WSFS FINANCIAL CORPORATION
Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
WSFS Financial Corporation (Company or Corporation) is a thrift holding company
headquartered in Wilmington, Delaware. Substantially all of the Corporation's
assets are held by its subsidiary, Wilmington Savings Fund Society, FSB (Bank or
WSFS). Founded in 1832, WSFS is one of the oldest financial institutions in the
country. As a federal savings bank that was formerly chartered as a state mutual
savings bank, WSFS enjoys broader investment powers than most other financial
institutions. WSFS has served the residents of the Delaware Valley for 174
years. WSFS is the largest thrift institution headquartered in Delaware and the
fourth largest financial institution in the state on the basis of total deposits
traditionally garnered in-market. The Corporation's primary market area is the
mid-Atlantic region of the United States that is characterized by a diversified
manufacturing and service economy. The long-term strategy of the Corporation is
to improve its status as a high-performing financial services company by
focusing on its core community banking business.
WSFS provides residential and commercial real estate, commercial and consumer
lending services, as well as retail deposit and cash management services.
Lending activities are funded primarily with retail deposits and borrowings. The
Federal Deposit Insurance Corporation (FDIC) insures deposits to their legal
maximum. WSFS serves customers primarily from its main office and 24 retail
banking offices located in Delaware and southeastern Pennsylvania.
The Corporation has two consolidated subsidiaries, WSFS and Montchanin Capital
Management, Inc. (Montchanin). The Corporation also has one unconsolidated
affiliate, WSFS Capital Trust 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.
Montchanin has one consolidated non-wholly owned subsidiary, Cypress Capital
Management, LLC (Cypress). Cypress, an 80% owned subsidiary, is a
Wilmington-based investment advisory firm serving high net-worth individuals and
institutions. Cypress had more than $473 million in assets under management at
December 31, 2005.
WSFS Credit Corporation (WCC), a consolidated subsidiary of the Bank, which was
engaged primarily in indirect auto financing and vehicle leasing, discontinued
operations in 2000. WCC no longer accepts new applications but continues to
service existing loans until their maturities. More information is provided in
the Discontinued Operations section of Management's Discussion and Analysis and
Note 2 to the Financial Statements.
Wilmington Finance, Inc. (WF), a majority owned subsidiary of WSFS, which was
engaged in sub-prime residential mortgage banking, was sold in January 2003.
This subsidiary was therefore classified as a business held-for-sale in the
Financial Statements. More information is provided in the Business Held-For-Sale
section of this Management's Discussion and Analysis, and Note 3 to the
Financial Statements.
During the third quarter of 2005, the Company finalized agreements related to
the move of its corporate headquarters to support growth in its core banking
activities. Related to this move, the Company sold the land on which the WSFS
Bank Center is to be built. As part of this agreement, the property developer
has agreed to purchase the Company's current headquarters, which is expected to
result in approximately a $3.0 million gain at the time of the move, expected to
be early 2007.
FORWARD-LOOKING STATEMENTS
Within this annual report and financial statements, management has included
certain "forward-looking statements" concerning the future operations of the
Corporation. Statements contained in this annual report which are not historical
facts, are forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. It is management's desire to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. This statement is for the express purpose of availing the
Corporation of the protections of such safe harbor with respect to all
"forward-looking statements." Management has used "forward-looking statements"
to describe future plans and strategies and expectations of the Corporation's
future financial results. Management's ability to predict results or the effect
or success 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.
7
WSFS FINANCIAL CORPORATION
RESULTS OF OPERATIONS
WSFS Financial Corporation recorded net income of $27.9 million for the year
ended December 31, 2005, compared to $25.9 million and $63.0 million in 2004 and
2003, respectively. Excluding gains recorded for businesses sold, reported
income was $27.9 million, $25.8 million and $21.2 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Net income for the year ended
December 31, 2003 included an after tax gain of $41.3 million from the sale of
WF. The sale of this business is discussed in more detail in the Business
Held-For-Sale section of this Management's Discussion and Analysis and Note 3 to
the Financial Statements.
Net Interest Income Net interest income increased $6.8 million, or 10%, to $73.6
million in 2005 compared to $66.9 million in 2004. Total interest income earned
on assets increased $31.9 million, due to the combination of higher amounts of
earning assets and higher rates. During the year, the yield on loans increased
85 basis points while the yield on mortgage-backed securities increased 48 basis
points. Interest expense increased $25.1 million due to higher amounts of
interest-bearing deposits and borrowings to fund the increase in earning assets
as well as higher rates. The higher rates on both earning assets and
interest-bearing liabilities were the result of higher prevailing rates during
2005.
Net interest income was negatively impacted in 2005 when the Company refinanced
$51.5 million of Floating Rate Capital Trust I Preferred Securities, which
carried an interest rate of 250 basis points over the three-month London
InterBank Offered Rate (LIBOR) and issued $67.0 million aggregate principal
amount of Pooled Floating Rate Capital Securities, at LIBOR plus 177 basis
points. In conjunction with the refinancing, the Company incurred a $1.1 million
(pretax) non-cash charge from the write down of unamortized debt issuance costs.
Net interest income increased $8.9 million, or 15%, to $66.9 million in 2004
compared to $58.0 million in 2003. Total interest income increased $14.8 million
between 2003 and 2004, primarily due to growth in loans and the increased yield
on mortgage-backed securities. Total interest expense, excluding the expense to
fund discontinued operations, increased $5.9 million from 2003 to 2004 primarily
due to an increase in deposits and borrowings used to fund the loan growth. The
average rate paid on Federal Home Loan Bank (FHLB) advances declined 34 basis
points, as higher costing advances matured during the year and were replaced at
lower rates. This partially offset the increase in volumes of deposits and other
borrowings.
The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in the rates for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on the changes that are attributable to:
(i) changes in volume (change in volume multiplied by prior year rate); (ii)
changes in rates (change in rate multiplied by prior year volume on each
category); and (iii) net change (the sum of the change in volume and the change
in rate). Changes due to the combination of rate and volume changes (changes in
volume multiplied by changes in rate) are allocated proportionately between
changes in rate and changes in volume.
Year Ended December 31, 2005 vs. 2004 2004 vs. 2003
- ----------------------------------------------------------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income:
Commercial real estate loans $ 8,307 $ 6,493 $ 14,800 $ 6,170 $ (362) $ 5,808
Residential real estate loans (564) (454) (1,018) (209) (2,886) (3,095)
Commercial loans (1) 5,813 6,078 11,891 4,714 (745) 3,969
Consumer loans 1,234 652 1,886 1,169 (1,510) (341)
Loans held-for-sale (10) (11) (21) (232) (9) (241)
Mortgage-backed securities 2,744 2,617 5,361 999 4,453 5,452
Investment securities (914) (774) (1,688) 2,953 514 3,467
Other 17 684 701 (97) (111) (208)
- -----------------------------------------------------------------------------------------------------------------------
Favorable (unfavorable) 16,627 15,285 31,912 15,467 (656) 14,811
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Interest-bearing demand 69 35 104 20 (23) (3)
Money market 2,117 1,055 3,172 157 389 546
Savings (180) 661 481 -- (370) (370)
Retail time deposits 1,141 1,955 3,096 (341) (442) (783)
Jumbo certificates of deposit - nonretail (69) 675 606 281 25 306
Brokered certificates of deposit 2,852 1,984 4,836 755 755 1,510
FHLB of Pittsburgh advances 782 6,300 7,082 5,145 (2,459) 2,686
Trust preferred borrowings 596 2,512 3,108 -- 221 221
Other borrowed funds (213) 2,715 2,502 693 313 1,006
Cost of funding discontinued operations 74 73 147 435 391 826
- -----------------------------------------------------------------------------------------------------------------------
Unfavorable (favorable) 7,169 17,965 25,134 7,145 (1,200) 5,945
- -----------------------------------------------------------------------------------------------------------------------
Net change as reported $ 9,458 $ (2,680) $ 6,778 $ 8,322 $ 544 $ 8,866
=======================================================================================================================
(1) The tax-equivalent income adjustment is related to commercial loans.
8
The following table provides information regarding the average balances of, and
yields/rates on interest-earning assets and interest-bearing liabilities during
the periods indicated:
Year Ended December 31, 2005 2004 2003
- ------------------------------------------------------------------------- ------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate(1) Balance Interest Rate(1)
- ------------------------------------------------------------------------- ------------------------------------------------------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans ....... $ 573,566 $ 39,561 6.90% $ 438,395 $ 24,761 5.56% $ 329,923 $18,953 5.67%
Residential real estate loans....... 436,373 22,545 5.17 446,910 23,563 5.27 450,483 26,658 5.92
Commercial loans ................... 439,375 28,361 6.62 340,611 16,470 5.08 250,577 12,501 5.37
Consumer loans...................... 222,679 15,051 6.76 204,122 13,165 6.45 187,111 13,506 7.22
---------- -------- ---------- -------- ---------- -------
Total loans...................... 1,671,993 105,518 6.38 1,430,038 77,959 5.53 1,218,094 71,618 5.97
Mortgage-backed securities (4)........ 575,580 25,687 4.46 510,965 20,326 3.98 480,389 14,874 3.10
Loans held-for-sale (3)............... 2,032 121 5.95 2,188 142 6.49 5,767 383 6.64
Investment securities (4)............. 88,094 3,258 3.70 110,567 4,946 4.47 42,325 1,479 3.49
Other interest-earning assets......... 48,077 1,438 2.99 47,010 737 1.57 52,681 945 1.79
---------- -------- ---------- -------- ---------- -------
Total interest-earning assets.... 2,385,776 136,022 5.75 2,100,768 104,110 5.01 1,799,256 89,299 5.03
-------- -------- -------
Allowance for loan losses............... (24,909) (23,357) (22,139)
Cash and due from banks................. 53,434 52,332 48,070
Cash in non-owned ATMs.................. 133,235 116,953 89,169
Bank-owned life insurance............... 53,137 48,400 -
Loans, operating leases and other
assets of discontinued operations .... 531 4,660 25,375
Other noninterest-earning assets ....... 55,000 45,338 34,703
---------- ---------- ----------
Total assets..................... $2,656,204 $2,345,094 $1,974,434
========== ========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand............. $ 111,585 297 0.27% $ 83,566 193 0.23% $ 74,926 196 0.26%
Money market........................ 177,911 3,837 2.16 60,615 665 1.10 33,170 119 0.36
Savings............................. 272,673 1,738 0.64 312,981 1,257 0.40 312,892 1,627 0.52
Retail time deposits................ 286,371 8,098 2.83 238,024 5,002 2.10 253,474 5,785 2.28
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
retail deposits................ 848,540 13,970 1.65 695,186 7,117 1.02 674,462 7,727 1.15
Jumbo certificates of
deposit - nonretail............... 43,554 1,374 3.15 47,555 768 1.61 30,105 462 1.53
Brokered certificates of deposit.... 189,593 6,346 3.35 84,194 1,510 1.79 - - -
---------- -------- ---------- -------- ---------- -------
Total interest-bearing deposits.. 1,081,687 21,690 2.01 826,935 9,395 1.14 704,567 8,189 1.16
FHLB of Pittsburgh advances........... 887,822 30,673 3.41 859,742 23,591 2.70 678,680 20,905 3.04
Trust preferred borrowings............ 62,986 5,292 8.29 51,162 2,184 4.20 50,000 1,963 3.87
Other borrowed funds.................. 165,406 4,739 2.87 181,334 2,237 1.23 122,459 1,231 1.01
Cost of funding discontinued
operations.......................... - (14) - (161) - (987)
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
liabilities.................... 2,197,901 62,380 2.84 1,919,173 37,246 1.94 1,555,706 31,301 2.01
-------- -------- -------
Noninterest-bearing demand deposits..... 250,321 220,446 187,190
Other noninterest-bearing liabilities... 19,274 15,040 31,233
Minority interest....................... 209 200 -
Stockholders' equity.................... 188,499 190,235 200,305
---------- ---------- ----------
Total liabilities and
stockholders' equity........... $2,656,204 $2,345,094 $1,974,434
========== ========== ==========
Excess (deficit) of interest-
earning assets over
interest-bearing liabilities.......... $ 187,875 $ 181,595 $ 243,550
========== ========== ==========
Net interest and dividend income........ $ 73,642 $66,864 $57,998
======== ======= =======
Interest rate spread.................... 2.91% 3.07% 3.02%
==== ==== ====
Interest rate margin.................... 3.13% 3.24% 3.29%
==== ==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale. .
9
WSFS FINANCIAL CORPORATION
Provision for Loan Losses. The Corporation maintains an allowance for loan
losses at an appropriate level based on management's assessment of the
"estimable" and "probable" losses in the loan portfolio, pursuant to accounting
literature which is discussed further in the Nonperforming Assets section of
Management's Discussion and Analysis. Management's evaluation is based upon a
review of the portfolio and requires significant judgement. For the year ended
December 31, 2005, the Corporation recorded a provision for loan losses from
continuing operations of $2.6 million compared to $3.2 million in 2004 and $2.6
million in 2003. In 2005, the decrease reflects an improvement in the credit
quality of the loan portfolio.
Noninterest Income. Noninterest income increased $2.7 million to $34.7 million
in 2005, or 8%, from $32.0 million in 2004. The increase was mainly the result
of an increase of $2.9 million in card and ATM income as a result of underlying
growth in volumes combined with increased prime-based bailment fees. As of
December 31, 2005, the CashConnect segment, WSFS' ATM unit, recognized income
from servicing 7,425 ATMs compared to 5,584 at December 31, 2004. Of these, WSFS
owned and operated 271 ATMs in 2005. Additionally, deposit service charges
increased $702,000 due primarily to an increase in total retail deposits driven
by the promotion of a new free checking product line. The increases were
partially offset by $605,000 of losses recognized on the sale of lower yielding
agency investments.
Noninterest income increased $5.8 million to $32.0 million in 2004, or 22% from
2003. This increase was primarily due to card and ATM fee income which grew $2.4
million during 2004 as a result of continued expansion of WSFS' ATM network and
customer card usage. At December 31, 2004, WSFS' CashConnect segment, WSFS's ATM
unit, recognized income from servicing 5,584 ATMs compared to 4,716 at December
31, 2003. Of these, WSFS owned and operated 246 ATMs in 2004 compared to 222 in
2003. The increase was also due to fee income of $2.3 million from Montchanin.
Additionally, WSFS received fee income of $2.2 million from the January 2004
investment in Bank-Owned Life Insurance (BOLI). Income from this long-term
illiquid investment is shown as noninterest income in accordance with U.S.
generally accepted accounting principles. These increases were partially offset
by lower loan fee income of $668,000 and lower gains on the sales of loans and
securities of $1.3 million. These decreases resulted primarily from generally
higher interest rates and reduced refinancing activity during 2004 as compared
to 2003.
Noninterest Expenses. Noninterest expenses for the year ended 2005 were $62.9
million for an increase of $7.2 million over the $55.7 million in 2004. This
increase is primarily a result of the Company's growth in the commercial and
retail banking areas and is mainly in salaries, benefits and other compensation,
occupancy expense, marketing expenses and other operating expenses. The increase
in marketing expenses also stem from expenses related to the promotion of a new
free checking product line, and a campaign to increase market share for
commercial banking. Consistent with accounting rules under Statement of
Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, a
$397,000 loss contingency for standby letters of credit was recorded during 2005
and is included in other operating expenses. The Corporation established this
reserve based on management's assessment of the "estimable" and "probable"
losses in the standby letters of credit portfolio. More information is provided
on the Corporation's standby letters of credit is provided in Note 16 to the
Financial Statements. As a result of the continued growth, and the formation of
the Wealth Management Services division, the Company anticipates that expenses
will continue to grow.
Noninterest expenses of $55.7 million in 2004 increased $6.3 million, or 13%
from 2003. Included in the 2004 results were $2.0 million in operating expenses
related to Montchanin. Included in the 2003 results were $1.3 million of
expenses recorded in connection with the sale of WF and $303,000 of expenses
related to the Corporation's Technology, Organizational and Process
Simplification Plan (TOPS). During the first quarter of 2003, the Corporation
completed the previously announced TOPS program; an initiative designed to
simplify the organization, better integrate technology solutions and reengineer
certain back office processes. Excluding the above-mentioned items, operating
expenses increased $5.9 million, or 12% from 2003. Included in this increase
were a $3.3 million increase in salaries, benefits and other compensation and a
$541,000 increase in occupancy expense. These increases were primarily due to
normal salary increases and the Company's continued branch expansion efforts
during 2004. Marketing expenses increased $700,000 from 2003, mainly due to the
promotion of a new free checking product line designed to attract a greater
share of market deposits over time. Also during 2004, the Company incurred
$469,000 of expenses associated with the initial compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 (SOX 404). Finally, during 2004 and 2003, the
CashConnect segment performed an extensive analysis of its reserve for business
losses. Based on its evaluation of probable losses using historical loss
experience, the Company recorded a reduction to this reserve of $4,000 in 2004
and $261,000 in 2003.
Income Taxes. The Corporation recorded a $14.8 million tax provision for the
year ended December 31, 2005 compared to $14.1 million and $34.9 million for the
years ended December 31, 2004 and 2003, respectively. The effective tax rates
for continuing operations for the years ended December 31, 2005, 2004 and 2003
were 34.8%, 35.1% and 34.1%, respectively. The provision for income taxes
includes federal, state and local income taxes that are currently payable or
deferred because of temporary differences between the financial reporting bases
and the tax reporting bases of the assets and liabilities. The increase in the
effective tax rate from 2003 to 2004 is principally the result of a change in
New Jersey tax law that was enacted in June 2004. This law change, which
eliminated the utilization of a portion of the Company's net operating losses in
2004, resulted in additional New Jersey state taxes payable.
10
WSFS FINANCIAL CORPORATION
At December 31, 2005, approximately $3.3 million in gross deferred tax assets of
the Corporation are related to net operating losses and tax credits attributable
to a former subsidiary. Management has assessed a valuation allowance of $1.96
million on these deferred tax assets due to limitations imposed by the Internal
Revenue Code. Approximately $744,000 in gross deferred tax assets of the
Corporation at December 31, 2005 are related to state tax net operating losses.
Management has established a valuation allowance on all of these deferred tax
assets due to such net operating losses expiring before being utilized.
The Corporation has an ongoing program that analyzes its projection of taxable
income and makes adjustments to its provision for income taxes accordingly. For
additional information regarding the Corporation's tax provision and net
operating loss carryforwards, see Note 14 to the Consolidated Financial
Statements.
FINANCIAL CONDITION
Total assets increased $343.8 million, or 14%, during 2005 to $2.8 billion. This
increase was predominantly due to growth in net loans, which grew $239.8
million, or 16% during 2005. Total liabilities increased $358.2 million during
the year to $2.7 billion at December 31, 2005. This increase was primarily the
result of an increase in deposits of $211.3 million, or 17% during 2005. In
addition, the increase was due to increased advances from the FHLB of $171.7
million.
Cash in non-owned ATMs. Between December 31, 2004 and December 31, 2005, the
CashConnect segments', WSFS' ATM unit, cash in non-owned ATMs increased $43.4
million, or 33%. This increase was the result of an increase in the number of
ATMs serviced by CashConnect from 5,584 at December 31, 2004 to 7,425 at
December 31, 2005. Of these, 271 ATMs were WSFS owned and operated during 2005.
Mortgage-backed Securities. Investments in mortgage-backed securities increased
$96.2 million during 2005 to $620.3 million. During 2005, the Corporation
purchased $220.8 million in mortgage-backed securities. This increase was offset
by principal repayments of $112.4 million. The weighted average duration of the
mortgage-backed securities was 3.1 years at December 31, 2005.
Loans, net. Net loans, including loans held-for-sale, increased $239.8 million,
or 16% during 2005. This included increases of $140.2 million, or 38% in
commercial loans, $51.9 million, or 10% in commercial real estate loans, $33.9
million, or 16% in consumer loans and $17.8 million, or 4% in residential
mortgage loans.
Retail Deposits. Retail deposits increased $141.7 million, or 13% during 2005 to
$1.2 billion. Core deposit relationships (demand deposits, money market and
savings accounts) increased $122.6 million, or 16% during the year. In addition,
retail time deposits (CDs) increased $19.1 million, or 7% in 2005. The table
below depicts the changes in retail deposits over the last three years:
Year Ended December 31, 2005 2004 2003
- --------------------------------------------------------------------------------
(In Millions)
Beginning balance $1,052.2 $ 883.1 $872.1
Interest credited 11.4 6.6 6.4
Deposit inflows, net 130.3 162.5 4.6
- --------------------------------------------------------------------------------
Ending balance $1,193.9 $1,052.2 $883.1
================================================================================
Borrowings and Brokered Certificates of Deposit. Total borrowings increased by
$140.9 million, or 13% between December 31, 2004 and December 31, 2005. Advances
from the FHLB increased $171.7 million, or 21% and Trust Preferred borrowings
increased $15.5 million, or 30%. Brokered deposits also increased $73.9 million,
or 54% during the year. These increases were primarily used to fund the 16%
growth in loans during 2005.
Stockholders' Equity. Stockholders' equity decreased $14.3 million to $182.0
million at December 31, 2005. This decrease was mainly due to the acquisition of
719,500 shares of the Corporation's common stock for $40.2 million ($55.94 per
share average). At December 31, 2005, the Corporation held 8.8 million shares of
its common stock as treasury shares. The Corporation intends to continue
repurchasing shares in 2006 in amounts depending on stock price and alternative
uses of capital. In addition, other comprehensive loss increased $6.6 million
due to a decline in the fair value of securities available-for-sale. Finally,
the Corporation declared cash dividends totaling $1.8 million. These decreases
were partially offset by net income of $27.9 million and in increase of $6.1
million in proceeds from the exercise of stock options.
ASSET/LIABILITY MANAGEMENT
The primary asset/liability management goal of the Corporation is maximizing its
net interest income opportunities within the constraints of managing interest
rate risk, while ensuring adequate liquidity and funding and maintaining a
strong capital base.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Corporation's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management
and the Board of Directors. Changing the relative proportions of fixed-rate and
adjustable-rate assets and liabilities is one of the primary strategies utilized
by the Corporation to accomplish this objective.
11
WSFS FINANCIAL CORPORATION
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period, and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
The repricing and maturities of the Corporation's interest-rate sensitive assets
and interest-rate sensitive liabilities at December 31, 2005 are set forth in
the following table:
Less than One to Over
One Year Five Years Five Years Total
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-rate sensitive assets :
Real estate loans (1).............................. $ 638,064 $ 328,379 $ 79,740 $1,046,183
Commercial loans................................... 426,238 58,842 23,850 508,930
Consumer loans..................................... 113,998 55,067 75,755 244,820
Mortgage-backed securities......................... 215,334 154,368 250,621 620,323
Loans held-for-sale................................ 438 - - 438
Investment securities.............................. 48,718 38,194 16,870 103,782
Other investments.................................. 173 - - 173
- ------------------------------------------------------------------------------------------------------------------------------
1,442,963 634,850 446,836 2,524,649
- ------------------------------------------------------------------------------------------------------------------------------
Interest-rate sensitive liabilities:
Money market and interest-bearing demand deposits.. 91,032 - 259,744 350,776
Savings deposits................................... 70,621 - 181,054 251,675
Retail time deposits............................... 224,950 85,814 1,301 312,065
Jumbo certificates of deposit...................... 36,935 3,632 - 40,567
Brokered certificates of deposit................... 211,738 - - 211,738
FHLB advances ..................................... 661,000 274,900 72,821 1,008,721
Trust preferred borrowings......................... 67,011 - - 67,011
Other borrowed funds............................... 95,794 1 23,481 119,276
- ------------------------------------------------------------------------------------------------------------------------------
1,459,081 364,347 538,401 2,361,829
- ------------------------------------------------------------------------------------------------------------------------------
(Deficiency) excess of interest-rate sensitive....
assets over interest-rate sensitive liabilities....
("interest-rate sensitive gap").................... $ (16,118) $ 270,503 $(91,565) $ 162,820
==============================================================================================================================
One-year interest-rate sensitive
assets/interest-rate sensitive liabilities 98.90%
One-year interest-rate sensitive gap as a
percent of total assets (0.57)%
(1) Includes commercial mortgage, construction, and residential mortgage loans.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. Conversely, during a period of falling rates, a
positive gap would result in a decrease in net interest income while a negative
gap would augment net interest income. However, the interest-sensitivity table
does not provide a comprehensive representation of the impact of interest rate
changes on net interest income. Each category of assets or liabilities will not
be affected equally or simultaneously by changes in the general level of
interest rates. Even assets and liabilities which contractually reprice within
the rate period may not, in fact, reprice at the same price or the same time or
with the same frequency. It is also important to consider that the table
represents a specific point in time. Variations can occur as the Company adjusts
its interest-sensitivity position throughout the year.
To provide a more accurate one-year gap position of the Corporation, certain
deposit classifications are based on the interest-rate sensitive attributes and
not on the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that 35%
of money market and 13% of interest-bearing demand deposits are sensitive to
interest rate changes and that 22% to 36% of savings deposits are sensitive to
interest rate changes. Accordingly, these interest-sensitive portions are
classified in the less than one-year category with the remainder in the over
five-year category.
Deposit rates other than time deposit rates are variable, and changes in deposit
rates are generally subject to local market conditions and management's
discretion and are not indexed to any particular rate.
12
WSFS FINANCIAL CORPORATION
In 1998, the Corporation purchased a ten-year interest rate cap in order to
limit its exposure on $51.5 million of variable Trust Preferred Securities
issued in 1998. On April 6, 2005, the Corporation completed the issuance of
$67.0 million of aggregate principal amount of Pooled Floating Rate Securities.
The proceeds from this issuance were used to fund the redemption of $51.5
million of Floating Rate Capital Trust I Preferred Securities. This derivative
instrument caps the three-month LIBOR, the base rate of the trust preferred
borrowings, at 6.00%. The Trust Preferred borrowings are classified in the less
than one-year category reflecting the ability to adjust upward for the balance
of the term of the interest rate cap. If the three-month LIBOR rate equals or
exceeds 6.00%, the Trust Preferred borrowing takes on a fixed characteristic and
therefore would be classified in the period corresponding to the cap's maturity.
REVERSE MORTGAGES
The Corporation holds an investment in reverse mortgages of $785,000 at December
31, 2005 representing a participation in reverse mortgages with a third party.
Reverse mortgage loans are contracts that require the lender to make monthly
advances throughout the borrower's life or until the borrower relocates, prepays
or the home is sold, at which time the loan becomes due and payable. Reverse
mortgages are nonrecourse obligations, which means that the loan repayments are
generally limited to the net sale proceeds of the borrower's residence.
The Corporation accounts for its investment in reverse mortgages by estimating
the value of the future cash flows on the reverse mortgages at a rate deemed
appropriate for these mortgages, based on the market rate for similar
collateral. Actual cash flows from the maturity of these mortgage loans can
result in significant volatility in the recorded value of reverse mortgage
assets. As a result, income varies significantly from reporting period to
reporting period. For the year ended December 31, 2005, the Corporation earned
$678,000 in interest income on reverse mortgages as compared to $1.8 million in
2004 and $(24,000) in 2003.
The projected cash flows depend on assumptions about life expectancy and the
changes in future collateral values. Projecting the changes in future collateral
values is the most significant factor impacting the volatility of future cash
flows. The Corporation is currently estimating a short-term annual appreciation
rate of -8.0% in the first year, and a long-term annual appreciation rate of
0.5% in future years. If the long-term appreciation rate was increased to 1.5%,
the resulting impact on income would have been $150,000. Conversely, if the
long-term appreciation rate was decreased to -0.5%, the resulting impact on
income would have been $(130,000).
The Corporation also holds $12.0 million in BBB-rated mortgage-backed securities
classified as trading and options to acquire up to 49.9% of Class "O"
Certificates issued in connection with securities consisting of a portfolio of
reverse mortgages previously held by the Corporation. At the time of the
securitization, the securitizer retained 100% of the Class "O" Certificates from
the securitization. These Class "O" Certificates have no priority over other
classes of Certificates under the Trust and no distributions will be made on the
Class "O" Certificates until, among other conditions, the principal amount of
each other class of notes has been reduced to zero. The underlying assets, the
reverse mortgages, are very long-term assets. Hence, any cash flow that might
inure to the holder of the Class "O" Certificates is not expected to occur until
many years in the future. Additionally, the Company can exercise its option on
49.9% of the Class "O" Certificates in up to five separate increments for an
aggregate purchase price of $1.0 million any time between January 1, 2004 and
the termination of the Securitization Trust. The option to purchase the Class
"O" Certificates does not meet the definition of a derivative under SFAS 133,
Accounting for Derivative and Hedging Activities.
DISCONTINUED OPERATIONS
In December 2000, the Corporation approved plans to discontinue the operations
of WCC. At December 31, 2000, WCC had 7,300 lease contracts and 2,700 loan
contracts, compared to zero lease contracts and 31 loan contracts at December
31, 2005. WCC no longer accepts new applications, but will continue to service
existing loans until their maturity.
An extensive analysis as of December 31, 2005 indicated that no additional
reserves were needed for the expected losses in the business during the
remaining wind-down period.
At December 31, 2005, there were $74,000 in indirect loans and zero in indirect
leases, net, still outstanding. At December 31, 2005, WSFS had exposure to
$19,000 in remaining used car residuals, for which it estimates a loss of
$8,000. Management has provided for this loss in the Financial Statements. Due
to the provision for this estimated exposure in the financial statements, the
loss on the wind-down of discontinued operations, net of tax, was zero in 2005.
13
WSFS FINANCIAL CORPORATION
BUSINESS HELD-FOR-SALE
In November 2002, WSFS signed a definitive agreement for the sale of WSFS'
majority-owned subsidiary, WF. This sale was completed in January 2003. In 2003,
WSFS recognized an after tax gain on the sale of $41.3 million or $5.01 per
diluted share. The sale included $148.2 million in assets, of which $117.6
million were residential mortgage loans held-for-sale. The gain on the sale of
WF is presented separately on the statement of operations, net of tax.
The completion of this divestiture transaction was consistent with the Company's
strategic direction to focus resources and capital on WSFS' core community bank
network in and around Delaware.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending, investing and funding activities. To that end, management actively
monitors and manages its interest rate risk exposure. One measure required to be
performed by the Office of Thrift Supervision (OTS)-regulated institutions is
the test specified by OTS Thrift Bulletin No. 13A, "Management of Interest Rate
Risk, Investment Securities and Derivatives Activities." This test measures the
impact on the net portfolio value of an immediate change in interest rates in
100 basis point increments. Net portfolio value is defined as the net present
value of the estimated cash flows from assets and liabilities as a percentage of
the net present value of assets. The following table is the estimated impact of
immediate changes in interest rates on the Company's net interest margin and net
portfolio value at the specified levels at December 31, 2005 and 2004,
calculated in compliance with Thrift Bulletin No. 13A:
December 31, 2005 2004
- ------------------------------------------------ ----------------------------
Change in Interest % Change in % Change in
Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value (2) Margin (1) Value (2)
- --------------------------------------------------------------------------------
+300 0% 7.33% 3% 9.26%
+200 0% 7.86% 2% 9.35%
+100 0% 8.31% 1% 9.42%
0 0% 8.72% 0% 9.47%
-100 -2% 8.83% -3% 9.30%
-200 (3) -7% 8.62% -9% 9.10%
-300 (3) -11% 8.32% -17% 9.07%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate environment changes.
(2) The net portfolio value of the Company in a stable interest rate
environment and the net portfolio value as projected under the various rate
environment changes.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points may not be
particularly meaningful at December 31, 2005 and 2004 given the
historically low absolute level of interest rates at these dates.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Company's net interest
income and capital, while maximizing the yield/cost spread on the Company's
asset/liability structure. The Company relies primarily on its asset/liability
structure to control interest rate risk.
The Company also engages in other business activities that are sensitive to
changes in interest rates. For example, mortgage banking revenues and expenses
can fluctuate with changing interest rates. These fluctuations are difficult to
model and estimate.
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure, can negatively affect the
Corporation's results of operations. Nonaccruing loans are those on which the
accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in the opinion of management, collection is doubtful, or when
principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest. Past due loans are defined as
loans contractually past due 90 days or more as to principal or interest
payments but which remain in accrual status because they are considered well
secured and in the process of collection.
14
WSFS FINANCIAL CORPORATION
The following table sets forth the Corporation's nonperforming assets and past
due loans at the dates indicated:
December 31, 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
Nonaccruing loans:
Commercial $ 925 $1,595 $1,549 $2,242 $1,330
Consumer 155 291 240 516 306
Commercial mortgages 727 909 941 326 1,928
Residential mortgages 1,567 1,601 2,513 3,246 3,618
Construction 36 - - 199 351
- ----------------------------------------------------------------------------------------------
Total nonaccruing loans 3,410 4,396 5,243 6,529 7,533
Assets acquired through foreclosure 59 217 301 904 432
- ----------------------------------------------------------------------------------------------
Total nonperforming assets $3,469 $4,613 $5,544 $7,433 $7,965
==============================================================================================
Past due loans:
Residential mortgages $ 327 $ 703 $ 915 $ 346 $ 88
Commercial and commercial mortgages - - 129 95 767
Consumer 59 104 148 88 244
- ----------------------------------------------------------------------------------------------
Total past due loans $ 386 $ 807 $1,192 $ 529 $1,099
==============================================================================================
Ratio of nonaccruing loans to total
loans (1) 0.19% 0.28% 0.40% 0.60% 0.72%
Ratio of allowance for loan losses to gross
loans (1) 1.41% 1.56% 1.69% 1.95% 2.05%
Ratio of nonperforming assets to total assets 0.12% 0.18% 0.25% 0.44% 0.42%
Ratio of loan loss allowance to nonaccruing
loans (2) 709.47% 524.05% 421.91% 324.49% 277.77%
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
The ratio of nonaccruing loans to total loans improved from 0.28% in 2004 to
0.19% in 2005. In addition, the ratio of nonperforming assets to total assets
improved from 0.18% in 2004 to 0.12% in 2005. These improvements were the result
of continued strong levels of asset quality.
The following table provides an analysis of the change in the balance of
nonperforming assets during the last three years:
Year Ended December 31, 2005 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Beginning balance $ 4,613 $ 5,544 $ 7,433
Additions 5,062 6,554 7,299
Collections (4,467) (4,668) (6,992)
Transfers to accrual (398) (1,717) (945)
Charge-offs/write-downs (1,341) (1,100) (1,251)
- --------------------------------------------------------------------------------
Ending balance $ 3,469 $ 4,613 $ 5,544
================================================================================
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 judgement
reflecting management's best estimate of probable loan losses related to
specifically identified loans as well as probable loan losses in the remaining
loan portfolio. Management's evaluation is based upon a 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.
15
WSFS FINANCIAL CORPORATION
The formula allowances for commercial and commercial real estate loans are
calculated by applying loss factors to outstanding loans in each case based on
the internal risk grade of each loan. As a result, changes in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors by risk grade have a basis in WSFS' historical loss
experience for such loans and may be adjusted for significant factors that, in
management's judgement, affect the collectability of the portfolio as of the
evaluation date. See the discussion of historical loss adjustment factors below.
Pooled loans are loans that are usually smaller, not-individually-graded and
homogenous in nature, such as consumer installment loans and residential
mortgages. Pooled loan loss allowances are based on historical net charge-offs
for ten years. The average loss allowance per homogenous pool is based on the
product of average annual historical loss rate and the average estimated
duration of the pool multiplied by the pool balances. These separate risk pools
are assigned a reserve for losses based upon this historical loss information
and historical loss adjustment factors. Historical loss adjustment factors are
based upon management's evaluation of various current conditions including those
listed below.
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet at least quarterly to discuss and
review these conditions and risks associated with individual problem loans. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for such losses. The
Company also gives consideration to the results of these regulatory agency
examinations.
The table below represents a summary of changes in the allowance for loan losses
during the periods indicated:
Year Ended December 31, 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Beginning balance $ 24,222 $ 22,386 $ 21,452 $ 21,597 $ 21,423
Provision for loan losses - continuing operations 2,582 3,217 2,550 2,243 1,865
Provision for loan losses - businesses held-for-sale - - - 211 347
Sale of businesses held-for-sale - - - (269) -
Charge-offs:
Residential real estate 90 222 329 725 106
Commercial real estate (1) 104 148 - 333 195
Commercial 1,048 656 827 895 1,000
Consumer (2) 631 817 860 1,551 1,031
- -----------------------------------------------------------------------------------------------------------------
Total charge-offs 1,873 1,843 2,016 3,504 2,332
- -----------------------------------------------------------------------------------------------------------------
Recoveries:
Residential real estate 59 32 - 76 1
Commercial real estate (1) 42 - 202 181 61
Commercial 209 335 79 483 100
Consumer (2) 140 95 119 434 132
- -----------------------------------------------------------------------------------------------------------------
Total recoveries 450 462 400 1,174 294
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs 1,423 1,381 1,616 2,330 2,038
- -----------------------------------------------------------------------------------------------------------------
Ending balance $ 25,381 $ 24,222 $ 22,386 $ 21,452 $ 21,597
=================================================================================================================
Net charge-offs to average gross loans outstanding,
net of unearned income 0.09% 0.10% 0.13% 0.22% 0.20%
=================================================================================================================
(1) Includes commercial mortgage and construction loans.
(2) 2002 and prior years include amounts for businesses held-for-sale.
16
WSFS FINANCIAL CORPORATION
For the year ended December 31, 2005, the Corporation provided $2.6 million for
loan losses. The decrease in 2005 reflects improved credit quality of the
Corporation's loan portfolio despite strong loan growth.
The allowance for losses is allocated by major portfolio type. As these
portfolios have developed, they have become a source of historical data in
projecting delinquencies and loss exposure; however, such allocations are not
indicative of where future losses may occur. The allocation of the allowance for
loan and lease losses by portfolio type at the end of each of the last five
fiscal years, and the percentage of outstanding in each category to total gross
loans outstanding, at such dates follow:
December 31, 2005 2004 2003 2002 2001
- ------------------------------------------------------ ------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------ ------------------ ----------------- ----------------- -----------------
(Dollars in Thousands)
Residential real estate $ 1,632 25.4% $ 1,468 28.1% $ 2,736 34.6% $ 3,620 38.2% $ 4,039 38.2%
Commercial real estate 10,978 32.7 9,211 34.6 8,338 29.3 7,208 26.2 6,927 24.3
Commercial 9,471 28.3 10,456 23.7 8,368 22.0 7,375 19.1 6,963 18.7
Consumer 3,300 13.6 3,087 13.6 2,944 14.1 3,249 16.5 3,668 18.8
- -------------------------------------------------------------------------------------------------------------------------------
Total $25,381 100.0% $24,222 100.0% $22,386 100.0% $21,452 100.0% $21,597 100.0%
===============================================================================================================================
LIQUIDITY
The Company manages its liquidity risk and funding needs through its treasury
function and its Asset/Liability Committee. Historically, the Company has had
success in growing its loan portfolio. For example, during the year ended
December 31, 2005, net loan growth resulted in the use of $228.8 million in
cash. The loan growth was primarily the result of the continued success
increasing corporate and small business lending. Management expects this trend
to continue. While the Company's loan-to-deposit ratio has been well above 100%
for many years, management has significant experience managing its funding needs
through borrowings and deposit growth.
As a financial institution, the Company has ready access to several sources of
funding. Among these are:
o Deposit growth
o The brokered CD market
o Borrowing from the FHLB
o Other borrowings such as repurchase agreements
o Cashflow from securities and loan repayments
o And net income of the Company
The Company's current branch expansion and renovation program is focused on
expanding the Company's retail footprint in Delaware and attracting new
customers to provide additional deposit growth. Retail deposit growth was
strong, equaling $141.7 million or 13% between December 31, 2004 and December
31, 2005.
The Corporation's portfolio of high-quality, liquid investments, primarily
short-duration AAA-rated, mortgage-backed securities and Agency notes also
provide a near-continuous source of cash flow to meet current cash needs. If
needed, portions of this portfolio could also be sold to provide cash to fund
loan growth. During the year ended December 31 2005, $39.3 million in cash was
also provided by operating activities.
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 7.4% at December 31, 2005,
compared with 10.5% at December 31, 2004. The ratio at both dates were well in
excess of the policy minimum. Also, liquidity risk management is a primary area
of examination by the OTS.
The Corporation has not used and has no intention of using any significant off
balance sheet financing arrangement for liquidity management purposes. The
Corporation's financial instruments with off balance sheet risk are limited to
obligations to fund loans to customers pursuant to existing commitments,
obligations of letters of credit and an interest rate cap which limits the
interest rate exposure on $50.0 million of trust preferred floating rate debt.
In addition, WSFS has not had and has no intention to have any significant
transactions, arrangements or other relationships with any unconsolidated,
limited purpose entities that could materially affect its liquidity or capital
resources.
CAPITAL RESOURCES
Federal laws, among other things, require the OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as WSFS to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted" assets and total "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
17
WSFS FINANCIAL CORPORATION
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well as
other requirements, established five capital tiers: well-capitalized,
adequately-capitalized, under-capitalized, significantly under-capitalized and
critically under- capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well-capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 2005, WSFS is classified as well-capitalized, the highest
regulatory defined level, and is in compliance with all regulatory capital
requirements. Additional information concerning WSFS' regulatory capital
compliance is included in Note 12 to the Financial Statements.
Since 1996, the Board of Directors has approved several stock repurchase
programs to acquire common stock outstanding. As part of these programs, the
Corporation acquired approximately 719,500 shares in 2005 and 373,900 shares in
2004. At December 31, 2005, the Corporation held 8.8 million shares of its
common stock as treasury shares. The Corporation intends to continue
repurchasing shares in 2006 in amounts depending on stock price and alternative
uses of capital. At December 31, 2005, the Corporation had 650,000 shares
remaining under its current share repurchase authorization.
OFF BALANCE SHEET ARRANGEMENTS
The Corporation has no off balance sheet arrangements that currently have, or
are reasonably likely to have a material future effect on the Corporation's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Additional information concerning the Corporation's off balance sheet
arrangements is included in Note 16 to the Financial Statements.
CONTRACTUAL OBLIGATIONS
At December 31, 2005, the Corporation had contractual obligations relating to
operating leases, long-term debt, data processing and credit obligations. These
obligations are summarized below. Additional information concerning the
Corporation's contractual obligations is included in Notes 9, 11, and 16 to the
Financial Statements.
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
- ----------------------------------------------------------------------------------------------------
(Amount in Thousands)
Operating lease obligations $ 37,288 $ 2,253 $ 5,550 $ 5,524 $23,961
Long-term debt obligations 1,008,721 661,000 209,900 65,000 72,821
Data processing contracts 12,587 3,364 6,147 3,076 -
Credit obligations 503,398 503,398 -
- ----------------------------------------------------------------------------------------------------
Total $1,561,994 $1,170,015 $221,597 $73,600 $96,782
====================================================================================================
IMPACT OF INFLATION AND CHANGING PRICES
The Corporation's Consolidated Financial Statements have been prepared in
accordance with U.S. generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased costs of the Corporation's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Corporation are
monetary. As a result, interest rates have a greater impact on the Corporation's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or the same extent as the price of
goods and services.
RECENT LEGISLATION
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Act"). The SEC promulgated certain regulations pursuant to the Act and
will continue to propose additional implementing or clarifying regulations as
necessary in furtherance of the Act.
The passage of the Act and the regulations implemented by the SEC subjected
publicly-traded companies to additional and more comprehensive reporting
regulations and disclosure. These new regulations, which are intended to curtail
corporate fraud, require the chief executive officer and chief financial officer
of the Company to personally certify certain SEC filings as well as the
Company's Financial Statements and to certify as to (i) the existence of
disclosure controls and procedures within the Company are designed to ensure
that information required to be disclosed by the Company in its SEC filings is
processed, summarized and reported accurately and (ii) the effectiveness of the
Company's internal control over financial reporting.
The Act and regulations promulgated thereunder by the SEC also impose additional
measures to be taken by the Company's officers, directors and outside auditors
and impose accelerated reporting requirements by officers and directors of the
Company in connection with certain changes in their equity holdings of the
Company. Implementation of and compliance with the Act and corresponding
regulations has and will likely increase the Company's operating expenses.
18
WSFS FINANCIAL CORPORATION
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, 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 judgements on the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The following are critical accounting policies that involve more significant
judgements 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 judgement reflecting management's best estimate of
probable loan losses related to specifically identified loans, as well as those
in the remaining loan portfolio. Management's evaluation is based upon a
continuing review of these portfolios, with consideration given to evaluations
resulting from examinations performed by regulatory authorities.
Contingencies (Including Indemnifications)
In the ordinary course of business, the Corporation, the Bank and its
subsidiaries are subject to legal actions which involve claims for monetary
relief. Based upon information presently available to the Corporation and its
counsel, it is the Corporation's opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on the Corporation's results of operations.
The Bank, as successor to originators of reverse mortgages is, from time to
time, involved in disputes, arbitration or litigation with various parties
including borrowers or the heirs of borrowers. Because reverse mortgages are a
relatively new and uncommon product, there can be no assurances regarding how
the courts or arbitrators may apply existing legal principles to the
interpretation and enforcement of the terms and conditions of the Bank's reverse
mortgage obligations.
Deferred Taxes
The Corporation accounts for income taxes in accordance with SFAS 109,
Accounting for Income Taxes, which requires the recording of deferred income
taxes that reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Management has assessed the Company's
valuation allowances on deferred income taxes resulting from, among other
things, limitations imposed by Internal Revenue Code and uncertainties,
including the timing of settlement and realization of these differences.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 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. See Note 1 to the Financial Statements for
the Company's disclosure of the prospective 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. The
adoption of this Statement will not have a material impact on the Corporation's
Consolidated Financial Statements.
In November 2005, FASB Staff Position (FSP) SFAS Nos. 115-1 and SFAS 124-1 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, was issued. This FSP addresses the determination as to when an
investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP also includes
accounting considerations subsequent to the recognition of other-than-temporary
impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments. The guidance in this
FSP shall be applied to reporting periods beginning after December 15, 2005. For
the Corporation, this will become effective on January 1, 2006. The adoption of
this Statement will not have a material impact on the Corporation's Consolidated
Financial Statements.
19
WSFS FINANCIAL CORPORATION
Market for Registrant's Common Equity and
Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock MarketSM
under the symbol WSFS. At December 31, 2005, the Corporation had 1,378
registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly
period within the two most recent fiscal years as well as the quarterly
dividends paid.
The closing market price of the common stock at December 31, 2005 was $61.25.
Stock Price Range
-----------------
Low High Dividends
-------------------------------------------------------------
2005 4th $57.12 $65.00 $ 0.07
3rd 54.00 59.26 0.07
2nd 49.50 56.70 0.07
1st 51.90 60.38 0.06
------
$ 0.27
======
2004 4th $49.90 $62.75 $ 0.06
3rd 47.80 53.75 0.06
2nd 45.03 51.12 0.06
1st 43.81 52.31 0.05
------
$ 0.23
======
20
WSFS FINANCIAL CORPORATION
Management's Report on Internal Control Over
Financial Reporting
To Our Stockholders:
Management of the Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
under the Securities Exchange Act of 1934. The Corporation's internal control
over financial reporting is designed to provide reasonable assurance to the
Corporation's management and board of directors regarding the preparation and
fair presentation of published financial statements.
Management assessed the effectiveness of the Corporation's internal control over
financial reporting as of December 31, 2005. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework. Based on this assessment, management has concluded that, as of
December 31, 2005, the Corporation's internal control over financial reporting
is effective based on those criteria.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2005, has been audited by KPMG LLP, the independent
registered public accounting firm who also audited the Corporation's
consolidated financial statements. KPMG's attestation report on management's
assessment of the Corporation's internal control over financial reporting
appears elsewhere in this annual report.
/s/Marvin N. Schoenhals /s/Stephen A. Fowle
- ------------------------------ -----------------------------
Marvin N. Schoenhals Stephen A. Fowle
Chairman and President Executive Vice President and
and Chief Financial Officer Chief Financial Officer
21
WSFS FINANCIAL CORPORATION
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
WSFS Financial Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that WSFS
Financial Corporation (the Corporation) maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Corporation's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Corporation's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Corporation maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in COSO.
Also, in our opinion, the Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statement of
condition of WSFS Financial Corporation and subsidiaries as of December 31, 2005
and 2004, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005, and our report dated March 15, 2006 expressed an
unqualified opinion on those consolidated financial statements.
/s/KPMG LLP
March 15, 2006
Philadelphia, Pennsylvania
22
WSFS FINANCIAL CORPORATION
Report of Independent Registered
Public Accounting Firm
The Board of Directors and Stockholders
WSFS Financial Corporation:
We have audited the accompanying consolidated statement of condition of WSFS
Financial Corporation and subsidiaries (the Corporation) as of December 31, 2005
and 2004, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WSFS Financial
Corporation and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 15, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/KPMG LLP
March 15, 2006
Philadelphia, Pennsylvania
23
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans $ 105,639 $ 78,101 $ 72,001
Interest on mortgage-backed securities 25,687 20,326 14,874
Interest and dividends on investment securities 2,580 3,099 1,503
Interest on investments in reverse mortgages 678 1,847 (24)
Other interest income 1,438 737 945
- ----------------------------------------------------------------------------------------------------------
136,022 104,110 89,299
- ----------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 21,690 9,395 8,189
Interest on Federal Home Loan Bank advances 30,659 23,430 19,918
Interest on federal funds purchased and securities sold under
agreements to repurchase 4,089 2,064 927
Interest on trust preferred borrowings 5,292 2,184 1,963
Interest on other borrowings 650 173 304
- ----------------------------------------------------------------------------------------------------------
62,380 37,246 31,301
- ----------------------------------------------------------------------------------------------------------
Net interest income 73,642 66,864 57,998
Provision for loan losses 2,582 3,217 2,550
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 71,060 63,647 55,448
- ----------------------------------------------------------------------------------------------------------
Noninterest income:
Credit/debit card and ATM income 15,049 12,137 9,749
Deposit service charges 10,091 9,389 9,119
Investment advisory income 2,519 2,262 -
Bank-owned life insurance income 2,003 2,190 -
Loan fee income 1,999 2,182 2,850
Mortgage banking activities, net 391 439 1,517
Securities (losses) gains (605) 249 515
Other income 3,206 3,102 2,416
- ----------------------------------------------------------------------------------------------------------
34,653 31,950 26,166
- ----------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries, benefits and other compensation 35,172 30,723 26,544
Occupancy expense 5,168 4,666 4,040
Equipment expense 3,879 3,696 3,777
Data processing and operations expense 3,465 3,246 2,812
Marketing expense 2,745 2,329 1,602
Professional fees 2,416 2,496 2,673
Other operating expenses 10,032 8,543 7,969
- ----------------------------------------------------------------------------------------------------------
62,877 55,699 49,417
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interest and taxes 42,836 39,898 32,197
Less minority interest 133 190 -
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before taxes 42,703 39,708 32,197
Income tax provision 14,847 13,951 10,964
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations 27,856 25,757 21,233
Income on wind-down of discontinued operations, net of taxes - 143 -
Gain on sale of businesses held-for-sale, net of taxes - - 41,789
- ----------------------------------------------------------------------------------------------------------
Net income $ 27,856 $ 25,900 $ 63,022
==========================================================================================================
24
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year Ended December 31, 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Earnings per share:
Basic:
Income from continuing operations $ 4.10 $ 3.60 $ 2.73
Income on wind-down of discontinued operations, net of taxes - 0.02 -
Gain on sale of businesses held-for-sale, net of taxes - - 5.38
- ----------------------------------------------------------------------------------------------------------
Net income $ 4.10 $ 3.62 $ 8.11
==========================================================================================================
Diluted:
Income from continuing operations $ 3.89 $ 3.39 $ 2.58
Income on wind-down of discontinued operations, net of taxes - 0.02 -
Gain on sale of businesses held-for-sale, net of taxes - - 5.07
- ----------------------------------------------------------------------------------------------------------
Net income $ 3.89 $ 3.41 $ 7.65
==========================================================================================================
The accompanying notes are an integral part of these Financial Statements.
25
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
December 31, 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Assets
Cash and due from banks $ 59,251 $ 61,328
Cash in non-owned ATMs 174,527 131,150
Interest-bearing deposits in other banks 173 531
- ------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 233,951 193,009
Investment securities held-to-maturity (market value: 2005-$5,005; 2004-$8,286) 4,806 7,767
Investment securities available-for-sale 52,683 89,609
Mortgage-backed securities held-to-maturity (market value: 2005-$-; 2004-$4) - 4
Mortgage-backed securities available-for-sale 608,372 512,189
Mortgage-backed securities trading 11,951 11,951
Loans held-for-sale 436 3,229
Loans, net of allowance for loan losses of $25,381 at December 31, 2005 and
$24,222 at December 31, 2004 1,774,858 1,532,238
Bank-owned life insurance 54,193 52,190
Stock in Federal Home Loan Bank of Pittsburgh, at cost 46,293 43,946
Assets acquired through foreclosure 59 217
Premises and equipment 22,904 22,835
Accrued interest receivable and other assets 36,212 32,684
Loans, operating leases and other assets of discontinued operations 34 1,088
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,846,752 $ 2,502,956
==============================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand $ 279,415 $ 246,592
Interest-bearing demand 141,378 100,098
Money market 209,398 123,523
Savings 251,675 289,041
Time 224,853 221,414
Jumbo certificates of deposit - retail 87,212 71,514
- ------------------------------------------------------------------------------------------------------------------------------
Total retail deposits 1,193,931 1,052,182
Jumbo certificates of deposit - nonretail 40,567 44,903
Brokered certificates of deposit 211,738 137,877
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,446,236 1,234,962
Federal funds purchased and securities sold under agreements to repurchase 83,150 132,105
Federal Home Loan Bank advances 1,008,721 837,063
Trust preferred borrowings 67,011 51,547
Other borrowed funds 36,126 33,441
Accrued interest payable and other liabilities 23,327 17,296
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,664,571 2,306,414
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 16)
Minority Interest 206 239
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 15,435,630
at December 31, 2005 and 15,213,647 at December 31, 2004 154 152
Capital in excess of par value 74,673 68,327
Accumulated other comprehensive loss (9,968) (3,385)
Retained earnings 319,065 293,054
Treasury stock at cost, 8,839,569 shares at December 31, 2005 and 8,127,269
shares at December 31, 2004 (201,949) (161,845)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 181,975 196,303
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and stockholders' equity $ 2,846,752 $ 2,502,956
==============================================================================================================================
The accompanying notes are an integral part of these Financial Statements.
26
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital in Other Total
Common Excess of Comprehensive Retained Treasury Stockholders'
Stock Par Value (Loss) Income Earnings Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Balance, December 31, 2002 $149 $ 59,789 $ 904 $207,358 $ (85,528) $182,672
Comprehensive income:
Net income - - - 63,022 - 63,022
Other comprehensive loss (1) - - (2,652) - - (2,652)
--------
Total comprehensive income 60,370
--------
Cash dividend, $0.20 per share - - - (1,583) - (1,583)
Exercise of common stock options 2 3,054 - - - 3,056
Treasury stock at cost, 1,596,600 shares (2) - 93 - - (58,418) (58,325)
Tax benefit from exercises of common stock options - 1,802 - - - 1,802
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $151 $ 64,738 $ (1,748) $268,797 $(143,946) $187,992
=============================================================================================================================
Comprehensive income:
Net income - - - 25,900 - 25,900
Other comprehensive loss (1) - - (1,637) - - (1,637)
--------
Total comprehensive income 24,263
--------
Cash dividend, $0.23 per share - - - (1,643) - (1,643)
Exercise of common stock options 1 2,044 - - - 2,045
Treasury stock at cost, 368,400 shares (3) - 173 - - (17,899) (17,726)
Tax benefit from exercises of common stock options - 1,372 - - - 1,372
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $152 $68,327 $ (3,385) $293,054 $(161,845) $196,303
=============================================================================================================================
Comprehensive income:
Net income - - - 27,856 - 27,856
Other comprehensive loss (1) - - (6,583) - - (6,583)
--------
Total comprehensive income 21,273
--------
Cash dividend, $0.27 per share - - - (1,845) - (1,845)
Exercise of common stock options 2 3,120 - - - 3,122
Treasury stock at cost, 712,300 shares (4) - 276 - - (40,104) (39,828)
Tax benefit from exercises of common stock options - 2,950 - - - 2,950
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $154 $74,673 $(9,968) $319,065 $(201,949) $181,975
=============================================================================================================================
(1) Other Comprehensive Income: 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized holding losses on securities available-for-sale arising during the
period net of taxes (2005 - $(4,540), 2004 - $(661), 2003 - $(1,455)) $ (7,407) $ (1,078) $ (2,374)
Net unrealized holding gains (losses) arising during the period on
derivatives, net of taxes (2005 - $241, 2004 - $(218), 2003 - $22) 449 (405) 41
Reclassification for losses (gains) included in income, net of taxes
(2005 - $230, 2004 - $(94), 2003 - $(196)) 375 (154) (319)
- -----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive (loss) income $ (6,583) $ (1,637) $ (2,652)
=============================================================================================================================
(2) Net of reissuance of 5,000 shares.
(3) Net of reissuance of 5,500 shares.
(4) Net of reissuance of 7,200 shares.
The accompanying notes are an integral part of these Financial Statements.
27
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------
(revised) (revised)
(In Thousands)
Operating activities:
Net income $ 27,856 $ 25,900 $ 63,022
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Provision for loan losses 2,582 3,217 2,550
Depreciation, accretion and amortization 5,440 6,022 11,562
Increase in accrued interest receivable and other assets (1,952) (2,831) (10,060)
Origination of loans held-for-sale (37,222) (42,647) (73,679)
Proceeds from sales of loans held-for-sale 38,721 38,223 68,338
Gain on sale of loans held-for-sale (84) (205) (751)
Loss (gain) on sale of loans 1 (234) (766)
Loss (gain) on sale of investments 605 (249) (515)
Minority interest in net income 133 190 -
Increase (decrease) in accrued interest payable and other liabilities 6,031 2,648 (22,526)
Gain on businesses held-for-sale - - (65,689)
Gain on sale of assets acquired through foreclosure (137) (60) (99)
Increase in value of bank-owned life insurance (2,003) (2,190) -
Increase in capitalized interest, net (678) (2,271) (502)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 39,293 25,513 (29,115)
- ----------------------------------------------------------------------------------------------------------------
Investing activities:
Maturities of investment securities 6,990 2,675 500
Sales of investment securities available-for-sale 60,454 25,057 21,292
Purchases of investment securities available-for-sale (26,744) (9,930) (116,088)
Sales of mortgage-backed securities available-for-sale - 51,634 109,502
Sales of mortgage-backed securities held-to-maturity - - 14,772
Repayments of mortgage-backed securities held-to-maturity 4 1,813 22,809
Repayments of mortgage-backed securities available-for-sale 112,395 150,988 333,460
Purchases of mortgage-backed securities available-for-sale (220,816) (200,696) (874,560)
Repayments on reverse mortgages 177 2,619 1,789
Disbursements for reverse mortgages (393) (470) (877)
Purchase of Cypress Capital Management, LLC (452) (1,122) -
Sale of loans 688 13,435 47,174
Purchase of loans (15,831) (14,767) (14,370)
Purchase of bank-owned life insurance - (50,000) -
Sale of businesses held-for-sale - - 129,283
Net increase in loans (228,758) (228,001) (254,676)
Net increase in stock of Federal Home Loan Bank of Pittsburgh (2,347) (270) (21,697)
Sales of assets acquired through foreclosure, net 683 532 1,322
Purchase of land (925) (2,860) -
Purchase of office building - (3,507) -
Sale of real estate held-for-investment 5,296 - -
Investment in real estate partnership (1,196) - -
Investment in premises and equipment, net (4,202) (6,378) (2,800)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (314,977) (269,248) (603,165)
- ----------------------------------------------------------------------------------------------------------------
(Continued on next page)
28
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year Ended December 31, 2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
(revised) (revised)
(In Thousands)
Financing activities:
Net increase in demand and savings deposits $ 125,297 $ 102,368 $ 68,612
Net increase (decrease) in time deposits 87,875 202,933 (40,876)
Net increase in federal funds purchased - - 50,000
Net (decrease) increase in securities sold under agreements to repurchase (48,955) (16,276) 72,456
Net increase (decrease) in FHLB advances 171,658 (6,233) 439,797
Redemption of WSFS Capital Trust I Preferred Securities (51,547) - -
Issuance of Pooled Floating Rate Capital Securities 67,011 - -
Dividends paid on common stock (1,845) (1,643) (1,583)
Issuance of common stock and exercise of common stock options 6,348 3,590 4,951
Purchase of treasury stock, net of reissuance (40,104) (17,899) (58,418)
(Decrease) increase in minority interest (166) 3 (12,845)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 315,572 266,843 522,094
- --------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 39,888 23,108 (110,186)
Net cash provided by operating activities of discontinued operations (1) 1,141 7,746 43,077
Net cash (used for) provided by investing activities of discontinued operations (1) (87) 640 (5,155)
Cash and cash equivalents at beginning of period 193,009 161,515 233,779
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 233,951 $ 193,009 $ 161,515
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 58,080 $ 36,355 $ 31,617
Cash paid for income taxes from continuing operations, net 10,151 9,803 61,984
Cash (refunded) paid for taxes of discontinued operations, net (45) 396 1,087
Loans transferred to assets acquired through foreclosure 388 388 620
Net change in other comprehensive loss (6,583) (1,637) (2,652)
Net transfer of loans held-for-sale to loans 1,378 2,858 8,150
Deconsolidation of WSFS Capital Trust I - 1,547 -
Transfer of building to real estate held-for-investment 1,878 - -
(1) In 2005, the Company has separately disclosed the operating and investing
portions of the cash flows attributable to its discontinued operations
which, in prior periods, were reported on a combined basis as a single
amount.
The accompanying notes are an integral part of these Financial Statements.
29
WSFS FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
WSFS Financial Corporation (Company or Corporation) is a thrift holding company
organized under the laws of the State of Delaware. The Corporation's principal
wholly-owned subsidiary, Wilmington Savings Fund Society, FSB (the Bank or
WSFS), is a federal savings bank organized under the laws of the United States
which, at December 31, 2005, serves customers from its main office, 24 retail
banking offices, loan production offices and operations centers located in
Delaware and southeastern Pennsylvania.
In preparing the Financial Statements, management is required to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. The material estimates that are particularly susceptible
to significant changes in the near term relate to the allowance for loan losses,
investment in reverse mortgages, contingencies (including indemnifications) and
income tax taxes.
Basis of Presentation
The consolidated Financial Statements include the accounts of the parent
company, Montchanin Capital Management, Inc. (Montchanin) and its non-wholly
owned subsidiary, Cypress Capital Management, LLC (Cypress), WSFS and its
wholly-owned subsidiaries, WSFS Investment Group, Inc., WSFS Reit, Inc. and WSFS
Credit Corporation (WCC), as well as not wholly-owned, but majority controlled
and consolidated subsidiary, Wilmington Finance, Inc. (WF). WF was sold in
January 2003. This subsidiary was classified as a business held-for-sale. See
Note 3 of the Financial Statements for further discussion of Business
Held-for-Sale. As discussed in Note 2 of the Financial Statements, the results
of WCC, the Corporation's wholly-owned indirect auto financing and leasing
subsidiary, are presented as discontinued operations.
WSFS Capital Trust III is an unconsolidated affiliate of the Company and was
formed in 2005 to issue $67.0 million aggregate principle amount of Pooled
Floating Rate Capital Securities. The proceeds from this issue were used to fund
the redemption of $51.5 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. WSFS Investment Group, Inc. markets
various third-party insurance and securities products to Bank customers through
WSFS' retail banking system. WSFS Reit, Inc. is a real estate investment trust
that was formed to hold qualifying real estate assets and may be used in the
future as a vehicle to raise capital. Montchanin was formed to provide asset
management products and services to customers in the Bank's primary market area.
In 2004, Montchanin acquired a 60% interest in Cypress, a Wilmington based
investment advisory firm servicing high net-worth individuals and institutions.
In January 2005, Montchanin increased its ownership in Cypress to 80%.
During 2005, the Corporation announced that it would move its corporate
headquarters in 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. Related to this move,
the Company sold the land on which the WSFS Bank Center is to be built. As part
of this agreement, the property developer has agreed to purchase the Company's
current headquarters, which is expected to result in approximately a $3.0
million gain at the time of the move, expected to be early 2007.
Certain reclassifications have been made to the prior years' Financial
Statements to conform them to the current year's presentation. All significant
intercompany transactions are eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks, federal funds sold and securities purchased under agreements to
resell. Generally, federal funds are purchased and sold for periods ranging up
to 90 days.
Debt and Equity Securities
Investments in equity securities that have a readily determinable fair value and
investments in debt securities are classified into three categories and
accounted for as follows:
o Debt securities with the positive intention to hold to maturity are
classified as "held-to-maturity" and reported at amortized cost.
o Debt and equity securities purchased with the intention of selling them in
the near future are classified as "trading securities" and are reported at
fair value, with unrealized gains and losses included in earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair value,
with unrealized gains and losses excluded from earnings and reported, net
of tax, as a separate component of stockholders' equity.
30
WSFS FINANCIAL CORPORATION
Debt and equity securities include mortgage-backed securities, corporate and
municipal bonds, U.S. Government and agency securities and certain equity
securities. Premiums and discounts on debt and equity securities
held-to-maturity and available-for-sale are recognized in interest income using
a level yield method over the period to expected maturity. The fair value of
debt and equity securities is primarily obtained from third-party pricing
services. Implicit in the valuation are estimated prepayments based on
historical and current market conditions.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary, result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses. Management has the discretion to
determine impairment in certain circumstances. The specific identification
method is used to determine realized gains and losses on sales of investment and
mortgage-backed securities. All sales are made without recourse.
Investment in Reverse Mortgages
The Corporation accounts for its investment in reverse mortgages in accordance
with the instructions provided by the staff of the Securities and Exchange
Commission entitled "Accounting for Pools of Uninsured Residential Reverse
Mortgage Contracts" which requires grouping the individual reverse mortgages
into "pools" and recognizing income based on the estimated effective yield of
the pool. In computing the effective yield, the Corporation must project the
cash inflows and outflows of the pool including actuarial projections of the
life expectancy of the individual contract holder and changes in the collateral
value of the residence. At each reporting date, a new economic forecast is made
of the cash inflows and outflows of each pool of reverse mortgages; the
effective yield of each pool is recomputed, and income is adjusted retroactively
and prospectively to reflect the revised rate of return. Accordingly, because of
this quasi-market-value based accounting, the recorded value of reverse mortgage
assets can result in significant volatility associated with estimations. As a
result income recognition can vary significantly from reporting period to
reporting period.
Loans
Loans are stated net of deferred fees and costs and unearned discounts. Loan
interest income is accrued using various methods that approximate a constant
yield. Loan origination and commitment fees and direct loan origination costs
are deferred and recognized over the life of the related loans using a level
yield method over the period to maturity.
A loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected future discounted cash flows, the market price of
the loan or the fair value of the underlying collateral if the loan is
collateral dependent. Impaired loans include loans within the Corporation's
commercial, commercial mortgage and commercial construction portfolios. The
Corporation's policy for recognition of interest income on impaired loans is the
same as for nonaccrual loans discussed below.
Nonaccrual Loans
Nonaccrual loans are those on which the accrual of interest has ceased. Loans
are placed on nonaccrual status immediately if, in the opinion of management,
collection is doubtful, or when principal or interest is past due 90 days or
more and collateral is insufficient to cover principal and interest. Interest
accrued but not collected at the date a loan is placed on nonaccrual status is
reversed and charged against interest income. In addition, the amortization of
net deferred loan fees is suspended when a loan is placed on nonaccrual status.
Subsequent cash receipts are applied either to the outstanding principal or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest. Loans are returned to an accrual
status when the borrower's ability to make periodic principal and interest
payments has returned to normal (i.e. - brought current with respect to
principal or interest or restructured) and the paying capacity of the borrower
or the underlying collateral is deemed sufficient to cover principal and
interest in accordance with the Corporation's previously established
loan-to-value policies.
Allowances for Loan Losses
The Corporation maintains allowances for credit losses and charges losses to
these allowances when such losses are realized. The determination of the
allowance for loan losses requires significant judgement reflecting management's
best estimate of probable losses related to specifically identified loans as
well as probable losses in the remaining loan portfolio. Management's evaluation
is based upon a review of these portfolios.
Management establishes the loan loss allowance in accordance with guidance
provided by 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.
31
WSFS FINANCIAL CORPORATION
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 that a loss has been incurred.
The formula allowances for commercial and commercial real estate loans are
calculated by applying loss factors to outstanding loans in each case based on
the internal risk grade of each loan. As a result, changes in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors by risk grade have a basis in WSFS' historical loss
experience for such loans and may be adjusted for significant factors that, in
management's judgement, 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
homogeneous in nature, such as consumer installment loans and residential
mortgages. Pooled loan loss allowances are based on historical net charge-offs
for ten years. The average loss allowance per homogeneous pool is based on the
product's average annual historical loss rate and the average estimated duration
of the pool multiplied by the pool balances. These separate risk pools are
assigned a reserve for loss based upon this historical loss information and
historical loss adjustment factors. Historical loss adjustment factors are based
upon management's evaluation of various current conditions, including those
listed below.
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected
to result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet at least quarterly to discuss and
review these conditions, and also risks associated with individual problem
loans. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. The Company also gives consideration to the results of these regulatory
agency examinations.
Allowances for estimated losses on investments in real estate and assets
acquired through foreclosure are provided if the carrying value exceeds the fair
value less estimated disposal costs.
Assets Held-for-Sale
Assets held-for-sale include loans held-for-sale and are carried at the lower of
cost or market of the aggregate or, in some cases, individual assets. Vehicles
that have been returned to the Company upon the expiration of their lease terms
have been included in the net assets of discontinued operations.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the recorded
investment in the loans or fair value less estimated disposal costs. Costs
subsequently incurred to improve the assets are included in the carrying value
provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. Net costs
of assets acquired through foreclosure include costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on a straight-line basis over the
estimated useful lives of the assets or, for leasehold improvements, over the
life of the related lease if less than the estimated useful life. In general,
computer equipment, furniture and equipment and building renovations are
depreciated over three, five and ten years, respectively. Accelerated methods
are used in depreciating certain assets for income tax purposes.
32
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to repurchase.
Reverse repurchase agreements are treated as financings, with the obligation to
repurchase securities sold reflected as a liability in the Consolidated
Statement of Condition. The securities underlying the agreements remain in the
asset accounts.
Loss Contingency for Standby Letters of Credit
The Corporation maintains a loss contingency for standby letters of credit and
charges losses to this reserve when such losses are realized. The determination
of the loss contingency for standby letters of credit requires significant
judgement reflecting management's best estimate of probable losses related to
standby letters of credit.
Income Taxes
The provision for income taxes includes federal, state and local income taxes
currently payable and those deferred because of temporary differences between
the financial statement basis and tax basis of assets and liabilities.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2005 2004 2003
- ------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Numerator:
Income from continuing operations $27,856 $25,757 $21,233
Income on wind-down of discontinued operations, net of taxes - 143 -
Gain on sale of businesses held-for-sale, net of taxes - - 41,789
- ------------------------------------------------------------------------------------------------------------------------
Net income $27,856 $25,900 $63,022
- ------------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share - weighted average shares 6,795 7,158 7,774
Effect of dilutive employee stock options 373 435 464
- ------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise 7,168 7,593 8,238
========================================================================================================================
Earnings per share:
Basic:
Income from continuing operations $ 4.10 $ 3.60 $ 2.73
Income on wind-down of discontinued operations, net of taxes - 0.02 -
Gain on sale of businesses held-for-sale, net of taxes - - 5.38
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 4.10 $ 3.62 $ 8.11
========================================================================================================================
Diluted:
Income from continuing operations $ 3.89 $ 3.39 $ 2.58
Income on wind-down of discontinued operations, net of taxes - 0.02 -
Gain on sale of businesses held-for-sale, net of taxes - - 5.07
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 3.89 $ 3.41 $ 7.65
========================================================================================================================
Outstanding common stock equivalents having no dilutive effect, in thousands 173 4 4
33
WSFS FINANCIAL CORPORATION
Stock Options
At December 31, 2005, the Corporation had two stock-based employee compensation
plans that are described more fully in Note 15 to the Financial Statements. The
Corporation accounts for these plans under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and Related Interpretations. No stock-based employee
compensation cost is reflected in the net income, as all options granted under
those plans had an exercise price at least equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share had the Company applied the fair
value recognition provision of the Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Effective January 1, 2006, the Corporation will implement SFAS No. 123 (revised
2004), Share-Based-Payment. The impact to the Corporation's Consolidated
Statement of Operations for 2006, on existing options, is expected to be
approximately $1.1 million.
2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Income from continuing operations, as reported $27,856 $25,757 $21,233
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects (972) (590) (708)
- --------------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $26,884 $25,167 $20,525
================================================================================================================================
Earnings per share:
Basic:
Income from continuing operations $ 4.10 $ 3.60 $ 2.73
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects (0.14) (0.08) (0.09)
- --------------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $ 3.96 $ 3.52 $ 2.64
================================================================================================================================
Diluted:
Income from continuing operations $ 3.89 $ 3.39 $ 2.58
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects (0.14) (0.08) (0.09)
- --------------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $ 3.75 $ 3.31 $ 2.49
================================================================================================================================
2. DISCONTINUED OPERATIONS OF A BUSINESS SEGMENT
- --------------------------------------------------------------------------------
In December 2000, the Corporation discontinued the operations of WCC, its
indirect auto financing and vehicle leasing subsidiary. At December 31, 2000,
WCC had 7,300 lease contracts and 2,700 loan contracts, compared to zero lease
contracts and 31 loan contracts at December 31, 2005.
At December 31, 2005, loans, operating leases and other assets of discontinued
operations, net were $34,000 compared to $1.1 million at December 31, 2004. This
decrease was mainly due to scheduled maturities in the remaining indirect loan
and lease portfolios. At December 31, 2004, the Corporation reviewed the
remaining used car residual values and determined that its exposure was
significantly reduced. As a result, at December 31, 2004, the Corporation
reduced its reserve for discontinued operations by $143,000, net of taxes. At
December 31, 2005, there were $74,000 in indirect loans and zero in indirect
leases, net, still outstanding. At December 31, 2005, WSFS had exposure to
$19,000 in remaining used car residuals, for which it estimates a loss of
$8,000. Management has provided for this loss in the Financial Statements. Due
to the provision for this estimated exposure in the Financial Statements, the
Corporation did not recognize any additional losses on the wind-down of
discontinued operations in 2005, 2004 and 2003.
34
WSFS FINANCIAL CORPORATION
The following table depicts the net income (loss) from
discontinued operations for the years ended December 31, 2005, 2004 and 2003:
Year Ended December 31, 2005 2004 2003
- ------------------------------------------------------------------------------------------
(In Thousands)
Interest income $ 27 $ 140 $ 422
Allocated interest expense (1) 14 161 987
- ------------------------------------------------------------------------------------------
Net interest income (expense) 13 (21) (565)
Loan and lease servicing fee income 72 237 292
Rental income on operating leases, net 63 377 (529)
Other Income - (2) 2
- ------------------------------------------------------------------------------------------
Net revenues 148 591 (800)
Noninterest expenses 358 352 557
- ------------------------------------------------------------------------------------------
(Loss) income before taxes (210) 239 (1,357)
Charge (credit) to the reserve for discontinued operations 210 (239) 1,357
- ------------------------------------------------------------------------------------------
Income from discontinued operations - - -
Income on wind-down of discontinued operations - 143 -
- ------------------------------------------------------------------------------------------
Total $ - $ 143 $ -
==========================================================================================
(1) The allocated interest expense for 2005 was based on the Company's annual
average wholesale borrowing rate of 3.41%, which approximated a marginal
funding cost for the business. For the years ended December 31, 2004 and
2003, the allocated interest expense was based on a direct matched-maturity
funding of the net non-cash assets of discontinued operations. The average
borrowing rates for 2004 and 2003 were 3.40% and 3.51%, respectively.
3. BUSINESSES HELD-FOR-SALE
- --------------------------------------------------------------------------------
In November 2002, WSFS signed a definitive agreement for the sale of WSFS'
majority-owned subsidiary, Wilmington Finance, Inc. (WF). The sale was completed
in January 2003 and WSFS recognized an after tax gain on the sale of $41.3
million or $5.01 per diluted share. The sale included $148.2 million in assets,
of which $117.6 million were residential mortgage loans held-for-sale. Under a
provision of the agreement between the sellers and buyers, certain sale
consideration was withheld in a separate escrow account pending the resolution
of certain events. During 2003, WSFS received the entire amount held in escrow.
As a result in 2003, the Company recorded $325,000 ($208,000 after taxes) as a
gain on sale of businesses held-for-sale which is included in the total recorded
gain on sale of $41.3 million.
Also in November 2002, the Corporation completed the sale of CustomerOne
Financial Network, Inc. (C1FN) and its related interests in its Everbank
Division. Under a provision of the agreement between sellers and buyers, certain
sale consideration was withheld in two separate escrow accounts pending the
resolution of certain events. During 2003, those events were resolved and WSFS
received the entire amount held in escrow. As a result, the Company recorded
$786,000 ($517,000 after taxes) as a gain on the sale of businesses
held-for-sale.
The gains realized on the sale of WF and C1FN are presented separately on the
statement of operations, net of tax.
35
WSFS FINANCIAL CORPORATION
4. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The following tables detail the amortized cost and the estimated fair value of
the Corporation's investment securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale securities:
December 31, 2005:
Reverse mortgages (1) $ 785 $ - $ - $ 785
U.S. Government and agencies 51,702 - 785 50,917
State and political subdivisions 975 6 - 981
- ------------------------------------------------------------------------------------
$ 53,462 $ 6 $ 785 $ 52,683
====================================================================================
December 31, 2004:
Reverse mortgages (1) $ (109) $ - $ - $ (109)
U.S. Government and agencies 90,730 - 1,012 89,718
- ------------------------------------------------------------------------------------
$ 90,621 $ - $ 1,012 $ 89,609
====================================================================================
Held-to-maturity:
December 31, 2005:
State and political subdivisions $ 4,806 $ 199 $ - $ 5,005
- ------------------------------------------------------------------------------------
$ 4,806 $ 199 $ - $ 5,005
====================================================================================
December 31, 2004:
Corporate bonds $ 310 $ 13 $ - $ 323
State and political subdivisions 7,457 507 1 7,963
- ------------------------------------------------------------------------------------
$ 7,767 $ 520 $ 1 $ 8,286
====================================================================================
(1) See Note 6 of the Financial Statements for a further discussion of Reverse
Mortgages.
Securities with book values aggregating $52.8 million at December 31, 2005 were
specifically pledged as collateral for WSFS' Treasury Tax and Loan account with
the Federal Reserve Bank, securities sold under agreement to repurchase and
certain letters of credit and municipal deposits which require collateral.
Accrued interest receivable relating to investment securities was $434,000 and
$728,000 at December 31, 2005 and 2004, respectively.
36
WSFS FINANCIAL CORPORATION
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 2005 were as follows:
Held-to-Maturity Available-for-Sale
------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
(In Thousands)
Within one year (1) $ - $ - $13,714 $13,693
After one year but within five years 3,299 3,482 39,408 38,646
After five but within ten years - - 340 344
After ten years 1,507 1,523 - -
- --------------------------------------------------------------------------------
$ 4,806 $ 5,005 $53,462 $52,683
================================================================================
(1) Reverse mortgages do not have contractual maturities. The Corporation has
included reverse mortgages in maturities within one year.
During 2005, proceeds from the sale of investment securities classified as
available-for-sale were $61.1 million, with a loss of $609,000 realized on the
sales. Municipal bonds totaling $180,000 and corporate bonds totaling $251,553
were called by the issuers, with a gain of $4,000 realized on these calls.
Proceeds from the sale of investments classified as available-for-sale during
2004 and 2003 were $25.0 million and $21.2 million, respectively. There was a
net gain of $1,000 realized on sales in 2004 and $200,000 net gain realized in
2003. The cost basis for all investment security sales was based on the specific
identification method. There were no sales of investment securities classified
as held-to-maturity in 2005, 2004 and 2003.
At December 31, 2005, the Company owned investment securities totaling $51.0
million where the amortized cost basis exceeded fair value. Total unrealized
losses on those securities were $785,000 at December 31, 2005. This temporary
impairment is the result of changes in market interest rates since the purchase
of the securities. Securities amounting to $36.0 million have been impaired for
12 months or longer. The Corporation has determined that these securities are
not "other than temporarily" impaired. The following table lists the unrealized
losses aggregated by category:
Less than 12 months 12 months or longer Total
------------------- ------------------- -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
Held-to-maturity
State and political subdivisions $ 71 $ - $ - $ - $ 71 $ -
Available-for-sale
State and political subdivisions - - - - - -
U.S. Government and agencies 14,898 5 36,019 780 50,917 785
- -----------------------------------------------------------------------------------------------------------------
Total temporarily impaired investments $14,969 $ 5 $36,019 $ 780 $50,988 $ 785
=================================================================================================================
37
WSFS FINANCIAL CORPORATION
5. MORTGAGE-BACKED SECURITIES
- --------------------------------------------------------------------------------
The following tables detail the amortized cost and the estimated fair value of
the Corporation's mortgage-backed securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale securities:
December 31, 2005:
Collateralized mortgage obligations $526,546 $ 205 $ 11,199 $515,552
FNMA 49,785 - 2,010 47,775
FHLMC 32,211 - 1,554 30,657
GNMA 14,643 - 255 14,388
- ------------------------------------------------------------------------------------------
$623,185 $ 205 $ 15,018 $608,372
==========================================================================================
Weighted average yield 4.63%
December 31, 2004:
Collateralized mortgage obligations $402,513 $ 1,319 $ 2,601 $401,231
FNMA 59,774 - 1,124 58,650
FHLMC 34,731 - 943 33,788
GNMA 18,408 165 53 18,520
- ------------------------------------------------------------------------------------------
$515,426 $ 1,484 $ 4,721 $512,189
==========================================================================================
Weighted average yield 4.27%
Held-to-maturity securities:
December 31, 2005:
FHLMC $ - $ - $ - $ -
- ------------------------------------------------------------------------------------------
$ - $ - $ - $ -
==========================================================================================
Weighted average yield -%
December 31, 2004:
FHLMC $ 4 $ - $ - $ 4
- ------------------------------------------------------------------------------------------
$ 4 $ - $ - $ 4
==========================================================================================
Weighted average yield 6.06%
Trading securities:
December 31, 2005:
Collateralized mortgage obligations $ 11,951 $ - $ - $ 11,951
- ------------------------------------------------------------------------------------------
$ 11,951 $ - $ - $ 11,951
==========================================================================================
Weighted average yield 7.38%
December 31, 2004:
Collateralized mortgage obligations $ 11,951 $ - $ - $ 11,951
- ------------------------------------------------------------------------------------------
$ 11,951 $ - $ - $ 11,951
==========================================================================================
Weighted average yield 5.32%
The portfolio of available-for-sale mortgage-backed securities consist of 100%
AAA-rated, currently cash flowing securities, backed by conventional 15 or
20-year mortgages. The weighted average duration of the mortgage-backed
securities was 3.1 years at December 31, 2005.
At December 31, 2005, mortgage-backed securities with par values aggregating
$369.0 million were pledged as collateral for retail customer repurchase
agreements, municipal deposits and Federal Home Loan Bank advances. Accrued
interest receivable relating to mortgage-backed securities was $2.4 million and
$1.9 million at December 31, 2005 and 2004, respectively. There were no sales of
mortgage-backed securities in 2005. Proceeds from the sale of mortgage-backed
securities available-for-sale
38
WSFS FINANCIAL CORPORATION
were $51.4 million in 2004, resulting in a gain of $248,000. The cost basis of
all mortgage-backed securities sales are based on specific identification
method.
The Corporation owns $12.0 million of SASCO RM-1 2002 securities, including
accrued interest which was paid in kind, which are classified as "trading."
$10.0 million was received as partial consideration for the sale of the reverse
mortgage portfolio, while an additional $1.0 million was purchased at par at the
time of the securitization and $950,000 from accrued interest paid in kind.
These floating rate notes represent the BBB traunche of the reverse mortgage
securitization underwritten by Lehman Brothers and carry a coupon rate of
one-month London InterBank Offered Rate (LIBOR) plus 300 basis points. For a
further discussion of reverse mortgages, see the Reverse Mortgages discussion in
Management's Discussion and Analysis and Note 6 to the Financial Statements.
Based on accounting rules under SFAS 115, when these securities were acquired
they were classified as "trading." It was the Company's intention to sell them
in the near term. 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 estimated
the value of these securities as of December 31, 2005 based on the pricing of
similar securities that have an active market as well as a fundamental analysis
of the actual cash flows of the underlying securities. The Corporation also
obtained an estimate, from an independent securities dealer, of the value of
these securities, which was also based in part on similar actively-traded
securities.
At December 31, 2005, the Company owned mortgage-backed securities totaling
$563.7 million where the amortized cost basis exceeded fair value. Total
unrealized losses on those securities were $15.0 million at December 31, 2005.
This temporary impairment is the result of changes in market interest rates
since the purchase of the securities. Some of these securities have been
impaired for twelve months or longer. The Corporation has determined that these
securities are not "other than temporarily" impaired. The following table lists
the unrealized losses aggregated by category:
Less than 12 months 12 months or longer Total
------------------- ------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale
CMO $260,241 $ (4,433) $210,657 $ (6,766) $470,898 $(11,199)
FNMA - - 47,775 (2,010) 47,775 (2,010)
FHLMC 2,257 (57) 28,400 (1,497) 30,657 (1,554)
GNMA 11,066 (143) 3,322 (112) 14,388 (255)
- ---------------------------------------------------------------------------------------------------------
Total temporarily impaired MBS $273,564 $ (4,633) $290,154 $(10,385) $563,718 $(15,018)
=========================================================================================================
6. REVERSE MORTGAGES AND RELATED ASSETS
- --------------------------------------------------------------------------------
The Corporation holds an investment in reverse mortgages of $785,000 at December
31, 2005 representing a participation in reverse mortgages with a third party.
Reverse mortgage loans are contracts that require the lender to make monthly
advances throughout the borrower's life or until the borrower relocates, prepays
or the home is sold, at which time the loan becomes due and payable. Reverse
mortgages are nonrecourse obligations, which means that the loan repayments are
generally limited to the net sale proceeds of the borrower's residence.
The Corporation accounts for its investment in reverse mortgages by estimating
the value of the future cash flows on the reverse mortgages at a rate deemed
appropriate for these mortgages, based on the market rate for similar
collateral. Actual cash flows from these mortgage loans can result in
significant volatility in the recorded value of reverse mortgage assets. As a
result, income varies significantly from reporting period to reporting period.
For the year ended December 31, 2005, the Corporation earned $678,000 in
interest income on reverse mortgages as compared to $1.8 million in 2004 and
$(24,000) in 2003.
The projected cash flows depend on assumptions about life expectancy
and the changes in future collateral values. Projecting the changes in future
collateral values is the most significant factor impacting the volatility of
future cash flows. The Corporation is currently estimating a short-term annual
appreciation rate of -8.0% in the first year, and a long-term annual
appreciation rate of 0.5% in future years. If the long-term appreciation rate
was increased to 1.5%, the resulting impact on income would have been $150,000.
Conversely, if the long-term appreciation rate was decreased to -0.5%, the
resulting impact on income would have been $(130,000).
39
WSFS FINANCIAL CORPORATION
The Corporation also holds $12.0 million in BBB-rated mortgage-backed
securities classified as trading and options to acquire up to 49.9% of Class "O"
Certificates issued in connection with securities consisting of a portfolio of
reverse mortgages previously held by the Corporation. At the time of the
securitization, the securitizer retained 100% of the Class "O" Certificates from
the securitization. These Class "O" Certificates have no priority over other
classes of Certificates under the Trust and no distributions will be made on the
Class "O" Certificates until, among other conditions, the principal amount of
each other class of notes has been reduced to zero. The underlying assets, the
reverse mortgages, are very long-term assets. Hence, any cash flow that might
inure to the holder of the Class "O" Certificates is not expected to occur until
many years in the future. Additionally, the Company can exercise its option on
49.9% of the Class "O" Certificates in up to five separate increments for an
aggregate purchase price of $1.0 million any time between January 1, 2004 and
the termination of the Securitization Trust. The option to purchase the Class
"O" Certificates does not meet the definition of a derivative under SFAS 133,
Accounting for Derivative and Hedging Activities.
7. LOANS
- --------------------------------------------------------------------------------
The following tables detail the Corporation's loan portfolio:
December 31, 2005 2004
- --------------------------------------------------------------------------------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) $ 457,213 $ 439,774
Other 432,660 433,947
Real estate construction loans 194,002 137,395
Commercial loans 511,798 370,660
Consumer loans 244,820 210,959
- --------------------------------------------------------------------------------
1,840,493 1,592,735
Less:
Loans in process 40,560 36,359
Deferred fees (306) (84)
Allowance for loan losses 25,381 24,222
- --------------------------------------------------------------------------------
Net loans $ 1,774,858 $ 1,532,238
================================================================================
The Corporation had impaired loans of approximately $3.4 million at December 31,
2005 compared to $4.4 million at December 31, 2004. A loan is impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. The average recorded balance of impaired loans was $3.9 million and
$4.8 million during 2005 and 2004, respectively. The allowance for losses on
impaired loans was $480,000 at December 31, 2005, as compared to $750,000 at
December 31, 2004. There was no interest income recognized on impaired loans.
The total amount of loans serviced for others were $255.8 million, $245.5
million and $244.7 million at December 31, 2005, 2004 and 2003, respectively.
The Corporation received fees from the servicing of loans of $769,000, $800,000
and $831,000 during 2005, 2004 and 2003, respectively.
Beginning in 2005, the Corporation began prospectively recording mortgage
servicing rights on its mortgage loan servicing portfolio. Mortgage servicing
rights represent the present value of the future net servicing fees from
servicing mortgage loans acquired or originated by the Corporation. At December
31, 2005, the total of this portfolio was $37.6 million. Mortgage loans serviced
for others are not included in loans on the accompanying Consolidated Statement
of Condition. The valuation of these servicing rights resulted in $308,000 of
noninterest income. Revenues from originating, marketing and servicing mortgage
loans as well as valuation adjustments related to capitalized mortgage servicing
rights are included in mortgage banking activities, net on the Consolidated
Statement of Operations.
Accrued interest receivable on loans outstanding was $7.9 million and $5.7
million at December 31, 2005 and 2004, respectively.
Nonaccruing loans aggregated $3.4 million, $4.4 million and $5.2 million at
December 31, 2005, 2004 and 2003, respectively. If interest on all such loans
had been recorded in accordance with contractual terms, net interest income
would have increased by $133,000 in 2005, $150,000 in 2004 and $218,000 in 2003.
40
WSFS FINANCIAL CORPORATION
A summary of changes in the allowance for loan losses follows:
Year Ended December 31, 2005 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Beginning balance $ 24,222 $ 22,386 $ 21,452
Provision for loan losses 2,582 3,217 2,550
Loans charged-off (1,873) (1,843) (2,016)
Recoveries 450 462 400
- --------------------------------------------------------------------------------
Ending balance $ 25,381 $ 24,222 $ 22,386
================================================================================
8. ASSETS ACQUIRED THROUGH FORECLOSURE
- --------------------------------------------------------------------------------
Assets acquired through foreclosure are summarized as follows:
December 31, 2005 2004
- --------------------------------------------------------------------------------
(In Thousands)
Real estate $ 59 $217
Less allowance for losses - -
- --------------------------------------------------------------------------------
Ending balance $ 59 $217
================================================================================
9. PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Land, office buildings, leasehold improvements, furniture and equipment and
renovations-in-process, at cost, are summarized by major classifications:
December 31, 2005 2004
- --------------------------------------------------------------------------------
(In Thousands)
Land $ 4,440 $ 3,946
Buildings 11,052 12,224
Leasehold improvements 13,094 11,878
Furniture and equipment 21,917 22,082
- --------------------------------------------------------------------------------
50,503 50,130
Less:
Accumulated depreciation 27,599 27,295
- --------------------------------------------------------------------------------
$22,904 $22,835
================================================================================
The Corporation occupies certain premises and operates certain
equipment under noncancelable leases with terms ranging from 1 to 25 years.
These leases are accounted for as operating leases. Accordingly, lease costs are
expensed as incurred. Rent expense was $2.2 million in 2005, $2.3 million in
2004 and $1.8 million in 2003. Future minimum payments under these leases at
December 31, 2005 are as follows:
(In Thousands)
2006 $ 2,253
2007 2,328
2008 3,222
2009 2,800
2010 2,724
Thereafter 23,961
----------------------------------------------------
Total future minimum lease payments $37,288
====================================================
41
WSFS FINANCIAL CORPORATION
10. DEPOSITS
- --------------------------------------------------------------------------------
The following is a summary of deposits by category, including a summary of the
remaining time to maturity for time deposits:
December 31, 2005 2004
- --------------------------------------------------------------------------------
(In Thousands)
Money market and demand:
Noninterest-bearing demand $ 279,415 $ 246,592
Interest-bearing demand 141,378 100,098
Money market 209,398 123,523
- --------------------------------------------------------------------------------
Total money market and demand 630,191 470,213
- --------------------------------------------------------------------------------
Savings 251,675 289,041
- --------------------------------------------------------------------------------
Retail certificates of deposits by maturity:
Less than one year 152,891 109,664
One year to two years 59,269 97,569
Two years to three years 8,137 9,517
Three years to four years 2,346 2,573
Over four years 2,210 2,091
- --------------------------------------------------------------------------------
Total retail time certificates 224,853 221,414
- --------------------------------------------------------------------------------
Jumbo certificates of deposit-retail, by maturity:
Less than one year 69,716 23,118
One year to two years 15,950 47,532
Two years to three years 1,292 301
Three years to four years 100 415
Over four years 154 148
- --------------------------------------------------------------------------------
Total jumbo certificates of deposit-retail 87,212 71,514
- --------------------------------------------------------------------------------
Subtotal retail deposits 1,193,931 1,052,182
- --------------------------------------------------------------------------------
Jumbo certificates of deposit-non-retail, by maturity:
Less than one year 36,935 43,246
One year to two years 1,496 --
Two years to three years -- 1,250
Three years to four years 415 --
Over four years 1,721 407
- --------------------------------------------------------------------------------
Total jumbo time certificates-non-retail 40,567 44,903
- --------------------------------------------------------------------------------
Brokered certificates of deposit less than one year 211,738 137,877
- --------------------------------------------------------------------------------
Total deposits $1,446,236 $1,234,962
================================================================================
42
WSFS FINANCIAL CORPORATION
Interest expense by category follows:
Year Ended December 31, 2005 2004 2003
- --------------------------------------------------------------------------------
(In Thousands)
Interest-bearing demand $ 297 $ 193 $ 196
Money market 3,837 665 119
Savings 1,738 1,257 1,627
Retail time deposits 8,098 5,002 5,785
- --------------------------------------------------------------------------------
Total retail interest expense 13,970 7,117 7,727
- --------------------------------------------------------------------------------
Jumbo certificates of deposit-non-retail 1,374 768 462
Brokered certificates of deposit 6,346 1,510 -
- --------------------------------------------------------------------------------
Total interest expense on deposits $21,690 $ 9,395 $ 8,189
================================================================================
11. BORROWED FUNDS
The following is a summary of borrowed funds by type:
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance Average End Outstanding Rate
at End of Interest During the During the During the
Period Rate Period Period Period
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
2005
- ----
FHLB advances $1,008,721 4.12% $1,008,721 $887,822 3.41%
Trust preferred borrowings 67,011 6.18 67,011 62,986 8.29
Federal funds purchased and securities
sold under agreements to repurchase 83,150 4.24 172,135 128,062 1.67
Other borrowed funds 36,126 3.05 42,037 37,344 1.74
2004
- ----
FHLB advances $ 837,063 2.90% $915,181 $859,742 2.70%
Trust preferred borrowings 51,547 4.90 51,547 51,162 4.20
Federal funds purchased and securities
sold under agreements to repurchase 132,105 2.33 158,195 145,321 1.42
Other borrowed funds 33,441 0.65 39,317 36,013 0.48
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with rates ranging
from 2.00% to 5.45% at December 31, 2005 are due as follows:
Weighted
Average
Amount Rate
--------------------------------------------------------------------
(Dollars in Thousands)
2006......................... $ 661,000 4.03%
2007......................... 125,000 3.37
2008......................... 84,900 5.17
2009......................... 35,000 4.48
2010 - 2013.................. 102,821 4.61
--------------------------------------------------
$1,008,721
===================================================
43
WSFS FINANCIAL CORPORATIOn
Pursuant to collateral agreements with the FHLB, advances are secured by
qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock
and an interest-bearing demand deposit account with the FHLB.
As a member of the FHLB of Pittsburgh, WSFS is required to acquire and hold
shares of capital stock in the FHLB of Pittsburgh in an amount at least equal to
4.55% of its advances (borrowings) from the FHLB of Pittsburgh, plus 0.55% of
the unused borrowing capacity. WSFS was in compliance with this requirement with
a stock investment in FHLB of Pittsburgh of $46.3 million at December 31, 2005.
Four advances are outstanding at December 31, 2005 totaling $145.0 million, with
a weighted average rate of 4.96% maturing in 2008 and beyond. They are
convertible on a quarterly basis (at the discretion of the FHLB) to a variable
rate advance based upon the three-month LIBOR rate, after an initial fixed term.
WSFS has the option to prepay these four advances at predetermined times or
rates.
Trust Preferred Borrowings
On April 6, 2005, the Corporation completed the issuance of $67.0 million of
aggregate principal amount of Pooled Floating Rate Securities at a variable
interest rate of 177 basis points over the three-month LIBOR rate. The proceeds
from this issuance were used to fund the redemption of $51.5 million of Floating
Rate Capital Trust I Preferred Securities which had a variable interest rate of
250 basis points over the three-month LIBOR rate.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
During 2005, WSFS purchased federal funds as a short-term funding source. At
December 31, 2005, WSFS had purchased $50.0 million in federal funds at a rate
of 4.19%. At December 31, 2004, WSFS had $50.0 million federal funds purchased.
During 2005, WSFS sold securities under agreements to repurchase as a short-term
funding source. At December 31, 2005, securities sold under agreements to
repurchase had fixed rates ranging from 4.20% to 4.36%. The underlying
securities are U.S. Government agency securities with a book value of $34.8
million at December 31, 2005. Securities sold under agreements to repurchase
with the corresponding carrying and market values of the underlying securities
are due as follows:
Collateral
--------------------------------
Borrowing Carrying Market Accrued
Amount Rate Value Value Interest
- ------------------------------------------------------------------------------
(Dollars in Thousands)
2005
Up to 30 days $ 33,150 4.31% $ 34,795 $ 34,036 $ 299
================================= ================================
2004
Up to 30 days $ 82,105 2.34% $ 84,716 $ 83,769 $ 583
================================= ================================
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $36.1 million
and $33.4 million at December 31, 2005 and 2004, respectively, consisting of
outstanding retail repurchase agreements, contractual arrangements under which
portions of certain securities are sold overnight to retail customers under
agreements to repurchase. Such borrowings were collateralized by
mortgaged-backed securities. The average rates on these borrowings were 3.05%
and 0.65% at December 31, 2005 and 2004, respectively.
44
WSFS FINANCIAL CORPORATION
12. STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as WSFS, must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk-weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on WSFS'
Financial Statements. At December 31, 2005 and 2004, WSFS was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
The following table presents WSFS' consolidated capital position as of December
31, 2005 and 2004:
To Be Well-Capitalized
Under Prompt
Consolidated For Capital Corrective
Bank Capital Adequacy Purposes Action Provisions
- ----------------------------------------------------------------------- ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
As of December 31, 2005:
Total Capital (to risk-weighted assets) $ 265,269 13.38% $ 158,620 8.00% $ 198,274 10.00%
Core Capital (to adjusted tangible assets) 244,164 8.56 114,097 4.00 142,622 5.00
Tangible Capital (to tangible assets).. 244,164 8.56 42,786 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets) 244,164 12.31 79,310 4.00 118,965 6.00
As of December 31, 2004:
Total Capital (to risk-weighted assets) $ 257,933 15.34% $ 134,552 8.00% $ 168,190 10.00%
Core Capital (to adjusted tangible assets) 242,289 9.69 100,049 4.00 125,061 5.00
Tangible Capital (to tangible assets).. 242,289 9.69 37,518 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets) 242,289 14.41 67,276 4.00 100,914 6.00
The Corporation has a simple capital structure with one class of $ 0.01
par common stock outstanding, each share having equal voting rights. In
addition, the Corporation has authorized 7,500,000 shares of $0.01 par
preferred stock. No preferred stock was outstanding at December 31, 2005 and
2004. When infused into the Bank, the Trust Preferred Securities issued in 2005
qualify as Tier 1 capital. WSFS is prohibited from paying any dividend or
making any other capital distribution if, after making the distribution, WSFS
would be undercapitalized within the meaning of the OTS Prompt Corrective
Action regulations. Since 1996, the Board of Directors has approved several
stock repurchase programs to reacquire common shares. As part of these
programs, the Corporation acquired approximately 719,500 shares in 2005 for
$40.2 million and 373,900 shares in 2004 for $18.0 million.
The Holding Company
In April 2005, WSFS Capital Trust III, an unconsolidated affiliate of WSFS
Financial Corporation issued $67.0 million of aggregate principle of Pooled
Floating Rate Securities at a variable interest rate of 177 basis points over
the three-month LIBOR rate. The proceeds were used to refinance the WSFS Capital
Trust I November 1998 issuance of $51.5 million of Trust Preferred Securities
which had a variable rate of 250 basis points over the three-month LIBOR rate.
At December 31, 2005, the coupon rate of the Capital Trust III securities was
6.18% with a scheduled maturity of June 1, 2035. The Corporation purchased an
interest rate cap that effectively limits the three-month LIBOR to 6.00% on
$50.0 million of the recently purchased $67.0 million of securities until 2008.
The effective rate of these securities, including the cost of the cap was 8.29%
at December 31, 2005. The effective rate will vary, however, due to fluctuations
in interest rates. The proceeds from the issue were invested in Junior
Subordinated Debentures issued by WSFS Financial Corporation. These securities
are treated as borrowings with the interest included in interest expense on the
consolidated statement of operations. Additional information concerning the
Trust Preferred Securities and the interest rate cap is included in Notes 11 and
20 to the Financial Statements. The proceeds were used primarily to extinguish
higher rate debt and for general corporate purposes.
Pursuant to federal laws and regulations, WSFS' ability to engage in
transactions with affiliated corporations is limited, and WSFS generally may not
lend funds to nor guarantee indebtedness of the Corporation.
45
WSFS FINANCIAL CORPORATIOn
13. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
- --------------------------------------------------------------------------------
Associate 401(k) Savings Plan
Certain subsidiaries of the Corporation maintain a qualified plan in which
Associates may participate. Participants in the plan may elect to direct a
portion of their wages into investment accounts that include professionally
managed mutual and money market funds and the Corporation's common stock.
Generally, the principal and earnings thereon are tax deferred until withdrawn.
The Company matches a portion of the Associates' contributions and periodically
makes discretionary contributions based on Company performance into the plan for
the benefit of Associates. The Corporation's total cash contributions to the
plan on behalf of its Associates resulted in a cash expenditure of $1.4 million,
$1.6 million and $1.3 million for 2005, 2004 and 2003, respectively.
All Company contributions are made in the form of the Corporation's common stock
that Associates may transfer to various other investment vehicles without any
significant restrictions. The plan purchased 36,000, 46,000 and 56,000 shares of
common stock of the Corporation during 2005, 2004 and 2003, respectively.
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. Amortization of unrecognized net gains or losses
resulting from experience different from that assumed and from changes in
assumptions is included as a component of net periodic benefit cost over the
remaining service period of active employees to the extent that such gains and
losses exceed 10% of the accumulated postretirement benefit obligation, as of
the beginning of the year. Disclosures are in accordance with SFAS No. 132
(Revised), Employers' Disclosure About Pensions and Other Postretirement
Benefits.
In December 2003, President Bush signed into law the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act"). The Act expanded Medicare
to include, for the first time, coverage for prescription drugs.
In May 2004, the FASB issued accounting guidance applicable to the Act in the
form of FASB Staff Position (FSP) 106-2. The guidance states, in part, that it
applies only to a health care plan for which the employer has concluded that
prescription drug benefits available under the plan to some or all participants
for some or all future years are "actuarially equivalent" to Medicare Part D and
thus qualify for subsidy under the Act. The Company, using an analysis performed
by an independent actuary, has determined that it is unlikely that its retiree
medical plan would qualify as actuarially equivalent to the Medicare Part D
benefit as of December 31, 2005.
46
WSFS FINANCIAL CORPORATION
The following disclosures relating to postretirement benefits were measured at
December 31, 2005:
2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,086 $ 2,083 $ 1,815
Service cost 106 97 74
Interest cost 122 122 119
Actuarial (gain)/loss 200 (81) 169
Benefits paid (227) (135) (94)
- ----------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 2,287 $ 2,086 $ 2,083
================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ - $ - $ -
Employer contributions 227 135 94
Benefits paid (227) (135) (94)
- ----------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ - $ -
================================================================================================================
Funded status:
Funded status $(2,287) $(2,086) $(2,083)
Unrecognized transition obligation 429 491 552
Unrecognized net loss 647 461 563
- ----------------------------------------------------------------------------------------------------------------
Net amount recognized $(1,211) $(1,134) $ (968)
================================================================================================================
Components of net periodic benefit cost:
Service cost $ 106 $ 97 $ 74
Interest cost 122 122 119
Amortization of transition obligation 61 61 61
Net loss recognition 15 21 13
- ----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 304 $ 301 $ 267
================================================================================================================
Assumptions used to determine net periodic benefit cost:
Discount rate 6.00% 6.00% 6.75%
Health care cost trend rate 5.50% 5.50% 6.00%
Sensitivity analysis of health care cost trends:
Effect of +1% on service cost plus interest cost $ 3 $ 3 $ 2
Effect of -1% on service cost plus interest cost (1) (1) -
Effect of +1% on APBO 18 18 15
Effect of -1% on APBO (9) (10) (8)
Assumptions used to value the Accumulated Postretirement Benefit
Obligation (APBO):
Discount rate 5.50% 6.00% 6.00%
Health care cost trend rate 5.50% 5.50% 5.50%
Ultimate trend rate 5.00% 5.00% 5.50%
Year of ultimate trend rate 2005 2005 2005
Estimated future benefit payments:
The following table shows the expected future payments for the next ten years:
During 2006 $ 115
During 2007 115
During 2008 114
During 2009 107
During 2010 108
During 2011 through 2015 659
- ----------------------------------------------------------------------------------------
$ 1,218
========================================================================================
47
WSFS FINANCIAL CORPORATION
The Corporation assumes that the average annual rate of increase for medical
benefits will decrease by one-half of 1% per year and stabilizes at an average
increase of 5% per annum. The costs incurred for retirees' health care are
limited since certain current and all future retirees are restricted to an
annual medical premium cap indexed (since 1995) by the lesser of 4% or the
actual increase in medical premiums paid by the Corporation. For 2005, this
annual premium cap amounted to $2,133 per retiree. The Corporation estimates
that it will contribute approximately $115,000 to the plan during fiscal 2006.
Supplemental Pension Plan
The Corporation provided a nonqualified plan that gives credit for 25 years of
service based on the qualified plan formula. This plan is currently being
provided to two retired executives of the Corporation. The plan is no longer
being provided to Associates of the Corporation. Unrecognized net gains or
losses resulting from experience different from that assumed and from changes in
assumptions is recognized immediately as a component of net periodic benefit
cost.
The following disclosures relating to the supplemental pension plan were
measured at December 31, 2005:
2005 2004 2003
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 760 $ 784 $ 767
Service cost - - -
Interest cost 43 45 49
Actuarial loss 58 15 52
Benefits paid (84) (84) (84)
- ----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 777 $ 760 $ 784
==========================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ - $ - $ -
Employer contributions 84 84 84
Benefits paid (84) (84) (84)
- ----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ - $ -
==========================================================================================================
Funded status:
Funded status $(777) $(760) $(784)
Unrecognized net loss - - -
- ----------------------------------------------------------------------------------------------------------
Net amount recognized $(777) $(760) $(784)
==========================================================================================================
Components of net periodic benefit cost:
Service cost $ - $ - $ -
Interest cost 43 45 49
Amortization of transition obligation - - -
Net loss recognition 58 15 52
- ----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 101 $ 60 $ 101
==========================================================================================================
Assumptions used to determine net periodic benefit cost:
Discount rate 6.00% 6.00% 6.75%
Assumptions used to value the Supplemental Pension Plan
Obligation:
Discount rate 5.50% 6.00% 6.00%
Estimated future supplemental pension plan payments:
The following table shows the expected future payments for the next ten years:
During 2006 $ 84
During 2007 84
During 2008 84
During 2009 83
During 2010 83
During 2011 through 2015 418
- ---------------------------------------------------------------------------------------
$ 836
=======================================================================================
The Corporation estimates that it will contribute approximately $84,000 to the
plan during fiscal 2006.
The Corporation has two additional plans. They are a Director's Plan with a
corresponding liability of $171,000 and an Early Retirement Window Plan with a
corresponding liability of $607,000.
48
WSFS FINANCIAL CORPORATION
14. TAXES ON INCOME
- --------------------------------------------------------------------------------
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. The income tax provision consists
of the following:
Year Ended December 31, 2005 2004 2003
- --------------------------------------------------------------------------------------------
(In Thousands)
From continuing operations:
Current income taxes:
Federal taxes $ 11,118 $ 12,175 $ 11,212
State and local taxes 2,197 1,993 1,695
Deferred income taxes:
Federal taxes 1,445 (22) (1,943)
State and local taxes 87 (195) -
- --------------------------------------------------------------------------------------------
Subtotal 14,847 13,951 10,964
- --------------------------------------------------------------------------------------------
From discontinued operations and businesses held-for-sale:
Current income taxes:
Federal taxes - 112 26,826
State and local taxes - 65 2,210
Deferred income taxes:
Federal taxes - - (4,258)
State and local taxes - - (878)
- --------------------------------------------------------------------------------------------
Subtotal - 177 23,900
- --------------------------------------------------------------------------------------------
Total $ 14,847 $ 14,128 $ 34,864
============================================================================================
Current federal income taxes include taxes on income that cannot be offset by
net operating loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following is a
summary of the significant components of the Corporation's deferred tax assets
and liabilities as of December 31, 2005 and 2004:
2005 2004
- --------------------------------------------------------------------------------
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation $ (856) $ (1,256)
Other (310) (321)
Prepaid expenses (1,109) (990)
Deferred loan costs (1,866) -
- --------------------------------------------------------------------------------
Total deferred tax liabilities (4,141) (2,567)
- --------------------------------------------------------------------------------
Deferred tax assets:
Bad debt deductions 8,849 8,462
Tax credit carryforwards 150 150
Net operating loss carryforwards 3,911 4,484
Loan fees 28 12
Reserves and other 1,748 1,646
Unrealized losses on available-for-sale securities 6,088 2,019
- --------------------------------------------------------------------------------
Total deferred tax assets 20,774 16,773
- --------------------------------------------------------------------------------
Valuation allowance (2,702) (2,812)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 13,931 $ 11,394
================================================================================
Included in the table above is the effect of certain temporary differences for
which no deferred tax expense or benefit was recognized. Such items consisted
primarily of unrealized gains and losses on certain investments in debt and
equity securities accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, and certain adjustments in non-wholly
owned subsidiaries.
49
WSFS FINANCIAL CORPORATION
Based on the Corporation's history of prior earnings and its expectations of the
future, it is anticipated that operating income and the reversal pattern of its
temporary differences will, more likely than not, be sufficient to realize a net
deferred tax asset of $13.9 million at December 31, 2005. An adjustment to
decrease gross deferred tax assets and the related valuation allowance in the
amount of $110,000 was made in 2005 to reflect state tax net operating losses
that have expired. An adjustment to the valuation allowance was made in 2004 to
reflect benefits previously recognized for state tax net operating losses that
are not realizable due to changes in state tax law enacted in 2004, along with
further unrealized benefits related to the discontinuance of the leasing
company. No adjustments to the valuation allowance were made in 2003.
At December 31, 2005, approximately $3.3 million in gross deferred tax assets of
the Corporation were related to net operating losses and tax credits
attributable to a former subsidiary. The Corporation has assessed a valuation
allowance of $1.96 million on a portion of these deferred tax assets due to
limitations imposed by the Internal Revenue Code.
Approximately $744,000 in gross deferred tax assets of the Corporation at
December 31, 2005 are related to state tax net operating losses. The Company has
assessed a valuation allowance of $744,000 on this entire deferred tax asset due
to an expectation of such net operating losses expiring before being utilized.
Net operating loss carryforwards (NOLs) of $21.6 million remain at December 31,
2005. The expiration dates and amounts of such carryforwards are listed below:
Federal State
--------------------------------------------------------
(In Thousands)
2007 $ - $ 8,479
2008 2,291 -
2009 6,755 -
2017 - 31
2018 - 4,071
--------------------------------------------------------
$ 9,046 $12,581
========================================================
The Corporation's ability to use its federal NOLs to offset future income is
subject to restrictions enacted in Section 382 of the Internal Revenue Code.
These restrictions limit a company's future use of NOLs if there is a
significant ownership change in a company's stock (an "Ownership Change"). The
utilization of approximately $9.0 million of federal net operating loss
carryforwards is limited to approximately $1.3 million each year as a result of
such Ownership Change in a former subsidiary's stock.
A reconciliation setting forth the differences between the effective tax rate of
the Corporation and the U.S. Federal statutory tax rate is as follows:
Year Ended December 31, 2005 2004 2003
- -----------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State tax net of federal tax benefit 3.2 3.0 1.2
Interest income 50% excludable (1.7) (1.9) (0.8)
Bank-owned life insurance income (1.6) (1.9) -
Utilization of loss carryforwards and
valuation allowance adjustments - 1.1 -
Other (0.1) - 0.2
- -----------------------------------------------------------------------------
Effective tax rate 34.8% 35.3% 35.6%
=============================================================================
50
WSFS FINANCIAL CORPORATION
15. STOCK OPTION PLANS
- --------------------------------------------------------------------------------
The Corporation has stock options outstanding under two stock option plans
(collectively, "Option Plans") for officers, directors and Associates of the
Corporation and its subsidiaries. After shareholder approval in 2005, the 1997
Stock Option Plan ("1997 Plan") was replaced by the 2005 Incentive Plan ("2005
Plan"). No future awards may be granted under the 1997 Plan. The 2005 Plan will
terminate on the tenth anniversary of its effective date, after which no awards
may be granted. The number of shares originally authorized under the 2005 Plan
is 400,000. At December 31, 2005, there were 268,193 shares available for future
grants under the 2005 Plan.
The Option Plans provide for the granting of incentive stock options as defined
in Section 422 of the Internal Revenue Code as well as nonincentive stock
options (collectively, "Stock Options"). Additionally, the 2005 Plan provides
for the granting of stock appreciation rights, performance awards, restricted
stock and restricted stock unit awards, deferred stock units, dividend
equivalents, other stock-based awards and cash awards. All Stock Options are to
be granted at not less than the market price of the Corporation's common stock
on the date of the grant. All Stock Options granted between October 1, 1996 and
December 14, 2005 are exercisable one year from grant date, vest in 20% per
annum increments and expire no later than ten years from the grant date. All
Stock Options granted between December 15, 2005 and December 31, 2005 are
exercisable one year from grant date, vest in 25% per annum increments and
expire no later than five years from the grant date. Generally, all awards
become immediately exercisable in the event of a change in control, as defined
within the Option Plans.
A summary of the status of the Corporation's Option Plans as of December 31,
2005, 2004 and 2003, and changes during the years then ended is presented below:
2005 2004 2003
---------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
Stock Options:
Outstanding at beginning of year 873,360 $23.48 938,264 $19.49 1,080,060 $16.33
Granted 109,847 62.69 87,495 55.10 91,455 42.52
Exercised (226,963) 15.05 (131,849) 15.51 (220,441) 13.86
Canceled (10,295) 38.98 (20,550) 26.92 (12,810) 14.55
-------- -------- ---------
Outstanding at end of year 745,949 31.60 873,360 23.48 938,264 19.49
Exercisable at end of year 434,144 20.51 499,496 16.90 436,863 15.70
Weighted-average fair value
of awards granted $15.13 $13.90 $9.19
The Black-Scholes option-pricing model was used to determine the grant-date
fair-value of options. Significant assumptions used in the model included a
weighted-average risk-free rate of return of 4.3% in 2005, 3.7% in 2004 and 3.3%
in 2003; expected option life of between three and three-quarter and six years
for all awards; and expected stock price volatility of 19% in 2005, 19% in 2004
and 17% in 2003. For the purposes of this option-pricing model 1% was used as
the expected dividend yield.
The Black-Scholes and other option-pricing models assume that options are freely
tradable and immediately vested. Since executives' options are not transferable,
have long vesting provisions, and are subject to trading blackout periods
imposed by the Company, the value calculated by the Black-Scholes model may
significantly overstate the true economic value of the options.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not
require, the adoption of fair-value accounting for stock-based compensation to
Associates. The Company, as permitted, had elected not to adopt the fair value
accounting provisions of SFAS 123, and has instead continued to apply Accounting
Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and
Related Interpretations, and related interpretations in accounting for the Stock
Plans and to provide the required pro forma disclosures of SFAS 123. Had the
grant-date fair-value provisions of SFAS 123 been adopted, the Corporation would
have recognized pretax compensation expense of $1.2 million in 2005, $907,000 in
2004 and $1.1 million in 2003 related to its Option Plans. As a result, pro
forma income from continuing operations for the Corporation would have been
$26.9 million in 2005, $25.2 million in 2004 and $20.5 million in 2003. Pro
forma diluted earnings per share from continuing operations would have been
$3.75 in 2005, $3.31 in 2004 and $2.49 in 2003.
51
WSFS FINANCIAL CORPORATION
The effects on pro forma net income and diluted earnings per share of
applying the disclosure requirement of SFAS 123 in past years may not be
representative of the future pro forma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.
The following table summarizes all stock options outstanding and
exercisable for Option Plans as of December 31, 2005, segmented by range of
exercise prices:
Outstanding Exercisable
----------------------------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise
Number Price Contractual Life Number Price
- --------------------------------------------------------------------------------
Stock Options:
$ 0.00-$ 6.37 6,545 $ - 2.8 years - $ -
$ 6.38-$12.73 90,427 10.92 4.8 years 90,427 10.92
$12.74-$19.10 288,603 16.00 5.0 years 244,203 15.87
$25.47-$31.83 4,000 31.60 7.2 years 1,600 31.60
$31.84-$38.20 90,971 33.41 7.0 years 50,675 33.40
$38.21-$44.57 77,955 43.71 7.8 years 30,948 43.71
$44.58-$50.94 5,080 48.67 8.5 years 1,016 48.67
$50.95-$57.30 8,907 53.86 9.4 years 220 53.26
$57.31-$63.67 173,461 61.49 6.7 years 15,055 58.78
------- -------
Total 745,949 $31.60 6.0 years 434,144 $20.51
========================= =======
16. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
Lending Operations
At December 31, 2005, the Corporation had commitments to extend credit of $503.4
million. Consumer lines of credit totaled $49.7 million of which $38.7 million
was secured by real estate. Outstanding letters of credit were $26.7 million and
outstanding commitments to make or acquire mortgage loans aggregated $37.7
million. Approximately $20.7 million of which were at fixed rates ranging from
5.25% to 7.88%, and approximately $17.0 million were at variable rates ranging
from 4.38% to 7.38%. Mortgage commitments generally have closing dates within a
six-month period.
Data Processing Operations
The Company has entered into contracts to manage network operations, data
processing and other related services. The projected amounts of future minimum
payments contractually due (in thousands) are as follows:
2006 $3,364
2007 3,417
2008 2,730
2009 2,421
2010 655
Legal Proceedings
In the ordinary course of business, the Corporation, the Bank and its
subsidiaries are subject to legal actions that involve claims for monetary
relief. Based upon information presently available to the Corporation and its
counsel, it is the Corporation's opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on the Corporation's results of operations.
The Bank, as successor to originators, is from time to time involved in
arbitration or litigation with reverse mortgage loan borrowers or with the heirs
of borrowers. Because reverse mortgages are a relatively new and uncommon
product, there can be no assurances regarding how the courts or arbitrators may
apply existing legal principles to the interpretation and enforcement of the
terms and conditions of the Bank's reverse mortgage rights and obligations.
52
WSFS FINANCIAL CORPORATION
Financial Instruments With Off Balance Sheet Risk
The Corporation is a party to financial instruments with off balance sheet risk
in the normal course of business primarily to meet the financing needs of its
customers. To varying degrees, these financial instruments involve elements of
credit risk that are not recognized in the Consolidated Statement of Condition.
Exposure to loss for commitments to extend credit and standby letters of credit
written is represented by the contractual amount of those instruments. The
Corporation generally requires collateral to support such financial instruments
in excess of the contractual amount of those instruments and essentially uses
the same credit policies in making commitments as it does for on-balance sheet
instruments.
The following represents a summary of off balance sheet financial instruments at
year-end:
December 31, 2005 2004
- -------------------------------------------------------------------------------
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments $104,000 $ 68,905
Commercial mortgage loan commitments 93,966 85,204
Commercial loan commitments 176,344 142,081
Commercial standby letters of credit 26,720 13,348
Residential mortgage loan commitments 37,692 19,923
Consumer loan commitments 64,676 57,250
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit are
conditional commitments issued to guarantee the performance of a customer to a
third party. The Corporation evaluates each customer's creditworthiness and
obtains collateral based on management's credit evaluation of the counterparty.
Indemnifications
Secondary Market Loan Sales. The Company generally does not sell loans with
recourse except to the extent arising from standard loan sale contract
provisions covering violations of representations and warranties and, under
certain circumstances first payment default by the borrower. These are customary
repurchase provisions in the secondary market for conforming mortgage loan
sales. The Company typically sells fixed-rate, conforming first mortgage loans
to Freddie Mac as part of its ongoing asset/liability management program. Loans
held-for-sale are carried at the lower of cost or market of the aggregate or in
some cases individual loans. Gains and losses on sales of loans are recognized
at the time of the sale.
As is customary in such sales, WSFS provides indemnifications to the buyers
under certain circumstances. These indemnifications may include the repurchase
of loans by WSFS. Repurchases and losses are rare, and no provision is made for
losses at the time of sale. During 2005, the Company had no repurchases.
Swap Guarantees. The Company entered into an agreement with an unaffiliated
financial institution whereby that financial institution entered into interest
rate derivative contracts (interest rate swap transactions) with customers
referred to them by the Company. By the terms of the agreement, that financial
institution has recourse to the Company for any exposure created under each swap
transaction in the event the customer defaults on the swap agreement and the
agreement is in a paying position to the third-party financial institution. This
is a customary arrangement that allows smaller financial institutions such as
WSFS to provide access to interest rate swap transactions for its customers
without WSFS creating the swap itself.
At December 31, 2005 there were eighteen variable-rate to fixed-rate swap
transactions between the third-party financial institution and customers of WSFS
with an initial notional amount aggregating approximately $57.9 million, and
with maturities ranging from two to ten years. The aggregate market value of
these swaps to the customers was an asset of $98,600 as of December 31, 2005.
53
WSFS FINANCIAL CORPORATION
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The reported fair values of financial instruments are based on a variety of
factors. In certain cases, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions regarding the amount and timing of estimated
future cash flows that are discounted to reflect current market rates and
varying degrees of risk. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year-end
or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments: For cash and short-term investments, including
due from banks, federal funds sold, securities purchased under agreements to
resell and interest-bearing deposits with other banks, the carrying amount is a
reasonable estimate of fair value.
Investments and Mortgage-Backed Securities: Fair value for investment and
mortgage-backed securities is based on quoted market prices, where available. If
a quoted market price is not available, fair value is estimated using quoted
prices for similar securities. The fair value of the Corporation's investment in
reverse mortgages is based on the net present value of estimated cash flows,
which have been updated to reflect recent external appraisals of the underlying
collateral.
Loans: Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type: commercial, commercial mortgages,
construction, residential mortgages and consumer. For loans that reprice
frequently, the book value approximates fair value. The fair values of other
types of loans are estimated by discounting expected cash flows using the
current rates at which similar loans would be made to borrowers with comparable
credit ratings and for similar remaining maturities. The fair value of
nonperforming loans is based on recent external appraisals of the underlying
collateral. Estimated cash flows, discounted using a rate commensurate with
current rates and the risk associated with the estimated cash flows, are
utilized if appraisals are not available.
Interest Rate Cap: The fair value is estimated using a standard sophisticated
option model.
Deposit Liabilities: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, money market and interest-bearing demand
deposits and savings deposits, is assumed to be equal to the amount payable on
demand. The carrying value of variable rate time deposits and time deposits that
reprice frequently also approximates fair value. The fair value of the remaining
time deposits is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits with
comparable remaining maturities.
Borrowed Funds: Rates currently available to the Corporation for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
Off Balance Sheet Instruments: The fair value of off balance sheet instruments,
including commitments to extend credit and standby letters of credit, is
estimated using the fees currently charged to enter into similar agreements with
comparable remaining terms and reflects the present creditworthiness of the
counterparties.
54
WSFS FINANCIAL CORORATION
The book value and estimated fair value of the Corporation's financial
instruments are as follows:
December 31, 2005 2004
- ------------------------------------------------------------------------------------ ----------------------
Book Fair Book Fair
Value Value Value Value
- -------------------------------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 233,951 $ 233,951 $ 193,009 $ 193,009
Investment securities 57,489 57,688 97,376 97,895
Mortgage-backed securities 620,323 620,323 524,144 524,144
Loans, net 1,775,294 1,779,746 1,535,467 1,542,006
Bank-owned life insurance 54,193 54,193 52,190 52,190
Stock in Federal Home Loan Bank of Pittsburgh46,293 46,293 46,293 43,946 43,946
Accrued interest receivable 11,070 11,070 8,656 8,656
Interest rate cap 125 125 322 322
Financial liabilities:
Deposits 1,446,236 1,447,165 1,234,962 1,237,779
Borrowed funds 1,195,008 1,200,477 1,054,156 1,060,555
Accrued interest payable 7,554 7,554 3,863 3,863
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows:
December 31, 2005 2004
- -------------------------------------------------------------------------------------------------------------
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit $4,120 $3,171
Standby letters of credit 267 133
18. RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Corporation routinely enters into transactions with its directors and
officers. Such transactions are made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and do not, in the opinion of management, involve more
than the normal credit risk or present other unfavorable features. The aggregate
amount of loans to such related parties was $6.9 million and $7.9 million at
December 31, 2005 and 2004, respectively. During 2005, new loans and credit line
advances to such related parties amounted to $5.9 million and repayments
amounted to $6.9 million.
A director of the Corporation is also a director of a loan customer of the Bank.
At December 31, 2005, the principal balance outstanding of that loan was $8.5
million.
The Chairman of the Corporation is also the Chairman of the FHLB of Pittsburgh.
At December 31, 2005, the Bank had borrowed funds outstanding from the FHLB of
Pittsburgh of $1.0 billion and owned $46.3 million of FHLB of Pittsburgh stock.
These transactions have the same terms and conditions as comparable transactions
with other financial institutions.
55
WSFS FINANCIAL CORPORATION
19. PARENT COMPANY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Condensed Statement of Financial Condition
December 31, 2005 2004
- -------------------------------------------------------------------------------------------------
(In Thousands)
Assets:
Cash $ 10,097 $ 1,574
Investment in subsidiaries 236,095 240,892
Investment in interest rate cap 125 322
Investment in Capital Trust I - 1,547
Investment in Capital Trust III 2,011 -
Other assets 1,056 2,240
- -------------------------------------------------------------------------------------------------
Total assets $ 249,384 $ 246,575
=================================================================================================
Liabilities:
Borrowings $ 67,011 $ 50,000
Interest payable 357 217
Other liabilities 41 55
- -------------------------------------------------------------------------------------------------
Total liabilities 67,409 50,272
- -------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock 154 152
Capital in excess of par value 74,673 68,327
Comprehensive loss (9,968) (3,385)
Retained earnings 319,065 293,054
Treasury stock (201,949) (161,845)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 181,975 196,303
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 249,384 $ 246,575
=================================================================================================
Condensed Statement of Operations
Year Ended December 31, 2005 2004 2003
- --------------------------------------------------------------------------------------------------
(In Thousands)
Income:
Interest income $ 533 $ 101 $ 631
Noninterest income 139 139 118
- --------------------------------------------------------------------------------------------------
672 240 749
- --------------------------------------------------------------------------------------------------
Expenses:
Interest expense 5,292 2,246 2,023
Other operating expenses (1,567) (681) (401)
- --------------------------------------------------------------------------------------------------
3,725 1,565 1,622
- --------------------------------------------------------------------------------------------------
Loss before equity in undistributed income of subsidiaries (3,053) (1,325) (873)
Equity in undistributed income of subsidiaries 30,909 27,225 63,895
- --------------------------------------------------------------------------------------------------
Net income $ 27,856 $ 25,900 $ 63,022
==================================================================================================
56
WSFS FINANCIAL CORPORATION
Condensed Statement of Cash Flows
Year Ended December 31, 2005 2004 2003
- -----------------------------------------------------------------------------------------------------------------
(In Thousands)
Operating activities:
Net income $ 27,856 $ 25,900 $ 63,022
Adjustments to reconcile net income to net cash used for operating activities:
Equity in undistributed income of subsidiaries (30,909) (27,225) (63,895)
Amortization 1,398 175 50
Decrease (increase) in other assets 432 (600) 160
Increase (decrease) in other liabilities 126 37 (20)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (1,097) (1,713) (683)
- -----------------------------------------------------------------------------------------------------------------
Investing activities:
Decrease in investment in subsidiaries 28,210 18,577 52,000
Net issuance of Pooled Floating Rate Capital Securities 17,011 - -
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 45,221 18,577 52,000
- -----------------------------------------------------------------------------------------------------------------
Financing activities:
Issuance of common stock 6,348 3,590 4,951
Dividends paid on common stock (1,845) (1,643) (1,583)
Treasury stock, net of reissuance (40,104) (17,899) (58,418)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (35,601) (15,952) (55,050)
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 8,523 912 (3,733)
Cash at beginning of period 1,574 662 4,395
- -----------------------------------------------------------------------------------------------------------------
Cash at end of period $ 10,097 $ 1,574 $ 662
=================================================================================================================
57
WSFS FINANCIAL CORPORATION
20. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
- --------------------------------------------------------------------------------
The Corporation has an interest-rate cap with a notional amount of $50.0
million, which limits three-month LIBOR to 6.00% for the ten years ending
December 1, 2008. Until December 31, 2003, the cap qualified as a hedge of the
cash flows on $50.0 million in trust preferred floating rate debt. The change in
the fair value of the cap during the hedging relationship, was captured in
accumulated other comprehensive income. The remaining amount recorded in
accumulated other comprehensive income from December 31, 2003 will be
reclassified into interest expense when each of the quarterly interest payments
is made on the trust preferred debt. During 2006, the company anticipates
recognizing a non-cash charge of $74,000 for interest expense from the
amortization of the balance in accumulated other comprehensive income.
The fair value of the cap is estimated using a standard option model. The fair
value of the interest rate cap at December 31, 2005 was $125,000 and is
considered a freestanding derivative.
The following depicts the change in fair market value of the Company's
derivatives from January 1, 2003 to December 31, 2005:
Carrying Carrying Carrying Carrying
Value Value Value Value
at Jan. 1, at Dec. 31, at Dec. 31, at Dec. 31,
2003 Activity 2003 Activity 2004 Activity 2005
- -------------------------------------------------------------------------------------------------------
(In Thousands)
Interest Rate Cap $1,012 $60 $1,072 $(750) 322 $(197) $125
=======================================================================================================
58
WSFS FINNACIAL CORORATION
21. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation has two operating segments:
WSFS and CashConnect, the ATM division of WSFS. WSFS provides financial products
through its main office, 24 retail banking offices, loan production offices and
operations centers to commercial and retail customers. Retail and Commercial
Banking, Commercial Real Estate Lending, Private Banking and other banking
business units are operating departments of WSFS. These departments share the
same regulator, market, many of the same customers, share common resources
(corporate and department-level) and provide similar products and services
through the general infrastructure of the Company. Because of these and other
reasons, these departments are not considered discrete segments and further are
appropriately aggregated within the WSFS segment of the Company in accordance
with SFAS No. 131. CashConnect provides turnkey ATM services through strategic
partnerships with several of the largest networks, manufacturers and service
providers in the ATM industry.
An operating segment is a component of an enterprise that engages in business
activities from which it may earn revenues and incur expenses, whose operating
results are regularly reviewed by the enterprise's chief operating decision
maker to make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is
available. The Corporation evaluates performance based on pretax ordinary income
relative to resources used, and allocates resources based on these results.
Segment information for the years ended December 31, 2005, 2004 and 2003 are
shown below.
For the year ended December 31, 2005: WSFS CashConnect Total
- ----------------------------------------------------------------------------------
(in thousands)
External customer revenues:
Interest income $136,022 $ - $136,022
Noninterest income 22,114 12,539 34,653
- ----------------------------------------------------------------------------------
Total external customer revenues 158,136 12,539 170,675
- ----------------------------------------------------------------------------------
Inter-segment revenues:
Interest income 4,729 - 4,729
Noninterest income 778 682 1,460
- ----------------------------------------------------------------------------------
Total inter-segment revenues 5,507 682 6,189
- ----------------------------------------------------------------------------------
Total revenue 163,643 13,221 176,864
- ----------------------------------------------------------------------------------
External customer expenses:
Interest expense 62,380 - 62,380
Noninterest expenses 58,921 3,956 62,877
Provision for loan loss 2,582 - 2,582
- ----------------------------------------------------------------------------------
Total external customer expenses 123,883 3,956 127,839
- ----------------------------------------------------------------------------------
Inter-segment expense:
Interest expense - 4,729 4,729
Noninterest expenses 682 778 1,460
- ----------------------------------------------------------------------------------
Total inter-segment expenses 682 5,507 6,189
- ----------------------------------------------------------------------------------
Total expenses 124,565 9,463 134,028
- ----------------------------------------------------------------------------------
Income before taxes and extraordinary items $ 39,078 $ 3,758 42,836
Provision for income taxes 14,847
Minority interest 133
- ----------------------------------------------------------------------------------
Consolidated net income $ 27,856
==================================================================================
Cash and cash equivalents $ 59,424 $ 174,527 $ 233,951
Other segment assets 2,605,648 7,153 2,612,801
- ----------------------------------------------------------------------------------
Total segment assets $2,665,072 $ 181,680 $2,846,752
==================================================================================
Capital expenditures $ 15,703 $ 811 $ 16,514
59
WSFS FINANCIAL CORPORATION
For the year ended December 31, 2004: WSFS CashConnect Total
- ---------------------------------------------------------------------------------------------------
(in thousands)
External customer revenues:
Interest income $ 104,110 $ - $ 104,110
Noninterest income 21,874 10,076 31,950
- ---------------------------------------------------------------------------------------------------
Total external customer revenues 125,984 10,076 136,060
- ---------------------------------------------------------------------------------------------------
Inter-segment revenues:
Interest income 1,771 - 1,771
Noninterest income 717 742 1,459
- ---------------------------------------------------------------------------------------------------
Total inter-segment revenues 2,488 742 3,230
- ---------------------------------------------------------------------------------------------------
Total revenue 128,472 10,818 139,290
- ---------------------------------------------------------------------------------------------------
External customer expenses:
Interest expense 37,246 - 37,246
Noninterest expenses 52,183 3,516 55,699
Provision for loan loss 3,217 - 3,217
- ---------------------------------------------------------------------------------------------------
Total external customer expenses 92,646 3,516 96,162
- ---------------------------------------------------------------------------------------------------
Inter-segment expense:
Interest expense - 1,771 1,771
Noninterest expenses 742 717 1,459
- ---------------------------------------------------------------------------------------------------
Total inter-segment expenses 742 2,488 3,230
- ---------------------------------------------------------------------------------------------------
Total expenses 93,388 6,004 99,392
- ---------------------------------------------------------------------------------------------------
Income before taxes and extraordinary items $ 35,084 $ 4,814 39,898
Provision for income taxes 13,951
Minority interest 190
Income on wind-down of discontinued operations, net of taxes 143
- ---------------------------------------------------------------------------------------------------
Consolidated net income $ 25,900
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 61,328 $ 131,150 $ 192,478
Other segment assets 2,302,895 7,583 2,310,478
- ---------------------------------------------------------------------------------------------------
Total segment assets $2,364,223 $ 138,733 $2,502,956
===================================================================================================
Capital expenditures $ 5,886 $ 522 $ 6,408
60
WSFS FINANCIAL CORPORATION
For the year ended December 31, 2003: WSFS CashConnect Total
- ----------------------------------------------------------------------------------
(in thousands)
External customer revenues:
Interest income $ 89,299 $ - $ 89,299
Noninterest income 18,386 7,780 26,166
- ----------------------------------------------------------------------------------
Total external customer revenues 107,685 7,780 115,465
- ----------------------------------------------------------------------------------
Inter-segment revenues:
Interest income 1,110 - 1,110
Noninterest income 662 747 1,409
- ----------------------------------------------------------------------------------
Total inter-segment revenues 1,772 747 2,519
- ----------------------------------------------------------------------------------
Total revenue 109,457 8,527 117,984
- ----------------------------------------------------------------------------------
External customer expenses:
Interest expense 31,301 - 31,301
Noninterest expenses 46,311 3,106 49,417
Provision for loan loss 2,550 - 2,550
- ----------------------------------------------------------------------------------
Total external customer expenses 80,162 3,106 83,268
- ----------------------------------------------------------------------------------
Inter-segment expense:
Interest expense - 1,110 1,110
Noninterest expenses 747 662 1,409
- ----------------------------------------------------------------------------------
Total inter-segment expenses 747 1,772 2,519
- ----------------------------------------------------------------------------------
Total expenses 80,909 4,878 85,787
- ----------------------------------------------------------------------------------
Income before taxes and extraordinary items $ 28,548 $ 3,649 32,197
Provision for income taxes 10,964
Gain on sale of businesses held-for-sale 41,789
- ----------------------------------------------------------------------------------
Consolidated net income $ 63,022
==================================================================================
Cash and cash equivalents $ 46,709 $113,711 $ 160,420
Other segment assets 2,043,162 3,495 2,046,657
- ----------------------------------------------------------------------------------
Total segment assets $2,089,871 $117,206 $2,207,077
==================================================================================
Capital expenditures $ 2,496 $ 301 $ 2,797
61
WSFS FINANCIAL CORPORATION
QUARTERLY FINANCIAL SUMMARY (Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended 12/31/05 9/30/05 6/30/05 3/31/05 12/31/04 9/30/04 6/30/04 3/31/04
- ---------------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
Interest income $37,835 $35,136 $32,886 $30,165 $29,065 $26,601 $24,282 $24,162
Interest expense 19,299 15,921 15,108 12,052 10,809 9,481 8,674 8,282
- ---------------------------------------------------------------------------------------------------------------
Net interest income 18,536 19,215 17,778 18,113 18,256 17,120 15,608 15,880
Provision for loan losses 1,006 225 772 579 847 996 687 687
- ---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 17,530 18,990 17,006 17,534 17,409 16,124 14,921 15,193
Noninterest income 9,499 8,584 8,714 7,856 8,012 8,160 8,220 7,558
Noninterest expenses 16,154 16,150 15,603 14,970 15,105 14,167 13,189 13,238
- ---------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
minority interest and taxes 10,875 11,424 10,117 10,420 10,316 10,117 9,952 9,513
Less minority interest 11 48 37 37 32 66 47 45
- ---------------------------------------------------------------------------------------------------------------
Income from continuing
operations before taxes 10,864 11,376 10,080 10,383 10,284 10,051 9,905 9,468
Income tax provision 3,771 3,969 3,514 3,593 3,528 3,499 3,638 3,286
- ---------------------------------------------------------------------------------------------------------------
Income from continuing
operations 7,093 7,407 6,566 6,790 6,756 6,552 6,267 6,182
Income on wind-down of
discontinued operations,
net of taxes - - - - 143 - - -
- ---------------------------------------------------------------------------------------------------------------
Net income $ 7,093 $ 7,407 $ 6,566 $ 6,790 $ 6,899 $ 6,552 $ 6,267 $ 6,182
===============================================================================================================
Earnings per share:
Basic:
Income from continuing
operations $ 1.09 $ 1.12 $ 0.95 $ 0.96 $ 0.96 $ 0.93 $ 0.87 $ 0.84
Income on wind-down of
discontinued operations,
net of taxes - - - - 0.02 - - -
- ---------------------------------------------------------------------------------------------------------------
Net income $ 1.09 $ 1.12 $ 0.95 $ 0.96 $ 0.98 $ 0.93 $ 0.87 $ 0.84
===============================================================================================================
Diluted:
Income from continuing
operations $ 1.03 $ 1.06 $ 0.90 $ 0.90 $ 0.90 $ 0.88 $ 0.82 $ 0.79
Income on wind-down of
discontinued operations,
net of taxes - - - - 0.02 - - -
- ---------------------------------------------------------------------------------------------------------------
Net income $ 1.03 $ 1.06 $ 0.90 $ 0.90 $ 0.92 $ 0.88 $ 0.82 $ 0.79
===============================================================================================================
62