UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
- ------------------------------------------ ------------------------------
(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES X NO
--- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of November 2, 2005:
Common Stock, par value $.01 per share 6,481,022
- -------------------------------------- --------------------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three and Nine Months
Ended September 30, 2005 and 2004 (Unaudited)...................................... 3
Consolidated Statement of Condition as of September 30, 2005
(Unaudited) and December 31, 2004.................................................. 4
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 2005 and 2004 (Unaudited)............................................ 5
Notes to the Consolidated Financial Statements for the Three and Nine
Months Ended September 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
----------------------------------------------------------
Item 4. Controls and Procedures ............................................................. 26
------------------------
PART II. Other Information
Item 1. Legal Proceedings.................................................................... 27
-----------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................... 27
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Item 3. Defaults upon Senior Securities...................................................... 27
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.................................. 27
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Item 5. Other Information ................................................................... 27
-----------------
Item 6. Exhibits ............................................................................ 27
---------
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 Nine months ended
September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
(Unaudited)
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans ....................... $ 27,419 $ 19,882 $ 76,023 $ 56,204
Interest on mortgage-backed securities ........... 6,445 5,468 18,763 14,884
Interest and dividends on investment securities .. 921 1,090 2,315 3,438
Other interest income ............................ 351 161 1,086 519
-------- -------- -------- --------
35,136 26,601 98,187 75,045
-------- -------- -------- --------
Interest expense:
Interest on deposits ............................. 5,674 2,320 14,423 5,945
Interest on Federal Home Loan Bank advances ...... 7,955 6,011 21,405 17,452
Interest on federal funds purchased and securities
sold under agreements to repurchase ........... 1,125 561 3,228 1,374
Interest on trust preferred borrowings ........... 954 551 3,633 1,550
Interest on other borrowings ..................... 213 38 392 116
-------- -------- -------- --------
15,921 9,481 43,081 26,437
-------- -------- -------- --------
Net interest income ................................... 19,215 17,120 55,106 48,608
Provision for loan losses ............................. 225 996 1,576 2,370
-------- -------- -------- --------
Net interest income after provision for loan losses ... 18,990 16,124 53,530 46,238
-------- -------- -------- --------
Noninterest income:
Credit/debit card and ATM income ................. 3,907 3,277 10,775 8,917
Deposit service charges .......................... 2,676 2,315 7,341 7,016
Investment advisory income ....................... 651 584 1,878 1,671
Bank owned life insurance income ................. 499 558 1,522 1,663
Loan fee income .................................. 516 518 1,511 1,676
Mortgage banking activities, net ................. 106 77 287 444
Securities (losses) gains ........................ (609) (15) (609) 209
Other income ..................................... 838 846 2,449 2,342
-------- -------- -------- --------
8,584 8,160 25,154 23,938
-------- -------- -------- --------
Noninterest expenses:
Salaries, benefits and other compensation ........ 9,061 7,655 26,377 22,704
Occupancy expense ................................ 1,290 1,151 3,829 3,422
Equipment expense ................................ 950 969 2,887 2,759
Data processing and operations expenses .......... 761 815 2,670 2,414
Marketing expense ................................ 689 465 2,042 1,526
Professional fees ................................ 610 607 1,661 1,438
Other operating expense .......................... 2,789 2,505 7,257 6,331
-------- -------- -------- --------
16,150 14,167 46,723 40,594
-------- -------- -------- --------
Income before minority interest and taxes ............. 11,424 10,117 31,961 29,582
Less minority interest ................................ 48 66 122 158
-------- -------- -------- --------
Income before taxes ................................... 11,376 10,051 31,839 29,424
Income tax provision .................................. 3,969 3,499 11,076 10,423
-------- -------- -------- --------
Net income ............................................ $ 7,407 $ 6,552 $ 20,763 $ 19,001
======== ======== ======== ========
Earnings per share:
Basic ................................................. $ 1.12 $ 0.93 $ 3.02 $ 2.64
Diluted ............................................... $ 1.06 $ 0.88 $ 2.85 $ 2.49
The accompanying notes are an integral part of these Financial Statements.
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
September 30, December 31,
2005 2004
----------- -----------
(Unaudited)
(In Thousands, Except Per Share Data)
Assets
Cash and due from banks .................................................... $ 61,012 $ 61,328
Cash in non-owned ATMs ..................................................... 143,289 131,150
Interest-bearing deposits in other banks ................................... 271 531
----------- -----------
Total cash and cash equivalents ........................................ 204,572 193,009
Investment securities held-to-maturity ..................................... 5,745 7,767
Investment securities available-for-sale including reverse mortgages ....... 51,954 89,609
Mortgage-backed securities held-to-maturity ................................ 1 4
Mortgage-backed securities available-for-sale .............................. 581,544 512,189
Mortgage-backed securities trading ......................................... 11,951 11,951
Loans held-for-sale ........................................................ 2,199 3,229
Loans, net of allowance for loan losses of $24,933 at September 30, 2005
and $24,222 at December 31, 2004 ......................................... 1,698,634 1,532,238
Bank owned life insurance .................................................. 53,713 52,190
Stock in Federal Home Loan Bank of Pittsburgh, at cost ..................... 45,663 43,946
Assets acquired through foreclosure ........................................ 89 217
Premises and equipment ..................................................... 23,935 22,835
Accrued interest receivable and other assets ............................... 31,276 32,684
Loans, operating leases and other assets of discontinued operations ........ 5 1,088
----------- -----------
Total assets ............................................................... $ 2,711,281 $ 2,502,956
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ............................................. $ 266,598 $ 246,592
Interest-bearing demand ................................................ 122,870 100,098
Money market ........................................................... 212,794 123,523
Savings ................................................................ 257,082 289,041
Time ................................................................... 216,388 221,414
Jumbo certificates of deposit - retail ................................. 74,665 71,514
----------- -----------
Total retail deposits ................................................ 1,150,397 1,052,182
Jumbo certificates of deposit - non-retail ............................. 44,433 44,903
Brokered certificates of deposit ....................................... 207,340 137,877
----------- -----------
Total deposits ..................................................... 1,402,170 1,234,962
Federal funds purchased and securities sold under agreements to repurchase . 83,150 132,105
Federal Home Loan Bank advances ............................................ 917,882 837,063
Trust preferred borrowings ................................................. 67,011 51,547
Other borrowed funds ....................................................... 41,594 33,441
Accrued interest payable and other liabilities ............................. 25,903 17,296
----------- -----------
Total liabilities .......................................................... 2,537,710 2,306,414
----------- -----------
Minority Interest .......................................................... 200 239
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
15,309,273 at September 30, 2005 and 15,213,647 at December 31, 2004 ... 153 152
Capital in excess of par value ............................................. 71,083 68,327
Accumulated other comprehensive loss ....................................... (8,341) (3,385)
Retained earnings .......................................................... 312,425 293,054
Treasury stock at cost, 8,839,569 shares at September 30, 2005 and 8,127,269
shares at December 31, 2004 ............................................ (201,949) (161,845)
----------- -----------
Total stockholders' equity ................................................. 173,371 196,303
----------- -----------
Total liabilities, minority interest and stockholders' equity .............. $ 2,711,281 $ 2,502,956
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30,
-------------------------------
2005 2004
--------- ---------
(Unaudited)
(In Thousands)
Operating activities:
Net income ...................................................................... $ 20,763 $ 19,001
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................... 1,576 2,370
Depreciation, accretion and amortization .................................... 4,598 4,767
Increase in accrued interest receivable and other assets .................... (1,703) (1,387)
Origination of loans held-for-sale .......................................... (32,971) (30,848)
Proceeds from sales of loans held-for-sale .................................. 32,691 27,142
Gain on sale of loans held-for-sale ......................................... (59) (185)
Loss (gain) on sale of loans ................................................ 1 (259)
Loss (gain) on sale of investments .......................................... 609 (209)
Minority interest net income ................................................ 122 158
Increase in accrued interest payable and other liabilities .................. 8,607 2,017
Gain on sale of assets acquired through foreclosure ......................... (119) (56)
Increase in value of bank-owned life insurance .............................. (1,523) (1,663)
Increase in capitalized interest, net ....................................... (201) (1,409)
--------- ---------
Net cash provided by operating activities ...................................... 32,391 19,439
--------- ---------
Investing activities:
Maturities of investment securities ............................................. 2,045 2,610
Sale of investment securities available-for-sale ................................ 60,451 25,059
Purchase of investments available-for-sale ...................................... (22,767) (9,930)
Sales of mortgage-backed securities available-for-sale .......................... - 38,531
Repayments of mortgage-backed securities held-to-maturity ....................... 4 1,810
Repayments of mortgage-backed securities available-for-sale ..................... 85,153 125,867
Purchases of mortgage-backed securities available-for-sale ...................... (163,279) (152,940)
Repayments of reverse mortgages ................................................. 177 1,240
Disbursements for reverse mortgages ............................................. (298) (365)
Purchase of Cypress Capital Management LLC ...................................... (452) (1,122)
Sale of loans ................................................................... 637 13,460
Purchase of loans ............................................................... (8,983) (11,569)
Purchase of bank owned life insurance ........................................... - (50,000)
Net increase in loans ........................................................... (158,515) (171,798)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ................... (1,717) (3,282)
Sales of assets acquired through foreclosure, net ............................... 619 509
Purchase of land ................................................................ (925) (2,860)
Purchase of office building ..................................................... - (3,507)
Sale of real estate held-for-investment ......................................... 5,296 -
Investment in premises and equipment, net ....................................... (2,589) (3,692)
--------- ---------
Net cash used for investing activities .......................................... (205,143) (201,979)
--------- ---------
Financing activities:
Net increase in demand and savings deposits ..................................... 108,243 51,444
Net increase in time deposits ................................................... 66,561 152,925
Net decrease in securities sold under agreement to repurchase ................... (48,955) (16,031)
Net increase in FHLB advances ................................................... 80,819 35,327
Redemption of WSFS Capital Trust I Preferred Securities ......................... (51,547) -
Issuance of Pooled Floating Rate Capital Securities ............................. 67,011 -
Dividends paid on common stock .................................................. (1,392) (1,224)
Issuance of common stock and exercise of employee stock options ................. 2,757 2,220
Purchase of treasury stock, net of reissuance ................................... (40,104) (17,899)
(Decrease) increase in minority interest ........................................ (161) 54
--------- ---------
Net cash provided by financing activities ....................................... 183,232 206,816
--------- ---------
Increase in cash and cash equivalents ........................................... 10,480 24,276
Change in net assets from discontinued operations ............................... 1,083 7,601
Cash and cash equivalents at beginning of period ................................ 193,009 161,515
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 204,572 $ 193,392
========= =========
(Continued on next page)
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Nine months ended September 30,
-------------------------------
2005 2004
--------- ---------
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid for interest .......................................................... $ 36,106 $ 24,102
Cash paid for income taxes, net.................................................. 6,727 7,916
Loans transferred to assets acquired through foreclosure ........................ 372 311
Net change in accumulated other comprehensive loss .............................. (4,956) 718
Transfer of loans held-for-sale to loans......................................... 1,369 2,858
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 NINE MONTHS ENDED SEPTEMBER 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.
During the quarter, the Corporation finalized agreements related to the
move of its corporate headquarters. The current anticipated move date for the
Corporation into its new headquarters is early 2007. As part of the transaction,
the Corporation acquired a passive ownership interest in a limited partnership
created to develop the office building in which the Corporation will be a
tenant.
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 a complete set of financial statements. Operating results for
the three and nine months period ended September 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 September 30, 2005, the Corporation had three stock-based employee
compensation plans. Beginning in April 2005, the Corporation grants 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 $830,000 for the full year.
7
For the three months For the nine months
ended September 30, ended September 30,
--------------------- -----------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
(In Thousands, Except Per Share Data)
Net income, as reported ................................................... $ 7,407 $ 6,552 $ 20,763 $ 19,001
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 201 150 620 457
--------- --------- ---------- ----------
Pro forma net income ...................................................... $ 7,206 $ 6,402 $ 20,143 $ 18,544
Earnings per share:
Basic:
- ------
Net income ................................................................ $ 1.12 $ 0.93 $ 3.02 $ 2.64
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 0.09 0.06
--------- --------- ---------- ----------
Pro forma net income ...................................................... $ 1.09 $ 0.91 $ 2.93 $ 2.58
========= ========= ========== ==========
Diluted:
- --------
Net income, as reported ................................................... $ 1.06 $ 0.88 $ 2.85 $ 2.49
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 0.08 0.06
--------- --------- ---------- ----------
Pro forma net income ...................................................... $ 1.03 $ 0.86 $ 2.77 $ 2.43
========= ========= ========== ==========
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months For the nine months
ended September 30, ended September 30,
--------------------- -----------------------
2005 2004 2005 2004
--------- --------- ---------- ----------
(In Thousands, Except Per Share Data)
Numerator:
- ----------
Net income ............................................................... $ 7,407 $ 6,552 $ 20,763 $ 19,001
======== ========= ========= =========
Denominator:
- ------------
Denominator for basic earnings per share - weighted average shares ....... 6,630 7,024 6,886 7,190
Effect of dilutive employee stock options and restricted stock ........... 376 431 390 431
-------- --------- --------- ---------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ........................................... 7,006 7,455 7,276 7,621
======== ========= ========= =========
Basic earnings per share ................................................. $ 1.12 $ 0.93 $ 3.02 $ 2.64
======== ========= ========= =========
Diluted earnings per share ............................................... $ 1.06 $ 0.88 $ 2.85 $ 2.49
======== ========= ========= =========
Outstanding common stock equivalents having no dilutive effect ........... 77 - 76 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 4 lease contracts and 67 loan
contracts at September 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.
At September 30, 2005 there were $21,000 in loans, operating leases and
other non-cash assets of discontinued operations, compared to $1.1 million at
December 31, 2004. At September 30, 2005, there were $134,000 in indirect loans
and $40,000 in indirect leases, net, still outstanding. At September 30, 2005,
WSFS had exposure to $45,000 in remaining used car residuals, for which it
estimates a loss between $9,000 and $15,000. 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 2005 and 2004. 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 the net income (loss) from discontinued
operations for the three and nine months ended September 30, 2005 and 2004:
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
2005 2004 2005 2004
----- ---- ---- ----
(In Thousands)
Interest income ......................................... $ 4 $ 28 $ 25 $ 121
Allocated interest expense (1) .......................... 3 27 11 150
----- ----- ----- -----
Net interest income (expense) ........................... 1 1 14 (29)
Loan and lease servicing fee income ..................... 13 68 56 253
Rental income on operating leases, net .................. 2 40 63 356
Other Income ............................................ - (2) - (2)
----- ----- ----- -----
Net revenues .......................................... 16 107 133 578
Noninterest expenses .................................. 18 84 204 292
----- ----- ----- -----
(Loss) income before taxes .............................. (2) 23 (71) 286
Charge (credit) to reserve on discontinued operations.... 2 (23) 71 (286)
Income tax provision .................................... - - - -
----- ----- ----- -----
Income from discontinued operations ..................... $ - $ - $ - $ -
===== ===== ===== =====
(1) Allocated interest expense for the three and nine months ended September
30, 2005 was based on the Company's annual average wholesale borrowing rate
of 3.48% and 3.25%, respectively, which approximated a marginal funding
cost for this business. For the three and nine months ended September 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 nine months ending September 30, 2004
were 3.93% and 3.87%, 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 September 30, 2005 was $145,000.
The following depicts the change in fair market value of the Company's
derivative:
2005 2004
-------------------------------------- ------------------------------------
At At At At
January 1, Change September 30, January 1, Change September 30,
---------- ------ ------------- ---------- ------ -------------
(In Thousands)
Interest Rate Cap................. $ 322(1) $ (177) $ 145(1) $ 1,072(1) $ (670) $ 402(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 nine months
ended September 30, ended September 30,
-------------------- --------------------
(In Thousands)
2005 2004 2005 2004
-------- -------- -------- --------
Net income ............................................... $ 7,407 $ 6,552 $ 20,763 $ 19,001
Other Comprehensive Income:
Unrealized holding (losses) gains on securities
available-for-sale arising during the period ........ (6,145) 8,424 (7,403) (329)
Tax benefit (expense) .................................... 2,335 (3,201) 2,813 125
-------- -------- -------- --------
Net of tax amount ........................................ (3,810) 5,223 (4,590) (204)
Unrealized holding gains (losses) arising during the
period on derivative used for cash flow hedge ....... 113 (455) 18 (585)
Tax (expense) benefit .................................... (39) 159 (6) 205
-------- -------- -------- --------
Net of tax amount ........................................ 74 (296) 12 (380)
Reclassification adjustment for (losses) gains included in
net income (609) 15 (609) (209)
Tax benefit (expense) .................................... 231 (7) 231 75
-------- -------- -------- --------
Net of tax amount ........................................ (378) 8 (378) (134)
-------- -------- -------- --------
Total comprehensive income ............................... $ 3,293 $ 11,487 $ 15,807 $ 18,283
======== ======== ======== ========
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 September 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 nine months ended September 30, 2005 and 2004 follows:
11
For the three months ended September 30,
-------------------------------------------------------------------------------------
2005 2004
-------------------------------------- -----------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---- ----------- ----- ---- ----------- -----
External customer revenues:
Interest income $ 35,136 $ - $ 35,136 $ 26,601 $ - $ 26,601
Non-interest income 5,290 3,294 8,584 5,367 2,793 8,160
---------- ---------- ---------- ---------- --------- ----------
Total external customer revenues 40,426 3,294 43,720 31,968 2,793 34,761
---------- ---------- ---------- ---------- --------- ----------
Intersegment revenues:
Interest income 1,208 - 1,208 487 - 487
Non-interest income 218 164 382 176 186 362
---------- ---------- ---------- ---------- --------- ----------
Total intersegment revenues 1,426 164 1,590 663 186 849
---------- ---------- ---------- ---------- --------- ----------
Total revenue 41,852 3,458 45,310 32,631 2,979 35,610
---------- ---------- ---------- ---------- --------- ----------
External customer expenses:
Interest expense 15,921 - 15,921 9,481 - 9,481
Non-interest expenses 15,066 1,084 16,150 13,084 1,083 14,167
Provision for loan loss 225 - 225 996 - 996
---------- ---------- ---------- ---------- --------- ----------
Total external customer expenses 31,212 1,084 32,296 23,561 1,083 24,644
---------- ---------- ---------- ---------- --------- ----------
Intersegment expenses:
Interest expense - 1,208 1,208 - 487 487
Non-interest expenses 164 218 382 186 176 362
---------- ---------- ---------- ---------- --------- ----------
Total intersegment expenses 164 1,426 1,590 186 663 849
---------- ---------- ---------- ---------- --------- ----------
Total expenses 31,376 2,510 33,886 23,747 1,746 25,493
---------- ---------- ---------- ---------- --------- ----------
Income before taxes and extraordinary items $ 10,476 $ 948 11,424 $ 8,884 $ 1,233 10,117
Less minority interest 48 66
Income tax provision 3,969 3,499
---------- ----------
Consolidated net income $ 7,407 $ 6,552
========== ==========
Cash and cash equivalents $ 61,283 $ 143,289 $ 204,572 $ 54,627 $ 123,765 $ 178,392
Other segment assets 2,500,099 6,610 2,506,709 2,251,649 6,102 2,257,751
---------- ---------- ---------- ---------- --------- ----------
Total segment assets $2,561,382 $ 149,899 $2,711,281 $2,306,276 $ 129,867 $2,436,143
========== ========== ========== ========== ========= ==========
Capital expenditures $ 1,827 $ 125 $ 1,952 $ 7,284 $ 81 $ 7,365
12
For the nine months ended September 30,
------------------------------------------------------------------------------
2005 2004
------------------------------------- ------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---- ----------- ----- ---- ----------- -----
External customer revenues:
Interest income $ 98,187 $ - $ 98,187 $ 75,045 $ - $ 75,045
Non-interest income 16,203 8,951 25,154 16,526 7,412 23,938
---------- --------- ---------- ---------- --------- ----------
Total external customer revenues 114,390 8,951 123,341 91,571 7,412 98,983
---------- --------- ---------- ---------- --------- ----------
Intersegment revenues:
Interest income 3,001 - 3,001 1,099 - 1,099
Non-interest income 592 498 1,090 514 552 1,066
---------- --------- ---------- ---------- --------- ----------
Total intersegment revenues 3,593 498 4,091 1,613 552 2,165
---------- --------- ---------- ---------- --------- ----------
Total revenue 117,983 9,449 127,432 93,184 7,964 101,148
---------- --------- ---------- ---------- --------- ----------
External customer expenses:
Interest expense 43,081 - 43,081 26,437 - 26,437
Non-interest expenses 43,943 2,780 46,723 37,793 2,801 40,594
Provision for loan loss 1,576 - 1,576 2,370 - 2,370
---------- --------- ---------- ---------- --------- ----------
Total external customer expenses 88,600 2,780 91,380 66,600 2,801 69,401
---------- --------- ---------- ---------- --------- ----------
Intersegment expenses:
Interest expense - 3,001 3,001 - 1,099 1,099
Non-interest expenses 498 592 1,090 552 514 1,066
---------- --------- ---------- ---------- --------- ----------
Total intersegment expenses 498 3,593 4,091 552 1,613 2,165
---------- --------- ---------- ---------- --------- ----------
Total expenses 89,098 6,373 95,471 67,152 4,414 71,566
---------- --------- ---------- ---------- --------- ----------
Income before taxes and extraordinary items $ 28,885 $ 3,076 31,961 $ 26,032 $ 3,550 $ 29,582
Less minority interest 122 158
Income tax provision 11,076 10,423
----------- -----------
Consolidated net income $ 20,763 $ 19,001
=========== ===========
Cash and cash equivalents $ 61,283 $ 143,289 $ 204,572 $ 54,627 $ 123,765 $ 178,392
Other segment assets 2,500,099 6,610 2,506,709 2,251,649 6,102 2,257,751
---------- --------- ---------- ---------- --------- ----------
Total segment assets $2,561,382 $ 149,899 $2,711,281 $2,306,276 $ 129,867 $2,436,143
========== ========= ========== ========== ========= ==========
Capital expenditures $ 2,926 $ 465 $ 3,391 $ 9,841 $ 230 $ 10,071
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 third 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 unrelated
financial institutions whereby those financial institutions entered into
interest rate derivative contracts (interest rate swap transactions) with
customers referred to them by the Company. By the terms of the agreement, 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 September 30, 2005 there were fifteen variable-rate to fixed-rate
swap transactions between the third party financial institution and customers of
WSFS, compared to twelve at December 31, 2004. The initial notional amount
aggregated approximately $50.9 million at September 30, 2005 compared with $40.1
million at December 31, 2004, with maturities ranging from approximately one to
ten years. The aggregate market value of these swaps to the customers was
($62,000) at September 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 September 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.
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.
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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------- ------- -------- ---------
Service cost ..................................... $ 26 $ 25 $ 80 $ 73
Interest cost..................................... 31 29 91 91
Amortization of transition obligation ............ 15 16 45 46
Net loss recognition.............................. 4 5 12 15
-------- ------- ------ --------
Net periodic benefit cost ....... $ 76 $ 75 $ 228 $ 225
======== ======= ====== =======
14
Supplemental Pension Plan
The Corporation provided a nonqualified plan that gives credit for 25
years of service based on the 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
--------- -------- -------- --------
Interest cost .................................... $ 11 $ 11 $ 33 $ 33
Net loss recognition.............................. 6 6 18 18
-------- ------- ------- -------
Net periodic benefit cost ....... $ 17 $ 17 $ 51 $ 51
======== ======= ======= =======
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 fourth largest financial
institution in the state on the basis of total deposits traditionally garnered
in-market. The Corporation's primary market area is the mid-Atlantic region of
the United States, which is characterized by a diversified manufacturing and
service economy. The long-term strategy of the Corporation is to improve its
status as a high-performing financial services company by focusing on its core
community banking business.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as retail deposit 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 maximums. 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. 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
The Corporation values its reverse mortgage portfolio 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 a reverse mortgage portfolio sold in 2002, 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 September 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.
Certain 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 $208.3 million during the nine months ended
September 30, 2005. During the first nine months of 2005 net loans grew $166.4
million to $1.7 billion reflecting the continued strong growth in commercial and
commercial real estate loans, which amounted to $150.3 million. Consumer loans
grew by $18.7 million during the same period. These increases were partially
offset by a $1.9 million decrease in residential real estate loans. MBS
increased by $69.4 million during the first nine months of 2005, however
Investment Securities decreased $39.7 million. Cash and cash equivalents
increased $11.6 million during the same period. In addition, loans, operating
leases and other assets of discontinued operations decreased $1.1 million, due
to the expected run-off in the WCC loan and lease portfolios.
Total liabilities increased $231.3 million between December 31, 2004
and September 30, 2005, to $2.5 billion, mainly due to a $167.2 million increase
in deposits. This included a $98.2 million increase in retail deposits and a
$69.5 million increase in brokered certificates of deposit. There was an $80.8
million increase in Federal Home Loan Bank (FHLB) advances primarily used to
fund loan growth. Federal Funds purchased and securities sold under agreement to
repurchase decreased $49.0 million. Other borrowed funds and other liabilities
increased $16.8 million. In addition, Trust Preferred borrowings increased $15.5
million. This was due to the redemption of approximately $50.0 million of
Floating Rate WSFS Capital Trust I Preferred Securities and the issuance of
$65.0 million of Pooled Floating Rate Capital Securities.
Capital Resources
Stockholders' equity decreased $22.9 million between December 31, 2004
and September 30, 2005. This decrease was mainly due to the purchase of 719,500
shares of the Corporation's common stock for $40.2 million ($55.94 per share
average). At September 30, 2005, the Corporation held 8,839,569 shares of its
common stock in its treasury at a cost of $201.9 million. In addition, other
comprehensive loss increased $5.0 million during the first nine months of 2005
due, in part, to a decline in the fair value of securities available-for-sale.
Finally, the Corporation declared cash dividends totaling $1.4 million during
the nine months ended September 30, 2005. These decreases were partially offset
by net income of $20.8 million and an increase of $2.8 million from the issuance
of common stock and the exercise of employee stock options.
Below is a table comparing the Bank's consolidated capital position to
the minimum regulatory requirements as of September 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) ........ $258,231 13.64% $151,493 8.00% $189,366 10.00%
Core Capital
(to Adjusted Total Assets)........ 236,031 8.69 108,615 4.00 135,768 5.00
Tangible Capital
(to Tangible Assets) ............. 236,031 8.69 40,731 1.50 N/A N/A
Tier 1 Capital
(to Risk-Weighted Assets)......... 236,031 12.46 75,746 4.00 113,619 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory actions and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. At September 30, 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 7.9% at September 30, 2005, compared
with 7.7% at June 30, 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 nine months ended September 30, 2005, net loan growth
resulted in the use of $158.5 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. The Company's loan to deposit ratio has been well above 100% for many
years and management has significant experience managing its funding needs
through borrowings, primarily through the Federal Home Loan Bank of Pittsburgh.
Additionally, during the nine months ended September 30, 2005, $32.4
million in cash was provided by operating activities, while $108.2 million in
cash was provided through the net increase in demand and savings deposits and
$66.6 million in cash was provided through the net increase in time deposits.
For the period, cash and cash equivalents increased $11.6 million to $204.6
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.
September 30, December 31,
2005 2004
------ ------
(In Thousands)
Nonaccruing loans:
Commercial ..................................... $1,383 $1,595
Consumer ....................................... 182 291
Commercial mortgage ............................ 753 909
Residential mortgage ........................... 1,813 1,601
Construction ................................... 140 -
------ ------
Total nonaccruing loans ............................. 4,271 4,396
Assets acquired through foreclosure ................. 89 217
------ ------
Total nonperforming assets .......................... $4,360 $4,613
====== ======
Past due loans:
Residential mortgages .......................... $ 149 $ 703
Commercial and commercial mortgages ............ - -
Consumer ....................................... 58 104
------ ------
Total past due loans ................................ $ 207 $ 807
====== ======
Ratios:
Nonaccruing loans to total loans (1) ........... 0.25% 0.28%
Allowance for loan losses to gross loans (1).... 1.45% 1.56%
Nonperforming assets to total assets ........... 0.16% 0.18%
Loan loss allowance to nonaccruing loans (2).... 556% 524%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ..................... 545% 499%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased $253,000 between December 31, 2004 and
September 30, 2005 resulting primarily from declines in commercial, consumer and
commercial mortgage loans. Residential mortgage loans increased $212,000 as a
result of the addition of various mortgage loans while construction loans
increased $140,000 due to the addition of one loan. Assets acquired through
foreclosure decreased $128,000 as a result of the sale of some residential
properties. An analysis of the change in the balance of non-performing assets is
presented below.
For the nine
months ended For the year ended
September 30, 2005 December 31, 2004
------------------ ------------------
(In Thousands)
Beginning balance.................................. $ 4,613 $ 5,544
Additions .................................... 4,799 6,554
Collections................................... (3,758) (4,668)
Transfers to accrual/restructured status...... (368) (1,717)
Charge-offs / write-downs, net................ (926) (1,100)
----------- ---------
Ending balance..................................... $ 4,360 $ 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
Corporation 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
September 30, 2005, interest-bearing liabilities exceeded interest-earning
assets that mature within one year (interest-sensitive gap) by $23 million. The
Corporation's interest-sensitive assets as a percentage of interest-sensitive
liabilities within the one-year window decreased to 98% at September 30, 2005
compared to 101% at June 30, 2005. Likewise, the one-year interest-sensitive gap
as a percentage of total assets changed to -0.86% at September 30, 2005 from
0.50% at June 30, 2005. The change in sensitivity since June 30, 2005 is the
result of the current interest rate environment and the Corporation's continuing
effort to effectively manage interest rate risk. Interest rate-sensitive assets
of the Corporation excluded cash flows of discontinued operations as well as the
interest rate-sensitive funding for these assets.
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13a "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
on the net portfolio value ratio of an immediate change in interest rates in 100
basis point increments. The net portfolio value ratio is defined as the net
present value of the estimated cash flows from assets and liabilities as a
percentage of net present value of cash flows from total assets (or the net
present value of equity). The table below is the estimated impact of immediate
changes in interest rates on the Company's net interest margin and net portfolio
value ratio at the specified levels at September 30, 2005 and 2004, calculated
in compliance with Thrift Bulletin No. 13a:
At September 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% 7.77% 1% 9.14%
+200 1% 8.21% 1% 9.29%
+100 1% 8.56% 0% 9.36%
0 0% 8.82% 0% 9.39%
-100 -2% 8.91% -1% 9.30%
-200 -6% 8.65% -8% 9.01%
-300 (3) -11% 8.29% -17% 8.96%
(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 300 basis points is not deemed
meaningful at September 30, 2005 and 2004 given the historically low
absolute level of interest rates at those times.
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Results of Operations
The Corporation recorded net income of $7.4 million or $1.06 per
diluted share for the third quarter of 2005. This compares to $6.6 million or
$0.88 per diluted share for the same quarter last year.
Net income for the nine months ended September 30, 2005 was $20.8
million or $2.85 per diluted share. This compares to $19.0 million or $2.49 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 September 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 .... $ 589,703 $10,450 7.09% $ 450,707 $ 6,409 5.69%
Residential real estate loans.... 430,871 5,587 5.19 445,748 5,830 5.23
Commercial loans ................ 451,532 7,554 6.79 350,263 4,254 5.07
Consumer loans................... 221,706 3,787 6.78 210,449 3,356 6.34
---------- ------- ----------- -------
Total loans.................... 1,693,812 27,378 6.53 1,457,167 19,849 5.53
Mortgage-backed securities (4)........ 576,779 6,445 4.47 520,356 5,468 4.20
Loans held-for-sale (3)............... 2,462 41 6.66 2,349 33 5.62
Investment securities (4)............. 100,523 921 3.66 109,086 1,090 4.00
Other interest-earning assets ........ 48,155 351 2.89 48,784 161 1.31
---------- ------- ----------- -------
Total interest-earning assets.... 2,421,731 35,136 5.85 2,137,742 26,601 5.03
------- -------
Allowance for loan losses............. (25,215) (23,482)
Cash and due from banks............... 53,121 54,439
Cash in non-owned ATMs................ 138,543 126,808
Loans, operating leases and other
assets of discontinued
operations......................... 367 2,992
Bank owned life insurance............. 53,389 51,302
Other noninterest-earning assets...... 54,235 48,963
---------- ----------
Total assets..................... $2,696,171 $2,398,764
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand.......... $ 116,518 71 0.24% $ 82,756 49 0.24%
Money market..................... 183,279 1,025 2.22 63,909 187 1.16
Savings.......................... 268,880 265 0.39 316,910 318 0.40
Retail time deposits ............ 287,925 2,085 2.87 225,906 1,128 1.99
---------- ------- ---------- -------
Total interest-bearing
retail deposits.............. 856,602 3,446 1.60 689,481 1,682 0.97
Jumbo certificates of deposits .. 46,430 383 3.27 50,578 211 1.66
Brokered certificates of deposit. 206,331 1,845 3.55 102,067 427 1.66
---------- ------- ---------- -------
Total interest-bearing
deposits..................... 1,109,363 5,674 2.03 842,126 2,320 1.10
FHLB of Pittsburgh advances........... 894,331 7,958 3.48 899,922 6,038 2.63
Trust preferred borrowings............ 67,011 954 5.57 51,547 551 4.18
Other borrowed funds.................. 166,268 1,338 3.22 177,392 599 1.35
Cost of funding discontinued
operations.......................... (3) (27)
---------- ------- ---------- -------
Total interest-bearing
liabilities.................... 2,236,973 15,921 2.85 1,970,987 9,481 1.92
------- -------
Noninterest-bearing demand deposits... 254,807 227,319
Other noninterest-bearing liabilities. 20,691 15,929
Minority interest .................... 201 259
Stockholders' equity.................. 183,499 184,270
---------- ----------
Total liabilities and stockholders'
equity.............................. $2,696,171 $2,398,764
========== ==========
Excess of interest-earning assets over
interest-bearing liabilities........ $ 184,758 $ 166,755
========== ==========
Net interest and dividend income...... $19,215 $17,120
======= =======
Interest rate spread.................. 3.00% 3.11%
===== =====
Net interest margin................... 3.22% 3.26%
===== =====
(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
Nine months ended September 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 .... $ 571,211 $28,611 6.68% $ 414,705 $17,044 5.40%
Residential real estate loans ... 432,566 16,691 5.14 448,215 17,819 5.30
Commercial loans ................ 423,918 19,729 6.40 330,619 11,499 4.91
Consumer loans................... 217,631 10,888 6.69 201,908 9,745 6.45
---------- ------- ---------- -------
Total loans.................... 1,645,326 75,919 6.22 1,395,447 56,107 5.44
Mortgage-backed securities (4)........ 567,967 18,763 4.40 509,518 14,884 3.89
Loans held-for-sale (3)............... 2,360 104 5.88 1,983 97 6.52
Investment securities (4)............. 98,405 2,315 3.14 114,892 3,438 3.99
Other interest-earning assets ........ 47,854 1,086 3.03 47,016 519 1.47
---------- ------- ---------- -------
Total interest-earning assets.... 2,361,912 98,187 5.59 2,068,856 75,045 4.89
------- -------
Allowance for loan losses............. (24,814) (23,006)
Cash and due from banks............... 53,078 50,420
Cash in non-owned ATMs................ 129,870 114,208
Loans, operating leases and other
assets of discontinued
operations.......................... 642 5,748
Bank-owned life insurance............. 52,881 47,241
Other noninterest-earning assets...... 53,636 43,549
---------- ----------
Total assets..................... $2,627,205 $2,307,016
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest bearing demand.......... $ 108,955 $ 196 0.24% $ 81,773 $ 143 0.23%
Money market..................... 162,595 2,362 1.94 44,784 244 0.73
Savings.......................... 278,276 816 0.39 318,989 973 0.41
Retail time deposits ............ 284,305 5,817 2.74 224,845 3,218 1.91
---------- ------- ---------- -------
Total interest-bearing
retail deposits.............. 834,131 9,191 1.47 670,391 4,578 0.91
Jumbo certificates of deposits .. 43,591 957 2.94 46,448 531 1.53
Brokered certificates of deposit. 181,857 4,275 3.14 68,366 836 1.63
---------- ------- ---------- -------
Total interest-bearing
deposits..................... 1,059,579 14,423 1.82 785,205 5,945 1.01
FHLB of Pittsburgh advances........... 868,090 21,416 3.25 863,102 17,602 2.68
Trust preferred borrowings............ 61,630 3,633 7.77 51,033 1,550 3.99
Other borrowed funds.................. 179,087 3,620 2.70 185,919 1,490 1.07
Cost of funding discontinued
operations.......................... (11) (150)
---------- ------- ---------- -------
Total interest-bearing
liabilities.................. 2,168,386 43,081 2.65 1,885,259 26,437 1.87
Noninterest-bearing demand deposits... 248,899 218,122
Other noninterest-bearing liabilities. 17,554 14,219
Minority interest .................... 207 180
Stockholders' equity.................. 192,159 189,236
---------- ----------
Total liabilities and stockholders'
equity.............................. $2,627,205 $2,307,016
========== ==========
Excess of interest-earning assets over
interest-bearing liabilities..... $ 193,526 $ 183,597
========== ==========
Net interest and dividend income...... $55,106 $48,608
======= =======
Interest rate spread.................. 2.94% 3.02%
===== =====
Net interest margin................... 3.16% 3.19%
===== =====
(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 third quarter of 2005 was $19.2 million
compared to $17.1 million for the same quarter in 2004. Higher volumes of loans
and mortgage backed securities (MBS) drove much of this increase. The yield on
earning assets was also higher in the third quarter of 2005 compared to the
third quarter of 2004. The yield on loans increased 1.00%, from 5.53% in the
third quarter of 2004 to 6.53% in the third quarter of 2005; while the yield on
mortgage backed securities increased 0.27% for the same period. The increases in
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 third quarter of 2005 was 3.22%, a slight decrease from
the third quarter 2004 which was 3.26%, as rates on deposits and borrowings
generally increased in tandem with yields on loans and investments.
Net interest income for the nine-month period ending September 30, 2005
was $55.1 million compared with $48.6 million for the same period in 2004.
Similar to the analysis for the third quarter above, the increase in net
interest income was driven by higher loan and MBS volumes. The yield on loans
increased 0.78% and the yield on MBS increased 0.51%. The net interest margin
for the first nine months of 2005 was 3.16%, a slight decrease from the same
period in 2004.
The net interest margin for the nine months ended September 30, 2005
was negatively affected by 6 basis points due to the redemption of $50 million
of WSFS Capital Trust I Securities and the $1.1 million (pre-tax) non-cash
charge from the write-down of unamortized debt issuance costs of the called
securities as a charge to interest expense in the second quarter 2005. Without
this charge the margin would have been 3.22% for the nine months ended September
30, 2005.
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The determination of
the allowance for loan losses requires significant 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 the Corporation's 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 the Corporation's key
lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
24
The Corporation's 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, as an integral part of their examination process, various regulatory
agencies 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 $2.4 million for the
first nine months of 2004 to $1.6 million for the first nine months of 2005,
primarily a result of an overall improvement in credit quality of the
Corporation's loan portfolio and a lower level of adversely rated loans.
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.
Nine months ended Nine months ended
September 30, 2005 September 30, 2004
------------------ ------------------
(Dollars in Thousands)
Beginning balance .................................. $24,222 $22,386
Provision for loan losses, continuing operations.... 1,576 2,370
Charge-offs:
Residential real estate ....................... 38 200
Commercial real estate (1) .................... - -
Commercial .................................... 746 198
Consumer ...................................... 434 586
------- -------
Total charge-offs .......................... 1,218 984
------- -------
Recoveries:
Residential real estate ....................... 58 29
Commercial real estate (1) .................... 42 -
Commercial .................................... 155 175
Consumer ...................................... 98 76
------- -------
Total recoveries ........................... 353 280
------- -------
Net charge-offs .................................... 865 704
------- -------
Ending balance ..................................... $24,933 $24,052
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (2) .......... 0.07% 0.07%
======= =======
(1) Includes commercial mortgage and construction loans.
(2) Ratios for the nine months ended September 30, 2005 and 2004 are
annualized.
Noninterest Income
Noninterest income for the quarter ended September 30, 2005 was $8.6
million compared to $8.2 million for the third quarter of 2004. The increase was
mainly the result of $630,000 in card and ATM fee income during the quarter due
to underlying growth in volume, and $361,000 in increased service charges on
deposits. The increases were partially offset by $609,000 in losses recognized
on the sale of lower yielding agency investments.
For the nine months ended September 30, 2005, noninterest income was
$25.2 million compared to $23.9 million for the same period of 2004. The
increase for the nine months period is reflective of the quarter with most of
the increase a result of underlying growth in volume in the ATM and card area.
Noninterest Expenses
Noninterest expenses for the quarter ended September 30, 2005 were
$16.2 million, an increase of $2.0 million over the third quarter of 2004. This
increase is a result of the Company's growth in commercial and retail banking
and is primarily concentrated in salaries, benefits and other compensation,
marketing expenses and occupancy expense. Additionally, a $397,000 expense was
recorded during the quarter representing a loss contingency for standby letters
of credit.
25
Noninterest expense increased from $40.6 million for the nine months
ended September 30, 2004 to $46.7 million for the nine months ended September
30, 2005. Of the $6.1 million increase, $3.7 million was from salaries, benefits
and other compensation as a result of the Company's branch expansion and growth
efforts. Consistent with the quarterly results, the remainder of the increases
were in marketing, occupancy expense, and other operating expenses.
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
nine months ended September 30, 2005 of $4.0 million and $11.1 million,
respectively, compared to an income tax provision from continuing operations of
$3.5 million and $10.4 million for the same periods in 2004. The effective tax
rates from continuing operations for each of the three and nine month periods
ended September 30, 2005 and 2004 were 35%.
The effective tax rates reflect the recognition of certain tax benefits
in the financial statements including those benefits from tax-exempt interest
income, BOLI income, a fifty percent interest income exclusion on a loan to an
Employee Stock Ownership Plan, and a provision for state income tax expense. The
income tax provision for the nine months ended September 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 recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission
rules and forms and is accumulated and communicated to the
Company's management, including the principal executive officer
and principal financial officer, as appropriate to allow timely
decisions regarding required disclosures.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's
internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at September 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 third 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
--------- --------- --------------- ---------------
July 1, to July 31, 2005 0 $ 0.00 0 382,064
August 1, to August 31, 2005 400,000 $57.22 400,000 650,000
September 1, to September 30, 2005 0 $ 0.00 0 650,000
Total for the quarter ended September 30, 2005 400,000 $57.22
On August 4, 2005 the Board of Directors renewed its share repurchase
authorization of June 24, 2004, authorizing the repurchase of
approximately 10% of the Company's outstanding 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
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
(a) Exhibit 31 - Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) Exhibit 32 - Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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: November 7, 2005 /s/MARVIN N. SCHOENHALS
----------------------------------------
Marvin N. Schoenhals
President and Chief Executive Officer
Date: November 7, 2005 /s/STEPHEN A. FOWLE
----------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
28