UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 0-16668
WSFS FINANCIAL CORPORATION
Delaware 22-2866913
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
500 Delaware Avenue, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 par value The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X Non-accelerated filer Smaller reporting company
--- --- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes No X
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the registrant's common stock as
quoted on NASDAQ as of June 29, 2007 was $398,547,000. For purposes of this
calculation only, affiliates are deemed to be directors, executive officers and
beneficial owners of greater than 10% of the outstanding shares.
As of March 5, 2008, there were issued and outstanding 6,173,236 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 24, 2008 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
----
Item 1. Business .............................................................................. 3
Item 1A. Risk Factors .......................................................................... 22
Item 1B. Unresolved Staff Comments ............................................................. 24
Item 2. Properties ............................................................................ 24
Item 3. Legal Proceedings....................................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders..................................... 28
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder - Matters
and Issuer Purchases of Equity Securities............................................... 28
Item 6. Selected Financial Data................................................................. 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 45
Item 8. Financial Statements and Supplementary Data............................................. 46
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 89
Item 9A. Controls and Procedures................................................................. 89
Item 9B. Other Information....................................................................... 91
Part III
Item 10. Directors, Executive Officers and Corporate Governance.................................. 91
Item 11. Executive Compensation.................................................................. 91
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters............................................................................... 91
Item 13. Certain Relationships and Related Transactions, and Director Independence............... 92
Item 14. Principal Accountant Fees and Services.................................................. 92
Item 15. Exhibits and Financial Statement Schedules.............................................. 92
Signatures.............................................................................. 95
-2-
PART I
FORWARD-LOOKING STATEMENTS
Within this Annual Report on Form 10-K and exhibits thereto, management
has included certain "forward-looking statements" concerning the future
operations of WSFS Financial Corporation ("the Company," "our Company," "we,"
"our" or "us"). 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 Company of the
protections of such safe harbor with respect to all "forward-looking
statements" contained in its financial statements. Management has used
"forward-looking statements" to describe the future plans and strategies
including expectations of our future financial results. Management's ability
to predict results or the effect of future plans and strategy is inherently
uncertain. Factors that could affect results include interest rate trends,
competition, the general economic climate in Delaware, the mid-Atlantic region
and the country as a whole, asset quality, loan growth, loan delinquency
rates, operating risk, uncertainty of estimates in general and changes in
federal and state regulations, among other factors. These factors should be
considered in evaluating the "forward-looking statements," and undue reliance
should not be placed on such statements. Actual results may differ materially
from management expectations. We do not undertake and specifically disclaim
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.
ITEM 1. BUSINESS
- -----------------
OUR BUSINESS
WSFS Financial Corporation is parent to WSFS Bank, one of the ten
oldest banks in the United States continuously-operating under the same name. A
permanent fixture in this community, WSFS has been in operation for more than
175 years. In addition to its focus on stellar customer service, the Bank has
continued to fuel growth and remain relevant. The Bank is a
relationship-focused, locally-managed, community banking institution that has
grown to become the largest thrift holding company among traditional thrifts in
the State of Delaware, the second largest commercial lender in the state and the
fourth largest bank in terms of Delaware deposits.
WSFS' core banking business is commercial lending funded by
customer-generated deposits. We have built a $1.5 billion commercial loan
portfolio by recruiting the best seasoned commercial lenders in our markets and
offering a high level of service and flexibility typically associated with a
community bank. We fund this business primarily with deposits generated through
commercial relationships and retail deposits in our 29 branch retail banking
franchise located in Delaware and southeastern Pennsylvania. We also offer a
broad variety of consumer loan products, retail securities and insurance
brokerage through our retail branches.
In 2005, we established WSFS Wealth Strategies, our wealth management
services division. We built this division in response to demand from our
commercial banking clients as their businesses and our relationships with them
matured. We also built this business as we learned that competitors in our
market provide a poor service and product offering to non-ultra wealthy clients
- - those with less than $5 million in investable assets. Our wealth management
business is complemented by an asset management company, Cypress Capital, which
we acquired in 2004.
Our Cash Connect division is a premier provider of ATM Vault Cash and
related services in the United States. Cash Connect manages more than $265
million in vault cash in approximately 10,000 ATMs nationwide and also provides
online reporting and ATM cash management, predictive cash ordering, armored
carrier management, ATM processing and equipment sales. Cash Connect also
operates over 300 ATMs for WSFS Bank, which owns the largest branded ATM network
in Delaware.
-3-
WSFS POINTS OF DIFFERENTIATION
While all banks offer similar products and services, we believe that
WSFS has set itself apart from other banks in our market and the industry in
general. The following factors summarize what we believe are those points of
differentiation.
Community Banking Model
Our size and community banking model play a key role in our success.
Our approach to business combines a service-oriented culture (which we call
Stellar Service) with a strong compliment of products and services, all aimed at
meeting the needs of our retail and business customers. We believe the essence
of being a community bank means that we are:
o Small enough to offer customers responsive, personalized service and direct
access to decision makers,
o Large enough to provide all the products and services needed by our target
market customers.
As the financial services industry has consolidated, many independent
banks have been acquired by national companies that have centralized their
decision-making authority away from their customers and focused their
mass-marketing to a regional or even national customer base. We believe this
trend has frustrated smaller business owners who have become accustomed to
dealing directly with their bank's senior executives and discouraged retail
customers who often experience deteriorating levels of service in the branches.
Additionally, it frustrates bank Associates who are no longer empowered to
provide good and timely service to their customers.
WSFS Bank offers:
o Rapid response. Our customers tell us this is a critical differentiator
from larger, in-market competitors.
o One point of contact. Our Relationship Managers are responsible for
understanding his or her customers' needs and bringing the right resources
in the Bank together to meet those needs.
o A customized approach to our clients. We believe this gives us an advantage
over our competitors who are too large or centralized to offer customized
products or services.
o Products and services that our customers value. This includes a broad array
of banking and cash management products, as well as a legal lending limit
high enough to meet the credit needs of our customers, especially as they
grow.
Building Associate Engagement and Customer Advocacy
Our business model is built on a concept called Human Sigma. The Human
Sigma model, identified by Gallup, Inc., begins with Associates who have taken
ownership of their jobs because their strengths have been identified and they
have been matched with the right position and strong management. This strategy
motivates Associates, accelerates their development and unleashes innovation and
productivity to engage our most valuable asset, our customers. As a result, we
create Customer Advocates, or customers who have built an emotional attachment
to the Bank. Research studies continue to show a direct link between Associate
engagement, customer engagement and a company's financial performance.
-4-
[GRAPHIC OMITTED]
[Engaged [Customer [Shareholder
Associates] Advocates] Value]
Surveys conducted for us by a nationally recognized polling company indicate:
o Our Associate Engagement scores consistently rank in the top quartile of
companies polled. In 2007, there were 7.6 engaged Associates for every
disengaged Associate. This compares to a 2.6:1 ratio in 2003 and a national
average of 1.9:1.
o Customer surveys rank us in the top 10% of all companies, a "world class"
rating. More than 38% of our customers ranked us a "five" out of "five,"
strongly agreeing with the statement "I can't imagine a world without
WSFS."
We believe that by fostering the energy of engaged and empowered
Associates, we have become an employer of choice in our market. In 2006 and
2007, WSFS was ranked "Best Place to Work" by The News Journal.
Strong Market Demographics
Delaware is situated in the middle of the Washington, DC - New York
corridor which includes the urban markets of Philadelphia and Baltimore. The
state benefits from this urban concentration as well as from a unique political
environment that has created favorable law and legal structure, a
business-friendly environment and a fair tax system. In its 2007 overview, the
Corporation for Enterprise Development ranked Delaware as one of only two states
to receive "Straight A's" in its assessment of economic development throughout
the U.S. Additionally, in a recent article, CFO Magazine ranked Delaware first
or second in each of the four measures it surveyed regarding impressions about
state tax environments. Demographics consistently compare favorably to US
economic and demographic averages.
-------------------------------------------- --------------- ------------
National
(Most recent available statistics) Delaware Average
-------------------------------------------- --------------- ------------
Average GDP Growth (Average 2003-2006) 4.2% 3.1%
-------------------------------------------- --------------- ------------
Unemployment (For December 2007) 3.8% 5.0%
-------------------------------------------- --------------- ------------
Median Household Income (Average 2005-2006) $52,676 $48,023
-------------------------------------------- --------------- ------------
Population Growth (2000-2006) 8.9% 6.4%
-------------------------------------------- --------------- ------------
Lending Discipline
We put a great deal of discipline around our lending, including planned
portfolio diversification and a willingness to accept a slightly higher risk of
default for customers in favor of a lower probability of loss should default
occur. Additionally, we take a proactive approach to identifying trends in our
business and lending market and have responded proactively to those areas of
concern. For instance, we have limited our exposure to construction and land
development (CLD) loans as we anticipated an end to the expansion in housing
prices. We have also increased our portfolio monitoring and reporting
sophistication. We maintain diversification in our loan portfolio to limit our
-5-
exposure to any single type of credit. Such discipline supplements careful
underwriting and the benefits of knowing our customers.
We have been subject to many of the same pressures facing the banking
industry, including an increase in our delinquent loans, problem loans and
charge-offs from the unsustainably low levels in recent years. The measures we
have taken strengthen the Bank's credit position by diversifying risk and
limiting exposure.
Disciplined and Aggressive Capital Management
We understand that the Company's capital (or shareholders' equity)
belongs to the Company's shareholders. They have entrusted this capital to us
with the expectation that it will be kept safe, but with the equal expectation
that it will earn an adequate return. As a result, we prudently but aggressively
manage our shareholders' capital. Since 1996, the year we first implemented our
capital management philosophy, we have returned more than 70% of cumulative
earnings in the form of dividends and share repurchase. In 2007, we increased
dividends by 25% and repurchased 564,100 shares or 8% of our common stock.
Strong Performance Expectations
We are focused on aggressive long term financial goals. We define "high
performing" as the top quintile in return on assets (ROA), return on equity
(ROE) and earnings per share (EPS) growth. While industry headwinds have
depressed these measures for the industry in recent years, we believe that, long
term, these targets should translate to approximately 1.5% ROA, 18% ROE and a
12% EPS growth rate. Management incentives are paid, in large part, based on
driving performance in these areas. "Target" payment level is only achieved by
reaching performance at the 60th percentile of a peer group of all publicly
traded bank and thrifts in our size range. More detail on this plan is included
in our proxy statement.
Growth
Our successful growth in lending, deposit gathering and earnings have
been the result of our focused strategy that provides the service and
responsiveness of a community bank in a consolidating marketplace. We will
continue to grow by:
o Recruiting and developing talented, service-minded Associates. We have
successfully recruited Associates with strong community ties to strengthen
our existing markets and provide a strong start in new communities. We also
focus efforts on developing talent and leadership in our current Associate
base to better equip those Associates for their jobs and prepare them for
leadership roles at WSFS.
o Embracing Human Sigma in all we do. We are committed to building Associate
engagement and customer advocacy as a way to develop our culture and grow
our franchise. We firmly believe franchise and shareholder value are
directly linked to our Human Sigma model.
o Continuing strong growth in commercial lending by:
o Selectively building a presence in contiguous markets.
o Providing product solutions like Remote Deposit Capture to facilitate
commercial banking outside of our primary market.
o Offering our community banking model that combines Stellar Service
with the banking products and services our business customers demand.
o Aggressively growing deposits. In 2003, we energized our retail branch
strategy by combining Stellar Service with an expanded and updated branch
network. We have also implemented a number of additional measures to
accelerate our deposit growth. We will continue to grow deposits by:
-6-
o Expanding and renovating our retail branch network.
o Further expanding our commercial customer relationships with deposit
products.
o Finding creative ways to build deposit market share such as hiring
deposit-focused relationship managers, and targeted marketing
programs.
o Growing our wealth management services division by leveraging the strong
relationships we have with our current customer base and providing
unparalleled service to non-ultra wealthy clients in our market.
Results
Our focus on these points of differentiation has allowed us to grow our
core franchise and build value for our shareholders. Since 2003, our commercial
loans have grown from $697 million to $1.5 billion, a strong 24% compound annual
growth rate (CAGR). Over the same period, customer deposits have grown from $922
million to $1.5 billion, a 15% CAGR. More importantly, over the last generation
shareholder value has increased at a far greater rate than our banking peers and
the market in general, as is evident in the table below.
Cumulative Total Shareholder Return Compared with Performance of
Selected Indexes
December 31, 1997 through December 31, 2007
[GRAPHIC OMITTED]
- -----------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
- -----------------------------------------------------------------------------------------------------------------
WSFS Financial Corporation 100 85 64 66 90 172 236 317 325 357 269
- -----------------------------------------------------------------------------------------------------------------
Dow Jones Total Market Index 100 123 149 134 117 89 115 127 132 150 156
- -----------------------------------------------------------------------------------------------------------------
Nasdaq Bank Index 100 90 85 99 112 120 159 181 178 202 162
- -----------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital
Management, Inc.
WSFS Bank has one subsidiary WSFS Investment Group, Inc., which was
formed in 1989 and markets various third-party investment and insurance
products, such as single-premium annuities, whole life policies and securities
primarily through the Bank's retail banking system and directly to the public.
Montchanin Capital Management, Inc. ("Montchanin") was formed in late
2003 to provide asset management services in the our primary market area.
Montchanin has one consolidated subsidiary, Cypress Capital management, LLC
("Cypress"). As of December 31, 2007 Montchanin owned 100% of Cypress. Cypress
is a Wilmington based
-7-
investment advisory firm servicing high net-worth individuals and institutions
and had approximately $515 million in assets under management at December 31,
2007.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Condensed average balance sheets for each of the last three years and
analyses of net interest income and changes in net interest income due to
changes in volume and rate are presented in "Results of Operations" included in
the section entitled "Management's Discussion and Analysis."
INVESTMENT ACTIVITIES
Our short-term investment portfolio is intended to keep the Bank's
funds fully employed at the maximum after-tax return, while maintaining
acceptable credit, market and interest-rate risk limits, and providing needed
liquidity under current circumstances. Book values of investment securities and
short-term investments by category, stated in dollar amounts and as a percent of
total assets, follow:
December 31,
-----------------------------------------------------------------------------
2007 2006 2005
--------------------- ---------------------- -------------------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Held-to-Maturity:
- -----------------
State and political subdivisions.... $ 1,516 0.1 % $ 4,219 0.1% $ 4,806 0.2%
- -------------------------------- ------- --- ------- --- -------- ---
Available-for-Sale:
- ------------------
Reverse Mortgages................... 2,037 0.1 598 - 785 -
State and political subdivisions.... 4,115 0.1 2,785 0.1 975 -
U.S. Government and agencies........ 20,477 0.6 46,920 1.6 51,702 1.8
- ---------------------------- ------- --- ------- --- -------- ---
26,629 0.8 50,303 1.7 53,462 1.8
------- --- ------- --- -------- ---
Short-term investments:
- ----------------------
Interest-bearing deposits in
- ----------------------------
other banks ........................ 1,078 - 243 - 148 -
- ----------- ------- --- ------- --- ------- ---
$29,223 0.9% $54,765 1.8% $58,416 2.0%
======= === ======= === ======= ===
During 2007, there were no sales of investment securities classified as
available-for-sale. Municipal bonds totaling $1.1 million were called by the
issuers. Proceeds from the sale of investments during 2006 and 2005 were $11.0
million and $60.7 million, respectively. There were net losses of $41,000 and
$609,000 realized on sales in 2006 and 2005, respectively. The cost basis for
all investment security sales was based on the specific identification method
(actual costs are matched to specific securities). There were no sales of
investment securities classified as held-to-maturity in 2007, 2006 and 2005.
-8-
The following table shows the terms to maturity and related weighted
average yields of investment securities and short-term investments at December
31, 2007. Substantially all of the related interest and dividends represent
taxable income.
At December 31, 2007
------------------------
Weighted
Average
Amount Yield (1)
------ ---------
(Dollars In Thousands)
Held-to-Maturity:
State and political subdivisions (2):
Within one year ................................... $ - - %
After one but within five years ................... 875 7.53
After ten years ................................... 641 5.27
-------
Total debt securities, held-to-maturity ................. 1,516 6.57
-------
Available-for-Sale:
Reverse Mortgages (3):
Within one year ................................... $ 2,037 -
-------
2,037 -
-------
State and political subdivisions (2):
Within one year ................................... - -
After one but within five years ................... 2,015 3.97
After five but within ten years ................... 2,100 4.28
-------
4,115 4.12
-------
U.S. Government and agencies:
Within one year ................................... $13,978 5.22
After one but within five years ................... 6,499 3.94
-------
20,477 4.81
-------
Total debt securities, available-for-sale ............... 26,629 4.34
-------
Total debt securities ................................... 28,145 4.46
-------
Short-term investments:
Interest-bearing deposits in other banks .......... 1,078 0.94
-------
Total short-term investments ............................ 1,078 0.94
-------
$29,223 4.33
=======
(1) Reverse mortgages have been excluded from weighted average yield
calculations because income can vary significantly from reporting period to
reporting period due to the volatility of factors used to value the
portfolio.
(2) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since the effect would be immaterial.
(3) Reverse mortgages do not have contractual maturities. We have included
reverse mortgages in maturities within one year.
In addition to these investment securities, we have maintained an
investment portfolio of mortgage-backed securities, $12.4 million of which is
classified as "trading." At December 31, 2007 mortgage-backed securities with a
par value of $464.9 million were pledged as collateral for retail customer
repurchase agreements and municipal deposits. Accrued interest receivable for
mortgage-backed securities was $2.0 million at both December 31, 2007 and 2006.
Proceeds from the sale of mortgage-backed securities available-for-sale in 2007
were $2.7 million, resulting in a gain of $82,000. In 2006, proceeds from the
sale of mortgage-backed securities available-for-sale were $49.6 million,
resulting in a loss of $1.9 million.
The following table shows the book value of mortgage-backed securities
and their related weighted average contractual rates at the end of the last
three fiscal years.
December 31,
-------------------------------------------------------------------------------
2007 2006 2005
----------------------- ------------------------ ------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Available-for-Sale:
- -------------------
Collateralized mortgage obligations ....... $ 407,113 4.97% $ 424,748 4.88% $ 526,546 4.73%
FNMA ...................................... 35,654 4.04 42,254 4.05 49,785 3.98
FHLMC ..................................... 31,357 4.31 31,121 4.29 32,211 4.05
GNMA ...................................... 15,923 4.73 19,115 4.72 14,643 4.37
--------- ---- --------- ---- --------- ----
$ 490,047 4.85% $ 517,238 4.77% $ 623,185 4.63%
========= ==== ========= ==== ========= ====
Trading:
- --------
Collateralized mortgage obligations........ $ 12,364 7.79% $ 12,364 8.35% $ 11,951 7.38%
======== ---- ========= ---- ======== ====
CREDIT EXTENSION ACTIVITIES
Over the past several years we have focused on increasing the more
profitable segments of our loan portfolio. Our current lending activity is
concentrated on lending to small to mid-sized businesses in the mid-Atlantic
region of the United States primarily in Delaware and contiguous counties in
Pennsylvania, Maryland and New Jersey. In 2003, residential first mortgage loans
comprised 35.1% of the loan portfolio, while the combination of commercial loans
and commercial real estate loans made up only 52.3%. In contrast, at December
31, 2007, residential loans totaled only 20.1%, while commercial loans and
commercial real estate loans have increased to a combined total of 68.6% of the
loan portfolio. Traditionally, the majority of typical thrift institutions' loan
portfolios have consisted of first mortgage loans on residential properties.
-10-
The following table shows the composition of our loan portfolio at
year-end for the last five years.
December 31,
------------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
---------------------- -------------------- ------------------ ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Type of Loans
- -------------
Residential real estate (1).. $ 449,853 20.1% $ 474,871 23.5% $ 457,651 25.8% $ 443,023 28.9% $ 458,408 35.1%
Commercial real estate:
Commercial mortgage ....... 465,928 20.9 422,089 20.9 410,552 23.1 416,287 27.1 335,050 25.7
Construction .............. 276,939 12.4 241,931 12.0 178,418 10.0 120,604 7.9 54,742 4.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total commercial
real estate............ 742,867 33.3 664,020 32.9 588,970 33.1 536,891 35.0 389,792 29.9
Commercial .................. 787,539 35.3 643,918 31.9 508,930 28.7 368,752 24.0 292,516 22.4
Consumer .................... 278,272 12.4 263,478 13.0 244,820 13.8 210,959 13.7 186,133 14.3
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross loans ................. $2,258,531 101.1 $2,046,287 101.3 $1,800,371 101.4 $1,559,625 101.6 $1,326,849 101.7
Less:
(Deferred fees)
unearned income ........... (701) 0.0 (838) 0.0 (304) 0.0 (64) 0.0 (414) 0.0
Allowance for loan
losses..................... 25,252 1.1 27,384 1.3 25,381 1.4 24,222 1.6 22,386 1.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Net loans ................... $2,233,980 100.0% $2,019,741 100.0% $1,775,294 100.0% $1,535,467 100.0% $1,304,877 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
(1) Includes $2,418; $925; $438; $3,249; and $1,465 of residential mortgage
loans held-for-sale at December 31, 2007; 2006; 2005; 2004; and 2003.
-11-
The following tables show how much time remains until our loans mature.
The first table details the total loan portfolio by type of loan. The second
table details the total loan portfolio by loans with fixed interest rates and
loans with adjustable interest rates. The tables show loans by contractual
maturity. Loans may be pre-paid so that the actual maturity is earlier than the
contractual maturity. Prepayments tend to be highly dependent upon the interest
rate environment. Loans having no stated maturity or repayment schedule are
reported in the Less than One Year category.
Less than One to Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in Thousands)
Real estate loans (1) ...................... $ 95,449 $273,682 $544,233 $ 913,364
Construction loans ......................... 158,044 111,508 7,387 276,939
Commercial loans ........................... 293,603 284,438 209,497 787,538
Consumer loans ............................. 136,826 57,887 83,559 278,272
$683,922 $727,515 $844,676 $2,256,113
Rate sensitivity:
Fixed .................................... $ 78,459 $325,242 $343,232 $ 746,933
Adjustable (2) ........................... 605,463 402,273 501,444 1,509,180
Gross loans $683,922 $727,515 $844,676 $2,256,113
(1) Includes commercial mortgage loans; does not include loans held-for-sale.
(2) Includes hybrid adjustable rate mortgages
Residential Real Estate Lending.
We originate residential mortgage loans with loan-to-value ratios up
to 100% and generally require private mortgage insurance for up to 30% of the
mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. We
do not have any significant concentrations of such insurance with any one
insurer. On a limited basis, we originate or purchase loans with loan-to-value
ratios exceeding 80% without a private mortgage insurance requirement. At
December 31, 2007, the balance of all such loans was approximately $4.4 million.
Generally, our residential mortgage loans are underwritten and
documented in accordance with standard underwriting criteria published by the
Federal Home Loan Mortgage Corporation ("FHLMC") to assure maximum eligibility
for subsequent sale in the secondary market. We sell only those loans that are
originated specifically with the intention to sell.
To protect the propriety of our liens, we require that title insurance
be obtained. We also require fire and extended coverage casualty insurance for
properties securing residential loans. All properties securing residential loans
made by us are appraised by independent, licensed and certified appraisers
selected by us and are subject to review in accordance with our standards.
The majority of our adjustable-rate residential real estate loans have
interest rates that adjust yearly after an initial period. Typically, the change
in rate is limited to two percentage points at the adjustment date. Adjustments
are generally based upon a margin (currently 2.75%) over the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity, as published
by the Federal Reserve Board.
Generally, the maximum rate on these loans is up to six percent above
the initial interest rate. We underwrite adjustable-rate loans under standards
consistent with private mortgage insurance and secondary
-12-
market criteria. We do not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization. Consistent with industry
practice in our market area, we typically originate adjustable-rate mortgage
loans with discounted initial interest rates.
The retention of adjustable-rate mortgage loans in our loan portfolio
helps mitigate our risk to changes in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing adjustable-rate mortgage loans. It is possible
that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest costs to the borrower. Further, although adjustable-rate mortgage loans
allow us to increase the sensitivity of our asset base to changes in interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limitations. Accordingly, there can be no
assurance that yields on our adjustable-rate mortgages will adjust sufficiently
to compensate for increases to our cost of funds during periods of extreme
interest rate increases.
The original contractual loan payment period for residential loans is
normally 10 to 30 years. Because borrowers may refinance or prepay their loans
without penalty, these loans tend to remain outstanding for a substantially
shorter period of time. First mortgage loans customarily include "due-on-sale"
clauses on adjustable- and fixed-rate loans. This provision gives us the right
to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage. Due-on-sale
clauses are an important means of adjusting the rate on existing fixed-rate
mortgage loans to current market rates. We enforce due-on-sale clauses through
foreclosure and other legal proceedings to the extent available under applicable
laws.
In general, loans are sold without recourse except for the repurchase
arising from standard contract provisions covering violation of representations
and warranties or, under certain investor contracts, a default by the borrower
on the first payment. We also have limited recourse exposure under certain
investor contracts in the event a borrower prepays a loan in total within a
specified period after sale, typically one year. The recourse is limited to a
pro rata portion of the premium paid by the investor for that loan, less any
prepayment penalty collectible from the borrower.
Commercial Real Estate, Construction and Commercial Lending.
Federal savings banks are generally permitted to invest up to 400% of
their total regulatory capital in nonresidential real estate loans and up to 20%
of its assets in commercial loans. As a federal savings bank that was formerly
chartered as a Delaware savings bank, we have certain additional lending
authority.
We offer commercial real estate mortgage loans on multi-family
properties and other commercial real estate. Generally, loan-to-value ratios for
these loans do not exceed 80% of appraised value at origination.
We offer commercial construction loans to developers. In some cases
these loans are made as "construction/permanent" loans, which provides for
disbursement of loan funds during construction and automatic conversion to
mini-permanent loans (1-5 years) upon completion of construction. These
construction loans are made on a short-term basis, usually not exceeding two
years, with interest rates indexed to our prime rate or London InterBank Offered
Rate ("LIBOR"), in most cases, and adjusted periodically as these rates change.
The loan appraisal process includes the same evaluation criteria as required for
permanent mortgage loans, but also takes into consideration: completed plans,
specifications, comparables and cost estimates. Prior to approval of the credit,
these items are used as a basis to determine the appraised value of the subject
property when completed. Our policy requires that all appraisals be reviewed
independently from our commercial lending staff. Generally, the loan-to-value
ratios for construction loans do not exceed 75%. The initial interest rate on
the permanent portion of the financing is determined by the prevailing market
rate at the
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time of conversion to the permanent loan. At December 31, 2007, $431.8 million
was committed for construction loans, of which $276.9 million had been
disbursed.
The remainder of our commercial lending includes loans for the purpose
of working capital, financing equipment acquisitions, business expansion and
other business purposes. These loans generally range in amounts up to $10
million, and their terms range from less than one year to seven years. The loans
generally carry variable interest rates indexed to our prime rate or LIBOR, at
the time of closing. We have no loans to any one industry with a concentration
greater then 12.0%.
Commercial, commercial mortgage and construction lending have a higher
level of risk than residential mortgage lending. These loans typically involve
larger loan balances concentrated with single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related real estate project and may be more subject to adverse conditions
in the commercial real estate market or in the economy generally. The majority
of our commercial and commercial real estate loans are concentrated in Delaware
and surrounding areas.
Construction loans involve additional risk because loan funds are
advanced as construction projects progress. The valuation of the underlying
collateral can be difficult to quantify prior to the completion of the
construction. This is due to uncertainties inherent in construction such as
changing construction costs, delays arising from labor or material shortages and
other unpredictable contingencies. We attempt to mitigate these risks and plan
for these contingencies through additional analysis and monitoring of our
construction projects. Construction loans receive independent inspections prior
to disbursement of funds.
Federal law limits the extensions of credit to any one borrower to 15%
of unimpaired capital, or 25% if the difference is secured by readily marketable
collateral having a market value that can be determined by reliable and
continually available pricing. Extensions of credit include outstanding loans as
well as contractual commitments to advance funds, such as standby letters of
credit, but do not include unfunded loan commitments. At December 31, 2007, no
borrower had collective outstandings exceeding these limits.
Consumer Lending.
Our primary consumer credit products are equity-secured installment
loans and home equity lines of credit. At December 31, 2007, we had
equity-secured installment loans totaling $147.6 million which represented 53%
of total consumer loans. A home equity line of credit grants a borrower a line
of credit of up to 100% of the appraised value (net of any senior mortgages) of
their residence. This line of credit is secured by a mortgage on the borrower's
property and can be drawn upon at any time during the period of agreement. At
December 31, 2007, we had extended $205.7 million in home equity lines of
credit, of which $108.9 million had been drawn at that date. Home equity lines
of credit offer customers with potential Federal income tax advantages, the
convenience of checkbook access and revolving credit features. Home equity lines
of credit expose us to the risk that falling collateral values may leave us
inadequately secured, while the risk on products like home equity loans is
mitigated as they amortize over time. We have not had any significant adverse
experience on home equity lines of credit.
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The following shows our consumer loans at year-end, for the last five years.
December 31,
---------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
---------------- ---------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Equity secured installment loans.... $147,551 53.0% $141,708 53.8% $136,721 55.8% $131,935 62.6% $124,411 66.9%
Home equity lines of credit......... 108,873 39.1 100,981 38.3 87,503 35.7 56,755 26.9 39,858 21.4
Automobile ......................... 1,159 0.4 1,702 0.7 2,616 1.1 5,126 2.4 9,137 4.9
Unsecured lines of credit........... 5,011 1.8 8,947 3.4 8,780 3.6 9,338 4.4 10,506 5.6
Other .............................. 15,678 5.7 10,140 3.8 9,200 3.8 7,805 3.7 2,221 1.2
-------- ----- -------- --- -------- ----- -------- ----- -------- -----
Total consumer loans................ $278,272 100.0% $263,478 100% $244,820 100.0% $210,959 100.0% $186,133 100.0%
======== ===== ======== === ======== ===== ======== ===== ======== =====
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Loan Originations, Purchase and Sales.
We have engaged in traditional lending activities primarily in Delaware
and contiguous areas of neighboring states. As a federal savings bank, however,
we may originate, purchase and sell loans throughout the United States. We have
purchased limited amounts of loans from outside our normal lending area when
such purchases are deemed appropriate. We originate fixed-rate and
adjustable-rate residential real estate loans through our banking offices. In
addition, we have established relationships with correspondent banks and
mortgage brokers to originate loans.
During 2007, we originated $671 million of residential real estate
loans. This compares to originations of $459 million in 2006. From time to time,
we have purchased whole loans and loan participations in accordance with our
ongoing asset and liability management objectives. Purchases of residential real
estate loans from correspondents and brokers primarily in the mid-Atlantic
region totaled $53.0 million for the year ended December 31, 2007 and $81.6
million for 2006. Residential real estate loan sales totaled $26 million in
2007, $33.0 million in 2006 and $39.1 million in 2005. While we generally intend
to hold our loans for the foreseeable future, we sell certain newly originated
mortgage loans in the secondary market primarily to control the interest rate
sensitivity of our balance sheet and to manage overall balance sheet mix. We
hold certain fixed-rate mortgage loans for investment consistent with our
current asset/liability management strategies.
Our residential real estate portfolio includes $17.4 million of
sub-prime mortgage loans. Most of our subprime portfolio is well seasoned, as is
evidenced by our low charge-offs and delinquency ratios. Of these loans $546,000
were in nonaccrual status as of December 31, 2007. Net charge offs in this
portfolio for the year were minimal at $41,000 or 23 basis points.
At December 31, 2007, we serviced approximately $255 million of
residential mortgage loans for others compared to $266 million at December 31,
2006. We also service residential mortgage loans for our own portfolio totaling
$447 million and $453 million at December 31, 2007 and 2006, respectively.
We originate commercial real estate and commercial loans through our
commercial lending division. Commercial loans are made for the purpose of
working capital, financing equipment acquisitions, business expansion and other
business purposes. During 2007, we originated $908 million of commercial and
commercial real estate loans compared with $711 million in 2006. To reduce our
exposure on certain types of these loans, or to maintain relationships within
internal lending limits at times we will sell a portion of our commercial real
estate loan portfolio. Commercial real estate loan sales totaled $19.3 million
and $16.0 million in 2007 and 2006, respectively. These amounts represent gross
contract amounts and do not reflect amounts outstanding on those loans.
Our consumer lending activity is conducted through our branch offices
and through correspondent banks and mortgage brokers. We originate a variety of
consumer credit products including home improvement loans, home equity lines of
credit, automobile loans, credit cards, unsecured lines of credit and other
secured and unsecured personal installment loans. During 2007, consumer loan
originations amounted to $19.0 million compared to $18.5 million in 2006.
During 2006, we formed a new reverse mortgage initiative. While the
Bank's activity during the year has been limited to acting as a correspondent
for these loans, our intention is to originate and underwrite our own reverse
mortgages in the future. We expect to sell most of these loans and not to hold
them in our portfolio. These reverse mortgages are government approved and
insured.
All loans to one borrowing relationship exceeding $3 million must be
approved by the Senior Management Loan Committee ("SLC"). The Executive
Committee of the Board of Directors ("EC") approves the minutes of the SLC
meetings. They also approve individual loans exceeding $5 million for customers
with less than one year of significant loan history with the Bank and loans in
excess of $7.5 million for customers with established borrowing relationships.
Depending upon their experience and management position, individual officers of
the Bank have the
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authority to approve smaller loan amounts. Our credit policy includes a "House
Limit" to one borrowing relationship of $18 million. In extraordinary
circumstances, we will approve exceptions to the "House Limit". The largest is a
borrowing relationship of $34.5 million, which the EC approved. This borrowing
is secured by U.S. Treasury securities which have a value at maturity equal to
or exceeding the aggregate loan payments.
Fee Income from Lending Activities.
We earn fee income from lending activities, including fees for
originating loans, servicing loans and selling loan participations. We also
receive fee income for making commitments to originate construction, residential
and commercial real estate loans. Additionally, we collect fees related to
existing loans which include prepayment charges, late charges and assumption
fees.
We charge fees for making loan commitments. Also as part of the loan
application process, the borrower may pay us for out-of-pocket costs to review
the application, whether or not the loan is closed.
Most loan fees are not recognized in the Consolidated Statement of
Operations immediately, but are deferred as adjustments of yield in accordance
with U.S. generally accepted accounting principles and are reflected in
interest income. Those fees represented an immaterial amount of interest income
during the three years ended December 31, 2007. Loan fees other than those
considered adjustments of yield (such as late charges) are reported as loan fee
income, a component of noninterest income.
LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
Our results of operations can be negatively impacted by nonperforming
assets, which include nonaccruing loans, nonperforming real estate investments
and assets acquired through foreclosure. 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 collateral is insufficient
to cover principal and interest. Interest accrued, but not collected at the date
a loan is placed on nonaccrual status, is reversed and charged against interest
income. In addition, the amortization of net deferred loan fees is suspended
when a loan is placed on nonaccrual status. Subsequent cash receipts are applied
either to the outstanding principal balance or recorded as interest income,
depending on management's assessment of the ultimate collectibility of principal
and interest.
We endeavor to manage our portfolio to identify problem loans as
promptly as possible and take immediate actions to minimize losses. To
accomplish this, our Risk Management Department monitors the asset quality of
our loan and investment in real estate portfolios and reports such information
to the Credit Policy Committee, the Audit Committee of the Board of Directors
and the Bank's Controller's Department.
SOURCES OF FUNDS
We manage our liquidity risk and funding needs through our treasury
function and our Asset/Liability Committee. Historically, we have had success in
growing our loan portfolio. For example, during the year ended December 31,
2007, net loan growth resulted in the net use of $221.2 million in cash. The
loan growth was primarily the result of our continued success in increasing
corporate and small business lending. Management expects this trend to continue.
While our 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, we have ready access to several sources of
funding. Among these are:
o Deposit growth,
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o The brokered deposit market,
o Borrowing from the Federal Home Loan Bank,
o Other borrowings such as repurchase agreements,
o Cash flow from securities and loan sales and repayments,
o And our net income.
Our current branch expansion and renovation program is focused on
expanding our retail footprint in Delaware and attracting new customers to
provide additional deposit growth. Customer deposit growth was strong, equaling
$135.5 million, or 10%, between December 31, 2006 and December 31, 2007.
Deposits. We offer various deposit programs to our customers, including
savings accounts, demand deposits, interest-bearing demand deposits, money
market deposit accounts and certificates of deposits. In addition, we accept
"jumbo" certificates of deposit with balances in excess of $100,000 from
individuals, businesses and municipalities in Delaware.
WSFS is the second largest independent full service banking institution
headquartered and operating in Delaware. The Bank primarily attracts deposits
through its system of 29 retail banking offices (as of December 31, 2007).
Twenty banking offices were located in northern Delaware's New Castle County,
WSFS' primary market. These banking offices maintain approximately 159,000 total
account relationships with approximately 63,000 total households. Four banking
offices are located in central Delaware's Kent County, two of which are in the
state capital, Dover. Three banking offices are located in Delaware's Sussex
County and two other banking offices are located in southeastern Pennsylvania.
The following table shows the maturity of certificates of deposit of
$100,000 or more as of December 31, 2007:
December 31,
Maturity Period 2007
- --------------- ----
(In Thousands)
Less than 3 months...................... $138,198
Over 3 months to 6 months............... 69,014
Over 6 months to 12 months.............. 31,723
Over 12 months.......................... 10,014
--------
$248,949
========
Borrowings. We utilize the following borrowing sources to fund
operations:
Federal Home Loan Bank Advances
As a member of the Federal Home Loan Bank of Pittsburgh, we are able to
obtain Federal Home Loan Bank ("FHLB") advances. Advances from the FHLB of
Pittsburgh had rates ranging from 3.48% to 5.45% at December 31, 2007. Pursuant
to collateral agreements with the FHLB, the advances are secured by qualifying
first mortgage loans, qualifying fixed-income securities, FHLB stock and an
interest-bearing demand deposit account with the FHLB. We are 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 borrowings from them, plus 0.65% of our unused
borrowing capacity. As of December 31, 2007, our FHLB stock investment totaled
$45.5 million.
Seven advances are outstanding at December 31, 2007 totaling $170.0
million, with a weighted average rate of 4.47% maturing in 2009 and beyond. At
the discretion of the FHLB, they are convertible quarterly to a variable rate
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advance based upon a three-month LIBOR rate, after an initial fixed term. If any
of these advances convert, we have the option to prepay these advances at
predetermined times or rates.
Trust Preferred Borrowings
On April 6, 2005, we 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 2007, we purchased federal funds as a short-term funding source.
At December 31, 2007, we had purchased $50.0 million in federal funds at a rate
of 4.25%. At December 31, 2006, we also had $50.0 million federal funds
purchased.
During 2007, we sold securities under agreements to repurchase as a
funding source. At December 31, 2007, securities sold under agreements to
repurchase had a fixed rate of 4.87%. The underlying securities are
mortgage-backed securities with a book value of $29.1 million at December 31,
2007.
PERSONNEL
As of December 31, 2007 we had 599 full-time equivalent Associates
(employees). The Associates are not represented by a collective bargaining unit.
Management believes its relationship with its Associates is very good.
REGULATION
Regulation of the Corporation
General. We are a registered savings and loan holding company and are
subject to the regulation, examination, supervision and reporting requirements
of the Office of Thrift Supervision ("OTS"). It is also a registered public
company subject to the reporting requirements of the United States Securities
and Exchange Commission. The filings we make with Securities and Exchange
Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and all amendments to those reports, are
available on the investor relations page of our website at www.wsfsbank.com.
Sarbanes-Oxley Act of 2002. Sarbanes-Oxley Act of 2002 (the "Act"). The
Securities and Exchange Commission (the "SEC") has promulgated new regulations
pursuant to the Sarbanes-Oxley Act of 2002 and may continue to propose
additional implementing or clarifying regulations as necessary in furtherance of
the Act. The passage of the Act and the regulations implemented by the SEC
subject publicly-traded companies to additional and more cumbersome reporting
regulations and disclosure. Compliance with the Act and corresponding
regulations has increased our expenses.
Restrictions on Acquisitions. A savings and loan holding company must
obtain the prior approval of the Director of OTS before acquiring, (i) control
of any other savings association or savings and loan holding company or
substantially all the assets thereof, or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Except with the prior approval of the Director of OTS, no director or officer of
a savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25%
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of such company's stock, may also acquire control of any savings association,
other than a subsidiary savings association, or of any other savings and loan
holding company.
The OTS may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings associations in
more than one state if: (i) the company involved controls a savings institution
which operated a home or branch office in the state of the association to be
acquired as of March 5, 1987; (ii) the acquirer is authorized to acquire control
of the savings association pursuant to the emergency acquisition provisions of
the Federal Deposit Insurance Act; or (iii) the statutes of the state in which
the association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions). The laws of
Delaware do not specifically authorize out-of-state savings associations or
their holding companies to acquire Delaware-chartered savings associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent us from entering into other states by
mergers or branching. OTS regulations permit federal associations to branch in
any state or states of the United States and its territories. Except in
supervisory cases or when interstate branching is otherwise permitted by state
law or other statutory provision, a federal association may not establish an
out-of-state branch unless the federal association qualifies as a "domestic
building and loan association" under Section 7701(a)(19) of the Internal Revenue
Code or as a "qualified thrift lender" under the Home Owners' Loan Act and the
total assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association or qualified thrift lender. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Regulation of WSFS Bank
General. As a federally chartered savings institution, the Bank is
subject to extensive regulation by the Office of Thrift Supervision. The lending
activities and other investments of the Bank must comply with various federal
regulatory requirements. The OTS periodically examines the Bank for compliance
with regulatory requirements. The FDIC also has the authority to conduct special
examinations of the Bank. The Bank must file reports with Office of Thrift
Supervision describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board.
Transactions with Affiliates; Tying Arrangements. The Bank is subject
to certain restrictions in its dealings with us and our affiliates. Transactions
between savings associations and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings association,
generally, is any company or entity which controls or is under common control
with the savings association or any subsidiary of the savings association that
is a bank or savings association. In a holding company context, the parent
holding company of a savings association (such as "WSFS Financial Corporation")
and any companies which are controlled by such parent holding company are
affiliates of the savings association. Generally, Sections 23A and 23B (i) limit
the extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings association may (i) lend or otherwise extend
credit to an affiliate that engages in any activity impermissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association. Savings associations are also
prohibited from extending credit, offering
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services, or fixing or varying the consideration for any extension of credit or
service on the condition that the customer obtain some additional service from
the institution or certain of its affiliates or that the customer not obtain
services from a competitor of the institution, subject to certain limited
exceptions.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "Tier 1" or "core" capital equal to 4% of adjusted total assets (or 3%
if the institution is rated composite 1 under the OTS examiner rating system),
and "total" capital (a combination of core and "supplementary" capital) equal to
8% of risk-weighted assets. In addition, OTS regulations impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital.
The OTS capital rule defines Tier 1 or core capital as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits of mutual institutions and "qualifying supervisory goodwill," less
intangible assets other than certain supervisory goodwill and, subject to
certain limitations, mortgage and non-mortgage servicing rights, purchased
credit card relationships and credit-enhancing interest only strips. Tangible
capital is given the same definition as core capital but does not include
qualifying supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets except for limited amounts of mortgage servicing
assets. The OTS capital rule requires that core and tangible capital be reduced
by an amount equal to a savings institution's debt and equity investments in
"non-includable" subsidiaries engaged in activities not permissible to national
banks, other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies. At December 31, 2007, the Bank was in
compliance with both the core and tangible capital requirements.
The risk weights assigned by the OTS risk-based capital regulation
range from 0% for cash and U.S. government securities to 100% for consumer and
commercial loans, non-qualifying mortgage loans, property acquired through
foreclosure, assets more than 90 days past due and other assets. In determining
compliance with the risk-based capital requirement, a savings institution may
include both core capital and supplementary capital in its total capital,
provided the amount of supplementary capital included does not exceed the
savings institution's core capital. Supplementary capital is defined to include
certain preferred stock issues, non-withdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments, general loan loss allowances up to 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair values. Total capital is
reduced by the amount of the institution's reciprocal holdings of depository
institution capital instruments and all equity investments. At December 31,
2006, WSFS Bank was in compliance with the OTS risk-based capital requirements.
Dividend Restrictions. As the subsidiary of a savings and loan holding
company, WSFS bank must submit notice to the OTS prior to making any capital
distribution (which includes cash dividends and payments to shareholders of
another institution in a cash merger). In addition, a savings association must
make application to the OTS to pay a capital distribution if (x) the association
would not be adequately capitalized following the distribution, (y) the
association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
Insurance of Deposit Accounts. The Bank's deposits are insured to
applicable limits by the FDIC. Although the FDIC is authorized to assess
premiums under a risk-based system for such deposit insurance, most insured
depository institutions have not been required to pay premiums for the last ten
years. The Federal Deposit Insurance Reform Act of 2005 (the "Reform Act"),
which was signed into law on February 15, 2006, resulted in significant changes
to the federal deposit insurance program: (i) effective March 31, 2006, the Bank
Insurance Fund and the
-21-
Savings Association Insurance Fund were merged into a new combined fund, called
the Deposit Insurance Fund; (ii) the current $100,000 deposit insurance coverage
will be indexed for inflation (with adjustments every five years, commencing
January 1, 2011); and (iii) deposit insurance coverage for retirement accounts
was increased to $250,000 per participant subject to adjustment for inflation.
In addition, the Reform Act gave the FDIC greater latitude in setting the
assessment rates for insured depository institutions, which could be used to
impose minimum assessments.
The FDIC is authorized to set the reserve ratio for the Deposit
Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits.
If the Deposit Insurance Fund's reserves exceed the designated reserve ratio,
the FDIC is required to pay out all or, if the reserve ratio is less than 1.5%,
a portion of the excess as a dividend to insured depository institutions based
on the percentage of insured deposits held on December 31, 1996 adjusted for
subsequently paid premiums. Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future assessments based
on the amount of their assessable deposits on that date. During 2007 we were
able to offset our entire deposit insurance premium. For 2008, we still have
$300,000 available from the special assessment credit.
Pursuant to the Reform Act, the FDIC has maintained the designated
reserve ratio at 1.25%. The FDIC has also adopted a new risk-based premium
system that provides for quarterly assessments based on an insured institution's
ranking in one of four risk categories based on their examination ratings and
capital ratios. Beginning in 2007, well-capitalized institutions with a CAMELS
("Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market
risk") rating of 1 or 2 will be grouped in Risk Category I and will be assessed
for deposit insurance at an annual rate of between five and seven basis points,
with the assessment rate for an individual institution to be determined
according to a formula based on a weighted average of the institution's
individual CAMEL component ratings, plus either five financial ratios or the
average ratings of its long-term debt. Institutions in Risk Categories II, III
and IV will be assessed at annual rates of 10, 28 and 43 basis points,
respectively.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation ("FICO"), an agency of the Federal government established
to recapitalize the predecessor to the SAIF. The FICO assessment rates, which
are determined quarterly, averaged 0.012% of insured deposits in fiscal 2007.
These assessments will continue until the FICO bonds mature in 2017.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain reserves against their transaction
accounts. As of December 31, 2007, no reserves were required to be maintained on
the first $8.5 million of transaction accounts, reserves of 3% were required to
be maintained against the next $37.3 million of transaction accounts and a
reserve of 10% against all remaining transaction accounts. This percentage is
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest bearing
account at a Federal Reserve Bank, the effect of the reserve requirement may
reduce the amount of an institution's interest-earning assets. As of December
31, 2007 we met our reserve requirements.
ITEM 1A. RISK FACTORS
- ----------------------
The following are certain risks that management believes are specific
to our business. This should not be viewed as an all inclusive list and the
order is not intended as an indicator of the level of importance.
Future loan losses may negatively impact the Company
We are subject to credit risk, which is the risk of losing principal or
interest due to borrowers' failure to repay loans in accordance with their
terms. A downturn in the economy or the real estate market in our market areas
or a rapid change in interest rates could have a negative effect on collateral
values and borrowers' ability to repay. This
-22-
deterioration in economic conditions could result in losses to us. To the extent
loans are not paid timely by borrowers, the loans are placed on non-accrual,
thereby reducing interest income.
Rapidly changing interest rate environments could reduce our profitability
Interest and fees on loans and securities, net of interest paid on
deposits and borrowings, are a large part of our net income. Interest rates are
key drivers of our net interest margin and subject to many factors beyond the
control of management. As interest rates change, net interest income is
affected. Rapid increases or decreases in interest rates in the future could
negatively impact our net interest margin.
Liquidity risk
Due to our continued success in our lending operations, particularly
in corporate and small business lending, our loans have exceeded customer
deposit funding. Changes in interest rates or alternative investment
opportunities and other factors may make deposit gathering more difficult.
Additionally, interest rate changes or disruptions in the capital market may
make the terms of the borrowings and brokered deposits less favorable. As a
result, there is a risk that we will not have funds to meet our obligations when
they come due. Interest rate and liquidity risk is managed by our
Asset/Liability Committee ("ALCO"). While our 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. A liquidity crisis plan
has been developed and is an important part of our liquidity management.
The financial services industry is very competitive
We face competition in attracting and retaining deposits, making
loans, and providing other financial services throughout our market area. Our
competitors include other community banks, larger banking institutions, and a
wide range of other financial institutions such as credit unions,
government-sponsored enterprises, mutual fund companies, insurance companies and
other non-bank businesses. Many of these competitors have substantially greater
resources than us. If we are unable to compete effectively, we will lose market
share and will have less income from deposits and loans, which will negatively
impact our net interest margin. Profitability of other products may be reduced
as well.
Adverse changes in the economic growth and vitality in our banking markets may
negatively impact us
Our business is closely tied to the economies of Delaware and the
contiguous counties outside of Delaware. A sustained economic downturn could
adversely affect our net income.
We are subject to extensive regulation
Our operations are subject to extensive regulation by federal banking
authorities which impose requirements and restrictions on our operations. The
impact of changes to laws and regulations or other actions by regulatory
agencies could make regulatory compliance more difficult or expensive for us and
could adversely affect our net income.
We may not be able to achieve our growth plans or effectively manage its growth
There can be no assurance that growth opportunities will be available
or that growth will be successfully managed. This includes, but is not limited
to, growth in generating loans and gathering deposits. Due to our investment in
future growth, failure to obtain sufficient growth would negatively effect our
net income.
-23-
Inability to hire or retain certain key professionals, management and staff
could adversely affect our revenues and net income
We rely on key personnel to manage and operate our business, including
major revenue generating functions such as our loan and deposit portfolios. The
loss of key staff may adversely affect our ability to maintain and manage these
portfolios effectively, which could negatively effect our revenues. In addition,
loss of key personnel could result in increased recruiting and hiring expenses,
which could cause a decrease in our net income.
We continually encounter technological change
The financial services industry is continually undergoing rapid
technological change with frequent introductions of new technology-driven
products and services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and reduce costs. Our
future success depends, in part, upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands, as well as to create additional efficiencies in our
operations. Our largest competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in
marketing these products and services to our customers. Failure to successfully
keep pace with technological change affecting the financial services industry
could have a material adverse impact on our business and, in turn, our financial
condition and our net income.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- -----------------------------------
None.
ITEM 2. PROPERTIES
- ------------------
The following table shows information regarding offices and material
properties held by us, and our subsidiaries, at December 31, 2007.
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements (1) Deposits
- -------- ------ ------- ---------------- --------
(In Thousands)
WSFS :
WSFS Bank Center Branch
Main Office
500 Delaware Avenue
Wilmington, De 19801 Leased 2011 796 683,456
Union Street Branch
3rd & Union Streets
Wilmington, DE 19805 Leased 2008 66 44,822
Trolley Square Branch
1711 Delaware Ave
Wilmington, DE 19806 Leased 2011 28 30,568
Fairfax Shopping Center (3)
2005 Concord Pike
Wilmington, DE 19803 Owned 8,195 78,304
Branmar Plaza Shopping Center Branch
1812 Marsh Road
Wilmington, DE 19810 Leased 2008 89 89,306
Prices Corner Shopping Center Branch
3202 Kirkwood Highway
Wilmington, DE 19808 Leased 2008 22 106,786
Pike Creek Shopping Center Branch
New Linden Hill & Limestone Road
Wilmington, DE 19808 Leased 2015 772 79,777
-24-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements (1) Deposits
- -------- ------ ------- ---------------- --------
(In Thousands)
University Plaza Shopping Center Branch
100 University Plaza
Newark, DE 19712 Leased 2026 1,412 46,938
College Square Shopping Center Branch(4)
Route 273 & Liberty Avenue
Newark, DE 19711 Leased 2012 142 78,551
Airport Plaza Shopping Center Branch
144 N. DuPont Hwy.
New Castle, DE 19720 Leased 2013 715 74,354
Stanton Branch
Inside ShopRite
1600 W. Newport Pike
Wilmington, DE 19804 Leased 2011 20 18,759
Glasgow Branch
Inside Genaurdi's at People Plaza
Routes 40 & 896
Newark, DE 19702 Leased 2008 37 21,727
Middletown Crossing Shopping Center
Route 299 and Silver Lake Road
Middletown, De 19709 Leased 2017 1,046 38,625
Dover Branch
Inside Metro Food Market
Rt. 134 & White Oak Road
Dover, DE 19901 Leased 2010 15 14,985
West Dover Loan Office
Greentree Office Center
160 Greentree Drive
Suite 105
Dover, DE 19904 Leased 2009 12 10
Blue Bell Loan Office
721 Skippack Pike
Suite 101
Blue Bell, PA 19422 Leased 2012 9 11,618
Glen Eagle Branch
Inside Genaurdi's Family Market
475 Glen Eagle Square
Glen Mills, PA 19342 Leased 2008 117 8,589
University of Delaware-Trabant University Center
17 West Main Street
Newark, DE 19716 Leased 2008 74 11,278
Brandywine Branch
Inside Genaurdi's Family Market
2522 Foulk Road
Wilmington, DE 19810 Leased 2009 54 22,889
Operations Center
2400 Philadelphia Pike
Wilmington, DE 19703 Owned 729 N/A
Longwood Branch
830 E. Baltimore Pike
E. Marlboro, PA 19348 Leased 2010 79 9,091
Holly Oak Branch
Inside Super Fresh
2105 Philadelphia Pike
Claymont, DE 19703 Leased 2010 67 18,364
Hockessin Branch
7450 Lancaster Pike
Wilmington, DE 19707 Leased 2015 622 59,253
-25-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements (1) Deposits
- -------- ------ ------- ---------------- --------
(In Thousands)
Lewes Branch
Southpointe Professional Center
1515 Savannah Road, Suite 103
Lewes, DE 19958 Leased 2008 117 30,673
Fox Run Shopping Center
Bear, De Leased 2015 961 32,589
Camden Town Center
4566 S. Dupont Highway
Camden, DE 19934 Leased 2024 1,032 24,240
Rehoboth Branch
Lighthouse Plaza
Route #1
Rehoboth, DE 19771 Leased 2028 914 45,313
Loan Operations
30 Blue Hen Drive
Suite 200
Newark, DE 19713 Leased 2012 5 N/A
West Dover Branch
1486 Forest Avenue
Dover, DE 19904 Owned 2,232 17,780
Longneck Branch
24985 John J. Williams Highway
Millsboro, DE 19966 Leased 2026 1,311 27,456
Smyrna(5)
231 N. DuPont Parkway
Smyrna, DE 19977 Leased 2008 - 13,263
Smyrna(6)
Simon's Corner Shopping Center
1300 South DuPont Highway
Smyrna, DE 19977 Leased 2026 177 N/A
Oxford, LPO
59 South Third Street
Oxford, PA Leased 2011 30 2,167
Greenville
3908 Kennett Pike
Greenville, DE Owned 2,183 22,265
WSFS Bank Center (2)
500 Delaware Avenue
Wilmington, De 19801 Leased 2019 1,813 -
Market Street Branch(7)
833 Market Street
Wilmington, De 19801 Leased 2009 148 62,982
Annandale, VA
7010 Little River Tnpk.
Suite 330
Annandale, VA 22003 Leased 2011 20 383
Oceanview(8)
69 Atlantic Avenue
Oceanview, DE 19970 Leased 2022 29 N/A
-26-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements (1) Deposits
- -------- ------ ------- ---------------- --------
(In Thousands)
Montchanin Capital Management, Inc.
- -----------------------------------
1220 Market Street
Suite 705
Wilmington, DE 19801 Leased 2010 14 N/A
Cypress Capital Management, LLC
- -------------------------------
1220 Market Street
Suite 704
Wilmington, DE 19801 Leased 2010 5 N/A
$1,827,161
==========
(1) The net book value of all the Company's investment in premise and equipment
totaled $34.9 million at December 31, 2007.
(2) Location of Corporate Headquarters
(3) Includes Fairfax Branch office.
(4) Includes the Company's education and development center.
(5) Temporary location for branch until permanent branch is complete in
February of 2008. The lease is month to month.
(6) As of December 31, 2007, location was under construction. To be completed
in February of 2008.
(7) Temporary location for branch until permanent location is complete.
(8) As of December 31, 2007, location was under construction. To be completed
in September of 2008.
-27-
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material legal proceedings to be disclosed under this
item.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 2007 through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER - MATTERS AND
- --------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is traded on The Nasdaq Stock Market(SM) under the
symbol WSFS. At December 31, 2007, we had 1,252 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 our common stock at December 31, 2007 was $50.20.
Stock Price Range
-----------------------------
Low High Dividends
- --------------------------------------------------------------------------
2007 4th $ 48.45 $ 68.33 $ 0.10
3rd $ 53.42 $ 68.81 $ 0.10
2nd $ 62.78 $ 69.00 $ 0.10
1st $ 60.91 $ 70.85 $ 0.08
------------
$ 0.38
============
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
============
-28-
COMPARATIVE STOCK PERFORMANCE GRAPH
The graph and table which follow show the cumulative total return on our Common
Stock 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 our Common Stock or the
index equals the total increase in value since December 31, 2002, 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, 2002 in our Common Stock and in each of the indexes. There can be
no assurance that our future stock performance will be the same or similar to
the historical stock performance shown in the graph below. We neither make nor
endorse any predictions as to stock performance.
CUMULATIVE TOTAL SHAREHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
December 31, 2002 through December 31, 2007
[OBJECT OMITTED]]
Cumulative Total Return
--------------------------------------------------
2002 2003 2004 2005 2006 2007
- --------------------------------------------------------------------------------
WSFS Financial Corporation $100 $137 $184 $188 $207 $156
Dow Jones Total Market Index 100 128 142 148 168 175
Nasdaq Bank Index 100 133 150 147 168 135
-29-
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
At December 31,
- ---------------
Total assets $3,200,188 $2,997,396 $2,846,752 $2,502,956 $2,207,077
Net loans (1) 2,233,980 2,019,741 1,775,294 1,535,467 1,304,877
Investment securities (2) 26,235 53,893 56,704 97,485 116,292
Investment in reverse mortgages, net 2,037 598 785 (109) 193
Other investments 46,615 41,615 46,466 44,477 44,771
Mortgage-backed securities (2) 496,792 516,711 620,323 524,144 530,552
Deposits 1,827,161 1,756,348 1,446,236 1,234,962 923,333
Borrowings (3) 1,068,149 935,668 1,127,997 1,002,609 1,031,058
Trust preferred borrowings 67,011 67,011 67,011 51,547 50,000
Stockholders' equity 211,330 212,059 181,975 196,303 187,992
Number of full-service branches (4) 29 27 24 24 23
For the Year Ended December 31,
- -------------------------------
Interest income $189,477 $177,177 $136,022 $104,110 $ 89,299
Interest expense 107,468 99,278 62,380 37,246 31,301
Noninterest income 48,166 40,305 34,653 31,950 26,166
Noninterest expenses 82,031 69,314 62,877 55,699 49,417
Income from continuing operations 29,649 30,441 27,856 25,757 21,233
Net income 29,649 30,441 27,856 25,900 63,022
Earnings per share:
Basic:
Income from continuing operations $ 4.69 $ 4.59 $ 4.10 $ 3.60 $ 2.73
Net income 4.69 4.59 4.10 3.62 8.11
Diluted:
Income from continuing operations 4.55 4.41 3.89 3.39 2.58
Net income 4.55 4.41 3.89 3.41 7.65
Interest rate spread 2.80% 2.70% 2.91% 3.07% 3.02%
Net interest margin 3.09 2.98 3.13 3.24 3.29
Return on average equity (5) 14.34 15.42 14.78 13.54 10.60
Return on average assets (5) 0.98 1.03 1.05 1.10 1.09
Average equity to average assets (5) 6.87 6.68 7.10 8.13 10.28
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances, securities sold under agreement to
repurchase and other borrowed funds.
(4) WSFS opened three branches and closed one branch in 2007, opened three
branches in 2006, opened one branch in 2004, and opened two branches in
2003.
(5) Based on continuing operations.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
WSFS Financial Corporation ("the Company," "our Company," "we," "our" or
"us") is a thrift holding company headquartered in Wilmington, Delaware.
Substantially all of our assets are held by our subsidiary, Wilmington Savings
Fund Society, FSB ("WSFS Bank" or the "Bank"). Founded in 1832, we are one of
the ten oldest banks in the United States continuously-operating under the same
name. As a federal savings bank, which was formerly chartered as a state mutual
savings bank, we enjoy broader investment powers than most other financial
institutions. We have served the residents of the Delaware Valley for 176 years.
We are the largest thrift institution headquartered in Delaware and the third
largest financial institution in the state on the basis of total deposits
traditionally garnered in-market. Our primary market area is the mid-Atlantic
region of the United States, which is characterized by a diversified
manufacturing and service economy. Our long-term strategy is to serve small and
mid-size businesses through loans, deposits, investments,
-30-
and related financial services, and to gather retail core deposits. Our
strategic focus is to exceed customer expectations, deliver stellar service and
build customer advocacy through highly trained, relationship oriented, friendly,
knowledgeable, and empowered Associates.
We provide residential and commercial real estate, commercial and consumer
lending services, as well as retail deposit and cash management services. In
addition, we offer a variety of wealth management and personal trust services
through Wilmington Advisors, which was formed during 2006. Lending activities
are funded primarily with retail deposits and borrowings. The Federal Deposit
Insurance Corporation ("FDIC") insures our customers' deposits to their legal
maximum. We serve our customers primarily from our main office, 29 retail
banking offices, loan production offices and operations centers located in
Delaware, southeastern Pennsylvania and Virginia and through our website at
www.wsfsbank.com.
We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital
Management, Inc. ("Montchanin"). We also have one unconsolidated affiliate, WSFS
Capital Trust III ("the Trust"). WSFS Bank has a fully-owned subsidiary, WSFS
Investment Group, Inc., which markets various third-party insurance products and
securities through the Bank's retail banking system.
Montchanin has one consolidated subsidiary, Cypress Capital Management, LLC
("Cypress"). Cypress is a Wilmington-based investment advisory firm serving high
net-worth individuals and institutions. Cypress had approximately $515 million
in assets under management at December 31, 2007.
FORWARD-LOOKING STATEMENTS
Within this annual report and financial statements, management has included
certain "forward-looking statements" concerning our future operations.
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 including expectations of our future financial results.
Management's ability to predict results or the effect of future plans and
strategy is inherently uncertain. Factors that could affect results include
interest rate trends, competition, the general economic climate in Delaware, the
mid-Atlantic region and the country as a whole, asset quality, loan growth, loan
delinquency rates, operating risk, uncertainty of estimates in general, and
changes in federal and state regulations, among other factors. These factors
should be considered in evaluating the "forward-looking statements," and undue
reliance should not be placed on such statements. Actual results may differ
materially from management expectations. We do not undertake, and specifically
disclaim 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 $29.6 million or $4.55
per diluted share for the year ended December 31, 2007, compared to $30.4
million or $4.41 per share and $27.9 million or $3.89 per share in 2006 and
2005, respectively.
Net Interest Income. Net interest income increased $4.1 million, or 5%, to
$82.0 million in 2007 compared to $77.9 million in 2006. The net interest margin
for 2007 was 3.09%, up 0.11% from 2006. The overall improvement in the net
interest margin over last year reflects loan growth and our continued efforts to
refocus the mix of our balance sheet. Loans, with an average yield of 7.55%,
increased $168.7 million on average while mortgage-backed securities, with an
average yield of 4.93%, declined $99.4 million on average mostly due to
scheduled repayments. In addition, interest-bearing deposits, with an average
rate of 3.76%, increased $219.3 million on average while FHLB advances, with an
average rate of 4.97%, decreased $210.1 million on average. The yield on earning
assets increased 0.37% on average in comparison to 2006 while the rate on
interest-bearing liabilities increased by 0.27% on average. Additionally, income
from reverse mortgages increased $1.3 million in comparison to 2006.
-31-
Net interest income increased $4.3 million, or 6%, to $77.9 million in 2006
compared to $73.6 million in 2005. The net interest margin of 2.98% for 2006
declined from 3.13% in 2005. This ratio was negatively impacted by a flattening
yield curve as the rate on interest-bearing liabilities increased 1.18% while
the rate on interest-earning assets only increased by 0.97%. Loans increased
$284.9 million on average while interest-bearing deposits increased by $223.2
million on average.
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 yields for the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on the changes that are
attributable to: (i) changes in volume (change in volume multiplied by prior
year rate); (ii) changes in rates (change in rate multiplied by prior year
volume on each category); and (iii) net change (the sum of the change in volume
and the change in rate). Changes due to the combination of rate and volume
changes (changes in volume multiplied by changes in rate) are allocated
proportionately between changes in rate and changes in volume.
Year Ended December 31, 2007 vs. 2006 2006 vs. 2005
------------------------------------------------------------------------------------------------------------------------
Volume Yield/Rate Net Volume Yield/Rate Net
------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest Income:
Commercial real estate loans $ 4,281 $ (320) $ 3,961 $ 4,549 $ 7,985 $ 12,534
Residential real estate loans (1,244) 1,186 (58) 2,312 1,531 3,843
Commercial loans (1) 10,318 475 10,793 10,832 6,780 17,612
Consumer loans 870 317 1,187 2,590 1,411 4,001
Mortgage-backed securities (4,898) 691 (4,207) 703 2,054 2,757
Investment securities (1,638) 2,430 792 (1,413) 723 (690)
Other (601) 433 (168) 97 1,001 1,098
------------------------------------------------------------------------------------------------------------------------
Favorable (unfavorable) 7,088 5,212 12,300 19,670 21,485 41,155
------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Interest-bearing demand 180 428 608 35 453 488
Money market 2,981 799 3,780 1,420 2,833 4,253
Savings (248) (310) (558) (224) 723 499
Retail time deposits 4,003 3,045 7,048 3,302 3,909 7,211
Jumbo certificates of deposits - nonretail 927 149 1,076 1,586 1,140 2,726
Brokered certificates of deposits 1,815 835 2,650 2,118 3,722 5,840
FHLB of Pittsburgh advances (10,342) 3,025 (7,317) 3,286 11,919 15,205
Trust Preferred 0 (300) (300) 319 (558) (239)
Other borrowed funds 1,090 113 1,203 (1,404) 2,305 901
Cost of funding discontinued operations 0 0 0 7 7 14
------------------------------------------------------------------------------------------------------------------------
Unfavorable (favorable) 406 7,784 8,190 10,445 26,453 36,898
------------------------------------------------------------------------------------------------------------------------
Net change, as reported $ 6,682 $ (2,572) $ 4,110 $ 9,225 $ (4,968) $ 4,257
------------------------------------------------------------------------------------------------------------------------
(1) The tax-equivalent income adjustment is related to commercial loans.
-32-
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, 2007 2006 2005
- ---------------------------------------------------------------------- --------------------------- ---------------------------
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 $ 687,614 $56,056 8.15% $ 635,133 $52,095 8.20% $ 573,566 $39,561 6.90%
Residential real estate loans 459,043 26,451 5.76 481,308 26,509 5.51 438,405 22,666 5.17
Commercial loans 709,507 56,766 8.05 582,546 45,973 7.97 439,375 28,361 6.62
Consumer loans 270,518 20,239 7.48 258,946 19,052 7.36 222,679 15,051 6.76
------------------ ----------------- ------------------
Total loans 2,126,682 159,512 7.55 1,957,933 143,629 7.39 1,674,025 105,639 6.38
Mortgage-backed securities (4) 491,650 24,237 4.93 591,021 28,444 4.81 575,580 25,687 4.46
Investment securities (4) 29,130 3,360 11.53 55,004 2,568 4.67 88,094 3,258 3.70
Other interest-earning assets 40,137 2,368 5.90 51,144 2,536 4.96 48,077 1,438 2.99
------------------ ----------------- ------------------
Total interest-earning assets 2,687,599 189,477 7.09 2,655,102 177,177 6.72 2,385,776 136,022 5.75
-------- ------- --------
Allowance for loan losses (28,192) (26,491) (24,909)
Cash and due from banks 70,387 57,771 53,434
Cash in non-owned ATMs 158,091 153,060 133,235
Bank-owned life insurance 56,307 53,137 53,137
Loans, operating leases and other
assets of discontinued operations - - 531
Other noninterest-earning assets 67,711 63,793 55,000
---------- ---------- ----------
Total assets $3,011,903 $2,956,372 $2,656,204
---------- ---------- ----------
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand $ 148,039 $ 1,393 0.94% $ 123,599 785 0.64% $111,585 297 0.27%
Money market 312,192 11,870 3.80 232,418 8,090 3.48 177,911 3,837 2.16
Savings 211,453 1,679 0.79 240,426 2,237 0.93 272,673 1,738 0.64
Retail time deposits 476,159 22,357 4.70 384,654 15,309 3.98 286,371 8,098 2.83
------------------ ----------------- ------------------
Total interest-bearing retail 1,147,843 37,299 3.25 981,097 26,421 2.69 848,540 13,970 1.65
deposits
Jumbo certificates of
deposit-nonretail 98,452 5,176 5.26 80,691 4,100 5.08 43,554 1,374 3.15
Brokered certificates of deposit 277,860 14,836 5.34 243,070 12,186 5.01 189,593 6,346 3.35
------------------ ----------------- ------------------
Total interest-bearing deposits 1,524,155 57,311 3.76 1,304,858 42,707 3.27 1,081,687 21,690 2.01
FHLB of Pittsburgh advances 765,974 38,561 4.97 976,101 45,878 4.64 887,822 30,673 3.41
Trust preferred borrowings 67,011 4,753 7.00 67,011 5,053 7.44 62,986 5,292 8.29
Other borrowed funds 147,251 6,843 4.65 123,800 5,640 4.56 165,406 4,739 2.87
Cost of funding discontinued operations - - - - - (14)
------------------ ----------------- -----------------
Total interest-bearing
liabilities 2,504,391 107,468 4.29 2,471,770 99,278 4.02 2,197,901 62,380 2.84
-------- ------- ---------
Noninterest-bearing demand deposits 272,964 262,838 250,321
Other noninterest-bearing liabilities 27,737 24,330 19,274
Minority interest 38 84 209
Stockholders' equity 206,773 197,350 188,499
---------- ---------- ----------
Total liabilities and
stockholders' equity $3,011,903 $2,956,372 $2,656,204
========== ========== ==========
Excess of interest-earning assets
over interest-bearing liabilities $ 183,208 $ 183,332 $ 187,875
========= ========== ==========
Net interest and dividend income $ 82,009 $77,899 $73,642
======== ======= =======
Interest rate spread 2.80% 2.70% 2.91%
==== ==== ====
Net interest margin 3.09% 2.98% 3.13%
==== ==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis using
a 35% effective tax rate.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale, trading securities and reverse
mortgages.
-33-
Provision for Loan Losses. We maintain 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, 2007, we
recorded a provision for loan losses of $5.0 million compared to $2.7 million in
2006 and $2.6 million in 2005. In 2007, the provision was primarily affected by:
(1) continued significant loan growth; (2) migration of certain loans toward
lower credit grades as we continue to assess our exposure in the current lending
environment; partially offset by (3) a lower level of estimated losses resulting
from an improvement in the methodology for estimating loan losses using
historical data adjusted for current conditions and trends. The improvement in
this methodology resulted in a net reduction of approximately $6.8 million from
the estimate previously used.
Noninterest Income. Noninterest income increased $7.9 million to $48.2 million
in 2007, or 16%, from $40.3 million in 2006. This is attributable to a $3.2
million increase in deposit service charges as we continue to benefit from
increased deposit accounts and offering additional fee-based services. The
increase also includes a $1.1 million non-recurring gain related to the sale of
our former headquarters building and an $882,000 gain from the sale of our
credit card portfolio. Credit/debit card and ATM income also increased $915,000
as a result of increased volumes of cash in non-owned ATMs and higher bailment
fees earned on this cash. In 2007 we also recorded two offsetting $6.0 million
items. Both occurred during the fourth quarter and resulted in a gain and an
expense recognized from the donation of a N.C. Wyeth mural, Apotheosis of the
Family, which was located in our former headquarters. During 2006, we recognized
a loss of $2.0 million on the sale of below-market yielding securities. This
sale was part of our efforts to improve our earning asset mix and return on
assets.
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 $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. Deposit service
charges also increased $2.2 million as a result of growth in deposit accounts as
well as additional fee-based services we provided. During 2006, noninterest
income was impacted by unanticipated income of $1.8 million in our investment in
Bank-Owned Life Insurance (BOLI) resulting from a death benefit we received.
Also, during 2006, we recognized a loss of $2.0 million on the sale of
below-market yielding securities. This sale was part of our efforts to improve
our earning asset mix and return on assets.
Noninterest Expenses. Noninterest expenses for the year ended 2007 were $82.0
million, an increase of 18%, or $12.7 million over $69.3 million recognized in
2006. The increase reflects our continued growth efforts in 2007 and included
the opening of three branch offices, one branch renovation, and the relocation
of our corporate headquarters. As a result of this growth, the number of
full-time Associates grew to 599, resulting in increased salaries, benefits and
other compensation of $4.3 million. This growth also affected both occupancy
expense, which increased by $2.8 million, and other operating expenses, which
increased by $1.9 million. During 2007 our marketing expenses increased $1.2
million, as a multi-year brand campaign was launched with the intent to leverage
our Stellar Service model with the message "We Stand For Service." Also during
2007, we recorded a $1.2 million expense related to the Visa antitrust lawsuit
settlement with American Express and other Visa-related litigation. We are not a
party to any of these lawsuits and our expense solely results from our being a
member of Visa. WSFS expects the proceeds from the anticipated share redemption
for its ownership interest in Visa's planned initial public offering will be
applied to this charge.
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 our 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 was 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 was
the result of the 2006 implementation of the Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based Payment.
Income Taxes. We recorded a $13.5 million tax provision for the year ended
December 31, 2007 compared to $15.7 million and $14.8 million for the years
ended December 31, 2006 and 2005, respectively. The effective tax rates for the
years ended December 31, 2007, 2006 and 2005 were 31.2%, 34.0% and 34.8%,
respectively. The reduction in the 2007 effective tax rate
-34-
is primarily the result of a $1.7 million tax benefit related to the previously
discussed donation of our N.C. Wyeth mural. 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.
We analyze our projection of taxable income and make adjustments to our
provision for income taxes accordingly. For additional information regarding our
tax provision and net operating loss carryforwards, see Note 12 to the
Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets increased $202.8 million, or 7%, during 2007 to $3.2
billion. This increase was predominantly due to growth in net loans, which grew
$214.2 million, or 11%, during 2007. This increase was partially offset by a
decrease of $26.2 million in investment securities and $19.9 million in
mortgage-backed securities. Total liabilities increased $203.6 million during
the year to $3.0 billion at December 31, 2007. This increase was primarily the
result of an increase in customer deposits of $135.5 million, or 10%, during
2007, and an increase in total borrowings of $132.5 million, or 13%. Partially
offsetting these increases was a $52.0 million, or 17%, decrease in brokered
deposits.
Cash in non-owned ATMs. During 2007, cash in non-owned ATMs managed by
CashConnect, our ATM unit, increased $16.4 million, or 10%. This increase was
the result of an increase in the number of ATMs serviced by CashConnect from
7,458 at December 31, 2006 to 9,976 at December 31, 2007. Of these, 325 ATMs
were WSFS owned and operated during 2007.
Mortgage-backed Securities. Investments in mortgage-backed securities decreased
$19.9 million during 2007 to $496.8 million. During 2007, we sold $2.6 million
of our mortgage-backed securities. The weighted average duration of the
mortgage-backed securities was 2.8 years at December 31, 2007.
Loans, net. Net loans increased $214.2 million, or 11%, during 2007. This
included increases of $143.6 million, or 22%, in commercial loans, $78.8
million, or 12%, in commercial real estate loans, and $14.8 million, or 6%, in
consumer loans. This increase was partially offset by a planned decrease of
$26.5 million, or 6%, in residential mortgage loans.
Customer Deposits. Customer deposits increased $135.5 million, or 10%, during
2007 to $1.5 billion. Customer time deposits (CDs) increased $69.8 million, or
16%, in 2007. In addition, core deposit relationships (demand deposits, money
market and savings accounts) increased $65.7 million, or 7%, during the year.
The table below depicts the changes in customer deposits over the last three
years:
Year Ended December 31,
----------------------------------------
2007 2006 2005
----- ----- ----
(In Millions)
Beginning balance......... $1,343.7 $1,193.9 $1,052.2
Interest credited......... 32.4 26.3 11.4
Deposit inflows, net...... 103.1 123.5 130.3
-------- -------- --------
Ending balance............ $1,479.2 $1,343.7 $1,193.9
======== ======== ========
Borrowings and Brokered Certificates of Deposit. Borrowings and brokered
certificates of deposit increased by $80.4 million, or 6%, during 2007. This
increase was primarily the result of an increase in FHLB advances of $114.3
million, or 15%. In addition, other borrowed funds increased $16.6 million, or
21%, and Federal funds purchased and securities sold under agreements to
repurchase increased $1.6 million, or 2%, in 2007. Partially offsetting these
increases was a $52.0 million, or 17%, decrease in brokered deposits.
Stockholders' Equity. Stockholders' equity decreased $729,000 to $211.3 million
at December 31, 2007. This decrease was mainly due to our purchase of 564,100
shares of treasury stock for $36.2 million. At December 31, 2007, we held 9.5
million
-35-
shares of our common stock as treasury stock. We intend to continue repurchasing
shares depending on stock price and alternative uses of capital. In addition, we
declared cash dividends totaling $2.4 million during 2007. These decreases were
partially offset by a $34.4 million increase in total comprehensive income,
including $29.6 million in net income, and a $2.0 million increase related to
the adoption of Financial Accounting Standards Board ("FASB") Interpretation No.
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109 ("FIN 48"). Lastly, an increase of $1.3 million resulted from the
exercise of common stock options.
ASSET/LIABILITY MANAGEMENT
Our primary asset/liability management goal is to maximize net interest
income opportunities within the constraints of managing interest rate risk,
while ensuring adequate liquidity and funding and maintaining a strong capital
base.
In general, interest rate risk is mitigated by closely matching the
maturities or repricing periods of interest-sensitive assets and liabilities to
ensure a favorable interest rate spread. We regularly review our interest-rate
sensitivity, and use 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 our primary strategies 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.
-36-
The repricing and maturities of our interest-rate sensitive assets and
interest-rate sensitive liabilities at December 31, 2007 are set forth in the
following table:
Less than One One to Over Total
Year Five Years Five Years
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Interest-rate sensitive assets:
Real estate loans (1) (2) $ 763,760 $300,366 $ 126,176 $1,190,302
Commercial loans (2) 609,190 120,704 57,644 787,538
Consumer loans (2) 138,194 56,071 84,007 278,272
Mortgage-backed securities 153,652 322,951 20,189 496,792
Loans held-for-sale (2) 2,417 - - 2,417
Investment securities 66,410 5,867 1,532 73,809
Interest-bearing deposits in other banks 1,078 - - 1,078
- -----------------------------------------------------------------------------------------------------------------------------------
1,734,701 805,959 289,548 2,830,208
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-rate sensitive liabilities:
Money market and interest-bearing demand deposits 166,353 - 308,941 475,294
Savings deposits 55,188 - 141,383 196,571
Retail time deposits 460,944 54,652 1,312 516,908
Jumbo certificates of deposit 98,581 177 - 98,758
Brokered certificates of deposit 163,571 - 85,635 249,206
FHLB advances 747,901 141,579 8,800 898,280
Trust preferred borrowings 67,011 - - 67,011
Other borrowed funds 83,204 25,000 61,665 169,869
- -----------------------------------------------------------------------------------------------------------------------------------
1,842,753 221,408 607,736 2,671,897
- -----------------------------------------------------------------------------------------------------------------------------------
(Deficiency) excess of interest-rate sensitive $ (108,052) $584,551 $(318,188) $ 158,311
assets over interest-rate liabilities
("interest-rate sensitive gap")
- -----------------------------------------------------------------------------------------------------------------------------------
One-year interest-rate sensitive assets/ 94.14%
Interest-rate sensitive liabilities
One-year interest-rate sensitive gap as a
Percent of total assets (3.38)%
(1) Includes commercial mortgage, construction, and residential mortgage loans.
(2) Loan balances exclude deferred fees and costs.
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 we adjust our interest-sensitivity position throughout the year.
To provide a more accurate position of our one-year gap, 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 our 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.
-37-
REVERSE MORTGAGES
We hold an investment in reverse mortgages of $2.0 million at December
31, 2007 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.
We account for our 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, 2007, we earned $2.0 million
in interest income on reverse mortgages as compared to $684,000 in 2006 and
$678,000 in 2005.
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. Our 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
$106,000. Conversely, if the long-term appreciation rate was decreased to -0.5%,
the resulting impact on income would have been $(89,000).
We also hold $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 we previously owned. At the time of the securitization, the
third-party 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. Therefore, 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, we can exercise our 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 and is carried in our
financial statements at cost.
During 2006, we formed a new reverse mortgage initiative. While our
activity during the past two years has been limited to acting as a correspondent
for these loans, it is our intention to originate and underwrite our own reverse
mortgages in the future. We expect to sell most of these loans and do not intend
to hold them in our portfolio. These reverse mortgages are government approved
and insured.
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming
real estate investments and assets acquired through foreclosure, can negatively
affect our results of operations. Nonaccruing loans are those on which the
accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in the opinion of management, collection is doubtful, or when
principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest. Past due loans are defined as
loans contractually past due 90 days or more as to principal or interest
payments but which remain in accrual status because they are considered well
secured and in the process of collection.
-38-
The following table sets forth our nonperforming assets and past due
loans at the dates indicated:
December 31, 2007 2006 2005 2004 2003
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Nonaccruing loans:
Commercial $17,187 $ 1,282 $ 925 $ 1,595 $ 1,549
Consumer 835 557 155 291 240
Commercial mortgages 3,873 500 727 909 941
Residential mortgages 2,417 1,493 1,567 1,601 2,513
Construction 6,794 - 36 - -
Total nonaccruing loans 31,106 3,832 3,410 4,396 5,243
Assets acquired through foreclosure 703 388 59 217 301
Total nonperforming assets $31,809 $ 4,220 $ 3,469 $ 4,613 $ 5,544
Past due loans:
Residential mortgages $ 388 $ 219 $ 327 $ 703 $ 915
Commercial and commercial mortgages 14 3 -- -- 129
Consumer 173 29 59 104 148
Total past due loans $ 575 $ 251 $ 386 $ 807 $ 1,192
Ratio of nonaccruing loans to total loans (1) 1.38% 0.19% 0.19% 0.28% 0.40%
Ratio of allowance for loan losses to gross loans (1) 1.12% 1.34% 1.41% 1.56% 1.69%
Ratio of nonperforming assets to total assets 0.99% 0.14% 0.12% 0.18% 0.25%
Ratio of loan loss allowance to nonaccruing loans (2) 78.80% 705.32% 709.47% 524.05% 421.91%
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
Total nonperforming assets increased $27.6 million during 2007. As a result,
nonperforming assets as a percentage of total assets increased from 0.14% at
December 31, 2006 to 0.99% at December 31, 2007. This increase results primarily
from two large lending relationships being placed on nonaccrual during 2007. The
first is a $10.3 million lending relationship consisting of $7.0 million in
construction loans and $3.3 million in commercial mortgages. We charged-off $1.4
million against this relationship during the fourth quarter of 2007. The second
is an asset-based loan for $18.7 million that was subsequently sold in March
2008 at a loss. The amount of this loss has been charged against this loan as of
December 31, 2007. Based on the sale, we charged-off $3.7 million from our
allowance for loan losses at December 31, 2007. The relationship also included
unused letters of credit amounting to $475,000. We increased our contingency
reserve for losses on the letters of credit associated with this relationship by
$184,000 at December 31, 2007.
The following table provides an analysis of the change in the balance
of nonperforming assets during the last three years:
Year Ended December 31, 2007 2006 2005
- --------------------------------------------------------------------------------
(In Thousands)
Beginning balance $ 4,220 $ 3,469 $ 4,613
Additions 37,017 5,697 5,062
Collections (3,029) (3,916) (4,467)
Transfers to accrual (295) (453) (398)
Charge-offs/write-downs (6,104) (577) (1,341)
- --------------------------------------------------------------------------------
Ending balance $ 31,809 $ 4,220 $ 3,469
- --------------------------------------------------------------------------------
Allowance for Loan Losses. We maintain allowances for credit losses and charge
losses to these allowances when such losses are realized. The determination of
the allowance for loan losses requires significant judgement reflecting
-39-
management's best estimate of probable loan losses related to specifically
identified loans as well as probable loan losses in the remaining loan
portfolio. Our evaluation is based upon a continuing review of these portfolios.
We established our 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 estimated loss factors to outstanding loans based on
the internal risk grade of loans. For low risk commercial and commercial real
estate loans the portfolio is pooled, based on internal risk grade, and
estimates are based on a ten-year net charge-off history. Higher risk and
criticized loans have loss factors that are derived from an analysis of both the
probability of default and the probability of loss should default occur. Loss
adjustment factors are applied based on criteria discussed below. As a result,
changes in risk grades of both performing and nonperforming loans affect the
amount of the formula allowance.
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
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 our evaluation of
various current conditions including those listed below:
o General economic and business conditions affecting our 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.
Our 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 our allowance for such losses. We also give
consideration to the results of these regulatory agency examinations.
During 2007, the provision for loan losses were affected by: (1) our
continued significant loan growth; (2) migration of certain loans toward lower
credit grades as we continue to assess our exposure in the current lending
environment; partially offset by (3) a lower level of estimated losses resulting
from an improvement in the methodology for estimating loan losses using
historical data adjusted for current conditions and trends. The improvement in
this methodology resulted in a reduction of approximately $6.8 million, net,
from the estimate previously used.
-40-
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated:
Year Ended December 31, 2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Beginning balance $27,384 $25,381 $24,222 $22,386 $21,452
Provision for loan losses 5,021 2,738 2,582 3,217 2,550
Charge-offs:
Residential real estate 41 75 90 222 329
Commercial real estate (1) 1,398 - 104 148 -
Commercial 4,379 470 1,048 656 827
Overdrafts (2) 1,441 607 - - -
Consumer 790 483 631 817 860
----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 8,049 1,635 1,873 1,843 2,016
----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Residential real estate 11 14 59 32 -
Commercial real estate (1) 127 170 42 - 202
Commercial 173 343 209 335 79
Overdrafts (2) 446 217 - - -
Consumer 139 156 140 95 119
----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 896 900 450 462 400
----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 7,153 735 1,423 1,381 1,616
----------------------------------------------------------------------------------------------------------------------------------
Ending balance $25,252 $27,384 $25,381 $24,222 $22,386
----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average gross loans
outstanding, net of unearned income 0.34% 0.04% 0.09% 0.10% 0.13%
----------------------------------------------------------------------------------------------------------------------------------
(1) Includes commercial mortgage and construction loans.
(2) Prior to April 2006, overdraft charge-offs/recoveries were recognized in
other operating expense.
The allowance for loan 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 a
guarantee of where future losses may occur. While we have allocated the
allowance for loan losses by portfolio type in the following table, the entire
reserve is available for any loan portfolio to utilize. The allocation of the
allowance for loan losses by portfolio type at the end of each of the last five
fiscal years, and the percentage of outstanding loans in each category to total
gross outstanding, at such dates follow:
December 31, 2007 2006 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Residential real estate $ 1,304 19.8% $ 1,645 23.1% $ 1,632 25.4% $ 1,468 28.1% $ 2,736 34.6%
Commercial real estate 12,151 32.9% 11,343 32.5% 10,978 32.7% 9,211 34.6% 8,338 29.3%
Commercial 8,088 35.0% 11,019 31.5% 9,471 28.3% 10,456 23.7% 8,368 22.0%
Consumer 3,709 12.3% 3,377 12.9% 3,300 13.6% 3,087 13.6% 2,944 14.1%
----------------------------------------------------------------------------------------------------------------------------------
Total $25,252 100.0% $27,384 100.0% $25,381 100.0% $24,222 100.0% $22,386 100.0%
----------------------------------------------------------------------------------------------------------------------------------
LIQUIDITY
We manage our liquidity risk and funding needs through our treasury
function and our Asset/Liability Committee. Historically, we have had success in
growing our loan portfolio. For example, during the year ended December 31,
2007, net loan growth resulted in the use of $221.2 million in cash. The loan
growth was primarily the result of our continued success increasing corporate
and small business lending. We expect this trend to continue. While our
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.
-41-
As a financial institution, we have ready access to several sources of
funding. Among these are:
o Deposit growth,
o Borrowing from the FHLB,
o The brokered deposit market,
o Other borrowings such as repurchase agreements,
o Cash flow from securities, loan sales and repayments, and
o Our ability to generate positive cash flows from our operations.
Our current branch expansion and renovation program is focused on
expanding our retail footprint in Delaware and attracting new customers to
provide additional deposit growth. Customer deposit growth was strong, equaling
$135.5 million, or 10%, during 2007.
Our 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, 2007, $32.7
million in cash was provided by operating activities.
We have a policy that separately addresses liquidity, and management
monitors our adherence to policy limits. As part of the liquidity management
process, we also monitor our available wholesale funding capacity. At December
31, 2007, we had $294.6 million in funding capacity at the Federal Home Loan
Bank of Pittsburgh and $551.2 million in estimated funding capacity in brokered
deposits. Liquidity risk management is a primary area of focus for us and is
subject to examination by the OTS.
We have not used and have no intention of using any significant off
balance sheet financing arrangement for liquidity management purposes. Our
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, we have not
had and have no intention to have any significant transactions, arrangements or
other relationships with any unconsolidated, limited purpose entities that could
materially affect our 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 us 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 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, 2007, we are classified as well-capitalized, the
highest regulatory defined level, and in compliance with all regulatory capital
requirements. Additional information concerning our regulatory capital
compliance is included in Note 10 to the Consolidated Financial Statements.
Since 1996, the Board of Directors has approved several stock
repurchase programs to acquire common stock outstanding. As part of these
programs, we acquired approximately 564,100 shares in 2007 and 103,400 shares in
2006. At December 31, 2007, we held 9.5 million shares of our common stock as
treasury shares. We intend to continue repurchasing
-42-
shares depending on stock price and alternative uses of capital. At December 31,
2007, we had 579,500 shares remaining under our current share repurchase
authorization.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements that currently have, or are
reasonably likely to have, a material future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources. Additional information
concerning our off balance sheet arrangements is included in Note 14 to the
Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
At December 31, 2007, we had contractual obligations relating
to operating leases, long-term debt, data processing and credit obligations.
These obligations are summarized below. See Notes 7, 9 and 14 to the
Consolidated Financial Statements for further discussion.
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Operating lease obligations $ 44,137 $ 4,562 $ 8,427 $ 7,417 $23,731
Long-term debt obligations 965,291 577,900 278,079 42,301 67,011
Data processing contracts 8,352 3,848 4,493 11 -
Credit obligations 586,252 586,252 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,604,032 $1,172,562 $290,999 $49,729 $90,742
- ------------------------------------------------------------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
Our 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 our operations. Unlike most industrial companies, nearly all
of our assets and liabilities are monetary. As a result, interest rates have a
greater impact on our 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
In February 2006, Congress passed the Federal Deposit Insurance Reform
Act of 2005 (FDIRA). This legislation merged the Bank Insurance Fund and the
Savings Association Insurance Fund into one fund, increased insurance coverage
for retirement accounts to $250,000, adjusted the maximum deposit insurance for
inflation after March 31, 2010 and gave the FDIC greater flexibility in setting
insurance assessments. As part of the FDIRA-2005, the Bank had been granted a
one-time credit of $1.0 million for utilization against future FDIC insurance
premiums. During 2007, we used $709,000 of this credit to offset premiums.
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. We regularly evaluate these estimates and assumptions including
those related to the
-43-
allowance for loan losses, contingencies (including indemnifications), and
deferred taxes. We base our estimates on historical experience and various other
factors and assumptions that are believed to be reasonable under the
circumstances. These form the basis for making judgements on the carrying value
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following are critical accounting policies that involve more
significant judgements and estimates:
Allowance for Loan Losses
We maintain allowances for credit losses and charge losses to these allowances
when realized. The determination of the allowance for loan losses requires
significant judgement reflecting our best estimate of probable loan losses
related to specifically identified loans as well as those in the remaining loan
portfolio. Our 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, we are subject to legal actions,
which involve claims for monetary relief. Based upon information presently
available to us and our counsel, it is our opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on our results of operations.
We maintain a loss contingency for standby letters of credit and charge
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 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
We account for income taxes in accordance with 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. We have assessed our 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 September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. Additionally, it
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. We do not believe the adoption of SFAS 157 will have a
material impact on our Consolidated Financial Statements in 2008.
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. This will become
effective for us on January 1, 2008. We do not believe the adoption of SFAS 159
will have a material impact on our Consolidated Financial Statements in 2008.
-44-
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141(R)). This Statement changes the requirements for an
acquirer's recognition and measurement of the assets acquired and the
liabilities assumed in a business combination. SFAS 141(R) is effective for
annual periods beginning after December 15, 2008 and should be applied
prospectively for all business combinations entered into after the date of
adoption. We have not yet determined whether there will be a material impact on
our Consolidated Financial Statements upon adoption.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements -- an amendment of ARB No. 51
(SFAS 160). This Statement requires (i) that noncontrolling (minority) interests
be reported as a component of shareholders' equity, (ii) that net income
attributable to the parent and to the noncontrolling interest be separately
identified in the consolidated statement of operations, (iii) that changes in a
parent's ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, (iv) that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be initially measured
at fair value, and (v) that sufficient disclosures are provided that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 is effective for annual periods beginning
after December 15, 2008 and should be applied prospectively. However, the
presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented. We do not believe the adoption of
SFAS 160 will have a material impact on our Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Market risk is the risk of loss from adverse changes in market prices and
rates. Our market risk arises primarily from interest rate risk inherent in our
lending, investing and funding activities. To that end, we actively monitor and
manage our 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 our net interest margin and net portfolio
value at the specified levels at December 31, 2007 and 2006, calculated in
compliance with Thrift Bulletin No. 13A:
December 31, 2007 2006
------------------------------------------------------- -----------------------------------
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Margin (1) Value (2) Margin (1) Value (2)
Points)
---------------------------------------------------------------------------------------------
+300 +2% 9.70% -1% 7.89%
+200 +2% 10.27% -1% 8.46%
+100 +1% 10.72% 0% 8.99%
0 0% 11.01% 0% 9.66%
-100 -1% 11.04% +2% 9.03%
-200 -2% 11.10% +1% 9.04%
(3)
-300 -4% 11.25% -1% 8.91%
(3)
(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) Our net portfolio value 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, 2007 and 2006 given the
historically low absolute level of interest rates at these dates.
Our primary objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on net interest income and capital,
while maximizing the yield/cost spread on our asset/liability structure. We rely
primarily on our asset/liability structure to control interest rate risk.
We also engage 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.
-45-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DISCLOSURES
- -----------------------------------------------------------
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 Company) as of December 31, 2007 and
2006, 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, 2007. These consolidated financial statements are the
responsibility of the Company'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, 2007 and 2006, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2007, 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 Company's internal control over
financial reporting as of December 31, 2007, 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 17,
2008 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted FASB Statement No. 123(revised), Share-Based Payment, a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation, effective January 1,
2006, and FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement 109, effective January 1, 2007.
/s/ KPMG LLP
- --------------------------
Philadelphia, Pennsylvania
March 17, 2008
-46-
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2007 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans $159,512 $143,629 $105,639
Interest on mortgage-backed securities 24,237 28,444 25,687
Interest and dividends on investment securities 1,353 1,884 2,580
Interest on investments in reverse mortgages 2,007 684 678
Other interest income 2,368 2,536 1,438
- -----------------------------------------------------------------------------------------------------------------------------------
189,477 177,177 136,022
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 57,311 42,707 21,690
Interest on Federal Home Loan Bank advances 38,561 45,878 30,659
Interest on federal funds purchased and securities
sold under agreements to repurchase 3,153 3,790 4,089
Interest on trust preferred borrowings 4,753 5,053 5,292
Interest on other borrowings 3,690 1,850 650
- -----------------------------------------------------------------------------------------------------------------------------------
107,468 99,278 62,380
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 82,009 77,899 73,642
Provision for loan losses 5,021 2,738 2,582
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 76,988 75,161 71,060
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Credit/debit card and ATM income 19,750 18,835 15,049
Deposit service charges 15,419 12,250 10,091
Investment advisory income 2,465 2,399 2,519
Loan fee income 2,384 1,824 1,999
Bank-owned life insurance income 2,269 3,976 2,003
Mortgage banking activities, net 217 225 391
Securities gains (losses) 82 (1,981) (605)
Non-recurring gains, net 1,979 - -
Other income 3,601 2,777 3,206
- -----------------------------------------------------------------------------------------------------------------------------------
48,166 40,305 34,653
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries, benefits and other compensation 43,662 39,369 35,172
Occupancy expense 8,280 5,508 5,168
Equipment expense 5,616 4,393 3,879
Data processing and operations expense 4,062 3,511 3,465
Marketing expense 3,911 2,713 2,745
Professional fees 2,662 2,070 2,416
Other operating expenses 13,838 11,750 10,032
- -----------------------------------------------------------------------------------------------------------------------------------
82,031 69,314 62,877
- -----------------------------------------------------------------------------------------------------------------------------------
Income before minority interest and taxes 43,123 46,152 42,836
Less minority interest - 51 133
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 43,123 46,101 42,703
Income tax provision 13,474 15,660 14,847
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $29,649 $30,441 $27,856
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $4.69 $4.59 $4.10
Diluted $4.55 $4.41 $3.89
The accompanying notes are an integral part of these Financial Statements.
-47-
CONSOLIDATED STATEMENT OF CONDITION
Year Ended December 31, 2007 2006
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Assets
Cash and due from banks $ 83,936 $ 73,989
Cash in non-owned ATMs 182,523 166,092
Federal funds sold - 1,500
Interest-bearing deposits in other banks 1,078 243
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 267,537 241,824
Investment securities held-to-maturity (fair value: 2007-$1,498; 2006-$4,252) 1,516 4,219
Investment securities available-for-sale including reverse mortgages 26,756 50,272
Mortgage-backed securities-available-for-sale 484,428 504,347
Mortgage-backed securities-trading 12,364 12,364
Loans held-for-sale 2,404 919
Loans, net of allowance for loan losses of $25,252 at December 31, 2007
and $27,384 at December 31, 2006 2,231,576 2,018,822
Bank-owned life insurance 57,551 55,282
Stock in Federal Home Loan Bank of Pittsburgh, at cost 45,537 39,872
Assets acquired through foreclosure 703 388
Premises and equipment 34,851 30,218
Accrued interest receivable and other assets 34,965 38,869
- --------------------------------------------------------------------------------------------------------------
Total assets $ 3,200,188 $ 2,997,396
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand $ 290,424 $ 276,338
Interest-bearing demand 171,363 146,719
Money market 303,931 246,645
Savings 196,571 226,853
Time 366,717 326,009
Jumbo certificates of deposit - customer 150,191 121,142
- --------------------------------------------------------------------------------------------------------------
Total customer deposits 1,479,197 1,343,706
Other jumbo certificates of deposit 98,758 111,388
Brokered deposits 249,206 301,254
- --------------------------------------------------------------------------------------------------------------
Total deposits 1,827,161 1,756,348
Federal funds purchased and securities sold under agreements to repurchase 75,000 73,400
Federal Home Loan Bank advances 898,280 784,028
Trust preferred borrowings 67,011 67,011
Other borrowed funds 94,869 78,240
Accrued interest payable and other liabilities 26,537 26,256
- --------------------------------------------------------------------------------------------------------------
Total liabilities 2,988,858 2,785,283
- --------------------------------------------------------------------------------------------------------------
Minority Interest - 54
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 15,673,865
at December 31, 2007 and 15,584,580 at December 31, 2006 157 156
Capital in excess of par value 83,077 81,580
Accumulated other comprehensive loss (3,861) (8,573)
Retained earnings 376,682 347,448
Treasury stock at cost, 9,507,069 shares at December 31, 2007 and 8,942,969
shares at December 31, 2006 (244,725) (208,552)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 211,330 212,059
- --------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest and stockholders' equity $ 3,200,188 $ 2,997,396
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Financial Statements.
-48-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital in Other Total
Common Excess of Comprehensive Retained Treasury Stockholders'
Stock Par Value Loss Earnings Stock Equity
(In Thousands)
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 (2) - 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 - - (561) - - (561)
Statement No. 158, net of tax $(344)
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
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - 29,649 - 29,649
Other comprehensive income (1) - - 4,712 - - 4,712
----------------
Total comprehensive income 34,361
----------------
Cumulative effect of change in accounting - - - 1,988 - 1,988
principle related to the adoption of
FIN 48
Cash dividend, $0.38 per share - - - (2,403) - (2,403)
Issuance of common stock,
including proceeds from exercise of
common stock options 1 3,704 - - - 3,705
Treasury stock at cost, 564,100 shares - - - - (36,173) (36,173)
Issuance of restricted stock - 230 - - - 230
Tax liability from exercises of
common stock options - (2,437) - - - (2,437)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2007 $157 $83,077 $(3,861) $376,682 $(244,725) $211,330
- -----------------------------------------------------------------------------------------------------------------------------------
-49-
(1) Other Comprehensive Income: 2007 2006 2005
-------------------------------------------------------------------------------------------------------------------------------
Net unrealized holding gains (losses) on securities available-for-sale arising $4,657 $ 426 $(7,407)
during the
period, net of taxes (2007-$2,855; 2006 - $261; 2005 - $(4,540))
Actuarial gain reclassified to periodic cost,
net of income taxes of $42 68 - -
Transition obligation reclassified to periodic cost,
net of income taxes of $23 38 - -
Net unrealized holding gains arising during the period on derivatives
net of taxes (2007 - $0; 2006 - $163; 2005 - $241) - 302 449
Reclassification for losses (gains) included in income, net of taxes (2007-$(31);
2006 - $753; 2005 - $230) (51) 1,228 375
-------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) $4,712 $1,956 $(6,583)
-------------------------------------------------------------------------------------------------------------------------------
(2) Net of reissuance of 7,200 shares.
The accompanying notes are an integral part of these Financial Statements.
-50-
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, 2007 2006 2005
- -----------------------------------------------------------------------------------------------------------------------
(In Thousands)
Operating activities:
Net income $ 29,649 $ 30,441 $ 27,856
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Provision for loan losses 5,021 2,738 2,582
Depreciation, accretion and amortization 4,930 4,507 5,440
Decrease (increase) in accrued interest receivable and other assets 1,142 (3,066) (1,952)
Origination of loans held-for-sale (27,160) (23,914) (37,222)
Proceeds from sales of loans held-for-sale 25,362 21,406 38,722
Gain on mortgage banking activity (217) (224) (84)
Gain on sale of credit card portfolio (882) - -
Gain on sale of former headquarters building (1,093) - -
(Gain) loss on sale of investments (82) 1,981 605
Stock-based compensation expense, net of tax benefit recognized 1,222 1,153 -
Excess tax liability (benefit) from share-based payment arrangements 2,437 (2,011) -
Minority interest in net income - 51 133
(Decrease) increase in accrued interest payable and other liabilities (3,328) 4,380 6,031
(Gain) loss on sale of assets acquired through foreclosure (20) 41 (137)
Increase in value of bank-owned life insurance (2,269) (3,976) (2,003)
Increase in capitalized interest, net (2,007) (1,097) (678)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,705 32,410 39,293
- -----------------------------------------------------------------------------------------------------------------------
Investing activities:
Maturities of investment securities 41,893 13,569 6,990
Sales of investment securities available-for-sale - 10,991 60,454
Purchases of investment securities available-for-sale (13,986) (20,718) (26,744)
Sales of mortgage-backed securities available-for-sale 2,690 49,412 -
Repayments of mortgage-backed securities held-to-maturity - - 4
Repayments of mortgage-backed securities available-for-sale 77,328 102,255 112,395
Purchases of mortgage-backed securities available-for-sale (52,507) (47,721) (220,816)
Repayments on reverse mortgages 3,532 1,347 177
Disbursements for reverse mortgages (2,964) (476) (393)
Purchase of Cypress Capital Management, LLC (240) (466) (452)
Purchase of ATM vault cash business (440) - -
Sales of loans 909 11,379 688
Purchases of loans (2,656) (9,600) (15,831)
Payment of bank-owned life insurance - 2,887 -
Net increase in loans (221,179) (246,432) (228,758)
Net (increase) decrease in stock of Federal Home Loan Bank of Pittsburgh (5,665) 6,421 (2,347)
Sales of assets acquired through foreclosure, net 120 80 683
Purchase of land - - (925)
Sale of real estate held-for-investment - - 5,296
Sale of credit card portfolio 6,295 - -
Sale of former headquarters building 2,436 - -
Deferred gain on sale of partnership interest 1,335 - -
Investment in real estate partnership 1,172 24 (1,196)
Premises and equipment, net (9,181) (10,750) (4,202)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (171,108) (137,798) (314,977)
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
(Continued on next page)
-51-
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Year Ended December 31, 2007 2006 2005
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands)
Financing activities:
Net increase in demand and saving deposits $ 82,363 $ 56,803 $ 125,297
Net increase in time deposits 4,256 294,365 87,875
Net increase (decrease) in securities sold
under agreement to repurchase 1,600 (9,750) (48,955)
Receipts of FHLB advances 31,427,417 8,796,661 7,789,201
Repayments of FHLB advances (31,313,165) (9,021,354) (7,617,543)
Redemption of Trust Preferred Securities - - (51,547)
Issuance of Pooled Floating Rate Capital Securities - - 67,011
Dividends paid on common stock (2,404) (2,058) (1,845)
Issuance of common stock and exercise of common stock options 2,713 3,355 6,348
Excess tax (liability) benefit from share-based payment arrangements (2,437) 2,011 -
Purchase of treasury stock, net of re-issuance (36,173) (6,603) (40,104)
Decrease in minority interest (54) (203) (166)
------------ ----------- -----------
Net cash provided by financing activities 164,116 113,227 315,572
------------ ----------- -----------
Increase in cash and cash equivalents from continuing operations 25,713 7,839 39,888
Net cash provided by operating activities of discontinued operations - 14 1,141
Net cash provided by (used for) investing activities of
discontinued operations - 20 (87)
Cash and cash equivalents at beginning of period 241,824 233,951 193,009
------------ ----------- -----------
Cash and cash equivalents at end of period $ 267,537 $ 241,824 233,951
------------ ----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid in interest during the year $ 105,969 $ 98,142 $ 58,080
Cash paid for income taxes, net 18,056 13,597 10,151
Cash refunded for taxes of discontinued operations, net - - (45)
Loans transferred to assets acquired through foreclosure 415 450 388
Net change in other comprehensive income 4,712 1,395 (6,583)
Transfer of loans held for sale to loans 333 2,129 1,378
Transfer of building to real estate held-for-investment - - 1,878
The accompanying notes are an integral part of these Financial Statements.
-52-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation ("the Company," "our Company," "we," "our"
or "us") is a thrift holding company organized under the laws of the State of
Delaware. Our principal wholly-owned subsidiary, Wilmington Savings Fund
Society, FSB ("WSFS Bank" or the "Bank"), is a federal savings bank organized
under the laws of the United States which, at December 31, 2007, serves
customers from its main office, 29 retail banking offices, loan production
offices and operations centers located in Delaware, southeastern Pennsylvania
and Virginia.
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 for impaired loans and the remainder of the loan portfolios,
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
wholly-owned subsidiary, Cypress Capital Management, LLC (Cypress), WSFS Bank
and its wholly-owned subsidiary, WSFS Investment Group, Inc. WSFS Investment
Group, Inc. markets various third-party insurance and securities products to
Bank customers through WSFS' retail banking system. Montchanin was formed to
provide asset management products and services. In January 2005, 2006 and 2007,
Montchanin increased its ownership in Cypress, a Wilmington-based investment
advisory firm servicing high net-worth individuals and institutions, to 80%, 90%
and 100%, respectively.
WSFS Capital Trust III ("the Trust") is an unconsolidated affiliate of
ours, 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.
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, cash in non-owned ATMs, 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:
-53-
o Debt securities with the positive intention to hold to maturity are
classified as "held-to-maturity" and reported at amortized cost.
o Debt and equity securities purchased with the intention of selling them
in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in
earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity.
Debt and equity securities include mortgage-backed securities,
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 is
required to use its judgement 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
We account for our investment in reverse mortgages in accordance with
the instructions provided by the staff of the Securities and Exchange Commission
(SEC) 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, we 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 our commercial,
commercial mortgage, commercial construction, residential mortgages and consumer
portfolios. Our policy for recognition of interest income on impaired loans is
the same as for nonaccrual loans discussed below.
-54-
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
contractually 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 our previously established
loan-to-value policies.
Allowances for Loan Losses
We maintain allowances for credit losses and charge 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 the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans
are calculated by applying estimated loss factors to outstanding loans based on
the internal risk grade of loans. For low risk commercial and commercial real
estate loans the portfolio is pooled, based on internal risk grade, and
estimates are based on a ten-year net charge-off history. Higher risk and
criticized loans have loss factors that are derived from an analysis of both the
probability of default and the probability of loss should default occur. Loss
adjustment factors are applied based on criteria discussed below. As a result,
changes in risk grades of both performing and nonperforming loans affect the
amount of the formula allowance.
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-off 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,
-55-
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.
Our 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 our allowance for such losses. We also
give consideration to the results of these regulatory agency examinations.
During 2007, the provision for loan losses was affected by changes in
estimates used in the calculation. These changes resulted in a lower level of
estimated losses resulting from an improvement in the methodology for estimating
loan losses using historical data adjusted for current conditions and trends.
Management believes this analysis better estimates losses currently in our loan
portfolio. These changes resulted in a reduction to the provision for loan
losses of $6.8 million or $0.68 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.
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
effective 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.
Federal Funds Purchased and Securities Sold Under Agreements to
Repurchase
We enter 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 are assets.
-56-
Loss Contingency for Standby Letters of Credit
We maintain a loss contingency for standby letters of credit and charge
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.
In July 2006, the Financial Accounting Standards Board ("FASB") issued
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 tax positions taken or expected to be taken in a tax return.
Benefits from tax positions are 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 50% likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold are 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 are 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 became effective for
us on January 1, 2007, and resulted in a $2.0 million increase to our retained
earnings on that date.
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
2007 2006 2005
---- ---- ----
(In Thousands, Except Per Share Data)
Numerator:
Net income................................................................ $ 29,649 $ 30,441 $ 27,856
========= ========= =========
Denominator:
Denominator for basic earnings per share - weighted average shares ........ 6,316 6,634 6,795
Effect of dilutive employee stock options.................................. 194 270 373
----------------------------------
Denominator for diluted earnings per share -.adjusted weighted average
shares and assumed exercise.............................................. 6,510 6,904 7,168
========== =========== ===========
Earnings per share:
Basic:
Net income................................................................ $ 4.69 $ 4.59 $ 4.10
========== ========== ===========
Diluted:
Net income................................................................ $ 4.55 $ 4.41 $ 3.89
========== ========== ===========
Outstanding common stock equivalents having no dilutive effect............ 194 197 173
-57-
Stock-Based Compensation
Stock-based compensation is accounted for in accordance with Statement
of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). We adopted SFAS 123R beginning January 1, 2006 using the
Modified Prospective Application Method. The impact of stock-based compensation
for 2007 was $1.2 million, or $0.16 per share, to salaries, benefits and other
compensation, compared to $1.5 million, or $0.19 per share in 2006.
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 SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
2005
----
(In Thousands, Except Per Share Data)
Income from continuing operations, as reported......................................... $27,856
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects.... (972)
-------
Pro forma income from continuing operations............................................. $26,884
=======
Earnings per share:
Basic:
Income from continuing operations............................................ $ 4.10
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects.. (0.14)
-------
Pro forma income from continuing operations................................... $ 3.96
=======
Diluted:
Income from continuing operations............................................ $ 3.89
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects.. (0.14)
-------
Pro forma income from continuing operations................................... $ 3.75
=======
2. INVESTMENT SECURITIES
The following tables detail the amortized cost and the estimated fair
value of the Company's investment securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Available-for-sale securities:
December 31, 2007:
Reverse mortgages (1).............. $ 2,037 $ - $ - $ 2,037
U.S. Government and agencies....... 20,477 99 - 20,576
State and political subdivisions... 4,115 28 - 4,143
------- ------- ------- -------
$26,629 $ 127 $ - $26,756
======= ======= ======= =======
-58-
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
======= ======= ======= =======
Held-to-maturity:
December 31, 2007:
State and political subdivisions... $ 1,516 $ 24 $ 42 $ 1,498
------- ------- ------- -------
$ 1,516 $ 24 $ 42 $ 1,498
======= ======= ======= =======
December 31, 2006:
State and political subdivisions... $ 4,219 $ 75 $ 42 $ 4,252
------- ------- ------- -------
$ 4,219 $ 75 $ 42 $ 4,252
======= ======= ======= =======
(1) See Note 4 of the Consolidated Financial Statements for a further
discussion of Reverse Mortgages.
Securities with book values aggregating $21.0 million at December 31,
2007 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
$341,000 and $560,000 at December 31, 2007 and 2006, respectively.
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 2007 were as follows:
Held-to-Maturity Available-for-Sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
(In Thousands)
Within one year (1)..................... $ - $ - $16,015 $16,073
After one year but within five years.... 875 899 8,514 8,569
After five years but within ten years... - - 2,100 2,114
After ten years......................... 641 599 - -
------- ------- ------- -------
$ 1,516 $ 1,498 $26,629 $26,756
======= ======= ======= =======
(1) Reverse mortgages do not have contractual maturities. We have included
reverse mortgages in maturities within one year.
During 2007, there were no sales of investment securities classified as
available-for-sale. Municipal bonds totaling $1.1 million were called by the
issuers. Proceeds from the sale of investments classified as available-for-sale
during 2006 and 2005 were $11.0 million and $60.7 million, respectively. There
was a net loss of $41,000 and $609,000 realized on sales in 2006 and 2005,
respectively. 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 2007, 2006 and 2005.
-59-
At December 31, 2007, we owned investment securities totaling $683,000
where the amortized cost basis exceeded fair value. Total unrealized losses on
those securities were $42,000 at December 31, 2007. This temporary impairment is
the result of changes in market interest rates since the purchase of the
securities. Securities amounting to $433,000 have been impaired for 12 months or
longer. We have determined that these securities are not other than temporarily
impaired. The following table includes 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 ............ $ - $ - $433 $ 42 $433 $ 42
Available-for-sale
State and political subdivisions ............ 250 - - - 250 -
---- ----- ---- ---- ---- ----
Total temporarily impaired investments.... $250 $ - $433 $ 42 $683 $ 42
==== ===== ==== ==== ==== ====
3. MORTGAGE-BACKED SECURITIES
The following tables detail the amortized cost and the estimated fair
value of the Company's mortgage-backed securities:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Available-for-sale securities:
December 31, 2007:
Collateralized mortgage obligations ... $407,113 $ 856 $ 4,440 $403,529
FNMA ................................. 35,654 - 1,009 34,645
FHLMC ................................ 31,357 34 937 30,454
GNMA ................................. 15,923 - 123 15,800
-------- -------- -------- --------
$490,047 $ 890 $ 6,509 $484,428
======== ======== ======== ========
Weighted average yield .......... 4.85%
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%
-60-
Trading securities:
December 31, 2007:
Collateralized mortgage obligations.... $ 12,364 $ - $ - $ 12,364
--------- ----------- ---------- ---------
$ 12,364 $ - $ - $ 12,364
========= =========== ========== =========
Weighted average yield................. 7.79%
December 31, 2006:
Collateralized mortgage obligations.... $ 12,364 $ - $ - $ 12,364
--------- ----------- ---------- ---------
$ 12,364 $ - $ - $ 12,364
========= =========== ========== =========
Weighted average yield................. 8.35%
The portfolio of available-for-sale mortgage-backed securities consists
entirely of AAA-rated, currently cash flowing securities, backed by conventional
10 to 30-year mortgages. The weighted average duration of the mortgage-backed
securities was 2.8 years at December 31, 2007.
At December 31, 2007, mortgage-backed securities with par values
aggregating $464.9 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 at both December 31,
2007 and 2006. 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, 2007 and 2006 was
$218.8 million and $0, respectively. Proceeds from the sale of mortgage-backed
securities available-for-sale were $2.7 million in 2007, resulting in a gain of
$82,000. In 2006, proceeds from the sale of mortgage-backed securities
available-for-sale were $49.6 million, resulting in a loss of $1.9 million. The
cost basis of all mortgage-backed sales is based on the specific identification
method.
We own $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 a previously
owned reverse mortgage portfolio, while an additional $1.0 million was
purchased at par at the time of the securitization of these assets by a third
party 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 4 to the Consolidated Financial Statements.
Based on 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 our 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 our intent to sell these securities if and when an active
market develops. Since there is no active market for these securities, we have
used the guidance under SFAS 115 to provide a reasonable estimate of fair
value. We estimated the value of these securities as of December 31, 2007 based
on the pricing of BBB+ securities that have an active market as well as a
fundamental analysis of the actual cash flows of the underlying securities. We
also obtained an estimate, from an independent securities dealer, of the value
of these securities.
At December 31, 2007, we owned mortgage-backed securities totaling
$374.5 million where the amortized cost basis exceeded fair value. Total
unrealized losses on those securities were $6.5 million at December 31, 2007.
This temporary impairment is the result of changes in market interest rates
since the purchase of the securities. Most of these securities have been
impaired for twelve months or longer. We have determined that these securities
are not "other than temporarily" impaired. The following table lists the
unrealized losses aggregated by category:
-61-
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................................... $46,322 $ 479 $254,213 $3,962 $300,535 $4,441
FNMA.................................. - - 34,645 1,009 34,645 1,009
FHLMC................................. - - 23,522 937 23,522 937
GNMA.................................. - - 15,800 123 15,800 123
------- ------- -------- ------ -------- ------
Total temporarily impaired MBS...... $46,322 $ 479 $328,180 $6,031 $374,502 $6,510
======= ======= ======== ====== ======== ======
4. REVERSE MORTGAGES AND RELATED ASSETS
We hold an investment in reverse mortgages of $2.0 million at December
31, 2007 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.
We account for our 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, 2007, the Company earned $2.0 million in
interest income on reverse mortgages as compared to $684,000 in 2006 and
$678,000 in 2005.
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 depreciation 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
$106,000. Conversely, if the long-term appreciation rate was decreased to -0.5%,
the resulting impact on income would have been $(89,000).
We also hold $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 we previously held. 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
long-term assets. Hence, any cash flow that might inure to the holder of the
Class "O" Certificates is not expected to occur until 2014. 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
-62-
excluded from the accounting treatment promulgated under SFAS 115. As a result,
the option is carried at cost (which is zero). The amount by which the option is
considered in the money, is included in Note 15 to the Consolidated Financial
Statements, as required by SFAS 107, Disclosures about Fair Value of Financial
Instruments.
5. LOANS
The following table details our loan portfolio:
December 31, 2007 2006
-------------------------------------------------------------------------------
(In Thousands) Real estate mortgage loans:
Residential (1-4 family) $ 447,435 473,946
Other 489,658 446,810
Real estate construction loans 300,130 260,733
Commercial loans 791,473 649,832
Consumer loans 278,272 263,478
-------------------------------------------------------------------------------
2,306,968 2,094,799
-------------------------------------------------------------------------------
Less:
Loans in process 50,855 49,437
Deferred costs, net (715) (844)
Allowance for loan losses 25,252 27,384
-------------------------------------------------------------------------------
Net loans $2,231,576 $2,018,822
-------------------------------------------------------------------------------
We had impaired loans of approximately $31.8 million at December 31,
2007 compared to $3.8 million and $3.4 million at December 31, 2006 and 2005,
respectively. 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 $10.0 million, $3.6 million and $3.9 million
during 2007, 2006 and 2005, respectively. The allowance for losses on impaired
loans was $738,000, $369,000 and $480,000 at December 31, 2007, 2006 and 2005,
respectively. There was no interest income recognized on impaired loans.
The total amount of loans serviced for others were $255.0 million,
$265.5 million and $255.8 million at December 31, 2007, 2006 and 2005,
respectively. We received fees from the servicing of loans of $718,000, $724,000
and $769,000 during 2007, 2006 and 2005, respectively.
We record mortgage-servicing rights on our 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 us.
The total of this portfolio was $81.9 million and $64.9 million for December 31,
2007 and 2006, 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 $144,000 and $135,000 of noninterest
income during 2007 and 2006, 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 $10.4 million and
$10.3 million at December 31, 2007 and 2006, respectively.
-63-
Nonaccruing loans aggregated $31.8 million, $3.8 million and $3.4
million at December 31, 2007, 2006 and 2005, respectively. If interest on all
such loans had been recorded in accordance with contractual terms, net interest
income would have increased by $790,000 in 2007, $159,000 in 2006 and $133,000
in 2005.
A summary of changes in the allowance for loan losses follows:
Year Ended December 31, 2007 2006 2005
-------------------------------------------------------------------------------
(In Thousands)
Beginning balance $27,384 $25,381 $24,222
Provision for loan losses 5,021 2,738 2,582
Loans charged-off (1) (8,049) (1,418) (1,873)
Recoveries (2) 896 683 450
-------------------------------------------------------------------------------
Ending balance $25,252 $27,384 $25,381
-------------------------------------------------------------------------------
(1) 2007 and 2006 include $1.4 million and $607,000 of overdraft charge-offs,
respectively. Prior to 2006, these amounts were recognized in other
operating expenses.
(2) 2007 and 2006 include $446,000 and $217,000 of overdraft recoveries,
respectively. Prior to 2006, these amounts were recognized in other
operating expenses.
6. ASSETS ACQUIRED THROUGH FORECLOSURE
Assets acquired through foreclosure are summarized as follows:
December 31, 2007 2006
- -------------------------------------------------------------------------------
(In Thousands)
Real estate $ 703 $388
Less allowance for losses - -
- -------------------------------------------------------------------------------
$ 703 $388
- -------------------------------------------------------------------------------
7. PREMISES AND EQUIPMENT
Land, office buildings, leasehold improvements and furniture and equipment,
at cost, are summarized by major classifications:
December 31, 2007 2006
-------------------------------------------------------------------------------
(In Thousands)
Land $4,415 $ 4,440
Buildings 10,713 12,125
Leasehold improvements 20,967 18,746
Furniture and equipment 27,817 25,349
-------------------------------------------------------------------------------
63,912 60,660
Less:
Accumulated depreciation 29,061 30,442
-------------------------------------------------------------------------------
$34,851 $30,218
-------------------------------------------------------------------------------
-64-
We occupy certain premises and operate certain equipment under
noncancelable leases with terms ranging from 1 to 25 years. These leases are
accounted for as operating leases. Accordingly, lease costs are expensed as
incurred. Rent expense was $4.5 million in 2007, $2.4 million in 2006 and $2.2
million in 2005. Future minimum payments under these leases at December 31, 2007
are as follows:
(In Thousands)
2008 $ 4,562
2009 4,371
2010 4,056
2011 3,947
2012 3,470
Thereafter 23,731
- --------------------------------------------------------------------------------
Total future minimum lease payments $44,137
- --------------------------------------------------------------------------------
8. DEPOSITS
The following is a summary of deposits by category, including a summary of the
remaining time to maturity for time deposits:
December 31, 2007 2006
- -----------------------------------------------------------------------------------------------
(In Thousands) Money market and demand:
Noninterest-bearing demand $ 290,424 $ 276,338
Interest-bearing demand 171,363 146,719
Money market 303,931 246,645
- -----------------------------------------------------------------------------------------------
Total money market and demand 765,718 669,702
Savings 196,571 226,853
- -----------------------------------------------------------------------------------------------
Customer certificates of deposit by maturity:
Less than one year 320,474 251,214
One year to two years 40,191 54,080
Two years to three years 3,234 17,217
Three years to four years 1,022 1,567
Over four years 1,796 1,931
- -----------------------------------------------------------------------------------------------
Total customer time certificates 366,717 326,009
Jumbo certificates of deposit--customer, by maturity:
Less than one year 140,353 98,636
One year to two years 9,569 16,087
Two years to three years 102 6,103
Three years to four years - -
Over four years 167 316
- -----------------------------------------------------------------------------------------------
Total jumbo certificates of deposit--customer 150,191 121,142
- -----------------------------------------------------------------------------------------------
Subtotal retail deposits 1,479,197 1,343,706
- -----------------------------------------------------------------------------------------------
-65-
Other jumbo certificates of deposit--by maturity:
Less than one year 98,582 110,964
One year to two years 176 152
Two years to three years - 272
Three years to four years - -
Over four years - -
- -----------------------------------------------------------------------------------------------
Total other jumbo time certificates 98,758 111,388
- -----------------------------------------------------------------------------------------------
Brokered deposits less than one year 249,206 301,254
- -----------------------------------------------------------------------------------------------
Total deposits $1,827,161 $1,756,348
- -----------------------------------------------------------------------------------------------
Interest expense by category follows:
Year Ended December 31, 2007 2006 2005
- -----------------------------------------------------------------------------------------------
(In Thousands)
Interest-bearing demand $ 1,393 $ 785 $ 297
Money market 11,870 8,090 3,837
Savings 1,679 2,237 1,738
Customer time deposits 22,357 15,309 8,098
- -----------------------------------------------------------------------------------------------
Total customer interest expense 37,299 26,421 13,970
- -----------------------------------------------------------------------------------------------
Other jumbo certificates of deposit 5,176 4,100 1,374
Brokered deposits 14,836 12,186 6,346
- -----------------------------------------------------------------------------------------------
Total interest expense on deposits $57,311 $42,707 $21,690
- -----------------------------------------------------------------------------------------------
9. 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)
2007
----
FHLB advances.................................. $898,280 4.23% $ 936,302 $765,974 4.97%
Trust preferred borrowings..................... 67,011 6.89 67,011 67,011 7.00
Federal funds purchased and securities
sold under agreements to repurchase ......... 75,000 4.46 75,000 60,649 5.13
Other borrowed funds .......................... 94,869 3.84 95,087 86,602 4.26
-66-
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
Federal Home Loan Bank Advances
Advances from the FHLB of Pittsburgh with rates ranging from 3.48% to
5.45% at December 31, 2007 are due as follows:
Weighted
Average
Amount Rate
------ ----
(Dollars in Thousands)
2008...................................... $577,900 4.03%
2009...................................... 162,562 4.67
2010...................................... 115,517 4.63
2012 - 2013............................... 42,301 4.27
--------
$898,280
========
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, we are 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. We were in compliance with this requirement with
a stock investment in FHLB of Pittsburgh of $45.5 million at December 31, 2007.
This stock is carried on the accompanying consolidated statement of condition at
cost, which approximates liquidation value.
Seven advances are outstanding at December 31, 2007 totaling $170.0
million, with a weighted average rate of 4.47% maturing in 2009 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.
Trust Preferred Borrowings
On April 6, 2005, we 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.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
During 2007, we purchased federal funds as a short-term funding source. At
December 31, 2007, we had purchased $50.0 million in federal funds at a rate of
4.25%. At December 31, 2006, we also had $50.0 million federal funds purchased.
-67-
During 2007, we sold securities under agreements to repurchase as a funding
source. At December 31, 2007, securities sold under agreements to repurchase had
a fixed rate of 4.87%. The underlying securities are mortgage-backed securities
with a book value of $29.1 million at December 31, 2007. 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)
2007
- ----
Over 90 days................. $ 25,000 4.87% $ 29,086 $ 28,155 $ 99
========= ========= ========= ==========
2006
Up to 30 days................ $ 23,400 5.32% $ 24,993 $ 24,969 $ 215
========= ========= ========= ==========
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $94.9
million and $78.2 million at December 31, 2007 and 2006, 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 3.84% and 4.30% at December 31, 2007 and 2006, respectively.
10. 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, 2007 and 2006, WSFS was in
compliance with regulatory capital requirements and was deemed a
"well-capitalized" institution.
The following table presents WSFS' consolidated capital position as of December
31, 2007 and 2006:
To Be
Well-Capitalized
Under Prompt
Consolidated For Capital Corrective
Bank Capital Adequacy Purposes Action Provisions
- ----------------------------------------------------------------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
As of December 31, 2007:
Total Capital (to risk-weighted assets) $304,992 12.31% $198,156 8.00% $247,696 10.00%
Core Capital (to adjusted tangible assets) 276,327 8.63 128,033 4.00 160,041 5.00
Tangible Capital (to tangible assets) 276,327 8.63 48,012 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets) 276,327 11.16 99,078 4.00 148,617 6.00
-68-
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
We have a simple capital structure with one class of $0.01 par common
stock outstanding, each share having equal voting rights. In addition, we have
authorized 7,500,000 shares of $0.01 par preferred stock. No preferred stock was
outstanding at December 31, 2007 and 2006. When infused into the Bank, the Trust
Preferred Securities issued in 2005 qualify as Tier 1 capital. We are prohibited
from paying any dividend or making any other capital distribution if, after
making the distribution, we would be undercapitalized within the meaning of the
OTS Prompt Corrective Action regulations. Since 1996, the Board of Directors has
approved several stock repurchase programs to reacquire common shares. As part
of these programs, we acquired approximately 564,100 shares in 2007 for $36.2
million and 103,400 shares in 2006 for $6.6 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, 2007, the coupon rate of the Capital Trust III
securities was 6.89% with a scheduled maturity of June 1, 2035. The Company
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 7.00%
at December 31, 2007. 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 9 and 18 to the Consolidated
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 Company.
11. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Associate 401(k) Savings Plan
Certain subsidiaries of ours 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 our common stock. Generally, the
principal and earnings thereon are tax deferred until withdrawn. We match a
portion of the Associates' contributions and periodically make discretionary
contributions based on our performance into the plan for the benefit of
Associates. Our total cash contributions to the plan on behalf of our Associates
resulted in a cash expenditure of $1.7 million, $1.6 million and $1.4 million
for 2007, 2006 and 2005, respectively.
Effective November 2007, all of our discretionary contributions are
invested in accordance with the Associates' selection of investments. If
Associates do not designate how discretionary contributions are to be invested,
80% will be invested in a balanced fund and 20% will be invested in our common
stock. Associates may make transfers to various other
-69-
investment vehicles within the plan without any significant restrictions. The
plan purchased 25,000, 13,000 and 36,000 shares of our common stock during 2007,
2006 and 2005, respectively.
Postretirement Benefits
We share 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 us.
We account for our 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 2007 and 2006 are in accordance with
SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans (SFAS 158), while disclosures for 2005 are in accordance
with SFAS No. 132 (Revised), Employers' Disclosure About Pensions and Other
Postretirement Benefits.
On December 31, 2006, we adopted the recognition and disclosure
provisions of SFAS 158. SFAS 158 requires that we recognize the funded status of
our defined benefit postretirement plan in our 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
represented 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 our statement of financial position pursuant to the
provisions of SFAS 87. These amounts will be subsequently recognized as net
periodic pension costs pursuant to our 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 our 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
2008, the Company expects to recognize $16,000 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.
-70-
The following disclosures relating to postretirement benefits were measured at
December 31, 2007:
2007 2006 2005
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,233 $ 2,287 $ 2,086
Service cost 137 108 106
Interest cost 125 93 122
Actuarial (gain)/loss (29) (110) 200
Benefits paid (127) (145) (227)
- -----------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 2,339 $ 2,233 $ 2,287
- -----------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ - $ - $ -
Employer contributions 127 145 227
Benefits paid (127) (145) (227)
- -----------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------
Funded status:
Funded status $(2,339) $(2,233) $(2,287)
Unrecognized transition obligation - - 429
Unrecognized net loss - - 647
Recognized net loss 795 905 -
- -----------------------------------------------------------------------------------------------------------------
Net amount recognized $(1,544) $(1,328) $(1,211)
- -----------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost 137 $ 108 $ 106
Interest cost 125 93 122
Amortization of transition obligation 61 61 61
Net loss recognition 19 - 15
- -----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 342 $ 262 $ 304
- -----------------------------------------------------------------------------------------------------------------
Assumptions used to determine net periodic benefit cost:
Discount rate 5.75% 5.50% 6.00%
Health care cost trend rate 5.00% 5.00% 5.50%
Sensitivity analysis of health care cost trends:
Effect of +1% on service cost plus interest cost $ (7) $ (8) $ 3
Effect of -1% on service cost plus interest cost 7 7 (1)
Effect of +1% on APBO (74) (76) 18
Effect of -1% on APBO 63 66 (9)
Assumptions used to value the Accumulated Postretirement Benefit
Obligation (APBO):
Discount rate 6.00% 5.75% 5.50%
Health care cost trend rate 5.00% 5.00% 5.50%
Ultimate trend rate 5.00% 5.00% 5.00%
Year of ultimate trend rate 2005 2005 2005
-71-
Estimated future benefit payments:
The following table shows the expected future payments for the next ten years:
During 2008 $ 109
During 2009 110
During 2010 111
During 2011 111
During 2012 118
During 2013 through 2017 717
- -------------------------------------------------------------------------------
$ 1,276
- -------------------------------------------------------------------------------
We assume 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
Company. For 2007, this annual premium cap amounted to $2,308 per retiree. We
estimate that we will contribute approximately $109,000 to the plan during
fiscal 2008.
We have three additional plans. They are a Supplemental Pension Plan
with a corresponding liability of $700,000, an Early Retirement Window Plan with
a corresponding liability of $455,000 and a Director's Plan with a corresponding
liability of $146,000.
12. TAXES ON INCOME
The Company and its subsidiaries, with the exception of WSFS Reit,
Inc., file a consolidated federal income tax return and separate state income
tax returns. WSFS Reit, Inc. files separate federal and state income tax
returns. Our income tax provision consists of the following:
Year Ended December 31, 2007 2006 2005
- --------------------------------------------------------------------------------
(In Thousands)
Current income taxes:
Federal taxes $ 10,389 $ 14,662 $ 11,118
State and local taxes 2,274 2,278 2,197
Deferred income taxes:
Federal taxes 811 (1,336) 1,445
State and local taxes - 56 87
- --------------------------------------------------------------------------------
Total $ 13,474 $ 15,660 $ 14,847
- --------------------------------------------------------------------------------
Current federal income taxes include taxes on income that cannot be
offset by net operating loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The following
is a summary of the significant components of our deferred tax assets and
liabilities as of December 31, 2007 and 2006:
-72-
2007 2006
- ---------------------------------------------------------------------------------------
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation $ (618) $ (488)
Other (24) (110)
Prepaid expenses (1,505) (1,490)
Deferred loan costs (2,100) (2,005)
- ---------------------------------------------------------------------------------------
Total deferred tax liabilities (4,247) (4,093)
- ---------------------------------------------------------------------------------------
Deferred tax assets:
Bad debt deductions 8,838 9,585
Tax credit carryforwards 150 150
Net operating loss carryforwards 2,482 3,406
Capital loss carryforwards 93 679
Loan fees 3 14
Reserves and other 2,732 2,033
Deferred gains 439 -
Unrealized losses on available-for-sale securities 2,366 5,255
- ---------------------------------------------------------------------------------------
Total deferred tax assets 17,103 21,122
- ---------------------------------------------------------------------------------------
Valuation allowance (2,178) (2,651)
- ---------------------------------------------------------------------------------------
Net deferred tax asset $ 10,678 $ 14,378
- ---------------------------------------------------------------------------------------
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 our history of prior earnings and our 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 $10.7 million at December 31, 2007. Adjustments to
decrease gross deferred tax assets and the related valuation allowance in the
amount of $473,000, $51,000 and $110,000 were made in 2007, 2006 and 2005,
respectively, to reflect state tax net operating losses that have expired.
Approximately $221,000 in our gross deferred tax assets at December 31,
2007 was related to state tax net operating losses. We assessed a valuation
allowance of $221,000 on this entire deferred tax asset due to an expectation of
such net operating losses expiring before being utilized.
We have $267,000 of capital loss carryforwards that will expire on
December 31, 2011. Net operating loss carryforwards (NOLs) of $10.2 million
remain at December 31, 2007. The expiration dates and amounts of such NOL
carryforwards are listed below:
Federal State
------- -----
(In Thousands)
2008.............................................. $ 1,294 $ -
2009.............................................. 5,165 -
2018.............................................. - 3,732
------- -------
$ 6,459 $ 3,732
======= =======
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Our ability to use our 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 $6.5 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. At December 31, 2007, approximately $2.4
million in our gross deferred tax assets was related to net operating losses and
tax credits attributable to a former subsidiary. We have 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 our effective
tax rate and the U.S. Federal statutory tax rate is as follows:
Year Ended December 31, 2007 2006 2005
- -----------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State tax net of federal tax benefit 3.4 3.2 3.2
Interest income 50% excludable (1.7) (1.6) (1.7)
Bank-owned life insurance income (1.8) (3.0) (1.6)
Charitable donation (5.0) - -
Incentive stock option compensation 0.5 0.6 -
Other 0.8 (0.2) (0.1)
- -----------------------------------------------------------------------------------------
Effective tax rate 31.2% 34.0% 34.8%
- -----------------------------------------------------------------------------------------
During 2007, we donated a N.C. Wyeth mural which was previously displayed
in our former headquarters. The estimated fair value of the mural was $6.0
million, which was recorded as a charitable contribution expense. We recognized
a related offsetting gain on the transfer of the asset during 2007. The expense
and offsetting gain was shown net in our Consolidated Financial Statements. As
the gain on the transfer of the asset is permanently excludible from taxation,
the charitable contribution transaction results in a permanent deduction for
income tax purposes. The amount of the deduction represents an income tax
uncertainty because it is subject to evaluation by the Internal Revenue Service.
We record interest and penalties on potential income tax deficiencies
as income tax expense. Federal tax years 2004 through 2007 remain subject to
examination as of December 31, 2007, while tax years 2004 through 2007 remain
subject to examination by state taxing jurisdictions. Our 2004, 2005 and 2006
federal income tax returns are currently being examined. No state income tax
return examinations are currently in process. We believe it is reasonably
possible that between $500,000 and $1.2 million of unrecognized state tax
benefits, net of federal tax, will be realized during 2008 as a result of the
expiration of statutes of limitations. It is also reasonably possible that
between $100,000 and $300,000 of additional reserves will be established during
2008 related to interest on existing unrecognized state tax benefits.
During 2007, an additional $3.6 million tax reserve was established
related primarily to the Internal Revenue Service ("IRS") disallowance of the
deduction for certain compensation in prior periods. This adjustment was the
result of a routine IRS audit of our 2004 through 2006 tax years. Because the
original tax benefit for this item was recorded as an increase to equity, $3.4
million of the tax liability was recorded as a reduction to equity in 2007. Even
though this matter is not yet settled, standards under FIN 48 require this
reserve to be established during 2007. In order to stop interest from accruing
on this tax liability until the matter can be resolved through the IRS appeals
process, we deposited the entire $3.4 million plus interest in 2007 so that no
reserve remains for this matter as of December 31, 2007.
The total amount of unrecognized tax benefits as of December 31, 2007
was $2.6 million, all of which would affect our effective tax rate if
recognized. The total amount of accrued interest and penalties included in such
unrecognized tax
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benefits were $660,000 and $0, respectively, which approximates the amount of
related expense in 2007. A reconciliation of the total amounts of unrecognized
tax benefits during 2007 is as follows:
(In Thousands)
Unrecognized tax benefits at December 31, 2006 $4,544
Reduction resulting from implementation of FIN 48 on January 1, 2007 (1,988)
Additions as a result of tax positions taken during prior years 3,416
Additions as a result of tax positions taken during current year 416
Reductions relating to settlements with taxing authorities (3,671)
Reductions as a result of a lapse of statues of limitations (85)
- -------------------------------------------------------------------------------
Unrecognized tax benefits at December 31, 2007 $2,632
- -------------------------------------------------------------------------------
13. STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with SFAS No.
123 (revised 2004), Share-Based Payment (SFAS 123R). We adopted SFAS 123R
beginning January 1, 2006 using the Modified Prospective Application Method.
We have stock options outstanding under two plans (collectively, "Stock
Incentive Plans") for officers, directors and Associates of the Company 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 862,000. At
December 31, 2007, there were 380,121 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 our common stock
on the date of the grant. All Stock Options granted during 2007 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 our Option Plans as of December 31, 2007,
2006 and 2005, and changes during the years then ended is presented below:
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2007 2006 2005
----------------------- ---------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Exercise Price
Stock Options:
Outstanding at beginning of year 703,427 $ 39.52 742,404 $ 31.92 869,845 $ 23.73
Granted 121,375 54.25 106,905 64.93 109,817 62.71
Exercised (80,836) 23.85 (143,346) 19.01 (226,963) 15.05
Forfeited (21,384) 60.08 (2,536) 46.19 (10,295) 38.98
-------- -------- --------
Outstanding at end of year 722,582 43.14 703,427 39.52 742,404 31.92
Exercisable at end of year 438,458 33.40 416,773 26.91 435,344 20.57
Weighted-average fair value
of awards granted $ 11.36 $ 13.52 $ 13.67
Beginning January 1, 2007, 416,773 stock options were exercisable with
an intrinsic value of $10.0 million. In addition, at January 1, 2007 there were
286,654 nonvested options with a grant date fair value of $12.76. During the
year ended December 31, 2007, 103,286 options vested with an intrinsic value of
$550,000, and a grant date fair value of $11.86 per option. Also during 2007,
80,836 options were exercised with an intrinsic value of $3.3 million. In
addition, 765 vested options were forfeited with an intrinsic value of $6,000
and a grant date fair value of $13.32, while 21,384 options were forfeited in
total with a grant date fair value of $13.34. There were 438,458 exercisable
options remaining at December 31, 2007, with an intrinsic value of $8.4 million
and a remaining contractual term of 4.2 years. At December 31, 2007 there were
722,582 stock options outstanding with an intrinsic value of $8.5 million and a
remaining contractual term of 4.4 years and 284,124 nonvested options with a
grant date fair value of $12.45. During 2006, 143,346 options were exercised
with an intrinsic value of $6.2 million and 125,235 options vested with a grant
date fair value of $9.91 per option.
The total amount of compensation cost related to nonvested stock
options as of December 31, 2007 was $2.1 million. The weighted-average period
over which it is expected to be recognized is 2.9 years. We issue new shares
upon the exercise of options.
During 2007, we granted 121,320 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 3.3% and 4.7% in 2007; an expected option life of three and
three-quarter years; and an expected stock price volatility of between 18.7% and
21.8% in 2007. For the purposes of this option-pricing model, a dividend yield
of between 0.5% and 0.7% was used as the expected dividend yield. The expected
option life was determined based on the mid-point between the vesting date and
the end of the contractual term.
Also during 2007, we granted 55 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 4.7%
in 2007; an expected option life of six and one-half years; and an expected
stock price volatility of 21.1% in 2007 based on our historical volatility of
our own common stock over a period that approximates the expected term of the
award. For the purposes of this option-pricing model, a dividend yield of 0.5%
was used as the expected dividend yield. The expected option life was based on
the mid-point between the vesting date and the end of the contractual term.
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Prior to adoption of SFAS 123R, we used a graded-vesting schedule to
calculate the expense related to stock options. Since the adoption of SFAS 123R,
we recognize compensation expense related to new stock options issued on a
straight-line basis over the applicable service period.
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 us,
the value calculated by the Black-Scholes model may significantly overstate the
true economic value of the options.
The impact of stock-based compensation for the year ended December 31,
2007 was $1.2 million pretax ($1.0 million after tax), or $0.16 per share, to
salaries, benefits and other compensation, compared to $1.5 million pretax ($1.3
million after tax), or $0.19 per share in 2006. Prior to the adoption of SFAS
123R, we 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 Company would have
recognized pretax compensation expense of $1.2 million in 2005 related to its
Stock Incentive Plans.
The following table summarizes all stock options outstanding and
exercisable for Option Plans as of December 31, 2007, 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:
$ 6.90-$13.80 59,357 $ 10.96 2.7 years 59,357 $ 10.96
$13.81-$20.70 142,503 16.67 3.4 years 142,503 16.67
$20.71-$27.60 - - - years - -
$27.61-$34.50 71,765 33.36 4.8 years 70,965 33.38
$34.51-$41.40 - - - years - -
$41.41-$48.30 70,695 43.78 5.8 years 55,178 43.76
$48.31-$55.20 119,065 53.31 5.0 years 2,416 51.10
$55.21-$62.10 73,192 58.91 6.8 years 41,631 58.83
$62.11-$69.00 186,005 64.50 3.5 years 66,408 64.18
------- -------
Total 722,582 $43.14 4.4 years 438,458 $33.40
======= =======
During 2007, 2006 and 2005, we issued 129, 15,269 and 30 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.
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14. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 2007, we had commitments to extend credit of $586.3
million. Consumer lines of credit totaled $48.7 million of which $31.5 million
was secured by real estate. Outstanding letters of credit were $46.0 million and
outstanding commitments to make or acquire mortgage loans aggregated $8.4
million. Approximately $565,000 of these mortgage loan commitments were at fixed
rates ranging from 5.13% to 8.25%, and approximately $7.9 million were at
variable rates ranging from 5.13% to 7.50%. Mortgage commitments generally have
closing dates within a six-month period.
Data Processing Operations
We have entered into contracts to manage our network operations, data
processing and other related services. The projected amounts of future minimum
payments contractually due (in thousands) are as follows:
2008................................ $3,848
2009................................ 3,635
2010................................ 858
2011................................ 11
Legal Proceedings
In the ordinary course of business, we are subject to legal actions
that involve claims for monetary relief. Based upon information presently
available to us and our counsel, it is our opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on our results of operations.
We, as successor to originators, are 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 our reverse mortgage rights and obligations.
Financial Instruments With Off-Balance Sheet Risk
We are a party to financial instruments with off-balance sheet risk in
the normal course of business primarily to meet the financing needs of our
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.
We generally require collateral to support such financial instruments in excess
of the contractual amount of those instruments and essentially use the same
credit policies in making commitments as we do for on-balance sheet instruments.
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The following represents a summary of off-balance sheet financial
instruments at year-end:
December 31, 2007 2006
- --------------------------------------------------------------------------------
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments $154,875 $127,858
Commercial mortgage loan commitments 105,094 96,618
Commercial loan commitments 223,181 209,125
Commercial standby letters of credit 45,977 40,594
Residential mortgage loan commitments 8,435 12,320
Consumer loan commitments 48,690 46,315
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. We evaluate each customer's creditworthiness and obtain collateral
based on management's credit evaluation of the counterparty.
Indemnifications
Secondary Market Loan Sales. We generally do 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. We typically sell fixed-rate, conforming first mortgage loans in the
secondary market as part of our 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, we provide indemnifications to the
buyers under certain circumstances. These indemnifications may include the
repurchase of loans by us. Repurchases and losses are rare, and no provision is
made for losses at the time of sale. During 2007, we had no repurchases.
Swap Guarantees. We 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 us. By the terms of the agreements, those
financial institutions have recourse to us 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 like
us to provide access to interest rate swap transactions for our customers
without creating the swap ourselves.
At December 31, 2007, there were twenty-six variable-rate to
fixed-rate swap transactions between the third-party financial institution and
our customers with an initial notional amount aggregating approximately $108.3
million, and with maturities ranging from four months to fifteen years. The
aggregate market value of these swaps to the customers was a liability of $4.7
million as of December 31, 2007, and essentially all of the swap transactions
were in a paying position to third-party financial institutions.
ATM Cash Management. We entered into an agreement with a financial
institution, whereby they provide cash for distribution/cash management by
CashConnect, our ATM division. Under this agreement we accept the operational
risk
-79-
associated with this cash and are legally bound to reimburse the financial
institution for any related operational losses. We have taken steps to mitigate
the risk of loss to us by purchasing a multi-layer insurance policy and
instituting strong operational controls. Additionally, CashConnect has the
ability to recover losses from its vault cash customers based on the strength of
our ATM cash bailment agreements, which hold the ATM vault cash customers
responsible for any loss of cash, which is not a result of our gross negligence.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a
variety of factors. In certain cases, fair values represent quoted market prices
for identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions regarding the amount and timing of estimated
future cash flows that are discounted to reflect current market rates and
varying degrees of risk. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year-end
or that will be realized in the future.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Short-Term Investments: For cash and short-term investments,
including due from banks, federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits with other banks, the
carrying amount is a reasonable estimate of fair value.
Investments and Mortgage-Backed Securities: Fair value for investment
and mortgage-backed securities is based on quoted market prices, where
available. If a quoted market price is not available, fair value is estimated
using quoted prices for similar securities. The fair value of our 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.
-80-
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 us 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.
The book value and estimated fair value of our financial instruments
are as follows:
December 31, 2007 2006
----------------------------------------------------------------------------------------- --------------------------------
Book Value Fair Value Book Value Fair Value
--------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 267,537 $ 267,537 $ 241,824 $ 241,824
Investment securities 28,272 28,254 54,491 54,524
Mortgage-backed securities 496,792 496,284 516,711 516,434
Loans, net 2,233,980 2,240,847 2,019,741 2,012,530
Bank-owned life insurance 57,551 57,551 55,282 55,282
Stock in Federal Home Loan Bank of Pittsburgh 45,537 45,455 39,872 39,720
Accrued interest receivable 12,905 12,905 13,037 13,037
Interest rate cap - - 30 30
Option to purchase Class "O" Certificates - 147 - 3,503
Financial liabilities:
Deposits 1,827,161 1,811,947 1,756,348 1,757,259
Borrowed funds 1,135,160 1,136,020 1,002,679 997,476
Accrued interest payable 10,189 10,189 8,690 8,690
The estimated fair value of our off-balance sheet financial instruments
is as follows:
December 31, 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit $4,942 $4,454
Standby letters of credit 460 406
-81-
16. RELATED PARTY TRANSACTIONS
We routinely enter into transactions with our directors and officers.
Such transactions are made in the ordinary course of business. The aggregate
amount of loans to such related parties was $5.4 million and $5.1 million at
December 31, 2007 and 2006, respectively. During 2007, new loans and credit line
advances to such related parties amounted to $7.0 million and repayments
amounted to $6.8 million.
We engage a law firm that is affiliated with one of our directors for
general legal services. Total fees for such services amounted to $56,000 during
2007.
Our Chairman was also the Chairman of the FHLB of Pittsburgh through
December 31, 2007. At December 31, 2007, we had borrowed funds outstanding from
the FHLB of Pittsburgh of $898.3 million and owned $45.5 million of FHLB of
Pittsburgh stock.
17. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31, 2007 2006
- -----------------------------------------------------------------------------
(In Thousands)
Assets:
Cash $ 682 $ 4,984
Investment in subsidiaries 275,258 270,994
Investment in interest rate cap - 30
Investment in Capital Trust III 2,011 2,011
Other assets 800 1,499
- -----------------------------------------------------------------------------
Total assets $ 278,751 $ 279,518
- -----------------------------------------------------------------------------
Liabilities:
Borrowings $ 67,011 $ 67,011
Interest payable 372 412
Other liabilities 38 36
- -----------------------------------------------------------------------------
Total liabilities 67,421 67,459
- -----------------------------------------------------------------------------
Stockholders' equity:
Common stock 157 156
Capital in excess of par value 83,077 81,580
Comprehensive loss (3,861) (8,573)
Retained earnings 376,682 347,448
Treasury stock (244,725) (208,552)
- -----------------------------------------------------------------------------
Total stockholders' equity 211,330 212,059
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 278,751 $ 279,518
- -----------------------------------------------------------------------------
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Condensed Statement of Operations
Year Ended December 31, 2007 2006 2005
(In Thousands)
Income:
Interest income $ 337 $ 594 $ 533
Noninterest income 166 354 139
- ---------------------------------------------------------------------------------------------
503 948 672
- ---------------------------------------------------------------------------------------------
Expenses:
Interest expense 4,752 5,053 5,292
Other operating expenses (1,437) (1,386) (1,567)
- ---------------------------------------------------------------------------------------------
3,315 3,667 3,725
- ---------------------------------------------------------------------------------------------
Loss before equity in undistributed income of subsidiaries (2,812) (2,719) (3,053)
Equity in undistributed income of subsidiaries 32,461 33,160 30,909
- ---------------------------------------------------------------------------------------------
Net income $ 29,649 $ 30,441 $ 27,856
- ---------------------------------------------------------------------------------------------
Condensed Statement of Cash Flows
Year Ended December 31, 2007 2006 2005
- ---------------------------------------------------------------------------------------------
(In Thousands)
Operating activities:
Net income $ 29,649 $ 30,441 $ 27,856
Adjustments to reconcile net income to net cash
used for operating activities:
Equity in undistributed income of subsidiaries (32,461) (33,160) (30,909)
Amortization - 560 1,398
Decrease (increase) in other assets 443 (606) 432
(Decrease) increase in other liabilities (38) 51 126
- ---------------------------------------------------------------------------------------------
Net cash used for operating activities (2,407) (2,714) (1,097)
- ---------------------------------------------------------------------------------------------
Investing activities:
Decrease (increase) in investment in subsidiaries 34,898 (646) 28,210
Net issuance of Pooled Floating Rate Capital Securities - 17,011
- ---------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 34,898 (646) 45,221
- ---------------------------------------------------------------------------------------------
Financing activities:
Issuance of common stock 1,784 6,907 6,348
Dividends paid on common stock (2,403) (2,057) (1,845)
Treasury stock, net of reissuance (36,174) (6,603) (40,104)
- ---------------------------------------------------------------------------------------------
Net cash used for financing activities (36,793) (1,753) (35,601)
- ---------------------------------------------------------------------------------------------
(Decrease) increase in cash (4,302) (5,113) 8,523
Cash at beginning of period 4,984 10,097 1,574
- ---------------------------------------------------------------------------------------------
Cash at end of period $ 682 $ 4,984 $ 10,097
- ---------------------------------------------------------------------------------------------
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18. ACCOUNTING FOR INTEREST RATE CAP
We have 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, 2007 was essentially zero.
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 2007, we recognized $30,000 of related interest expense.
19. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS 131), we discuss our business in three
segments. There is one segment for WSFS Bank and one for CashConnect, the ATM
division of WSFS. The third segment, "All Others," represents the combined
contributions of Montchanin, WSFS Investment Group, Inc., and our Wealth
Management Services Division. Montchanin, WSFS Investment Group, Inc., and the
Wealth Management Services Division each offer different products, to a separate
customer base, through distinct distribution methods. Therefore, we have
combined Montchanin, WSFS Investment Group, Inc., and the Wealth Management
Services Division to form the operating segment "All Others." All prior years'
information has been updated to reflect this presentation. The WSFS segment
provides financial products to commercial and retail customers through its main
office, 29 retail banking offices, loan production offices and operations
centers. 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 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 Company's primary market area.
Montchanin has one consolidated wholly-owned subsidiary, Cypress Capital
Management, LLC (Cypress). Cypress is a Wilmington-based investment advisory
firm serving high net-worth individuals and institutions. WSFS Investment Group,
Inc. markets various third-party insurance products and securities directly to
the public and through WSFS' retail banking system. The Wealth Management
Services Division provides wealth management and personal trust services to
customers in the Company's primary market area.
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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 makers to make decisions about resources to be allocated to the segment
and assess its performance, and for which discrete financial information is
available. We evaluate performance based on pretax ordinary income relative to
resources used, and allocate resources based on these results. The accounting
policies applicable to our segments are those that apply to our preparation of
the accompanying Consolidated Financial Statements. Segment information for the
years ended December 31, 2007, 2006 and 2005 is shown below.
For the Year Ended December 31, 2007: WSFS CashConnect All Others (1) Total
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
External customer revenues:
Interest income $ 189,477 $ - $ - $ 189,477
Noninterest income 27,991 16,584 3,591 48,166
- ------------------------------------------------------------------------------------------------------------------
Total external customer revenues 217,468 16,584 3,591 237,643
- ------------------------------------------------------------------------------------------------------------------
Intersegment revenues:
Interest income 8,684 - - 8,684
Noninterest income 2,544 675 - 3,219
- ------------------------------------------------------------------------------------------------------------------
Total intersegment revenues 11,228 675 - 11,903
- ------------------------------------------------------------------------------------------------------------------
Total revenue 228,696 17,259 3,591 249,546
- ------------------------------------------------------------------------------------------------------------------
External customer expenses:
Interest expense 107,468 - - 107,468
Noninterest expenses 72,657 4,683 4,691 82,031
Provision for loan loss 5,021 - - 5,021
- ------------------------------------------------------------------------------------------------------------------
Total external customer expenses 185,146 4,683 4,691 194,520
Intersegment expenses:
Interest expense - 8,684 - 8,684
Noninterest expenses 675 1,076 1,468 3,219
- ------------------------------------------------------------------------------------------------------------------
Total intersegment expenses 675 9,760 1,468 11,903
- ------------------------------------------------------------------------------------------------------------------
Total expenses 185,821 14,443 6,159 206,423
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes $ 42,875 $ 2,816 $ (2,568) 43,123
Provision for income taxes 13,474
- ------------------------------------------------------------------------------------------------------------------
Consolidated net income $ 29,649
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 83,650 $ 182,523 $ 1,364 $ 267,537
Other segment assets 2,913,328 17,314 2,009 2,932,651
- ------------------------------------------------------------------------------------------------------------------
Total segment assets $2,996,978 $ 199,837 $ 3,373 $3,200,188
- ------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 8,134 $ 194 $ 5 $ 8,333
(1) Includes Montchanin Capital Management, Inc., WSFS Investment Group Inc.
and the Wealth Management Services Division.
-85-
For the Year Ended December 31, 2006: WSFS CashConnect All Others (1) Total
- ---------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
External customer revenues:
Interest income $ 177,177 $ - $ - $ 177,177
Noninterest income 21,472 15,644 3,189 40,305
- ---------------------------------------------------------------------------------------------------------------------------------
Total external customer revenues 198,649 15,644 3,189 217,482
- ---------------------------------------------------------------------------------------------------------------------------------
Intersegment revenues:
Interest income 8,071 - - 8,071
Noninterest income 1,704 685 - 2,389
- ---------------------------------------------------------------------------------------------------------------------------------
Total intersegment revenues 9,775 685 - 10,460
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 208,424 16,329 3,189 227,942
- ---------------------------------------------------------------------------------------------------------------------------------
External customer expenses:
Interest expense 99,278 - - 99,278
Noninterest expenses 61,521 4,222 3,571 69,314
Provision for loan loss 2,738 - - 2,738
- ---------------------------------------------------------------------------------------------------------------------------------
Total external customer expenses 163,537 4,222 3,571 171,330
- ---------------------------------------------------------------------------------------------------------------------------------
Intersegment expenses:
Interest expense - 8,071 - 8,071
Noninterest expenses 685 688 1,016 2,389
- ---------------------------------------------------------------------------------------------------------------------------------
Total intersegment expenses 685 8,759 1,016 10,460
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 164,222 12,981 4,587 181,790
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and minority interest $ 44,202 $ 3,348 $ (1,398) 46,152
Provision for income taxes 15,660
Minority interest 51
- ---------------------------------------------------------------------------------------------------------------------------------
Consolidated net income $ 30,441
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 74,905 $ 166,092 $ 827 $ 241,824
Other segment assets 2,738,531 15,228 1,813 2,755,572
- ---------------------------------------------------------------------------------------------------------------------------------
Total segment assets $2,813,436 $ 181,320 $ 2,640 $2,997,396
- ---------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 9,790 $ 382 $ 20 $ 10,192
(1) Includes Montchanin Capital Management, Inc., WSFS Investment Group Inc.
and the Wealth Management Services Division.
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For the Year Ended December 31, 2005: WSFS CashConnect All Others (1) Total
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
External customer revenues:
Interest income $ 136,022 $ - $ - $ 136,022
Noninterest income 18,544 12,539 3,570 34,653
- ----------------------------------------------------------------------------------------------------------------------------
Total external customer revenues 154,566 12,539 3,570 170,675
- ----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues:
Interest income 4,729 - - 4,729
Noninterest income 1,671 682 - 2,353
- ----------------------------------------------------------------------------------------------------------------------------
Total intersegment revenues 6,400 682 - 7,082
- ----------------------------------------------------------------------------------------------------------------------------
Total revenue 160,966 13,221 3,570 177,757
- ----------------------------------------------------------------------------------------------------------------------------
External customer expenses:
Interest expense 62,380 - - 62,380
Noninterest expenses 55,351 3,956 3,570 62,877
Provision for loan loss 2,582 - - 2,582
- ----------------------------------------------------------------------------------------------------------------------------
Total external customer expenses 120,313 3,956 3,570 127,839
- ----------------------------------------------------------------------------------------------------------------------------
Intersegment expenses:
Interest expense - 4,729 - 4,729
Noninterest expenses 682 778 893 2,353
- ----------------------------------------------------------------------------------------------------------------------------
Total intersegment expenses 682 5,507 893 7,082
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 120,995 9,463 4,463 134,921
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and minority interest $ 39,971 $ 3,758 $ (893) 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 2,604,001 7,153 1,647 2,612,801
- ----------------------------------------------------------------------------------------------------------------------------
Total segment assets $ 2,663,110 $ 181,680 $ 1,962 $ 2,846,752
- ----------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 15,656 $ 811 $ 59 $ 16,526
(1) Includes Montchanin Capital Management, Inc., WSFS Investment Group Inc.
and the Wealth Management Services Division.
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QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three months ended 12/31/07 09/30/07 06/30/07 03/31/07 12/31/06 09/30/06 06/30/06 03/31/06
- --------------------------------------- -------------- ------------ --------- ---------- ---------- --------- ---------- ---------
(In Thousands, Except Per Share Data)
Interest income $48,143 $47,579 $46,667 $47,088 $46,701 $46,131 $43,868 $40,477
Interest expense 27,433 27,480 26,527 26,028 26,611 27,011 24,482 21,174
- --------------------------------------- -------------- ------------ --------- ---------- ---------- --------- ---------- ---------
Net interest income 20,710 20,099 20,140 21,060 20,090 19,120 19,386 19,303
Provision for loan losses 2,376 1,001 1,273 371 1,036 319 695 688
- --------------------------------------- -------------- ------------ --------- ---------- ---------- --------- ---------- ---------
Net interest income after
provision for loan losses 18,334 19,098 18,867 20,689 19,054 18,801 18,691 18,615
Noninterest income 13,008 12,809 11,616 10,733 11,078 10,309 9,880 9,038
Noninterest expenses 22,313 21,333 19,027 19,358 18,553 17,587 16,932 16,242
- --------------------------------------- -------------- ------------ --------- ---------- ---------- --------- ---------- ---------
Income before minority interest
and taxes 9,029 10,574 11,456 12,064 11,579 11,523 11,639 11,411
Less minority interest - - - - 11 9 15 16
- --------------------------------------- -------------- ------------ --------- ---------- ---------- --------- ---------- ---------
Income before taxes 9,029 10,574 11,456 12,064 11,568 11,514 11,624 11,395
Income tax provision 1,533 3,431 4,227 4,283 3,969 3,511 4,126 4,054
- --------------------------------------- -------------- ------------ --------- ---------- ---------- --------- ---------- ---------
Net Income $ 7,496 $ 7,143 $ 7,229 $ 7,781 $ 7,599 $ 8,003 $ 7,498 $ 7,341
- --------------------------------------- -------------- ------------ --------- ---------- ---------- --------- ---------- ---------
Earnings per share:
Basic 1.21 1.14 1.15 1.19 1.14 1.20 1.13 1.11
Diluted 1.18 1.11 1.11 1.15 1.10 1.16 1.09 1.06
-88-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There are no matters required to be disclosed under this item.
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
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, 2007. 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, 2007, the Corporation's internal control over financial
reporting is effective based on those criteria.
KPMG LLP, an independent registered public accounting firm, has audited
the Company's consolidated financial statements as of and for the year ended
December 31, 2007 and the effectiveness of the Company's internal control over
financial reporting as of December 31, 2007, as stated in their reports, which
are included herein.
/s/ Mark A. Turner /s/ Stephen A. Fowle
- ------------------------------------- --------------------------------
Mark A. Turner Stephen A. Fowle
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
-89-
Report of Independent Registered Public
Accounting Firm
The Board of Directors and Stockholders
WSFS Financial Corporation:
We have audited the internal control over financial reporting of WSFS Financial
Corporation and subsidiaries (the Company) as of December 31, 2007, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company'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, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company'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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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, WSFS Financial Corporation and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (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 the Company as of December 31, 2007 and 2006, 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, 2007,
and our report dated March 17, 2008 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
- --------------------------
Philadelphia, Pennsylvania
March 17, 2008
-90-
During the quarter ended December 31, 2007, there was no change in
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
- --------------------------
There are no matters required to be disclosed under this item.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
- ---------------------------------------------------------------
The Information under "Section 16a Beneficial Ownership Reporting
Compliance" and "Proposal 1 - Election of Directors" in the Registrant's
definitive proxy statement for the registrant's Annual Meeting of Stockholders
to be held on April 24, 2008 (the "Proxy Statement") is incorporated into this
item by reference.
We have adopted a Code of Ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer, controller
or persons performing similar functions. A copy of the Code of Ethics is posted
on our website at www.wsfsbank.com.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information under "Proposal I - Election of Directors" in the Proxy
Statement is incorporated into this item by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- --------------------------------------------------------------------------------
RELATED SHAREHOLDER MATTERS
---------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" of the Proxy Statement
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the section captioned "Proposal 1 Election of Directors - Stock
Ownership of Management" of the Proxy Statement
(c) We know of no arrangements, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in
a change in control of the registrant.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
-91-
Shown below is information as of December 31, 2007 with respect to compensation
plans under which equity securities of the Registrant are authorized for
issuance.
Equity Compensation Plan Information
(a) (b) (c) Number of securities
Number of Securities Weighted-Average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding outstanding equity compensation plans
Options and Options and (excluding securities
Phantom Stock Awards Phantom Stock Awards reflected in column (a)
-------------------- -------------------- -----------------------
Equity compensation plans
approved by stockholders (1) 722,582 $ 43.14 380,121
Equity compensation plans
not approved by stockholders n/a n/a n/a
-------- ------- --------
TOTAL 722,582 $ 43.143 80,121
======= ======== ======
(1) Plans approved by stockholders include the 1997 Stock Option Plan, as
amended and the 2005 Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information under "Business Relationships and Related Transactions" in
the Proxy Statement is incorporated into this item by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -----------------------------------------------
The information under "Independent Public Accountants" in the Proxy
Statement is incorporated into this item by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ---------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part of
this report, and are incorporated by reference.
1. The consolidated statements of Condition of WSFS Financial
Corporation and subsidiary as of December 31, 2007 and 2006, and
the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the
three year period ended December 31, 2007, together with the
related notes and the independent auditors' report of KPMG LLP,
independent registered public accounting firm.
2. Schedules omitted as they are not applicable.
-92-
The following exhibits are incorporated by reference herein or annexed to this
Annual Report:
Exhibit
Number Description of Document
- ------ -----------------------
3.1 Registrant's Certificate of Incorporation, as amended is incorporated
herein by reference to Exhibit 3.1 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994.
3.2 Amended and Restated Bylaws of WSFS Financial Corporation,
incorporated herein by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2003.
10.1 WSFS Financial Corporation, 1994 Short Term Management Incentive Plan
Summary Plan Description is incorporated herein by reference to
Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.2 Amended and Restated Wilmington Savings Fund Society, Federal Savings
Bank 1997 Stock Option Plan is incorporated herein by reference to the
Registrant's Registration Statement on Form S-8 (File No. 333-26099)
filed with the Commission on April 29, 1997.
10.3 2000 Stock Option and Temporary Severance Agreement among Wilmington
Savings Fund Society, Federal Savings Bank, WSFS Financial Corporation
and Marvin N. Schoenhals on February 24, 2000 is incorporated herein
by reference to Exhibit 10.4 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000.
10.4 Severance Policy among Wilmington Savings Fund Society, Federal
Savings Bank and certain Executives dated March 13, 2001, as amended
is incorporated herein by reference to Exhibit 10.5 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2000.
10.5 WSFS Financial Corporation's 2005 Incentive Plan is incorporated
herein by reference to appendix A of the Registrant's Definitive Proxy
Statement on Schedule 14-A for the 2005 Annual Meeting of
Stockholders.
21 Subsidiaries of Registrant.
23 Consent of KPMG LLP
31 Certification pursuant to Rule 13a-14 of the Exchange Act
-93-
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibits 10.1 through 10.4.1 represent management contracts or compensatory plan
arrangements.
-94-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: March 17, 2008 BY: /s/ Mark A. Turner
-----------------------------------------
Mark A. Turner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 17, 2008 BY: /s/ Marvin N. Schoenhals
-----------------------------------------
Marvin N. Schoenhals
Chairman
Date: March 17, 2008 BY: /s/ Mark A. Turner
-----------------------------------------
Mark A. Turner
President and Chief Executive Officer
Date: March 17, 2008 BY: /s/ Charles G. Cheleden
-----------------------------------------
Charles G. Cheleden
Vice Chairman and Lead Director
Date: March __, 2008 BY:
-----------------------------------------
John F. Downey
Director
Date: March 17, 2008 BY: /s/ Linda C. Drake
-----------------------------------------
Linda C. Drake
Director
-95-
Date: March 17, 2008 BY: /s/ David E. Hollowell
-----------------------------------------
David E. Hollowell
Director
Date: March 17, 2008 BY: /s/ Joseph R. Julian
-----------------------------------------
Joseph R. Julian
Director
Date: March 17, 2008 BY: /s/Dennis E. Klima
-----------------------------------------
Dennis E. Klima
Director
Date: March 17, 2008 BY: /s/ Calvert A. Morgan, Jr.
-----------------------------------------
Calvert A. Morgan, Jr.
Director
Date: March 17, 2008 BY: /s/ Thomas P. Preston
-----------------------------------------
Thomas P. Preston
Director
Date: March 17, 2008 BY: /s/ Scott E. Reed
-----------------------------------------
Scott E. Reed
Director
Date: March 17, 2008 BY: /s/ Claibourne D. Smith
-----------------------------------------
Claibourne D. Smith
Director
Date: March 17, 2008 BY: /s/ Stephen A. Fowle
-----------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
Date: March 17, 2008 BY: /s/ Robert F. Mack
-----------------------------------------
Robert F. Mack
Senior Vice President and Controller
-96-