Letter from the Office of the Chief Executive Officer
To Our Stockholders, Customers, Neighbors, Associates and Friends:
2004 was an exceptional year of strong performance and continued results for
WSFS Financial Corporation. We are very pleased to report strong earnings and
extraordinary momentum.
Serving the needs of commercial and small business customers and leveraging the
strength of our retail franchise to gather core deposits is our strategic focus.
The results of our 2004 performance is evidence of a strategy that is working,
powered by the force of WSFS Associates who are empowered to be responsive
decision-makers, providing innovative solutions to our customers.
WSFS recorded net income from continuing operations of $25.8 million, or $3.39
per share in 2004. This represented growth rates of 21% and 31%, respectively,
over 2003. Our return on equity, based on net income from continuing operations,
was 13.54% and our return on assets was 1.10%. Reported net income was $25.9
million or $3.41 per share.
Empowered, Responsive Decision-Makers
WSFS Associates are known in our marketplace for being empowered to make
decisions. Our business customers value working with bankers who under- stand
their need for responsiveness and flexibility. A major component of our strategy
and key to our overall success is having Associates who have the attitude and
desire to create the ultimate customer experience by consistently delivering
stellar service.
Aggressively Expand Our Market Share
As a result of continued strong growth in commercial and commercial real estate
loans, we reported an increase of $222 million, or 33% over 2003, to $903
million in total. In September 2004, WSFS ranked 2nd in commercial loan market
share* in Delaware. The increase in loan volume is the result of experienced and
empowered relationship managers who are committed to delivering extraordinary
levels of service to their customers. In addition, we successfully introduced
new lockbox services and newly enhanced checking products designed specifically
for the needs of municipalities and non-profit organizations.
* According to a market share study conducted November 2004 by the Capital
Performance Group based on the outstanding commercial loans of 14 competitive
banks.
Our retail banking business had exceptionally strong growth as core deposit
relationships (demand deposits, money market and savings accounts) increased by
$108 million, or 17% over 2003 year-end. This growth was fueled by opening three
new banking offices in Kent and Sussex counties in Delaware, and by launching an
aggressive deposit-gathering program to capture retail market share. Residential
real estate loans and consumer loans (primarily home equity loans) grew by $8
million, or 1% from year-end 2003.
Our Private Banking services continued to grow with strong momentum, increasing
deposits by $40 million over 2003. Overall Private Banking relationships grew in
2004, fueled by newly developed loan and deposit products. Special initiatives
targeting professionals and privately held business owners also contributed to
our growth.
The Power Of WSFS Associates
WSFS Associates are truly the driving force behind our successful business
strategy. Our Associates are true professionals who share a common vision of
exceptional customer service.
The WSFS Brand Promise is to deliver extraordinary service by exceeding our
customers' expectations each time we connect with them. In 2003, we introduced a
company-wide training initiative focused on delivering extraordinary customer
service. Under this curriculum, all WSFS Associates undergo continuous training
that is specifically designed to deliver on our brand promise. Creating the
ultimate customer experience is the essence of the WSFS Brand.
All of this is part of a comprehensive approach to nurturing a productive,
customer-centric workplace that begins with Associate commitment to the
organization. WSFS utilizes a highly reputable, national research organization
to measure this level of commitment. Our 2005 Associate Survey indicates that
WSFS Associates scored above the 84th percentile nationally. We are on target to
reach our goal of being world-class by 2006. We strongly believe that Associate
commitment translates into customer profitability and increased Associate
retention.
Our Associate Bonus is now linked to delivering stellar service. We survey our
customers regularly to find out how we are doing at delivering on our brand
promise. In 2004, our customer survey results placed us in the 86th percentile
nationally for delivering service to our retail, small business and commercial
banking customers.
Making Our Value Statements A Reality
We strongly believe that two important values, the customer first and integrity
in all we do, must underpin how we do business. We believe that these value
statements become reality when every WSFS Associate lives up to the expectations
expressed in them. We hold ourselves accountable to conduct ourselves according
to the highest ethical standards -- not only because it is absolutely the right
thing, but also because we believe that it is good business to do so.
WSFS Foundation
The WSFS Charitable Foundation was established to provide charitable
contributions to 501(c)3 tax-exempt organizations. The Foundation provides
grants to organizations engaged in activities that are designed to improve the
economic and social well-being of the local community. WSFS Foundation's primary
giving focuses on fundamental and structural issues that strive to correct
education achievement gaps.
In 2004, the Foundation participated in the funding of a Christina School
District initiative, New Directions in Christina, designed to improve student
achievement in the Christina School District and to shape the agenda for school
reform throughout the state. Christina is Delaware's largest school system.
TEAM WSFS
Our corporate volunteerism program, TEAM WSFS, gives Associates the opportunity
to participate as part of a team or individually in programs such as March of
Dimes, Adopt-a-Family, Meals on Wheels, Habitat for Humanity and many others. We
are proud of our Associates for their constant commitment to the communities we
serve.
Expanding Our Footprint
We unveiled our first prototype banking office in 2003 with great success. 2004
was another year of successful expansion for WSFS. We continued to build our
strong footprint in Delaware by opening three new banking offices. In June, we
celebrated the opening of our Rehoboth Beach banking office and in November, we
opened offices in Camden and Middletown with great fanfare. All three are off to
a strong start.
As we continue to add to our retail network, we are experiencing an exceptional
response from new and existing customers to the prototype design. All of our new
banking offices are delivering strong results and are being embraced by our
customers.
In addition, early in the year we opened a Loan Production Office in Dover,
Delaware, and added new relationship managers in Kent and Sussex counties.
CashConnect
Our ATM division, CashConnect, provides the largest off-premise ATM network in
Delaware, expanding our retail reach and enhancing customer convenience. In
addition, CashConnect is one of the top vault cash providers in the country,
servicing 5,600 ATMs nationwide. CashConnect has strategic working alliances
with some of the most highly recognized armored carrier and transaction networks
across the nation that service funding locations throughout the United States.
CashConnect also provides cutting-edge technology through enhanced-function
ATMs. In 2004, CashConnect provided the ATM technology in the newly designed
University of Delaware banking office, the WSFS e-zone. The WSFS e-zone was
especially designed to meet the needs of University of Delaware students to
provide additional access hours, greater convenience, increased security and
faster transactions.
Montchanin Capital Management
Montchanin Capital Management, an investment management firm, was created to
serve the needs of high net-worth individuals and small- to medium-sized
institutions in the Delaware area. Establishing Montchanin Capital Management
was a key element in our strategy to provide comprehensive financial services to
our growing Private Banking clients, business owners and foundations.
As part of this strategy, in January 2004, Montchanin Capital Management
acquired a majority interest in Cypress Capital Management, a Wilmington-based
investment advisory firm serving high net-worth individuals and institutions.
Cypress was founded in 1984 and now has more than $450 million in assets under
management. Cypress constructs balanced portfolios of larger dividend-paying
stocks combined with fixed income positions.
As We Look To 2005 - Our Strategy Is Clear
We have a remarkable year of high- performance growth behind us. WSFS is well
positioned for meeting our goals as we continue to execute our strategy. We
intend to aggressively grow our commercial banking business by expanding our
reach and leveraging the strength of our retail franchise. We will also deepen
and grow our existing relationships.
In 2005, we will continue to build on our strong momentum with more expansion of
our retail network. We plan to add two more banking offices in November 2005. We
will remain centered on Delaware and its contiguous markets. Our state is rich
with opportunity and enjoys a strong and diverse economy. We will also focus on
enhancing our existing banking offices with renovations to further strengthen
our retail franchise.
The coming year will also see us continue to concentrate on the power of our
Associates. We will nurture a customer-centric workplace and strive to build on
our already knowledgeable and skilled family of professionals. We recognize that
our Associates are the driving force behind our successful business strategy.
Commercial Banking, Private Banking and Treasury Management will continue to be
a major focus for us in 2005. We will be investing more energy and
infrastructure in a key growth market, Southern Delaware. Private Banking will
continue to be an important component of our strategy, working with the
individuals who own and manage privately held businesses.
In the coming year, we will launch an aggressive small business initiative that
will include new product development and is designed to aggressively build
deposits and market share. Small business is an important element of our
strategy and provides tremendous long-term market share growth potential.
Our future is bright and our focus is steady and clear. By building on the hard
work and accomplishments of 2004, we intend to stay true to our business
strategy and enjoy many more years of future success.
Marvin N. Schoenhals
Chairman and President
Karl L. Johnston
Chief Operating Officer, Chief Lending Officer
Mark A. Turner
Chief Operating Officer
A Special Honor For One Of Our Directors
Dale E. Wolf, WSFS Board of Director since 1993, was honored with the Delaware
State Chamber Josiah Marvel Cup in January, 2005 for his outstanding
contributions to the state of Delaware. The Josiah Marvel Cup, named for a
former chamber president, has been given annually since 1951 to recognize an
outstanding contribution to the state, community and society.
WSFS FINANCIAL CORPORATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
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 that 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 173
years. WSFS is the largest thrift institution headquartered in Delaware and the
fifth 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 that 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 and cash management services.
Lending activities are funded primarily with retail deposits and borrowings. The
Federal Deposit Insurance Corporation (FDIC) insures deposits to their legal
maximum. WSFS serves customers primarily from its main office and 24 retail
banking offices located in Delaware and southeastern Pennsylvania.
The Corporation has two consolidated subsidiaries, WSFS and Montchanin Capital
Management, Inc. (Montchanin). The Corporation also has one unconsolidated
affiliate, WSFS Capital Trust I. The Corporation has no unconsolidated
subsidiaries or off balance sheet entities. Fully-owned and continuing
consolidated subsidiaries of WSFS include WSFS Investment Group, Inc., which
markets various third-party insurance products and securities through WSFS'
retail banking system; and WSFS Reit, Inc., which holds qualifying real estate
assets and may be used in the future to raise capital.
In 2000, the Board of Directors approved management's plans to discontinue the
operations of WSFS Credit Corporation (WCC). At December 31, 2000, WCC had 7,300
lease contracts and 2,700 loan contracts, compared to 52 lease contracts and 223
loan contracts at December 31, 2004. WCC no longer accepts new applications but
continues to service existing loans and leases until their maturity. See the
Discontinued Operations section of Management's Discussion and Analysis and Note
2 to the Financial Statements for a detailed discussion.
In addition to the wholly owned subsidiaries, in the past, WSFS had consolidated
two non-wholly owned subsidiaries, CustomerOne Financial Network, Inc. (C1FN)
and Wilmington Finance, Inc. (WF). C1FN, then a 21% owned subsidiary engaged in
Internet and branchless banking, was sold in November 2002. WF, a majority owned
subsidiary engaged in sub-prime residential mortgage banking, was sold in
January 2003. Both subsidiaries are therefore classified as businesses
held-for-sale in the Financial Statements. See the Businesses Held-for-Sale
section of this Management's Discussion and Analysis, and Note 3 to the
Financial Statements for a further discussion.
Montchanin has one consolidated non-wholly owned subsidiary, Cypress Capital
Management, LLC (Cypress). Cypress a 60% owned subsidiary is a Wilmington based
investment advisory firm serving high net-worth individuals and institutions.
FORWARD-LOOKING STATEMENTS
Within this annual report and financial statements, management has included
certain "forward-looking statements" concerning the future operations of the
Corporation. It is management's desire to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward-looking statements"
contained in its financial statements. Management has used "forward-looking
statements" to describe the future plans and strategies including expectations
of the Corporation's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Delaware, the mid-Atlantic region and the country as
a whole, asset quality, loan growth, loan delinquency rates, operating risk,
uncertainty of estimates in general, and changes in federal and state
regulations, among other factors. These factors should be considered in
evaluating the "forward-looking statements," and undue reliance should not be
placed on such statements. Actual results may differ materially from management
expectations. WSFS Financial Corporation does not undertake, and specifically
disclaims any obligation to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
RESULTS OF OPERATIONS
The Corporation recorded net income of $25.9 million for the year ended December
31, 2004, compared to $63.0 million and $101.1 million in 2003 and 2002,
respectively. Income from continuing operations was $25.8 million, $21.2 million
and $88.0 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Net income for the year ended December 31, 2003 included an
7
WSFS FINANCIAL CORPORATION
after tax gain of $41.3 million from the sale of WF and an after tax gain of
$517,000 from the sale of C1FN/Everbank. See the Businesses Held-for-Sale
section of this Management's Discussion and Analysis and Note 3 to the Financial
Statements for a further discussion. Net income for the year ended December 31,
2002 included a significant gain on sale of WSFS' reverse mortgage portfolio.
Net Interest Income. Net interest income increased $8.9 million, or 15%, to
$66.9 million in 2004 compared to $58.0 million in 2003. Total interest income
increased $14.8 million between 2003 and 2004, primarily due to growth in loans
which contributed $6.1 million in interest income. In addition, the yield on
mortgage-backed securities increased 88 basis points between 2003 and 2004,
contributing $5.5 million in interest income. Total interest expense, excluding
the expense to fund discontinued operations, increased $5.9 million from 2003 to
2004 primarily due to an increase in deposits and borrowings used to fund the
loan growth. The average rate paid on Federal Home Loan Bank (FHLB) advances
declined 34 basis points, as higher costing advances matured during the year and
were replaced at lower rates. This partially offset the increase in volumes of
deposits and other borrowings.
Between 2002 and 2003, interest income decreased $5.4 million, while interest
expense decreased $2.1 million, resulting in a decrease in net interest income
of $3.3 million. The decrease in interest income was primarily due to the sale
of substantially the entire reverse mortgage portfolio in November 2002. The
portfolio had contributed $13.1 million in interest income in 2002. For further
discussion of reverse mortgages, see the Investment in Reverse Mortgages
discussion included in this Management's Discussion and Analysis and Note 6 to
the Financial Statements. In addition, the yield on total loans and
mortgage-backed securities decreased 105 basis points and 225 basis points,
respectively, between 2002 and 2003. This decline in yield was offset by
increases in average loan balances of $179.1 million and average mortgage-backed
securities balances of $338.1 million. Despite increases in the amount of
deposits and borrowings, total interest expense, excluding the expense to fund
discontinued operations and business held-for-sale, decreased $2.1 million from
2002 to 2003 primarily due to the decrease in the average cost of deposits of 63
basis points from 1.79% to 1.16%. The decline in interest expense was affected
by the decline in interest rates in 2003, as longer-term borrowing and deposits
matured and were replaced at lower rates.
The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in the rates for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in
volume (change in volume multiplied by prior year rate); (ii) changes in rates
(change in rate multiplied by prior year volume); and (iii) net change (the sum
of the change in volume and the change in rate). Changes due to the combination
of rate and volume changes (changes in volume multiplied by changes in rate) are
allocated proportionately between changes in rate and changes in volume.
Year Ended December 31, 2004 vs. 2003 2003 vs. 2002
- ------------------------------------------------------------------------------------ -----------------------------------
Volume Rate Net Volume Rate Net
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income:
Commercial real estate loans $ 6,170 $ (362) $ 5,808 $ 3,991 $ (2,423) $ 1,568
Residential real estate loans (209) (2,886) (3,095) 3,929 (4,459) (530)
Commercial loans (1) 4,714 (745) 3,969 3,128 (2,320) 808
Consumer loans 1,169 (1,510) (341) (250) (1,782) (2,032)
Loans held-for-sale (232) (9) (241) 184 (15) 169
Mortgage-backed securities 999 4,453 5,452 11,613 (4,347) 7,266
Investment securities 1,999 (403) 1,596 1,116 (503) 613
Investment in reverse mortgages 1 1,870 1,871 (6,244) (6,872) (13,116)
Other (97) (111) (208) 276 (426) (150)
- ---------------------------------------------------------------------------------------------------------------------------
Favorable (unfavorable) 14,514 297 14,811 17,743 (23,147) (5,404)
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Money market and interest-bearing demand 130 413 543 71 (186) (115)
Savings -- (370) (370) 69 (1,356) (1,287)
Retail time deposits (341) (442) (783) (227) (2,255) (2,482)
Jumbo certificates of deposit - nonretail 281 25 306 249 (206) 43
Brokered certificates of deposit 755 755 1,510 (5) (5) (10)
FHLB of Pittsburgh advances 5,145 (2,459) 2,686 8,377 (8,195) 182
Trust preferred borrowings - 221 221 - (636) (636)
Other borrowed funds 693 313 1,006 172 (2,081) (1,909)
Cost of funding discontinued operations 435 391 826 1,259 224 1,483
Cost of funding businesses held-for-sale - - - 1,299 1,299 2,598
- ---------------------------------------------------------------------------------------------------------------------------
Unfavorable (favorable) 7,098 (1,153) 5,945 11,264 (13,397) (2,133)
- ---------------------------------------------------------------------------------------------------------------------------
Net change as reported $ 7,416 $ 1,450 $ 8,866 $ 6,479 $ (9,750) $ (3,271)
===========================================================================================================================
(1) The tax-equivalent income adjustment is related to commercial loans.
8
WSFS FINANCIAL CORPORATION
The following table provides information regarding the average balances of, and
yields/rates on interest-earning assets and interest-bearing liabilities during
the periods indicated:
Year Ended December 31, 2004 2003 2002
- ------------------------------------------------------------------------ ---------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1) Balance Interest Rate(1)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans $ 438,395 $ 24,761 5.56% $ 329,923 $18,953 5.67% $ 263,151 $ 17,385 6.52%
Residential real estate loans 446,910 23,563 5.27 450,483 26,658 5.92 389,240 27,188 6.98
Commercial loans 340,611 16,470 5.08 250,577 12,501 5.37 196,343 11,693 6.44
Consumer loans 204,122 13,165 6.45 187,111 13,506 7.22 190,212 15,538 8.17
---------- -------- ---------- ------- ---------- --------
Total loans 1,430,038 77,959 5.53 1,218,094 71,618 5.97 1,038,946 71,804 7.02
Mortgage-backed securities (4) 510,965 20,326 3.98 480,389 14,874 3.10 142,250 7,608 5.35
Loans held-for-sale (3) 2,188 142 6.49 5,767 383 6.64 3,013 214 7.10
Investment securities (4) 110,524 3,099 2.80 41,666 1,503 3.61 14,292 890 6.23
Investment in reverse mortgages 43 1,847 - 659 (24) (3.64) 26,328 13,092 49.73
Other interest-earning assets 47,010 737 1.57 52,681 945 1.79 40,590 1,095 2.70
---------- -------- ---------- ------- ---------- --------
Total interest-earning assets 2,100,768 104,110 5.01 1,799,256 89,299 5.03 1,265,419 94,703 7.57
-------- ------- --------
Allowance for loan losses (23,357) (22,139) (21,358)
Cash and due from banks 52,332 48,070 55,264
Cash in non-owned ATMs 116,953 89,169 65,758
Bank-owned life insurance 48,400 - -
Loans, operating leases and other
assets of discontinued operations 4,660 25,375 79,479
Assets of businesses held-for-sale - - 371,830
Other noninterest-earning assets 45,338 34,703 51,020
---------- ---------- ----------
Total assets $2,345,094 $1,974,434 $1,867,412
========== ========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and
interest-bearing demand $ 144,181 858 0.60% $ 108,096 315 0.29% $ 90,585 430 0.47%
Savings 312,981 1,257 0.40 312,892 1,627 0.52 305,418 2,914 0.95
Retail time deposits 238,024 5,002 2.10 253,474 5,785 2.28 260,858 8,267 3.17
---------- -------- ---------- ------- ---------- --------
Total interest-bearing retail
deposits 695,186 7,117 1.02 674,462 7,727 1.15 656,861 11,611 1.77
Jumbo certificates of deposit -
nonretail 47,555 768 1.61 30,105 462 1.53 16,674 419 2.51
Brokered certificates of deposit 84,194 1,510 1.79 - - - 137 10 7.30
---------- -------- ---------- ------- ---------- --------
Total interest-bearing deposits 826,935 9,395 1.14 704,567 8,189 1.16 673,672 12,040 1.79
FHLB of Pittsburgh advances 859,742 23,591 2.70 678,680 20,905 3.04 448,103 20,723 4.56
Trust preferred borrowings 51,162 2,184 4.20 50,000 1,963 3.87 50,000 2,599 5.13
Other borrowed funds 181,334 2,237 1.23 122,459 1,231 1.01 115,740 3,140 2.71
Cost of funding discontinued
operations - (161) - (987) - (2,470)
Cost of funding businesses held-
for-sale - - - - - (2,598)
---------- -------- ---------- ------- ---------- --------
Total interest-bearing
liabilities 1,919,173 37,246 1.94 1,555,706 31,301 2.01 1,287,515 33,434 2.60
-------- ------- --------
Noninterest-bearing demand deposits 220,446 187,190 159,741
Liabilities of businesses held-for-sale - - 271,864
Other noninterest-bearing liabilities 15,040 31,233 16,181
Minority interest 200 - 7,597
Stockholders' equity 190,235 200,305 124,514
---------- ---------- ----------
Total liabilities and
stockholders' equity $2,345,094 $1,974,434 $1,867,412
========== ========== ==========
Excess (deficit) of interest-
earning assets over
interest-bearing liabilities $ 181,595 $ 243,550 $ (22,096)
========== ========== ==========
Net interest and dividend income $ 66,864 $57,998 $ 61,269
======== ======= ========
Interest rate spread 3.07% 3.02% 4.97%
==== ==== ====
Interest rate margin 3.24% 3.29% 4.93%
==== ==== ====
(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. .
9
WSFS FINANCIAL CORPORATION
Provision for Loan Losses. The Corporation records a provision for loan losses
in order to maintain the allowance for loan losses at a level which management
considers its best estimate of known and probable inherent losses. Management's
evaluation is based upon a continuing review of the portfolio and requires
significant management judgment (see the Allowance for Loan Losses section of
Management's Discussion and Analysis). For the year ended December 31, 2004, the
Corporation recorded a provision for loan losses from continuing operations of
$3.2 million compared to $2.6 million in 2003 and $2.2 million in 2002. These
increases reflect, among other things, the Company's strong loan growth,
particularly in commercial loans, partially offset by an overall improvement in
the credit quality statistics of the Corporation's loan portfolio.
Noninterest Income. Noninterest income of $32.0 million in 2004, increased $5.8
million, or 22% from 2003. This increase was primarily due to card and ATM fee
income, which grew $2.4 million during 2004 resulting from the continued
expansion of WSFS' ATM network and customer card usage. At December 31, 2004,
the CashConnect segment, WSFS' ATM unit, derived income from 5,584 ATMs compared
to 4,716 at December 31, 2003. Of these, WSFS owned and operated 246 ATMs in
2004 compared to 222 in 2003. The increase was also due to fee income of $2.3
million from Montchanin. Additionally, WSFS received fee income of $2.2 million
from the January 2004 investment in Bank-Owned Life Insurance (BOLI). Income
from this long-term illiquid investment is shown as noninterest income in
accordance with U.S. generally accepted accounting principles. These increases
were partially offset by lower loan fee income of $668,000 and lower gains on
the sales of loans and securities of $1.3 million. These decreases resulted
primarily from generally higher interest rates and reduced refinancing activity
during 2004 as compared to 2003. ATM fee income growth trends from the Company's
Cash Connect segment may be negatively impacted in future periods as a result of
ATM industry consolidation and increased competition.
Noninterest income of $26.2 million in 2003, decreased $97.9 million, or 79%
from 2002. This decrease was almost entirely due to the sale of the reverse
mortgage portfolio in 2002. In 2002, substantially all of WSFS' $33 million
reverse mortgage portfolio was sold, resulting in a pretax gain of $101.5
million. Partially offsetting this decrease was credit/debit card and ATM
income, which grew $1.3 million during 2003 due to the continued expansion of
WSFS' ATM network and card usage. At December 31, 2003, WSFS' CashConnect
segment derived income from 4,716 ATMs compared to 4,251 at December 31, 2002.
Of these, WSFS owned and operated 222 ATMs in 2003 and 189 ATMs in 2002. In
addition, gains on sales of loans increased $1.1 million during 2003. This
increase was mainly the result of the continued low interest rate environment.
Because of low interest rates, WSFS originated a higher than usual amount of
conforming mortgage loans. Some of these loans were sold in the secondary market
(primarily to the Federal Home Loan Mortgage Corporation) for gains.
Noninterest Expenses. Noninterest expenses of $55.7 million in 2004, increased
$6.3 million, or 13% from 2003. Included in the 2004 results were $2.0 million
in operating expenses related to Montchanin. Included in the 2003 results were
$1.3 million of expenses recorded in connection with the sale of WF and $303,000
of expenses related to the Corporation's Technology, Organizational and Process
Simplification Plan (TOPS). During the first quarter of 2003, the Corporation
completed the previously announced TOPS program; an initiative designed to
simplify the organization, better integrate technology solutions and reengineer
certain back office processes. Excluding the above-mentioned items, operating
expenses increased $5.9 million, or 12% from 2003. Included in this increase
were a $3.3 million increase in salaries, benefits, and other compensation and a
$541,000 increase in occupancy expense. These increases were primarily due to
normal salary increases and the Company's continued branch expansion efforts
during 2004. Marketing expenses increased $700,000 from 2003, mainly due to the
promotion of a new free checking product line designed to attract a greater
share of market deposits over time. Also during 2004, the Company incurred
$469,000 of expenses associated with the initial compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 (SOX 404). Finally, during 2004 and 2003, the
CashConnect segment performed an extensive analysis of its reserve for business
losses. Based on its evaluation of probable losses using historical loss
experience, the Company recorded a reduction to this reserve of $4,000 in 2004
and $261,000 in 2003. Other operating expenses, especially salaries, occupancy
and marketing expenses, will continue to increase as a result of growth in
retail banking offices, deposits, commercial loans, other initiatives and their
associated costs.
Noninterest expenses of $49.4 million in 2003 decreased $2.2 million, or 4% from
2002. This improvement was mainly due to a decrease in data processing,
professional fees and equipment expenses as a result of the successful
completion of the Corporation's TOPS program. Salaries, benefits and other
compensation expenses of $26.5 million increased $891,000 from 2002. This
increase was a direct result of higher levels of variable compensation that was
a direct result of profitable mortgage banking activity, commercial loan growth
and ATM business growth experienced in 2003. Included in salaries and benefits
in 2003 and 2002 was $663,000 and $823,000, respectively, of expenses related to
special management compensation and a special contribution to the Company's
401(k) plan for all Associates. These charges were made possible because of the
sale of WF in 2003 and the sale of the reverse mortgage portfolio in 2002. Also,
following the sale of WF in 2003 and the reverse mortgage portfolio in 2002, the
Company made contributions to the previously established WSFS charitable
foundation of $660,000 and $1.0 million, respectively. Finally, during 2003 and
2002, the CashConnect segment performed an extensive analysis of its reserves
for business losses. Based on its evaluation of probable losses using historical
loss experience, the Company recorded a reduction to this reserve of $261,000 in
2003 and an increase to the reserve of $407,000 in 2002.
Income Taxes. The Corporation recorded a $14.1 million tax provision for the
year ended December 31, 2004 compared to $34.9 million and $51.6 million for the
years ended December 31, 2003 and 2002, respectively. The effective tax rates
for continuing
10
WSFS FINANCIAL CORPORATION
operations for the years ended December 31, 2004, 2003 and 2002 were 35.1%,
34.1% and 33.6%, respectively. The provision for income taxes includes federal,
state and local income taxes that are currently payable or deferred because of
temporary differences between the financial reporting bases and the tax
reporting bases of the assets and liabilities. The increase in the effective tax
rate from 2003 to 2004 is principally the result of a change in New Jersey tax
law that was enacted in June 2004. This law change, which eliminated the
utilization of a portion of the Company's net operating losses, resulted in
additional New Jersey state taxes payable. In 2002, the Internal Revenue Service
(IRS) concluded an examination of the Corporation's federal income tax returns
for all years through December 31, 2000. The income tax provision for the year
ended December 31, 2002 was reduced by $894,000 primarily as a result of the
resolution of tax authority examinations and tax return settlements.
At December 31, 2004, approximately $3.8 million in gross deferred tax assets of
the Corporation are related to net operating losses and tax credits attributable
to a former subsidiary. Management has assessed a valuation allowance on a
portion of these deferred tax assets due to limitations imposed by the Internal
Revenue Code. Approximately $865,000 in gross deferred tax assets of the
Corporation at December 31, 2004 are related to state tax net operating losses.
Management has established a valuation allowance on the majority of these
deferred tax assets due to such net operating losses expiring before being
utilized.
The Corporation has an ongoing program that analyzes its projection of taxable
income and makes adjustments to its provision for income taxes accordingly. For
additional information regarding the Corporation's tax provision and net
operating loss carryforwards, see Note 14 to the Consolidated Financial
Statements.
FINANCIAL CONDITION
Total assets increased $295.9 million, or 13.4%, during 2004 to $2.5 billion.
This increase was predominantly due to growth in loans and the purchase of BOLI.
These increases were partially offset by decreases of $19.7 million in
investments and $6.4 million in mortgage-backed securities. In addition, loans,
operating leases and assets of discontinued operations decreased $8.4 million,
the effect of maturities and repayments of loans and leases at WCC. Total
liabilities increased $287.4 million during the year to $2.3 billion at December
31, 2004. This increase was primarily the result of an increase in deposits of
$311.6 million.
Investments. Between December 31, 2003 and December 31, 2004, total investments
decreased $19.7 million. During that time, investments categorized as
available-for-sale decreased $16.5 million, mainly due to sales of U.S. Agency
notes.
Mortgage-backed Securities. Investments in mortgage-backed securities decreased
$6.4 million during 2004 to $524.1 million. During 2004, the Corporation
purchased $200.7 million in mortgage-backed securities. This increase was offset
by principal repayments of $152.8 million and sales of $51.6 million.
Loans, net. Net loans, including loans held-for-sale, increased $230.6 million
during 2004. This included increases of $146.2 million in commercial real estate
loans, $76.1 million in commercial loans and $24.7 million in consumer loans.
These increases reflect the Company's continued emphasis on commercial and
commercial real estate loan growth. Partially offsetting these increases were
residential loans, which decreased $16.4 million.
Retail Deposits. Retail deposits increased $169.1 million during 2004 to $1.1
billion. Core deposit relationships (demand deposits, money market and savings
accounts) increased $108.3 million during the year. In addition, retail time
deposits (CDs) increased $60.8 million in 2004. The table below depicts the
changes in retail deposits over the last three years:
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
(In Millions)
Beginning balance $ 883.1 $ 872.1 $1,125.7
Interest credited 6.6 6.4 16.3
Deposits sold -- - (348.6)
Deposit inflows, net 162.5 4.6 78.7 (1)
- --------------------------------------------------------------------------------
Ending balance $1,052.2 $ 883.1 $ 872.1
================================================================================
(1) Includes $45.1 million in deposit increases at C1FN that were sold in
November 2002.
Borrowings and Brokered Certificates of Deposit. Total borrowings decreased by
$26.9 million between December 31, 2003 and December 31, 2004. Advances from the
FHLB decreased $6.2 million and federal funds purchased and securities sold
under agreements to repurchase decreased $16.3 million. In addition, sweep
repurchases decreased $5.9 million during the year. As a strategy to diversify
wholesale borrowings, brokered deposits increased $137.9 million.
Stockholders' Equity. Stockholders' equity increased $8.3 million to $196.3
million at December 31, 2004. This included $25.9 million in net income and $3.4
million in proceeds from the exercise of stock options. This was offset in part
by the acquisition of 373,900 shares of treasury stock for $17.9 million,
dividends of $1.6 million paid to stockholders and a reduction of other
comprehensive income by $1.6 million.
11
WSFS FINANCIAL CORPORATION
ASSET/LIABILITY MANAGEMENT
The primary asset/liability management goal of the Corporation is maximizing its
net interest income opportunities within the constraints of managing interest
rate risk, while ensuring adequate liquidity and funding and maintaining a
strong capital base.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread regardless of the future direction of interest
rates. Management regularly reviews the Corporation's interest-rate sensitivity,
and uses a variety of strategies as needed to adjust that sensitivity within
acceptable tolerance ranges established by management and the Board of
Directors. Changing the relative proportions of fixed-rate and adjustable-rate
assets and liabilities is one of the primary strategies utilized by the
Corporation to accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period, and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
The repricing and maturities of the Corporation's interest-rate sensitive assets
and interest-rate sensitive liabilities at December 31, 2004 are set forth in
the following table:
Less than One to Over
One Year Five Years Five Years Total
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-rate sensitive assets (1):
Real estate loans (2) $ 472,188 $ 347,166 $ 157,312 $ 976,666
Commercial loans 313,403 16,352 38,998 368,753
Consumer loans 85,142 53,993 71,823 210,958
Mortgage-backed securities 182,831 295,139 46,174 524,144
Loans held-for-sale 3,249 - - 3,249
Investment securities 50,512 88,787 2,023 141,322
Other investments 531 - - 531
- -----------------------------------------------------------------------------------------------------------------
1,107,856 801,437 316,330 2,225,623
- -----------------------------------------------------------------------------------------------------------------
Interest-rate sensitive liabilities:
Money market and interest-bearing demand deposits 56,246 - 167,375 223,621
Savings deposits 82,436 - 206,605 289,041
Retail time deposits 133,888 157,057 1,983 292,928
Jumbo certificates of deposit-nonretail 43,246 1,657 - 44,903
Brokered certificates of deposit 137,877 - - 137,877
FHLB advances (1) 479,000 255,000 103,063 837,063
Trust preferred borrowings and interest rate cap 51,547 - - 51,547
Other borrowed funds 143,809 - 21,737 165,546
- -----------------------------------------------------------------------------------------------------------------
1,128,049 413,714 500,763 2,042,526
- -----------------------------------------------------------------------------------------------------------------
(Deficiency) excess of interest-rate sensitive
assets over interest-rate sensitive liabilities
("interest-rate sensitive gap") $ (20,193) $ 387,723 $ (184,433) $ 183,097
=================================================================================================================
One-year interest-rate sensitive assets/
interest-rate sensitive liabilities 98.21%
One-year interest-rate sensitive gap as a
percent of total assets (0.81)%
(1) Interest-sensitive assets of discontinued operations are excluded.
(2) Includes commercial mortgage, construction, and residential mortgage loans.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. Conversely, during a period of falling rates, a
positive gap would result in a decrease in net interest income while a negative
gap would augment net interest income. However, the interest-sensitivity table
does not provide a comprehensive representation of the impact of interest rate
changes on net interest income. Each category of assets or liabilities will not
be affected equally or simultaneously by changes in the general level of
interest rates. Even assets and liabilities which contractually reprice within
the rate period may not, in fact, reprice at the same price or the same time or
with the same frequency. It is also important to consider that the table
represents a specific point in time. Variations can occur as the Company adjusts
its interest-sensitivity position throughout the year.
12
WSFS FINANCIAL CORPORATION
To provide a more accurate one-year gap position of the Corporation, certain
deposit classifications are based on the interest-rate sensitive attributes and
not on the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of WSFS' deposit accounts, that 35% of
money market and 13% of interest-bearing demand deposits are sensitive to
interest rate changes and that 22% to 36% of savings deposits are sensitive to
interest rate changes. Accordingly, these interest-sensitive portions are
classified in the less than one-year category with the remainder in the over
five-year category.
Deposit rates other than time deposit rates are variable, and changes in deposit
rates are generally subject to local market conditions and management's
discretion and are not indexed to any particular rate.
In 1998, the Corporation purchased a ten-year interest rate cap in order to
limit its exposure on $50 million of variable rate Trust Preferred Securities
issued in 1998. This derivative instrument caps the three-month London InterBank
Offered Rate (LIBOR), the base rate of the trust preferred borrowings, at 6.00%.
The trust preferred borrowings are classified in the less than one-year category
reflecting the ability to adjust upward for the balance of the term of the
interest rate cap. If the three- month LIBOR rate equals or exceeds 6.00%, the
trust preferred borrowing takes on a fixed characteristic and therefore is
classified in the period corresponding to the cap's maturity.
REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make monthly
advances throughout the borrower's life or until the borrower relocates, prepays
or the home is sold, at which time the loan becomes due and payable. Since
reverse mortgages are nonrecourse obligations, the loan repayments are generally
limited to the net sale proceeds of the borrower's residence, and the mortgage
balance consists of cash advanced, interest compounded over the life of the loan
and a premium which represents a portion of the shared appreciation in the
home's value, if any, or a percentage of the value of the residence.
In 1993, the Corporation acquired a pool of reverse mortgages from the FDIC and
another lender. In 1994, the Corporation purchased Providential Home Income
Plan, Inc., a California-based reverse mortgage lender, for approximately $24.4
million. Providential's assets at acquisition primarily consisted of cash and
its investment in reverse mortgages. Providential's results were included in the
Corporation's consolidated statement of operations since the acquisition date.
On January 1, 2002, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) 142, Goodwill and Other Intangible Assets. Statement 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes Accounting Principles Board (APB) Opinion 17,
Intangible Assets. Under this standard, goodwill can no longer be amortized but
instead must be tested for impairment and its value adjusted accordingly.
Negative goodwill is required to be taken into earnings immediately upon
adoption. The Corporation had $1.2 million in negative goodwill associated with
the 1994 purchase of Providential Home Income Plan, Inc. As a result of adopting
this standard, the Corporation recognized income of $703,000 in the first
quarter of 2002 as a cumulative effect of a change in accounting principle, net
of $469,000 in income tax.
Capitalizing on the robust housing and interest rate markets, substantially all
of WSFS' $33 million reverse mortgage portfolio was sold, effective October 1,
2002, for a pretax gain of $101.5 million. The Corporation received $128 million
in cash, $10 million in BBB-rated mortgage-backed securities classified as
trading and options to acquire up to 49.9% of Class "O" Certificates issued in
connection with mortgage-backed security SASCO RM-1 2002. Since this was the
sale of a financial asset, results are shown in continuing operations in the
accompanying Financial Statements, in accordance with U.S. generally accepted
accounting principles. Included in the net gain on sale of reverse mortgages in
2002 are amounts for transaction costs and other estimates of costs of future
obligations, including an estimated future payment due to a participant in the
value received for certain of the sold reverse mortgages, under a pre-existing
agreement. On December 31, 2003, the Company entered into a settlement agreement
in which the Company agreed to pay a final settlement of $2.5 million for all
amounts, current and future, due to that participant under the pre-existing
agreement. This amount had been previously reserved. The remaining investment in
reverse mortgages of $(109,000) at December 31, 2004 represents a participation
in reverse mortgages with a third party and was not part of the previously
mentioned sale. The Corporation is currently estimating a short-term annual
appreciation rate of -8.0% and a long-term annual appreciation rate of 0.5%. If
the long-term appreciation rate was increased to 1.5%, the resulting impact on
income would be $100,000. Conversely, if the long-term appreciation rate was
decreased to -0.5%, the resulting impact on income would be $(100,000).
As noted above, the Corporation received $128 million in cash, $10 million in
BBB-rated mortgage-backed securities classified as trading and options to
acquire up to 49.9% of the Class "O" Certificates issued in connection with
mortgage-backed security SASCO RM-1 2002. The securitizer retained 100% of the
Class "O" Certificates from the securitization. The Class "O" Certificates have
no priority over other classes of Certificates under the Trust. No distributions
will be made on the Class "O" Certificates until, among other conditions, the
principal amount of each other class of notes has been reduced to zero. The
underlying assets, the reverse mortgages, are very long-term assets. Hence, any
cash flow that might inure to the holder of the Class "O" Certificates is not
expected to occur until many years in the future. Additionally, the Company can
exercise its option on 49.9% of the Class "O" Certificates (in up to five
separate increments) for an aggregate purchase price of $1 million any time
between January 1, 2004 and the termination of the Securitization Trust. The
option to purchase the Class "O" Certificates do not meet the definition of a
derivative under SFAS 133, Accounting for Derivative and Hedging Activities.
13
WSFS FINANCIAL CORPORATION
The Corporation accounted for its investment in reverse mortgages in accordance
with the instructions provided by the staff of the Securities and Exchange
Commission (SEC) entitled "Accounting for Pools of Uninsured Residential Reverse
Mortgage Contracts" which requires grouping the individual reverse mortgages
into "pools" and recognizing income based on the estimated effective yield of
the pool. Prior to the sale of substantially all of the portfolio in 2002, in
computing the effective yield, the Corporation projected the cash inflows and
outflows of the pool including actuarial projections of the life expectancy of
the individual contract holder and changes in the collateral values of the
residence. At each reporting date, a new economic forecast was made of the cash
inflows and outflows of each pool of reverse mortgages. The effective yield of
each pool was recomputed, and income was adjusted retroactively and
prospectively to reflect the revised rate of return. After the sale of
substantially all of the portfolio in 2002, the future cash flows on the
remaining reverse mortgages were discounted at the market rate for similar
collateral. Accordingly, because of this quasi-market-value based accounting,
the recorded value of reverse mortgage assets included significant volatility
associated with estimations, and as a result, along with the sale of reverse
mortgages in 2002, income varied significantly from reporting period to
reporting period. For the year ended December 31, 2004, the Corporation earned
$1.8 million in interest income on reverse mortgages as compared to $(24,000) in
2003 and $13.1 million in 2002. The yield on the portfolio was 4,329% in 2004,
compared to (3.64)% in 2003 and 49.73% in 2002. The negative yield in 2003 was a
result of the quasi-market-value based accounting on the participation in the
remaining reverse mortgages that were not part of the previously mentioned sale.
As noted above, the projected cash flows are influenced by assumptions about
life expectancy and the changes in future collateral values. Projection in the
changes in future collateral values is the most significant factor impacting the
volatility of future cash flows.
DISCONTINUED OPERATIONS
In December 2000, the Corporation approved plans to discontinue the operations
of WCC. At December 31, 2000, WCC had 7,300 lease contracts and 2,700 loan
contracts, compared to 52 lease contracts and 223 loan contracts at December 31,
2004. WCC no longer accepts new applications but will continue to service
existing loans and leases until their maturity.
In accordance with APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, and Related
Interpretations, which was the authoritative literature in 2000, accounting for
discontinued operations of a business segment at that time required that the
Company forecast operating results over the wind-down period and accrue any
expected net losses. The historic results of WCC's operations, the accrual of
expected losses to be incurred over the wind-down period, and the future
reported results of WCC are required to be treated as Discontinued Operations of
a Business Segment, and shown in a summary form separately from the Company's
results of continuing operations in reported results of the Corporation. Prior
periods are restated, as required by U.S. generally accepted accounting
principles.
As a result, at December 31, 2000, a $6.2 million pretax reserve was established
to absorb expected future losses, primarily related to residual value losses on
leases. Consequently, the Corporation recognized an after tax charge of $2.2
million, net of $4.0 million in tax benefits related to net operating loss
carryforwards, for the expected loss over the projected wind-down period.
During 2002 and 2001, because of the heavy incenting of new car purchases by
manufacturers and other factors, both used car prices and WSFS' exposure to
residual values on its outstanding leases continued to deteriorate. As a result,
management recorded additional pretax provisions for residual losses of $2.0
million and $3.1 million in 2002 and 2001, respectively. Extensive analysis of
remaining leases as of December 31, 2004 indicated that no additional reserves
were needed for the expected losses in the business during the remaining
wind-down period.
At December 31, 2004, there were $749,000 in indirect loans and $516,000 in
indirect leases, net, still outstanding. At December 31, 2004, WSFS had exposure
to $625,000 in remaining used car residuals, for which it estimates a loss of
$99,000. Management has provided for this loss in the Financial Statements. Due
to the provision for this estimated exposure in the financial statements, the
loss on the wind-down of discontinued operations, net of tax, was zero in 2004.
Based on the scheduled maturities of remaining leases, management estimates the
Company's residual exposure is negligible. At December 31, 2003, WSFS had
exposure to $7.5 million in remaining used car residuals for which it estimated
a loss of $1.3 million.
BUSINESSES HELD-FOR-SALE
In September 2002, WSFS sold its United Asian Bank Division (UAB). The sale
resulted in an after tax gain of $737,000, and included $8.6 million in deposits
and $15.8 million in loans in addition to branch fixed assets and branch lease
obligations.
In November 2002, the Corporation completed the sale of C1FN and related
interests in its Everbank Division. Everbank was started with C1FN in 1999 as a
joint initiative in Internet and branchless banking. Consistent with the manner
in which the segment was managed and operated, information in this report
labeled "C1FN" generally represents the pro forma combined results of C1FN and
WSFS' Everbank Division (the C1FN/Everbank segment). The sale included total
assets of $342.8 million and deposits of $340.1 million. WSFS recorded an after
tax gain of $187,000 on the sale.
14
WSFS FINANCIAL CORPORATION
Under a provision of the agreement between sellers and buyers, certain sale
consideration was withheld in two separate escrow accounts pending the
resolution of certain events. WSFS' portion of these escrow amounts totaled
approximately $786,000. These amounts were not recognized by WSFS in 2002 as
their receipt was not assured beyond a reasonable doubt. During 2003, WSFS
received the entire amount held in escrow. As a result, the Company recorded the
$786,000 ($517,000 after taxes) as a gain on the sale of businesses
held-for-sale. All indemnifications provided by WSFS in the sale of
C1FN/Everbank expired in 2004 with no claims being made.
Also in November 2002, WSFS signed a definitive agreement for the sale of WSFS'
majority-owned subsidiary, WF. This sale was completed in January 2003. In 2003,
WSFS recognized an after tax gain on the sale of $41.3 million or $5.01 per
diluted share. The sale included $148.2 million in assets, of which $117.6
million were residential mortgage loans held-for-sale. Indemnifications which
were provided by WSFS in the sale of WF are more fully discussed in Note 16 to
the Financial Statements.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the major classes of assets and liabilities of WF are
presented separately on the statement of condition as of December 31, 2002. The
income (losses) from the operation of these three businesses (UAB, C1FN/Everbank
and WF) have been presented as income (losses) of businesses held-for-sale, and
presented separately for the applicable period of 2002.
The gains on the sale of UAB, C1FN and WF are presented separately on the
statement of operations, net of tax. The average balance sheet is presented with
total assets and liabilities of businesses held-for-sale displayed separately.
The completion of these divestiture transactions was consistent with the
Company's strategic direction to focus resources and capital on WSFS' core
community bank network in and around Delaware.
MARKET RISK
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 the Office of Thrift Supervision (OTS)-regulated institutions is
the test specified by OTS Thrift Bulletin No. 13A, "Management of Interest Rate
Risk, Investment Securities and Derivatives Activities." This test measures the
impact on the net portfolio value of an immediate change in interest rates in
100 basis point increments. Net portfolio value is defined as the net present
value of the estimated cash flows from assets and liabilities as a percentage of
the net present value of assets. The following table is the estimated impact of
immediate changes in interest rates on the Company's net interest margin and net
portfolio value at the specified levels at December 31, 2004 and 2003,
calculated in compliance with Thrift Bulletin No. 13A:
December 31, 2004 2003
- -------------------------------------------------- ---------------------------
Change in Interest % Change in % Change in
Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value (2) Margin (1) Value (2)
- -------------------------------------------------------------------------------
+300 3% 9.26% -7% 8.41%
+200 2% 9.35% -4% 8.74%
+100 1% 9.42% -2% 8.99%
0 0% 9.47% 0% 9.21%
-100 -3% 9.30% -2% 9.08%
-200 (3) -9% 9.10% -9% 9.04%
-300 (3) -17% 9.07% -21% 9.72%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate environment changes.
(2) The net portfolio value of the Company in a stable interest rate
environment and the net portfolio value as projected under the various rate
environment changes.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points may not be
particularly meaningful at December 31, 2004 and 2003 given the
historically low absolute level of interest rates at these dates.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while maximizing the yield/cost spread on the Company's
asset/liability structure. The Company relies primarily on its asset/liability
structure to control interest rate risk.
The Company also engages in other business activities that are sensitive to
changes in interest rates. For example, mortgage banking revenues and expenses
can fluctuate with changing interest rates. These fluctuations are difficult to
model and estimate.
15
WSFS FINANCIAL CORPORATION
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure, can negatively affect the
Corporation's results of operations. 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 defined as
loans contractually past due 90 days or more as to principal or interest
payments but which remain in accrual status because they are considered well
secured and in the process of collection.
The following table sets forth the Corporation's nonperforming assets and past
due loans at the dates indicated:
December 31, 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
(Dollars in Thousands)
Nonaccruing loans:
Commercial $1,595 $1,549 $2,242 $1,330 $2,766
Consumer 291 240 516 306 383
Commercial mortgages 909 941 326 1,928 2,272
Residential mortgages 1,601 2,513 3,246 3,618 2,704
Construction - - 199 351 210
- ----------------------------------------------------------------------------------------
Total nonaccruing loans 4,396 5,243 6,529 7,533 8,335
Assets acquired through foreclosure 217 301 904 432 630
- ----------------------------------------------------------------------------------------
Total nonperforming assets $4,613 $5,544 $7,433 $7,965 $8,965
========================================================================================
Past due loans:
Residential mortgages $ 703 $ 915 $ 346 $ 88 $ 449
Commercial and commercial mortgages - 129 95 767 790
Consumer 104 148 88 244 199
- ----------------------------------------------------------------------------------------
Total past due loans $ 807 $1,192 $ 529 $1,099 $1,438
========================================================================================
Ratio of nonaccruing loans to total
loans (1) 0.28% 0.40% 0.60% 0.72% 0.87%
Ratio of allowance for loan losses
to gross loans (1) 1.56% 1.69% 1.95% 2.05% 2.22%
Ratio of nonperforming assets to
total assets 0.18% 0.25% 0.44% 0.42% 0.52%
Ratio of loan loss allowance to
nonaccruing loans (2) 524.05% 421.91% 324.49% 277.77% 248.81%
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased by $931,000 for the year ended December 31, 2004.
The decline was a result of $6.6 million of new nonperforming assets being
offset by $4.7 million of collections, $1.7 million of loans transferred to
accrual and $1.1 million of charge-offs/write-downs. Nonaccruing loans declined
in all loan categories, except consumer and commercial loans, which increased
$51,000 and $46,000, respectively. Foreclosed assets declined by $84,000
primarily as a result of the sale of various residential properties.
An analysis of the change in the balance of nonperforming assets during the last
three years is presented below:
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
(In Thousands)
Beginning balance $ 5,544 $ 7,433 $ 7,965
Additions 6,554 7,299 8,442
Collections (4,668) (6,992) (4,854)
Transfers to accrual (1,717) (945) (1,762)
Charge-offs/write-downs (1,100) (1,251) (2,358)
- --------------------------------------------------------------------------------
Ending balance $ 4,613 $ 5,544 $ 7,433
================================================================================
16
WSFS FINANCIAL CORPORATION
The ratio of nonaccruing loans to total loans decreased from 0.40% in 2003 to
0.28% in 2004. The decrease was due to a reduction in nonaccruing loans, as well
as an increase in total loans for the year. The ratio of nonperforming assets to
total assets decreased from 0.25% in 2003 to 0.18% in 2004. The decrease was due
to the reduction in nonaccruing loans as well as an increase in total assets.
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 management
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 each loan. Changes in risk grades of both performing
and nonperforming loans affect the amount of the formula allowance. Loss factors
by risk grade have a basis in WSFS' historical loss experience for such loans
and may be adjusted for significant factors that, in management's judgment,
affect the collectability of the portfolio as of the evaluation date. See the
discussion of historical loss adjustment factors below.
Pooled loans are loans that are usually smaller, not-individually-graded and
homogenous in nature, such as consumer installment loans and residential
mortgages. Pooled loan loss allowances are based on historical net charge-offs
for six years which management believes approximates the average business cycle.
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, as
adjusted for historical loss adjustment factors. Historical loss adjustment
factors are based upon management's evaluation of various current conditions
(listed below). The evaluation of the inherent loss with respect to these more
current conditions is subject to a higher degree of uncertainty because they are
not identified with specific credits. The more current conditions, analyzed in
connection with the adjustment factors, include an evaluation of the following:
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet at least quarterly to discuss and
review these conditions and risks associated with individual problem loans. By
assessing the probable estimated losses inherent in the loan portfolio
management is able to adjust specific and inherent loss estimates based upon the
availability of its most recent information. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Corporation's allowance for such losses. The Company also gives
consideration to the results of these regulatory agency examinations.
17
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated:
Year Ended December 31, 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Beginning balance $22,386 $21,452 $21,597 $21,423 $22,223
Provision for loan losses - continuing operations 3,217 2,550 2,243 1,865 864
Provision for loan losses - businesses held-for-sale - - 211 347 30
Sale of businesses held-for-sale - - (269) - -
Reclass from allowance for ORE losses - - - - 175
Charge-offs:
Residential real estate 222 329 725 106 133
Commercial real estate (1) 148 - 333 195 376
Commercial 656 827 895 1,000 998
Consumer (2) 817 860 1,551 1,031 1,002
- --------------------------------------------------------------------------------------------------------------------------
Total charge-offs 1,843 2,016 3,504 2,332 2,509
- --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Residential real estate 32 - 76 1 6
Commercial real estate (1) - 202 181 61 252
Commercial 335 79 483 100 70
Consumer (2) 95 119 434 132 312
- --------------------------------------------------------------------------------------------------------------------------
Total recoveries 462 400 1,174 294 640
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,381 1,616 2,330 2,038 1,869
- --------------------------------------------------------------------------------------------------------------------------
Ending balance $24,222 $22,386 $21,452 $21,597 $21,423
==========================================================================================================================
Net charge-offs to average gross loans outstanding,
net of unearned income 0.10% 0.13% 0.22% 0.20% 0.20%
==========================================================================================================================
(1) Includes commercial mortgage and construction loans.
(2) 2002 and prior years include amounts for businesses held-for-sale.
For the year ended December 31, 2004, the Corporation provided $3.2 million for
loan losses, which was greater than the amounts provided in 2003 and 2002. This
increase reflects, among other things, the Corporation's strong loan growth,
particularly in commercial and commercial real estate loans, partially offset by
an overall improvement in credit quality of the Corporation's loan portfolio.
The allowance for losses is allocated by major portfolio type. As these
portfolios have seasoned, they have become a source of historical data in
projecting loss exposure; however, such allocations are not indicative of where
future losses may occur. The allocation of the allowance for loan and lease
losses by portfolio type at the end of each of the last five fiscal years, and
the percentage of outstanding in each category to total gross outstandings at
such dates follows:
December 31, 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount(1) Percent Amount Percent
- ----------------------------------------------------- -------------- -------------- ------------------ --------------
(Dollars in Thousands)
Residential real estate $ 1,468 28.1% $ 2,736 34.6% $ 3,620 38.2% $ 4,039 38.2% $ 1,754 43.2%
Commercial real estate 9,211 34.6 8,338 29.3 7,208 26.2 6,927 24.3 3,187 22.9
Commercial 10,456 23.7 8,368 22.0 7,375 19.1 6,963 18.7 13,985 15.7
Consumer 3,087 13.6 2,944 14.1 3,249 16.5 3,668 18.8 2,497 18.2
- -------------------------------------------------------------------------------------------------------------------------------
Total $24,222 100.0% $22,386 100.0% $21,452 100.0% $21,597 100.0% $21,423 100.0%
===============================================================================================================================
(1) The implementation of SAB 102 in 2001 led to a change in the allocation
methodologies for anticipated loan losses.
LIQUIDITY
The Company manages its liquidity risk and funding needs through its
treasury function and through its Asset/Liability Committee. The Company has a
policy that separately addresses liquidity, and management monitors the
Company's adherence to policy limits. One measure of the Company's liquidity is
the ratio of cash and qualified assets to net withdrawable deposits
18
WSFS FINANCIAL CORPORATION
and borrowings due within one year which was 10.5% at December 31, 2004,
compared with 6.1% at December 31, 2003. Both of these ratios were well in
excess of the policy minimum. Also, liquidity risk management is a primary area
of examination by the OTS. The Company complies with guidance promulgated under
Thrift Bulletin 77 that requires thrift institutions to maintain adequate
liquidity to assure safe and sound operations.
As a financial institution, the Company has ready access to several sources to
fund growth and meet its liquidity needs. Among these are: net income, deposit
programs, loan repayments, borrowing from the FHLB, repurchase agreements and
the brokered CD market. The branch expansion that the Company is currently
undertaking is intended to enter the Company into new, but contiguous markets,
attract new customers and provide funding for its business loan growth. In
addition, the Corporation has a large portfolio of high-quality, liquid
investments, primarily short-duration. AAA-rated, mortgage-backed securities and
Agency notes that are positioned to provide a near-continuous source of cash
flow to meet current cash needs, or can be sold to meet larger discrete needs
for cash. Management believes these sources are sufficient to maintain the
required and prudent levels of liquidity.
During the year ended December 31, 2004, net loan growth resulted in the use of
$228.0 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. Management expects this trend to continue. While the
Company's loan-to-deposit ratio has been well above 100% for many years,
management has significant experience managing its funding needs through
borrowings, primarily through the Federal Home Loan Bank of Pittsburgh.
Additionally, during the year ended December 31, 2004, $25.5 million in cash was
provided by operating activities, while $102.4 million in cash was provided
through the net increase in demand and savings deposits and $202.9 million
through the net increase in time deposits. For the period, cash and cash
equivalents increased $32.1 million to $192.5 million.
There were several structural changes to the Company in 2002 and 2003, the
direct and indirect impact of which were to affect cash flows in ways that did
not continue in 2004. Specifically, in 2002 and in early 2003, the Company
generated excess capital from a variety of sources, including, but not limited
to: the sale of substantially all of the Company's reverse mortgage portfolio;
the sale of its branchless banking segment; the sale of certain Pennsylvania
branches; and the sale of its mortgage banking subsidiary. As a result, in 2003,
the Company increased its borrowings and repurchase agreements in order to fund
increased volumes of mortgage-backed security purchases. Additionally, in 2002
and 2003, the Company repurchased $73.8 million of its common stock which was
well in excess of historical levels. Such discretionary strategies were
undertaken to optimize the significant capital generated from the asset and
business sales mentioned above. The Company carefully monitors these capital
management activities so that they align with other corporate goals including:
maintaining its status as a "well-capitalized" financial institution as defined
by the standards of its federal banking regulator, the OTS; supporting asset
growth; and funding other capital investments. While management expects
investment purchases and share repurchases to be a continuing part of its
capital management strategy, the increased levels of investment purchases and
share repurchases in 2002 and 2003 were not continued in 2004.
The Corporation has not used and has no intention of using any significant off
balance sheet financing arrangement for liquidity management purposes. The
Corporation's financial instruments with off balance sheet risk are limited to
obligations to fund loans to customers pursuant to existing commitments,
obligations of letters of credit and an interest rate cap which limits the
interest rate exposure on $50 million of trust preferred floating rate debt. In
addition, WSFS has not had and has no intention to have any significant
transactions, arrangements or other relationships with any unconsolidated,
limited purpose entities that could materially affect its liquidity or capital
resources. Finally, WSFS has not traded in, and does not intend to trade in
commodity contracts.
In January 2004, the Corporation purchased $50 million (cash surrender value) of
BOLI which insures the lives of certain senior Associates of the Company for the
benefit of the Company and provides nontaxable income to the Company over the
life of the insurance contract. The Corporation paid a single premium of $50
million to purchase the BOLI through the liquidation of mortgage-backed
securities. Proceeds are returned to the Corporation as life insurance death
benefits, but substantial amounts may not be returned for periods of 20 years or
more depending on the mortality of the insured Associates. The Corporation may
terminate the insurance contracts early, but that event would result in payments
of taxes and penalties on accumulated earnings.
CAPITAL RESOURCES
Federal laws, among other things, require the OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as WSFS to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted" assets and total "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well as
other requirements, established five capital tiers: well-capitalized,
adequately-capitalized, under-capitalized, significantly under-capitalized and
critically under- capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as
19
WSFS FINANCIAL CORPORATION
well-capitalized are subject to various restrictions regarding capital
distributions, payment of management fees, acceptance of brokered deposits and
other operating activities.
At December 31, 2004, WSFS is classified as well-capitalized, the highest
regulatory defined level, and is in compliance with all regulatory capital
requirements. For additional information concerning WSFS' regulatory capital
compliance see Note 12 to the Financial Statements.
Since 1996, the Board of Directors has approved several stock repurchase
programs to acquire common stock outstanding. As part of these programs, the
Corporation acquired approximately 373,900 shares in 2004 and 1.6 million shares
in 2003. At December 31, 2004, the Corporation held 8.1 million shares of its
common stock as treasury shares. The Corporation intends to continue
repurchasing shares in 2005 in amounts depending on stock price and alternative
uses of capital.
OFF BALANCE SHEET ARRANGEMENTS
The Corporation has no off balance sheet arrangements that currently have, or
are reasonably likely to have a material future effect on the Corporation's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources. See
Note 16 to the Financial Statements for additional information.
CONTRACTUAL OBLIGATIONS
At December 31, 2004, the Corporation had contractual obligations relating to
operating leases, long-term debt, data processing and credit obligations. These
obligations are summarized below. See Notes 9, 11, and 16 to the Financial
Statements for further discussion.
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
- --------------------------------------------------------------------------------------------
(Amounts in Thousands)
Operating lease obligations $ 13,004 $ 2,162 $ 3,634 $ 1,932 $ 5,276
Long-term debt obligations 837,063 479,000 170,000 85,000 103,063
Data processing contracts 16,093 3,629 6,065 5,830 569
Credit obligations 386,711 386,711 - - -
- --------------------------------------------------------------------------------------------
Total $1,252,871 $ 871,502 $ 179,699 $ 92,762 $ 108,908
============================================================================================
IMPACT OF INFLATION AND CHANGING PRICES
The Corporation's Consolidated Financial Statements have been prepared in
accordance with U.S. generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased costs of the Corporation's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Corporation are
monetary. As a result, interest rates have a greater impact on the Corporation's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or the same extent as the price of
goods and services.
RECENT LEGISLATION
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Act"). The SEC promulgated certain regulations pursuant to the Act and
will continue to propose additional implementing or clarifying regulations as
necessary in furtherance of the Act.
The passage of the Act and the regulations implemented by the SEC subjected
publicly-traded companies to additional and more comprehensive reporting
regulations and disclosure. These new regulations, which are intended to curtail
corporate fraud, require the chief executive officer and chief financial officer
of the Company to personally certify certain SEC filings as well as the
Company's Financial Statements and to certify as to (i) the existence of
disclosure controls and procedures within the Company are designed to ensure
that information required to be disclosed by the Company in its SEC filings is
processed, summarized and reported accurately and (ii) the effectiveness of the
Company's internal control over financial reporting.
The Act and regulations promulgated thereunder by the SEC also impose additional
measures to be taken by the Company's officers, directors and outside auditors
and impose accelerated reporting requirements by officers and directors of the
Company in connection with certain changes in their equity holdings of the
Company. Implementation of and compliance with the Act and corresponding
regulations has and will likely increase the Company's operating expenses.
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 loan losses, investment in
reverse mortgages, the reserve for discontinued operations, contingencies
(including indemnifications), and
20
WSFS FINANCIAL CORPORATION
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.
Investment in Reverse Mortgages
The Corporation accounts for its investment in reverse mortgages in accordance
with the instructions provided by the staff of the SEC entitled "Accounting for
Pools of Uninsured Residential Reverse Mortgage Contracts" which requires
grouping the individual reverse mortgages into "pools" and recognizing income
based on the estimated effective yield of the pool. In computing the effective
yield, the Corporation must project the cash inflows and outflows of the pool,
including actuarial projections of the life expectancy of the individual
contract holder and changes in the collateral value of the residence. At each
reporting date, a new economic forecast is made of the cash inflows and outflows
of each pool of reverse mortgages; the effective yield of each pool is
recomputed, and income is adjusted retroactively and prospectively to reflect
the revised rate of return. Accordingly, because of this quasi-market-value
based accounting, the recorded value of reverse mortgage assets include
significant risk associated with estimations and income recognition can vary
significantly from reporting period to reporting period.
Reserve for Discontinued Operations
The Corporation discontinued the operations of WCC in 2000. In accordance with
APB 30, which was the authoritative literature in 2000, accounting for
discontinued operations of a business segment required that the Company forecast
operating results over the wind-down period and accrue any expected net losses.
As a result, the Corporation has established a reserve to absorb expected future
net losses of WCC.
Contingencies (Including Indemnifications)
In the ordinary course of business, the Corporation, 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 Bank, as successor to originators of reverse mortgages, is from time to time
involved in disputes, arbitration or litigation with the various parties
including borrowers or with the heirs of borrowers. Because reverse mortgages
are a relatively new and uncommon product, there can be no assurances regarding
how the courts or arbitrators may apply existing legal principles to the
interpretation and enforcement of the terms and conditions of the Bank's reverse
mortgage obligations.
Deferred Taxes
The Corporation accounts for income taxes in accordance with SFAS 109,
Accounting for Income Taxes, which requires the recording of deferred income
taxes that reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management has assessed the Company's
valuation allowances on deferred income taxes resulting from, among other
things, limitations imposed by Internal Revenue Code and uncertainties,
including the timing of settlement and realization of these differences.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB) issued FIN
46(R), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51 (the Interpretation). The Interpretation
requires the consolidation of entities in which an enterprise absorbs a majority
of the entity's expected losses, receives a majority of the entity's expected
residual returns, or both, as a result of ownership, contractual or other
financial interests in the entity. Previously, entities were generally
consolidated by an enterprise when it has a controlling financial interest
through ownership of a majority voting interest in the entity. Application of
this Interpretation is required in financial statements of public entities that
have interests in variable interest entities commonly referred to as special
purpose entities for periods ending after December 31, 2003. Application by
public entities for all other types of entities is required in financial
statements for periods ending after March 15, 2004. As a result of the adoption
of FIN 46(R), the Corporation deconsolidated WSFS Capital Trust I in the first
quarter of 2004. As a result, trust preferred borrowings increased $1.5 million.
In December 2003, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee (AcSEC) issued Statement of Position
(SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 is
21
WSFS FINANCIAL CORPORATION
effective for loans acquired in fiscal years beginning after December 15, 2004,
with early adoption encouraged. A certain transition provision applies for
certain aspects of loans currently within the scope of Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans. SOP 03-3 addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investor's initial investment in loans or debt
securities (loans) acquired in a transfer if those differences are attributable,
at least in part, to credit quality. It includes loans acquired in business
combinations and applies to all nongovernmental entities, including
not-for-profit organizations. SOP 03-3 does not apply to loans originated by the
entity. The Corporation will adopt this statement for any pools of loans
purchased after December 31, 2004.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment - An Amendment of Statements No. 123 and 95 that addresses the
accounting for equity-based compensation arrangements, including employee stock
options. Upon implementation of the changes proposed in this statement, entities
would no longer be able to account for equity-based compensation using the
intrinsic value method under Opinion No. 25. Entities would be required to
measure the cost of employee services received in exchange for awards of equity
instruments at the grant date of the award using a fair value based method. The
comment period for this proposed statement ended on June 30, 2004. In October
2004, FASB announced that for public entities, this proposed statement would
apply prospectively for reporting periods beginning after June 15, 2005 as if
all equity-based compensation awards granted, modified or settled after December
15, 1994 had been accounted for using a fair value based method of accounting.
While the Corporation has estimated the impact on its existing stock options
outstanding, the Corporation is currently evaluating the potential impact of the
proposed statement on future stock option grants. See Note 1 to the Financial
Statements for the Company's disclosure of the retrospective impact of fair
value accounting for stock options.
In September 2004, the Emerging Issues Task Force (EITF) issued FASB Staff
Position (FSP) EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF
Issued No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF Issue No. 03-1. The
Board has directed the FASB staff to delay the effective date for the
measurement and recognition guidance contained in paragraphs 10-20 of EITF Issue
No. 03-1. This delay does not suspend the requirement to recognize
other-than-temporary impairments as required by existing authoritative
literature. The delay of the effective date for paragraphs 10-20 of EITF Issue
No. 03-1 will be superseded concurrent with the final issuance of proposed FSP
EITF Issue No. 03-1-a, Implication Guidance for the Application of Paragraph 16
of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The disclosure guidance in paragraphs 21 and
22 of EITF Issue No. 03-1 remains effective. The Corporation will evaluate any
potential impact of this revised proposed statement when it is available.
Market for Registrant's Common Equity and
Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock MarketSM
under the symbol WSFS. At December 31, 2004, the Corporation had 1,408
registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly
period within the two most recent fiscal years as well as the quarterly
dividends paid.
The closing market price of the common stock at December 31, 2004 was $60.00.
Stock Price Range
-----------------
Low High Dividends
---------------------------------------------------------
2004 4th $49.90 $62.75 $ 0.06
3rd 47.80 53.75 0.06
2nd 45.03 51.12 0.06
1st 43.81 52.31 0.05
------
$ 0.23
======
2003 4th $41.61 $46.98 $ 0.05
3rd 38.00 45.41 0.05
2nd 31.25 39.19 0.05
1st 30.85 33.40 0.05
------
$ 0.20
======
22
WSFS FINANCIAL CORPORATION
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of WSFS Financial Corporation (the Corporation) is responsible
for establishing and maintaining effective internal control over financial
reporting presented in conformity with accounting principles generally accepted
in the United States of America, including controls over the safeguarding of
assets. This internal control contains monitoring mechanisms, and actions are
taken to correct deficiencies identified.
There are inherent limitations in any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the Corporation's internal control over financial reporting
presented in conformity with accounting principles generally accepted in the
United States of America, including controls over the safeguarding of assets, as
of December 31, 2004. This assessment was based on criteria for effective
internal control over financial reporting established in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes, as of December 31, 2004 the Corporation maintained effective internal
control over financial reporting, presented in conformity with accounting
principles generally accepted in the United States of America, including
controls over the safeguarding of assets.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Office of Thrift Supervision as safety and soundness laws and regulations.
The Corporation assessed its compliance with the designated laws and regulations
relating to safety and soundness. Based on this assessment, management believes
that the Corporation complied, in all material respects, with the designated
laws and regulations related to safety and soundness for the year ended December
31, 2004.
Management's Report on Internal Control Over Financial Reporting
Management of the Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
under the Securities Exchange Act of 1934. The Corporation's internal control
over financial reporting is designed to provide reasonable assurance to the
Corporation's management and board of directors regarding the preparation and
fair presentation of published financial statements.
Management assessed the effectiveness of the Corporation's internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework. Based on this assessment, management has concluded that, as of
December 31, 2004, the Corporation's internal control over financial reporting
is effective based on those criteria.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004, has been audited by KPMG LLP, the independent
registered public accounting firm who also audited the Corporation's
consolidated financial statements. KPMG's attestation report on management's
assessment of the Corporation's internal control over financial reporting
appears elsewhere in this report.
/s/ Marvin N. Schoenhals /s/ Stephen A. Fowle
- ----------------------------------- ---------------------------------
Marvin N. Schoenhals Stephen A. Fowle
Chairman and President Executive Vice President
and Chief Financial Officer
23
WSFS FINANCIAL CORPORATION
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
WSFS Financial Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that WSFS
Financial Corporation (the Corporation) maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Corporation's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Corporation's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Corporation maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in COSO.
Also, in our opinion, the Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statement of
condition of WSFS Financial Corporation and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of operations, changes
in stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004, and our report dated March 9, 2005 expressed an
unqualified opinion on those consolidated financial statements and referred to
the adoption of Statement 142, "Goodwill and Other Intangible Assets," in 2002.
/s/ KPMG LLP
March 9, 2005
Philadelphia, Pennsylvania
24
WSFS FINANCIAL CORPORATION
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
WSFS Financial Corporation:
We have audited the accompanying consolidated statement of condition of WSFS
Financial Corporation and subsidiaries (the Corporation) as of December 31, 2004
and 2003, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WSFS Financial
Corporation and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 9, 2005 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
As discussed in Note 6 to the Financial Statements, the Corporation adopted
Statement 142, "Goodwill and Other Intangible Assets," in 2002.
/s/ KPMG LLP
March 9, 2005
Philadelphia, Pennsylvania
25
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans $ 78,101 $ 72,001 $ 72,018
Interest on mortgage-backed securities 20,326 14,874 7,608
Interest and dividends on investment securities 3,099 1,503 890
Interest on investments in reverse mortgages 1,847 (24) 13,092
Other interest income 737 945 1,095
- -------------------------------------------------------------------------------------------------------------------------
104,110 89,299 94,703
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 9,395 8,189 12,040
Interest on Federal Home Loan Bank advances 23,430 19,918 18,166
Interest on federal funds purchased and securities sold under
agreements to repurchase 2,064 927 542
Interest on trust preferred borrowings 2,184 1,963 2,599
Interest on other borrowings 173 304 87
- -------------------------------------------------------------------------------------------------------------------------
37,246 31,301 33,434
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 66,864 57,998 61,269
Provision for loan losses 3,217 2,550 2,243
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 63,647 55,448 59,026
- -------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Credit/debit card and ATM income 12,137 9,749 8,489
Deposit service charges 9,389 9,119 8,568
Investment advisory income 2,262 - -
Bank-owned life insurance income 2,190 - -
Loan fee income 2,182 2,850 3,025
Gain on sale of loans 439 1,517 443
Securities gains 249 515 23
Gain on sale of reverse mortgages - - 101,518
Other income 3,102 2,416 1,994
- -------------------------------------------------------------------------------------------------------------------------
31,950 26,166 124,060
- -------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries, benefits and other compensation 30,723 26,544 25,653
Occupancy expense 4,666 4,040 3,794
Equipment expense 3,696 3,777 4,185
Data processing and operations expense 3,246 2,812 3,815
Professional fees 2,496 2,673 3,621
Marketing expense 2,329 1,602 1,427
Other operating expenses 8,543 7,969 9,122
- -------------------------------------------------------------------------------------------------------------------------
55,699 49,417 51,617
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interest,
taxes and cumulative effect of change in accounting principle 39,898 32,197 131,469
Less minority interest 190 - -
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes and cumulative effect of
change in accounting principle 39,708 32,197 131,469
Income tax provision 13,951 10,964 44,154
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative effect of change in
accounting principle 25,757 21,233 87,315
Cumulative effect of change in accounting principle, net of taxes - - 703
- -------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 25,757 21,233 88,018
Income (loss) on wind-down of discontinued operations, net of taxes 143 - (2,766)
Income on discontinued operations of businesses held-for-sale,
net of taxes - - 14,965
Gain on sale of businesses held-for-sale, net of taxes - 41,789 924
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 25,900 $ 63,022 $ 101,141
=========================================================================================================================
(Continued on next page)
26
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Earnings per share:
Basic:
Income from continuing operations before cumulative effect of change in
accounting principle $ $3.60 $2.73 $ 9.61
Cumulative effect of change in accounting principle, net of taxes - - 0.08
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations 3.60 2.73 9.69
Income (loss) on wind-down of discontinued operations, net of taxes 0.02 - (0.30)
Income on discontinued operations of businesses held-for-sale,
net of taxes - - 1.64
Gain on sale of businesses held-for-sale, net of taxes - 5.38 0.10
- --------------------------------------------------------------------------------------------------------------
Net income $3.62 $8.11 $11.13
==============================================================================================================
Diluted:
Income from continuing operations before cumulative effect of change in
accounting principle $3.39 $2.58 $ 9.27
Cumulative effect of change in accounting principle, net of taxes - - 0.07
- --------------------------------------------------------------------------------------------------------------
Income from continuing operations 3.39 2.58 9.34
Income (loss) on wind-down of discontinued operations, net of taxes 0.02 - (0.30)
Income on discontinued operations of businesses held-for-sale,
net of taxes - - 1. 59
Gain on sale of businesses held-for-sale, net of taxes - 5.07 0.10
- --------------------------------------------------------------------------------------------------------------
Net income $3.41 $7.65 $10.73
==============================================================================================================
The accompanying notes are an integral part of these Financial Statements.
27
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
December 31, 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Assets
Cash and due from banks $ 61,328 $ 46,709
Cash in non-owned ATMs 131,150 113,711
Interest-bearing deposits in other banks 531 1,095
Investment securities held-to-maturity (market value: 2004-$8,286; 2003-$11,231) 7,767 10,410
Investment securities available-for-sale 89,609 106,078
Mortgage-backed securities held-to-maturity (market value: 2004-$4; 2003-$1,816) 4 1,814
Mortgage-backed securities available-for-sale 512,189 517,211
Mortgage-backed securities trading 11,951 11,527
Loans held-for-sale 3,229 1,458
Loans, net of allowance for loan losses of $24,222 at December 31, 2004 and
$22,386 at December 31, 2003 1,532,238 1,303,419
Bank-owned life insurance 52,190 -
Stock in Federal Home Loan Bank of Pittsburgh, at cost 43,946 43,676
Assets acquired through foreclosure 217 301
Premises and equipment 22,835 13,345
Accrued interest receivable and other assets 32,684 26,849
Loans, operating leases and other assets of discontinued operations 1,088 9,474
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $2,502,956 $2,207,077
==============================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand $ 246,592 $ 215,819
Money market and interest-bearing demand 223,621 118,151
Savings 289,041 316,976
Time 221,414 192,037
Jumbo certificates of deposit - retail 71,514 40,076
- ------------------------------------------------------------------------------------------------------------------------------
Total retail deposits 1,052,182 883,059
Jumbo certificates of deposit - nonretail 44,903 40,274
Brokered certificates of deposit 137,877 -
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,234,962 923,333
Federal funds purchased and securities sold under agreements to repurchase 132,105 148,381
Federal Home Loan Bank advances 837,063 843,296
Trust preferred borrowings 51,547 50,000
Other borrowed funds 33,441 39,381
Accrued interest payable and other liabilities 17,296 14,648
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,306,414 2,019,039
==============================================================================================================================
Commitments and contingencies (see Note 16)
Minority Interest 239 46
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 15,213,647
at December 31, 2004 and 15,080,162 at December 31, 2003 152 151
Capital in excess of par value 68,327 64,738
Accumulated other comprehensive loss (3,385) (1,748)
Retained earnings 293,054 268,797
Treasury stock at cost, 8,127,269 shares at December 31, 2004 and 7,758,869
shares at December 31, 2003 (161,845) (143,946)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 196,303 187,992
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and stockholders' equity $2,502,956 $2,207,077
==============================================================================================================================
The accompanying notes are an integral part of these Financial Statements.
28
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital Other Total
Common in Excess of Comprehensive Retained Treasury Stockholders'
Stock Par Value (Loss) Income Earnings Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Balance, December 31, 2001 $148 $59,079 $ 3,146 $107,950 $ (70,320) $100,003
Comprehensive income:
Net income - - - 101,141 - 101,141
Other comprehensive loss (1) - - (2,242) - - (2,242)
---------
Total comprehensive income 98,899
---------
Cash dividend, $0.19 per share - - - (1,733) - (1,733)
Exercise of common stock options 1 517 - - - 518
Treasury stock at cost, 485,100 shares (2) - 26 - - (15,208) (15,182)
Tax benefit from exercises of common
stock options - 167 - - - 167
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $149 $59,789 $ 904 $207,358 $ (85,528) $182,672
=============================================================================================================================
Comprehensive income:
Net income - - - 63,022 - 63,022
Other comprehensive loss (1) - - (2,652) - - (2,652)
---------
Total comprehensive income 60,370
---------
Cash dividend, $0.20 per share - - - (1,583) - (1,583)
Exercise of common stock options 2 3,054 - - - 3,056
Treasury stock at cost,
1,596,600 shares (3) - 93 - - (58,418) (58,325)
Tax benefit from exercises of
common stock options - 1,802 - - - 1,802
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $151 $64,738 $(1,748) $268,797 $(143,946) $187,992
=============================================================================================================================
Comprehensive income:
Net income - - - 25,900 - 25,900
Other comprehensive loss (1) - - (1,637) - - (1,637)
---------
Total comprehensive income 24,263
---------
Cash dividend, $0.23 per share - - - (1,643) - (1,643)
Exercise of common stock options 1 2,044 - - - 2,045
Treasury stock at cost, 368,400 shares (4) - 173 - - (17,899) (17,726)
Tax benefit from exercises of common
stock options - 1,372 - - - 1,372
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $152 $ 68,327 $(3,385) $293,054 $(161,845) $ 196,303
=============================================================================================================================
(1) Other Comprehensive Income: 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized holding losses on securities
available-for-sale arising during the period
net of taxes (2004 - $(661), 2003 - $(1,455),
2002 - $(1,539)) $ (1,078) $ (2,374) $ (2,511)
Net unrealized holding (losses) gains arising during the
period on derivatives used for cash flow hedge, net of
taxes (2004 - $(218), 2003 - $22, 2002 - $(415)) (405) 41 (771)
Reclassification for (gains) losses included in income,
net of taxes (2004 - $(94), 2003 - $(196), 2002 - $637) (154) (319) 1,040
- -----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income $ (1,637) $ (2,652) $ (2,242)
=============================================================================================================================
(2) Net of reissuance of 5,000 shares.
(3) Net of reissuance of 5,000 shares.
(4) Net of reissuance of 5,500 shares.
The accompanying notes are an integral part of these Financial Statements.
29
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Operating activities:
Net income $ 25,900 $ 63,022 $ 101,141
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Provision for loan losses 3,217 2,550 2,243
Depreciation, accretion and amortization 6,022 11,562 8,891
(Increase) decrease in accrued interest receivable and other assets (2,831) (10,060) 5,363
Origination of loans held-for-sale (42,647) (73,679) (1,946,047)
Proceeds from sales of loans held-for-sale 38,223 68,338 1,857,789
Gain on sale of loans held-for-sale (205) (751) (443)
Gain on sale of loans (234) (766) -
Gain on sale of investments (249) (515) (23)
Minority interest in net income 190 - 16,731
Increase (decrease) in accrued interest payable and other liabilities 2,648 (22,526) 26,792
Gain on sale of reverse mortgage - - (101,518)
Gain on businesses held-for-sale - (65,689) (1,516)
Gain on sale of assets acquired through foreclosure (60) (99) (73)
Increase in value of bank-owned life insurance (2,190) - -
Increase in capitalized interest, net (2,271) (502) (16,184)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 25,513 (29,115) (46,854)
- --------------------------------------------------------------------------------------------------------------------------
Investing activities:
Net decrease (increase) of interest-bearing deposits in other banks 564 6,381 (176,987)
Maturities of investment securities 2,675 500 182,467
Sales of investment securities available-for-sale 25,057 21,292 1,788
Purchases of investment securities available-for-sale (9,930) (116,088) (241,110)
Sales of mortgage-backed securities available-for-sale 51,634 109,502 128,316
Sales of mortgage-backed securities held-to-maturity - 14,772 -
Repayments of mortgage-backed securities held-to-maturity 1,813 22,809 30,747
Repayments of mortgage-backed securities available-for-sale 150,988 333,460 253,860
Purchases of mortgage-backed securities available-for-sale (200,696) (874,560) (261,658)
Purchases of mortgage-backed securities trading - - (1,000)
Repayments on reverse mortgages 2,619 1,789 23,641
Disbursements for reverse mortgages (470) (877) (5,536)
Sale of reverse mortgages - - 127,580
Purchase of Cypress Capital Management, LLC (1,122) - -
Sale of loans 13,435 47,174 5,986
Purchase of loans (14,767) (14,370) (32,077)
Purchase of bank-owned life insurance (50,000) - -
Sale of businesses held-for-sale - 129,283 14,332
Net (increase) decrease in loans (228,001) (254,676) 71,767
Net increase in loans of businesses held-for-sale - - (83,397)
Net (increase) decrease in stock of Federal Home Loan Bank of Pittsburgh (270) (21,697) 6,771
Sales of assets acquired through foreclosure, net 532 1,322 1,116
Purchase of land (2,860) - -
Purchase of office building (3,507) - -
Purchase of premises and equipment, net (6,378) (2,800) (4,750)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (268,684) (596,784) 41,856
- --------------------------------------------------------------------------------------------------------------------------
(Continued on next page)
30
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Financing activities:
Net increase in demand and savings deposits $ 102,368 $ 68,612 $ 10,733
Net increase (decrease) in time deposits 202,933 (40,876) 93,768
Net increase in federal funds purchased - 50,000 -
Net (decrease) increase in securities sold under agreements to repurchase (16,276) 72,456 (19,075)
Net (decrease) increase in FHLB advances (6,233) 439,797 (116,500)
Increase of other borrowing of businesses held-for-sale - - 50,000
Net decrease in obligations under capital lease - - (199)
Dividends paid on common stock (1,643) (1,583) (1,733)
Issuance of common stock and exercise of common stock options 3,590 4,951 711
Purchase of treasury stock, net of reissuance (17,899) (58,418) (15,208)
Increase (decrease) in minority interest 3 (12,845) (9,687)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 266,843 522,094 (7,190)
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents from continuing operations 23,672 (103,805) (12,188)
Change in net assets from discontinued operations 8,386 37,922 67,899
Cash and cash equivalents at beginning of period 160,420 226,303 170,592
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 192,478 $ 160,420 $ 226,303
==========================================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year $ 36,137 $ 31,617 $ 39,119
Cash paid for income taxes, net 10,199 63,071 21,701
Loans transferred to assets acquired through foreclosure 388 620 1,262
Net change in other comprehensive income 1,637 (2,652) (2,242)
Transfer of loans held-for-sale to loans 2,858 8,150 -
Deconsolidation of WSFS Capital Trust I 1,547 - -
Loans, net of allowance, of businesses held-for-sale - - 117,646
Other assets transferred to businesses held-for-sale - - 3,810
Other liabilities transferred to businesses held-for-sale - - 7,862
The accompanying notes are an integral part of these Financial Statements.
31
WSFS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
WSFS Financial Corporation (Company or Corporation) is a thrift holding company
organized under the laws of the State of Delaware. The Corporation's principal
wholly-owned subsidiary, Wilmington Savings Fund Society, FSB (the Bank or
WSFS), is a federal savings bank organized under the laws of the United States
which, at December 31, 2004, serves customers from its main office, 24 retail
banking offices, loan production offices and operations centers located in
Delaware and southeastern Pennsylvania.
In preparing the Financial Statements, management is required to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. The material estimates that are particularly susceptible
to significant changes in the near term relate to the allowance for loan losses,
investment in reverse mortgages, contingencies (including indemnifications) and
deferred tax assets.
Basis of Presentation
The consolidated Financial Statements include the accounts of the parent
company, Montchanin Capital Management, Inc. (Montchanin) and its non-wholly
owned subsidiary, Cypress Capital Management, LLC (Cypress), WSFS and its
wholly-owned subsidiaries, WSFS Investment Group, Inc., WSFS Reit, Inc. and WSFS
Credit Corporation (WCC), as well as not wholly-owned, but majority controlled
and consolidated subsidiaries, Wilmington Finance, Inc. (WF) and CustomerOne
Financial Network, Inc. (C1FN). C1FN was sold in November 2002 and WF was sold
in January 2003. These subsidiaries were classified as businesses held-for-sale
and the statement of operations was retroactively restated for all periods
presented. See Note 3 of the Financial Statements for further discussion of
Businesses Held-for-Sale. As discussed in Note 2 of the Financial Statements,
the results of WCC, the Corporation's wholly-owned indirect auto financing and
leasing subsidiary, are also presented as discontinued operations.
WSFS Capital Trust I is an unconsolidated affiliate of the Company and was
formed in 1998 to sell Trust Preferred Securities. The Trust invested all of the
proceeds from the sale of the Trust Preferred Securities in Junior Subordinated
Debentures of the Corporation. The Corporation used the proceeds from the Junior
Subordinated Debentures for general corporate purposes, including the redemption
of higher rate debt. WSFS Investment Group, Inc. markets various third-party
insurance and securities products to Bank customers through WSFS' retail banking
system. WSFS Reit, Inc. is a real estate investment trust formed in 2002 to hold
qualifying real estate assets and may be used in the future as a vehicle to
raise capital. Montchanin was formed in 2003 to provide asset management
products and services to customers in the Bank's primary market area. In January
2004, Montchanin acquired a 60% interest in Cypress. Cypress is a Wilmington
based investment advisory firm servicing high net-worth individuals and
institutions.
Certain reclassifications have been made to the prior years' Financial
Statements to conform them to the current year's presentation. All significant
intercompany transactions are eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks, federal funds sold and securities purchased under agreements to
resell. Generally, federal funds are purchased and sold for periods ranging up
to 90 days.
Debt and Equity Securities
Investments in equity securities that have a readily determinable fair value and
investments in debt securities are classified into three categories and
accounted for as follows:
o Debt securities with the positive intention to hold to maturity are
classified as "held-to-maturity" and reported at amortized cost.
o Debt and equity securities purchased with the intention of selling them
in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in
earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity.
Debt and equity securities include mortgage-backed securities, corporate and
municipal bonds, U.S. Government and agency securities and certain equity
securities. Premiums and discounts on debt and equity securities
held-to-maturity and available-for-sale are recognized in interest income using
a level yield method over the period to expected maturity. The fair value of
debt and equity securities is primarily obtained from third-party pricing
services. Implicit in the valuation are estimated prepayments based on
historical and current market conditions.
32
WSFS FINANCIAL CORPORATION
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary, result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses. Management has the discretion, in
certain circumstances, in determining impairment. The specific identification
method is used to determine realized gains and losses on sales of investment and
mortgage-backed securities. All sales are made without recourse.
Investment in Reverse Mortgages
The Corporation accounts for its investment in reverse mortgages in accordance
with the instructions provided by the staff of the Securities and Exchange
Commission entitled "Accounting for Pools of Uninsured Residential Reverse
Mortgage Contracts" which requires grouping the individual reverse mortgages
into "pools" and recognizing income based on the estimated effective yield of
the pool. In computing the effective yield, the Corporation must project the
cash inflows and outflows of the pool including actuarial projections of the
life expectancy of the individual contract holder and changes in the collateral
value of the residence. At each reporting date, a new economic forecast is made
of the cash inflows and outflows of each pool of reverse mortgages; the
effective yield of each pool is recomputed, and income is adjusted retroactively
and prospectively to reflect the revised rate of return. Accordingly, because of
this quasi-market-value based accounting the recorded value of reverse mortgage
assets include significant volatility associated with estimations and income
recognition can vary significantly from reporting period to reporting period.
Loans
Loans are stated net of deferred fees and costs and unearned discounts. Loan
interest income is accrued using various methods that approximate a constant
yield. Loan origination and commitment fees and direct loan origination costs
are deferred and recognized over the life of the related loans using a level
yield method over the period to maturity.
A loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected future discounted cash flows, the market price of
the loan or the fair value of the underlying collateral if the loan is
collateral dependent. Impaired loans include loans within the Corporation's
commercial, commercial mortgage and commercial construction portfolios. The
Company's policy for recognition of interest income on impaired loans is the
same as for nonaccrual loans discussed below.
Nonaccrual Loans
Nonaccrual 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 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 or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest. Loans are returned to an accrual
status when the borrower's ability to make periodic principal and interest
payments has returned to normal (i.e. - brought current with respect to
principal or interest or restructured) and the paying capacity of the borrower
and/or the underlying collateral is deemed sufficient to cover principal and
interest in accordance with the Corporation's previously established
loan-to-value policies.
Allowances 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 management judgement 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 each loan. Changes in risk grades of both performing
and nonperforming loans affect the amount of the formula allowance. Loss factors
by risk grade have a basis in WSFS' historical loss experience for such loans
and may be adjusted for significant factors that, in management's judgment,
affect the collectability of the portfolio as of the evaluation date. See
discussion of historical loss adjustment factors below.
33
WSFS FINANCIAL CORPORATION
Pooled loans are loans that are usually smaller, not-individually-graded and
homogeneous in nature, such as consumer installment loans and residential
mortgages. Pooled loan loss allowances are based on historical net charge-offs
for six years which management believes approximates an average business cycle.
The average loss allowance per homogeneous 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, as
adjusted for historical loss adjustment factors. Historical loss adjustment
factors are based upon management's evaluation of various current conditions
(listed below). The evaluation of the inherent loss with respect to these more
current conditions is subject to a higher degree of uncertainty because they are
not identified with specific credits. The more current conditions, evaluated in
connection with the adjustment factors, include an evaluation of the following:
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet at least quarterly to discuss and
review these conditions, and also risks associated with individual problem
loans. By assessing the probable estimated losses inherent in the loan portfolio
management is able to adjust specific and inherent loss estimates based upon the
availability of more recent information. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Corporation's allowance for loan losses. The Company also gives
consideration to the results of these regulatory agency examinations.
Allowances for estimated losses on investments in real estate and assets
acquired through foreclosure are provided if the carrying value exceeds the fair
value less estimated disposal costs.
Assets Held-for-Sale
Assets held-for-sale include loans held-for-sale and are carried at the lower of
cost or market of the aggregate or in some cases individual assets. Vehicles
that have been returned to the Company upon the expiration of their lease terms
have been included in the net assets of discontinued operations.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the recorded
investment in the loan or fair value less estimated disposal costs. Costs
subsequently incurred to improve the assets are included in the carrying value
provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. Net costs
of assets acquired through foreclosure includes costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life. In
general, computer equipment, furniture and equipment and building renovations
are depreciated over three, five and ten years, respectively. Accelerated
methods are used in depreciating certain assets for income tax purposes.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to repurchase.
Reverse repurchase agreements are treated as financings, with the obligation to
repurchase securities sold reflected as a liability in the Consolidated
Statement of Condition. The securities underlying the agreements remain in the
asset accounts.
34
WSFS FINANCIAL CORPORATION
Income Taxes
The provision for income taxes includes federal, state and local income taxes
currently payable and those deferred because of temporary differences between
the financial statement basis and tax basis of assets and liabilities.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Numerator:
Income from continuing operations before cumulative effect
of change in accounting principle $25,757 $21,233 $ 87,315
Cumulative effect of change in accounting principle, net of taxes -- -- 703
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 25,757 21,233 88,018
Income (loss) on wind-down of discontinued operations, net of taxes 143 -- (2,766)
Income on discontinued operations of businesses held-for-sale,
net of taxes -- -- 14,965
Gain on sale of businesses held-for-sale, net of taxes -- 41,789 924
- ----------------------------------------------------------------------------------------------------------------------------
Net income $25,900 $63,022 $101,141
============================================================================================================================
Denominator:
Denominator for basic earnings per share - weighted average shares 7,158 7,774 9,086
Effect of dilutive employee stock options 435 464 336
- ----------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -adjusted weighted average
shares and assumed exercise 7,593 8,238 9,422
============================================================================================================================
Earnings per share:
Basic:
Income from continuing operations before cumulative effect
of change in accounting principle $3.60 $2.73 $ 9.61
Cumulative effect of change in accounting principle, net of taxes -- -- 0.08
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3.60 2.73 9.69
Income (loss) on wind-down of discontinued operations, net of taxes 0.02 -- (0.30)
Income on discontinued operations of businesses held-for-sale,
net of taxes -- -- 1.64
Gain on sale of businesses held-for-sale, net of taxes -- 5.38 0.10
- ----------------------------------------------------------------------------------------------------------------------------
Net income $3.62 $8.11 $11.13
============================================================================================================================
Diluted:
Income from continuing operations before cumulative effect
of change in accounting principle $3.39 $2.58 $ 9.27
Cumulative effect of change in accounting principle, net of taxes -- -- 0.07
- ----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3.39 2.58 9.34
Income (loss) on wind-down of discontinued operations, net of taxes 0.02 -- (0.30)
Income on discontinued operations of businesses held-for-sale,
net of taxes -- -- 1.59
Gain on sale of businesses held-for-sale, net of taxes -- 5.07 0.10
- ----------------------------------------------------------------------------------------------------------------------------
Net income $3.41 $7.65 $10.73
============================================================================================================================
Outstanding common stock equivalents having no dilutive effect, in thousands 4 4 4
35
WSFS FINANCIAL CORPORATION
Stock Options
At December 31, 2004, the Corporation had two stock-based employee compensation
plans that are described more fully in Note 15 to the Financial Statements. The
Corporation accounts for these plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and Related Interpretations. No stock-based employee
compensation cost is reflected in the net income, as all options granted under
those plans had an exercise price at least equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share had the Company applied the fair
value recognition provision of the Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Effective July 1, 2005 the Corporation will implement SFAS 123 (revised 2004),
Share-Based-Payment An Amendment of Statements No. 123 and 95. Because this
implementation will occur in the second half of 2005, the impact to the
Corporation's Consolidated Statement of Operations on existing options is
expected to be approximately $300,000.
2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Income from continuing operations, as reported $25,757 $21,233 $ 88,018
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects (590) (708) (720)
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $25,167 $20,525 $ 87,298
=================================================================================================================================
Earnings per share:
Basic:
Income from continuing operations $ 3.60 $ 2.73 $ 9.69
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects . (0.08) (0.09) (0.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $ 3.52 $ 2.64 $ 9.61
=================================================================================================================================
Diluted:
Income from continuing operations $ 3.39 $ 2.58 $ 9.34
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects . (0.08) (0.09) (0.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $ 3.31 $ 2.49 $ 9.26
=================================================================================================================================
2. DISCONTINUED OPERATIONS OF A BUSINESS SEGMENT
- --------------------------------------------------------------------------------
In December 2000, the Board of Directors approved management's plans to
discontinue the operations of WCC. At December 31, 2000, WCC had 7,300 lease
contracts and 2,700 loan contracts, compared to 52 lease contracts and 223 loan
contracts at December 31, 2004. WCC no longer accepts new applications but will
continue to service existing loans and leases until their maturities.
In accordance with APB 30, Reporting the Results of Operations-Reporting the
Effects of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, and Related Interpretations, which was the
authoritative literature in 2000, accounting for discontinued operations of a
business segment at that time required that the Company forecast operating
results over the wind-down period and accrue any expected net losses. The
historic results of WCC's operations, the accrual of expected losses to be
incurred over the wind-down period, and the future reported results of WCC are
required to be treated as Discontinued Operations of a Business Segment, and
shown in summary form separately from the Company's results of continuing
operations in reported results of the Corporation.
In 2000, a $6.2 million pretax reserve was established to absorb expected future
losses, primarily related to residual value losses on leases. Consequently, the
Corporation recognized an after tax charge of $2.2 million, net of $4.0 million
in tax benefits related to net operating loss carryforwards, for the expected
loss over the projected wind-down period.
36
WSFS FINANCIAL CORPORATION
During 2002 and 2001, because of the heavy incenting of new car purchases by
manufacturers and other factors, both used car prices and WSFS' exposure to
residual values on its outstanding leases continued to deteriorate. As a result,
management recorded additional provisions for residual losses of $2.0 million in
2002 and $3.1 million in 2001. At December 31, 2004 the Corporation reviewed the
remaining used car residual values and determined that its exposure was
significantly reduced. As a result, as of December 31, 2004, the Corporation
reduced its reserve for discontinued operations by $143,000, net of taxes. At
December 31, 2004, there were $749,000 in indirect loans and $516,000 in
indirect leases, net, still outstanding. At December 31, 2004, WSFS had exposure
to $625,000 in remaining used car residuals, for which it estimates a loss of
$99,000. Management has provided for this loss in the Financial Statements. Due
to the provision for this estimated exposure in the Financial Statements, the
loss on the wind-down of discontinued operations, net of tax, was zero in 2004
and 2003. Based on the remaining maturities of leases, management has determined
that its residual exposure is negligible.
The following table depicts loans, operating leases and other assets of
discontinued operations at December 31, 2004 and 2003:
At December 31, 2004 2003
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
Vehicles under operating leases, net $ 516 $ 6,542
Loans, net 639 2,359
Other non-cash assets (67) 573
- --------------------------------------------------------------------------------------------------------------
Loans, operating leases and other assets of
discontinued operations, net $ 1,088 $ 9,474
==============================================================================================================
The following table depicts the net income (loss) from discontinued operations
for the years ended December 31, 2004, 2003 and 2002:
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
Interest income $ 140 $ 422 $ 974
Allocated interest expense (1) 161 987 2,470
- --------------------------------------------------------------------------------------------------------------
Net interest expense (21) (565) (1,496)
Loan and lease servicing fee income 237 292 379
Rental income on operating leases, net 377 (529) 2,229
Other income (2) 2 7
- --------------------------------------------------------------------------------------------------------------
Net revenues 591 (800) 1,119
Noninterest expenses 352 557 1,234
- --------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 239 (1,357) (115)
Credit (charge) to the reserve for discontinued operations (239) 1,357 115
Income tax provision -- -- --
- --------------------------------------------------------------------------------------------------------------
Income from discontinued operations $ -- $ -- $ --
Income (loss) on wind-down of discontinued operations, net of taxes 143 -- (2,766)
- --------------------------------------------------------------------------------------------------------------
Total $ 143 $ -- $(2,766)
==============================================================================================================
(1) The allocated interest expense for 2004, 2003 and 2002 is based on a direct
matched-maturity funding of the net non-cash assets of discontinued
operations. The average funding rate for 2004, 2003 and 2002 was 3.40%,
3.51% and 2.87%, respectively, on average net assets of $4.7 million, $28.1
million and $86.0 million, respectively.
37
WSFS FINANCIAL CORPORATION
3. BUSINESSES HELD-FOR-SALE
- --------------------------------------------------------------------------------
In September 2002, WSFS sold its United Asian Bank Division (UAB). The sale
resulted in an after tax gain of $737,000, and included $8.6 million in deposits
and $15.8 million in loans in addition to branch fixed assets and the lease
obligations.
In November 2002, the Corporation completed the sale of C1FN and related
interests in its Everbank Division. Everbank was started with C1FN in 1999 as a
joint initiative in Internet and branchless banking. Consistent with the manner
in which the segment was managed and operated, information in this report
labeled "C1FN" generally represents the pro forma combined results of C1FN and
WSFS' Everbank Division (the C1FN/Everbank segment). The sale included total
assets of $342.8 million and deposits of $340.1 million. WSFS recorded an after
tax gain at the time of $187,000 on this sale.
Under a provision of the agreement between sellers and buyers, certain sale
consideration was withheld in two separate escrow accounts pending the
resolution of certain events. WSFS' portion of these escrow amounts totaled
approximately $786,000. These amounts were not recognized by WSFS in 2002, as
their receipt was not assured beyond a reasonable doubt. During 2003, WSFS
received the entire amount held in escrow. As a result, the Company recorded the
$786,000 ($517,000 after taxes) as a gain on the sale of businesses
held-for-sale. All indemnifications provided by WSFS in the sale of
C1FN/Everbank expired in 2004 with no claims being made.
Also in November 2002, WSFS signed a definitive agreement for the sale of WSFS'
majority-owned subsidiary, Wilmington Finance, Inc. (WF). The sale was completed
in January 2003 and WSFS recognized an after tax gain on the sale of $41.3
million or $5.01 per diluted share. The sale included $148.2 million in assets,
of which $117.6 million were residential mortgage loans held-for-sale. Under a
provision of the agreement between the sellers and buyers, certain sale
consideration was withheld in a separate escrow account pending the resolution
of certain events. During 2003, WSFS received the entire amount held in escrow.
As a result in 2003, the Company recorded $325,000 ($208,000 after taxes) as a
gain on sale of businesses held-for-sale which is included in the total recorded
gain on sale of $41.3 million.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the major classes of assets and liabilities of WF are
presented separately on the statement of condition as of December 31, 2002. The
income (losses) from the operation of these three businesses (UAB, C1FN/Everbank
and WF) have been presented as income/losses of businesses held-for-sale, and
presented separately for all periods presented.
The gains realized on the sale of UAB, C1FN, and WF are presented separately on
the statement of operations, net of tax. The average balance sheet is presented
with total assets and liabilities of businesses held-for-sale displayed
separately.
38
WSFS FINANCIAL CORPORATION
The following tables present the net income from businesses held-for-sale for
the year ended December 31, 2002. No activity was recorded during 2003 or 2004
other than the above referenced gains on sales of WF and C1FN.
For the Year Ended December 31, 2002 WF(1) C1FN UAB Total
- ---------------------------------------------------------------------------------------
(In Thousands)
Net interest income $ 6,835 $ 3,738 $ 863 $ 11,436
Provision for loan losses -- 154 57 211
- ---------------------------------------------------------------------------------------
Net interest income after provision 6,835 3,584 806 11,225
Noninterest income 74,163 5,797 51 80,011
- ---------------------------------------------------------------------------------------
Total revenues 80,998 9,381 857 91,236
Noninterest expenses 40,113 10,842 1,059 52,014
- ---------------------------------------------------------------------------------------
Income before taxes and minority interest 40,885 (1,461) (202) 39,222
Minority interest 20,111 (3,380) -- 16,731
- ---------------------------------------------------------------------------------------
Income before taxes 20,774 1,919 (202) 22,491
Provision for income taxes 7,997 (391) (80) 7,526
- ---------------------------------------------------------------------------------------
Income from businesses held-for-sale $ 12,777 $ 2,310 $ (122) $ 14,965
- ---------------------------------------------------------------------------------------
Gain on sale of businesses held-for-sale N/A $ 187 $ 737 $ 924
=======================================================================================
(1) Includes $2.6 million in interest expense allocated to fund the average net
assets of $97.0 million of businesses held-for-sale. The rate of 2.68% is
based on the weighted average rate on other borrowed funds which
approximates the marginal funding rate for this niche business.
4. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The following tables detail the amortized cost and the estimated fair value of
the Corporation's investment securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale securities:
December 31, 2004:
Reverse mortgages (1) $ (109) $ -- $ -- $ (109)
U.S. Government and agencies 90,730 -- 1,012 89,718
- -----------------------------------------------------------------------------------------
$ 90,621 $ -- $ 1,012 $ 89,609
=========================================================================================
December 31, 2003:
Reverse mortgages (1) $ 193 $ -- $ -- $ 193
U.S. Government and agencies 105,761 256 132 105,885
- -----------------------------------------------------------------------------------------
$ 105,954 $ 256 $ 132 $ 106,078
=========================================================================================
Held-to-maturity:
December 31, 2004:
Corporate bonds $ 310 $ 13 $ -- $ 323
State and political subdivisions 7,457 507 1 7,963
- -----------------------------------------------------------------------------------------
$ 7,767 $ 520 $ 1 $ 8,286
=========================================================================================
December 31, 2003:
Corporate bonds $ 310 $ 26 $ -- $ 336
State and political subdivisions 10,100 806 11 10,895
- -----------------------------------------------------------------------------------------
$ 10,410 $ 832 $ 11 $ 11,231
=========================================================================================
(1) See Note 6 of the Financial Statements for a further discussion of Reverse
Mortgages.
39
WSFS FINANCIAL CORPORATION
Securities with book values aggregating $95.5 million at December 31, 2004 were
specifically pledged as collateral for WSFS' Treasury Tax and Loan account with
the Federal Reserve Bank, securities sold under agreement to repurchase and
certain municipal deposits which require collateral. Accrued interest receivable
relating to investment securities was $728,000 and $956,000 at December 31, 2004
and 2003, respectively.
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 2004 were as follows:
Held-to-Maturity Available-for-Sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
(In Thousands)
Within one year (1) $ 2,555 $ 2,630 $ 3,889 $ 3,863
After one year but within five years 2,099 2,303 86,732 85,746
After five but within ten years 1,452 1,677 -- --
After ten years 1,661 1,676 -- --
- --------------------------------------------------------------------------------
$ 7,767 $ 8,286 $90,621 $89,609
================================================================================
(1) Reverse mortgages do not have contractual maturities. The Corporation has
included reverse mortgages in maturities within one year.
During 2004, proceeds from the sale of investment securities classified as
available-for-sale were $25.0 million, with a gain of $1,000 realized on the
sales. Municipal bonds totaling $2.7 million were called by the issuers.
Proceeds from the sale of investments during 2003 and 2002 were $21.2 million
and $1.8 million, respectively. There was a net gain of $200,000 realized on
sales in 2003 and $15,000 net loss realized in 2002. The cost basis for all
investment security sales was based on the specific identification method. There
were no sales of investment securities classified as held-to-maturity.
At December 31, 2004, the Company owned investment securities totaling $90.0
million where the amortized cost basis exceeded fair value. Total unrealized
losses on those securities were $1.0 million at December 31, 2004. This
temporary impairment is the result of changes in market interest rates since the
purchase of the securities. Only one security amounting to $2.0 million has been
impaired for 12 months or longer. The Corporation has determined that this
security is not "other than temporarily" impaired. The following table lists the
unrealized losses aggregated by category:
Less than 12 months 12 months or longer Total
- -------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
- -------------------------------------------------------------------------------------------------------------
(In Thousands)
Held-to-maturity
State and political subdivisions $ 236 $ 1 $ -- $ -- $ 236 $ 1
Available-for-sale
U.S. Government and agencies 87,740 975 1,978 37 89,718 1,012
- -------------------------------------------------------------------------------------------------------------
Total temporarily impaired investments $87,976 $ 976 $ 1,978 $ 37 $89,954 $ 1,013
=============================================================================================================
40
WSFS FINANCIAL CORPORATION
5. MORTGAGE-BACKED SECURITIES
- --------------------------------------------------------------------------------
The following tables detail the amortized cost and the estimated fair value of
the Corporation's mortgage-backed securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale securities:
December 31, 2004:
Collateralized mortgage obligations $402,513 $ 1,319 $ 2,601 $401,231
FNMA 59,774 -- 1,124 58,650
FHLMC 34,731 -- 943 33,788
GNMA 18,408 165 53 18,520
- ---------------------------------------------------------------------------------------
$515,426 $ 1,484 $ 4,721 $512,189
=======================================================================================
Weighted average yield 4.27%
December 31, 2003:
Collateralized mortgage obligations $390,529 $ 2,400 $ 2,462 $390,467
FNMA 71,597 63 1,315 70,345
FHLMC 39,129 -- 1,193 37,936
GNMA 18,341 122 -- 18,463
- ---------------------------------------------------------------------------------------
$519,596 $ 2,585 $ 4,970 $517,211
=======================================================================================
Weighted average yield 4.19%
Held-to-maturity securities:
December 31, 2004:
FHLMC $ 4 $ -- $ -- $ 4
- ---------------------------------------------------------------------------------------
$ 4 $ -- $ -- $ 4
=======================================================================================
Weighted average yield 6.06%
December 31, 2003:
Collateralized mortgage obligations $ 1,785 $ 1 $ -- $ 1,786
FNMA -- -- -- --
FHLMC 29 1 -- 30
- ---------------------------------------------------------------------------------------
$ 1,814 $ 2 $ -- $ 1,816
=======================================================================================
Weighted average yield 6.18%
Trading securities:
December 31, 2004:
Collateralized mortgage obligations $ 11,951 $ -- $ -- $ 11,951
- ---------------------------------------------------------------------------------------
$ 11,951 $ -- $ -- $ 11,951
=======================================================================================
Weighted average yield 5.32%
December 31, 2003:
Collateralized mortgage obligations $ 11,527 $ -- $ -- $ 11,527
- ---------------------------------------------------------------------------------------
$ 11,527 $ -- $ -- $ 11,527
=======================================================================================
Weighted average yield 4.14%
41
WSFS FINANCIAL CORPORATION
At December 31, 2004, mortgage-backed securities with book values aggregating
$367.6 million were pledged as collateral for retail customer repurchase
agreements, municipal deposits and Federal Home Loan Bank advances. Accrued
interest receivable relating to mortgage-backed securities was $1.9 million and
$2.0 million at December 31, 2004 and 2003, respectively. Proceeds from the sale
of mortgage-backed securities available-for-sale were $51.4 million in 2004,
resulting in a gain of $248,000. In 2003, proceeds from the sale of
mortgage-backed securities classified as available-for-sale were $109.5 million
resulting in a loss of $109,000. Also in 2003, proceeds from the sale of
mortgage-backed securities classified as held-to-maturity (HTM) were $14.8
million resulting in a gain of $424,000. This sale was considered an effective
maturity consistent with guidance promulgated under SFAS 115. The cost basis of
all mortgage-backed securities sales are based on specific identification
method.
The Corporation owns $11.95 million of SASCO RM-1 2002 securities, including
accrued interest, classified as "trading." $10.0 million was received as partial
consideration for the sale of the reverse mortgage portfolio, while an
additional $1.0 million was purchased at par at the time of the securitization.
These floating rate notes represent the BBB traunche of the reverse mortgage
securitization underwritten by Lehman Brothers and carry a coupon rate of
one-month London InterBank Offered Rate (LIBOR) plus 300 basis points. For a
further discussion of reverse mortgages, see the Reverse Mortgages discussion in
Management's Discussion and Analysis and Note 6 to the Financial Statements.
At the time of the acquisition of these SASCO RM-1 2002 securities it was the
Corporation's intent to sell these securities in the near term. Therefore, based
on rules promulgated under SFAS 115, the securities were classified as
"trading." An active market for these securities has not developed since the
issuance, but it continues to be the intent of the Corporation to sell these
securities if and when an active market develops. Since there is no active
market for these securities, the Corporation has used the guidance under SFAS
115 to provide a reasonable estimate of fair value. The Corporation utilized
matrix pricing and a fundamental analysis of the actual cash flows of the
underlying reverse mortgages to estimate a reasonable fair value as of December
31, 2004. The Corporation also obtained a fair value estimate from an
independent securities dealer.
At December 31, 2004, the Company owned mortgage-backed securities totaling
$331.5 million where the amortized cost basis exceeded fair value. Total
unrealized losses on those securities were $4.7 million at December 31, 2004.
This temporary impairment is the result of changes in market interest rates
since the purchase of the securities. Some of these securities have been
impaired for twelve months or longer. The Corporation has determined that these
securities are not "other than temporarily" impaired. The following table lists
the unrealized losses aggregated by category:
Less than 12 months 12 months or longer Total
------------------- ------------------- -----------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
- ------------------------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale
CMO $211,894 $ 1,836 $ 22,781 $ 765 $234,675 $ 2,601
FNMA 19,472 186 39,179 938 58,651 1,124
FHLMC -- -- 33,788 943 33,788 943
GNMA 4,346 53 -- -- 4,346 53
- ------------------------------------------------------------------------------------------------------
Total temporarily impaired MBS $235,712 $ 2,075 $ 95,748 $ 2,646 $331,460 $ 4,721
======================================================================================================
6. REVERSE MORTGAGES AND RELATED ASSETS
- --------------------------------------------------------------------------------
Reverse mortgage loans are contracts that require the lender to make monthly
advances throughout the borrower's life or until the borrower relocates, prepays
or the home is sold, at which time the loan becomes due and payable. Since
reverse mortgages are nonrecourse obligations, the loan repayments are generally
limited to the sale proceeds of the borrower's residence, and the mortgage
balance consists of cash advanced, interest compounded over the life of the loan
and a premium which represents a portion of the shared appreciation in the
home's value, if any, or a percentage of the value of the residence.
In 1993, the Corporation acquired a pool of reverse mortgages from the Federal
Deposit Insurance Corporation (FDIC) and another lender. In 1994, the
Corporation purchased Providential Home Income Plan, Inc., a California-based
reverse mortgage lender, for approximately $24.4 million. Providential's assets
at acquisition primarily consisted of cash and its investment in reverse
mortgages.
On January 1, 2002, the Corporation adopted SFAS 142, Goodwill and Other
Intangible Assets. Statement 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion 17,
Intangible Assets. It also addresses how intangible assets that are acquired
individually or with a group of other assets (i.e. those not acquired in a
business combination) should be accounted for in Financial Statements upon their
acquisition.
42
WSFS FINANCIAL CORPORATION
Statement 142 also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the Financial
Statements. Under this Statement, goodwill can no longer be amortized but
instead must be tested for impairment and its value adjusted accordingly.
Negative goodwill is required to be taken into earnings immediately upon
adoption. The Corporation had $1.2 million in negative goodwill associated with
the 1994 purchase of Providential Home Income Plan, Inc. As a result of adopting
this Statement, the Corporation recognized income of $703,000 in 2002 as a
cumulative effect of a change in accounting principle, net of $469,000 in income
tax.
The Corporation accounted for its investment in reverse mortgages in accordance
with the instructions provided by the staff of the Securities and Exchange
Commission entitled "Accounting for Pools of Uninsured Residential Reverse
Mortgage Contracts" which requires grouping the individual reverse mortgages
into "pools" and recognizing income based on the estimated effective yield of
the pool. Prior to the sale of substantially all of the portfolio in 2002, in
computing the effective yield, the Corporation projected the cash inflows and
outflows of the pool including actuarial projections of the life expectancy of
the individual contract holder and changes in the collateral values of the
residence. At each reporting date, a new economic forecast was made of the cash
inflows and outflows of each pool of reverse mortgages; the effective yield of
each pool was recomputed, and income was adjusted retroactively and
prospectively to reflect the revised rate of return. After the sale of
substantially all of the portfolio in 2002, the future cash flows on the
remaining reverse mortgages were discounted at the market rate for similar
collateral. Accordingly, because of this quasi-market-value based accounting,
the recorded value of reverse mortgage assets included significant risk
associated with estimations, and income varied significantly from reporting
period to reporting period. For the year ended December 31, 2004, the
Corporation earned $1.8 million in interest income on reverse mortgages compared
to $(24,000) in 2003 and $13.1 million in 2002. The yield on the portfolio was
4,329% in 2004, compared to (3.64)% in 2003 and 49.73% in 2002. The negative
yield in 2003 was a result of the quasi-market-value based accounting on the
participation in the remaining reverse mortgages that were not part of the
previously mentioned sale.
On November 22, 2002, substantially all of WSFS' $33 million reverse mortgage
portfolio was sold, effective October 1, 2002, for a pretax gain of $101.5
million. The Corporation received $128 million in cash, $10 million in BBB-rated
mortgage-backed securities classified as trading and options to acquire up to
49.9% of the Class "O" Certificates issued in connection with mortgage-backed
security SASCO RM-1 2002. These mortgage-backed securities were part of a larger
issuance of securities backed, in part, by the sold reverse mortgages. Since
this was the sale of a financial asset, results are shown in continuing
operations in the accompanying Financial Statements, in accordance with U.S.
generally accepted accounting principles. The Corporation has retained the
servicing of these sold reverse mortgages and receives $35 per loan per month,
or $195,000 in 2004 and $244,000 for 2003. Since servicing fees approximate the
cost to service these loans, no excess servicing rights were recorded as they
were deemed immaterial. Included in the net gain on sale of reverse mortgages in
2002 are amounts for transaction costs and other estimates of costs of future
obligations, including an estimated future payment due to a participant in the
value received for certain of the sold reverse mortgages, under a pre-existing
agreement. On December 31, 2003, the Company entered into a settlement agreement
in which the Company agreed to pay a final settlement of $2.5 million for all
amounts, current and future, due to that participant under the pre-existing
agreement. The Corporation's remaining investment in reverse mortgages of
$(109,000) at December 31, 2004 represents a participation in reverse mortgages
with a third party and was not part of the previously mentioned sale. This
amount is included in investment securities available-for-sale on the statement
of condition. As noted above, the projected cash flows are influenced by
assumptions about life expectancy and the changes in future collateral values.
Projection in the changes in future collateral values is the most significant
factor impacting the volatility of future cash flows. The balance of the
investment in reverse mortgages was $193,000 at December 31, 2003.
As noted above, the Corporation received $128 million in cash, $10 million in
BBB-rated mortgage-backed securities classified as trading and options to
acquire up to 49.9% of the Class "O" Certificates issued in connection with
mortgage-backed security SASCO RM-1 2002. The securitizer retained 100% of the
Class "O" Certificates from the securitization. The Class "O" Certificates have
no priority over other classes of Certificates under the Trust. No distributions
will be made on the Class "O" Certificates until, among other conditions, the
principal amount of each other class of notes has been reduced to zero. The
underlying assets, the reverse mortgages, are very long-term assets. Hence, any
cash flow that might inure to the holder of the Class "O" Certificates is not
expected to occur until many years in the future. Additionally, the Company can
exercise its option on 49.9% of the Class "O" Certificates (in up to five
separate increments) for an aggregate purchase price of $1 million any time
between January 1, 2004 and the termination of the Securitization Trust. The
option to purchase the Class "O" Certificates do not meet the definition of a
derivative under SFAS 133, Accounting for Derivative and Hedging Activities.
Since these Certificates are unseasoned long-term interests in only the
second-ever securitization of reverse mortgages in the United States, there is
no active market for the securities, nor are there other comparable securities
that can be used as a basis for valuation. Therefore, in order to value the
option under SFAS 115, the Company calculated the net present value of the
expected cash flows for these Certificates and compared the estimate to the
option price of $1 million. For the years ended 2004 and 2003, the expected cash
flows were determined using relevant assumptions (including but not limited to,
housing values, home price appreciation, mortality, mobility and interest rates)
that the Company considered appropriate based on its analysis and its experience
of owning reverse
43
WSFS FINANCIAL CORPORATION
mortgages. The rate used to discount the expected cash flows was the Bank of
America High Yield Nonrated Index, as it is believed to be the most appropriate
available independently published index that would most closely match the rate
of return required on the long-term uncertain cash flows of a Class "O"
Certificate interest. Applying this method resulted in expected values of
$784,156 and $448,579 at December 31, 2004 and December 31, 2003, respectively,
for outright ownership of 49.9% of the Class "O" Certificates. Both values were
significantly less than the option exercise price of $1 million, therefore a
zero valuation was recorded at each reporting date. As the securitization
matures, expected cash flows and the discount rate are regularly evaluated and
the valuation adjusted, if appropriate.
7. LOANS
- --------------------------------------------------------------------------------
The following tables detail the Corporation's loan portfolio:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) $ 439,774 $ 456,943
Other 433,947 343,270
Real estate construction loans 137,395 64,406
Commercial loans 370,660 293,807
Consumer loans 210,959 186,133
- --------------------------------------------------------------------------------
1,592,735 1,344,559
Less:
Loans in process 36,359 19,175
Deferred fees (84) (421)
Allowance for loan losses 24,222 22,386
- --------------------------------------------------------------------------------
Net loans $1,532,238 $1,303,419
================================================================================
The Corporation had impaired loans of approximately $4.4 million at December 31,
2004 compared to $5.2 million at December 31, 2003. The average recorded balance
of impaired loans was $4.8 million and $6.1 million during 2004 and 2003,
respectively. The allowance for losses on impaired loans was $750,000 at
December 31, 2004, as compared to $516,000 at December 31, 2003. There was no
interest income recognized on impaired loans.
The total amount of loans serviced for others were $245.5 million, $244.7
million and $234.1 million at December 31, 2004, 2003 and 2002, respectively.
The corporation received fees from the servicing of loans of $800,000, $831,000
and $705,000 during 2004, 2003 and 2002, respectively. These fees approximated
the Corporation's costs associated with the servicing of loans and as a result
no mortgage servicing asset or liability was recorded at December 31, 2004 and
2003.
Accrued interest receivable on loans outstanding was $5.7 million and $4.8
million at December 31, 2004 and 2003, respectively.
Nonaccruing loans aggregated $4.4 million, $5.2 million and $6.5 million at
December 31, 2004, 2003 and 2002, respectively. If interest on all such loans
had been recorded in accordance with contractual terms, net interest income
would have increased by $150,000 in 2004, $218,000 in 2003 and $599,000 in 2002.
A summary of changes in the allowance for loan losses follows:
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------------------
(In Thousands)
Beginning balance $ 22,386 $ 21,452 $ 21,597
Provision for loan losses 3,217 2,550 2,243
Provision for loan losses - businesses held-for-sale -- -- 211
Sale of business held-for-sale -- -- (269)
Loans charged-off (1,843) (2,016) (3,504)
Recoveries 462 400 1,174
- --------------------------------------------------------------------------------------------
Ending balance $ 24,222 $ 22,386 $ 21,452
============================================================================================
44
WSFS FINANCIAL CORPORATION
8. ASSETS ACQUIRED THROUGH FORECLOSURE
- --------------------------------------------------------------------------------
Assets acquired through foreclosure are summarized as follows:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Real estate $217 $301
Less allowance for losses -- --
- --------------------------------------------------------------------------------
Ending balance $217 $301
================================================================================
9. PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Land, office buildings, leasehold improvements, furniture and equipment and
renovations-in-process, at cost, are summarized by major classifications:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Land $ 3,946 $ 1,086
Buildings 12,224 8,614
Leasehold improvements 11,878 8,106
Furniture and equipment 22,082 19,683
Renovations-in-process -- 386
- --------------------------------------------------------------------------------
50,130 37,875
Less:
Accumulated depreciation 27,295 24,530
- --------------------------------------------------------------------------------
$22,835 $13,345
================================================================================
The Corporation occupies certain premises and operates certain equipment under
noncancelable leases with terms ranging from 1 to 25 years. These leases are
accounted for as operating leases. Accordingly, lease costs are expensed as
incurred. Rent expense was $2.3 million in 2004, $1.8 million in 2003, and $2.0
million in 2002. Future minimum payments under these leases at December 31, 2004
are as follows:
(In Thousands)
2005 $ 2,162
2006 2,036
2007 1,598
2008 1,177
2009 755
Thereafter 5,276
- --------------------------------------------------------------------------------
Total future minimum lease payments $13,004
================================================================================
45
WSFS FINANCIAL CORPORATION
10. DEPOSITS
- --------------------------------------------------------------------------------
The following is a summary of deposits by category, including a summary of the
remaining time to maturity for time deposits:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Money market and demand:
Noninterest-bearing demand $ 246,592 $ 215,819
Money market and interest-bearing demand 223,621 118,151
- --------------------------------------------------------------------------------
Total money market and demand 470,213 333,970
- --------------------------------------------------------------------------------
Savings 289,041 316,976
- --------------------------------------------------------------------------------
Retail certificates of deposits by maturity:
Less than one year 109,664 134,114
One year to two years 97,569 47,582
Two years to three years 9,517 5,314
Three years to four years 2,573 2,086
Over four years 2,091 2,941
- --------------------------------------------------------------------------------
Total retail time certificates 221,414 192,037
- --------------------------------------------------------------------------------
Jumbo certificates of deposit-retail, by maturity:
Less than one year 23,118 30,518
One year to two years 47,532 8,773
Two years to three years 301 480
Three years to four years 415 --
Over four years 148 305
- --------------------------------------------------------------------------------
Total jumbo certificates of deposit-retail 71,514 40,076
- --------------------------------------------------------------------------------
Subtotal retail deposits 1,052,182 883,059
- --------------------------------------------------------------------------------
Jumbo certificates of deposit non-retail, by maturity:
Less than one year 43,246 39,024
One year to two years -- --
Two years to three years 1,250 --
Three years to four years -- 1,250
Over four years 407 --
- --------------------------------------------------------------------------------
Total jumbo time certificates, non-retail 44,903 40,274
- --------------------------------------------------------------------------------
Brokered certificates of deposit less than one year 137,877 --
- --------------------------------------------------------------------------------
Total deposits $1,234,962 $ 923,333
================================================================================
46
WSFS FINANCIAL CORPORATION
Interest expense, restated for continuing operations, by category follows:
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
(In Thousands)
Money market and interest-bearing demand $ 858 $ 315 $ 430
Savings 1,257 1,627 2,914
Retail time deposits 5,002 5,785 8,267
- --------------------------------------------------------------------------------
Total retail interest expense 7,117 7,727 11,611
- --------------------------------------------------------------------------------
Jumbo certificates of deposit-non-retail 768 462 419
Brokered certificates of deposit 1,510 -- 10
- --------------------------------------------------------------------------------
Total interest expense on deposits $ 9,395 $ 8,189 $12,040
================================================================================
11. BORROWED FUNDS
- --------------------------------------------------------------------------------
The following is a summary of borrowed funds by type:
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance at Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
2004
- ----
FHLB advances $837,063 2.90% $915,181 $859,742 2.70%
Trust preferred borrowings 51,547 4.90 51,547 51,162 4.20
Federal funds purchased and securities
sold under agreements to repurchase 132,105 2.33 158,195 145,321 1.42
Other borrowed funds 33,441 0.65 39,317 36,013 0.48
2003
- ----
FHLB advances $843,296 2.61% $843,296 $678,680 3.04%
Trust preferred borrowings 50,000 3.67 50,000 50,000 3.87
Federal funds purchased and securities
sold under agreements to repurchase 148,381 1.08 158,645 80,152 1.17
Other borrowed funds 39,381 0.40 48,087 42,307 0.72
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with rates ranging
from 1.77% to 5.45% at December 31, 2004 are due as follows:
Weighted
Average
Amount Rate
- --------------------------------------------------------------------------------
(Dollars in Thousands)
2005 $479,000 2.08%
2006 100,000 2.24
2007 70,000 2.67
2008 50,000 5.43
2009 - 2013 138,063 4.58
- --------------------------------------------------------------------
$837,063
====================================================================
47
WSFS FINANCIAL CORPORATION
Four advances are outstanding at December 31, 2004 totaling $145.0 million, with
a weighted average rate of 4.96% maturing in 2008 and beyond. They are
convertible on a quarterly basis (at the discretion of the FHLB) to a variable
rate advance based upon the three-month LIBOR rate, after an initial fixed term.
WSFS has the option to prepay these four advances at predetermined times or
rates. Pursuant to collateral agreements with the FHLB, advances are secured by
qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock
and an interest-bearing demand deposit account with the FHLB.
As a member of the FHLB of Pittsburgh, WSFS is required to acquire and hold
shares of capital stock in the FHLB of Pittsburgh in an amount at least equal to
5% of its advances (borrowings) from the FHLB of Pittsburgh, plus 0.7% of the
unused borrowing capacity. WSFS was in compliance with this requirement with a
stock investment in FHLB of Pittsburgh of $43.9 million at December 31, 2004.
Trust Preferred Borrowings
On November 20, 1998, the Corporation's unconsolidated affiliate, WSFS Capital
Trust I, issued $51.5 million of Trust Preferred Securities, due on December 1,
2028, pursuant to a shelf registration under the Securities Act of 1933. These
securities were issued at a floating rate of 250 basis points over the
three-month LIBOR, repricing quarterly.
WSFS Capital Trust I, a Delaware statutory trust, invested the proceeds in
junior subordinated debentures issued by the Corporation. The net proceeds from
the sale of Trust Preferred Securities were used primarily as replacement
financing for the early retirement of other Corporation debt. The Corporation
benefits from reduced long-term financing costs and the flexibility of
additional Bank regulatory capital.
At the same time, the Corporation also entered into an agreement to limit the
interest rate exposure in the Trust Preferred Securities by purchasing an
interest rate cap, which provides a ceiling on three-month LIBOR of 6.00% for
the first ten years (expires December 2008). This limits the net interest rate
coupon (or cash paid) on the Trust Preferred Securities to no more than 8.50%
through the first ten years. The cost of this interest rate cap was $2.4
million, which, prior to the adoption of SFAS 133, was to be amortized as a
yield adjustment over the ten-year period. On January 1, 2000, the Corporation
adopted SFAS 133 which changed the accounting treatment of the cap. See Note 20
to the Financial Statements for a further discussion. The effective accounting
rate of the Trust Preferred Securities including amortization of transactional
costs was 4.90% and 3.67% at December 31, 2004 and 2003, respectively. The
Corporation did not receive any payments from the cap in 2002, 2003 or 2004.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
During 2004, WSFS purchased federal funds as a short-term funding source. At
December 31, 2004, WSFS had purchased $50.0 million in federal funds at a rate
of 2.31%. At December 31, 2003, WSFS had $50.0 million federal funds purchased.
During 2004, WSFS sold securities under agreements to repurchase as a short-term
funding source. At December 31, 2004, securities sold under agreements to
repurchase had fixed rates ranging from 2.20% to 2.38%. The underlying
securities are U.S. Government agency securities with a book value of $84.7
million at December 31, 2004. Securities sold under agreements to repurchase
with the corresponding carrying and market values of the underlying securities
are due as follows:
Collateral
Borrowing Carrying Market Accrued
Amount Rate Value Value Interest
- --------------------------------------------------------------------------------
(Dollars in Thousands)
2004 Up to 30 days $ 82,105 2.34% $ 84,716 $83,769 $ 583
================================== ================================
2003 Up to 30 days $ 98,381 1.11% $ 99,739 $98,867 $ 792
================================== ================================
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $33.4 million
and $39.4 million at December 31, 2004 and 2003, respectively, consisting of
outstanding retail repurchase agreements, contractual arrangements under which
portions of certain securities are sold overnight to retail customers under
agreements to repurchase. Such borrowings were collateralized by
mortgaged-backed securities. The average rates on these borrowings were 0.65%
and 0.40% at December 31, 2004 and 2003, respectively.
48
WSFS FINANCIAL CORPORATION
12. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as WSFS, 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 - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on WSFS'
Financial Statements. At December 31, 2004 and 2003, WSFS was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
The following table presents WSFS' consolidated capital position as of December
31, 2004 and 2003:
To Be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------- ----------------- ------------------------
Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
As of December 31, 2004:
Total Capital (to risk-weighted assets) $ 257,933 15.34% $ 134,552 8.00% $ 168,190 10.00%
Core Capital (to adjusted tangible assets) 242,289 9.69 100,049 4.00 125,061 5.00
Tangible Capital (to tangible assets) 242,289 9.69 37,518 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets) 242,289 14.41 67,276 4.00 100,914 6.00
As of December 31, 2003:
Total Capital (to risk-weighted assets) $ 246,967 17.94% $ 110,103 8.00% $ 137,629 10.00%
Core Capital (to adjusted tangible assets) 235,019 10.63 88,413 4.00 110,516 5.00
Tangible Capital (to tangible assets).. 235,019 10.63 33,155 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets) 235,019 17.08 55,051 4.00 82,577 6.00
The Corporation has a simple capital structure with one class of $ 0.01 par
common stock outstanding, each share having equal voting rights. In addition,
the Corporation has authorized 7,500,000 shares of $0.01 par preferred stock. No
preferred stock was outstanding at December 31, 2004 and 2003. The Trust
Preferred Securities issued in 1998 qualify as Tier 1 capital. WSFS is
prohibited from paying any dividend or making any other capital distribution if,
after making the distribution, WSFS would be undercapitalized within the meaning
of the OTS Prompt Corrective Action regulations. Since 1996, the Board of
Directors has approved several stock repurchase programs to reacquire common
shares. As part of these programs, the Corporation acquired approximately
373,900 shares in 2004 and 1,601,600 shares in 2003. At December 31, 2004, the
Corporation held 8.1 million shares of its common stock in the treasury.
The Holding Company
Although the holding company does not have significant assets or engage in
significant operations separate from WSFS, the Corporation has agreed to cause
WSFS' required regulatory capital level to be maintained by infusing sufficient
additional capital as necessary. In November 1998, WSFS Financial Corporation's
unconsolidated affiliate, WSFS Capital Trust I, issued $51.5 million of Trust
Preferred securities at a variable interest rate of 250 basis points over the
three-month LIBOR rate. At December 31, 2004, the coupon rate on these
securities was 4.90% with a scheduled maturity of December 1, 2028. The
Corporation purchased an interest rate cap that effectively limits three-month
LIBOR to 6.00% until 2008. The effective rate of these securities, including
amortization of issuance costs and the cost of the interest rate cap was 5.92%
at December 31, 2004. The effective rate will vary, however, due to fluctuations
in interest rates. See Note 20 to the Financial Statements for further
discussion of the interest rate cap. The proceeds from the issue were invested
in Junior Subordinated Debentures issued by WSFS Financial Corporation. These
securities are treated as borrowings with the interest included in interest
expense on the consolidated statement of operations. See Notes 11 and 20 to the
Financial Statements for additional information. The proceeds were used
primarily to extinguish higher rate debt and for general corporate purposes.
Pursuant to federal laws and regulations, WSFS' ability to engage in
transactions with affiliated corporations is limited, and WSFS generally may not
lend funds to nor guarantee indebtedness of the Corporation.
49
WSFS FINANCIAL CORPORATION
13. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
- --------------------------------------------------------------------------------
Associate 401(k) Savings Plan
Certain subsidiaries of the Corporation maintain a qualified plan in which
Associates may participate. Participants in the plan may elect to direct a
portion of their wages into investment accounts that include professionally
managed mutual and money market funds and the Corporation's common stock.
Generally, the principal and earnings thereon are tax deferred until withdrawn.
The Company matches a portion of the Associates' contributions and periodically
makes discretionary contributions based on Company performance into the plan for
the benefit of Associates. To that end, in each of December 2002 and January
2003, the Corporation set aside $343,000 of its gain on the sale of reverse
mortgages and WF as special contributions to the Associate 401(k) plan. The
Corporation's total cash contributions to the plan on behalf of its Associates
resulted in a cash expenditure of $1.6 million, $1.3 million and $848,000 for
2004, 2003 and 2002, respectively. The plan purchased 46,000, 56,000 and 72,000
shares of common stock of the Corporation during 2004, 2003 and 2002,
respectively.
All Company contributions are made in the form of the Corporation's common stock
that Associates may transfer to various other investment vehicles without any
significant restrictions.
Postretirement Benefits
The Corporation shares certain costs of providing health and life insurance
benefits to retired Associates (and their eligible dependents). Substantially
all Associates may become eligible for these benefits if they reach normal
retirement age while working for the Corporation.
The Corporation accounts for its obligations under the provisions of SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions. SFAS
106 requires that the costs of these benefits be recognized over an Associate's
active working career. Disclosures are in accordance with SFAS No. 132
(Revised), Employer's Disclosure About Pensions and Other Postretirement
Benefits, 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.
In May 2004, the FASB issued accounting guidance applicable to the Act in the
form of FASB Staff Position (FSP) 106-2. The guidance states, in part, that it
applies only to a health care plan for which the employer has concluded that
prescription drug benefits available under the plan to some or all participants
for some or all future years are "actuarially equivalent" to Medicare Part D and
thus qualify for subsidy under the Act. The Company, using an analysis performed
by an independent actuary, has determined that it is very unlikely that its
retiree medical plan would qualify as actuarially equivalent to the Medicare
Part D benefit now or in the future. The Company concluded, therefore, that it
would be very unlikely to be eligible for the federal subsidy provided by the
Act. As a result, the benefits provided by the Company's retiree medical plan
would most likely not be affected by the Act in a significant fashion and
therefore the Act would have no impact on the Company's financial position and
results of operations.
50
WSFS FINANCIAL CORPORATION
The following disclosures are in accordance with SFAS No. 132 (as revised in
2003) and were measured at January 1, 2005:
2004 2003 2002
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,083 $ 1,815 $ 1,430
Service cost 97 74 59
Interest cost 122 119 100
Actuarial (gain)/loss (81) 169 298
Benefits paid (135) (94) (72)
- ---------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 2,086 $ 2,083 $ 1,815
===================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ -- $ --
Employer contributions 135 94 72
Benefits paid (135) (94) (72)
- ---------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ -- $ --
===================================================================================================
Funded status:
Funded status $(2,086) $(2,083) $(1,815)
Unrecognized transition obligation 491 552 613
Unrecognized net loss 461 563 407
- ---------------------------------------------------------------------------------------------------
Net amount recognized $(1,134) $ (968) $ (795)
===================================================================================================
Components of net periodic benefit cost:
Service cost $ 106 $ 97 $ 74
Interest cost 122 122 119
Amortization of transition obligation 61 61 61
Net loss recognition 15 21 13
- ---------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 304 $ 301 $ 267
===================================================================================================
Assumptions used to determine net periodic benefit cost:
Discount rate 6.00% 6.75% 7.25%
Health care cost trend rate 5.50% 6.00% 6.50%
Sensitivity analysis of health care cost trends:
Effect of +1% on service cost plus interest cost $ 3 $ 2 $ 2
Effect of -1% on service cost plus interest cost (1) -- (1)
Effect of +1% on APBO 18 15 9
Effect of -1% on APBO (10) (8) (3)
Assumptions used to value the Accumulated Postretirement Benefit
Obligation (APBO):
Discount rate 6.00% 6.00% 6.75%
Health care cost trend rate 5.50% 5.50% 6.00%
Ultimate trend rate 5.00% 5.50% 6.00%
Year of ultimate trend rate 2006 2005 2005
The Corporation assumes that the average annual rate of increase for medical
benefits will decrease by one-half of 1% per year and stabilizes at an average
increase of 5% per annum. The costs incurred for retirees' health care are
limited since certain current and all future retirees are restricted to an
annual medical premium cap indexed (since 1995) by the lesser of 4% or the
actual increase in medical premiums paid by the Corporation. For 2004, this
annual premium cap amounted to $2,051 per retiree. The Corporation estimates
that it will contribute approximately $117,000 to the plan during fiscal 2005.
Supplemental Pension Plan
The Corporation provided a nonqualified plan that gives credit for 25 years of
service based on the qualified plan formula. This plan is currently being
provided to two retired executives of the Corporation. The plan is no longer
being provided to Associates of the Corporation.
51
WSFS FINANCIAL CORPORATION
The following disclosures are in accordance with SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits, (as revised in
2003) and were measured at January 1, 2005:
2004 2003 2002
- -------------------------------------------------------------------------------------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 784 $ 767 $ 761
Service cost -- -- --
Interest cost 45 49 52
Actuarial loss 15 52 37
Benefits paid (84) (84) (83)
- -------------------------------------------------------------------------------------
Benefit obligation at end of year $ 760 $ 784 $ 767
=====================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ -- $ --
Employer contributions 84 84 84
Benefits paid (84) (84) (84)
- -------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ -- $ --
=====================================================================================
Funded status:
Funded status $(760) $(784) $(767)
Unrecognized transition obligation -- -- --
Unrecognized net loss 330 338 307
- -------------------------------------------------------------------------------------
Net amount recognized $(430) $(446) $(460)
=====================================================================================
Components of net periodic benefit cost:
Service cost $ -- $ -- $ --
Interest cost 43 45 49
Amortization of transition obligation -- -- --
Net loss recognition 25 24 20
- -------------------------------------------------------------------------------------
Net periodic benefit cost $ 68 $ 69 $ 69
=====================================================================================
Assumptions used to determine net periodic benefit cost:
Discount rate 6.00% 6.75% 7.25%
Assumptions used to value the Supplemental Pension Plan
Obligation:
Discount rate 6.00% 6.00% 6.75%
The Corporation estimates that it will contribute approximately $84,000 to the
plan during fiscal 2005.
The Corporation has two additional plans. They are a Director's Plan with a
corresponding liability of $265,000 and a Window Plan with a corresponding
liability of $623,000.
52
WSFS FINANCIAL CORPORATION
14. TAXES ON INCOME
- --------------------------------------------------------------------------------
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. The income tax provision consists
of the following:
Year Ended December 31, 2004 2003 2002
- -----------------------------------------------------------------------------------------------
(In Thousands)
From continuing operations:
Current income taxes:
Federal taxes $ 12,175 $ 11,212 $ 34,635
State and local taxes 1,993 1,695 3,543
Deferred income taxes:
Federal taxes (22) (1,943) 5,976
State and local taxes (195) -- --
- -----------------------------------------------------------------------------------------------
Subtotal 13,951 10,964 44,154
- -----------------------------------------------------------------------------------------------
From discontinued operations and businesses held-for-sale:
Current income taxes:
Federal taxes 112 26,826 9,247
State and local taxes 65 2,210 778
Deferred income taxes:
Federal taxes -- (4,258) (2,494)
State and local taxes -- (878) (547)
- -----------------------------------------------------------------------------------------------
Subtotal 177 23,900 6,984
- -----------------------------------------------------------------------------------------------
Current taxes from adoption of accounting principle:
Federal taxes on SFAS 142 adoption -- -- 469
- -----------------------------------------------------------------------------------------------
Subtotal -- -- 469
- -----------------------------------------------------------------------------------------------
Total $ 14,128 $ 34,864 $ 51,607
===============================================================================================
Current federal income taxes include taxes on income that cannot be offset by
net operating loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following is a
summary of the significant components of the Corporation's deferred tax assets
and liabilities as of December 31, 2004 and 2003 (certain reclassifications have
been made to the prior year's amounts to conform them to the current year's
presentation):
2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation $ (1,256) $ (3,142)
Other (321) (22)
Prepaid expenses (990) --
- --------------------------------------------------------------------------------
Total deferred tax liabilities (2,567) (3,164)
- --------------------------------------------------------------------------------
Deferred tax assets:
Bad debt deductions 8,462 8,022
Tax credit carryforwards 150 150
Net operating loss carryforwards 4,484 5,020
Loan fees 12 68
Reserves and other 1,646 1,439
Unrealized losses on available-for-sale securities 2,019 1,046
- --------------------------------------------------------------------------------
Total deferred tax assets 16,773 15,745
- --------------------------------------------------------------------------------
Valuation allowance (2,812) (2,377)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 11,394 $ 10,204
================================================================================
53
WSFS FINANCIAL CORPORATION
Included in the table above is the effect of certain temporary differences for
which no deferred tax expense or benefit was recognized. Such items consisted
primarily of unrealized gains and losses on certain investments in debt and
equity securities accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, and certain adjustments in non-wholly
owned subsidiaries.
Based on the Corporation's history of prior earnings and its expectations of the
future, it is anticipated that operating income and the reversal pattern of its
temporary differences will, more likely than not, be sufficient to realize a net
deferred tax asset of $11.4 million at December 31, 2004. An adjustment to the
valuation allowance was made in 2004 to reflect benefits previously recognized
for state tax net operating losses that are not realizable due to changes in
state tax law enacted in 2004, along with further unrealized benefits related to
the discontinuance of the leasing company. No adjustments to the valuation
allowance were made in 2003. Adjustments to the valuation allowance were made in
2002 to reflect the lapsing of uncertainties related to certain tax benefits
that were deemed to be realizable as a result of the closure of an IRS
examination along with the sale of the reverse mortgage portfolio. Further
adjustments to the valuation allowance were made in 2002 concerning previously
unrecorded tax benefits related to C1FN that were realizable as a result of the
sale of WF. This was offset by adjustments for benefits previously recognized
for state tax net operating losses that are not realizable due to changes in
state tax law enacted in 2002.
At December 31, 2004, approximately $3.8 million in gross deferred tax assets of
the Corporation were related to net operating losses and tax credits
attributable to a former subsidiary. The Corporation has assessed a valuation
allowance of $1.96 million on a portion of these deferred tax assets due to
limitations imposed by the Internal Revenue Code.
Approximately $865,000 in gross deferred tax assets of the Corporation at
December 31, 2004 are related to state tax net operating losses. The Company has
assessed a valuation allowance of $852,000 on a portion of these deferred tax
assets due to such net operating losses expiring before being utilized.
In 2002, the Internal Revenue Service (IRS) concluded an examination of the
Corporation's federal income tax returns for the year ended December 31, 2000.
The income tax provision for the year ended December 31, 2002 was reduced by
$894,000 primarily as a result of the favorable resolution of tax authority
examinations and tax return settlements.
Net operating loss carryforwards (NOLs) of $25.0 million remain at December 31,
2004. The expiration dates and amounts of such carryforwards are listed below:
Federal State
- --------------------------------------------------------------------------------
(In Thousands)
2007 $ - $10,323
2008 3,585 -
2009 6,755 -
2017 - 36
2018 - 4,263
- --------------------------------------------------------------------------------
$10,340 $14,622
================================================================================
The Corporation's ability to use its federal NOLs to offset future income is
subject to restrictions enacted in Section 382 of the Internal Revenue Code.
These restrictions limit a company's future use of NOLs if there is a
significant ownership change in a company's stock (an "Ownership Change"). The
utilization of approximately $10.3 million of federal net operating loss
carryforwards is limited to approximately $1.3 million each year as a result of
such Ownership Change in a former subsidiary's stock.
A reconciliation setting forth the differences between the effective tax rate of
the Corporation and the U.S. Federal statutory tax rate is as follows:
Year Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State tax net of federal tax benefit 3.0 1.2 1.5
Interest income 50% excludable (1.9) (0.8) (0.5)
Bank-owned life insurance income (1.9) -- --
Utilization of loss carryforwards and
valuation allowance adjustments 1.1 -- (1.9)
Other -- 0.2 (0.3)
- --------------------------------------------------------------------------------
Effective tax rate 35.3% 35.6% 33.8%
================================================================================
54
WSFS FINANCIAL CORPORATION
15. STOCK OPTION PLANS
- --------------------------------------------------------------------------------
The Corporation has stock options outstanding under two stock option plans
(collectively, "Option Plans") for officers, directors and Associates of the
Corporation and its subsidiaries. The 1986 Stock Option Plan ("1986 Plan")
expired in 1996, on the tenth anniversary of its effective date. No future
awards may be granted under the 1986 Plan. The 1997 Stock Option Plan ("1997
Plan") was approved by shareholders to replace the expired 1986 Plan. The 1997
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
1997 Plan is 1,615,000. At December 31, 2004, there were 373,860 shares
available for future grants under the 1997 Plan.
The Option Plans provide for the granting of incentive stock options as defined
in Section 422 of the Internal Revenue Code as well as nonincentive stock
options (collectively, "Stock Options"), phantom stock awards and stock
appreciation rights. All awards are to be granted at not less than the market
price of the Corporation's common stock on the date of the grant and expire no
later than ten years from the grant date. All Stock Options granted after
October 1996 are exercisable one year from grant date and vest in 20% per annum
increments. Generally, all awards become immediately exercisable in the event of
a change in control, as defined within the Option Plans.
A summary of the status of the Corporation's Option Plans as of December 31,
2004, 2003 and 2002, and changes during the years then ended is presented below:
2004 2003 2002
----------------------- ---------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
Stock Options:
Outstanding at beginning of year 938,264 $ 19.49 1,080,060 $ 16.33 1,001,605 $ 14.42
Granted 87,495 55.10 91,455 42.52 125,075 30.83
Exercised (131,849) 15.51 (220,441) 13.86 (36,070) 14.35
Canceled (20,550) 26.92 (12,810) 14.55 (10,550) 14.28
-------- --------- ---------
Outstanding at end of year 873,360 23.48 938,264 19.49 1,080,060 16.33
Exercisable at end of year 499,496 16.90 436,863 15.70 66,194 14.55
Weighted-average fair value
of awards granted $ 13.90 $ 9.19 $ 8.73
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 3.7% in 2004, 3.3% in 2003 and 2.6%
in 2002; expected option life of six years for all awards; and expected stock
price volatility of 19% in 2004, 17% in 2003 and 26% in 2002. For the purposes
of this option-pricing model 1% was used as the expected dividend yield.
The Black-Scholes and other option-pricing models assume that options are freely
tradable and immediately vested. Since executives' options are not transferable,
have long 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.
SFAS No. 123 (revised 2004), Share-Based Payment - An Amendment of Statements
No. 123 and 95, encourages, but does not require, the adoption of fair-value
accounting for stock-based compensation to Associates. The Company, as permitted
in 2004, had elected not to adopt the fair value accounting provisions of SFAS
123(R), and has instead continued to apply Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and Related
Interpretations, and related interpretations in accounting for the Stock Plans
and to provide the required pro forma disclosures of SFAS 123(R). Had the
grant-date fair-value provisions of SFAS 123(R) been adopted, the Corporation
would have recognized pretax compensation expense of $907,000 in 2004, $1.1
million in 2003 and $1.1 million in 2002 related to its Option Plans. As a
result, pro forma income from continuing operations for the Corporation would
have been $25.2 million in 2004, $20.5 million in 2003 and $87.3 million in
2002. Pro forma diluted earnings per share from continuing operations would have
been $3.31 in 2004, $2.49 in 2003 and $9.26 in 2002.
55
WSFS FINANCIAL CORPORATION
The effects on pro forma net income and diluted earnings per share of applying
the disclosure requirement of SFAS 123(R) in past years may not be
representative of the future pro forma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.
The following table summarizes all stock options outstanding and exercisable for
Option Plans as of December 31, 2004, segmented by range of exercise prices:
Outstanding Exercisable
--------------------------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise
Number Price Contractual Life Number Price
- ---------------------------------------------------------------------------------------------
Stock Options:
$ 6.16-$12.31 153,739 $ 10.96 5.6 years 109,659 $ 10.95
$12.32-$18.47 448,125 15.80 5.6 years 327,005 15.63
$18.48-$24.63 8,996 18.81 2.7 years 8,996 18.81
$30.80-$36.95 101,920 33.33 8.0 years 38,195 33.36
$36.96-$43.11 410 37.77 8.5 years 82 37.77
$43.12-$49.27 82,205 43.79 9.0 years 15,559 43.71
$49.28-$55.43 6,470 50.60 9.5 years - -
$55.44-$61.59 71,495 58.78 10.0 years - -
------- --------
Total 873,360 $23.48 6.5 years 499,496 $16.90
========================== ========
16. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Lending Operations
At December 31, 2004, the Corporation had commitments to extend credit of $386.7
million. Consumer lines of credit totaled $57.2 million of which $45.7 million
was secured by real estate. Outstanding letters of credit were $13.3 million and
outstanding commitments to make or acquire mortgage loans aggregated $19.9
million. Approximately $9.2 million of which were at fixed rates ranging from
4.13% to 6.88%, and approximately $10.7 million were at variable rates ranging
from 3.25% to 6.25%. Mortgage commitments generally have closing dates within a
six-month period.
Data Processing Operations
The Company has entered into contracts to manage network operations, data
processing and other related services. The projected amounts of future minimum
payments contractually due (in thousands) are as follows:
2005 $3,629
2006 3,083
2007 2,982
2008 2,891
2009 2,939
2010 569
Legal Proceedings
In the ordinary course of business, the Corporation, the Bank and its
subsidiaries are subject to legal actions that 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 Bank, as successor to originators, is from time to time involved in
arbitration or litigation with reverse mortgage loan borrowers or with the heirs
of borrowers. Because reverse mortgages are a relatively new and uncommon
product, there can be no assurances regarding 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 rights and obligations.
56
WSFS FINANCIAL CORPORATION
Financial Instruments With Off Balance Sheet Risk
The Corporation is a party to financial instruments with off balance sheet risk
in the normal course of business primarily to meet the financing needs of its
customers. To varying degrees, these financial instruments involve elements of
credit risk that are not recognized in the Consolidated Statement of Condition.
Exposure to loss for commitments to extend credit and standby letters of credit
written is represented by the contractual amount of those instruments. The
Corporation generally requires collateral to support such financial instruments
in excess of the contractual amount of those instruments and essentially uses
the same credit policies in making commitments as it does for on-balance sheet
instruments.
The following represents a summary of off balance sheet financial instruments at
year-end:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments $ 68,905 $ 40,123
Commercial mortgage loan commitments 85,204 29,691
Commercial loan commitments 142,081 110,752
Commercial standby letters of credit 13,348 7,338
Residential mortgage loan commitments 19,923 23,299
Consumer lines of credit 57,250 60,401
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit are
conditional commitments issued to guarantee the performance of a customer to a
third party. The Corporation evaluates each customer's creditworthiness and
obtains collateral based on management's credit evaluation of the counterparty.
Indemnifications
Secondary Market Loan Sales. The Company generally does not sell loans with
recourse except to the extent arising from standard loan sale contract
provisions covering violations of representations and warranties and, under
certain circumstances first payment default by the borrower. These are customary
repurchase provisions in the secondary market for conforming mortgage loan
sales. The Company typically sells fixed-rate, conforming first mortgage loans
to Freddie Mac as part of its ongoing asset/liability management program. Loans
held-for-sale are carried at the lower of cost or market of the aggregate or in
some cases individual loans. 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 2004, the Company made one repurchase but did
not incur any loss on the repurchase.
Swap Guarantees. The Company entered into an agreement with an unaffiliated
financial institution whereby that financial institution entered into interest
rate derivative contracts (interest rate swap transactions) with customers
referred to them by the Company. By the terms of the agreement, that financial
institution has 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 December 31, 2004 there were twelve variable-rate to fixed-rate swap
transactions between the third-party financial institution and customers of WSFS
with an initial notional amount aggregating approximately $40.1 million, and
with maturities ranging from two to ten years. The aggregate market value of
these swaps to the customers was a liability of $607,000 as of December 31,
2004.
Sale of Wilmington Finance, Inc. In January 2003, WSFS completed the sale of its
majority-owned subsidiary, Wilmington Finance, Inc. (WF). As is customary in the
sale of a privately held business, certain indemnifications were provided by
WSFS and the other shareholders of WF to the buyer.
57
WSFS FINANCIAL CORPORATION
Remaining indemnifications provided by the sellers, fall into three separate
categories. These include: (1) indemnification for sellers' ownership, which
indemnification extends indefinitely and is uncapped in amount; (2)
indemnification for tax, environmental, and benefit plan related issues, all of
which indemnifications extend for their respective statute of limitations and
are uncapped in amount; and (3) protection to the buyer in the event of
successful third-party claims that result from the operation of the business
prior to the sale date (third-party claims indemnification). The remaining
third-party claims indemnification includes a dollar limit of $32 million from
months 25 through 30 from the sale date. The buyer must exhaust any related
reserves provided in the closing balance sheet and then incur $2 million of
damages before an initial dollar claim may be made against the sellers for any
third-party claims indemnification. Dollar liability is uncapped for the
indemnifying party if damages are due to willful misconduct, fraud or bad faith.
Generally, WSFS is proportionately liable for its ownership share of WF (which
was 65%) of the related successful claims under indemnification provisions,
except that, for a fee, in order to facilitate the sale, WSFS agreed to assume a
portion of the management shareholders' indemnification obligations.
WSFS is not aware of any claims to date or any potential future claims made
under the WF indemnification provisions that could result in payment. As a
result, no provision for loss has been made in WSFS' financial statements at
December 31, 2004.
There can be no assurances those payments, if any, under all indemnifications
provided by the Corporation will not be material or exceed any reserves that the
Company may have established for such contingencies.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The reported fair values of financial instruments are based on a variety of
factors. In certain cases, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions regarding the amount and timing of estimated
future cash flows that are discounted to reflect current market rates and
varying degrees of risk. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year-end
or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments: For cash and short-term investments, including
due from banks, federal funds sold, securities purchased under agreements to
resell and interest-bearing deposits with other banks, the carrying amount is a
reasonable estimate of fair value.
Investments and Mortgage-Backed Securities: Fair value for investment and
mortgage-backed securities is based on quoted market prices, where available. If
a quoted market price is not available, fair value is estimated using quoted
prices for similar securities. The fair value of the Corporation's investment in
reverse mortgages is based on the net present value of estimated cash flows,
which have been updated to reflect recent external appraisals of the underlying
collateral.
Loans: Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type: commercial, commercial mortgages,
construction, residential mortgages and consumer. For loans that reprice
frequently, the book value approximates fair value. The fair value of other type
of loans is estimated by discounting expected cash flows using the current rates
at which similar loans would be made to borrowers with comparable credit ratings
and for similar remaining maturities. The fair value of nonperforming loans is
based on recent external appraisals of the underlying collateral. Estimated cash
flows, discounted using a rate commensurate with current rates and the risk
associated with the estimated cash flows, are utilized if appraisals are not
available.
Interest Rate Cap: The fair value is estimated using a standard sophisticated
option model.
Deposit Liabilities: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, money market and interest-bearing demand
deposits and savings deposits, is assumed to be equal to the amount payable on
demand. The carrying value of variable rate time deposits and time deposits that
reprice frequently also approximates fair value. The fair value of the remaining
time deposits is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits with
comparable remaining maturities.
58
WSFS FINANCIAL CORPORATION
Borrowed Funds: Rates currently available to the Corporation for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
Off Balance Sheet Instruments: The fair value of off balance sheet instruments,
including commitments to extend credit and standby letters of credit, is
estimated using the fees currently charged to enter into similar agreements with
comparable remaining terms and reflects the present creditworthiness of the
counterparties.
The book value and estimated fair value of the Corporation's financial
instruments are as follows:
December 31, 2004 2003
- ----------------------------------------------------------------------------------- -------------------------
Book Fair Book Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and other investments $ 193,009 $ 193,009 $ 161,515 $ 161,515
Investment securities 97,376 97,895 116,488 117,309
Mortgage-backed securities 524,144 524,144 530,552 530,554
Loans, net 1,535,467 1,542,006 1,304,877 1,322,748
Bank-owned life insurance 52,190 52,190 -- --
Stock in Federal Home Loan Bank of Pittsburgh 43,946 43,946 43,676 43,676
Accrued interest receivable 8,656 8,656 7,948 7,948
Interest rate cap 322 322 1,072 1,072
Financial liabilities:
Deposits 1,234,962 1,237,779 923,333 926,292
Borrowed funds 1,054,156 1,060,555 1,081,058 1,109,272
Accrued interest payable 3,863 3,863 2,972 2,972
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows:
December 31, 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit $3,171 $2,038
Standby letters of credit 133 73
18. RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Corporation routinely enters into transactions with its directors and
officers. Such transactions are made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and do not, in the opinion of management, involve more
than the normal credit risk or present other unfavorable features. The aggregate
amount of loans to such related parties was $7.9 million and $8.2 million at
December 31, 2004 and 2003, respectively. During 2004, new loans and credit line
advances to such related parties amounted to $5.5 million and repayments
amounted to $5.8 million.
The Corporation engages a law firm that is affiliated with a director of the
Corporation for general legal services. Total fees for such services amounted to
$27,000 during 2004.
A director of the Corporation is also a director of a loan customer of the Bank.
At December 31, 2004 the principal balance outstanding of that loan was $2.7
million.
The Chairman of the Corporation is also the Chairman of the FHLB of Pittsburgh.
At December 31, 2004, the Bank had borrowed funds outstanding from the FHLB of
Pittsburgh of $837.1 million.
59
WSFS FINANCIAL CORPORATION
19. PARENT COMPANY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Condensed Statement of Financial Condition
December 31, 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Assets:
Cash $ 1,574 $ 662
Investment in subsidiaries 240,892 233,473
Investment in interest rate cap 322 1,072
Investment in Capital Trust I 1,547 1,547
Other assets 2,240 1,473
- --------------------------------------------------------------------------------
Total assets $ 246,575 $ 238,227
================================================================================
Liabilities:
Borrowings $ 50,000 $ 50,000
Interest payable 217 163
Other liabilities 55 72
- --------------------------------------------------------------------------------
Total liabilities 50,272 50,235
================================================================================
Stockholders' equity:
Common stock 152 151
Capital in excess of par value 68,327 64,738
Comprehensive loss (3,385) (1,748)
Retained earnings 293,054 268,797
Treasury stock (161,845) (143,946)
- --------------------------------------------------------------------------------
Total stockholders' equity 196,303 187,992
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 246,575 $ 238,227
================================================================================
Condensed Statement of Operations
Year Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------------------------------------
(In Thousands)
Income:
Interest income $ 101 $ 631 $ 353
Noninterest income 139 118 144
- -------------------------------------------------------------------------------------------------
240 749 497
- -------------------------------------------------------------------------------------------------
Expenses:
Interest expense 2,246 2,023 2,667
Other operating expenses (681) (401) (714)
- -------------------------------------------------------------------------------------------------
1,565 1,622 1,953
- -------------------------------------------------------------------------------------------------
Loss before equity in undistributed income of subsidiaries (1,325) (873) (1,456)
Equity in undistributed income of subsidiaries 27,225 63,895 102,597
- -------------------------------------------------------------------------------------------------
Net income $ 25,900 $ 63,022 $ 101,141
=================================================================================================
60
WSFS FINANCIAL CORPORATION
Condensed Statement of Cash Flows
Year Ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------------------------------
(In Thousands)
Operating activities:
Net income $ 25,900 $ 63,022 $ 101,141
Adjustments to reconcile net income to net cash
used for operating activities:
Equity in undistributed income of subsidiaries (27,225) (63,895) (102,597)
Amortization 175 50 383
(Increase) decrease in other assets (600) 160 (154)
Increase (decrease) in other liabilities 37 (20) (17)
- ---------------------------------------------------------------------------------------------
Net cash used for operating activities (1,713) (683) _(1,244)
- ---------------------------------------------------------------------------------------------
Investing activities:
Decrease in investment in subsidiaries 18,577 52,000 16,000
- ---------------------------------------------------------------------------------------------
Net cash provided by investing activities 18,577 52,000 16,000
- ---------------------------------------------------------------------------------------------
Financing activities:
Issuance of common stock 3,590 4,951 711
Dividends paid on common stock (1,643) (1,583) (1,733)
Treasury stock, net of reissuance (17,899) (58,418) (15,208)
- ---------------------------------------------------------------------------------------------
Net cash used for financing activities (15,952) (55,050) (16,230)
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash 912 (3,733) (1,474)
Cash at beginning of period 662 4,395 5,869
- ---------------------------------------------------------------------------------------------
Cash at end of period $ 1,574 $ 662 $ 4,395
=============================================================================================
61
WSFS FINANCIAL CORPORATION
20. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
- --------------------------------------------------------------------------------
The Corporation has an interest-rate cap with a notional amount of $50 million,
which limits three-month LIBOR to 6% for the ten years ending December 1, 2008.
The cap is being used to hedge the cash flows on $50 million in trust preferred
floating rate debt. The cap was recorded at the date of purchase in other
assets, at a cost of $2.4 million. On July 1, 2002, the inception date of the
redesignated hedging relationship, using guidance from the Financial Accounting
Standards Board (FASB) for implementation of Statement 133, Accounting for
Derivative and Hedging Activities, the fair value of the interest rate cap was
$1.6 million. This amount was allocated to the respective multiple "caplets" on
a fair value basis. The change in each caplet's respective allocated fair value
amount is reclassified out of other comprehensive income and into interest
expense when each of the quarterly interest payments is made on the trust
preferred debt. The redesignation of the cash flow hedge has the effect of
providing a more systematic method for amortizing the cost of the cap against
earnings. The fair value of the cap is estimated using a standard option model.
The fair value of the interest rate cap at December 31, 2004 was $322,000.
Everbank had entered into short-term forward exchange contracts to provide an
effective fair value hedge on the foreign currency denominated deposits from
fluctuations that may occur in world currency markets. At December 31, 2001
Everbank had entered into such contracts with notional amounts of $60.4 million.
During the years ended December 31, 2002 and 2001, the expense associated with
these hedging contracts was almost entirely offset by changes in the fair value
of the world currency denominated deposits. There was no material impact on
noninterest income. On November 5, 2002, WSFS sold C1FN/Everbank and therefore
had no foreign exchange contracts at December 31, 2004.
The following depicts the change in fair market value of the Company's
derivatives from January 1, 2002 to December 31, 2004:
Carrying Value Carrying Value Carrying Value Carrying Value
at Jan. 1, at Dec. 31, at Dec. 31, at Dec. 31,
2002 Activity 2002 Activity 2003 Activity 2004
- -------------------------------------------------------------------------------------------------------------------
(In Thousands)
Interest rate cap:
Intrinsic Value
Dedesignated cap $ 589(1) $ (589) $ -- $ -- $ -- $ -- $ --
Time Value
Dedesignated cap 1,945 (1,945) -- -- -- -- --
Redesignated cap -- 1,012 1,012 60 1,072 (750) 322
- -------------------------------------------------------------------------------------------------------------------
$ 2,534 $ (1,522) $ 1,012 $ 60 $ 1,072 $ (750) $ 322
===================================================================================================================
Foreign Exchange Contracts
Time Value $ (395) $ 395 N/A N/A N/A N/A N/A
===================================================================================================================
(1) Included in other comprehensive income, net of taxes.
62
WSFS FINANCIAL CORPORATION
21. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation has two operating segments:
WSFS and CashConnect, the ATM division of WSFS. WSFS provides financial products
through its main office, 24 retail banking offices, loan production offices and
operations centers to commercial and retail customers. Retail and Commercial
Banking, Commercial Real Estate Lending, Private Banking and other banking
business units are operating departments of WSFS. These departments share the
same regulator, market, many of the same customers, share common resources
(corporate and department-level) and provide similar products and services
through the general infrastructure of the Company. Because of these and other
reasons, these departments are not considered discrete segments and further are
appropriately aggregated within the WSFS segment of the Company in accordance
with SFAS No. 131. CashConnect provides turnkey ATM services through strategic
partnerships with several of the largest networks, manufacturers and service
providers in the ATM industry.
An operating segment is a component of an enterprise that engages in business
activities from which it may earn revenues and incur expenses, whose operating
results are regularly reviewed by the enterprise's chief operating decision
maker to make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is
available. The Corporation evaluates performance based on pretax ordinary income
relative to resources used, and allocates resources based on these results.
Segment information for the years ended December 31, 2004, 2003 and 2002 are
shown below.
For the year ended December 31, 2004 (in thousands):
WSFS CashConnect Total
- ------------------------------------------------------------------------------------------------------
External customer revenues:
Interest income $ 104,110 $ -- $ 104,110
Noninterest income 21,874 10,076 31,950
- ------------------------------------------------------------------------------------------------------
Total external customer revenues 125,984 10,076 136,060
- ------------------------------------------------------------------------------------------------------
Inter-segment revenues:
Interest income 1,771 -- 1,771
Noninterest income 717 742 1,459
- ------------------------------------------------------------------------------------------------------
Total inter-segment revenues 2,488 742 3,230
- ------------------------------------------------------------------------------------------------------
Total revenue 128,472 10,818 139,290
======================================================================================================
External customer expenses:
Interest expense 37,246 -- 37,246
Noninterest expenses 52,183 3,516 55,699
Provision for loan loss 3,217 -- 3,217
- ------------------------------------------------------------------------------------------------------
Total external customer expenses 92,646 3,516 96,162
- ------------------------------------------------------------------------------------------------------
Inter-segment expense:
Interest expense -- 1,771 1,771
Noninterest expenses 742 717 1,459
- ------------------------------------------------------------------------------------------------------
Total inter-segment expenses 742 2,488 3,230
- ------------------------------------------------------------------------------------------------------
Total expenses 93,388 6,004 99,392
- ------------------------------------------------------------------------------------------------------
Income before taxes and extraordinary items $ 35,084 $ 4,814 39,898
Provision for income taxes 13,951
Minority interest 190
Income on wind-down of discontinued operations, net of taxes 143
- ------------------------------------------------------------------------------------------------------
Consolidated net income $ 25,900
======================================================================================================
Cash and cash equivalents $ 61,328 $ 131,150 $ 192,478
Other segment assets 2,302,895 7,583 2,310,478
- ------------------------------------------------------------------------------------------------------
Total segment assets $2,364,223 $ 138,733 $2,502,956
======================================================================================================
Capital expenditures $ 5,886 $ 522 $ 6,408
63
WSFS FINANCIAL CORPORATION
For the year ended December 31, 2003 WSFS CashConnect Total
- -----------------------------------------------------------------------------------
(in thousands):
External customer revenues:
Interest income $ 89,299 $ -- $ 89,299
Noninterest income 18,386 7,780 26,166
- ----------------------------------------------------------------------------------
Total external customer revenues 107,685 7,780 115,465
- ----------------------------------------------------------------------------------
Inter-segment revenues:
Interest income 1,110 -- 1,110
Noninterest income 662 747 1,409
- ----------------------------------------------------------------------------------
Total inter-segment revenues 1,772 747 2,519
- ----------------------------------------------------------------------------------
Total revenue 109,457 8,527 117,984
- ----------------------------------------------------------------------------------
External customer expenses:
Interest expense 31,301 -- 31,301
Noninterest expenses 46,311 3,106 49,417
Provision for loan loss 2,550 -- 2,550
- ----------------------------------------------------------------------------------
Total external customer expenses 80,162 3,106 83,268
- ----------------------------------------------------------------------------------
Inter-segment expense:
Interest expense -- 1,110 1,110
Noninterest expenses 747 662 1,409
- ----------------------------------------------------------------------------------
Total inter-segment expenses 747 1,772 2,519
- ----------------------------------------------------------------------------------
Total expenses 80,909 4,878 85,787
- ----------------------------------------------------------------------------------
Income before taxes and extraordinary items $ 28,548 $ 3,649 32,197
Provision for income taxes 10,964
Gain on sale of businesses held-for-sale 41,789
- ----------------------------------------------------------------------------------
Consolidated net income $ 63,022
==================================================================================
Cash and cash equivalents $ 46,709 $ 113,711 $ 160,420
Other segment assets 2,043,162 3,495 2,046,657
- ----------------------------------------------------------------------------------
Total segment assets $2,089,871 $ 117,206 $2,207,077
==================================================================================
Capital expenditures $ 2,496 $ 301 $ 2,797
64
WSFS FINANCIAL CORPORATION
For the year ended December 31, 2002 WSFS CashConnect Total
- ----------------------------------------------------------------------------------------------------------
(in thousands):
External customer revenues:
Interest income $ 94,703 $ -- $ 94,703
Noninterest income 117,518 6,542 124,060
- ----------------------------------------------------------------------------------------------------------
Total external customer revenues 212,221 6,542 218,763
- ----------------------------------------------------------------------------------------------------------
Inter-segment revenues:
Interest income 1,200 -- 1,200
Noninterest income 644 726 1,370
- ----------------------------------------------------------------------------------------------------------
Total inter-segment revenues 1,844 726 2,570
- ----------------------------------------------------------------------------------------------------------
Total revenue 214,065 7,268 221,333
- ----------------------------------------------------------------------------------------------------------
External customer expenses:
Interest expense 33,434 -- 33,434
Noninterest expenses 48,256 3,361 51,617
Provision for loan loss 2,243 -- 2,243
- ----------------------------------------------------------------------------------------------------------
Total external customer expenses 83,933 3,361 87,294
- ----------------------------------------------------------------------------------------------------------
Inter-segment expense:
Interest expense -- 1,200 1,200
Noninterest expenses 726 644 1,370
- ----------------------------------------------------------------------------------------------------------
Total inter-segment expenses 726 1,844 2,570
- ----------------------------------------------------------------------------------------------------------
Total expenses 84,659 5,205 89,864
- ----------------------------------------------------------------------------------------------------------
Income before taxes and extraordinary items $ 129,406 $ 2,063 131,469
Provision for income taxes 44,154
Cumulative effect of change in accounting principle 703
Loss on wind-down of discontinued operations (2,766)
Income on discontinued operations of businesses held-for-sale 14,965
Gain on sale of business held-for-sale 924
- ----------------------------------------------------------------------------------------------------------
Consolidated net income $ 101,141
==========================================================================================================
Cash and cash equivalents 128,909 97,394 226,303
Other segment assets 1,478,065 632 1,478,697
- ----------------------------------------------------------------------------------------------------------
Total segment assets $ 1,606,974 $ 98,026 $ 1,705,000
==========================================================================================================
Capital expenditures $ 3,373 $ 164 $ 3,537
22. SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
On March 8, 2005, the Corporation announced that it had called for redemption
its approximately $50 million of Floating Rate WSFS Capital Trust I Preferred
Securities (WSFS Capital Trust I Securities). The redemption date will be on or
about April 6, 2005. In connection with this redemption, the Corporation will
recognize a debt extinguishment charge in the second quarter of 2005 from the
write-down of the unamortized debt issuance costs of the called securities. The
Corporation estimates that the write-down charge, net of taxes will total
approximately $728,000 or $.10 per diluted share.
On the redemption date of the WSFS Capital Trust I Securities, the Corporation
expects to complete the issuance of up to approximately $65 million aggregate
principal amount of Pooled Floating Rate Capital Securities. The securities to
be issued will have a 30-year maturity and will be redeemable by the Corporation
after five years. The securities will pay a floating interest rate based on
three-month LIBOR, repricing quarterly. The proceeds will be used to fund the
redemption of the WSFS Capital Trust I Preferred Securities and for general
corporate purposes. The Corporation estimates that the borrowing cost on $50.0
million of securities will be reduced by approximately 73 basis points.
65
WSFS FINANCIAL CORPORATION
QUARTERLY FINANCIAL SUMMARY (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended 12/31/04 9/30/04 6/30/04 3/31/04 12/31/03 9/30/03 6/30/03 3/31/03
- --------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest income $29,065 $26,601 $24,282 $24,162 $23,745 $21,177 $22,470 $21,907
Interest expense 10,809 9,481 8,674 8,282 7,964 7,778 7,867 7,692
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 18,256 17,120 15,608 15,880 15,781 13,399 14,603 14,215
Provision for loan losses 847 996 687 687 525 525 725 775
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 17,409 16,124 14,921 15,193 15,256 12,874 13,878 13,440
Noninterest income 8,012 8,160 8,220 7,558 6,514 6,542 7,300 5,810
Noninterest expenses 15,105 14,167 13,189 13,238 12,562 11,526 12,359 12,970
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
minority interest and taxes 10,316 10,117 9,952 9,513 9,208 7,890 8,819 6,280
Less minority interest 32 66 47 45 - - - -
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before taxes. 10,284 10,051 9,905 9,468 9,208 7,890 8,819 6,280
Income tax provision 3,528 3,499 3,638 3,286 3,020 2,562 3,183 2,199
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations 6,756 6,552 6,267 6,182 6,188 5,328 5,636 4,081
Income on wind-down of
discontinued operations,
net of taxes 143 - - - - - - -
Gain on sale of businesses
held-for-sale, net of taxes - - - - 400 - 208 41,181
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 6,899 $ 6,552 $ 6,267 $ 6,182 $ 6,588 $ 5,328 $ 5,844 $ 45,262
==========================================================================================================================
Earnings per share:
Basic:
Income from continuing
operations $ 0.96 $ 0.93 $ 0.87 $ 0.84 $ 0.84 $ 0.70 $ 0.73 $ 0.49
Income on wind-down of
discontinued operations,
net of taxes 0.02 - - - - - - -
Gain on sale of businesses
held-for-sale, net of taxes - - - - 0.05 - 0.02 4.92
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 0.98 $ 0.93 $ 0.87 $ 0.84 $ 0.89 $ 0.70 $ 0.75 $ 5.41
==========================================================================================================================
Diluted:
Income from continuing
operations $ 0.90 $ 0.88 $ 0.82 $ 0.79 $ 0.79 $ 0.66 $ 0.69 $ 0.46
Income from on wind-down
of discontinued operations,
net of taxes. 0.02 - - - - - - -
Gain on sale of businesses
held-for-sale, net of taxes - - - - 0.05 - 0.02 4.68
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 0.92 $ 0.88 $ 0.82 $ 0.79 $ 0.84 $ 0.66 $ 0.71 $ 5.14
==========================================================================================================================
66