.
QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three months ended
12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011 6/30/2011 3/31/2011
(In Thousands, Except Per Share Data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Noninterest income
Noninterest expenses
Income (loss) before taxes
Income tax provision (benefit)
Net Income
Dividends on preferred stock and
$36,787
5,289
$36,514
5,621
$37,763
5,685
$39,223
6,693
$39,585
7,169
$40,091
7,911
$39,814
8,627
$39,152
8,898
31,498
3,674
30,893
3,751
32,078
16,383
32,530
8,245
32,416
6,948
32,180
6,558
31,187
8,582
30,254
5,908
27,824
21,195
37,186
11,833
4,275
7,558
27,142
19,748
32,153
14,737
4,758
15,695
28,992
33,017
11,670
4,340
24,285
16,758
30,989
10,054
3,610
9,979
7,330
6,444
25,468
16,996
33,026
9,438
3,276
6,162
25,622
16,924
32,412
10,134
3,348
6,786
22,605
16,029
30,652
7,982
2,459
5,523
24,346
13,639
31,387
6,598
2,392
4,206
accretion of discount
693
693
692
692
693
692
693
692
Net Income (loss) allocable to
common stockholders
$ 6,865
$ 9,286
$ 6,638
$ 5,752
$ 5,469
$ 6,094
$ 4,830
$ 3,514
Earnings per share:
Basic
Diluted
$
0.79
0.78
$
1.07
1.06
$
0.76
0.76
$
0.66
0.65
$
0.63
0.63
$
0.71
0.70
$
0.56
0.55
$
$
0.41
0.40
115
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no matters required to be disclosed under this item.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
With the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures are effective.
Internal Control Over Financial Reporting
During the quarter ended December 31, 2012, there was no change in internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
116
Management’s Report on Internal Control Over Financial Reporting
To Our Stockholders:
Management of the Corporation is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The
Corporation’s internal control over financial reporting is designed to provide reasonable assurance to the
Corporation’s management and board of directors regarding the preparation and fair presentation of published
financial statements.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of
December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
Based on this assessment, management has concluded that, as of December 31, 2012, the Corporation’s internal
control over financial reporting is effective based on those criteria.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
KPMG LLP, an independent registered public accounting firm, has audited the Company’s consolidated
financial statements as of and for the year ended December 31, 2012 and the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2012, as stated in their reports, which are included
herein.
/s/ Mark A. Turner
Mark A. Turner
President and Chief Executive Officer
March 18, 2013
/s/ Stephen A. Fowle
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
117
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
WSFS Financial Corporation:
We have audited WSFS Financial Corporation’s (the “Corporation”) internal control over financial reporting as
of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
limitations,
In our opinion, the Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated statements of condition of the Corporation and subsidiaries as of December 31,
2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and
our report dated March 18, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 18, 2013
118
ITEM 9B. OTHER INFORMATION
There are no matters required to be disclosed under this item.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding directors, executive officers and corporate governance of the Company in the Proxy
Statement for the 2013 Annual Meeting of Stockholders is incorporated herein by reference.
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer,
principal accounting officer, Controller or persons performing similar functions. A copy of the Code of Ethics is
posted on our website at www.wsfsbank.com.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation in the Proxy Statement for the 2013 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and the Company’s management in
the Proxy Statement for the 2013 Annual Meeting of Stockholders is incorporated herein by reference.
119
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding certain relationships and related transactions, and director independence in the Proxy
Statement for the 2013 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the fees paid to and services provided by KPMG LLP, the Company’s independent
registered public accounting firm, in the Proxy Statement for the 2013 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Listed below are all financial statements and exhibits filed as part of this report, and are incorporated
by reference.
1.
The consolidated statements of Condition of WSFS Financial Corporation and subsidiary as of
December 31, 2012 and 2011, and the related consolidated statements of income, changes in
stockholders’ equity and cash flows for each of the years in the three year period ended
December 31, 2012, together with the related notes and the report of KPMG LLP, independent
registered public accounting firm.
2.
Schedules omitted as they are not applicable.
The following exhibits are incorporated by reference herein or annexed to this Annual Report:
Exhibit
Number
Description of Document
3.1
3.2
3.3
4.1
4.2
4.3
10.1
Registrant’s Amended and Restated Certificate of Incorporation, is incorporated herein by reference
to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2011.
Amended and Restated Bylaws of WSFS Financial Corporation, incorporated herein by reference to
Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on October 27, 2008.
Certificate of Designations for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
incorporated herein by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed
on January 23, 2009.
Form of Certificate for the Series A Preferred Stock, incorporated herein by reference to Exhibit 4.1
of the Registrant’s Current Report on Form 8-K filed on January 23, 2009.
Warrant for Purchase of Shares of Common Stock, incorporated herein by reference to Exhibit 4.2 of
the Registrant’s Current Report on Form 8-K filed on January 23, 2009.
Warrant for Purchase of Shares of Common Stock, incorporated herein by reference to Exhibit 10.2 of
the Registrant’s Current Report on Form 8-K filed on July 27, 2009.
WSFS Financial Corporation, 1994 Short Term Management
Incentive Plan Summary Plan
Description is incorporated herein by reference to Exhibit 10.7 of the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 1994.
120
Exhibit
Number
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
21
23
24
31.1
31.2
32
Description of Document
Amended and Restated Wilmington Savings Fund Society, Federal Savings Bank 1997 Stock Option
Plan is incorporated herein by reference to the Registrant’s Registration Statement on Form S-8
(File No. 333-26099) filed with the Commission on April 29, 1997.
2000 Stock Option and Temporary Severance Agreement among Wilmington Savings Fund Society,
Federal Savings Bank, WSFS Financial Corporation and Marvin N. Schoenhals on February 24, 2000
is incorporated herein by reference to Exhibit 10.4 of the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2000.
WSFS Financial Corporation Severance Policy for Executive Vice Presidents dated February 28,
2008,
incorporated herein by reference to Exhibit 10.4 of the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2008.
WSFS Financial Corporation’s 2005 Incentive Plan is incorporated herein by reference to appendix A
of the Registrant’s Definitive Proxy Statement on Schedule 14-A for the 2005 Annual Meeting of
Stockholders.
Amendment to WSFS Financial Corporation 2005 Incentive Plan for IRC 409A and FAS 123R dated
December 31, 2008, incorporated herein by reference to Exhibit 10.6 of the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2008.
Amendment to the WSFS Financial Corporation Severance Policy for Executive Vice Presidents
dated December 31, 2008, incorporated herein by reference to Exhibit 10.7 of the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2008.
Letter Agreement, dated January 23, 2009, between WSFS Financial Corporation and the
United States Department of Treasury, with respect to the issuance and sale of the Series A Preferred
Stock and the Warrant, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current
Report on Form 8-K filed on January 23, 2009.
Form of Waiver, executed by Messrs. Marvin N. Schoenhals, Mark A. Turner, Stephen A. Fowle,
Richard M. Wright, Rodger Levenson and Mrs. Barbara J. Fischer, incorporated herein by reference
to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on January 23, 2009.
Form of Letter Agreement, executed by Messrs. Marvin N. Schoenhals, Mark A. Turner, Stephen A.
Fowle, Richard M. Wright, Rodger Levenson and Mr. Barbara J. Fischer, incorporated herein by
reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed on January 23, 2009.
Securities Purchase Agreement, dated July 27, 2009, between WSFS Financial Corporation and
Peninsula Investment Partners, L.P.,
incorporated herein by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K on July 27, 2009.
Warrant Repurchase Letter Agreement is incorporated herein by reference to Exhibit 10 of the
Registrant’s Current Report on Form 8-K filed on September 12, 2012.
Amendment to WSFS Financial Corporation Severance Policy for Executive Vice Presidents dated
February 28, 2013.
Subsidiaries of Registrant.
Consent of KPMG LLP
Power of Attorney (included on signature page to this report)
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
121
Exhibit
Number
Description of Document
101.INS XBRL Instance Document *
101.SCH XBRL Schema Document *
101.CAL XBRL Calculation Linkbase Document *
101.LAB XBRL Labels Linkbase Document *
101.PRE XBRL Presentation Linkbase Document *
101.DEF XBRL Definition Linkbase Document *
* Submitted as Exhibits 101 to this Form 10-K are documents formatted in XBRL (Extensible Business
Reporting Language). Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed
or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.
Exhibits 10.1 through 10.10 and Exhibit 10.13 represent management contracts or compensatory plan
arrangements.
122
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 18, 2013
WSFS FINANCIAL CORPORATION
BY:
/s/ Mark A. Turner
Mark A. Turner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
BY: /s/ Marvin N. Schoenhals
Marvin N. Schoenhals
Chairman
BY: /s/ Mark A. Turner
Mark A. Turner
President, Chief Executive Officer and
Director
BY: /s/ Charles G. Cheleden
Charles G. Cheleden
Vice Chairman and Lead Director
BY: /s/ Anat Bird
Anat Bird
Director
BY: /s/ William B. Chandler, III
William B. Chandler, III
Director
BY: /s/ Jennifer W. Davis
Jennifer W. Davis
Director
BY: /s/ Donald W. Delson
Donald W. Delson
Director
BY: /s/ Zissimos A. Frangopoulos
Zissimos A. Frangopoulos
Director
BY: /s/ Dennis E. Klima
Dennis E. Klima
Director
123
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
Date: March 18, 2013
BY: /s/ Calvert A. Morgan, Jr.
Calvert A. Morgan, Jr.
Director
BY: /s/ R. Ted Weschler
R. Ted Weschler
Director
BY: /s/ Stephen A. Fowle
Stephen A. Fowle
Executive Vice President and Chief
Financial Officer
BY: /s/ Robert F. Mack
Robert F. Mack
Senior Vice President and Controller
124