News Column

WSFS FINANCIAL CORP - 10-Q - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 11, 2014

GENERAL

We are a thrift holding company headquartered in Wilmington, Delaware. Substantially all of our assets are held by our subsidiary, Wilmington Savings Fund Society, FSB, or WSFS Bank, one of the ten oldest banks continuously operating under the same name in the United States. As a federal savings bank, which was formerly chartered as a state mutual savings bank, we enjoy broad fiduciary powers. A fixture in the community, WSFS Bank has been in operation for more than 182 years. In addition to its focus on stellar customer service, WSFS Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution that has grown to become the largest thrift holding company in the State of Delaware, one of the top commercial lenders in the state and the third largest bank in terms of Delaware deposits. We state our mission simply: "We Stand for Service." Our strategy of "Engaged Associates delivering Stellar Service growing Customer Advocates and value for our Owners" focuses on exceeding customer expectations, delivering stellar service and building customer advocacy through highly-trained, relationship-oriented, friendly, knowledgeable and empowered Associates. Our core banking business is commercial lending funded by customer-generated deposits. We have built a $2.5 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and offering a high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through commercial relationships and retail deposits. We service our customers primarily from our 52 offices located in Delaware (42), Pennsylvania (8), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches. In July 2013 we added two new divisions to WSFS Bank with the purchase Array Financial Group, Inc., a mortgage banking company, and a related entity, Arrow Land Transfer Company, an abstract and title company. Additionally, during late 2013, we announced that we entered into an Agreement and Plan of Reorganization, with First Wyoming Financial Corporation, the parent company of The First National Bank of Wyoming ("First Wyoming").This transaction has received all required regulatory and stockholder approvals and is expected to close in September 2014. Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages more than $509 million in vault cash in over 15,000 ATMs nationwide and also provides online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates over 460 ATMs for WSFS Bank, which has, by far, the largest branded ATM network in Delaware. 36



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As a leading provider of ATM Vault Cash to the U.S. ATM industry, Cash Connect is exposed to substantial operational risk, including theft of cash from ATMs, armored vehicles, or armored carrier terminals, as well as general risk of accounting errors or fraud. This risk is managed through a series of financial controls, automated tracking and settlement systems, contracts, and other risk mitigation strategies, including both loss prevention and loss recovery strategies. Throughout its 13-year history, Cash Connect periodically has been exposed to theft from armored courier companies and consistently has been able to recover losses through its risk management strategies. The Trust and Wealth Management division provides a broad array of fiduciary, investment management, credit and deposit products to clients through four business lines. WSFS Investment Group, Inc. provides insurance and brokerage products primarily to our retail banking clients. Cypress Capital Management, LLC is a registered investment advisor with over $645 million in assets under management. Cypress' primary market segment is high net worth individuals, offering a 'balanced' investment style focused on preservation of capital and current income. Christiana Trust, with $10 billion in assets under management and administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, custodial and commercial domicile services to corporate and institutional clients. WSFS Private Banking serves high net worth clients by delivering credit and deposit products and partnering with Cypress, Christiana and WSFS Investment Group to deliver investment management and fiduciary products and services. We have one consolidated subsidiary, WSFS Bank. We also have one unconsolidated affiliate, WSFS Capital Trust III, or the Trust. WSFS Bank has two wholly-owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services LLC, or Monarch. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains estimates, predictions, opinions, projections and other "forward-looking statements" as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to our financial goals, management's plans and objectives for future operations, financial and business trends, business prospects, and management's outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. Such forward-looking statements are based on various assumptions (some of which may be beyond our control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, those related to the economic environment, particularly in the market areas in which we operate, including an increase in unemployment levels; our level of nonperforming assets; the volatility of the financial and securities markets, including changes with respect to the market value of financial assets; changes in market interest rates which may increase funding costs and reduce earning asset yields thus reducing margin; increases in benchmark rates would also increase debt service requirements for customers whose terms include a variable interest rate, which may negatively impact the ability of borrowers to pay as contractually obligated; changes in government regulation affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations being issued in accordance with this statute and potential expenses and elevated capital levels associated therewith; additional loan losses and impairment of the collectability of loans; changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations, may have an adverse effect on business; rules and regulations issued by the Consumer Financial Protection Bureau or other regulators which might adversely impact our business model or products and services; stresses in the real estate markets, including continued deterioration in property values that affect the collateral value underlying our real estate loans; our ability to expand into new markets, develop competitive new products and services in a timely manner, and to maintain profit margins in the face of competitive pressures; changes in consumer and business spending and saving habits could affect our ability to increase assets and to attract deposits; our ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk, reputational risk, and regulatory and compliance risk; the effects of increased competition from both banks and non-banks; the effects of geopolitical instability and risks such as terrorist attacks; the effects of weather and natural disasters such as floods, droughts, wind, tornados and hurricanes, and the effects of man-made disasters; changes in the speed of loan prepayments by our customers and loan origination or sales volumes; acceleration of prepayments of mortgage-backed securities ("MBS") due to low interest rates, and the related acceleration of premium amortization on prepayments on MBS due to low interest rates; and the costs associated with resolving any problem loans, litigation and other risks and uncertainties. Such risks and uncertainties are discussed herein, including under the heading "Risk Factors," and in our Form 10-K for the year ended December 31, 2013 and other documents filed by us with the Securities and Exchange Commission ("SEC") from time to time. Forward looking statements are as of the date they are made, and we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of us. 37



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CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity with GAAP. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for loan losses, deferred taxes, fair value measurements, goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2014, it is reasonably possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.



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

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $97.3 million or 2.16% to $4.6 billion during the six months ended June 30, 2014. Included in this increase was a $92.1 million, or 3%, increase in net loans (including loans held for sale), and a $25.0 million increase in investment securities. Partially offsetting these increases was a $9.3 million decrease in cash and cash equivalents. Total liabilities increased $48.4 million during the six months ended June 30, 2014 to $4.2 billion. This increase was primarily the result of an increase in Federal Home Loan Bank advances of $120.3 million, or 19%. Federal Home Loan Bank Advances were used to fund a $22.0 million decrease in reverse mortgage trust bonds payable related to the call of those bonds, a $33.6 million decrease in total deposits, mainly due to the purposeful decline in time and temporary trust deposits during the period and an $11.0 million decrease in Fed funds purchased and securities sold under agreements to repurchase. Excluding the effects of the temporary trust deposits at December 31, 2013, total deposits increased $81.4 million during the six months ended June 30, 2014.



Capital Resources

Stockholders' equity increased $48.9 million between December 31, 2013 and June 30, 2014. This increase was primarily due to net income of $29.6 million during the six months ended June 30, 2014 combined with a $18.3 million increase (net of tax) in the value of our available for sale securities portfolio. Partially offsetting these increases were payments of dividends on our common stock of $2.1 million during the six months ended June 30, 2014. Tangible common equity (a non-GAAP financial measure) increased $49.6 million from $344.1 million at December 31, 2013 to $393.7 million at June 30, 2014. Tangible common book value per share of common stock (a non-GAAP financial measure) was $44.11 at June 30, 2014, an increase of $5.43 or 14%, from $38.68 reported at December 31, 2013. Book value per share of common stock was $48.40 at June 30, 2014, an increase of $5.34 from $43.06 reported at December 31, 2013. See "Reconciliation of Non-GAAP Measurement to GAAP" in Item 2 of this quarterly report on Form 10-Q.



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

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



Total Capital (to Risk-Weighted Assets) $ 536,655 14.68 % $ 292,422 8.00 % $ 365,528 10.00 % Core Capital (to Adjusted Total Assets) 494,460 10.82 182,842 4.00

228,552 5.00



Tangible Capital (to Tangible Assets) 494,460 10.82 68,566 1.50

N/A N/A Tier 1 Capital (to Risk-Weighted Assets) 494,460 13.53 146,211 4.00 219,317 6.00 38



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Under guidelines issued by banking regulators, savings institutions such as WSFS Bank must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of risk weighted assets and "total" or "risk-based" capital (a combination of core and "supplementary" capital) equal to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our bank's financial statements. The Federal Deposit Insurance Corporation Act (FDICIA), as well as other requirements, established five capital tiers: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. A depository institution's capital tier depends upon its capital levels in relating to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. At June 30, 2014, WSFS Bank was in compliance with regulatory capital requirements and was considered a "well-capitalized" institution. WSFS Bank's core capital ratio of 10.82%, Tier 1 capital ratio of 13.53% and total risk based capital ratio of 14.68%, all remain substantially in excess of "well-capitalized" regulatory benchmarks, the highest regulatory capital rating. In addition, and not included in Bank capital, the holding company held $19.6 million in cash to support potential dividends, acquisitions and strategic growth plans.



Liquidity

We manage our liquidity and funding needs through our Treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators. We have ready access to several sources to fund growth and meet our liquidity needs. Among these are: net income (to the extent in cash), retail and commercial deposit programs, loan repayments, borrowing from the FHLB, repurchase agreements, access to the Federal Reserve Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration MBS and government sponsored enterprises ("GSE") notes that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. We believe these sources are sufficient to maintain required and prudent levels of liquidity. During the six months ended June 30, 2014, cash and cash equivalents decreased $9.2 million to $475 million. This decrease was primarily a result of: $92 million increase in net loans ,and a $33.6 million decrease in total deposits. Offsetting these decreases in cash were: $120.3 million from the net repayments of FHLB Advances and a $27.5 million increase in cash provided by operations. 39



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NONPERFORMING ASSETS

The following table shows our nonperforming assets and past due loans at the dates indicated. Nonperforming assets include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure and restructured commercial, mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectability of principal and interest. Past due loans are loans contractually past due 90 days or more as to principal or interest payments but which remain on accrual status because they are considered well secured and in the process of collection. June 30, December 31, 2014 2013 (In Thousands) Nonaccruing loans: Commercial $ 3,511$ 4,305 Owner-occupied commercial 4,928 5,197 Consumer 3,746 3,293 Commercial mortgages 13,391 8,565 Residential mortgages 8,485 8,432 Construction - 1,158 Total nonaccruing loans 34,061 30,950 Assets acquired through foreclosure 4,451



4,532

Troubled debt restructuring (accruing) 11,779



12,332

Total nonperforming assets $ 50,291$ 47,814 Past due loans (1): Residential mortgages - 533 Total past due loans $ - $ 533 Ratios: Allowance for loan losses to total loans (2) 1.36 %



1.40 %

Nonperforming assets to total asset 1.09



1.06

Nonaccruing loans to total loans (2) 1.11



1.05

Loan loss allowance to nonaccruing loans 121.49



133.26

Loan loss allowance to total nonperforming assets 82.28 86.26



(1) Accruing Loans only; Nonaccruing TDR's are included in their respective

categories of nonaccruing loans. (2) Total loans exclude loans held for sale. Nonperforming assets increased $2.5 million between December 31, 2013 and June 30, 2014. As a result, non-performing assets as a percentage of total assets increased from 1.06% at December 31, 2013 to 1.09% at June 30, 2014. New nonperforming loans increased by $2.4 million during the second quarter, increasing total new nonperforming loans to $17.1 million between December 31, 2013 and June 30, 2014. The addition of new nonperforming loans was offset by a significant $10.6 million improvement in collections and an additional $3.9 million written down or charged-off. As a result, nonperforming assets decreased by $5.1 million during the quarter. 40



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The following table summarizes the changes in nonperforming assets during the period indicated: For the six For the year months ended ended June 30, 2014 December 31, 2013 (In Thousands) Beginning balance $ 47,814 $ 62,475 Additions 17,101 30,367 Collections (10,613 ) (29,725 ) Transfers to accrual (96 ) (1,702 ) Charge-offs/write-downs, net (3,915 ) (13,601 ) Ending balance $ 50,291 $ 47,814 The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Timely identification enables us to take appropriate action and, accordingly, minimize losses. An asset review system established to monitor the asset quality of our loans and investments in real estate portfolios facilitates the identification of problem assets. In general, this system utilizes guidelines established by federal regulation.



INTEREST RATE SENSITIVITY

The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest rate sensitivity and adjust the sensitivity within acceptable tolerance ranges established by the Board of Directors. At June 30, 2014, interest-earning assets exceeded interest-bearing liabilities that mature or reprice within one year (interest-sensitive gap) by $0.7 million. Our interest-sensitive liabilities as a percentage of interest-sensitive assets within the one-year window increased from 94% at December 31, 2013 to 100.03% at June 30, 2014. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 0.01% at June 30, 2014 from -3.28% at December 31, 2013. The low level of sensitivity reflects our continuing efforts to effectively manage interest rate risk. Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, required to be performed by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the economic value of equity ratio. The economic value of equity ratio is defined as the economic value of the estimated cash flows from assets and liabilities as a percentage of economic value of cash flows from total assets. The table below shows the estimated impact of immediate changes in interest rates on our net interest margin and economic value of equity ratio at the specified levels at June 30, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 % Change in % Change in Economic % Change in Economic Interest Rate Net Interest Value of Net Interest Value of Equity (Basis Points) Margin (1) Equity (2) Margin (1) (2) +300 4 % 12.75 % -1 % 11.78 % +200 1 % 12.88 % -2 % 11.97 % +100 -2 % 12.79 % -3 % 12.13 % - 0 % 12.73 % - % 12.25 % -100 -1 % 12.13 % -1 % 11.92 % -200 (3) NMF NMF NMF NMF -300 (3) NMF NMF NMF NMF



(1) The percentage difference between net interest margin in a stable interest

rate environment and net interest margin as projected under the various rate

change environments.

(2) The economic value of equity ratio of the Company in a stable interest rate

environment and the economic value of equity ratio as projected under the

various rate change environments.

(3) Sensitivity indicated by a decrease of 200 or 300 basis points is not deemed

meaningful at June 30, 2014 given the low absolute level of interest rates at

that time. 41



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

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

Results of Operations

We recorded net income of $12.7 million for the quarter ended June 30, 2014, a 17% increase over $10.9 million for the quarter ended June 30, 2013. Net income allocable to common shareholders (after preferred stock dividends) was $12.7 million, or $1.39 per diluted common share, for the quarter ended June 30, 2014, or a 20% increase in EPS compared to net income allocable to common stockholders of $10.3 million, or $1.16 per diluted common share, for the quarter ended June 30, 2013. Revenues grew at a strong pace with increases in net interest income and noninterest income. Net interest income increased $3.4 million reflecting the growth in our loan portfolio as well as the benefit from the consolidation of reverse mortgage assets late in the third quarter of 2013 and continued growth and improvement in our yield on investments. Noninterest income increased as growth in our fee business outpaced decreased securities gains. Provision for loan losses decreased $1.6 million when compared to the second quarter of 2013 as a result of improved credit quality. Noninterest expenses also grew in support of revenue growth for the second quarter of 2014 to $35.5 million compared to $33.2 million for the second quarter of 2013. Contributing to this increase was salaries and benefits expense due in part to the addition of Array & Arrow associates combined with increased legal and professional fees due to litigation and continued corporate development costs. Net income for the first six months of 2014 was $29.6 million as compared to $20.6 million for the first six months of 2013. Net income allocable to common stockholders was $29.6 million, or $3.24 per diluted share of common stock, compared to net income allocable to common stockholders of $19.3 million, or $2.18 per diluted share of common stock, for the six months ended June 30, 2013, a 49% increase in EPS. For the first six months of 2014, we directly benefited from a one-time tax benefit of approximately $6.7 million due to the legal call of our reverse mortgage trust bonds which were previously consolidated on WSFS' balance sheet. The remainder of the increase in net income for the first six months of 2014 was consistent with the quarterly results attributable to revenue growth that exceeded noninterest expenses. 42



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Net Interest Income

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



Three Months Ended June 30,

2014 2013 Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) (Dollars In Thousands) Assets: Interest-earning assets: Loans (2) (3): Commercial real estate loans $ 850,719$ 9,585 4.51 % $ 793,173$ 9,340 4.71 % Residential real estate loans (4) 232,916 2,281 3.92 252,777 2,550 4.04 Commercial loans 1,632,784 18,001 4.39 1,505,390 16,892 4.48 Consumer loans 310,226 3,452 4.46 285,548 3,326 4.67 Total loans 3,026,645 33,319 4.42 2,836,888 32,108 4.55 Mortgage-backed securities (5) (6) 714,551 3,564 2.00 719,548 3,117 1.68 Investment securities (5) (6) 146,139 814 3.35 83,870 311 2.00



Reverse mortgages and related assets 34,463 1,368

15.88 18,463 324 7.02 Other interest-earning assets 35,629 348 3.92 35,157 22 0.25 Total interest-earning assets 3,957,427 39,413 4.04 3,693,926 35,882 3.91 Allowance for loan losses (42,332 ) (43,470 ) Cash and due from banks 78,476 78,747 Cash in non-owned ATMs 364,461 435,150 Bank-owned life insurance 63,374 62,971 Other noninterest-earning assets 127,708 118,174 Total assets $ 4,549,114$ 4,345,498 Liabilities and Stockholders' Equity: Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand $ 632,160$ 148 0.09 % $ 543,544$ 128 0.09 % Money market 751,559 335 0.18 778,705 259 0.13 Savings 403,921 62 0.06 396,009 50 0.05 Customer time deposits 451,372 980 0.87 540,952 1,229 0.91 Total interest-bearing customer deposits 2,239,012 1,525 0.27 2,259,210 1,666 0.30 Brokered certificates of deposit 230,366 189 0.33 183,163 155 0.34 Total interest-bearing deposits 2,469,378 1,714 0.28 2,442,373 1,821 0.30 FHLB of Pittsburgh advances 684,295 661 0.38 554,455 451 0.32 Trust preferred borrowings 67,011 330 1.95 67,011 337 1.99 Reverse mortgage bonds payable - - - - - - Senior Debt 55,000 941 6.84 55,000 944 6.86 Other borrowed funds (7) 148,910 290 0.78 141,063 273 0.77



Total interest-bearing liabilities 3,424,594 3,936

0.46 3,259,902 3,826 0.47 Noninterest-bearing demand deposits 671,384 633,467 Other noninterest-bearing liabilities 30,112 27,984 Stockholders' equity 423,024 424,145 Total liabilities and stockholders' equity $ 4,549,114$ 4,345,498 Excess of interest-earning assets over interest-bearing liabilities $ 532,833$ 434,024 Net interest and dividend income $ 35,477$ 32,056 Interest rate spread 3.58 % 3.44 % Net interest margin 3.64 % 3.50 %



(1) Weighted average yields have been computed on a tax-equivalent basis using a

35% effective tax rate.

(2) Nonperforming loans are included in average balance computations.

(3) Balances are reflected net of unearned income.

(4) Includes residential mortgage loans HFS.

(5) Includes securities available-for-sale at fair value.

(6) Average Balances and related yield are calculated using the fair value of

available-for-sale securities.

(7) Includes federal funds purchased and securities sold under agreement to

repurchase. 43



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Table of Contents Six Months Ended June 30, 2014 2013 Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) (Dollars In Thousands) Assets: Interest-earning assets: Loans (2) (3): Commercial real estate loans $ 842,503$ 18,871 4.48 % $ 777,428$ 18,266 4.70 % Residential real estate loans (4) 236,673 4,553 3.85 256,533 5,176 4.04 Commercial loans 1,617,284 35,221 4.36 1,497,242 33,443 4.47 Consumer loans 306,280 6,876 4.53 284,866 6,675 4.73 Total loans 3,002,740 65,521 4.36 2,816,069 63,560 4.51 Mortgage-backed securities (5) (6) 697,411 6,813 1.95 742,386 6,506 1.70 Investment securities (5) (6) 142,499 1,606 3.40 70,025 453 1.30



Reverse mortgages and related assets 35,854 2,594

14.47 18,902 907 9.60 Other interest-earning assets 35,364 664 3.79 33,333 47 0.28 Total interest-earning assets 3,913,868 77,198 4.00 3,680,715 71,473 3.90 Allowance for loan losses (41,961 ) (43,977 ) Cash and due from banks 77,439 77,562 Cash in non-owned ATMs 360,152 420,069 Bank-owned life insurance 63,304 62,951 Other noninterest-earning assets 134,195 117,756 Total assets $ 4,506,997$ 4,315,076 Liabilities and Stockholders' Equity: Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand $ 628,481$ 294 0.09 % $ 534,324$ 248 0.09 % Money market 759,417 648 0.17 780,279 594 0.15 Savings 399,145 120 0.06 396,295 110 0.06 Customer time deposits 452,600 1,937 0.87 564,630 2,570 0.92 Total interest-bearing customer deposits 2,239,643 2,999 0.27 2,275,528 3,522 0.31 Brokered certificates of deposit 222,892 371 0.34 180,470 318 0.36 Total interest-bearing deposits 2,462,535 3,370 0.28 2,455,998 3,840 0.32 FHLB of Pittsburgh advances 669,982 1,187 0.35 515,287 894 0.35 Trust preferred borrowings 67,011 656 1.96 67,011 666 1.98 Reverse mortgage bonds payable 3,280 15 0.91 - - - Senior Debt 55,000 1,883 6.85 55,000 1,887 6.86 Other borrowed funds (7) 148,088 566 0.77 146,112 550 0.75



Total interest-bearing liabilities 3,405,896 7,677

0.45 3,239,408 7,837 0.48 Noninterest-bearing demand deposits 656,302 622,269 Other noninterest-bearing liabilities 33,570 29,283 Stockholders' equity 411,229 424,116 Total liabilities and stockholders' equity $ 4,506,997$ 4,315,076 Excess of interest-earning assets over interest-bearing liabilities $ 507,972$ 441,307 Net interest and dividend income $ 69,521$ 63,636 Interest rate spread 3.55 % 3.42 % Net interest margin 3.61 % 3.48 %



(1) Weighted average yields have been computed on a tax-equivalent basis using a

35% effective tax rate.

(2) Nonperforming loans are included in average balance computations.

(3) Balances are reflected net of unearned income.

(4) Includes residential mortgage loans HFS.

(5) Includes securities available-for-sale at fair value.

(6) Average Balances and related yield are calculated using the fair value of

available-for-sale securities.

(7) Includes federal funds purchased and securities sold under agreement to

repurchase.

The net interest margin for the second quarter of 2014 was 3.64%, a fourteen basis point increase compared to 3.50% for the second quarter of 2013. The increase in net interest margin from the second quarter of 2013 reflected improvement due to the consolidation of reverse mortgage assets late in the third quarter of 2013, improved balance sheet mix as higher yielding loans replaced low yielding mortgage-backed securities, as well as increases in other interest earning assets. In conjunction with the reduction of higher-cost CDs, our net interest income increased $3.4 million, or 11%, over the second quarter of 2013. The net interest margin for the six months ended June 30, 2014 was 3.61%, compared to the 3.48% for the same period in 2013. Compared to the six months ended June 30, 2013, our net interest income increased $5.9 million, or 9%. Similar to the quarterly discussion above, the increase in net interest margin and income reflected improvement due to the consolidation of reverse mortgage assets, improved balance sheet mix, increases in other interest earning assets and deposit pricing management. 44



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Provision for Loan Losses

Our provision for loan losses is based on the inherent risk of our loans and considers various factors including collateral values, trends in asset quality, level of delinquent loans and loan concentrations. In addition, regional economic conditions are also taken into consideration. The provision for loan losses decreased to $2.7 million for the six months ended June 30, 2014, compared to $3.9 million for the same period in 2013. Our allowance for loan losses of $41.4 million at June 30, 2014 increased slightly from $41.2 million at December 31, 2013 and the ratio of allowance to loan losses for total gross loans was 1.36% at June 30, 2014, compared to 1.40% at December 31, 2013 as loans grew faster than our provision. The allowance for loan losses and provision reflect the following: Net charge-offs were $2.5 million for the six months



ended June 30,

2014 compared to $6.3 million for the six months ended June 30, 2013. Total problem loans (all criticized, classified, and



non-performing

loans) were 35.59% of Tier 1 Capital plus allowance for loan losses as of June 30, 2014, compared to 33.58% at December 31, 2013 and 41.44% at June 30, 2013. Nonperforming loans increased to $34.1 million as of June 30, 2014 compared to $31.0 million as of December 31, 2013. Total loan delinquency was 0.76% as of June 30, 2014, compared to 0.76% as of December 31, 2013. For the Six Months Ended June 30, 2014 2013 (Dollars in Thousands) Beginning balance $ 41,244$ 43,922 Provision for loan losses 2,680 3,911 Charge-offs: Residential real estate 527 695 Commercial real estate 160 1,721 Construction 88 1,340 Commercial 1,495 1,139 Owner-occupied commercial 321 37 Overdrafts 486 449 Consumer 1,237 2,361 Total charge-offs 4,314 7,742 Recoveries: Residential real estate 43 41 Commercial real estate 39 109 Construction 184 85 Commercial 807 627 Owner-occupied commercial 167 45 Overdrafts 279 214 Consumer 252 282 Total recoveries 1,771 1,403 Net charge-offs 2,543 6,339 Ending balance $ 41,381$ 41,494 Net charge-offs to average gross loans outstanding, net of unearned income (1) 0.17 % 0.44 %



(1) Ratios for the six months ended June 30, 2014 and 2013 are annualized.

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Noninterest Income

During the second quarter of 2014, the company earned noninterest income of $19.6 million, compared to $19.5 million in the second quarter of 2013. Excluding net securities gains in both periods, noninterest income increased $625,000, or 3%. The growth is a result of continued expansion in the Trust and Wealth Management and the Cash Connect divisions as well as increases in the Bank's deposit service charges. Partially offsetting these gains were small declines in mortgage banking revenue and debit/credit and ATM revenue. For the six months ended June 30, 2014, the company earned noninterest income of $38.0 million, compared to $37.6 million, an increase of 1% compared to June 30, 2013. Excluding net securities gains in both periods, noninterest income increased $2.0 million or 6%. This overall increase also reflects expansion in the Cash Connect division, increases in deposit service charges, and expansion in the Trust and Wealth Management division. Compared to the six months ended June 30, 2013, Cash Connect Courier revenue increased $1.2 million, or 6.3%, Deposit service charges increased $385,000, or 5% and the Trust and Wealth Management investment management and fiduciary revenue increased $334,000, or 4%. Mortgage banking income held steady despite the significant decrease in refinance activity. The stability in mortgage banking reflects last August's addition of Array, our Pennsylvania mortgage banking division.



Noninterest Expense

Noninterest expense for the second quarter of 2014 was $35.5 million, an increase of $2.3 million or 7% from $33.2 million in the second quarter of 2013. During the second quarter of 2014, corporate development and litigation costs increased due to ongoing costs related to the legal matter as disclosed in Note 14 to the Consolidated Financial Statements as well as the merger with First Wyoming. Also contributing to the year-over-year expense growth is an increase in salaries, benefits and other compensation expense of $1.2 million due to the addition of Array and Arrow, as well as a higher level of expenses related to growth in the franchise. For the six months ended June 30, 2014, noninterest expense for the second quarter of 2014 was $69.7 million, an increase of $4.2 million or 6% from $65.5 million at June 30, 2013. Similar to the quarterly comparison above, corporate development, litigation and other professional fees increased. Also included in the increase was additional expenses due to the Array and Arrow acquisition and support for overall corporate growth. Finally, first half 2014 expenses included increase costs such as higher utility and snow removal expenses as a result of the 2014 winter weather. Income Taxes We and our subsidiaries file a consolidated federal income tax return and separate state income tax returns. Income taxes are accounted for in accordance with ASC 740, which requires the recording of deferred income taxes for tax consequences of temporary differences. We recorded an income tax expense of $6.8 million and $5.5 million during the three and six months ended June 30, 2014, respectively, compared to an income tax expense of $5.9 million and $11.2 million for the same periods in 2013. The first quarter of 2014 included the recognition of $6.7 million of tax benefits related to the legal call of our reverse mortgage trust bonds as more fully discussed in Note 9, Taxes on Income to our Consolidated Financial Statements. Our effective tax rate was 34.9% and 15.6% for the three and six months ended June 30, 2014, respectively, compared to 34.9% and 35.1% during the same periods in 2013. Excluding the reverse mortgage tax benefit, our effective tax rate was 34.8% for the six months ended June 30, 2014. The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, and BOLI income. These tax benefits are offset by the tax effect of stock-based compensation expense related to incentive stock options and a provision for state income tax expense.



We frequently analyze our projections of taxable income and make adjustments to our provision for income taxes accordingly.

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RECONCILIATION OF NON-GAAP MEASUREMENT TO GAAP

The following table provides a reconciliation of tangible common book value per share of common stock to book value per share of common stock, the most directly comparable GAAP financial measure. We believe this measure is important to management and investors to better understand and assess changes from period to period in stockholders' equity exclusive of changes in intangible assets. June 30, December 31, 2014 2013 (In Thousands)



End of period balance sheet data:

Stockholders' equity $ 431,955 $



383,050

Goodwill and other intangible assets (38,295 )



(38,978 )

Tangible common equity (numerator) $ 393,660 $



344,072

Shares of common stock outstanding (denominator) 8,924



8,895

Book value per share of common stock $ 48.40 $



43.06

Goodwill and other intangible assets (4.29 )



(4.38 )

Tangible book value per share of common stock $ 44.11 $

38.68 RECENT LEGISLATION In July 2013, the Board of Governors of the Federal Reserve System, FDIC and the OCC approved final rules (the "Final Capital Rules") implementing revised capital rules to reflect the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the Basel III international capital standards. Among other things, the Final Capital Rules establish a new capital ratio of common equity Tier 1 capital of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets; increase the minimum ratio of Tier 1 capital ratio from 4% to 6% and include a minimum leverage ratio of 4%; place an emphasis on common equity Tier 1 capital and implement the Dodd-Frank Act phase-out of certain instruments from Tier 1 capital; and change the risk weights assigned to certain assets. Failure to meet these standards would result in limitations on capital distributions as well as executive bonuses. The Final Capital Rules will be applicable to us on January 1, 2015 with conservation buffers phasing in over the subsequent five years.



While it is still too early to fully analyze the impact of all aspects of the new regulatory guidance, we currently have strong capital levels and are significantly above well-capitalized levels under the current guidelines.

On July 31, 2013, a Federal District Court judge ruled that the Federal Reserve inflated debit interchange fees when implementing the Durbin amendment of the Dodd-Frank Act in 2011. The judge ruled that the Federal Reserve erred in using criteria outside of the scope Congress intended to determine the fee cap, which the Federal Reserve set at 21 cents per transaction. The judge also ruled that the network options for both signature and PIN transactions were not set appropriately in accordance with the Dodd-Frank Act. The case is currently on appeal at the D.C. Circuit Court of Appeals, where oral arguments were heard on January 17, 2014. If not overturned on appeal, this ruling could significantly affect debit fees for the banking industry and for us. However, these developments are preliminary and the impact on us is not determinable at this time. The many provisions of the Dodd-Frank Act are so extensive that implementation by regulators is still ongoing. Several of the key regulations included in the original law have been delayed since the law's passing, making an assessment of the Dodd Frank Act's full effect on us not possible at this time.


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Source: Edgar Glimpses


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