UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2866913
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
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(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 4, 2006:
Common Stock, par value $.01 per share 6,651,857
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(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
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Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2006 and 2005 (Unaudited)........................................... 3
Consolidated Statement of Condition as of June 30, 2006
(Unaudited) and December 31, 2005.................................................. 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2006 and 2005 (Unaudited)................................................. 5
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 2006 and 2005 (Unaudited).................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.......................................................... 16
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 26
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Item 4. Controls and Procedures ............................................................. 26
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PART II. Other Information
Item 1. Legal Proceedings.................................................................... 26
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Item 1A. Risk Factors......................................................................... 26
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................... 26
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Item 3. Defaults upon Senior Securities...................................................... 26
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Item 4. Submission of Matters to a Vote of Security Holders.................................. 26
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Item 5. Other Information ................................................................... 26
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Item 6. Exhibits ............................................................................ 26
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Signatures .................................................................................... 27
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ........... 28
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ........... 30
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
-------- -------- -------- --------
(Unaudited)
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans ..................... $ 35,332 $ 25,447 $ 67,428 $ 48,604
Interest on mortgage-backed securities ......... 7,471 6,444 14,803 12,318
Interest and dividends on investment securities 388 639 1,023 1,394
Other interest income .......................... 677 356 1,091 735
-------- -------- -------- --------
43,868 32,886 84,345 63,051
-------- -------- -------- --------
Interest expense:
Interest on deposits ........................... 10,113 4,662 18,290 8,749
Interest on Federal Home Loan Bank advances .... 12,004 7,263 22,747 13,450
Interest on trust preferred borrowings ......... 1,106 1,967 2,123 2,679
Interest on other borrowings ................... 1,259 1,216 2,496 2,282
-------- -------- -------- --------
24,482 15,108 45,656 27,160
-------- -------- -------- --------
Net interest income ................................. 19,386 17,778 38,689 35,891
Provision for loan losses ........................... 695 772 1,383 1,351
-------- -------- -------- --------
Net interest income after provision for loan losses . 18,691 17,006 37,306 34,540
-------- -------- -------- --------
Noninterest income:
Credit/debit card and ATM income ............... 4,858 3,665 9,018 6,868
Deposit service charges ........................ 2,826 2,487 5,403 4,665
Investment advisory income ..................... 618 619 1,248 1,227
Bank owned life insurance income ............... 522 527 1,010 1,023
Loan fee income ................................ 413 569 834 995
Mortgage banking activities, net ............... 61 37 83 181
Securities losses .............................. (41) - (41) -
Other income ................................... 623 810 1,363 1,611
-------- -------- -------- --------
9,880 8,714 18,918 16,570
-------- -------- -------- --------
Noninterest expenses:
Salaries, benefits and other compensation ...... 9,421 8,494 18,613 17,316
Occupancy expense .............................. 1,347 1,263 2,647 2,539
Equipment expense .............................. 1,075 954 2,057 1,937
Data processing and operations expenses ........ 889 998 1,746 1,909
Marketing expense .............................. 728 828 1,341 1,353
Professional fees .............................. 505 498 762 1,051
Other operating expense ........................ 2,967 2,568 6,008 4,468
-------- -------- -------- --------
16,932 15,603 33,174 30,573
-------- -------- -------- --------
Income before minority interest and taxes ........... 11,639 10,117 23,050 20,537
Less minority interest .............................. 15 37 31 74
-------- -------- -------- --------
Income before taxes ................................. 11,624 10,080 23,019 20,463
Income tax provision ................................ 4,126 3,514 8,180 7,107
-------- -------- -------- --------
Net income .......................................... $ 7,498 $ 6,566 $ 14,839 $ 13,356
======== ======== ======== ========
Earnings per share:
Basic ............................................... $ 1.13 $ 0.95 $ 2.24 $ 1.90
Diluted ............................................. $ 1.09 $ 0.90 $ 2.15 $ 1.80
The accompanying notes are an integral part of these consolidated Financial
Statements.
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31,
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Assets
Cash and due from banks ...................................................... $ 71,237 $ 59,251
Cash in non-owned ATMs ....................................................... 171,174 174,527
Interest-bearing deposits in other banks ..................................... 342 173
----------- -----------
Total cash and cash equivalents .......................................... 242,753 233,951
Investment securities held-to-maturity ....................................... 4,638 4,806
Investment securities available-for-sale including reverse mortgages ......... 43,790 52,683
Mortgage-backed securities available-for-sale ................................ 587,828 608,372
Mortgage-backed securities trading ........................................... 12,105 11,951
Loans held-for-sale .......................................................... 1,752 436
Loans, net of allowance for loan losses of $26,701 at June 30, 2006
and $25,381 at December 31, 2005 ........................................... 1,970,385 1,774,858
Bank owned life insurance .................................................... 55,203 54,193
Stock in Federal Home Loan Bank of Pittsburgh, at cost ....................... 50,119 46,293
Assets acquired through foreclosure .......................................... 61 59
Premises and equipment ....................................................... 26,451 22,904
Accrued interest receivable and other assets ................................. 41,545 36,246
----------- -----------
Total assets ................................................................. $ 3,036,630 $ 2,846,752
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ............................................... $ 289,054 $ 279,415
Interest-bearing demand .................................................. 126,430 141,378
Money market ............................................................. 218,719 209,398
Savings .................................................................. 244,843 251,675
Time ..................................................................... 278,057 224,853
Jumbo certificates of deposit - retail ................................... 110,152 87,212
----------- -----------
Total retail deposits .................................................. 1,267,255 1,193,931
Jumbo certificates of deposit - non-retail ............................... 73,946 40,567
Brokered certificates of deposit ......................................... 241,623 211,738
----------- -----------
Total deposits ....................................................... 1,582,824 1,446,236
Federal funds purchased and securities sold under agreements to repurchase.... 73,400 83,150
Federal Home Loan Bank advances .............................................. 1,051,458 1,008,721
Trust preferred borrowings ................................................... 67,011 67,011
Other borrowed funds ......................................................... 43,353 36,126
Accrued interest payable and other liabilities ............................... 27,151 23,327
----------- -----------
Total liabilities ............................................................ 2,845,197 2,664,571
----------- -----------
Minority Interest ............................................................ 69 206
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding ................................................... - -
Common stock $.01 par value, 20,000,000 shares authorized; issued
15,502,476 at June 30, 2006 and 15,435,630 at December 31, 2005 .......... 155 154
Capital in excess of par value ............................................... 77,779 74,673
Accumulated other comprehensive loss ......................................... (16,769) (9,968)
Retained earnings ............................................................ 332,913 319,065
Treasury stock at cost, 8,852,069 shares at June 30, 2006 and 8,839,569
shares at December 31, 2005 .............................................. (202,714) (201,949)
----------- -----------
Total stockholders' equity ................................................... 191,364 181,975
----------- -----------
Total liabilities, minority interest and stockholders' equity ................ $ 3,036,630 $ 2,846,752
=========== ===========
The accompanying notes are an integral part of these consolidated Financial
Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30,
-------------------------
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Operating activities:
Net income ...................................................................... $ 14,839 $ 13,356
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................... 1,383 1,351
Depreciation, accretion and amortization .................................... 2,001 3,506
Increase in accrued interest receivable and other assets .................... (538) (899)
Origination of loans held-for-sale .......................................... (10,492) (20,685)
Proceeds from sales of loans held-for-sale .................................. 8,049 21,619
Gain on mortgage banking activity ........................................... (83) (181)
Stock-based compensation expense (net of tax benefit recognized) ............ 578 -
Excess tax benefits from share-based payment arrangements ................... (824) -
Minority interest net income ................................................ 31 74
Increase in accrued interest payable and other liabilities .................. 4,648 2,751
Gain on sale of assets acquired through foreclosure ......................... (8) (41)
Increase in value of bank-owned life insurance .............................. (1,010) (1,023)
Increase in capitalized interest, net ....................................... (233) (10)
----------- -----------
Net cash provided by operating activities ...................................... 18,341 19,818
----------- -----------
Investing activities:
Maturities of investment securities ............................................. 180 30
Sale of investment securities available-for-sale ................................ 23,991 -
Purchase of investments available-for-sale ...................................... (14,765) (975)
Repayments of mortgage-backed securities held-to-maturity ....................... - 3
Repayments of mortgage-backed securities available-for-sale ..................... 54,090 54,854
Purchases of mortgage-backed securities available-for-sale ...................... (44,793) (118,313)
Repayments of reverse mortgages ................................................. 354 178
Disbursements for reverse mortgages ............................................. (300) (200)
Purchase of Cypress Capital Management LLC ...................................... (466) (452)
Sale of loans ................................................................... 183 341
Purchase of loans ............................................................... (6,955) (4,469)
Net increase in loans ........................................................... (188,964) (127,141)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ................... (3,826) (2,453)
Sales of assets acquired through foreclosure, net ............................... 68 258
Investment in partnership ....................................................... 23 -
Investment in premises and equipment, net ....................................... (5,118) (1,517)
----------- -----------
Net cash used for investing activities .......................................... (186,298) (199,856)
----------- -----------
Financing activities:
Net increase in demand and savings deposits ..................................... 4,407 71,977
Net increase in time deposits ................................................... 138,873 43,938
Net decrease in securities sold under agreement to repurchase ................... (9,750) (285)
Receipts from FHLB advances ..................................................... 4,514,063 3,954,200
Repayments of FHLB advances ..................................................... (4,471,326) (3,888,320)
Redemption of WSFS Capital Trust I Preferred Securities ......................... - (51,547)
Issuance of Trust preferred borrowings .......................................... - 67,011
Dividends paid on common stock .................................................. (991) (913)
Issuance of common stock and exercise of employee stock options ................. 1,592 2,499
Excess tax benefit from share-based payment arrangements ........................ 824 -
Purchase of treasury stock, net of reissuance ................................... (765) (17,216)
Decrease in minority interest ................................................... (168) (129)
----------- -----------
Net cash provided by financing activities ....................................... 176,759 181,215
----------- -----------
Increase in cash and cash equivalents ........................................... 8,802 1,177
Cash and cash equivalents at beginning of period ................................ 233,951 193,009
----------- -----------
Cash and cash equivalents at end of period ...................................... $ 242,753 $ 194,186
=========== ===========
(Continued on next page)
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Six months ended June 30,
-------------------------
2006 2005
----------- -----------
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
-------------------------------------------------
Cash paid for interest during the year...................................... $ 39,941 $ 22,795
Cash paid for income taxes, net............................................. 7,427 5,710
Loans transferred to assets acquired through foreclosure ................... 62 372
Net change in accumulated other comprehensive loss, net of taxes ........... (6,801) (842)
Transfer of loans held-for-sale to loans.................................... 1,157 1,047
The accompanying notes are an integral part of these consolidated Financial
Statements.
6
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated Financial Statements include the accounts of the
parent company (WSFS Financial Corporation), Wilmington Savings Fund Society,
FSB (Bank or WSFS) and Montchanin Capital Management, Inc. (Montchanin) and its
non-wholly owned subsidiary, Cypress Capital Management, LLC (Cypress). WSFS
Financial Corporation (Company or Corporation) also has one unconsolidated
affiliate, WSFS Capital Trust III (the Trust). WSFS was founded in 1832 and is
one of the oldest financial institutions in the country. WSFS provides
residential and commercial real estate, commercial and consumer lending
services, as well as retail deposit and cash management services. Lending
activities are funded primarily with retail deposits and borrowings. Deposits
are insured to their legal maximum by the Federal Deposit Insurance Corporation
(FDIC). WSFS serves customers from its main office, 25 retail banking offices,
loan production offices and operations centers located in Delaware and
southeastern Pennsylvania. Montchanin was formed in 2003 to provide asset
management products and services in the Bank's primary market area. In January
2005, Montchanin acquired a 80% interest in Cypress. Cypress is a Wilmington
based investment advisory firm servicing high net-worth individuals and
institutions. In January 2006, Montchanin increased its ownership in Cypress to
90%. The Trust was formed in 2005 to issue Pooled Floating Rate Capital
Securities. The Trust invested all of the proceeds from the issuance of the
Pooled Floating Rate Capital Securities in Junior Subordinated Debentures of the
Corporation.
Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), WSFS Investment Group, Inc. and WSFS Reit, Inc. WSFS
Investment Group, Inc. markets various third-party investment and insurance
products, such as single-premium annuities, whole life policies and securities
in conjunction with WSFS. The investment activity is processed through the Bank
while the insurance products are processed through WSFS Investment Group, Inc.
WSFS Reit, Inc. is a real estate investment trust formed to hold qualifying real
estate assets and may be used to raise capital in the future.
The accounting and reporting policies of the Corporation conform with
U.S. generally accepted accounting principles and prevailing practices within
the banking industry for interim financial information and Rule 10-01 of
Regulation S-X. Per Rule 10-01 of Regulation S-X, the Corporation is not
required to include all information and notes for complete financial statements
and prevailing practices within the banking industry. Operating results for the
three and six months period ended June 30, 2006 are not necessarily indicative
of the results that may be expected for any future quarters or for the year
ending December 31, 2006. For further information, refer to the consolidated
financial statements and notes thereto included in the Corporation's Annual
Report of Form 10-K for the year ended December 31, 2005 as filed with the
Securities and Exchange Commission.
Accounting for Stock Option Grants
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Base Payment (SFAS 123R). SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized as compensation expense in the consolidated financial statements
based on their fair values. That expense will be recognized over the period
during which an Associate is required to provide services in exchange for the
award, known as the requisite service period (usually the vesting period). The
Corporation adopted SFAS 123R beginning January 1, 2006 using the Modified
Prospective Application Method. This method relates to current and future
periods and does not require the restatement of prior periods. The impact of
adopting SFAS 123R for the three months ended June 30, 2006, was an increase of
$358,000 (pre-tax) or $0.04 (after-tax) per share, to salaries, benefits and
other compensation. The impact of adopting SFAS 123R for the six months ended
June 30, 2006, was an increase of $691,000 (pre-tax) or $0.09 (after-tax) per
share, to salaries, benefits and other compensation.
The Corporation has stock options outstanding under two stock option
plans (collectively, "Option Plans") for officers, directors and Associates of
the Corporation and its subsidiaries. After shareholder approval in 2005, the
1997 Stock Option Plan ("1997 Plan"), was replaced by the 2005 Incentive Plan
("2005 Plan"). No future awards may be granted under the 1997 Plan. The 2005
Plan will terminate on the tenth anniversary of its effective date, after which
no awards may be granted. The number of shares reserved for issuance under the
2005 Plan is 400,000. At June 30, 2006, there were 231,109 shares available for
future grants under the 2005 Plan.
The Option Plans provide for the granting of incentive stock options as
defined in Section 422 of the Internal Revenue Code as well as nonincentive
stock options (collectively, "Stock Options"). Additionally, the 2005 Plan
provides for the granting of stock appreciation rights, performance awards,
restricted stock and restricted stock unit awards, deferred stock units,
dividend equivalents, other stock-based awards and cash awards. All Stock
Options are to be granted at not less than the market price of the Corporation's
common stock on the date of the grant. All Stock Options granted during 2006
vest in 20% or 25% per annum increments, start to become exercisable one year
from the grant date and expire between five and ten years from the grant date.
Generally, all awards become immediately exercisable in the event of a change in
control, as defined within the Option Plans.
7
A summary of the status of the Corporation's Option Plans and changes
during the quarter then ended is presented below:
June 2006 June 2005
---------------------------- ------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of period 732,511 $32.00 816,237 $24.24
Granted 1,808 60.67 1,798 52.87
Exercised (41,456) 16.15 (27,617) 14.73
Forfeited (340) 32.27 (2,930) 22.53
------- -------
Outstanding at end of period 692,523 33.02 787,488 24.65
Exercisable at end of period 394,930 21.27 458,829 17.14
Weighted-average fair value
of awards granted $15.45 $12.76
Beginning April 1, 2006, 423,054 stock options were exercisable. During
the second quarter of 2006, 13,332 options vested with an intrinsic value of
$346,000, and a grant date fair value of $8.36 per option. Also, during the
quarter, 41,456 options were exercised with an intrinsic value of $1.9 million.
There were 394,930 exercisable options remaining at June 30, 2006, with an
intrinsic value of $16.3 million and a remaining contractual term of 5.0 years.
At June 30, 2006 there were 692,523 stock options outstanding with an intrinsic
value of $20.6 million and a remaining contractual term of 5.5 years. During the
second quarter of 2005, 27,617 options were exercised with an intrinsic value of
$1.1 million and 12,516 options vested with a grant date fair value of $6.44 per
option.
A summary of the status of the Corporation's Option Plans and changes
during the six months then ended is presented below:
June 2006 June 2005
---------------------------- ------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of period 745,949 $31.60 873,360 $23.48
Granted 7,036 62.32 6,395 56.98
Exercised (59,346) 18.53 (89,337) 15.62
Forfeited (1,116) 37.53 (2,930) 22.53
------- -------
Outstanding at end of period 692,523 33.02 787,488 24.65
Exercisable at end of period 394,930 21.27 458,829 17.14
Weighted-average fair value
of awards granted $16.26 $13.71
Beginning January 1, 2006, 434,144 stock options were exercisable. During
the six months ended June 30, 2006, 20,132 options vested with an intrinsic
value of $607,000, and a grant date fair value of $7.67 per option. Also, during
the first six months of 2006, 59,346 options were exercised with an intrinsic
value of $2.6 million. During the first six months of 2005, 89,337 options were
exercised with an intrinsic value of $3.6 million and 48,890 options vested with
a grant date fair value of $5.19 per option.
The total amount of compensation cost related to nonvested stock options
as of June 30, 2006 is $1.9 million. The weighted-average period over which it
is expected to be recognized is 1.3 years. The Corporation issues new shares
upon the exercise of options.
The Black-Scholes option-pricing model was used to determine the
grant-date fair-value of options. Significant assumptions used in the model
included a weighted-average risk-free rate of return of 4.7% in 2006; an
expected option life of between three and three-quarter and six and one-half
years for all awards; and an expected stock price volatility of 22.0% in 2006.
For the purposes of this option-pricing model, 0.4% was used as the expected
dividend yield. Prior to adoption of SFAS 123R the Corporation used a
graded-vesting schedule to calculate the expense related to stock options. Since
the adoption of SFAS 123R the Corporation now uses a straight-line schedule to
calculate the expense related to new stock options issued.
8
The Black-Scholes and other option-pricing models assume that options are
freely tradable and immediately vested. Since options are not transferable, have
vesting provisions, and are subject to trading blackout periods imposed by the
Company, the value calculated by the Black-Scholes model may significantly
overstate the true economic value of the options.
Prior to adoption of SFAS 123R, SFAS No. 123 Accounting for Stock-Based
Compensation, encouraged, but did not require, the adoption of fair-value
accounting for stock-based compensation to Associates. The Company, as permitted
in 2005, had elected not to adopt the fair value accounting provisions of SFAS
123, and had instead continued to apply Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for the Stock Plans and to provide the required
pro forma disclosures of SFAS 123. Had the grant-date fair-value provisions of
SFAS 123 been adopted, the Corporation would have recognized pretax compensation
expense of $244,000 and $494,000 for the three and six months ended June 30,
2005 related to its Option Plans.
For comparative purposes, the following table illustrates the effect on
net income and earnings per share, for the three and six months ended June 30,
2005, had the Company applied the fair value recognition provision of the SFAS
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
For the three months For the six months
ended June 30, 2005 ended June 30, 2005
------------------- -------------------
(In Thousands, Except Per Share Data)
Net income, as reported ................................................... $ 6,566 $ 13,356
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 207 419
--------- ---------
Pro forma net income ................................................... $ 6,359 $ 12,937
Earnings per share:
Basic:
------
Net income ................................................................ $ 0.95 $ 1.90
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 0.03 0.06
--------- ---------
Pro forma net income ...................................................... $ 0.92 $ 1.84
========= =========
Diluted:
--------
Net income, as reported ................................................... $ 0.90 $ 1.80
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax
effects ......................................................... 0.03 0.05
--------- ---------
Pro forma net income ...................................................... $ 0.87 $ 1.75
========= =========
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months For the six months
ended June 30, ended June 30,
----------------------- -----------------------
2006 2005 2006 2005
------- ------- ------- -------
(In Thousands, Except Per Share Data)
Numerator:
----------
Net income ........................................................... $ 7,498 $ 6,566 $14,839 $13,356
======= ======= ======= =======
Denominator:
------------
Denominator for basic earnings per share - weighted average shares ... 6,620 6,942 6,611 7,016
Effect of dilutive employee stock options ............................ 280 371 288 397
------- ------- ------- -------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ....................................... 6,900 7,313 6,899 7,413
======= ======= ======= =======
Basic earnings per share ............................................. $ 1.13 $ 0.95 $ 2.24 $ 1.90
======= ======= ======= =======
Diluted earnings per share ........................................... $ 1.09 $ 0.90 $ 2.15 $ 1.80
======= ======= ======= =======
Outstanding common stock equivalents having no dilutive effect ....... 102 75 101 75
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Corporation has an interest-rate cap with a notional amount of
$50.0 million, which limits three-month London InterBank Offered Rate (LIBOR) to
6.00% for the ten years ending December 1, 2008. Until December 31, 2003, the
cap qualified as a hedge of the
9
cash flows on $50.0 million in trust preferred floating rate debt. The change in
the fair value of the cap during the hedging relationship was captured in
accumulated other comprehensive income. The remaining amount recorded in
accumulated other comprehensive income from December 31, 2003 will be
reclassified into interest expense when each of the quarterly interest payments
is made on the trust preferred debt. During the first six months of 2006, the
Company recognized a non-cash pre-tax charge of $53,000 in interest expense for
the amortization of the remaining balance in accumulated other comprehensive
income.
The fair value of the cap is estimated using a standard option model.
The fair value of the interest rate cap at June 30, 2006 was $188,000. The cap
is considered a free standing derivative and all changes in the fair value of
the cap are recorded in the Statement of Operations.
The following depicts the change in fair market value of the Company's
derivative for the three and six months ended:
For the three months ended June 30,
------------------------------------------------------------------------
2006 2005
-------------------------------- ---------------------------------
At At At At
April 1, Change June 30, April 1, Change June 30,
-------- ------ -------- -------- ------ --------
(In Thousands)
Interest Rate Cap................. $ 162 $ 26 $ 188 $ 145 $ (48) $ 97
For the six months ended June 30,
------------------------------------------------------------------------
2006 2005
-------------------------------- ---------------------------------
At At At At
January 1, Change June 30, January 1, Change June 30,
---------- ------ -------- ---------- ------ --------
(In Thousands)
Interest Rate Cap................. $ 125 $ 63 $ 188 $ 322 $ (225) $ 97
4. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive
income as required by SFAS No. 130, Reporting Comprehensive Income:
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
(In Thousands)
2006 2005 2006 2005
-------- -------- -------- --------
Net income .................................................. $ 7,498 $ 6,566 $ 14,839 $ 13,356
Other Comprehensive Income:
Unrealized holding (losses) gains on securities
available-for-sale arising during the period ........... (2,781) 6,895 (10,984) (1,258)
Tax benefit (expense) ....................................... 1,057 (2,620) 4,174 478
-------- -------- -------- --------
Net of tax amount ........................................... (1,724) 4,275 (6,810) (780)
Unrealized holding gains (losses) arising during the
Period on derivative used for cash flow hedge .......... 26 (206) 52 (95)
Tax (expense) benefit ....................................... (9) 72 (18) 33
-------- -------- -------- --------
Net of tax amount ........................................... 17 (134) 34 (62)
Reclassification adjustment for losses included in net income (41) - (41) -
Tax benefit ................................................. 16 - 16 -
-------- -------- -------- --------
Net of tax amount ........................................... (25) - (25) -
-------- -------- -------- --------
Total comprehensive income .................................. $ 5,766 $ 10,707 $ 8,038 $ 12,514
======== ======== ======== ========
10
5. TAXES ON INCOME
The Corporation accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes, which requires the recording of deferred
income taxes that reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Management has assessed valuation
allowances on the deferred income taxes due to, among other things, limitations
imposed by Internal Revenue Code and uncertainties, including the timing of
settlement and realization of these differences.
In November 2005, the FASB issued FASB Staff Position (FSP) No. FAS
123R-3, Transition Election for the Tax Effects of Share-Based Payment Awards.
This FSP provides a simplified method to calculate the Company's hypothetical
additional paid-in capital (APIC) pool for the beginning balance of excess
benefits and the method of determining the subsequent pool of option awards that
are outstanding and fully or partially vested upon adoption of SFAS 123R. This
FSP allows companies up to one year from the later of the adoption date of SFAS
123R or November 10, 2006 to evaluate the available transition alternatives and
make a one-time election. The Corporation has elected to use the simplified
method of accounting for the tax effect of share-based payment awards.
6. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation has two operating segments
at June 30, 2006: WSFS and CashConnect, the ATM division of WSFS.
The WSFS segment provides financial products through its banking
offices to commercial and retail customers. The CashConnect segment provides
turnkey ATM services through strategic partnerships with several of the largest
networks, manufacturers, and service providers in the ATM industry. The balance
sheet category "Cash in non-owned ATMs" includes cash in which fee income is
earned through bailment arrangements with customers of CashConnect. Bailment
arrangements are typically renewed annually.
Reportable segments are business units that are managed separately and
offer different services to distinct customer bases. The Corporation evaluates
performance based on pre-tax ordinary income relative to resources used, and
allocates resources based on these results. Segment information for the three
and six months ended June 30, 2006 and 2005 follows:
11
For the three months ended June 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---------- ---------- ---------- ---------- ---------- ----------
External customer revenues:
Interest income $ 43,868 $ - $ 43,868 $ 32,886 $ - $ 32,886
Non-interest income 5,873 4,007 9,880 5,733 2,981 8,714
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 49,741 4,007 53,748 38,619 2,981 41,600
---------- ---------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income 2,045 - 2,045 985 - 985
Non-interest income 169 171 340 194 179 373
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment revenues 2,214 171 2,385 1,179 179 1,358
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 51,955 4,178 56,133 39,798 3,160 42,958
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 24,482 - 24,482 15,108 - 15,108
Non-interest expenses 15,993 939 16,932 14,487 1,116 15,603
Provision for loan loss 695 - 695 772 - 772
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 41,170 939 42,109 30,367 1,116 31,483
---------- ---------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense - 2,045 2,045 - 985 985
Non-interest expenses 171 169 340 179 194 373
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment expenses 171 2,214 2,385 179 1,179 1,358
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 41,341 3,153 44,494 30,546 2,295 32,841
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary items $ 10,614 $ 1,025 11,639 $ 9,252 $ 865 10,117
Less minority interest 15 37
Income tax provision 4,126 3,514
---------- ----------
Consolidated net income $ 7,498 $ 6,566
========== ==========
Cash and cash equivalents $ 71,579 $ 171,174 $ 242,753 $ 56,983 $ 137,203 $ 194,186
Other segment assets 2,779,999 13,878 2,793,877 2,500,143 5,517 2,505,660
---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,851,578 $ 185,052 $3,036,630 $2,557,126 $ 142,720 $2,699,846
========== ========== ========== ========== ========== ==========
Capital expenditures $ 2,105 $ 135 $ 2,240 $ 826 $ 74 $ 900
12
For the six months ended June 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
(In Thousands)
Bank CashConnect Total Bank CashConnect Total
---------- ---------- ---------- ---------- ---------- ----------
External customer revenues:
Interest income $ 84,345 $ - $ 84,345 $ 63,051 $ - $ 63,051
Non-interest income 11,453 7,465 18,918 10,913 5,657 16,570
---------- ---------- ---------- ---------- ---------- ----------
Total external customer revenues 95,798 7,465 103,263 73,964 5,657 79,621
---------- ---------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income 3,802 - 3,802 1,793 - 1,793
Non-interest income 336 340 676 374 334 708
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment revenues 4,138 340 4,478 2,167 334 2,501
---------- ---------- ---------- ---------- ---------- ----------
Total revenue 99,936 7,805 107,741 76,131 5,991 82,122
---------- ---------- ---------- ---------- ---------- ----------
External customer expenses:
Interest expense 45,656 - 45,656 27,160 - 27,160
Non-interest expenses 31,285 1,889 33,174 28,877 1,696 30,573
Provision for loan loss 1,383 - 1,383 1,351 - 1,351
---------- ---------- ---------- ---------- ---------- ----------
Total external customer expenses 78,324 1,889 80,213 57,388 1,696 59,084
---------- ---------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense - 3,802 3,802 - 1,793 1,793
Non-interest expenses 340 336 676 334 374 708
---------- ---------- ---------- ---------- ---------- ----------
Total intersegment expenses 340 4,138 4,478 334 2,167 2,501
---------- ---------- ---------- ---------- ---------- ----------
Total expenses 78,664 6,027 84,691 57,722 3,863 61,585
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and extraordinary items $ 21,272 $ 1,778 23,050 $ 18,409 $ 2,128 $ 20,537
Less minority interest 31 74
Income tax provision 8,180 7,107
---------- ----------
Consolidated net income $ 14,839 $ 13,356
========== ==========
Cash and cash equivalents $ 71,579 $ 171,174 $ 242,753 $ 56,983 $ 137,203 $ 194,186
Other segment assets 2,779,999 13,878 2,793,877 2,500,143 5,517 2,505,660
---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,851,578 $ 185,052 $3,036,630 $2,557,126 $ 142,720 $2,699,846
========== ========== ========== ========== ========== ==========
Capital expenditures $ 4,923 $ 195 $ 5,118 $ 1,099 $ 340 $ 1,439
13
7. INDEMNIFICATIONS AND GUARANTEES
Secondary Market Loan Sales. The Company generally does not sell loans
with recourse except to the extent arising from standard loan sale contract
provisions covering violations of representations and warranties and, under
certain circumstances, first payment default by the borrower. These are
customary repurchase provisions in the secondary market for conforming mortgage
loan sales. The Company sells certain first mortgage loans to the Federal Home
Loan Mortgage Corporation as part of its ongoing asset/liability management
program. Loans held-for-sale are carried at the lower of cost or market. Gains
and losses on sales of loans are recognized at the time of the sale.
As is customary in such sales, WSFS provides indemnifications to the
buyers under certain circumstances. These indemnifications may include the
repurchase of loans by WSFS. Repurchases and losses are rare, and no provision
is made for losses at the time of sale. During the second quarter of 2006, the
Company made no repurchases of any loans sold in the secondary market.
Swap Guarantees. The Company entered into agreements with unrelated
financial institutions, whereby those financial institutions entered into
interest rate derivative contracts (interest rate swap transactions) with
customers referred to them by the Company. By the terms of the agreements, those
financial institutions have recourse to the Company for any exposure created
under each swap transaction in the event the customer defaults on the swap
agreement and the agreement is in a paying position to the third-party financial
institution. This is a customary arrangement that allows smaller financial
institutions, such as WSFS, to provide access to interest rate swap transactions
for its customers without WSFS creating the swap itself.
At June 30, 2006 and December 31, 2005, there were eighteen
variable-rate to fixed-rate swap transactions between the third party financial
institution and customers of WSFS with an initial notional amount aggregating
approximately $57.9 million, and with maturities ranging from approximately one
to ten years. The aggregate market value of these swaps to the customers was an
asset of $1.2 million at June 30, 2006 and $98,600 at December 31, 2005. The
amount of liability recorded by the Company for these guarantees that were in a
paying position at June 30, 2006 and December 31, 2005 was $3,000 and $8,000,
respectively. This amount represented the fair market value of the guarantee to
perform under the terms of the swap agreements.
8. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Postretirement Benefits
The Corporation shares certain costs of providing health and life
insurance benefits to retired Associates (and their eligible dependents).
Substantially all Associates may become eligible for these benefits if they
reach normal retirement age while working for the Corporation.
The Corporation accounts for its obligations under the provisions of
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. SFAS 106 requires that the costs of these benefits be recognized over
an Associate's active working career. Disclosures are in accordance with SFAS
No. 132 (Revised), Employer's Disclosure About Pensions and Other Postretirement
Benefits, that standardized the applicable disclosure requirements.
In December 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The
act expanded Medicare to include, for the first time, coverage for prescription
drugs beginning in 2006. The Corporation determined that its prescription drug
benefits under its postretirement benefit plan is actuarially equivalent to
Medicare Part D and thereby qualifies for subsidy under the Act.
Based on an actuarial analysis performed during the first quarter of
2006, the Corporation anticipates that its future benefit payments will be lower
due to the subsidy. The reduction to the total accumulated postretirement
benefit obligation (APBO) at January 1, 2006 was $559,000. Recognition of this
subsidy is also expected to reduce 2006 net periodic benefit costs by
approximately $74,000, or approximately $18,500 each quarter.
14
The following disclosures of the net periodic benefit cost components
of post-retirement benefits are in accordance with SFAS 132 (Revised) and were
measured at January 1, 2006:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost ................................... $ 27 $ 27 $ 54 $ 54
Interest cost .................................. 24 30 47 60
Amortization of transition obligation .......... 15 15 30 30
Net loss recognition ........................... - 4 - 8
---- ---- ---- ----
Net periodic benefit cost................ $ 66 $ 76 $131 $152
==== ==== ==== ====
Supplemental Pension Plan
The Corporation provided a nonqualified plan that gives credit for 25
years of service based on the qualified plan formula. This plan is currently
being provided to two retired executives of the Corporation. The plan is no
longer being provided to Associates of the Corporation. Unrecognized net gains
or losses resulting from experience different from that assumed and from changes
in assumptions is recognized immediately as a component of net periodic benefit
cost.
The following disclosures of the net periodic benefit cost components
of a supplemental pension plan are in accordance with SFAS 132 (Revised) and
were measured at January 1, 2006:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
---- ---- ---- ----
Interest cost................................... $11 $11 $22 $22
Net loss recognition............................ 14 6 28 12
--- --- --- ---
Net periodic benefit cost................ $25 $17 $50 $34
=== === === ===
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (Bank or WSFS). Founded in 1832, WSFS is one of the oldest
financial institutions in the country. As a federal savings bank, which was
formerly chartered as a state mutual savings bank, WSFS enjoys broader
investment powers than most other financial institutions. WSFS has served the
residents of the Delaware Valley for 174 years. WSFS is the largest thrift
institution headquartered in Delaware and the fourth largest financial
institution in the state on the basis of total deposits traditionally garnered
in-market. The Corporation's primary market area is the mid-Atlantic region of
the United States, which is characterized by a diversified manufacturing and
service economy. The long-term strategy of the Corporation is to improve its
status as a high-performing financial services company by focusing on its core
community banking business.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as retail deposit, cash management and wealth
management services. Lending activities are funded primarily with retail
deposits and borrowings. The Federal Deposit Insurance Corporation (FDIC)
insures deposits to their legal maximum. WSFS serves customers from its main
office and 25 retail banking offices, loan production offices and operations
centers located in Delaware and southeastern Pennsylvania. Wealth Management
services includes WSFS Investment Group, Inc., Montchanin Capital Management,
Inc. (Montchanin) and an investment management and trust services group.
The Corporation has two consolidated subsidiaries, WSFS and Montchanin.
The Corporation also has one unconsolidated affiliate, WSFS Capital Trust III.
Fully-owned and continuing consolidated subsidiaries of WSFS include WSFS
Investment Group, Inc. which markets various third-party insurance products and
securities in conjunction with WSFS, and WSFS Reit, Inc., which holds qualifying
real estate assets and may be used in the future to raise capital.
Montchanin has one consolidated non-wholly owned subsidiary, Cypress
Capital Management, LLC (Cypress). Cypress, a 90% owned subsidiary, is a
Wilmington-based investment advisory firm serving high net-worth individuals and
institutions. Cypress has more than $429 million in assets under management at
June 30, 2006.
WSFS Credit Corporation (WCC), a consolidated subsidiary of the Bank,
which was engaged primarily in indirect motor vehicle leasing, discontinued
operations in 2000. WCC no longer accepts new applications but continues to
service an immaterial amount of existing loans until their maturities.
FORWARD-LOOKING STATEMENTS
Within this report and financial statements, management has included
certain "forward-looking statements" concerning the future operations of the
Corporation. Statements contained in this 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 the
future plans and strategies including expectations of the Corporation's future
financial results. Management's ability to predict results or the effect of
future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Delaware, the mid-Atlantic region and the country as a whole, asset quality,
loan growth, loan delinquency rates, operating risk, uncertainty of estimates in
general, and changes in federal and state regulations, among other factors.
These factors should be considered in evaluating the "forward-looking
statements," and undue reliance should not be placed on such statements. Actual
results may differ materially from management expectations. WSFS Financial
Corporation does not undertake, and specifically disclaims any obligation to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of
operations are based on the consolidated Financial Statements, which are
prepared in conformity with U.S. generally accepted accounting principles. The
preparation of these Financial Statements requires management to make estimates
and assumptions affecting the reported amounts of assets, liabilities, revenue
and expenses. Management evaluates these estimates and assumptions on an ongoing
basis, including those related to the allowance for
16
loan losses, contingencies (including indemnifications), and deferred taxes.
Management bases its estimates on historical experience and various other
factors and assumptions that are believed to be reasonable under the
circumstances. These form the basis for making judgments on the carrying value
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following are critical accounting policies that involve more
significant judgments and estimates:
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when realized. The determination of the allowance for
loan losses requires significant judgment reflecting management's best estimate
of probable loan losses related to specifically identified loans as well as
those in the remaining loan portfolio. Management's evaluation is based upon a
continuing review of these portfolios, with consideration given to evaluations
resulting from examinations performed by regulatory authorities.
Contingencies (Including Indemnifications)
In the ordinary course of business, the Corporation, the Bank and its
subsidiaries are subject to legal actions, which involve claims for monetary
relief. Based upon information presently available to the Corporation and its
counsel, it is the Corporation's opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on the Corporation's results of operations.
The Corporation maintains a loss contingency for standby letters of
credit and charges losses to this reserve when such losses are realized. The
determination of the loss contingency for standby letters of credit requires
significant judgement reflecting management's best estimate of probable losses
related to standby letters of credit. The balance in this reserve at June 30,
2006 was $652,000.
The Bank, as successor to originators of reverse mortgages is, from
time to time, involved in arbitration or litigation with the various parties
including borrowers or the heirs of borrowers. Because reverse mortgages are a
relatively new and uncommon product, there can be no assurances about how the
courts or arbitrators may apply existing legal principles to the interpretation
and enforcement of the terms and conditions of the Bank's reverse mortgage
obligations.
Deferred Taxes
The Corporation accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes, which requires the recording of deferred
income taxes that reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Management has assessed the
Company's valuation allowances on deferred income taxes resulting from, among
other things, limitations imposed by Internal Revenue Code and uncertainties,
including the timing of settlement and realization of these differences.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $189.9 million during the six months ended June
30, 2006. During the first six months of 2006, net loans grew $195.5 million, or
11%, to $2.0 billion, reflecting the continued strong growth in commercial and
commercial real estate loans, which amounted to $146.3 million. Residential and
consumer loans grew by $36.0 million and $14.5 million respectively. Cash and
cash equivalents increased by $8.8 million. Mortgage-backed securities (MBS)
decreased by $20.4 million, mainly due to repayments. Investment securities
decreased $9.1 million, due to the sales of U.S. Treasury Notes.
Total liabilities increased $180.6 million between December 31, 2005
and June 30, 2006, to $2.8 billion, mainly due to a $136.6 million, or 9%,
increase in deposits. This included increases of $73.3 million in retail
deposits, $33.4 million in non-retail certificates of deposit (primarily
municipal deposits), and $29.9 million in brokered certificates of deposits. The
incremental increase in non-retail certificates of deposit and brokered
certificates of deposit were used to fund the strong loan growth during the
first six months of 2006. Federal Home Loan Bank (FHLB) advances increased $42.7
million. These increases were partially offset by a drecrease of $9.8 million in
Federal Funds purchased and securities sold under agreement to repurchase.
Capital Resources
Stockholders' equity increased $9.4 million between December 31, 2005
and June 30, 2006. This increase was mainly due to net income of $14.8 million
and an increase of $3.1 million from the issuance of common stock and exercise
of employee stock options. These increases were partially offset by other
comprehensive loss, which increased $6.8 million during the first six months of
2006 due,
17
in part to a decline in the fair value of securities available-for-sale
resulting from rising interest rates. In addition, the Corporation purchased
12,500 shares of its common stock for $765,000 ($61.22 per share average).
Finally, the Corporation declared cash dividends totaling $991,000 during the
six months ended June 30, 2006.
Below is a table comparing the Bank's consolidated capital position to the
minimum regulatory requirements as of June 30, 2006 (dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------ ----------------- -----------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Total Capital
(to Risk-Weighted Assets) ........ $284,541 13.07% $174,231 8.00% $217,788 10.00%
Core Capital (to Adjusted
Total Assets)..................... 260,047 8.53 121,977 4.00 152,471 5.00
Tangible Capital (to Tangible
Assets) .......................... 260,047 8.53 45,741 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 260,047 11.94 87,115 4.00 130,673 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory actions and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. At June 30, 2006 the Bank was in compliance
with regulatory capital requirements and is considered a "well-capitalized"
institution.
Liquidity
The Company manages its liquidity risk and funding needs through its
treasury function and through its Asset/Liability Committee. The Company has a
policy that separately addresses liquidity, and management monitors the
Company's adherence to policy limits. One measure of the Company's liquidity is
the ratio of cash and qualified assets to net withdrawable deposits and
borrowings due within one year, which was 6.4% at June 30, 2006, compared with
6.5% at March 31, 2006. Both of these ratios were in excess of the policy
minimum. Also, liquidity risk management is a primary area of examination by the
OTS. The Company complies with guidance promulgated under Thrift Bulletin 77
that requires thrift institutions to maintain adequate liquidity to assure safe
and sound operations.
As a financial institution, the Bank has ready access to several
sources to fund growth and meet its liquidity needs. Among these are: net
income, deposit programs, loan repayments, borrowing from the FHLB, repurchase
agreements and the brokered CD market. The branch expansion the Company is
currently undertaking is intended to enter the Company into new, but contiguous,
markets, attract new customers and provide funding for its business loan growth.
In addition, the Corporation has a large portfolio of high-quality, liquid
investments, primarily short-duration, AAA-rated, mortgage-backed securities and
Agency notes that are positioned to provide a near-continuous source of cash
flow to meet current cash needs, or can be sold to meet larger discrete needs
for cash. Management believes these sources are sufficient to maintain the
required and prudent levels of liquidity.
During the six months ended June 30, 2006, net loan growth resulted in
the use of $195.7 million in cash. The loan growth was primarily the result of
the successful implementation of specific strategies designed to increase
corporate and small business lending. While the Company's loan to deposit ratio
has been well above 100% for many years, management has significant experience
managing its funding needs through borrowings, primarily through the Federal
Home Loan Bank of Pittsburgh.
Additionally, during the six months ended June 30, 2006, $18.3 million
in cash was provided by operating activities, while $4.4 million in cash was
provided through the net increase in demand and savings deposits and $138.9
million in cash through the net increase in time deposits. For the period, cash
and cash equivalents increased $8.8 million to $242.8 million.
18
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets
and past due loans at the dates indicated. Nonperforming assets 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 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 loans contractually past due 90 days or more as
to principal or interest payments but which remain on accrual status because
they are considered well secured and in the process of collection.
June 30, December 31,
2006 2005
---- ----
(In Thousands)
Nonaccruing loans:
Commercial .................................... $1,137 $ 925
Consumer ...................................... 142 155
Commercial mortgage ........................... 553 727
Residential mortgage .......................... 1,357 1,567
Construction .................................. - 36
------ ------
Total nonaccruing loans ............................ 3,189 3,410
Assets acquired through foreclosure ................ 61 59
------ ------
Total nonperforming assets ......................... $3,250 $3,469
====== ======
Past due loans:
Residential mortgages ......................... $ 348 $ 327
Commercial and commercial mortgages ........... - -
Consumer ...................................... 179 59
------ ------
Total past due loans ............................... $ 527 $ 386
====== ======
Ratios:
Nonaccruing loans to total loans (1) .......... 0.16% 0.19%
Allowance for loan losses to gross loans (1)... 1.34% 1.41%
Nonperforming assets to total assets .......... 0.11% 0.12%
Loan loss allowance to nonaccruing loans (2)... 826% 709%
Loan and foreclosed asset allowance to total
nonperforming assets (2) .................... 810% 697%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased $219,000 between December 31, 2005 and
June 30, 2006. This decrease resulted primarily from collections, charge-offs
and accrual transfers of commercial mortgage, consumer and residential mortgage,
exceeding non-accrual additions. Nonaccruing commercial loans increased
primarily from the addition of a $247,000 loan. Nonaccruing construction loans
decreased to zero due to the collection of a loan. Assets acquired through
foreclosure remained almost flat as a result of sales and write-offs of various
residential properties being almost equal to additions. An analysis of the
change in the balance of non-performing assets is presented below.
For the six
months ended For the year ended
June 30, 2006 December 31, 2005
------------- -----------------
(In Thousands)
Beginning balance................................ $ 3,469 $ 4,613
Additions .................................. 1,656 5,062
Collections................................. (1,524) (4,467)
Transfers to accrual/restructured status.... (198) (398)
Charge-offs / write-downs, net.............. (153) (1,341)
------- -------
Ending balance................................... $ 3,250 $ 3,469
======= =======
19
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those, which would result from a regulatory examination.
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest
rate-sensitive assets and liabilities to promote a favorable interest rate
spread and mitigate exposure to fluctuations in interest rates is the
Corporation's primary tool for achieving its asset/liability management
strategies. Management regularly reviews the interest-rate sensitivity of the
Corporation and adjusts the sensitivity within acceptable tolerance ranges
established by management. At June 30, 2006, interest-bearing liabilities
exceeded interest-earning assets that mature or reprice within one year
(interest-sensitive gap) by $51.7 million. The Corporation's interest-sensitive
assets as a percentage of interest-sensitive liabilities within the one-year
window decreased to 97% at June 30, 2006 compared to 100% at March 31, 2006.
Likewise, the one-year interest-sensitive gap as a percentage of total assets
changed to -1.92% at June 30, 2006 from 0.04% at March 31, 2006. The change in
sensitivity since March 31, 2006 is the result of the current interest rate
environment and the Corporation's continuing effort to effectively manage
interest rate risk. Interest rate-sensitive assets of the Corporation excluded
cash flows of discontinued operations as well as the interest rate-sensitive
funding for these assets.
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13a "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
of an immediate change in interest rates in 100 basis point increments on the
net portfolio value ratio. The net portfolio value ratio is defined as the net
present value of the estimated cash flows from assets and liabilities as a
percentage of net present value of cash flows from total assets (or the net
present value of equity). The table below is the estimated impact of immediate
changes in interest rates on the Company's net interest margin and net portfolio
value ratio at the specified levels at June 30, 2006 and 2005, calculated in
compliance with Thrift Bulletin No. 13a:
At June 30,
---------------------------------------------------------------------
2006 2005
------------------------------ ---------------------------------
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value Ratio (2) Margin (1) Value Ratio (2)
-------------- ---------- --------------- ---------- ---------------
+300 1% 7.54% 2% 8.49%
+200 1% 7.89% 2% 8.86%
+100 0% 8.25% 1% 9.16%
0 0% 8.87% 0% 9.37%
-100 -1% 9.29% -2% 9.45%
-200 -4% 9.85% -7% 9.18%
-300 -10% 10.68% -13% 8.86%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate change environments.
(2) The net portfolio value ratio of the Company in a stable interest rate
environment and the net portfolio value ratio as projected under the
various rate change environments.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
Results of Operations
The Corporation recorded net income of $7.5 million or $1.09 per
diluted share for the second quarter of 2006. This compares to $6.6 million or
$0.90 per diluted share for the same quarter last year. Earnings for the second
quarter of 2005 were impacted by the refinancing of $50.0 million of Trust
Preferred Securities, resulting in a non-cash charge, net of taxes, of $728,000,
or $0.10 per share.
Net income for the six months ended June 30, 2006 was $14.8 million or
$2.15 per diluted share. This compares to $13.4 million or $1.80 per diluted
share for the comparable period last year. Earnings for the six months ended
June 30, 2005 were also impacted by the refinancing charge related to the Trust
Preferred Securities, discussed above.
20
Net Interest Income
The following tables provide information concerning the balances,
yields and rates on interest-earning assets and interest-bearing liabilities
during the periods indicated.
Three months ended June 30,
----------------------------------------------------------------------------
2006 2005
--------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans .............. $ 638,645 $ 12,860 8.05% $ 572,714 $ 9,576 6.69%
Residential real estate loans.............. 484,000 6,621 5.47 429,787 5,524 5.14
Commercial loans .......................... 573,853 11,146 7.88 434,056 6,686 6.35
Consumer loans............................. 257,930 4,687 7.29 218,328 3,633 6.67
---------- -------- ---------- -------
Total loans.............................. 1,954,428 35,314 7.28 1,654,885 25,419 6.21
Mortgage-backed securities (4).................. 617,553 7,471 4.84 583,785 6,444 4.42
Loans held-for-sale (3)......................... 1,284 18 5.61 2,107 28 5.32
Investment securities (4) (5)................... 54,366 388 2.85 97,459 639 2.62
Other interest-earning assets .................. 52,402 677 5.18 49,434 356 2.89
---------- -------- ---------- -------
Total interest-earning assets.............. 2,680,033 43,868 6.59 2,387,670 32,886 5.56
Allowance for loan losses....................... (26,397) -------- (24,842) -------
Cash and due from banks......................... 55,424 51,945
Cash in non-owned ATMs.......................... 157,655 127,760
Bank owned life insurance....................... 54,860 52,877
Other noninterest-earning assets................ 62,156 53,919
---------- ----------
Total assets............................... $2,983,731 $2,649,329
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand.................... $ 122,917 $ 162 0.53% $ 110,565 $ 66 0.24%
Money market............................... 228,493 1,978 3.47 162,934 747 1.84
Savings.................................... 239,474 444 0.74 280,668 280 0.40
Retail time deposits ...................... 364,669 3,497 3.85 278,253 1,882 2.71
---------- -------- ---------- -------
Total interest-bearing retail deposits... 955,553 6,081 2.55 832,420 2,975 1.43
Jumbo certificates of deposits ........... 84,353 1,033 4.91 39,081 280 2.87
Brokered certificates of deposit.......... 245,213 2,999 4.91 182,220 1,407 3.10
---------- -------- ---------- -------
Total interest-bearing deposits......... 1,285,119 10,113 3.16 1,053,721 4,662 1.77
FHLB of Pittsburgh advances.................... 1,037,132 12,004 4.58 889,641 7,263 3.23
Trust preferred borrowings..................... 67,011 1,106 6.53 66,161 1,967 11.76
Other borrowed funds........................... 113,190 1,259 4.45 177,090 1,216 2.75
---------- -------- ---------- -------
Total interest-bearing liabilities........ 2,502,452 24,482 3.91 2,186,613 15,108 2.76
Noninterest-bearing demand deposits............ 269,060 -------- 252,134 -------
Other noninterest-bearing liabilities.......... 22,566 16,061
Minority interest ............................. 65 195
Stockholders' equity........................... 189,588 194,326
---------- ----------
Total liabilities and stockholders' equity..... $2,983,731 $2,649,329
---------- ----------
Excess of interest-earning over
interest-bearing liabilities.............. $ 177,581 $ 201,057
========== ==========
Net interest and dividend income............... $ 19,386 $17,778
======== =======
Interest rate spread........................... 2.68% 2.80%
==== ====
Net interest margin............................ 2.94% 3.03%
==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
(5) Includes reverse mortgages.
21
Six months ended June 30,
----------------------------------------------------------------------------
2006 2005
--------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans ................ $ 622,009 $24,621 7.92% $ 561,812 $18,160 6.46%
Residential real estate loans ............... 475,213 12,900 5.43 433,427 11,104 5.12
Commercial loans ............................ 549,730 20,790 7.72 409,882 12,176 6.18
Consumer loans............................... 254,413 9,093 7.21 215,560 7,101 6.64
---------- ------- ---------- -------
Total loans................................ 1,901,365 67,404 7.15 1,620,681 48,541 6.06
Mortgage-backed securities (4).................... 620,535 14,803 4.77 563,488 12,318 4.37
Loans held-for-sale (3)........................... 941 24 5.10 2,308 63 5.46
Investment securities (4) (5)..................... 56,203 1,023 3.64 97,327 1,394 2.86
Other interest-earning assets .................... 50,556 1,091 4.35 47,702 735 3.11
---------- ------- ---------- -------
Total interest-earning assets................ 2,629,600 84,345 6.46 2,331,506 63,051 5.46
Allowance for loan losses......................... (25,958) ------- (24,610) -------
Cash and due from banks........................... 53,401 52,985
Cash in non-owned ATMs............................ 151,086 125,533
Bank-owned life insurance......................... 54,614 52,623
Other noninterest-earning assets.................. 61,077 54,113
---------- ----------
Total assets................................. $2,923,820 $2,592,150
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest bearing demand...................... $ 123,359 $ 302 0.49% $ 105,111 $ 125 0.24%
Money market................................. 227,367 3,693 3.28 152,081 1,338 1.77
Savings...................................... 243,292 955 0.79 283,052 550 0.39
Retail time deposits ........................ 343,544 6,184 3.63 282,463 3,733 2.67
---------- ------- ---------- -------
Total interest-bearing retail deposits..... 937,562 11,134 2.39 822,707 5,746 1.41
Jumbo certificates of deposits .............. 72,284 1,696 4.73 42,148 574 2.75
Brokered certificates of deposit............. 235,671 5,460 4.67 169,417 2,429 2.89
---------- ------- ---------- -------
Total interest-bearing deposits............ 1,245,517 18,290 2.96 1,034,272 8,749 1.71
FHLB of Pittsburgh advances....................... 1,020,334 22,747 4.43 854,752 13,450 3.13
Trust preferred borrowings........................ 67,011 2,123 6.30 58,895 2,679 9.05
Other borrowed funds.............................. 117,481 2,496 4.25 185,603 2,282 2.46
---------- ------- ---------- -------
Total interest-bearing liabilities........... 2,450,343 45,656 3.73 2,133,522 27,160 2.55
Noninterest-bearing demand deposits............... 263,542 ------- 245,897 -------
Other noninterest-bearing liabilities............. 21,799 15,960
Minority interest ................................ 109 210
Stockholders' equity.............................. 188,027 196,561
---------- ----------
Total liabilities and stockholders' equity........ $2,923,820 $2,592,150
========== ==========
Excess of interest-earning assets over
interest-bearing liabilities................. $ 179,257 $ 197,984
========== ==========
Net interest and dividend income.................. $38,689 $35,891
======= =======
Interest rate spread.............................. 2.73% 2.91%
==== ====
Net interest margin............................... 2.98% 3.13%
==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
(5) Includes reverse mortgages.
Net interest income for the second quarter of 2006 was $19.4 million
compared to $17.8 million for the same quarter in 2005. Higher loan and higher
mortgage-backed securities (MBS) volumes drove much of this increase. The yield
on earning assets was also higher in the second quarter of 2006 compared to the
second quarter of 2005. The yield on loans increased 1.07% from 6.21% in the
second quarter of 2005 to 7.28% in the second quarter of 2006, while the yield
on mortgage backed securities increased 0.42% for the same period. The increases
in the yields were due to the higher overall level of market interest rates as
the Federal Reserve continued raising short-term interest rates through 2005 and
into 2006. The net interest margin for the second quarter of 2006 was 2.94%, a
slight decrease from the second quarter 2005 which was 3.03%.
22
The net interest margin for the second quarter of 2005 was negatively
affected by 18 basis points due to the redemption of $50 million of WSFS Capital
Trust I Securities, which carried an interest rate of the London InterBank
Offered Rate (LIBOR) plus 250 basis points. In connection with the redemption,
the Company recognized a $1.1 million (pre-tax) non-cash charge to interest
expense from the write-down of the unamortized debt issuance costs of the called
securities. In conjunction with this redemption, the Company issued $65 million
aggregate principal amount of Pooled Floating Rate Capital Securities, which
carry an interest rate of LIBOR plus 177 basis points. Without this charge the
margin would have been 3.21 % for the second quarter of 2005.
Net interest income for the six-month period ending June 30, 2006 was
$38.7 million compared with $35.9 million for the same period in 2005. Similar
to the analysis for the second quarter above, the increase in net interest
income was driven by higher loan and MBS volumes. The yield on loans increased
1.09% and the yield on MBS increased 0.40%. The net interest margin for the
first six months of 2006 was 2.98%, compared with 3.13% for the same period in
2005.
The net interest margin for the six months ended June 30, 2005 was
negatively affected by 9 basis points due to the redemption of $50 million of
WSFS Capital Trust I Securities detailed above. Without this charge the margin
would have been 3.22% for the six months ended June 30, 2005.
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The determination of
the allowance for loan losses requires significant judgment reflecting
management's best estimate of probable loan losses related to specifically
identified loans as well as probable loan losses in the remaining loan
portfolio. Management's evaluation is based upon a continuing review of these
portfolios.
Management establishes the loan loss allowance in accordance with
guidance provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the
allowance consists of several key elements which include: specific allowances
for identified problem loans; formula allowances for commercial and commercial
real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans in cases where
management has identified significant conditions or circumstances related to a
specific credit that management believes indicate the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans
are calculated by applying loss factors to outstanding loans in each case based
on the internal risk grade of loans. As a result, changes in risk grades of both
performing and nonperforming loans affect the amount of the formula allowance.
Loss factors by risk grade have a basis in WSFS' historical loss experience for
such loans and may be adjusted for significant factors that, in management's
judgment, affect the collectability of the portfolio as of the evaluation date.
See discussion of historical loss adjustment factors below.
Pooled loans are loans that are usually smaller,
not-individually-graded and homogenous in nature, such as consumer installment
loans and residential mortgages. Pooled loan loss allowances are based on
historical net charge-offs over the past ten years. The average loss allowance
per homogenous pool is based on the product of average annual historical loss
rate and the average estimated duration of the pool multiplied by the pool
balances. These separate risk pools are then assigned a reserve for losses based
upon this historical loss information and historical loss adjustment factors.
Historical loss adjustment factors are based upon management's evaluation of
various current conditions, including those listed below.
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet at least quarterly to
discuss and review these conditions and risks associated with individual problem
loans. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for such
losses. The provision for loan losses increased from $1,351,000 for the first
six months of 2005 to $1,383,000 for the first six months of 2006, primarily the
result of continued loan growth, despite continued positive trends in asset
quality.
23
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The allowances for
losses are maintained at a level which management considers adequate to provide
for losses based upon an evaluation of known and inherent risks in the
portfolios. Management's evaluation is based upon a continuing review of the
portfolios.
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated.
Six months ended Six months ended
June 30, 2006 June 30, 2005
------------- -------------
(Dollars in Thousands)
Beginning balance ............................. $ 25,381 $ 24,222
Provision for loan losses...................... 1,383 1,351
Charge-offs:
Residential real estate .................. 70 38
Commercial real estate (1) ............... - -
Commercial................................ 79 524
Consumer.................................. 189 289
Overdrafts ............................... 117 -
-------- --------
Total charge-offs.............................. 455 851
-------- --------
Recoveries:
Residential real estate .................. 14 57
Commercial real estate (1) ............... 156 41
Commercial ............................... 121 39
Consumer.................................. 101 80
-------- --------
Total recoveries .............................. 392 217
-------- --------
Net charge-offs ............................... 63 634
-------- --------
Ending balance................................. $ 26,701 $ 24,939
======== ========
Net charge-offs to average gross loans
outstanding, net of unearned income (2)...... 0.01% 0.08%
======== ========
(1) Includes commercial mortgage and construction loans.
(2) Ratio for six months ended June 30, 2006 and June 30, 2005 are annualized.
Noninterest Income
Noninterest income for the quarter ended June 30, 2006 was $9.9 million
compared to $8.7 million for the second quarter of 2005 an increase of $1.2
million or 14%. The increase over the second quarter 2005 was mainly
attributable to an increase of $1.2 million in card and ATM income due to
increased volumes of cash in non-owned ATMs and higher rates earned on this cash
during the quarter. Deposit service charges also increased $339,000 mainly due
to an increase in deposit accounts resulting from the continued success of the
Company's personal and business checking initiatives that began during the third
quarter of 2004.
During the second quarter of 2006, the Corporation sold $11.0 million
of U.S. Government securities, which resulted in a $41,000 loss. These
securities were originally purchased for collateral management purposes.
Subsequent to the purchase of the securities, certain collateral requirements
were adjusted and the U.S. Government securities were no longer required. As a
result, the securities were then sold.
For the six months ended June 30, 2006, noninterest income was $18.9
million, an increase of $2.3 million or 14% over the same period in 2005.
Consistent with the quarter, this increase was mainly due to increases in card
and ATM income at CashConnect and deposit service charges.
Noninterest Expense
For the quarter ended June 30, 2006, noninterest expense was $16.9
million compared to $15.6 million for the same period in 2005 an increase of
$1.3 million or 8%. The increase in salaries, benefits and other compensation
was partially due to $333,000 of expense related to stock options. As of January
1, 2006 the Corporation implemented SFAS 123R, which requires that all
share-based payments to participants, including grants of stock options, be
recognized as compensation expense in the income statement based on their fair
values. The remaining increases in noninterest expense were primarily the result
of overall growth of the Company.
24
Noninterest expense for the six months ended June 30, 2006 was $33.2
million, an increase of $2.6 million or 8% over the $30.6 million reported for
the same period in 2005. This increase was mainly due to salaries, benefits and
other compensation. These expenses increased primarily due to the Company's
continued growth efforts and, as a result, the number of Associates increased to
554 at June 30, 2006. This was an increase of 38 Associates compared to the same
period in 2005. In addition, and consistent with the discussion above, the
increase in salaries, benefits and other compensation was impacted by $691,000
of expense related to stock options which resulted from the implementation of
SFAS 123R. Lastly, the first six months of 2005 were favorably impacted by the
reversal of a $503,000 reserve for losses in the CashConnect (ATM) business.
This reserve was no longer necessary because losses were determined to be
unlikely.
The Corporation's stock option plans contain provisions which
accelerate vesting of stock options upon retirement. SFAS 123R requires
accelerated expensing of option awards to participants who are or will become
eligible for retirement under those plans. There are a number of participants
who qualify for this accelerated vesting. Had the Corporation been subject to
SFAS 123R at the time of the Corporation's award in December 2005, it would have
expensed $309,000 (pre-tax), or $0.03 per share, net of tax, related to awards
granted to retirement-eligible participants. Historically, the Corporation
awards options in the fourth quarter of each year and expects this practice to
continue.
Income Taxes
The Corporation and its subsidiaries file a consolidated Federal income
tax return and separate state income tax returns. Income taxes are accounted for
in accordance with SFAS 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences." The Corporation recorded
a provision for income taxes during the three and six months ended June 30, 2006
of $4.1 million and $8.2 million, respectively, compared to an income tax
provision of $3.5 million and $7.1 million for the same periods in 2005. The
effective tax rate for the three and six month periods ended June 30, 2006 was
36%, compared to 35% for the comparable periods in 2005. This increased
effective tax rate was primarily due to the non-deductibility of stock option
expense related to incentive stock options in accordance with SFAS 123R.
The effective tax rates reflect the recognition of certain tax benefits
in the financial statements including those benefits from tax-exempt interest
income, BOLI income, and fifty percent interest income exclusion on a loan to an
Employee Stock Ownership Plan. These tax benefits are offset by the tax effect
of stock based compensation expense related to incentive stock options and a
provision for state income tax expense.
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision for income taxes
accordingly.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 155, Accounting
for Certain Hybrid Financial Instruments - An Amendment of Statements No. 133
and 140. This Statement permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation. It also clarifies which interest-only strips are not
subject to the requirements of SFAS 133. In addition, it establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation. SFAS 155
becomes effective in fiscal years beginning after September 15, 2006. The
adoption of this Statement is not expected to have a material impact on the
Corporation's Consolidated Financial Statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets - An Amendment of Statement No. 140. This Statement will
modify the accounting for servicing assets and liabilities, such as those common
with mortgage securitization activities. The new Standard addresses the
recognition and measurement of separately recognized servicing assets and
liabilities and provides an approach to lessen the efforts to obtain hedge-like
(offset) accounting. SFAS 156 becomes effective in fiscal years beginning after
September 15, 2006. The adoption of this Statement is not expected to have a
material impact on the Corporation's Consolidated Financial Statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48). This interpretation of SFAS No. 109 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The interpretation is effective for fiscal years beginning after
December 15, 2006. The Corporation has reserves related to certain of its tax
positions which would be subject to analysis under FIN 48. The Corporation has
not yet determined the impact on its Consolidated Financial Statements, if any,
that would result as a consequence of adopting this interpretation in 2007.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report
on Form 10-Q.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934 (the "Exchange Act")), the Company's principal executive
officer and the principal financial officer have concluded that
as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective
to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and is
accumulated
25
and communicated to the Company's management, including the
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosures.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's
internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at June 30, 2006. From time to time, the Company is party to
legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
Item 1A. Risk Factors
------------
Management of the Company does not believe there have been any
material changes to the risk factors previously disclosed under Item
1A. of the Company's Form 10-K for the year ended December 31, 2005,
previously filed with the Securities and Exchange Commission.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table lists purchases of the Company's Common Stock
during the second quarter of 2006.
Total Number of Maximum Number
Total Number Average Shares Purchased of Shares that May
of Shares Price Paid As Part of Publicly Yet Be Purchased
Purchased per Share Announced Plans Under the Plans
--------- --------- --------------- ---------------
April 1, to April 30, 2006 0 $0.00 0 637,500
May 1, to May 31, 2006 0 $0.00 0 637,500
June 1, to June 30, 2006 0 $0.00 0 637,500
Total for the quarter ended June 30, 2006 0 $0.00
There is no expiration date under either Plan.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Corporation's Annual Stockholder's Meeting (the Meeting) held
on April 27, 2006, all the nominees for director proposed by the
Corporation were elected. The votes cast for each nominee were as
follows:
For Withheld
--- --------
Linda C. Drake..................................... 6,048,452 17,922
David E. Hollowell................................. 6,047,338 19,036
Scott E. Reed...................................... 6,048,213 18,160
Claibourne D. Smith................................ 5,978,943 87,430
At the Meeting, the shareholders also ratified the appointment of
KPMG, LLP as independent auditors for fiscal year ending December 31,
2006. The votes cast were as follows:
For Against Abstain
--- ------- -------
5,957,212 101,011 8,150
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
(a) Exhibit 31 - Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) Exhibit 32 - Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: August 8, 2006 /s/Marvin N. Schoenhals
-------------------------------------
Marvin N. Schoenhals
President and Chief Executive Officer
Date: August 8, 2006 /s/Stephen A. Fowle
-------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
27