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 September 30, 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 ______________________
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 November 3, 2006:
Common Stock, par value $.01 per share 6,677,087
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(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three and Nine months
Ended September 30, 2006 and 2005 (Unaudited)...................................... 3
Consolidated Statement of Condition as of September 30, 2006
(Unaudited) and December 31, 2005.................................................. 4
Consolidated Statement of Cash Flows for the Nine months Ended
September 30, 2006 and 2005 (Unaudited)............................................ 5
Notes to the Consolidated Financial Statements for the Three and Nine
Months Ended September 30, 2006 and 2005 (Unaudited)............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.......................................................... 16
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 27
----------------------------------------------------------
Item 4. Controls and Procedures ............................................................. 27
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PART II. Other Information
Item 1. Legal Proceedings.................................................................... 28
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Item 1A. Risk Factors......................................................................... 28
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................... 28
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Item 3. Defaults upon Senior Securities...................................................... 28
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Item 4. Submission of Matters to a Vote of Security Holders.................................. 28
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Item 5. Other Information ................................................................... 28
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Item 6. Exhibits ............................................................................ 28
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Signatures .................................................................................... 29
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ........... 30
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ........... 32
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
(Unaudited)
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans ......................... $ 37,577 $ 27,419 $ 105,005 $ 76,023
Interest on mortgage-backed securities ............. 7,186 6,445 21,989 18,763
Interest and dividends on investment securities..... 616 921 1,639 2,315
Other interest income .............................. 752 351 1,843 1,086
--------- --------- --------- ---------
46,131 35,136 130,476 98,187
--------- --------- --------- ---------
Interest expense:
Interest on deposits ............................... 11,392 5,674 29,682 14,423
Interest on Federal Home Loan Bank advances ........ 12,384 7,955 35,131 21,405
Interest on trust preferred borrowings ............. 1,736 954 3,859 3,633
Interest on other borrowings ....................... 1,499 1,338 3,995 3,620
--------- --------- --------- ---------
27,011 15,921 72,667 43,081
--------- --------- --------- ---------
Net interest income ................................... 19,120 19,215 57,809 55,106
Provision for loan losses ............................. 319 225 1,702 1,576
--------- --------- --------- ---------
Net interest income after provision for loan losses.... 18,801 18,990 56,107 53,530
--------- --------- --------- ---------
Noninterest income:
Credit/debit card and ATM income ................... 4,982 3,907 14,000 10,775
Deposit service charges ............................ 2,979 2,676 8,382 7,341
Bank owned life insurance income ................... 2,401 499 3,411 1,522
Investment advisory income ......................... 573 651 1,821 1,878
Loan fee income .................................... 458 516 1,292 1,511
Mortgage banking activities, net ................... 136 106 219 287
Securities losses .................................. (1,940) (609) (1,981) (609)
Other income ....................................... 720 838 2,083 2,449
--------- --------- --------- ---------
10,309 8,584 29,227 25,154
--------- --------- --------- ---------
Noninterest expense:
Salaries, benefits and other compensation .......... 10,189 9,061 28,802 26,377
Occupancy expense .................................. 1,387 1,290 4,034 3,829
Equipment expense .................................. 1,162 950 3,219 2,887
Data processing and operations expenses ............ 886 761 2,632 2,670
Marketing expense .................................. 676 689 2,017 2,042
Professional fees .................................. 587 610 1,349 1,661
Other operating expense ............................ 2,700 2,789 8,708 7,257
--------- --------- --------- ---------
17,587 16,150 50,761 46,723
--------- --------- --------- ---------
Income before minority interest and taxes ............. 11,523 11,424 34,573 31,961
Less minority interest ................................ 9 48 40 122
--------- --------- --------- ---------
Income before taxes ................................... 11,514 11,376 34,533 31,839
Income tax provision .................................. 3,511 3,969 11,691 11,076
--------- --------- --------- ---------
Net Income ............................................ $ 8,003 $ 7,407 $ 22,842 $ 20,763
========= ========= ========= =========
Earnings per share:
Basic .............................................. $ 1.20 $ 1.12 $ 3.45 $ 3.02
Diluted ............................................ $ 1.16 $ 1.06 $ 3.31 $ 2.85
The accompanying notes are an integral part of these Financial Statements.
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
September 30, December 31,
2006 2005
----------- -----------
(Unaudited)
(In Thousands, Except Per Share Data)
Assets:
Cash and due from banks ....................................................... $ 67,616 $ 59,251
Cash in non-owned ATMs ........................................................ 155,257 174,527
Federal funds sold and securities purchased under agreements to resell ........ 15,000 -
Interest-bearing deposits in other banks....................................... 628 173
----------- -----------
Total cash and cash equivalents ............................................ 238,501 233,951
Investment securities held-to-maturity......................................... 4,383 4,806
Investment securities available-for-sale including reverse mortgages .......... 50,216 52,683
Mortgage-backed securities available-for-sale ................................. 525,633 608,372
Mortgage-backed securities trading ............................................ 12,279 11,951
Loans held-for-sale............................................................ 621 436
Loans, net of allowance for loan losses of $26,747 at September 30, 2006
and $25,381 at December 31, 2005 ........................................... 1,986,982 1,774,858
Bank owned life insurance ..................................................... 57,604 54,193
Stock in Federal Home Loan Bank of Pittsburgh, at cost ........................ 48,156 46,293
Assets acquired through foreclosure............................................ 17 59
Premises and equipment ........................................................ 28,075 22,904
Accrued interest receivable and other assets .................................. 47,235 36,246
----------- -----------
Total assets .................................................................. $ 2,999,702 $ 2,846,752
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ................................................. $ 263,363 $ 279,415
Interest-bearing demand .................................................... 127,861 141,378
Money market ............................................................... 235,210 209,398
Savings .................................................................... 238,978 251,675
Time ....................................................................... 308,686 224,853
Jumbo certificates of deposit - customer ................................... 118,339 87,212
----------- -----------
Total customer deposits ................................................. 1,292,437 1,193,931
Other jumbo certificates of deposit ........................................ 84,352 40,567
Brokered certificates of deposit ........................................... 239,361 211,738
----------- -----------
Total deposits .......................................................... 1,616,150 1,446,236
Federal funds purchased and securities sold under agreements to repurchase .... 63,400 83,150
Federal Home Loan Bank advances ............................................... 956,755 1,008,721
Trust preferred borrowings .................................................... 67,011 67,011
Other borrowed funds .......................................................... 58,549 36,126
Accrued interest payable and other liabilities ................................ 29,407 23,327
----------- -----------
Total liabilities ............................................................. 2,791,272 2,664,571
----------- -----------
Minority Interest.............................................................. 47 206
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
15,546,556 at September 30, 2006 and 15,435,630 at December 31, 2005 ....... 155 154
Capital in excess of par value ................................................ 79,477 74,673
Accumulated other comprehensive loss........................................... (7,749) (9,968)
Retained earnings ............................................................. 340,386 319,065
Treasury stock at cost, 8,871,469 shares at September 30, 2006 and 8,839,569
shares at December 31, 2005................................................. (203,886) (201,949)
----------- -----------
Total stockholders' equity .................................................... 208,383 181,975
----------- -----------
Total liabilities, minority interest and stockholders' equity ................. $ 2,999,702 $ 2,846,752
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30,
------------------------------
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Operating activities:
Net income .......................................................................... $ 22,842 $ 20,763
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ........................................................ 1,702 1,576
Depreciation, accretion and amortization ......................................... 3,622 4,598
(Increase) decrease in accrued interest receivable and other assets .............. (11,773) 805
Origination of loans held-for-sale................................................ (17,134) (32,971)
Proceeds from sales of loans held-for-sale ....................................... 15,216 32,691
Gain on mortgage banking activity................................................. (219) (287)
Loss on sale of investments ...................................................... 1,981 609
Stock-based compensation expense (net of tax benefit recognized) ................. 847 -
Excess tax benefits from share-based payment arrangements......................... (1,529) -
Minority interest net income ..................................................... 40 122
Increase in accrued interest payable and other liabilities ....................... 7,609 8,607
Loss (gain) on sale of assets acquired through foreclosure........................ 44 (119)
Increase in value of bank-owned life insurance.................................... (3,411) (1,523)
Increase in capitalized interest, net............................................. (562) (201)
----------- -----------
Net cash provided by operating activities ........................................... 19,275 34,670
----------- -----------
Investing activities:
Maturities of investment securities ................................................. 440 2,045
Sale of investment securities available-for-sale .................................... 23,950 60,451
Purchase of investments available-for-sale .......................................... (20,718) (22,767)
Repayments of mortgage-backed securities held-to-maturity............................ - 4
Repayments of mortgage-backed securities available-for-sale ......................... 81,590 85,153
Sales of mortgage-backed securities available-for-sale .............................. 49,412 -
Purchases of mortgage-backed securities available-for-sale .......................... (47,721) (163,279)
Repayments of reverse mortgages ..................................................... 586 177
Disbursements for reverse mortgages.................................................. (393) (298)
Purchase of Cypress Capital Management LLC........................................... (466) (452)
Sale of loans ....................................................................... 10,253 637
Purchase of loans.................................................................... (9,124) (8,983)
Net increase in loans ............................................................... (213,036) (158,515)
Net increase in stock of Federal Home Loan Bank of Pittsburgh........................ (1,863) (1,717)
Sales of assets acquired through foreclosure, net ................................... 60 619
Purchase of land..................................................................... - (925)
Sale of real estate held-for-investment ............................................. - 5,296
Investment in partnership............................................................ 23 (1,196)
Investment in premises and equipment, net............................................ (7,687) (2,589)
----------- -----------
Net cash used for investing activities .............................................. (134,694) (206,339)
----------- -----------
Financing activities:
Net increase in demand and savings deposits ......................................... 5,969 108,243
Net increase in time deposits ....................................................... 185,560 66,561
Net decrease in securities sold under agreement to repurchase........................ (9,750) (48,955)
Net decrease in federal funds purchased.............................................. (10,000) -
Receipts from FHLB advances ......................................................... 6,173,923 5,410,301
Repayments of FHLB advances ......................................................... (6,225,889) (5,329,482)
Redemption of WSFS Capital Trust I Preferred Securities.............................. - (51,547)
Issuance of Pooled Floating Rate Capital Securities ................................. - 67,011
Dividends paid on common stock....................................................... (1,521) (1,392)
Issuance of common stock and exercise of employee stock options ..................... 2,284 2,757
Excess tax benefit from share-based payment arrangements ............................ 1,529 -
Purchase of treasury stock, net of reissuance........................................ (1,937) (40,104)
Decrease in minority interest........................................................ (199) (161)
----------- -----------
Net cash provided by financing activities ........................................... 119,969 183,232
----------- -----------
Increase in cash and cash equivalents ............................................... 4,550 11,563
Cash and cash equivalents at beginning of period .................................... 233,951 193,009
----------- -----------
Cash and cash equivalents at end of period .......................................... $ 238,501 $ 204,572
=========== ===========
(Continued on next page)
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Nine months ended September 30,
------------------------------
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year............................................... $ 66,213 $ 36,106
Cash paid for income taxes, net ..................................................... 10,332 6,727
Loans transferred to assets acquired through foreclosure ............................ 62 372
Net change in other comprehensive income ............................................ (2,219) (4,956)
Transfer of loans held-for-sale to loans ............................................ 1,837 1,369
The accompanying notes are an integral part of these Financial Statements.
6
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 deposit and cash management services. Lending activities
are funded primarily with deposits and borrowings. Deposits are insured to their
legal maximum by the Federal Deposit Insurance Corporation (FDIC). WSFS serves
customers from its main office, 26 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 a 80% interest in Cypress and in January 2006, it increased its
ownership to 90%. Cypress is a Wilmington based investment advisory firm
servicing high net-worth individuals and institutions. 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
in conjunction with WSFS. 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. Per Rule 10-01 of Regulation S-X, the Corporation is not
required to include all information and notes for complete financial statements
and prevailing practices within the banking industry. Operating results for the
three and nine month periods ended September 30, 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 on Form 10-K for the year ended December 31, 2005 as
filed with the Securities and Exchange Commission.
Accounting for Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Base 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 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 September 30, 2006, was $301,000
or $0.04 per share, to salaries, benefits and other compensation. The impact of
adopting SFAS 123R for the nine months ended September 30, 2006, was $992,000 or
$0.12 per share, to salaries, benefits and other compensation.
The Corporation has stock options outstanding under two plans
(collectively, "Stock Incentive 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 September 30, 2006, there were 168,997 shares available
for future grants under the 2005 Plan.
The Stock Incentive Plans provide for the granting of incentive stock
options as defined in Section 422 of the Internal Revenue Code as well as
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 in 20% or 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 Stock Incentive Plans.
7
A summary of the status of the Corporation's Stock Incentive Plans and
changes during the quarter then ended is presented below:
At or for the three months At or for the three months
------------------------------------------ ---------------------------------
ended September 30, 2006 ended September 30, 2005
------------------------------------------ ---------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of period 692,523 $ 33.02 787,488 $ 24.65
Granted - stock options 1,200 61.32 7,677 55.44
Granted - restricted shares 15,228 - 7 -
Exercised - stock options (44,080) 16.31 (9,590) 15.14
Forfeited - stock options (410) 61.59 (2,820) 47.73
------- -------
Outstanding at end of period 664,461 33.41 782,762 24.98
Exercisable at end of period 354,635 22.02 451,627 17.21
Weighted-average fair value
of stock options granted $ 20.81 $ 13.26
Weighted-average fair value
of restricted shares granted $ 63.60 $ 56.61
As of June 30, 2006, 394,930 stock options were exercisable with an
intrinsic value of $16.3 million. During the third quarter of 2006, 4,195
options vested with an intrinsic value of $110,000, and a grant date fair value
of $9.52 per option. Also during the quarter, 44,080 options were exercised with
an intrinsic value of $2.0 million. In addition, 410 vested options were
forfeited with an intrinsic value of $433. There were 354,635 exercisable
options remaining at September 30, 2006, with an intrinsic value of $14.4
million and a remaining contractual term of 4.9 years. At September 30, 2006
there were 664,461 stock options outstanding with an intrinsic value of $19.5
million and a remaining contractual term of 5.4 years. During the third quarter
of 2005, 9,590 options were exercised with an intrinsic value of $408,000 and
2,880 options vested with a grant date fair value of $7.77 per option.
A summary of the status of the Corporation's Stock Incentive Plans and
changes during the nine months then ended is presented below:
At or for the nine months At or for the nine months
------------------------------------------ ---------------------------------
ended September 2006 ended September 2005
------------------------------------------ ---------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of period 745,949 $ 31.60 873,360 $ 23.48
Granted - stock options 8,220 62.29 14,057 56.20
Granted - restricted shares 15,244 - 22 -
Exercised - stock options (103,426) 17.58 (98,927) 15.57
Forfeited - stock options (1,526) 43.99 (5,750) 34.89
------- -------
Outstanding at end of period 664,461 33.41 782,762 24.98
Exercisable at end of period 354,635 22.02 451,627 17.21
Weighted-average fair value
of stock options granted $ 16.84 $ 13.42
Weighted-average fair value
of restricted shares granted $ 63.59 $ 56.43
8
Beginning January 1, 2006, 434,144 stock options were exercisable. During
the nine months ended September 30, 2006, 24,327 options vested with an
intrinsic value of $778,000, and a grant date fair value of $7.99 per option.
Also during the first nine months of 2006, 103,426 options were exercised with
an intrinsic value of $4.6 million. In addition, 410 vested options were
forfeited with an intrinsic value of $433. During the first nine months of 2005,
98,927 options were exercised with an intrinsic value of $4.0 million and 51,770
options vested with a grant date fair value of $5.36 per option.
The total amount of compensation cost related to nonvested stock options
as of September 30, 2006 was $1.5 million. The weighted-average period over
which it is expected to be recognized is 1.2 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 between 4.6% and 5.2% in
2006; an expected option life of between three and three-quarter and six and
one-half years for all awards; and an expected stock price volatility of between
21.7% and 22.3% in 2006. For the purposes of this option-pricing model, a
dividend yield of between 0.4% and 0.5% 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. Since the adoption of SFAS 123R
the Corporation now uses a straight-line schedule to calculate the expense
related to new stock options issued.
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. The Company, as permitted in 2005, had
elected not to adopt the fair value accounting provisions of SFAS 123, and had
instead continued to apply Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for the Stock Incentive 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 $238,000 and $732,000 for the three and nine months ended September 30, 2005,
respectively, related to its Stock Incentive Plans.
During the third quarter of 2005 and 2006 the Company issued 7 and 15,228
shares, respectively, of restricted stock. During the first nine months of 2005
and 2006 the Company issued 22 and 15,244 shares, respectively, of restricted
stock. Restricted stock vests over five years: 0% in the first two years, 25% in
the third and fourth years and 50% in the fifth year.
For comparative purposes, the following table illustrates the effect on
net income and earnings per share, for the three and nine months ended September
30, 2005, had the Company applied the fair value recognition provision of the
SFAS No. 123 to stock-based employee compensation.
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
2005 2005
---- ----
(In Thousands, Except Per Share Data)
Net income, as reported ................................................ $ 7,407 $ 20,763
Less: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects ................................ 201 620
------- --------
Pro forma net income.................................................... $ 7,206 $ 20,143
Earnings per share:
Basic:
------
Net income ............................................................. $ 1.12 $ 3.02
Less: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects ................................ 0.03 0.09
------- --------
Pro forma net income.................................................... $ 1.09 $ 2.93
Diluted:
Net income, as reported ................................................ $ 1.06 $ 2.85
Less: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects ................................ 0.03 0.08
------- --------
Pro forma net income.................................................... $ 1.03 $ 2.77
9
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
---- ---- ---- ----
(In Thousands, Except Per Share Data)
Numerator:
Net income .......................................................... $8,003 $7,407 $22,842 $20,763
====== ====== ======= =======
Denominator:
Denominator for basic earnings per share - weighted average shares... 6,657 6,630 6,626 6,886
Effect of dilutive employee stock options ........................... 258 376 278 390
------ ------ ------- -------
Denominator for diluted earnings per share - adjusted weighted
average shares and assumed exercise .............................. 6,915 7,006 6,904 7,276
====== ====== ======= =======
Basic earnings per share ............................................ $ 1.20 $ 1.12 $ 3.45 $ 3.02
====== ====== ======= =======
Diluted earnings per share .......................................... $ 1.16 $ 1.06 $ 3.31 $ 2.85
====== ====== ======= =======
Outstanding common stock equivalents having no dilutive effect ...... 101 77 101 76
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 ten years ending December 1, 2008. The fair value of the cap is
estimated using a standard option model. The fair value of the interest rate cap
at September 30, 2006 was $35,000. 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. During the first nine months of 2006, the Company
recognized $555,000 of interest expense, of which $411,000 was the result of the
reclassification of the residual amounts related to the hedge that were not
reclassified at the time the Corporation refinanced its Trust Preferred
Securities in 2005.
The following depicts the change in fair market value of the Company's
derivative for the three and nine months ended:
For the three months ended September 30
--------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------- ---------------------------------------------
At At At At
July 1, Change September 30, July 1, Change September 30,
------- ------ ------------- ------- ------ -------------
(In Thousands)
Interest Rate Cap ......... $ 188 $ (153) $ 35 $ 97 $ 48 $ 145
For the nine months ended September 30
--------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------- ---------------------------------------------
At At At At
January 1, Change September 30, January 1, Change September 30,
(In Thousands)
Interest Rate Cap ......... $ 125 $ (90) $ 35 $ 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 For the nine months
ended September 30, ended September 30,
------------------- -------------------
(In Thousands)
2006 2005 2006 2005
---- ---- ---- ----
Net income .................................................... $ 8,003 $ 7,407 $ 22,842 $ 20,763
Other Comprehensive Income:
Unrealized holding gains (losses) on securities
available-for-sale arising during the period ............. 16,057 (6,145) 5,073 (7,403)
Tax (expense) benefit ......................................... (6,101) 2,335 (1,927) 2,813
-------- -------- -------- --------
Net of tax amount ............................................. 9,956 (3,810) 3,146 (4,590)
Unrealized holding gains arising during the
period on derivative used for cash flow hedge, including
amounts reclassified into earnings ........................ 411 113 465 18
Tax expense ................................................... (144) (39) (164) (6)
-------- -------- -------- --------
Net of tax amount ............................................. 267 74 301 12
Reclassification adjustment for losses included in net income . (1,940) (609) (1,981) (609)
Tax benefit ................................................... 737 231 753 231
-------- -------- -------- --------
Net of tax amount ............................................. (1,203) (378) (1,228) (378)
-------- -------- -------- --------
Total comprehensive income .................................... $ 17,023 $ 3,293 $ 25,061 $ 15,807
======== ======== ======== ========
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 September 30, 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
and nine months ended September 30, 2006 and 2005 follows:
11
For the three months ended September 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
(In Thousands)
WSFS CashConnect Total WSFS CashConnect Total
---- ----------- ----- ---- ----------- -----
External customer revenues:
Interest income $ 46,131 $ - $ 46,131 $ 35,136 $ - $ 35,136
Non-interest income 6,145 4,164 10,309 5,290 3,294 8,584
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 52,276 4,164 56,440 40,426 3,294 43,720
---------- ---------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income 2,174 - 2,174 1,208 - 1,208
Non-interest income 172 179 351 218 164 382
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment revenues 2,346 179 2,525 1,426 164 1,590
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 54,622 4,343 58,965 41,852 3,458 45,310
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 27,011 - 27,011 15,921 - 15,921
Non-interest expenses 16,465 1,122 17,587 15,066 1,084 16,150
Provision for loan loss 319 - 319 225 - 225
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 43,795 1,122 44,917 31,212 1,084 32,296
---------- ---------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense - 2,174 2,174 - 1,208 1,208
Non-interest expenses 179 172 351 164 218 382
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment expenses 179 2,346 2,525 164 1,426 1,590
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 43,974 3,468 47,442 31,376 2,510 33,886
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary items $ 10,648 $ 875 11,523 $ 10,476 $ 948 11,424
Less minority interest 9 48
Income tax provision 3,511 3,969
---------- ----------
Consolidated net income $ 8,003 $ 7,407
========== ==========
Cash and cash equivalents $ 83,244 $ 155,257 $ 238,501 $ 61,283 $ 143,289 $ 204,572
Other segment assets 2,748,279 12,922 2,761,201 2,500,099 6,610 2,506,709
---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,831,523 $ 168,179 $2,999,702 $2,561,382 $ 149,899 $2,711,281
========== ========== ========== ========== ========== ==========
Capital expenditures $ 2,389 $ 174 $ 2,563 $ 1,827 $ 125 $ 1,952
12
For the nine months ended September 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
(In Thousands)
WSFS CashConnect Total WSFS CashConnect Total
---- ----------- ----- ---- ----------- -----
External customer revenues:
Interest income $ 130,476 $ - $ 130,476 $ 98,187 $ - $ 98,187
Non-interest income 17,598 11,629 29,227 16,203 8,951 25,154
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 148,074 11,629 159,703 114,390 8,951 123,341
---------- ---------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income 5,976 - 5,976 3,001 - 3,001
Non-interest income 508 519 1,027 592 498 1,090
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment revenues 6,484 519 7,003 3,593 498 4,091
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 154,558 12,148 166,706 117,983 9,449 127,432
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 72,667 - 72,667 43,081 - 43,081
Non-interest expenses 47,750 3,011 50,761 43,943 2,780 46,723
Provision for loan loss 1,702 - 1,702 1,576 - 1,576
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 122,119 3,011 125,130 88,600 2,780 91,380
---------- ---------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense - 5,976 5,976 - 3,001 3,001
Non-interest expenses 519 508 1,027 498 592 1,090
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment expenses 519 6,484 7,003 498 3,593 4,091
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 122,638 9,495 132,133 89,098 6,373 95,471
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary items $ 31,920 $ 2,653 34,573 $ 28,885 $ 3,076 $ 31,961
Less minority interest 40 122
Income tax provision 11,691 11,076
---------- ----------
Consolidated net income $ 22,842 $ 20,763
========== ==========
Cash and cash equivalents $ 83,244 $ 155,257 $ 238,501 $ 61,283 $ 143,289 $ 204,572
Other segment assets 2,748,279 12,922 2,761,201 2,500,099 6,610 2,506,709
---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,831,523 $ 168,179 $2,999,702 $2,561,382 $ 149,899 $2,711,281
========== ========== ========== ========== ========== ==========
Capital expenditures $ 7,312 $ 369 $ 7,681 $ 2,926 $ 465 $ 3,391
13
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 sells certain 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 third 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 agreements, 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 September 30, 2006, there were nineteen variable-rate to fixed-rate
swap transactions between the third party financial institution and customers of
WSFS, compared to eighteen at December 31, 2005. The initial notional amount
aggregated approximately $65.2 million at September 30, 2006 compared with $57.9
million at December 31, 2005, with maturities ranging from approximately one to
ten years. The aggregate market value of these swaps to the customers was an
asset of $225,000 at September 30, 2006 and $98,600 at December 31, 2005. The
amount of liability recorded by the Company for these guarantees that were in a
liability position at September 30, 2006 and December 31, 2005 was $6,000 and
$8,000, respectively. This amount represented the fair market value of the
guarantee to perform under the terms of the swap agreements.
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). 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.
14
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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost............................... $ 27 $ 26 $ 81 $ 80
Interest cost.............................. 23 31 70 91
Amortization of transition obligation...... 15 15 45 45
Net loss recognition....................... - 4 - 12
---- ---- ----- -----
Net periodic benefit cost......... $ 65 $ 76 $ 196 $ 228
==== ==== ===== =====
Supplemental Pension Plan
The Corporation provided a nonqualified plan that gave credit for 25
years of service based on the qualified plan formula. This plan is 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Interest cost.............................. $ 11 $ 11 $ 33 $ 33
Net loss recognition....................... 15 6 43 18
---- ---- ---- ----
Net periodic benefit cost......... $ 26 $ 17 $ 76 $ 51
==== ==== ==== ====
15
ITEM 2. 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 deposits and
borrowings. The Federal Deposit Insurance Corporation (FDIC) insures deposits to
their legal maximum. WSFS serves customers from its main office and 26 retail
banking offices, loan production offices and operations centers located in
Delaware and southeastern Pennsylvania. Wealth management services include: WSFS
Investment Group, Inc., Montchanin Capital Management, Inc. (Montchanin) and an
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 consolidated subsidiaries of WSFS include WSFS Investment Group,
Inc. which markets various third-party insurance products and securities in
conjunction with WSFS, 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 $429 million in assets under management at
September 30, 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." 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
16
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.
The balance in this reserve at September 30, 2006 was $715,000.
The Bank, as successor to originators of reverse mortgages is, from
time to time, involved in arbitration or litigation with 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 Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes
(SFAS 109), 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 $153.0 million during the nine months ended
September 30, 2006. During the first nine months of 2006, net loans grew $212.1
million, or 12%, to $2.0 billion, reflecting the continued strong growth in
commercial and commercial real estate loans, which amounted to $169.3 million.
Residential and consumer loans grew by $24.4 million and $19.7 million
respectively. Cash and cash equivalents increased by $5.0 million.
Mortgage-backed securities (MBS) decreased by $82.4 million. This decrease was
due to a $51.4 million sale of mortgage-backed securities and repayments.
During the third quarter of 2006 the Company transferred $3.0 million
of mortgage loans to a third party through a securitization transaction in order
to transform these mortgage loans into investment securities, receiving MBS with
an equivalent notional amount in exchange. Those MBS are collateralized by the
same mortgage loans that the Company transferred to the third party. The Federal
Home Loan Mortgage Corporation backs the MBS.
Total liabilities increased $126.7 million between December 31, 2005
and September 30, 2006, to $2.8 billion, mainly due to a $169.9 million, or 12%,
increase in deposits. This included increases of $98.5 million in customer
deposits, $43.8 million in other jumbo certificates of deposit (primarily
municipal deposits), and $27.6 million in brokered certificates of deposits. The
incremental increases in other jumbo certificates of deposit and brokered
certificates of deposit were used to fund the strong loan growth during the
first nine months of 2006. Federal Home Loan Bank (FHLB) advances decreased
$52.0 million. This decrease in FHLB advances was mainly due to using excess
funds from the sale of mortgage-backed securities to repay advances.
17
Capital Resources
Stockholders' equity increased $26.4 million between December 31, 2005
and September 30, 2006. This increase was mainly due to net income of $22.8
million and an increase of $4.8 million from the issuance of common stock and
exercise of employee stock options. Other comprehensive loss decreased by $2.2
million during the first nine months of 2006 due in part to an increase in the
fair value of securities available-for-sale. In addition, the Corporation
purchased 31,900 shares of its common stock for $1.9 million ($60.72 per share
average). Finally, the Corporation declared cash dividends totaling $1.5 million
during the nine months ended September 30, 2006.
Below is a table comparing the Bank's consolidated capital position to the
minimum regulatory requirements as of September 30, 2006 (dollars in thousands):
To be Well-Capitalized
Under Prompt Corrective
Consolidated For Capital Action Provisions
Bank Capital Adequacy Purposes
-------------------------- --------------------------- --------------------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Total Capital
(to Risk-Weighted Assets) ........ $293,604 13.32% $176,360 8.00% $220,450 10.00%
Core Capital (to Adjusted
Total Assets) .................... 269,194 8.96 120,145 4.00 150,182 5.00
Tangible Capital (to Tangible
Assets) .......................... 269,194 8.96 45,054 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
(Assets) ......................... 269,194 12.21 88,180 4.00 132,270 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 September 30, 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 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 8.5% at September 30, 2006, compared with 6.4% at
June 30, 2006. Both of these ratios were 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 deposit market. The Bank's branch expansion 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
Company 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 nine months ended September 30, 2006, net loan growth
resulted in the use of $211.9 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.
18
During the nine months ended September 30, 2006, $19.3 million in cash
was provided by operating activities, while $6.0 million in cash was provided
through the net increase in demand and savings deposits and $185.6 million in
cash through the net increase in time deposits. During this period, cash and
cash equivalents increased $4.6 million to $238.5 million.
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.
September 30, December 31,
2006 2005
------------------ ------------------
(In Thousands)
Nonaccruing loans:
Commercial ...................................................... $ 2,203 $ 925
Consumer ........................................................ 279 155
Commercial mortgage ............................................. 770 727
Residential mortgage ............................................ 2,244 1,567
Construction .................................................... - 36
------- -------
Total nonaccruing loans ............................................... 5,496 3,410
Assets acquired through foreclosure ................................... 17 59
------- -------
Total nonperforming assets ............................................ $ 5,513 $ 3,469
======= =======
Past due loans:
Residential mortgages ........................................... $ 276 $ 327
Commercial and commercial mortgages ............................. - -
Consumer ........................................................ 13 59
------- -------
Total past due loans .................................................. $ 289 $ 386
======= =======
Ratios:
Nonaccruing loans to total loans (1) ............................ 0.27% 0.19%
Allowance for loan losses to gross loans (1) .................... 1.33% 1.41%
Nonperforming assets to total assets ............................ 0.18% 0.12%
Loan loss allowance to nonaccruing loans (2) .................... 477% 709%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ..................................... 476% 697%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $2.0 million between December 31, 2005
and September 30, 2006. Nonaccruing commercial loans increased primarily from
the third quarter transfer of a $1.3 million loan into this category.
Nonaccruing residential mortgage loans increased $677,000 primarily from the
third quarter addition of two large residential mortgages, partially offset by
charge-offs and accrual transfers. Assets acquired through foreclosure decreased
$42,000 as a result of a residential property sale. An analysis of the change in
the balance of nonperforming assets is presented on the following page.
19
For the nine
months ended For the year ended
September 30, 2006 December 31, 2005
(In Thousands)
Beginning balance .................................. $ 3,469 $ 4,613
Additions .................................... 4,388 5,062
Collections .................................. (1,935) (4,467)
Transfers to accrual/restructured status ..... (247) (398)
Charge-offs / write-downs, net ............... (162) (1,341)
------- -------
Ending balance ..................................... $ 5,513 $ 3,469
======= =======
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 promote 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 September 30, 2006, interest-bearing liabilities
exceeded interest-earning assets that mature or reprice within one year
(interest-sensitive gap) by $35.3 million. The Corporation's interest-sensitive
assets as a percentage of interest-sensitive liabilities within the one-year
window increased to 98% at September 30, 2006 compared to 97% at June 30, 2006.
Likewise, the one-year interest-sensitive gap as a percentage of total assets
changed to -1.18% at September 30, 2006 from -1.92% at June 30, 2006. The change
in sensitivity since June 30, 2006 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
of an immediate change in interest rates in 100 basis point increments on the
net portfolio value ratio. 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 September 30, 2006 and 2005, calculated
in compliance with Thrift Bulletin No. 13a:
At September 30,
----------------------------------------------------------------------
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 3% 8.55% 2% 7.77%
+200 2% 9.15% 1% 8.21%
+100 1% 9.82% 1% 8.56%
0 0% 9.97% 0% 8.82%
-100 -2% 10.24% -2% 8.91%
-200 -6% 10.66% -6% 8.65%
-300 -10% 10.72% -11% 8.29%
(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.
20
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Results of Operations
The Corporation recorded net income of $8.0 million or $1.16 per
diluted share for the third quarter of 2006. This compares to $7.4 million or
$1.06 per diluted share for the same quarter last year. Significant items
impacting the third quarter of 2006 were $1.8 million in unanticipated
non-taxable income related to the Bank's investment in bank-owned life insurance
(BOLI), or $0.26 per share and a $1.9 million loss on the sale of MBS, or $0.18
per share.
Net income for the nine months ended September 30, 2006 was $22.8
million or $3.31 per diluted share. This compares to $20.8 million or $2.85 per
diluted share for the comparable period last year. Earnings for the nine months
ended June 30, 2006 were also impacted by the income related to the Bank's
investment in BOLI and the loss on the sale of MBS, discussed above. Significant
items impacting the nine months ended September 30, 2005 include the refinancing
of $51.5 million of Trust Preferred Securities, resulting in a non-cash charge,
of $1.1 million, or $0.10 per share.
21
Net Interest Income
The following tables provide information concerning the balances,
yields and rates on interest-earning assets and interest-bearing liabilities
during the periods indicated.
Three months ended September 30,
---------------------------------------------------------------------------------
2006 2005
---------------------------------------- -------------------------------------
Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Rate (1) Balance Dividends Rate (1)
------- --------- -------- ------- --------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans .................. $ 639,307 $13,537 8.47% $ 589,703 $10,450 7.09%
Residential real estate loans ................. 491,223 6,798 5.54 430,871 5,587 5.19
Commercial loans .............................. 601,763 12,294 8.18 451,532 7,554 6.79
Consumer loans ................................ 262,600 4,938 7.46 221,706 3,787 6.78
---------- ------- ---------- -------
Total loans ................................ 1,994,893 37,567 7.59 1,693,812 27,378 6.53
Mortgage-backed securities (4) ................... 593,589 7,186 4.84 576,779 6,445 4.47
Loans held-for-sale (3) .......................... 1,185 10 3.38 2,462 41 6.66
Investment securities (4) (5) .................... 52,935 616 4.65 100,523 921 3.66
Other interest-earning assets .................... 55,668 752 5.36 48,155 351 2.89
---------- ------- ---------- -------
Total interest-earning assets .............. 2,698,270 46,131 6.88 2,421,731 35,136 5.85
Allowance for loan losses ........................ (26,938) ------- (25,215) -------
Cash and due from banks .......................... 57,372 53,121
Cash in non-owned ATMs ........................... 158,396 138,543
Bank owned life insurance ........................ 55,414 53,389
Other noninterest-earning assets ................. 63,607 54,602
---------- ----------
Total assets ............................... $3,006,121 $2,696,171
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand ....................... $ 121,160 229 0.75% $ 116,518 71 0.24%
Money market .................................. 227,285 2,080 3.63 183,279 1,025 2.22
Savings ....................................... 241,823 667 1.09 268,880 265 0.39
Customer time deposits ........................ 415,792 4,183 3.99 287,925 2,085 2.87
---------- ------- ---------- -------
Total interest-bearing customer deposits.... 1,006,060 7,159 2.82 856,602 3,446 1.60
Other jumbo certificates of deposits .......... 77,255 1,039 5.34 46,430 383 3.27
Brokered certificates of deposit .............. 238,983 3,194 5.30 206,331 1,845 3.55
---------- ------- ---------- -------
Total interest-bearing deposits ............ 1,322,298 11,392 3.42 1,109,363 5,674 2.03
FHLB of Pittsburgh advances ...................... 1,002,001 12,384 4.84 894,331 7,955 3.48
Trust preferred borrowings ....................... 67,011 1,736 10.14 67,011 954 5.57
Other borrowed funds ............................. 123,377 1,499 4.86 166,268 1,338 3.22
---------- ------- ---------- -------
Total interest-bearing liabilities ......... 2,514,687 27,011 4.30 2,236,973 15,921 2.85
Noninterest-bearing demand deposits............... 265,594 ------- 254,807 -------
Other noninterest-bearing liabilities ............ 25,970 20,691
Minority interest ................................ 68 201
Stockholders' equity ............................. 199,802 183,499
---------- ----------
Total liabilities and stockholders' equity.. $3,006,121 $2,696,171
========== ==========
Excess of interest-earning over
interest bearing liabilities .................. $ 183,583 $ 184,758
========== ==========
Net interest and dividend income ................. $19,120 $19,215
======= =======
Interest rate spread ............................. 2.58% 3.00%
==== ====
Net interest margin .............................. 2.88% 3.22%
==== ====
(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.
(5) Includes reverse mortgages.
22
Nine months ended September 30,
---------------------------------------------------------------------------------
2006 2005
---------------------------------------- -------------------------------------
Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Rate (1) Balance Dividends Rate (1)
------- --------- -------- ------- --------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans ................. $ 627,838 $ 38,157 8.10% $ 571,211 $28,611 6.68%
Residential real estate loans ................ 480,609 19,698 5.46 432,566 16,691 5.14
Commercial loans ............................. 567,265 33,085 7.89 423,918 19,729 6.40
Consumer loans ............................... 257,172 14,031 7.29 217,631 10,888 6.69
---------- -------- ---------- -------
Total loans ............................... 1,932,884 104,971 7.30 1,645,326 75,919 6.22
Mortgage-backed securities (4) .................. 611,454 21,989 4.79 567,967 18,763 4.40
Loans held-for-sale (3) ......................... 1,023 34 4.43 2,360 104 5.88
Investment securities (4) (5) ................... 55,102 1,639 3.97 98,405 2,315 3.14
Other interest-earning assets ................... 52,279 1,843 4.71 47,854 1,086 3.03
---------- -------- ---------- -------
Total interest-earning assets ............. 2,652,742 130,476 6.60 2,361,912 98,187 5.49
Allowance for loan losses ....................... (26,288) -------- (24,814) -------
Cash and due from banks ......................... 54,767 53,078
Cash in non-owned ATMs .......................... 153,522 129,870
Bank owned life insurance ....................... 54,884 52,881
Other noninterest-earning assets ................ 61,928 54,278
---------- ----------
Total assets .............................. $2,951,555 $2,627,205
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand ...................... $ 122,618 531 0.58% $ 108,955 196 0.24%
Money market ................................. 227,340 5,772 3.39 162,595 2,362 1.94
Savings ...................................... 242,797 1,622 0.89 278,276 816 0.39
Customer time deposits ....................... 367,891 10,367 3.77 284,305 5,817 2.74
---------- -------- ---------- -------
Total interest-bearing customer deposits... 960,646 18,292 2.55 834,131 9,191 1.47
Other jumbo certificates of deposits ......... 73,959 2,736 4.95 43,591 957 2.94
Brokered certificates of deposit ............. 236,787 8,654 4.89 181,857 4,275 3.14
---------- -------- ---------- -------
Total interest-bearing deposits ........... 1,271,392 29,682 3.12 1,059,579 14,423 1.82
FHLB of Pittsburgh advances ..................... 1,014,156 35,131 4.57 868,090 21,405 3.25
Trust preferred borrowings ...................... 67,011 3,859 7.59 61,630 3,633 7.77
Other borrowed funds ............................ 119,468 3,995 4.46 179,087 3,620 2.70
---------- -------- ---------- -------
Total interest-bearing liabilities ........ 2,472,027 72,667 3.92 2,168,386 43,081 2.65
Noninterest-bearing demand deposits 264,233 -------- 248,899 -------
Other noninterest-bearing liabilities ........... 23,205 17,554
Minority interest ............................... 95 207
Stockholders' equity ............................ 191,995 192,159
---------- ----------
Total liabilities and stockholders' equity. $2,951,555 $2,627,205
========== ==========
Excess of interest-earning over
Interest bearing liabilities ................. $ 180,715 $ 193,526
========== ==========
Net interest and dividend income ................ $57,809 $55,106
======= =======
Interest rate spread ............................ 2.68% 2.94%
==== ====
Net interest margin ............................. 2.95% 3.16%
==== ====
(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.
(5) Includes reverse mortgages.
Net interest income for the third quarter of 2006 was $19.1 million
compared to $19.2 million for the same quarter in 2005. Higher loan and higher
MBS volumes were offset by higher volumes and yields on liabilities. The yield
on earning assets was higher in the third quarter of 2006 compared to the third
quarter of 2005. The yield on loans increased 1.06% from 6.53% in the third
quarter of 2005 to 7.59% in the third quarter of 2006, while the yield on MBS
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 third quarter of 2006 was 2.88%, a decrease from the third
quarter 2005 which was 3.22%. Rates on interest-bearing liabilities rose 1.45%
during the third quarter versus 2005.
23
The net interest margin for the third quarter of 2006 was negatively
affected by 6 basis points due to a non-cash charge related to trust preferred
borrowings ($411,000). This amount is related to hedge accounting at the time
the Company refinanced its trust preferred securities in 2005 and is in addition
to the non-cash charge related to the unamortized issuance costs recorded at
that time. Without this charge the margin would have been 2.94%.
Net interest income for the nine-month period ending September 30, 2006
was $57.8 million compared with $55.1 million for the same period in 2005. The
increase in net interest income was driven by higher loan and MBS volumes. The
yield on loans increased 1.08% and the yield on MBS increased 0.39%. The net
interest margin for the first nine months of 2006 was 2.95%, compared with 3.16%
for the same period in 2005.
The net interest margin for the nine months ended September 30, 2006
was negatively affected by 2 basis points due to the charge related to trust
preferred hedge accounting referenced above. Without this charge the margin
would have been 2.97% for the nine months ended September 30, 2006.
The net interest margin for the nine months ended September 30, 2005
was negatively affected by 6 basis points due to the redemption of $51.5 million
of WSFS Capital Trust I Securities, which carried an interest rate of the London
InterBank Offered Rate (LIBOR) plus 250 basis points. In conjunction with this
redemption, the Company issued $67.0 million aggregate principal amount of
Pooled Floating Rate Capital Securities, which carry an interest rate of LIBOR
plus 177 basis points. In connection with the refinancing, the Company
recognized a $1.1 million non-cash charge to interest expense from the
write-down of the unamortized debt issuance costs of the called securities.
Without this charge the margin would have been 3.22 % for the nine months ended
September 30, 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 derived from analysis of both the
probability of default and the probability of loss should default occur. 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 default experience for such loans and an assessment of the
probability of default. Loss adjustment factors are applied based on criteria
discussed 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 over the past 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.
24
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 provision for loan losses increased from $1.6 million for the first
nine months of 2005 to $1.7 million for the first nine months of 2006, primarily
the result of continued loan growth, despite continued positive trends in asset
quality.
During the third quarter the provision for loan losses was also
affected by a change in estimates used in the calculation. The change is the
result of continued analysis of the Corporation's loss experience on commercial
loans and the Corporation's consideration of proposed regulatory guidance and
professional studies on the classification of commercial credits to change its
estimates. This change combines an estimate of the probability of default for
each of the Corporation's classified loan grades with an estimate of loss should
an event of default occur. The estimate of loss further segments classified loan
grades into sub-grades with unique factors. Management believes this analysis
better estimates losses currently in its loan portfolio. These changes resulted
in a reduction to the provision for loan losses of $1.8 million or $0.17 per
share.
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.
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated.
Nine months ended Nine months ended
September 30, 2006 September 30, 2005
------------------ ------------------
(Dollars in Thousands)
Beginning balance ....................................... $ 25,381 $ 24,222
Provision for loan losses................................ 1,702 1,576
Charge-offs:
Residential real estate ........................... 70 38
Commercial real estate (1) ........................ - -
Commercial ........................................ 145 746
Overdrafts (2)..................................... 257 -
Consumer .......................................... 365 434
-------- --------
Total charge-offs .............................. 837 1,218
-------- --------
Recoveries:
Residential real estate ........................... 14 58
Commercial real estate (1) ........................ 166 42
Commercial ........................................ 189 155
Consumer .......................................... 132 98
-------- --------
Total recoveries ............................... 501 353
-------- --------
Net charge-offs ......................................... 336 865
-------- --------
Ending balance .......................................... $ 26,747 $ 24,933
======== ========
Net charge-offs to average gross loans
outstanding, net of unearned income (3) .............. 0.02% 0.07%
======== ========
(1) Includes commercial mortgage and construction loans.
(2) Prior to April 2006 overdraft charge-offs were recognized in other
operating expense.
(3) Ratio for nine months ended September 30, 2006 and September 30, 2005 are
annualized.
Noninterest Income
Noninterest income for the quarter ended September 30, 2006 was $10.3
million compared to $8.6 million for the third quarter of 2006, an increase of
$1.7 million or 20%. Noninterest income for the quarter was impacted by a gain
of $1.9 million in unanticipated income related to the Bank's investment in
BOLI. In addition, there was an increase of $1.1 million in card and ATM income
due to increased volumes of cash in non-owned ATMs and higher rates earned on
this cash during the quarter. Deposit service charges also increased $303,000
mainly due to an increase in deposit accounts resulting from the continued
success of the Company's personal and business checking initiatives begun during
the third quarter of 2004. Partially offsetting these increases was a loss of
25
$1.9 million on the sale of $51.4 million of below-market yielding MBS as part
of the Company's efforts to improve its earning asset mix and return on assets.
For the nine months ended September 30, 2006, noninterest income was
$29.2 million, an increase of $4.0 million over the same period in 2005.
Consistent with the year over year trend, this increase was mainly due to
increases in card and ATM income at CashConnect and deposit service charges. The
nine-months ended September 30, 2006 also included the gain related to BOLI and
the loss on the sale of MBS mentioned above.
Noninterest Expense
For the quarter ended September 30, 2006, noninterest expense was $17.6
million compared to $16.2 million for the same period in 2005, an increase of
$1.4 million or 9%. Increases in salaries, benefits and other compensation as
well as data processing expense contributed to the additional expense. Both were
the result of the Bank's continued growth efforts as the number of full-time
Associates increased from 512 at September 30, 2005 to 592 at September 30,
2006. The increase in salaries, benefits and other compensation also includes
$301,000 of expense related to stock options. As of January 1, 2006 the
Corporation implemented SFAS No. 123 (revised 2004), Share-Base Payment (SFAS
123R), which requires that share-based payments to participants, including
grants of stock options, be recognized as compensation expense in the income
statement based on their fair values.
Noninterest expense for the nine months ended September 30, 2006 was
$50.8 million, an increase of $4.0 million over the $46.7 million reported for
the same period in 2005. This increase was mainly due to salaries, benefits and
other compensation. These expenses increased primarily due to the Company's
continued growth efforts including branch expansion, renovation initiatives, and
the recently formed Wealth Management division. In addition, and consistent with
the discussion above, the increase in salaries, benefits and other compensation
was impacted by expense related to stock options which resulted from the
implementation of SFAS 123R.
The Corporation's stock option plans contain provisions which
accelerate vesting of stock options upon retirement. SFAS 123R requires
accelerated expensing of option awards to participants who are or will become
eligible for retirement under those plans. There are a number of participants
who qualify for this accelerated vesting. Had the Corporation been subject to
SFAS 123R at the time of the Corporation's award in December 2005, it would have
expensed $309,000, or $0.03 per share related to awards granted to
retirement-eligible participants. Historically, the Corporation awards options
in the fourth quarter of each year and expects this practice to continue.
Income Taxes
The Corporation and its subsidiaries, with the exception of WSFS Reit,
Inc., file a consolidated Federal income tax return and separate state income
tax returns. WSFS Reit, Inc. files a separate Federal and state income tax
return. 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 and nine months ended September 30, 2006 of $3.5 million and
$11.7 million, respectively, compared to an income tax provision of $4.0 million
and $11.1 million for the same periods in 2005. The effective tax rates for the
three and nine month periods ended September 30, 2006 were 31% and 34%,
respectively, compared to 35% for the comparable periods in 2005. This decreased
effective tax rate was primarily due to the receipt of $1.9 million tax-free
death benefit pursuant to the BOLI plan in September 2006, partially offset by
the non-deductibility of stock option expense related to incentive stock options
in accordance with SFAS 123R.
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 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.
26
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.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48). This interpretation of SFAS No. 109 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The interpretation is effective for fiscal years beginning after
December 15, 2006. The Corporation has reserves related to certain of its tax
positions which would be subject to analysis under FIN 48. The Corporation has
not yet determined the impact on its Consolidated Financial Statements, if any,
that would result as a consequence of adopting this interpretation in 2007.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principals and expands
disclosures about fair value measurements. Additionally, it establishes a fair
value hierarchy that prioritizes the information used to develop those
assumptions. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The Corporation has not yet determined the impact on its Consolidated
Financial Statements, if any, that would result as a consequence of adopting
this Statement in 2008.
Also in September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statement No. 87, 88, 106, and 132(R). This Statement requires
recognition of the funded status of a benefit plan and other postretirement
plans in the statement of financial position. The Statement also requires
recognition in other comprehensive income, net of tax, the gains or losses and
prior service costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost. Additionally, SFAS 158
requires employers to measure the funded status of a plan as of the date of its
year-end statement of financial position. SFAS 158 provides recognition and
disclosure elements to be effective as of the end of the fiscal years ending
after December 15, 2006 and measurement elements to be effective for fiscal
years ending after December 15, 2008. The Corporation has not yet determined the
impact on its Consolidated Financial Statements, if any, that would result as a
consequence of adopting this Statement in 2006.
In addition, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements in September 2006. This Statement provides SEC staff views on
diversity in practice in quantifying financial statement misstatements and the
potential under current practice for the build up of improper amounts on the
balance sheet. The SEC staff believes that registrants should quantify errors
using both a balance sheet and an income statement approach and evaluate whether
either approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. These prior
year misstatements should be considered in quantifying misstatements in current
year financial statements. SAB 108 is effective for fiscal years ending after
November 15, 2006. The Corporation has not yet determined the impact on its
Consolidated Financial Statements, if any, that would result as a consequence of
adopting this Statement in 2006.
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 to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms
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.
27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
------- -----------------
The Company is not engaged in any legal proceedings of a material
nature at September 30, 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table lists purchases of the Company's Common Stock
during the third quarter of 2006.
Total Total Number of Maximum Number
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 the Plans
--------- --------- --------------- ---------------
July 1, to July 31, 2006 0 $0.00 0 637,500
August 1, to August 31, 2006 19,400 $60.39 19,400 618,100
September 1, to September 30, 2006 0 $0.00 0 618,100
Total for the quarter ended September 30, 2006 19,400 $60.39
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
28
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: November 7, 2006 /s/ Marvin N. Schoenhals
-------------------------------------
Marvin N. Schoenhals
President and Chief Executive Officer
Date: November 7, 2006 /s/ Stephen A. Fowle
-------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
29