UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
-------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 2, 2005:
Common Stock, par value $.01 per share 6,999,917
- -------------------------------------- -------------------------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three Months
Ended March 31, 2005 and 2004 (Unaudited).................................. 3
Consolidated Statement of Condition as of March 31, 2005
(Unaudited) and December 31, 2004.......................................... 4
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2005 and 2004 (Unaudited)........................................ 5
Notes to the Consolidated Financial Statements for the Three
Months Ended March 31, 2005 and 2004 (Unaudited)........................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 15
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 24
----------------------------------------------------------
Item 4. Controls and Procedures ................................................... 24
-----------------------
PART II. Other Information
Item 1. Legal Proceedings............................................................ 24
-----------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ................ 24
-------------------------------------------------------------
Item 3. Defaults upon Senior Securities.............................................. 25
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.......................... 25
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Item 5. Other Information ........................................................... 25
-----------------
Item 6. Exhibits .................................................................... 25
--------
Signatures ........................................................................... 26
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .. 27
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ... 29
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended March 31,
----------------------------
2005 2004
---- ----
(Unaudited)
(In Thousands)
Interest income:
Interest and fees on loans ............................ $23,157 $18,100
Interest on mortgage-backed securities ................ 5,874 4,727
Interest and dividends on investment securities ....... 755 1,129
Other interest income ................................. 379 206
------- -------
30,165 24,162
------- -------
Interest expense:
Interest on deposits .................................. 4,087 1,793
Interest on Federal Home Loan Bank advances ........... 6,187 5,555
Interest on federal funds purchased and securities
sold under agreements to repurchase ................. 1,011 400
Interest on trust preferred borrowings ................ 712 496
Interest on other borrowings .......................... 55 38
------- -------
12,052 8,282
------- -------
Net interest income ........................................ 18,113 15,880
Provision for loan losses .................................. 579 687
------- -------
Net interest income after provision for loan losses ........ 17,534 15,193
------- -------
Noninterest income:
Credit/debit card and ATM income ...................... 3,203 2,664
Deposit service charges ............................... 2,178 2,335
Investment advisory income ............................ 608 538
Bank owned life insurance income ...................... 496 479
Loan fee income ....................................... 426 531
Gain on sale of loans ................................. 144 73
Securities gains ...................................... - 222
Other income .......................................... 801 716
------- -------
7,856 7,558
------- -------
Noninterest expenses:
Salaries, benefits and other compensation ............. 8,822 7,643
Occupancy expense ..................................... 1,276 1,149
Equipment expense ..................................... 983 865
Data processing and operations expenses ............... 911 762
Professional fees ..................................... 553 522
Marketing expense ..................................... 525 520
Other operating expense ............................... 1,900 1,777
------- -------
14,970 13,238
------- -------
Income before minority interest and taxes .................. 10,420 9,513
Less minority interest ..................................... 37 45
------- -------
Income before taxes ........................................ 10,383 9,468
Income tax provision ....................................... 3,593 3,286
------- -------
Net income ................................................. $ 6,790 $ 6,182
======= =======
Earnings per share:
Basic.................................................... $ 0.96 $ 0.84
Diluted.................................................. $ 0.90 $ 0.79
The accompanying notes are an integral part of these Financial Statements.
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
March 31, December 31,
2005 2004
---- ----
(Unaudited)
(In Thousands)
Assets
Cash and due from banks .................................................. $ 52,733 $ 61,328
Cash in non-owned ATMs ................................................... 129,688 131,150
Interest-bearing deposits in other banks ................................. 141 531
----------- -----------
Total cash and cash equivalents ...................................... 182,562 193,009
Investment securities held-to-maturity ................................... 7,745 7,767
Investment securities available-for-sale including reverse mortgages ..... 88,961 89,609
Mortgage-backed securities held-to-maturity .............................. 3 4
Mortgage-backed securities available-for-sale ............................ 565,716 512,189
Mortgage-backed securities trading ....................................... 11,951 11,951
Loans held-for-sale ...................................................... 2,387 3,229
Loans, net of allowance for loan losses of $24,647 at March 31, 2005
and $24,222 at December 31, 2004 ....................................... 1,605,293 1,532,238
Bank owned life insurance ................................................ 52,686 52,190
Stock in Federal Home Loan Bank of Pittsburgh, at cost ................... 43,863 43,946
Assets acquired through foreclosure ...................................... 425 217
Premises and equipment ................................................... 22,574 22,835
Accrued interest receivable and other assets ............................. 37,354 32,684
Loans, operating leases and other assets of discontinued operations ...... 557 1,088
----------- -----------
Total assets ............................................................. $ 2,622,077 $ 2,502,956
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ........................................... $ 256,926 $ 246,592
Money market and interest-bearing demand ............................. 260,181 223,621
Savings .............................................................. 286,229 289,041
Time ................................................................. 211,720 221,414
Jumbo certificates of deposit - retail ............................... 67,266 71,514
----------- -----------
Total retail deposits .............................................. 1,082,322 1,052,182
Jumbo certificates of deposit - non-retail ........................... 45,511 44,903
Brokered certificates of deposit ..................................... 170,921 137,877
----------- -----------
Total deposits ................................................... 1,298,754 1,234,962
Federal funds purchased and securities sold under agreements to repurchase 161,915 132,105
Federal Home Loan Bank advances .......................................... 868,004 837,063
Trust preferred borrowings ............................................... 51,547 51,547
Other borrowed funds ..................................................... 31,419 33,441
Accrued interest payable and other liabilities ........................... 19,208 17,296
----------- -----------
Total liabilities ........................................................ 2,430,847 2,306,414
----------- -----------
Minority Interest ........................................................ 213 239
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
15,272,066 at March 31, 2005 and 15,213,647 at December 31, 2004 ..... 446 152
Capital in excess of par value ........................................... 69,773 68,327
Accumulated other comprehensive loss ..................................... (8,368) (3,385)
Retained earnings ........................................................ 299,420 293,054
Treasury stock at cost, 8,273,569 shares at March 31, 2005 and 8,127,269
shares at December 31, 2004 .......................................... (170,254) (161,845)
----------- -----------
Total stockholders' equity ............................................... 191,017 196,303
----------- -----------
Total liabilities, minority interest and stockholders' equity ............ $ 2,622,077 $ 2,502,956
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31,
----------------------------
2005 2004
---- ----
(Unaudited)
(In Thousands)
Operating activities:
Net income ............................................................. $ 6,790 $ 6,182
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Provision for loan losses .......................................... 579 687
Depreciation, accretion and amortization ........................... 1,208 1,586
Increase in accrued interest receivable and other assets ........... (1,016) (1,213)
Origination of loans held-for-sale ................................. (12,036) (8,118)
Proceeds from sales of loans held-for-sale ......................... 12,565 6,314
Gain on sale of loans held-for-sale ................................ (144) (37)
Gain on sale of loans .............................................. - (36)
Gain on sale of investments ........................................ - (222)
Minority interest net income ....................................... 37 45
Increase in accrued interest payable and other liabilities ......... 1,912 105
Gain on sale of assets acquired through foreclosure ................ (3) (1)
Increase in value of bank-owned life insurance ..................... (496) -
Increase in capitalized interest, net .............................. (67) (930)
--------- ---------
Net cash provided by operating activities ............................. 9,329 4,362
--------- ---------
Investing activities:
Maturities of investment securities .................................... 30 2,585
Sales of mortgage-backed securities available-for-sale ................. - 29,580
Repayments of mortgage-backed securities held-to-maturity .............. 1 1,798
Repayments of mortgage-backed securities available-for-sale ............ 25,843 37,672
Purchases of mortgage-backed securities available-for-sale ............. (87,022) (13,366)
Repayments of reverse mortgages ........................................ 110 382
Disbursements for reverse mortgages .................................... (100) (134)
Purchase of Cypress Capital Management LLC ............................. (452) (1,122)
Sale of loans .......................................................... - 5,999
Purchase of loans ...................................................... (1,742) (3,120)
Purchase of bank owned life insurance .................................. - (50,000)
Net increase in loans .................................................. (71,824) (44,627)
Net increase in stock of Federal Home Loan Bank of Pittsburgh .......... 83 1,639
Sales of assets acquired through foreclosure, net ...................... 98 69
Premises and equipment, net ............................................ (545) (502)
--------- ---------
Net cash used for investing activities ................................. (135,520) (33,147)
--------- ---------
Financing activities:
Net increase in demand and savings deposits ............................ 42,060 14,110
Net increase in time deposits .......................................... 19,558 47,218
Net increase in federal funds purchased ................................ 30,000 5,000
Net (decrease) increase in securities sold under agreement to repurchase (190) 583
Net increase (decrease) in FHLB advances ............................... 30,941 (45,057)
Dividends paid on common stock ......................................... (424) (369)
Issuance of common stock and exercise of employee stock options ........ 1,740 1,582
Purchase of treasury stock, net of reissuance .......................... (8,409) (1,194)
(Decrease) increase in minority interest ............................... (63) 100
--------- ---------
Net cash provided by financing activities .............................. 115,213 21,973
--------- ---------
Decrease in cash and cash equivalents from continuing operations ....... (10,978) (6,812)
Change in net assets from discontinued operations ...................... 531 3,327
Cash and cash equivalents at beginning of period ....................... 193,009 161,515
--------- ---------
Cash and cash equivalents at end of period ............................. $ 182,562 $ 158,030
========= =========
(Continued on next page)
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Three months ended March 31,
----------------------------
2005 2004
---- ----
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid for interest ................................................ $ 19,952 $ 6,945
Cash paid for income taxes, net ....................................... 1,088 813
Loans transferred to assets acquired through foreclosure .............. 303 620
Net change in accumulated other comprehensive (loss) income............ (4,983) 4,231
Transfer of loans held-for-sale to loans .............................. 333 59
Deconsolidation of WSFS Capital Trust I ............................... -- 1,547
The accompanying notes are an integral part of these Financial Statements.
6
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated Financial Statements include the accounts of the parent
company (WSFS Financial Corporation), Wilmington Savings Fund Society, FSB (Bank
or WSFS) and Montchanin Capital Management, Inc. (Montchanin) and its non-wholly
owned subsidiary, Cypress Capital Management, LLC (Cypress). WSFS Financial
Corporation (Company or Corporation) also has one unconsolidated affiliate, WSFS
Capital Trust I (the Trust). WSFS was founded in 1832 and is one of the oldest
financial institutions in the country. WSFS provides residential and commercial
real estate, commercial and consumer lending services, as well as retail deposit
and cash management services. Lending activities are funded primarily with
retail deposits and borrowings. Deposits are insured to their legal maximum by
the Federal Deposit Insurance Corporation (FDIC). WSFS serves customers from its
main office, 24 retail banking offices, loan production offices and operations
centers located in Delaware and southeastern Pennsylvania. Montchanin was formed
in 2003 to provide asset management products and services in the Bank's primary
market area. In January 2004, Montchanin acquired a 60% interest in Cypress.
Cypress is a Wilmington based investment advisory firm servicing high net-worth
individuals and institutions. In January 2005, Montchanin increased its
ownership in Cypress to 80%. The Trust 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.
Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), WSFS Investment Group, Inc. and WSFS Reit, Inc. As discussed
in Note 3 of the Financial Statements, the results of WCC, the Corporation's
wholly owned indirect auto financing and leasing subsidiary, are presented as
discontinued operations. WSFS Investment Group, Inc. was formed in 1989. WSFS
Investment Group, Inc. markets various third-party investment and insurance
products, such as single-premium annuities, whole life policies and securities
primarily through WSFS' retail banking system. WSFS Reit, Inc. is a real estate
investment trust formed to hold qualifying real estate assets and may be used to
raise capital in the future.
The accounting and reporting policies of the Corporation conform with U.S.
generally accepted accounting principles and prevailing practices within the
banking industry for interim financial information and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
for complete financial statements and prevailing practices within the banking
industry. Operating results for the three month period ended March 31, 2005 are
not necessarily indicative of the results that may be expected for any future
quarters or for the year ending December 31, 2005. For further information,
refer to the consolidated financial statements and notes thereto included in the
Corporation's Annual Report of Form 10-K for the year ended December 31, 2004 as
filed with the Securities and Exchange Commission.
Valuation of Stock Option Grants
At March 31, 2005, the Corporation had two stock-based employee
compensation plans. 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 net
income, as all options granted under these 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 January 1, 2006, the Corporation will implement SFAS 123 (revised
2004), Share-Based-Payment-An Amendment of Statements No. 123 and 95. The impact
to the Corporation's Consolidated Statement of Operations is expected to be
approximately $650,000 for the full year.
7
For the three months ended March 31,
------------------------------------
2005 2004
---- ----
(In Thousands, Except Per Share Data)
Net income, as reported ................................................... $ 6,790 $ 6,182
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 163 161
--------- ---------
Pro forma net income ...................................................... $ 6,627 $ 6,021
Earnings per share:
Basic:
- ------
Net income ................................................................ $ 0.96 $ 0.84
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 0.03 0.02
--------- ---------
Pro forma net income ...................................................... $ 0.93 $ 0.82
========= =========
Diluted:
- --------
Net income, as reported ................................................... $ 0.90 $ 0.79
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 0.02 0.02
--------- ---------
Pro forma net income ...................................................... $ 0.88 $ 0.77
========= =========
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months ended March 31,
------------------------------------
2005 2004
---- ----
(In Thousands, Except Per Share Data)
Numerator:
- ----------
Net income .............................................................. $ 6,790 $ 6,182
========= =========
Denominator:
- ------------
Denominator for basic earnings per share - weighted average shares....... 7,090 7,361
Effect of dilutive employee stock options ............................... 419 439
--------- ---------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ........................................... 7,509 7,800
========= =========
Basic earnings per share .................................................... $ 0.96 $ 0.84
========= =========
Diluted earnings per share .................................................. $ 0.90 $ 0.79
========= =========
Outstanding common stock equivalents having no dilutive effect............... 75 --
8
3. 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 24 lease contracts and 184 loan
contracts at March 31, 2005. 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.
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 reduced.
As a result, as of December 31, 2004, the Corporation reduced its reserve for
discontinued operations by $143,000, net of taxes. At March 31, 2005, there were
$335,000 in indirect loans and $189,000 in indirect leases, net, still
outstanding. At March 31, 2005, WSFS had exposure to $344,000 in remaining used
car residuals, for which it estimates a loss of $124,000. Management has
provided for this loss 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 March 31, 2005 and December 31, 2004:
At March 31, December 31,
2005 2004
---------------------------
(In Thousands)
Vehicles under operating leases, net of reserves ... $ 189 $ 516
Loans .............................................. 335 639
Other non-cash assets .............................. 33 (67)
------- -------
Loans, operating leases and other non-cash assets of
discontinued operations .......................... $ 557 $ 1,088
======= =======
The following table depicts the net income(loss) from discontinued
operations for the three months ended March 31, 2005 and 2004:
For the three months
ended March 31,
---------------------
2005 2004
---- ----
(In Thousands)
Interest income ................................ $ 14 $ 54
Allocated interest expense (1) ................. 4 76
----- -----
Net interest income (expense) .................. 10 (22)
Loan and lease servicing fee income ............ 47 37
Rental income on operating leases, net ......... 51 194
----- -----
Net revenues ................................. 108 209
Noninterest expenses ......................... 20 111
----- -----
Income before taxes ............................ 88 98
Credit to reserve on discontinued operations.... (88) (98)
Income tax provision ........................... - -
----- -----
Income from discontinued operations ............ $ - $ -
===== =====
(1) Allocated interest expense for the three months ended March 31, 2005
was based on the Company's annual average wholesale borrowing rate of
3.02%, which approximated a marginal funding cost for this business.
For the three months ended March 31, 2004 allocated interest expense
was based on a direct matched-maturity funding of the non-cash assets
of discontinued operations. The average borrowing rates for the three
months ended March 31, 2004 was 3.89%.
9
4. 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 March 31, 2005 was $366,000.
The following depicts the change in fair market value of the Company's
derivatives:
2005 2004
------------------------------------ ------------------------------------
At At At At
January 1, Change March 31, January 1, Change March 31,
---------- ------ --------- ---------- ------ ---------
(In Thousands)
Interest Rate Cap................. $ 322(1) $ 44 $ 366(1) $ 1,072(1) $ (446) $ 626(1)
(1) Included in other comprehensive income, net of taxes.
5. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive income
as required by SFAS No. 130, Reporting Comprehensive Income:
For the three months
ended March 31,
--------------------
2005 2004
---- ----
(In Thousands)
Net income ................................................................... $ 6,790 $ 6,182
Other Comprehensive Income:
Net unrealized holding (losses) gains on securities
available-for-sale arising during the period,
net of taxes ............................................................. (5,055) 4,652
Net unrealized holding gains (losses) arising during
the period on derivatives used for cash flow hedge,
net of taxes ............................................................. 72 (276)
Reclassification adjustment for gains included in net
income, net of taxes .................................................... - (145)
-------- --------
Total comprehensive income ................................................... $ 1,807 $ 10,413
======== ========
6. TAXES ON INCOME
The Corporation accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the recording of deferred income
taxes that reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management has assessed valuation
allowances on the deferred income taxes due to, among other things, limitations
imposed by Internal Revenue Code and uncertainties, including the timing of
settlement and realization of these differences.
10
7. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation has two operating segments
at March 31, 2005: WSFS and CashConnect, the ATM division of WSFS.
The WSFS segment provides financial products through its banking offices to
commercial and retail customers. The CashConnect segment provides turnkey ATM
services through strategic partnerships with several of the largest networks,
manufacturers, and service providers in the ATM industry. The balance sheet
category "Cash in non-owned ATMs" includes cash in which fee income is earned
through bailment arrangements with customers of CashConnect. Bailment
arrangements are typically renewed annually.
Reportable segments are business units that are managed separately and
offer different services to distinct customer bases. The Corporation evaluates
performance based on pre-tax ordinary income relative to resources used, and
allocates resources based on these results. Segment information for the three
months ended March 31, 2005 and 2004 follows:
11
For the Three Months Ended March 31,
---------------------------------------------------------------------------
2005 2004
------------------------------------ ------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---- ----------- ----- ---- ----------- -----
External customer revenues:
Interest income $ 30,165 $ - $ 30,165 $ 24,162 $ - $ 24,162
Non-interest income 5,180 2,676 7,856 5,367 2,191 7,558
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 35,345 2,676 38,021 29,529 2,191 31,720
---------- ---------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income 808 - 808 291 - 291
Non-interest income 180 155 335 172 177 349
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment revenues 988 155 1,143 463 177 640
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 36,333 2,831 39,164 29,992 2,368 32,360
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 12,052 - 12,052 8,282 - 8,282
Non-interest expenses 14,390 580 14,970 12,545 693 13,238
Provision for loan loss 579 - 579 687 - 687
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 27,021 580 27,601 21,514 693 22,207
---------- ---------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense - 808 808 - 291 291
Non-interest expenses 155 180 335 177 172 349
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment expenses 155 988 1,143 177 463 640
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 27,176 1,568 28,744 21,691 1,156 22,847
---------- ---------- ---------- ---------- ---------- ----------
Income before minority interest and taxes $ 9,157 $ 1,263 $ 10,420 $ 8,301 $ 1,212 $ 9,513
Less minority interest 37 45
Income tax provision 3,593 3,286
---------- ----------
Consolidated net income $ 6,790 $ 6,182
========== ==========
Cash and cash equivalents $ 52,874 $ 129,688 $ 182,562 $ 51,357 $ 106,673 $ 158,030
Other segment assets 2,435,084 4,431 2,439,515 2,080,363 2,823 2,083,186
---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,487,958 $ 134,119 $2,622,077 $2,131,720 $ 109,496 $2,241,216
========== ========== ========== ========== ========== ==========
Capital expenditures $ 273 $ 266 $ 539 $ 387 $ 147 $ 534
12
8. INDEMNIFICATIONS AND GUARANTEES
Secondary Market Loan Sales. The Company generally does not sell loans with
recourse except to the extent arising from standard loan sale contract
provisions covering violations of representations and warranties and, under
certain circumstances, first payment default by the borrower. These are
customary repurchase provisions in the secondary market for conforming mortgage
loan sales. The Company typically sells fixed-rate, conforming first mortgage
loans to the Federal Home Loan Mortgage Corporation as part of its ongoing
asset/liability management program. Loans held-for-sale are carried at the lower
of cost or market 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 the first quarter of 2005, the Company made
no repurchases of any loans sold in the secondary market.
Swap Guarantees. The Company entered into an agreement with an unrelated
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 March 31, 2005 and 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 approximately two to ten years.
The aggregate market value of these swaps to the customers was $133,000 at March
31, 2005 and ($607,000) at December 31, 2004. The amount of liability recorded
by the Company for these guarantees that were in a paying position at both March
31, 2005 and December 31, 2004 was $6,000. This amount represented the fair
market value of the guarantee to perform under the terms of the swap agreements.
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.
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 28 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, 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
March 31, 2005.
There can be no assurances that payments, if any, under all
indemnifications and guarantees provided by the Corporation will not be material
or exceed any reserves that the Company may have established for such
contingencies.
9. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Postretirement Benefits
The Corporation shares certain costs of providing health and life insurance
benefits to retired Associates (and their eligible dependents). Substantially
all Associates may become eligible for these benefits if they reach normal
retirement age while working for the Corporation.
13
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.
The following disclosures of the net periodic benefit cost components of
post-retirement benefits are in accordance with SFAS 132 (Revised) and were
measured at January 1, 2005:
Three months ended March 31,
----------------------------
2005 2004
---- ----
Service cost ............................................... $ 27 $ 24
Interest cost............................................... 30 31
Amortization of transition obligation ...................... 15 15
Net loss recognition........................................ 4 5
------- -------
Net periodic benefit cost ................. $ 76 $ 75
======= =======
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.
The following disclosures of the net periodic benefit cost components of a
supplemental pension plan are in accordance with SFAS 132 (Revised) and were
measured at January 1, 2005:
Three months ended March 31,
----------------------------
2005 2004
---- ----
Interest cost ............................................. $ 11 $ 11
Net loss recognition........................................ 6 6
------- -------
Net periodic benefit cost ................. $ 17 $ 17
======= =======
10. SUBSEQUENT EVENTS
On April 5, 2005, the Corporation completed an issuance of $65 million
aggregate principal amount of Pooled Floating Rate Capital Securities. These
securities have a 30-year maturity and are redeemable by the Corporation after
five years. The securities pay a floating interest rate based on three-month
LIBOR plus 177 basis points and reprice quarterly.
The proceeds from this issuance were used to fund the redemption of
approximately $50 million of Floating Rate WSFS Capital Trust I Preferred
Securities and will be used for general corporate purposes including repurchases
of the Company's common stock. In the second quarter, and in connection with the
redemption, the Corporation will recognize a non-cash debt extinguishment charge
from the write-down of the unamortized debt issuance costs of the called
securities. The write-down charge, net of taxes, was approximately $728,000, or
$0.10 per share.
On April 28, 2005, the stockholders of WSFS Financial Corporation approved
the WSFS Financial Corporation 2005 Incentive Plan. A description of the
material terms of the 2005 Incentive Plan was included in the Corporation's
Definitive Proxy Statement and filed with the Securities and Exchange Commission
on March 24, 2005. A total of 400,000 shares of the Company's common stock are
reserved and available for issuance pursuant to awards granted under the
Incentive Plan.
14
ITEM 2. WSFS FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (Bank or WSFS). Founded in 1832, WSFS is one of the oldest
financial institutions in the country. As a federal savings bank, which was
formerly chartered as a state mutual savings bank, WSFS enjoys broader
investment powers than most other financial institutions. WSFS has served the
residents of the Delaware Valley for 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, which is characterized by a diversified manufacturing and
service economy. The long-term strategy of the Corporation is to improve its
status as a high-performing financial services company by focusing on its core
community banking business.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as retail deposit 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 from its main office and 24 retail
banking offices loan production offices and operations centers located in
Delaware and southeastern Pennsylvania.
The Corporation has two consolidated subsidiaries, WSFS and Montchanin
Capital Management, Inc. 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.
WSFS Credit Corporation (WCC), a consolidated subsidiary of the Bank, which
was engaged primarily in indirect motor vehicle leasing, discontinued operations
in 2000. WCC no longer accepts new applications but continues to service
existing loans and leases until their maturities. For a detailed discussion, see
Note 3 to the Financial Statements.
FORWARD-LOOKING STATEMENTS
Within this 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 our financial statements. Management has used "forward-looking
statements" to describe the future plans and strategies including expectations
of the Corporation's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Delaware, the mid-Atlantic region and the country as
a whole, asset quality, loan growth, loan delinquency rates, operating risk,
uncertainty of estimates in general, and changes in federal and state
regulations, among other factors. These factors should be considered in
evaluating the "forward-looking statements," and undue reliance should not be
placed on such statements. Actual results may differ materially from management
expectations. WSFS Financial Corporation does not undertake, and specifically
disclaims any obligation to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of
operations are based on the Consolidated Financial Statements, which are
prepared in conformity with U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates
and assumptions effecting 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 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.
15
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 and Reverse Mortgage Bonds
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 values 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.
The Corporation owns $11.9 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. At the
time of the acquisition of these SASCO RM-1 securities it was the Corporation's
intent to sell these securities in the near term. Therefore, based on rules
promulgated under Statement of Financial Accounting Standards (SFAS) 115,
Accounting for Certain Investments in Debt and Equity Securities, 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 March 31, 2005. The Corporation also obtained a fair value estimate
from an independent securities dealer.
Reserve for Discontinued Operations
The Corporation discontinued the operations of WCC in 2000. In accordance
with Accounting Principles Board (APB) 30, Reporting the Results of
Operations-Reporting the Effects of Disposal 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 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 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 arbitration or litigation with the various parties including
borrowers or the heirs of borrowers. Because reverse mortgages are a relatively
new and uncommon product, there can be no assurances about how the courts or
arbitrators may apply existing legal principles to the interpretation and
enforcement of the terms and conditions of the Bank's reverse mortgage
obligations.
16
Deferred Taxes
The Corporation accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the recording of deferred income
taxes that reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management has assessed the Company's
valuation allowances on deferred income taxes resulting from, among other
things, limitations imposed by Internal Revenue Code and uncertainties,
including the timing of settlement and realization of these differences.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $119.1 million during the first three months of 2005
to $2.6 billion at March 31, 2005. During the first three months of 2005 loans,
net, grew $73.1 million to $1.6 billion reflecting the continued strong growth
in commercial and commercial real estate loans, which amounted to $77.6 million.
Consumer loans grew by $4.5 million during the same period. These increases were
partially offset by a decrease of $8.6 million in residential real estate loans.
MBS increased by $53.5 million during the first three months of 2005. These
increases were partially offset by a decrease of $10.4 million in cash and cash
equivalents during the period. In addition, loans, operating leases and other
assets of discontinued operations decreased $531,000, due to the expected
run-off in the WCC loan and lease portfolios.
Total liabilities increased $124.4 million between December 31, 2004 and
March 31, 2005, to $2.4 billion, mainly due to a $63.8 million increase in
deposits. This included a $33.0 million increase in brokered certificates of
deposit and a $30.1 million increase in retail deposits. In addition, there was
a $30.9 million increase in Federal Home Loan Bank (FHLB) advances and a $29.8
million increase in federal funds purchased and securities sold under agreements
to repurchase, primarily used to fund loan growth.
Capital Resources
Stockholders' equity decreased $5.3 million between December 31, 2004 and
March 31, 2005. This decrease was mainly due to the purchase of 153,500 shares
of the Corporation's common stock for $8.6 million ($55.71 per share average).
At March 31, 2005, the Corporation held 8,273,569 shares of its common stock in
its treasury at a cost of $170.3 million. In addition, other comprehensive
income decreased $5.0 million during the first three months of 2005 due, in
part, to a decline in the fair value of securities available-for-sale. Finally,
the Corporation declared cash dividends totaling $426,000 during the three
months ended March 31, 2005. These decreases were partially offset by net income
of $6.8 million and an increase of $1.5 million from the exercise of stock
options and the recognition of the related tax benefit.
Below is a table comparing the Bank's consolidated capital position to the
minimum regulatory requirements as of March 31, 2005 (dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
---------------------- ---------------------- ------------------------
% of % of % of
Amount Assets Amount Assets Amount Assets
Total Capital
(to Risk-Weighted Assets) ........ $254,676 14.36% $141,848 8.00% $177,310 10.00%
Core Capital (to Adjusted
Total Assets)..................... 239,468 9.12 105,008 4.00 131,260 5.00
Tangible Capital (to Tangible
Assets) .......................... 239,468 9.12 39,378 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 239,468 13.51 70,924 4.00 106,386 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory actions and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. At March 31, 2005 the Bank was in compliance
with regulatory capital requirements and is considered a "well-capitalized"
institution.
17
Liquidity
The Company manages its liquidity risk and funding needs through its
treasury function and through its Asset/Liability Committee. The Company has a
policy that separately addresses liquidity, and management monitors the
Company's adherence to policy limits. One measure of the Company's liquidity is
the ratio of cash and qualified assets to net withdrawable deposits and
borrowings due within one year, which was 8.3% at March 31, 2005, compared with
10.5% at December 31, 2004. Both of these ratios were well in excess of the
policy minimum. Also, liquidity risk management is a primary area of examination
by the OTS. The Company complies with guidance promulgated under Thrift Bulletin
77 that requires thrift institutions to maintain adequate liquidity to assure
safe and sound operations.
As a financial institution, the Bank has ready access to several sources to
fund growth and meet its liquidity needs. Among these are: net income, deposit
programs, loan repayments, borrowing from the FHLB, repurchase agreements and
the brokered CD market. The branch expansion the Company is currently
undertaking is intended to enter the Company into new, but contiguous, markets,
attract new customers and provide funding for its business loan growth. In
addition, the Corporation has a large portfolio of high-quality, liquid
investments, primarily short-duration, AAA-rated, mortgage-backed securities and
Agency notes that are positioned to provide a near-continuous source of cash
flow to meet current cash needs, or can be sold to meet larger discrete needs
for cash. Management believes these sources are sufficient to maintain the
required and prudent levels of liquidity.
During the three months ended March 31, 2005, net loan growth resulted in
the use of $73.6 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 three months ended March 31, 2005, $9.3 million in
cash was provided by operating activities, while $42.1 million in cash was
provided through the net increase in demand and savings deposits and $19.6
million in cash through the net increase in time deposits. For the period, cash
and cash equivalents decreased $10.4 million to $182.6 million.
18
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets and
past due loans at the dates indicated. Past due loans are loans contractually
past due 90 days or more as to principal or interest payments but which remain
on accrual status because they are considered well secured and in the process of
collection.
March 31, December 31,
2005 2004
--------- -----------
(In Thousands)
Nonaccruing loans:
Commercial .................................... $3,175 $1,595
Consumer ...................................... 207 291
Commercial mortgage ........................... 1,002 909
Residential mortgage .......................... 1,910 1,601
Construction .................................. - -
------ ------
Total nonaccruing loans ............................ 6,294 4,396
Assets acquired through foreclosure ................ 425 217
------ ------
Total nonperforming assets ......................... $6,719 $4,613
====== ======
Past due loans:
Residential mortgages ......................... $ 334 $ 703
Commercial and commercial mortgages............ - -
Consumer ...................................... 15 104
------ ------
Total past due loans ............................... $ 349 $ 807
====== ======
Ratios:
Nonaccruing loans to total loans (1) .......... 0.39% 0.28%
Allowance for loan losses to gross loans (1)... 1.51% 1.56%
Nonperforming assets to total assets .......... 0.26% 0.18%
Loan loss allowance to nonaccruing loans (2)... 373% 524%
Loan and foreclosed asset allowance to total
nonperforming assets (2) .................... 349% 499%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $2.1 million between March 31, 2005 and
December 31, 2004. The increase resulted primarily from a $1.7 million increase
attributable to one commercial loan. Residential nonaccruing loans increased
$309,000 as a result of various mortgages being placed on non-accrual. Assets
acquired through foreclosure increased $208,000 as a result of three residential
properties being acquired. An analysis of the change in the balance of
non-performing assets is presented below.
For the Three
Months Ended For the Year Ended
March 31, 2005 December 31, 2004
-------------- ------------------
(In Thousands)
Beginning balance.................................... $ 4,613 $ 5,544
Additions ...................................... 2,970 6,554
Collections..................................... (686) (4,668)
Transfers to accrual/restructured status........ (48) (1,717)
Charge-offs / write-downs, net.................. (130) (1,100)
----------- ---------
Ending balance....................................... $ 6,719 $ 4,613
========== =========
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those, which would result from a regulatory examination.
19
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest rate-sensitive
assets and liabilities to ensure a favorable interest rate spread and mitigate
exposure to fluctuations in interest rates is the Corporation's primary tool for
achieving its asset/liability management strategies. Management regularly
reviews the interest-rate sensitivity of the Corporation and adjusts the
sensitivity within acceptable tolerance ranges established by management. At
March 31, 2005, interest-bearing liabilities exceeded interest-earning assets
that mature or reprice within one year (interest-sensitive gap) by $32 million.
The Corporation's interest-sensitive assets as a percentage of
interest-sensitive liabilities within the one-year window decreased to 97% at
March 31, 2005 compared to 98% at December 31, 2004. Likewise, the one-year
interest-sensitive gap as a percentage of total assets changed to -1.22% at
March 31, 2005 from --0.81% at December 31, 2004. The change in sensitivity
since December 31, 2004 is the result of the current interest rate environment
and the Corporation's continuing effort to effectively manage interest rate
risk. Interest rate-sensitive assets of the Corporation excluded cash flows of
discontinued operations as well as the interest rate-sensitive funding for these
assets.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13a "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
of an immediate change in interest rates in 100 basis point increments on the
net portfolio value ratio. The net portfolio value ratio is defined as the net
present value of the estimated cash flows from assets and liabilities as a
percentage of net present value of cash flows from total assets (or the net
present value of equity). The table below is the estimated impact of immediate
changes in interest rates on the Company's net interest margin and net portfolio
value ratio at the specified levels at March 31, 2005 and 2004, calculated in
compliance with Thrift Bulletin No. 13a:
At March 31,
-----------------------------------------------------------------------
2005 2004
-------------------------------- --------------------------------
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value Ratio (2) Margin (1) Value Ratio (2)
- ------------- ------------- --------------- ----------- ---------------
+300 1% 8.30% -3% 9.60%
+200 1% 8.70% -2% 9.74%
+100 1% 8.98% -1% 9.83%
0 0% 9.17% 0% 9.88%
-100 -2% 9.17% -3% 9.67%
-200 (3) -7% 9.02% -12% 9.42%
-300 (3) -14% 9.04% -25% 9.88%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate change environments.
(2) The net portfolio value ratio of the Company in a stable interest rate
environment and the net portfolio value ratio as projected under the
various rate change environments.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points are not
deemed meaningful at March 31, 2005 and 2004 given the historically low
absolute level of interest rates at those times.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Results of Operations
The Corporation recorded net income of $6.8 million or $0.90 per diluted
share for the first quarter of 2005. This compares to $6.2 million or $0.79 per
diluted share for the same quarter last year.
20
Net Interest Income
The following tables provide information concerning the balances, yields
and rates on interest-earning assets and interest-bearing liabilities during the
periods indicated.
Three Months Ended March 31,
------------------------------------------------------------------------------
2005 2004
-------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans..... $ 550,790 $ 8,584 6.23% $ 386,911 $ 5,212 5.39%
Residential real estate loans.... 437,109 5,580 5.11 452,886 6,124 5.41
Commercial loans ................ 385,439 5,489 5.98 304,227 3,505 4.92
Consumer loans .................. 212,762 3,469 6.61 194,168 3,226 6.68
----------- --------- ----------- ---------
Total loans ................... 1,586,100 23,122 5.90 1,338,192 18,067 5.48
Mortgage-backed securities (4) ....... 542,965 5,874 4.33 496,699 4,727 3.81
Loans held-for-sale (3) .............. 2,510 35 5.58 1,174 33 11.24
Investment securities (4) ............ 97,194 755 3.11 114,473 1,129 3.95
Other interest-earning assets ........ 45,950 379 3.30 46,643 206 1.78
----------- --------- ----------- ---------
Total interest-earning assets 2,274,719 30,165 5.35 1,997,181 24,162 4.90
--------- ---------
Allowance for loan losses ............ (24,377) (22,632)
Cash and due from banks............... 54,011 47,126
Cash in non-owned ATMs................ 123,306 103,257
Loans, operating leases and other
assets of discontinued operations... 988 8,619
Bank owned life insurance............. 52,367 39,684
Other noninterest-earning assets...... 53,322 38,600
----------- -----------
Total assets..................... $ 2,534,336 $ 2,211,835
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 240,703 649 1.09% $ 113,052 66 0.23%
Savings.......................... 285,462 271 0.39 317,396 329 0.42
Retail time deposits ............ 286,722 1,851 2.62 226,027 1,067 1.90
----------- --------- ----------- ---------
Total interest-bearing
retail deposits.............. 812,887 2,771 1.38 656,475 1,462 0.90
Jumbo certificates of deposits .. 45,250 294 2.63 42,779 152 1.43
Brokered certificates of deposit. 156,471 1,022 2.65 42,820 179 1.68
----------- --------- ----------- ---------
Total interest-bearing deposits 1,014,608 4,087 1.63 742,074 1,793 0.97
FHLB of Pittsburgh advances........... 819,476 6,191 3.02 819,713 5,631 2.72
Trust preferred borrowings............ 51,547 712 5.53 50,000 496 3.92
Other borrowed funds.................. 194,210 1,066 2.20 186,780 438 0.94
Cost of funding discontinued
operations.......................... - (4) - (76)
----------- --------- ----------- ---------
Total interest-bearing liabilities 2,079,841 12,052 2.32 1,798,567 8,282 1.84
--------- ---------
Noninterest-bearing demand deposits... 239,590 205,803
Other noninterest-bearing liabilities. 15,861 12,950
Minority interest .................... 224 66
Stockholders' equity.................. 198,820 194,449
----------- -----------
Total liabilities and stockholders'
equity.............................. $ 2,534,336 $ 2,211,835
=========== ===========
Excess of interest-earning assets
over interest-bearing liabilities $ 194,878 $ 198,614
=========== ===========
Net interest and dividend income...... $ 18,113 $ 15,880
========= =========
Interest rate spread.................. 3.03% 3.06%
===== =====
Net interest margin................... 3.23% 3.24%
===== =====
(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.
21
Net interest income for the first quarter of 2005 was $18.1 million
compared to $15.9 million for the same quarter in 2004. Higher loan and higher
mortgage backed securities (MBS) volumes drove much of this increase. The yield
on earning assets was also higher in the first quarter of 2005 compared to the
first quarter of 2004. The yield on loans increased 0.42% from 5.48% in the
first quarter of 2004 to 5.90% in the first quarter of 2005; while the yield on
mortgage backed securities increased 0.52% for the same period. The increases in
the yields were due to the higher overall level of market interest rates as the
Federal Reserve began raising short term interest rates in June of 2004. The net
interest margin for the first quarter of 2005 was 3.23%, essentially unchanged
from the first quarter 2004 which was 3.24%, as rates on deposits and borrowings
increased in tandem with yields on loans and investments.
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 loans. Changes in risk grades of both performing and
nonperforming loans affect the amount of the formula allowance. Loss factors by
risk grade have a basis in WSFS' historical loss experience for such loans and
may be adjusted for significant factors that, in management's judgment, affect
the collectability of the portfolio as of the evaluation date. See discussion of
historical loss adjustment factors below.
Pooled loans are loans that are usually smaller, not-individually-graded
and homogenous in nature, such as consumer installment loans and residential
mortgages. Pooled loan loss allowances are based on historical net charge-offs
for six years which management believes approximates an 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. The
provision for loan losses decreased from $687,000 for the first three months of
2004 to $579,000 for the first three months of 2005, primarily a result of an
overall improvement in credit quality of the Corporation's loan portfolio.
The Corporation maintains allowances for credit losses and charges losses
to these allowances when such losses are realized. The allowances for losses are
maintained at a level which management considers adequate to provide for losses
based upon an evaluation of known and inherent risks in the portfolios.
Management's evaluation is based upon a continuing review of the portfolios.
22
The table below represents a summary of the changes in the allowance for
loan losses during the periods indicated.
Three months ended March 31,
2005 2004
---- ----
(Dollars in Thousands)
Beginning balance .................................. $24,222 $22,386
Provision for loan losses, Continuing operations.... 579 687
Charge-offs:
Residential real estate ....................... 36 141
Commercial real estate (1) .................... - -
Commercial .................................... 66 40
Consumer ...................................... 158 275
------- -------
Total charge-offs .......................... 260 456
------- -------
Recoveries:
Residential real estate ....................... 56 25
Commercial real estate (1) .................... - -
Commercial .................................... 9 83
Consumer ...................................... 41 20
------- -------
Total recoveries ........................... 106 128
------- -------
Net charge-offs .................................... 154 328
------- -------
Ending balance ..................................... $24,647 $22,745
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (2) .......... 0.04% 0.10%
======= =======
(1) Includes commercial mortgage and construction loans.
(2) Ratios for the three months ended March 31, 2005 and 2004 are annualized.
Noninterest Income
Noninterest income for the quarter ended March 31, 2005 was $7.9 million
compared to $7.6 million for the first quarter of 2004. The increase was
primarily due to increases of $539,000 in card and ATM fee income, $401,000 of
which was due to growth in the CashConnect segment. This increase was partially
offset by lower gains on the sales of securities of $222,000.
Noninterest Expense
Noninterest expenses for the quarter ended March 31, 2005 were $15.0
million, or $1.8 million above the $13.2 million for the same period of 2004.
Salaries, benefits and other compensation, equipment, occupancy and data
processing expenses all increased during the first quarter 2005 mainly the
result of growth in WSFS' branch system. Also, an additional $727,000 of bonus
and post-retirement related expenses were recorded during the first quarter of
2005. Partially offsetting these increases was the reversal of a reserve for
losses in the CashConnect business of $503,000. This reserve was no longer
necessary because losses were no longer probable.
Income Taxes
The Corporation and its subsidiaries file a consolidated Federal income tax
return and separate state income tax returns. Income taxes are accounted for in
accordance with SFAS 109, which requires the recording of deferred income taxes
for tax consequences of "temporary differences." During the first quarter of
2005, the Corporation recorded a provision for income taxes of $3.6 million
compared to $3.3 million for the same period in 2004. The effective tax rates
for the first quarter of 2005 and 2004 were both approximately 35%.
The effective tax rates reflect the recognition of certain tax benefits in
the financial statements including those benefits from tax-exempt interest
income, BOLI income, a fifty-percent interest income exclusion on a loan to an
Employee Stock Ownership Plan, and a provision for state income tax expense.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly.
23
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (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. On April 14, 2005 the Securities
and Exchange Commission amended the compliance dates for SFAS 123(R). Under the
amended compliance dates, SFAS 123(R) becomes effective for public entities that
do not file as small business issuers, as of the beginning of the first fiscal
reporting period that begins after June 15, 2005. For the Corporation, this will
become effective on January 1, 2006. While the Corporation has estimated the
impact on is 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report
on Form 10-Q.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act")), the Company's principal executive
officer and the principal financial officer have concluded that
as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective
to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's
internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at March 31, 2005. From time to time, the Company is party to
legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table lists purchases of the Company's Common Stock
during the first quarter of 2005.
Total Number of Maximum Number
Total Number Average Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Purchased per Share Announced Plans Under Plans
------------ ---------- ------------------- ------------------
January 1, to January 31, 2005 0 $ 0.00 0 701,564
February 1, to February 28, 2005 0 $ 0.00 0 701,564
March 1, to March 31, 2005 156,801(1) $55.73 153,500 548,064
-------
Total for the quarter ended March 31, 2005 156,801 $55.73
(1) 3,301 shares of Common Stock were purchased by the Company in a
private transaction resulting from the exercise of stock options.
On June 24, 2004 the Board of Directors approved an authorization to
repurchase 10% of the Company's outstanding shares, or 701,564 shares.
There is no expiration date under either Plan.
24
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
(a) Exhibit 31 - Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) Exhibit 32 - Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: May 9, 2005 /s/ MARVIN N. SCHOENHALS
--------------------------------------
Marvin N. Schoenhals
President and Chief Executive Officer
Date: May 9, 2005 /s/ STEPHEN A. FOWLE
--------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
26