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| NWSB > SEC Filings for NWSB > Form 10-K on 4-Mar-2009 | All Recent SEC Filings |
4-Mar-2009
Annual Report
• Adverse changes in our loan portfolio or investment securities portfolio and the resulting credit risk-related. losses and/ or market value adjustments;
• The adequacy of the allowance for loan losses;
• Changes in general economic or business conditions resulting in changes in demand for credit and other services, among other things;
• Changes in consumer confidence, spending and savings habits relative to the bank and non-bank financial services we provide;
• Compliance with laws and regulatory requirements of federal and state agencies;
• New legislation affecting the financial services industry;
• Competition from other financial institutions in originating loans and attracting deposits;
• Our ability to effectively implement technology driven products and services;
• Sources of liquidity;
• Changes in costs and expenses; and
• Our success in managing the risks involved in the foregoing.
Executive Summary
Total assets increased by $266.7 million, or 4.0%, to $6.930 billion at
December 31, 2008 from $6.664 billion at December 31, 2007. This increase is
primarily due to strong loan demand throughout the Company's market area, as net
loans receivable increased by $346.3 million, or 7.2%, to $5.142 billion at
December 31, 2008 from $4.796 billion at December 31, 2007.
The earnings of the Company depend primarily on its level of net interest
income, which is the difference between interest earned on the Company's
interest-earning assets, consisting primarily of loans, mortgage-backed
securities and other investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits, borrowed funds,
and trust-preferred securities. Net interest income is a function of the
Company's interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to interest-bearing liabilities.
Also contributing to the Company's earnings is noninterest income, which
consists primarily of service charges and fees on loan and deposit products and
services, fees related to insurance and investment management and trust
services, and gains and losses on sale of assets. Interest income and
noninterest income are offset by a provision for loan losses, general
administrative and other expenses, including employee compensation and benefits
and occupancy and equipment costs, as well as by state and federal income tax
expense.
Net income for the year ended December 31, 2008 was $48.2 million, or $0.99
per diluted share, a decrease of $926,000, or 1.9%, from $49.1 million, or $0.99
per diluted share, for the year ended December 31, 2007. This decrease was a
result of a decrease in noninterest income and an increase in noninterest
expense, partially offset by an increase in net interest income, all of which
are discussed in detail in the following sections.
Critical Accounting Policies and Estimates
The Company's critical accounting policies involve accounting estimates that:
a) require assumptions about highly uncertain matters, and b) could vary
sufficiently to cause a material effect on the Company's financial condition or
results of operations.
Allowance for Loan Losses. In originating loans, the Company recognizes that
losses will be experienced on loans and that the risk of loss will vary with,
among other things, the type of loan, the creditworthiness of the borrower,
general economic conditions and the quality of the collateral for the loan. The
Company maintains an allowance for loan losses to absorb losses inherent in the
loan portfolio. The allowance for loan losses represents management's estimate
of probable losses based on information available as of the date of the
financial statements. The allowance for loan losses is based on management's
evaluation of the collectibility of the loan portfolio, including past loan loss
experience, known and inherent losses, information about specific borrower
situations and estimated collateral values, and current economic conditions. The
loan portfolio and other credit exposures are regularly reviewed by management
in its determination of the allowance for loan losses. The methodology for
assessing the appropriateness of the allowance includes a review of historical
losses, peer group comparisons, industry data and economic conditions. As an
integral part of their examination process, regulatory agencies periodically
review the Company's allowance for loan losses and may require the Company to
make additional provisions for estimated losses based upon judgments different
from those of management. In establishing the allowance for loan losses, loss
factors are applied to various pools of outstanding loans. Loss factors are
derived using the Company's historical loss experience and may be adjusted for
factors that affect the collectibility of the portfolio as of the evaluation
date. Commercial loans over a certain dollar amount are evaluated individually
to determine the required allowance for loan losses and to evaluate the
potential impairment of such loans under SFAS 114. Although management believes
that it uses the best information available to establish the allowance for loan
losses, future adjustments to the allowance for loan losses may be necessary and
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used in making the determinations. Because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan losses
is adequate or that increases will not be necessary should the quality of any
loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect the Company's
financial condition and results of operations. The allowance review methodology
is based on information known at the time of the review. Changes in factors
underlying the assessment could have a material impact on the amount of the
allowance that is necessary and the amount of provision to be charged against
earnings. Such changes could impact future results. Management believes, to the
best of their knowledge, that all known losses as of December 31, 2008 have been
recorded.
Valuation of Investment Securities. All of the Company's investment
securities are classified as available for sale and recorded at current fair
value on our Consolidated Statement of Financial Condition. Unrealized gains or
losses, net of deferred taxes, are reported in other comprehensive income as a
separate component of shareholder's equity. In general, fair value is based upon
quoted market prices of identical assets, where available. If quoted prices are
not available, fair value is based upon valuation models that use cash flow,
security structure and other observable information. Where sufficient data is
not available to produce a fair valuation, fair value is based on broker quotes
of similar assets. Broker quotes may be adjusted to ensure that financial
instruments are recorded at fair value. Adjustments may include unobservable
parameters, among other things.
The Company conducts a quarterly review and evaluation of our investment
securities to determine if any declines in fair value are other than temporary.
In making this determination, we consider the period of time the securities were
in a loss position, the percentage decline in comparison to the securities'
amortized cost, the financial condition of the issuer and the delinquency or
default rates of underlying collateral. In addition, we consider our ability and
intent to hold the investment securities currently in an unrealized loss
position until they mature or for a sufficient period of time to allow for a
recovery in
their fair value. Any valuation decline that we determine to be other than
temporary would require us to write down the security to fair value through a
charge to earnings. See note 3 to the Company's audited financial statements for
further information.
During the year ended December 31, 2008, the Company recorded
other-than-temporary impairment charges of approximately $16.0 million. The
Company recorded charges of $320,000 during the quarter ended March 31, 2008,
$1.1 million during the quarter ended June 30, 2008, $10.9 million during the
quarter ended September 30, 2008 and $3.7 million during the quarter ended
December 31, 2008. The other-than-temporary impairment charges were $5.5 million
of Freddie Mac perpetual preferred stock, $600,000 of a single issuer trust
preferred security and $9.9 million of pooled trust preferred securities. As of
December 31, 2008, the remaining fair value of securities on which
other-than-temporary impairment was recorded was $1.8 million.
Goodwill. Goodwill is not subject to amortization but must be tested for
impairment at least annually, and possibly more frequently if certain events or
changes in circumstances arise. Impairment testing requires that the fair value
of each reporting unit be compared to its carrying amount, including goodwill.
Reporting units are identified based upon analyzing each of the Company's
individual operating segments. A reporting unit is defined as any distinct,
separately identifiable component of an operating segment for which complete,
discrete financial information is available that management regularly reviews.
Goodwill is allocated to the carrying value of each reporting unit based on its
relative fair value at the time it is acquired. Determining the fair value of a
reporting unit requires a high degree of subjective management judgment. A
discounted cash flow valuation model is used to determine the fair value of each
reporting unit. The discounted cash flow model incorporates such variables as
growth of net income, interest rates and terminal values. Based upon an
evaluation of key data and market factors, management selects the specific
variables to be incorporated into the valuation model. Future changes in the
economic environment or the operations of the reporting units could cause
changes to these variables, which could give rise to declines in the estimated
fair value of the reporting unit. Declines in fair value could result in
impairment being identified. The Company has established June 30 of each year as
the date for conducting its annual goodwill impairment assessment. The variables
are selected as of that date and the valuation model is run to determine the
fair value of each reporting unit. At June 30, 2008, the Company did not
identify any individual reporting unit where the fair value was less than the
carrying value.
Deferred Income Taxes. The Company uses the asset and liability method of
accounting for income taxes as prescribed in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Using this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. If current available information raises doubt as to the realization of
the deferred tax assets, a valuation allowance is established. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The Company exercises significant judgment
in evaluating the amount and timing of recognition of the resulting tax
liabilities and assets. These judgments require us to make projections of future
taxable income. The judgments and estimates the Company makes in determining our
deferred tax assets, which are inherently subjective, are reviewed on an ongoing
basis as regulatory and business factors change. A reduction in estimated future
taxable income could require the Company to record a valuation allowance.
Changes in levels of valuation allowances could result in increased income tax
expense, and could negatively affect earnings.
Other Intangible Assets. Using the purchase method of accounting for
acquisitions, the Company is required to record the assets acquired, including
identified intangible assets, and liabilities assumed at their fair values.
These fair values often involve estimates based on third-party valuations,
including appraisals, or internal valuations based on discounted cash flow
analyses or other valuation techniques, which are inherently subjective. Core
deposit and other intangible assets are recorded in purchase accounting when a
premium is paid to acquire other entities or deposits. Other intangible assets,
which are determined to have finite lives, are amortized based on the period of
estimated economic benefits received, primarily on an accelerated basis.
Pension Benefits. Pension costs and liabilities are dependent on assumptions
used in calculating such amounts. These assumptions include discount rates,
benefits earned, interest costs, expected return on plan assets, mortality
rates, and other factors. In accordance with U.S. generally accepted accounting
principles, actual results that differ from the assumptions are amortized over
future periods and, therefore, generally affect recognized expense. While
management believes that the assumptions used are appropriate, differences in
actual experience or changes in assumptions may affect the Company's pension
obligations and future expense.
In determining the present value of future obligations for pension benefits
at December 31, 2008, the Company used a discount rate of 6.00%, which is 0.50%
lower than the discount rate used at December 31, 2007 of 6.50%. The Company
uses the Citigroup Pension Liability Index rate as of the measurement date to
determine the discount rate. Effective January 1, 2008, the Company changed the
measurement date from October 31 to December 31 concurrent with the Company's
adoption of the
measurement provisions of Statement of Financial Accounting Standards No. 158.
The Company's pre-tax pension expense is forecasted to increase from
approximately $4.8 million for the year ended December 31, 2008 to approximately
$7.9 million for the year ending December 31, 2009.
Financial Condition
Cash and equivalents. Cash and equivalents decreased by $150.7 million, or
65.3%, to $79.9 million at December 31, 2008 from $230.6 million at December 31,
2007. This decrease was attributable to the Company using cash to fund loan
growth and purchase investment securities.
Marketable securities. Investment securities increased by $5.8 million, or
0.5%, to $1.139 billion at December 31, 2008 from $1.133 billion at December 31,
2007. This increase was the result of the Company investing excess cash in
marketable securities in order to earn a higher yield. The Company regularly
reviews the investment portfolio for declines in value below amortized cost that
might be considered "other than temporary." During the year the Company
recognized other-than-temporary impairment charges of $16.0 million. The
other-than-temporary impairment charges were $5.5 million for preferred stock of
Freddie Mac, $600,000 for a single issuer trust preferred security with a
remaining amortized cost of $1.4 million at December 31, 2008 and $9.9 million
for multiple pooled-trust preferred securities with remaining amortized cost of
$13.7 million as of December 31, 2008. As of December 31, 2008 and 2007, the
Company concluded that the remaining declines associated with the rest of the
investment securities were temporary in nature.
Loans receivable. Net loans receivable increased $346.3 million, or 7.2%, to
$5.142 billion at December 31, 2008 from $4.796 billion at December 31, 2007.
This increase in loans was primarily attributable to growth in the Company's
consumer and commercial loan portfolios. Consumer home equity loans increased
$43.6 million, or 4.4%, commercial real estate loans increased $193.6 million,
or 21.4%, and commercial business loans increased $19.7 million, or 5.4%.
Geographically, the Company's loans are predominately in Pennsylvania.
Approximately 79.4% of the Company's loans are in Pennsylvania, 9.1% in New
York, 7.3% in Maryland, 1.9% in Florida, 0.8% in Ohio and 1.5% in other states.
Of the loans in each geographic area, 1.3% of the Pennsylvania loans are greater
than 90 days delinquent, 0.5% of the New York loans are greater than 90
delinquent, 3.0% of the Maryland loans are greater than 90 days delinquent,
20.1% of the Florida loans are greater than 90 days delinquent, 0.7% of the Ohio
loans are greater than 90 days delinquent and 14.5% of the other loans are
greater than 90 days delinquent.
Total delinquency 30 days or more past due increased by $67.8 million, or
54.2%, to $192.8 million at December 31, 2008 from $125.0 million at
December 31, 2007. The $192.8 million of total delinquency at December 31, 2008
represents 3,492 loans, while the $125.0 million of total delinquency at
December 31, 2007 represents 3,587 loans. Delinquency of one- to four-family
mortgage and consumer loans increased $18.3 million, or 27.3%, and commercial
real estate and commercial business loans increased $49.5 million, or 85.0%.
Like most financial institutions, the Company experienced an increase in the
amount of delinquency during the past year due to deteriorating economic
conditions. The largest increases have occurred in Florida and Maryland where
economic activity has slowed the most. However, most of the increase in
delinquency is related to several large commercial relationships as the total
number of delinquent loans decreased by 95.
Deposits. Deposits decreased $504.1 million, or 9.1%, to $5.038 billion at
December 31, 2008 from $5.542 billion at December 31, 2007. This designed
decrease in deposits was attributable to the Company using FHLB advances as a
less expensive long-term funding alternative, while allowing rate-sensitive
certificates of deposit to mature and be invested elsewhere. The Company allowed
$579.2 million of certificate of deposit funds to exit, reducing the related
cost of certificates of deposit from 4.58% as of December 31, 2007, to 3.93% as
of December 31, 2008. This provided a reduction in certificate of deposit
interest expense of $34.3 million during the year ended December 31, 2008.
Shareholders' equity. Shareholders' equity increased by $906,000, or less
than 1.0%, to $613.8 million at December 31, 2008 from $612.9 million at
December 31, 2007. This increase in shareholders' equity was primarily
attributable to net income of $48.2 million, which was offset by other
comprehensive loss of $30.6 million, the payment of dividends of $15.8 million
and stock repurchases of $3.3 million.
Results of Operations - Year ended December 31, 2008 compared to year ended
December 31, 2007
Interest income. Interest income decreased by $7.8 million, or 1.9%, on a
taxable equivalent basis, to $396.8 million for the year ended December 31, 2008
from $404.6 million for the year ended December 31, 2007. The decrease in
interest income was due to a decrease in the average yield on interest-earning
assets, which was partially offset by an increase in the average balance of
interest-earning assets. The average rate earned on interest-earnings assets
decreased by 27 basis points, to 6.18% for the year ended December 31, 2008 from
6.45% for the year ended December 31, 2007. The average balance of
interest-earning assets increased by $131.9 million, or 2.1%, to $6.381 billion
for the year ended December 31, 2008 from
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$6.249 billion for the year ended December 31, 2007. An explanation of the
growth in interest-earnings assets is discussed in each category below.
Interest income on loans receivable increased by $11.4 million, or 3.6%, on a
taxable equivalent basis, to $328.7 million for the year ended December 31, 2008
from $317.3 million for the year ended December 31, 2007. This increase was
attributable to an increase in the average balance of loans receivable, which
was partially offset by a decrease in the average yield on loans receivable. The
average loans receivable balance increased by $356.0 million, or 7.6%, to $5.017
billion for the year ended December 31, 2008 from $4.661 billion for the year
ended December 31, 2007. This increase was attributable to both the Company's
efforts in attracting and maintaining quality consumer and commercial loan
relationships as well as continued strong loan demand throughout the Company's
market area. During the year the Company increased commercial loan balances by
$213.3 million, or 16.7% and consumer home equity loans by $43.6 million, or
4.4%. The average yield on loans receivable decreased by 28 basis points, to
6.50% for the year ended December 31, 2008, from 6.78% for the year ended
December 31, 2007. This decrease is primarily due to the Company's variable rate
loans repricing in a generally lower interest rate environment.
Interest income on mortgage-backed securities increased $5.3 million, or
18.1%, to $34.7 million for the year ended December 31, 2008 from $29.4 million
for the year ended December 31, 2007. This increase was attributable to an
increase in the average balance of mortgage-backed securities, which was
partially offset by a decrease in the mortgage-backed securities average yield.
The average mortgage-backed securities balance increased by $148.2 million, or
25.4%, to $732.3 million for the year ended December 31, 2008 from
$584.1 million for the year ended December 31, 2007. The increase in the average
balance is primarily the result of the Company investing cash flows during the
first six months of the year from calls and maturities in the investment
portfolio into mortgage-backed securities, many of which were variable rate, in
anticipation of interest rates moving higher. The average yield on
mortgage-backed securities decreased by 29 basis points, to 4.74% for the year
ended December 31, 2008, from 5.03% for the year ended December 31, 2007. This
decrease in yield is primarily the result of the generally low interest rate
environment throughout 2008.
Interest income on investment securities decreased by $18.7 million, or
39.0%, on a taxable equivalent basis, to $29.3 million for the year ended
December 31, 2008 from $48.0 million for the year ended December 31, 2007. This
decrease was attributable to a decrease in the average balance of investment
securities, which was partially offset by an increase in the yield on investment
securities. The average investment securities balance decreased by
$341.4 million, or 41.6%, to $478.9 million for the year ended December 31, 2008
from $820.3 million for the year ended December 31, 2007. This decrease is
primarily from the November 2007 sale of $120.0 million of investment securities
as well as the ongoing sale of zero coupon treasury strips throughout 2008. The
average yield increased by 26 basis points, to 6.11% for the year ended
December 31, 2008, from 5.85% for the year ended December 31, 2007. The increase
in the average yield is primarily due the 6.75% taxable equivalent yield on
municipal securities comprising a larger percentage of the investment security
portfolio.
Interest expense. Interest expense decreased by $41.7 million, or 19.8%, to
$169.3 million for the year ended December 31, 2008 from $211.0 million for the
year ended December 31, 2007. This decrease was attributed to a decrease in the
interest rate paid on all funding sources, which was partially offset by an
increase in the average balance of interest-bearing liabilities. The average
rate paid on all deposit accounts decreased during the year ending December 31,
2008 with savings accounts decreasing from 1.38% for the year ended December 31,
2007, to 1.18% for the year ended December 31, 2008, interest-bearing demand
deposits decreasing from 1.58% for the year ended December 31, 2007 to 0.88% for
the year ended December 31, 2008, money market demand accounts decreasing from
3.69% for the year ended December 31, 2007 to 2.04% for the year ended
December 31, 2008 and certificate accounts decreasing from 4.58% for the year
ended December 31, 2007 to 3.93% for the year ended December 31, 2008. In
addition to the decreases in the rates paid on deposit accounts there was an
overall decrease in the average balance of deposit accounts, which decreased by
$258.5 million, or 5.0%, to $4.948 billion for the year ended December 31, 2008
from $5.206 billion for the year ended December 31, 2007. The strategic
reduction of certificate accounts was offset by an increase in the average
balance of borrowed funds, which increased by $337.4 million, or 88.5%, to
$718.7 million for the year ended December 31, 2008, from $381.3 million for the
year ended December 31, 2007. The average rate paid on borrowed funds also
decreased 78 basis points to 3.74% for the year ended December 31, 2008, from
4.52% for the year ended December 31, 2007. Throughout the year, the Company
monitored funding alternatives, including borrowings from the FHLB, to extend
the maturities on funding sources, while maintaining a low cost of funds.
Net interest income (including GAAP reconciliation). Net interest income
increased $33.9 million, or 17.5%, on a taxable equivalent basis, to
$227.5 million for the year ended December 31, 2008 from $193.6 million for the
year ended December 31, 2007. This increase was a result of the factors
previously discussed, primarily due to the cost of funds decreasing more than
the asset yield, contributing to a 47 basis point increase in net interest
margin to 3.57% for the year ended December 31, 2008 from 3.10% for the year
ended December 31, 2007. The interest earned on certain assets is
completely or partially exempt from federal income tax. As such, these
tax-exempt instruments typically yield lower returns than a taxable investment.
To provide more meaningful comparisons of yields for all interest-earning
assets, we also provide net interest income on a taxable-equivalent basis by
increasing the interest income earned on tax-exempt assets to make it fully
equivalent to interest income earned on other taxable investments. This
adjustment is not permitted under GAAP in the Consolidated Statements of Income.
Net interest income on a GAAP basis was $219.4 million, the taxable-equivalent
adjustment was $8.2 million and the net interest income on a taxable equivalent
basis was $227.5 million for the year ended December 31, 2008. Net interest
income on a GAAP basis was $185.0 million, the taxable-equivalent adjustment was
$8.6 million and the net interest income on a taxable equivalent basis was
$193.6 million for the year ended December 31, 2007.
Provision for loan losses. Management analyzes the allowance for loan losses
as described in the section "Allowance for Loan Losses." The provision recorded
adjusts this allowance to a level that reflects the loss inherent in the
Company's loan portfolio as of the reporting date. The provision for loan losses
. . .
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