UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2866913
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
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(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one): Large accelerated filer Accelerated filer X Non-accelerated
filer
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of May 5, 2006:
Common Stock, par value $.01 per share 6,609,151
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(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
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Item 1. Financial Statements
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Consolidated Statement of Operations for the Three Months
Ended March 31, 2006 and 2005 (Unaudited)...................................... 3
Consolidated Statement of Condition as of March 31, 2006
(Unaudited) and December 31, 2005.............................................. 4
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2006 and 2005 (Unaudited)............................................ 5
Notes to the Consolidated Financial Statements for the Three
Months Ended March 31, 2006 and 2005 (Unaudited)............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations...................................................... 15
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 23
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Item 4. Controls and Procedures ......................................................... 23
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PART II. Other Information
Item 1. Legal Proceedings................................................................ 23
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Item 1A. Risk Factors..................................................................... 23
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ..................... 24
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Item 3. Defaults upon Senior Securities.................................................. 24
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Item 4. Submission of Matters to a Vote of Security Holders.............................. 24
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Item 5. Other Information ............................................................... 24
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Item 6. Exhibits ........................................................................ 24
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Signatures ............................................................................... 25
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ...... 26
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ....... 28
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended March 31,
----------------------------
2006 2005
---- ----
(Unaudited)
(In Thousands)
Interest income:
Interest and fees on loans .......................... $32,096 $23,157
Interest on mortgage-backed securities .............. 7,332 5,874
Interest and dividends on investment securities ..... 635 755
Other interest income ............................... 414 379
------- -------
40,477 30,165
------- -------
Interest expense:
Interest on deposits ................................ 8,177 4,087
Interest on Federal Home Loan Bank advances ......... 10,743 6,187
Interest on trust preferred borrowings .............. 1,017 712
Interest on other borrowings ........................ 1,237 1,066
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21,174 12,052
------- -------
Net interest income ...................................... 19,303 18,113
Provision for loan losses ................................ 688 579
------- -------
Net interest income after provision for loan losses ...... 18,615 17,534
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Noninterest income:
Credit/debit card and ATM income .................... 4,160 3,203
Deposit service charges ............................. 2,577 2,178
Investment advisory income .......................... 630 608
Bank owned life insurance income .................... 488 496
Loan fee income ..................................... 421 426
Mortgage banking activities, net .................... 22 144
Other income ........................................ 740 801
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9,038 7,856
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Noninterest expenses:
Salaries, benefits and other compensation ........... 9,192 8,822
Occupancy expense ................................... 1,300 1,276
Equipment expense ................................... 982 983
Data processing and operations expenses ............. 857 911
Marketing expense ................................... 613 525
Professional fees ................................... 257 553
Other operating expense ............................. 3,041 1,900
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16,242 14,970
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Income before minority interest and taxes ................ 11,411 10,420
Less minority interest ................................... 16 37
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Income before taxes ...................................... 11,395 10,383
Income tax provision ..................................... 4,054 3,593
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Net income ............................................... $ 7,341 $ 6,790
======= =======
Earnings per share:
Basic ................................................. $ 1.11 $ 0.96
Diluted ............................................... $ 1.06 $ 0.90
The accompanying notes are an integral part of these Financial Statements.
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
March 31, December 31,
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Assets
Cash and due from banks .................................................. $ 58,589 $ 59,251
Cash in non-owned ATMs ................................................... 159,042 174,527
Interest-bearing deposits in other banks ................................. 145 173
----------- -----------
Total cash and cash equivalents ...................................... 217,776 233,951
Investment securities held-to-maturity ................................... 4,632 4,806
Investment securities available-for-sale including reverse mortgages ..... 54,062 52,683
Mortgage-backed securities available-for-sale ............................ 618,082 608,372
Mortgage-backed securities trading ....................................... 12,105 11,951
Loans held-for-sale ...................................................... 1,503 436
Loans, net of allowance for loan losses of $26,143 at March 31, 2006
and $25,381 at December 31, 2005 ....................................... 1,877,770 1,774,858
Bank owned life insurance ................................................ 54,681 54,193
Stock in Federal Home Loan Bank of Pittsburgh, at cost ................... 46,548 46,293
Assets acquired through foreclosure ...................................... 44 59
Premises and equipment ................................................... 25,087 22,904
Accrued interest receivable and other assets ............................. 40,571 36,246
----------- -----------
Total assets ............................................................. $ 2,952,861 $ 2,846,752
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ........................................... $ 274,983 $ 279,415
Interest-bearing demand .............................................. 141,972 141,378
Money market ......................................................... 238,003 209,398
Savings .............................................................. 245,011 251,675
Time ................................................................. 245,943 224,853
Jumbo certificates of deposit - retail ............................... 97,819 87,212
----------- -----------
Total retail deposits .............................................. 1,243,731 1,193,931
Jumbo certificates of deposit - non-retail ........................... 79,122 40,567
Brokered certificates of deposit ..................................... 244,301 211,738
----------- -----------
Total deposits ................................................... 1,567,154 1,446,236
Federal funds purchased and securities sold under agreements
to repurchase........................................................... 73,400 83,150
Federal Home Loan Bank advances .......................................... 998,533 1,008,721
Trust preferred borrowings ............................................... 67,011 67,011
Other borrowed funds ..................................................... 35,968 36,126
Accrued interest payable and other liabilities ........................... 26,374 23,327
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Total liabilities ........................................................ 2,768,440 2,664,571
----------- -----------
Minority Interest ........................................................ 72 206
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding ............................................... - -
Common stock $.01 par value, 20,000,000 shares authorized; issued
15,458,220 at March 31, 2006 and 15,435,630 at December 31, 2005 ..... 155 154
Capital in excess of par value ........................................... 76,001 74,673
Accumulated other comprehensive loss ..................................... (15,037) (9,968)
Retained earnings ........................................................ 325,944 319,065
Treasury stock at cost, 8,852,069 shares at March 31, 2006 and 8,839,569
shares at December 31, 2005 .......................................... (202,714) (201,949)
----------- -----------
Total stockholders' equity ............................................... 184,349 181,975
----------- -----------
Total liabilities, minority interest and stockholders' equity ............ $ 2,952,861 $ 2,846,752
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31,
----------------------------
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Operating activities:
Net income ...................................................................... $ 7,341 $ 6,790
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................... 688 579
Depreciation, accretion and amortization .................................... 781 1,208
Increase in accrued interest receivable and other assets .................... (707) (485)
Origination of loans held-for-sale .......................................... (4,019) (12,036)
Proceeds from sales of loans held-for-sale .................................. 2,682 12,565
Gain on mortgage banking activity ........................................... (22) (144)
Stock-based compensation expense (net of tax benefit recognized) ............ 286 -
Excess tax benefits from share-based payment arrangements ................... (215) -
Minority interest net income ................................................ 16 37
Increase in accrued interest payable and other liabilities .................. 3,047 1,912
Loss (gain) on sale of assets acquired through foreclosure .................. 1 (3)
Increase in value of bank-owned life insurance .............................. (488) (496)
Increase in capitalized interest, net ....................................... (311) (67)
----------- -----------
Net cash provided by operating activities ....................................... 9,080 9,860
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Investing activities:
Maturities of investment securities ............................................. 180 30
Sale of investment securities available-for-sale ................................ 11,000 -
Purchase of investments available-for-sale ...................................... (11,991) -
Repayments of mortgage-backed securities held-to-maturity ....................... - 1
Repayments of mortgage-backed securities available-for-sale ..................... 26,773 25,843
Purchases of mortgage-backed securities available-for-sale ...................... (44,793) (87,022)
Repayments of reverse mortgages ................................................. 125 110
Disbursements for reverse mortgages ............................................. (207) (100)
Purchase of Cypress Capital Management LLC ...................................... (466) (452)
Sale of loans ................................................................... 183 -
Purchase of loans ............................................................... (3,305) (1,742)
Net increase in loans ........................................................... (100,002) (71,824)
Net (decrease) increase in stock of Federal Home Loan Bank of Pittsburgh ........ (255) 83
Sales of assets acquired through foreclosure, net ............................... 14 98
Investment in partnership ....................................................... 23 -
Investment in premise and equipment, net ........................................ (2,938) (545)
----------- -----------
Net cash used for investing activities .......................................... (125,659) (135,520)
----------- -----------
Financing activities:
Net increase in demand and savings deposits ..................................... 17,945 42,060
Net increase in time deposits ................................................... 102,563 19,558
Net increase in federal funds purchased ......................................... - 30,000
Net decrease in securities sold under agreement to repurchase ................... (9,750) (190)
Receipts from FHLB advances ..................................................... 2,224,375 1,762,900
Repayments of FHLB advances ..................................................... (2,234,563) (1,731,959)
Dividends paid on common stock .................................................. (462) (424)
Issuance of common stock and exercise of employee stock options ................. 996 1,740
Excess tax benefits from share-based payment arrangements ....................... 215 -
Purchase of treasury stock, net of reissuance ................................... (765) (8,409)
Decrease in minority interest ................................................... (150) (63)
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Net cash provided by financing activities ....................................... 100,404 115,213
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Decrease in cash and cash equivalents ........................................... (16,175) (10,447)
Cash and cash equivalents at beginning of period ................................ 233,951 193,009
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Cash and cash equivalents at end of period ...................................... $ 217,776 $ 182,562
=========== ===========
(Continued on next page)
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Three months ended March 31,
----------------------------
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
-------------------------------------------------
Cash paid in interest during the period.......................................... $ 18,946 $ 9,952
Cash paid for income taxes, net.................................................. 1,200 1,088
Loans transferred to assets acquired through foreclosure ........................ - 303
Net change in other comprehensive income ........................................ (5,069) (4,983)
Transfer of loans held-for-sale to loans......................................... 281 333
The accompanying notes are an integral part of these Financial Statements.
6
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated Financial Statements include the accounts of the
parent company (WSFS Financial Corporation), Wilmington Savings Fund Society,
FSB (Bank or WSFS) and Montchanin Capital Management, Inc. (Montchanin) and its
non-wholly owned subsidiary, Cypress Capital Management, LLC (Cypress). WSFS
Financial Corporation (Company or Corporation) also has one unconsolidated
affiliate, WSFS Capital Trust III (the Trust). WSFS was founded in 1832 and is
one of the oldest financial institutions in the country. WSFS provides
residential and commercial real estate, commercial and consumer lending
services, as well as retail deposit and cash management services. Lending
activities are funded primarily with retail deposits and borrowings. Deposits
are insured to their legal maximum by the Federal Deposit Insurance Corporation
(FDIC). WSFS serves customers from its main office, 25 retail banking offices,
loan production offices and operations centers located in Delaware and
southeastern Pennsylvania. Montchanin was formed in 2003 to provide asset
management products and services in the Bank's primary market area. In January
2005, Montchanin acquired an 80% interest in Cypress. Cypress is a Wilmington
based investment advisory firm servicing high net-worth individuals and
institutions. In January 2006, Montchanin increased its ownership in Cypress to
90%. The Trust was formed in 2005 to issue Pooled Floating Rate Capital
Securities. The Trust invested all of the proceeds from the issuance of the
Pooled Floating Rate Capital Securities in Junior Subordinated Debentures of the
Corporation.
Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), WSFS Investment Group, Inc. and WSFS Reit, Inc. WSFS
Investment Group, Inc. markets various third-party investment and insurance
products, such as single-premium annuities, whole life policies and securities
primarily through WSFS' retail banking system. The investment activity is
processed through the Bank while the insurance products are processed through
WSFS Investment Group, Inc. WSFS Reit, Inc. is a real estate investment trust
formed to hold qualifying real estate assets and may be used to raise capital in
the future.
The accounting and reporting policies of the Corporation conform with
U.S. generally accepted accounting principles and prevailing practices within
the banking industry for interim financial information and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required for complete financial statements and prevailing practices within
the banking industry. Operating results for the three month period ended March
31, 2006 are not necessarily indicative of the results that may be expected for
any future quarters or for the year ending December 31, 2006. For further
information, refer to the consolidated financial statements and notes thereto
included in the Corporation's Annual Report of Form 10-K for the year ended
December 31, 2005 as filed with the Securities and Exchange Commission.
Accounting for Stock Option Grants
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment (SFAS 123R). SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized as compensation expense in the consolidated financial statements
based on their fair values. That expense will be recognized over the period
during which an Associate is required to provide services in exchange for the
award, known as the requisite service period (usually the vesting period). The
Corporation adopted SFAS 123R effective beginning January 1, 2006 using the
Modified Prospective Application Method. This method relates to current and
future periods and does not require the restatement of prior periods. The impact
of adopting SFAS 123R for the three months ended March 31, 2006, was an increase
of $333,000 (pre-tax) or $0.04 (after-tax) per share, to salaries, benefits and
other compensation.
The Corporation has stock options outstanding under two stock option
plans (collectively, "Option Plans") for officers, directors and Associates of
the Corporation and its subsidiaries. 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. The 2005
Plan will terminate on the tenth anniversary of its effective date, after which
no awards may be granted. The number of shares reserved for issuance under the
2005 Plan is 400,000. At March 31, 2006, there were 232,941 shares available for
future grants under the 2005 Plan.
The Option Plans provide for the granting of incentive stock options as
defined in Section 422 of the Internal Revenue Code as well as nonincentive
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 the Corporation's
common stock on the date of the grant. All Stock Options granted during 2006
vest between 20% and 25% per annum increments, start to become exercisable one
year from the grant date and expire between five and ten years from the grant
date. Generally, all awards become immediately exercisable in the event of a
change in control, as defined within the Option Plans.
7
A summary of the status of the Corporation's Option Plans and changes
during the quarter then ended is presented below:
March 2006 March 2005
--------------------------- -------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of period 745,949 $ 31.60 873,360 $ 23.48
Granted 5,228 62.89 4,597 58.58
Exercised (17,890) 24.05 (61,720) 16.02
Forfeited (776) 39.83 - -
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Outstanding at end of period 732,511 32.00 816,237 24.24
Exercisable at end of period 423,054 20.43 474,150 16.89
Weighted-average fair value
of awards granted $ 15.33 $ 14.08
Beginning January 1, 2006, 434,144 stock options were exercisable. During
the first quarter of 2006, 6,800 options vested with an intrinsic value of
$261,000, a fair value of $6.31 per option. Also during the quarter, 17,890
options were exercised with an intrinsic value of $694,000. There were 423,054
exercisable options remaining at March 31, 2006, with an intrinsic value of
$17.8 million and a remaining contractual term of 5.2 years. At March 31, 2006
there were 732,511 stock options outstanding with an intrinsic value of $22.5
million and a remaining contractual term of 5.7 years. During the first quarter
of 2005, 61,720 options were exercised with an intrinsic value of $2.5 million
and 36,374 options vested with a fair value of $4.77 per option.
The total amount of compensation cost related to nonvested stock options as
of March 31, 2006 is $2.3 million. The weighted-average period over which it is
expected to be recognized is 1.3 years. The Corporation issues new shares upon
the exercise of options.
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 of 4.7% in 2006; expected option life
of between three and three-quarter and six and one-half years for all awards;
and expected stock price volatility of 21.9% in 2006. For the purposes of this
option-pricing model 0.4% was used as the expected dividend yield. Prior to
adoption of SFAS 123R the Corporation used a graded-vesting schedule to
calculate the expense related to stock options. Upon adoption of SFAS 123R the
Corporation has switched to a straight-line schedule to calculate the expense
related to stock options.
The Black-Scholes and other option-pricing models assume that options are
freely tradable and immediately vested. Since options are not transferable, have
vesting provisions, and are subject to trading blackout periods imposed by the
Company, the value calculated by the Black-Scholes model may significantly
overstate the true economic value of the options.
Prior to adoption of SFAS 123R, SFAS No. 123, Accounting for Stock-Based
Compensation, encouraged, but did not require, the adoption of fair-value
accounting for stock-based compensation to Associates. The Company, as permitted
in 2005, had elected not to adopt the fair value accounting provisions of SFAS
123, and has instead continued to apply Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and Related
Interpretations, and related interpretations in accounting for the Stock Plans
and to provide the required pro forma disclosures of SFAS 123. Had the
grant-date fair-value provisions of SFAS 123 been adopted, the Corporation would
have recognized pretax compensation expense of $250,000 for the three months
ended March 31, 2005 related to its Option Plans.
8
For comparative purposes, the following table illustrates the effect on
net income and earnings per share, for the three months ended March 31 2005, had
the Company applied the fair value recognition provision of the SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Net income, as reported...................................................... $ 6,790
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects............................................................ 212
-------
Pro forma net income......................................................... $ 6,578
=======
Earnings per share:
Basic:
-----
Net income .................................................................. $ 0.96
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects............................................................ 0.03
-------
Pro forma net income ....................................................... $ 0.93
=======
Diluted:
-------
Net income, as reported...................................................... $ 0.90
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects............................................................ 0.02
-------
Pro forma net income ........................................................ $ 0.88
=======
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months ended March 31,
------------------------------------
2006 2005
---- ----
(In Thousands, Except Per Share Data)
Numerator:
---------
Net income .............................................................. $7,341 $6,790
====== ======
Denominator:
-----------
Denominator for basic earnings per share - weighted average shares....... 6,601 7,090
Effect of dilutive employee stock options ............................... 304 419
----- -----
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ........................................... 6,905 7,509
===== =====
Basic earnings per share .................................................... $ 1.11 $ 0.96
====== ======
Diluted earnings per share .................................................. $ 1.06 $ 0.90
====== ======
Outstanding common stock equivalents having no dilutive effect............... 100 75
9
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Corporation has an interest-rate cap with a notional amount of
$50.0 million, which limits three-month London InterBank Offered Rate (LIBOR) to
6.00% for the ten years ending December 1, 2008. Until December 31, 2003, the
cap qualified as a hedge of the cash flows on $50.0 million in trust preferred
floating rate debt. The change in the fair value of the cap during the hedging
relationship, was captured in accumulated other comprehensive income. The
remaining amount recorded in accumulated other comprehensive income from
December 31, 2003 will be reclassified into interest expense when each of the
quarterly interest payments is made on the trust preferred debt. During the
first quarter of 2006, the Company recognized a non-cash pre-tax charge of
$26,000 in interest expense for the amortization of the remaining balance in
accumulated other comprehensive income.
The fair value of the cap is estimated using a standard option model.
The fair value of the interest rate cap at March 31, 2006 was $162,000. The cap
is considered a free standing derivative and all changes in the fair value of
the cap are recorded in the Statement of Operations.
The following depicts the change in fair market value of the Company's
derivatives for the periods indicated:
2006 2005
-------------------------------- ---------------------------------
At At At At
January 1, Change March 31, January 1, Change March 31,
---------- ------ --------- ---------- ------ ---------
(In Thousands)
Interest Rate Cap....... $125 $ 37 $162 $ 322 $ (177) $ 145
10
4. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive
income as required by SFAS No. 130, Reporting Comprehensive Income:
For the three months
ended March 31,
---------------
(In Thousands)
2006 2005
---- ----
Net income ......................................... $ 7,341 $ 6,790
Other Comprehensive Income:
Unrealized holding losses on securities
available-for-sale arising during the period... (8,203) (8,153)
Tax benefit ........................................ 3,117 3,098
------- -------
Net of tax amount .................................. (5,086) (5,055)
Unrealized holding gains arising during the
period on derivatives ......................... 26 111
Tax expense ........................................ (9) (39)
------- -------
Net of tax amount .................................. 17 72
Total comprehensive income ......................... $ 2,272 $ 1,807
======= =======
5. TAXES ON INCOME
The Corporation accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes, 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. Management has assessed valuation
allowances on the deferred income taxes due to, among other things, limitations
imposed by Internal Revenue Code and uncertainties, including the timing of
settlement and realization of these differences.
In November 2005, the FASB issued FASB Staff Position (FSP) No. FAS
123R-3, Transition Election for the Tax Effects of Share-Based Payment Awards.
This FSP provides a simplified method to calculate the Company's hypothetical
additional paid-in capital (APIC) pool for the beginning balance of excess
benefits and the method of determining the subsequent pool of option awards that
are outstanding and fully or partially vested upon adoption of SFAS 123R. This
FSP allows companies up to one year from the later of the adoption date of SFAS
123R or November 10, 2006 to evaluate the available transition alternatives and
make a one-time election. The Corporation has elected to use the simplified
method of accounting for the tax effect of share-based payment awards.
6. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation has two operating segments
at March 31, 2006: WSFS and CashConnect, the ATM division of WSFS.
The WSFS segment provides financial products through its banking
offices to commercial and retail customers. The CashConnect segment 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 in which fee income is
earned through bailment arrangements with customers of CashConnect. Bailment
arrangements are typically renewed annually.
Reportable segments are business units that are managed separately and
offer different services to distinct customer bases. The Corporation evaluates
performance based on pre-tax ordinary income relative to resources used, and
allocates resources based on these results. Segment information for the three
months ended March 31, 2006 and 2005 follows:
11
For the Three Months Ended March 31,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---- ----------- ----- ---- ----------- -----
External customer revenues:
Interest income $ 40,477 $ - $ 40,477 $ 30,165 $ - $ 30,165
Noninterest income 5,580 3,458 9,038 5,180 2,676 7,856
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 46,057 3,458 49,515 35,345 2,676 38,021
---------- ---------- ---------- ---------- ---------- ----------
Inter-segment revenues:
Interest income 1,708 - 1,708 808 - 808
Noninterest income 230 179 409 180 155 335
---------- ---------- ---------- ---------- ---------- ----------
Total inter-segment revenues 1,938 179 2,117 988 155 1,143
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 47,995 3,637 51,632 36,333 2,831 39,164
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 21,174 - 21,174 12,052 - 12,052
Noninterest expenses 15,329 913 16,242 14,390 580 14,970
Provision for loan loss 688 - 688 579 - 579
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 37,191 913 38,104 27,021 580 27,601
---------- ---------- ---------- ---------- ---------- ----------
Inter-segment expenses:
Interest expense - 1,708 1,708 - 808 808
Noninterest expenses 179 230 409 155 180 335
---------- ---------- ---------- ---------- ---------- ----------
Total inter-segment expenses 179 1,938 2,117 155 988 1,143
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 37,370 2,851 40,221 27,176 1,568 28,744
---------- ---------- ---------- ---------- ---------- ----------
Income before minority interest and taxes $ 10,625 $ 786 $ 11,411 $ 9,157 $ 1,263 10,420
Less minority interest 16 37
Income tax provision 4,054 3,593
---------- ----------
Consolidated net income $ 7,341 $ 6,790
========== ==========
Cash and cash equivalents $ 58,734 $ 159,042 $ 217,776 $ 52,874 $ 129,688 $ 182,562
Other segment assets 2,723,554 11,531 2,735,085 2,435,084 4,431 2,439,515
---------- ---------- ---------- ========== ========== ==========
Total segment assets $2,782,288 $ 170,573 $2,952,861 $2,487,958 $ 134,119 $2,622,077
========== ========== ========== ========== ========== ==========
Capital expenditures $ 18,614 $ 60 $ 18,674 $ 273 $ 266 $ 539
12
7. INDEMNIFICATIONS AND GUARANTEES
Secondary Market Loan Sales. The Company generally does 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. The Company typically sells fixed-rate, conforming first mortgage
loans to the Federal Home Loan Mortgage Corporation as part of its ongoing
asset/liability management program. Loans held-for-sale are carried at the lower
of cost or market. Gains and losses on sales of loans are recognized at the time
of the sale.
As is customary in such sales, WSFS provides indemnifications to the
buyers under certain circumstances. These indemnifications may include the
repurchase of loans by WSFS. Repurchases and losses are rare, and no provision
is made for losses at the time of sale. During the first quarter of 2006, the
Company made no repurchases of any loans sold in the secondary market.
Swap Guarantees. The Company entered into agreements with unrelated
financial institutions, whereby those financial institutions entered into
interest rate derivative contracts (interest rate swap transactions) with
customers referred to them by the Company. By the terms of the agreement, those
financial institutions have recourse to the Company for any exposure created
under each swap transaction in the event the customer defaults on the swap
agreement and the agreement is in a paying position to the third-party financial
institution. This is a customary arrangement that allows smaller financial
institutions, such as WSFS, to provide access to interest rate swap transactions
for its customers without WSFS creating the swap itself.
At March 31, 2006 and December 31, 2005, there were eighteen
variable-rate to fixed-rate swap transactions between the third party financial
institutions and customers of WSFS with an initial notional amount aggregating
approximately $57.9 million, and with maturities ranging from approximately one
to ten years. The aggregate market value of these swaps to the customers was an
asset of $771,100 at March 31, 2006 and $98,600 at December 31, 2005. The amount
of liability recorded by the Company for these guarantees that were in a paying
position at March 31, 2006 and December 31, 2005 was $5,000 and $8,000,
respectively. This amount represented the fair value of the guarantee to perform
under the terms of the swap agreements.
13
8. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Postretirement Benefits
The Corporation shares 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 the Corporation.
The Corporation accounts for its obligations under the provisions of
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. SFAS 106 requires that the costs of these benefits be recognized over
an Associate's active working career. Disclosures are in accordance with SFAS
No. 132 (Revised), Employer's Disclosure About Pensions and Other Postretirement
Benefits (SFAS 132R) that standardized the applicable disclosure requirements.
In December 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The
act expanded Medicare to include, for the first time, coverage for prescription
drugs beginning in 2006. The Corporation determined that its prescription drug
benefits under its postretirement benefit plan is actuarially equivalent to
Medicare Part D and thereby qualifies for subsidy under the Act.
Based on an actuarial analysis performed during the first quarter of
2006, the Corporation anticipates that its future benefit payments will be lower
due to the subsidy. The reduction to the total accumulated postretirement
benefit obligation (APBO) at January 1, 2006 was $559,000. Recognition of this
subsidy is also expected to reduce 2006 net periodic benefit costs by
approximately $74,000, or approximately $18,500 each quarter.
The following disclosures of the net periodic benefit cost components
of post-retirement benefits are in accordance with SFAS 132R and were measured
at January 1, 2006:
Three months ended March 31,
----------------------------
2006 2005
---- ----
Service cost ............................. $27 $27
Interest cost ............................ 23 30
Amortization of transition obligation .... 15 15
Net loss recognition ..................... - 4
--- ---
Net periodic benefit cost........... $65 $76
=== ===
Supplemental Pension Plan
The Corporation provided a nonqualified plan that gives credit for 25
years of service based on the qualified plan formula. This plan is currently
being provided to two retired executives of the Corporation. The plan is no
longer being provided to Associates of the Corporation. Unrecognized net gains
or losses resulting from experience different from that assumed and from changes
in assumptions is recognized immediately as a component of net periodic benefit
cost.
The following disclosures of the net periodic benefit cost components
of a supplemental pension plan are in accordance with SFAS 132R and were
measured at January 1, 2006:
Three months ended March 31,
----------------------------
2006 2005
---- ----
Interest cost ........................... $11 $11
Net loss recognition ..................... 14 6
--- ---
Net periodic benefit cost........... $25 $17
=== ===
14
ITEM 2. WSFS FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (Bank or WSFS). Founded in 1832, WSFS is one of the oldest
financial institutions in the country. As a federal savings bank, which was
formerly chartered as a state mutual savings bank, WSFS enjoys broader
investment powers than most other financial institutions. WSFS has served the
residents of the Delaware Valley for 174 years. WSFS is the largest thrift
institution headquartered in Delaware and the fourth largest financial
institution in the state on the basis of total deposits traditionally garnered
in-market. The Corporation's primary market area is the mid-Atlantic region of
the United States, which is characterized by a diversified manufacturing and
service economy. The long-term strategy of the Corporation is to improve its
status as a high-performing financial services company by focusing on its core
community banking business.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as retail deposit, cash management and wealth
management services. Lending activities are funded primarily with retail
deposits and borrowings. The Federal Deposit Insurance Corporation (FDIC)
insures deposits to their legal maximum. WSFS serves customers from its main
office and 25 retail banking offices, loan production offices and operations
centers located in Delaware and southeastern Pennsylvania. Wealth Management
services includes WSFS Investment Group, Inc., Montchanin Capital Management,
Inc. (Montchanin) and a new investment management and trust services group.
The Corporation has two consolidated subsidiaries, WSFS and Montchanin.
The Corporation also has one unconsolidated affiliate, WSFS Capital Trust III.
Fully-owned and continuing consolidated subsidiaries of WSFS include WSFS
Investment Group, Inc. which markets various third-party insurance products and
securities through WSFS' retail banking system, and WSFS Reit, Inc., which holds
qualifying real estate assets and may be used in the future to raise capital.
Montchanin has one consolidated non-wholly owned subsidiary, Cypress
Capital Management, LLC (Cypress). Cypress, a 90% owned subsidiary, is a
Wilmington-based investment advisory firm serving high net-worth individuals and
institutions. Cypress has more than $465 million in assets under management at
March 31, 2006.
WSFS Credit Corporation (WCC), a consolidated subsidiary of the Bank,
which was engaged primarily in indirect motor vehicle leasing, discontinued
operations in 2000. WCC no longer accepts new applications but continues to
service an immaterial amount of existing loans until their maturities.
FORWARD-LOOKING STATEMENTS
Within this report and financial statements, management has included
certain "forward-looking statements" concerning the future operations of the
Corporation. Statements contained in this report which are not historical facts,
are forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. It is management's desire to take advantage of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. This statement is for the express purpose of availing the Corporation of
the protections of such safe harbor with respect to all "forward-looking
statements" contained in our financial statements. Management has used
"forward-looking statements" to describe the future plans and strategies
including expectations of the Corporation's future financial results.
Management's ability to predict results or the effect of future plans and
strategy is inherently uncertain. Factors that could affect results include
interest rate trends, competition, the general economic climate in Delaware, the
mid-Atlantic region and the country as a whole, asset quality, loan growth, loan
delinquency rates, operating risk, uncertainty of estimates in general, and
changes in federal and state regulations, among other factors. These factors
should be considered in evaluating the "forward-looking statements," and undue
reliance should not be placed on such statements. Actual results may differ
materially from management expectations. WSFS Financial Corporation does not
undertake, and specifically disclaims any obligation to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of
operations are based on the Consolidated Financial Statements, which are
prepared in conformity with U.S. generally accepted accounting principles. The
preparation of these Financial Statements requires management to make estimates
and assumptions affecting the reported amounts of assets, liabilities, revenue
and expenses. Management evaluates these estimates and assumptions on an ongoing
basis, including those related to the allowance for
15
loan losses, contingencies (including indemnifications), and deferred taxes.
Management bases its 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:
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when realized. The determination of the allowance for
loan losses requires significant judgment reflecting management's best estimate
of probable loan losses related to specifically identified loans as well as
those in the remaining loan portfolio. Management's evaluation is based upon a
continuing review of these portfolios, with consideration given to evaluations
resulting from examinations performed by regulatory authorities.
Contingencies (Including Indemnifications)
In the ordinary course of business, the Corporation, the Bank and its
subsidiaries are subject to legal actions, which involve claims for monetary
relief. Based upon information presently available to the Corporation and its
counsel, it is the Corporation's opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on the Corporation's results of operations.
The Corporation maintains a loss contingency for standby letters of
credit and charges losses to this reserve when such losses are realized. The
determination of the loss contingency for standby letters of credit requires
significant judgement reflecting management's best estimate of probable losses
related to standby letters of credit. The balance in this reserve at March 31,
2006 was $542,000.
The Bank, as successor to originators of reverse mortgages is, from
time to time, involved in arbitration or litigation with the various parties
including borrowers or the heirs of borrowers. Because reverse mortgages are a
relatively new and uncommon product, there can be no assurances about how the
courts or arbitrators may apply existing legal principles to the interpretation
and enforcement of the terms and conditions of the Bank's reverse mortgage
obligations.
Deferred Taxes
The Corporation accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes, 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. Management has assessed the
Company's valuation allowances on deferred income taxes resulting from, among
other things, limitations imposed by Internal Revenue Code and uncertainties,
including the timing of settlement and realization of these differences.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $106.1 million during the three months ended
March 31, 2006. During the first three months of 2006, net loans grew $102.9
million to $1.9 billion reflecting the continued strong growth in commercial and
commercial real estate loans, which amounted to $76.0 million. Residential and
consumer loans grew by $17.1 million and $10.6 million, respectively. In
addition, mortgage-backed securities (MBS) increased by $9.9 million during the
first three months of 2006. Other assets and accrued interest receivable
increased $4.4 million. These increases were partially offset by decreases of
$16.2 million in cash and cash equivalents.
Total liabilities increased $103.9 million between December 31, 2005
and March 31, 2006, to $2.8 billion, mainly due to a $120.9 million increase in
deposits. This included increases of $49.8 million in retail deposits, $38.5
million in non-retail certificates of deposit (primarily municipal deposits) and
$32.6 million in brokered certificates of deposit. The incremental increases in
non-retail certificates of deposit and brokered certificates of deposit were
used to fund the strong loan growth during the quarter. These increases were
partially offset by a $10.2 million decrease in Federal Home Loan Bank (FHLB)
advances and a decrease of $9.8 million in Federal Funds purchased and
securities sold under agreement to repurchase.
16
Capital Resources
Stockholders' equity increased $2.4 million between December 31, 2005
and March 31, 2006. This increase was mainly due to net income of $7.3 million
and an increase of $5.2 million from the issuance of common stock and the
exercise of employee stock options. These increases were partially offset by
other comprehensive loss, which increased $5.1 million during the first three
months of 2006 due, in part, to a decline in the fair value of securities
available-for-sale. In addition, the Corporation purchased 12,500 shares of its
common stock for $765,000 ($61.22 per share average). Finally, the Corporation
declared cash dividends totaling $462,000 during the three months ended March
31, 2006.
Below is a table comparing the Bank's consolidated capital position to
the minimum regulatory requirements as of March 31, 2006 (dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------ ------------------ -----------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Total Capital
(to Risk-Weighted Assets) ........ $272,608 13.18% $165,461 8.00% $206,826 10.00%
Core Capital (to Adjusted
Total Assets)..................... 251,964 12.18 118,499 4.00 148,124 5.00
Tangible Capital (to Tangible
Assets) .......................... 251,964 8.51 44,437 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 251,964 8.51 82,730 4.00 124,096 6.00
Under Office of Thrift Supervision (OTS) capital regulations, 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 the Bank's financial statements. At March 31, 2006 the Bank was in compliance
with regulatory capital requirements and is considered a "well-capitalized"
institution.
Liquidity
The Company manages its liquidity risk and funding needs through its
treasury function and through its Asset/Liability Committee. The Company has a
policy that separately addresses liquidity, and management monitors the
Company's adherence to policy limits. One measure of the Company's liquidity is
the ratio of cash and qualified assets to net withdrawable deposits and
borrowings due within one year, which was 6.5% at March 31, 2006, compared with
7.4% at December 31, 2005. Both of these ratios were well in excess of the
policy minimum. Also, liquidity risk management is a primary area of examination
by the OTS. The Company complies with guidance promulgated under Thrift Bulletin
77 that requires thrift institutions to maintain adequate liquidity to assure
safe and sound operations.
As a financial institution, the Bank has ready access to several
sources to fund growth and meet its liquidity needs. Among these are: net
income, deposit programs, loan repayments, borrowing from the FHLB, repurchase
agreements and the brokered CD market. The branch expansion the Company is
currently undertaking is intended to enter the Company into new, but contiguous,
markets, attract new customers and provide funding for its business loan growth.
In addition, the Corporation has a large portfolio of high-quality, liquid
investments, primarily short-duration, AAA-rated, mortgage-backed securities and
Agency notes that are positioned to provide a near-continuous source of cash
flow to meet current cash needs, or can be sold to meet larger discrete needs
for cash. Management believes these sources are sufficient to maintain the
required and prudent levels of liquidity.
During the three months ended March 31, 2006, net loan growth resulted
in the use of $103.1 million in cash. The loan growth was primarily the result
of the successful implementation of specific strategies designed to increase
corporate and small business lending. While the Company's loan to deposit ratio
has been well above 100% for many years, management has significant experience
managing its funding needs through borrowings, primarily through the Federal
Home Loan Bank of Pittsburgh.
Additionally, during the three months ended March 31, 2006, $9.1
million in cash was provided by operating activities, while $17.9 million in
cash was provided through the net increase in demand and savings deposits and
$102.6 million in cash through the net increase in time deposits. For the
period, cash and cash equivalents decreased $16.2 million to $217.8 million.
17
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets
and past due loans at the dates indicated. Nonperforming assets include
nonaccruing loans, nonperforming real estate investments and assets acquired
through foreclosure. 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 collectibility 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.
March 31, December 31,
2006 2005
------ ------
(In Thousands)
Nonaccruing loans:
Commercial ....................................... $ 868 $ 925
Consumer ......................................... 103 155
Commercial mortgage .............................. 419 727
Residential mortgage ............................. 1,465 1,567
Construction ..................................... 36 36
------ ------
Total nonaccruing loans ............................... 2,891 3,410
Assets acquired through foreclosure ................... 44 59
------ ------
Total nonperforming assets ............................ $2,935 $3,469
====== ======
Past due loans:
Residential mortgages ............................ $ 247 $ 327
Commercial and commercial mortgages .............. - -
Consumer ......................................... 30 59
------ ------
Total past due loans .................................. $ 277 $ 386
====== ======
Ratios:
Nonaccruing loans to total loans (1) ............. 0.15% 0.19%
Allowance for loan losses to gross loans (1)...... 1.37% 1.41%
Nonperforming assets to total assets ............. 0.10% 0.12%
Loan loss allowance to nonaccruing loans (2)...... 863% 709%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ....................... 850% 697%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased $534,000 between March 31, 2006 and
December 31, 2005. The decrease in commercial, consumer, commercial and
residential mortgage resulted from collections, charge-offs, and accrual
transfers of various loans exceeding non-accrual additions. Construction
remained unchanged. Assets acquired through foreclosure decreased $15,000 as a
result of a write-down to a residential property. An analysis of the change in
the balance of non-performing assets is presented below.
For the Three
Months Ended For the Year Ended
March 31, 2006 December 31, 2005
-------------- -----------------
(In Thousands)
Beginning balance.................................. $3,469 $4,613
Additions .................................... 566 5,062
Collections................................... (884) (4,467)
Transfers to accrual/restructured status...... (113) (398)
Charge-offs / write-downs, net................ (103) (1,341)
------ ------
Ending balance..................................... $2,935 $3,469
====== ======
18
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those, which would result from a regulatory examination.
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest
rate-sensitive assets and liabilities to ensure a favorable interest rate spread
and mitigate exposure to fluctuations in interest rates is the Corporation's
primary tool for achieving its asset/liability management strategies. Management
regularly reviews the interest-rate sensitivity of the Corporation and adjusts
the sensitivity within acceptable tolerance ranges established by management. At
March 31, 2006, interest-earning assets exceeded interest-bearing liabilities
that mature or reprice within one year (interest-sensitive gap) by $1.3 million.
The Corporation's interest-sensitive assets as a percentage of
interest-sensitive liabilities within the one-year window increased to 100% at
March 31, 2006 compared to 99% at December 31, 2005. Likewise, the one-year
interest-sensitive gap as a percentage of total assets changed to 0.04% at March
31, 2006 from -0.57% at December 31, 2005. The change in sensitivity since
December 31, 2005 is the result of the current interest rate environment and the
Corporation's continuing effort to effectively manage interest rate risk.
Interest rate-sensitive assets of the Corporation excluded cash flows of
discontinued operations as well as the interest rate-sensitive funding for these
assets.
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13a "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
on the net portfolio value ratio of an immediate change in interest rates in 100
basis point increments. The net portfolio value ratio is defined as the net
present value of the estimated cash flows from assets and liabilities as a
percentage of net present value of cash flows from total assets (or the net
present value of equity). The table below is the estimated impact of immediate
changes in interest rates on the Company's net interest margin and net portfolio
value ratio at the specified levels at March 31, 2006 and 2005, calculated in
compliance with Thrift Bulletin No. 13a:
At March 31,
--------------------------------------------------------------------
2006 2005
------------------------------- ---------------------------------
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value Ratio (2) Margin (1) Value Ratio (2)
-------------- ---------- --------------- ---------- ---------------
+300 -1% 7.12% 1% 8.30%
+200 0% 7.77% 1% 8.70%
+100 0% 8.38% 1% 8.98%
0 0% 8.90% 0% 9.17%
-100 -1% 9.35% -2% 9.17%
-200 -3% 9.40% -7% 9.02%
-300 -7% 9.28% -14% 9.04%
(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 net portfolio value ratio of the Company in a stable interest rate
environment and the net portfolio value ratio as projected under the
various rate change environments.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
Results of Operations
The Corporation recorded net income of $7.3 million or $1.06 per
diluted share for the first quarter of 2006. This compares to $6.8 million or
$0.90 per diluted share for the same quarter last year.
19
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 March 31,
---------------------------------------------------------------------------
2006 2005
----------------------------------- ----------------------------------
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 ............. $ 605,189 $ 11,760 7.77% $550,790 $ 8,584 6.23%
Residential real estate loans ............ 466,329 6,279 5.39 437,109 5,580 5.11
Commercial loans ......................... 525,339 9,645 7.55 385,439 5,489 5.98
Consumer loans ........................... 250,856 4,406 7.12 212,762 3,469 6.61
----------- -------- ----------- --------
Total loans ............................ 1,847,713 32,090 7.01 1,586,100 23,122 5.90
Mortgage-backed securities (4) ................ 623,551 7,332 4.70 542,965 5,874 4.33
Loans held-for-sale (3) ....................... 594 6 4.04 2,510 35 5.58
Investment securities (4) ..................... 58,060 635 4.37 97,194 755 3.11
Other interest-earning assets ................. 48,690 414 3.45 45,950 379 3.30
----------- -------- ----------- --------
Total interest-earning assets ............ 2,578,608 40,477 6.32 2,274,719 30,165 5.35
-------- --------
Allowance for loan losses ..................... (25,515) (24,377)
Cash and due from banks ....................... 51,364 54,011
Cash in non-owned ATMs ........................ 144,436 123,306
Bank owned life insurance ..................... 54,365 52,367
Other noninterest-earning assets .............. 59,986 54,310
----------- -----------
Total assets ............................. $ 2,863,244 $ 2,534,336
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand .................. $ 123,805 140 0.46% $ 99,596 $ 59 0.24%
Money market ............................. 226,229 1,714 3.07 141,107 590 1.70
Savings .................................. 247,152 511 0.84 285,462 271 0.39
Retail time deposits ..................... 322,184 2,688 3.38 286,722 1,851 2.62
----------- -------- ----------- --------
Total interest-bearing retail deposits . 919,370 5,053 2.23 812,887 2,771 1.38
Jumbo certificates of deposits ................ 60,081 663 4.48 45,250 294 2.63
Brokered certificates of deposit .............. 226,022 2,461 4.42 156,471 1,022 2.65
----------- -------- ----------- --------
Total interest-bearing deposits......... 1,205,473 8,177 2.75 1,014,608 4,087 1.63
FHLB of Pittsburgh advances ................... 1,003,350 10,743 4.28 819,476 6,187 3.02
Trust preferred borrowings .................... 67,011 1,017 6.07 51,547 712 5.53
Other borrowed funds .......................... 121,822 1,237 4.06 194,210 1,066 2.20
----------- -------- ----------- --------
Total interest-bearing liabilities ....... 2,397,656 21,174 3.53 2,079,841 12,052 2.32
-------- --------
Noninterest-bearing demand deposits ........... 257,963 239,590
Other noninterest-bearing liabilities ......... 21,022 15,861
Minority interest ............................. 154 224
Stockholders' equity .......................... 186,449 198,820
----------- -----------
Total liabilities and stockholders' equity .... $ 2,863,244 $ 2,534,336
=========== ===========
Excess of interest-earning assets
over interest-bearing liabilities ........ $ 180,952 $ 194,878
=========== ===========
Net interest and dividend income .............. $ 19,303 $ 18,113
========= ========
Interest rate spread .......................... 2.79% 3.03%
==== ====
Net interest margin ........................... 3.04% 3.23%
==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
20
Net interest income for the first quarter of 2006 was $19.3 million
compared to $18.1 million for the same quarter in 2005. Higher loan and higher
mortgage backed securities (MBS) volumes drove much of this increase. The yield
on earning assets was also higher in the first quarter of 2006 compared to the
first quarter of 2005. The yield on loans increased 1.11% from 5.90% in the
first quarter of 2005 to 7.01% in the first quarter of 2006; while the yield on
mortgage backed securities increased 0.37% for the same period. The increases in
the yields were due to the higher overall level of market interest rates as the
Federal Reserve continued raising short term interest rates through 2005 and
into 2006. The net interest margin for the first quarter of 2006 was 3.04%, down
..19% from March 31, 2005. Rates on interest bearing liabilities rose 1.21% to
3.53% from 2.32% at March 31, 2005.
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The determination of
the allowance for loan losses requires significant judgment reflecting
management's best estimate of probable loan losses related to specifically
identified loans as well as probable loan losses in the remaining loan
portfolio. Management's evaluation is based upon a continuing review of these
portfolios.
Management establishes the loan loss allowance in accordance with
guidance provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the
allowance consists of several key elements which include: specific allowances
for identified problem loans; formula allowances for commercial and commercial
real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans in cases where
management has identified significant conditions or circumstances related to a
specific credit that management believes indicate the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans
are calculated by applying loss factors to outstanding loans in each case based
on the internal risk grade of loans. As a result, changes in risk grades of both
performing and nonperforming loans affect the amount of the formula allowance.
Loss factors by risk grade have a basis in WSFS' historical loss experience for
such loans and may be adjusted for significant factors that, in management's
judgment, affect the collectability of the portfolio as of the evaluation date.
See discussion of historical loss adjustment factors below.
Pooled loans are loans that are usually smaller,
not-individually-graded and homogenous in nature, such as consumer installment
loans and residential mortgages. Pooled loan loss allowances are based on
historical net charge-offs for ten years. The average loss allowance per
homogenous pool is based on the product of average annual historical loss rate
and the average estimated duration of the pool multiplied by the pool balances.
These separate risk pools are then assigned a reserve for losses based upon this
historical loss information and historical loss adjustment factors. Historical
loss adjustment factors are based upon management's evaluation of various
current conditions, including those listed below.
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet at least quarterly to
discuss and review these conditions and risks associated with individual problem
loans. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for such
losses. The Company also gives consideration to the results of these regulatory
agency examinations. The provision for loan losses increased from $579,000 for
the first three months of 2005 to $688,000 for the first three months of 2006,
primarily the result of more than $100 million in loan growth during the most
recent quarter, despite continued positive trends in asset quality.
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The allowances for
losses are maintained at a level which management considers adequate to provide
for losses based upon an evaluation of known and inherent risks in the
portfolios. Management's evaluation is based upon a continuing review of the
portfolios.
21
The table below represents a summary of the changes in the allowance
for loan losses during the periods indicated.
Three months ended March 31,
----------------------------
2006 2005
---- ----
(Dollars in Thousands)
Beginning balance ............................... $ 25,381 $ 24,222
Provision for loan losses ....................... 688 579
Charge-offs:
Residential real estate .................... 58 36
Commercial real estate (1) ................. - -
Commercial ................................. 30 66
Consumer ................................... 81 158
-------- --------
Total charge-offs ....................... 169 260
-------- --------
Recoveries:
Residential real estate .................... 3 56
Commercial real estate (1) ................. 147 -
Commercial ................................. 49 9
Consumer ................................... 44 41
-------- --------
Total recoveries ........................ 243 106
-------- --------
Net charge-offs ................................. (74) 154
-------- --------
Ending balance .................................. $ 26,143 $ 24,647
======== ========
Net charge-offs to average gross loans
outstanding, net of unearned income (2)........ (0.02)% 0.04%
======== ========
(1) Includes commercial mortgage and construction loans.
(2) Ratios for the three months ended March 31, 2006 and 2005 are annualized.
Noninterest Income
Noninterest income for the quarter ended March 31, 2006 was $9.0
million compared to $7.9 million for the first quarter of 2005, a 15% increase.
The increase over the first quarter of the prior year was mainly attributable to
increases of $957,000 in card and ATM income as a result of underlying growth in
volumes combined with $399,000 in increased deposit services charges. Mortgage
banking activities declined $122,000 as fewer loans sold during the first
quarter of 2006 resulted in lower mortgage servicing rights being recognized by
the Corporation.
Noninterest Expense
Noninterest expense for the quarter ended March 31, 2006 was $16.2
million for an increase of $1.2 million over the $15.0 million reported for the
same period of 2005. The 8% increase was primarily a result of increases in
salaries, benefits and other compensation, and other operating expenses. The
salaries, benefits and other compensation increase was mainly due to $333,000 of
expenses related to stock options. As of January 1, 2006, the Corporation
implemented Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment, which requires that all share-based payments to
Associates, including grants of stock options, be recognized as compensation
expense in the income statement based on their fair values. The increase in
other operating expenses stem from the reversal of a $503,000 reserve for losses
in the CashConnect (ATM) business recorded during the first quarter of 2005 that
was no longer necessary because losses were unlikely. Additionally, a $120,000
loss contingency for standby letters of credit was recorded during the first
quarter of 2006. The increases were offset by a $296,000 decrease in
professional fees, partially the result of the first quarter 2006 reversal of a
reserve related to reverse mortgages. This reserve is analyzed quarterly and is
adjusted in accordance with a formulaic calculation.
Income Taxes
The Corporation and its subsidiaries file a consolidated Federal income
tax return and separate state income tax returns. Income taxes are accounted for
in accordance with SFAS 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences." The Corporation recorded
a provision for income taxes during the three months ended March 31, 2006 of
$4.1 million compared to an income tax provision of $3.6 million for the same
period in 2005. The effective tax rates for each of the three month periods
ended March 31, 2006 and 2005 were 36% and 35%, respectively.
22
The effective tax rates reflect the recognition of certain tax benefits
in the financial statements including those benefits from tax-exempt interest
income, BOLI income and fifty-percent interest income exclusion on a loan to an
Employee Stock Ownership Plan. 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.
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision for income taxes
accordingly.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 155, Accounting
for Certain Hybrid Financial Instruments - An Amendment of Statements No. 133
and 140. This Statement permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation. It also clarifies which interest-only strips are not
subject to the requirements of SFAS 133. In addition, it establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. SFAS 155
becomes effective in fiscal years beginning after September 15, 2006. The
adoption of this Statement is not expected to have a material impact on the
Corporation's Consolidated Financial Statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets - An Amendment of Statement No. 140. This Statement will
modify the accounting for servicing assets and liabilities, such as those common
with mortgage securitization activities. The new Standard addresses the
recognition and measurement of separately recognized servicing assets and
liabilities and provides an approach to lessen the efforts to obtain hedge-like
(offset) accounting. SFAS 156 becomes effective in fiscal years beginning after
September 15, 2006. The adoption of this Statement is not expected to have a
material impact on the Corporation's Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report
on Form 10-Q.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act")), the Company's principal executive
officer and the principal financial officer have concluded that
as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective
and is accumulated and communicated to the Company's management,
including the principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding
required disclosures.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's
internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at March 31, 2006. From time to time, the Company is party to
legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
Item 1A. Risk Factors
------------
Management of the Company does not believe there have been any
material changes to the risk factors previously disclosed under Item
1A. of the Company's Form 10-K for the year ended December 31, 2005,
previously filed with the Securities and Exchange Commission.
23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table lists purchases of the Company's common stock
during the first quarter of 2006.
Total Number of Maximum Number
Total Number Average Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Purchased per Share Announced Plans Under Plans
--------- --------- --------------- -----------
January 1, to January 31, 2006 0 $0.00 0 650,000
February 1, to February 28, 2006 0 $0.00 0 650,000
March 1, to March 31, 2006 12,500 $61.22 12,500 637,500
Total for the quarter ended March 31, 2006 12,500 $61.22
There is no expiration date under either Plan.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
(a) Exhibit 31 - Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) Exhibit 32 - Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
24
SIGNATURES
Pursuant to the requirements 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.
WSFS FINANCIAL CORPORATION
Date: May 9, 2006 /s/MARVIN N. SCHOENHALS
-------------------------------------
Marvin N. Schoenhals
President and Chief Executive Officer
Date: May 9, 2006 /s/STEPHEN A. FOWLE
-------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
25