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EX-32 - EXHIBIT 32 - WSFS FINANCIAL CORPex32.htm
EX-31.1 - EXHIBIT 31.1 - WSFS FINANCIAL CORPex31-1.htm
EX-31.2 - EXHIBIT 31.2 - WSFS FINANCIAL CORPex31-2.htm


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
March 31, 2010
     
OR
     
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   
EXCHANGE ACT OF 1934
     
For the transition period from
 
to
 
     
     
Commission File Number  0-16668
     
     
WSFS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
 
22-2866913
(State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization)
 
Identification Number)
     
500 Delaware Avenue, Wilmington, Delaware
 
19801
(Address of principal executive offices)
 
(Zip Code)
     
(302) 792-6000
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),   ____ Yes_____ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [  ]                                                      Accelerated filer [X]
Non-accelerated filer [  ]                                                      Smaller reporting company [   ]
(Do not check if smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [  ]      No [X]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 3, 2010:
 
Common Stock, par value $.01 per share
 
7,097,024
(Title of Class)
 
(Shares Outstanding)

 
 

 

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX


PART I. Financial Information



       
Page
Item 1.
 
Financial Statements (Unaudited)
   
         
   
Consolidated Statement of Operations for the Three Months
   
   
Ended March 31, 2010 and 2009
 
3
         
   
Consolidated Statement of Condition as of March 31, 2010
   
   
and December 31, 2009
 
4
         
   
Consolidated Statement of Cash Flows for the Three  Months Ended
   
   
March 31, 2010 and 2009
 
5
         
   
Notes to the Consolidated Financial Statements for the Three
   
   
Months Ended March 31, 2010 and 2009
 
6
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
 
23
   
and Results of Operations
   
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
34
         
Item 4.
 
Controls and Procedures
 
34
         
         
PART II. Other Information
         
Item 1.
 
Legal Proceedings
 
34
         
Item 1A.
 
Risk Factors
 
34
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
34
         
Item 3.
 
Defaults upon Senior Securities
 
34
         
Item 4.
 
[Reserved]
 
34
         
Item 5.
 
Other Information
 
34
         
Item 6.
 
Exhibits
 
34
         
Signatures
     
35
         
Exhibit 31.1
 
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
         
Exhibit 31.2
 
Certification of CFO 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 March 31,
 
 
2010
   
2009
 
 
(Unaudited)
 
 
(In Thousands, Except Per Share Data)
 
Interest income:
             
Interest and fees on loans
$
31,223
   
$
31,374
 
Interest on mortgage-backed securities
 
9,032
     
7,336
 
Interest and dividends on investment securities
 
303
     
97
 
   
40,558
     
38,807
 
Interest expense:
             
Interest on deposits
 
6,294
     
8,329
 
Interest on Federal Home Loan Bank advances
 
3,977
     
5,341
 
Interest on trust preferred borrowings
 
329
     
595
 
Interest on other borrowings
 
615
     
651
 
   
11,215
     
14,916
 
Net interest income
 
29,343
     
23,891
 
Provision for loan losses
 
11,410
     
7,653
 
Net interest income after provision for loan losses
 
17,933
     
16,238
 
               
Noninterest income:
             
Credit/debit card and ATM income
 
4,370
     
3,702
 
Deposit service charges
 
3,879
     
3,817
 
Loan fee income
 
680
     
1,250
 
Investment advisory income
 
604
     
531
 
Mortgage banking activities, net
 
252
     
202
 
Bank owned life insurance income
 
196
     
210
 
Security gains
 
     
423
 
Other income
 
1,160
     
966
 
   
11,141
     
11,101
 
Noninterest expenses:
             
Salaries, benefits and other compensation
 
11,986
     
12,331
 
Non-routine ATM loss
 
4,491
     
 
Occupancy expense
 
2,562
     
2,436
 
FDIC expenses
 
1,643
     
1,465
 
Equipment expense
 
1,469
     
1,579
 
Data processing and operations expenses
 
1,286
     
1,121
 
Professional Fees
 
1,170
     
962
 
Net costs of assets acquired through foreclosure
 
743
     
500
 
Marketing Expense
 
704
     
727
 
Other operating expense
 
3,579
     
3,253
 
   
29,633
     
24,374
 
(Loss) income before taxes
 
(559
)
   
2,965
 
Income tax (benefit) provision
 
(1,073
)
   
25
 
Net income
 
514
     
 2,940
 
Dividends on preferred stock and accretion of discount
 
692
     
513
 
Net (loss) income allocable to common stockholders
$
(178
)
 
$
2,427
 
               
Earnings per share:
             
Basic
$
(0.03
)
 
$
0.39
 
Diluted
$
(0.03
)
 
$
0.39
 

The accompanying notes are an integral part of these consolidated Financial Statements.

 
3

 
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
   
(In Thousands, Except Per Share Data)
 
Assets
               
Cash and due from banks
 
$
58,920
   
$
55,756
 
Cash in non-owned ATMs
   
263,330
     
264,903
 
Federal funds sold
   
-
     
-
 
Interest-bearing deposits in other banks
   
750
     
1,090
 
Total cash and cash equivalents
   
323,000
     
321,749
 
Investment securities held-to-maturity
   
556
     
709
 
Investment securities-available-for-sale including reverse mortgages
   
44,468
     
44,808
 
Mortgage-backed securities - available-for-sale
   
747,560
     
669,059
 
Mortgages-backed securities-trading
   
12,183
     
12,183
 
Loans held-for-sale
   
5,074
     
8,366
 
Loans, net of allowance for loan losses of $57,052 at March 31, 2010
   and $53,446 at December 31, 2009
   
2,459,765
     
2,470,789
 
Bank owned life insurance
   
60,450
     
60,254
 
Stock in Federal Home Loan Bank of Pittsburgh, at cost
   
39,305
     
39,305
 
Assets acquired through foreclosure
   
10,711
     
8,945
 
Premises and equipment
   
36,115
     
36,108
 
Goodwill
   
10,870
     
10,870
 
Intangible assets
   
2,636
     
2,781
 
Accrued interest receivable and other assets
   
59,638
     
62,581
 
                 
Total assets
 
$
3,812,331
   
$
3,748,507
 
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities:
               
Deposits:
               
Noninterest-bearing demand
 
$
435,812
   
$
431,476
 
Interest-bearing demand
   
259,140
     
265,719
 
Money market
   
608,343
     
550,639
 
Savings
   
237,502
     
224,921
 
Time
   
470,287
     
470,139
 
Jumbo certificates of deposit – customer
   
198,211
     
203,126
 
Total customer deposits
   
2,209,295
     
2,146,020
 
Other jumbo certificates of deposit
   
79,329
     
69,208
 
Brokered deposits
   
328,787
     
346,643
 
Total deposits
   
2,617,411
     
2,561,871
 
                 
Federal funds purchased and securities sold under agreements to repurchase
   
100,000
     
100,000
 
Federal Home Loan Bank advances
   
615,454
     
613,144
 
Trust preferred borrowings
   
67,011
     
67,011
 
Other borrowed funds
   
76,215
     
74,654
 
Accrued interest payable and other liabilities
   
29,725
     
30,027
 
Total liabilities
   
3,505,816
     
3,446,707
 
                 
Stockholders’ Equity:
               
Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 56,625 at
   March 31, 2010 and December 31, 2009
   
1
     
1
 
Common stock $.01 par value, 20,000,000 shares authorized; issued
   16,677,593 at March 31, 2010 and 16,660,588 at December 31, 2009
   
166
     
166
 
Capital in excess of par value
   
167,241
     
166,627
 
Accumulated other comprehensive income (loss)
   
3,107
     
(2,022
)
Retained earnings
   
384,280
     
385,308
 
Treasury stock at cost, 9,580,569 shares at March 31, 2010 and December 31, 2009
   
(248,280
)
   
(248,280
)
Total stockholders’ equity
   
306,515
     
301,800
 
Total liabilities and stockholders’ equity
 
$
3,812,331
   
$
3,748,507
 

The accompanying notes are an integral part of these consolidated Financial Statements.

 
4

 
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
 
   
Three months ended
March 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
   
(In Thousands)
 
Operating activities:
           
Net Income
  $ 514     $ 2,940  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    11,410       7,653  
Depreciation, accretion and amortization
    1,384       1,592  
Increase in accrued interest receivable and other assets
    (4,693 )     (275 )
Non-routine ATM loss
    4,491        
Origination of loans held-for-sale
    (14,814 )     (19,413 )
Proceeds from sales of loans held-for-sale
    18,162       16,648  
Gain on mortgage banking activity
    (252 )     (202 )
Loss on mark to market adjustment on trading securities
          124  
Gain on sale of investments
          (547 )
Stock-based compensation expense, net of tax benefit recognized
    204       286  
Excess tax benefits from share-based payment arrangements
    (79 )      
Increase (decrease) in accrued interest payable and other liabilities
    (292 )     4,004  
Loss on sale of assets acquired through foreclosure and valuation adjustments
    226       723  
Increase in value of bank-owned life insurance
    (196 )     (210 )
Decrease (increase) in capitalized interest, net
    (13 )     301  
Net cash provided by operating activities
    16,052       13,624  
                 
Investing activities:
               
Maturities of investment securities
    500       16,025  
Purchase of investments available-for-sale
          (14,027 )
Sales of mortgage-backed securities available-for  sale
          20,830  
Repayments of mortgage-backed securities available-for-sale
    46,372       30,895  
Purchases of mortgage-backed securities available-for-sale
    (116,297 )     (143,343 )
Repayments of reverse mortgages
          50  
Disbursements for reverse mortgages
    (49 )     (52 )
Net increase in loans
    (3,919 )     (69,991 )
Sales of assets acquired through foreclosure, net
    1,627       1,007  
Investment in premises and equipment, net
    (1,184 )     (1,640 )
Net cash used for investing activities
    (72,950 )     (160,246 )
                 
Financing activities:
               
Net increase in demand and saving deposits
    69,603       104,879  
Net (decrease) increase in time deposits
    (12,711 )     7,678  
Receipts from federal funds purchased and securities sold under agreement to
repurchase
    4,435,000       4,425,000  
Repayments of federal funds purchased and securities sold under agreement to
repurchase
    (4,435,000 )     (4,400,000 )
Receipts from FHLB advances
    6,321,940       11,371,780  
Repayments of FHLB advances
    (6,319,630 )     (11,491,446 )
Proceeds from issuance of unsecured bank debt
          30,000  
Dividends paid
    (1,507 )     (901 )
Proceeds from issuance of preferred stock
          52,625  
Issuance of common stock and exercise of common stock options
    375       297  
Excess tax benefits from share-based payment arrangements
    79        
Net cash provided by financing activities
    58,149       99,912  
                 
Increase (decrease) cash and cash equivalents
    1,251       (46,710 )
Cash and cash equivalents at beginning of period
    321,749       248,558  
Cash and cash equivalents at end of period
  $ 323,000     $ 201,848  
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest during the period
  $ 9,278     $ 11,873  
Cash paid for (refund of) income taxes, net
    1,008       (851 )
Loans transferred to assets acquired through foreclosure
    3,619       5,076  
Net change in other comprehensive income
    5,129       3,734  


The accompanying notes are an integral part of these consolidated Financial Statements.

 
5

 

WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(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”). We also have one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”). WSFS Bank has a fully-owned subsidiary, WSFS Investment Group, Inc., which markets various third-party insurance products and securities products to Bank customers through WSFS’ retail banking system.  Founded in 1832, the Bank is 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 trust services through WSFS Trust and Wealth Management.  Lending activities are funded primarily with retail deposits and borrowings.  The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximum.  We serve our customers primarily from our 41 banking offices located in Delaware (36), Pennsylvania (4) and Virginia (1) and through our website at www.wsfsbank.com.

Although our current estimates contemplate current economic conditions and how we expect them to change in the future, it is reasonably possible that in 2010, actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Amounts subject to significant estimates are items such as the allowance for loan losses and lending related commitments, goodwill and intangible assets, post-retirement obligations, the fair value of financial instruments and other-than-temporary impairments. Among other effects, such changes could result in future impairments of investment securities, goodwill and intangible assets and establishment of allowances for loan losses and lending related commitments as well as increased post-retirement expense.

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 the SEC’s Regulation S-X.  Rule 10-01 of Regulation S-X does not require us to include all information and notes for complete financial statements and prevailing practices within the banking industry. Operating results for the three month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission.

Accounting for Stock-Based Compensation

Stock-based compensation is accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718 (formerly SFAS No. 123R, Share-Based Payment).  We have stock options outstanding under two plans (collectively, “Stock Incentive Plans”) for officers, directors and Associates of the Company and its subsidiaries.  After shareholder approval in 2005, the 1997 Stock Option Plan (“1997 Plan”) was replaced by the 2005 Incentive Plan (“2005 Plan”).  No future awards may be granted under the 1997 Plan.  The 2005 Plan will terminate on the tenth anniversary of its effective date, after which no awards may be granted.  The number of shares reserved for issuance under the 2005 Plan is 862,000.  At March 31, 2010 there were 67,485 shares available for future grants under the 2005 Plan.  At the April 2010 Annual Meeting of Shareholders a proposal was approved that increased the number of shares available for issuance by 335,000.

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 non-incentive stock options (collectively, “Stock Options”). Additionally, the 2005 Plan provides for the granting of stock appreciation rights, performance awards, restricted stock and restricted stock unit awards, deferred stock units, dividend equivalents, other stock-based awards and cash awards. All Stock Options are to be granted at not less than the market price of our Corporation’s common stock on the date of the grant. All Stock Options granted during 2010 vest in 25% per annum increments, start to become exercisable one year from the grant date and expire five years from the grant date. Generally, all awards become immediately exercisable in the event of a change in control, as defined within the Stock Incentive Plans.

 
 
6

 
 
We announced on April 18, 2007, that our Executive Committee of the Board of Directors adopted an administrative policy related to the future award of stock options under the 2005 Plan.  The Executive Committee’s policy provided that any change to the policy would only be made following the approval by our stockholders.  At the 2010 Annual meeting of Shareholders, a proposal was approved to increase the maximum life of stock options and stock appreciation rights from five years to seven years.

A summary of the status of our Stock Incentive Plans at March 31, 2010 and March 31, 2009, respectively, and changes during the quarters then ended is presented below:

   
March 31, 2010
   
March 31, 2009
 
         
Weighted-
         
Weighted-
 
         
Average
         
Average
 
   
Shares
   
Exercise Price
   
Shares
   
Exercise Price
 
Stock Options:
                       
Outstanding at beginning of period
    733,468     $ 42.95       675,887     $ 44.98  
Granted
    26,089       30.46       82,421       23.28  
Exercised
    (16,861 )     14.13       0       0.00  
Forfeited
    (6,120 )     54.93       (2,920 )     59.26  
Outstanding at end of period
    736,576       43.06       755,388       42.56  
                                 
Exercisable at end of period
    544,912     $ 43.66       475,617     $ 39.93  
                                 
Weighted-average fair value
                               
of awards granted
  $ 9.16             $ 5.38          

Beginning January 1, 2010, 541,910 stock options were exercisable with an intrinsic value of $1.5 million.  In addition, at January 1, 2010, there were 191,558 non-vested options with a grant date fair value of $8.92.  During the first quarter of 2010, 24,201 options vested with an intrinsic value of $328,000, and a grant date fair value of $6.65 per option. Also during the quarter, there were 16,861 options exercised with an intrinsic value of $351,000.  In addition, 4,338 vested options and 1,782 non-vested options were forfeited with an intrinsic value of $3,000 and $10,000 and a grant date fair value of $12.65 and $9.69, respectively.  There were 544,912 exercisable options remaining at March 31, 2010, with an intrinsic value of $3.7 million and a remaining contractual term of 2.4 years.  At March 31, 2010, there were 736,576 stock options outstanding with an intrinsic value of $4.9 million and a remaining contractual term of 2.7 years.  During the first quarter of 2009, no options were exercised and 3,624 options vested with a fair value of $13.88 per option.

The total amount of compensation cost related to non-vested stock options as of March 31, 2010 was $1.1 million.  The weighted-average period over which they are expected to be recognized is 2.2 years.  We issue new shares upon the exercise of options.

The Black-Scholes and other option-pricing models assume that options are freely tradable and immediately vested.  Since options are not transferable, have vesting provisions, and are subject to trading blackout periods imposed by us, the value calculated by the Black-Scholes model may significantly overstate the true economic value of the options.

During the first quarter of 2010, we granted 26,089 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 1.8% for 2010; an expected option life of three and three-quarters years; and an expected stock price volatility of 43.3% in 2010.  For the purposes of this option-pricing model, a dividend yield of 1.6% was assumed.  The expected option life was determined based on the mid-point between the vesting date and the end of the contractual term.

We issued 5,703 restricted stock units and awards during the first quarter of 2010.   These awards generally vest over a four to five year period.  In addition, for these stock awards made to certain executive officers, there are additional vesting limitations.  Under these additional limitations;  25% of the awards will become transferrable at the time of repayment of at least 25% of the aggregate financial assistance received by the Company under the Emergency Economic Stabilization Act of 2008 (“EESA”); an additional 25% of the shares granted (for an aggregate total of 50% of the shares transferrable) at the time of repayment of at least 50% of the aggregate financial assistance received by the Company under EESA; an additional 25% of the shares granted (for an aggregate total of 75% of the shares transferrable) at the time of repayment of at least 75% of the aggregate financial assistance received by the Company under EESA.  The remainder of the shares will vest following the time of repayment of 100% of the aggregate financial assistance received by the Company under EESA.  If the date specified has not occurred by the tenth anniversary of the grant date, the grantee shall forfeit all of the restricted shares.
 
 
 
7

 
 
Compensation costs related to these issuances are recognized over the lives of the restricted stock and restricted stock units.  We amortize the expense related to the restricted stock grants into salaries, benefits and other compensation expense on a straight-line basis over the requisite service period for the entire award.  When we award restricted stock to individuals from whom we may not receive services in the future, such as those who are eligible for retirement, we recognize the expense of restricted stock grants when we make the award, instead of amortizing the expense over the vesting period of the award.

The Long-Term Performance-Based Restricted Stock Unit program (“Long-Term Program”) will award up to an aggregate of 109,200 shares of WSFS stock to seventeen participants, only after the achievement of targeted levels of return on assets (“ROA”).  Under the terms of the plan, if an annual ROA performance level of 1.20% is achieved, up to 54,900 shares will be awarded.  If an annual ROA performance level of 1.35% is achieved, up to 76,100 shares will be awarded.  If an annual ROA performance level of 1.50% or greater is achieved, up to 109,200 shares will be awarded.  If these targets are achieved in any year up until 2011, the awarded stock will vest in 25% increments over four years.  We did not recognize any compensation expense related to this program in the first quarter of 2010.  Compensation expense for the Long-Term Program was based on the closing stock price as of May 28, 2009 and will begin to be recognized once the achievement of target performance is considered probable.

At March 31, 2010 we had 67,485 remaining shares available for issuance under the 2005 Plan.  Full share awards, such as restricted stock, have the equivalence of four option grants for the purpose of calculating shares available for issuance.  Under the provisions of the Long-Term Program, if a performance level is achieved and there are insufficient shares available for grant, then we would have the option of granting the available shares with the remainder being paid in cash.

The impact of stock-based compensation for the three months ended March 31, 2010 was $370,000 pre-tax ($288,000 after tax) or $0.04 per share, to salaries, benefits and other compensation.  This compares to $445,000 pre-tax ($359,000 after tax) or $0.06 per share for the three months ended March 31, 2009.

2. EARNINGS PER SHARE

The following table shows the computation of basic and diluted earnings per share:

   
For the three months ended
March 31,
 
   
2010
   
2009
 
   
(In Thousands, Except Per Share Data)
 
Numerator:
               
Net (loss) income allocable to common stockholders
 
$
(178
)
 
$
2,427
 
                 
Denominator:
               
Denominator for basic earnings per share - weighted average shares
   
7,084
     
6,173
 
Effect of dilutive employee stock options
   
-
     
68
 
Denominator for diluted earnings per share – adjusted weighted
 average shares and assumed exercise
   
7,084
     
6,241
 
                 
Earnings per share:
               
Basic:
               
    Net (loss) income allocable to common shareholders
 
$
(0.03
)
 
$
0.39
 
Diluted:
               
    Net (loss) income allocable to common shareholders
 
$
(0.03
)
 
$
0.39
 
                 
Outstanding common stock equivalents having no dilutive effect
   
795
     
772
 

For the three months ended March 31, 2010, 795,000 employee stock options were excluded from the computation of diluted net loss per common share of which 78,000 were because the effect would have been antidilutive due to the net loss reported in this period.

 
8

 

3. INVESTMENT SECURITIES

The following tables detail the amortized cost and the estimated fair value of the Company’s investment securities held-to-maturity and securities available-for-sale (which includes reverse mortgages):

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In Thousands)
 
Available-for-sale securities:
                       
                         
March 31, 2010:
                       
Reverse mortgages
  $ (468 )   $     $     $ (468 )
U.S. Government and agencies
    40,653       622       (9 )     41,266  
State and political subdivisions
    3,590       80             3,670  
    $ 43,775     $ 702     $ (9 )   $ 44,468  
December 31, 2009
                               
Reverse mortgages
  $ (530 )   $     $     $ (530 )
U.S. Government and agencies
    40,695       652       (35 )     41,312  
State and political subdivisions
    3,935       91             4,026  
    $ 44,100     $ 743     $ (35 )   $ 44,808  
Held-to-maturity:
                               
                                 
March 31, 2010:
                               
State and political subdivisions
  $ 556     $     $ (16 )   $ 540  
    $ 556     $     $ (16 )   $ 540  
 
                               
December 31, 2009:
                               
State and political subdivisions
  $ 709     $     $ (38 )   $ 671  
    $ 709     $     $ (38 )   $ 671  
 
Securities with market values aggregating $40.3 million at March 31, 2010 were specifically pledged as collateral for WSFS’ Treasury Tax and Loan account with the Federal Reserve Bank, securities sold under agreement to repurchase, and certain letters of credit and municipal deposits which require collateral. Accrued interest receivable relating to investment securities was $379,000 and $352,000 at March 31, 2010 and December 31, 2009, respectively.

The scheduled maturities of investment securities held-to-maturity and securities available-for-sale at March 31, 2010 and December 31, 2009 were as follows:

 
Held-to-Maturity
 
Available-for Sale
 
 
Amortized
 
Fair
 
Amortized
 
Fair
 
 
Cost
 
Value
 
Cost
 
Value
 
 
(In Thousands)
 
2010
               
Within one year (1)
  $ 340     $ 340     $ 17,930     $ 18,204  
After one year but within five years
                25,725       26,141  
After five years but within ten years
                120       123  
After ten years
    216       200              
    $ 556     $ 540     $ 43,775     $ 44,468  
2009
                               
Within one year (1)
  $ 340     $ 340     $ 10,864     $ 11,068  
After one year but within five years
                32,986       33,485  
After five years but within ten years
                250       255  
After ten years
    369       331              
    $ 709     $ 671     $ 44,100     $ 44,808  
 
(1) Reverse mortgages do not have contractual maturities. We have included reverse mortgages in maturities within one year.
 
 
 
9

 
 
There were no sales of investment securities classified as available-for-sale during 2010 or 2009. As a result, there were no net gains/losses realized during 2010 or 2009.  The cost basis for investment security sales was based on the specific identification method.  Investment securities totaling $240,000 and $18.6 million were called by their issuers during 2010 and 2009, respectively.

At March 31, 2010, we owned investment securities totaling $3.1 million where the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $25,000 at March 31, 2010. This temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Securities amounting to $109,000 have been impaired for 12 months or longer. We have determined that these securities are not other than temporarily impaired. The investment portfolio is reviewed on a quarterly basis for indications of impairment.  This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and new-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market.  We evaluate our intent and ability to hold debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position.  In addition, we do not have the intent to sell, nor is it more likely-than not we will be required to sell these securities before we are able to recover the amortized cost basis.
 
The table below shows our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at March, 31, 2010.
 

   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
   
(In Thousands)
 
Held-to-maturity
                                   
State and political subdivisions
  $     $     $ 109     $ 16     $ 109     $ 16  
                                                 
Available-for-sale
                                               
State and political subdivisions
                                   
U.S Government and agencies
    3,009       9        —             3,009       9  
                                                 
Total temporarily impaired investments
  $ 3,009     $ 9     $ 109     $ 16     $ 3,118     $ 25  

The table below shows our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2009.
 

   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
   
(In Thousands)
 
Held-to-maturity
                                   
State and political subdivisions
  $     $     $ 242     $ 38     $ 242     $ 38  
                                                 
Available-for-sale
                                               
State and political subdivisions
                                   
U.S Government and agencies
    2,985       35                   2,985       35  
                                                 
Total temporarily impaired investments
  $ 2,985     $ 35     $ 242     $ 38     $ 3,227     $ 73  

 
10

 

4. MORTGAGE-BACKED SECURITIES

The following tables detail the amortized cost and the estimated fair value of the Company’s mortgage-backed securities:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In Thousands)
 
Available-for-sale securities:
                       
                         
March 31, 2010:
                       
Collateralized mortgage obligations (1)
  $ 598,245     $ 7,883     $ (5,926 )   $ 600,202  
FNMA
    58,508       1,072       (129 )     59,451  
FHLMC
    41,766       850             42,616  
GNMA
    43,989       1,328       (26 )     45,291  
    $ 742,508     $ 11,133     $ (6,081 )   $ 747,560  
                                 
Weighted average yield
    5.12 %                        
                                 
December 31, 2009:
                               
Collateralized mortgage obligations (1)
  $ 519,527     $ 5,368     $ (10,383 )   $ 514,512  
FNMA
    61,603       813       (454 )     61,962  
FHLMC
    44,536       561       (83 )     45,014  
GNMA
    46,629       1,129       (187 )     47,571  
    $ 672,295     $ 7,871     $ (11,107 )   $ 669,059  
                                 
Weighted average yield
    5.00 %                        
                                 
Trading securities:
                               
                                 
March 31, 2010:
                               
Collateralized mortgage obligations
  $ 12,183     $     $     $ 12,183  
    $ 12,183     $     $     $ 12,183  
                                 
Weighted average yield
    3.28 %                        
                                 
December 31, 2009:
                               
Collateralized mortgage obligations
  $ 12,183     $     $     $ 12,183  
    $ 12,183     $     $     $ 12,183  
                                 
Weighted average yield
    3.74 %                        

(1)  Includes Agency CMO’s classified as available-for-sale.

The portfolio of available-for-sale mortgage-backed securities consists of $742.5 million of both Agency and non-Agency bonds.  All bonds were AAA-rated at the time of purchase; $90.8 million are now rated below AAA.  Downgraded bonds were evaluated at March 31, 2010.  The result of this evaluation shows no other-than-temporary impairment as of March 31, 2010.  An evaluation of downgraded bonds at December 31, 2009 showed one bond ($2.6 million) had other-than-temporary impairment which resulted in an earnings charge of $86,000 or 9 basis points of downgraded bonds and only 1 basis point of the total mortgage-backed security portfolio.  The $86,000 of other-than-temporary impairment loss recognized during the fourth quarter of 2009 represents our only other-than-temporary impairment charge since the start of the credit cycle in 2008.  The weighted average duration of the mortgage-backed securities was 2.5 years at March 31, 2010.

Accrued interest receivable relating to mortgage-backed securities was $3.1 million at March 31, 2010 and $2.8 million at December 31, 2009.  At March 31, 2010, mortgage-backed securities with market values aggregating $343.6 million were pledged as collateral for retail customer repurchase agreements and municipal deposits. From time to time, mortgage-backed securities are also
 
 
 
11

 
 
pledged as collateral for Federal Home Loan Bank (FHLB) borrowings and other obligations.  The fair value of these pledged mortgage-backed securities at March 31, 2010 was $114.4 million.

During the first three months of 2010, there were no sales of mortgage-backed securities available-for-sale. The cost basis of all mortgage-backed securities sales is based on the specific identification method. During the first three months of 2009, proceeds from the sale of mortgage-backed securities available-for-sale were $20.8 million, resulting in a gain of $547,000.
 
We own $12.4 million par value of SASCO RM-1 2002 securities which are classified as trading, of which, $1.4 million is accrued interest paid in kind.  Because of seasoning and being well over-collateralized, we expect to recover all principal and interest.  Based on FASB ASC 320, Investments – Debt and Equity Securities (“ASC 320”) (Formerly SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities) when these securities were acquired they were classified as trading. It was our intent to sell them in the near term. We have used the guidance under ASC 320 to provide a reasonable estimate of fair value in 2009. We estimated the value of these securities as of March 31, 2010 based on the pricing of BBB+ securities that have an active market through a technique which estimates the fair value of this asset using the income approach.

At March 31, 2010, we owned mortgage-backed securities totaling $184.7 million where the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $6.1 million at March 31, 2010. This temporary impairment is the result of changes in market interest rates, a lack of liquidity in the mortgage-backed securities market and the reduction in credit ratings of 28 bonds out of 216 bonds.  Most of these securities have been impaired for twelve months or longer. We have determined that these securities are not other-than-temporarily impaired. Quarterly, we evaluate the current characteristics of each of our mortgage-backed securities such as delinquency and foreclosure levels, credit enhancement, projected losses and coverage.  In addition, we do not have the intent to sell, nor is it more likely-than not we will be required to sell these securities before we are able to recover the amortized cost basis.

The table below shows our mortgage-backed securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at March, 31, 2010.
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
 
 
(In Thousands)
 
Available-for-sale
                                   
CMO
  $ 74,524     $ 1,446     $ 90,340     $ 4,480     $ 164,864     $ 5,926  
FNMA
    18,532       129                   18,532       129  
FHLMC
                                   
GNMA
    1,346       26                   1,346       26  
                                                 
Total temporarily impaired MBS
  $ 94,402     $ 1,601     $ 90,340     $ 4,480     $ 184,742     $ 6,081  

The table below shows our mortgage-backed securities’ gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2009.
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
 
 
(In Thousands)
 
Available-for-sale
                                   
CMO
  $ 115,088     $ 2,701     $ 108,839     $ 7,682     $ 223,927     $ 10,383  
FNMA
    29,360       454                   29,360       454  
FHLMC
    25,434       83                   25,434       83  
GNMA
    19,953       187                   19,953       187  
                                                 
Total temporarily impaired MBS
  $ 189,835     $ 3,425     $ 108,839     $ 7,682     $ 298,674     $ 11,107  



 
12

 

5. IMPAIRED LOANS

Loans from which it is probable we will not collect all principal and interest due according to contractual terms are measured for impairment in accordance with the provisions of FASB ASC 310, Receivables (Formerly SFAS No. 114, Accounting for Creditors for Impairment of a Loan).  The amount of impairment is required to be measured using one of three methods; (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of collateral if the loan is collateral dependent.  If the measure of the impaired loan is less than the recorded investment in the loan, a specific allowance is allocated for the impairment.

We had impaired loans (for which ASC 310 applied) of approximately $71.4 million at March 31, 2010 compared to $73.2 million at December 31, 2009. The average recorded balance of aggregate impaired loans was $72.3 million for the three months ended March 31, 2010 and $62.2 million for the year-ended December 31, 2009. The specific allowance for losses on these impaired loans was $11.0 million at March 31, 2010 compared to $11.8 million at December 31, 2009.   The specific reserve at March 31, 2010 was associated with $41.9 million of total impaired loans.  The remaining $29.5 million of impaired loans had no related specific reserve.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for loan losses. Losses are recognized in the period an obligation becomes uncollectible.

6. COMPREHENSIVE INCOME

The following schedule reconciles net income to total comprehensive income:

   
For the three months ended March 31,
 
   
(In Thousands)
 
   
2010
   
2009
 
                 
Net income
 
$
514
   
$
2,940
 
                 
Other Comprehensive Income:
               
                 
Unrealized holding gains on securities
               
available-for-sale arising during the period
   
8,273
     
6,569
 
Tax expense
   
(3,144
)
   
(2,496
)
Net of tax amount
   
5,129
     
4,073
 
Reclassification adjustment for gains included in
net income
   
-
     
(547
)
Tax expense
   
-
     
208
 
Net of tax amounts
   
-
     
(339
)
                 
Total comprehensive income
 
$
5,643
   
$
6,674
 

7. TAXES ON INCOME

We account for income taxes in accordance with FASB ASC 740, Income Taxes (“ASC 740”) (Formerly SFAS No. 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty In Income Taxes, an Interpretation of FASB Statement 109).  ASC 740 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.  We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations. Significant judgment may be involved in applying the requirements of ASC 740.
 
 
 
13

 
 
The total amount of unrecognized tax benefits as of March 31, 2010 and December 31, 2009 were $1.0 million and $1.9 million, respectively, of which $500,000 would have affected our March 31, 2010 effective tax rate if recognized. As of March 31, 2010 and December 31, 2009, the total amount of accrued interest included in such unrecognized tax benefits was $39,000 and $372,000, respectively. No penalties are included in such unrecognized tax benefits. We record interest and penalties on potential income tax deficiencies as income tax expense. The decrease in the unrecognized tax benefits was primarily due to the expiration of a statute of limitations.

While our Federal and State tax years 2006 through 2009 remain subject to examination as of March 31, 2010, the Internal Revenue Service (“IRS”) completed its examination of our 2004 through 2006 Federal tax returns during the quarter ended June 30, 2008. During 2008 we successfully completed the IRS appeal process and during the quarter ended March 31, 2009 we recovered $863,000 of taxes plus $275,000 of interest that were previously assessed during the audit phase.

During 2007, we donated a N.C. Wyeth mural which was previously displayed in our former headquarters. The estimated fair value of the mural was $6.0 million, which was recorded as a charitable contribution expense. We recognized a related offsetting gain on the transfer of the asset during 2007. The expense and offsetting gain was shown net in our Consolidated Financial Statements during 2007. As the gain on the transfer of the asset is permanently excludible from taxation, the charitable contribution transaction results in a permanent deduction for income tax purposes. The amount of the deduction represents an income tax uncertainty because it is subject to evaluation by the IRS. The IRS is still in the process of evaluating this tax deduction and we anticipate this evaluation to be completed during 2010.

8. SEGMENT INFORMATION
 
Under the definition of FASB ASC 280, Segment Reporting (“ASC 280”) (Formerly SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information) we discuss our business in three segments.  There is one segment for WSFS Bank (including WSFS Investment Group, Inc.), Cash Connect, (the ATM division of WSFS), and Trust and Wealth Management.  Trust and Wealth Management combines Montchanin and the WSFS Trust and Wealth Management Division into a single reportable segment because each has similar economic characteristics, products, customers and distribution methods.  During 2009 we reported the results of 1st Reverse (the national reverse mortgage subsidiary of WSFS) as a separate segment, consistent with the guidance promulgated in ASC 280,  however we completed a wind-down of 1st Reverse’s operation during the latter part of 2009 and have no results to report as an operating segment in 2010.

The WSFS Bank segment provides financial products to commercial and retail customers through its 41 banking offices located in Delaware (36), Pennsylvania (4) and Virginia (1).  Retail and Commercial Banking, Commercial Real Estate Lending, Private Banking and other banking business units (including the reorganization of WSFS Investment Group, Inc.) are operating departments of WSFS.  These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank.  Because of these and other reasons, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment of the Company in accordance with ASC 280.

Cash Connect provides turnkey ATM services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry.  The balance sheet category “Cash in non-owned ATMs” includes cash from which fees income is earned through bailment arrangements with customers of Cash Connect.

The Wealth Management column is comprised of the WSFS Trust & Wealth Management division and Montchanin.  In 2005, the WSFS Trust and Wealth Management division was established in response to our commercial customers’ demand for the same high level service in their investment relationships that they enjoy as banking customers of WSFS Bank.  Montchanin provides asset management products and services to customers in the Bank’s primary market area.  Montchanin has one consolidated wholly owned subsidiary, Cypress Capital Management, LLC (Cypress). Cypress is a Wilmington-based investment advisory firm serving high net-worth individuals and institutions.

An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to the allocated to the segment and assess its performance, and for which discrete financial information is available.  We evaluate performance based on pretax ordinary income relative to resources used, and allocate resources based on these results.  The accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Segment information for the three months ended March 31, 2010 and 2009 follows:

 
14

 

For the three months ended March 31, 2010 (In Thousands)
             
   
WSFS
   
Cash Connect
   
Trust & Wealth Management
   
Total
 
                         
External customer revenues:
                       
Interest income
  $ 40,558     $ -     $ -     $ 40,558  
Noninterest income
    7,197       3,139       805       11,141  
Total external customer revenues
    47,755       3,139       805       51,699  
                                 
Inter-segment revenues:
                               
Interest income
    222       -       -       222  
Noninterest income
    730       172       -       902  
Total inter-segment revenues
    952       172       -       1,124  
                                 
Total revenue
    48,707       3,311       805       52,823  
                                 
External customer expenses:
                               
Interest expense
    11,215       -       -       11,215  
Noninterest expenses
    23,105       5,706       822       29,633  
Provision for loan loss
    11,410       -       -       11,410  
Total external customer expenses
    45,730       5,706       822       52,258  
                                 
Inter-segment expenses
                               
Interest expense
    -       222       -       222  
Noninterest expenses
    172       366       364       902  
Total inter-segment expenses
    172       588       364       1,124  
                                 
Total expenses
    45,902       6,294       1,186       53,382  
                                 
Income (loss) before taxes and extraordinary items
  $ 2,805     $ (2,983 )   $ (381 )   $ (559 )
                                 
Income tax benefit
                            (1,073 )
Consolidated net income
                          $ 514  
                                 
Cash and cash equivalents
  $ 58,775     $ 263,330     $ 895     $ 323,000  
Other segment assets
    3,472,909       15,445       977       3,489,331  
                                 
Total segment assets
  $ 3,531,684     $ 278,775     $ 1,872     $ 3,812,331  
                                 
Capital expenditures
  $ 1,643     $ 3     $ -     $ 1,646  


 
15

 

For the three months ended March 31, 2009 (In Thousands)
                   
   
WSFS
   
Cash Connect
   
1st Reverse
   
Trust & Wealth Management
   
Total
 
                               
External customer revenues:
                             
Interest income
  $ 38,807     $ -     $ -     $ -     $ 38,807  
Noninterest income
    7,346       2,777       556       422       11,101  
Total external customer revenues
    46,153       2,777       556       422       49,908  
                                         
Inter-segment revenues:
                                       
Interest income
    165       -       -       -       165  
Noninterest income
    725       71       -       -       796  
Total inter-segment revenues
    890       71       -       -       961  
                                         
Total revenue
    47,043       2,848       556       422       50,869  
                                         
External customer expenses:
                                       
Interest expense
    14,916       -       -       -       14,916  
Noninterest expenses
    21,509       1,074       1,069       722       24,374  
Provision for loan loss
    7,653       -       -       -       7,653  
Total external customer expenses
    44,078       1,074       1,069       722       46,943  
                                         
Inter-segment expenses
                                       
Interest expense
    -       156       9       -       165  
Noninterest expenses
    112       187       63       434       796  
Total inter-segment expenses
    112       343       72       434       961  
                                         
Total expenses
    44,190       1,417