Attached files
file | filename |
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EX-32 - EXHIBIT 32. - WSFS FINANCIAL CORP | ex32.htm |
EX-23 - EXHIBIT 23 - CONSENT OF KPMG LLP - WSFS FINANCIAL CORP | ex23.htm |
EX-21 - EXHIBIT 21 - SUBSIDIARIES - WSFS FINANCIAL CORP | ex21.htm |
EX-31.1 - EXHIBIT 31.1 - WSFS FINANCIAL CORP | ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - WSFS FINANCIAL CORP | ex31-2.htm |
EX-99.2 - EXHIBIT 99.2 - WSFS FINANCIAL CORP | ex99-2.htm |
EX-99.1 - EXHIBIT 99.1 - WSFS FINANCIAL CORP | ex99-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
One)
(X) ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31,
2009
OR
( ) TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from to
_______
Commission
file number 0-16668
WSFS
FINANCIAL CORPORATION
|
(Exact
Name of Registrant as Specified in its
Charter)
|
Delaware
|
22-2866913
|
|
(State
or other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer Identification No.)
|
500
Delaware Avenue, Wilmington, Delaware
|
19801
|
|||
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
Telephone Number, Including Area Code: (302)
792-6000
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock, $0.01 par value
|
The
NASDAQ Stock Market LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicated
by check if the registrant is a well-known seasoned issuer as defined in Rule
405 of the Securities Act. YES __ NO
__X_
Indicate
by check if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. YES __ NO
__X___
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
___
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ___
No ___
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
( )
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer____ Accelerated filer X
Non-accelerated filer ___ Smaller reporting company
___
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes ____ No __X___
The
aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the registrant’s common stock as
quoted on NASDAQ as of June 30, 2009 was $162,750,000. For purposes of this
calculation only, affiliates are deemed to be directors, executive officers and
beneficial owners of greater than 10% of the outstanding shares.
As of March 11, 2010, there were issued
and outstanding 7,084,903 shares of the registrant’s common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy
Statement for the Annual Meeting of Stockholders to be held on April 29, 2010
are incorporated by reference in Part III hereof.
WSFS
FINANCIAL CORPORATION
TABLE
OF CONTENTS
Part
I
|
Page
|
|
Item
1.
|
Business
|
3
|
Item
1A.
|
Risk
Factors
|
26
|
Item
1B.
|
Unresolved
Staff Comments
|
32
|
Item
2.
|
Properties
|
33
|
Item
3.
|
Legal
Proceedings
|
36
|
Item
4.
|
[Reserved]
|
36
|
Part
II
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases
of
Equity Securities
|
36
|
Item
6.
|
Selected
Financial Data
|
38
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
39
|
Item
7A.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
59
|
Item
8.
|
Financial
Statements and Supplementary Data
|
61
|
Item
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
109
|
Item
9A.
|
Controls
and Procedures
|
109
|
Item
9B.
|
Other
Information
|
112
|
Part
III
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
112
|
Item
11.
|
Executive
Compensation
|
112
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
112
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
113
|
Item
14.
|
Principal
Accounting Fees and Services
|
113
|
Part
IV
|
||
Item
15.
|
Exhibits,
Financial Statement Schedules
|
113
|
Signatures
|
116
|
|
- 2
-
PART
I
FORWARD-LOOKING
STATEMENTS
Within this
Annual Report on Form 10-K and exhibits thereto, management has included certain
“forward-looking statements” concerning the future operations of WSFS Financial
Corporation (“the Company,” “our Company,” “WSFS” “we,” “our” or
“us”). It is management’s desire to take advantage of the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Company of the protections
of such safe harbor with respect to all “forward-looking statements” contained
in its financial statements. Management has used “forward-looking statements” to
describe the future plans and strategies including expectations of our future
financial results. Management’s ability to predict results or the effect of
future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Delaware, the mid-Atlantic region and the country as a whole, asset quality,
loan growth, loan delinquency rates, operating risk, uncertainty of estimates in
general and changes in federal and state regulations, among other factors. These
factors should be considered in evaluating the “forward-looking statements,” and
undue reliance should not be placed on such statements. Actual results may
differ materially from management expectations. We do not undertake and
specifically disclaim any obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
ITEM 1.
BUSINESS
OUR
BUSINESS
WSFS
Financial Corporation is parent to Wilmington Savings Fund Society, FSB (“WSFS
Bank” or the “Bank”), one of the ten oldest banks in the United States
continuously operating under the same name. A permanent fixture in this
community, WSFS has been in operation for more than 177 years. In addition to
its focus on stellar customer service, the Bank has continued to fuel growth and
remain relevant. The Bank is a relationship-focused, locally-managed, community
banking institution that has grown to become the largest thrift holding company
in the State of Delaware, the second largest commercial lender in the state and
the fourth largest bank in terms of Delaware deposits. We state our
mission simply: We Stand for Service and Strengthening Our
Communities.
WSFS’
core banking business is commercial lending funded by customer-generated
deposits. We have built a $1.9 billion commercial loan portfolio by recruiting
the best seasoned commercial lenders in our markets and offering a high level of
service and flexibility typically associated with a community bank. We fund this
business primarily with deposits generated through commercial relationships and
retail deposits in our 41 banking offices located in Delaware, southeastern
Pennsylvania and Virginia. We also offer a broad variety of consumer loan
products, retail securities and insurance brokerage through our retail
branches. In 2009, WSFS was the number one reverse mortgage
originator in Delaware.
In 2005,
we established our WSFS Trust and Wealth Management division (WSFS Trust). WSFS
Trust was formed in response to our commercial customers’ demand for the same
high level service in their investment relationships that they enjoy as banking
customers of WSFS. We found that many competitors are not devoting human capital
to clients with less than $5 million in investable assets, thereby creating an
opportunity for WSFS Trust. This division is complemented by Cypress Capital
Management, a Registered Investment Advisor, acquired by WSFS in
2004.
Our Cash
Connect division is a premier provider of ATM Vault Cash and related services in
the United States. Cash Connect manages more than $308 million in vault cash in
more than 10,000 ATMs nationwide and also provides online reporting and ATM cash
management, predictive cash ordering, armored
- 3
-
carrier
management, ATM processing and equipment sales. Cash Connect also operates over
360 ATMs for WSFS Bank, which owns the largest branded ATM network in
Delaware.
WSFS
POINTS OF DIFFERENTIATION
While all
banks offer similar products and services, we believe that WSFS has set itself
apart from other banks in our market and the industry in general. Also,
community banks including WSFS have been able to distinguish themselves from
large national or international banks that fail to provide their customers with
the service levels they want as reorganizations, government rescues and other
big-bank problems distract their emphasis on the customer, especially in the
current environment. The following factors summarize what we believe are those
points of differentiation.
Building
Associate Engagement and Customer Advocacy
Our
business model is built on a concept called Human Sigma, which we have
implemented in our strategy of “Engaged Associates delivering Stellar Service to
create Customer Advocates”, resulting in a high performing, very profitable
company. The Human Sigma model, identified by Gallup, Inc., begins with
Associates who have taken ownership of their jobs and therefore perform at a
higher level. We invest significantly in training, development and
talent management as our Associates are the cornerstone of our
model. This strategy motivates Associates, and unleashes innovation
and productivity to engage our most valuable asset, our customers, by providing
them Stellar Service experiences. As a result, we create Customer
Advocates, or customers who have built an emotional attachment to the Bank.
Research studies continue to show a direct link between Associate engagement,
customer engagement and a company’s financial performance.
Surveys
conducted for us by a nationally recognized polling company
indicate:
·
|
Our
Associate Engagement scores consistently rank in the top quartile of
companies polled. In 2009 our engagement ratio was 17.5:1, which means
there are 17.5 engaged Associates for every disengaged Associate. This
compares to a 2.6:1 ratio in 2003 and a national average of
1.45:1. Gallup defines “world-class” as
8:1.
|
·
|
Customer
surveys rank us in the top 10% of all companies Gallup surveys, a “world
class” rating. More than 40% of our customers ranked us a “five” out of
“five,” strongly agreeing with the statement “I can’t imagine a world
without WSFS.”
|
We
believe that by fostering a culture of engaged and empowered Associates, we have
become an employer of choice in our market. During each of the past four years,
WSFS was ranked among the top five “Best Places to Work” by The Wilmington News
Journal. In 2009 we were awarded the News Journal’s number one
“Best Place to Work” for large corporations in the state of
Delaware.
- 4
-
Community
Banking Model
Our size
and community banking model play a key role in our success. Our approach to
business combines a service-oriented culture with a strong complement of
products and services, all aimed at meeting the needs of our retail and business
customers. We believe the essence of being a community bank means that we
are:
·
|
Small
enough to offer customers responsive, personalized service and direct
access to decision makers.
|
·
|
Large
enough to provide all the products and services needed by our target
market customers.
|
As the
financial services industry has consolidated, many independent banks have been
acquired by national companies that have centralized their decision-making
authority away from their customers and focused their mass-marketing to a
regional or even national customer base. We believe this trend has frustrated
smaller business owners who have become accustomed to dealing directly with
their bank’s senior executives and discouraged retail customers who often
experience deteriorating levels of service in the branches and other service
outlets. Additionally, it frustrates bank Associates who are no longer empowered
to provide good and timely service to their customers.
WSFS Bank
offers:
·
|
One
point of contact. Our Relationship Managers are responsible for
understanding his or her customers’ needs and bringing together the right
resources in the Bank to meet those
needs.
|
·
|
A
customized approach to our clients. We believe this gives us an advantage
over our competitors who are too large or centralized to offer customized
products or services.
|
·
|
Products
and services that our customers value. This includes a broad array of
banking and cash management products, as well as a legal lending limit
high enough to meet the credit needs of our customers, especially as they
grow.
|
·
|
Rapid
response and a company that is easy to do business with. Our customers
tell us this is an important differentiator from larger, in-market
competitors.
|
Strong
Market Demographics
Delaware
is situated in the middle of the Washington, DC - New York corridor which
includes the urban markets of Philadelphia and Baltimore. The state benefits
from this urban concentration as well as from a unique political environment
that has created favorable law and legal structure, a business-friendly
environment and a fair tax system. Additionally, Delaware is one of
only seven states with a AAA bond rating from the three predominant rating
agencies. Delaware’s demographics compare favorably to U.S. economic and
demographic averages.
(Most
recent available statistics)
|
Delaware
|
National
Average
|
|||||
Unemployment
(For December 2010)
(1)
|
9.0
|
%
|
10.0
|
%
|
|||
Median
Household Income (Average 2008)
(2)
|
$
|
58,380
|
$
|
52,029
|
|||
Population
Growth (2000-2009)
(3)
|
13.0
|
%
|
9.1
|
%
|
|||
House
Price Depreciation (last
twelve months) (4)
|
(5.14)
|
%
|
(4.66)
|
%
|
|||
House
Price Appreciation (last
five years) (4)
|
11.68
|
%
|
6.38
|
%
|
|||
Average
GDP Growth (Average 2007-2008) (5)
|
(1.6)
|
%
|
0.7
|
%
|
|||
(1)
Bureau of Labor Statistics, Economy at a Glance
|
|||||||
(2)
U.S. Census Bureau, State & County Quick Facts
|
|||||||
(3)
U.S. Census Bureau, Population Estimates
|
|||||||
(4)
Federal Housing Finance Agency, All-Transaction Indexes
|
|||||||
(5)
Bureau of Economic Analysis, GDP by State
|
- 5
-
Balance
Sheet Management
We put a
great deal of focus on actively managing our balance sheet. This management
manifests itself in:
·
|
Prudent
capital levels. Maintaining prudent capital levels is key to our operating
philosophy. All regulatory capital levels exceed well-capitalized levels.
Our Tier 1 capital ratio was 11% as of December 31, 2009, more than $140
million in excess of the 6% “well-capitalized”
level.
|
·
|
We
maintain discipline in our lending, including planned portfolio
diversification. Additionally, we take a proactive approach to identifying
trends in our business and lending market and have responded proactively
to areas of concern. For instance, in 2005 we limited our exposure to
construction and land development (CLD) loans as we anticipated an end to
the expansion in housing prices. We have also increased our portfolio
monitoring and reporting sophistication and hired additional senior credit
administration and asset disposition professionals to manage our
portfolio. We maintain diversification in our loan portfolio to
limit our exposure to any single type of credit. Such discipline
supplements careful underwriting and the benefits of knowing our
customers.
|
·
|
We
seek to avoid credit risk in our investment portfolio and use this portion
of our balance sheet primarily to help us manage liquidity and interest
rate risk, while providing some marginal income. As a result, we have no
exposure to Freddie Mac or Fannie Mae preferred securities or Trust
Preferred securities. Our security purchases have been almost exclusively
AAA-rated credits. This philosophy has allowed us to avoid the significant
investment write-downs taken by many of our bank
peers.
|
We have
been subject to many of the same pressures facing the banking
industry. The extended recession has negatively impacted our
customers and has driven increased provisioning and an increase in our
delinquent loans, problem loans and charge-offs. The measures we have taken
strengthen the Bank’s credit position by diversifying risk and limiting
exposure, but do not insulate us from the effects of this
recession.
Disciplined
and Aggressive Capital Management
We
understand that our capital (or shareholders’ equity) belongs to our
shareholders. They have entrusted this capital to us with the expectation that
it will be kept safe and with the expectation that it will earn an adequate
return. As a result, we prudently but aggressively manage our shareholders’
capital with an eye to this balance.
Strong
Performance Expectations
We are
focused on high-performing long-term financial goals. We define
“high-performing” as the top quintile of a relevant peer group in return on
assets (ROA), return on equity (ROE) and earnings per share (EPS)
growth. Management incentives are paid, in large part, based on
driving performance in these areas. A “Target” payment level is only achieved by
reaching performance at the 60th
percentile of a peer group of all publicly traded banks and thrifts in our size
range. More details on this plan are included in our proxy
statement.
As we
navigate through this recession we are focused on strengthening our franchise to
optimize financial performance when the recession subsides. We are
taking steps to strengthen net interest margin, enhance revenues and manage
expenses as we continue to build our market share.
- 6
-
Growth
Our
successful long-term trend in lending, deposit gathering and EPS have been the
result of our focused strategy that provides the service and responsiveness of a
community bank in a consolidating marketplace. We will continue to grow
by:
|
·
Recruiting and developing talented, service-minded Associates. We have
successfully recruited Associates with strong community ties to strengthen
our existing markets and provide a strong start in new communities. We
also focus efforts on developing talent and leadership in our current
Associate base to better equip those Associates for their jobs and prepare
them for leadership roles at WSFS.
|
|
·
Embracing the Human Sigma concept. We are committed to building Associate
engagement and customer advocacy as a way to differentiate ourselves and
grow our franchise.
|
|
·
Continuing strong growth in commercial lending
by:
|
o
|
Selectively
building a presence in contiguous markets.
|
|
o
|
Providing product
solutions like Remote Deposit Capture to facilitate commercial banking
outside of our primary market.
|
|
o
|
Offering our
community banking model that combines Stellar Service with the banking
products and services our business customers
demand.
|
|
·
Aggressively growing deposits. In 2003, we energized our retail branch
strategy by combining Stellar Service with an expanded and updated branch
network. We have also implemented a number of additional measures to
accelerate our deposit growth. Our three-year goal is to attain a 100%
loan to customer funding (deposit) ratio. We will continue to
grow deposits by:
|
o
|
Opening new
branches in Delaware and contiguous markets.
|
|
o
|
Renovating our
retail branch network in our current footprint.
|
|
o
|
Further expanding
our commercial customer relationships with deposit
products.
|
|
o
|
Finding creative
ways to build deposit market share such as targeted marketing
programs.
|
|
o
|
Acquisitions such
as the branch acquisition we completed in 2008. Over the next several
years we intend to grow approximately 80% organically
and 20%
through acquisition,
although each year’s growth
will reflect the opportunities available
then.
|
·
|
Growing
our Trust and Wealth Management division by leveraging the strong
relationships we have with our current customer base promoting the
“Delaware Advantage” and providing unparalleled service to modestly
wealthy clients in our market.
|
·
|
Exploring
niche businesses. We are an organization with an entrepreneurial spirit
and we are open to the risk/reward proposition that comes with niche
businesses. We have developed a set of decision rules that will guide our
consideration of future niche business
opportunities.
|
Values
We
are:
· Committed
to always doing the right thing.
· Empowered
to serve our customers and communities.
· Dedicated
to openness and candor.
· Driven to
grow and improve.
Our values
speak to integrity, service, accountability, transparency, honesty, growth and
desire to improve. They are the core of our culture, they make us who we are and
we live them everyday.
- 7
-
Results
Our focus
on these points of differentiation has allowed us to grow our core franchise and
build value for our shareholders. Since 2005, our commercial loans
have grown from $1.1 billion to $1.9 billion, a strong 16% compound annual
growth rate (CAGR). Over the same period, customer deposits have grown from $1.2
billion to $2.1 billion, a 15% CAGR. More importantly, over the last decade,
shareholder value has increased at a far greater rate than our banking peers and
the market in general. An investment of $100 in WSFS stock in 2000
would be worth $213 at December 31, 2009. By comparison, $100
invested in the Dow Jones Total Market Index in 2000, would be worth $90 at
December 31, 2009 and $100 invested in the Nasdaq Bank Index in 2000 would be
worth $107 at December 31, 2009.
SUBSIDIARIES
We have
two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management,
Inc.
WSFS Bank
has one wholly owned subsidiary, WSFS Investment Group, Inc., which markets
various third-party investment and insurance products, such as single-premium
annuities, whole life policies and securities primarily through the Bank’s
retail banking system and directly to the public.
Montchanin
Capital Management, Inc. (“Montchanin”) provides asset management services in
our primary market area. Montchanin has one wholly owned subsidiary, Cypress
Capital Management, LLC (“Cypress”). Cypress is a Wilmington-based investment
advisory firm servicing high net-worth individuals and institutions and had
approximately $458 million in assets under management at December 31,
2009.
DISTRIBUTION
OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY
Condensed
average balance sheets for each of the last three years and analyses of net
interest income and changes in net interest income due to changes in volume and
rate are presented in “Results of Operations” included in the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
INVESTMENT
ACTIVITIES
At
December 31, 2009, WSFS’ total securities portfolio had a carrying value of
$727.3 million. The Company’s strategy has been to avoid credit risk in our
securities portfolio. Our investment portfolio is intended to keep
the Bank’s funds fully employed at the maximum after-tax return, while
maintaining acceptable credit, market and interest-rate risk limits, and
providing needed liquidity under current circumstances. In addition, our taxable
investments provide collateral for various Bank obligations. Our municipal
securities provide for a portion of the Bank’s CRA investment
program.
·
|
WSFS
owns no CDOs, Bank Trust Preferred, Agency Preferred securities or equity
securities in other FDIC insured banks or
thrifts.
|
The portfolio
is comprised of:
·
|
$40.7
million in Federal Agency debt securities with a maturity of four years or
less.
|
·
|
$238.5
million in “plain vanilla” Agency MBS. Of these, $85.8 million are
sequential pay CMOs with no contingent cash flows and $152.7 million are
Agency MBS with 10-30 year original final
maturities.
|
·
|
$433.8
million in Non-Agency MBS, including purchases of $172.0 million during
2009. These MBS purchases were all short duration,
super-senior tranches. These bonds not only underwent
significant internal pre-purchase due diligence using sophisticated
models, but also were rated AAA during 2009,
under
|
- 8
-
heightened
rating agency scrutiny. The remaining bonds are 90% 2005 vintage or
earlier and the remainder is 2006 vintage. They are predominately 15
year pass through cash flow with an average LTV of 39% (based on scheduled
amortization and initial appraisal value) and average FICO scores greater the
700 at origination.
Of the
100 Non-Agency bonds, 28 bonds with a par value of $97.6 million were downgraded
as of December 31, 2009. Based on stress tests of these 28 bonds using
proprietary models of two independent companies, management believes the
collection of the contractual principal and interest is probable in nearly all
cases and therefore most of the unrealized losses are considered to be
temporary. The Bank took a charge of $86,000 due to
other-than-temporary impairment on one security during 2009 and has not needed
to take any other-than-temporary impairment charge to earnings prior to this
year.
Amortized
cost of investment securities and investments by category, stated in dollar
amounts and as a percent of total assets, follow:
At
December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||
Percent
of
|
Percent
of
|
Percent
of
|
||||||||||||||||||
Amount
|
Assets
|
Amount
|
Assets
|
Amount
|
Assets
|
|||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||
Held-to-Maturity:
|
||||||||||||||||||||
State
and political subdivisions
|
$
|
709
|
—
|
%
|
$
|
1,181
|
—
|
%
|
$
|
1,516
|
0.1
|
%
|
||||||||
Available-for-Sale:
|
||||||||||||||||||||
Reverse
Mortgages
|
(530
|
)
|
—
|
(61
|
)
|
—
|
2,037
|
0.1
|
||||||||||||
State
and political subdivisions
|
3,935
|
0.1
|
4,020
|
0.1
|
4,115
|
0.1
|
||||||||||||||
U.S.
Government and agencies
|
40,695
|
1.1
|
43,778
|
1.3
|
20,477
|
0.6
|
||||||||||||||
44,100
|
1.2
|
47,737
|
1.4
|
26,629
|
0.8
|
|||||||||||||||
Short-term
investments:
|
||||||||||||||||||||
Interest-bearing
deposits in other banks
|
1,090
|
—
|
216
|
—
|
1,078
|
—
|
||||||||||||||
$
|
45,899
|
1.2
|
%
|
$
|
49,134
|
1.4
|
%
|
$
|
29,223
|
0.9
|
%
|
There
were no sales of investment securities (excluding mortgage-backed securities)
classified as available-for-sale during 2009, 2008 or
2007. Investment securities totaling $18.6 million (including
$566,000 of municipal bonds) were called by the issuers during 2009 and
municipal bonds totaling $404,000 were called by the issuers during 2008. There
were no net losses realized on sales in 2009, 2008 or 2007. The
cost basis for all investment security sales was based on the specific
identification method. There were no sales of investment securities classified
as held-to-maturity in 2009, 2008 or 2007.
The
investment in reverse mortgages are reverse mortgage loans with contracts
that require us to make monthly advances throughout the borrower’s life or until
the borrower relocates, prepays or the home is sold, at which time the loan
becomes due and payable. Reverse mortgages are nonrecourse obligations, which
means that the loan repayments are generally limited to the net sale proceeds of
the borrower’s residence. We account for our investment in reverse
mortgages by estimating the value of the future cash flows on the reverse
mortgages at a rate deemed appropriate for these mortgages, based on the market
rate for similar collateral. Actual cash flows from the maturity of these
mortgage loans can result in significant volatility in the recorded value of
reverse mortgage assets.
- 9
-
The
following table shows the terms to maturity and related weighted average yields
of investment securities and short-term investments at December 31, 2009.
Substantially all of the related interest and dividends represent taxable
income.
At
December 31, 2009
|
||||||
Amount
|
Weighted
Average
Yield
(1)
|
|||||
(Dollars
in Thousands)
|
||||||
Held-to-Maturity:
|
||||||
State
and political subdivisions (2):
|
||||||
Within
one year
|
$
|
340
|
7.53
|
%
|
||
After
one but within five years
|
―
|
―
|
||||
After
ten years
|
369
|
5.20
|
||||
Total
debt securities, held-to-maturity
|
709
|
6.32
|
||||
Available-for-Sale:
|
||||||
Reverse
Mortgages (3):
|
||||||
Within
one year
|
|
(530
|
)
|
―
|
||
State
and political subdivisions (2):
|
||||||
Within
one year
|
825
|
3.84
|
||||
After
one but within five years
|
2,860
|
4.19
|
||||
After
five but within ten years
|
250
|
4.25
|
||||
3,935
|
4.12
|
|||||
U.S.
Government and agencies:
|
||||||
Within
one year
|
|
10,569
|
2.97
|
|||
After
one but within five years
|
30,126
|
2.19
|
||||
40,695
|
2.39
|
|||||
Total
debt securities, available-for-sale
|
44,100
|
2.54
|
||||
Total
debt securities
|
44,809
|
2.60
|
||||
Short-term
investments:
|
||||||
Interest-bearing
deposits in other banks
|
1,090
|
0.01
|
||||
Total
short-term investments
|
1,090
|
0.01
|
||||
$
|
45,899
|
2.54
|
%
|
(1)
|
Reverse
mortgages have been excluded from weighted average yield calculations
because income can vary significantly from reporting period to reporting
period due to the volatility of factors used to value the
portfolio.
|
(2)
|
Yields
on state and political subdivisions are not calculated on a tax-equivalent
basis since the effect would be immaterial.
|
(3)
|
Reverse
mortgages do not have contractual maturities. We have included
reverse mortgages in maturities within one
year.
|
- 10
-
In
addition to these investment securities, we have maintained a $684.5 million
portfolio of mortgage-backed securities (of which $12.2 million is classified as
“trading”) that are BBB+ rated and were purchased in conjunction with a 2002
reverse mortgage securitization. At December 31, 2009, mortgage-backed
securities with a par value of $250.3 million were pledged as collateral for
customer repurchase agreements and municipal deposits. Accrued interest
receivable for mortgage-backed securities was $2.8 million, $2.1 million and
$2.0 million at December 31, 2009, 2008 and 2007, respectively. Proceeds from
the sale of mortgage-backed securities classified as available-for-sale totaled
$111.5 million with a net gain on sale of $2.0 million in 2009. There
were no sales of mortgage-backed securities available-for-sale in
2008. During 2007, proceeds from the sale of mortgage-backed
securities classified as available-for-sale totaled $2.7 million with a net gain
of $82,000.
The
following table shows the amortized cost of mortgage-backed securities and their
related weighted average contractual rates at the end of the last three fiscal
years.
December
31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||
Amount
|
Rate
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||
Available-for-Sale:
|
||||||||||||||||||||
Collateralized
mortgage obligations (1)
|
$
|
519,527
|
5.44
|
%
|
$
|
419,177
|
5.12
|
%
|
$
|
407,113
|
4.97
|
%
|
||||||||
FNMA
|
61,603
|
3.63
|
35,578
|
4.19
|
35,654
|
4.04
|
||||||||||||||
FHLMC
|
44,536
|
3.87
|
30,477
|
4.44
|
31,357
|
4.31
|
||||||||||||||
GNMA
|
46,629
|
4.32
|
22,536
|
5.01
|
15,923
|
4.73
|
||||||||||||||
$
|
672,295
|
5.00
|
%
|
$
|
507,768
|
4.97
|
%
|
$
|
490,047
|
4.85
|
%
|
|||||||||
Trading:
|
||||||||||||||||||||
Collateralized
mortgage obligations
|
$
|
12,183
|
3.74
|
%
|
$
|
10,816
|
6.01
|
%
|
$
|
12,364
|
7.79
|
%
|
(1)
Includes Agency CMO’s available-for-sale.
CREDIT
EXTENSION ACTIVITIES
Over the
past several years we have focused on increasing the more profitable segments of
our loan portfolio. Our current lending activity is concentrated on lending to
small to mid-sized businesses in the mid-Atlantic region of the United States
primarily in Delaware and contiguous counties in Pennsylvania, Maryland and New
Jersey. In 2005, residential first mortgage loans comprised 25.8% of the loan
portfolio, while the combination of commercial loans and commercial real estate
loans made up 61.8%. In contrast, at December 31, 2009, residential first
mortgage loans totaled only 14.4%, while commercial loans and commercial
real estate loans have increased to a combined total of 75.7% of the loan
portfolio. Traditionally, the majority of typical thrift institutions’ loan
portfolios have consisted of first mortgage loans on residential
properties.
- 11
-
The following table shows the
composition of our loan portfolio at year-end for the last five
years.
December
31,
|
||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||
Types of Loans
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||
Residential
real estate (1)
|
$
|
357,250
|
14.4
|
%
|
$
|
425,018
|
17.4
|
%
|
$
|
449,853
|
20.1
|
%
|
$
|
474,871
|
23.5
|
%
|
$
|
457,651
|
25.8
|
%
|
||||||||||||||
Commercial
real estate:
|
||||||||||||||||||||||||||||||||||
Commercial
mortgage
|
524,380
|
21.2
|
558,979
|
22.9
|
465,928
|
20.9
|
422,089
|
20.9
|
410,552
|
23.1
|
||||||||||||||||||||||||
Construction
|
231,625
|
9.3
|
251,508
|
10.3
|
276,939
|
12.4
|
241,931
|
12.0
|
178,418
|
10.0
|
||||||||||||||||||||||||
Total
commercial real estate
|
756,005
|
30.5
|
810,487
|
33.2
|
742,867
|
33.3
|
664,020
|
32.9
|
588,970
|
33.1
|
||||||||||||||||||||||||
Commercial
|
1,120,807
|
45.2
|
942,920
|
38.6
|
787,539
|
35.3
|
643,918
|
31.9
|
508,930
|
28.7
|
||||||||||||||||||||||||
Consumer
|
300,648
|
12.1
|
296,728
|
12.1
|
278,272
|
12.4
|
263,478
|
13.0
|
244,820
|
13.8
|
||||||||||||||||||||||||
Gross
loans
|
$
|
2,534,710
|
102.2
|
$
|
2,475,153
|
101.3
|
$
|
2,258,531
|
101.1
|
$
|
2,046,287
|
101.3
|
$
|
1,800,371
|
101.4
|
|||||||||||||||||||
Less:
|
||||||||||||||||||||||||||||||||||
Deferred
fees (unearned income)
|
2,109
|
0.1
|
129
|
0.0
|
(701
|
)
|
0.0
|
(838
|
)
|
0.0
|
(304
|
)
|
0.0
|
|||||||||||||||||||||
Allowance
for loan losses
|
53,531
|
2.1
|
31,189
|
1.3
|
25,252
|
1.1
|
27,384
|
1.3
|
25,381
|
1.4
|
||||||||||||||||||||||||
Net
loans
|
$
|
2,479,070
|
100.0
|
%
|
$
|
2,443,835
|
100.0
|
%
|
$
|
2,233,980
|
100.0
|
%
|
$
|
2,019,741
|
100.0
|
%
|
$
|
1,775,294
|
100.0
|
%
|
(1) Includes $8,377, $2,275, $2,418,
$925 and $438 of residential mortgage loans held-for-sale at December 31, 2009,
2008, 2007, 2006 and 2005.
- 12
-
The
following tables show how much time remains until our loans mature. The first
table details the total loan portfolio by type of loan. The second table details
the total loan portfolio by loans with fixed interest rates and loans with
adjustable interest rates. The tables show loans by contractual maturity. Loans
may be pre-paid so that the actual maturity may be earlier than the contractual
maturity. Prepayments tend to be highly dependent upon the interest rate
environment. Loans having no stated maturity or repayment schedule are reported
in the Less than One Year category.
Less
than
|
One
to
|
Over
|
|||||||||||
One
Year
|
Five
Years
|
Five
Years
|
Total
|
||||||||||
(Dollars
in thousands)
|
|||||||||||||
Real
estate loans (1)
|
$
|
12,931
|
$
|
45,475
|
$
|
290,467
|
$
|
348,873
|
|||||
Commercial
mortgage loans
|
139,228
|
247,997
|
137,155
|
524,380
|
|||||||||
Construction
loans
|
187,270
|
21,856
|
22,499
|
231,625
|
|||||||||
Commercial
loans
|
362,935
|
472,025
|
285,847
|
1,120,807
|
|||||||||
Consumer
loans
|
201,333
|
46,817
|
52,498
|
300,648
|
|||||||||
$
|
903,697
|
$
|
834,170
|
$
|
788,466
|
$
|
2,526,333
|
||||||
Rate
sensitivity:
|
|||||||||||||
Fixed
|
$
|
96,710
|
$
|
317,736
|
$
|
261,716
|
$
|
676,162
|
|||||
Adjustable
(2)
|
806,987
|
516,434
|
526,750
|
1,850,171
|
|||||||||
Gross
loans
|
$
|
903,697
|
$
|
834,170
|
$
|
788,466
|
$
|
2,526,333
|
(1) Excludes
loans held-for-sale.
|
(2) Includes
hybrid adjustable-rate mortgages.
|
Residential
Real Estate Lending.
We
generally originate residential first mortgage loans with loan-to-value ratios
of up to 80% and require private mortgage insurance for up to 30% of the
mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. We
do not have any significant concentrations of such insurance with any one
insurer. On a very limited basis, we originate or purchase loans with
loan-to-value ratios exceeding 80% without a private mortgage insurance
requirement. At December 31, 2009, the balance of all such loans was
approximately $4.9 million.
Generally, our residential mortgage
loans are underwritten and documented in accordance with standard underwriting
criteria published by the Federal Home Loan Mortgage Corporation (“FHLMC”) to
assure maximum eligibility for subsequent sale in the secondary market.
Generally, we sell only those loans that are originated specifically with
the intention to sell on a “flow” basis. However, during 2009 we
completed a bulk sale of $16.7 million in residential first mortgages in order
to take advantage of market improvements and optimize our
portfolio.
To protect the propriety of our
liens, we require that title insurance be obtained. We also require fire,
extended coverage casualty and flood insurance (where applicable) for properties
securing residential loans. All properties securing residential loans made by us
are appraised by independent, licensed and certified appraisers and are subject
to review in accordance with our standards.
The
majority of our adjustable-rate, residential real estate loans have interest
rates that adjust yearly after an initial period. Typically, the change in rate
is limited to two percentage points at each adjustment date. Adjustments are
generally based upon a margin (currently 2.75%) over the weekly average yield on
U.S. Treasury securities adjusted to a constant maturity, as published by the
Federal Reserve Board.
- 13
-
Generally,
the maximum rate on these loans is up to six percent above the initial interest
rate. We underwrite adjustable-rate loans under standards consistent with
private mortgage insurance and secondary market underwriting criteria. We do not
originate adjustable-rate mortgages with payment limitations that could produce
negative amortization.
The
retention of adjustable-rate mortgage loans in our loan portfolio helps mitigate
our risk to changes in interest rates. However, there are unquantifiable credit
risks resulting from potential increased costs to the borrower as a result of
re-pricing adjustable-rate mortgage loans. It is possible that during periods of
rising interest rates, the risk of default on adjustable-rate mortgage loans may
increase due to the upward adjustment of interest costs to the borrower.
Further, although adjustable-rate mortgage loans allow us to increase the
sensitivity of our asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limitations. Accordingly, there can be no assurance that yields on
our adjustable-rate mortgages will adjust sufficiently to compensate for
increases to our cost of funds during periods of extreme interest rate
increases.
The
original contractual loan payment period for residential loans is normally 10 to
30 years. Because borrowers may refinance or prepay their loans without penalty,
these loans tend to remain outstanding for a substantially shorter period of
time. First mortgage loans customarily include “due-on-sale” clauses on
adjustable- and fixed-rate loans. This provision gives us the right to declare a
loan immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage. Due-on-sale clauses are
an important means of adjusting the rate on existing fixed-rate mortgage loans
to current market rates. We enforce due-on-sale clauses through foreclosure and
other legal proceedings to the extent available under applicable
laws.
In
general, loans are sold without recourse except for the repurchase right arising
from standard contract provisions covering violation of representations and
warranties or, under certain investor contracts, a default by the borrower on
the first payment. We also have limited recourse exposure under certain investor
contracts in the event a borrower prepays a loan in total within a specified
period after sale, typically one year. The recourse is limited to a pro rata
portion of the premium paid by the investor for that loan, less any prepayment
penalty collectible from the borrower.
We have a
very limited amount of subprime loans, $15.1 million, at December 31, 2009
(0.59% of loans) and no negative amortizing loans or interest only first
mortgage loans. Subprime mortgage
delinquencies of 10.15% in our small portfolio are a fraction of the national
average of 26.67%, due to our underwriting and the seasoning of these
loans.
Commercial
Real Estate, Construction and Commercial Lending.
Pursuant
to section 5(c) of the Home Owners’ Loan Act (“HOLA”) federal savings banks are
generally permitted to invest up to 400% of their total regulatory capital in
nonresidential real estate loans and up to 20% of its assets in commercial
loans. As a federal savings bank that was formerly chartered as a Delaware
savings bank, we have certain additional lending authority.
We offer
commercial real estate mortgage loans on multi-family properties and other
commercial real estate. Generally, loan-to-value ratios for these loans do not
exceed 80% of appraised value at origination.
We offer
commercial construction loans to developers. In some cases these loans are made
as “construction/permanent” loans, which provides for disbursement of loan funds
during construction and automatic conversion to mini-permanent loans (1-5 years)
upon completion of construction. These construction loans are made on a
short-term basis, usually not exceeding two years, with interest rates indexed
to our prime rate, the “Wall Street” prime rate or London InterBank Offer Rate
(“LIBOR”), in most cases, and are adjusted periodically as these rates change.
The loan appraisal process includes the same evaluation criteria as
required
- 14
-
for
permanent mortgage loans, but also takes into consideration: completed plans,
specifications, comparables and cost estimates. Prior to approval of the credit,
these items are used as a basis to determine the appraised value of the subject
property when completed. Our policy requires that all appraisals be reviewed
independently from our commercial lending staff. Generally, at origination, the
loan-to-value ratios for construction loans do not exceed 75%. The initial
interest rate on the permanent portion of the financing is determined by the
prevailing market rate at the time of conversion to the permanent loan. At
December 31, 2009, $287.6 million was committed for construction loans, of which
$231.6 million was outstanding.
The
remainder of our commercial lending includes loans for working capital,
financing equipment acquisitions, business expansion and other business
purposes. These loans generally range in amounts up to $10 million (with a few
loans higher), and their terms range from less than one year to seven years. The
loans generally carry variable interest rates indexed to our Wall Street prime
rate, national prime rate or LIBOR, at the time of closing.
Commercial,
commercial mortgage and construction lending have a higher level of risk than
residential mortgage lending. These loans typically involve larger loan balances
concentrated with single borrowers or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real estate
project and may be more subject to adverse conditions in the commercial real
estate market or in the general economy. The majority of our commercial and
commercial real estate loans are concentrated in Delaware and surrounding
areas.
As of
December 31, 2009 our commercial loan portfolio was $1.1 billion and represented
44% of our total loan portfolio. These loans are diversified by
industry, with no industry representing more than 10% of the portfolio (Retail
Trades). We have noticed some weakness in this portfolio primarily
from smaller credits with most of these loans well below $1
million. This weakness was mainly in the small business sector which
has been affected by the prolonged economic downturn.
Our
commercial real estate (CRE) portfolio was $524.4 million at December 31,
2009. This portfolio is diversified by property type, with no type
representing more than 28% of the portfolio. The largest
concentration is retail related (shopping centers, malls and other retail) with
balances of $146.7 million. The average loan size of the CRE
portfolio is $1.6 million and we have only eight loans greater than $5 million
with no loans greater than $10 million. Most significant projects are
located in our geographic footprint and while we have not experienced
significant weakness to date, management continues to monitor this portfolio
closely.
Construction
loans involve additional risk because loan funds are advanced as construction
projects progress. The valuation of the underlying collateral can be difficult
to quantify prior to the completion of the construction. This is due to
uncertainties inherent in construction such as changing construction costs,
delays arising from labor or material shortages and other unpredictable
contingencies. We attempt to mitigate these risks and plan for these
contingencies through additional analysis and monitoring of our construction
projects. Construction loans receive independent inspections prior to
disbursement of funds.
As of
December 31, 2009, our construction and land development (CLD) loans totaled
$231.6 million, or only 9.3% of our loan portfolio. Since 2005, we have imposed
limits on each category of residential and commercial CLD loans, as well as
geographic sub-limits and a sub-limit on “land hold” CLD. Residential
CLD, one of the hardest hit sectors in today’s economy, represents only $109.6
million or 4.3% of the loan portfolio. Our average residential CLD loan is $1.3
million. Only five of our residential CLD loans exceeded $5 million in
outstandings and our largest geographic concentration (Sussex County, Delaware)
represents only $37.0 million. Our commercial CLD portfolio was only
$84.7 million or 3.3% of total loans. We continue to reduce the
amount of exposure we have to these types of loans. We are recording
very few new
- 15
-
CLD
loans, the remaining amount of availability on existing loans is minimal and
there are very few loans with interest reserves remaining.
Land
loans were $113.6 million at December 31, 2009 including $50.6 million of “land
hold” loans which are land loans not currently being developed.
Only nine
commercial relationships have outstandings in excess of $20.0 million and each
of these relationships is collateralized by real estate.
Federal
law limits the extensions of credit to any one borrower to 15% of unimpaired
capital, or 25% if the difference is secured by readily marketable collateral
having a market value that can be determined by reliable and continually
available pricing. Extensions of credit include outstanding loans as well as
contractual commitments to advance funds, such as standby letters of credit, but
do not include unfunded loan commitments. At December 31, 2009, no borrower had
collective outstandings exceeding these limits.
Consumer
Lending.
Our
primary consumer credit products are home equity lines of credit and
equity-secured installment loans. At December 31, 2009, home equity lines of
credit totaled $177.4 million and equity-secured installment loans totaled
$102.7 million. In total these product lines represent 93.2% of total consumer
loans. Some home equity products granted a borrower credit availability of up to
100% of the appraised value (net of any senior mortgages) of their residence.
Maximum LTV limits were reduced to 80% as of November 2008 and 75% as of June
2009. At December 31, 2009, we had extended $284.9 million in home
equity lines of credit. Home equity lines of credit offer customers potential
Federal income tax advantages, the convenience of checkbook access and revolving
credit features and are typically more attractive in the current low interest
rate environment. Home equity lines of credit expose us to the risk that falling
collateral values may leave us inadequately secured, while the risk on products
like home equity loans is mitigated as they amortize over time.
Prior to
2008, we had not observed any significant adverse experience on home equity
lines of credit or equity-secured installment loans but delinquencies and net
charge-offs on these products increased over the past two years, mainly as a
result of the deteriorating economy and declining home values. Since
2008, we also increased our loan loss reserves related to consumer
loans.
- 16
-
The
following table shows our consumer loans at year-end, for the last five
years.
December
31,
|
||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||
Equity
secured installment loans
|
$
|
102,727
|
34.2
|
%
|
$
|
131,550
|
44.3
|
%
|
$
|
147,551
|
53.0
|
%
|
$
|
141,708
|
53.8
|
%
|
$
|
136,721
|
55.8
|
%
|
||||||||||||||
Home
equity lines of credit
|
177,407
|
59.0
|
141,678
|
47.8
|
107,912
|
38.8
|
98,567
|
37.4
|
85,505
|
34.9
|
||||||||||||||||||||||||
Automobile
|
1,135
|
0.4
|
1,134
|
0.4
|
1,159
|
0.4
|
1,702
|
0.7
|
2,616
|
1.1
|
||||||||||||||||||||||||
Unsecured
lines of credit
|
7,246
|
2.4
|
6,779
|
2.3
|
5,972
|
2.1
|
11,361
|
4.3
|
10,778
|
4.4
|
||||||||||||||||||||||||
Other
|
12,133
|
4.0
|
15,587
|
5.2
|
15,678
|
5.7
|
10,140
|
3.8
|
9,200
|
3.8
|
||||||||||||||||||||||||
Total
consumer loans
|
$
|
300,648
|
100.0
|
%
|
$
|
296,728
|
100.0
|
%
|
$
|
278,272
|
100.0
|
%
|
$
|
263,478
|
100.0.0
|
%
|
$
|
244,820
|
100.0
|
%
|
- 17
-
Loan
Originations, Purchase and Sales.
We have
engaged in traditional lending activities primarily in Delaware and contiguous
areas of neighboring states. As a federal savings bank, however, we may
originate, purchase and sell loans throughout the United States. We have
purchased limited amounts of loans from outside our normal lending area when
such purchases are deemed appropriate. We originate fixed-rate and
adjustable-rate residential real estate loans through our banking offices. In
addition, we have established relationships with correspondent banks and
mortgage brokers to originate loans.
During
2009, we originated $482.8 million of residential real estate loans. This
compares to originations of $434.7 million in 2008. From time to time, we have
purchased whole loans and loan participations in accordance with our ongoing
asset and liability management objectives. Purchases of residential real estate
loans from correspondents and brokers primarily in the mid-Atlantic region
totaled $4.0 million for the year ended December 31, 2009 and $27.7 million for
2008. Residential real estate loan sales totaled $269.4 million in 2009 and
$30.2 million in 2008. We sell certain newly originated mortgage
loans in the secondary market primarily to control the interest rate sensitivity
of our balance sheet and to manage overall balance sheet mix. We hold certain
fixed-rate mortgage loans for investment consistent with our current
asset/liability management strategies.
At
December 31, 2009, we serviced approximately $256.7 million of residential
mortgage loans for others compared to $268.8 million at December 31, 2008. We
also service residential mortgage loans for our own portfolio totaling $348.9
million and $422.7 million at December 31, 2009 and 2008,
respectively.
We
originate commercial real estate and commercial loans through our commercial
lending division. Commercial loans are made for working capital, financing
equipment acquisitions, business expansion and other business purposes. During
2009, we originated $502.7 million of commercial and commercial real estate
loans compared with $870.4 million in 2008. To reduce our exposure on certain
types of these loans, or to maintain relationships within internal lending
limits, at times we will sell a portion of our commercial real estate loan
portfolio, typically through loan participations. Commercial real estate loan
sales totaled $23.5 million and $39.3 million in 2009 and 2008, respectively.
These amounts represent gross contract amounts and do not necessarily reflect
amounts outstanding on those loans.
Our
consumer lending activity is conducted mainly through our branch offices. We
originate a variety of consumer credit products including home improvement
loans, home equity lines of credit, automobile loans, unsecured lines of credit
and other secured and unsecured personal installment loans.
During
2006, we formed a new reverse mortgage initiative under the Bank’s retail
leadership. While the Bank’s activity during 2009 has been limited to acting as
a correspondent for these loans, our intention is to originate and underwrite
our own reverse mortgages in the future. We expect to sell most of
these loans and not hold them in our portfolio. These reverse mortgages are
government insured. During 2009 we originated $46.9 million in
reverse mortgages compared to $38.6 million during 2008, of which all were sold
(does not include loan originated by 1st
Reverse Financial Services, LLC).
During
2008, we acquired a majority interest in 1st
Reverse Financial Services, LLC (1st
Reverse), which specializes in originating and subsequently selling reverse
mortgage loans nationwide. These reverse mortgages are government approved and
insured. During the latter part of 2009, we decided to conduct an
orderly wind-down of 1st
Reverse operations (discussed further in Note 20 of the Financial
Statements).
All loans
to one borrowing relationship exceeding $3.5 million must be approved by the
Senior Management Loan Committee (“SLC”). The Executive Committee of the Board
of Directors (“EC”) reviews the minutes of the SLC meetings. They also approve
individual loans exceeding $5 million for customers with less than one year of
significant loan history with the Bank and loans in excess of $7.5 million for
customers with established borrowing relationships. Depending upon their
experience and management position,
- 18
-
individual
officers of the Bank have the authority to approve smaller loan amounts. Our
credit policy includes a “House Limit” to one borrowing relationship of $20
million. In extraordinary circumstances, we will approve exceptions
to the “House Limit”. Currently we have nine relationships that
exceed this limit. Those nine relationships were allowed to exceed
the “House Limit” because either the relationship contained several
loans/borrowers that have no economic relationship (typically real estate
investors with amounts diversified across a number of properties) or the
exposure was marginally in excess of the “House Limit” and the credit profile
was deemed strong.
Fee Income from
Lending Activities.
We earn fee
income from lending activities, including fees for originating loans, servicing
loans and selling loan participations. We also receive fee income for
making commitments to originate construction, residential and commercial real
estate loans. Additionally, we collect fees related to existing loans which
include prepayment charges, late charges, assumption fees and swap
fees.
We charge
fees for making loan commitments. Also as part of the loan
application process, the borrower may pay us for out-of-pocket costs to review
the application, whether or not the loan is closed.
Most loan
fees are not recognized in the Consolidated Statement of Operations immediately,
but are deferred as adjustments of yield in accordance with U.S. generally
accepted accounting principles and are reflected in interest income. Those fees
represented interest income of $944,000, $1.1 million, and $124,000 during 2009,
2008, and 2007, respectively. Fee income in 2009 was mainly due to
fee accretion on existing loans (including the acceleration of the accretion on
loans that paid early), loan growth and prepayment penalties. The increase in
2008 was mainly the result of several large prepayment penalties. Loan fees
other than those considered adjustments of yield (such as late charges) are
reported as loan fee income, a component of noninterest income.
LOAN
LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
Our
results of operations can be negatively impacted by nonperforming assets, which
include nonaccruing loans, nonperforming real estate investments, assets
acquired through foreclosure and restructured loans. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management’s assessment of the
ultimate collectability of principal and interest.
We
endeavor to manage our portfolio to identify problem loans as promptly as
possible and take immediate actions to minimize losses. To accomplish this, our
Risk Management Department monitors the asset quality of our loan and investment
in real estate portfolios and reports such information to the Credit Policy
Committee, the Audit Committee of the Board of Directors and the Bank’s
Controller’s Department.
SOURCES
OF FUNDS
We manage
our liquidity risk and funding needs through our treasury function and our
Asset/Liability Committee. Historically, we have had success in growing our loan
portfolio. For example, during the year ended December 31, 2009, net loan growth
resulted in the use of $109.3 million in cash. The loan growth was primarily the
result of our continued success increasing corporate and small business lending.
Management expects this trend to continue. While our loan-to-deposit ratio has
been well above 100% for many years, during 2009 we have made significant
improvements to decrease this ratio through increased deposit
growth.
- 19
-
Our
long-term goal is 100% by 2012. Management has significant experience
managing its funding needs through borrowings and deposit growth.
As a
financial institution, we have ready access to several sources of funding. Among
these are:
·
|
Deposit
growth
|
·
|
Brokered
deposits
|
·
|
Borrowing
from the Federal Home Loan Bank
(“FHLB”)
|
·
|
Fed
Discount Window access
|
·
|
Other
borrowings such as repurchase
agreements
|
·
|
Cash
flow from securities and loan sales and
repayments
|
·
|
Net
income.
|
Our
current branch expansion and renovation program is focused on expanding our
retail footprint in Delaware and attracting new customers to provide additional
deposit growth. Customer deposit growth was strong, equaling $438.9 million, or
26%, between December 31, 2008 and December 31, 2009.
Deposits.
We offer various deposit programs to our customers, including savings
accounts, demand deposits, interest-bearing demand deposits, money market
deposit accounts and certificates of deposits. In addition, we accept “jumbo”
certificates of deposit with balances in excess of $100,000 from individuals,
businesses and municipalities in Delaware.
WSFS is
the second largest independent full service banking institution headquartered
and operating in Delaware. The Bank primarily attracts deposits through its 41
banking offices. Twenty-four banking offices were located in northern Delaware’s
New Castle County, WSFS’ primary market. These banking offices maintain
approximately 167,000 total account relationships with approximately 65,000
total households. Seven banking offices are located in Delaware’s Sussex County.
Five banking offices are located in central Delaware’s Kent County, three of
which are in the state capital, Dover. Four banking offices are
located in nearby southeastern Pennsylvania and one banking office is located in
Annandale, Virginia.
Growth in
total deposits of $439.5 million, or 21% compares favorably to the national
average growth rate of 6% based on a recent Federal Reserve statistical release
(FRB: H.8 Release dated February 5, 2010).
The
following table shows the maturity of certificates of deposit of $100,000 or
more as of December 31, 2009:
Maturity Period
|
December
31,
2009
|
|
||||||||
(In Thousands)
|
||||||||||
Less
than 3 months
|
$
|
125,491
|
||||||||
Over
3 months to 6 months
|
42,597
|
|||||||||
Over
6 months to 12 months
|
38,612
|
|||||||||
Over
12 months
|
65,634 |
|
||||||||
$
|
272,334
|
|
- 20
-
Borrowings. We utilize the following
borrowing sources to fund operations:
Federal Home
Loan Bank Advances
As a member
of the Federal Home Loan Bank of Pittsburgh, we are able to obtain Federal Home
Loan Bank (“FHLB”) advances. Advances from the FHLB of Pittsburgh
had rates ranging from 0.26% to 5.45% at December 31, 2009. Pursuant to
collateral agreements with the FHLB, the advances are secured by qualifying
first mortgage loans, qualifying fixed-income securities, FHLB stock and an
interest-bearing demand deposit account with the FHLB. We are required to
acquire and hold shares of capital stock in the FHLB of Pittsburgh in an amount
at least equal to 4.75% of its borrowings from them, plus 0.75% of our unused
borrowing capacity. As of December 31, 2009, our FHLB stock investment totaled
$39.3 million.
At December
31, 2009 we had $613.1 million in FHLB advances with a weighted average
rate of 2.59% maturing in 2010 and beyond. Six advances totaling $95.0 million
are convertible on a quarterly basis (at the discretion of the FHLB) to a
variable rate advance based upon the three-month LIBOR rate, after an initial
fixed term. If any of these advances convert, WSFS has the option to prepay
these advances at predetermined times or rates.
In December
2008, the FHLB of Pittsburgh announced the suspension of both dividend payments
and the repurchase of capital stock until such time as it becomes prudent to
reinstate both. We received no dividends from the FHLB of Pittsburgh during
2009.
Trust
Preferred Borrowings
In 2005, we
issued $67.0 million aggregate principal amount of Pooled Floating Rate
Securities at a variable interest rate of 177 basis points over the three-month
LIBOR rate. The proceeds from this issuance were used to fund the redemption of
$51.5 million of Floating Rate Capital Trust I Preferred Securities which had a
variable interest rate of 250 basis points over the three-month LIBOR
rate.
Temporary
Liquidity Guarantee Program (“TLGP”)
During 2009,
we participated in the FDIC’s TLGP Debt Guarantee Program. Under this
program we issued $30.0 million of unsecured debt with a coupon rate of 2.74%
and a 3 year maturity.
Federal Funds
Purchased and Securities Sold Under Agreements to Repurchase
During 2009,
we purchased federal funds as a short-term funding source. At December 31, 2009,
we had purchased $75.0 million in federal funds at a rate of 0.38%. At December
31, 2008, we had purchased $50.0 million in federal funds at a rate of 0.38%.
During 2009,
we sold securities under agreements to repurchase as a funding source. At
both December 31, 2009 and 2008, we had $25.0 million of securities
sold under agreements to repurchase with a fixed rate of 4.87%. The underlying
securities are mortgage-backed securities with a book value of $29.2 million at
December 31, 2009.
PERSONNEL
As of
December 31, 2009 we had 643 full-time equivalent Associates
(employees). The Associates are not represented by a collective
bargaining unit. Management believes its relationship with its
Associates is very good.
- 21
-
REGULATION
Regulation
of the Corporation
General.
We are a registered savings and loan holding company and are subject to
the regulation, examination, supervision and reporting requirements of the
Office of Thrift Supervision (“OTS”). We are also a registered public company
subject to the reporting requirements of the United States Securities and
Exchange Commission. The filings we make with Securities and Exchange
Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and all amendments to those reports, are
available on the investor relations page of our website at
www.wsfsbank.com.
Sarbanes-Oxley
Act of 2002. The
Securities and Exchange Commission (the “SEC”) has promulgated new regulations
pursuant to the Sarbanes-Oxley Act of 2002 (the “Act”) and may continue to
propose additional implementing or clarifying regulations as necessary in
furtherance of the Act. The passage of the Act and the regulations implemented
by the SEC subject publicly-traded companies to additional and more cumbersome
reporting regulations and disclosure. Compliance with the Act and corresponding
regulations has increased our expenses.
Restrictions on
Acquisitions. A savings and loan holding company must obtain the prior
approval of the Director of OTS before acquiring (i) control of any other
savings association or savings and loan holding company or substantially all the
assets thereof, or (ii) more than 5% of the voting shares of a savings
association or holding company thereof which is not a subsidiary. Except with
the prior approval of the Director of OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company’s stock, may also acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The OTS
may only approve acquisitions resulting in the formation of a multiple savings
and loan holding company which controls savings associations in more than one
state if: (i) the company involved controls a savings institution which operated
a home or branch office in the state of the association to be acquired as of
March 5, 1987; (ii) the acquirer is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions). The laws of
Delaware do not specifically authorize out-of-state savings associations or
their holding companies to acquire Delaware-chartered savings
associations.
The
statutory restrictions on the formation of interstate multiple holding companies
would not prevent us from entering into other states by mergers or branching.
OTS regulations permit federal associations to branch in any state or states of
the United States and its territories. Except in supervisory cases or when
interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
the federal association qualifies as a “domestic building and loan association”
under Section 7701(a)(19) of the Internal Revenue Code or as a “qualified thrift
lender” under the Home Owners’ Loan Act and the total assets attributable to all
branches of the association in the state would qualify such branches taken as a
whole for treatment as a domestic building and loan association or qualified
thrift lender. Federal associations generally may not establish new branches
unless the association meets or exceeds minimum regulatory capital requirements.
The OTS will also consider the association’s record of compliance with the
Community Reinvestment Act of 1977 in connection with any branch
application.
Recent
Legislative and Regulatory Initiatives to Address the Current Financial and
Economic Crisis Congress, the United States Department
of the Treasury (“Treasury”) and the federal banking regulators, including the
FDIC, have taken broad action since early September 2008 to address
volatility in the
- 22
-
U.S.
banking system and financial markets. See “Recent Legislation” under
Management’s Discussion and Analysis of Financial Condition and Results of
Operations for further discussion.
Regulation
of WSFS Bank
General.
As a federally chartered savings institution, the Bank is subject to extensive
regulation by the Office of Thrift Supervision. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. The OTS periodically examines the Bank for compliance with
regulatory requirements. The FDIC also has the authority to conduct special
examinations of the Bank. The Bank must file reports with the OTS describing its
activities and financial condition. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
Transactions with
Affiliates; Tying Arrangements. The Bank is subject to certain
restrictions in its dealings with us and our affiliates. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association, generally, is
any company or entity which controls or is under common control with the savings
association or any subsidiary of the savings association that is a bank or
savings association. In a holding company context, the parent holding company of
a savings association (such as “WSFS Financial Corporation”) and any companies
which are controlled by such parent holding company are affiliates of the
savings association. Generally, Sections 23A and 23B (i) limit the extent to
which the savings institution or its subsidiaries may engage in “covered
transactions” with any one affiliate to an amount equal to 10% of such
institution’s capital stock and surplus, and limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term “covered transaction”
includes the making of loans, purchase of assets, issuance of a guarantee and
similar types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings association may (i) lend or otherwise extend
credit to an affiliate that engages in any activity impermissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association. Savings associations are also
prohibited from extending credit, offering services, or fixing or varying the
consideration for any extension of credit or service on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or that the customer not obtain services from a competitor of the
institution, subject to certain limited exceptions.
Regulatory
Capital Requirements. Under OTS capital regulations, savings institutions
must maintain “tangible” capital equal to 1.5% of adjusted total assets, “Tier
1” or “core” capital equal to 4% of adjusted total assets (or 3% if the
institution is rated composite 1 under the OTS examiner rating system), and
“total” capital (a combination of core and “supplementary” capital) equal to 8%
of risk-weighted assets. In addition, OTS regulations impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital.
The OTS
capital rule defines Tier 1 or core capital as common stockholders’ equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual
institutions and “qualifying supervisory goodwill,” less intangible assets other
than certain supervisory goodwill and, subject to certain limitations, mortgage
and non-mortgage servicing rights, purchased credit card relationships and
credit-enhancing interest only strips. Tangible capital is given the same
definition as core capital but does not include qualifying supervisory goodwill
and is reduced by the amount of all the savings
- 23
-
institution’s
intangible assets except for limited amounts of mortgage servicing assets. The
OTS capital rule requires that core and tangible capital be reduced by an amount
equal to a savings institution’s debt and equity investments in “non-includable”
subsidiaries engaged in activities not permissible to national banks, other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies. At December 31, 2009, the Bank was in compliance with both
the core and tangible capital requirements.
The risk
weights assigned by the OTS risk-based capital regulation range from 0% for cash
and U.S. government securities to 100% for consumer and commercial loans,
non-qualifying mortgage loans, property acquired through foreclosure, assets
more than 90 days past due and other assets. In determining compliance with the
risk-based capital requirement, a savings institution may include both core
capital and supplementary capital in its total capital, provided the amount of
supplementary capital included does not exceed the savings institution’s core
capital. Supplementary capital is defined to include certain preferred stock
issues, non-withdrawable accounts and pledged deposits that do not qualify as
core capital, certain approved subordinated debt, certain other capital
instruments, general loan loss allowances up to 1.25% of risk-weighted assets
and up to 45% of unrealized gains on available-for-sale equity securities with
readily determinable fair values. Total capital is reduced by the amount of the
institution’s reciprocal holdings of depository institution capital instruments
and all equity investments. At December 31, 2009, WSFS Bank was in compliance
with the OTS risk-based capital requirements.
Dividend
Restrictions. As the subsidiary of a savings and loan holding company,
WSFS bank must submit notice to the OTS prior to making any capital distribution
(which includes cash dividends and payments to shareholders of another
institution in a cash merger). In addition, a savings association must make
application to the OTS to pay a capital distribution if (x) the association
would not be adequately capitalized following the distribution, (y) the
association’s total distributions for the calendar year exceeds the
association’s net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
Insurance of
Deposit Accounts. The Bank’s deposits are insured to applicable limits by
the FDIC (“Federal Deposit Insurance Corporation”). The Federal
Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into
law on February 15, 2006, resulted in significant changes to the federal deposit
insurance program: (i) effective March 31, 2006, the Bank Insurance Fund and the
Savings Association Insurance Fund were merged into a new combined fund, called
the Deposit Insurance Fund (“DIF”); (ii) the current $100,000 deposit insurance
coverage will be indexed for inflation (with adjustments every five years,
commencing January 1, 2011); and (iii) deposit insurance coverage for retirement
accounts was increased to $250,000 per participant subject to adjustment for
inflation. However, due to the recent difficult economic conditions, deposit
insurance per account owner has been raised to $250,000 for all types of
accounts until December 2013. In addition, the Reform Act gave the FDIC greater
latitude in setting the assessment rates for insured depository institutions,
which could be used to impose minimum assessments.
Under the
FDIC’s risk-based assessment system, insured institutions are assigned to one of
four risk categories based on supervisory evaluations, regulatory capital level,
and certain other factors, with less risky institutions paying lower
assessments. An institution’s assessment rate depends upon the category to which
it is assigned. No institution may pay a dividend if in default of the federal
deposit insurance assessment.
For
calendar year 2008, assessments ranged from five to 43 basis points of each
institution’s deposit assessment base. Due to losses incurred by the DIF in 2008
from failed institutions, and anticipated future losses, the FDIC adopted an
across the board seven-basis point increase in the assessment range for the
first quarter of 2009. The FDIC made further refinements to its risk-based
assessment system, as of April 1, 2009, that effectively made the range
seven to 77.5 basis points. The FDIC may adjust the scale uniformly from one
quarter to the next, except that no adjustment can deviate more than three basis
points from the base scale without notice and comment
rulemaking.
- 24
-
The FDIC
also imposed on all insured institutions a special emergency assessment of five
basis points of total assets minus Tier 1 capital (capped at ten basis points of
an institution’s deposit assessment base, as of June 30, 2009), in order to
cover losses to the DIF. That special assessment was collected on
September 30, 2009.
In
November 2009, the FDIC issued a rule that required all insured depository
institutions, with limited exceptions, to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011
and 2012 on December 30, 2009. The assessment was calculated by taking the
institution’s actual September 30, 2009 assessment base and increasing it
quarterly by an estimated 5% annual growth rate through the end of 2012. The
FDIC also adopted a uniform three basis point increase in assessment rates
effective on January 1, 2011. Under GAAP accounting rules, the prepaid
assessments would not immediately affect a bank’s earnings. Each institution
records the entire amount of the prepaid assessment as a prepaid expense, an
asset on its balance sheet, as of December 30, 2009, the date the payment
was made. As of December 31, 2009, and each quarter thereafter,
each institution records an expense for its quarterly assessment invoiced on its
quarterly statement and an offsetting credit to the prepaid assessment until the
asset is exhausted. The FDIC would also have the authority to
exercise its discretion as supervisor and insurer to exempt an institution from
the prepayment requirement if the FDIC determines that the prepayment would
significantly impair the institution’s liquidity or would otherwise create
significant hardship.
Federal
law also provides for the possibility that the FDIC may pay dividends to insured
institutions once the DIF reserve ratio equals or exceeds 1.35% of estimated
insured deposits.
The
Federal Deposit Insurance Reform Act of 2005 provided the FDIC with authority to
adjust the DIF ratio to insured deposits within a range of 1.15% and 1.50%, in
contrast to the prior statutorily fixed ratio of 1.25%. The Restoration Plan
adopted by the FDIC seeks to restore the DIF to a 1.15% ratio within a period of
eight years.
Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC. Management does not know of any
practice, condition, or violation that might lead to termination of the deposit
insurance of the Bank.
In
addition, all FDIC-insured institutions are required to pay assessments to the
FDIC to fund interest payments on bonds issued by the Financing Corporation
(“FICO”), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. The FICO assessment rates, which are determined
quarterly, averaged 1.06 basis points of assessable deposits in 2009. These
assessments will continue until the FICO bonds mature in 2019.
Temporary
Liquidity Guarantee Program. In November 2008, the Board
of Directors of the FDIC adopted a final rule relating to the Temporary
Liquidity Guarantee Program (“TLG Program”). Under the TLG Program, the FDIC
will (i) guarantee, through the earlier of maturity or December 31,
2012 (extended from June 30, 2012 by subsequent amendment), certain newly
issued senior unsecured debt issued by participating institutions on or after
October 14, 2008, and before October 31, 2009 (extended from
June 30, 2009 by subsequent amendment) and (ii) provide full FDIC
deposit insurance coverage for non-interest bearing transaction deposit
accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5%
interest per annum and Interest on Lawyers Trust Accounts (“IOLTA”) held at
participating FDIC insured institutions through June 30, 2010 (extended
from December 31, 2009, subject to an opt-out provision, by subsequent
amendment). We have elected to participate in both guarantee programs and did
not opt out of the six-month extension of the transaction account guarantee
program. In 2009, we issued $30.0 million of unsecured debt under
this program.
- 25
-
Federal Reserve System. Pursuant to
regulations of the Federal Reserve Board, a savings institution must maintain
reserves against their transaction accounts. As of December 31, 2009, no
reserves were required to be maintained on the first $10.7 million of
transaction accounts, reserves of 3% were required to be maintained against the
next $55.2 million of transaction accounts and a reserve of 10% against all
remaining transaction accounts. This percentage is subject to adjustment by the
Federal Reserve Board. Because required reserves must be maintained in the form
of vault cash or in a non-interest bearing account at a Federal Reserve Bank,
the effect of the reserve requirement may reduce the amount of an institution’s
interest-earning assets. As of December 31, 2009 we met our reserve
requirements.
ITEM 1A. RISK
FACTORS
The
following are certain risks that management believes are specific to our
business. This should not be viewed as an all inclusive list and the order is
not intended as an indicator of the level of importance.
Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. economy or the U.S. banking
system.
On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (the “EESA”) which, among other measures, authorizes
the U.S. Department of the Treasury (“Treasury”) to purchase from financial
institutions and their holding companies up to $700 billion in mortgage loans,
mortgage-related securities and certain other financial instruments, including
debt and equity securities issued by financial institutions and their holding
companies, under a troubled asset relief program, or “TARP.” The purpose of TARP
is to restore confidence and stability to the U.S. banking system and to
encourage financial institutions to increase their lending to customers and to
each other. Under the TARP Capital Purchase Program (“CPP”), Treasury is
purchasing equity securities from participating institutions. On January 23,
2009, as part of CPP, we sold (i) 52,625 shares of the Registrant’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”)
and (ii) a warrant to purchase 175,105 shares of our Common Stock for an
aggregate purchase price of $52.6 million in cash. The EESA also increased
federal deposit insurance on most deposit accounts from $100,000 to $250,000.
This increase is in place until the end of 2013 and is not covered by deposit
insurance premiums paid by the banking industry.
The EESA
followed, and has been followed by, numerous actions by the Board of Governors
of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC
and others to address the current liquidity and credit crisis that has followed
the sub-prime meltdown that commenced in 2007. These measures include homeowner
relief that encourages loan restructuring and modification; the establishment of
significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program for money market
funds; the establishment of a commercial paper funding facility to provide
back-stop liquidity to commercial paper issuers; and coordinated international
efforts to address illiquidity and other weaknesses in the banking sector. More
recently, on February 17, 2009, the American Recovery and Reinvestment Act of
2009 (“ARRA”) was signed into law. ARRA, more commonly known as the economic
stimulus bill or economic recovery package, is intended to stimulate the economy
and provides for broad infrastructure, education and health
spending.
- 26
-
30, 2008.
The guarantee will extend to June 30, 2012 even if the maturity of the debt is
after that date. The Bank pays a fee equal to 300 basis points for its
participation in the unsecured debt guarantee program.
The
purpose of these legislative and regulatory actions is to stabilize the U.S.
economy and banking system. The EESA, the ARRA and the other regulatory
initiatives described above may not have their desired effects. If the
volatility in the markets continues and economic conditions fail to improve or
worsen, our business, financial condition, results of operations and cash flows
could be materially and adversely affected.
Higher
Federal Deposit Insurance Corporation insurance premiums and assessments will
adversely impact our earnings.
FDIC insurance
premiums have increased substantially in 2009 already, and we expect to pay
significantly higher FDIC premiums in the future. A large number of bank
failures have significantly depleted the deposit insurance fund and reduced the
ratio of reserves to insured deposits. On May 22, 2009, the Federal Deposit
Insurance Corporation adopted a final rule levying a five basis point special
assessment on each insured depository institution’s assets minus Tier 1 capital
as of June 30, 2009. The special assessment was payable on September 30,
2009. We recorded an expense of $1.7 million during the quarter ended June 30,
2009, to reflect the special assessment. The final rule permits the Federal
Deposit Insurance Corporation to levy up to two additional special assessments
of up to five basis points each during 2009 if the Federal Deposit Insurance
Corporation estimates that the Deposit Insurance Fund reserve ratio will fall to
a level that the Federal Deposit Insurance Corporation believes would adversely
affect public confidence or to a level that will be close to or below zero. We
participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLG, for
noninterest-bearing transaction deposit accounts. Banks that participate in the
TLG’s noninterest-bearing transaction account guarantee will pay the FDIC an
annual assessment of 10 basis points on the amounts in such accounts above the
amounts covered by FDIC deposit insurance. To the extent that these TLG
assessments are insufficient to cover any loss or expenses arising from the TLG
program, the FDIC is authorized to impose an emergency special assessment on all
FDIC-insured depository institutions. The FDIC has authority to impose charges
for the TLG program upon depository institution holding companies, as well. The
FDIC has extended the TLG to June 30, 2010, and increased the fee to banks that
elect to participate in the extension to 15 to 25 basis points, depending on the
institution’s risk category. WSFS Bank elected to continue to participate in the
TLG. These changes will cause our deposit insurance expense to increase. These
actions could significantly increase our noninterest expense for the foreseeable
future.
Any further
special assessments that the Federal Deposit Insurance Corporation levies will
be recorded as an expense during the appropriate period. In addition, the
Federal Deposit Insurance Corporation increased the general assessment rate and
our prior credits for federal deposit insurance were fully utilized during the
quarter ended June 30, 2009. Therefore, our Federal Deposit Insurance
Corporation general insurance premium expense will increase compared to prior
periods.
On November
12, 2009, the FDIC issued a final rule requiring all banks to prepay their
estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011
and 2012 on December 30, 2009. Under the rule, the assessment rate for the
fourth quarter of 2009 and for 2010 will be based on each bank’s base assessment
rate in effect as of September 30, 2009, and the assessment rate for 2011 and
2012 will be equal to such September 30, 2009 assessment rate plus an additional
three basis points. In addition, each institution’s base assessment rate for
each period would be calculated using its assessment base as of September 30,
2009, adjusted quarterly for an estimated 5% annual growth rate in the
assessment base through the end of 2012. Based on the final rule, we were
required to make a payment of $21.3 million to the FDIC on December 30, 2009 and
to record the pre-payment as a prepaid expense, which will be amortized to
expense over three years. Whether this prepayment will provide sufficient
funding is uncertain. There is no assurance the FDIC will not require additional
funding from the banking system which may negatively impact us.
- 27
-
The
prolonged deep recession, difficult market conditions and economic trends have
adversely affected our industry and our business.
We are
particularly exposed to downturns in the U. S. housing market. Dramatic declines
in the housing market over the past year, with decreasing home prices and
increasing delinquencies and foreclosures, have negatively impacted the credit
performance of mortgage and construction loans that resulted in significant
write-downs of assets by many financial institutions. In addition, the values of
real estate collateral supporting many loans have declined and may continue to
decline. General downward economic trends, reduced availability of commercial
credit and increasing unemployment have negatively impacted the credit
performance of commercial and consumer credit, resulting in additional
write-downs. Concerns over the stability of the financial markets and the
economy have resulted in decreased credit supply in part due to the reduction in
non-bank providers of credit in the marketplace. This market turmoil and
tightening of credit has led to increased commercial and consumer deficiencies,
lack of customer confidence, increased market volatility and widespread
reduction in general business activity. Competition among depository
institutions for deposits has increased significantly. Financial institutions
have experienced decreased access to deposits or borrowings. The resulting
economic pressure on consumers and businesses and the lack of confidence in the
financial markets may adversely affect our business, financial condition,
results of operations and stock price. We do not expect that the difficult
market conditions will improve in the near future. A worsening of these
conditions would likely exacerbate the adverse effects of these difficult market
conditions on us and others in the industry. In particular, we may face the
following risks in connection with these events:
• | An increase in the number of borrowers unable to repay their loans in accordance with the original terms | |
•
|
Our
ability to assess the creditworthiness of customers and to estimate the
losses inherent in our credit exposure is made more complex by these
difficult market and economic
conditions.
|
|
|
•
|
We
also may be required to pay even higher Federal Deposit Insurance
Corporation premiums than the recently increased level, because financial
institution failures resulting from the depressed market conditions have
depleted and may continue to deplete the deposit insurance fund and reduce
its ratio of reserves to insured
deposits.
|
|
|
•
|
Our
ability to borrow from other financial institutions or the Federal Home
Loan Bank on favorable terms or at all could be adversely affected by
further disruptions in the capital markets or other
events.
|
|
|
•
|
We
may experience increases in foreclosures, delinquencies and customer
bankruptcies, as well as more restricted access to
funds.
|
Concentration
of loans in our primary market area, which has recently experienced an economic
downturn, may increase risk.
Our
success depends primarily on the general economic conditions in the State of
Delaware, southeastern Pennsylvania and northern Virginia, as nearly all of our
loans are to customers in this market. Accordingly, the local economic
conditions in these markets have a significant impact on the ability of
borrowers to repay loans as well as our ability to originate new loans. As such,
a continuation of the decline in real estate valuations in these markets would
lower the value of the collateral securing those loans. In addition, a continued
weakening in general economic conditions such as inflation, recession,
unemployment or other factors beyond our control could negatively affect our
financial results.
- 28
-
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings will decrease.
We make
various assumptions and judgments about the collectability of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans. In determining the amount of the allowance for loan losses, we review
our loans, our loss and delinquency experience, and we evaluate economic
conditions. If our assumptions are incorrect, our allowance for loan losses may
not be sufficient to cover probable incurred losses in our loan portfolio,
resulting in additions to our allowance. Material additions to our allowance
could materially decrease our net income.
Our
loan portfolio includes a substantial amount of commercial real estate and
commercial and industrial loans. The credit risk related to these types of loans
is greater than the risk related to residential loans.
Our
commercial loan portfolio, which includes commercial and industrial loans and
commercial real estate loans, totaled $1.9 billion at December 31, 2009,
comprising 74% of total loans. Commercial and industrial loans generally carry
larger loan balances and involve a greater degree of risk of nonpayment or late
payment than home equity loans or residential mortgage loans. Any significant
failure to pay or late payments by our customers would hurt our earnings. The
increased credit risk associated with these types of loans is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the size of loan balances, and the effects of general
economic conditions on income-producing properties. A significant portion of our
commercial real estate and commercial and industrial loan portfolios includes a
balloon payment feature. A number of factors may affect a borrower’s ability to
make or refinance a balloon payment, including the financial condition of the
borrower, the prevailing local economic conditions and the prevailing interest
rate environment.
Furthermore,
commercial real estate loans secured by owner-occupied properties are dependent
upon the successful operation of the borrower’s business. If the operating
company suffers difficulties in terms of sales volume and/or profitability, the
borrower’s ability to repay the loan may be impaired. Loans secured by
properties where repayment is dependent upon payment of rent by third party
tenants or the sale of the property may be impacted by loss of tenants, lower
lease rates needed to attract new tenants or the inability to sell a completed
project in a timely fashion and at a profit. The collateral for our commercial
loans that are secured by real estate are classified as 64% owner occupied
properties and 36% non-owner occupied properties.
We
are subject to extensive regulation which could have an adverse effect on our
operations.
We are
subject to extensive regulation and supervision from the Office of Thrift
Supervision and the FDIC. This regulation and supervision is intended primarily
for the protection of the FDIC insurance fund, our depositors and borrowers,
rather than for holders of our equity securities. Regulatory authorities have
extensive discretion in their supervisory and enforcement activities, including
the imposition of restrictions on operations, the classification of our assets
and determination of the level of the allowance for loan losses. As a result of
recent market conditions, we expect to face increased regulation of our
industry. Compliance with such regulation may increase our costs and limit our
ability to pursue business opportunities.
WSFS
Bank has entered into a memorandum of understanding.
In December
2009, WSFS Bank entered into an informal memorandum of understanding (the
“Understanding”) with the OTS. An Understanding is characterized by bank
regulatory agencies as an informal action that is neither published nor made
publicly available by the agencies and is used when circumstances warrant a
milder response than a formal regulatory action. Regulatory actions, such as
this Understanding, are on the rise as a result of the current severe economic
conditions and the related impact on the banking industry.
- 29
-
In
accordance with the terms of the Understanding, WSFS Bank has agreed, among
other things, to: (i) adopt and implement a written plan to reduce criticized
assets; (ii) review and revise its policies regarding the identification,
monitoring and managing the risks associated with loan concentrations for
certain commercial loans and reduce concentration limits of such loans; (iii)
review and revise credit administration policies and dedicate additional
staffing resources to this department; (iv) implement a revised internal review
program; (v) obtain prior OTS approval before increasing the amount of brokered
deposits; and (vi) approve a written strategic business plan and compliance plan
concerning the exercise of fiduciary powers.
We are
committed to expeditiously addressing and resolving all the issues raised in the
Understanding and the Board of Directors and management of WSFS Bank have
already initiated actions to comply with its provisions. A material failure to
comply with the terms of the Understanding could subject the Bank to additional
regulatory actions and further regulation by the OTS, or result in a formal
action or constraints on the Bank’s business, any of which may have a material
adverse effect on our future results of operations and financial
condition.
The
fiscal, monetary and regulatory policies of the Federal Government and its
agencies could have a material adverse effect on our results of
operations.
The
Federal Reserve regulates the supply of money and credit in the United States.
Its policies determine in large part the cost of funds for lending and investing
and the return earned on those loans and investments, both of which affect the
net interest margin. It also can materially decrease the value of financial
assets we hold, such as debt securities. Its policies also can adversely affect
borrowers, potentially increasing the risk that they may fail to repay their
loans. Additionally, legislation has been introduced into each house of Congress
proposing sweeping financial reforms, including the creation of a Consumer
Financial Protection Agency with extensive powers. If enacted, the legislation
would significantly alter not only how financial firms are regulated but also
how they conduct their business. Changes in Federal Reserve policies and our
regulatory environment generally are beyond our control, and we are unable to
predict what changes may occur or the manner in which any future changes may
affect our business, financial condition and results of operation.
The
securities purchase agreement between us and Treasury permits Treasury to impose
additional restrictions on us retroactively.
On
January 23, 2009, as part of the TARP Capital Purchase Program (“CPP”), we
entered into a securities purchase agreement with the Treasury pursuant to which
we sold (i) 52,625 shares of the Registrant’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant to
purchase 175,105 shares of our Common Stock for an aggregate purchase price of
$52.6 million in cash. The Series A Preferred Stock is included in the
calculation of Tier 1 capital and pays cumulative dividends at a rate of 5% per
annum for the first five years, and 9% per annum thereafter. The Treasury
warrant has a 10-year term and is immediately exercisable upon its issuance,
with an exercise price, subject to anti-dilution adjustments, equal to $45.08
per share of the Common Stock. The securities purchase agreement we entered into
with Treasury permits Treasury to unilaterally amend the terms of the securities
purchase agreement to comply with any changes in federal statutes after the date
of its execution. ARRA imposed additional executive compensation and expenditure
limits on all current and future TARP recipients, including us, until we have
repaid the Treasury. These additional restrictions may impede our ability to
attract and retain qualified executive officers. ARRA also permits TARP
recipients to repay the Treasury without penalty or requirement that additional
capital be raised, subject to Treasury’s consultation with our primary federal
regulator. The securities purchase agreement required that, for a period of
three years, the Series A Preferred Stock could generally only be repaid if we
raised additional capital to repay the securities and such capital qualified as
Tier 1 capital. The terms of the CPP also restrict our ability to
increase dividends on our common stock and undertake stock repurchase
programs. Congress may impose additional restrictions in the future
which may also apply retroactively. These restrictions may have a material
adverse affect on our operations, revenue and financial condition, on the
ability to pay dividends, our ability to attract and retain
- 30
-
executive
talent and restricts our ability to increase our cash dividends or undertake
stock repurchase programs.
We
are subject to liquidity risk.
Due to the
continued growth in our lending operations, particularly in corporate and small
business lending, our total loans have exceeded customer deposit funding.
Changes in interest rates, alternative investment opportunities and other
factors may make deposit gathering more difficult. Additionally, interest rate
changes or disruptions in the capital markets may make the terms of the
borrowings and brokered deposits less favorable and may make it difficult to
sell securities when needed to provide additional liquidity. As a result, there
is a risk that the cost of funding will increase or that we will not have
sufficient funds to meet our obligations when they come due.
The
market value of our securities portfolio may be impacted by the level of
interest rates and the credit quality and strength of the underlying issuers and
general liquidity in the market for investment securities.
If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value with the amount of impairment related to credit losses recognized in earnings while the amount of impairment related to all other factors is recognized in other comprehensive income. As of December 31, 2009, we owned securities classified as available for sale with an aggregate historical cost of $716.5 million and an estimated fair value of $713.9 million. During the year ended December 31, 2009, we had one security that was determined to be other than temporarily impaired with a credit loss recognized in earnings of only $86,000, although we can give no assurance that we will not have additional other than temporarily impaired securities in the future. Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities. As a result, changes in values of securities affect our equity and may impact earnings.
In
addition, the value of our BBB+ rated mortgage-backed security is subject to
market value fluctuations. To develop a range of likely fair value prices, our
valuation is highly dependent upon various observable and unobservable
inputs. If the value of the observable inputs declines or as a result
of economic conditions, management changes its assumptions regarding what market
participants would use in pricing this asset, the value of this asset may
decline. As a result, we would record any market adjustments related
to this asset as a charge to earnings.
We
must evaluate whether any portion of our recorded goodwill is impaired.
Impairment testing may result in a material, non-cash write-down of our goodwill
assets and could have a material adverse impact on our results of
operations.
At
December 31, 2009 we had $13.7 million of goodwill and intangible
assets. We have recorded goodwill because we paid more for some of
our businesses than the fair market value of the tangible and separately
measurable intangible net assets of those businesses. We test our goodwill and
other intangible assets with indefinite lives for impairment at least annually
(or whenever events occur which may indicate possible impairment). Goodwill
impairment begins with a comparison of the fair value of a reporting unit
to its carrying amount, including goodwill. If the fair value exceeds the
carrying amount, goodwill of the reporting unit is not considered impaired. If
the fair value of the reporting unit is less than the carrying amount, a Step 2
impairment test is required. Determining the fair value of our reporting unit
requires a high degree of subjective management assumptions. Any changes in key
assumptions about our business and its prospects, changes in market conditions
or other external factors, for impairment testing purposes could result in an
impairment charge to earnings.
- 31
-
Our
investment in the Federal Home Loan Bank of Pittsburgh (FHLB) stock may be
subject to impairment charges in future periods if the financial condition of
the FHLB declines further.
We are
required to hold FHLB stock as a condition of membership in the
FHLB. Ownership of FHLB stock is restricted and there is no market
for these securities. As of December 31, 2009, the carrying value of
our FHLB stock was $39.3 million. In 2009, the FHLB reported significant losses
due to numerous factors, including other-than-temporary impairment charges on
its portfolio of private-label mortgage-backed securities. The FHLB announced a
capital restoration plan in February 2009 which restricts it from repurchasing
or redeeming capital stock or paying dividends. If the FHLB financial condition
continues to decline, other-than-temporary impairment charges related to our
investment in FHLB stock may occur in future periods. An additional
discussion related to our evaluation of impairment of FHLB stock is included in
Note 15 to the Consolidated Financial Statements.
Our
Cash Connect Division relies on numerous couriers and armored car companies to
transport its cash and fund the ATMs it services for our customers, and
numerous networks to settle its cash.
The
profitability of Cash Connect is reliant upon its efficient distribution of
large amounts of cash to its customers’ ATMs using an extensive network of
couriers and armored car companies. It is possible those associated
with a courier or armored car company could misappropriate funds belonging to
Cash Connect. Cash Connect has experienced such occurrences in the
past, including one in 2001 and potentially another in 2010. For
additional information see Note 22 to the Consolidated Financial Statements. In
addition, Cash Connect settles its transactions through a number of national
networks. It is possible a network could fraudulently redirect the
settlement of cash belonging to Cash Connect. It is also possible
Cash Connect would not have established proper policies, controls or insurance
and, as a result, any misappropriation of funds could result in an impact to
earnings.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
- 32
-
ITEM 2.
PROPERTIES
The
following table shows information regarding offices and material properties held
by us, and our subsidiaries, at December 31, 2009:
Location
|
Owned/
Leased
|
Date
Lease
Expires
|
Net
Book Value
of
Property
or
Leasehold
Improvements (1)
|
Deposits
|
||
(In Thousands)
|
||||||
WSFS
:
|
||||||
WSFS
Bank Center Branch
Main
Office
500
Delaware Avenue
Wilmington,
DE 19801
|
Leased
|
2011
|
$723
|
$1,054,959
|
||
Union
Street Branch
211
North Union Street
Wilmington,
DE 19805
|
Leased
|
2012
|
53
|
54,830
|
||
Trolley
Square Branch
1711
Delaware Ave
Wilmington,
DE 19806
|
Leased
|
2011
|
41
|
34,200
|
||
Fairfax
Shopping Center (3)
2005
Concord Pike
Wilmington,
DE 19803
|
Master
Lease
|
7,780
|
88,805
|
|||
Branmar
Plaza Shopping Center Branch
1812
Marsh Road
Wilmington,
DE 19810
|
Leased
|
2013
|
66
|
106,964
|
||
Prices
Corner Shopping Center Branch
3202
Kirkwood Highway
Wilmington,
DE 19808
|
Leased
|
2023
|
312
|
101,464
|
||
Pike
Creek Shopping Center Branch
4730
Limestone Road
Wilmington,
DE 19808
|
Leased
|
2015
|
583
|
101,840
|
||
University
Plaza Shopping Center Branch
100
University Plaza
Newark,
DE 19702
|
Leased
|
2026
|
1,244
|
50,620
|
||
College
Square Shopping Center Branch
Route
273 & Liberty Avenue
Newark,
DE 19711
|
Leased
|
2012
|
244
|
114,165
|
||
Airport
Plaza Shopping Center Branch
144
N. DuPont Hwy.
New
Castle, DE 19720
|
Leased
|
2013
|
607
|
70,354
|
||
Stanton
Branch
Inside
ShopRite
1600
W. Newport Pike
Wilmington,
DE 19804
|
Leased
|
2011
|
14
|
40,879
|
||
Glasgow
Branch
Inside
Safeway at People Plaza
Routes
40 & 896
Newark,
DE 19702
|
Leased
|
2012
|
24
|
34,972
|
||
Middletown
Crossing Shopping Center
400
East Main Street
Middletown,
DE 19709
|
Leased
|
2017
|
835
|
58,668
|
||
Dover
Branch
Dover
Mart
262
S. DuPont Highway
Dover,
DE 19901
|
Leased
|
2010
|
29
|
11,510
|
||
West
Dover Loan Office
Greentree
Office Center
160
Greentree Drive
Suite
105
Dover,
DE 19904
|
Leased
|
2014
|
17
|
N/A
|
- 33
-
Location
|
Owned/
Leased
|
Date
Lease
Expires
|
Net
Book Value
of
Property
or
Leasehold
Improvements (1)
|
Deposits
|
||
(In Thousands)
|
||||||
Blue
Bell Loan Office
721
Skippack Pike
Suite
101
Blue
Bell, PA 19422
|
Leased
|
2012
|
$18
|
$8,993
|
||
Glen
Eagle
Inside
Genaurdi’s Family Market
475
Glen Eagle Square
Glen
Mills, PA 19342
|
Leased
|
2024
|
9
|
13,751
|
||
University
of Delaware-Trabant University Center
17
West Main Street
Newark,
DE 19716
|
Leased
|
2013
|
25
|
12,531
|
||
Brandywine
Branch
Inside
Safeway Market
2522
Foulk Road
Wilmington,
DE 19810
|
Leased
|
2014
|
9
|
34,849
|
||
Operations
Center
2400
Philadelphia Pike
Wilmington,
DE 19703
|
Owned
|
636
|
N/A
|
|||
Longwood
Branch
Inside
Genaurdi’s Family Market
830
E. Baltimore Pike
E.
Marlboro, PA 19348
|
Leased
|
2010
|
33
|
15,876
|
||
Holly
Oak Branch
Inside
Super Fresh
2105
Philadelphia Pike
Claymont,
DE 19703
|
Leased
|
2015
|
22
|
28,358
|
||
Hockessin
Branch
7450
Lancaster Pike
Wilmington,
DE 19707
|
Leased
|
2015
|
511
|
89,418
|
||
Lewes
LPO
Southpointe
Professional Center
1515
Savannah Road, Suite 103
Lewes,
DE 19958
|
Leased
|
2013
|
84
|
N/A
|
||
Fox
Run Shopping Center
210 Fox Hunt
Drive
Bear,
DE 19701
|
Leased
|
2015
|
812
|
67,230
|
||
Camden
Town Center
4566
S. Dupont Highway
Camden,
DE 19934
|
Leased
|
2024
|
879
|
32,656
|
||
Rehoboth
Branch
19335
coastal Highway
Lighthouse
Plaza
Rehoboth,
DE 19771
|
Leased
|
2028
|
859
|
50,166
|
||
Loan
Operations
30
Blue Hen Drive
Suite
200
Newark,
DE 19713
|
Leased
|
2010
(4)
|
N/A
|
N/A
|
||
West
Dover Branch
1486
Forest Avenue
Dover,
DE 19904
|
Owned
|
2,134
|
32,416
|
|||
Longneck
Branch
25926
Plaza Drive
Millsboro,
DE 19966
|
Leased
|
2026
|
1,157
|
35,557
|
- 34
-
Location
|
Owned/
Leased
|
Date
Lease
Expires
|
Net
Book Value
of
Property
or
Leasehold
Improvements (1)
|
Deposits
|
||
(In Thousands)
|
||||||
Smyrna
Simon’s
Corner Shopping Center
400
Jimmy Drive
Smyrna,
DE 19977
|
Leased
|
2028
|
$1,190
|
$34,561
|
||
Oxford,
LPO
59
South Third Street
Suite
1
Oxford,
PA 19363
|
Leased
|
2011
|
24
|
7,527
|
||
Greenville
3908
Kennett Pike
Greenville,
DE 19807
|
Owned
|
2,020
|
44,415
|
|||
WSFS
Bank Center (2)
500
Delaware Avenue
Wilmington,
DE 19801
|
Leased
|
2019
|
1,837
|
N/A
|
||
Market
Street Branch
833
Market Street
Wilmington,
DE 19801
|
Leased
|
2010
|
35
|
20,698
|
||
Annandale,
VA
7010
Little River Tnpk.
Suite
330
Annandale,
VA 22003
|
Leased
|
2011
|
12
|
834
|
||
Oceanview
69
Atlantic Avenue
Oceanview,
DE 19970
|
Leased
|
2024
|
1,346
|
11,915
|
||
Selbyville
Strawberry
Center
Unit
2
Selbyville,
DE 19975
|
Leased
|
2013
|
49
|
8,391
|
||
Lewes
Branch
34383
Carpenters Way
Lewes,
DE 19958
|
Leased
|
2028
|
313
|
18,258
|
||
Millsboro
26644
Center View Drive
Millsboro,
DE 19966
|
Leased
|
2029
|
1,212
|
7,062
|
||
Concord
Square
4401
Concord Pike
Wilmington,
DE 19803
|
Leased
|
2011
|
57
|
27,893
|
||
Crossroads
2080 New
Castle Avenue
New
Castle, DE 19720
|
Leased
|
2013
|
57
|
16,779
|
||
Delaware
City
145 Clinton
Street
Delaware
City, DE 19706
|
Owned
|
93
|
7,015
|
|||
Governor’s
Square
1101
Governor’s Place
Bear,
DE 19701
|
Leased
|
2010
|
57
|
10,492
|
||
Glen
Mills Shopping Center
Route
202
Glen
Mills, PA 19342
|
Leased
|
2039
|
256
|
N/A
|
||
$2,561,871 |
- 35
-
Location | Owned/ Leased |
Date
Lease Expires |
Net
Book Value
of Property
or Leasehold
Improvements (1)
|
Deposits |
(In Thousands) | ||||
Cypress Capital Management,
LLC
1220
Market Street
Suite
704
Wilmington,
DE 19801
|
Leased
|
2010
|
5
|
N/A
|
(1)
|
The
net book value of all the Company’s investment in premise and equipment
totaled $36.1 million at December 31, 2009.
|
(2)
|
Location
of Corporate Headquarters and Montchanin Capital Management,
Inc.
|
(3)
|
Includes
Fairfax Branch office and shopping center which is under a master lease.
Net book value represents the value of the entire
facility.
|
(4)
|
This
lease expired in February of 2010 and was not renewed. The
Company no longer occupies this
property.
|
ITEM 3. LEGAL
PROCEEDINGS
There are
no material legal proceedings to be disclosed under this item.
ITEM 4.
[Reserved]
PART
II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market
for Registrant’s Common Equity and Related Stockholder Matters
Our Common Stock is traded on
the NASDAQ Global Select Market under the symbol WSFS. At December 31, 2009, we
had 1,122 registered common stockholders of record. The following table sets
forth the range of high and low sales prices for the Common Stock for each full
quarterly period within the two most recent fiscal years as well as the
quarterly dividends paid.
The
closing market price of our common stock at December 31, 2009 was
$25.63.
Stock Price
Range
Low
|
High
|
Dividends
|
|||||||||
2009
|
4th
|
$
|
24.16
|
$
|
30.18
|
$
|
0.12
|
||||
3rd
|
$
|
26.00
|
$
|
32.70
|
$
|
0.12
|
|||||
2nd
|
$
|
20.78
|
$
|
33.85
|
$
|
0.12
|
|||||
1st
|
$
|
16.47
|
$
|
49.50
|
$
|
0.12
|
|||||
$
|
0.48
|
||||||||||
2008
|
4th
|
$
|
35.51
|
$
|
60.50
|
$
|
0.12
|
||||
3rd
|
$
|
40.04
|
$
|
65.50
|
$
|
0.12
|
|||||
2nd
|
$
|
42.79
|
$
|
53.84
|
$
|
0.12
|
|||||
1st
|
$
|
41.12
|
$
|
54.17
|
$
|
0.10
|
|||||
$
|
0.46
|
||||||||||
- 36
-
COMPARATIVE
STOCK PERFORMANCE GRAPH
The graph and table which follow show
the cumulative total return on our Common Stock over the last five years
compared with the cumulative total return of the Dow Jones Total Market Index
and the Nasdaq Bank Index over the same period as obtained from Bloomberg L.P.
Cumulative total return on our Common Stock or the index equals the total
increase in value since December 31, 2004, assuming reinvestment of all
dividends paid into the Common Stock or the index, respectively. The graph and
table were prepared assuming $100 was invested on December 31, 2004 in our
Common Stock and in each of the indexes. There can be no assurance that our
future stock performance will be the same or similar to the historical stock
performance shown in the graph below. We neither make nor endorse any
predictions as to stock performance.
CUMULATIVE
TOTAL SHAREHOLDER RETURN
COMPARED
WITH PERFORMANCE OF SELECTED INDEXES
December
31, 2004 through December 31, 2009
Cumulative
Total Return
|
||||||
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
WSFS
Financial Corporation
|
$100
|
$103
|
$113
|
$85
|
$82
|
$45
|
Dow
Jones Total Market Index
|
100
|
106
|
123
|
130
|
82
|
106
|
Nasdaq
Bank Index
|
100
|
98
|
111
|
90
|
71
|
59
|
- 37
-
ITEM 6. SELECTED FINANCIAL
DATA
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||
(Dollars
in Thousands, Except Per Share Data)
|
||||||||||||||||
At December 31,
|
||||||||||||||||
Total
assets
|
$
|
3,748,507
|
$
|
3,432,560
|
$
|
3,200,188
|
$
|
2,997,396
|
$
|
2,846,752
|
||||||
Net
loans (1)
|
2,479,155
|
2,443,835
|
2,233,980
|
2,019,741
|
1,775,294
|
|||||||||||
Investment
securities (2)
|
46,047
|
49,749
|
26,235
|
53,893
|
56,704
|
|||||||||||
Investment
in reverse mortgages, net
|
(530
|
)
|
(61
|
)
|
2,037
|
598
|
785
|
|||||||||
Other
investments
|
40,395
|
39,521
|
46,615
|
41,615
|
46,466
|
|||||||||||
Mortgage-backed
securities (2)
|
681,242
|
498,205
|
496,492
|
516,711
|
620,323
|
|||||||||||
Deposits
|
2,561,871
|
2,122,352
|
1,827,161
|
1,756,348
|
1,446,236
|
|||||||||||
Borrowings
(3)
|
787,798
|
999,734
|
1,068,149
|
935,668
|
1,127,997
|
|||||||||||
Trust
preferred borrowings
|
67,011
|
67,011
|
67,011
|
67,011
|
67,011
|
|||||||||||
Stockholders’
equity
|
301,800
|
216,635
|
211,330
|
212,059
|
181,975
|
|||||||||||
Number
of full-service branches (4)
|
37
|
35
|
29
|
27
|
24
|
|||||||||||
For the Year Ended December
31,
|
||||||||||||||||
Interest
income
|
$
|
157,730
|
$
|
166,477
|
$
|
189,477
|
$
|
177,177
|
$
|
136,022
|
||||||
Interest
expense
|
53,086
|
77,258
|
107,468
|
99,278
|
62,380
|
|||||||||||
Noninterest
income
|
50,241
|
45,989
|
48,166
|
40,305
|
34,653
|
|||||||||||
Noninterest
expenses
|
108,504
|
89,098
|
82,031
|
69,314
|
62,877
|
|||||||||||
Provision
(benefit) for income taxes
|
(2,093
|
)
|
6,950
|
13,474
|
15,660
|
14,847
|
||||||||||
Net
Income
|
663
|
16,136
|
29,649
|
30,441
|
27,856
|
|||||||||||
Dividends
on preferred stock and accretion of discount
|
2,590
|
-
|
-
|
-
|
-
|
|||||||||||
Net
(loss) income allocable to common stockholders
|
(1,927
|
)
|
16,136
|
29,649
|
30,441
|
27,856
|
||||||||||
Earnings
(loss) per share allocable to common stockholders:
|
||||||||||||||||
Basic
|
(0.30
|
)
|
2.62
|
4.69
|
4.59
|
4.10
|
||||||||||
Diluted
|
(0.30
|
)
|
2.57
|
4.55
|
4.41
|
3.89
|
||||||||||
Interest
rate spread
|
3.10
|
%
|
2.94
|
%
|
2.80
|
%
|
2.70
|
%
|
2.91
|
%
|
||||||
Net
interest margin
|
3.30
|
3.13
|
3.09
|
2.98
|
3.13
|
|||||||||||
Efficiency
ratio
|
69.56
|
65.36
|
62.48
|
58.09
|
57.46
|
|||||||||||
Noninterest
income as a percentage of total
revenue (5) |
32.21
|
33.74
|
36.69
|
33.78
|
31.67
|
|||||||||||
Return
on average equity
|
0.24
|
7.30
|
14.34
|
15.42
|
14.78
|
|||||||||||
Return
on average assets
|
0.02
|
0.50
|
0.98
|
1.03
|
1.05
|
|||||||||||
Average
equity to average assets
|
7.86
|
6.86
|
6.87
|
6.68
|
7.10
|
|||||||||||
Tangible
equity to assets
|
7.72
|
5.88
|
6.52
|
7.00
|
6.33
|
|||||||||||
Tangible
common equity to assets
|
6.31
|
5.88
|
6.52
|
7.00
|
6.33
|
|||||||||||
Ratio
of nonperforming assets to total assets
|
2.19
|
1.04
|
0.99
|
0.14
|
0.12
|
|||||||||||
(1)
|
Includes
loans held-for-sale.
|
(2)
|
Includes
securities available-for-sale and trading.
|
(3)
|
Borrowings
consist of FHLB advances, securities sold under agreement to repurchase
and other borrowed funds.
|
(4)
|
WSFS
opened two branches in 2009, acquired six (keeping four open and closing
two) in 2008, opened three branches and closed one branch in 2007, and
opened three in 2006.
|
(5)
|
Computed
on a fully tax-equivalent basis.
|
- 38
-
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
WSFS
Financial Corporation (“the Company,” “our Company,” “we,” “our” or “us”) is a
thrift holding company headquartered in Wilmington,
Delaware. Substantially all of our assets are held by our subsidiary,
Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”). Founded in
1832, we are one of the ten oldest banks in the United States
continuously-operating under the same name. As a federal savings
bank, which was formerly chartered as a state mutual savings bank, we enjoy
broader fiduciary powers than most other financial institutions. We
have served the residents of the Delaware Valley for over 177
years. We are 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. Our primary
market area is the mid-Atlantic region of the United States, which is
characterized by a diversified manufacturing and service economy. Our long-term
strategy is to serve small and mid-size businesses through loans, deposits,
investments, and related financial services, and to gather retail core
deposits. Our strategy of “Engaged Associates delivering Stellar
Service to create Customer Advocates” focuses on exceeding customer
expectations, delivering stellar service and building customer advocacy through
highly trained, relationship oriented, friendly, knowledgeable, and empowered
Associates.
We
provide residential and commercial real estate, commercial and consumer lending
services, as well as retail deposit and cash management services. In
addition, we offer a variety of wealth management and personal trust services
through WSFS Trust and Wealth Management, which was formed during
2005. Lending activities are funded primarily with retail deposits
and borrowings. The Federal Deposit Insurance Corporation (“FDIC”) insures our
customers’ deposits to their legal maximum. We serve our customers
primarily from our 41 banking offices located in Delaware (36), Pennsylvania
(4), and Virginia (1) and through our website at www.wsfsbank.com.
We have
two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc.
(“Montchanin”). We also have one unconsolidated affiliate, WSFS Capital Trust
III (“the Trust”). WSFS Bank has a fully-owned subsidiary, WSFS
Investment Group, Inc., which markets various third-party insurance products and
securities through the Bank’s retail banking system.
Montchanin
has one consolidated subsidiary, Cypress Capital Management, LLC
(“Cypress”). Cypress is a Wilmington-based investment advisory firm
serving high net-worth individuals and institutions. Cypress had
approximately $458 million in assets under management at December 31,
2009.
FORWARD-LOOKING
STATEMENTS
Within
this annual report and financial statements, management has included certain
“forward-looking statements” concerning our future operations. Statements
contained in this annual report which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. It is management’s desire to take advantage of
the “safe harbor” provisions of the Private Securities Litigation Reform Act of
1995. This statement is for the express purpose of availing the Corporation of
the protections of such safe harbor with respect to all “forward-looking
statements.” Management has used “forward-looking statements” to
describe future plans and strategies including expectations of our future
financial results. Management’s ability to predict results or the effect of
future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Delaware, the mid-Atlantic region and the country as a whole, asset quality,
loan growth, loan delinquency rates, operating risk, uncertainty of estimates in
general, and changes in federal and state regulations, among other factors.
These factors should be considered in evaluating the “forward-looking
statements,” and undue reliance should not be placed on such statements. Actual
results may differ materially from management expectations. We do not undertake,
and specifically disclaim any obligation to publicly release the result of any
revisions
- 39
-
that may
be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
RESULTS
OF OPERATIONS
WSFS
Financial Corporation recorded net income of $663,000, or a net loss allocable
to common stockholders’ of $1.9 million (after preferred stock dividends), for a
loss per common share of $0.30 for the year ended December 31, 2009, compared to
net income of $16.1 million or $2.57 per diluted common share and net income of
$29.6 million or $4.55 per diluted common share for the years ended December 31,
2008 and 2007, respectively.
Net Interest
Income. Net interest income increased $15.4 million, or 17%,
to $104.6 million in 2009 compared to $89.2 million in 2008. The net interest
margin for 2009 was 3.30%, up 17 basis points (0.17%) from 2008. These increases
were the result of the Company’s growth in core deposits (which improved our
funding mix) combined with active management of deposit and wholesale
pricing. In comparison to 2008, the yield on interest-bearing
liabilities declined by 1.03%, while the yield on interest-earning assets only
declined by 0.87% due to ongoing loan pricing management. Also, contributing to
the increase in net interest income was an increase in our mortgage-backed
securities (MBS) portfolio during 2009, due to purchases made throughout the
year to take advantage of market opportunity and optimize our capital position.
In addition, the yield on our loan portfolio remained relatively
stable.
Net interest income increased $7.2
million, or 9%, to $89.2 million in 2008 compared to $82.0 million in 2007. The
net interest margin for 2008 was 3.13%, up 0.04% from 2007. These increases were
the result of a liability sensitive balance sheet combined with active
management of loan and deposit pricing. In comparison to 2007, the yield on
interest-bearing liabilities declined by 1.41%, while the yield on
interest-earning assets only declined by 1.27%. The improvement in the net
interest margin also reflects growth, and the improved mix of our balance sheet.
The investment category on our average balance sheet includes income from
reverse mortgages, which declined substantially in 2008 compared to 2007,
consistent with decreases in home prices during the year 2008. During 2008 we
lost $1.1 million on reverse mortgages compared to income of $2.0 million in
2007.
- 40
-
The
following table sets forth certain information regarding changes in net interest
income attributable to changes in the volumes of interest-earning assets and
interest-bearing liabilities and changes in the rates for the periods
indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on the changes that are
attributable to: (i) changes in volume (change in volume multiplied
by prior year rate); (ii) changes in rates (change in rate multiplied by prior
year volume on each category); and (iii) net change (the sum of the change in
volume and the change in rate). Changes due to the combination of
rate and volume changes (changes in volume multiplied by changes in rate) are
allocated proportionately between changes in rate and changes in
volume.
Year
Ended December 31,
|
2009
vs. 2008
|
2008
vs. 2007
|
||||||||||||||||||
Volume
|
Yield/Rate
|
Net
|
Volume
|
Yield/Rate
|
Net
|
|||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||
Interest
Income:
|
||||||||||||||||||||
Commercial
real estate loans
|
$
|
942
|
$
|
(11,287
|
)
|
$
|
(10,345
|
)
|
$
|
5,722
|
$
|
(15,131
|
)
|
$
|
(9,409
|
)
|
||||
Residential
real estate loans
|
(2,020
|
)
|
(1,732
|
)
|
(3,752
|
)
|
(1,280
|
)
|
360
|
(920
|
)
|
|||||||||
Commercial
loans (1)
|
11,368
|
(7,171
|
)
|
4,197
|
9,460
|
(15,396
|
)
|
(5,936
|
)
|
|||||||||||
Consumer
loans
|
1,043
|
(3,556
|
)
|
(2,513
|
)
|
894
|
(3,480
|
)
|
(2,586
|
)
|
||||||||||
Mortgage-backed
securities
|
4,723
|
(147
|
)
|
4,576
|
(588
|
)
|
335
|
(253
|
)
|
|||||||||||
Investment
securities
|
149
|
519
|
668
|
504
|
(3,610
|
)
|
(3,106
|
)
|
||||||||||||
FHLB
Stock and deposits in other banks
|
(113
|
)
|
(1,465
|
)
|
(1,578
|
)
|
155
|
(945
|
)
|
(790
|
)
|
|||||||||
Favorable
(unfavorable)
|
16,092
|
(24,839
|
)
|
(8,747
|
)
|
14,867
|
(37,867
|
)
|
(23,000
|
)
|
||||||||||
Interest
expense:
|
||||||||||||||||||||
Deposits:
|
||||||||||||||||||||
Interest-bearing
demand
|
233
|
(649
|
)
|
(416
|
)
|
217
|
(546
|
)
|
(329
|
)
|
||||||||||
Money
market
|
2,045
|
(3,097
|
)
|
(1,052
|
)
|
(419
|
)
|
(5,542
|
)
|
(5,961
|
)
|
|||||||||
Savings
|
89
|
(304
|
)
|
(215
|
)
|
(106
|
)
|
(837
|
)
|
(943
|
)
|
|||||||||
Retail
time deposits
|
3,700
|
(4,686
|
)
|
(986
|
)
|
2,933
|
(4,515
|
)
|
(1,582
|
)
|
||||||||||
Jumbo
certificates of deposits – nonretail
|
(479
|
)
|
(767
|
)
|
(1,246
|
)
|
(229
|
)
|
(1,856
|
)
|
(2,085
|
)
|
||||||||
Brokered
certificates of deposits
|
1,320
|
(6,825
|
)
|
(5.505
|
)
|
258
|
(6,860
|
)
|
(6,602
|
)
|
||||||||||
FHLB
of Pittsburgh advances
|
(6,559
|
)
|
(4,755
|
)
|
(11,314
|
)
|
3,460
|
(12,401
|
)
|
(8,941
|
)
|
|||||||||
Trust
Preferred
|
—
|
(1,478
|
)
|
(1,478
|
)
|
—
|
(1,478
|
)
|
(1,478
|
)
|
||||||||||
Other
borrowed funds
|
345
|
(2,305
|
)
|
(1,960
|
)
|
1,500
|
(3,789
|
)
|
(2,289
|
)
|
||||||||||
Unfavorable
(favorable)
|
694
|
(24,866
|
)
|
(24,172
|
)
|
7,614
|
(37,824
|
)
|
(30,210
|
)
|
||||||||||
Net
change, as reported
|
$
|
15,398
|
$
|
27
|
$
|
15,425
|
$
|
7,253
|
$
|
(43
|
)
|
$
|
7,210
|
(1) The
tax-equivalent income adjustment is related to commercial
loans.
- 41
-
The
following table provides information regarding the average balances of, and
yields/rates on interest-earning assets and interest-bearing liabilities during
the periods indicated:
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||||||||||||||||
Average
Balance
|
Interest
|
Yield/
Rate
(1)
|
Average
Balance
|
Interest
|
Yield/
Rate
(1)
|
Average
Balance
|
Interest
|
Yield/
Rate
(1)
|
||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||
Loans
(2) (3):
|
||||||||||||||||||||||||
Commercial
real estate loans
|
$
|
781,433
|
$ |
36,302
|
4.65
|
%
|
$
|
763,825
|
$
|
46,647
|
6.11
|
%
|
$
|
687,614
|
$
|
56,056
|
8.15
|
%
|
||||||
Residential
real estate loans
|
400,561
|
21,779
|
5.44
|
437,223
|
25,531
|
5.84
|
459,043
|
26,451
|
5.76
|
|||||||||||||||
Commercial
loans
|
1,063,339
|
55,027
|
5.21
|
840,303
|
50,830
|
6.08
|
709,507
|
56,766
|
8.05
|
|||||||||||||||
Consumer
loans
|
301,234
|
15,140
|
5.03
|
282,943
|
17,653
|
6.24
|
270,518
|
20,239
|
7.48
|
|||||||||||||||
Total
loans
|
2,546,567
|
128,248
|
5.08
|
2,324,294
|
140,661
|
6.10
|
2,126,682
|
159,512
|
7.55
|
|||||||||||||||
Mortgage-backed
securities (4)
|
574,176
|
28,560
|
4.97
|
480,002
|
23,984
|
5.00
|
491,650
|
24,237
|
4.93
|
|||||||||||||||
Investment
securities (4) (5)
|
47,710
|
922
|
1.93
|
34,263
|
254
|
0.74
|
29,130
|
3,360
|
11.53
|
|||||||||||||||
Other
interest-earning assets
|
39,839
|
-
|
0.00
|
42,934
|
1,578
|
3.68
|
40,137
|
2,368
|
5.90
|
|||||||||||||||
Total
interest-earning assets
|
3,208,292
|
157,730
|
4.95
|
2,881,493
|
166,477
|
5.82
|
2,687,599
|
189,477
|
7.09
|
|||||||||||||||
Allowance
for loan losses
|
(40,731
|
)
|
(27,210
|
)
|
(28,192
|
)
|
||||||||||||||||||
Cash
and due from banks
|
57,396
|
65,022
|
70,387
|
|||||||||||||||||||||
Cash
in non-owned ATMs
|
204,912
|
172,304
|
158,091
|
|||||||||||||||||||||
Bank-owned
life insurance
|
59,750
|
58,503
|
56,307
|
|||||||||||||||||||||
Other
noninterest-earning assets
|
94,213
|
70,838
|
67,711
|
|||||||||||||||||||||
Total
assets
|
$
|
3,583,832
|
$
|
3,220,950
|
$
|
3,011,903
|
||||||||||||||||||
Liabilities
and Stockholders’ Equity
|
||||||||||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
Interest-bearing
deposits:
|
||||||||||||||||||||||||
Interest-bearing
demand
|
$
|
230,738
|
$
|
648
|
0.28
|
%
|
$
|
174,080
|
1,064
|
0.61
|
%
|
$
|
148,039
|
1,393
|
0.94
|
%
|
||||||||
Money
market
|
430,437
|
4,857
|
1.13
|
300,775
|
5,909
|
1.96
|
312,192
|
11,870
|
3.80
|
|||||||||||||||
Savings
|
221,913
|
521
|
0.23
|
197,175
|
736
|
0.37
|
211,453
|
1,679
|
0.79
|
|||||||||||||||
Customer
time deposits
|
662,733
|
19,789
|
2.99
|
543,808
|
20,775
|
3.82
|
476,159
|
22,357
|
4.70
|
|||||||||||||||
Total
interest-bearing
customer deposits |
1,545,821
|
25,815
|
1.67
|
1,215,838
|
28,484
|
2.34
|
1,147,843
|
37,299
|
3.25
|
|||||||||||||||
Other
jumbo certificates of deposit
|
77,087
|
1,845
|
2.39
|
93,901
|
3,091
|
3.29
|
98,452
|
5,176
|
5.26
|
|||||||||||||||
Brokered
certificates of deposit
|
337,394
|
2,729
|
0.81
|
282,760
|
8,234
|
2.91
|
277,860
|
14,836
|
5.34
|
|||||||||||||||
Total
interest-bearing
deposits
|
1,960,302
|
30,389
|
1.55
|
1,592,499
|
39,809
|
2.50
|
1,524,155
|
57,311
|
3.76
|
|||||||||||||||
FHLB
of Pittsburgh advances
|
642,496
|
18,306
|
2.81
|
841,005
|
29,620
|
3.46
|
765,974
|
38,561
|
4.97
|
|||||||||||||||
Trust
preferred borrowings
|
67,011
|
1,797
|
2.64
|
67,011
|
3,275
|
4.81
|
67,011
|
4,753
|
7.00
|
|||||||||||||||
Other
borrowed funds
|
206,635
|
2,594
|
1.26
|
186,081
|
4,554
|
2.45
|
147,251
|
6,843
|
4.65
|
|||||||||||||||
Total
interest-bearing
liabilities |
2,876,444
|
53,086
|
1.85
|
2,686,596
|
77,258
|
2.88
|
2,504,391
|
107,468
|
4.29
|
|||||||||||||||
Noninterest-bearing
demand deposits
|
392,069
|
283,845
|
272,964
|
|||||||||||||||||||||
Other
noninterest-bearing liabilities
|
33,488
|
29,560
|
27,737
|
|||||||||||||||||||||
Minority
interest
|
-
|
—
|
38
|
|||||||||||||||||||||
Stockholders’
equity
|
281,831
|
220,949
|
206,773
|
|||||||||||||||||||||
Total
liabilities and
stockholders’
equity
|
$
|
3,583,832
|
$
|
3,220,950
|
$
|
3,011,903
|
||||||||||||||||||
Excess
of interest-earning assets
over
interest-bearing liabilities
|
$
|
331,848
|
$
|
194,897
|
$
|
183,208
|
||||||||||||||||||
Net
interest and dividend income
|
$
|
104,644
|
$
|
89,219
|
$
|
82,009
|
||||||||||||||||||
Interest
rate spread
|
3.10
|
%
|
2.94
|
%
|
2.80
|
%
|
||||||||||||||||||
Net
interest margin
|
3.30
|
%
|
3.13
|
%
|
3.09
|
%
|
(1) Weighted
average yields have been computed on a tax-equivalent basis using a 35%
effective tax rate.
(2) Nonperforming
loans are included in average balance computations.
(3) Balances
are reflected net of unearned income.
(4) Includes
securities available-for-sale.
(5)
Includes reverse mortgages.
- 42
-
Provision for
Loan Losses. We
maintain an allowance for loan losses at an appropriate level based on
management’s assessment of the estimable and probable losses in the loan
portfolio, pursuant to accounting literature, which is discussed further in the
“Nonperforming Assets” section of this Management’s Discussion and
Analysis. Management’s evaluation is based upon a review of the
portfolio and requires significant judgment. For the year ended
December 31, 2009, we recorded a provision for loan losses of $47.8 million
compared to $23.0 million in 2008 and $5.0 million in 2007. The $47.8
million was the reslt of credit risk migration and collateral depreciation
in our commercial loan portfolio due to economic conditions (mostly in our
construction and land development (CLD) portfolio), net charge-offs,
continued growth of our loan portfolio and restructured consumer
loans. The increase in the provision for loan loss reflects the protracted
economic recession and its adverse effects on our customers’ ability to pay
their obligations.
Noninterest
Income. Noninterest income increased $4.3 million to $50.2
million in 2009, or 9%, from $46.0 million in 2008. A significant
amount of this increase was due to securities gains, which increased $3.3
million during 2009. This security gain included $3.0 million of
incremental mark-to-market adjustments on the BBB+ mortgage-backed security
(“MBS”), as we recognized positive adjustments of $1.4 million during 2009
compared with negative adjustments of $1.6 million in 2008. The
securities gains increase also included $2.0 million in gains from the sale of
securities during 2009. Partially offsetting these increases was the
absence of any gains on the sale of Visa, Inc. shares in 2009. During
2008 we recognized $1.8 million in gains on sale of Visa, Inc shares related to
the completion of their initial public offer. In addition to
securities gains, mortgage banking activities increased $1.5 million due to
increased mortgage loan originations and sales, including a $16.7 million bulk
loan sale completed during 2009. Also during 2009, loan fee income
increased $1.2 million as a result of increased fees from 1st
Reverse, our majority owned national reverse mortgage
subsidiary. During the second quarter of 2009 the decision was made
to conduct an orderly wind-down of 1st
Reverse which was completed in the fourth quarter of 2009. These
noninterest income increases were partially offset by a reduction in BOLI income
of $869,000 due to lower yields in underlying investments funding this program
and a $707,000 decrease in credit/debit card and ATM income which was the result
of reduced prime-based ATM bailment fees from Cash Connect resulting from the
lower interest rate environment. Although noninterest income was
negatively impacted by lower bailment fees, the net interest margin benefited
due to lower funding costs for these borrowings.
Noninterest
income decreased $2.2 million, or 5%, to $46.0 million in 2008, from $48.2
million in 2007. The majority of the decrease was due to a $2.5 million decrease
in credit card/debit card and ATM income due to reduced prime-based ATM bailment
fees. In addition, 2007 had included a $1.1 million non-recurring gain related
to the sale of our former headquarters building and an $882,000 gain from the
sale of our credit card portfolio. Also during 2009, income from BOLI decreased
$483,000 from the prior year. These decreases were partially offset by an
increase in loan fee income of $1.3 million. The majority of the increase in
loan fee income was due to $851,000 in fees from 1st
Reverse. Deposit service charges also increased $1.1 million, as a
result of overall growth in deposits. In 2008 we also recorded a $1.8 million
gain on the sale of shares related to the completion of Visa’s initial public
offering, and a $1.6 million charge related to the mark-to-market adjustment on
the BBB+ rated MBS.
Noninterest
Expenses. Noninterest
expenses increased $19.4 million, or 22%, to $108.5 million in 2009 from $89.1
million in 2008. A large portion of the increase is attributable to
$6.1 million of non-routine items recorded during 2009, including a $1.9 million
charge related to the wind-down of 1st
Reverse, $1.7 million for the FDIC Special Assessment, $1.5 million of expense
resulting from a wire fraud and $1.0 million of due diligence expenses on an
acquisition prospect in which discussions have terminated. For
additional information on any of these non-routine items see Note 20 to the
Consolidated Financial Statements. Excluding the non-routine items,
the remaining increase was mainly due to an additional $5.4 million of FDIC
insurance premium expense during 2009. Also during 2009, write-downs
of assets acquired through foreclosure (REO) and other credit related costs
increased $3.3 million, related to additional deterioration in housing prices
and appraisal values. Further, during 2009 professional fees
increased $3.0 million mainly due to increased credit related costs. In
addition, the increase in professional fees included a $1.2 million accrual of
consulting expenses related the Company’s efficiency effort: Creative
Opportunities for Revenues and
- 43
-
Expenses
(CORE) program. This expense accrual is for the portion of the consultant’s work
that is substantially performed, while the consultant’s payments, expense
savings and revenue enhancements will largely be realized in future
periods. Lastly, salaries, benefits and other compensation as well as
occupancy and equipment expenses increased $3.4 million due to the continued
growth of our banking franchise during 2009. This growth included the
full year impact of seven branch openings and renovations during 2008 (including
four branches from Sun National Bank) and an additional two new branches and two
branch relocations during 2009.
Noninterest
expenses increased $7.1 million to $89.1 million in 2008, or 9%, from $82.0
million in 2007. Excluding $2.8 million of expenses related to 1st
Reverse, acquired in the second quarter of 2008, expenses increased $4.3 million
or 5% over 2007. As a result of continued growth efforts salaries, benefits, and
other compensation increased $1.1 million while other operating expenses
increased $1.2 million. Included in other operating expenses was a $453,000
increase in FDIC charges due to increased assessment rates. During 2008 the
investment in the WSFS franchise included the opening of one branch in
Selbyville, Delaware, the relocation of another branch in Smyrna, Delaware, and
the previously mentioned acquisition of branches in 2008. Further, during 2008
professional fees increased $1.3 million as a result of legal fees reflecting
increased costs relating to problem credits.
Income Taxes.
We recorded a $2.1 million tax benefit for the year ended December 31,
2009 compared to tax expense of $7.0 million and $13.5 million for the years
ended December 31, 2008 and 2007, respectively. The 2009 tax benefit is a result
of our pre-tax operating loss, combined with tax free income and a reduction in
unrecognized tax benefits during the year. Volatility in effective
tax rates is directly impacted by the level of pretax income or loss combined
with the amount of tax-free income as well as the effects of unrecognized tax
benefits. The provision for income taxes includes federal, state and local
income taxes that are currently payable or deferred because of temporary
differences between the financial reporting bases and the tax reporting bases of
the assets and liabilities.
We
analyze our projection of taxable income and make adjustments to our provision
for income taxes accordingly. For additional information regarding our tax
provision and net operating loss carryforwards, see Note 12 to the Consolidated
Financial Statements.
FINANCIAL
CONDITION
Total
assets increased $315.9 million, or 9%, during 2009 to $3.7 billion. This
increase was due to growth in mortgage-backed securities, which grew $183.0
million, or 37% and cash in non-owned ATMs which increased $75.0 million, or 39%
during 2009. Additionally, net loans increased by $35.3 million, or
1% during the year. Funding this growth was an increase in customer
deposits of $438.9 million, or 26% and an increase in stockholders’ equity of
$85.2 million, or 39%. Partially offsetting these funding increases was
a decrease in wholesale funding, including $202.8 million, or 25%
decrease in Federal Home Loan Bank advances.
Cash in non-owned
ATMs. During 2009, cash in non-owned ATMs managed by Cash Connect,
our ATM unit, increased $74.9 million, or 39%. During the year one of
our cash management partners decided to no longer invest their cash in bailments
and as a result we replaced $28 million of external funding with our own
cash. In addition, the number of ATMs serviced by Cash Connect
increased from 10,031 at December 31, 2008 to 10,791 at December 31, 2009. Of
these, 364 ATMs were WSFS owned and operated during 2009.
Mortgage-backed
Securities. Investments in mortgage-backed securities increased $183.0
million during 2009 to $681.2 million. Included in the increase was
the purchase of $172.0 short-duration; recently AAA-rated, super senior tranches
of securities during fourth quarter. There were proceeds from sales of $111.5
million in mortgage-backed securities during 2009 for a gain of $2.0 million.
The weighted average duration of the mortgage-backed securities portfolio was
2.4 years at December 31, 2009.
- 44
-
Investment
Securities. Our investment securities are comprised mostly of Federal
Agency debt securities with a maturity of four years or less. We own no
Collateralized Debt Obligations, Bank Trust Preferred, Agency Preferred
securities or equity securities in other FDIC insured banks or thrifts.
Loans,
net. Net loans increased $35.3 million, or 1%, during 2009. This included
increases of $121.9 million, or 7%, in commercial and commercial real estate
loans, and $3.9 million, or 1%, in consumer loans. This increase was partially
offset by a decrease of $68.2 million, or 16%, in residential mortgage loans
mainly due to our strategy to originate then sell these loans in the secondary
market to generate fee income. First mortgage originations for the
year totaled $102.7 million, the majority of which were subsequently
sold.
Customer
Deposits. Customer deposits increased $438.9 million, or 26%, during 2009
to $2.1 billion. During 2008 we acquired six Delaware branches from Sun National
Bank, including $95.3 million in customer deposit accounts and paid a 12%
premium on the balances. For additional information regarding this transaction,
see Note 19 to the Consolidated Financial Statements. Core deposit relationships
(demand deposits, money market and savings accounts) increased $411.5 million,
or 39%, during 2009. In addition, customer time deposits (CDs)
increased $27.4 million, or 4%, in 2009. The table below depicts the changes in
customer deposits over the last three years:
Year
Ended December 31,
|
||||||||||
2009
|
2008
|
2007
|
||||||||
(In
Millions)
|
||||||||||
Beginning
balance
|
$
|
1,707.1
|
$
|
1,479.2
|
$
|
1,343.7
|
||||
Interest
credited
|
27.2
|
34.6
|
32.4
|
|||||||
Deposit
inflows, net
|
411.7
|
193.3
|
103.1
|
|||||||
Ending
balance
|
$
|
2,146.0
|
$
|
1,707.1
|
$
|
1,479.2
|
Borrowings and
Brokered Certificates of Deposit. Borrowings and brokered certificates of
deposit decreased by $176.7 million, or 13%, during 2009. This decrease was
primarily the result of a decrease in FHLB Advances of $202.8 million, or 25%,
as customer deposits replaced these borrowings and we improved our funding
mix. Partially offsetting this decrease was a $35.2 million, or 11%,
increase in brokered deposits. Also during 2009 we issued $30.0
million of debt under the FDIC’s Temporary Liquidity Program.
Stockholders’
Equity. Stockholders’ equity increased $85.2 million to $301.8 million at
December 31, 2009. This increase was mainly due to the sale of senior
preferred stock to the U.S. Department of the Treasury under its Capital
Purchase Program (“CPP”) totaling $52.6 million and the sale of $25.0 million of
common stock to Peninsula Investment Partners, L.P (“Peninsula”). The increase also included
$10.6 million in comprehensive income mainly due to an increase in the fair
value of securities available-for-sale. Partially offsetting these
increases was the payment of cash dividends (both preferred and common stock)
totaling $3.1 million during 2009. During 2009 we did not repurchase
any shares of common stock.
ASSET/LIABILITY
MANAGEMENT
Our
primary asset/liability management goal is to maximize long term net interest
income opportunities within the constraints of managing interest rate risk,
while ensuring adequate liquidity and funding and maintaining a strong capital
base.
In
general, interest rate risk is mitigated by closely matching the maturities or
repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. We regularly review our interest-rate
sensitivity, and use a variety of strategies as needed to adjust that
sensitivity within acceptable tolerance ranges established by management and the
Board of Directors. Changing the relative proportions of fixed-rate and
adjustable-rate assets and liabilities is one of our primary strategies to
accomplish this objective.
The
matching of assets and liabilities may be analyzed by examining the extent to
which such assets and liabilities are “interest-rate sensitive” and by
monitoring an institution’s interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period, and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
- 45
-
The
repricing and maturities of our interest-rate sensitive assets and interest-rate
sensitive liabilities at December 31, 2009 are set forth in the following
table:
Less
than
One
Year
|
One
to
Five
Years
|
Over
Five
Years
|
Total
|
||||||||||
(Dollars
in Thousands)
|
|||||||||||||
Interest-rate
sensitive assets:
|
|||||||||||||
Real
estate loans (1) (2)
|
$
|
733,777
|
$
|
191,185
|
$
|
123,121
|
$
|
1,048,083
|
|||||
Commercial
loans (2)
|
919,473
|
144,906
|
48,100
|
1,112,479
|
|||||||||
Consumer
loans (2)
|
201,292
|
45,620
|
52,918
|
299,830
|
|||||||||
Mortgage-backed
securities
|
143,616
|
370,206
|
167,420
|
681,242
|
|||||||||
Loans
held-for-sale (2)
|
8,377
|
—
|
(11
|
)
|
8,366
|
||||||||
Investment
securities
|
14,283
|
32,416
|
38,123
|
84,822
|
|||||||||
Interest-bearing
deposits in other banks
|
1,090
|
—
|
—
|
1,090
|
|||||||||
2,021,908
|
784,333
|
429,671
|
3,235,912
|
||||||||||
Interest-rate
sensitive liabilities:
|
|||||||||||||
Money
market and interest-bearing demand deposits
|
545,834
|
9
|
270,515
|
816,358
|
|||||||||
Savings
deposits
|
112,456
|
4
|
112,461
|
224,921
|
|||||||||
Retail
time deposits
|
430,720
|
241,324
|
1,221
|
673,265
|
|||||||||
Jumbo
certificates of deposit
|
69,208
|
—
|
—
|
69,208
|
|||||||||
Brokered
certificates of deposit
|
345,388
|
1,255
|
—
|
346,643
|
|||||||||
FHLB
advances
|
405,517
|
207,627
|
—
|
613,144
|
|||||||||
Trust
preferred borrowings
|
67,011
|
—
|
—
|
67,011
|
|||||||||
Other
borrowed funds
|
119,654
|
55,000
|
—
|
174,654
|
|||||||||
2,095,788
|
505,219
|
384,197
|
2,985,204
|
||||||||||
(Deficiency)
excess of interest-rate sensitive
assets
over interest-rate liabilities
(“interest-rate
sensitive gap”)
|
$
|
(73,880
|
)
|
$
|
279,114
|
$
|
45,474
|
$
|
250,708
|
||||
One-year
interest-rate sensitive assets/
Interest-rate
sensitive liabilities
|
96.47
|
%
|
|||||||||||
One-year
interest-rate sensitive gap as a
Percent of total
assets
|
(1.97)
|
%
|
(1)
|
Includes
commercial mortgage, construction, and residential mortgage
loans.
|
(2)
|
Loan
balances exclude nonaccruing loans, deferred fees and
costs.
|
Generally,
during a period of rising interest rates, a positive gap would result in an
increase in net interest income while a negative gap would adversely affect net
interest income. Conversely, during a period of falling rates, a positive gap
would result in a decrease in net interest income while a negative gap would
augment net interest income. However, the interest-sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities which contractually reprice within the rate period
may not, in fact, reprice at the same price or the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as we adjust our interest-sensitivity
position throughout the year.
To
provide a more accurate position of our one-year gap, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of our deposit accounts, that 75% of money
market and 50% of interest-bearing demand deposits are sensitive to interest
rate changes and that 50% of savings deposits are sensitive to interest rate
changes. Accordingly, these interest-sensitive portions are classified in the
less than one-year category with the remainder in the over five-year
category.
Deposit
rates other than time deposit rates are variable, and changes in deposit rates
are generally subject to local market conditions and management’s discretion and
are not indexed to any particular rate.
- 46
-
During
the first quarter of 2010 we executed $75.0 million of intermediate-term FHLB
Advances in order to reduce the sensitivity of our net interest
income to increases in market interest rates.
REVERSE
MORTGAGES
We hold
an investment in reverse mortgages of $(530,000) at December 31, 2009
representing a participation in reverse mortgages with a third party. Eighteen
loans remain in this portfolio. The loans were originated in the
early 1990’s.
These
reverse mortgage loans are contracts that require the lender to make monthly
advances throughout the borrower’s life or until the borrower relocates, prepays
or the home is sold, at which time the loan becomes due and payable. Reverse
mortgages are nonrecourse obligations, which means that the loan repayments are
generally limited to the net sale proceeds of the borrower’s
residence.
We
account for our investment in reverse mortgages by estimating the value of the
future cash flows on the reverse mortgages at a rate deemed appropriate for
these mortgages, based on the market rate for similar collateral. Actual cash
flows from the maturity of these mortgage loans can result in significant
volatility in the recorded value of reverse mortgage assets. As a result, income
varies significantly from reporting period to reporting period. For the year
ended December 31, 2009, we lost $464,000 in interest income on reverse
mortgages. For the year ended December 31, 2008, we lost $1.1 million in
interest income on reverse mortgages as compared to posting income of $2.0
million in 2007. The losses in 2008 and 2009 primarily resulted from the
decrease in the values of the properties securing the mortgages, based on annual
re-evaluations and consistent with the decrease in home values over the past two
years.
The
projected cash flows depend on assumptions about life expectancy of the
mortgagee and the future changes in collateral values. Projecting the changes in
collateral values is the most significant factor impacting the volatility of
reverse mortgage values. Our current assumptions include a short-term annual
appreciation rate of 0.0% in the first year, and a long-term annual appreciation
rate of 0.5% in future years. If the long-term appreciation rate was increased
to 1.5%, the resulting impact on income would have been $19,000. Conversely, if
the long-term appreciation rate was decreased to -0.5%, the resulting impact on
income would have been $(17,000). If housing values do not change
(0.0% annual appreciation for all future years) the resulting impact on income
would be $(8,000).
We also
hold $12.2 million fair value of BBB+ rated mortgage-backed securities
classified as trading and have options to acquire up to 49.9% of Class “O”
Certificates issued in connection with securities consisting of a portfolio of
reverse mortgages we previously owned. The Class “O” Certificates are currently
recorded on our financial statements at a zero value. At the time of the
securitization, the third-party securitizer (Lehman Brothers Holding, Inc.
“Lehman Brothers”) retained 100% of the Class “O” Certificates from the
securitization. These Class “O” Certificates have no priority over other classes
of Certificates under the Trust and no distributions will be made on the Class
“O” Certificates until, among other conditions, the principal amount of each
other class of notes has been reduced to zero. The underlying assets, the
reverse mortgages, are very long-term assets. Therefore, any cash flow that
might inure to the holder of the Class “O” Certificates is not expected to occur
until a number of years in the future. Additionally, we can exercise our option
on 49.9% of the Class “O” Certificates in up to five separate increments for an
aggregate purchase price of $1.0 million any time between January 1, 2004 and
the termination of the Securitization Trust. The option to purchase the Class
“O” Certificates does not meet the definition of a derivative under ASU 815-10,
Derivatives and Hedging
(SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133)
and is carried in our financial statements at cost. During the third
quarter of 2008 Lehman Brothers filed for bankruptcy. During 2009 we filed a
“Proof of Claim” against Lehman Brothers regarding the option on the Class “O”
Certificate. Also during 2009 we notified Lehman Brothers that we
were exercising our option on these securities. The status of this
exercise is pending.
During
2006, we formed a new reverse mortgage initiative, originating reverse mortgages
primarily in our retail banking footprint. In 2009 we ranked as the
#1 reverse mortgage lender in Delaware and seventy-seventh
nationwide. While our activity during the past two years has been
limited to acting as a correspondent
- 47
-
for these loans, it is our intention to
originate and underwrite our own reverse mortgages in the future. We expect to
sell most of these loans and do not intend to hold them in our portfolio.
These reverse mortgages are
government approved and insured.
During
2008, we acquired a majority interest in 1st
Reverse Financial Services, LLC (1st
Reverse), which specializes in originating and subsequently selling reverse
mortgage loans nationwide. These reverse mortgages are government approved and
insured. During the latter part of 2009, we decided to conduct an
orderly wind-down of 1st
Reverse operations (discussed further in Note 19 of the Financial
Statements).
NONPERFORMING
ASSETS
Nonperforming
assets, which include nonaccruing loans, nonperforming real estate investments
and assets acquired through foreclosure and troubled debt restructures, can
negatively affect our results of operations. Nonaccruing loans are those on
which the accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in the opinion of management, collection is doubtful, or when
principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management’s assessment of the
ultimate collectability of principal and interest. Past due loans are defined as
loans contractually past due 90 days or more as to principal or interest
payments but which remain in accrual status because they are considered well
secured and in the process of collection.
The
following table sets forth our nonperforming assets and past due loans at the
dates indicated:
December
31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||
Nonaccruing
loans:
|
||||||||||||||||||
Commercial
|
$
|
8,328
|
$
|
986
|
$
|
17,187
|
$
|
1,282
|
$
|
925
|
||||||||
Consumer
|
818
|
352
|
835
|
557
|
155
|
|||||||||||||
Commercial
mortgages
|
2,156
|
5,748
|
3,873
|
500
|
727
|
|||||||||||||
Residential
mortgages
|
9,958
|
4,753
|
2,417
|
1,493
|
1,567
|
|||||||||||||
Construction
|
44,681
|
16,595
|
6,794
|
—
|
36
|
|||||||||||||
Total
nonaccruing loans
|
65,941
|
28,434
|
31,106
|
3,832
|
3,410
|
|||||||||||||
Assets
acquired through foreclosure
|
8,945
|
4,471
|
703
|
388
|
59
|
|||||||||||||
Restructured
loans
|
7,274
|
2,855
|
—
|
—
|
—
|
|||||||||||||
Total
nonperforming assets
|
$
|
82,160
|
$
|
35,760
|
$
|
31,809
|
$
|
4,220
|
$
|
3,469
|
||||||||
Past
due loans:
|
||||||||||||||||||
Residential
mortgages
|
$
|
1,221
|
$
|
1,313
|
$
|
388
|
$
|
219
|
$
|
327
|
||||||||
Commercial
and commercial mortgages
|
105
|
—
|
14
|
3
|
—
|
|||||||||||||
Consumer
|
97
|
26
|
173
|
29
|
59
|
|||||||||||||
Total
past due loans
|
$
|
1,423
|
$
|
1,339
|
$
|
575
|
$
|
251
|
$
|
386
|
||||||||
Ratio
of nonaccruing loans to total loans (1)
|
2.61
|
%
|
1.15
|
%
|
1.38
|
%
|
0.19
|
%
|
0.19
|
%
|
||||||||
Ratio
of allowance for loan losses to gross loans (1)
|
2.12
|
1.26
|
1.12
|
1.34
|
1.41
|
|||||||||||||
Ratio
of nonperforming assets to total assets
|
2.19
|
1.04
|
0.99
|
0.14
|
0.12
|
|||||||||||||
Ratio
of loan loss allowance to nonaccruing loans (2)
|
63.10
|
108.30
|
78.80
|
705.32
|
709.47
|
|
(1)
|
Total
loans exclude loans
held-for-sale.
|
|
(2)
|
The
applicable allowance represents general valuation allowances
only.
|
Total
non-performing assets increased $46.4 million during 2009. As a result,
nonperforming assets as a percentage of total assets increased from 1.04% at
December 31, 2008 to 2.19% at December 31, 2009. Nonperforming assets increased
in all portfolios except commercial mortgages. Nonaccruing construction loans
increased $28.1 million during 2009 with a bulk of the dollar increase related
to six borrowing relationships that were placed on nonaccrual status during the
year. Nonaccruing commercial loans increased by $7.3
million. Except for the addition of two larger relationships ($2.6
million in balances), the increase was mostly due to the
- 48
-
migration
of small business loans during 2009. Assets acquired through
foreclosure increased $4.5 million predominantly due to the foreclosure of two
residential construction and land development loans during the
year. Restructured loans increased by $4.4 million. All of
the restructured loans continue to be residential mortgage and consumer
loans. Concessions on these loans consisted mainly of forbearance
agreements, reduction in interest rate or extensions of maturity. All
loans classified above as restructured are accruing and there were only $1.0
million of restructured loans included in nonaccruing loan
balances. Nonaccruing restructured loans remain in nonaccrual status
until there has been sustained historical repayment performance for a reasonable
period, generally six months.
The
following table provides an analysis of the change in the balance of
nonperforming assets during the last three years:
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
(In
Thousands)
|
||||||||||
Beginning
balance
|
$
|
35,760
|
$
|
31,809
|
$
|
4,220
|
||||
Additions
|
100,925
|
48,152
|
37,017
|
|||||||
Collections
|
(19,133
|
)
|
(26,574
|
)
|
(3,029
|
)
|
||||
Transfers
to accrual
|
(6,236
|
)
|
(1,345
|
)
|
(295
|
)
|
||||
Charge-offs/write-downs
|
(29,156
|
)
|
(16,282
|
)
|
(6,104
|
)
|
||||
Ending
balance
|
$
|
82,160
|
$
|
35,760
|
$
|
31,809
|
As of December 31, 2009, we had $98.5
million of loans, which although performing at that date, require increased
supervision and review, and may, depending on the economic environment and other
factors, become nonperforming assets in future periods. The amount of such loans
at December 31, 2008 was $70.2 million. The majority of the loans are secured by
commercial real estate, with lesser amounts being secured by residential real
estate, inventory and receivables.
At December 31, 2009, we did not have a
material amount of loans not classified as non-accrual, 90 days past due or
restructured but where known information about possible credit problems of
borrowers caused us to have serious concerns as to the ability of the borrowers
to comply with present loan repayment terms and may result in disclosure as
non-accrual, 90 days past due or restructured.
Allowance for
Loan Losses. We maintain allowances for credit losses and
charge losses to these allowances when such losses are realized. The
determination of the allowance for loan losses requires significant 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. Our evaluation is based upon a continuing review of these
portfolios.
We
established our loan loss allowance in accordance with guidance provided in the
Securities and Exchange Commission’s Staff Accounting Bulletin 102 (SAB 102).
Its methodology for assessing the appropriateness of the allowance consists of
several key elements which include: specific allowances for identified problem
loans; formula allowances for commercial and commercial real estate loans; and
allowances for pooled homogenous loans.
Specific
reserves are established for certain loans in cases where management has
identified significant conditions or circumstances related to a specific credit
that management believes indicate the probability that a loss has been
incurred.
The
formula allowances for commercial and commercial real estate loans are
calculated by applying estimated loss factors to outstanding loans based on the
internal risk grade of loans. For low risk commercial and commercial real estate
loans the portfolio is pooled, based on internal risk grade, and estimates are
based on a ten-year net charge-off history. Higher risk and criticized loans
have loss factors that are derived from an analysis of both the probability of
default and the probability of loss should default occur. Loss adjustment
factors are applied based on criteria discussed below. As a result, changes in
risk grades of both performing and nonperforming loans affect the amount of the
formula allowance.
Pooled
loans are loans that are usually smaller, not-individually-graded and homogenous
in nature, such as consumer installment loans and residential mortgages. Loan
loss allowances for pooled loans are based on a
- 49
-
ten-year
net charge-off history. The average loss allowance per homogenous pool is based
on the product of the average annual historical loss rate and the
estimated duration of the pool multiplied by the pool balances. These separate
risk pools are assigned a reserve for losses based upon this historical loss
information and loss adjustment factors.
Historical
loss adjustment factors are based upon our evaluation of various current
conditions including those listed below:
·
|
General
economic and business conditions affecting our key lending
areas,
|
·
|
Credit
quality trends,
|
·
|
Recent
loss experience in particular segments of the
portfolio,
|
·
|
Collateral
values and loan-to-value ratios,
|
·
|
Loan
volumes and concentrations, including changes in
mix,
|
·
|
Seasoning
of the loan portfolio,
|
·
|
Specific
industry conditions within portfolio
segments,
|
·
|
Bank
regulatory examination results, and
|
·
|
Other
factors, including changes in quality of the loan origination, servicing
and risk management processes.
|
Our loan
officers and risk managers meet at least quarterly to discuss and review these
conditions and risks associated with individual problem loans. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review our allowance for such losses. We also give consideration to
the results of these regulatory agency examinations. In addition, we
also contract with a loan review firm to review portions of the
portfolio.
During
2009, the provision for loan losses was affected by the protracted economic
recession; including (1) increased charge-offs; (2) continued migration in loans
to lower credit grades; (3) continued deterioration of collateral values; and
(4) an increase in estimated disposition costs.
Increases
in the allowance for loan losses were also due to rising trends in our past due
and nonperforming loans (as discussed in the earlier nonperforming assets
section) and rising unemployment rates. This increase in non-performing
loans is a direct result of the weak economic environment, impacting numerous
borrowers’ ability to pay as scheduled. This has resulted in increased
loan delinquencies, and in some cases decreases in the collateral value used to
secure real estate loans and the ability to sell the collateral upon
foreclosure. Collateral value is assessed based on collateral value
trends, liquidation value trends, and other liquidation expenses to determine
appropriate discounts that may be needed. In response to this
deterioration in real estate loan quality, management is aggressively monitoring
its classified loans and is continuing to monitor credits with material
weaknesses.
As a
result of continued economic deterioration in 2009, a detailed review and
analysis of our commercial loan portfolio was completed during the
year. This included a review of every commercial loan commitment
greater than $1 million, regardless of risk rating. This represented 74% of our
commercial portfolio. The review considered cash flows from the
business or project, appropriately conservative real estate values, a careful
view of guarantor support, and the direction of the economy.
Our real estate portfolio has
approximately $524.4 million of commercial real estate loans, $231.6 million of
construction loans, $357.3 million in first lien mortgage loans (only $15.1
million of which are considered subprime loans), and $284.3 million in home
equity loans and lines as of December 31, 2009. We do not have any
option ARM products in our portfolio. We consider our construction loans
our riskiest loans within our real estate portfolio. Construction loans
are typically comprised of loans to borrowers for real estate to be
developed. Normally, these loans are repaid with the proceeds from the
sale or lease of the developed property. The greater degree of strain on
these real estate types of loans and the significance to our overall loan
portfolio has caused us to apply a greater degree of scrutiny in analyzing the
ultimate collectability of amounts due. A number of these borrowers are
having financial difficulties that may affect their ability to repay their
loans. Our analysis has resulted in a significant provision expense to
increase our allowance to appropriate levels based on continued deterioration in
the portfolio during 2009.
- 50
-
The table
below represents a summary of changes in the allowance for loan losses during
the periods indicated:
Year Ended December 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||
(Dollars
in Thousands)
|
||||||||||||||||
Beginning
balance
|
$
|
31,189
|
$
|
25,252
|
$
|
27,384
|
$
|
25,381
|
$
|
24,222
|
||||||
Provision
for loan losses
|
47,811
|
23,024
|
5,021
|
2,738
|
2,582
|
|||||||||||
Charge-offs:
|
||||||||||||||||
Residential
real estate
|
1,164
|
628
|
41
|
75
|
90
|
|||||||||||
Commercial
real estate (1)
|
15,932
|
12,195
|
1,398
|
—
|
104
|
|||||||||||
Commercial
|
5,796
|
1,992
|
4,379
|
470
|
1,048
|
|||||||||||
Overdrafts
(2)
|
1,216
|
1,327
|
1,441
|
607
|
—
|
|||||||||||
Consumer
|
2,458
|
1,697
|
790
|
483
|
631
|
|||||||||||
Total
charge-offs
|
26,566
|
17,839
|
8,049
|
1,635
|
1,873
|
|||||||||||
Recoveries:
|
||||||||||||||||
Residential
real estate
|
38
|
7
|
11
|
14
|
59
|
|||||||||||
Commercial
real estate (1)
|
379
|
12
|
127
|
170
|
42
|
|||||||||||
Commercial
|
150
|
100
|
173
|
343
|
209
|
|||||||||||
Overdrafts
(2)
|
380
|
384
|
446
|
217
|
—
|
|||||||||||
Consumer
|
65
|
249
|
139
|
156
|
140
|
|||||||||||
Total
recoveries
|
1,012
|
752
|
896
|
900
|
450
|
|||||||||||
Net
charge-offs
|
25,554
|
17,087
|
7,153
|
735
|
1,423
|
|||||||||||
Ending
balance
|
$
|
53,446
|
$
|
31,189
|
$
|
25,252
|
$
|
27,384
|
$
|
25,381
|
||||||
Net
charge-offs to average gross loans outstanding, net of unearned
income
|
1.01
|
%
|
0.74
|
%
|
0.34
|
%
|
0.04
|
%
|
0.09
|
%
|
(1)
Includes commercial mortgage and construction
loans.
|
(2)
Prior to April 2006, overdraft charge-offs/recoveries were recognized in
other operating
expense.
|
Net
charge-offs did increase this year as we moved loans through the resolution
process in some of the larger construction loans we identified earlier in this
cycle. During 2009, net charge-offs increased to $25.6 million, or
1.01% of average loans, from $17.1 million, or 0.74% of average loans in
2008. This is due to the fact we provide for losses earlier in the
problem loan identification process when they are probable and charge the loans
off and utilize the provision when the losses are certain or near
certain.
The
allowance for loan losses is allocated by major portfolio type. As these
portfolios have developed, they have become a source of historical data in
projecting delinquencies and loss exposure; however, such allocations are not a
guarantee of where future losses may occur. While we have allocated the
allowance for loan losses by portfolio type in the following table, the entire
reserve is available for any loan portfolio to utilize. The allocation of the
allowance for loan losses by portfolio type at the end of each of the last five
fiscal years, and the percentage of outstanding loans in each category to total
gross outstanding, at such dates follow:
At
December 31,
|
||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||
Residential
real estate
|
$
|
4,073
|
13.8
|
%
|
$
|
2,480
|
17.1
|
%
|
$
|
1,304
|
19.8
|
%
|
$
|
1,645
|
23.1
|
%
|
$
|
1,632
|
25.4
|
%
|
||||||||||||||
Commercial
real estate
|
17,082
|
29.9
|
%
|
10,656
|
32.8
|
%
|
12,151
|
32.9
|
%
|
11,343
|
32.5
|
%
|
10,978
|
32.7
|
%
|
|||||||||||||||||||
Commercial
|
24,834
|
44.4
|
%
|
12,510
|
38.1
|
%
|
8,088
|
35.0
|
%
|
11,019
|
31.5
|
%
|
9,471
|
28.3
|
%
|
|||||||||||||||||||
Consumer
|
7,457
|
11.9
|
%
|
5,543
|
12.0
|
%
|
3,709
|
12.3
|
%
|
3,377
|
12.9
|
%
|
3,300
|
13.6
|
%
|
|||||||||||||||||||
Total
|
$
|
53,446
|
100.0
|
%
|
$
|
31,189
|
100.0
|
%
|
$
|
25,252
|
100.0
|
%
|
$
|
27,384
|
100.0
|
%
|
$
|
25,381
|
100.0
|
%
|
- 51
-
LIQUIDITY
We manage
our liquidity risk and funding needs through our treasury function and our
Asset/Liability Committee. Historically, we have had success in growing our loan
portfolio. For example, during the year ended December 31, 2009, net loan growth
resulted in the use of $103.8 million in cash. The loan growth was primarily the
result of our continued success increasing corporate and small business lending.
Management expects this trend to continue. Our loan-to-deposit ratio has been
well above 100% for many years, however during 2009 we have made significant
improvements in this ratio through increased deposit growth. At
December 31, 2009 our loan-to-deposit ratio was 114% compared to 143% at
December 31, 2008. Our long-term goal is 100% by
2012. Management has significant experience managing its funding
needs through borrowings and deposit growth.
As a
financial institution, we have ready access to several sources of funding. Among
these are:
● Deposit
growh
● Borrowing
from the Federal Home Loan Bank
● Fed
Discount Window access
● Other
borrowings such as repurchase agreements
● Cash flow
from securities and loan sales and repayments
● Net
income
● Deposit
growh
Our
current branch expansion and renovation program is focused on expanding our
retail footprint in Delaware and southeastern Pennsylvania and attracting new
customers to provide additional deposit growth. Customer deposit growth was
strong, equaling $438.9 million, or 26% between December 31, 2008 and December
31, 2009.
Our
portfolio of high-quality, liquid investments, primarily short-duration
mortgage-backed securities and Agency notes also provide a source of cash flow
to meet current cash needs. If necessary, portions of this portfolio, as well as
portions of the loan portfolio, could be sold to provide liquidity or new loans.
During the year ended December 31, 2009, $21.1 million in cash was provided by
operating activities.
We have a
policy that separately addresses liquidity, and management monitors our
adherence to policy limits. As part of the liquidity management process, we also
monitor our available wholesale funding capacity. At December 31, 2009, we had
$376.3 million in funding capacity at the Federal Home Loan Bank of Pittsburgh.
Also, liquidity risk management is a primary area of examination by the
OTS.
We have
not used and have no intention of using any significant off balance sheet
financing arrangement for liquidity management purposes. Our financial
instruments with off balance sheet risk are limited to obligations to fund loans
to customers pursuant to existing commitments and obligations of letters of
credit. In addition, we have not had and have no intention to have any
significant transactions, arrangements or other relationships with any
unconsolidated, limited purpose entities that could materially affect our
liquidity or capital resources.
CAPITAL
RESOURCES
Federal
laws, among other things, require the OTS to mandate uniformly applicable
capital standards for all savings institutions. These standards currently
require institutions such as us to maintain a “tangible” capital ratio equal to
1.5% of adjusted total assets, “core” (or “leverage”) capital equal to 4.0% of
adjusted total assets, “Tier 1” capital equal to 4.0% of “risk-weighted” assets
and total “risk-based” capital (a combination of core and “supplementary”
capital) equal to 8.0% of “risk-weighted” assets.
The
Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well as other
requirements, established five capital tiers: well-capitalized,
adequately-capitalized, under-capitalized, significantly under-capitalized, and
critically under- capitalized. A depository institution’s capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and
- 52
-
certain
other factors. Depository institutions that are not classified as
well-capitalized are subject to various restrictions regarding capital
distributions, payment of management fees, acceptance of brokered deposits and
other operating activities.
At
December 31, 2009, we are classified as well-capitalized, the highest regulatory
defined level, and in compliance with all regulatory capital
requirements. Additional information concerning our regulatory
capital compliance is included in Note 10 to the Consolidated Financial
Statements.
Since
1996, the Board of Directors has approved several stock repurchase programs to
acquire common stock outstanding. We did not acquire any shares in 2009, but as
part of these programs, we acquired approximately 73,500 shares in 2008. At
December 31, 2009, we held 9.6 million shares of our common stock as treasury
shares. At December 31, 2009, we had 506,000 shares remaining under
our current share repurchase authorization.
On January 23, 2009, under the U.S.
Treasury’s Capital Purchase Plan (“CPP”), we issued and sold 52,625 shares of
senior preferred stock to the U.S. Treasury, having a liquidation amount equal
to $1,000 per share, or $52.6 million. Although we are currently
well-capitalized under regulatory guidelines, the Board of Directors believed it
was advisable to take advantage of the CPP to raise additional capital to ensure
that, during these uncertain times, we are well-positioned to support our
existing operations as well as anticipated future growth. Additional
information concerning the CPP is included in Note 21 to the Consolidated
Financial Statements.
As part of the CPP program, any share
repurchases or increase in the dividend level from the September 2008 quarterly
payment of $0.12 per share, must be approved by the U.S. Treasury
department.
The Company completed a private
placement of stock to Peninsula Investment Partners, L.P. (Peninsula) on
September 24, 2009, pursuant to which the company issued and sold 862,069 shares
of common stock for a total purchase price of $25.0 million, and a 10-year
warrant to purchase 129,310 shares of the Company’s common stock at an exercise
price of $29.00 per share. Additional information concerning the Peninsula
transaction is included in Note 21 to the Consolidated Financial
Statements.
OFF
BALANCE SHEET ARRANGEMENTS
We have no off balance sheet
arrangements that currently have, or are reasonably likely to have, a material
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources. Additional information concerning our off balance
sheet arrangements is included in Note 14 to the Consolidated Financial
Statements.
CONTRACTUAL
OBLIGATIONS
At December 31, 2009, we had
contractual obligations relating to operating leases, long-term debt, data
processing and credit obligations. These obligations are summarized
below. See Notes 7, 9 and 14 to the Consolidated Financial Statements
for further discussion.
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
||||||||||||
(In
Thousands)
|
||||||||||||||||
Operating
lease obligations
|
$
|
48,581
|
$
|
5,113
|
$
|
9,165
|
$
|
7,675
|
$
|
26,628
|
||||||
Long-term
debt obligations
|
680,155
|
405,517
|
174,394
|
33,233
|
67,011
|
|||||||||||
Data
processing contracts
|
3,972
|
3,170
|
802
|
—
|
—
|
|||||||||||
Credit
obligations
|
640,738
|
640,738
|
—
|
—
|
—
|
|||||||||||
Total
|
$
|
1,373,446
|
$
|
1,054,538
|
$
|
184,361
|
$
|
40,908
|
$
|
93,639
|
- 53
-
IMPACT
OF INFLATION AND CHANGING PRICES
Our
Consolidated Financial Statements have been prepared in accordance with U.S.
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
consideration of the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased costs of
our operations. Unlike most industrial companies, nearly all of our assets and
liabilities are monetary. As a result, interest rates have a greater impact on
our performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or the same extent as the
price of goods and services.
RECENT
LEGISLATION
The
economy is experiencing significantly reduced business activity as a result of,
among other factors, disruptions in the financial system during the past year.
Declines in the housing market during the past year, due to falling home prices
and increased foreclosures and unemployment, have resulted in substantial
declines in mortgage-related asset values, which has had a dramatic negative
impact on government-sponsored entities and major commercial and investment
banks.
Reflecting
concern about the stability of the finance markets in general and the strength
of counterparties, many lenders and institutional investors have reduced, and in
some cases, ceased, to provide funding and liquidity to borrowers, including
other financial institutions. In response to the financial crisis affecting the
banking system and financial markets and going concern threats to investment
banks and other financial institutions, on October 3, 2008, the Emergency
Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to
the EESA, specifically the Troubled Asset Relief Program (“TARP”) thereunder,
the U.S. Treasury will have the authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.
On
October 14, 2008, the Secretary of the Department of the Treasury announced the
Department of the Treasury will purchase equity stakes in a wide variety of
banks and thrifts through TARP’s CPP. Under this program, from the $700 billion
authorized by the EESA, the Treasury made $250 billion of capital available to
U.S. financial institutions in the form of preferred stock as
a way for healthy U.S. financial institutions to help stabilize the U.S.
economy. In conjunction with the purchase of preferred stock, the Treasury
received, from participating financial institutions, warrants to purchase common
stock with an aggregate market price equal to 15% of the preferred stock
investment. Participating financial institutions were required to adopt the
Treasury’s standards for executive compensation and corporate governance for the
period during which the Treasury holds equity in such institution issued under
the CPP. After careful consideration of all the costs, restrictions,
risks and benefits, we have elected to participate in the CPP
program. The Treasury’s investment signals their faith in us as a
healthy institution that can help stabilize and eventually grow the
economy. Additional
information regarding this transaction can be found in Note 21 to the
Consolidated Financial Statements.
On
November 21, 2008, the Board of Directors of the FDIC adopted a final rule
relating to the Temporary Liquidity Guarantee Program (the “TLGP”). The TLGP was
announced by the FDIC on October 14, 2008, after the determination of systemic
risk by the Secretary of the Department of Treasury (after consultation with the
President), as an initiative to counter the system-wide crisis in the nation’s
financial sector. Under the TLGP the FDIC will (i) guarantee, through the
earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt
issued by participating institutions on or after October 14, 2008, and before
June 30, 2009 and (ii) provide full FDIC insurance deposit insurance coverage
for noninterest bearing transaction deposit accounts, Negotiable Order of
Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and
Interest on Lawyers Trust Accounts (“IOLTA”) accounts held at participating
FDIC-insured institutions through December 31, 2009. Coverage under the TLGP was
available for the first 30 days without charge. The fee assessment for coverage
of senior unsecured debt ranges from 50 basis points to 100 basis points per
annum, depending on the initial maturity of the debt. The fee assessment for
deposit insurance
- 54
-
coverage
is 10 basis points per quarter on amounts in covered accounts exceeding
$250,000. We have elected to participate in the TLGP
program.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009
(“ARRA”) was signed into law by President Obama. The ARRA includes a wide
variety of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In addition, the ARRA
imposes certain new executive compensation and corporate expenditure limits on
all current and future TARP recipients until the institution has repaid the U.S.
Treasury, which is now permitted under the ARRA without penalty and without the
need to raise new capital, subject to the U.S. Treasury’s consultation with the
recipient’s appropriate regulatory agency.
On
November 12, 2009, the FDIC adopted a final ruling that required banks to prepay
their estimated quarterly risk-based assessments for the 4th
quarter of 2009 and for all of 2010 through 2012. In addition the
FDIC board voted to adopt a uniform three-basis point increase in assessment
rates effective January 1, 2011. Prepayment of the assessments
allowed the industry to strengthen the cash position of the Deposit Insurance
Fund (DIF) immediately while allowing the capital impact to be felt over time as
the industry’s financial condition improves. We have paid our
estimated assessment for 2010 through 2012 of $19.9 million and will expense
this amount based on actual calculations of quarterly provisions during the
period to which it relates.
On
November 17, 2009, the Federal Reserve adopted a final ruling regarding
Regulation E, otherwise known as the Electronic Fund Transfer
Act. The ruling limits our ability to assess fees for overdrafts on
ATM or one-time debit transactions without receiving prior consent from our
customers who have opted-in to our overdraft service. This act will
become effective on July 1, 2010.
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
Consolidated Financial Statements requires management to make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenue and
expenses. We regularly evaluate these estimates and assumptions including those
related to the allowance for loan losses, contingencies (including
indemnifications), and deferred taxes. We base our estimates on historical
experience and various other factors and assumptions that are believed to be
reasonable under the circumstances. These form the basis for making 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
We
maintain allowances for credit losses and charge losses to these allowances when
realized. The determination of the allowance for loan losses requires
significant judgment reflecting our best estimate of probable loan losses
related to specifically identified loans as well as those in the remaining loan
portfolio. Our evaluation is based upon a continuing review of these portfolios,
with consideration given to evaluations resulting from examinations performed by
regulatory authorities.
Contingencies
(Including Indemnifications)
In the
ordinary course of business we are subject to legal actions, which involve
claims for monetary relief. Based upon information presently available to us and
our counsel, it is our opinion that any legal and financial responsibility
arising from such claims will not have a material adverse effect on our results
of operations.
- 55
-
We
maintain a loss contingency for standby letters of credit and charge losses to
this reserve when such losses are realized. The determination of the loss
contingency for standby letters of credit requires significant judgment
reflecting management’s best estimate of probable losses.
The Bank,
as successor to originators of reverse mortgages is, from time to time, involved
in arbitration or litigation with various parties including borrowers or the
heirs of borrowers. Because reverse mortgages are a relatively new and uncommon
product, there can be no assurances about how the courts or arbitrators may
apply existing legal principles to the interpretation and enforcement of the
terms and conditions of the Bank’s reverse mortgage obligations.
Deferred
Taxes
We
account for income taxes in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes (“ASC 740”), which requires the
recording of deferred income taxes that reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. We regularly
assess the need for valuation allowances on deferred income tax assets that may
result from, among other things, limitations imposed by Internal Revenue Code
and uncertainties, including the timing of settlement and realization of these
differences. No valuation allowance is required as of December 31,
2009.
Fair
Value Measurements
We
adopted FASB ASC 820-10, Fair Value
Measurements and Disclosures (“ASC 820”) during 2008, which defines fair
value, establishes a framework for measuring fair value under GAAP, and expands
disclosures about fair value measurements. See Note 1 to the Consolidated
Financial Statements.
Goodwill
and Other Intangible Assets
In
accordance with FASB ASC 805, Business Combinations, and
FASB ASC 350, Intangibles—Goodwill and
Other, all assets and liabilities acquired in purchase acquisitions,
including goodwill, indefinite-lived intangibles and other intangibles are
recorded at fair value. We consider our accounting policies related to goodwill
and other intangible assets to be critical because the assumptions or judgment
used in determining the fair value of assets and liabilities acquired in past
acquisitions are subjective and complex. As a result, changes in these
assumptions or judgment could have a significant impact on our financial
condition or results of operations.
The fair
value of acquired assets and liabilities, including the resulting goodwill, was
based either on quoted market prices or provided by other third-party sources,
when available. When third-party information was not available, estimates were
made in good faith by management primarily through the use of internal cash flow
modeling techniques. The assumptions that were used in the cash flow modeling
were subjective and are susceptible to significant changes.
Goodwill
and other intangible assets with indefinite useful lives are tested for
impairment at least annually and written down and charged to results of
operations only in periods in which the recorded value is more than the
estimated fair value. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives and are periodically evaluated
for impairment. As of December 31, 2009, goodwill totaled $10.9 million, the
majority of which is in the WSFS Bank reporting unit and is the result of a
branch acquisition in 2008. For additional information, see Note 19 to the
Consolidated Financial Statements. In addition, amortizing
intangibles totaled $2.8 million as of December 31, 2009.
Goodwill
is tested for impairment using a two-step process that begins with an estimation
of fair value. The first step compares the estimated fair value of our reporting
units with their carrying amount, including goodwill. If the estimated fair
value exceeds its carrying amount, goodwill is not considered impaired. However,
if the carrying amount exceeds its estimated fair value, a second step would be
performed that would compare the implied fair value to the carrying amount of
goodwill. An impairment loss would be recorded to the extent that the carrying
amount of goodwill exceeds its implied fair value.
Fair
value may be determined using market prices, comparison to similar assets,
market multiples, discounted cash flow analysis and other variables. Estimated
cash flows extend five years into the future and,
- 56
-
by their
nature, are difficult to estimate over such an extended time-frame. Factors that
may significantly affect the estimates include, but are not limited to, balance
sheet growth assumptions, credit losses in our investment and loan portfolios,
competitive pressures in our market area, changes in customer base and customer
product preferences, changes in revenue growth trends, cost structure, changes
in discount rates, conditions in the banking sector and general economic
variables.
As of
December 31, 2009, we retained a third-party valuation firm to assist in our
Step 1 test for potential goodwill impairment of the WSFS Bank reporting unit.
The valuation incorporated both income and market based analyses and indicated
the fair value of our WSFS Bank reporting unit was 3.7% above the carrying
amount, therefore in accordance with FASB ASC 350-20-35-6; the Step 2 analysis
was not required.
As of
December 31, 2009, goodwill and other intangible assets were not considered
impaired; however, changing economic conditions that may adversely affect our
performance and stock price could result in impairment, which could adversely
affect earnings in future.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued new guidance impacting FASB ASC 805, Business Combinations (“ASC
805”), (Formerly SFAS No. 141 (revised 2007), Business Combinations). This
new guidance changes the requirements for an acquirer’s recognition and
measurement of the assets acquired and the liabilities assumed in a business
combination, ASC 805 is effective for annual periods beginning after December
15, 2008 and is applied prospectively for all business combinations entered into
after the date of adoption. The adoption of this statement did not have a
material impact on our Consolidated Financial Statements.
In
December 2007, the FASB issued FASB ASC 810-10, Consolidation (“ASC 810-10”),
(Formerly SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51).
This Statement requires (i) that noncontrolling (minority) interests
be reported as a component of shareholders’ equity, (ii) that net income
attributable to the parent and to the noncontrolling interest be separately
identified in the consolidated statement of operations, (iii) that changes
in a parent’s ownership interest while the parent retains its controlling
interest be accounted for as equity transactions, (iv) that any retained
noncontrolling equity investment upon the deconsolidation of a subsidiary be
initially measured at fair value, and (v) that sufficient disclosures are
provided that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. ASC 810-10 is effective
for annual periods beginning after December 15, 2008 and is applied
prospectively. However, the presentation and disclosure requirements of the
statement are applied retrospectively for all periods presented. The adoption of
this statement did not have a material impact on our Consolidated Financial
Statements.
In March
2008, the FASB issued FASB ASC 815-10, Derivatives and Hedging
(Formerly SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133). This statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedges are accounted for under Statement 133
and its related interpretations and (c) how derivative instruments and related
hedged affect an entity’s financial position, financial performance, and cash
flows. This statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The adoption of
this statement did not have a material impact on our Consolidated Financial
Statements.
In April
2009, the FASB issued new guidance and enhanced disclosures regarding fair value
measurements of impairment securities. This guidance is effective for periods
ending after June 15, 2009, with an early adoption election permitted. We
elected early adoption in the quarter ended March 31, 2009 and have determined
the adoption did not have a material impact on our Consolidated Financial
Statements:
FASB ASC
825-10-50, Financial
Instruments (Formerly FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments), changes the disclosure
requirements of any financial instrument not currently reflected on the balance
sheet. Prior to issuing this guidance, fair
- 57
-
values
for these financial instruments were only disclosed annually. Effective with
adoption of this guidance, the fair value of these instruments are required to
be disclosed on an interim and annual basis.
FASB ASC
320-10, Investments
(Formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments), amends the guidance on
other-than-temporary impairment for debt securities and modifies the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements.
FASB ASC
820 (Formerly FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly), provides additional
guidance for estimating fair value under FASB ASC 820-10 (Formerly SFAS No. 157,
Fair Value
Measurements) when there is an
inactive market or the market is not orderly.
In
May 2009, the FASB issued FASB ASC 855, Subsequent Events (Formerly
SFAS No. 165, Subsequent
Events). This Statement incorporates guidance into accounting literature
that was previously addressed only in auditing standards. The statement refers
to subsequent events that provide additional evidence about conditions that
existed at the balance-sheet date as “recognized subsequent events”. Subsequent
events which provide evidence about conditions that arose after the
balance-sheet date but prior to the issuance of the financial statements are
referred to as “non-recognized subsequent events”. It also requires companies to
disclose the date through which subsequent events have been evaluated and
whether this date is the date the financial statements were issued or the date
the financial statements were available to be issued. The adoption of this
statement did not have a material impact on our Consolidated Financial
Statements. See Note 22, to the Consolidated Financial Statements.
In June
2009 the FASB issued new guidance impacting FASB ASC 860, Transfers and Servicing (“ASC
860”), (Formerly SFAS No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140). This new
standard amends derecognition guidance and eliminates the concept of qualifying
special-purpose entities. The new standard is effective for fiscal years and
interim periods beginning after November 15, 2009. Early adoption of ASC 860 is
prohibited. We have not determined whether the adoption of the new standard will
have a material impact on our Consolidated Financial Statements.
In
June 2009, the FASB issued new guidance impacting FASB ASC 810-10, Consolidation (Formerly SFAS
No. 167, Amendments to
FASB Interpretation No. 46(R)). The new standard amends previous
guidance to replace the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity with an approach focused on identifying which
enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and (i) the
obligation to absorb losses of the entity or (ii) the right to receive
benefits from the entity. The pronouncement is effective January 1, 2010
and we have not determined whether the adoption of the new standard will have a
material impact on our Consolidated Financial Statements.
In June
2009 the FASB issued FASB ASC 105-10, Generally Accepted Accounting
Principles (Formerly SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles—a replacement of FASB Statement No. 162).
This new standard establishes the FASB Accounting Standards CodificationTM as
the source of authoritative U.S. generally accepted accounting principles
recognized by the FASB to be applied to nongovernmental entities. This new
standard was effective for financial statements issued for interim and annual
periods ending after September 15, 2009 at which time the Codification
superseded all than-existing non-SEC accounting and reporting standards. The
adoption of this statement did not have a material impact on our Consolidated
Financial Statements.
In
August 2009, the FASB issued an update (Accounting Standards Update
No. 2009-05, Measuring Liabilities at Fair Value) impacting FASB ASC
820-10, Fair Value Measurements and Disclosures. The update provides
clarification about measuring liabilities at fair value in circumstances where a
quoted price in an active market for an identical liability is not available and
the valuation techniques that should be used. The update also clarifies that
when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents
- 58
-
the
transfer of the liability. This update became effective for the Company for the
reporting period ending September 30, 2009 and did not have a material
impact on the Company’s Consolidated Financial Statements.
In
January 2010, the FASB issued an update (Accounting Standards Update No.
2010-06, Improving Disclosures about Fair Value Measurements) impacting FASB ASC
820, Fair Value Measurements and Disclosures. The update provides clarification
regarding existing disclosures and requires additional disclosures regarding
fair value measurements. Specifically, the guidance now requires
reporting entities to disclose the amounts of significant transfers between
levels and the reasons for the transfers. In addition, the
reconciliation should present separate information about purchases, sales,
issuances and settlements. A reporting entity should provide
disclosures about the valuation techniques and inputs used to measure fair
value. The new standard is effective for reporting periods beginning after
December 15, 2009 except for disclosures about purchases, sales, issuances and
settlements which is not effective until reporting periods beginning after
December 15, 2010. Adoption of this guidance is not expected to have
a material impact on our Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 our primary tool for achieving our
asset/liability management strategies. Management regularly reviews our
interest-rate sensitivity and adjusts the sensitivity within acceptable
tolerance ranges established by management. At December 31, 2009
interest-earning liabilities exceeded interest-bearing assets that mature or
reprice within one year (interest-sensitive gap) by $73.9 million. Our
interest-sensitive assets as a percentage of interest-sensitive liabilities
within the one-year window decreased from 100.6% at December 31, 2008 to 96.4%
at December 31, 2009. Likewise, the one-year interest-sensitive gap as a
percentage of total assets changed to (1.97%) at December 31, 2009 from 0.3% at
December 31, 2008. The change in sensitivity since December 31, 2008 is the
result of the current interest rate environment and our continuing effort to
effectively manage interest rate risk.
Market
risk is the risk of loss from adverse changes in market prices and rates. Our
market risk arises primarily from interest rate risk inherent in our lending,
investing and funding activities. To that end, we actively monitor and manage
our interest rate risk exposure. One measure required to be performed by the
Office of Thrift Supervision (OTS)-regulated institutions is the test specified
by OTS Thrift Bulletin No. 13A, Management of Interest Rate Risk,
Investment Securities and Derivatives Activities. This test measures the
impact on the net portfolio value of an immediate change in interest rates in
100 basis point increments. Net portfolio value is defined as the net present
value of the estimated cash flows from assets and liabilities as a percentage of
the net present value of assets. The following table is the estimated impact of
immediate changes in interest rates on our net interest margin and net portfolio
value at the specified levels at December 31, 2009 and 2008, calculated in
compliance with Thrift Bulletin No. 13A:
December
31,
|
2009
|
2008
|
|||||||||
Change
in
Interest
Rate
(Basis
Points)
|
%
Change in
Net
Interest
Margin
(1)
|
Net
Portfolio
Value
(2)
|
%
Change in
Net
Interest
Margin
(1)
|
Net
Portfolio
Value
(2)
|
|||||||
+300
|
+4
|
%
|
8.88
|
%
|
-9
|
%
|
7.92
|
%
|
|||
+200
|
+3
|
%
|
9.24
|
%
|
-6
|
%
|
8.17
|
%
|
|||
+100
|
+1
|
%
|
9.43
|
%
|
-3
|
%
|
8.37
|
%
|
|||
0
|
0
|
%
|
9.39
|
%
|
0
|
%
|
8.50
|
%
|
|||
-100
|
-7
|
%
|
9.16
|
%
|
-2
|
%
|
8.43
|
%
|
|||
-200
|
(3)
|
NMF
|
NMF
|
NM
|
F
|
NM
|
F
|
||||
-300
|
(3)
|
NMF
|
NMF
|
NM
|
F
|
NM
|
F
|
(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 as projected under the various
rate change environments.
|
(3)
|
Sensitivity
indicated by a decrease of 200 and 300 basis points is deemed not
meaningful (NMF) at December 31, 2009 given the low absolute level of
interest rates at that time.
|
- 59
-
|
Our
primary objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on net interest income and capital, while
maximizing the yield/cost spread on our asset/liability structure. We rely
primarily on our asset/liability structure to control interest rate
risk.
We also
engage in other business activities that are sensitive to changes in interest
rates. For example, mortgage banking revenues and expenses can fluctuate with
changing interest rates. These fluctuations are difficult to model and
estimate.
During
the first quarter of 2010 we executed $75.0 million of intermediate-term FHLB
Advances in order to reduce the sensitivity of our net interest
income to increases in market interest rates.
- 60
-
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
WSFS
Financial Corporation:
We have
audited the accompanying consolidated statement of condition of WSFS Financial
Corporation and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the years in the three-year period ended
December 31, 2009. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of WSFS Financial Corporation
and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (included in FASB ASC
Topic 740, Income
Taxes),
effective January 1, 2007, and FASB Statement No. 157, Fair Value Measurements
(included in FASB ASC Subtopic 820-10, Fair Value Measurements and
Disclosures), effective January 1, 2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), WSFS Financial Corporation’s internal control
over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 16,
2010 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Philadelphia,
Pennsylvania
March 16,
2010
- 61
-
CONSOLIDATED
STATEMENT OF OPERATIONS
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
(Dollars
in Thousands, Except Per Share Data)
|
||||||||||
Interest
income:
|
||||||||||
Interest
and fees on loans
|
$
|
128,248
|
$
|
140,661
|
$
|
159,512
|
||||
Interest
on mortgage-backed securities
|
28,560
|
23,984
|
24,237
|
|||||||
Interest
and dividends on investment securities
|
1,386
|
1,331
|
1,353
|
|||||||
Interest
on investments in reverse mortgages
|
(464
|
)
|
(1,077
|
)
|
2,007
|
|||||
Other
interest income
|
—
|
1,578
|
2,368
|
|||||||
157,730
|
166,477
|
189,477
|
||||||||
Interest
expense:
|
||||||||||
Interest
on deposits
|
30,389
|
39,809
|
57,311
|
|||||||
Interest
on Federal Home Loan Bank advances
|
18,306
|
29,620
|
38,561
|
|||||||
Interest
on federal funds purchased and securities
sold
under agreements to repurchase
|
1,531
|
2,397
|
3,153
|
|||||||
Interest
on trust preferred borrowings
|
1,797
|
3,275
|
4,753
|
|||||||
Interest
on other borrowings
|
1,063
|
2,157
|
3,690
|
|||||||
53,086
|
77,258
|
107,468
|
||||||||
Net
interest income
|
104,644
|
89,219
|
82,009
|
|||||||
Provision
for loan losses
|
47,811
|
23,024
|
5,021
|
|||||||
Net
interest income after provision for loan losses
|
56,833
|
66,195
|
76,988
|
|||||||
Noninterest
income:
|
||||||||||
Deposit
service charges
|
16,881
|
16,484
|
19,750
|
|||||||
Credit/debit
card and ATM income
|
16,522
|
17,229
|
15,419
|
|||||||
Loan
fee income
|
4,857
|
3,696
|
2,384
|
|||||||
Securities
gains
|
3,423
|
139
|
82
|
|||||||
Investment
advisory income
|
2,162
|
2,395
|
2,465
|
|||||||
Mortgage
banking activities, net
|
1,646
|
148
|
217
|
|||||||
Bank-owned
life insurance income
|
917
|
1,786
|
2,269
|
|||||||
Non-recurring
gains, net
|
—
|
—
|
1,979
|
|||||||
Other
income
|
3,833
|
4,112
|
3,601
|
|||||||
50,241
|
45,989
|
48,166
|
||||||||
Noninterest
expenses:
|
||||||||||
Salaries,
benefits and other compensation
|
48,133
|
46,654
|
43,662
|
|||||||
Occupancy
expense
|
9,664
|
8,416
|
8,280
|
|||||||
Professional
fees
|
7,074
|
4,082
|
2,662
|
|||||||
FDIC
expenses
|
7,064
|
661
|
208
|
|||||||
Equipment
expense
|
6,803
|
6,174
|
5,616
|
|||||||
Data
processing and operations expense
|
4,743
|
4,216
|
4,062
|
|||||||
Net
costs of assets acquired through foreclosure
|
4,310
|
968
|
22
|
|||||||
Marketing
expense
|
3,304
|
3,920
|
3,911
|
|||||||
Other
operating expenses
|
17,409
|
14,007
|
13,608
|
|||||||
108,504
|
89,098
|
82,031
|
||||||||
(Loss)
income before taxes
|
(1,430
|
)
|
23,086
|
43,123
|
||||||
Income
tax (benefit) provision
|
(2,093
|
)
|
6,950
|
13,474
|
||||||
Net
income
|
663
|
16,136
|
29,649
|
|||||||
Dividends
on preferred stock and accretion of discount
|
2,590
|
—
|
—
|
|||||||
Net
(loss) income allocable to common stockholders
|
$
|
(1,927
|
)
|
$
|
16,136
|
$
|
29,649
|
|||
Earnings
per share:
Basic
|
$
|
(0.30
|
)
|
$
|
2.62
|
$
|
4.69
|
|||
Diluted
|
$
|
(0.30
|
)
|
$
|
2.57
|
$
|
4.55
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
- 62
-
CONSOLIDATED
STATEMENT OF CONDITION
2009
|
2008
|
|||||
(Dollars
in Thousands, Except Per Share Data)
|
||||||
Assets
|
||||||
Cash
and due from banks
|
$
|
55,756
|
$
|
58,377
|
||
Cash
in non-owned ATMs
|
264,903
|
189,965
|
||||
Federal
funds sold
|
—
|
—
|
||||
Interest-bearing
deposits in other banks
|
1,090
|
216
|
||||
Total
cash and cash equivalents
|
321,749
|
248,558
|
||||
Investment
securities held-to-maturity (fair value: 2009-$671;
2008-$1,071)
|
709
|
1,181
|
||||
Investment
securities available-for-sale including reverse mortgages
|
44,808
|
48,507
|
||||
Mortgage-backed
securities-available-for-sale
|
669,059
|
487,389
|
||||
Mortgage-backed
securities-trading
|
12,183
|
10,816
|
||||
Loans
held-for-sale
|
8,366
|
2,275
|
||||
Loans,
net of allowance for loan losses of $53,446 at December 31,
2009
and $31,189 at
December 31, 2008
|
2,470,789
|
2,441,560
|
||||
Bank-owned
life insurance
|
60,254
|
59,337
|
||||
Stock
in Federal Home Loan Bank of Pittsburgh, at cost
|
39,305
|
39,305
|
||||
Assets
acquired through foreclosure
|
8,945
|
4,471
|
||||
Premises
and equipment
|
36,108
|
34,966
|
||||
Goodwill
|
10,870
|
11,849
|
||||
Intangible
assets
|
2,781
|
3,867
|
||||
Accrued
interest receivable and other assets
|
62,581
|
38,479
|
||||
Total
assets
|
$
|
3,748,507
|
$
|
3,432,560
|
||
Liabilities
and Stockholders’ Equity
|
||||||
Liabilities:
|
||||||
Deposits:
|
||||||
Noninterest-bearing
demand
|
$ |
431,476
|
$ |
311,322
|
||
Interest-bearing
demand
|
265,719
|
214,749
|
||||
Money
market
|
550,639
|
326,792
|
||||
Savings
|
224,921
|
208,368
|
||||
Time
|
470,139
|
450,056
|
||||
Jumbo
certificates of deposit - customer
|
203,126
|
195,846
|
||||
Total
customer deposits
|
|
2,146,020
|
|
1,707,133
|
||
Other
jumbo certificates of deposit
|
69,208
|
103,825
|
||||
Brokered
deposits
|
346,643
|
311,394
|
||||
Total
deposits
|
2,561,871
|
2,122,352
|
||||
Federal
funds purchased and securities sold under agreements to
repurchase
|
100,000
|
75,000
|
||||
Federal
Home Loan Bank advances
|
613,144
|
815,957
|
||||
Trust
preferred borrowings
|
67,011
|
67,011
|
||||
Other
borrowed funds
|
74,654
|
108,777
|
||||
Accrued
interest payable and other liabilities
|
30,027
|
26,828
|
||||
Total
liabilities
|
3,446,707
|
3,215,925
|
||||
Stockholders’
Equity:
|
||||||
Serial
preferred stock $.01 par value, 7,500,000 shares authorized;
issued 52,625 at December
31, 2009 and -0- at December 31, 2008
|
1
|
—
|
||||
Common
stock $.01 par value, 20,000,000 shares authorized; issued
16,660,588
at December 31, 2009 and
15,739,768 at December 31, 2008
|
166
|
157
|
||||
Capital
in excess of par value
|
166,627
|
87,033
|
||||
Accumulated
other comprehensive loss
|
(2,022
|
)
|
(12,613
|
)
|
||
Retained
earnings
|
385,308
|
390,338
|
||||
Treasury stock at cost, 9,580,569 shares at December 31, 2009 | ||||||
and
December 31, 2008
|
(248,280
|
)
|
(248,280
|
)
|
||
Total
stockholders’ equity
|
301,800
|
216,635
|
||||
Total
liabilities and stockholders’ equity
|
$
|
3,748,507
|
$
|
3,432,560
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
- 63
-
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Preferred
Stock
|
Common
Stock
|
Capital
in
Excess
of
Par
Value
|
Accumulated
Other
Comprehensive
Loss
|
Retained
Earnings
|
Treasury
Stock
|
Total
Stockholders’
Equity
|
||||||||||||||||
(In
Thousands)
|
||||||||||||||||||||||
Balance,
December 31, 2006
|
$
|
—
|
$
|
156
|
$
|
81,580
|
$
|
(8,573
|
)
|
$
|
347,448
|
$
|
(208,552
|
)
|
$
|
212,059
|
||||||
Comprehensive
income:
|
||||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
29,649
|
—
|
29,649
|
|||||||||||||||
Other
comprehensive income (1)
|
—
|
—
|
—
|
4,712
|
—
|
—
|
4,712
|
|||||||||||||||
Total
comprehensive income
|
34,361
|
|||||||||||||||||||||
Cumulative
effect of change in
accounting principle related to the adoption of FIN 48 |
—
|
—
|
—
|
—
|
1,988
|
—
|
1,988
|
|||||||||||||||
Cash
dividend, $0.38 per share
|
—
|
—
|
—
|
—
|
(2,403
|
)
|
—
|
(2,403
|
)
|
|||||||||||||
Issuance
of common stock, including
proceeds from exercise of common stock options |
—
|
1
|
3,704
|
—
|
—
|
—
|
3,705
|
|||||||||||||||
Treasury
stock at cost, 564,100 shares
|
—
|
—
|
—
|
—
|
—
|
(36,173
|
)
|
(36,173
|
)
|
|||||||||||||
Issuance
of restricted stock
|
—
|
—
|
230
|
—
|
—
|
—
|
230
|
|||||||||||||||
Tax
liability from exercises of common
stock options
|
—
|
—
|
(2,437
|
)
|
—
|
—
|
—
|
(2,437
|
)
|
|||||||||||||
Balance,
December 31, 2007
|
$
|
—
|
$
|
157
|
$
|
83,077
|
$
|
(3,861
|
)
|
$
|
376,682
|
$
|
(244,725
|
)
|
$
|
211,330
|
||||||
Comprehensive
income:
|
||||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
16,136
|
—
|
16,136
|
|||||||||||||||
Other
comprehensive income (1)
|
—
|
—
|
—
|
(8,752
|
)
|
—
|
—
|
(8,752
|
)
|
|||||||||||||
Total
comprehensive income
|
7,384
|
|||||||||||||||||||||
Cash
dividend, $0.46 per share
|
—
|
—
|
—
|
—
|
(2,832
|
)
|
—
|
(2,832
|
)
|
|||||||||||||
Issuance
of common stock, including
proceeds from exercise of common stock options |
—
|
—
|
2,391
|
—
|
—
|
—
|
2,391
|
|||||||||||||||
Treasury
stock at cost, 73,500 shares
|
—
|
—
|
—
|
—
|
—
|
(3,555
|
)
|
(3,555
|
)
|
|||||||||||||
Issuance
of restricted stock
|
—
|
—
|
202
|
—
|
—
|
—
|
202
|
|||||||||||||||
Reclassification
adjustment of negative minority interest
|
—
|
—
|
—
|
—
|
352
|
—
|
352
|
|||||||||||||||
Tax
benefit from exercises of common
stock options
|
—
|
—
|
1,363
|
—
|
—
|
—
|
1,363
|
|||||||||||||||
Balance,
December 31, 2008
|
$
|
—
|
$
|
157
|
$
|
87,033
|
$
|
(12,613
|
)
|
$
|
390,338
|
$
|
(248,280
|
)
|
$
|
216,635
|
||||||
Comprehensive
income:
|
||||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
663
|
—
|
663
|
|||||||||||||||
Other
comprehensive income (1)
|
—
|
—
|
—
|
10,591
|
—
|
—
|
10,591
|
|||||||||||||||
Total
comprehensive income
|
11,254
|
|||||||||||||||||||||
Cash
dividend, $0.48 per share
|
—
|
—
|
—
|
—
|
(3,078
|
)
|
—
|
(3,078
|
)
|
|||||||||||||
Issuance
of common stock, including
proceeds from exercise of common stock options |
—
|
9
|
25,109
|
—
|
—
|
—
|
25,118
|
|||||||||||||||
Issuance
of restricted stock
|
—
|
—
|
174
|
—
|
—
|
—
|
174
|
|||||||||||||||
Reclassification
adjustment of negative minority interest
|
—
|
—
|
—
|
—
|
(352
|
)
|
—
|
(352
|
)
|
|||||||||||||
Tax
benefit from exercises of common
stock options
|
—
|
—
|
80
|
—
|
—
|
—
|
80
|
|||||||||||||||
Preferred
stock cash dividends
|
—
|
—
|
—
|
—
|
(2,136
|
)
|
—
|
(2,136
|
)
|
|||||||||||||
Preferred
stock discount accretion
|
—
|
|
—
|
127
|
—
|
(127
|
)
|
—
|
—
|
|||||||||||||
Preferred
stock and common stock warrants issued
|
1
|
—
|
54,104
|
—
|
—
|
—
|
54,105
|
|||||||||||||||
Balance,
December 31, 2009
|
$
|
1
|
$
|
166
|
$
|
166,627
|
$
|
(2,022
|
)
|
$
|
385,308
|
$
|
(248,280
|
)
|
$
|
301,800
|
- 64
-
(1)
Other Comprehensive Income (Loss):
|
2009
|
2008
|
2007
|
|||||||
Net
unrealized holding gains (losses) on securities available-for-sale arising
during the
period, net of
taxes (2009 - $6,491; 2008 - $(5,364); 2007 - $2,855);
|
$
|
11,845
|
$
|
(8,752
|
)
|
$
|
4,657
|
|||
Actuarial
gain reclassified to periodic cost, net of income taxes (2007 -
$42);
|
—
|
—
|
68
|
|||||||
Transition
obligation reclassified to periodic cost, net of income taxes (2007 -
$23);
|
—
|
—
|
38
|
|||||||
Reclassification
for losses (gains) included in income,
net
of taxes (2009 - $(768); 2007 - $(31));
|
(1,254
|
) |
—
|
(51
|
)
|
|||||
Total
other comprehensive (loss) income
|
$
|
10,591
|
$
|
(8,752
|
)
|
$
|
4,712
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
- 65
-
CONSOLIDATED
STATEMENT OF CASH FLOWS
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
(In
Thousands)
|
||||||||||
Operating
activities:
|
||||||||||
Net
income
|
$
|
663
|
$
|
16,136
|
$
|
29,649
|
||||
Adjustments
to reconcile net income to net cash provided by
operating
activities:
|
||||||||||
Provision
for loan losses
|
47,811
|
23,024
|
5,021
|
|||||||
Depreciation,
accretion and amortization
|
6,823
|
6,218
|
4,930
|
|||||||
(Increase)
decrease in accrued interest receivable and other assets
|
(31,217
|
)
|
(94
|
)
|
1,142
|
|||||
Origination
of loans held-for-sale
|
(115,196
|
)
|
(31,358
|
)
|
(27,160
|
)
|
||||
Proceeds
from sales of loans held-for-sale
|
110,731
|
31,648
|
25,362
|
|||||||
Gain
on mortgage banking activity
|
(1,646
|
)
|
(148
|
)
|
(217
|
)
|
||||
(Income)
loss on mark to market adjustment on trading securities
|
(1,368
|
)
|
1,616
|
—
|
||||||
Gain
on sale of credit card portfolio
|
—
|
—
|
(882
|
)
|
||||||
Securities
gain from the sale of MasterCard, Inc. and Visa, Inc. common
stock
|
(119
|
)
|
(1,755
|
)
|
—
|
|||||
Gain
on sale of former headquarters building
|
—
|
—
|
(1,093
|
)
|
||||||
Gain
on sale of investments
|
(2,022
|
)
|
—
|
(82
|
)
|
|||||
Stock-based
compensation expense, net of tax benefit recognized
|
874
|
730
|
1,222
|
|||||||
Excess
tax (benefits) liability from share-based payment
arrangements
|
(80
|
)
|
(1,363
|
)
|
2,437
|
|||||
Increase
(decrease) in accrued interest payable and other
liabilities
|
3,188
|
1,693
|
(3,328
|
)
|
||||||
Loss
on wind down of 1st
Reverse
|
1,857
|
—
|
—
|
|||||||
Loss
(gain) on sale of assets acquired through foreclosure and valuation
adjustments
|
1,905
|
816
|
(20
|
)
|
||||||
Increase
in value of bank-owned life insurance
|
(917
|
)
|
(1,786
|
)
|
(2,269
|
)
|
||||
Decrease
(increase) in capitalized interest, net
|
464
|
1,009
|
(2,007
|
)
|
||||||
Net
cash provided by operating activities
|
21,751
|
46,386
|
32,705
|
|||||||
Investing
activities:
|
||||||||||
Maturities
of investment securities
|
22,591
|
14,440
|
41,893
|
|||||||
Purchases
of investment securities available-for-sale
|
(19,070
|
)
|
(37,298
|
)
|
(13,986
|
)
|
||||
Sales
of mortgage-backed securities available-for-sale
|
111,214
|
—
|
2,690
|
|||||||
Repayments
of mortgage-backed securities available-for-sale
|
151,571
|
77,856
|
77,328
|
|||||||
Purchases
of mortgage-backed securities available-for-sale
|
(424,813
|
)
|
(95,195
|
)
|
(52,507
|
)
|
||||
Repayments
on reverse mortgages
|
207
|
1,248
|
3,532
|
|||||||
Disbursements
for reverse mortgages
|
(202
|
)
|
(227
|
)
|
(2,964
|
)
|
||||
Purchase
of 1st
Reverse Financial Services, LLC
|
—
|
(2,442
|
)
|
—
|
||||||
Acquisition
of branches
|
—
|
(11,505
|
)
|
—
|
||||||
Sales
of loans
|
22,270
|
—
|
909
|
|||||||
Purchase
of Cypress Capital Management, LLC
|
—
|
—
|
(240
|
)
|
||||||
Purchase
of ATM vault cash business
|
—
|
—
|
(440
|
)
|
||||||
Purchases
of loans
|
—
|
(3,190
|
)
|
(2,656
|
)
|
|||||
Net
increase in loans
|
(109,131
|
)
|
(236,674
|
)
|
(221,179
|
)
|
||||
Net
decrease (increase) in stock of Federal Home Loan Bank of
Pittsburgh
|
—
|
6,232
|
(5,665
|
)
|
||||||
Sale
of assets acquired through foreclosure, net
|
3,274
|
1,674
|
120
|
|||||||
Sale
of credit card portfolio
|
—
|
—
|
6,295
|
|||||||
Proceeds
from the sale of MasterCard, Inc. and Visa, Inc. common
stock
|
119
|
1,755
|
—
|
|||||||
Sale
of former headquarters building
|
—
|
—
|
2,436
|
|||||||
Deferred
gain on sale of partnership interest
|
—
|
—
|
1,335
|
|||||||
Investment
in real estate partnership
|
—
|
—
|
1,172
|
|||||||
Investment
in premises and equipment, net
|
(6,776
|
)
|
(4,989
|
)
|
(9,181
|
)
|
||||
Net
cash used for investing activities
|
(248,746
|
)
|
(288,315
|
)
|
(171,108
|
)
|
(Continued
on next page)
- 66
-
CONSOLIDATED
STATEMENT OF CASH FLOWS (continued)
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
(In
Thousands)
|
||||||||||
Financing
activities:
|
||||||||||
Net
increase in demand and saving deposits
|
$
|
347,401
|
$
|
112,850
|
$
|
82,363
|
||||
Net
increase in time deposits
|
27,126
|
195,584
|
4,256
|
|||||||
Receipts from federal funds purchased and securities sold under agreement
to repurchase
|
18,922,995
|
12,853,000
|
12,709,000
|
|||||||
Repayments
of federal funds purchased and securities sold under agreement to
repurchase
|
(18,897,995
|
)
|
(12,853,000
|
)
|
(12,707,400
|
)
|
||||
Receipts
of FHLB advances
|
30,481,564
|
82,778,987
|
31,427,417
|
|||||||
Repayments
of FHLB advances
|
(30,684,378
|
)
|
(82,861,310
|
)
|
(31,313,165
|
)
|
||||
Proceeds
from issuance of unsecured bank debt
|
30,000
|
—
|
—
|
|||||||
Dividends
paid
|
(5,214
|
)
|
(2,832
|
)
|
(2,404
|
)
|
||||
Proceeds
from issuance of preferred stock
|
52,625
|
—
|
—
|
|||||||
Issuance
of common stock and exercise of common stock options
|
25,982
|
1,863
|
2,713
|
|||||||
Excess
tax benefit (liability) from share-based payment
arrangements
|
80
|
1,363
|
(2,437
|
)
|
||||||
Purchase
of treasury stock, net of re-issuance
|
—
|
(3,555
|
)
|
(36,173
|
)
|
|||||
Decrease
in minority interest
|
—
|
—
|
(54
|
)
|
||||||
Net
cash provided by financing activities
|
300,186
|
222,950
|
164,116
|
|||||||
Increase
(decrease) in cash and cash equivalents
|
73,191
|
(18,979
|
)
|
25,713
|
||||||
Cash
and cash equivalents at beginning of year
|
248,558
|
267,537
|
241,824
|
|||||||
Cash
and cash equivalents at end of year
|
$
|
321,749
|
$
|
248,558
|
$
|
267,537
|
||||
Supplemental
Disclosure of Cash Flow Information:
|
||||||||||
Cash
paid in interest during the year
|
$
|
55,640
|
$
|
80,654
|
$
|
105,969
|
||||
Cash
paid for income taxes, net
|
2,593
|
10,521
|
18,056
|
|||||||
Loans
transferred to assets acquired through foreclosure
|
9,143
|
6,186
|
415
|
|||||||
Net
change in accumulated other comprehensive income
|
10,591
|
(8,752
|
)
|
4,712
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
- 67
-
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
WSFS
Financial Corporation (“the Company,” “our Company,” “WSFS”, “we,” “our” or
“us”) is a savings and loan holding company organized under the laws of the
State of Delaware. Our principal wholly-owned subsidiary, Wilmington Savings
Fund Society, FSB (“WSFS Bank” or the “Bank”), is a federal savings bank
organized under the laws of the United States which, at December 31, 2009,
serves customers from our 41 banking offices located in Delaware (36),
Pennsylvania (4), and Virginia (1).
In
preparing the Consolidated Financial Statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The material estimates that are particularly
susceptible to significant changes in the near term relate to the allowance for
loan losses for impaired loans and the remainder of the loan portfolios,
investment in reverse mortgages, contingencies (including indemnifications),
goodwill and income taxes.
Although
our current estimates contemplate current conditions and how we expect them to
change in the future, it is reasonably possible that in 2010, actual conditions
could be worse than anticipated in those estimates, which could materially
affect our results of operations and financial condition. Amounts subject to
significant estimates are items such as the allowance for loan losses and
lending related commitments, goodwill and intangible assets, post-retirement
obligations, the fair value of financial instruments and other-than-temporary
impairments. Among other effects, such changes could result in future
impairments of investment securities, goodwill and intangible assets and
establishment of allowances for loan losses and lending related commitments as
well as increased post-retirement expense.
Basis
of Presentation
The
Consolidated Financial Statements include the accounts of the parent company,
Montchanin Capital Management, Inc. (Montchanin) and its wholly-owned
subsidiary, Cypress Capital Management, LLC (Cypress), WSFS Bank and its
wholly-owned subsidiary, WSFS Investment Group, Inc. (“WIG”). WIG markets
various third-party insurance and securities products to Bank customers through
WSFS’ retail banking system. During 2009, WSFS Bank also owned a majority
interest in 1st
Reverse Financial Services, LLC (1st
Reverse), specializing in reverse mortgage lending however operations
were wound-down during the 4th
quarter of 2009 due, in part, to the current economic climate. Montchanin was
formed to provide asset management products and services. In 2007, Montchanin
increased its ownership in Cypress, a Wilmington-based investment advisory firm
servicing high net-worth individuals and institutions to100%.
WSFS
Capital Trust III (“the Trust”) is an unconsolidated subsidiary of ours, and was
formed in 2005 to issue $67.0 million aggregate principal amount of Pooled
Floating Rate Capital Securities. The proceeds from this issue were used to fund
the redemption of $51.5 million of Floating Rate WSFS Capital Trust I Preferred
Securities (formerly WSFS Capital Trust I). The Trust invested all of the
proceeds from the sale of the Pooled Floating Rate Capital Securities in Junior
Subordinated Debentures of the Company.
Certain
reclassifications have been made to the prior years’ Consolidated Financial
Statements to conform them to the current year’s presentation. All significant
intercompany transactions are eliminated in consolidation.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash and cash equivalents include cash, cash
in non-owned ATMs, cash due from banks, federal funds sold and securities
purchased under agreements to resell.
- 68
-
Debt
and Equity Securities
Investments
in equity securities that have a readily determinable fair value and investments
in debt securities are classified into three categories and accounted for as
follows:
o
|
Debt
securities with the positive intention to hold to maturity are classified
as “held-to-maturity” and reported at amortized
cost.
|
o
|
Debt
and equity securities purchased with the intention of selling them in the
near future are classified as “trading securities” and are reported at
fair value, with unrealized gains and losses included in
earnings.
|
o
|
Debt
and equity securities not classified in either of the above are classified
as “available-for-sale securities” and reported at fair value, with
unrealized gains and losses excluded from earnings and reported, net of
tax, as a separate component of stockholders’
equity.
|
Debt and
equity securities include mortgage-backed securities, municipal bonds, U.S.
Government and agency securities and certain equity securities. Premiums and
discounts on debt and equity securities, held-to-maturity and
available-for-sale, are recognized in interest income using a level yield method
over the period to expected maturity. The fair value of debt and equity
securities is primarily obtained from third-party pricing services. Implicit in
the valuation are estimated prepayments based on historical and current market
conditions.
When we
conclude an investment security is other-than-temporarily impaired (“OTTI”), a
loss for the difference between the investment security’s carrying value and the
fair value is recognized as a reduction to non-interest income in the
consolidated statement of operations. For an investment in a debt security, if
we do not intend to sell the investment security and conclude that it is not
more likely than not we will be required to sell the security before recovering
the carrying value, which may be maturity, the OTTI charge is separated into the
“credit” and “other” components. The “other” component of the OTTI is included
in other comprehensive loss, net of the tax effect, and the “credit” component
of the OTTI is included as a reduction to non-interest income in the
consolidated statement of operations. Management is required to use its judgment
to determine impairment in certain circumstances. The specific identification
method is used to determine realized gains and losses on sales of investment and
mortgage-backed securities. All sales are made without recourse.
Investment
in Reverse Mortgages
We
account for our investment in reverse mortgages in accordance with the
instructions provided by the staff of the Securities and Exchange Commission
(SEC) entitled “Accounting for Pools of Uninsured Residential Reverse Mortgage
Contracts,” which requires grouping the individual reverse mortgages into
“pools” and recognizing income based on the estimated effective yield of the
pool. In computing the effective yield, we must project the cash inflows and
outflows of the pool including actuarial projections of the life expectancy of
the individual contract holder and changes in the collateral value of the
residence. At each reporting date, a new economic forecast is made of the cash
inflows and outflows of each pool of reverse mortgages; the effective yield of
each pool is recomputed, and income is adjusted retroactively and prospectively
to reflect the revised rate of return. Because of this highly specialized
accounting, the recorded value of reverse mortgage assets can result in
significant volatility associated with estimations. As a result, income
recognition can vary significantly from reporting period to reporting period.
During 2009, we recorded a $464,000 charge (taken through interest income)
related to our second-lien interest in the 18 whole-loan reverse
mortgage.
During
2009 we recorded income of $1.4 million related to the mark-to-market adjustment
on the $12.4 million par value BBB+ rated mortgage-backed security (MBS) issued
in connection with a 2002 reverse mortgage securitization.
- 69
-
Loans
Loans are
stated net of deferred fees and costs and unearned
discounts. Interest income on loans is recognized using the level
yield method. Loan origination and commitment fees and direct loan
origination costs are deferred and recognized over the life of the related loans
using a level yield method over the period to maturity.
A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans are measured based on the present
value of expected future discounted cash flows, the market price of the loan or
the fair value of the underlying collateral if the loan is collateral dependent.
Impaired loans include loans within our commercial, commercial mortgage,
commercial construction, residential mortgages and consumer portfolios. Our
policy for recognition of interest income on impaired loans is the same as for
nonaccrual loans discussed below.
Nonaccrual
Loans
Nonaccrual
loans are those on which the accrual of interest has ceased. Loans are placed on
nonaccrual status immediately if, in the opinion of management, collection is
doubtful, or when principal or interest is contractually past due 90 days or
more. Interest accrued but not collected at the date a loan is placed on
nonaccrual status is reversed and charged against interest income. In addition,
the amortization of net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Subsequent cash receipts are applied either to the
outstanding principal or recorded as interest income, depending on management’s
assessment of ultimate collectability of principal and interest. Loans are
returned to an accrual status when the borrower’s ability to make periodic
principal and interest payments has returned to normal (i.e.: brought current
with respect to principal or interest or restructured) and the paying capacity
of the borrower or the underlying collateral is deemed sufficient to cover
principal and interest in accordance with our previously established
loan-to-value policies.
Allowances
for Loan Losses
We
maintain allowances for credit losses and charge losses to these allowances when
such losses are realized. The determination of the allowance for loan losses
requires significant judgment reflecting management’s best estimate of probable
losses related to specifically identified loans as well as probable losses in
the remaining loan portfolio. Management’s evaluation is based upon a review of
these portfolios.
Management
establishes the loan loss allowance in accordance with guidance provided by the
Securities and Exchange Commission’s Staff Accounting Bulletin 102 (SAB 102).
Its methodology for assessing the appropriateness of the allowance consists of
several key elements which include: specific allowances for identified problem
loans, formula allowances for commercial and commercial real estate loans, and
allowances for pooled, homogenous loans. Troubled debt restructurings
are measured at the present value of estimated future cash flows using the
loan’s effective rate at inception.
Specific
reserves are established for certain loans in cases where management has
identified significant conditions or circumstances related to a specific credit
that management believes indicate the probability that a loss has been
incurred.
The
formula allowances for commercial and commercial real estate loans are
calculated by applying estimated loss factors to outstanding loans based on the
internal risk grade of loans. For low risk commercial and commercial real estate
loans the portfolio is pooled, based on internal risk grade, and estimates are
based on a ten-year net charge-off history adjusted to reflect current estimates
of loss. Higher risk and criticized loans have loss factors that are derived
from an analysis of both the probability of default and the probability of loss
should default occur. Loss adjustment factors are applied based on criteria
discussed below. As a result, changes in risk grades of both performing and
nonperforming loans affect the amount of the formula allowance.
- 70
-
Pooled loans
are loans that are usually smaller, not-individually-graded and homogeneous in
nature, such as consumer installment loans and residential mortgages. Loan loss
allowances for pooled loans are based on a ten-year net charge-off history
adjusted to reflect current estimates of loss. The average loss allowance per
homogeneous pool is based on the product’s average annual historical loss rate
and the average estimated duration of the pool multiplied by the pool balances.
These separate risk pools are assigned a reserve for loss based upon this
historical loss information and loss adjustment factors.
Historical
loss adjustment factors are based upon management’s evaluation of various
current conditions, including those listed below:
·
|
General
economic and business conditions affecting WSFS’ key lending
areas,
|
·
|
Credit
quality trends,
|
·
|
Recent
loss experience in particular segments of the
portfolio,
|
·
|
Collateral
values and loan-to-value ratios,
|
·
|
Loan
volumes and concentrations, including changes in
mix,
|
·
|
Seasoning
of the loan portfolio,
|
·
|
Specific
industry conditions within portfolio
segments,
|
·
|
Bank
regulatory examination results, and
|
·
|
Other
factors, including changes in quality of the loan origination, servicing
and risk management processes.
|
Our loan
officers and risk managers meet at least quarterly to discuss and review these
conditions, and also risks associated with individual problem loans. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review our allowance for such losses. We also give
consideration to the results of these regulatory agency
examinations.
During
2008, the provision for loan losses was affected by changes in estimates used in
the calculation. These changes included additional reserves reflecting the
effects of updated loss rate expectations on our loan portfolio. These changes
resulted in an increase to the provision for loan losses of $2.8 million or
$0.29 per share.
During
2009, we recorded a $47.8 million provision for loan losses, which was a result
of many factors including increased charge-offs, continued migration in loans to
lower credit grades, continued deterioration of collateral values and an
increase in estimated disposition costs.
Increases
in the allowance for loan losses in both 2009 and 2008 were also due to rising
trends in our past due and nonperforming loans (as discussed in the earlier
nonperforming assets section) and rising unemployment rates. This increase
in non-performing loans is a direct result of the weak economic environment,
impacting numerous borrowers’ ability to pay as scheduled. This has
resulted in increased loan delinquencies, and in some cases decreases in the
collateral value used to secure real estate loans and the ability to sell the
collateral upon foreclosure. Collateral value is assessed based on
collateral value trends, liquidation value trends, and other liquidation
expenses to determine appropriate discounts that may be needed. In
response to this deterioration in real estate loan quality, management is
aggressively monitoring its classified loans and is continuing to monitor
credits with material weaknesses.
As a
result of continued economic deterioration, a detailed review and analysis of
our commercial loan portfolio was completed during the year. This
included a review of every commercial loan commitment greater than $1 million,
regardless of risk rating. This represented 74% of our commercial
portfolio. The review considered cash flows from the business or
project, appropriately conservative real estate values, a careful view of
guarantor support, and the direction of the economy.
Our real estate portfolio has
approximately $524.4 million of commercial real estate loans, $231.6 million of
construction loans, $357.3 million in first lien mortgage loans (only $15.5
million of which are
- 71
-
considered
subprime loans), and $284.3 million in home equity loans and lines as of
December 31, 2009. We do not have any option ARM products in our
portfolio. We consider our construction loans our riskiest loans within
our real estate portfolio. Construction loans are typically comprised of
loans to borrowers for real estate to be developed. Normally, these loans
are repaid with the proceeds from the sale or lease of the developed
property. The greater degree of strain on these real estate types of loans
and the significance to our overall loan portfolio has caused us to apply a
greater degree of scrutiny in analyzing the ultimate collectability of amounts
due. A number of these borrowers are having financial difficulties that
may affect their ability to repay their loans.
Assets
Held-for-Sale
Assets
held-for-sale includes loans held-for-sale and are carried at the lower of cost
or market of the aggregate or, in some cases, individual assets.
Assets
Acquired Through Foreclosure
Assets
acquired through foreclosure are recorded at the lower of the recorded
investment in the loans or fair value less estimated disposal costs. Costs
subsequently incurred to improve the assets are included in the carrying value
provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. We write-down the value of the assets when
declines in fair value below the carrying value are identified. Net costs of
assets acquired through foreclosure include costs of holding and operating the
assets, net gains or losses on sales of the assets and provisions for losses to
reduce such assets to fair value less estimated disposal costs. During 2009, we
booked $4.1 million in additional write-downs of values of assets acquired
through foreclosure (REO).
Premises
and Equipment
Premises
and equipment is stated at cost less accumulated depreciation and amortization.
Costs of major replacements, improvements and additions are capitalized.
Depreciation expense is computed on a straight-line basis over the estimated
useful lives of the assets or, for leasehold improvements, over the effective
life of the related lease if less than the estimated useful life. In general,
computer equipment, furniture and equipment and building renovations are
depreciated over three, five and ten years, respectively.
Federal
Funds Purchased and Securities Sold Under Agreements to Repurchase
We enter
into sales of securities under agreements to repurchase. Reverse repurchase
agreements are treated as financings, with the obligation to repurchase
securities sold reflected as a liability in the Consolidated Statement of
Condition. The securities underlying the agreements are assets. Generally,
federal funds are purchased for periods ranging up to 90 days.
Loss
Contingency for Standby Letters of Credit
We
maintain a loss contingency for standby letters of credit and charge losses to
this contingency when such losses are realized. The determination of the loss
contingency for standby letters of credit requires significant judgment
reflecting management’s best estimate of probable losses related to standby
letters of credit. During 2009 we increased these reserves by
$532,000.
Income
Taxes
The
provision for income taxes includes federal, state and local income taxes
currently payable and those deferred because of temporary differences between
the financial statement basis and tax basis of assets and
liabilities.
- 72 -
We
account for income taxes in accordance with Financial Accounting Standard
Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes (formerly
Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes
and FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an
interpretation of FASB Statement 109). ASC 740 prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a
tax return. Benefits from tax positions are recognized in the financial
statements only when it is more-likely-than-not that the tax position will be
sustained upon examination by the appropriate taxing authority that would have
full knowledge of all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the largest amount of
benefit that is greater than 50% likely of being realized upon ultimate
settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold are recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold are derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. ASC 740 also provides
guidance on the accounting for and disclosure of unrecognized tax benefits,
interest and penalties. ASC 740 became effective for us on January 1, 2007,
and resulted in a $2.0 million increase to our retained earnings on that
date.
Earnings Per Share
The following table sets forth the
computation of basic and diluted earnings per share:
2009
|
2008
|
2007
|
||||||||
(In
Thousands, Except Per Share Data)
|
||||||||||
Numerator:
|
||||||||||
Net
(loss) income allocable to common shareholders
|
$
|
(1,927
|
)
|
$
|
16,136
|
$
|
29,649
|
|||
Denominator:
|
||||||||||
Denominator
for basic earnings per share - weighted average shares
|
6,429
|
6,158
|
6,316
|
|||||||
Effect
of dilutive employee stock options
|
―
|
132
|
194
|
|||||||
Denominator
for diluted earnings per share - adjusted weighted average shares and
assumed exercise
|
6,429
|
6,290
|
6,510
|
|||||||
Earnings
per share:
|
||||||||||
Basic:
|
||||||||||
Net
(loss) income allocable to common shareholders
|
$
|
(0.30
|
)
|
$
|
2.62
|
$
|
4.69
|
|||
Diluted:
|
||||||||||
Net
(loss) income allocable to common shareholders
|
$
|
(0.30
|
)
|
$
|
2.57
|
$
|
4.55
|
|||
Outstanding
common stock equivalents having no dilutive effect
|
939
|
371
|
194
|
For the year ended December 31, 2009,
939,000 employee stock options were excluded from the computation of diluted net
loss per common share, of which 59,000 were because the effect would have been
antidilutive due to the net loss reported in this period.
|
|
- 73
-
Fair Value of Financial
Assets
Effective
January 1, 2008, we adopted the provisions of FASB ASC 820-10 (Formerly SFAS No.
157, Fair Value
Measurements and Financial Accounting Standards Board Staff Position
(FSP) No. 157-2, Effective
Date of FASB Statement No. 157), for nonfinancial assets and financial
liabilities. This adoption did not have a material impact on our financial
statements.
ASC
820-10 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820-10 establishes a fair value
hierarchy that prioritizes the use of inputs used in valuation methodologies
into the following three levels:
Level
1:
|
Inputs
to the valuation methodology are quoted prices, unadjusted, for identical
assets or liabilities in active markets. A quoted price in an active
market provides the most reliable evidence of fair value and shall be used
to measure fair value whenever
available.
|
Level
2:
|
Inputs
to the valuation methodology include quoted prices for similar assets or
liabilities in active markets; inputs to the valuation methodology include
quoted prices for identical or similar assets or liabilities in markets
that are not active; or inputs to the valuation methodology that are
derived principally from or can be corroborated by observable market data
by correlation or other means.
|
Level
3:
|
Inputs
to the valuation methodology are unobservable and significant to the fair
value measurement. Level 3 assets and liabilities include financial
instruments whose value is determined using discounted cash flow
methodologies, as well as instruments for which the determination of fair
value requires significant management judgment or
estimation.
|
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation methodologies were
applied to all of our financial assets carried at fair value effective January
1, 2008. The table below presents the balances of assets measured at fair value
as of December 31, 2009 (there are no material liabilities measured at fair
value):
Quoted
|
|||||||||||||
Prices in
|
|||||||||||||
Active
|
Significant
|
||||||||||||
Markets for
|
Other
|
Significant
|
|||||||||||
Identical
|
Observable
|
Unobservable
|
|||||||||||
Asset
|
Inputs
|
Inputs
|
Total
|
||||||||||
Description
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Fair
Value
|
|||||||||
(in
Thousands)
|
|||||||||||||
Assets
Measured at Fair Value on a Recurring Basis
|
|||||||||||||
Available-for-sale
securities including reverse mortgages
|
$
|
—
|
$
|
714,397
|
$
|
(530
|
)
|
$
|
713,867
|
||||
Trading
Securities
|
—
|
—
|
12,183
|
12,183
|
|||||||||
Total
assets measured at fair value on a recurring basis
|
$
|
—
|
$
|
714,397
|
$
|
11,653
|
$
|
726,050
|
|||||
Assets
Measured at Fair Value on a Nonrecurring Basis
|
|||||||||||||
Impaired
Loans
|
$
|
—
|
$
|
61,375
|
$
|
—
|
$
|
61,375
|
|||||
Total
assets measured at fair value on a nonrecurring basis
|
$
|
—
|
$
|
61,375
|
$
|
—
|
$
|
61,375
|
- 74
-
The table
below presents the balances of assets measured at fair value as of December 31,
2008 (there were no material liabilities measured at fair value):
Quoted
|
|||||||||||||
Prices in
|
|||||||||||||
Active
|
Significant
|
||||||||||||
Markets for
|
Other
|
Significant
|
|||||||||||
Identical
|
Observable
|
Unobservable
|
|||||||||||
Asset
|
Inputs
|
Inputs
|
Total
|
||||||||||
Description
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Fair
Value
|
|||||||||
(in
Thousands)
|
|||||||||||||
Assets
Measured at Fair Value on a Recurring Basis
|
|||||||||||||
Available-for-sale
securities including reverse mortgages
|
$
|
—
|
$
|
535,957
|
$
|
(61)
|
$
|
535,896
|
|||||
Trading
Securities
|
—
|
—
|
10,816
|
10,816
|
|||||||||
Total
assets measured at fair value on a recurring basis
|
$
|
—
|
$
|
535,957
|
$
|
10,755
|
$
|
546,712
|
|||||
Assets
Measured at Fair Value on a Nonrecurring Basis
|
|||||||||||||
Impaired
Loans
|
$
|
—
|
$
|
22,840
|
$
|
—
|
$
|
22,840
|
|||||
Total
assets measured at fair value on a nonrecurring basis
|
$
|
—
|
$
|
22,840
|
$
|
—
|
$
|
22,840
|
Fair
value is based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon internally developed models
or obtained from third parties that primarily use, as inputs, observable
market-based parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjustments may include
unobservable parameters. Any such valuation adjustments have been applied
consistently over time. Our valuation methodologies may produce a fair value
calculation that may not be indicative of net realizable value or reflective of
future fair values. While we believe our valuation methodologies are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting
date.
Available for
sale securities.
As of December 31, 2009, securities classified as available for sale are
reported at fair value using Level 2 inputs. Included in the Level 2 total
are approximately $41.3 million in Federal Agency debentures,
$240.2 million in Federal Agency MBS, $424.8 million of Private
Label MBS, and $3.7 million in municipal bonds. Agency and MBS
securities are predominately AAA-rated. We believe that this Level 2
designation is appropriate for these securities under ASC 820-10 as, with
almost all fixed income securities, none are exchange traded, and all are priced
by correlation to observed market data. For these securities we obtain fair
value measurements from an independent pricing service. The fair value
measurements consider observable data that may include dealer quotes, market
spreads, cash flows, U.S. government and agency yield curves, live trading
levels, trade execution data, market consensus prepayment speeds, credit
information, and the security’s terms and conditions, among other
factors.
- 75
-
Securities
classified as available for sale as of December 31, 2008 were also reported at
fair value using Level 2 inputs. Included under the Level 2 designation was
approximately $44.6 million in Federal Agency debentures, $194.7 million in
Federal Agency MBS, $292.7 million of Private Label MBS, and
$3.9 million in municipal bonds. Agency and MBS securities were
predominately AAA-rated and designated Level 2 pursuant to ASC
820-10. As discussed above, almost all were fixed income securities,
none were exchange traded, and all were priced by correlation to observed market
data.
Trading
securities. The
amount included in the trading securities category represents the fair value of
a BBB-rated traunche of a reverse mortgage security. There has never been an
active market for these securities. As such, we classify these trading
securities as Level 3 under ASC 820-10. As prescribed by ASC 820-10, management
used various observable and unobservable inputs to develop a range of likely
fair value prices where this security would be exchanged in an orderly
transaction between market participants at the measurement date. The
unobservable inputs reflect management’s assumptions about the assumptions that
market participants would use in pricing this asset. Included in these inputs
were the median of a selection of other BBB-rated securities as well as quoted
market prices from higher rated traunches of this asset class. As a result, the
value assigned to this security is determined primarily through a discounted
cash flow analysis. All of these assumptions require a significant
degree of management judgment.
Reverse Mortgages
available-for-sale. The amount of our investment
in reverse mortgages represents the estimated value of future cash flows of the
reverse mortgages at a rate deemed appropriate for these mortgages, based on the
market rate for similar collateral. The projected cash flows depend on
assumptions about life expectancy of the mortgagee and the future changes in
collateral values. Due to the significant amount of management judgment and the
unobservable input calculations, these reverse mortgages have been classified as
Level 3.
The
changes in Level 3 assets measured at fair value are summarized as
follows:
Trading
Securities
|
Available-
For-Sale
Securities Including Reverse Mortgages
|
Total
|
|||||||
(in
Thousands)
|
|||||||||
Balance
at December 31, 2007
|
$
|
12,364
|
$
|
2,037
|
$
|
14,401
|
|||
Total
net income (losses) for the period included in net income
|
(1,548
|
)
|
(1,077
|
)
|
(2,625
|
)
|
|||
Purchases,
sales, issuances, and settlements, net
|
—
|
(1,021
|
)
|
(1,021
|
)
|
||||
Balance
at December 31, 2008
|
$
|
10,816
|
$
|
(61
|
)
|
$
|
10,755
|
||
Total
net income (losses) for the period included in net income
|
1,367
|
(464
|
)
|
903
|
|||||
Purchases,
sales, issuances, and settlements, net
|
—
|
(5
|
)
|
(5
|
)
|
||||
Balance
at December 31, 2009
|
$
|
12,183
|
$
|
(530
|
)
|
$
|
11,653
|
Impaired
loans. Impaired loans, which are measured for impairment using the fair
value of the collateral for collateral dependent loans, had a gross amount of
$73.2 million and $22.8 million at December 31, 2009 and 2008, respectively. The
valuation allowance on impaired loans was $11.8 million as of December 31, 2009
and $395,000 as of December 31, 2008.
- 76
-
2.
INVESTMENT SECURITIES
The
following tables detail the amortized cost and the estimated fair value of the
Company’s investment securities:
Gross
|
Gross
|
||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
Cost
|
Gains
|
Losses
|
Value
|
||||||||||
(In
Thousands)
|
|||||||||||||
Available-for-sale
securities:
|
|||||||||||||
December
31, 2009:
|
|||||||||||||
Reverse
mortgages (1)
|
$
|
(530
|
)
|
$
|
—
|
$
|
—
|
$
|
(530
|
)
|
|||
U.S.
Government and agencies
|
40,695
|
652
|
(35
|
)
|
41,312
|
||||||||
State
and political subdivisions
|
3,935
|
91
|
—
|
4,026
|
|||||||||
$
|
44,100
|
$
|
743
|
$
|
(35
|
)
|
$
|
44,808
|
|||||
December
31, 2008:
|
|||||||||||||
Reverse
mortgages (1)
|
$
|
(61
|
)
|
$
|
—
|
$
|
—
|
$
|
(61
|
)
|
|||
U.S.
Government and agencies
|
43,778
|
857
|
(1
|
)
|
44,634
|
||||||||
State
and political subdivisions
|
4,020
|
—
|
(86
|
)
|
3,934
|
||||||||
$
|
47,737
|
$
|
857
|
$
|
(87
|
)
|
$
|
48,507
|
|||||
Held-to-maturity:
|
|||||||||||||
December
31, 2009:
|
|||||||||||||
State
and political subdivisions
|
$
|
709
|
$
|
—
|
$
|
(38
|
)
|
$
|
671
|
||||
$
|
709
|
$
|
—
|
$
|
(38
|
)
|
$
|
671
|
|||||
|
|||||||||||||
December
31, 2008:
|
|||||||||||||
State
and political subdivisions
|
$
|
1,181
|
$
|
—
|
$
|
(110
|
)
|
$
|
1,071
|
||||
$
|
1,181
|
$
|
—
|
$
|
(110
|
)
|
$
|
1,071
|
(1) See
Note 4 to the Consolidated Financial Statements for a further discussion of
Reverse Mortgages.
Securities with book values aggregating
$39.5 million at December 31, 2009 were specifically pledged as collateral for
WSFS’ Treasury Tax and Loan account with the Federal Reserve Bank, securities
sold under agreement to repurchase and certain letters of credit and municipal
deposits which require collateral. Accrued interest receivable relating to
investment securities was $352,000 and $409,000 at December 31, 2009 and 2008,
respectively.
- 77
-
The scheduled maturities of investment
securities held-to-maturity and securities available-for-sale at December 31,
2009 and 2008 were as follows:
Held-to-Maturity
|
Available-for
Sale
|
||||||||||||
Amortized
|
Fair
|
Amortized
|
Fair
|
||||||||||
Cost
|
Value
|
Cost
|
Value
|
||||||||||
(In
Thousands)
|
|||||||||||||
2009
|
|||||||||||||
Within
one year (1)
|
$
|
340
|
$
|
340
|
$
|
10,864
|
$
|
11,068
|
|||||
After
one year but within five years
|
—
|
—
|
32,986
|
33,485
|
|||||||||
After
five years but within ten years
|
—
|
—
|
250
|
255
|
|||||||||
After
ten years
|
369
|
331
|
—
|
—
|
|||||||||
$
|
709
|
$
|
671
|
$
|
44,100
|
$
|
44,808
|
||||||
2008
|
|||||||||||||
Within
one year (1)
|
$
|
—
|
$
|
—
|
$
|
3,940
|
$
|
4,054
|
|||||
After
one year but within five years
|
630
|
630
|
42,522
|
43,220
|
|||||||||
After
five years but within ten years
|
—
|
—
|
1,275
|
1,233
|
|||||||||
After
ten years
|
551
|
441
|
—
|
—
|
|||||||||
$
|
1,181
|
$
|
1,071
|
$
|
47,737
|
$
|
48,507
|
||||||
(1)
Reverse mortgages do not have contractual maturities. We have included reverse
mortgages in maturities within one year.
There were no sales of investment
securities classified as available-for-sale or held-to-maturity during 2009,
2008, or 2007. As a result, there were no net gains/losses realized during 2009,
2008, or 2007. The cost basis for investment security sales is based on the
specific identification method. Investment securities totaling $18.6 million
were called by their issuers during 2009.
At December 31, 2009, we owned
investment securities totaling $3.2 million where the amortized cost basis
exceeded fair value. Total unrealized losses on those securities were $73,000 at
December 31, 2009. This temporary impairment is the result of changes in market
interest rates subsequent to the purchase of the securities. Securities
amounting to $242,000 have been impaired for 12 months or longer. We have
determined that these securities are not other than temporarily impaired. The
following table includes unrealized losses aggregated by category as of December
31, 2009:
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||
(In
Thousands)
|
|||||||||||||||||||
Held-to-maturity
|
|||||||||||||||||||
State
and political subdivisions
|
$
|
—
|
$
|
—
|
$
|
242
|
$
|
38
|
$
|
242
|
$
|
38
|
|||||||
Available-for-sale
|
|||||||||||||||||||
State
and political subdivisions
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
U.S
Government and agencies
|
2,985
|
35
|
—
|
—
|
2,985
|
35
|
|||||||||||||
Total
temporarily impaired investments
|
$
|
2,985
|
$
|
35
|
$
|
242
|
$
|
38
|
$
|
3,227
|
$
|
73
|
- 78
-
The
following table includes unrealized losses aggregated by category as of December
31, 2008:
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||
(In
Thousands)
|
|||||||||||||||||||
Held-to-maturity
|
|||||||||||||||||||
State
and political subdivisions
|
$
|
92
|
$
|
—
|
$
|
265
|
$
|
110
|
$
|
357
|
$
|
110
|
|||||||
Available-for-sale
|
|||||||||||||||||||
State
and political subdivisions
|
3,934
|
86
|
—
|
—
|
3,934
|
86
|
|||||||||||||
U.S
Government and agencies
|
2,053
|
1
|
—
|
—
|
2,053
|
1
|
|||||||||||||
Total
temporarily impaired investments
|
$
|
6,079
|
$
|
87
|
$
|
265
|
$
|
110
|
$
|
6,344
|
$
|
197
|
3.
MORTGAGE-BACKED SECURITIES
The following tables detail the
amortized cost and the estimated fair value of the Company’s mortgage-backed
securities:
Gross
|
Gross
|
||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
Cost
|
Gains
|
Losses
|
Value
|
||||||||||
(In
Thousands)
|
|||||||||||||
Available-for-sale
securities:
|
|||||||||||||
December
31, 2009:
|
|||||||||||||
Collateralized
mortgage obligations (1)
|
$
|
519,527
|
$
|
5,368
|
$
|
(10,383
|
)
|
$
|
514,512
|
||||
FNMA
|
61,603
|
813
|
(454
|
)
|
61,962
|
||||||||
FHLMC
|
44,536
|
561
|
(83
|
)
|
45,014
|
||||||||
GNMA
|
46,629
|
1,129
|
(187
|
)
|
47,571
|
||||||||
$
|
672,295
|
$
|
7,871
|
$
|
(11,107
|
)
|
$
|
669,059
|
|||||
Weighted
average yield
|
5.00
|
%
|
|||||||||||
December
31, 2008:
|
|||||||||||||
Collateralized
mortgage obligations (1)
|
$
|
419,177
|
$
|
2,595
|
$
|
(25,728
|
)
|
$
|
396,044
|
||||
FNMA
|
35,578
|
932
|
—
|
36,510
|
|||||||||
FHLMC
|
30,477
|
830
|
—
|
31,307
|
|||||||||
GNMA
|
22,536
|
992
|
—
|
23,528
|
|||||||||
$
|
507,768
|
$
|
5,349
|
$
|
(25,728
|
)
|
$
|
487,389
|
|||||
Weighted
average yield
|
4.97
|
%
|
|||||||||||
(1)
Includes Agency CMO’s classified as available-for-sale.
|
|||||||||||||
- 79
-
Trading
securities:
|
|||||||||||||
December
31, 2009:
|
|||||||||||||
Collateralized
mortgage obligations
|
$
|
12,183
|
$
|
—
|
$
|
—
|
$
|
12,183
|
|||||
$
|
12,183
|
$
|
—
|
$
|
—
|
$
|
12,183
|
||||||
Weighted
average yield
|
3.74
|
%
|
|||||||||||
December
31, 2008:
|
|||||||||||||
Collateralized
mortgage obligations
|
$
|
10,816
|
$
|
—
|
$
|
—
|
$
|
10,816
|
|||||
$
|
10,816
|
$
|
—
|
$
|
—
|
$
|
10,816
|
||||||
Weighted
average yield
|
6.02
|
%
|
The
portfolio of available-for-sale mortgage-backed securities consists of both
Agency and non-Agency bonds. All bonds (except the BBB+ rated trading
securities) were AAA-rated at the time of purchase; $97.6 million are now rated
below AAA-. Downgraded bonds were evaluated at December 31, 2009. The result of
this evaluation shows only one bond with other-than-temporary impairment as of
December 31, 2009, which resulted in an earnings charge of $86,000 or 9 basis
points of downgraded bonds and only 1 basis point of the total MBS portfolio.
The weighted average duration of the mortgage-backed securities was 2.4 years at
December 31, 2009.
At
December 31, 2009, mortgage-backed securities with market values aggregating
$250.3 million were pledged as collateral for customer repurchase agreements and
municipal deposits. Accrued interest receivable relating to mortgage-backed
securities was $2.8 million and $2.1 million at both December 31, 2009 and 2008,
respectively. From time to time, mortgage-backed securities are pledged as
collateral for Federal Home Loan Bank (FHLB) borrowings. The fair value of these
pledged mortgage-backed securities at December 31, 2009 and 2008 was $122.7
million and $16.0 million, respectively. In 2009, proceeds from the sale of
mortgage-backed securities available-for-sale were $111.2 million, resulting in
a gain of $2.0 million. There were no sales of mortgage-backed securities
available-for-sale in 2008. The cost basis of all mortgage-backed sales is based
on the specific identification method.
We own
$12.4 million par value of SASCO RM-1 2002 securities which are classified as
trading, of which, $1.4 million is accrued interest paid in kind. Based on FASB
ASC 320, Investments – Debt
and Equity Securities (“ASC 320”) (Formerly SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities) when these securities were acquired they
were classified as trading. It was our intent to sell them in the near term. We
have used the guidance under ASC 320 to provide a reasonable estimate of fair
value in 2009. We estimated the value of these securities as of December 31,
2009 based on the pricing of BBB+ securities that have an active market through
a technique which estimates the fair value of this asset using the income
approach. As a result of these mark-to-market adjustments, we recognized $1.4
million of securities gains and $1.6 million of securities losses during 2009
and 2008, respectively. There was no mark-to-market adjustments recorded during
2007.
At December 31, 2009, we owned
mortgage-backed securities totaling $298.7 million where the amortized cost
basis exceeded fair value. Total unrealized losses on these securities were
$11.1 million at December 31, 2009. This temporary impairment is the result of
changes in market interest rates, a lack of liquidity in the private-label
mortgage-backed securities market and the reduction in credit ratings of 28
bonds out of 175 private-label bonds we own. Most of these securities have been
impaired for less than twelve months. We have determined that all except one of
these securities are not other-than-temporarily impaired. Quarterly, we evaluate
the current characteristics of each of our mortgage-backed securities such as
delinquency and foreclosure levels, credit enhancement, projected losses and
coverage. In addition, we do not have the intent to sell, nor is it more likely
than not we will be required to sell these securities before we are able to
recover the amortized cost basis.
- 80
-
The table below shows our
mortgage-backed securities’ gross unrealized losses and fair value by investment
category and length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2009. We have reviewed
individual securities to determine whether a decline in fair value below the
amortized cost basis is other-than-temporary.
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||
(In
Thousands)
|
|||||||||||||||||||
Available-for-sale
|
|||||||||||||||||||
CMO
|
$
|
115,088
|
$
|
2,701
|
$
|
108,839
|
$
|
7,682
|
$
|
223,927
|
$
|
10,383
|
|||||||
FNMA
|
29,360
|
454
|
—
|
—
|
29,360
|
454
|
|||||||||||||
FHLMC
|
25,434
|
83
|
—
|
—
|
25,434
|
83
|
|||||||||||||
GNMA
|
19,953
|
187
|
—
|
—
|
19,953
|
187
|
|||||||||||||
Total
temporarily impaired MBS
|
$
|
189,835
|
$
|
3,425
|
$
|
108,839
|
$
|
7,682
|
$
|
298,674
|
$
|
11,107
|
The table
below shows our mortgage-backed securities’ gross unrealized losses and fair
value by investment category and length of time that individual securities were
in a continuous unrealized loss position at December 31, 2008:
Less
than 12 months
|
12
months or longer
|
Total
|
|||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||
(In
Thousands)
|
|||||||||||||||||||
Available-for-sale
|
|||||||||||||||||||
CMO
|
$
|
249,118
|
$
|
23,536
|
$
|
37,298
|
$
|
2,192
|
$
|
286,416
|
$
|
25,728
|
|||||||
FNMA
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
FHLMC
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
GNMA
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
Total
temporarily impaired MBS
|
$
|
249,118
|
$
|
23,536
|
$
|
37,298
|
$
|
2,192
|
$
|
286,416
|
$
|
25,728
|
At
December 31, 2009, we owned one $2.6 million mortgage-backed security where the
amortized cost exceeded fair value and we recognized other-than-temporary
impairment. The total loss on this bond was $187,000 at December 31, 2009. Of
this loss, $86,000 was related to credit impairment and $101,000 was related to
market interest rates and/or lack of liquidity in the market for mortgage-backed
securities. As a result, we realized an earnings charge of $86,000 for
other-than-temporary impairment during 2009. There was no
other-than-temporary impairment recognized in any prior years.
4.
REVERSE MORTGAGES AND RELATED ASSETS
We hold an investment in reverse
mortgages of $(530,000) at December 31, 2009 representing a participation in 18
reverse mortgages with a third party. These loans were originated in the early
1990’s.
These reverse mortgage loans are
contracts that require the lender to make monthly advances throughout the
borrower’s life or until the borrower relocates, prepays or the home is sold, at
which time the loan becomes due and payable. Reverse mortgages are nonrecourse
obligations, which means that the loan repayments are generally limited to the
net sale proceeds of the borrower’s residence.
We account for our investment in
reverse mortgages by estimating the value of the future cash flows on the
reverse mortgages at a rate deemed appropriate for these mortgages, based on the
market rate for similar collateral. Actual cash flows from these mortgage loans
can result in significant volatility in the recorded value of reverse mortgage
assets. As a result, income varies significantly from reporting period to
reporting period. For the
- 81
-
year
ended December 31, 2009, the Company lost $464,000 in interest income on reverse
mortgages as compared to a loss of $1.1 million in 2008 and posting income of
$2.0 million in 2007. The losses in 2008 and 2009 primarily resulted
from the decrease in the values of the properties securing these mortgages,
based on annual re-evaluation and consistent with the decrease in home values
over the past two years.
The projected cash flows depend on
assumptions about life expectancy of the mortgagee and the future changes in
collateral values. Projecting the changes in collateral values is the most
significant factor impacting the volatility of reverse mortgage values. The
current assumptions include a short-term annual depreciation rate of 0.0% in the
first year, and a long-term annual appreciation rate of 0.5% in future years. If
the long-term appreciation rate was increased to 1.5%, the resulting impact on
income would have been $19,000. Conversely, if the long-term appreciation rate
was decreased to -0.5%, the resulting impact on income would have been
$(17,000). If housing values do not change (0.0% annual appreciation
for all future years), the resulting impact on income would be
$(8,000).
We also
hold $12.2 million fair value in BBB+ rated mortgage-backed securities
classified as trading and have options to acquire up to 49.9% of Class “O”
Certificates issued in connection with securities consisting of a portfolio of
reverse mortgages we previously owned. The Class “O” Certificates are currently
recorded on our financial statements at a zero value. At the time of the
securitization, the third party securitizer (Lehman Brothers) retained 100% of
the Class “O” Certificates from the securitization. These Class “O” Certificates
have no priority over other classes of Certificates under the Trust and no
distributions will be made on the Class “O” Certificates until, among other
conditions, the principal amount of each other class of notes has been reduced
to zero. The underlying assets, the reverse mortgages, are long-term assets.
Hence, any cash flow that might inure to the holder of the Class “O”
Certificates is not expected to occur until 2014 or later. Additionally, the
Company can exercise its option on 49.9% of the Class “O” Certificates in up to
five separate increments for an aggregate purchase price of $1.0 million any
time between January 1, 2004 and the termination of the Securitization Trust.
The option to purchase the Class “O” Certificates does not meet the definition
of a derivative under ASU 815, Derivatives and Hedging
(formerly SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133). This certificate is an equity security with no readily determinable
fair value; as such, it is excluded from the accounting treatment promulgated
under ASU 320, Investments—Debt and Equity
Securities (formerly SFAS 115) As a result, the option is carried at cost
(which is zero). During the third quarter of 2008 Lehman Brothers Holdings filed
for bankruptcy. During 2009 we filed a “Proof of Claim” against
Lehman Brothers Holding, Inc. regarding the option on the Class “O”
Certificates. Also during 2009 we notified Lehman Brothers Holding,
Inc. that we were exercising our option on these securities. The
status of this exercise is pending.
5.
LOANS
The
following table details our loan portfolio:
December
31,
|
2009
|
2008
|
|||
(In
Thousands)
|
|||||
Real
estate mortgage loans:
|
|||||
Residential
(1-4 family)
|
$
|
348,873
|
$
|
422,740
|
|
Other
|
524,380
|
558,979
|
|||
Real
estate construction loans
|
231,625
|
251,508
|
|||
Commercial
loans
|
1,120,807
|
942,920
|
|||
Consumer
loans
|
300,648
|
296,728
|
|||
2,526,333
|
2,472,875
|
||||
Less:
|
|||||
Deferred
fees (costs), net
|
2,098
|
126
|
|||
Allowance
for loan losses
|
53,446
|
31,189
|
|||
Net
loans
|
$
|
2,470,789
|
$
|
2,441,560
|
- 82
-
Nonaccruing
loans aggregated $65.9 million, $28.4 million and $31.8 million at December 31,
2009, 2008 and 2007, respectively. If interest on all such loans had
been recorded in accordance with contractual terms, net interest income would
have increased by $2.6 million in 2009, $2.0 million in 2008, and $790,000 in
2007. Portfolio
delinquency is actually less than nonperforming assets at December 31, 2009 as
two large credits, that have been current, were moved to nonaccrual status in
the second quarter of 2009.
The total
amount of loans serviced for others were $256.7 million, $268.8 million and
$255.0 million at December 31, 2009, 2008 and 2007, respectively all of which
were residential first mortgage loans. We received fees from the servicing of
loans of $570,000, $650,000 and $718,000 during 2009, 2008 and 2007,
respectively.
We record
mortgage-servicing rights on our mortgage loan-servicing portfolio. Mortgage
servicing rights represent the present value of the future net servicing fees
from servicing mortgage loans acquired or originated by us. The value of these
servicing rights was $349,000 and $329,000 at December 31, 2009 and 2008,
respectively. Mortgage loans serviced for others are not included in loans on
the accompanying Consolidated Statement of Condition. Changes in the valuation
of these servicing rights resulted in net revenue of $20,000 during 2009 and net
expense of $259,000 in 2008. The increase from the prior year was mainly due to
an increase in prepayment speeds during 2008 and the resulting impairment
charge. Revenues from originating, marketing and servicing mortgage
loans as well as valuation adjustments related to capitalized mortgage servicing
rights are included in mortgage banking activities, net on the Consolidated
Statement of Operations.
Accrued
interest receivable on loans outstanding was $7.6 million and $7.5 million at
December 31, 2009 and 2008, respectively.
A summary
of changes in the allowance for loan losses follows:
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||
(In
Thousands)
|
||||||
Beginning
balance
|
$ 31,189
|
$25,252
|
$27,384
|
|||
Provision
for loan losses
|
47,811
|
23,024
|
5,021
|
|||
Loans
charged-off (1)
|
(26,566
|
)
|
(17,839
|
)
|
(8,049
|
)
|
Recoveries
(2)
|
1,012
|
752
|
896
|
|||
Ending
balance
|
$ 53,446
|
$31,189
|
$25,252
|
(1)
|
2009,
2008 and 2007 include $1.2 million, $1.3 million and $1.4 million of
overdraft charge-offs,
respectively.
|
(2)
|
2009,
2008 and 2007 include $380,000, $384,000 and $446,000 of overdraft
recoveries, respectively.
|
Net
charge-offs increased this year as we moved loans through the resolution process
in some of the larger construction loans we identified earlier in this
cycle. During 2009, net charge-offs increased to $25.6 million, or
1.01%, of average loans annualized, from $17.1 million, or 0.74%, of average
loans in 2008. This is due to the fact we provide for losses earlier
in the problem loan identification process when they are probable and charge the
loans off and utilize the provision when the losses are certain or near
certain.
6.
IMPAIRED LOANS
Loans from which it is probable we will
not collect all principal and interest due according to contractual terms are
measured for impairment in accordance with the provisions of FASB ASC 310, Receivables (Formerly SFAS
No. 114, Accounting for
Creditors for Impairment of a Loan). The amount of impairment
is required to be measured using one of three methods: (1) the present
value of expected future cash flows discounted at the loan’s effective interest
rate; (2) the loan’s observable market price; or (3) the fair value of
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, a specific allowance is
allocated for the impairment.
We had impaired loans of approximately
$73.2 million at December 31, 2009 compared to $31.3 million at December 31,
2008. The average recorded balance of aggregate impaired loans was
$62.2 million for the year-ended December 31, 2009 and $26.1 million for the
year-ended December 31, 2008. The specific allowance for losses on
these impaired loans was $11.8 million at December 31, 2009 compared to $395,000
at December 31,
- 83
-
2008. The
change in the specific allowance was due to additional provision for loan loss
of $12.9 million and net transfers of $3.9 million from general valuation
allowances. These increases were partially offset by $5.4 million of
charge-offs and transfers to assets acquired through foreclosure during
2009.
When there is little prospect of
collecting principal or interest, loans, or portions of loans, may be
charged-off to the allowance for loan losses. Losses are recognized
in the period when an obligation becomes uncollectible.
7.
PREMISES AND EQUIPMENT
Land, office buildings, leasehold
improvements and furniture and equipment, at cost, are summarized by major
classifications:
December
31,
|
2009
|
2008
|
|||
(In
Thousands)
|
|||||
Land
|
$
|
4,422
|
$
|
4,422
|
|
Buildings
|
10,900
|
10,797
|
|||
Leasehold
improvements
|
26,089
|
22,990
|
|||
Furniture
and equipment
|
32,444
|
29,892
|
|||
73,855
|
68,101
|
||||
Less:
|
|||||
Accumulated
depreciation
|
37,747
|
33,135
|
|||
$
|
36,108
|
$
|
34,966
|
Depreciation
expense is computed on a straight-line basis over the estimated useful lives of
the assets or, for leasehold improvements, over the effective life of the
related lease if less than the estimated useful life. In general, computer
equipment, furniture and equipment and building renovations are depreciated over
three, five and ten years, respectively.
The
Company occupies certain premises including some with renewal options, and
operates certain equipment under noncancelable leases with terms ranging
primarily from 1 to 25 years. These leases are accounted for as operating
leases. Accordingly, lease costs are expensed as incurred in accordance with
FASB ASC 840-20 Operating
Leases. Rent expense was $5.9 million in 2009, $5.0 million in
2008 and $4.5 million in 2007. Future minimum payments under these leases at
December 31, 2009 are as follows:
(In
Thousands)
|
||
2010
|
$
|
5,113
|
2011
|
4,841
|
|
2012
|
4,324
|
|
2013
|
3,949
|
|
2014
|
3,726
|
|
Thereafter
|
26,628
|
|
Total
future minimum lease payments
|
$
|
48,581
|
8.
DEPOSITS
The
following is a summary of deposits by category, including a summary of the
remaining time to maturity for time deposits:
December
31,
|
2009
|
2008
|
|||||
(In
Thousands)
|
|||||||
Money
market and demand:
|
|||||||
Noninterest-bearing
demand
|
$
|
431,476
|
$
|
311,322
|
|||
Interest-bearing
demand
|
265,719
|
214,749
|
|||||
Money
market
|
550,639
|
326,792
|
|||||
Total
money market and demand
|
1,247,834
|
852,863
|
|||||
Savings
|
224,921
|
208,368
|
|||||
- 84
-
December
31,
|
2009
|
2008
|
|||||
(In
Thousands)
|
|||||||
Customer
certificates of deposit by maturity:
|
|||||||
Less
than one year
|
292,884
|
287,546
|
|||||
One
year to two years
|
129,144
|
107,593
|
|||||
Two
years to three years
|
43,622
|
9,681
|
|||||
Three
years to four years
|
2,580
|
42,161
|
|||||
Over
four years
|
1,909
|
3,075
|
|||||
Total
customer time certificates
|
470,139
|
450,056
|
|||||
Jumbo
certificates of deposit--customer, by maturity:
|
|||||||
Less
than one year
|
137,492
|
144,925
|
|||||
One
year to two years
|
46,883
|
32,399
|
|||||
Two
years to three years
|
18,426
|
1,463
|
|||||
Three
years to four years
|
161
|
16,795
|
|||||
Over
four years
|
164
|
264
|
|||||
Total
jumbo certificates of deposit--customer
|
203,126
|
195,846
|
|||||
Subtotal
customer deposits
|
2,146,020
|
1,707,133
|
|||||
Other
jumbo certificates of deposit--by maturity:
|
|||||||
Less
than one year
|
69,208
|
103,825
|
|||||
One
year to two years
|
—
|
—
|
|||||
Two
years to three years
|
—
|
—
|
|||||
Three
years to four years
|
—
|
—
|
|||||
Over
four years
|
—
|
—
|
|||||
Total
other jumbo time certificates
|
69,208
|
103,825
|
|||||
Brokered
deposits less than one year
|
346,643
|
311,394
|
|||||
Total
deposits
|
$
|
2,561,871
|
$
|
2,122,352
|
Customer
deposits increased $438.9 million, or 26%, over balances at December 31, 2008.
The growth was across all categories.
Interest
expense by category follows:
|
||||||||
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||
(In
Thousands)
|
||||||||
Interest-bearing
demand
|
$
|
648
|
$
|
1,064
|
$
|
1,393
|
||
Money
market
|
4,857
|
5,909
|
11,870
|
|||||
Savings
|
521
|
736
|
1,679
|
|||||
Customer
time deposits
|
19,789
|
20,775
|
22,357
|
|||||
Total
customer interest expense
|
25,815
|
28,484
|
37,299
|
|||||
Other
jumbo certificates of deposit
|
1,845
|
3,091
|
5,176
|
|||||
Brokered
deposits
|
2,729
|
8,234
|
14,836
|
|||||
Total
interest expense on deposits
|
$
|
30,389
|
$
|
39,809
|
$
|
57,311
|
- 85
-
9.
BORROWED FUNDS
The
following is a summary of borrowed funds by type:
Maximum
|
Weighted
|
||||||||||||||
Outstanding
|
Average
|
Average
|
|||||||||||||
Weighted
|
at
Month
|
Amount
|
Interest
|
||||||||||||
Balance
at
|
Average
|
End
|
Outstanding
|
Rate
|
|||||||||||
End
of
|
Interest
|
During
the
|
During
the
|
During
the
|
|||||||||||
Period
|
Rate
|
Period
|
Period
|
Period
|
|||||||||||
(Dollars
in Thousands)
|
|||||||||||||||
2009
|
|||||||||||||||
FHLB
advances
|
$
|
613,144
|
2.59
|
%
|
$
|
738,639
|
$
|
642,496
|
2.81
|
%
|
|||||
Trust
preferred borrowings
|
67,011
|
2.03
|
67,011
|
67,011
|
2.64
|
||||||||||
Federal
funds purchased and securities sold under agreements to
repurchase
|
100,000
|
1.50
|
100,000
|
101,019
|
1.49
|
||||||||||
Other
borrowed funds
|
74,654
|
1.21
|
132,604
|
105,616
|
1.01
|
||||||||||
2008
|
|||||||||||||||
FHLB
advances
|
$
|
815,957
|
2.74
|
%
|
$
|
942,922
|
$
|
841,005
|
3.46
|
%
|
|||||
Trust
preferred borrowings
|
67,011
|
3.97
|
67,011
|
67,011
|
4.81
|
||||||||||
Federal
funds purchased and securities sold under agreements to
repurchase
|
75,000
|
1.87
|
99,999
|
75,844
|
3.11
|
||||||||||
Other
borrowed funds
|
108,777
|
0.79
|
127,556
|
110,237
|
1.96
|
Federal
Home Loan Bank Advances
Advances from the FHLB of Pittsburgh
with rates ranging from 0.26% to 5.45% at December 31, 2009 are due as
follows:
Weighted
|
||||||
Average
|
||||||
Matures
during:
|
Amount
|
Rate
|
||||
(Dollars
in Thousands)
|
||||||
2010
|
$
|
405,517
|
2.24
|
%
|
||
2011
|
86,855
|
3.64
|
||||
2012
|
87,539
|
3.06
|
||||
2013
|
33,233
|
2.90
|
||||
$
|
613,144
|
Pursuant to collateral agreements with
the FHLB, advances are secured by qualifying first mortgage loans, qualifying
fixed-income securities, FHLB stock and an interest-bearing demand deposit
account with the FHLB.
As a member of the FHLB of Pittsburgh,
we are required to acquire and hold shares of capital stock in the FHLB of
Pittsburgh in an amount at least equal to 4.75% of its advances (borrowings)
from the FHLB of, plus 0.75% of the unused borrowing capacity. We were in
compliance with this requirement with a stock investment in FHLB of Pittsburgh
of $39.3 million at December 31, 2009. This stock is carried on the accompanying
Consolidated Statement of Condition at cost, which approximates liquidation
value.
In December 2008, the FHLB of
Pittsburgh announced the suspension of both dividend payments and the repurchase
of capital stock until such time as it becomes prudent to reinstate
both. We received no dividends from the FHLB of Pittsburgh during
2009. For additional information regarding our stock in the FHLB of
Pittsburgh see Note 15.
- 86
-
At December 31, 2009, 32 advances were
outstanding totaling $613.1 million, with a weighted average rate of 2.59%. Six
advances totaling $95.0 million are convertible on a quarterly basis (at the
discretion of the FHLB) to a variable rate advance based upon the three-month
London Interbank Offer Rate (“LIBOR”), after an initial fixed term. If any of
these advances convert, WSFS has the option to prepay these advances at
predetermined times or rates.
Trust Preferred Borrowings
On April 6, 2005, we completed the
issuance of $67.0 million of aggregate principal amount of Pooled Floating Rate
Securities at a variable interest rate of 177 basis points over the three-month
LIBOR rate. The proceeds from this issuance were used to fund the redemption of
$51.5 million of Floating Rate Capital Trust I Preferred
Securities.
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase
During 2009 and 2008, we purchased
federal funds as a short-term funding source. At December 31,
2009, we had purchased $75.0 million in federal funds at a rate of
0.38%. At December 31, 2008, we had purchased $50.0 million in
federal funds at a rate of 0.38%. At December 31, 2007, we also had $50.0
million federal funds purchased.
During 2009, we sold securities under
agreements to repurchase as a funding source. At December 31, 2009, securities
sold under agreements to repurchase had a fixed rate of 4.87%. The underlying
securities are mortgage-backed securities with a book value of $29.2 million at
December 31, 2009. Securities sold under agreements to repurchase with the
corresponding carrying and market values of the underlying securities are due as
follows:
Collateral
|
||||||||||||||||
Borrowing
|
Carrying
|
Market
|
Accrued
|
|||||||||||||
Amount
|
Rate
|
Value
|
Value
|
Interest
|
||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||
2009
|
||||||||||||||||
Over
90 days
|
$
|
25,000
|
4.87
|
%
|
$
|
29,226
|
$
|
29,471
|
$
|
101
|
||||||
2008
|
||||||||||||||||
Over
90 days
|
$
|
25,000
|
4.87
|
%
|
$
|
29,500
|
$
|
30,223
|
$
|
101
|
Other
Borrowed Funds
Included
in other borrowed funds are collateralized borrowings of $44.7 million and
$108.8 million at December 31, 2009 and 2008, respectively, consisting of
outstanding retail repurchase agreements, contractual arrangements under which
portions of certain securities are sold overnight to customers under agreements
to repurchase. Such borrowings were collateralized by mortgage-backed
securities. The average rates on these borrowings were 0.18% and 0.79% at
December 31, 2009 and 2008, respectively. During 2009, we
participated in the FDIC’s Temporary Liquidity Guarantee Program
(“TLGP”). Under this program we issued $30.0 million of unsecured
debt with a coupon rate of 2.74% and a 3 year maturity.
10.
STOCKHOLDERS’ EQUITY
Under Office
of Thrift Supervision (OTS) capital regulations, savings institutions such as
WSFS, must maintain “tangible” capital equal to 1.5% of adjusted total assets,
“core” capital equal to 4.0% of adjusted total assets, “Tier 1” capital equal to
4.0% of risk-weighted assets and “total” or “risk-based” capital (a combination
of
- 87
-
core and
“supplementary” capital) equal to 8.0% of risk-weighted
assets. Failure to meet minimum capital requirements can initiate
certain mandatory – and possibly additional discretionary – actions by
regulators that, if undertaken, could have a direct material effect on WSFS’
Financial Statements. At December 31, 2009 and 2008, WSFS was in
compliance with regulatory capital requirements and was deemed a
“well-capitalized” institution.
The
following table presents WSFS’ capital position as of December 31, 2009 and
2008:
Consolidated
Bank
Capital
|
For
Capital
Adequacy
Purposes
|
To
Be Well-Capitalized Under Prompt Corrective Action
Provisions
|
|||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||
(In
Thousands)
|
|||||||||||||||
As
of December 31, 2009:
|
|||||||||||||||
Total
Capital (to risk-weighted assets)
|
$
|
359,834
|
12.24
|
%
|
$
|
235,163
|
8.00
|
%
|
$
|
293,953
|
10.00
|
%
|
|||
Core
Capital (to adjusted tangible assets)
|
323,957
|
8.67
|
149,404
|
4.00
|
186,755
|
5.00
|
|||||||||
Tangible
Capital (to tangible assets)
|
323,957
|
8.67
|
56,026
|
1.50
|
N/A
|
N/A
|
|||||||||
Tier
1 Capital (to risk-weighted assets)
|
323,957
|
11.02
|
117,581
|
4.00
|
176,372
|
6.00
|
|||||||||
As
of December 31, 2008:
|
|||||||||||||||
Total
Capital (to risk-weighted assets)
|
$
|
304,679
|
11.00
|
%
|
$
|
221,561
|
8.00
|
%
|
$
|
276,951
|
10.00
|
%
|
|||
Core
Capital (to adjusted tangible assets)
|
274,221
|
7.99
|
137,303
|
4.00
|
171,629
|
5.00
|
|||||||||
Tangible
Capital (to tangible assets)
|
274,221
|
7.99
|
51,489
|
1.50
|
N/A
|
N/A
|
|||||||||
Tier
1 Capital (to risk-weighted assets)
|
274,221
|
9.90
|
110,780
|
4.00
|
166,170
|
6.00
|
The
Holding Company holds additional funds, mostly from the $25 million common
equity raised in the third quarter of 2009 that can be contributed as capital to
the Bank, if desired. A $25 million infusion of this cash to the Bank
would increase total and Tier 1 capital by 85 basis points and core and tangible
capital by 67 basis points.
Our capital
structure includes one class of $0.01 par common stock outstanding, each share
having equal voting rights and one class of $.01 par preferred
stock. During 2009 we completed a private placement of common stock
to Peninsula Investment Partners, L.P. for a total purchase price of $25.0
million. Information concerning this transaction is included in Note
21.
During 2009,
we issued and sold senior preferred stock to the U.S. Department of Treasury
under its Capital Purchase Program (“CPP”) totaling $52.6 million. Information
concerning this transaction is included in Note 21.
When infused
into the Bank, the Trust Preferred Securities issued in 2005 qualify as Tier 1
capital. We are prohibited from paying any dividend or making any other capital
distribution if, after making the distribution, we would be undercapitalized
within the meaning of the OTS Prompt Corrective Action
regulations. Since 1996, the Board of Directors has approved several
stock repurchase programs to reacquire common shares. We did not
acquire any shares in 2009; however, we acquired 73,500 shares totaling $3.6
million during 2008 as part of these programs.
The Holding
Company
In April 2005, WSFS Capital Trust III,
an unconsolidated subsidiary of WSFS Financial Corporation, issued $67.0 million
of aggregate principle of Pooled Floating Rate Securities at a variable interest
rate of 177 basis points over the three-month LIBOR rate. The
proceeds were used to refinance the WSFS Capital Trust I November 1998 issuance
of $51.5 million of Trust Preferred Securities which had a variable rate of 250
basis points over the three-month LIBOR rate. At December 31, 2009,
the coupon rate of the Capital Trust III securities was 2.03% with a scheduled
maturity of June 1, 2035. The effective rate will vary, however, due
to fluctuations in interest rates. The proceeds from the issue were invested in
Junior Subordinated Debentures issued
- 88
-
by WSFS
Financial Corporation. These securities are treated as borrowings with the
interest included in interest expense on the Consolidated Statement of
Operations. The remaining proceeds were used primarily to extinguish
higher rate debt and for general corporate purposes. In addition, we
had an interest rate cap with a notional amount of $50.0 million, which limited
the three month LIBOR to 6.00%. This cap expired on December 1,
2008.
Pursuant to federal laws and
regulations, WSFS' ability to engage in transactions with affiliated
corporations is limited, and WSFS generally may not lend funds to nor guarantee
indebtedness of the Company.
11.
ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Associate
401(k) Savings Plan
Certain subsidiaries of ours maintain a
qualified plan in which Associates may participate. Participants in the plan may
elect to direct a portion of their wages into investment accounts that include
professionally managed mutual and money market funds and our common
stock. Generally, the principal and earnings thereon are tax deferred
until withdrawn. We match a portion of the Associates' contributions
and periodically make discretionary contributions based on our performance into
the plan for the benefit of Associates. Our total cash contributions
to the plan on behalf of our Associates resulted in a cash expenditure of $1.5
million, $1.8 million and $1.7 million for 2009, 2008 and 2007,
respectively.
Effective November 2007, all of our
discretionary contributions are invested in accordance with the Associates’
selection of investments. If Associates do not designate how
discretionary contributions are to be invested, 80% will be invested in a
balanced fund and 20% will be invested in our common
stock. Associates may make transfers to various other investment
vehicles within the plan without any significant restrictions. The
plan purchased 50,000, 10,000, and 25,000 shares of our common stock during
2009, 2008 and 2007, respectively.
Postretirement Benefits
We share certain costs of providing
health and life insurance benefits to retired Associates (and their eligible
dependents). Substantially all Associates may become eligible for
these benefits if they reach normal retirement age while working for
us.
We
account for our obligations under the provisions of FASB ASC 715, Compensation – Retirement
Benefits (“ASC 715”) (Formerly SFAS No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions). ASC 715 requires that the
costs of these benefits be recognized over an Associate’s active working
career. Amortization of unrecognized net gains or losses resulting
from experience different from that assumed and from changes in assumptions is
included as a component of net periodic benefit cost over the remaining service
period of active employees to the extent that such gains and losses exceed 10%
of the accumulated postretirement benefit obligation, as of the beginning of the
year.
ASC 715
requires that we recognize the funded status of our defined benefit
postretirement plan in our statement of financial position, with a corresponding
adjustment to accumulated other comprehensive income, net of tax. The adjustment
to accumulated other comprehensive income at adoption represented the net
unrecognized actuarial losses and unrecognized transition obligation remaining
from the initial adoption of ASC 715, all of which were previously netted
against the plan’s funded status in our statement of financial position pursuant
to the provisions of ASC 715. These amounts will be subsequently recognized as
net periodic pension costs pursuant to our historical accounting policy for
amortizing such amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic pension cost in the
same periods will be recognized as a component of other comprehensive income.
Those amounts will be subsequently recognized as a component of net periodic
pension cost on the same basis as the amounts recognized in accumulated other
comprehensive income at adoption of ASC 715.
- 89
-
In accordance
with ASC 715, during 2010, the Company expects to recognize $12,000 in expense
relating to the amortization of the net actuarial loss and $61,000 in expense
relating to the amortization of the net transition obligation.
The following
disclosures relating to postretirement benefits were measured at December 31,
2009:
2009
|
2008
|
2007
|
|||||||||||
(Dollars
in Thousands)
|
|||||||||||||
Change
in benefit obligation:
|
|||||||||||||
Benefit
obligation at beginning of year
|
$
|
2,502
|
$
|
2,339
|
$
|
2,233
|
|||||||
Service
cost
|
161
|
142
|
137
|
||||||||||
Interest
cost
|
141
|
137
|
125
|
||||||||||
Actuarial
loss/(gain)
|
(69
|
)
|
56
|
(29
|
)
|
||||||||
Benefits
paid
|
(167
|
)
|
(172
|
)
|
(127
|
)
|
|||||||
Benefit
obligation at end of year
|
$
|
2,568
|
$
|
2,502
|
$
|
2,339
|
|||||||
Change
in plan assets:
|
|||||||||||||
Fair
value of plan assets at beginning of year
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||
Employer
contributions
|
167
|
172
|
127
|
||||||||||
Benefits
paid
|
(167
|
)
|
(172
|
)
|
(127
|
)
|
|||||||
Fair
value of plan assets at end of year
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||||
Funded
status:
|
|||||||||||||
Funded
status
|
$
|
(2,568
|
)
|
$
|
(2,502
|
)
|
$
|
(2,339
|
)
|
||||
Unrecognized
transition obligation
|
—
|
—
|
—
|
||||||||||
Unrecognized
net loss
|
—
|
—
|
—
|
||||||||||
Recognized
net loss
|
626
|
774
|
795
|
||||||||||
Net
amount recognized
|
$
|
(1,942
|
)
|
$
|
(1,728
|
)
|
$
|
(1,544
|
)
|
||||
Components
of net periodic benefit cost:
|
|||||||||||||
Service
cost
|
161
|
142
|
$
|
137
|
|||||||||
Interest
cost
|
141
|
137
|
125
|
||||||||||
Amortization
of transition obligation
|
61
|
61
|
61
|
||||||||||
Net
loss recognition
|
18
|
16
|
19
|
||||||||||
Net
periodic benefit cost
|
$
|
381
|
$
|
356
|
$
|
342
|
|||||||
Assumptions
used to determine net periodic benefit cost:
|
|||||||||||||
Discount
rate
|
5.75
|
%
|
6.00
|
%
|
5.75
|
%
|
|||||||
Health
care cost trend rate
|
5.00
|
%
|
5.00
|
%
|
5.00
|
%
|
|||||||
Sensitivity
analysis of health care cost trends:
|
|||||||||||||
Effect
of +1% on service cost plus interest cost
|
$
|
(11
|
)
|
$
|
(12
|
)
|
$
|
(7
|
)
|
||||
Effect
of –1% on service cost plus interest cost
|
9
|
9
|
7
|
||||||||||
Effect
of +1% on APBO
|
(74
|
)
|
(89
|
)
|
(74
|
)
|
|||||||
Effect
of –1% on APBO
|
60
|
72
|
63
|
||||||||||
Assumptions
used to value the Accumulated Postretirement Benefit Obligation
(APBO):
|
|||||||||||||
Discount
rate
|
6.00
|
%
|
5.75
|
%
|
6.00
|
%
|
|||||||
Health
care cost trend rate
|
5.00
|
%
|
5.00
|
%
|
5.00
|
%
|
|||||||
Ultimate
trend rate
|
5.00
|
%
|
5.00
|
%
|
5.00
|
%
|
|||||||
Year
of ultimate trend rate
|
2009
|
2008
|
2005
|
- 90
-
Estimated
future benefit payments:
The
following table shows the expected future payments for the next ten
years:
(In Thousands)
During
2010
|
$
|
119
|
During
2011
|
121
|
|
During
2012
|
127
|
|
During
2013
|
131
|
|
During
2014
|
129
|
|
During
2015 through 2019
|
660
|
|
$
|
1,287
|
We assume that the average annual rate
of increase for medical benefits will remain flat and stabilize at an average
increase of 5% per annum. The costs incurred for retirees’ health care are
limited since certain current and all future retirees are restricted to an
annual medical premium cap indexed (since 1995) by the lesser of 4% or the
actual increase in medical premiums paid by the Company. For 2009, this annual
premium cap amounted to $2,496 per retiree. We estimate that we will contribute
approximately $119,000 to the plan during fiscal 2010.
We have three additional plans which
are no longer being provided to Associates. They are a Supplemental
Pension Plan with a corresponding liability of $646,000, an Early Retirement
Window Plan with a corresponding liability of $373,000 and a Director’s Plan
with a corresponding liability of $108,000.
12.
TAXES ON INCOME
The Company
and its subsidiaries file a consolidated federal income tax return and separate
state income tax returns. Our income tax (benefit) provision consists
of the following:
Year
Ended December 31,
|
2009
|
2008
|
2007
|
||||||
(In
Thousands)
|
|||||||||
Current
income taxes:
|
|||||||||
Federal
taxes
|
$
|
7,699
|
$
|
9,741
|
$
|
10,389
|
|||
State
and local taxes
|
(1,408
|
)
|
119
|
2,274
|
|||||
Deferred
income taxes:
|
|||||||||
Federal
taxes
|
(8,384
|
)
|
(2,910
|
)
|
811
|
||||
State
and local taxes
|
-
|
-
|
-
|
||||||
Total
|
$
|
(2,093
|
)
|
$
|
6,950
|
$
|
13,474
|
Current federal income taxes include
taxes on income that cannot be offset by net operating loss
carryforwards.
- 91
-
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. The following is a summary of the significant components of our
deferred tax assets and liabilities as of December 31, 2009 and
2008:
2009
|
2008
|
||||||||
(In
Thousands)
|
|||||||||
Deferred
tax liabilities:
|
|||||||||
Accelerated
depreciation
|
$
|
(683
|
)
|
$
|
(802
|
)
|
|||
Other
|
(140
|
)
|
(99
|
)
|
|||||
Prepaid
expenses
|
(1,537
|
)
|
(1,556
|
)
|
|||||
Deferred
loan costs
|
(1,955
|
)
|
(1,959
|
)
|
|||||
Total
deferred tax liabilities
|
(4,315
|
)
|
(4,416
|
)
|
|||||
Deferred
tax assets:
|
|||||||||
Allowance
for loan losses
|
18,706
|
10,916
|
|||||||
Tax
credit carryforwards
|
—
|
150
|
|||||||
Reserves
and other
|
5,242
|
4,399
|
|||||||
Deferred
gains
|
343
|
542
|
|||||||
Unrealized
losses on available-for-sale securities
|
1,239
|
7,731
|
|||||||
Total
deferred tax assets
|
25,530
|
23,738
|
|||||||
Valuation
allowance
|
—
|
—
|
|||||||
Net
deferred tax asset
|
$
|
21,215
|
$
|
19,322
|
Included in the table above is the
effect of certain temporary differences for which no deferred tax expense or
benefit was recognized. Such items consisted primarily of unrealized gains and
losses on certain investments in debt and equity securities accounted for under
ASC 320. Also included above for 2008 are $369,000 of deferred tax
assets recorded in conjunction with the acquisition of 1st
Reverse. As a result of the wind-down of 1st
Reverse, there are no deferred tax assets for 1st
Reverse included in 2009.
Based on our history of prior earnings
and our expectations of the future, it is anticipated that operating income and
the reversal pattern of its temporary differences will, more likely than not, be
sufficient to realize a net deferred tax asset of $21.2 million at December 31,
2009. Adjustments to decrease gross deferred tax assets and the related
valuation allowance in the amount of $2.0 million and $473,000 were made in 2008
and 2007, respectively, to reflect federal and state tax net operating losses
that have expired. No federal or state net operating losses remain at December
31, 2009.
A reconciliation setting forth
the differences between our effective tax rate and the U.S. Federal statutory
tax rate is as follows:
Year
Ended December 31,
|
2009
|
2008
|
2007
|
||||
Statutory
federal income tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
|
State
tax net of federal tax benefit
|
64.0
|
0.3
|
3.4
|
||||
Interest
income 50% excludable
|
50.6
|
(3.2
|
)
|
(1.7
|
)
|
||
Bank-owned
life insurance income
|
22.4
|
(2.7
|
)
|
(1.8
|
)
|
||
Charitable
donation
|
—
|
—
|
(5.0
|
)
|
|||
Incentive
stock option and other
nondeductible
compensation
|
(18.0
|
)
|
0.7
|
0.5
|
|||
Nondeductible
goodwill
|
(8.0
|
)
|
—
|
—
|
|||
Other
|
0.4
|
—
|
0.8
|
||||
Effective
tax rate
|
146.4
|
%
|
30.1
|
%
|
31.2
|
%
|
- 92
-
During 2007,
we donated an N.C. Wyeth mural which was previously displayed in our former
headquarters. Pursuant to an appraisal by a nationally recognized art appraisal
firm, the estimated fair value of the mural was $6.0 million, which was recorded
as a charitable contribution expense. We recognized a related offsetting gain on
the transfer of the asset during 2007. The expense and offsetting gain was shown
net in our Consolidated Financial Statements. As the gain on the transfer of the
asset is permanently excludible from taxation, the charitable contribution
transaction results in a permanent deduction for income tax purposes. The amount
of the deduction represents an income tax uncertainty because it is subject to
evaluation by the Internal Revenue Service (“IRS”).
We record
interest and penalties on potential income tax deficiencies as income tax
expense. Federal tax years 2006 through 2008 remain subject to
examination as of December 31, 2009, while tax years 2006 through 2008 remain
subject to examination by state taxing jurisdictions. The IRS audit of our 2004,
2005 and 2006 federal income tax returns was completed during 2008. No state
income tax return examinations are currently in process. We believe it is
reasonably possible that between $800,000 and $1.0 million of unrecognized state
tax benefits, net of federal tax, will be realized during 2010 as a result of
the expiration of statutes of limitations. Excluding the potential impact of the
IRS review of the mural valuation, we expect to record less than $50,000 of
additional reserves during 2010 related to interest on existing unrecognized tax
benefits.
During 2007,
an additional $3.6 million tax reserve was established related primarily to the
Internal Revenue Service disallowance of the deduction for certain compensation
in prior periods. This adjustment was the result of a routine IRS audit of our
2004 through 2006 tax years. Because the original tax benefit for this item was
recorded as an increase to equity, $3.4 million of the tax liability was
recorded as a reduction to equity in 2007. Even though this matter was not yet
settled, as of December 31, 2007, standards under ASC 740 required this reserve
to be established during 2007. In order to stop interest from accruing on this
tax liability until the matter could be resolved through the IRS appeals
process, we deposited the entire $3.4 million, plus interest in 2007 so that no
reserve remained for this matter as of December 31, 2007. During 2008 we
successfully completed the IRS appeal process and during the first quarter of
2009 we recovered $863,000 of taxes plus $275,000 of interest that were
previously assessed during the audit phase. The tax recovery was
recorded as an increase to equity in 2008 while the interest received was
recorded as a reduction of income tax expense in 2008.
The total
amount of unrecognized tax benefits related to ASC 740 as of December 31, 2009
was $1.9 million, of which $1.3 million would affect our effective tax rate if
recognized. The total amount of accrued interest and penalties included in such
unrecognized tax benefits were $372,000 and $0, respectively, of which $119,000
was recorded as expense in 2009. A reconciliation of the total amounts of
unrecognized tax benefits during 2009 is as follows:
(In
Thousands)
|
|||
Unrecognized
tax benefits at December 31, 2008
|
$
|
2,585
|
|
Additions
as a result of tax positions taken during prior years
|
119
|
||
Additions
as a result of tax positions taken during current year
|
—
|
||
Reductions
relating to settlements with taxing authorities
|
—
|
||
Reductions
as a result of a lapse of statutes of limitations
|
(854)
|
)))
|
|
Unrecognized
tax benefits at December 31, 2009
|
$
|
1,850
|
13.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted
for in accordance with ASC 718 (Formerly SFAS No. 123R, Share-Based Payment). We have stock
options outstanding under two plans (collectively, “Stock Incentive Plans”) for
officers, directors and Associates of the Company and its
subsidiaries. After shareholder approval in 2005, the 1997 Stock
Option Plan (“1997 Plan”) was replaced by the 2005 Incentive Plan (“2005
Plan”). No future awards may be granted under the 1997
Plan. The 2005 Plan will terminate on the tenth anniversary of
its
- 93
-
effective
date, after which no awards may be granted. The number of shares
reserved for issuance under the 2005 Plan is 862,000. At December 31,
2009, there were 105,902 shares available for future grants under the 2005
Plan.
The Stock Incentive Plans provide for
the granting of incentive stock options as defined in Section 422 of the
Internal Revenue Code as well as nonincentive stock options (collectively,
“Stock Options”). Additionally, the 2005 Plan provides for the
granting of stock appreciation rights, performance awards, restricted stock and
restricted stock unit awards, deferred stock units, dividend equivalents, other
stock-based awards and cash awards. All Stock Options are to be
granted at not less than the market price of our common stock on the date of the
grant. All Stock Options granted during 2009 vest in 25% per annum
increments, start to become exercisable one year from the grant date and expire
in five years from the grant date. Generally, all awards become
immediately exercisable in the event of a change in control, as defined within
the Stock Incentive Plans.
A summary of the status of our Stock
Incentive Plans as of December 31, 2009, 2008 and 2007, respectively, and
changes during the years then ended is presented below:
2009
|
2008
|
2007
|
|||||||||||||||||
Weighted-
|
Weighted-
|
Weighted-
|
|||||||||||||||||
Average
|
Average
|
Average
|
|||||||||||||||||
Exercise
|
Exercise
|
Exercise
|
|||||||||||||||||
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
||||||||||||||
Stock
Options:
|
|||||||||||||||||||
Outstanding
at beginning of year
|
675,887
|
$
|
44.98
|
722,582
|
$
|
43.14
|
703,427
|
$
|
39.52
|
||||||||||
Granted
|
83,921
|
23.33
|
33,250
|
49.08
|
121,375
|
54.25
|
|||||||||||||
Exercised
|
(16,460
|
)
|
16.48
|
(60,240
|
)
|
20.51
|
(80,836
|
)
|
23.85
|
||||||||||
Forfeited
|
(9,880
|
)
|
59.50
|
(19,705
|
)
|
59.27
|
(21,384
|
)
|
60.08
|
||||||||||
Outstanding
at end of year
|
733,468
|
42.95
|
675,887
|
44.98
|
722,582
|
43.14
|
|||||||||||||
Exercisable
at end of year
|
541,910
|
$
|
43.52
|
473,445
|
$
|
39.84
|
444,653
|
$
|
33.75
|
||||||||||
Weighted-average
fair value of awards granted
|
$
|
5.42
|
$
|
10.57
|
$
|
11.36
|
The variance in shares granted between
the respective periods is due to a timing change for awarding
options. In periods prior to 2008, options were awarded during
December of the respective year. However, beginning with 2008, awards
were granted in March, and as a result the awards typically granted during
December 2008 were granted during March of 2009.
Beginning
January 1, 2009, 473,445 stock options were exercisable with an intrinsic value
of $6.1 million. In addition, at January 1, 2009 there were 202,442
nonvested options with a grant date fair value of $12.10. During the
year ended December 31, 2009, 93,337 options vested with no intrinsic value, and
a grant date fair value of $12.63 per option. Also during 2009,
16,460 options were exercised with an intrinsic value of $231,000. In
addition, 8,412 vested options were forfeited with no intrinsic value, and a
grant date fair value of $14.17, while 9,880 options were forfeited in total
with a grant date fair value of $13.86. There were 541,910
exercisable options remaining at December 31, 2009, with an intrinsic value of
$1.5 million and a remaining contractual term of 2.5 years. At
December 31, 2009 there were 733,468 stock options outstanding with an intrinsic
value of $1.7 million and a remaining contractual term of 2.8 years and 191,558
nonvested options with a grant date fair value of $8.92. During 2008,
60,240 options were exercised with an intrinsic value of $2.0 million and
105,479 options vested with a grant date fair value of $12.47 per
option.
The total amount of compensation cost
related to nonvested stock options as of December 31, 2009 was $1.1
million. The weighted-average period over which it is expected to be
recognized is 2.1 years. We issue new shares upon the exercise of
options.
- 94
-
During 2009,
we granted 83,921 options with a five-year life and a four-year vesting
period. The Black-Scholes option-pricing model was used to determine
the grant date fair value of these options. Significant assumptions
used in the model included a weighted-average risk-free rate of return of
between 1.7% and 2.1% in 2009; an expected option life of three and
three-quarter years; and an expected stock price volatility of between 34.4% and
41.3% in 2009. For the purposes of this option-pricing model, a
dividend yield of between 1.8% and 2.1% was used as the expected dividend
yield. The expected option life was determined based on the mid-point
between the vesting date and the end of the contractual term.
Prior to the
adoption of ASC 718, we used a graded-vesting schedule to calculate the expense
related to stock options. Since the adoption of ASC 718 we have used
a straight-line schedule to calculate the expense related to new stock options
issued.
The
Black-Scholes and other option-pricing models assume that options are freely
tradable and immediately vested. Since options are not transferable,
have vesting provisions, and are subject to trading blackout periods imposed by
us, the value calculated by the Black-Scholes model may significantly overstate
the true economic value of the options.
During 2009
and 2008 we issued 285 and 185 shares, respectively, of restricted stock
units. These awards vest over five years: 0% during the
first two years, 25% at the end of each of the third and fourth years and 50% at
the end of the fifth year. In addition, during 2009 we issued 1,146
shares of restricted stock units, which vest over four years, 25% on each
anniversary date.
During 2009
we issued 25,248 shares of restricted stock and 5,259 shares of restricted stock
units. These awards vest over four years (25% per year on the first
four anniversaries of the awards). In addition, for these stock
awards made to certain executive officers, there are additional vesting
limitations relating to these awards. Under these additional
limitations; 25% of the awards will become transferrable at the time of
repayment of at least 25% of the aggregate financial assistance received by the
Company under the Emergency Economic Stabilization Act of 2008 (“EESA”); an
additional 25% of the shares granted (for an aggregate total of 50% of the
shares transferrable) at the time of repayment of at least 50% of the aggregate
financial assistance received by the Company under EESA; an
additional 25% of the shares granted (for an aggregate total of 75% of the
shares transferrable) at the time of repayment of at least 75% of the aggregate
financial assistance received by the Company under EESA. The
remainder of the shares will vest following the time of repayment of 100% of the
aggregate financial assistance received by the Company under
EESA. If the date specified has not occurred by the tenth
anniversary of the grant date, the grantee shall forfeit all of the restricted
shares. Finally, we issued 640 shares of restricted stock during 2009
that vest over four years, 25% on each anniversary date which are not subject to
the additional EESA restrictions. Compensation costs related to these
issuances are recognized over the lives of the restricted stock and restricted
stock units. We amortize the expense related to restricted stock
grants into salaries, benefits and other compensation expense on a straight-line
basis over the requisite service period for the entire award. When we
award restricted stock to individuals from whom we may not receive services in
the future, such as those who are eligible for retirement, we recognize the
expense of restricted stock grants when we make the award, instead of amortizing
the expense over the vesting period of the award.
The increase
in restricted stock issued during 2009 was due to payment of bonuses to our
senior executive officers in restricted stock, in lieu of cash payments, which
is a requirement of our agreement with the U.S. Treasury under CPP.
During 2008,
we created a performance-based incentive program under the terms of the 2005
Plan. Under this program shares of WSFS stock may be awarded to
certain members of management.
The Long-Term
Performance-Based Restricted Stock Unit Program (Long-Term Program) will award
up to an aggregate of 109,200 shares of WSFS stock to seventeen participants,
only after the achievement of
- 95
-
targeted
levels of return on assets (“ROA”). Under the terms of the plan, if
an annual ROA performance level of 1.20% is achieved, up to 54,900 shares will
be awarded. If an annual ROA performance level of 1.35% is achieved,
up to 76,100 shares will be awarded. If an annual ROA performance
level of 1.50% or greater is achieved, up to 109,200 shares will be
awarded. If these targets are achieved in any year up until 2011, the
awarded stock will then vest in 25% increments over four years. We
did not recognize any compensation expense related to this program during
2009. Compensation expense for the Long-Term Program will be based on
the closing stock price as of May 28, 2008 and will begin to be recognized once
the achievement of target performance is considered probable.
At
December 31, 2009 we had 105,902 shares remaining available for issuance under
the 2005 Plan. Full share awards, such as restricted stock, have the
equivalence of four option grants for the purpose of calculating shares
available for issuance. Under the provisions of the Long Term
Program, if a performance level is achieved and there are insufficient shares
available for grant, then we would have the option of granting the available
shares with the remainder being paid in cash.
The impact of stock-based compensation
for the year ended December 31, 2009 was $1.4 million pretax ($1.1 million after
tax), or $0.18 per share, to salaries, benefits and other compensation, compared
to $1.1 million pretax ($917,000 after tax), or $0.15 per share in 2008 and $1.5
million pretax ($1.2 million after tax), or $0.19 per share in
2007.
The
following table summarizes all stock options outstanding and exercisable for
Option Plans as of December 31, 2009, segmented by range of exercise
prices:
Outstanding
|
Exercisable
|
||||||||||||
Weighted-
|
Weighted-
|
Weighted
|
|||||||||||
Average
|
Average
|
Average
|
|||||||||||
Exercise
|
Remaining
|
Exercise
|
|||||||||||
Number
|
Price
|
Contractual
Life
|
Number
|
Price
|
|||||||||
Stock
Options:
|
|||||||||||||
$6.90-$13.80
|
39,270
|
$
|
10.88
|
0.9
years
|
39,270
|
$
|
10.88
|
||||||
$13.81-$20.70
|
103,110
|
16.89
|
1.8
years
|
103,110
|
16.89
|
||||||||
$20.71-$27.60
|
83,921
|
23.33
|
4.2
years
|
-
|
-
|
||||||||
$27.61-$34.50
|
61,755
|
33.40
|
3.0
years
|
61,755
|
33.40
|
||||||||
$34.51-$41.40
|
-
|
-
|
-
years
|
-
|
-
|
||||||||
$41.41-$48.30
|
85,215
|
44.49
|
4.0
years
|
67,885
|
44.01
|
||||||||
$48.31-$55.20
|
118,215
|
53.19
|
3.0
years
|
60,251
|
53.18
|
||||||||
$55.21-$62.10
|
67,367
|
58.82
|
4.8
years
|
60,804
|
58.86
|
||||||||
$62.11-$69.00
|
174,615
|
64.53
|
1.5
years
|
148,835
|
64.40
|
||||||||
Total
|
733,468
|
$
|
42.95
|
2.8
years
|
541,910
|
$
|
43.52
|
14.
COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 2009, we had
commitments to extend credit of $626.9 million. Commercial loan commitments
represented $270.1 million, while commercial mortgage and construction
commitments were $107.7 million and $56.0 million,
respectively. Outstanding letters of credit were $60.9
million. Consumer lines of credit totaled $126.3 million of which
$107.5 million was secured by real estate and outstanding commitments to make or
acquire mortgage loans aggregated $6.0 million; all were at fixed rates ranging
from 4.25% to 7.35%. Mortgage commitments generally have closing dates within a
six-month period.
- 96
-
Data Processing
Operations
We have entered into contracts to
manage our network operations, data processing and other related services. The
projected amounts of future minimum payments contractually due (in thousands)
are as follows:
2010 | $ 3,170 | ||
2011
|
$ 658 |
|
|
2012 | $ 144 |
We are
currently in negotiations with our vendors for a number of these contracts which
represents a majority of these payments. The expenses for data
processing and operations were $4.7 million for the year ended December 31,
2009.
Legal Proceedings
In the ordinary course of business, we
are subject to legal actions that involve claims for monetary relief. Based upon
information presently available to us and our counsel, it is our opinion that
any legal and financial responsibility arising from such claims will not have a
material adverse effect on our results of operations.
We, as successor to originators, are
from time to time involved in arbitration or litigation with reverse mortgage
loan borrowers or with the heirs of borrowers. Because reverse mortgages are a
relatively new and uncommon product, there can be no assurances regarding how
the courts or arbitrators may apply existing legal principles to the
interpretation and enforcement of the terms and conditions of our reverse
mortgage rights and obligations.
Financial Instruments With Off-Balance
Sheet Risk
We are a party to financial instruments
with off-balance sheet risk in the normal course of business primarily to meet
the financing needs of our customers. To varying degrees, these financial
instruments involve elements of credit risk that are not recognized in the
Consolidated Statement of Condition.
Exposure to loss for commitments to
extend credit and standby letters of credit written is represented by the
contractual amount of those instruments. We generally require collateral to
support such financial instruments in excess of the contractual amount of those
instruments and essentially use the same credit policies in making commitments
as we do for on-balance sheet instruments.
The following represents a summary of
off-balance sheet financial instruments at year-end:
December
31,
|
2009
|
2008
|
||||
(In
Thousands)
|
||||||
Financial
instruments with contract amounts which represent potential credit
risk:
|
||||||
Construction
loan commitments
|
$
|
55,962
|
$
|
129,935
|
||
Commercial
mortgage loan commitments
|
107,690
|
126,918
|
||||
Commercial
loan commitments
|
270,100
|
249,643
|
||||
Commercial
standby letters of credit
|
60,903
|
59,703
|
||||
Residential
mortgage loan commitments
|
5,952
|
8,270
|
||||
Consumer
loan commitments
|
116,612
|
126,071
|
- 97
-
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
completely drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party. We evaluate
each customer’s creditworthiness and obtain collateral based on management’s
credit evaluation of the counterparty.
Indemnifications
Secondary Market Loan Sales. We
generally do not sell loans with recourse except to the extent arising from
standard loan sale contract provisions covering violations of representations
and warranties and, under certain circumstances first payment default by the
borrower. These are customary repurchase provisions in the secondary market for
conforming mortgage loan sales. These indemnifications may include
the repurchase of loans by us. Repurchases and losses are rare, and no provision
is made for losses at the time of sale. We had no repurchases during 2009, 2008
or 2007.
We typically
sell fixed-rate, conforming first mortgage loans in the secondary market as part
of our ongoing asset/liability management program. Loans held-for-sale are
carried at the lower of cost or market of the aggregate or in some cases
individual loans. Gains and losses on sales of loans are recognized at the time
of the sale.
Swap Guarantees. We entered into
agreements with three unaffiliated financial institutions whereby those
financial institutions entered into interest rate derivative contracts (interest
rate swap transactions) with customers referred to them by us. By the terms of
the agreements, those financial institutions have recourse to us for any
exposure created under each swap transaction in the event the customer defaults
on the swap agreement and the agreement is in a paying position to the
third-party financial institution. This is a customary arrangement that allows
financial institutions like us to provide access to interest rate swap
transactions for our customers without creating the swap ourselves.
At December
31, 2009, there were forty-four variable-rate to fixed-rate swap transactions
between the third-party financial institutions and our customers with an initial
notional amount aggregating approximately $209.6 million, and with maturities
ranging from one month to thirteen years. The aggregate fair value of these
swaps to the customers was a liability of $12.6 million as of December 31, 2009,
and all but one of the swap transactions were in a paying position to
third-party financial institutions.
15.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported
fair values of financial instruments are based on a variety of factors. In
certain cases, fair values represent quoted market prices for identical or
comparable instruments. In other cases, fair values have been estimated based on
assumptions regarding the amount and timing of estimated future cash flows that
are discounted to reflect current market rates and varying degrees of risk.
Accordingly, the fair values may not represent actual values of the financial
instruments that could have been realized as of year-end or that will be
realized in the future.
The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term
Investments: For cash and short-term investments, including
due from banks, federal funds sold, securities purchased under agreements to
resell and interest-bearing deposits with other banks, the carrying amount is a
reasonable estimate of fair value.
- 98
-
Investments and Mortgage-Backed
Securities: Fair value for investment and mortgage-backed
securities is based on quoted market prices, where available. If a quoted market
price is not available, fair value is estimated using quoted prices for similar
securities. The fair value of our investment in reverse mortgages is based on
the net present value of estimated cash flows, which have been updated to
reflect recent external appraisals of the underlying collateral. For additional
discussion of our mortgage-backed securities-trading, see Footnote 1 to the
Consolidated Financial Statements.
Loans: Fair values
are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type: commercial, commercial mortgages, construction,
residential mortgages and consumer. For loans that reprice frequently, the book
value approximates fair value. The fair values of other types of loans are
estimated by discounting expected cash flows using the current rates at which
similar loans would be made to borrowers with comparable credit ratings and for
similar remaining maturities which is not an exit price under ASU 820, Fair Value Measurements and
Disclosures. The fair value of nonperforming loans is based on recent
external appraisals of the underlying collateral. Estimated cash flows,
discounted using a rate commensurate with current rates and the risk associated
with the estimated cash flows, are utilized if appraisals are not
available.
Bank-Owned Life
Insurance: The estimated fair value approximates the book value for
this investment
Stock in the Federal Home Loan Bank
of Pittsburgh: The fair value of FHLB stock is assumed to be
essentially equal to its cost. We carry FHLB stock at cost, or par value,
and evaluate FHLB stock for impairment based on the ultimate recoverability of
par value rather than by recognizing temporary declines in value. As part of the
impairment assessment of FHLB stock, management considers, among other things,
(i) the significance and length of time of any declines in net assets of
the FHLB compared to its capital stock, (ii) commitments by the FHLB to
make payments required by law or regulations and the level of such payments in
relation to its operating performance, (iii) the impact of legislative and
regulatory changes on financial institutions and, accordingly, the customer base
of the FHLB and (iv) the liquidity position of the FHLB. The
FHLB has access to the U.S. Government-Sponsored Enterprise Credit Facility, a
secured lending facility that serves as a liquidity backstop, substantially
reducing the likelihood that the FHLB would need to sell securities to raise
liquidity and, thereby, cause the realization of large economic losses. The FHLB
is rated AAA and is likely to remain unchanged based on expectations that the
FHLB has a very high degree of government support and was in compliance with all
regulatory capital requirements as of December 31, 2009. Based on the
above, we have determined there was no other-than-temporary impairment related
to our FHLB stock investment as of December 31, 2009.
Deposit
Liabilities: The fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, money market and
interest-bearing demand deposits and savings deposits, is assumed to be equal to
the amount payable on demand. The carrying value of variable rate time deposits
and time deposits that reprice frequently also approximates fair value. The fair
value of the remaining time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits with comparable remaining maturities.
Borrowed
Funds: Rates currently available to us for debt with similar
terms and remaining maturities are used to estimate fair value of existing
debt.
Off-Balance Sheet
Instruments: The fair value of off-balance sheet instruments,
including commitments to extend credit and standby letters of credit, is
estimated using the fees currently charged to enter into similar agreements with
comparable remaining terms and reflects the present creditworthiness of the
counterparties.
- 99
-
The book
value and estimated fair value of our financial instruments are as
follows:
December
31,
|
2009
|
2008
|
|||
Book
Value
|
Fair
Value
|
Book
Value
|
Fair
Value
|
||
(In
Thousands)
|
|||||
Financial
assets:
|
|||||
Cash
and cash equivalents
|
$ 321,749
|
$ 321,749
|
$ 248,558
|
$ 248,558
|
|
Investment
securities
|
45,517
|
45,479
|
49,688
|
49,578
|
|
Mortgage-backed
securities
|
681,242
|
681,242
|
498,205
|
498,205
|
|
Loans,
net
|
2,479,155
|
2,487,129
|
2,443,835
|
2,435,135
|
|
Bank-owned
life insurance
|
60,254
|
60,254
|
59,337
|
59,337
|
|
Stock
in Federal Home Loan Bank of Pittsburgh
|
39,305
|
39,305
|
39,305
|
39,305
|
|
Accrued
interest receivable
|
12,407
|
12,407
|
11,609
|
11,609
|
|
Financial
liabilities:
|
|||||
Deposits
|
2,561,871
|
2,572,418
|
2,122,352
|
2,101,881
|
|
Borrowed
funds
|
854,809
|
858,896
|
1,066,745
|
1,035,401
|
|
Accrued
interest payable
|
4,240
|
4,240
|
6,794
|
6,794
|
The
estimated fair value of our off-balance sheet financial instruments is as
follows:
December
31,
|
2009
|
2008
|
||
(In
Thousands)
|
||||
Off-balance
sheet instruments:
|
||||
Commitments
to extend credit
|
$5,071
|
$5,926
|
||
Standby
letters of credit
|
317
|
248
|
16.
RELATED PARTY TRANSACTIONS
We routinely enter into transactions
with our directors and officers. Such transactions are made in the
ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and do not, in the opinion of
management, involve more than the normal credit risk or present other
unfavorable features. The aggregate amount of loans to such related
parties was $6.0 million and $5.0 million at December 31, 2009 and 2008,
respectively. During 2009, new loans and credit line advances to such
related parties amounted to $8.9 million and repayments amounted to $7.9
million.
We engage a law firm that is affiliated
with one of our directors for general legal services. Total fees for such
services amounted to $24,000 during 2009 and $56,000 for 2007. We
paid no fees to this firm during 2008.
- 100
-
17.
PARENT COMPANY FINANCIAL INFORMATION
Condensed
Statement of Financial Condition
December
31,
|
2009
|
2008
|
|||||
(In
Thousands)
|
|||||||
Assets:
|
|||||||
Cash
|
$
|
30,741
|
$
|
3,228
|
|||
Investment
in subsidiaries
|
335,796
|
277,439
|
|||||
Investment
in Capital Trust III
|
2,011
|
2,011
|
|||||
Other
assets
|
404
|
1,232
|
|||||
Total
assets
|
$
|
368,952
|
$
|
283,910
|
|||
Liabilities:
|
|||||||
Borrowings
|
$
|
67,011
|
$
|
67,011
|
|||
Interest
payable
|
117
|
229
|
|||||
Other
liabilities
|
24
|
35
|
|||||
Total
liabilities
|
67,152
|
67,275
|
|||||
Stockholders’
equity:
Preferred
stock
|
1
|
-
|
-
|
||||
Common
stock
|
166
|
157
|
|||||
Capital
in excess of par value
|
166,627
|
87,033
|
|||||
Comprehensive
loss
|
(2,022
|
)
|
(12,613
|
)
|
|||
Retained
earnings
|
385,308
|
390,338
|
|||||
Treasury
stock
|
(248,280
|
)
|
(248,280
|
)
|
|||
Total
stockholders’ equity
|
301,800
|
216,635
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
368,952
|
$
|
283,910
|
- 101
-
Condensed
Statement of Operations
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
(In
Thousands)
|
||||||||||
Income:
|
||||||||||
Interest
income
|
$
|
1,716
|
$
|
324
|
$
|
337
|
||||
Noninterest
income
|
64
|
65
|
64
|
|||||||
1,780
|
389
|
401
|
||||||||
Expenses:
|
||||||||||
Interest
expense
|
1,797
|
3,275
|
4,752
|
|||||||
Other
operating expenses
|
79
|
(941
|
)
|
(1,437
|
)
|
|||||
1,876
|
2,334
|
3,315
|
||||||||
Loss
before equity in undistributed income of subsidiaries
|
(96
|
)
|
(1,945
|
)
|
(2,914
|
)
|
||||
Equity
in undistributed income of subsidiaries
|
759
|
18,081
|
32,563
|
|||||||
Net
income
|
663
|
16,136
|
29,649
|
|||||||
Dividends
on preferred stock and accretion of discount
|
(2,590
|
)
|
―
|
―
|
||||||
Net
(loss) income allocable to common stockholders
|
$
|
(1,927
|
)
|
$
|
16,136
|
$
|
29,649
|
|||
Condensed
Statement of Cash Flows
|
||||||||||
Year
Ended December 31,
|
2009
|
2008
|
2007
|
|||||||
(In
Thousands)
|
||||||||||
Operating
activities:
|
||||||||||
Net
income
|
$
|
663
|
$
|
16,136
|
$
|
29,649
|
||||
Adjustments
to reconcile net income to net cash used for operating
activities:
|
||||||||||
Equity
in undistributed income of subsidiaries
|
(759
|
)
|
(18,081
|
)
|
(32,563
|
)
|
||||
Amortization
|
—
|
—
|
—
|
|||||||
Decrease
(increase) in other assets
|
829
|
(432
|
)
|
443
|
||||||
Decrease
in other liabilities
|
(123
|
)
|
(146
|
)
|
(38
|
)
|
||||
Net
cash provided by (used for) operating activities
|
610
|
(2,523
|
)
|
(2,509
|
)
|
|||||
Investing
activities:
|
||||||||||
(Increase)
decrease in investment in subsidiaries
|
(47,363
|
)
|
7,500
|
35,000
|
||||||
Net
cash (used for) provided by investing activities
|
(47,363
|
)
|
7,500
|
35,000
|
||||||
Financing
activities:
|
||||||||||
Issuance
of common stock
|
26,851
|
3,956
|
1,784
|
|||||||
Issuance
of preferred stock
|
52,625
|
—
|
—
|
|||||||
Cash
dividends paid
|
(5,210
|
)
|
(2,832
|
)
|
(2,403
|
)
|
||||
Treasury
stock, net of reissuance
|
—
|
(3,555
|
)
|
(36,174
|
)
|
|||||
Net
cash provided by (used for) financing activities
|
74,266
|
(2,431
|
)
|
(36,793
|
)
|
|||||
Increase
(decrease) in cash
|
27,513
|
2,546
|
(4,302
|
)
|
||||||
Cash
at beginning of period
|
3,228
|
682
|
4,984
|
|||||||
Cash
at end of period
|
$
|
30,741
|
$
|
3,228
|
$
|
682
|
- 102
-
18.
SEGMENT INFORMATION
Under the definition of FASB ASC 280,
Segment Reporting (“ASC
280”) (Formerly SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information) we discuss our business in four
segments. There is a segment for WSFS Bank (including WSFS Investment
Group, Inc.), Cash Connect, (the ATM division of WSFS), 1st
Reverse, (the reverse mortgage subsidiary of WSFS), and Trust and Wealth
Management. Trust and Wealth Management combines Montchanin and the
WSFS Trust and Wealth Management Division into a single reportable segment
because each has similar economic characteristics, products, customers and
distribution methods. During 2009 we began to report the results of
1st
Reverse as a separate segment, consistent with the guidance promulgated in ASC
280. As required by ASC 280, all prior years’ information has been
updated to reflect this presentation.
The WSFS
Bank segment provides financial products to commercial and retail customers
through its 41 banking offices located in Delaware (36), Pennsylvania (4) and
Virginia(1). Retail and Commercial Banking, Commercial Real Estate
Lending, Private Banking and other banking business units (including the
reorganization of WSFS Investment Group, Inc.) are operating departments of
WSFS. These departments share the same regulator, the same market,
many of the same customers and provide similar products and services through the
general infrastructure of the Bank. Because of these and other
reasons, these departments are not considered discrete segments and are
appropriately aggregated within the WSFS Bank segment of the Company in
accordance with ASC 280.
Cash
Connect 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 from which fee income is earned through bailment arrangements with
customers of Cash Connect.
During
2008, we acquired a majority interest in 1st
Reverse Financial Services, LLC (1st
Reverse), which specialized in originating and subsequently selling reverse
mortgage loans nationwide. These reverse mortgages were government approved and
insured. In 2009, we announced and completed a wind-down of these operations.
Included in the year ended December 31, 2009, is a $1.9 million pre-tax charge
which consists of the write-off of all related goodwill and intangibles, the
uncollectable receivables and our remaining investment in this
subsidiary. This charge combined with the operating losses for 2009
represents the $3.1 million net loss in this column.
The
Wealth Management column is comprised of the WSFS Trust & Wealth Management
Division and Montchanin. In 2005, the WSFS Trust and Wealth Management division
was established in response to our commercial customers’ demand for the same
high level service in their investment relationships that they enjoy as banking
customers of WSFS Bank. Montchanin provides asset management products and
services to customers in the Bank’s primary market area. Montchanin has one
consolidated wholly owned subsidiary, Cypress Capital Management, LLC (Cypress).
Cypress is a Wilmington-based investment advisory firm serving high net-worth
individuals and institutions.
An
operating segment is a component of an enterprise that engages in business
activities from which it may earn revenues and incur expenses, whose operating
results are regularly reviewed by the enterprise’s chief operating decision
makers to make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is
available. We evaluate performance based on pretax ordinary income
relative to resources used, and allocate resources based on these
results. The accounting policies applicable to our segments are those
that apply to our preparation of the accompanying Consolidated Financial
Statements. Segment information for the years ended December 31, 2009, 2008, and
2007 follows:
- 103
-
For
the Year Ended December 31, 2009:
|
WSFS
Bank
|
Cash
Connect
|
1st
Reverse
|
Trust
& Wealth Management
|
Total
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||||
External
customer revenues:
|
||||||||||||||||||
Interest
income
|
$
|
157,698
|
$
|
—
|
|
$
|
32
|
$
|
—
|
$
|
157,730
|
|||||||
Noninterest
income
|
34,501
|
11,992
|
2,023
|
1,725
|
50,241
|
|||||||||||||
Total
external customer revenues
|
192,199
|
11,992
|
2,055
|
1,725
|
207,971
|
|||||||||||||
Intersegment
revenues:
|
||||||||||||||||||
Interest
income
|
627
|
—
|
|
—
|
|
—
|
627
|
|||||||||||
Noninterest
income
|
3,343
|
408
|
—
|
|
—
|
3,751
|
||||||||||||
Total
intersegment revenues
|
3,970
|
408
|
—
|
|
—
|
4,378
|
||||||||||||
Total
revenue
|
196,169
|
12,400
|
2,055
|
1,725
|
212,349
|
|||||||||||||
External
customer expenses:
|
||||||||||||||||||
Interest
expense
|
53,086
|
—
|
|
—
|
|
—
|
53,086
|
|||||||||||
Noninterest
expenses
|
95,447
|
5,387
|
4,917
|
2,753
|
108,504
|
|||||||||||||
Provision
for loan loss
|
47,811
|
—
|
|
|
—
|
|
—
|
47,811
|
||||||||||
Total
external customer expenses
|
196,344
|
5,387
|
4,917
|
2,753
|
209,401
|
|||||||||||||
Intersegment
expenses:
|
||||||||||||||||||
Interest
expense
|
—
|
627
|
—
|
|
—
|
627
|
||||||||||||
Noninterest
expenses
|
408
|
905
|
261
|
2,177
|
3,751
|
|||||||||||||
Total
intersegment expenses
|
408
|
1,532
|
261
|
2,177
|
4,378
|
|||||||||||||
Total
expenses
|
196,752
|
6,919
|
5,178
|
4,930
|
213,779
|
|||||||||||||
Income
(loss) before taxes
|
$
|
(583
|
)
|
$
|
5,481
|
$
|
(3,123)
|
$
|
(3,205
|
)
|
$
|
(1,430
|
)
|
|||||
Income
tax benefit
|
(2,093
|
)
|
||||||||||||||||
Consolidated
net income
|
$
|
663
|
||||||||||||||||
Cash
and cash equivalents
|
$
|
56,124
|
$
|
264,903
|
$
|
—
|
$
|
722
|
$
|
321,749
|
||||||||
Other
segment assets
|
3,410,793
|
14,861
|
—
|
|
1,104
|
3,426,758
|
||||||||||||
Total
segment assets at December 31, 2009
|
$
|
3,466,917
|
$
|
279,764
|
$
|
—
|
$
|
1,826
|
$
|
3,748,507
|
||||||||
Capital
expenditures
|
$
|
6,287
|
$
|
474
|
$
|
—
|
$
|
15
|
$
|
6,776
|
- 104
-
For
the Year Ended December 31, 2008:
|
WSFS
Bank
|
Cash
Connect
|
1st
Reverse
|
Trust
& Wealth Management
|
Total
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||||
External
customer revenues:
|
||||||||||||||||||
Interest
income
|
$
|
166,477
|
$
|
—
|
|
$
|
$
|
—
|
$
|
166,477
|
||||||||
Noninterest
income
|
28,763
|
13,752
|
852
|
2,622
|
45,989
|
|||||||||||||
Total
external customer revenues
|
195,240
|
13,752
|
852
|
2,622
|
212,466
|
|||||||||||||
Intersegment
revenues:
|
||||||||||||||||||
Interest
income
|
3,524
|
—
|
|
5
|
|
—
|
3,529
|
|||||||||||
Noninterest
income
|
2,841
|
641
|
—
|
|
—
|
3,482
|
||||||||||||
Total
intersegment revenues
|
6,365
|
641
|
5
|
|
—
|
7,011
|
||||||||||||
Total
revenue
|
201,605
|
14,393
|
857
|
2,622
|
219,477
|
|||||||||||||
External
customer expenses:
|
||||||||||||||||||
Interest
expense
|
77,258
|
—
|
|
—
|
|
—
|
77,258
|
|||||||||||
Noninterest
expenses
|
76,424
|
5,978
|
2,568
|
4,128
|
89,098
|
|||||||||||||
Provision
for loan loss
|
23,024
|
—
|
|
|
—
|
|
—
|
23,024
|
||||||||||
Total
external customer expenses
|
176,706
|
5,978
|
2,568
|
4,128
|
189,380
|
|||||||||||||
Intersegment
expenses:
|
||||||||||||||||||
Interest
expense
|
5
|
3,524
|
—
|
|
—
|
3,529
|
||||||||||||
Noninterest
expenses
|
641
|
868
|
204
|
1,769
|
3,482
|
|||||||||||||
Total
intersegment expenses
|
646
|
4,392
|
204
|
1,769
|
7,011
|
|||||||||||||
Total
expenses
|
177,352
|
10,370
|
2,772
|
5,897
|
196,391
|
|||||||||||||
Income
(loss) before taxes
|
$
|
24,253
|
$
|
4,023
|
$
|
(1,915)
|
$
|
(3,275
|
)
|
$
|
23,086
|
|||||||
Income
tax provision
|
6,950
|
|||||||||||||||||
Consolidated
net income
|
$
|
16,136
|
||||||||||||||||
Cash
and cash equivalents
|
$
|
57,962
|
$
|
189,965
|
$
|
8
|
$
|
623
|
$
|
248,558
|
||||||||
Other
segment assets
|
3,168,512
|
12,836
|
750
|
|
1,904
|
3,184,002
|
||||||||||||
Total
segment assets at December 31, 2008
|
$
|
3,226,474
|
$
|
202,801
|
$
|
758
|
$
|
2,527
|
$
|
3,432,560
|
||||||||
Capital
expenditures
|
$
|
4,587
|
$
|
204
|
$
|
108
|
$
|
1
|
$
|
4,900
|
- 105
-
For
the Year Ended December 31, 2007:
|
WSFS
Bank
|
Cash
Connect
|
Trust
& Wealth Management
|
Total
|
||||||||||||
(In
Thousands)
|
||||||||||||||||
External
customer revenues:
|
||||||||||||||||
Interest
income
|
$
|
189,477
|
$
|
—
|
|
$
|
—
|
$
|
189,477
|
|||||||
Noninterest
income
|
28,479
|
16,584
|
3,103
|
48,166
|
||||||||||||
Total
external customer revenues
|
217,956
|
16,584
|
3,103
|
237,643
|
||||||||||||
Intersegment
revenues:
|
||||||||||||||||
Interest
income
|
8,684
|
—
|
|
—
|
8,684
|
|||||||||||
Noninterest
income
|
2,325
|
675
|
—
|
3,000
|
||||||||||||
Total
intersegment revenues
|
11,009
|
675
|
—
|
11,684
|
||||||||||||
Total
revenue
|
228,965
|
17,259
|
3,103
|
249,327
|
||||||||||||
External
customer expenses:
|
||||||||||||||||
Interest
expense
|
107,468
|
—
|
|
—
|
107,468
|
|||||||||||
Noninterest
expenses
|
72,633
|
4,683
|
4,715
|
82,031
|
||||||||||||
Provision
for loan loss
|
5,021
|
—
|
|
|
—
|
5,021
|
||||||||||
Total
external customer expenses
|
185,122
|
4,683
|
4,715
|
194,520
|
||||||||||||
Intersegment
expenses:
|
||||||||||||||||
Interest
expense
|
—
|
8,684
|
—
|
8,684
|
||||||||||||
Noninterest
expenses
|
675
|
1,076
|
1,249
|
3,000
|
||||||||||||
Total
intersegment expenses
|
675
|
9,760
|
1,249
|
11,684
|
||||||||||||
Total
expenses
|
185,797
|
14,443
|
5,964
|
206,204
|
||||||||||||
Income
(loss) before taxes
|
$
|
43,168
|
$
|
2,816
|
$
|
(2,861
|
)
|
$
|
43,123
|
|||||||
Income
tax provision
|
13,474
|
|||||||||||||||
Consolidated
net income
|
$
|
29,649
|
||||||||||||||
Cash
and cash equivalents
|
$
|
84,552
|
$
|
182,523
|
$
|
462
|
$
|
267,537
|
||||||||
Other
segment assets
|
2,913,379
|
17,314
|
1,958
|
2,932,651
|
||||||||||||
Total
segment assets at December 31, 2007
|
$
|
2,997,931
|
$
|
199,837
|
$
|
2,420
|
$
|
3,200,188
|
||||||||
Capital
expenditures
|
$
|
8,134
|
$
|
194
|
$
|
5
|
$
|
8,333
|
The
Company did not acquire its interest in 1st
Reverse until 2008.
- 106
-
19.
BUSINESS COMBINATIONS
1st
Reverse Financial Services, LLC Acquisition
On April
30, 2008, we completed the acquisition of a 51% majority stake in 1st Reverse
Financial Services, LLC ("1st Reverse"). Operating results of 1st Reverse
are included in the consolidated financial statements since the date of
acquisition.
The
acquisition resulted in recording $685,000 of goodwill, which is the excess cost
over the fair value of its assets at the time of acquisition. Other
intangibles amounting to $658,000 were also identified in the transaction, with
amortization periods of 5-10 years using straight-line methods.
During
2009 we decided to wind-down the operations of 1st
Reverse due to the weakened prospect of achieving required returns due, in part,
to the current economic climate. During 2009 we had pre-tax losses of
$1.9 million related to the wind-down, which included the write-down of all
related goodwill and intangibles. We have included these losses in
other operating expense.
Sun
National Bank Branch Purchase
On
October 24, 2008, we completed the acquisition of six branches from Sun National
Bank and their respective deposits. The operating results of these
branches have been included in the consolidated financial statements since the
date of acquisition. We expect this acquisition to further build our
market share in Delaware, expand our customer base to enhance deposit fee income
and provide an opportunity to market additional products and services to new
customers.
The
aggregate cash purchase price was $11.5 million. The purchase price
resulted in approximately $9.0 million in goodwill and $2.5 million in core
deposit intangibles ("CDI"). This CDI will be amortized over 7.5 years,
using straight-line methods. During 2009 and 2008 we recorded amortization
expense of $370,000 and $14,000, respectively. The goodwill and
intangible assets will be deducted for tax purposes. In the transaction,
WSFS acquired $95.3 million of deposits.
We
engaged an independent third party to perform an appraisal of the Corporation as
of December 31, 2009. This appraisal was completed in accordance with
FASB ASC 350 “Goodwill and
Other Intangibles” (“ASC 350”). Based on the results of this
appraisal, the goodwill related to the Sun National Bank branch purchase passed
Step 1 under ASC 350 as of December 31, 2009 and it was determined that no
impairment exists.
20.
NONINTEREST EXPENSES
During the year ended December 31,
2009, we incurred $6.0 million of charges we consider to be
non-routine. These charges are included in Noninterest expenses in
the Consolidated Statement of Operations and include the following:
o
|
A
$1.9 million charge resulting from management’s decision to conduct an
orderly wind-down of 1st
Reverse. The charge represents the write-off of all related
goodwill and intangibles, uncollectible receivables and our remaining
investment in that subsidiary as well as miscellaneous payables arising
during the course of winding-down this subsidiary (reflected in Other
operating expenses).
|
o
|
A
$1.7 million insurance premium charged by the FDIC representing our share
of the special assessment levied on the banking industry at June 30, 2009
(reflected in FDIC expenses).
|
- 107
-
o
|
A $1.5
million charge related to fraudulent wire transfer activity affecting the
accounts of two customers ($1.3 million reflected in Other operating
expense and $0.2 million reflected in Professional
fees).
|
o
|
A A
$953,000 expense related to due diligence on an acquisition prospect in
which discussions have terminated (reflected in Professional
fees).
|
There
were no material non-routine charges recorded during 2008 or 2007.
21.
STOCK AND COMMON STOCK WARRANTS
The Company entered into a purchase
agreement with the U.S. Treasury on January 23, 2009, pursuant to which the
Company issued and sold 52,625 shares of the Company’s fixed-rate cumulative
perpetual preferred stock for a total purchase price of $52.6 million, and a
10-year warrant to purchase 175,105 shares of the Company’s common stock at an
exercise price of $45.08 per share. The Company will pay the Treasury Department
a five percent dividend annually for each of the first five years of the
investment and a nine percent dividend thereafter until the shares are
redeemed. The cumulative dividend for the preferred stock is accrued
for and payable on February 15, May 15, August 15 and November 15 of each
year. The Company has declared and paid $2.1 million in preferred
stock dividends during 2009.
The Company allocated total proceeds of
$52.6 million, based on the relative fair value of preferred stock and common
stock warrants, to preferred stock for $51.9 million and common stock warrants
for $693,000 respectively, on January 23, 2009. The preferred stock
discount will be accreted, on an effective yield method, to preferred stock over
five years. The Company has accreted a total of $127,000 during the
year ended December 31, 2009 relating to the discount on preferred
stock.
The
preferred stock is nonvoting, except for class voting rights on certain matters
that could affect the shares adversely. It may be redeemed by us for the
liquidation preference ($1,000 per share), plus accrued but unpaid dividends,
with the Treasury’s approval. The warrants are exercisable immediately and
subject to certain anti-dilution and other adjustments.
The Company completed a private
placement of stock to Peninsula Investment Partners, L.P. (Peninsula) on
September 24, 2009, pursuant to which the Company issued and sold 862,069 shares
of common stock for a total purchase price of $25.0 million, and a 10-year
warrant to purchase 129,310 shares of the Company’s common stock at an exercise
price of $29.00 per share. The warrants are immediately
exercisable.
The Company allocated total proceeds of
$25.0 million, based on the relative fair value of common stock and common stock
warrants, to common stock for $23.5 million and common stock warrants for $1.5
million on September 24, 2009.
22.
SUBSEQUENT EVENT
On
February 9, 2010, we were advised that an executive of an armored car company
based in Mount Vernon, New York, was arrested and charged with fraud and theft
in connection with an ATM vault cash program. This same armored car
company serves as an armored carrier for several customers of Cash Connect, our
ATM division.
Based on
preliminary estimates, we believe there is approximately $4.8 million that
should have been in the vaults of the armored car carrier or in transit to those
vaults as of February 9, 2010. Based on the early stage of the
federal investigation it is unknown if any or all of these funds are exposed to
a loss. Cash Connect has several layers of safeguards established in
its operations. In the event a loss is determined, we have avenues of
recovery, including reimbursements from Cash Connect customers and through
insurance claims. If it is ultimately determined that a loss is
probable and estimable, we will record the loss in the
appropriate
- 108
-
fiscal
period. If we are successful in making recoveries, we will record the
recoveries in the period received, or when the receipt of such recoveries
becomes certain.
QUARTERLY
FINANCIAL SUMMARY (Unaudited)
Three
months ended
|
12/31/09
|
09/30/09
|
06/30/09
|
03/31/09
|
12/31/08
|
09/30/08
|
06/30/08
|
03/31/08
|
|||||||||||||||||||
(In
Thousands, Except Per Share Data)
|
|||||||||||||||||||||||||||
Interest
income
|
$
|
39,954
|
$
|
39,130
|
$
|
39,839
|
$
|
38,807
|
$
|
39,785
|
$
|
41,337
|
$
|
40,795
|
$
|
44,560
|
|||||||||||
Interest
expense
|
11,874
|
12,837
|
13,459
|
14,916
|
17,209
|
18,030
|
18,428
|
23,591
|
|||||||||||||||||||
Net
interest income
|
28,080
|
26,293
|
26,380
|
23,891
|
22,576
|
23,307
|
22,367
|
20,969
|
|||||||||||||||||||
Provision
for loan losses
|
12,678
|
15,483
|
11,997
|
7,653
|
14,699
|
3,502
|
2,433
|
2,390
|
|||||||||||||||||||
Net
interest income after provision
for
loan losses
|
15,402
|
10,810
|
14,383
|
16,238
|
7,877
|
19,805
|
19,934
|
18,579
|
|||||||||||||||||||
Noninterest
income
|
11,935
|
14,538
|
12,667
|
11,101
|
10,128
|
11,684
|
11,671
|
12,506
|
|||||||||||||||||||
Noninterest
expenses
|
27,606
|
25,569
|
30,955
|
24,374
|
23,969
|
23,022
|
21,170
|
20,937
|
|||||||||||||||||||
Income
before taxes
|
(269
|
)
|
(221
|
)
|
(3,905
|
)
|
2,965
|
(5,964
|
)
|
8,467
|
10,435
|
10,148
|
|||||||||||||||
Income
tax (benefit) provision
|
(307
|
)
|
(222
|
)
|
(1,589
|
)
|
25
|
(2,644
|
)
|
2,957
|
3,735
|
2,902
|
|||||||||||||||
Net
Income
|
38
|
1
|
(2,316
|
)
|
2,940
|
(3,320
|
)
|
5,510
|
6,700
|
7,246
|
|||||||||||||||||
Dividends
on preferred stock and
accretion
of discount
|
692
|
634
|
751
|
513
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
Net
Income available to
common
shareholders
|
$
|
(654
|
)
|
$
|
(633
|
)
|
$
|
(3,067
|
)
|
$
|
2,427
|
$
|
(3,320
|
)
|
$
|
5,510
|
$
|
6,700
|
$
|
7,246
|
|||||||
Earnings
per share:
|
|||||||||||||||||||||||||||
Basic
|
(0.09
|
)
|
(0.10
|
)
|
(0.50
|
)
|
0.39
|
(0.54
|
)
|
0.90
|
1.09
|
1.17
|
|||||||||||||||
Diluted
|
(0.09
|
)
|
(0.10
|
)
|
(0.50
|
)
|
0.39
|
(0.54
|
)
|
0.88
|
1.07
|
1.15
|
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There are no matters required to be
disclosed under this item.
ITEM 9A. CONTROLS AND
PROCEDURES
Disclosure Controls and
Procedures
Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective.
Internal
Control Over Financial Reporting
- 109
-
Management’s
Report on Internal Control Over Financial Reporting
To Our
Stockholders:
Management
of the Corporation is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) under
the Securities Exchange Act of 1934. The Corporation’s internal control over
financial reporting is designed to provide reasonable assurance to the
Corporation’s management and board of directors regarding the preparation and
fair presentation of published financial statements.
Management
assessed the effectiveness of the Corporation’s internal control over financial
reporting as of December 31, 2009. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated
Framework. Based on this assessment, management has concluded that, as of
December 31, 2009, the Corporation’s internal control over financial reporting
is effective based on those criteria.
KPMG LLP,
an independent registered public accounting firm, has audited the Company’s
consolidated financial statements as of and for the year ended December 31, 2009
and the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2009, as stated in their reports, which are included
herein.
/s/
Mark A. Turner
|
/s/
Stephen A. Fowle
|
|||
Mark
A. Turner
|
Stephen
A. Fowle
|
|||
President
and Chief Executive Officer
|
Executive
Vice President and
Chief
Financial Officer
|
|||
March
16, 2010
|
||||
- 110
-
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
WSFS
Financial Corporation:
We have
audited WSFS Financial Corporation’s (the Company) internal control over
financial reporting as of December 31, 2009, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, WSFS Financial Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statement of condition of WSFS
Financial Corporation and subsidiaries as of December 31, 2009 and 2008,
and the related consolidated statements of operations, changes in stockholders’
equity, and cash flows for each of the years in the three-year period ended
December 31, 2009, and our report dated March 16, 2010 expressed an
unqualified opinion on those consolidated financial statements.
Philadelphia,
Pennsylvania
March 16,
2010
- 111
-
During
the quarter ended December 31, 2009, there was no change in internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER
INFORMATION
There are
no matters required to be disclosed under this item.
PART
III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
Information under “Directors and Officers of WSFS Financial Corporation and
Wilmington Savings Fund Society, FSB” and “Corporate Governance - Committees of
the Board of Directors” in the Registrant’s definitive proxy statement for the
registrant’s Annual Meeting of Stockholders to be held on April 29, 2010 (the
“Proxy Statement”) is incorporated into this item by reference.
We have
adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, controller or persons
performing similar functions. A copy of the Code of Ethics is posted on our
website at www.wsfsbank.com.
ITEM 11. EXECUTIVE
COMPENSATION
The
information under the heading “Compensation” and “Compensation of the Board of
Directors” in the Proxy Statement is incorporated into this item by
reference.
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS
|
(a)
|
Security
Ownership of Certain Beneficial
Owners
|
Information
required by this item is incorporated herein by reference to the section
captioned “Other Information - Large Stockholders” of the Proxy
Statement
|
(b)
|
Security
Ownership of Management
|
Information
required by this item is incorporated herein by reference to the section
captioned “Directors and Officers of WSFS Financial Corporation and Wilmington
Savings Fund Society, FSB – Ownership of WSFS Financial Corporation
Common Stock” of the Proxy Statement
|
(c)
|
We
know of no arrangements, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a
change in control of the registrant
|
|
(d)
|
Securities Authorized for
Issuance Under Equity Compensation
Plans
|
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Shown
below is information as of December 31, 2009 with respect to compensation plans
under which equity securities of the Registrant are authorized for
issuance.
Equity
Compensation Plan Information
|
|||||||||||||
(a)
|
(b)
|
(c)
|
|||||||||||
Number
of Securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-Average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column)
(a)
|
|||||||||||
Equity
compensation plans approved by stockholders (1)
|
752,038
|
$
|
41.89
|
105,902
|
|||||||||
Equity
compensation plans not approved by stockholders
|
N/A
|
N/A
|
N/A
|
||||||||||
TOTAL
|
752,038
|
$
|
41.89
|
105,902
|
(1) Plans
approved by stockholders include the 1997 Stock Option Plan, as amended and the
2005 Incentive Plan.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information under “Directors and Officers of WSFS Financial Corporation and
Wilmington Savings Fund Society, FSB – Transactions with our Insiders” in the
Proxy Statement is incorporated into this item by reference.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information under “Committees of the Board of Directors – Audit Committee” in
the Proxy Statement is incorporated into this item by reference.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)
|
Listed
below are all financial statements and exhibits filed as part of this
report, and are incorporated by
reference.
|
|
1.
|
The
consolidated statements of Condition of WSFS Financial Corporation and
subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of income, changes in stockholders’ equity and cash flows for
each of the years in the three year period ended December 31, 2009,
together with the related notes and the report of KPMG LLP, independent
registered public accounting firm.
|
|
2.
|
Schedules
ommitted as they are not applicable.
|
|
2. Schedules omitted as they
are not applicable.
|
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-
The
following exhibits are incorporated by reference herein or annexed to this
Annual Report:
Exhibit
Number Description of
Document
3.1
|
Registrant’s
Certificate of Incorporation, as amended is incorporated herein by
reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K
for the year ended December 31,
1994.
|
3.2
|
Amended
and Restated Bylaws of WSFS Financial Corporation, incorporated herein by
reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K
(filed on October 27, 2008).
|
3.3
|
Certificate
of Designations for the Fixed Rate Cumulative Perpetual Preferred Stock,
Series A, incorporated herein by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on January 23,
2009.
|
4.1
|
Form
of Certificate for the Series A Preferred Stock, incorporated herein by
reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K
filed on January 23, 2009.
|
4.2
|
Warrant
for Purchase of Shares of Common Stock, incorporated herein by reference
to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on
January 23, 2009.
|
4.3
|
Warrant
for Purchase of Shares of Common Stock, incorporated herein by reference
to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on
July 27, 2009.
|
10.1
|
WSFS
Financial Corporation, 1994 Short Term Management Incentive Plan Summary
Plan Description is incorporated herein by reference to Exhibit 10.7 of
the Registrant’s Annual Report on Form 10-K for the year ended December
31, 1994.
|
10.2
|
Amended
and Restated Wilmington Savings Fund Society, Federal Savings Bank 1997
Stock Option Plan is incorporated herein by reference to the Registrant’s
Registration Statement on Form S-8 (File No. 333-26099) filed with the
Commission on April 29, 1997.
|
10.3
|
2000
Stock Option and Temporary Severance Agreement among Wilmington Savings
Fund Society, Federal Savings Bank, WSFS Financial Corporation and Marvin
N. Schoenhals on February 24, 2000 is incorporated herein by reference to
Exhibit 10.4 of the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2000.
|
10.4
|
WSFS
Financial Corporation Severance Policy for Executive Vice Presidents dated
February 28, 2008.
|
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-
10.5
|
WSFS
Financial Corporation’s 2005 Incentive Plan is incorporated herein by
reference to appendix A of the Registrant’s Definitive Proxy Statement on
Schedule 14-A for the 2005 Annual Meeting of
Stockholders.
|
10.6
|
Amendment
to WSFS Financial Corporation 2005 Incentive Plan for IRC 409A and FAS
123R dated December 31, 2008.
|
10.7
|
Amendment
to the WSFS Financial Corporation Severance Policy for Executive Vice
Presidents dated December 31, 2008.
|
10.8
|
Letter
Agreement, dated January 23, 2009, between WSFS Financial Corporation and
the United States Department of Treasury, with respect to the issuance and
sale of the Series A Preferred Stock and the Warrant, incorporated herein
by reference to Exhibit 10.1 of the Registrant's Current Report on Form
8-K filed on January 23, 2009.
|
10.9
|
Form
of Waiver, executed by Messrs. Marvin N. Schoenhals, Mark A. Turner,
Stephen A. Fowle, Richard M. Wright, Rodger Levenson and Mrs. Barbara J.
Fischer, incorporated herein by reference to Exhibit 10.2 of the
Registrant's Current Report on Form 8-K filed on January 23,
2009.
|
10.10
|
Form
of Letter Agreement, executed by Messrs. Marvin N. Schoenhals, Mark A.
Turner, Stephen A. Fowle, Richard M. Wright, Rodger Levenson and Mr.
Barbara J. Fischer, incorporated herein by reference to Exhibit 10.3 of
the Registrant's Current Report on Form 8-K filed on January 23,
2009.
|
10.11
|
Securities
Purchase Agreement, dated July 27, 2009, between WSFS Financial
Corporation and Peninsula Investment Partners, L.P., incorporated herein
by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K
on July 27, 2009.
|
21
|
Subsidiaries
of Registrant.
|
23
|
Consent
of KPMG LLP
|
31.1
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification of CFO pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
99.1 Certification
of CEO pursuant to Section 5221
99.2 Certification
of CFO pursuant to Section 5221
Exhibits
10.1 through 10.10 represent management contracts or compensatory plan
arrangements.
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-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
WSFS
FINANCIAL CORPORATION
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Mark A. Turner
|
|
Mark
A. Turner
|
||||
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following Federal Savings Bank persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date:
|
March
16, 2010
|
BY:
|
/s/
Marvin N. Schoenhals
|
|
Marvin
N. Schoenhals
|
||||
Chairman
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Mark A. Turner
|
|
Mark
A. Turner
|
||||
President
and Chief Executive Officer
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Charles G. Cheleden
|
|
Charles
G. Cheleden
|
||||
Vice
Chairman and Lead Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Jennifer W. Davis
|
|
Jennifer
W. Davis
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Donald W. Delson
|
|
Donald
W. Delson
|
||||
Director
|
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-
Date:
|
March
16, 2010
|
BY:
|
/s/
John F. Downey
|
|
John
F. Downey
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Linda C. Drake
|
|
Linda
C. Drake
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
David E. Hollowell
|
|
David
E. Hollowell
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Joseph R. Julian
|
|
Joseph
R. Julian
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Dennis E. Klima
|
|
Dennis
E. Klima
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Calvert A. Morgan, Jr.
|
|
Calvert
A. Morgan, Jr.
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Thomas P. Preston
|
|
Thomas
P. Preston
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Scott E. Reed
|
|
Scott
E. Reed
|
||||
Director
|
||||
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-
Date:
|
March
16, 2010
|
BY:
|
/s/
Claibourne D. Smith
|
|
Claibourne
D. Smith
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
R. Ted Weschler
|
|
R.
Ted Weschler
|
||||
Director
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Stephen A. Fowle
|
|
Stephen
A. Fowle
|
||||
Executive
Vice President and
|
||||
Chief
Financial Officer
|
||||
Date:
|
March
16, 2010
|
BY:
|
/s/
Robert F. Mack
|
|
Robert
F. Mack
|
||||
Senior
Vice President and Controller
|
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