Exhibit 13
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 ten oldest
continuously-operating banks in the United States. 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 175 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. In addition, WSFS provides wealth management and personal trust
services through its new division, Wilmington Advisors, which was formed during
2006. 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 27
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, a 90% owned subsidiary, is a
Wilmington-based investment advisory firm serving high net-worth individuals and
institutions. Cypress had approximately $455 million in assets under management
at December 31, 2006.
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. More information is provided in the
Discontinued Operations section of Management's Discussion and Analysis and Note
2 to the Financial Statements.
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 strategies 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
1
should be considered in evaluating the "forward-looking statements," and undue
reliance should not be placed on such statements. Actual results may differ
materially from management expectations. WSFS Financial Corporation does not
undertake, and specifically disclaims any obligation to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.
RESULTS OF OPERATIONS
WSFS Financial Corporation recorded net income of $30.4 million for the
year ended December 31, 2006, compared to $27.9 million and $25.9 million in
2005 and 2004, respectively. Income from continuing operations was $30.4
million, $27.9 million and $25.8 million for the years ended December 31, 2006,
2005 and 2004, respectively.
Net Interest Income. Net interest income increased $4.3 million, or 6%,
to $77.9 million in 2006 compared to $73.6 million in 2005. Total interest
income earned on assets increased $41.2 million, due to the combination of
higher amounts of earning assets and higher rates. During the year, the yield on
loans increased 101 basis points while the yield on mortgage-backed securities
increased 35 basis points. Interest expense increased $36.9 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 2006.
The net interest margin ratio of 2.98% for 2006 declined from 3.13% in
2005. This ratio was negatively impacted by a flattening yield curve, growth in
the Company's CashConnect (ATM) division (revenues related to cash outstanding
for this business is recorded as fee income rather than interest income, while
the cost of funding these balances is charged to interest expense) and
aggressive competition for deposits.
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 $6.8 million, or 10%, to $73.6 million in
2005 compared to $66.9 million in 2004. Total interest income increased $31.9
million between 2004 and 2005, primarily due to growth in loans and the
increased yield on loans and mortgage-backed securities. Total interest expense,
excluding the expense to fund discontinued operations, increased $25.1 million
from 2004 to 2005 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 increased 71 basis points, as lower costing advances matured during the
year and were replaced at higher rates.
The following table sets forth certain information regarding changes in
net interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in the rates for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on 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.
2
Year Ended December 31,
-------------------------------------------------------------------
2006 vs. 2005 2005 vs. 2004
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Interest income:
Commercial real estate loans .............. $ 4,549 $ 7,985 $12,534 $ 8,307 $ 6,493 $14,800
Residential real estate loans ............. 2,367 1,546 3,913 (564) (454) (1,018)
Commercial loans (1) ...................... 10,832 6,780 17,612 5,813 6,078 11,891
Consumer loans ............................ 2,590 1,411 4,001 1,234 652 1,886
Loans held-for-sale ....................... (55) (15) (70) (10) (11) (21)
Mortgage-backed securities ................ 703 2,054 2,757 2,744 2,617 5,361
Investment securities ..................... (1,413) 723 (690) (914) (774) (1,688)
Other ..................................... 97 1,001 1,098 17 684 701
------- ------- ------- ------- ------- -------
Favorable (unfavorable) ....................... 19,670 21,485 41,155 16,627 15,285 31,912
------- ------- ------- ------- ------- -------
Interest expense:
Deposits:
Interest-bearing demand ................. 35 453 488 69 35 104
Money market ............................ 1,420 2,833 4,253 2,117 1,055 3,172
Savings ................................. (224) 723 499 (180) 661 481
Retail time deposits .................... 3,302 3,909 7,211 1,141 1,955 3,096
Jumbo certificates of deposit - nonretail 1,586 1,140 2,726 (69) 675 606
Brokered certificates of deposit ........ 2,118 3,722 5,840 2,852 1,984 4,836
FHLB of Pittsburgh advances ............... 3,286 11,919 15,205 782 6,300 7,082
Trust preferred borrowings ................ 319 (558) (239) 596 2,512 3,108
Other borrowed funds ...................... (1,404) 2,305 901 (213) 2,715 2,502
Cost of funding discontinued operations ... 7 7 14 74 73 147
------- ------- ------- ------- ------- -------
Unfavorable (favorable) ....................... 10,445 26,453 36,898 7,169 17,965 25,134
------- ------- ------- ------- ------- -------
Net change as reported ........................ $ 9,225 $(4,968) $ 4,257 $ 9,458 $(2,680) $ 6,778
======== ======= ======= ======= ======= ========
(1) The tax-equivalent income adjustment is related to commercial loans.
3
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,
----------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------- ---------------------------- -----------------------------
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 ... $ 635,133 $ 52,095 8.20% $ 573,566 $ 39,561 6.90% $ 438,395 $ 24,761 5.56%
Residential real estate loans... 480,307 26,458 5.51 436,373 22,545 5.17 446,910 23,563 5.27
Commercial loans ................... 582,546 45,973 7.97 439,375 28,361 6.62 340,611 16,470 5.08
Consumer loans.................. 258,946 19,052 7.36 222,679 15,051 6.76 204,122 13,165 6.45
---------- -------- ---------- -------- ---------- --------
Total loans.................. 1,956,932 143,578 7.39 1,671,993 105,518 6.38 1,430,038 77,959 5.53
Mortgage-backed securities (4).... 591,021 28,444 4.81 575,580 25,687 4.46 510,965 20,326 3.98
Loans held-for-sale (3)........... 1,001 51 5.09 2,032 121 5.95 2,188 142 6.49
Investment securities (4)......... 55,004 2,568 4.67 88,094 3,258 3.70 110,567 4,946 4.47
Other interest-earning assets..... 51,144 2,536 4.96 48,077 1,438 2.99 47,010 737 1.57
---------- -------- ---------- -------- ----------- --------
Total interest-earning
assets..................... 2,655,102 177,177 6.72 2,385,776 136,022 5.75 2,100,768 104,110 5.01
-------- -------- --------
Allowance for loan losses........... (26,491) (24,909) (23,357)
Cash and due from banks............. 57,771 53,434 52,332
Cash in non-owned ATMs.............. 153,060 133,235 116,953
Bank-owned life insurance........... 53,137 53,137 48,400
Loans, operating leases and
other assets of discontinued
operations ....................... - 531 4,660
Other noninterest-earning assets ... 63,793 55,000 45,338
---------- ---------- ----------
Total assets................. $2,956,372 $2,656,204 $2,345,094
========== ========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand......... $ 123,599 785 0.64% $ 111,585 297 0.27% $ 83,566 193 0.23%
Money market.................... 232,418 8,090 3.48 177,911 3,837 2.16 60,615 665 1.10
Savings......................... 240,426 2,237 0.93 272,673 1,738 0.64 312,981 1,257 0.40
Retail time deposits............ 384,654 15,309 3.98 286,371 8,098 2.83 238,024 5,002 2.10
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
retail deposits............ 981,097 26,421 2.69 848,540 13,970 1.65 695,186 7,117 1.02
Jumbo certificates of deposit -
nonretail..................... 80,691 4,100 5.08 43,554 1,374 3.15 47,555 768 1.61
Brokered certificates of
deposit....................... 243,070 12,186 5.01 189,593 6,346 3.35 84,194 1,510 1.79
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
deposits................... 1,304,858 42,707 3.27 1,081,687 21,690 2.01 826,935 9,395 1.14
FHLB of Pittsburgh advances....... 976,101 45,878 4.64 887,822 30,673 3.41 859,742 23,591 2.70
Trust preferred borrowings........ 67,011 5,053 7.44 62,986 5,292 8.29 51,162 2,184 4.20
Other borrowed funds.............. 123,800 5,640 4.56 165,406 4,739 2.87 181,334 2,237 1.23
Cost of funding discontinued
operations...................... - - - (14) - (161)
---------- -------- ---------- -------- ----------
Total interest-bearing
liabilities................ 2,471,770 99,278 4.02 2,197,901 62,380 2.84 1,919,173 37,246 1.94
-------- -------- -------
Noninterest-bearing
demand deposits................... 262,838 250,321 220,446
Other noninterest-bearing
liabilities....................... 24,330 19,274 15,040
Minority interest................... 84 209 200
Stockholders' equity................ 197,350 188,499 190,235
---------- ---------- ----------
Total liabilities and
stockholders' equity....... $2,956,372 $2,656,204 $2,345,094
========== ========== ==========
Excess (deficit) of interest-
earning assets over
interest-bearing liabilities...... $ 183,332 $ 187,875 $ 181,595
========== ========== ==========
Net interest and dividend income.... $ 77,899 $ 73,642 $66,864
======== ======== =======
Interest rate spread................ 2.70% 2.91% 3.07%
==== ==== ====
Interest rate margin................ 2.98% 3.13% 3.24%
==== ==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
4
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, 2006, the Corporation recorded a provision for loan losses from
continuing operations of $2.7 million compared to $2.6 million in 2005 and $3.2
million in 2004. In 2006, the increase is the result of continued loan growth
despite continued positive trends in asset quality.
Noninterest Income. Noninterest income increased $5.7 million to $40.3
million in 2006, or 16%, from $34.7 million in 2005. The largest increase was
attributable to the $3.8 million in card and ATM income as a result of increased
volumes of cash in non-owned ATMs and higher bailment rates earned on this cash.
During 2006, the number of ATMs serviced by the CashConnect segment, WSFS' ATM
unit, remained essentially flat, while the number of WSFS owned and operated
ATMs increased to 313. Deposit service charges also increased $2.2 million as a
result of growth in deposit accounts as well as additional fee based services
provided by WSFS. During the third quarter of 2006, noninterest income was
impacted by unanticipated income of $1.8 million in the Bank's investment in
Bank-Owned Life Insurance (BOLI). Also, during 2006, the Bank recognized a loss
of $2.0 million on the sale of below-market yielding securities. This sale was
part of the Bank's efforts to improve its earning asset mix and return on
assets.
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. During 2005, the
CashConnect segment increased the number of ATMs it serviced by 33%. 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 Expenses. Noninterest expenses increased $6.4 million to
$69.3 million in 2006, or 10%, from $62.9 million in 2005. Salaries, benefits
and other compensation increased $4.2 million as a result of the Company's
continued growth including the opening of three branch offices and two branch
renovations / relocations in 2006 and the formation of the Wealth Management
Division. The number of full-time Associates increased from 515 in 2005 to 573
in 2006. The growth is also reflected in higher equipment and other operating
expenses with an increase of $514,000 in equipment expense and $1.7 million in
other operating expenses. Additionally, $1.5 million of the increase in
salaries, benefits and other compensation is the result of the implementation
during 2006 of the Statement of Financial Accounting Standards (SFAS) No. 123R
(revised 2004), Share-Based Payment, which requires that all share-based
payments to Associates, including grants of stock options, be recognized over
the related service period as compensation expense in the income statement based
on their fair values. As a result of the continued growth, and the establishment
of the Wealth Management Services division, the Company anticipates that
expenses will continue to grow.
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 stems from expenses related to the promotion of a new
free checking product line, and a campaign to increase market share for
commercial banking.
Income Taxes. The Corporation recorded a $15.7 million tax provision
for the year ended December 31, 2006 compared to $14.8 million and $14.1 million
for the years ended December 31, 2005 and 2004, respectively. The effective tax
rates for continuing operations for the years ended December 31, 2006, 2005 and
2004 were 34.0%, 34.8% and 35.1%, 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.
At December 31, 2006, approximately $2.9 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 $2.0 million on these deferred tax assets due to limitations
imposed by the Internal Revenue Code. Approximately $693,000 in gross deferred
tax assets of the Corporation at December 31, 2006 are related to state tax net
operating losses.
5
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 13 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
Total assets increased $150.6 million, or 5%, during 2006 to $3.0
billion. This increase was predominantly due to growth in net loans, which grew
$244.4 million, or 14%, during 2006. This increase was partially offset by a
decrease of $103.6 million in mortgage-backed securities. Total liabilities
increased $120.7 million during the year to $2.8 billion at December 31, 2006.
This increase was primarily the result of an increase in deposits of $310.1
million, or 21%, during 2006. This increase was offset by a decrease of $192.3
million in total borrowings.
During 2006, the Corporation took steps to realign its balance sheet
and improve its net interest margin ratio. These steps included, but were not
limited to, selling $51.4 million of below-market yielding mortgage-backed
securities.
Cash in non-owned ATMs. Between December 31, 2005 and December 31,
2006, the CashConnect segments', WSFS' ATM unit, cash in non-owned ATMs
decreased $8.4 million, or 5%. This decrease was the result of a decrease in the
number of ATMs serviced by CashConnect from 7,696 at December 31, 2005 to 7,458
at December 31, 2006. Of these, 313 ATMs were WSFS owned and operated during
2006.
Mortgage-backed Securities. Investments in mortgage-backed securities
decreased $103.6 million during 2006 to $516.7 million. This decrease was mainly
the result of the run-off of lower yielding securities during the year and the
sale of $51.4 million of mortgage-backed securities. The weighted average
duration of the mortgage-backed securities was 2.9 years at December 31, 2006.
Loans, net. Net loans increased $244.4 million, or 14%, during 2006.
This included increases of $136.0 million, or 27%, in commercial loans, $77.0
million, or 13%, in commercial real estate loans, $17.8 million, or 7%, in
consumer loans and $14.3 million, or 3%, in residential mortgage loans.
Customer Deposits. Customer deposits increased $149.8 million, or 13%,
during 2006 to $1.3 billion. Customer time deposits (CDs) increased $135.1
million, or 43%, in 2006. In addition, core deposit relationships (demand
deposits, money market and savings accounts) increased $14.7 million, or 1%,
during the year. The table below depicts the changes in customer deposits over
the last three years:
Year Ended December 31,
----------------------------------------
2006 2005 2004
---- ---- ----
(In Millions)
Beginning balance................... $1,193.9 $1,052.2 $ 883.1
Interest credited................... 33.8 11.4 6.6
Deposit inflows, net................ 116.0 130.3 162.5
-------- -------- --------
Ending balance...................... $1,343.7 $1,193.9 $1,052.2
======== ======== ========
Borrowings and Brokered Certificates of Deposit. Total borrowings
decreased by $192.3 million, or 16%, between December 31, 2005 and December 31,
2006. This decrease was primarily the result of a decrease in FHLB advances of
$224.7 million, or 22%, during 2006. In addition, Federal funds purchased and
securities sold under agreements to repurchase decreased $9.8 million, or 12%,
in 2006. This decrease was partially offset by an increase in other borrowed
funds of $42.1 million, or 117%, in 2006. Brokered deposits increased $89.5
million, or 42%, during the year.
6
Stockholders' Equity. Stockholders' equity increased $30.1 million to
$212.1 million at December 31, 2006. This increase included $30.4 million in net
income and $1.4 million in other comprehensive income. There were also $4.1
million in proceeds from the exercise of common stock options. These amounts
were partially offset by the acquisition of 103,400 shares of treasury stock for
a total of $6.1 million. At December 31, 2006, the Corporation held 8.9 million
shares of its common stock as treasury shares. The Corporation intends to
continue repurchasing shares in amounts depending on stock price and alternative
uses of capital. Finally, the Corporation declared cash dividends totaling $2.1
million.
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, while 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.
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.
7
The repricing and maturities of the Corporation's interest-rate
sensitive assets and interest-rate sensitive liabilities at December 31, 2006
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) ........................... $ 717,191 $ 331,910 $ 88,869 $ 1,137,970
Commercial loans ................................ 507,625 102,298 33,995 643,918
Consumer loans .................................. 127,242 55,747 80,488 263,477
Mortgage-backed securities ...................... 209,217 51,464 256,030 516,711
Loans held-for-sale ............................. 925 - - 925
Investment securities ........................... 77,035 1,585 15,743 94,363
Other investments ............................... 1,743 - - 1,743
----------- ----------- ----------- -----------
1,640,978 543,004 475,125 2,659,107
----------- ----------- ----------- -----------
Interest-rate sensitive liabilities:
Money market and interest-bearing demand deposits 105,400 - 287,965 393,365
Savings deposits ................................ 58,588 - 168,265 226,853
Retail time deposits ............................ 397,176 35,600 14,370 447,146
Jumbo certificates of deposit ................... 110,966 424 - 111,390
Brokered certificates of deposit ................ 216,362 21,223 63,669 301,254
FHLB advances ................................... 614,000 160,962 9,067 784,029
Trust preferred borrowings ...................... 67,011 - - 67,011
Other borrowed funds ............................ 100,784 - 50,856 151,640
----------- ----------- ----------- -----------
1,670,287 218,209 594,192 2,482,688
----------- ----------- ----------- -----------
(Deficiency) excess of interest-rate sensitive
assets over interest-rate sensitive liabilities
("interest-rate sensitive gap") ................. $ (29,309) $ 324,795 $ (119,067) $ 176,419
=========== =========== =========== ===========
One-year interest-rate sensitive assets/interest-rate sensitive liabilities 98.25%
One-year interest-rate sensitive gap as a percent of total assets (0.98)%
- -----------------
(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.
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 economically 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
8
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 $598,000 at
December 31, 2006 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, 2006, the Corporation earned
$684,000 in interest income on reverse mortgages as compared to $678,000 in 2005
and $1.8 million in 2004.
The projected cash flows depend on assumptions about life expectancy of
the mortgagee and the future changes in collateral values. Projecting the
changes in collateral values is the most significant factor impacting the
volatility of reverse mortgage values. The current assumptions include 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
$101,000. Conversely, if the long-term appreciation rate was decreased to -0.5%,
the resulting impact on income would have been $(85,000).
The Corporation also holds $12.4 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 No.
133, Accounting for Derivative and Hedging Activities.
During 2006, the Corporation formed a new reverse mortgage initiative.
While the Company's activity during the year has been limited to acting as a
correspondent for these loans, the intention of the Company is to originate and
underwrite its own reverse mortgages in the future. The Company expects to sell
most of these loans and does not intend to hold them in its portfolio. These
reverse mortgages are government approved, insured and are endorsed by the AARP.
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 zero loan contracts at
December 31, 2006.
An extensive analysis as of December 31, 2006 indicated that no
additional reserves were needed for the expected losses in the business during
the remaining wind-down period.
9
At December 31, 2006, there were zero in indirect loans and zero in
indirect leases. At December 31, 2006, WSFS had exposure to no remaining used
car residuals.
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, 2006 and 2005, calculated in compliance with Thrift
Bulletin No. 13A:
December 31,
-----------------------------------------------------------
2006 2005
----------------------------- ---------------------------
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 -1% 7.89% 0% 7.33%
+200 -1% 8.46% 0% 7.86%
+100 0% 8.99% 0% 8.31%
0 0% 9.66% 0% 8.72%
-100 +2% 9.03% -2% 8.83%
-200 (3) +1% 9.04% -7% 8.62%
-300 (3) -1% 8.91% -11% 8.32%
(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, 2006 and 2005 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
10
management's assessment of the ultimate collectibility of principal and
interest. Past due loans are defined as loans contractually past due 90 days or
more as to principal or interest payments but which remain in accrual status
because they are considered well secured and in the process of collection.
The following table sets forth the Corporation's nonperforming assets
and past due loans at the dates indicated:
December 31,
----------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
(Dollars in Thousands)
Nonaccruing loans:
Commercial ............................. $1,282 $ 925 $1,595 $1,549 $2,242
Consumer ............................... 557 155 291 240 516
Commercial mortgages ................... 500 727 909 941 326
Residential mortgages .................. 1,493 1,567 1,601 2,513 3,246
Construction ........................... - 36 - - 199
------ ------ ------ ------ ------
Total nonaccruing loans ..................... 3,832 3,410 4,396 5,243 6,529
Assets acquired through foreclosure ......... 388 59 217 301 904
------ ------ ------ ------ ------
Total nonperforming assets .................. $4,220 $3,469 $4,613 $5,544 $7,433
====== ====== ====== ====== ======
Past due loans:
Residential mortgages .................. $ 219 $ 327 $ 703 $ 915 $ 346
Commercial and commercial mortgages .... 3 - - 129 95
Consumer ............................... 29 59 104 148 88
------ ------ ------ ------ ------
Total past due loans ........................ $ 251 $ 386 $ 807 $1,192 $ 529
====== ====== ====== ====== ======
Ratio of nonaccruing loans to total
loans (1) .............................. 0.19% 0.19% 0.28% 0.40% 0.60%
Ratio of allowance for loan losses to gross
loans (1) .............................. 1.34% 1.41% 1.56% 1.69% 1.95%
Ratio of nonperforming assets to total assets 0.14% 0.12% 0.18% 0.25% 0.44%
Ratio of loan loss allowance to nonaccruing
loans (2) .............................. 705.32% 709.47% 524.05% 421.91% 324.49%
(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 remained flat at 0.19%
between 2006 and 2005. In addition, the ratio of nonperforming assets to total
assets increased slightly from 0.12% in 2005 to 0.14% in 2006. The consistency
of these results illustrate 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,
-------------------------------------
2006 2005 2004
------- ------- -------
(In Thousands)
Beginning balance ................. $ 3,469 $ 4,613 $ 5,544
Additions ................... 5,697 5,062 6,554
Collections ................. (3,916) (4,467) (4,668)
Transfers to accrual ........ (453) (398) (1,717)
Charge-offs/write-downs...... (577) (1,341) (1,100)
------- ------- -------
Ending balance ................... $ 4,220 $ 3,469 $ 4,613
======= ======= =======
11
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
continuing review of these portfolios.
Management establishes the loan loss allowance in accordance with
guidance provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the
allowance consists of several key elements which include: specific allowances
for identified problem loans; formula allowances for commercial and commercial
real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans in cases where
management has identified significant conditions or circumstances related to a
specific credit that management believes indicate the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans
are calculated by applying loss factors to outstanding loans in each case based
on the internal risk grade of loans derived from analysis of both the
probability of default and the probability of loss should default occur. 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 default experience for such loans and assessment of the
probability of default. Loss adjustment factors are applied based on criteria
discussed below.
Pooled loans are loans that are usually smaller,
not-individually-graded and homogenous in nature, such as consumer installment
loans and residential mortgages. Loan loss allowances for pooled loans are based
on a ten-year net charge-off history. 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 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,
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.
During 2006, the provision for loan losses was also affected by a
change in estimates used in the calculation. The change is the result of
continued analysis of the Corporation's loss experience on commercial loans and
the Corporation's consideration of proposed regulatory guidance and professional
studies on the classification of commercial
12
credits to change its estimates. This change combines an estimate of the
probability of default for each of the Corporation's classified loan grades with
an estimate of loss should an event of default occur. The estimate of loss
further segments classified loan grades into sub-grades with unique factors.
Management believes this analysis better estimates losses currently in its loan
portfolio. These changes resulted in a reduction to the provision for loan
losses of $1.8 million or $0.17 per share.
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated:
Year Ended December 31,
--------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(Dollars in Thousands)
Beginning balance ................................... $ 25,381 $ 24,222 $ 22,386 $ 21,452 $ 21,597
Provision for loan losses - continuing operations ... 2,738 2,582 3,217 2,550 2,243
Provision for loan losses - businesses held-for-sale. - - - - 211
Sale of businesses held-for-sale .................... - - - - (269)
Charge-offs:
Residential real estate ......................... 75 90 222 329 725
Commercial real estate (1) ...................... - 104 148 - 333
Commercial ...................................... 470 1,048 656 827 895
Overdrafts ...................................... 390 - - - -
Consumer (2) .................................... 483 631 817 860 1,551
-------- -------- -------- -------- --------
Total charge-offs ................................... 1,418 1,873 1,843 2,016 3,504
-------- -------- -------- -------- --------
Recoveries:
Residential real estate ......................... 14 59 32 - 76
Commercial real estate (1) ...................... 170 42 - 202 181
Commercial ...................................... 343 209 335 79 483
Consumer (2) .................................... 156 140 95 119 434
-------- -------- -------- -------- --------
Total recoveries .................................... 683 450 462 400 1,174
-------- -------- -------- -------- --------
Net charge-offs ..................................... 735 1,423 1,381 1,616 2,330
-------- -------- -------- -------- --------
Ending balance ...................................... $ 27,384 $ 25,381 $ 24,222 $ 22,386 $ 21,452
======== ======== ======== ======== ========
Net charge-offs to average gross loans outstanding,
net of unearned income .......................... 0.04% 0.09% 0.10% 0.13% 0.22%
======== ======== ======== ======== ========
(1) Includes commercial mortgage and construction loans.
(2) 2002 includes amounts for businesses held-for-sale.
For the year ended December 31, 2006, the Corporation provided $2.7
million for loan losses. The increase in 2006 over 2005 is a result of continued
loan growth despite continued positive trends in asset quality.
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. Management believes that the
allowance for loan losses of $27.4 million at December 31, 2006 is adequate to
provide for probable losses on existing loans based on information currently
available. 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,
-------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
-------------- -------------- ------------- -------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Residential real estate.......... $ 1,645 23.1% $ 1,632 25.4% $ 1,468 28.1% $ 2,736 34.6% $ 3,620 38.2%
Commercial real estate........... 11,343 32.5 10,978 32.7 9,211 34.6 8,338 29.3 7,208 26.2
Commercial....................... 11,019 31.5 9,471 28.3 10,456 23.7 8,368 22.0 7,375 19.1
Consumer......................... 3,377 12.9 3,300 13.6 3,087 13.6 2,944 14.1 3,249 16.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total............................ $27,384 100.0% $25,381 100.0% $24,222 100.0% $22,386 100.0 $21,452 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
13
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, 2006, net loan growth resulted in the use of $246.4 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 deposit market,
o Borrowing from the FHLB,
o Other borrowings such as repurchase agreements,
o Cash flow from securities and loan sales and repayments, and
o 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. Customer deposit growth was
strong, equaling $149.8 million, or 13%, between December 31, 2005 and December
31, 2006.
The Corporation's portfolio of high-quality, liquid investments,
primarily short-duration AAA-rated, mortgage-backed securities and Agency notes
also provide a source of cash flow to meet current cash needs. If needed,
portions of this portfolio, as well as portions of the loan portfolio, could be
sold to provide cash to fund new loans. During the year ended December 31, 2006,
$32.4 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. As part of the
liquidity management process, the Company also monitors its available wholesale
funding capacity. At December 31, 2006, the Company had $471 million in funding
capacity at the Federal Home Loan Bank of Pittsburgh and $451 million in
estimated funding capacity in brokered deposits. 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.
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
14
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, 2006, 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 103,400 shares in 2006 and
719,500 shares in 2005. At December 31, 2006, the Corporation held 8.9 million
shares of its common stock as treasury shares. The Corporation intends to
continue repurchasing shares in amounts depending on stock price and alternative
uses of capital. At December 31, 2006, the Corporation had 546,600 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 15 to the Financial Statements.
CONTRACTUAL OBLIGATIONS
At December 31, 2006, 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 8, 10,
and 15 to the Financial Statements.
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----- ------ --------- --------- -------
(In Thousands)
Operating lease obligations $ 44,891 $ 3,029 $ 7,923 $ 7,227 $ 26,712
Long-term debt obligations 851,039 449,000 262,462 30,000 109,577
Data processing contracts 9,223 3,417 5,151 655 --
Credit obligations 532,335 532,335 --
---------- ---------- ---------- ---------- ----------
Total $1,437,488 $ 987,781 $ 275,536 $ 37,882 $ 136,289
========== ========== ========== ========== ==========
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.
15
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.
In February 2006, Congress passed the Federal Deposit Insurance Reform
Act of 2005 (FDIRA). This legislation will merge the Bank Insurance Fund and the
Savings Association Insurance Fund into one fund, increase insurance coverage
for retirement accounts to $250,000, adjust the maximum deposit insurance for
inflation after March 31, 2010 and give the FDIC greater flexibility in setting
insurance assessments. As part of the FDIRA-2005, the Corporation's primary
operating subsidiary, the Bank, has been granted a one-time credit of
approximately $1.0 million for utilization against future FDIC insurance
premiums. The FDIC announced that 2007 assessments will range from 5 to 7 basis
points for well-capitalized institutions with composite regulatory ratings of
one or two. The Corporation anticipates that the $1.0 million credit will offset
substantially the entire 2007 premium.
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 judgments and estimates:
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when realized. The determination of the allowance for
loan losses requires significant judgment reflecting management's best estimate
of probable loan losses related to specifically identified loans as well as
those in the remaining loan portfolio. Management's evaluation is based upon a
continuing review of these portfolios, with consideration given to evaluations
resulting from examinations performed by regulatory authorities.
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 management'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 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.
The balance in this reserve at December 31, 2006 was $715,000.
16
The Bank, as successor to originators of reverse mortgages is, from
time to time, involved in 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 about how the
courts or arbitrators may apply existing legal principles to the interpretation
and enforcement of the terms and conditions of the Bank's reverse mortgage
obligations.
Deferred Taxes
The Corporation accounts for income taxes in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes
(SFAS 109), 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 July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
Benefits from tax positions should be recognized in the financial statements
only when it is more-likely-than-not that the tax position will be sustained
upon examination by the appropriate taxing authority that would have full
knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. FIN 48 also provides
guidance on the accounting for and disclosure of unrecognized tax benefits,
interest and penalties. FIN 48 becomes effective for the Corporation on January
1, 2007 and is expected to have an immaterial favorable impact to the equity of
the Corporation.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. For the
Corporation, this will become effective on January 1, 2008. The Corporation is
currently evaluating the impact that the adoption of SFAS 159 will have on our
Consolidated Financial Statements.
17
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, 2006, the Corporation had 1,320
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, 2006 was
$66.93.
Stock Price Range
-----------------
Low High Dividends
--- ---- ---------
2006 4th $60.00 $68.27 $ 0.08
3rd 57.22 64.62 0.08
2nd 57.34 64.65 0.08
1st 59.80 64.75 0.07
------
$ 0.31
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
======
18
COMPARATIVE STOCK PERFORMANCE GRAPH
The graph and table which follow show the cumulative total return on
the Common Stock of the Company over the last five years compared with the
cumulative total return of the Dow Jones Total Market Index and the Nasdaq Bank
Index over the same period as obtained from Bloomberg L.P. Cumulative total
return on the Common Stock or the index equals the total increase in value since
December 31, 2001, assuming reinvestment of all dividends paid into the Common
Stock or the index, respectively. The graph and table were prepared assuming
$100 was invested on December 31, 2001 in the Common Stock of the Company and in
each of the indexes. There can be no assurance that the Company's future stock
performance will be the same or similar to the historical stock performance
shown in the graph below. The Company neither makes nor endorses any predictions
as to stock performance.
CUMULATIVE TOTAL SHAREHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
December 31, 2001 through December 31, 2006
[GRAPHIC OMITTED]
Cumulative Total Return
-----------------------------------------------------------
2001 2002 2003 2004 2005 2006
-----------------------------------------------------------
WSFS Financial Corporation $100 $191 $ 261 $351 $360 $395
Dow Jones Total Market Index 100 77 98 109 113 129
Nasdaq Bank Index 100 107 142 161 158 179
19
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, 2006. 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, 2006, 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, 2006, 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
Chief Financial Officer
20
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, 2006, 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, 2006, 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, 2006,
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, 2006
and 2005, 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, 2006, and our report dated March 9, 2007 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
- -----------------
Philadelphia, Pennsylvania
March 9, 2007
21
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, 2006
and 2005, 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, 2006. 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, 2006 and 2005, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2006, 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, 2006,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 9, 2007 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
As discussed in Note 1 to the consolidated financial statements, the Corporation
adopted Statement of Financial Accounting Standards No. 123R, Share-Based
Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation, effective January 1, 2006.
/s/ KPMG LLP
- ------------
Philadelphia, Pennsylvania
March 9, 2007
22
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
----------------------------------
2006 2005 2004
--------- --------- ---------
(Dollars in Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans ......................................... $ 143,629 $ 105,639 $ 78,101
Interest on mortgage-backed securities ............................. 28,444 25,687 20,326
Interest and dividends on investment securities .................... 1,884 2,580 3,099
Interest on investments in reverse mortgages ....................... 684 678 1,847
Other interest income .............................................. 2,536 1,438 737
--------- --------- ---------
177,177 136,022 104,110
--------- --------- ---------
Interest expense:
Interest on deposits ............................................... 42,707 21,690 9,395
Interest on Federal Home Loan Bank advances ........................ 45,878 30,659 23,430
Interest on federal funds purchased and securities sold under
agreements to repurchase ......................................... 3,790 4,089 2,064
Interest on trust preferred borrowings ............................. 5,053 5,292 2,184
Interest on other borrowings ....................................... 1,850 650 173
--------- --------- ---------
99,278 62,380 37,246
--------- --------- ---------
Net interest income ................................................ 77,899 73,642 66,864
Provision for loan losses .......................................... 2,738 2,582 3,217
--------- --------- ---------
Net interest income after provision for loan losses ................ 75,161 71,060 63,647
--------- --------- ---------
Noninterest income:
Credit/debit card and ATM income ................................... 18,835 15,049 12,137
Deposit service charges ............................................ 12,250 10,091 9,389
Investment advisory income ......................................... 2,399 2,519 2,262
Bank-owned life insurance income ................................... 3,976 2,003 2,190
Loan fee income .................................................... 1,824 1,999 2,182
Mortgage banking activities, net ................................... 225 391 439
Securities (losses) gains .......................................... (1,981) (605) 249
Other income ....................................................... 2,777 3,206 3,102
--------- --------- ---------
40,305 34,653 31,950
--------- --------- ---------
Noninterest expenses:
Salaries, benefits and other compensation .......................... 39,369 35,172 30,723
Occupancy expense .................................................. 5,508 5,168 4,666
Equipment expense .................................................. 4,393 3,879 3,696
Data processing and operations expense ............................. 3,511 3,465 3,246
Marketing expense .................................................. 2,713 2,745 2,329
Professional fees .................................................. 2,070 2,416 2,496
Other operating expenses ........................................... 11,750 10,032 8,543
--------- --------- ---------
69,314 62,877 55,699
--------- --------- ---------
Income from continuing operations before minority interest and taxes 46,152 42,836 39,898
Less minority interest ............................................. 51 133 190
--------- --------- ---------
Income from continuing operations before taxes ..................... 46,101 42,703 39,708
Income tax provision ............................................... 15,660 14,847 13,951
--------- --------- ---------
Income from continuing operations .................................. 30,441 27,856 25,757
Income on wind-down of discontinued operations, net of taxes ....... - - 143
--------- --------- ---------
Net income ......................................................... $ 30,441 $ 27,856 $ 25,900
========= ========= =========
23
CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year Ended December 31,
------------------------------
2006 2005 2004
-------- -------- --------
(Dollars in Thousands, Except Per Share Data)
Earnings per share:
Basic:
Income from continuing operations ............................... $ 4.59 $ 4.10 $ 3.60
Income on wind-down of discontinued operations, net of taxes..... - - 0.02
------- ------- -------
Net income .................................................. $ 4.59 $ 4.10 $ 3.62
======= ======= =======
Diluted:
Income from continuing operations ............................... $ 4.41 $ 3.89 $ 3.39
Income on wind-down of discontinued operations, net of taxes..... - - 0.02
------- ------- -------
Net income .................................................. $ 4.41 $ 3.89 $ 3.41
======= ======= =======
The accompanying notes are an integral part of these Financial Statements.
24
CONSOLIDATED STATEMENT OF CONDITION
December 31,
------------------------------
2006 2005
---------- ----------
(In Thousands)
Assets
Cash and due from banks....................................................... $ 73,989 $ 59,251
Cash in non-owned ATMs........................................................ 166,092 174,527
Federal funds sold............................................................ 1,500 -
Interest-bearing deposits in other banks...................................... 243 173
---------- ----------
Total cash and cash equivalents..................................... 241,824 233,951
Investment securities held-to-maturity (fair value: 2006-$4,252; 2005-$5,005) 4,219 4,806
Investment securities available-for-sale including reverse mortgages.......... 50,272 52,683
Mortgage-backed securities available-for-sale................................. 504,347 608,372
Mortgage-backed securities trading............................................ 12,364 11,951
Loans held-for-sale........................................................... 919 436
Loans, net of allowance for loan losses of $27,384 at December 31, 2006 and
$25,381 at December 31, 2005................................................ 2,018,822 1,774,858
Bank-owned life insurance..................................................... 55,282 54,193
Stock in Federal Home Loan Bank of Pittsburgh, at cost......................... 39,872 46,293
Assets acquired through foreclosure........................................... 388 59
Premises and equipment........................................................ 30,218 22,904
Accrued interest receivable and other assets.................................. 38,869 36,246
---------- ----------
Total assets.................................................................. $2,997,396 $2,846,752
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand...................................................... $ 276,338 $ 279,415
Interest-bearing demand ........................................................ 146,719 141,378
Money market ................................................................... 246,645 209,398
Savings......................................................................... 226,853 251,675
Time............................................................................ 326,009 224,853
Jumbo certificates of deposit - customer........................................ 121,142 87,212
---------- ----------
Total customer deposits ............................................ 1,343,706 1,193,931
Other jumbo certificates of deposit............................................. 111,388 40,567
Brokered deposits............................................................... 301,254 211,738
---------- ----------
Total deposits..................................................... 1,756,348 1,446,236
Federal funds purchased and securities sold under agreements to repurchase ... 73,400 83,150
Federal Home Loan Bank advances............................................... 784,028 1,008,721
Trust preferred borrowings.................................................... 67,011 67,011
Other borrowed funds.......................................................... 78,240 36,126
Accrued interest payable and other liabilities................................ 26,256 23,327
---------- ----------
Total liabilities............................................................. 2,785,283 2,664,571
---------- ----------
Minority Interest............................................................. 54 206
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 15,584,580
at December 31, 2006 and 15,435,630 at December 31, 2005.................... 156 154
Capital in excess of par value ............................................... 81,580 74,673
Accumulated other comprehensive loss.......................................... (8,573) (9,968)
Retained earnings............................................................ 347,448 319,065
Treasury stock at cost, 8,942,969 shares at December 31, 2006 and 8,839,569
shares at December 31, 2005................................................. (208,552) (201,949)
---------- ----------
Total stockholders' equity.................................................... 212,059 181,975
---------- ----------
Total liabilities, minority interest and stockholders' equity................. $2,997,396 $2,846,752
========== ==========
The accompanying notes are an integral part of these Financial Statements.
25
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Acumulated
Capital in Other Total
Common Excess of Comprehensive Retained Treasury Stockholders'
Stock Par Value Loss Earnings Stock Equity
----- --------- ---- -------- ----- ------
(In Thousands)
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)
Issuance of common stock, including proceeds from
exercise of common stock options .................... 1 2,044 - - - 2,045
Treasury stock at cost, 368,400 shares (2) .......... - 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)
Issuance of common stock, including proceeds from
exercise of common stock options .................... 2 3,120 - - - 3,122
Treasury stock at cost, 712,300 shares (3) .......... - 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
========= ========= ========= ========= ========= =========
Comprehensive income:
Net income ..................................... - - - 30,441 - 30,441
Other comprehensive income (1) ................. - - 1,956 - - 1,956
---------
Total comprehensive income .......................... 32,397
---------
Adjustment to initially apply FASB Statement No......
158, net of tax $(344) ......................... - - (561) - - (561)
Cash dividend, $0.31 per share ...................... - - - (2,058) - (2,058)
Issuance of common stock, including proceeds from
exercise of common stock options .................... 2 4,610 - - - 4,612
Treasury stock at cost, 103,400 shares .............. - - - - (6,603) (6,603)
Issuance of restricted stock ........................ - 286 - - - 286
Tax benefit from exercises of common stock options... - 2,011 - - - 2,011
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2006 .......................... $ 156 $ 81,580 $ (8,573) $ 347,448 $(208,552) $ 212,059
========= ========= ========= ========= ========= =========
(1) Other Comprehensive Income: 2006 2005 2004
----- ---- -----
Net unrealized holding losses on securities
available-for-sale arising during the period
net of taxes (2006 - $261, 2005 - $(4,540),
2004 - $(661))............................... $ 426 $ (7,407) $ (1,078)
Net unrealized holding gains (losses)
arising during the period on
derivatives net of taxes (2006 - $163,
2005 - $241, 2004 - $(218))................. 302 449 (405)
Reclassification for losses (gains) included
in income, net of taxes (2006 - $753,
2005 - $230, 2004 - $(94)).................. 1,228 375 (154)
--------- --------- ---------
Total other comprehensive income (loss)......... $ 1,956 $ (6,583) $ (1,637)
========= ========= =========
(2) Net of reissuance of 5,500 shares.
(3) Net of reissuance of 7,200 shares. The accompanying notes are an integral
part of these Financial Statements.
26
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------------------
2006 2005 2004
--------- --------- ---------
(In Thousands)
Operating activities:
Net income .................................................................................. $ 30,441 $ 27,856 $ 25,900
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for loan losses .............................................................. 2,738 2,582 3,217
Depreciation, accretion and amortization ............................................... 4,507 5,440 6,022
(Increase) decrease in accrued interest receivable and other assets .................... (3,066) (1,952) (2,831)
Origination of loans held-for-sale ..................................................... (23,914) (37,222) (42,647)
Proceeds from sales of loans held-for-sale ............................................. 21,406 38,721 38,223
Gain on mortgage banking activity ...................................................... (224) (84) (205)
Loss (gain) on sale of loans ........................................................... - 1 (234)
Loss (gain) on sale of investments ..................................................... 1,981 605 (249)
Stock-based compensation expense (net of tax benefit recognized) ....................... 1,153 - -
Excess tax benefits from share-based payment arrangements .............................. (2,011) - -
Minority interest in net income ........................................................ 51 133 190
Increase in accrued interest payable and other liabilities ............................. 4,380 6,031 2,648
Loss (gain) on sale of assets acquired through foreclosure ............................. 41 (137) (60)
Increase in value of bank-owned life insurance ......................................... (3,976) (2,003) (2,190)
Increase in capitalized interest, net .................................................. (1,097) (678) (2,271)
--------- --------- ---------
Net cash provided by operating activities ................................................... 32,410 39,293 25,513
--------- --------- ---------
Investing activities:
Maturities of investment securities .................................................... 610 6,990 2,675
Sales of investment securities available-for-sale ...................................... 23,950 60,454 25,057
Purchases of investment securities available-for-sale .................................. (20,718) (26,744) (9,930)
Sales of mortgage-backed securities available-for-sale ................................. 49,412 - 51,634
Repayments of mortgage-backed securities held-to-maturity .............................. - 4 1,813
Repayments of mortgage-backed securities available-for-sale ............................ 102,255 112,395 150,988
Purchases of mortgage-backed securities available-for-sale ............................. (47,721) (220,816) (200,696)
Repayments on reverse mortgages ........................................................ 1,347 177 2,619
Disbursements for reverse mortgages .................................................... (476) (393) (470)
Purchase of Cypress Capital Management, LLC ............................................ (466) (452) (1,122)
Sale of loans .......................................................................... 11,379 688 13,435
Purchase of loans ...................................................................... (9,600) (15,831) (14,767)
Purchase of bank-owned life insurance .................................................. - - (50,000)
Payment of bank-owned life insurance ................................................... 2,887 - -
Net increase in loans .................................................................. (246,432) (228,758) (228,001)
Net increase in stock of Federal Home Loan Bank of Pittsburgh .......................... 6,421 (2,347) (270)
Sales of assets acquired through foreclosure, net ...................................... 80 683 532
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 .................................................. 24 (1,196) -
Premises and equipment, net ............................................................ (10,750) (4,202) (6,378)
--------- --------- ---------
Net cash used for investing activities ...................................................... (137,798) (314,977) (269,248)
--------- --------- ---------
(Continued on next page)
27
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year Ended December 31,
-----------------------------------------
2006 2005 2004
----------- ----------- -----------
(In Thousands)
Financing activities:
Net increase in demand and savings deposits ...................................... $ 56,803 $ 125,297 $ 102,368
Net increase in time deposits .................................................... 294,365 87,875 202,933
Net decrease in securities sold under agreements to repurchase ................... (9,750) (48,955) (16,276)
Receipts of FHLB advances ........................................................ 8,796,661 7,789,201 6,193,801
Repayments of FHLB advances ...................................................... (9,021,354) (7,617,543) (6,200,034)
Redemption of Trust I Preferred Securities ....................................... - (51,547) -
Issuance of Pooled Floating Rate Capital Securities .............................. - 67,011 -
Dividends paid on common stock ................................................... (2,058) (1,845) (1,643)
Issuance of common stock and exercise of common stock options .................... 3,355 6,348 3,590
Excess tax benefit from share-based payment arrangements ......................... 2,011 - -
Purchase of treasury stock, net of reissuance .................................... (6,603) (40,104) (17,899)
(Decrease) increase in minority interest ......................................... (203) (166) 3
----------- ----------- -----------
Net cash provided by financing activities ........................................ 113,227 315,572 266,843
----------- ----------- -----------
Increase in cash and cash equivalents from continuing operations ................. 7,839 39,888 23,108
Net cash provided by operating activities of discontinued operations ............. 14 1,141 7,746
Net cash provided by (used for) investing activities of discontinued operations... 20 (87) 640
Cash and cash equivalents at beginning of period ................................. 233,951 193,009 161,515
----------- ----------- -----------
Cash and cash equivalents at end of period ....................................... $ 241,824 $ 233,951 $ 193,009
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest for the year .............................................. $ 98,142 $ 58,080 $ 36,355
Cash paid for income taxes, net .................................................. 13,597 10,151 9,803
Cash (refunded) paid for taxes of discontinued operations, net ................... - (45) 396
Loans transferred to assets acquired through foreclosure ......................... 450 388 388
Net change in accumulated other comprehensive loss ............................... 1,395 (6,583) (1,637)
Transfer of loans held-for-sale to loans ......................................... 2,129 1,378 2,858
Deconsolidation of WSFS Capital Trust I .......................................... - - 1,547
Transfer of building to real estate held-for-investment .......................... - 1,878 -
The accompanying notes are an integral part of these Financial Statements.
28
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, 2006, serves customers from its main office, 27
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 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 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. 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 and January 2006, Montchanin
increased its ownership in Cypress to 80%, and 90%, respectively.
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.
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.
29
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity.
Debt and equity securities include mortgage-backed securities,
corporate and municipal bonds, U.S. Government and agency securities and certain
equity securities. Premiums and discounts on debt and equity securities
held-to-maturity and available-for-sale are recognized in interest income using
a level yield method over the period to expected maturity. The fair value of
debt and equity securities is primarily obtained from third-party pricing
services. Implicit in the valuation are estimated prepayments based on
historical and current market conditions.
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.
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, commercial construction, residential mortgages
and consumer 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.
30
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.
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 loans derived from analysis of both the
probability of default and the probability of loss should default occur. 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 default experience for such loans and an assessment of the
probability of default. Loss adjustment factors are applied based on criteria
discussed below.
Pooled loans are loans that are usually smaller, not-individually-
graded and homogeneous in nature, such as consumer installment loans and
residential mortgages. Loan loss allowances for pooled loans are based on a
ten-year net charge-offs history. 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 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,
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.
During 2006, the provision for loan losses was also affected by a
change in estimates used in the calculation. The change is the result of
continued analysis of the Corporation's loss experience on commercial loans and
the Corporation's consideration of proposed regulatory guidance and professional
studies on the classification of commercial credits to change its estimates.
This change combines an estimate of the probability of default for each of the
Corporation's classified loan grades with an estimate of loss should an event of
default occur. The estimate of loss further segments classified loan grades into
sub-grades with unique factors. Management believes this analysis better
estimates losses currently in its loan portfolio. These changes resulted in a
reduction to the provision for loan losses of $1.8 million or $0.17 per share.
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.
31
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.
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.
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.
32
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
2006 2005 2004
------- ------- --------
(In Thousands, Except Per Share Data)
Numerator:
Income from continuing operations ................................... $30,441 $27,856 $25,757
Income on wind-down of discontinued operations, net of taxes ........ - - 143
------- ------- -------
Net income .......................................................... $30,441 $27,856 $25,900
======= ======= =======
Denominator:
Denominator for basic earnings per share - weighted average shares ... 6,634 6,795 7,158
Effect of dilutive employee stock options ............................ 270 373 435
------- ------- -------
Denominator for diluted earnings per share -.adjusted weighted average
shares and assumed exercise ........................................ 6,904 7,168 7,593
======= ======= =======
Earnings per share:
Basic:
Income from continuing operations ................................... $ 4.59 $ 4.10 $ 3.60
Income on wind-down of discontinued operations, net of taxes ........ - - 0.02
------- ------- -------
Net income .......................................................... $ 4.59 $ 4.10 $ 3.62
======= ======= =======
Diluted:
Income from continuing operations ................................... $ 4.41 $ 3.89 $ 3.39
Income on wind-down of discontinued operations, net of taxes ........ - - 0.02
------- ------- -------
Net income .......................................................... $ 4.41 $ 3.89 $ 3.41
======= ======= =======
Outstanding common stock equivalents having no dilutive effect ...... 197 173 4
33
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment (SFAS 123R). SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized as compensation expense in the consolidated financial statements
based on their fair values. That expense will be recognized over the period
during which an Associate is required to provide services in exchange for the
award, known as the requisite service period (usually the vesting period). The
Corporation adopted SFAS 123R beginning January 1, 2006 using the Modified
Prospective Application Method. This method relates to current and future
periods and does not require the restatement of prior periods. The impact of
adopting SFAS 123R for 2006 was $1.5 million, or $0.19 per share, to salaries,
benefits and other compensation.
For comparative purposes, the following table illustrates the effect on
net income and earnings per share had the Company applied the fair value
recognition provision of the SFAS No. 123 to stock-based employee compensation.
2005 2004
-------- ---------
(In Thousands, Except Per Share Data)
Income from continuing operations, as reported......................................... $27,856 $25,757
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects.... (972) (590)
-------- ---------
Pro forma income from continuing operations............................................. $26,884 $25,167
======= =======
Earnings per share:
Basic:
Income from continuing operations............................................ $ 4.10 $ 3.60
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)
-------- ---------
Pro forma income from continuing operations................................... $ 3.96 $ 3.52
======== =========
Diluted:
Income from continuing operations............................................ $ 3.89 $ 3.39
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)
-------- ---------
Pro forma income from continuing operations................................... $ 3.75 $ 3.31
======== =========
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 zero loan contracts at December 31, 2006.
At December 31, 2006, loans, operating leases and other assets of
discontinued operations, net were zero compared to $34,000 at December 31, 2005.
This 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. There were no such
adjustments recorded during 2005 or 2006. As of December 31, 2006, all assets
and liabilities relating to the discontinued operations of WCC were zero and as
a result WSFS expects no additional gains or losses from this discontinued
business segment.
34
3. 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, 2006:
Reverse mortgages (1) .............. $ 598 $ - $ - $ 598
U.S. Government and agencies ....... 46,920 21 74 46,867
State and political subdivisions.... 2,785 23 1 2,807
------- ------- ------- -------
$50,303 $ 44 $ 75 $50,272
======= ======= ======= =======
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
======= ======= ======= =======
Held-to-maturity:
December 31, 2006:
State and political subdivisions.... $ 4,219 $ 75 $ 42 $ 4,252
------- ------- ------- -------
$ 4,219 $ 75 $ 42 $ 4,252
======= ======= ------- -------
December 31, 2005:
State and political subdivisions.... $ 4,806 $ 199 $ - $ 5,005
------- ------- ------- -------
$ 4,806 $ 199 $ - $ 5,005
======= ======= ======= =======
(1) See Note 6 of the Financial Statements for a further discussion of Reverse
Mortgages.
Securities with book values aggregating $49.7 million at December 31,
2006 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
$560,000 and $434,000 at December 31, 2006 and 2005, respectively.
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 2006 were as follows:
Held-to-Maturity Available-for-Sale
---------------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
(In Thousands)
Within one year (1)........................ $ 2,050 $ 2,080 $ 39,677 $ 39,604
After one year but within five years....... 1,085 1,130 8,576 8,595
After five but within ten years............ - - 2,050 2,073
After ten years............................ 1,084 1,042 - -
------- -------- -------- --------
$ 4,219 $ 4,252 $ 50,303 $ 50,272
======= ======= ======== ========
(1) Reverse mortgages do not have contractual maturities. The Corporation has
included reverse mortgages in maturities within one year.
35
During 2006, proceeds from the sale of investment securities classified
as available-for-sale were $11.0 million, with a loss of $41,000 realized on the
sales. Municipal bonds totaling $610,000 were called by the issuers. Proceeds
from the sale of investments classified as available-for-sale during 2005 and
2004 were $60.7 million and $25.0 million, respectively. There was a net loss of
$609,000 realized on sales in 2005 and $1,000 net gain realized in 2004. 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 2006, 2005 and 2004.
At December 31, 2006, the Company owned investment securities totaling
$40.9 million where the amortized cost basis exceeded fair value. Total
unrealized losses on those securities were $117,000 at December 31, 2006. This
temporary impairment is the result of changes in market interest rates since the
purchase of the securities. Securities amounting to $38.9 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 ............ $ 966 $ 42 $ - $ - $ 966 $ 42
Available-for-sale
State and political subdivisions ............ 984 1 - - 984 1
-------
U.S. Government and agencies ................ - - 38,906 74 38,906 74
------- ------- ------- ------- ------- -------
Total temporarily impaired investments.... $ 1,950 $ 43 $38,906 $ 74 $40,856 $ 117
======= ======= ======= ======= ======= =======
36
4. 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, 2006:
Collateralized mortgage obligations ......... $424,748 $ 119 $ 9,023 $415,844
FNMA ....................................... 42,254 - 2,036 40,218
FHLMC ...................................... 31,121 97 1,632 29,586
GNMA ....................................... 19,115 - 416 18,699
-------- -------- -------- --------
$517,238 $ 216 $ 13,107 $504,347
======== ======== ======== ========
Weighted average yield ................ 4.77%
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%
Trading securities:
December 31, 2006:
Collateralized mortgage obligations.... $ 12,364 $ - - $ 12,364
-------- -------- -------- --------
$ 12,364 $ - $ - $ 12,364
======== ======== ======== ========
Weighted average yield ................ 8.35%
December 31, 2005:
Collateralized mortgage obligations.... $ 11,951 $ - $ - $ 11,951
-------- -------- -------- --------
$ 11,951 $ - $ - $ 11,951
======== ======== ======== ========
Weighted average yield ............ 7.38%
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 2.9 years at December 31, 2006.
At December 31, 2006, mortgage-backed securities with par values
aggregating $183.2 million were pledged as collateral for retail customer
repurchase agreements and municipal deposits. Accrued interest receivable
relating to mortgage-backed securities was $2.0 million and $2.4 million at
December 31, 2006 and 2005, respectively. From time to time mortgage-backed
securities are pledged as collateral for Federal Home Loan Bank (FHLB)
borrowings. The fair value of these pledged mortgage-backed securities at
December 31, 2006 and 2005 were $0 and $272.2 million, respectively. Proceeds
from the sale of mortgage-backed securities available-for-sale were $49.4
million in 2006, resulting in a loss of $1.94 million. There were no sales of
mortgage-backed securities in 2005. The cost basis of all mortgage-backed sales
are based on specific identification method.
The Corporation owns $12.4 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 $1.4 million from accrued interest
paid in kind. These floating rate notes represent the BBB+ traunche of a 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 5 to the Financial Statements.
37
Based on accounting rules under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities (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, 2006
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, 2006, the Company owned mortgage-backed securities
totaling $471.2 million where the amortized cost basis exceeded fair value.
Total unrealized losses on those securities were $13.1 million at December 31,
2006. 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 ............................... $ 46,654 $ 173 $338,984 $ 8,850 $385,638 $ 9,023
FNMA .............................. - - 40,218 2,036 40,218 2,036
FHLMC ............................. - - 26,629 1,632 26,629 1,632
GNMA .............................. 7,011 126 11,688 290 18,699 416
-------- -------- -------- -------- -------- --------
Total temporarily impaired MBS... $ 53,665 $ 299 $417,519 $ 12,808 $471,184 $ 13,107
======== ======== ======== ======== ======== ========
5. REVERSE MORTGAGES AND RELATED ASSETS
The Corporation holds an investment in reverse mortgages of $598,000 at
December 31, 2006 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, 2006, the Corporation earned $684,000 in
interest income on reverse mortgages as compared to $678,000 in 2005 and $1.8
million in 2004.
The projected cash flows depend on assumptions about life expectancy of
the mortgagee and the future changes in collateral values. Projecting the
changes in collateral values is the most significant factor impacting the
volatility of reverse mortgage values. The current assumptions include 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
$101,000. Conversely, if the long-term appreciation rate was decreased to -0.5%,
the resulting impact on income would have been $(85,000).
The Corporation also holds $12.4 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
38
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 No. 133,
Accounting for Derivative and Hedging Activities. This certificate is an equity
security with no readily determinable fair value, as such, it is excluded from
the accounting treatment promulgated under SFAS 115. As a result, the security
is carried at cost (which is zero). The amount, by which the certificate is
considered in the money, is included in Note 16 to the Financial Statements, as
required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
6. LOANS
The following tables detail the Corporation's loan portfolio:
December 31,
------------------------
2006 2005
---- ----
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) ...................... $ 473,946 $ 457,213
Other ......................................... 446,810 432,660
Real estate construction loans...................... 260,733 194,002
Commercial loans.................................... 649,832 511,798
Consumer loans...................................... 263,478 244,820
---------- ----------
2,094,799 1,840,493
Less:
Loans in process .............................. 49,437 40,560
Deferred fees.................................. (844) (306)
Allowance for loan losses ..................... 27,384 25,381
---------- ----------
Net loans................................... $2,018,822 $1,774,858
========== ==========
The Corporation had impaired loans of approximately $3.8 million at
December 31, 2006 compared to $3.4 million at December 31, 2005. 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
$3.6 million and $3.9 million during 2006 and 2005, respectively. The allowance
for losses on impaired loans was $369,000 at December 31, 2006, as compared to
$480,000 at December 31, 2005. There was no interest income recognized on
impaired loans.
The total amount of loans serviced for others were $265.5 million,
$255.8 million and $245.5 million at December 31, 2006, 2005 and 2004,
respectively. The Corporation received fees from the servicing of loans of
$724,000, $769,000 and $800,000 during 2006, 2005 and 2004, 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. The
total of this portfolio was $64.9 million and $37.6 million for December 31,
2006 and 2005, respectively. 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 $135,000 and $308,000 of noninterest
income during 2006 and 2005, respectively. 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 $10.3 million and
$7.9 million at December 31, 2006 and 2005, respectively.
Nonaccruing loans aggregated $3.8 million, $3.4 million and $4.4
million at December 31, 2006, 2005 and 2004, respectively. If interest on all
such loans had been recorded in accordance with contractual terms, net interest
income would have increased by $159,000 in 2006, $133,000 in 2005 and $150,000
in 2004.
39
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
--------------------------------
2006 2005 2004
-------- -------- --------
(In Thousands)
Beginning balance ................ $ 25,381 $ 24,222 $ 22,386
Provision for loan losses.... 2,738 2,582 3,217
Loans charged-off (1) ....... (1,418) (1,873) (1,843)
Recoveries .................. 683 450 462
-------- -------- --------
Ending balance ................... $ 27,384 $ 25,381 $ 24,222
======== ======== ========
(1) 2006 includes $390,000 of overdraft charge-offs. Prior to 2006, these
expenses were recognized in other operating expense.
7. ASSETS ACQUIRED THROUGH FORECLOSURE
Assets acquired through foreclosure are summarized as follows:
December 31,
--------------------
2006 2005
-------- --------
(In Thousands)
Real estate ...................... $ 388 $ 59
Less allowance for losses......... - -
-------- --------
Ending balance.................... $ 388 $ 59
======== ========
8. PREMISES AND EQUIPMENT
Land, office buildings, leasehold improvements, furniture and equipment
and renovations-in-process, at cost, are summarized by major classifications:
December 31,
--------------------
2006 2005
-------- --------
(In Thousands)
Land ............................. $ 4,440 $ 4,440
Buildings ........................ 12,125 11,052
Leasehold improvements ........... 18,746 13,094
Furniture and equipment .......... 25,349 21,917
------- -------
60,660 50,503
Less:
Accumulated depreciation ......... 30,442 27,599
-------- --------
$30,218 $22,904
======= =======
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. Rent expense was $2.4
million in 2006, $2.2 million in 2005 and $2.3 million in 2004. Future minimum
payments under these leases at December 31, 2006 are as follows:
(In Thousands)
2007 ....................................... $ 3,029
2008 ....................................... 4,158
2009 ....................................... 3,765
2010 ....................................... 3,690
2011 ....................................... 3,537
Thereafter ..................................... 26,712
-------
Total future minimum lease payments ... $44,891
=======
40
9. DEPOSITS
The following is a summary of deposits by category, including a summary of the
remaining time to maturity for time deposits:
December 31,
-----------------------
2006 2005
---------- ----------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ..................... $ 276,338 $ 279,415
Interest-bearing demand ........................ 146,719 141,378
Money market ................................... 246,645 209,398
---------- ----------
Total money market and demand ............... 669,702 630,191
---------- ----------
Savings ............................................ 226,853 251,675
---------- ----------
Customer certificates of deposits, by maturity:
Less than one year ............................. 251,215 152,891
One year to two years .......................... 54,079 59,269
Two years to three years ....................... 17,217 8,137
Three years to four years ...................... 1,567 2,346
Over four years ................................ 1,931 2,210
---------- ----------
Total customer time certificates ............ 326,009 224,853
---------- ----------
Jumbo certificates of deposit-customer, by maturity:
Less than one year ............................. 98,636 69,716
One year to two years .......................... 16,087 15,950
Two years to three years ....................... 6,103 1,292
Three years to four years ...................... - 100
Over four years ................................ 316 154
---------- ----------
Total jumbo certificates of deposit-customer . 121,142 87,212
---------- ----------
Subtotal customer deposits ......................... 1,343,706 1,193,931
---------- ----------
Other jumbo certificates of deposit, by maturity:
Less than one year ............................. 110,964 36,935
One year to two years .......................... 152 1,496
Two years to three years ....................... 272 -
Three years to four years ...................... - 415
Over four years ................................ - 1,721
---------- ----------
Total other jumbo time certificates ......... 111,388 40,567
---------- ----------
Brokered deposits less than one year ............... 301,254 211,738
---------- ----------
Total deposits ..................................... $1,756,348 $1,446,236
========== ==========
Interest expense by category follows:
Year Ended December 31,
---------------------------
2006 2005 2004
------- ------- -------
(In Thousands)
Interest-bearing demand ...................... $ 785 $ 297 $ 193
Money market ................................. 8,090 3,837 665
Savings ...................................... 2,237 1,738 1,257
Customer time deposits ....................... 15,309 8,098 5,002
------- ------- -------
Total customer interest expense ........ 26,421 13,970 7,117
------- ------- -------
Other jumbo certificates of deposit .......... 4,100 1,374 768
Brokered deposits ............................ 12,186 6,346 1,510
------- ------- -------
Total interest expense on deposits...... $42,707 $21,690 $ 9,395
======= ======= =======
41
10. BORROWED FUNDS
The following is a summary of borrowed funds by type:
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance at Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
------ ---- ------ ------ ------
(Dollars in Thousands)
2006
----
FHLB advances............................................ $ 784,028 4.93% $1,051,458 $976,101 4.64%
Trust preferred borrowings............................... 67,011 7.14 67,011 67,011 7.44
Federal funds purchased and securities
sold under agreements to repurchase ................... 73,400 5.36 83,150 74,412 5.02
Other borrowed funds .................................... 78,240 4.30 78,240 49,388 3.74
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
Federal Home Loan Bank Advances
Advances from the FHLB of Pittsburgh with rates ranging from 2.47% to
5.65% at December 31, 2006 are due as follows:
Weighted
Average
Amount Rate
------ ---------
(Dollars in Thousands)
2007............................... $449,000 4.83%
2008............................... 174,900 5.32
2009............................... 87,562 4.80
2010 - 2013........................ 72,566 4.76
--------
$784,028
========
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 4.65% of its advances (borrowings) from the FHLB of Pittsburgh, plus
0.65% of the unused borrowing capacity. WSFS was in compliance with this
requirement with a stock investment in FHLB of Pittsburgh of $39.9 million at
December 31, 2006.
Three advances are outstanding at December 31, 2006 totaling $115.0
million, with a weighted average rate of 5.15% 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. If any of these advances convert, WSFS has the option to prepay
these advances at predetermined times or rates.
42
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 2006, WSFS purchased federal funds as a short-term funding
source. At December 31, 2006, WSFS had purchased $50.0 million in federal funds
at a rate of 5.38%. At December 31, 2005, WSFS had $50.0 million federal funds
purchased.
During 2006, WSFS sold securities under agreements to repurchase as a
short-term funding source. At December 31, 2006, securities sold under
agreements to repurchase had a fixed rate of 5.32%. The underlying securities
are U.S. Government agency securities with a book value of $25.0 million at
December 31, 2006. 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)
2006
- ----
Up to 30 days................ $ 23,400 5.32% $ 24,993 $ 24,969 $ 215
========= ========= ========= ==========
2005
- ----
Up to 30 days................ $ 33,150 4.31% $ 34,795 $ 34,036 $ 299
========= ========= ========= ==========
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $78.2
million and $36.1 million at December 31, 2006 and 2005, 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 mortgage-backed securities. The average rates on these
borrowings were 4.30% and 3.05% at December 31, 2006 and 2005, respectively.
11. 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, 2006 and 2005, WSFS was in
compliance with regulatory capital requirements and was deemed a
"well-capitalized" institution.
43
The following table presents WSFS' consolidated capital position as of
December 31, 2006 and 2005:
To Be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
As of December 31, 2006:
Total Capital (to risk-weighted assets)..... $ 302,805 13.54% $ 178,857 8.00% $ 223,571 10.00%
Core Capital (to adjusted tangible assets).. 277,593 9.25 120,084 4.00 150,105 5.00
Tangible Capital (to tangible assets)....... 277,593 9.25 45,032 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets).... 277,593 12.42 89,429 4.00 134,143 6.00
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
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, 2006 and 2005. 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
ndercapitalized 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 103,400 shares in 2006 for $6.6 million and
719,500 shares in 2005 for $40.2 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, 2006, the coupon rate of the Capital Trust III
securities was 7.14% with a scheduled maturity of June 1, 2035. The Corporation
purchased an interest rate cap that economically limits the three-month LIBOR to
6.00% on $50.0 million of the $67.0 million of securities until December 2008.
The effective rate of these securities, including the cost of the cap was 7.44%
at December 31, 2006. The effective rate will vary, however, due to fluctuations
in interest rates and changes in the fair value of the cap. The proceeds from
the issue were invested in Junior Subordinated Debentures issued by WSFS
Financial Corporation. These securities are treated as borrowings with the
interest included in interest expense on the Consolidated Statement of
Operations. 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.
44
12. 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 $1.6 million,
$1.4 million and $1.6 million for 2006, 2005 and 2004, 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 13,000, 36,000 and
46,000 shares of common stock of the Corporation during 2006, 2005 and 2004,
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). 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
for 2006 are in accordance with SFAS No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans (SFAS 158), while disclosures for
previous years are in accordance with SFAS No. 132 (Revised), Employers'
Disclosure About Pensions and Other Postretirement Benefits.
On December 31, 2006, the Corporation adopted the recognition and
disclosure provisions of SFAS 158. SFAS 158 requires the Corporation to
recognize the funded status of its defined benefit postretirement plan in its
statement of financial position, with a corresponding adjustment to accumulated
other comprehensive income, net of tax. The adjustment to accumulated other
comprehensive income at adoption represents the net unrecognized actuarial
losses and unrecognized transition obligation remaining from the initial
adoption of SFAS No. 87, Employers' Accounting for Pensions (SFAS 87), all of
which were previously netted against the plan's funded status in the
Corporation's statement of financial position pursuant to the provisions of SFAS
87. These amounts will be subsequently recognized as net periodic pension costs
pursuant to the Corporation's historical accounting policy for amortizing such
amounts. Further, actuarial gains and losses that arise in subsequent periods
and are not recognized as net periodic pension cost in the same periods will be
recognized as a component of other comprehensive income. Those amounts will be
subsequently recognized as a component of net periodic pension cost on the same
basis as the amounts recognized in accumulated other comprehensive income at
adoption of SFAS 158.
The incremental effect of adopting the recognition and disclosure
provisions of SFAS 158 on the Corporation's Consolidated Statement of Condition
at December 31, 2006 was a $905,000 (pretax) decrease in other comprehensive
income. This included a net actuarial loss of $537,000 and a net transition
obligation of $368,000. Also related to the adoption of SFAS 158, the Company
recorded a deferred tax asset of $344,000 and a corresponding liability of
$905,000. During 2007, the Company expects to recognize $19,000 in expense
relating to the amortization of the net actuarial loss and $61,000 in expense
relating to the amortization of the net transition obligation.
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.
45
The following disclosures relating to postretirement benefits were measured at
December 31, 2006:
2006 2005 2004
------- ------- -------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ......................................... $ 2,287 $ 2,086 $ 2,083
Service cost .................................................................... 108 106 97
Interest cost ................................................................... 93 122 122
Actuarial (gain)/loss ........................................................... (110) 200 (81)
Benefits paid ................................................................... (145) (227) (135)
------- ------- -------
Benefit obligation at end of year ......................................... $ 2,233 $ 2,287 $ 2,086
======= ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year .................................. $ - $ - $ -
Employer contributions .......................................................... 145 227 135
Benefits paid ................................................................... (145) (227) (135)
------- ------- -------
Fair value of plan assets at end of year .................................. $ - $ - $ -
======= ======= =======
Funded status:
Funded status ................................................................... $(2,233) $(2,287) $(2,086)
Unrecognized transition obligation .............................................. - 429 491
Unrecognized net loss ........................................................... - 647 461
Recognized net loss ............................................................. 905 - -
------- ------- -------
Net amount recognized ..................................................... $(1,328) $(1,211) $(1,134)
======= ======= =======
Components of net periodic benefit cost:
Service cost .................................................................... $ 108 $ 106 $ 97
Interest cost ................................................................... 93 122 122
Amortization of transition obligation ........................................... 61 61 61
Net loss recognition ............................................................ - 15 21
------- ------- -------
Net periodic benefit cost ................................................. $ 262 $ 304 $ 301
======= ======= =======
Assumptions used to determine net periodic benefit cost:
Discount rate ............................................................ 5.50% 6.00% 6.00%
Health care cost trend rate .............................................. 5.00% 5.50% 5.50%
Sensitivity analysis of health care cost trends:
Effect of +1% on service cost plus interest cost................................ $ (8) $ 3 $ 3
Effect of -1% on service cost plus interest cost ................................ 7 (1) (1)
Effect of +1% on APBO ........................................................... (76) 18 18
Effect of -1% on APBO ........................................................... 66 (9) (10)
Assumptions used to value the Accumulated Postretirement Benefit
Obligation (APBO):
Discount rate ............................................................ 5.75% 5.50% 6.00%
Health care cost trend rate .............................................. 5.00% 5.50% 5.50%
Ultimate trend rate ...................................................... 5.00% 5.00% 5.00%
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 2007 ..................................................................... $ 109
During 2008 ..................................................................... 108
During 2009 ..................................................................... 109
During 2010 ..................................................................... 109
During 2011 ..................................................................... 110
During 2012 through 2016 ........................................................ 672
-------
$ 1,217
=======
46
The Corporation assumes that the average annual rate of increase for
medical benefits will remain flat and stabilize 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 2006, this annual premium cap amounted to
$2,219 per retiree. The Corporation estimates that it will contribute
approximately $109,000 to the plan during fiscal 2007.
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, 2006:
2006 2005 2004
---- ---- ----
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ................ $ 777 $ 760 $ 784
Service cost ........................................... - - -
Interest cost .......................................... 40 43 45
Actuarial loss ......................................... 4 58 15
Benefits paid .......................................... (84) (84) (84)
----- ----- -----
Benefit obligation at end of year ................ $ 737 $ 777 $ 760
===== ===== =====
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 .......................................... $(737) $(777) $(760)
Unrecognized net loss .................................. - - -
----- ----- -----
Net amount recognized ............................ $(737) $(777) $(760)
===== ===== =====
Components of net periodic benefit cost:
Service cost ........................................... $ - $ - $ -
Interest cost .......................................... 40 43 45
Amortization of transition obligation .................. - - -
Net loss recognition ................................... 4 58 15
----- ----- -----
Net periodic benefit cost ........................ $ 44 $ 101 $ 60
===== ===== =====
Assumptions used to determine net periodic benefit cost:
Discount rate ................................... 5.50% 6.00% 6.00%
Assumptions used to value the Supplemental Pension Plan
Obligation:
Discount rate ................................... 5.75% 5.50% 6.00%
47
Estimated future supplemental pension plan payments:
The following table shows the expected future payments for the next ten years:
During 2007....................................................... $ 84
During 2008....................................................... 84
During 2009....................................................... 84
During 2010....................................................... 83
During 2011....................................................... 83
During 2012 through 2016.......................................... 418
----
$836
====
The Corporation estimates that it will contribute approximately $84,000
to the plan during fiscal 2007.
The Corporation has two additional plans. They are a Director's Plan
with a corresponding liability of $143,000 and an Early Retirement Window Plan
with a corresponding liability of $569,000.
13. 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,
----------------------------------------
2006 2005 2004
---- ---- ----
(In Thousands)
From continuing operations:
Current income taxes:
Federal taxes .............................................. $14,662 $11,118 $12,175
State and local taxes....................................... 2,278 2,197 1,993
Deferred income taxes:
Federal taxes .............................................. (1,336) 1,445 (22)
State and local taxes ...................................... 56 87 (195)
------- -------- --------
Subtotal ............................................. 15,660 14,847 13,951
------- -------- --------
From discontinued operations and businesses held-for-sale:
Current income taxes:
Federal taxes............................................... - - 112
State and local taxes....................................... - - 65
------- -------- --------
Subtotal ............................................. - - 177
------- -------- --------
Total ................................................ $15,660 $ 14,847 $ 14,128
======= ======== ========
Current federal income taxes include taxes on income that cannot be
offset by net operating loss carryforwards.
48
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, 2006 and 2005:
2006 2005
-------- --------
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation ......................... $ (488) $ (856)
Other ............................................ (110) (310)
Prepaid expenses ................................. (1,490) (1,109)
Deferred loan costs .............................. (2,005) (1,866)
-------- --------
Total deferred tax liabilities ........................ (4,093) (4,141)
-------- --------
Deferred tax assets:
Bad debt deductions .............................. 9,585 8,849
Tax credit carryforwards ......................... 150 150
Net operating loss carryforwards ................. 3,406 3,911
Capital loss carryforwards ....................... 679 -
Loan fees ........................................ 14 28
Reserves and other ............................... 2,033 1,748
Unrealized losses on available-for-sale securities 5,255 6,088
-------- --------
Total deferred tax assets ............................. 21,122 20,774
-------- --------
Valuation allowance ................................... (2,651) (2,702)
-------- --------
Net deferred tax asset ................................ $ 14,378 $ 13,931
======== ========
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.
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 $14.4 million at December 31,
2006. Adjustments to decrease gross deferred tax assets and the related
valuation allowance in the amount of $51,000 and $110,000 were made in 2006 and
2005, respectively, 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.
At December 31, 2006, approximately $2.9 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 $2.0 million on a portion of these deferred tax assets due to
limitations imposed by the Internal Revenue Code.
Approximately $693,000 in gross deferred tax assets of the Corporation
at December 31, 2006 are related to state tax net operating losses. The Company
has assessed a valuation allowance of $693,000 on this entire deferred tax asset
due to an expectation of such net operating losses expiring before being
utilized.
The Corporation has $1.9 million of capital loss carryforwards that
will expire on December 31, 2011. Net operating loss carryforwards (NOLs) of
$19.5 million remain at December 31, 2006. The expiration dates and amounts of
such NOL carryforwards are listed below:
Federal State
------- -----
(In Thousands)
2007.................................... $ - $ 7,980
2008.................................... 997 -
2009.................................... 6,755 -
2018.................................... - 3,732
------- -------
$ 7,752 $11,712
======= =======
49
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 $7.8 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. The Corporation has
assessed a valuation allowance of $2.0 million on a portion of these deferred
tax assets due to limitations imposed by the Internal Revenue Code.
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,
-------------------------------------
2006 2005 2004
---- ---- ----
Statutory federal income tax rate ...................... 35.0% 35.0% 35.0%
State tax net of federal tax benefit.................... 3.2 3.2 3.0
Interest income 50% excludable.......................... (1.6) (1.7) (1.9)
Bank-owned life insurance income........................ (3.0) (1.6) (1.9)
Utilization of loss carryforwards and
valuation allowance adjustments.................. - - 1.1
Incentive stock option compensation..................... 0.6 - -
Other................................................... (0.2) (0.1) -
------- ------- ---------
Effective tax rate ..................................... 34.0% 34.8% 35.3 %
====== ====== =======
50
14. STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized as compensation expense in the consolidated
financial statements based on their fair values. That expense will be recognized
over the period during which an Associate is required to provide services in
exchange for the award, known as the requisite service period (usually the
vesting period). The Corporation adopted SFAS 123R beginning January 1, 2006
using the Modified Prospective Application Method. This method relates to
current and future periods and does not require the restatement of prior
periods.
The Corporation has stock options outstanding under two plans
(collectively, "Stock Incentive 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 reserved for issuance under the
2005 Plan is 400,000. At December 31, 2006, there were 70,212 shares available
for future grants under the 2005 Plan.
The Stock Incentive 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 during 2006
vest in 20% or 25% per annum increments, start to become exercisable one year
from the grant date and expire between five and ten years from the grant date.
Generally, all awards become immediately exercisable in the event of a change in
control, as defined within the Stock Incentive Plans.
A summary of the status of the Corporation's Option Plans as of
December 31, 2006, 2005 and 2004, and changes during the years then ended is
presented below:
2006 2005 2004
-------------------------- -------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of year 739,404 $ 31.88 866,845 $ 23.66 938,264 $ 19.49
Granted 106,905 64.93 109,817 62.71 80,980 59.50
Exercised (143,346) 19.01 (226,963) 15.05 (131,849) 15.51
Canceled (2,536) 46.19 (10,295) 38.98 (20,550) 26.92
--------- --------- ---------
Outstanding at end of year 700,427 39.50 739,404 31.88 866,845 23.66
Exercisable at end of year 414,973 26.84 434,144 20.51 499,496 16.90
Weighted-average fair value
of awards granted $ 13.52 $ 13.67 $ 13.90
Beginning January 1, 2006, 434,144 stock options were exercisable with
an intrinsic value of $20.2 million. In addition, at January 1, 2006 there were
305,260 nonvested options with a grant date fair value of $11.28. During the
year ended December 31, 2006, 124,635 options vested with an intrinsic value of
$3.4 million, and a grant date fair value of $9.87 per option. Also during 2006,
143,346 options were exercised with an intrinsic value of $6.2 million. In
addition, 460 vested options were forfeited with an intrinsic value of $3,000
and a grant date fair value of $14.75, while 2,536 options were forfeited in
total with a grant date fair value of $11.17. There were 414,973 exercisable
options remaining at December 31, 2006, with an intrinsic value of $16.6 million
and a remaining contractual term of 4.8 years. At December 31, 2006 there were
700,427 stock options outstanding with an intrinsic value of $19.2 million and a
remaining contractual term of 5.2 years and 285,454 nonvested options with a
grant date fair value of $12.74. During 2005, 226,963 options were exercised
with an intrinsic value of $10.0 million and 162,323 options vested with a grant
date fair value of $7.05 per option.
51
The total amount of compensation cost related to nonvested stock
options as of December 31, 2006 was $2.2 million. The weighted-average period
over which it is expected to be recognized is 1.5 years. The Corporation issues
new shares upon the exercise of options.
During 2006, the Corporation granted 103,885 options with a five-year
life and a four-year vesting period. The Black-Scholes option-pricing model was
used to determine the grant date fair value of these options. Significant
assumptions used in the model included a weighted-average risk-free rate of
return of between 4.6% and 4.8% in 2006; an expected option life of three and
three-quarter years; and an expected stock price volatility of between 18.2% and
22.1% in 2006. For the purposes of this option-pricing model, a dividend yield
of between 0.4% and 0.5% was used as the expected dividend yield.
Also during 2006, the Corporation granted 3,020 options with a ten-year
life and a five-year vesting period. The Black-Scholes option-pricing model was
used to determine the grant date fair value of these options. Significant
assumptions used in the model included a weighted-average risk-free rate of
return of between 4.7% and 5.2% in 2006; an expected option life of six and
one-half years; and an expected stock price volatility of between 21.8% and
22.3% in 2006. For the purposes of this option-pricing model, a dividend yield
of between 0.4% and 0.5% was used as the expected dividend yield.
Prior to adoption of SFAS 123R, the Corporation used a graded-vesting
schedule to calculate the expense related to stock options. Since the adoption
of SFAS 123R, the Corporation now uses a straight-line schedule to calculate the
expense related to new stock options issued.
The Black-Scholes and other option-pricing models assume that options
are freely tradable and immediately vested. Since options are not transferable,
have 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.
The impact of adopting SFAS 123R for the year ended December 31, 2006
was $1.5 million, or $0.19 per share, to salaries, benefits and other
compensation. This included $233,000, or $0.03 per share, from the immediate
expensing of options granted to retirement-eligible Associates during the fourth
quarter of 2006, as required by SFAS 123R. Prior to the adoption of SFAS 123R,
the Company applied Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for the
Stock Incentive Plans and to provide the required pro forma disclosures of SFAS
No.123 Accounting for Stock-Based Compensation (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 and $907,000 in
2004, respectively, related to its Stock Incentive Plans.
The following table summarizes all stock options outstanding and
exercisable for Option Plans as of December 31, 2006, segmented by range of
exercise prices:
Outstanding Exercisable
--------------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise
Number Price Contractual Life Number Price
------ ----------- ---------------- ------ ------------
Stock Options:
$ 6.52-$13.04 83,377 $ 10.92 3.8 years 83,377 $ 10.92
$13.05-$19.56 177,633 16.46 4.2 years 172,633 16.44
$19.57-$26.08 - - - years - -
$26.09-$32.60 1,600 31.60 6.2 years - -
$32.61-$39.12 75,400 33.40 5.8 years 56,295 33.40
$39.13-$45.64 70,935 43.71 6.7 years 41,397 43.71
$45.65-$52.16 4,670 48.54 7.5 years 1,868 48.54
$52.17-$58.68 12,357 55.05 7.7 years 3,391 54.63
$58.69-$65.20 274,455 62.89 5.6 years 56,012 61.10
------- -------
Total 700,427 $39.50 5.2 years 414,973 $26.84
======= =======
During 2006, 2005 and 2004 the Company issued 15,269, 30 and 6,515
shares, respectively, of restricted stock. These awards vest over five years: 0%
in the first two years, 25% in each of the third and fourth years and 50% in the
fifth year.
52
15. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 2006, the Corporation had commitments to extend credit
of $532.8 million. Consumer lines of credit totaled $46.3 million of which $35.5
million was secured by real estate. Outstanding letters of credit were $40.6
million and outstanding commitments to make or acquire mortgage loans aggregated
$12.3 million. Approximately $8.4 million of these mortgage loan commitments
were at fixed rates ranging from 5.25% to 7.13%, and approximately $3.9 million
were at variable rates ranging from 5.00% to 6.63%. Mortgage commitments
generally have closing dates within a six-month period.
Data Processing Operations
The Company has entered into contracts to manage its network
operations, data processing and other related services. The projected amounts of
future minimum payments contractually due (in thousands) are as follows:
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.
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.
53
The following represents a summary of off-balance sheet financial
instruments at year-end:
December 31,
--------------------------
2006 2005
---- ------
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments ............................. $127,858 $104,000
Commercial mortgage loan commitments ...................... 96,618 93,966
Commercial loan commitments ............................... 209,125 176,344
Commercial standby letters of credit ...................... 40,594 26,720
Residential mortgage loan commitments ..................... 12,320 37,692
Consumer loan commitments ................................. 46,315 64,676
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 2006, the Company had no
repurchases.
Swap Guarantees. The Company entered into agreements with two
unaffiliated financial institutions whereby those financial institutions
entered into interest rate derivative contracts (interest rate swap
transactions) with customers referred to them by the Company. By the terms of
the agreements, those financial institutions have 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, 2006, there were twenty-two variable-rate to
fixed-rate swap transactions between the third-party financial institution and
customers of WSFS with an initial notional amount aggregating approximately
$77.4 million, and with maturities ranging from six months to eleven years. The
aggregate market value of these swaps to the customers was a liability of
$291,000 as of December 31, 2006, and includes $1.0 million of swap
transactions in a paying position to third-party financial institutions.
16. 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.
54
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.
Class "O" Certificates: The fair value of the option to purchase 49.9%
of the Class "O" Certificates of SASCO 2002 RM1 is based on the net present
value of the forecasted cash flows. The forecasted cash flows are based on
assumptions about the life expectancy of the mortgagee, current collateral
values, the future change in collateral values, and future interest rates. The
current assumptions include 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.
These projected cash flows are discounted at an appropriate discount rate. The
discount rate is derived using the "Build-up Model" taking into account as a
base the risk free rate of return and adding individual factors unique and
applicable to the cash flows of the Class "O" Certificates. The discount rate
currently used is approximately 21%. Finally, since the Class "O" Certificates
represent the equity tranche of SASCO 2002 RM1, a 15% illiquidity discount is
applied to the resulting net present value.
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.
55
The book value and estimated fair value of the Corporation's financial
instruments are as follows:
December 31,
---------------------------------------------------------
2006 2005
------------------------ -----------------------
Book Fair Book Fair
Value Value Value Value
--------- ---------- --------- ---------
(In Thousands)
Financial assets:
Cash and cash equivalents....................... $ 241,824 $ 241,824 $ 233,951 $ 233,951
Investment securities........................... 54,491 54,524 57,489 57,688
Mortgage-backed securities...................... 516,711 516,434 620,323 620,323
Loans, net...................................... 2,019,741 2,012,530 1,775,294 1,779,746
Bank-owned life insurance....................... 55,282 55,282 54,193 54,193
Stock in Federal Home Loan Bank of Pittsburgh... 39,872 39,720 46,293 46,293
Accrued interest receivable..................... 13,037 13,037 11,070 11,070
Interest rate cap............................... 30 30 125 125
Option to purchase Class "O" Certificates....... - 3,503 - -
Financial liabilities:
Deposits........................................ 1,756,348 1,757,259 1,446,236 1,447,165
Borrowed funds.................................. 1,002,679 997,476 1,195,008 1,200,477
Accrued interest payable........................ 8,690 8,690 7,554 7,554
The estimated fair value of the Corporation's off-balance sheet
financial instruments is as follows:
December 31,
------------------------
2006 2005
---- -----
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit....................................................... $4,454 $4,120
Standby letters of credit.......................................................... 406 267
17. 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 $5.1 million and $6.9 million at
December 31, 2006 and 2005, respectively. During 2006, new loans and credit line
advances to such related parties amounted to $9.4 million and repayments
amounted to $8.2 million. In addition, during 2006, one director retired and
$3.0 million in loans have been excluded from related party transactions.
The Corporation engages a law firm that is affiliated with a director
of the Corporation for general legal services. Total fees for such services
amounted to $31,000 during 2006.
A director of the Corporation is also a director of a loan customer of
the Bank. At December 31, 2006, the principal balance outstanding of that loan
was $7.0 million.
The Chairman of the Corporation is also the Chairman of the FHLB of
Pittsburgh. At December 31, 2006, the Bank had borrowed funds outstanding from
the FHLB of Pittsburgh of $784.0 million and owned $39.9 million of FHLB of
Pittsburgh stock.
56
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
----------------------
2006 2005
--------- ---------
(In Thousands)
Assets:
Cash ................................................ $ 4,984 $ 10,097
Investment in subsidiaries .......................... 270,994 236,095
Investment in interest rate cap ..................... 30 125
Investment in Capital Trust III ..................... 2,011 2,011
Other assets ........................................ 1,499 1,056
--------- ---------
Total assets ............................................. $ 279,518 $ 249,384
========= =========
Liabilities:
Borrowings .......................................... $ 67,011 $ 67,011
Interest payable .................................... 412 357
Other liabilities ................................... 36 41
--------- ---------
Total liabilities ................................... 67,459 67,409
--------- ---------
Stockholders' equity:
Common stock ........................................ 156 154
Capital in excess of par value ...................... 81,580 74,673
Comprehensive loss .................................. (8,573) (9,968)
Retained earnings ................................... 347,448 319,065
Treasury stock ...................................... (208,552) (201,949)
--------- ---------
Total stockholders' equity .......................... 212,059 181,975
--------- ---------
Total liabilities and stockholders' equity ............... $ 279,518 $ 249,384
========= =========
Condensed Statement of Operations
December 31,
-----------------------------------
2006 2005 2004
--------- --------- ---------
(In Thousands)
Income:
Interest income ..................................... $ 594 $ 533 $ 101
Noninterest income .................................. 354 139 139
--------- --------- ---------
948 672 240
--------- --------- ---------
Expenses:
Interest expense .................................... 5,053 5,292 2,246
Other operating expenses ............................ (1,386) (1,567) (681)
--------- --------- ---------
3,667 3,725 1,565
--------- --------- ---------
Loss before equity in undistributed income of subsidiaries (2,719) (3,053) (1,325)
Equity in undistributed income of subsidiaries ........... 33,160 30,909 27,225
--------- --------- ---------
Net income ............................................... $ 30,441 $ 27,856 $ 25,900
========= ========= =========
57
Condensed Statement of Cash Flows
Year Ended December 31,
---------------------------------
2006 2005 2004
--------- -------- ---------
(In Thousands)
Operating activities:
Net income ..................................................................... $ 30,441 $ 27,856 $ 25,900
Adjustments to reconcile net income to net cash used for operating activities:
Equity in undistributed income of subsidiaries ............................ (33,160) (30,909) (27,225)
Amortization .............................................................. 560 1,398 175
(Increase) decrease in other assets........................................ (606) 432 (600)
Increase in other liabilities.............................................. 51 126 37
--------- -------- ---------
Net cash used for operating activities ......................................... (2,714) (1,097) (1,713)
--------- -------- ---------
Investing activities:
(Increase) decrease in investment in subsidiaries.......................... (646) 28,210 18,577
Net issuance of Pooled Floating Rate Capital Securities.................... - 17,011 -
--------- -------- ---------
Net cash (used for) provided by investing activities............................ (646) 45,221 18,577
--------- -------- ---------
Financing activities:
Issuance of common stock .................................................. 6,907 6,348 3,590
Dividends paid on common stock ............................................ (2,057) (1,845) (1,643)
Treasury stock, net of reissuance ......................................... (6,603) (40,104) (17,899)
--------- -------- ---------
Net cash used for financing activities ......................................... (1,753) (35,601) (15,952)
--------- -------- ---------
(Decrease) increase in cash .................................................... (5,113) 8,523 912
Cash at beginning of period .................................................... 10,097 1,574 662
--------- -------- ---------
Cash at end of period .......................................................... $ 4,984 $ 10,097 $ 1,574
========== ========= =========
19. ACCOUNTING FOR INTEREST RATE CAP
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. The fair value of the cap is estimated using a standard option
model. The fair value of the interest rate cap at December 31, 2006 was $30,000.
The cap is considered a free standing derivative and all changes in the fair
value of the cap are recorded in the Consolidated Statement of Operations.
During 2006, the Company recognized $560,000 of interest expense of which
$411,000 was the result of the reclassification of the residual amounts related
to the hedge that were not reclassified at the time the Corporation refinanced
its Trust Preferred Securities in 2005.
20. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation discusses its business in
three segments. There is one segment for WSFS and one for CashConnect, the ATM
division of WSFS. The third segment, "All Others," represents the combined
contributions of Montchanin and the newly formed Wealth Management Services
Division. Montchanin and the Wealth Management Services Division each offer
different products, to a separate customer base, through distinct distribution
methods than those of the Corporation. Therefore, the Corporation has combined
Montchanin and the Wealth Management Services Division to form the operating
segment "All Others." All prior years' information has been updated to reflect
this presentation. WSFS provides financial products through its main office, 27
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 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. Montchanin
provides asset management products and services to customers in the Bank's
primary market area. Montchanin has one consolidated non-wholly owned
subsidiary, Cypress Capital Management, LLC (Cypress). Cypress, a 90% owned
subsidiary, is a Wilmington-based investment advisory firm
58
serving high net-worth individuals and institutions. The Wealth Management
Services Division provides wealth management and personal trust services to
customers in the Bank's primary market area.
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, 2006, 2005 and 2004 is
shown below.
For the Year Ended December 31, 2006: (In Thousands)
---------- ----------- ------------- ----------
WSFS CashConnect All Others (1) Total
---------- ----------- ------------- ----------
External customer revenues:
Interest income ......... $ 177,177 $ - $ - $ 177,177
Noninterest income ...... 22,253 15,644 2,408 40,305
---------- ---------- ---------- ----------
Total external customer revenues.. 199,430 15,644 2,408 217,482
---------- ---------- ---------- ----------
Intersegment revenues:
Interest income ......... 8,071 - - 8,071
Noninterest income ...... 1,344 685 - 2,029
---------- ---------- ---------- ----------
Total intersegment revenues ...... 9,415 685 - 10,100
---------- ---------- ---------- ----------
Total revenue .................... 208,845 16,329 2,408 227,582
---------- ---------- ---------- ----------
External customer expenses:
Interest expense ........ 99,278 - - 99,278
Noninterest expenses .... 62,439 4,222 2,653 69,314
Provision for loan loss.. 2,738 - - 2,738
---------- ---------- ---------- ----------
Total external customer expenses.. 164,455 4,222 2,653 171,330
---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense ........ - 8,071 - 8,071
Noninterest expenses .... 685 688 656 2,029
---------- ---------- ---------- ----------
Total intersegment expenses ...... 685 8,759 656 10,100
---------- ---------- ---------- ----------
Total expenses ................... 165,140 12,981 3,309 181,430
---------- ---------- ---------- ----------
Income before taxes and
extraordinary items ............ $ 43,705 $ 3,348 $ (901) 46,152
Provision for income taxes ....... 15,660
Minority interest ................ 51
----------
Consolidated net income .......... $ 30,441
==========
Cash and cash equivalents ........ $ 75,203 $ 166,092 $ 529 $ 241,824
Other segment assets ............. 2,738,576 15,228 1,768 2,755,572
---------- ---------- ---------- ----------
Total segment assets ............. $2,813,779 $ 181,320 $ 2,297 $2,997,396
========== ========== ========== ==========
Capital expenditures ............. $ 9,790 $ 382 $ 20 $ 10,192
(1) Includes Montchanin Capital Management, Inc. and the Wealth Management
Services Division.
59
For the Year Ended December 31, 2005: (In Thousands)
---------- ----------- ------------- ----------
WSFS CashConnect All Others (1) Total
---------- ----------- ------------- ----------
External customer revenues:
Interest income ......... $ 136,022 $ - $ - $ 136,022
Noninterest income ...... 19,595 12,539 2,519 34,653
---------- ---------- ---------- ----------
Total external customer revenues.. 155,617 12,539 2,519 170,675
---------- ---------- ---------- ----------
Intersegment revenues:
Interest income ......... 4,729 - - 4,729
Noninterest income ...... 1,361 682 - 2,043
---------- ---------- ---------- ----------
Total intersegment revenues ...... 6,090 682 - 6,772
---------- ---------- ---------- ----------
Total revenue .................... 161,707 13,221 2,519 177,447
---------- ---------- ---------- ----------
External customer expenses:
Interest expense ........ 62,380 - - 62,380
Noninterest expenses .... 56,562 3,956 2,359 62,877
Provision for loan loss.. 2,582 - - 2,582
---------- ---------- ---------- ----------
Total external customer expenses.. 121,524 3,956 2,359 127,839
---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense ........ - 4,729 - 4,729
Noninterest expenses .... 682 778 583 2,043
---------- ---------- ---------- ----------
Total intersegment expenses ...... 682 5,507 583 6,772
---------- ---------- ---------- ----------
Total expenses ................... 122,206 9,463 2,942 134,611
---------- ---------- ---------- ----------
Income before taxes and
extraordinary items ............ $ 39,501 $ 3,758 $ (423) 42,836
Provision for income taxes ....... 14,847
Minority interest ................ 133
----------
Consolidated net income .......... $ 27,856
==========
Cash and cash equivalents ........ $ 59,109 $ 174,527 $ 315 $ 233,951
Other segment assets ............. 2,604,038 7,153 1,610 2,612,801
---------- ---------- ---------- ----------
Total segment assets ............. $2,663,147 $ 181,680 $ 1,925 $2,846,752
========== ========== ========== ==========
Capital expenditures ............. $ 15,656 $ 811 $ 59 $ 16,526
(1) Includes Montchanin Capital Management, Inc. and the Wealth Management
Services Division.
60
For the Year Ended December 31, 2004: (In Thousands)
---------- ----------- ------------- ----------
WSFS CashConnect All Others (1) Total
---------- ----------- ------------- ----------
External customer revenues:
Interest income .......... $ 104,110 $ - $ - $ 104,110
Noninterest income ....... 19,612 10,076 2,262 31,950
---------- ---------- ---------- ----------
Total external customer revenues .. 123,722 10,076 2,262 136,060
---------- ---------- ---------- ----------
Intersegment revenues:
Interest income .......... 1,771 - - 1,771
Noninterest income ....... 1,046 742 - 1,788
---------- ---------- ---------- ----------
Total intersegment revenues ....... 2,817 742 - 3,559
---------- ---------- ---------- ----------
Total revenue ..................... 126,539 10,818 2,262 139,619
---------- ---------- ---------- ----------
External customer expenses:
Interest expense ......... 37,246 - - 37,246
Noninterest expenses ..... 50,134 3,516 2,049 55,699
Provision for loan loss .. 3,217 - - 3,217
---------- ---------- ---------- ----------
Total external customer expenses .. 90,597 3,516 2,049 96,162
---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense ......... - 1,771 - 1,771
Noninterest expenses ..... 742 717 329 1,788
---------- ---------- ---------- ----------
Total intersegment expenses ....... 742 2,488 329 3,559
---------- ---------- ---------- ----------
Total expenses .................... 91,339 6,004 2,378 99,721
---------- ---------- ---------- ----------
Income before taxes and
extraordinary items ............. $ 35,200 $ 4,814 $ (116) 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 ......... $ 61,021 $ 131,150 $ 307 $ 192,478
Other segment assets .............. 2,301,726 7,583 1,169 2,310,478
---------- ---------- ---------- ----------
Total segment assets .............. $2,362,747 $ 138,733 $ 1,476 $2,502,956
========== ========== ========== ==========
Capital expenditures .............. $ 5,865 $ 522 $ 22 $ 6,409
(1) Includes Montchanin Capital Management, Inc. and the Wealth Management
Services Division.
61
QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended
------------------------------------------------------------------------------
12/31/06 9/30/06 6/30/06 3/31/06 12/31/05 9/30/05 6/30/05 3/31/05
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income ................. $46,701 $46,131 $43,868 $40,477 $37,835 $35,136 $32,886 $30,165
Interest expense ................ 26,611 27,011 24,482 21,174 19,299 15,921 15,108 12,052
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ............. 20,090 19,120 19,386 19,303 18,536 19,215 17,778 18,113
Provision for loan losses ....... 1,036 319 695 688 1,006 225 772 579
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses..... 19,054 18,801 18,691 18,615 17,530 18,990 17,006 17,534
Noninterest income .............. 11,078 10,309 9,880 9,038 9,499 8,584 8,714 7,856
Noninterest expenses ............ 18,553 17,587 16,932 16,242 16,154 16,150 15,603 14,970
------- ------- ------- ------- ------- ------- ------- -------
Income before
minority interest and taxes.... 11,579 11,523 11,639 11,411 10,875 11,424 10,117 10,420
Less minority interest .......... 11 9 15 16 11 48 37 37
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes ............. 11,568 11,514 11,624 11,395 10,864 11,376 10,080 10,383
Income tax provision ............ 3,969 3,511 4,126 4,054 3,771 3,969 3,514 3,593
------- ------- ------- ------- ------- ------- ------- -------
Net income ...................... $ 7,599 $ 8,003 $ 7,498 $ 7,341 $ 7,093 $ 7,407 $ 6,566 $ 6,790
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ........................... $ 1.14 $ 1.20 $ 1.13 $ 1.11 $ 1.09 $ 1.12 $ 0.95 $ 0.96
Diluted ......................... $ 1.10 $ 1.16 $ 1.09 $ 1.06 $ 1.03 $ 1.06 $ 0.90 $ 0.90
62