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 June 30, 2005
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
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(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark whether the registrant is 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 August 2, 2005:
Common Stock, par value $.01 per share 6,862,514
- -------------------------------------- --------------------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2005 and 2004 (Unaudited)........................................... 3
Consolidated Statement of Condition as of June 30, 2005
(Unaudited) and December 31, 2004.................................................. 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2005 and 2004 (Unaudited)................................................. 5
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 2005 and 2004 (Unaudited).................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.......................................................... 16
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 26
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Item 4. Controls and Procedures ............................................................. 26
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PART II. Other Information
Item 1. Legal Proceedings.................................................................... 27
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................... 27
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Item 3. Defaults upon Senior Securities...................................................... 27
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Item 4. Submission of Matters to a Vote of Security Holders.................................. 27
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Item 5. Other Information ................................................................... 27
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Item 6. Exhibits ............................................................................ 27
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Signatures .................................................................................... 28
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ........... 29
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ........... 31
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30, Six months ended June 30,
---------------------------- -------------------------
2005 2004 2005 2004
------- ------- ------- -------
(Unaudited)
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans ....................... $25,447 $18,222 $48,604 $36,322
Interest on mortgage-backed securities ........... 6,444 4,689 12,318 9,416
Interest and dividends on investment securities .. 639 1,219 1,394 2,348
Other interest income ............................ 356 152 735 358
------- ------- ------- -------
32,886 24,282 63,051 48,444
------- ------- ------- -------
Interest expense:
Interest on deposits ............................. 4,662 1,832 8,749 3,625
Interest on Federal Home Loan Bank advances ...... 7,263 5,886 13,450 11,441
Interest on federal funds purchased and securities
sold under agreements to repurchase ............ 1,092 413 2,103 813
Interest on trust preferred borrowings ........... 1,967 503 2,679 999
Interest on other borrowings ..................... 124 40 179 78
------- ------- ------- -------
15,108 8,674 27,160 16,956
------- ------- ------- -------
Net interest income ................................... 17,778 15,608 35,891 31,488
Provision for loan losses ............................. 772 687 1,351 1,374
------- ------- ------- -------
Net interest income after provision for loan losses ... 17,006 14,921 34,540 30,114
------- ------- ------- -------
Noninterest income:
Credit/debit card and ATM income ................. 3,665 2,976 6,868 5,640
Deposit service charges .......................... 2,487 2,366 4,665 4,701
Investment advisory income ....................... 619 549 1,227 1,087
Bank owned life insurance income ................. 527 626 1,023 1,105
Loan fee income .................................. 569 627 995 1,158
Mortgage banking activities, net ................. 37 294 181 367
Securities gains ................................. - 2 - 224
Other income ..................................... 810 780 1,611 1,496
------- ------- ------- -------
8,714 8,220 16,570 15,778
------- ------- ------- -------
Noninterest expenses:
Salaries, benefits and other compensation ........ 8,494 7,406 17,316 15,049
Occupancy expense ................................ 1,263 1,122 2,539 2,271
Equipment expense ................................ 954 925 1,937 1,790
Data processing and operations expenses .......... 998 837 1,909 1,599
Marketing expense ................................ 828 541 1,353 1,061
Professional fees ................................ 498 309 1,051 831
Other operating expense .......................... 2,568 2,049 4,468 3,826
------- ------- ------- -------
15,603 13,189 30,573 26,427
------- ------- ------- -------
Income before minority interest and taxes ............. 10,117 9,952 20,537 19,465
Less minority interest ................................ 37 47 74 92
------- ------- ------- -------
Income before taxes ................................... 10,080 9,905 20,463 19,373
Income tax provision .................................. 3,514 3,638 7,107 6,924
------- ------- ------- -------
Net income ............................................ $ 6,566 $ 6,267 $13,356 $12,449
======= ======= ======= =======
Earnings per share:
Basic ................................................. $ 0.95 $ 0.87 $ 1.90 $ 1.71
Diluted ............................................... $ 0.90 $ 0.82 $ 1.80 $ 1.62
The accompanying notes are an integral part of these Financial Statements.
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31,
2005 2004
---- ----
(Unaudited)
(In Thousands, Except Per Share Data)
Assets
Cash and due from banks .................................................. $ 56,776 $ 61,328
Cash in non-owned ATMs ................................................... 137,203 131,150
Interest-bearing deposits in other banks ................................. 207 531
----------- -----------
Total cash and cash equivalents ...................................... 194,186 193,009
Investment securities held-to-maturity ................................... 7,753 7,767
Investment securities available-for-sale including reverse mortgages ..... 90,338 89,609
Mortgage-backed securities held-to-maturity .............................. 1 4
Mortgage-backed securities available-for-sale ............................ 574,307 512,189
Mortgage-backed securities trading ....................................... 11,951 11,951
Loans held-for-sale ...................................................... 1,429 3,229
Loans, net of allowance for loan losses of $24,939 at June 30, 2005
and $24,222 at December 31, 2004 ....................................... 1,662,910 1,532,238
Bank owned life insurance ................................................ 53,213 52,190
Stock in Federal Home Loan Bank of Pittsburgh, at cost ................... 46,399 43,946
Assets acquired through foreclosure ...................................... 372 217
Premises and equipment ................................................... 22,729 22,835
Accrued interest receivable and other assets ............................. 34,031 32,684
Loans, operating leases and other assets of discontinued operations ...... 227 1,088
----------- -----------
Total assets ............................................................. $ 2,699,846 $ 2,502,956
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ........................................... $ 261,987 $ 246,592
Interest-bearing demand .............................................. 120,232 100,098
Money market ......................................................... 167,854 123,523
Savings .............................................................. 276,514 289,041
Time ................................................................. 212,002 221,414
Jumbo certificates of deposit - retail ............................... 68,650 71,514
----------- -----------
Total retail deposits .............................................. 1,107,239 1,052,182
Jumbo certificates of deposit - non-retail ........................... 35,930 44,903
Brokered certificates of deposit ..................................... 203,400 137,877
----------- -----------
Total deposits ................................................... 1,346,569 1,234,962
Federal funds purchased and securities sold under agreements to
repurchase.............................................................. 131,820 132,105
Federal Home Loan Bank advances .......................................... 902,943 837,063
Trust preferred borrowings ............................................... 67,011 51,547
Other borrowed funds ..................................................... 38,085 33,441
Accrued interest payable and other liabilities ........................... 20,047 17,296
----------- -----------
Total liabilities ........................................................ 2,506,475 2,306,414
----------- -----------
Minority Interest ........................................................ 184 239
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
15,299,683 at June 30, 2005 and 15,213,647 at December 31, 2004 ...... 153 152
Capital in excess of par value ........................................... 70,825 68,327
Accumulated other comprehensive loss ..................................... (4,227) (3,385)
Retained earnings ........................................................ 305,497 293,054
Treasury stock at cost, 8,439,569 shares at June 30, 2005 and 8,127,269
shares at December 31, 2004 .......................................... (179,061) (161,845)
----------- -----------
Total stockholders' equity ............................................... 193,187 196,303
----------- -----------
Total liabilities, minority interest and stockholders' equity ............ $ 2,699,846 $ 2,502,956
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30,
-------------------------
2005 2004
---- ----
(Unaudited)
(In Thousands)
Operating activities:
Net income ...................................................................... $ 13,356 $ 12,449
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................... 1,351 1,374
Depreciation, accretion and amortization .................................... 3,506 3,448
Increase in accrued interest receivable and other assets .................... (1,760) (1,593)
Origination of loans held-for-sale .......................................... (20,685) (18,922)
Proceeds from sales of loans held-for-sale .................................. 21,473 18,070
Gain on sale of loans held-for-sale ......................................... (35) (106)
Gain on sale of loans ....................................................... - (261)
Gain on sale of investments ................................................. - (224)
Minority interest net income ................................................ 74 92
Increase in accrued interest payable and other liabilities .................. 2,751 725
Gain on sale of assets acquired through foreclosure ......................... (41) (39)
Increase in value of bank-owned life insurance .............................. (1,023) -
Increase in capitalized interest, net ....................................... (10) (2,053)
--------- ---------
Net cash provided by operating activities ...................................... 18,957 12,960
--------- ---------
Investing activities:
Maturities of investment securities ............................................. 30 2,585
Purchase of investments available-for-sale ...................................... (975) (9,930)
Sales of mortgage-backed securities available-for-sale .......................... - 31,346
Repayments of mortgage-backed securities held-to-maturity ....................... 3 1,804
Repayments of mortgage-backed securities available-for-sale ..................... 54,854 99,481
Purchases of mortgage-backed securities available-for-sale ...................... (118,313) (138,097)
Repayments of reverse mortgages ................................................. 178 1,238
Disbursements for reverse mortgages ............................................. (200) (257)
Purchase of Cypress Capital Management LLC ...................................... (452) (1,122)
Sale of loans ................................................................... 341 12,250
Purchase of loans ............................................................... (4,469) (7,449)
Purchase of bank owned life insurance ........................................... - (50,000)
Net increase in loans ........................................................... (127,141) (104,654)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ................... (2,453) (3,282)
Sales of assets acquired through foreclosure, net ............................... 258 406
Investment in premises and equipment, net ....................................... (1,517) (2,688)
--------- ---------
Net cash used for investing activities .......................................... (199,856) (168,369)
--------- ---------
Financing activities:
Net increase in demand and savings deposits ..................................... 71,977 32,102
Net increase in time deposits ................................................... 43,938 73,309
Net (decrease) increase in securities sold under agreement to repurchase ........ (285) 8,259
Net increase in FHLB advances ................................................... 65,880 86,885
Redemption of WSFS Capital Trust I Preferred Securities ......................... (51,547) -
Issuance of Pooled Floating Rate Capital Securities ............................. 67,011 -
Dividends paid on common stock .................................................. (913) (804)
Issuance of common stock and exercise of employee stock options ................. 2,499 1,641
Purchase of treasury stock, net of reissuance ................................... (17,216) (17,909)
(Decrease) increase in minority interest ........................................ (129) 99
--------- ---------
Net cash provided by financing activities ....................................... 181,215 183,582
--------- ---------
Increase in cash and cash equivalents ........................................... 316 28,173
Change in net assets from discontinued operations ............................... 861 5,829
Cash and cash equivalents at beginning of period ................................ 193,009 161,515
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 194,186 $ 195,517
========= =========
(Continued on next page)
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Six months ended June 30,
-------------------------
2005 2004
---- ----
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid for interest ........................................ $ 22,795 $ 15,410
Cash paid for income taxes, net................................ 5,710 5,053
Loans transferred to assets acquired through foreclosure ...... 372 240
Net change in accumulated other comprehensive loss ............ (842) (5,653)
Transfer of loans held-for-sale to loans....................... 1,047 1,352
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 AND SIX MONTHS ENDED JUNE 30, 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 III (the Trust). WSFS was founded in 1832 and is
one of the oldest financial institutions in the country. WSFS provides
residential and commercial real estate, commercial and consumer lending
services, as well as retail deposit and cash management services. Lending
activities are funded primarily with retail deposits and borrowings. Deposits
are insured to their legal maximum by the Federal Deposit Insurance Corporation
(FDIC). WSFS serves customers from its main office, 24 retail banking offices as
well as 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%. In April 2005, the Corporation formed the Trust to issue $65 million
aggregate principle amount of Pooled Floating Rate Capital Securities. The
proceeds from this issue were used to fund the redemption of $50 million of
Floating Rate WSFS Capital Trust I Preferred Securities (formerly WSFS Capital
Trust I). The Trust invested all of the proceeds from the sale of the Pooled
Floating Rate Capital Securities in Junior Subordinated Debentures of the
Corporation.
Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), WSFS Investment Group, Inc. and WSFS Reit, Inc. 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 to
market 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 and six months period
ended June 30, 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 June 30, 2005, the Corporation had three stock-based employee
compensation plans. Beginning in April 2005, the Corporation will grant new
awards solely from the 2005 Incentive Plan. 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 2006 Consolidated Statement of Operations is
expected to be approximately $840,000 for the full year.
7
For the three months For the six months
ended June 30, ended June 30,
--------------------- -----------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
(In Thousands, Except Per Share Data)
Net income, as reported ................................................... $ 6,566 $ 6,267 $ 13,356 $ 12,449
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 207 146 419 307
--------- --------- ---------- ----------
Pro forma net income ...................................................... $ 6,359 $ 6,121 $ 12,937 $ 12,142
Earnings per share:
Basic:
- ------
Net income ................................................................ $ 0.95 $ 0.87 $ 1.90 $ 1.71
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 0.06 0.04
--------- --------- ---------- ----------
Pro forma net income ...................................................... $ 0.92 $ 0.85 $ 1.84 $ 1.67
========= ========= ========== ==========
Diluted:
- --------
Net income, as reported ................................................... $ 0.90 $ 0.82 $ 1.80 $ 1.62
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 0.05 0.04
--------- --------- ---------- ----------
Pro forma net income ...................................................... $ 0.87 $ 0.80 $ 1.75 $ 1.58
========= ========= ========== ==========
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months For the six months
ended June 30, ended June 30,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- ---------- --------
(In Thousands, Except Per Share Data)
Numerator:
- ----------
Net income ........................................................... $ 6,566 $ 6,267 $13,356 $ 12,449
======= ========== ======= ==========
Denominator:
- ------------
Denominator for basic earnings per share - weighted average shares ... 6,942 7,185 7,016 7,273
Effect of dilutive employee stock options ............................ 371 420 397 431
------- ---------- ------- ----------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ....................................... 7,313 7,605 7,413 7,704
======= ========== ======= ==========
Basic earnings per share ............................................. $ 0.95 $ 0.87 $ 1.90 $ 1.71
======= ========== ======= ==========
Diluted earnings per share ........................................... $ 0.90 $ 0.82 $ 1.80 $ 1.62
======= ========== ======= ==========
Outstanding common stock equivalents having no dilutive effect ....... 75 3 75 2
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 14 lease contracts and 123 loan
contracts at June 30, 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
June 30, 2005, there were $260,000 in indirect loans and $165,000 in indirect
leases, net, still outstanding. At June 30, 2005, WSFS had exposure to $164,000
in remaining used car residuals, for which it estimates a loss of $59,000.
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.
The loss on wind-down of discontinued operations excludes any adjustments to the
reserve for discontinued operations. 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 June 30, 2005 and December 31, 2004:
At June 30, December 31,
2005 2004
------- -------
(In Thousands)
Vehicles under operating leases, net of reserves ......... $ 40 $ 516
Loans, net ............................................... 186 639
Other non-cash assets .................................... 1 (67)
------- -------
Loans, operating leases and other non-cash assets of
discontinued operations ................................ $ 227 $ 1,088
======= =======
The following table depicts the net income (loss) from discontinued
operations for the three and six months ended June 30, 2005 and 2004:
For the three months ended June 30, For the six months ended June 30,
----------------------------------- --------------------------------
2005 2004 2005 2004
---- ---- ---- -----
(In Thousands)
Interest income........................ $ 7 $ 39 $ 21 $ 93
Allocated interest expense (1)......... 4 47 8 123
-------- -------- -------- --------
Net interest income (expense).......... 3 (8) 13 (30)
Loan and lease servicing fee
(expense) income..................... (4) 148 43 185
Rental income on operating leases, net. 10 122 61 316
-------- -------- -------- --------
Net revenues......................... 9 262 117 471
Noninterest expenses................. 96 97 186 208
-------- -------- -------- --------
(Loss) income before taxes............. (87) 165 (69) 263
Charge (credit) to reserve on
discontinued operations.............. 87 (165) 69 (263)
Income tax provision .................. - - - -
-------- -------- -------- --------
Income from discontinued operations.... $ - $ - $ - $ -
======== ======== ======== ========
(1) Allocated interest expense for the three and six months ended June 30, 2005
was based on the Company's annual average wholesale borrowing rate of 3.23%
and 3.13%, respectively, which approximated a marginal funding cost for
this business. For the three and six months ended June 30, 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 and six months were 3.79% and 3.85%, respectively.
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 London InterBank Offered Rate (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 (SFAS 133),
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
accumulated other comprehensive loss and into interest expense when each of the
quarterly interest payments is made on the trust preferred debt.
On April 6, 2005, the Corporation completed the issuance of $65 million
of aggregate principal amount of Pooled Floating Rate Securities. The proceeds
from this issuance were used to fund the redemption of $50 million of Floating
Rate Capital Trust I Preferred Securities. The cap provides a hedging
relationship on $50 million of the recently purchased $65 million of aggregate
principal amount of Pooled Floating Rate Capital Securities. The remaining $15
million of aggregate principal amount of Pooled Floating Rate Capital Securities
is unhedged.
The fair value of the cap is estimated using a standard option model.
The fair value of the interest rate cap at June 30, 2005 was $97,000.
The following depicts the change in fair market value of the Company's
derivative:
2005 2004
----------------------------- -----------------------------
At At At At
January 1, Change June 30, January 1, Change June 30,
---------- ------ -------- ---------- ------ -------
(In Thousands)
Interest Rate Cap........ $ 322(1) $ (225) $ 97(1) $ 1,072(1) $ (180) $ 892(1)
(1) Included in accumulated other comprehensive loss, 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 For the six months
ended June 30, ended June 30,
-------------------- ------------------
2005 2004 2005 2004
-------- -------- -------- --------
(In Thousands)
Net income ................................................. $ 6,566 $ 6,267 $ 13,356 $ 12,449
Other Comprehensive Income:
Unrealized holding gains (losses) on securities
available-for-sale arising during the period ........... 6,895 (16,245) (1,258) (8,747)
Tax (expense) benefit ...................................... (2,620) 6,173 478 3,324
-------- -------- -------- --------
Net of tax amount .......................................... 4,275 (10,072) (780) (5,423)
Unrealized holding (losses) gains arising during the
period on derivative used for cash flow hedge .......... (206) 291 (95) (132)
Tax benefit (expense) ...................................... 72 (102) 33 46
-------- -------- -------- --------
Net of tax amount .......................................... (134) 189 (62) (86)
Reclassification adjustment for gains included in net income - (2) - (224)
Tax expense ................................................ - 1 - 80
-------- -------- -------- --------
Net of tax amount .......................................... - (1) - (144)
-------- -------- -------- --------
Total comprehensive income (loss) .......................... $ 10,707 $ (3,617) $ 12,514 $ 6,796
======== ======== ======== ========
10
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.
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 June 30, 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
and six months ended June 30, 2005 and 2004 follows:
11
For the three months ended June 30,
---------------------------------------------------------------------------
2005 2004
------------------------------------ ------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---------- ---------- ---------- ---------- ---------- ----------
External customer revenues:
Interest income $ 32,886 $ - $ 32,886 $ 24,282 $ - $ 24,282
Non-interest income 5,733 2,981 8,714 5,792 2,428 8,220
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 38,619 2,981 41,600 30,074 2,428 32,502
---------- ---------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income 985 - 985 321 - 321
Non-interest income 194 179 373 166 189 355
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment revenues 1,179 179 1,358 487 189 676
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 39,798 3,160 42,958 30,561 2,617 33,178
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 15,108 - 15,108 8,674 - 8,674
Non-interest expenses 14,487 1,116 15,603 12,164 1,025 13,189
Provision for loan loss 772 - 772 687 - 687
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 30,367 1,116 31,483 21,525 1,025 22,550
---------- ---------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense - 985 985 - 321 321
Non-interest expenses 179 194 373 189 166 355
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment expenses 179 1,179 1,358 189 487 676
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 30,546 2,295 32,841 21,714 1,512 23,226
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary items $ 9,252 $ 865 10,117 $ 8,847 $ 1,105 9,952
Less minority interest 37 47
Income tax provision 3,514 3,638
---------- ----------
Consolidated net income $ 6,566 $ 6,267
========== ==========
Cash and cash equivalents $ 56,983 $ 137,203 $ 194,186 $ 56,740 $ 123,777 $ 180,517
Other segment assets 2,500,143 5,517 2,505,660 2,214,417 5,020 2,219,437
---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,557,126 $ 142,720 $2,699,846 $2,271,157 $ 128,797 $2,399,954
========== ========== ========== ========== ========== ==========
Capital expenditures $ 826 $ 74 $ 900 $ 2,170 $ 2 $ 2,172
12
For the six months ended June 30,
---------------------------------------------------------------------------
2005 2004
------------------------------------ ------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---------- ---------- ---------- ---------- ---------- ----------
External customer revenues:
Interest income $ 63,051 $ - $ 63,051 $ 48,444 $ - $ 48,444
Non-interest income 10,913 5,657 16,570 11,159 4,619 15,778
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 73,964 5,657 79,621 59,603 4,619 64,222
---------- ---------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income 1,793 - 1,793 612 - 612
Non-interest income 374 334 708 338 366 704
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment revenues 2,167 334 2,501 950 366 1,316
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 76,131 5,991 82,122 60,553 4,985 65,538
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 27,160 - 27,160 16,956 - 16,956
Non-interest expenses 28,877 1,696 30,573 24,709 1,718 26,427
Provision for loan loss 1,351 - 1,351 1,374 - 1,374
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 57,388 1,696 59,084 43,039 1,718 44,757
---------- ---------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense - 1,793 1,793 - 612 612
Non-interest expenses 334 374 708 366 338 704
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment expenses 334 2,167 2,501 366 950 1,316
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 57,722 3,863 61,585 43,405 2,668 46,073
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary items $ 18,409 $ 2,128 20,537 $ 17,148 $ 2,317 $ 19,465
Less minority interest 74 92
Income tax provision 7,107 6,924
---------- ----------
Consolidated net income $ 13,356 $ 12,449
========== ==========
Cash and cash equivalents $ 56,983 $ 137,203 $ 194,186 $ 56,740 $ 123,777 $ 180,517
Other segment assets 2,500,143 5,517 2,505,660 2,214,417 5,020 2,219,437
---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,557,126 $ 142,720 $2,699,846 $2,271,157 $ 128,797 $2,399,954
========== ========== ========== ========== ========== ==========
Capital expenditures $ 1,099 $ 340 $ 1,439 $ 2,557 $ 149 $ 2,706
13
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 second 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 June 30, 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 one to ten years.
The aggregate market value of these swaps to the customers was ($391,000) at
June 30, 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
June 30, 2005 and December 31, 2004 was $8,000 and $6,000, respectively. 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. Generally,
WSFS is proportionately liable for its ownership share of WF (which was 65%) of
the related successful claims under indemnification provisions.
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). This third
indemnification expired during the second quarter of 2005 with no claims being
made.
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
June 30, 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.
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.
14
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 June 30, Six months ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service cost ..................................... $ 27 $ 24 $ 54 $ 48
Interest cost..................................... 30 31 60 62
Amortization of transition obligation ............ 15 15 30 30
Net loss recognition.............................. 4 5 8 10
------- ------- ------ -------
Net periodic benefit cost ....... $ 76 $ 75 $ 152 $ 150
======= ======= ====== =======
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 June 30, Six months ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
---- ---- ---- ----
Interest cost .................................... $ 11 $ 11 $ 22 $ 22
Net loss recognition.............................. 6 6 12 12
------- ------- ------- -------
Net periodic benefit cost ....... $ 17 $ 17 $ 34 $ 34
======= ======= ======= =======
15
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 as well as 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 III. 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 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 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.
16
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
In 2002 substantially all of the Corporation's reverse mortgage
portfolio was sold. The Corporation values the remaining reverse mortgages by
discounting future cash flows at the market rate for similar collateral. Because
of this quasi-market-value based accounting, the recorded value of reverse
mortgage assets includes 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 June 30, 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.
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.
17
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $196.9 million during the six months ended June
30, 2005. During the first six months of 2005 loans, net, grew $130.7 million to
$1.7 billion reflecting the continued strong growth in commercial and commercial
real estate loans, which amounted to $132.8 million. Consumer loans grew by $7.9
million during the same period. These increases were partially offset by a $9.3
million decrease in residential real estate loans. MBS increased by $62.1
million during the first six months of 2005. In addition, loans, operating
leases and other assets of discontinued operations decreased $861,000, due to
the expected run-off in the WCC loan and lease portfolios.
Total liabilities increased $200.1 million between December 31, 2004
and June 30, 2005, to $2.5 billion, mainly due to a $111.6 million increase in
deposits. This included a $65.5 million increase in brokered certificates of
deposit and a $55.1 million increase in retail deposits. These increases were
partially offset by a decrease of $9.0 million in non-retail jumbo certificates
of deposit. There was a $65.9 million increase in Federal Home Loan Bank (FHLB)
advances primarily used to fund loan growth. In addition, Trust Preferred
borrowings increased $15.5 million. This was mainly due to the redemption of
$50.0 million of WSFS Capital Trust I Securities and the issuance of $65.0
million of Pooled Floating Rate Capital Securities.
Capital Resources
Stockholders' equity decreased $3.1 million between December 31, 2004
and June 30, 2005. This decrease was mainly due to the purchase of 319,500
shares of the Corporation's common stock for $17.4 million ($54.33 per share
average). At June 30, 2005, the Corporation held 8,439,569 shares of its common
stock in its treasury at a cost of $179.1 million. In addition, the Corporation
declared cash dividends totaling $913,000 during the six months ended June 30,
2005. Finally, other comprehensive loss increased $842,000 during the first six
months of 2005 due, in part, to a decline in the fair value of securities
available-for-sale. These decreases were partially offset by net income of $13.4
million and an increase of $2.2 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 June 30, 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) ........ $264,712 14.34% $147,678 8.00% $184,597 10.00%
Core Capital
(to Adjusted Total Assets)........ 247,124 9.15 107,991 4.00 134,989 5.00
Tangible Capital
(to Tangible Assets) ............. 247,124 9.15 40,497 1.50 N/A N/A
Tier 1 Capital
(to Risk-Weighted Assets)......... 247,124 13.39 73,839 4.00 110,758 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 June 30, 2005 the Bank was in compliance
with regulatory capital requirements and is considered a "well-capitalized"
institution.
18
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 7.7% at June 30, 2005, compared with
8.3% at March 31, 2005. Both of these ratios were well in excess of the policy
minimum. Also, liquidity risk management is a primary area of examination by the
OTS. The Company complies with guidance promulgated under Thrift Bulletin 77
that requires thrift institutions to maintain adequate liquidity to assure safe
and sound operations.
As a financial institution, the Bank has ready access to several
sources to fund growth and meet its liquidity needs. Among these are: net
income, deposit programs, loan repayments, borrowing from the FHLB, repurchase
agreements and the brokered CD market. The branch expansion the Company is
currently undertaking is intended to enter the Company into new, but contiguous,
markets, attract new customers and provide funding for its business loan growth.
In addition, the Corporation has a large portfolio of high-quality, liquid
investments, primarily short-duration, AAA-rated, mortgage-backed securities and
Agency notes that are positioned to provide a near-continuous source of cash
flow to meet current cash needs, or can be sold to meet larger discrete needs
for cash. Management believes these sources are sufficient to maintain the
required and prudent levels of liquidity.
During the six months ended June 30, 2005, net loan growth resulted in
the use of $127.1 million in cash. The loan growth was primarily the result of
the successful implementation of specific strategies designed to increase
corporate and small business lending. 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 six months ended June 30, 2005, $19.0 million
in cash was provided by operating activities, while $72.0 million in cash was
provided through the net increase in demand and savings deposits and $43.9
million in cash through the net increase in time deposits. For the period, cash
and cash equivalents increased $1.2 million to $194.2 million.
19
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.
June 30, December 31,
2005 2004
----------- -----------
(In Thousands)
Nonaccruing loans:
Commercial .................................... $2,857 $1,595
Consumer ...................................... 104 291
Commercial mortgage ........................... 717 909
Residential mortgage .......................... 1,784 1,601
Construction .................................. 140 -
------ ------
Total nonaccruing loans ............................ 5,602 4,396
Assets acquired through foreclosure ................ 372 217
------ ------
Total nonperforming assets ......................... $5,974 $4,613
====== ======
Past due loans:
Residential mortgages ......................... $ 332 $ 703
Commercial and commercial mortgages ........... - -
Consumer ...................................... 38 104
------ ------
Total past due loans ............................... $ 370 $ 807
====== ======
Ratios:
Nonaccruing loans to total loans (1) .......... 0.33% 0.28%
Allowance for loan losses to gross loans (1)... 1.48% 1.56%
Nonperforming assets to total assets .......... 0.22% 0.18%
Loan loss allowance to nonaccruing loans (2)... 424% 524%
Loan and foreclosed asset allowance to total
nonperforming assets (2) .................... 398% 499%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $1.4 million between June 30, 2005 and
December 31, 2004. The increase resulted primarily from a $1.7 million
commercial loan and a $140,000 construction loan. In addition, residential
nonaccruing loans increased $183,000. Assets acquired through foreclosure
increased $155,000 as a result of various residential properties being acquired.
An analysis of the change in the balance of non-performing assets is presented
below.
For the six
months ended For the year ended
June 30, 2005 December 31, 2004
------------- ------------------
(In Thousands)
Beginning balance................................... $ 4,613 $ 5,544
Additions ..................................... 3,982 6,554
Collections.................................... (1,788) (4,668)
Transfers to accrual/restructured status....... (245) (1,717)
Charge-offs / write-downs, net................. (588) (1,100)
---------- ---------
Ending balance...................................... $ 5,974 $ 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.
20
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
June 30, 2005, interest-earning assets exceeded interest-bearing liabilities
that mature or reprice within one year (interest-sensitive gap) by $13 million.
The Corporation's interest-sensitive assets as a percentage of
interest-sensitive liabilities within the one-year window increased to 101% at
June 30, 2005 compared to 98% at December 31, 2004. Likewise, the one-year
interest-sensitive gap as a percentage of total assets changed to .50% at June
30, 2005 from -.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 June 30, 2005 and 2004, calculated in
compliance with Thrift Bulletin No. 13a:
At June 30,
----------------------------------------------------------------
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 2% 8.49% -5% 7.98%
+200 2% 8.86% -3% 8.26%
+100 1% 9.16% -1% 8.42%
0 0% 9.37% 0% 8.50%
-100 -2% 9.45% -2% 8.39%
-200 (3) -7% 9.18% -11% 8.29%
-300 (3) -13% 8.86% -20% 8.44%
(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 June 30, 2005 and 2004 given the historically low
absolute level of interest rates at those times.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Results of Operations
The Corporation recorded net income of $6.6 million or $0.90 per
diluted share for the second quarter of 2005. This compares to $6.3 million or
$0.82 per diluted share for the same quarter last year.
Net income for the six months ended June 30, 2005 was $13.4 million or
$1.80 per diluted share. This compares to $12.4 million or $1.62 per diluted
share for the comparable period last year.
21
Net Interest Income
The following tables provide information concerning the balances,
yields and rates on interest-earning assets and interest-bearing liabilities
during the periods indicated.
Three months ended June 30,
-----------------------------------------------------------------------------
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 .... $ 572,714 $ 9,576 6.69% $ 406,101 $ 5,424 5.34%
Residential real estate loans.... 429,787 5,524 5.14 446,039 5,864 5.26
Commercial loans ................ 434,056 6,686 6.35 337,152 3,740 4.72
Consumer loans................... 218,328 3,633 6.67 201,013 3,163 6.33
---------- ---------- ---------- --------
Total loans.................... 1,654,885 25,419 6.21 1,390,305 18,191 5.31
Mortgage-backed securities (4)........ 583,785 6,444 4.42 511,379 4,689 3.67
Loans held-for-sale (3)............... 2,107 28 5.32 2,423 31 5.12
Investment securities (4)............. 97,459 639 2.62 121,179 1,219 4.02
Other interest-earning assets ........ 49,434 356 2.89 45,601 152 1.33
---------- ---------- ---------- --------
Total interest-earning assets.... 2,387,670 32,886 5.56 2,070,887 24,282 4.74
---------- --------
Allowance for loan losses............. (24,842) (22,899)
Cash and due from banks............... 51,945 49,512
Cash in non-owned ATMs................ 127,760 112,559
Loans, operating leases and other assets of
discontinued operations............. 577 5,663
Bank owned life insurance............. 52,877 50,691
Other noninterest-earning assets...... 53,342 43,027
---------- ----------
Total assets..................... $2,649,329 $2,309,440
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand.......... $ 110,565 66 0.24% $ 83,720 51 0.25%
Money market..................... 162,934 747 1.84 36,012 33 0.37
Savings.......................... 280,668 280 0.40 322,682 326 0.41
Retail time deposits ............ 278,253 1,882 2.71 222,589 1,024 1.85
---------- ---------- ---------- --------
Total interest-bearing
retail deposits.............. 832,420 2,975 1.43 665,003 1,434 0.87
Jumbo certificates of deposits .. 39,081 280 2.87 45,942 168 1.47
Brokered certificates of deposit. 182,220 1,407 3.10 59,841 230 1.55
---------- ---------- ---------- --------
Total interest-bearing
deposits..................... 1,053,721 4,662 1.77 770,786 1,832 0.96
FHLB of Pittsburgh advances........... 889,641 7,267 3.23 869,267 5,933 2.70
Trust preferred borrowings............ 66,161 1,967 11.76 51,547 503 3.86
Other borrowed funds.................. 177,090 1,216 2.75 193,678 453 0.94
Cost of funding discontinued
operations.......................... (4) (47)
---------- ---------- ---------- --------
Total interest-bearing
liabilities.................... 2,186,613 15,108 2.76 1,885,278 8,674 1.84
---------- --------
Noninterest-bearing demand deposits... 252,134 221,141
Other noninterest-bearing liabilities. 16,061 13,767
Minority interest .................... 195 213
Stockholders' equity.................. 194,326 189,041
---------- ----------
Total liabilities and
stockholders' equity................ $2,649,329 $2,309,440
========== ==========
Excess of interest-earning over
interest-bearing liabilities..... $ 201,057 $ 185,609
========== ==========
Net interest and dividend income...... $ 17,778 $ 15,608
========= =========
Interest rate spread.................. 2.80% 2.90%
===== =====
Net interest margin................... 3.03% 3.07%
===== =====
(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.
22
Six months ended June 30,
-----------------------------------------------------------------------------
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 .... $ 561,812 $18,160 6.46% $ 396,506 $ 10,636 5.31%
Residential real estate loans ... 433,427 11,104 5.12 449,462 11,988 5.37
Commercial loans ................ 409,882 12,176 6.18 320,689 7,245 4.82
Consumer loans................... 215,560 7,101 6.64 197,591 6,389 6.50
---------- ------- ---------- --------
Total loans.................... 1,620,681 48,541 6.06 1,364,248 36,258 5.40
Mortgage-backed securities (4)........ 563,488 12,318 4.37 504,039 9,416 3.74
Loans held-for-sale (3)............... 2,308 63 5.46 1,799 64 7.12
Investment securities (4)............. 97,327 1,394 2.86 117,826 2,348 3.99
Other interest-earning assets ........ 47,702 735 3.11 46,121 358 1.56
---------- ------- ---------- --------
Total interest-earning assets.... 2,331,506 63,051 5.46 2,034,033 48,444 4.82
------- --------
Allowance for loan losses............. (24,610) (22,766)
Cash and due from banks............... 52,985 48,238
Cash in non-owned ATMs................ 125,533 107,989
Loans, operating leases and other assets of
discontinued operations............. 781 7,141
Bank-owned life insurance............. 52,623 45,188
Other noninterest-earning assets...... 53,332 40,815
---------- ----------
Total assets..................... $2,592,150 $2,260,638
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest bearing demand.......... $ 105,111 $ 125 0.24% $ 81,276 $ 95 0.24%
Money market..................... 152,081 1,338 1.77 35,116 57 0.33
Savings.......................... 283,052 550 0.39 320,039 655 0.41
Retail time deposits ............ 282,463 3,733 2.67 224,309 2,090 1.87
---------- ------- ---------- -------
Total interest-bearing retail
deposits..................... 822,707 5,746 1.41 660,740 2,897 0.88
Jumbo certificates of deposits .. 42,148 574 2.75 44,360 319 1.45
Brokered certificates of deposit. 169,417 2,429 2.89 51,330 409 1.60
---------- ------- ---------- -------
Total interest-bearing
deposits..................... 1,034,272 8,749 1.71 756,430 3,625 0.96
FHLB of Pittsburgh advances........... 854,752 13,458 3.13 844,490 11,564 2.71
Trust preferred borrowings............ 58,895 2,679 9.05 50,774 999 3.89
Other borrowed funds.................. 185,603 2,282 2.46 190,229 891 0.94
Cost of funding discontinued
operations.......................... (8) (123)
---------- ------- ---------- -------
Total interest-bearing
liabilities.................... 2,133,522 27,160 2.55 1,841,923 16,956 1.84
------- -------
Noninterest-bearing demand deposits... 245,897 213,472
Other noninterest-bearing liabilities. 15,960 13,358
Minority interest .................... 210 139
Stockholders' equity.................. 196,561 191,746
---------- ----------
Total liabilities and
stockholders' equity................ $2,592,150 $2,260,638
========== ==========
Excess of interest-earning assets over
interest-bearing liabilities..... $ 197,984 $ 192,110
========== ==========
Net interest and dividend income...... $35,891 $31,488
======= =======
Interest rate spread.................. 2.91% 2.98%
===== =====
Net interest margin................... 3.13% 3.15%
===== =====
(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.
23
Net interest income for the second quarter of 2005 was $17.8 million
compared to $15.6 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 second quarter of 2005 compared to the
second quarter of 2004. The yield on loans increased 0.90% from 5.31% in the
second quarter of 2004 to 6.21% in the second quarter of 2005; while the yield
on mortgage backed securities increased 0.75% 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 second quarter of 2005 was 3.03%, a slight decrease
from the second quarter 2004 which was 3.07%, as rates on deposits and
borrowings generally increased in tandem with yields on loans and investments.
The net interest margin for the quarter was negatively affected by 18
basis points due to the redemption of $50 million of WSFS Capital Trust I
Securities, which carried an interest rate of the London InterBank Offered Rate
(LIBOR) plus 250 basis points. In connection with the redemption, the Company
recognized a $1.1 million (pre-tax) non-cash charge from the write-down of the
unamortized debt issuance costs of the called securities as a charge to interest
expense. In conjunction with this redemption, the Company issued $65 million
aggregate principal amount of Pooled Floating Rate Capital Securities, which
carry an interest rate of LIBOR plus 177 basis points. Without this charge the
margin would have been 3.21 % for the second quarter of 2005.
Net interest income for the six-month period ending June 30, 2005 was
$35.9 million compared with $31.5 million for the same period in 2004. Similar
to the analysis for the second quarter above, the increase in net interest
income was driven by higher loan and MBS volumes. The yield on loans increased
0.66% and the yield on MBS increased 0.63%. The net interest margin for the
first six months of 2005 was 3.13%, again essentially unchanged from the same
period in 2004.
The net interest margin for the six months ended June 30, 2005 was
negatively affected by 9 basis points due to the redemption of $50 million of
WSFS Capital Trust I Securities detailed above. Without this charge the margin
would have been 3.22% for the six months ended June 30, 2005.
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The determination of
the allowance for loan losses requires significant 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,
24
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 $1,374,000 for the first six months of
2004 to $1,351,000 for the first six 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.
The table below represents a summary of the changes in the allowance
for loan losses during the periods indicated.
Six months ended Six months ended
June 30, 2005 June 30, 2004
------------- -------------
(Dollars in Thousands)
Beginning balance .............................. $24,222 $22,386
Provision for loan losses, Continuing operations 1,351 1,374
Charge-offs:
Residential real estate ................... 38 188
Commercial real estate (1) ................ - -
Commercial ................................ 524 173
Consumer .................................. 289 462
------- -------
Total charge-offs ...................... 851 823
------- -------
Recoveries:
Residential real estate ................... 57 25
Commercial real estate (1) ................ 41 -
Commercial ................................ 39 129
Consumer .................................. 80 48
------- -------
Total recoveries ....................... 217 202
------- -------
Net charge-offs ................................ 634 621
------- -------
Ending balance ................................. $24,939 $23,139
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (2) ...... 0.08% 0.09%
======= =======
(1) Includes commercial mortgage and construction loans.
(2) Ratios for the six months ended June 30, 2005 and 2004 are annualized.
Noninterest Income
Noninterest income for the quarter ended June 30, 2005 was $8.7 million
compared to $8.2 million for the second quarter of 2004. The improvement in
noninterest income was mainly the result of an increase of $689,000 in card and
ATM income, of which $529,000 was due to growth in the CashConnect segment. This
increase was partially offset by a net decrease in mortgage banking activities
of $257,000.
For the six months ended June 30, 2005, noninterest income was $16.6
million, an increase of $792,000 compared to the same period of 2004. Consistent
with the quarter, this increase was mainly attributable to the growth in card
and ATM income. Partially offsetting this increase were securities gains and
mortgage banking activities, which decreased $224,000 and $186,000,
respectively.
25
Noninterest Expense
Noninterest expenses for the quarter ended June 30, 2005 were $15.6
million, an increase of $2.4 million over the second quarter of 2004. This
increase was in salaries, benefits and other compensation, marketing expenses
and other operating expenses mainly due to the Company's branch expansion and
growth efforts.
Noninterest expense increased from $26.4 million for the six months
ended June 30, 2004 to $30.6 million of the six months ended June 30, 2005. Of
the $4.2 million increase, $2.3 million was attributable to salaries, benefits,
and other compensation as WSFS' Associate base experienced growth of 10% during
the past year. In addition, marketing expense, professional fees, and other
operating expenses increased during the same time period. Similar to the
quarter, the increases in these expenses were the result of the Company's branch
expansion and growth efforts.
Income Taxes
The Corporation and its subsidiaries file a consolidated Federal income
tax return and separate state income tax returns. Income taxes are accounted for
in accordance with SFAS 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences." The Corporation recorded
a provision for income taxes from continuing operations during the three and six
months ended June 30, 2005 of $3.5 million and $7.1 million, respectively,
compared to an income tax provision from continuing operations of $3.6 million
and $6.9 million for the same periods in 2004. The effective tax rates from
continuing operations for each of the three and six month periods ended June 30,
2005 were 35%, compared to 37% and 36%, respectively, for the comparable periods
in 2004.
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
income tax provision for the three months ended June 30, 2004 was increased by
$280,000 as a result of additional state taxes WCC is expected to owe due to tax
law changes in the State of New Jersey. While the operations of WCC are
reflected as discontinued operations, the additional tax provision resulting
from the change in tax law has been reflected income from continuing operations
in accordance with SFAS 109.
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision for income taxes
accordingly.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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. 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, it will become effective on January 1, 2006. While the Corporation
has estimated the impact on its existing stock options outstanding, the
Corporation is 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 May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3 that
requires retrospective application to prior periods financial statements of
voluntary changes in accounting principle and changes required by new accounting
standards when the standard does not include specific transition provisions
unless it is impracticable to do so. SFAS 154 becomes effective for accounting
changes and corrections of errors in fiscal years beginning after December 15,
2005. For the Corporation, this will become effective on January 1, 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report
on Form 10-Q.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act")), the Company's principal executive
officer and the principal financial officer have concluded that
as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective
to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange
Act is
26
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 June 30, 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 second 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 the Plans
--------- --------- --------------- ---------------
April 1, to April 30, 2005 0 $0.00 0 548,064
May 1, to May 31, 2005 120,100 $53.16 120,100 427,964
June 1, to June 30, 2005 45,900 $52.78 45,900 382,064
Total for the quarter ended June 30, 2005 166,000 $53.05
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.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Corporation's Annual Stockholder's Meeting (the Meeting) held
on April 28, 2005, all the nominees for director proposed by the
Corporation were elected. The votes cast for each nominee were as
follows:
For Withheld
--- --------
Charles G. Cheleden....................... 6,110,832 136,504
Joseph R. Julian.......................... 6,111,874 135,462
Dennis E. Klima........................... 6,168,364 78,972
Calvert A. Morgan, Jr..................... 6,184,791 62,545
At the Meeting, the shareholders also ratified the appointment of
KPMG, LLP as independent auditors for fiscal year ending December 31,
2005. The votes cast were as follows:
For Against Abstain
--- ------- -------
6,151,553 93,553 2,230
Also at the meeting, the shareholders approved the WSFS Financial
Corporation 2005 Incentive Plan. The votes cast were as follows:
For Against Abstain
--- ------- -------
4,329,569 794,291 32,134
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
27
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: August 8, 2005 /s/ MARVIN N. SCHOENHALS
---------------------------------------------
Marvin N. Schoenhals
President and Chief Executive Officer
Date: August 8, 2005 /s/ STEPHEN A. FOWLE
---------------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
28