UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2866913
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Delaware Avenue, Wilmington, Delaware 19801
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(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 3, 2007:
Common Stock, par value $.01 per share 6,286,963
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(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statement (Unaudited)
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Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2007 and 2006....................................................... 3
Consolidated Statement of Condition as of June 30, 2007
and December 31, 2006.............................................................. 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2007 and 2006 ............................................................ 5
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 2007 and 2006 ............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.......................................................... 16
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Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 26
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Item 4. Controls and Procedures ............................................................. 26
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PART II. Other Information
Item 1. Legal Proceedings.................................................................... 27
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Item 1A. Risk Factors......................................................................... 27
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................... 27
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Item 3. Defaults upon Senior Securities...................................................... 27
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Item 4. Submission of Matters to a Vote of Security Holders.................................. 27
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Item 5. Other Information ................................................................... 27
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Item 6. Exhibits ............................................................................ 27
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Signatures .................................................................................... 28
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
---- ---- ---- ----
(Unaudited)
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans ..................... $ 39,385 $ 35,332 $ 77,854 $ 67,428
Interest on mortgage-backed securities ......... 6,001 7,471 12,238 14,803
Interest and dividends on investment securities. 723 388 2,437 1,023
Other interest income .......................... 558 677 1,226 1,091
-------- -------- -------- --------
46,667 43,868 93,755 84,345
-------- -------- -------- --------
Interest expense:
Interest on deposits ........................... 14,299 10,113 28,687 18,290
Interest on Federal Home Loan Bank advances .... 9,538 12,004 18,460 22,747
Interest on trust preferred borrowings ......... 1,161 1,106 2,338 2,123
Interest on other borrowings ................... 1,529 1,259 3,070 2,496
-------- -------- -------- --------
26,527 24,482 52,555 45,656
-------- -------- -------- --------
Net interest income ................................. 20,140 19,386 41,200 38,689
Provision for loan losses ........................... 1,273 695 1,644 1,383
-------- -------- -------- --------
Net interest income after provision for loan losses.. 18,867 18,691 39,556 37,306
-------- -------- -------- --------
Noninterest income:
Credit/debit card and ATM income ............... 5,074 4,858 9,557 9,018
Deposit service charges ........................ 3,854 2,826 7,456 5,403
Investment advisory income ..................... 598 618 1,192 1,248
Loan fee income ................................ 581 413 1,142 834
Bank owned life insurance income ............... 542 522 1,099 1,010
Mortgage banking activities, net ............... 78 61 150 83
Securities losses .............................. - (41) - (41)
Other income ................................... 889 623 1,753 1,363
-------- -------- -------- --------
11,616 9,880 22,349 18,918
-------- -------- -------- --------
Noninterest expenses:
Salaries, benefits and other compensation ...... 10,251 9,421 21,101 18,613
Occupancy expense .............................. 2,083 1,347 3,915 2,647
Equipment expense .............................. 1,345 1,075 2,591 2,057
Data processing and operations expenses ........ 946 889 1,889 1,746
Marketing expense .............................. 867 728 1,609 1,341
Professional fees .............................. 654 505 1,307 762
Other operating expense ........................ 2,881 2,967 5,973 6,008
-------- -------- -------- --------
19,027 16,932 38,385 33,174
-------- -------- -------- --------
Income before minority interest and taxes ........... 11,456 11,639 23,520 23,050
Less minority interest .............................. - 15 - 31
-------- -------- -------- --------
Income before taxes ................................. 11,456 11,624 23,520 23,019
Income tax provision ................................ 4,227 4,126 8,510 8,180
-------- -------- -------- --------
Net income .......................................... $ 7,229 $ 7,498 $ 15,010 $ 14,839
======== ======== ======== ========
Earnings per share:
Basic ............................................... $ 1.15 $ 1.13 $ 2.34 $ 2.24
Diluted ............................................. $ 1.11 $ 1.09 $ 2.26 $ 2.15
The accompanying notes are an integral part of these consolidated Financial Statements.
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31,
2007 2006
---- ----
(Unaudited)
(In Thousands)
Assets
Cash and due from banks ....................................................... $ 83,291 $ 73,989
Cash in non-owned ATMs ........................................................ 176,987 166,092
Federal funds sold ............................................................ 4,000 1,500
Interest-bearing deposits in other banks ...................................... 202 243
----------- -----------
Total cash and cash equivalents ........................................... 264,480 241,824
Investment securities held-to-maturity ........................................ 4,221 4,219
Investment securities available-for-sale including reverse mortgages .......... 24,273 50,272
Mortgage-backed securities available-for-sale ................................. 460,103 504,347
Mortgage-backed securities trading ............................................ 12,364 12,364
Loans held-for-sale ........................................................... 1,258 919
Loans, net of allowance for loan losses of $28,359 at June 30, 2007
and $27,384 at December 31, 2006 ............................................ 2,084,223 2,018,822
Bank owned life insurance ..................................................... 56,381 55,282
Stock in Federal Home Loan Bank of Pittsburgh, at cost ........................ 37,366 39,872
Assets acquired through foreclosure ........................................... 388 388
Premises and equipment ........................................................ 34,262 30,218
Accrued interest receivable and other assets .................................. 38,800 38,869
----------- -----------
Total assets .................................................................. $ 3,018,119 $ 2,997,396
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ................................................ $ 295,729 $ 276,338
Interest-bearing demand ................................................... 162,487 146,719
Money market .............................................................. 308,639 246,645
Savings ................................................................... 216,104 226,853
Time ...................................................................... 349,434 326,009
Jumbo certificates of deposit - customer .................................. 132,308 121,142
----------- -----------
Total customer deposits ................................................. 1,464,701 1,343,706
Other jumbo certificates of deposit ....................................... 100,595 111,388
Brokered deposits ......................................................... 283,265 301,254
----------- -----------
Total deposits ........................................................ 1,848,561 1,756,348
Federal funds purchased and securities sold under agreements to repurchase..... 50,000 73,400
Federal Home Loan Bank advances ............................................... 734,377 784,028
Trust preferred borrowings .................................................... 67,011 67,011
Other borrowed funds .......................................................... 88,074 78,240
Accrued interest payable and other liabilities ................................ 28,886 26,256
----------- -----------
Total liabilities ............................................................. 2,816,909 2,785,283
----------- -----------
Minority Interest ............................................................. 34 54
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding .................................................... - -
Common stock $.01 par value, 20,000,000 shares authorized; issued
15,666,283 at June 30, 2007 and 15,584,580 at December 31, 2006 ........... 157 156
Capital in excess of par value ................................................ 85,324 81,580
Accumulated other comprehensive loss .......................................... (10,414) (8,573)
Retained earnings ............................................................. 363,286 347,448
Treasury stock at cost, 9,370,469 shares at June 30, 2007 and 8,942,969
shares at December 31, 2006 ............................................... (237,177) (208,552)
----------- -----------
Total stockholders' equity .................................................... 201,176 212,059
----------- -----------
Total liabilities, minority interest and stockholders' equity ................. $ 3,018,119 $ 2,997,396
=========== ===========
The accompanying notes are an integral part of these consolidated Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30,
2007 2006
---- ----
(Unaudited)
(In Thousands)
Operating activities:
Net income ...................................................................... $ 15,010 $ 14,839
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ................................................... 1,644 1,383
Depreciation, accretion and amortization .................................... 2,588 2,001
Decrease (increase) in accrued interest receivable and other assets ......... 3,478 (538)
Origination of loans held-for-sale .......................................... (14,436) (10,492)
Proceeds from sales of loans held-for-sale .................................. 13,967 8,049
Gain on mortgage banking activity ........................................... (150) (83)
Stock-based compensation expense (net of tax benefit recognized) ............ 415 578
Excess tax benefits from share-based payment arrangements ................... (934) (824)
Minority interest net income ................................................ - 31
Increase in accrued interest payable and other liabilities .................. 2,282 4,648
Gain on sale of assets acquired through foreclosure ......................... - (8)
Increase in value of bank-owned life insurance .............................. (1,099) (1,010)
Increase in capitalized interest, net ....................................... (1,734) (233)
----------- -----------
Net cash provided by operating activities ....................................... 21,031 18,341
----------- -----------
Investing activities:
Maturities of investment securities ............................................. 25,010 180
Sale of investment securities available-for-sale ................................ 10,000 23,991
Purchase of investments available-for-sale ...................................... (7,487) (14,765)
Repayments of mortgage-backed securities available-for-sale ..................... 41,423 54,090
Purchases of mortgage-backed securities available-for-sale ...................... - (44,793)
Repayments of reverse mortgages ................................................. 1,243 354
Disbursements for reverse mortgages ............................................. (1,014) (300)
Purchase of Cypress Capital Management LLC ...................................... (240) (466)
Purchase of Creative Strategic Solutions, Inc. .................................. (383) -
Sale of loans ................................................................... 725 183
Purchase of loans ............................................................... (1,239) (6,955)
Net increase in loans ........................................................... (66,600) (188,964)
Net decrease (increase) in stock of Federal Home Loan Bank of Pittsburgh ........ 2,506 (3,826)
Sales of assets acquired through foreclosure, net ............................... - 68
Investment in partnership ....................................................... - 23
Deferred gain on sale of investment in partnership .............................. 1,282 -
Investment in premises and equipment, net ....................................... (5,596) (5,118)
----------- -----------
Net cash used for investing activities .......................................... (370) (186,298)
----------- -----------
Financing activities:
Net increase in demand and savings deposits ..................................... 96,238 4,407
Net increase in time deposits ................................................... 5,349 138,873
Net decrease in securities sold under agreement to repurchase ................... (23,400) (9,750)
Receipts from FHLB advances ..................................................... 8,543,680 4,514,063
Repayments of FHLB advances ..................................................... (8,593,331) (4,471,326)
Dividends paid on common stock .................................................. (1,161) (991)
Issuance of common stock and exercise of employee stock options ................. 2,331 1,592
Excess tax benefit from share-based payment arrangements ........................ 934 824
Purchase of treasury stock, net of reissuance ................................... (28,625) (765)
Decrease in minority interest ................................................... (20) (168)
----------- -----------
Net cash provided by financing activities ....................................... 1,995 176,759
----------- -----------
Increase in cash and cash equivalents ........................................... 22,656 8,802
Cash and cash equivalents at beginning of period ................................ 241,824 233,951
----------- -----------
Cash and cash equivalents at end of period ...................................... $ 264,480 $ 242,753
=========== ===========
(Continued on next page)
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Six months ended June 30,
-------------------------
2007 2006
---- ----
Supplemental Disclosure of Cash Flow Information:
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Cash paid for interest during the year........................................... $ 47,959 $ 39,941
Cash paid for income taxes, net.................................................. 8,121 7,427
Loans transferred to assets acquired through foreclosure ........................ - 62
Net change in accumulated other comprehensive loss, net of taxes ................ (1,841) (6,801)
Transfer of loans held-for-sale to loans......................................... 128 1,157
The accompanying notes are an integral part of these consolidated Financial
Statements.
6
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)
1. BASIS OF PRESENTATION
Our consolidated Financial Statements include the accounts of WSFS
Financial Corporation ("the Company", "our Company", "we", "our" or "us"),
Wilmington Savings Fund Society, FSB ("WSFS Bank" or the "Bank") and Montchanin
Capital Management, Inc. ("Montchanin") and its wholly owned subsidiary, Cypress
Capital Management, LLC ("Cypress"). Cypress is a Wilmington-based investment
advisory firm servicing high net-worth individuals and institutions. We also
have one unconsolidated affiliate, WSFS Capital Trust III ("the Trust"). Founded
in 1832, we are one of the ten oldest banks continuously operating under the
same name in the United States. 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 the Bank's new division, Wilmington
Advisors, which was formed during 2006. Lending activities are funded primarily
with retail deposits and borrowings. The Federal Deposit Insurance Corporation
("FDIC") insures our customers' deposits to their legal maximum. We serve
customers from our main office, 30 retail banking offices, loan production
offices and operations centers located in Delaware and southeastern
Pennsylvania. Montchanin was formed in 2003 to provide asset management products
and services in the Bank's primary market area. The Trust was formed in 2005 to
issue Pooled Floating Rate Capital Securities.
The Bank's fully-owned and consolidated subsidiaries include WSFS
Investment Group, Inc. and WSFS Reit, Inc. WSFS Investment Group, Inc. markets
various third-party insurance products and securities directly to the public and
through the Bank's retail banking system. WSFS Reit, Inc. is a real estate
investment trust formed to hold qualifying real estate assets and may be used to
raise capital in the future.
Our accounting and reporting policies conform with U.S. generally
accepted accounting principles and prevailing practices within the banking
industry for interim financial information and Rule 10-01 of Regulation S-X. Per
Rule 10-01 of Regulation S-X, we are not required to include all information and
notes for complete financial statements. Operating results for the three and six
months period ended June 30, 2007 are not necessarily indicative of the results
that may be expected for any future quarters or for the year ending December 31,
2007. For further information, refer to the Consolidated Financial Statements
and notes thereto included in our Annual Report of Form 10-K for the year ended
December 31, 2006 as filed with the Securities and Exchange Commission.
Accounting for Stock-Based Compensation
The impact of expensing stock options for the three months ended June
30, 2007, was an increase of $226,000 (pre-tax) or $0.03 (after-tax) per share,
to salaries, benefits and other compensation. This compares to $358,000
(pre-tax) or $0.04 (after-tax) per share for the three months ended June 30,
2006. The impact of expensing stock options for the six months ended June 30,
2007, was an increase of $480,000 (pre-tax) or $0.06 (after-tax) per share, to
salaries, benefits and other compensation. This compares to $691,000 (pre-tax)
or $0.09 (after-tax) per share for the six months ended June 30, 2006.
We have stock options outstanding under two plans (collectively, "Stock
Incentive Plans") for officers, directors and Associates of the Corporation and
its subsidiaries. After shareholder approval in 2005, the 1997 Stock Option Plan
("1997 Plan"), was replaced by the 2005 Incentive Plan ("2005 Plan"). No future
awards may be granted under the 1997 Plan. The 2005 Plan will terminate on the
tenth anniversary of its effective date, after which no awards may be granted.
The number of shares reserved for issuance under the 2005 Plan is 862,000. At
June 30, 2007, there were 496,796 available for future grants under the 2005
Plan.
The Stock Incentive Plans provide for the granting of incentive stock
options as defined in Section 422 of the Internal Revenue Code as well as
nonincentive stock options (collectively, "Stock Options"). Additionally, the
2005 Plan provides for the granting of stock appreciation rights, performance
awards, restricted stock and restricted stock unit awards, deferred stock units,
dividend equivalents, other stock-based awards and cash awards. All Stock
Options are to be granted at not less than the market price of the Corporation's
common stock on the date of the grant. All Stock Options granted during 2007
vest in 20% or 25% per annum increments, start to become exercisable one year
from the grant date and expire between five and ten years from the grant date.
Generally, all awards become immediately exercisable in the event of a change in
control and termination without cause or constructive termination of the
Associate.
During the second quarter of 2007, the Board of Directors adopted an
administrative policy directing that future awards of stock options under the
2005 Plan will have a minimum vesting period of four years and maximum option
life of five years from the date of grant.
7
Summarized below is the status of our Option Plans and changes during
the quarters shown.
June 2007 June 2006
-------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of period 690,614 $39.81 730,458 $32.39
Granted - - 300 62.04
Exercised (58,860) 19.41 (41,456) 16.15
Forfeited (8,325) 58.74 (340) 32.27
------- -------
Outstanding at end of period 623,429 41.49 688,962 33.38
Exercisable at end of period 352,775 28.13 396,130 21.33
Weighted-average fair value
of awards granted $ - $20.71
Beginning April 1, 2007, 408,473 stock options were exercisable with an
intrinsic value of $15.8 million. In addition, at April 1, 2007, there were
282,141 nonvested options with a grant date fair value of $12.93. During the
second quarter of 2007, 3,402 options vested with an intrinsic value of $41,000,
and a grant date fair value of $12.34 per option. Also during the quarter,
58,860 options were exercised with an intrinsic value of $2.7 million. There
were 352,775 exercisable options remaining at June 30, 2007, with an intrinsic
value of $13.2 million and a remaining contractual term of 4.5 years. At June
30, 2007 there were 623,429 stock options outstanding with an intrinsic value of
$14.9 million and a remaining contractual term of 4.8 years. During the second
quarter of 2006, 41,456 options were exercised with an intrinsic value of $1.9
million and 12,272 options vested with a grant date fair value of $7.90 per
option.
Summarized below is the status of our Option Plans and changes during
the six months shown.
June 2007 June 2006
-------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of period 703,427 $39.52 742,404 $31.92
Granted 4,980 69.00 7,020 62.46
Exercised (74,903) 22.63 (59,346) 18.53
Forfeited (10,075) 58.01 (1,116) 37.53
Outstanding at end of period 623,429 41.49 688,962 33.38
Exercisable at end of period 352,775 28.13 396,130 21.33
Weighted-average fair value
of awards granted $14.95 $16.16
Beginning January 1, 2007, 416,773 stock options were exercisable.
During the six months ended June 30, 2007, 11,670 options vested with an
intrinsic value of $320,000, and a grant date fair value of $9.25 per option.
Also, during the first six months of 2007, 74,903 options were exercised with an
intrinsic value of $3.2 million. During the first six months of 2006, 59,346
options were exercised with an intrinsic value of $2.6 million and 20,132
options vested with a grant date fair value of $7.67 per option.
The total amount of compensation cost related to nonvested stock
options as of June 30, 2007 was $1.7 million. This amount has not yet been
recorded in our financial statements. The weighted-average period over which it
is expected to be recognized is 1.4 years. We issue new shares upon the exercise
of options.
There were no options granted during the second quarter of 2007. During
the first six months of 2007, we granted 4,925 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 options. Significant assumptions used in
the model included a weighted-average risk-free rate of return of 4.7% in
8
2007; an expected option life of three and three-quarter years; and an expected
stock price volatility of 18.7% in 2007. For the purposes of this option-pricing
model, a dividend yield of 0.5% was assumed.
Also during the first six months of 2007, we granted 55 options with a
ten-year life and a five-year vesting period. The Black-Scholes option-pricing
model was used to determine the grant date fair value of options. Significant
assumptions used in the model included a weighted-average risk-free rate of
return of 4.7% in 2007; an expected option life of six and one-half years; and
an expected stock price volatility of 21.1% in 2007. For the purposes of this
option-pricing model, a dividend yield of 0.5% was assumed.
Prior to adoption of Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS 123R") we used a
graded-vesting schedule to calculate the expense related to stock options. Since
the adoption of SFAS 123R we have used a straight-line schedule to calculate the
expense related to new stock options issued.
The Black-Scholes option-pricing model assumes 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 the second quarter of 2007 and 2006 we issued 32 and 8 shares,
respectively, of restricted stock. During the first two quarters of 2007 and
2006 we issued 59 and 16 shares, respectively, of restricted stock. 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.
2. EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings
per share:
For the three months For the six months
ended June 30, ended June 30,
-------------- ----- --------
2007 2006 2007 2006
---- ---- ---- ----
(In Thousands, Except Per Share Data)
Numerator:
---------
Net income ........................................................... $ 7,229 $ 7,498 $15,010 $14,839
======= ======= ======= =======
Denominator:
-----------
Denominator for basic earnings per share - weighted average shares ... 6,289 6,620 6,416 6,611
Effect of dilutive employee stock options ............................ 211 280 217 288
------- ------- ------- -------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ....................................... 6,500 6,900 6,633 6,899
======= ======= ======= =======
Basic earnings per share ............................................. $ 1.15 $ 1.13 $ 2.34 $ 2.24
======= ======= ======= =======
Diluted earnings per share ........................................... $ 1.11 $ 1.09 $ 2.26 $ 2.15
======= ======= ======= =======
Outstanding common stock equivalents having no dilutive effect ....... 99 102 5 101
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
We have an interest-rate cap with a notional amount of $50.0 million,
which limits three-month London InterBank Offered Rate ("LIBOR") to 6.00% for
the ten years ending December 1, 2008. The fair value of the cap is estimated
using a standard option model. The fair value of the interest rate cap at June
30, 2007 was $24,000. The cap is considered a free standing derivative and all
changes in the fair value of the cap are recorded in the Statement of
Operations. During the first six months of 2007, we recognized $6,000 of related
interest expense.
9
4. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive
income as required by SFAS No. 130, Reporting Comprehensive Income:
For the three months For the six months
ended June 30, ended June 30,
-------------- --------------
(In Thousands)
2007 2006 2007 2006
---- ---- ---- ----
Net income ..................................................... $ 7,229 $ 7,498 $ 15,010 $ 14,839
Other Comprehensive Income:
Unrealized holding losses on securities
available-for-sale arising during the period .............. (6,200) (2,781) (2,969) (10,984)
Tax benefit .................................................... 2,356 1,057 1,128 4,174
-------- -------- -------- --------
Net of tax amount .............................................. (3,844) (1,724) (1,841) (6,810)
Unrealized holding gains arising during the
period on derivative used for cash flow hedge .. .......... - 26 - 52
Tax expense .................................................... - (9) - (18)
-------- -------- -------- --------
Net of tax amount .............................................. - 17 - 34
Reclassification adjustment for losses included in net income... - (41) - (41)
Tax benefit .................................................... - 16 - 16
-------- -------- -------- --------
Net of tax amount .............................................. - (25) - (25)
-------- -------- -------- --------
Total comprehensive income ..................................... $ 3,385 $ 5,766 $ 13,169 $ 8,038
======== ======== ======== ========
5. TAXES ON INCOME
We account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, which requires the recording of deferred income taxes that
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. We have assessed valuation allowances on
the deferred income taxes due to, among other things, limitations imposed by
Internal Revenue Code and uncertainties, including the timing of settlement and
realization of these differences.
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109 ("FIN 48"). FIN 48 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return.
Benefits from tax positions are recognized in the financial statements only when
it is more-likely-than-not that the tax position will be sustained upon
examination by the appropriate taxing authority that would have full knowledge
of all relevant information. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of benefit that is
greater than fifty-percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold are recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not recognition threshold are derecognized
in the first subsequent financial reporting period in which that threshold is no
longer met. FIN 48 also provides guidance on the accounting for and disclosure
of unrecognized tax benefits, interest and penalties. FIN 48 became effective
for us on January 1, 2007, and resulted in a $2.0 million increase to our
retained earnings during the quarter ended March 31, 2007.
The total amount of unrecognized tax benefits as of January 1, 2007 was
$2.2 million, all of which would affect our effective tax rate if recognized.
The total amount of accrued interest and penalties associated with such
unrecognized tax benefits were $400,000 and $0, respectively. There have been no
significant changes to these amounts during the three or six months ended June
30, 2007. We record interest and penalties on potential income tax deficiencies
as income tax expense. We do not expect the total amount of unrecognized tax
benefits will significantly change within the next twelve months. Federal tax
years 2003 through 2006 remain subject to examination as of January 1, 2007,
while tax years 2003 through 2006 remain subject to examination by state taxing
jurisdictions.
10
6. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, we have three operating segments at June 30,
2007. There is one segment for WSFS and one for CashConnect, the ATM division of
WSFS. The third segment, "All Others", represents the combined contributions of
Montchanin, WSFS Investment Group, Inc., and our Wealth Management Services
Division. Montchanin, WSFS Investment Group, Inc., and the Wealth Management
Services Division each offer different products, to a separate customer base,
through distinct distribution methods. All prior years' information has been
updated to reflect this presentation.
The WSFS segment provides financial products through its banking
offices to commercial and retail customers.
The CashConnect segment provides turnkey ATM services through strategic
partnerships with several of the largest networks, manufacturers, and service
providers in the ATM industry. The balance sheet category "Cash in non-owned
ATMs" includes cash in which fee income is earned through bailment arrangements
with customers of CashConnect.
Montchanin provides asset management products and services to customers
in the Bank's primary market area. Montchanin has one wholly-owned subsidiary,
Cypress. Cypress is a Wilmington-based investment advisory firm serving high
net-worth individuals and institutions. WSFS Investment Group, Inc. markets
various third-party insurance products and securities directly to the public and
through WSFS' retail banking system. The Wealth Management Services Division
provides wealth management and personal trust services to customers in the
Bank's primary market area.
An operating segment is a component of an enterprise that engages in
business activities from which it may earn revenues and incur expenses, whose
operating results are regularly reviewed by the enterprise's chief operating
decision 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. Segment
information for the three and six months ended June 30, 2007 and 2006 follows:
11
For the Three Months Ended June 30,
------------------------------------------------------------------------------------------------------
2007 2006
-------------------------------------------------- -------------------------------------------------
WSFS CashConnect All Others (1) Total WSFS CashConnect All Others (1) Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in Thousands)
External customer revenues:
Interest income $ 46,667 $ - $ - $ 46,667 $ 43,868 $ - $ - $ 43,868
Noninterest income 6,530 4,216 870 11,616 5,379 4,007 494 9,880
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total external customer
revenues 53,197 4,216 870 58,283 49,247 4,007 494 53,748
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Inter-segment revenues:
Interest income 2,167 - - 2,167 2,045 - - 2,045
Noninterest income 630 177 - 807 424 171 - 595
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total inter-segment
revenues 2,797 177 - 2,974 2,469 171 - 2,640
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue 55,994 4,393 870 61,257 51,716 4,178 494 56,388
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
External expenses:
Interest expense 26,527 - - 26,527 24,482 - - 24,482
Noninterest expenses 16,778 1,029 1,220 19,027 15,383 939 610 16,932
Provision for loan loss 1,273 - - 1,273 695 - - 695
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total external expenses 44,578 1,029 1,220 46,827 40,560 939 610 42,109
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Inter-segment expenses
Interest expense - 2,167 - 2,167 - 2,045 - 2,045
Noninterest expenses 177 285 345 807 171 169 255 595
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total inter-segment expenses 177 2,452 345 2,974 171 2,214 255 2,640
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 44,755 3,481 1,565 49,801 40,731 3,153 865 44,749
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest and taxes $ 11,239 $ 912 $ (695) $ 11,456 $ 10,985 $ 1,025 $ (371) $ 11,639
Less minority interest - 15
Income tax provision 4,227 4,126
---------- ----------
Consolidated net income 7,229 7,498
Cash and cash equivalents $ 86,152 $ 176,987 $ 1,341 $ 264,480 $ 70,944 $ 171,174 $ 635 $ 242,753
Other segment assets 2,739,144 12,464 2,031 2,753,639 2,778,109 13,878 1,890 2,793,877
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,825,296 $ 189,451 $ 3,372 $3,018,119 $2,849,053 $ 185,052 $ 2,525 $3,036,630
========== ========== ========== ========== ========== ========== ========== ==========
Capital expenditures $ 2,461 $ 1 $ 3 $ 2,465 $ 2,088 $ 135 $ 17 $ 2,240
(1) Includes Montchanin Capital Management, Inc., WSFS Investment Group Inc.
and the Wealth Management Services Division.
12
For the Six Months Ended June 30,
------------------------------------------------------------------------------------------------------
2007 2006
-------------------------------------------------- -------------------------------------------------
WSFS CashConnect All Others (1) Total WSFS CashConnect All Others (1) Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in Thousands)
External customer revenues:
Interest income $ 93,755 $ - $ - $ 93,755 $ 84,345 $ - $ - $ 84,345
Noninterest income 12,695 7,886 1,768 22,349 9,837 7,465 1,616 18,918
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total external customer
revenues 106,450 7,886 1,768 116,104 94,182 7,465 1,616 103,263
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Inter-segment revenues:
Interest income 4,075 - - 4,075 3,802 - - 3,802
Noninterest income 1,182 330 - 1,512 828 340 - 1,168
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total inter-segment revenues 5,257 330 - 5,587 4,630 340 - 4,970
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue 111,707 8,216 1,768 121,691 98,812 7,805 1,616 108,233
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
External expenses:
Interest expense 52,555 - - 52,555 45,656 - - 45,656
Noninterest expenses 33,888 2,298 2,199 38,385 29,556 1,889 1,729 33,174
Provision for loan loss 1,644 - - 1,644 1,383 - - 1,383
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total external expenses 88,087 2,298 2,199 92,584 76,595 1,889 1,729 80,213
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Inter-segment expenses
Interest expense - 4,075 - 4,075 - 3,802 - 3,802
Noninterest expenses 330 531 651 1,512 340 336 492 1,168
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total inter-segment expenses 330 4,606 651 5,587 340 4,138 492 4,970
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses 88,417 6,904 2,850 98,171 76,935 6,027 2,221 85,183
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest and taxes $ 23,290 $ 1,312 $ (1,082) $ 23,520 $ 21,877 $ 1,778 $ (605) $ 23,050
Less minority interest - 31
Income tax provision 8,510 8,180
---------- ----------
Consolidated net income 15,010 14,839
Cash and cash equivalents $ 86,152 $ 176,987 $ 1,341 $ 264,480 $ 70,944 $ 171,174 $ 635 $ 242,753
Other segment assets 2,739,144 12,464 2,031 2,753,639 2,778,109 13,878 1,890 2,793,877
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total segment assets $2,825,296 $ 189,451 $ 3,372 $3,018,119 $2,849,053 $ 185,052 $ 2,525 $3,036,630
========== ========== ========== ========== ========== ========== ========== ==========
Capital expenditures $ 5,180 $ 5 $ 4 $ 5,189 $ 4,889 $ 195 $ 34 $ 5,118
(1) Includes Montchanin Capital Management, Inc., WSFS Investment Group Inc.
and the Wealth Management Services Division.
13
7. INDEMNIFICATIONS AND GUARANTEES
Secondary Market Loan Sales. Generally, we 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 borrowers. These are customary
repurchase provisions in the secondary market for conforming mortgage loan
sales. We sell fixed-rate, conforming first mortgage loans to Freddie Mac as
part of our ongoing asset/liability management program. Loans held-for-sale are
carried at the lower of cost or market of the aggregate or, in some cases,
individual loans. Gains and losses on sales of loans are recognized at the time
of the sale.
As is customary in such sales, we provide indemnifications to the
buyers under certain circumstances. These indemnifications may include our
repurchase of the loans. Repurchases and losses have been rare, and no provision
is made for losses at the time of sale. From January 2005 through the second
quarter of 2007, we have had no repurchases under these indemnifications.
Swap Guarantees. We entered into agreements with two unrelated
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, such as
ours, to provide access to interest rate swap transactions for its customers
without creating the swap itself.
At June 30, 2007, there were twenty-one variable-rate to fixed-rate
swap transactions between the third party financial institutions and customers
of ours, compared to twenty-two at December 31, 2006. The initial notional
amount aggregated approximately $79.4 million at June 30, 2007 compared with
$77.4 million at December 31, 2006, with maturities ranging from approximately
one to fifteen years. The aggregate fair value of these swaps to the customers
was an asset of $377,000 at June 30, 2007 compared to a liability of $291,000 at
December 31, 2006. The amount of liability recorded by us for these guarantees
that were in a liability position at June 30, 2007 and December 31, 2006 was
$6,000 and $7,000, respectively. This amount represented the fair market value
of the guarantee to perform under the terms of the swap agreements.
8. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Postretirement Benefits
We share certain costs of providing health and life insurance benefits
to retired Associates (and their eligible dependents). Substantially all
Associates may become eligible for these benefits if they reach normal
retirement age while working for us.
We account for our obligations under the provisions of SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106"). SFAS 106 requires that the costs of these benefits be recognized over an
Associate's active working career. Disclosures for 2007 are in accordance with
SFAS No. 158, Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans ("SFAS 158") while disclosures for previous years are in
accordance with SFAS No. 132 (Revised), Employers' Disclosure About Pensions and
Other Postretirement Benefits.
The following disclosures of the net periodic benefit cost components
of post-retirement benefits were measured at January 1, 2007 and 2006:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
---- ---- ---- ----
Service cost ..................................... $ 35 $ 27 $ 69 $ 54
Interest cost..................................... 31 24 62 47
Amortization of transition obligation ............ 15 15 30 30
Net loss recognition.............................. 5 - 10 -
------- ------- ------ -------
Net periodic benefit cost ....... $ 86 $ 66 $ 171 $ 131
======= ======= ====== =======
14
Supplemental Pension Plan
We provide a nonqualified supplemental pension plan that gives credit
for 25 years of service based on the qualified plan formula. This plan is
provided to two of our retired executives. The plan is no longer being provided
to our Associates. Unrecognized net gains or losses resulting from experience
different from that assumed and from changes in assumptions is recognized
immediately as a component of net periodic benefit cost.
The following disclosures of the net periodic benefit cost components
of the supplemental pension plan are in accordance with SFAS 132 (Revised) and
were measured at January 1, 2007 and 2006:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
---- ---- ---- ----
Interest cost .................................... $ 10 $ 11 $ 20 $ 22
Net loss recognition.............................. 7 14 14 28
------- ------- ------- -------
Net periodic benefit cost ....... $ 17 $ 25 $ 34 $ 50
======= ======= ======= =======
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 continuously operating under the same name in the United
States. As a federal savings bank, which was formerly chartered as a state
mutual savings bank, the Bank enjoys broader investment powers than most other
financial institutions. We have served the residents of the Delaware Valley for
175 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 business strategy
is to serve small and mid-size businesses through loans, deposits, investments,
and related financial services, and to gather retail core deposits. Our
strategic focus is to exceed customer expectations, deliver stellar service and
build customer advocacy through highly trained, relationship oriented, friendly,
knowledgeable, and empowered Associates.
We provide residential and commercial real estate, commercial and
consumer lending services, as well as retail deposit and cash management
services. In addition, we offer a variety of wealth management and personal
trust services through the Bank's new division, Wilmington Advisors, which was
formed during 2006. Lending activities are funded primarily with retail deposits
and borrowings. The Federal Deposit Insurance Corporation ("FDIC") insures our
customers' deposits to their legal maximum. We serve customers from our main
office and 30 retail banking offices, loan production offices and operations
centers located in Delaware and southeastern Pennsylvania.
We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital
Management, Inc. ("Montchanin"). We also have one unconsolidated affiliate, WSFS
Capital Trust III. Fully-owned consolidated subsidiaries of WSFS include WSFS
Investment Group, Inc. which markets various third-party insurance products and
securities directly to the public and through the Banks' retail banking system,
and WSFS Reit, Inc., which holds qualifying real estate assets and may be used
in the future to raise capital.
Montchanin has one consolidated wholly-owned subsidiary, Cypress
Capital Management, LLC ("Cypress"). Cypress is a Wilmington-based investment
advisory firm serving high net-worth individuals and institutions. Cypress has
more than $463 million in assets under management at June 30, 2007.
FORWARD-LOOKING STATEMENTS
Within this report and financial statements, management has included
certain "forward-looking statements" concerning our future operations. 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". 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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of
operations are based on the Consolidated Financial Statements, which are
prepared in conformity with U.S. generally accepted accounting principles. The
preparation of these Financial Statements requires management to make estimates
and assumptions affecting the reported amounts of assets, liabilities, revenue
and expenses. Management evaluates these estimates and assumptions on an ongoing
basis, including those related to the allowance for loan losses, contingencies
(including indemnifications), and deferred taxes. Management bases its estimates
on historical experience and various other factors and assumptions that are
believed to be reasonable under the circumstances. These form the basis for
making 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.
16
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 management's best estimate of probable
loan losses related to specifically identified loans as well as those in the
remaining loan portfolio. Management's evaluation is based upon a continuing
review of these portfolios.
Contingencies (Including Indemnifications)
In the ordinary course of business we are subject to legal actions
which involve claims for monetary relief. Based upon information presently
available to us and our counsel, it is our opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on our results of operations.
We maintain a loss contingency for standby letters of credit and charge
losses to this reserve when such losses are realized. The determination of the
loss contingency for standby letters of credit requires significant judgment
reflecting management's best estimate of probable losses. The balance in this
reserve at June 30, 2007 was $411,000.
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. 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.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Account Standards ("SFAS") No. 109, Accounting for Income Taxes ("SFAS 109"),
which requires the recording of deferred income taxes that reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Management has assessed the Company's valuation allowances on deferred
income taxes resulting from, among other things, limitations imposed by Internal
Revenue Code and uncertainties, including the timing of settlement and
realization of these differences. We adopted Financial Accounting Standards
Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement 109 ("FIN 48") on January 1, 2007.
The impact of the adoption of this interpretation is more fully discussed in
Note 5 to the consolidated financial statements.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Our total assets increased $20.7 million or 1% during the six months
ended June 30, 2007. Net loans increased $65.4 million, or 3% mainly
attributable an $80.7 million or 6% increase in commercial and commercial real
estate loans offset by a decrease in residential mortgage loans of $20.3
million, or 4%. The decrease in residential mortgage loans is mainly due to our
decision to sell more of these loans rather than holding them on our balance
sheet. Cash and cash equivalents increased $22.7 million or 9% mainly due to new
customers from our Cash Connect division. Mortgage-backed securities decreased
$44.2 million or 9% due to scheduled repayments. There are no mortgage-backed
securities in the portfolio with subprime loans as collateral. Investment
securities decreased $26.0 million or 48% primarily due to $25.0 million in
agency notes maturing during the first quarter of 2007.
Total liabilities increased $31.6 million or 1% between December 31,
2006 and June 30, 2007 to $2.8 billion. This increase was due to a $121.0
million or 9% increase in customer deposits. This increase included $62.0
million in money market accounts and $34.6 million in customer time deposits.
These increases were partially offset by a decrease in Federal Home Loan Bank
("FHLB") advances of $49.7 million or 6% mainly due to using excess funds from
mortgage-backed security repayments to repay advances. There was also a decrease
of $23.4 million or 32% in federal funds purchased and securities sold under
agreements to repurchase.
We continue to improve our balance sheet mix of earning assets and
interest-bearing liabilities. Higher yielding loans have been increasing while
lower-yielding mortgage backed securities have declined, mostly due to scheduled
repayments. In addition, lower costing deposits have been increasing while
higher costing FHLB advances have decreased.
17
Capital Resources
Stockholders' equity decreased $10.9 million between December 31, 2006
and June 30, 2007. This decrease was mainly due to our purchase of 427,500
shares of our common stock for $28.6 million ($66.96 per share average). At June
30, 2007 we held 9.4 million shares of common stock in our treasury at a cost of
$237.2 million. Accumulated other comprehensive loss increased $1.8 million
during the first six months of 2007 due, in part, to a decrease in the fair
value of securities available-for-sale. Finally, we declared cash dividends
totaling $1.2 million during the six months ended June 30, 2007. These decreases
were partially offset by net income of $15.0 million and an increase of $3.7
million from the issuance of common stock and exercise of employee stock
options. In addition, stockholders' equity increased $2.0 million as a result of
the implementation of the FIN 48. The impact of the adoption of this
interpretation is more fully discussed in Note 5 to the Consolidated Financial
Statements.
Below is a table comparing the Bank's consolidated capital position to
the minimum regulatory requirements as of June 30, 2007 (dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------ ----------------- -----------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Total Capital
(to Risk-Weighted Assets) ........ $299,703 12.88% $186,124 8.00% $232,655 10.00%
Core Capital (to Adjusted
Total Assets)..................... 271,850 8.99 120,959 4.00 151,198 5.00
Tangible Capital (to Tangible
Assets) .......................... 271,850 8.99 45,360 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 271,850 11.68 93,062 4.00 139,593 6.00
Under Office of Thrift Supervision ("OTS") capital regulations, savings
institutions such as our bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory actions and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on our bank's financial statements. At June 30, 2007 the Bank was in compliance
with regulatory capital requirements and is considered a "well-capitalized"
institution.
Liquidity
We manage our liquidity risk and funding needs through our treasury
function and our Asset/Liability Committee. We have a policy that separately
addresses liquidity, and management monitors our adherence to policy limits.
Also, liquidity risk management is a primary area of examination by the OTS. We
comply with guidance promulgated under Thrift Bulletin 77 that requires thrift
institutions to maintain adequate liquidity to assure safe and sound operations.
As a financial institution, the Bank has ready access to several
sources to fund growth and meet its liquidity needs. Among these are: net
income, deposit programs, loan repayments, borrowing from the FHLB, repurchase
agreements and the brokered deposit market. The Bank's branch expansion is
intended to enter us into new, but contiguous, markets, attract new customers
and provide funding for its business loan growth. In addition, we have a large
portfolio of high-quality, liquid investments, primarily short-duration,
AAA-rated, mortgage-backed securities and Agency notes that are positioned to
provide a near-continuous source of cash flow to meet current cash needs, or can
be sold to meet larger discrete needs for cash. Management believes these
sources are sufficient to maintain the required and prudent levels of liquidity.
During the six months ended June 30, 2007, net loan growth resulted in
the use of $67.1 million in cash. The loan growth was primarily the result of
the successful implementation of specific strategies designed to increase
corporate and small business lending. While our loan to deposit ratio has been
well above 100% for many years, management has significant experience managing
its funding needs through borrowings, primarily through the FHLB.
During the six months ended June 30, 2007, $21.0 million in cash was
provided by operating activities, while $96.2 million in cash was provided
through the net increase in demand and savings deposits and $5.3 million in cash
was provided by the net increase in time deposits. During this period, cash and
cash equivalents increased $22.7 million to $264.5 million.
18
NONPERFORMING ASSETS
The following table shows our nonperforming assets and past due loans
at the dates indicated. Nonperforming assets include nonaccruing loans,
nonperforming real estate investments and assets acquired through foreclosure.
Nonaccruing loans are those on which the accrual of interest has ceased. Loans
are placed on nonaccrual status immediately if, in the opinion of management,
collection is doubtful, or when principal or interest is past due 90 days or
more and the value of the collateral is insufficient to cover principal and
interest. Interest accrued but not collected at the date a loan is placed on
nonaccrual status is reversed and charged against interest income. In addition,
the amortization of net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Subsequent cash receipts are applied either to the
outstanding principal balance or recorded as interest income, depending on
management's assessment of the ultimate collectibility of principal and
interest. Past due loans are loans contractually past due 90 days or more as to
principal or interest payments but which remain on accrual status because they
are considered well secured and in the process of collection.
June 30, December 31,
2007 2006
-------- --------
(In Thousands)
Nonaccruing loans:
Commercial ...................................... $ 1,217 $ 1,282
Consumer ........................................ 680 557
Commercial mortgage ............................. 404 500
Residential mortgage ............................ 1,572 1,493
Construction .................................... - -
-------- --------
Total nonaccruing loans .............................. 3,873 3,832
Assets acquired through foreclosure .................. 388 388
-------- --------
Total nonperforming assets ........................... $ 4,261 $ 4,220
======== ========
Past due loans:
Residential mortgages ........................... $ 72 $ 219
Commercial and commercial mortgages ............. 293 3
Consumer ........................................ 61 29
-------- --------
Total past due loans ................................. $ 426 $ 251
======== ========
Ratios:
Nonaccruing loans to total loans (1) ............ 0.18% 0.19%
Allowance for loan losses to gross loans (1)..... 1.34% 1.34%
Nonperforming assets to total assets ............ 0.14% 0.14%
Loan loss allowance to nonaccruing loans (2)..... 719% 705%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ...................... 654% 640%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $41,000 between December 31, 2006 and
June 30, 2007. This slight increase resulted from nonaccrual additions exceeding
collections, charge-offs and transfers of loans to accruing status. Nonaccruing
consumer loans grew $123,000 as the result of the addition of one installment
loan amounting to $144,000. Nonaccruing commercial loans decreased primarily
because of the payoff of two loans totaling $292,000. Assets acquired through
foreclosure and nonaccruing construction loans remained unchanged. An analysis
of the change in the balance of non-performing assets is presented below.
For the six
months ended For the year ended
June 30, 2007 December 31, 2006
------------- -----------------
(In Thousands)
Beginning balance................................... $ 4,220 $ 3,469
Additions ..................................... 1,711 5,697
Collections.................................... (1,191) (3,916)
Transfers to accrual/restructured status....... (205) (453)
Charge-offs / write-downs, net................. (274) (577)
---------- ---------
Ending balance...................................... $ 4,261 $ 4,220
========== =========
19
The timely identification of problem loans is a key element in our
strategy to manage our loan portfolio. Timely identification enables us to take
appropriate action and, accordingly, minimize losses. An asset review system
established to monitor the asset quality of our loans and investments in real
estate portfolios facilitates the identification of problem assets. In general,
this system utilizes guidelines established by federal regulation. However,
there can be no assurance that the levels or the categories of problem loans and
assets established by the Bank are the same as those which would result from a
regulatory examination.
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest
rate-sensitive assets and liabilities to promote a favorable interest rate
spread and mitigate exposure to fluctuations in interest rates is 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 June 30, 2007,
interest-bearing liabilities exceeded interest-earning assets that mature or
reprice within one year (interest-sensitive gap) by $20.1 million. Our
interest-sensitive assets as a percentage of interest-sensitive liabilities
within the one-year window increased from 97% at March 31, 2007 to 98% at June
30, 2007. Likewise, the one-year interest-sensitive gap as a percentage of total
assets changed to -0.67% at June 30, 2007 from -1.74% at March 31, 2007. The
change in sensitivity since March 31, 2007 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
its lending, investing, and funding activities. To that end, management actively
monitors and manages its interest rate risk exposure. One measure, required to
be performed by OTS-regulated institutions, is the test specified by OTS Thrift
Bulletin No. 13a "Management of Interest Rate Risk, Investment Securities and
Derivative Activities." This test measures the impact of an immediate change in
interest rates in 100 basis point increments on the net portfolio value ratio.
The net portfolio value ratio is defined as the net present value of the
estimated cash flows from assets and liabilities as a percentage of net present
value of cash flows from total assets (or the net present value of equity). The
table below shows the estimated impact of immediate changes in interest rates on
our net interest margin and net portfolio value ratio at the specified levels at
June 30, 2007 and 2006, calculated in compliance with Thrift Bulletin No. 13a:
At June 30,
------------------------------------------------------------
2007 2006
----------------------------- ---------------------------
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value Ratio (2) Margin (1) Value Ratio (2)
-------------- ---------- --------------- ---------- --------------
+300 -1% 8.97% 1% 7.54%
+200 0% 9.59% 1% 7.89%
+100 0% 10.08% 0% 8.25%
0 0% 10.30% 0% 8.87%
-100 1% 10.41% -1% 9.29%
-200 1% 10.57% -4% 9.85%
-300 1% 10.61% -10% 10.68%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate change environments.
(2) The net portfolio value ratio of the Company in a stable interest rate
environment and the net portfolio value ratio as projected under the
various rate change environments.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
Results of Operations
We recorded net income of $7.2 million or $1.11 per diluted share for
the second quarter of 2007. This compares to $7.5 million or $1.09 per diluted
share for the same quarter last year. Earnings for the second quarter of 2007
were negatively impacted by $578,000 ($0.06 per share) in increased provisions
for loan losses due to increased net charge-offs as well as the migration of a
small amount of loans to lower quality credit grades. The second quarter of 2007
was also impacted by a one-time increase in the effective tax rate due to
changes in Maryland tax law and by the effects of new tax accounting guidance
resulting in $142,000 ($0.02 per share) in increased tax expense.
Net income for the six months ended June 30, 2007 was $15.0 million or
$2.26 per diluted share. This compares to $14.8 million or $2.15 per diluted
share for the comparable period last year.
20
Net Interest Income
The following tables provide information concerning the balances,
yields and rates on interest-earning assets and interest-bearing liabilities
during the periods indicated.
Three months ended June 30,
-----------------------------------------------------------------------------
2007 2006
----------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans .... $ 663,812 $ 13,807 8.32% $ 638,645 $ 12,860 8.05%
Residential real estate loans.... 460,592 6,530 5.67 485,284 6,639 5.47
Commercial loans ................ 687,493 14,001 8.22 573,853 11,146 7.88
Consumer loans................... 268,472 5,047 7.54 257,930 4,687 7.29
---------- ---------- ---------- ---------
Total loans.................... 2,080,369 39,385 7.63 1,955,712 35,332 7.28
Mortgage-backed securities (4)........ 489,318 6,001 4.91 617,553 7,471 4.84
Investment securities (4) (5)......... 28,242 723 10.24 54,366 388 2.85
Other interest-earning assets ........ 39,117 558 5.72 52,402 677 5.18
---------- ---------- ---------- ---------
Total interest-earning assets.... 2,637,046 46,667 7.12 2,680,033 43,868 6.59
---------- ---------
Allowance for loan losses............. (27,789) (26,397)
Cash and due from banks............... 70,648 55,424
Cash in non-owned ATMs................ 157,690 157,655
Bank owned life insurance............. 56,035 54,860
Other noninterest-earning assets...... 67,315 62,156
---------- ----------
Total assets..................... $2,960,945 $2,983,731
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand.......... $ 147,552 $ 322 0.88% $ 122,917 $ 162 0.53%
Money market..................... 309,655 3,002 3.89 228,493 1,978 3.47
Savings.......................... 217,117 439 0.81 239,474 444 0.74
Retail time deposits ............ 458,298 5,353 4.68 364,669 3,497 3.85
---------- ---------- ---------- ---------
Total interest-bearing
retail deposits.............. 1,132,622 9,116 3.23 955,553 6,081 2.55
Jumbo certificates of deposits .. 99,079 1,311 5.31 84,353 1,033 4.91
Brokered certificates of deposit. 287,025 3,872 5.41 245,213 2,999 4.91
---------- ---------- ---------- ---------
Total interest-bearing
deposits..................... 1,518,726 14,299 3.78 1,285,119 10,113 3.16
FHLB of Pittsburgh advances........... 741,095 9,538 5.09 1,037,132 12,004 4.58
Trust preferred borrowings............ 67,011 1,161 6.85 67,011 1,106 6.53
Other borrowed funds.................. 127,905 1,529 4.78 113,190 1,259 4.45
---------- ---------- ---------- ---------
Total interest-bearing
liabilities.................... 2,454,737 26,527 4.32 2,502,452 24,482 3.91
---------- ---------
Noninterest-bearing demand deposits... 278,360 269,060
Other noninterest-bearing liabilities. 24,376 22,566
Minority interest .................... 38 65
Stockholders' equity.................. 203,434 189,588
---------- ----------
Total liabilities and stockholders'
equity.............................. $2,960,945 $2,983,731
========== ==========
Excess of interest-earning over
interest-bearing liabilities..... $ 182,309 $ 177,581
========== ==========
Net interest and dividend income...... $ 20,140 $ 19,386
========== =========
Interest rate spread.................. 2.80% 2.68%
==== ====
Net interest margin................... 3.10% 2.94%
==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
(5) Includes reverse mortgages.
21
Six months ended June 30,
-----------------------------------------------------------------------------
2007 2006
----------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- -------- ------- -------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans .... $ 659,763 $ 27,497 8.34% $ 622,009 $ 24,621 7.92%
Residential real estate loans ... 466,614 13,267 5.69 476,154 12,924 5.43
Commercial loans ................ 669,601 27,065 8.20 549,730 20,790 7.72
Consumer loans................... 267,426 10,025 7.56 254,413 9,093 7.21
---------- -------- ---------- --------
Total loans.................... 2,063,404 77,854 7.60 1,902,306 67,428 7.15
Mortgage-backed securities (4)........ 499,216 12,238 4.90 620,535 14,803 4.77
Investment securities (4) (5)......... 30,488 2,437 15.99 56,203 1,023 3.64
Other interest-earning assets ........ 38,487 1,226 6.42 50,556 1,091 4.35
---------- -------- ---------- --------
Total interest-earning assets.... 2,631,595 93,755 7.17 2,629,600 84,345 6.46
-------- --------
Allowance for loan losses............. (27,749) (25,958)
Cash and due from banks............... 68,920 53,401
Cash in non-owned ATMs................ 149,897 151,086
Bank-owned life insurance............. 55,756 54,614
Other noninterest-earning assets...... 66,540 61,077
---------- ----------
Total assets..................... $2,944,959 $2,923,820
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Interest bearing demand.......... $ 141,541 $ 592 0.84% $ 123,359 $ 302 0.49%
Money market..................... 312,574 6,089 3.93 227,367 3,693 3.28
Savings.......................... 218,507 884 0.82 243,292 955 0.79
Retail time deposits ............ 457,415 10,571 4.66 343,544 6,184 3.63
---------- -------- ---------- --------
Total interest-bearing retail
deposits..................... 1,130,037 18,136 3.24 937,562 11,134 2.39
Jumbo certificates of deposits .. 100,957 2,666 5.33 72,284 1,696 4.73
Brokered certificates of deposit. 292,605 7,885 5.43 235,671 5,460 4.67
---------- -------- ---------- --------
Total interest-bearing
deposits..................... 1,523,599 28,687 3.80 1,245,517 18,290 2.96
FHLB of Pittsburgh advances........... 719,296 18,460 5.10 1,020,334 22,747 4.43
Trust preferred borrowings............ 67,011 2,338 6.94 67,011 2,123 6.30
Other borrowed funds.................. 129,560 3,070 4.74 117,481 2,496 4.25
---------- -------- ---------- --------
Total interest-bearing
liabilities.................... 2,439,466 52,555 4.31 2,450,343 45,656 3.73
-------- --------
Noninterest-bearing demand deposits... 272,887 263,542
Other noninterest-bearing liabilities. 25,382 21,799
Minority interest .................... 43 109
Stockholders' equity.................. 207,181 188,027
---------- ----------
Total liabilities and stockholders'
equity.............................. $2,944,959 $2,923,820
========== ==========
Excess of interest-earning assets over
interest-bearing liabilities..... $ 192,129 $ 179,257
========= ===========
Net interest and dividend income...... $ 41,200 $ 38,689
======== ========
Interest rate spread.................. 2.86% 2.73%
==== ====
Net interest margin................... 3.17% 2.98%
==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
(5) Includes reverse mortgages.
Net interest income for the second quarter of 2007 was $20.1 million
compared to $19.4 million for the same quarter in 2006. Mainly contributing to
the increase in net interest income was an improved balance sheet mix of earning
assets and interest-bearing liabilities. Loans, with a yield of 7.63%, increased
$124.7 million while mortgage-backed securities, with a yield of 4.91%, declined
$128.2 million mostly due to scheduled repayments. In addition, deposits, with a
rate of 3.78%, increased $233.6 million while FHLB advances, with a rate of
5.09%, decreased $296.0 million. The yield on earning assets increased 0.53% in
comparison to the second quarter of 2006 while the rate on interest-bearing
liabilities increased by 0.41%. The net interest margin for the second quarter
of 2007 was 3.10%, up 0.16% from the second quarter of 2006.
22
Net interest income for the six-month period ending June 30, 2007 was
$41.2 million compared to $38.7 million for the same period in 2006. Consistent
with the quarterly trend discussed above, the increase in net interest income
was mostly due to improved balance sheet mix of earning assets and
interest-bearing liabilities. The yield on earning assets increased 0.71% in
comparison to the first six months of 2006 while the rate on interest-bearing
liabilities increased by 0.58%. Additionally, income from reverse mortgages
increased $1.7 million in comparison to the first six months of 2006. The net
interest margin for the first six months of 2007 was 3.17%, up 0.19% from the
same period of 2006.
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. Management's evaluation is
based upon a continuing review of these portfolios.
Management establishes the loan loss allowance in accordance with
guidance provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 102 ("SAB 102"). Its methodology for assessing the appropriateness of
the allowance consists of several key elements which include: specific
allowances for identified problem loans; formula allowances for commercial and
commercial real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans in cases where
management has identified significant conditions or circumstances related to a
specific credit that indicate the probability that a loss has been incurred.
The allowance formula for commercial and commercial real estate loans
is calculated in each case by applying loss factors to outstanding loans based
on the internal risk grade of loans. Based on this internal risk grade the loss
factor may include an analysis of both the probability of default and the
probability of loss should default occur. As a result, changes in risk grades of
both performing and nonperforming loans affect the amount of the formula
allowance. Loss factors by risk grade have a basis in our historical default
experience for such loans and an assessment of the probability of default. Loss
adjustment factors are applied based on criteria discussed below.
Pooled loans are loans that are usually smaller,
not-individually-graded and homogenous in nature, such as consumer installment
loans and residential mortgages. Loan loss allowances for pooled loans are based
on a ten-year net charge-off history. The average loss allowance per homogenous
pool is based on the product of average annual historical loss rate and the
average estimated duration of the pool multiplied by the pool balances. These
separate risk pools are then assigned a reserve for losses based upon this
historical loss information and historical loss adjustment factors.
Historical loss adjustment factors are based upon management's
evaluation of various current conditions, including those listed below.
o General economic and business conditions affecting the Bank's key lending
areas,
o Credit quality trends,
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
Our loan officers and risk managers meet at least quarterly to discuss
and review these conditions and risks associated with individual problem loans.
The provision for loan losses increased to $1.6 million for the first six months
of 2007 from $1.4 million during the first six months of 2006. This was the
result of increased net charge-offs as well as a migration of a small amount of
loans to lower quality credit grades. Deposit overdraft charge-offs have been
included in net charge-offs since the second quarter of 2006. During the second
quarter of 2007, we extended our "loss given default" methodology to include
"eight rated" loans (one grade above classified). Additionally, we began
applying adjustment factors against all loan balances. Also during the quarter
we lowered the adjustment factor attributable to commercial loan concentration
due to the continued seasoning of the portfolio. We believe this analysis better
estimates losses currently in our loan portfolio. These changes resulted in a
pre-tax reduction to the provision for loan losses, for the quarter ended June
30, 2007, of $1.5 million or $0.14 per share.
We maintain allowances for credit losses and charge losses to these
allowances when such losses are realized. The allowances for losses are
maintained at a level which management considers adequate to provide for losses
based upon an evaluation of known and inherent risks in the portfolios.
23
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated.
Six months ended Six months ended
June 30, 2007 June 30, 2006
------------- -------------
(Dollars in Thousands)
Beginning balance ................................. $ 27,384 $ 25,381
Provision for loan losses.......................... 1,644 1,383
Charge-offs:
Residential real estate ...................... 41 70
Commercial real estate (1) ................... - -
Commercial.................................... 197 79
Overdrafts (2)................................ 697 162
Consumer...................................... 249 189
-------- --------
Total charge-offs.................................. 1,184 500
-------- --------
Recoveries:
Residential real estate ...................... 7 14
Commercial real estate (1) ................... 122 156
Commercial ................................... 107 121
Overdrafts (2)................................ 226 45
Consumer...................................... 53 101
-------- --------
Total recoveries .................................. 515 437
-------- --------
Net charge-offs ................................... 669 63
-------- --------
Ending balance..................................... $ 28,359 $ 26,701
======== ========
Net charge-offs to average gross loans
outstanding, net of unearned income (3).......... 0.06% 0.01%
(1) Includes commercial mortgage and construction loans.
(2) Overdraft charge-offs and recoveries have been included in the allowance
for loan losses since the second quarter of 2006.
(3) Ratio for six months ended June 30, 2007 and June 30, 2006 are annualized.
Noninterest Income
Noninterest income for the quarter ended June 30, 2007 was $11.6
million compared to $9.9 million for the second quarter of 2006 an increase of
$1.7 million or 18%. The increase over the second quarter 2006 was mainly
attributable to a $1.0 million increase in deposit service charges and a
$216,000 increase in credit/debit card and ATM income. Deposit service charges
continue to benefit from an increase in deposit accounts and additional
fee-based services offered by us. The increase in credit/debit card and ATM
income was due to slightly higher volumes of cash in non-owned ATMs and higher
rates earned on this cash.
For the six months ended June 30, 2007, noninterest income was $22.3
million, an increase of $3.4 million or 18% over the same period in 2006.
Consistent with the quarter over quarter trend, the increase was mainly due to a
$2.1 million increase in deposit service charges as a result of our continued
success in personal and business checking initiatives. In addition, credit/debit
card and ATM income increased $539,000 as a result of higher rates earned on
cash in non-owned ATMs.
Noninterest Expense
Noninterest expense for the quarter ended June 30, 2007 was $19.0
million for an increase of $2.1 million over the $16.9 million reported for the
same period in 2006. The 12% increase over the second quarter of 2006 was
primarily a result of our continued growth efforts. Since June 2006, we have
opened five branch offices, renovated/relocated two branch offices, formed a
reverse mortgage business unit, and continued growing the Wealth Management
Division. This expansion is reflected in higher compensation, occupancy,
equipment, and marketing expenses. The number of full-time equivalent Associates
increased from 554 in the second quarter of 2006 to 609 in the second quarter of
2007. Partially offsetting these increases was a reduction to a reserve for
standby letters of credit of $322,000 and a $220,000 decrease in expenses
relating to our 401 K plan.
Noninterest expense for the six months ended June 30, 2007 was $38.4
million, an increase of $5.2 million or 16% over the $33.2 million reported for
the same period in 2006. The increase was mainly due to our growth efforts
mentioned above plus the
24
additional expenses related to the move into our new corporate headquarters in
the WSFS Bank Center in March 2007. As a result of our continued investment in
the franchise, increases can be found in salaries, benefits and other
compensation as well as occupancy expense. Consistent with the quarterly
analysis, these increases were offset by a reduction in expenses relating to a
reserve for standby letters of credit and a decrease to our 401 K plan.
Income Taxes
The Company and its subsidiaries, with the exception of WSFS Reit,
Inc., file a consolidated Federal income tax return and separate state income
tax returns. WSFS Reit, Inc. files separate Federal and state income tax
returns. Income taxes are accounted for in accordance with SFAS 109, which
requires the recording of deferred income taxes for tax consequences of
"temporary differences." We recorded a provision for income taxes during the
three and six months ended June 30, 2007 of $4.2 million and $8.5 million,
respectively, compared to an income tax provision of $4.1 million and $8.2
million for the same periods in 2006. The effective tax rate for the three and
six month periods ended June 30, 2007 was 37% and 36%, respectively, compared to
35% and 36%, respectively, for the comparable periods in 2006. This increased
effective tax rate was primarily due to a one-time charge to reflect changes in
Maryland tax law combined with the effects of new tax accounting guidance under
FIN 48. While the impact of FIN 48 adds volatility to our quarterly effective
tax rate, we believe it will have a minimal impact to the rate over the full
year.
The effective tax rate reflects the recognition of certain tax benefits
in the financial statements including those benefits from tax-exempt interest
income, Bank-Owned Life Insurance ("BOLI") income and fifty-percent interest
income exclusion on a loan to an Employee Stock Ownership Plan. These tax
benefits are offset by the tax effect of stock-based compensation expense
related to incentive stock options and a provision for state income tax expense.
We frequently analyze our projections of taxable income and make
adjustments to our provision for income taxes accordingly.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments - An Amendment of Statements No. 133 and 140 ("SFAS
155"). This Statement permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. It also clarifies which interest-only strips are not subject to the
requirements of SFAS 133. In addition, it establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation. SFAS 155 becomes effective in
fiscal years beginning after September 15, 2006. The adoption of this Statement
did not have a material impact on our Consolidated Financial Statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets - An Amendment of Statement No. 140 ("SFAS 156"). This
Statement will modify the accounting for servicing assets and liabilities, such
as those common with mortgage securitization activities. The new Standard
addresses the recognition and measurement of separately recognized servicing
assets and liabilities and provides an approach to lessen the efforts to obtain
hedge-like (offset) accounting. SFAS 156 becomes effective in fiscal years
beginning after September 15, 2006. The adoption of this Statement did not have
a material impact on our Consolidated Financial Statements.
In September 2006, the Emerging Issues Task Force ("EITF") reached a
final consensus on Issue 06-04, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements. In accordance with the EITF consensus, an agreement by an employer
to share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement
required to be accounted for in accordance with SFAS No. 106 Employers'
Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106") or
Accounting Principles Board Opinion ("APB") No. 12, Omnibus Opinion -- 1967.
Furthermore, the purchase of a split dollar life insurance policy does not
constitute a settlement under SFAS 106 and, therefore, a liability for the
postretirement obligation must be recognized under SFAS 106 if the benefit is
offered under an arrangement that constitutes a plan or under Accounting
Principles Board No. 12 if it is not part of a plan. The provisions of EITF
Issue 06-04 are to be applied through either a cumulative-effect adjustment to
retained earnings as of the beginning of the year of adoption or retrospective
application. We are required to adopt this statement in the fiscal year
beginning after December 15, 2007, with early adoption permitted. We plan to
adopt this statement on January 1, 2008 and are currently assessing the impact
the adoption will have on our Consolidated Financial Statements.
In September 2006, the FASB ratified the consensus reached by the EITF
in Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin No.
85-4, Accounting for Purchases of Life Insurance," ("EITF 06-5"). EITF 06-5
concluded that companies purchasing a life insurance policy should record the
amount that could be realized, considering any additional amounts beyond cash
surrender value included in the contractual terms of the policy. The amount that
could be realized should be based on assumed surrender at the individual policy
or certificate level, unless all policies or certificates are required to be
surrendered as a group. When it is probable that contractual restrictions would
limit
25
the amount that could be realized, such contractual limitations should be
considered and any amounts recoverable at the insurance company's discretion
should be excluded from the amount that could be realized. Companies are
permitted to recognize the effects of applying the consensus through either (1)
a change in accounting principle through a cumulative-effect adjustment to
retained earnings or to other components of equity or net assets as of the
beginning of the year of adoption or (2) a change in accounting principle
through retrospective application to all prior periods. EITF 06-5 was effective
for fiscal years beginning after December 15, 2006. We adopted EITF 06-5 at the
beginning of 2007, and the adoption had no impact on our Consolidated Financial
Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure
eligible items at fair value at specified election dates. Unrealized gains and
losses on items for which the fair value option has been elected are to be
reported in earnings at each subsequent reporting date. The fair value option
(i) may be applied instrument by instrument, with certain exceptions, (ii) is
irrevocable (unless a new election date occurs) and (iii) is applied only to
entire instruments and not to portions of instruments. SFAS 159 is effective for
us on January 1, 2008. We are currently evaluating the impact the adoption of
SFAS 159 will have on our Consolidated Financial Statements.
In March 2007, the EITF reached a final consensus on Issue No. 06-10
("EITF 06-10"), "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements." EITF
06-10 requires employers to recognize a liability for the post-retirement
benefit related to collateral assignment split-dollar life insurance
arrangements in accordance with SFAS No. 106 or APB Opinion No. 12. EITF 06-10
also requires employers to recognize and measure an asset based on the nature
and substance of the collateral assignment split-dollar life insurance
arrangement. The provisions of EITF 06-10 are effective for us on January 1,
2008, with earlier application permitted, and are to be applied as a change in
accounting principle either through a cumulative-effect adjustment to retained
earnings or other components of equity or net assets in the statement of
financial position as of the beginning of the year of adoption; or as a change
in accounting principle through retrospective application to all prior periods.
We are currently assessing the impact the adoption of EITF 06-10 will have on
our Consolidated Financial Statements.
In May 2007, the FASB issued a Staff Position on FIN No. 48-1
"Definition of Settlement in FASB Interpretation No. 48" (FSP FIN 48-1), FSP FIN
48-1 provides three conditions a tax position will have to meet to be considered
"effectively settled": (a) the taxing authority has completed all required
examination procedures; (b) the company does not intend to appeal any aspect of
the tax position; and (c) the chance that the taxing authority would reexamine
any aspect of its position is remote. FSP FIN 48-1 is effective for us upon the
initial adoption of FIN 48 (January 1, 2007) and should be applied
retrospectively if a company did not apply FIN 48 in a manner consistent with
FSP FIN 48-1. We have adopted the provisions of FSP FIN 48-1 and the adoption
had no effect on our Consolidated Financial Statements.
In June 2007, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 06-11 ("EITF 06-11"), "Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards." EITF 06-11 requires realized income
tax benefits from dividends paid to employees for equity classified nonvested
equity shares to be recognized as an increase in additional paid in capital and
be included in the pool of excess tax benefits available to absorb potential
future tax deficiencies on share-based payment awards. The provisions of EITF
06-11 are to be applied prospectively to the income tax benefits resulting from
dividends declared in fiscal years beginning after December 15, 2007. We are
currently assessing the impact the adoption of EITF 06-11 will have on our
Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report
on Form 10-Q.
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")), our principal executive officer and the
principal financial officer have concluded that as of the end of
the period covered by this Quarterly Report on Form 10-Q such
disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Securities and Exchange Commission's
rules and forms and is accumulated and communicated to our
management, including the principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosures.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in our internal control
over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
We are not engaged in any legal proceedings of a material nature at
June 30, 2007. From time to time, we are party to legal proceedings
in the ordinary course of business which enforces its security
interest in loans.
Item 1A. Risk Factors
------------
Our management does not believe there have been any material changes
to the risk factors previously disclosed under Item 1A. of the
Company's Form 10-K for the year ended December 31, 2006, previously
filed with the Securities and Exchange Commission.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table lists purchases of our Common Stock during the
second quarter of 2007.
Total Number of Maximum Number
Total Number Average Shares Purchased of Shares that May
of Shares Price Paid As Part of Publicly Yet Be Purchased
Purchased Per Share Announced Plan Under the Plan
--------- --------- -------------- --------------
April 1, to April 30, 2007 0 $0.00 0 165,100
May 1, to May 31, 2007 5,000 $64.83 5,000 160,100
June 1, to June 30, 2007 41,000 $64.35 41,000 119,100
Total for the quarter ended June 30, 2007 46,000 $64.40
There is no expiration date under the Plan.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Corporation's Annual Stockholder's Meeting (the Meeting) held
on April 26, 2007, all the nominees for director proposed by us were
elected. The votes cast for each nominee were as follows:
For Withheld
--- --------
John F. Downey..................... 5,685,838 43,890
Thomas P. Preston.................. 5,657,128 72,600
Marvin N. Schoenhals............... 5,546,163 183,565
At the Meeting, the shareholders also ratified the appointment of
KPMG, LLP as independent auditors for fiscal year ending December 31,
2007. The votes cast were as follows:
For Against Abstain
--- ------- -------
5,656,111 53,516 20,101
Also at the meeting, the shareholders approved an amendment to the
WSFS Financial Corporation 2005 Incentive Plan. The votes cast were
as follows:
For Against Abstain
--- ------- -------
4,083,432 717,834 35,565
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
(a) Exhibit 31 - Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) Exhibit 32 - Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: August 3, 2007 /s/ MARK A. TURNER
------------------------------------------
Mark A. Turner
President and Chief Executive Officer
Date: August 3, 2007 /s/ STEPHEN A. FOWLE
------------------------------------------
Stephen A. Fowle
Executive Vice President and
Chief Financial Officer
28