f10q_063010-0312.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
June 30, 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 July 26, 2010
 
Common Stock, par value $.01 per share
 
7,116,714
(Title of Class)
 
(Shares Outstanding)


 
1

 

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX


PART I. Financial Information



       
Page
Item 1.
 
Financial Statements (Unaudited)
   
         
   
Consolidated Statement of Operations for the Three and Six Months
 
3
   
Ended June 30, 2010 and 2009
   
         
   
Consolidated Statement of Condition as of June 30, 2010
 
4
   
and December 31, 2009
   
         
   
Consolidated Statement of Cash Flows for the Six  Months Ended
 
5
   
June 30, 2010 and 2009
   
         
   
Notes to the Consolidated Financial Statements for the Six
 
6
   
Months Ended June 30, 2010 and 2009
   
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
 
26
   
and Results of Operations
   
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
40
         
Item 4.
 
Controls and Procedures
 
40
         
         
PART II. Other Information
         
Item 1.
 
Legal Proceedings
 
40
         
Item 1A.
 
Risk Factors
 
40
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
43
         
Item 3.
 
Defaults upon Senior Securities
 
43
         
Item 4.
 
[Reserved]
 
43
         
Item 5.
 
Other Information
 
43
         
Item 6.
 
Exhibits
 
43
         
Signatures
     
44
         
Exhibit 2.1
   
  Stock Purchase Agreement between WSFS Financial Corporation and National Penn Bancshares, Inc. dated as of June 24, 2010    
         
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
   
Six months ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
 
   
(In Thousands, Except Per Share Data)
 
   Interest income:
                               
Interest and fees on loans
 
$
31,610
   
$
32,356
   
$
62,833
   
$
63,730
 
Interest on mortgage-backed securities
   
9,639
     
6,948
     
18,671
     
14,284
 
Interest and dividends on investment securities
   
199
     
535
     
502
     
632
 
Other interest income
   
6
     
     
6
     
 
     
41,454
 
 
 
39,839
     
82,012
     
78,646
   
   Interest expense:
                               
Interest on deposits
   
5,771
     
7,523
     
12,065
     
15,852
 
Interest on Federal Home Loan Bank advances
   
4,017
     
4,804
     
7,994
     
10,145
 
Interest on trust preferred borrowings
   
348
     
465
     
677
     
1,060
 
Interest on other borrowings
   
620
     
667
     
1,235
     
1,318
 
     
10,756
     
13,459
     
21,971
     
28,375
   
   Net interest income
   
30,698
     
26,380
     
60,041
     
50,271
 
   Provision for loan losses
   
10,594
     
11,997
     
22,004
     
19,650
    
   Net interest income after provision for loan losses
   
20,104
     
14,383
     
38,037
     
30,621
 
                                    
   Noninterest income:
                               
Credit/debit card and ATM income
   
4,817
     
4,049
     
9,187
     
7,751
 
Deposit service charges
   
4,349
     
4,276
     
8,228
     
8,093
 
Loan fee income
   
709
     
1,354
     
1,389
     
2,604
 
Investment advisory income
   
612
     
516
     
1,216
     
1,047
 
Security gains, net
   
268
 
 
 
887
     
268
     
1,310
 
Mortgage banking activities, net
   
247
     
406
     
499
     
608
 
Bank owned life insurance income
   
219
     
229
     
415
     
439
 
Other income
   
1,215
     
950
     
2,375
     
1,916
 
     
12,436
 
 
 
12,667
     
23,577
     
23,768
    
   Noninterest expenses:
                               
Salaries, benefits and other compensation
   
12,111
     
12,051
     
24,097
     
24,382
 
Loan workout and OREO expenses
   
2,872
     
1,721
     
3,969
     
2,361
 
Occupancy expense
   
2,271
     
2,355
     
4,833
     
4,791
 
FDIC expenses
   
1,762
     
2,903
     
3,405
     
4,368
 
Equipment expense
   
1,646
     
1,725
     
3,114
     
3,304
 
Professional fees
   
1,440
     
2,082
     
2,458
     
2,992
 
Data processing and operations expenses
   
1,159
     
1,157
     
2,445
     
2,278
 
Marketing expense
   
904
     
831
     
1,609
     
1,558
 
Non-recurring ATM loss
   
     
     
4,491
     
 
Other operating expense
   
3,574
     
6,130
     
6,951
     
9,295
 
     
27,739
     
30,955
     
57,372
     
55,329
 
                                   
   Income before taxes
   
4,801
     
(3,905
)
   
4,242
     
(940
)
   Income tax provision (benefit)
   
1,500
     
(1,589
)
   
427
     
(1,564
)
   Net income (loss)
   
3,301
     
(2,316
)
   
3,815
     
 624
    
   Dividends on preferred stock and accretion of discount
   
692
     
751
     
1,384
     
1,264
 
   Net income (loss) allocable to common shareholders
 
$
2,609
   
$
 (3,067
)
 
$
2,431
   
$
 (640
)
                                 
   Earnings (loss) per share:
                                  
   Basic
 
$
0.37
   
$
 (0.50
)
 
$
0.34
   
$
 (0.10
)
   Diluted
 
$
0.36
   
$
 (0.50
)
 
$
0.34
   
$
 (0.10
)


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

 
3

 

WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION



   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
   
(In Thousands, Except Per Share Data)
 
   Assets:
                  
   Cash and due from banks
 
$
57,664
   
$
55,756
   
   Cash in non-owned ATMs
   
263,989
     
264,903
 
   Federal funds sold
   
-
     
-
 
   Interest-bearing deposits in other banks
   
474
     
1,090
 
    Total cash and cash equivalents
   
322,127
     
321,749
 
   Investment securities held-to-maturity
   
557
     
709
 
   Investment securities-available-for-sale including reverse mortgages
   
44,469
     
44,808
 
   Mortgage-backed securities - available-for-sale
   
743,470
     
669,059
 
   Mortgages-backed securities-trading
   
12,121
     
12,183
 
   Loans held-for-sale
   
10,372
     
8,366
 
   Loans, net of allowance for loan losses of $62,256 at June 30, 2010
    and $53,446 at December 31, 2009
   
2,449,631
     
2,470,789
 
   Bank owned life insurance
   
60,669
     
60,254
 
   Stock in Federal Home Loan Bank of Pittsburgh, at cost
   
39,305
     
39,305
    
   Assets acquired through foreclosure
   
9,428
     
8,945
 
   Premises and equipment
   
29,304
     
36,108
 
   Goodwill
   
10,870
     
10,870
 
   Intangible assets
   
2,501
     
2,781
 
   Accrued interest receivable and other assets
   
57,042
     
62,581
 
                 
   Total assets
 
$
3,791,866
   
$
3,748,507
 
                 
   Liabilities and Stockholders’ Equity
               
                 
   Liabilities:
               
   Deposits:
               
   Noninterest-bearing demand
 
$
469,518
   
$
431,476
 
   Interest-bearing demand
   
259,180
     
265,719
    
   Money market
   
594,007
     
550,639
 
   Savings
   
243,268
     
224,921
 
   Time
   
469,114
     
470,139
 
   Jumbo certificates of deposit – customer
   
200,834
     
203,126
 
    Total customer deposits
   
2,235,921
     
2,146,020
 
   Other jumbo certificates of deposit
   
91,915
     
69,208
 
   Brokered deposits
   
300,946
     
346,643
 
    Total deposits
   
2,628,782
     
2,561,871
 
                 
   Federal funds purchased and securities sold under agreements to repurchase
   
100,000
     
100,000
 
   Federal Home Loan Bank advances
   
572,072
     
613,144
 
   Trust preferred borrowings
   
67,011
     
67,011
 
   Other borrowed funds
   
80,782
     
74,654
 
   Accrued interest payable and other liabilities
   
28,486
     
30,027
 
   Total liabilities
   
3,477,133
     
3,446,707
 
                 
   Stockholders’ Equity:
               
   Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 52,625 at
       June 30, 2010 and December 31, 2009
   
1
     
1
 
   Common stock $.01 par value, 20,000,000 shares authorized; issued
    16,697,283 at June 30, 2010 and 16,660,588 at December 31, 2009
   
166
     
166
 
   Capital in excess of par value
   
167,992
     
166,627
    
   Accumulated other comprehensive income (loss)
   
8,818
     
(2,022
)
   Retained earnings
   
386,036
     
385,308
 
   Treasury stock at cost, 9,580,569 shares at June 30, 2010 and December 31, 2009
   
(248,280
)
   
(248,280
)
   Total stockholders’ equity
   
314,733
     
301,800
 
   Total liabilities and stockholders’ equity
 
$
3,791,866
   
$
3,748,507
 

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,
 
 
2010
   
2009
 
 
(Unaudited)
 
 
(In Thousands)
    
   Operating activities:
             
   Net income
$
3,815
   
$
624
 
   Adjustments to reconcile net income to net cash provided by operating activities:
             
    Provision for loan losses
 
22,004
     
19,650
 
    Depreciation, accretion and amortization
 
2,973
     
3,393
 
    Increase in accrued interest receivable and other assets
 
(5,597
)
   
(4,538
)
    Non-routine ATM losses
 
4,491
     
 
    Origination of loans held-for-sale
 
(54,225
)
   
(53,740
)
    Proceeds from sales of loans held-for-sale
 
52,543
     
43,104
 
      Gain on mortgage banking activity
 
(499
)
   
(608
)
    Loss (gain) on mark to market adjustment on trading securities
 
62
     
(497
)
    Securities gain from the sale of MasterCard, Inc. and Visa, Inc. common stock
 
     
(119
    Gain on sale of investments, net
 
(330
)
   
(694
)
    Stock-based compensation expense, net of tax benefit recognized
 
372
     
484
 
    Excess tax benefits from share-based payment arrangements
 
(263
)
   
 
    Increase in accrued interest payable and other liabilities
 
4,994
     
8,995
     
      Loss on wind-down of 1st Reverse Financial Services, LLC
 
     
1,589
 
      Loss on sale of assets acquired through foreclosure and valuation adjustments
 
3,563
     
1,993
 
    Increase in value of bank-owned life insurance
 
(415
)
   
(439
)
    Decrease in capitalized interest, net
 
76
     
106
   
   Net cash provided by operating activities
 
33,564
     
19,303
 
                   
  Investing activities:
             
    Maturities and calls of investment securities
 
2,500
     
18,025
 
    Purchases of investment securities available-for-sale
 
(2,002
)
   
(16,049
)
    Sales of mortgage backed securities available-for-sale
 
45,979
     
38,646
 
    Repayments of mortgage-backed securities available-for-sale
 
90,523
     
75,605
 
    Purchases of mortgage-backed securities available-for-sale
 
(192,700
)
   
(158,473
)
    Repayments of reverse mortgages
 
     
50
 
    Disbursements for reverse mortgages
 
(97
)
   
(104
)
    Net increase in loans
 
(5,872
)
   
(88,002
)
    Sales of assets acquired through foreclosure, net
 
926
     
1,523
 
    Proceeds from the sale of MasterCard, Inc. and Visa, Inc. common stock
 
     
119
 
    Investment in premises and equipment, net
 
(2,165
)
   
(3,526
)
   Net cash used for investing activities
 
(62,908
)
   
(132,186
)
               
   Financing activities:
             
    Net increase in demand and savings deposits
 
99,346
     
210,943
 
    Net increase (decrease) in time deposits
 
19,390
     
(17,427
)
    Net (decrease) increase in brokered deposits
 
(46,109
)
   
21,344
 
    Receipts from federal funds purchased & securities sold under agreement to repurchase
 
9,245,000
     
9,247,995
 
    Repayments of federal funds purchased & securities sold under agreement to repurchase
 
(9,245,000
)
   
(9,222,995
)
    Receipts from FHLB advances
 
15,593,383
     
17,615,421
 
    Repayments of FHLB advances
 
(15,634,455
)
   
(17,794,606
)
    Proceeds from issuance of unsecured bank debt
 
     
30,000
 
    Dividends paid
 
(3,016
)
   
(2,301
)
    Proceeds from issuance of preferred stock
 
     
52,625
 
    Issuance of common stock and exercise of common stock options
 
920
     
454
     
    Excess tax benefits from share-based payment arrangements
 
263
     
 
   Net cash provided by financing activities
 
29,722
     
141,453
     
    Increase in cash and cash equivalents
 
378
     
28,570
 
    Cash and cash equivalents at beginning of period
 
321,749
     
248,558
 
    Cash and cash equivalents at end of period
$
322,127
   
$
277,128
 
               
   Supplemental Disclosure of Cash Flow Information:
                 
   Cash paid for interest during the period
$
17,660
   
$
22,919
    
   Cash paid for income taxes, net
 
4,659
     
971
 
   Loans transferred to assets acquired through foreclosure
 
4,972
     
6,683
   
   Net change in other comprehensive income
 
10,840
     
3,744
 
 Settlement of pending sale of premises and equipment        
6,515
     
 

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

 
5

 

WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 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 customer deposits and borrowings.  The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximum.  We serve our customers primarily from our 40 banking offices located in Delaware (35), 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, 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 increases 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 and six month periods ended June 30, 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 SEC.

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 1,197,000.  At June 30, 2010, there were 402,669 shares available for future grants under the 2005 Plan.

The Stock Incentive Plans provide for the granting of incentive stock options as defined in Section 422 of the Internal Revenue Code as well as 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 the 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 in 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 June 30, 2010 and June 30, 2009, respectively, and changes during the quarters then ended is presented below:

 
June 30, 2010
 
June 30, 2009
 
Shares
 
Weighted- Average
Exercise Price
 
Shares
 
Weighted- Average
Exercise Price
Stock Options:
                 
Outstanding at beginning of period
736,576
 
$
  43.06
 
755,388
 
$
42.56
Granted
200
   
43.71
 
1,500
   
26.23
Exercised
(19,690
)
 
13.27
 
0
   
0.00
Forfeited or canceled
0
   
0.00
 
0
   
0.00
Outstanding at end of period
717,086
   
43.88
 
756,888
   
42.52
                   
Exercisable at end of period
526,015
 
$
44.79
 
476,469
 
$
39.95
                   
Weighted-average fair value
of stock options granted
$   16.98
       
$     7.69
     

On April 1, 2010, 544,912 stock options were exercisable with an intrinsic value of $3.0 million.  In addition, at April 1, 2010, there were 191,664 nonvested options with a grant date fair value of $9.23 per option.  During the second quarter of 2010, 793 options vested with an intrinsic value of $4,000, and a grant date fair value of $10.88 per option.  Also during the quarter, 19,690 options were exercised with an intrinsic value of $556,000.  There were 526,015 exercisable options remaining at June 30, 2010, with an intrinsic value of $2.5 million and a remaining contractual term of 2.2 years.  At June 30, 2010 there were 717,086 stock options outstanding with an intrinsic value of $3.4 million and a remaining contractual term of 2.5 years.  During the second quarter of 2009, no options were exercised and 852 options vested with a grant date fair value of $12.44 per option.


A summary of the status of our Stock Incentive Plans at June 30, 2010 and June 30, 2009, respectively and changes during the six months then ended is presented below:

 
June 30, 2010
 
June 30, 2009
 
Shares
 
Weighted- Average
Exercise Price
 
Shares
 
Weighted- Average
Exercise Price
Stock Options:
                 
Outstanding at beginning of period
733,468
 
$
  42.95
 
675,887
 
$
44.98
Granted
26,289
   
30.56
 
83,921
   
23.23
Exercised
(36,551
)
 
13.67
 
0
   
0.00
Forfeited or canceled
(6,120
)
 
54.93
 
(2,920
)
 
59.26
Outstanding at end of period
717,086
   
43.88
 
756,888
   
42.52
                   
Exercisable at end of period
526,015
 
$
44.79
 
476,469
 
$
39.95
                   
Weighted-average fair value
of stock options granted
$    9.22
       
$           5.42
     
                   

Beginning January 1, 2010, 541,910 stock options were exercisable.  During the six months ended June 30, 2010, 24,994 options vested with a $261,000 intrinsic value, and a weighted-average grant date fair value of $6.78 per option.  Also during the first six months of 2010, 36,551 options were exercised with an intrinsic value of $907,000.  During the first six months of 2009, no options were exercised and 4,476 options vested with a weighted-average grant date fair value of $13.61 per option.

 
7

 

The total amount of compensation cost related to non-vested stock options as of June 30, 2010 was $931,000.  The weighted-average period over which they are expected to be recognized is 2.1 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 second quarter of 2010, we granted 200 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 1.9% in 2010; an expected option life of three and three-quarter years; and an expected stock price volatility of 54.4% in 2010.  For the purposes of this option-pricing model, a dividend yield of 1.1% was assumed.  During the first six months of 2010, we granted 26,289 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% in 2010; an expected option life of three and three-quarter years; and an expected stock price volatility of 43.4% in 2010.  For the purposes of this option-pricing model, a dividend yield of 1.6% was assumed.

During the second quarter of 2010, we issued 59 restricted stock units.  During the first six months of 2010, we issued 5,761 restricted stock units and awards.  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 will forfeit all of the restricted shares.

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.  In addition, 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.  We did not recognize any compensation expense related to this program in the first six months 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.

The impact of stock-based compensation for the three months ended June 30, 2010 was $273,000 pre-tax ($213,000 after tax) or $0.03 per share, to salaries, benefits and other compensation.  This compares to $356,000 pre-tax ($273,000 after tax) or $0.04 per share for the three months ended June 30, 2009.  The impact of stock-based compensation for the six months ended June 30, 2010 was $642,000 pre-tax ($500,000 after tax) or $0.07 per share, to salaries, benefits and other compensation.  This compares to $801,000 pre-tax ($639,000 after tax) or $0.10 per share for the six months ended June 30, 2009.

 
8

 

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,
 
     
2010
   
2009
   
2010
   
2009
 
     
(Unaudited)
 
     
(In Thousands, Except per Share Data)
 
 
Numerator:
                       
 
Net income (loss) allocable to common stockholders
$
2,609
 
$
(3,067
)
$
2,431
 
$
(640
)
                           
 
Denominator:
                       
 
Denominator for basic earnings per share — weighted average shares
$
7,107
 
$
6,191
 
$
7,096
 
$
6,182
 
 
Effect of dilutive employee stock options
 
152
   
 —
   
125
   
 —
 
 
    Denominator for diluted earnings per share — adjusted weighted
                       
 
        average shares and assumed exercise
$
7,259
 
$
6,191
 
$
7,221
 
$
6,182
 
 
Basic:
                       
 
   Net income (loss) available to common shareholders
$
0.37
 
$
(0.50
)
$
0.34
 
$
(0.10
)
 
Diluted:
                       
 
   Net income (loss) available to common shareholders
$
0.36
 
$
(0.50
)
$
0.34
 
$
(0.10
)
 
Outstanding common stock equivalents having no dilutive effect
 
616
   
763
   
637
   
761
 


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:
                         
                           
June 30, 2010:
                         
Reverse mortgages
 
$
(509
)
$
 
$
 
$
(509
)
U.S. Government and agencies
   
40,613
   
695
   
   
41,308
 
State and political subdivisions
   
3,590
   
82
   
(2
)
 
3,670
 
   
$
43,694
 
$
777
 
$
(2
)
$
44,469
 
                           
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:
                         
                           
June 30, 2010:
                         
State and political subdivisions
 
$
557
 
$
 
$
(15
)
$
542
 
   
$
557
 
$
 
$
(15
)
$
542
 
                           
December 31, 2009:
                         
State and political subdivisions
 
$
709
 
$
 
$
 (38
)
$
671
 
   
$
709
 
$
 
$
 (38
)
$
671
 

 
 
9

 
 
Securities with fair values aggregating $41.3 million at June 30, 2010 were specifically pledged as collateral for WSFS’ Treasury Tax and Loan account with the Federal Reserve Bank, securities sold under agreement to repurchase, certain letters of credit and municipal deposits which require collateral. Accrued interest receivable relating to investment securities was $336,000 and $352,000 at June 30, 2010 and December 31, 2009, respectively.

The scheduled maturities of investment securities held-to-maturity and securities available-for-sale at June 30, 2010 and December 31, 2009 were as follows:

   
Held-to-Maturity
 
Available-for Sale
 
   
Amortized
 
Fair
 
Amortized
 
Fair
 
   
Cost
 
Value
 
Cost
 
Value
 
   
(In Thousands)
 
 June 30, 2010
                 
  Within one year (1)
 
$
340
 
$
340
 
$
19,866
 
$
20,140
 
  After one year but within five years
   
   
   
23,708
   
24,204
   
  After five years but within ten years
   
   
   
120
   
125
 
  After ten years
   
217
   
202
   
   
 
   
$
557
 
$
542
 
$
43,694
 
$
44,469
   
 December 31, 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.

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.  Investment securities totaling $2.5 million and $18.0 million matured or were called by their issuers during the six months ended June 30, 2010 and 2009, respectively.

At June 30, 2010, we owned investment securities totaling $333,000 where the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $17,000 at June 30, 2010. This temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Securities amounting to $110,000 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 each quarter 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 (which may be at maturity).

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 June 30, 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
 
$
 
$
 
$
110
 
$
15
 
$
110
 
$
15
 
                                          
   Available-for-sale
                                     
   State and political subdivisions
   
223
   
2
   
   
   
223
   
2
 
   U.S Government and agencies
   
   
   
   
   
   
 
                                       
Total temporarily impaired investments
 
$
223
 
$
2
 
$
110
 
$
15
 
$
333
 
$
17
 

 
 
 
10

 
 
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
 

4. MORTGAGE-BACKED SECURITIES

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

       
Gross
 
Gross
     
   
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
   
Cost
 
Gains
 
Losses
 
Value
 
   
(In Thousands)
 
   Available-for-sale securities:
                         
                           
   June 30, 2010:
                         
Collateralized mortgage obligations (1)
 
$
600,027
 
$
11,622
 
$
(2,753
)
$
608,896
 
FNMA
   
45,485
   
2,021
   
   
47,506
 
FHLMC
   
39,496
   
1,632
   
   
41,128
 
GNMA
   
44,280
   
1,660
   
   
45,940
 
   
$
729,288
 
$
16,935
 
$
(2,753
)
$
743,470
 
Weighted average yield
   
5.05%
                   
                           

   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:
                         
                           
   June 30, 2010:
                         
Collateralized mortgage obligations
 
$
12,121
 
$
 
$
 
$
12,121
 
   
$
12,121
 
$
 
$
 
$
12,121
 
Weighted average yield
   
3.35%
                   
                           
   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.

 
 
11

 
 
The portfolio of available-for-sale mortgage-backed securities (“MBS”) is comprised of 190 securities with a book value of $729.3 million including both Agency ($271.5 million) and non-Agency securities ($457.8 million).  All securities were AAA-rated at the time of purchase; $76.8 million are now rated below AAA.  Downgraded securities were evaluated at June 30, 2010.  The result of this evaluation showed no other-than-temporary impairment as of June 30, 2010.  An evaluation of downgraded securities at December 31, 2009 showed one security ($2.6 million) had an other-than-temporary impairment which resulted in an earnings charge of $86,000 or 9 basis points of downgraded securities and only 1 basis point of the total mortgage-backed securities 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 this credit cycle in 2008.  The weighted average duration of the mortgage-backed securities was 2.4 years at June 30, 2010.

Accrued interest receivable relating to mortgage-backed securities was $3.0 million at June 30, 2010 and $2.8 million at December 31, 2009.  At June 30, 2010, mortgage-backed securities with fair values aggregating $355.2 million were pledged as collateral for retail customer repurchase agreements and municipal deposits. From time to time, mortgage-backed securities are also pledged as collateral for Federal Home Loan Bank (“FHLB”) borrowings and other obligations.  The fair value of these FHLB-pledged mortgage-backed securities at June 30, 2010 was $106.8 million.

During the first six months of 2010, as part our portfolio management, there were proceeds from the sales of mortgage-backed securities available-for-sale of $46.0 million with net securities gains of $330,000.  These sales were primarily in late part of the second quarter to take advantage of significant improved pricing in the market.  The cost basis of all mortgage-backed securities sales is based on the specific identification method.  During the first six months of 2009, proceeds from the sale of mortgage-backed securities available-for-sale were $38.6 million, resulting in a net gain of $694,000.  In addition, and also part of our portfolio management we purchased $192.7 million of mortgage-backed securities primarily during the first quarter of 2010.

MBS have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty.
 
At June 30, 2010, we owned mortgage-backed securities totaling $104.6 million where the amortized cost basis exceeded fair value. Total unrealized losses on these securities were $2.8 million at June 30, 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 24 out of 109 bonds in the non-agency mortgage-backed security portfolio.  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 June 30, 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
 
$
44,225
 
$
124
 
$
60,419
 
$
2,629
 
$
104,644
 
$
2,753
 
    FNMA
   
   
   
   
   
   
 
    FHLMC
   
   
   
   
   
   
 
    GNMA
   
   
   
   
   
   
 
                                       
    Total temporarily impaired MBS
 
$
44,225
 
$
124
 
$
60,419
 
$
2,629
 
$
104,644
 
$
2,753
 

 

 

 
12

 

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
 


We own $12.4 million par value of SASCO RM-1 2002 reverse mortgage MBS which are classified as trading, of which $1.4 million is accrued interest paid in kind.  We expect to recover all principal and interest due to seasoning and excess collateral.  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 at June 30, 2010 and December 31, 2009.  We estimated the fair value of these securities as of June 30, 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.

5.   IMPAIRED LOANS

Loans for 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 $76.4 million at June 30, 2010 compared to $73.2 million at December 31, 2009. The average recorded balance of aggregate impaired loans was $73.7 million for the six months ended June 30, 2010 and $62.2 million for the year-ended December 31, 2009. The specific allowance for losses on these impaired loans was $15.0 million at June 30, 2010 compared to $11.8 million at December 31, 2009.   The specific reserve at June 30, 2010 was associated with $46.8 million of total impaired loans.  The remaining $29.6 million of impaired loans had no related specific reserve as collateral is more than sufficient to cover our loan balance or because of previous charge-offs.

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.













 
13

 

6. COMPREHENSIVE INCOME (LOSS)

The following schedule reconciles net income (loss) to total comprehensive income:

 
For the three months
 
For the six months
 
 
Ended June 30,
 
Ended June 30,
 
 
2010
 
2009
 
2010
 
2009
 
 
(In Thousands)
 
                         
  Net income (loss)
$
3,301
 
$
 (2,316
)
$
3,815
 
$
624
 
                         
  Other Comprehensive Income (Loss):
                       
Unrealized holding gains on securities
                       
available-for-sale arising during the period
 
9,211
   
158
   
17,484
   
6,727
 
Tax expense
 
(3,500
)
 
(60
)
 
(6,644
)
 
(2,556
)
  Net of tax amount
 
5,711
   
98
   
10,840
   
4,171
 
                         
  Reclassification adjustment for gains included in net income
 
(330
)
 
(141
)
 
(330
)
 
(688
)
  Tax expense
 
125
   
54
   
125
   
261
 
  Net of tax amount
 
(205
)
 
(87
)
 
(205
)
 
(427
)
  Total comprehensive income (loss)
$
8,807
 
$
 (2,305
)
$
14,450
 
$
4,368
 

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 Consolidated 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.

The total amount of unrecognized tax benefits as of June 30, 2010 and December 31, 2009 were $1.0 million and $1.9 million, respectively, of which $500,000 would have affected our June 30, 2010 effective tax rate if recognized. As of June 30, 2010 and December 31, 2009, the total amount of accrued interest included in such unrecognized tax benefits was $43,000 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 June 30, 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

 
14

 

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.
 
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 (including Montchanin).  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 three and six months ended June 30, 2009, includes a $1.6 million pre-tax charge related to 1st Reverse, which includes the write-off of all related goodwill and intangibles, uncollectable receivables and our remaining investment in this subsidiary.
 
The WSFS Bank segment provides financial products to commercial and retail customers through its 40 banking offices located in Delaware (35), Pennsylvania (4) and Virginia (1).  Retail and Commercial Banking, Commercial Real Estate Lending, Private Banking and other banking business units including WSFS Investment Group, Inc. are operating departments of WSFS.  These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank.  Because of these and other reasons, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment of the Company in accordance with ASC 280.

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

The Wealth Management column is comprised of the WSFS Trust & Wealth Management division and Montchanin.  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 through its one consolidated, wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”). Cypress is a Wilmington-based Registered Investment Advisory firm serving high net-worth individuals and institutions.

An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segments and assessment of the performance of the segments, 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 and six months ended June 30, 2010 and 2009 follows:

 
15

 

For the Three Months Ended June 30, 2010
 

 

   
WSFS
 
Cash Connect
 
Trust & Wealth Management
 
Total
     
   
(In Thousands)
     
   External customer revenues:
                             
Interest income
 
$
41,454
 
$
 
$
 
$
41,454
     
Noninterest income
   
8,425
   
3,321
   
690
   
12,436
     
   Total external customer revenues
   
49,879
   
3,321
   
690
   
53,890
     
                               
   Inter-segment revenues:
                             
Interest income
   
225
   
   
   
225
     
Noninterest income
   
699
   
203
   
   
902
     
   Total inter-segment revenues
   
924
   
203
   
   
1,127
     
                               
   Total revenue
   
50,803
   
3,524
   
690
   
55,017
     
                               
   External expenses:
                             
Interest expense
   
10,756
   
   
   
10,756
     
Noninterest expenses
   
25,449
   
1,407
   
883
   
27,739
     
Provision for loan loss
   
10,594
   
   
   
10,594
        
   Total external expenses
   
46,799
   
1,407
   
883
   
49,089
     
                               
   Inter-segment expenses
                             
Interest expense
   
   
225
   
   
225
     
Noninterest expenses
   
203
   
367
   
332
   
902
     
   Total inter-segment expenses
   
203
   
592
   
332
   
1,127
     
                               
   Total expenses
   
47,002
   
1,999
   
1,215
   
50,216
     
                               
   Income (loss) before taxes
 
$
3,801
 
$
1,525
 
$
(525)
 
$
4,801
     
                               
   Income tax provision
                     
1,500
     
   Consolidated net income
                   
$
3,301
     
                               
   Cash and cash equivalents
 
$
57,073
 
$
263,989
 
$
1,065
 
$
322,127
        
   Other segment assets
   
3,454,067
   
14,871
   
801
   
3,469,739
     
                               
   Total segment assets
 
$
3,511,140
 
$
278,860
 
$
1,866
 
$
3,791,866
     
                               
   Capital expenditures
 
$
1,427
 
$
4
 
$
 
$
1,431
     

 
16

 

For the Three Months Ended June 30, 2009
 


       
WSFS
 
Cash Connect
 
1st Reverse
 
Trust & Wealth Management
 
Total
   
       
(In Thousands)
 
   External customer revenues:
                                 
Interest income
     
$
39,839
 
$
 
$
 $
 
$
39,839
 
Noninterest income
       
8,570
   
2,855
   
654
 
588
   
12,667
 
   Total external customer revenues
       
48,409
   
2,855
   
654
 
588
   
52,506
 
                                   
   Inter-segment revenues:
                                 
Interest income
       
162
   
   
 
   
162
 
Noninterest income
       
1,071
   
98
   
 
   
1,169
 
   Total inter-segment revenues
       
1,233
   
98
   
 
   
1,331
 
                                   
   Total revenue
       
49,642
   
2,953
   
654
 
588
   
53,837
 
                                   
   External expenses:
                                 
Interest expense
       
13,459
   
   
 
   
13,459
 
Noninterest expenses
       
26,484
   
1,272
   
2,332
 
867
   
30,955
 
Provision for loan loss
       
11,997
   
   
 
   
11,997
 
   Total external expenses
       
51,940
   
1,272
   
2,332
 
867
   
56,411
 
                                   
   Inter-segment expenses
                                 
Interest expense
       
   
162
   
 
   
162
 
Noninterest expenses
       
285
   
253
   
63
 
568
   
1,169
 
   Total inter-segment expenses
       
285
   
415
   
63
 
568
   
1,331
 
                                   
   Total expenses
       
52,225
   
1,687
   
2,395
 
1,435
   
57,742
 
                                   
   (Loss) income before taxes
     
$
(2,583
)
$
1,266
 
$
(1,741)
 $
(847)
 
$
(3,905
)
                                   
   Income tax benefit
                             
(1,589
)  
   Consolidated net loss
                           
$
(2,316
)
                                   
   Cash and cash equivalents
     
$
74,602
 
$
201,844
 
$
$
682
 
$
277,128
 
   Other segment assets
       
3,293,523
   
15,967
   
 
1,298
   
3,310,788
 
                                   
   Total segment assets
     
$
3,368,125
 
$
217,811
 
$
$
1,980
 
$
3,587,916
 
                                   
   Capital expenditures
     
$
2,524
 
$
138
 
$
$
2
 
$
2,664
 



 
17

 


 
For the Six Months Ended June 30, 2010
 

 

   
WSFS
 
Cash Connect
 
Trust & Wealth Management
 
Total
     
   
(In Thousands)
     
   External customer revenues:
                             
Interest income
 
$
82,012
 
$
 
$
 
$
82,012
     
Noninterest income
   
15,622
   
6,460
   
1,495
   
23,577
     
   Total external customer revenues
   
97,634
   
6,460
   
1,495
   
105,589
     
                               
   Inter-segment revenues:
                             
Interest income
   
447
   
   
   
447
     
Noninterest income
   
1,429
   
375
   
   
1,804
     
   Total inter-segment revenues
   
1,876
   
375
   
   
2,251
     
                               
   Total revenue
   
99,510
   
6,835
   
1,495
   
107,840
     
                               
   External expenses:
                             
Interest expense
   
21,971
   
   
   
21,971
     
Noninterest expenses
   
48,554
   
7,113
   
1,705
   
57,372
     
Provision for loan loss
   
22,004
   
   
   
22,004
     
   Total external expenses
   
92,529
   
7,113
   
1,705
   
101,347
     
                               
   Inter-segment expenses
                             
Interest expense
   
   
447
   
   
447
     
Noninterest expenses
   
375
   
733
   
696
   
1,804
     
   Total inter-segment expenses
   
375
   
1,180
   
696
   
2,251
     
                               
   Total expenses
   
92,904
   
8,293
   
2,401
   
103,598
     
                               
   Income (loss) before taxes
 
$
6,606
 
$
(1,458)
 
$
(906)
 
$
4,242
     
                               
   Income tax provision
                     
427
     
   Consolidated net income
                   
$
3,815
     
                               
   Cash and cash equivalents
 
$
57,073
 
$
263,989
 
$
1,065
 
$
322,127
        
   Other segment assets
   
3,454,067
   
14,871
   
801
   
3,469,739
     
                               
   Total segment assets
 
$
3,511,140
 
$
278,860
 
$
1,866
 
$
3,791,866
     
                               
   Capital expenditures
 
$
3,070
 
$
7
 
$
 
$
3,077
     


 
18

 

For the Six Months Ended June 30, 2009
 


       
WSFS
 
Cash Connect
 
1st Reverse
 
Trust & Wealth Management
 
Total
 
       
(In Thousands)
 
   External customer revenues:
                                 
Interest income
     
$
78,646
 
$
 
$
 $
 
$
78,646
 
Noninterest income
       
15,916
   
5,632
   
1,210
 
1,010
   
23,768
 
   Total external customer revenues
       
94,562
   
5,632
   
1,210
 
1,010
   
102,414
 
                                   
   Inter-segment revenues:
                                 
Interest income
       
327
   
   
 
   
327
 
Noninterest income
       
1,796
   
169
   
 
   
1,965
 
   Total inter-segment revenues
       
2,123
   
169
   
 
   
2,292
 
                                   
   Total revenue
       
96,685
   
5,801
   
1,210
 
1,010
   
104,706
 
                                   
   External expenses:
                                 
Interest expense
       
28,375
   
   
 
   
28,375
 
Noninterest expenses
       
47,993
   
2,346
   
3,401
 
1,589
   
55,329
 
Provision for loan loss
       
19,650
   
   
 
   
19,650
    
   Total external expenses
       
96,018
   
2,346
   
3,401
 
1,589
   
103,354
 
                                   
   Inter-segment expenses
                                 
Interest expense
       
   
318
   
9
 
   
327
 
Noninterest expenses
       
397
   
440
   
126
 
1,002
   
1,965
 
   Total inter-segment expenses
       
397
   
758
   
135
 
1,002
   
2,292
 
                                   
   Total expenses
       
96,415
   
3,104
   
3,536
 
2,591
   
105,646
 
                                   
   Income (loss) before taxes
     
$
270
 
$
2,697
 
$
(2,326)
 $
(1,581
)
$
(940
)
                                   
   Income tax benefit
                             
(1,564
)
   Consolidated net income
                           
$
624
 
                                   
   Cash and cash equivalents
     
$
74,602
 
$
201,844
 
$
$
682
 
$
277,128
 
   Other segment assets
       
3,293,523
   
15,967
   
 
1,298
   
3,310,788
 
                                   
   Total segment assets
     
$
3,368,125
 
$
217,811
 
$
$
1,980
 
$
3,587,916
 
                                   
   Capital expenditures
     
$
4,401
 
$
138
 
$
$
13
 
$
4,552
 


 
19

 

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments: For cash and short-term investments, including due from banks, federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.

Investments and Mortgage-Backed Securities:  Fair value of investment and mortgage-backed securities is based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. The fair value of our investment in reverse mortgages is based on the net present value of estimated cash flows, which have been updated to reflect recent external appraisals of the underlying collateral. For additional discussion of our mortgage-backed securities-trading, see Note 10, Fair Value of Financial Assets, to the Consolidated Financial Statements.

Loans:  Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair value of impaired loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available.  This technique does not contemplate an exit price.

Bank-Owned Life Insurance:  The estimated fair value approximates the book value for this investment.

Stock in the Federal Home Loan Bank of Pittsburgh:  The fair value of FHLB stock is assumed to be essentially equal to its cost.  We carry FHLB stock at cost, or par value, and evaluate FHLB stock for impairment based on the ultimate recoverability of par value rather than by recognizing temporary declines in value.  As part of the impairment assessment of FHLB stock, management considers, among other things, (i) the significance and length of time of any declines in net assets of the FHLB compared to its capital stock, (ii) commitments by the FHLB to make payments required by law or regulations and the level of such payments in relation to its operating performance, (iii) the impact of legislative and regulatory changes on FHLB, the FHLB has access to the U.S. Government-Sponsored Enterprise Credit Facility, a secured lending facility that serves as a liquidity backstop, substantially reducing the likelihood that the FHLB would need to sell securities to raise liquidity and, thereby, cause the realization of large economic losses.  The FHLB is rated AAA and its rating is likely to remain unchanged based on expectations that the FHLB has a very high degree of government support and was in compliance with all regulatory capital requirements as of June 30, 2010.  Based on the above, we have determined there was no other-than-temporary impairment related to our FHLB stock investment as of June 30, 2010.

Deposit Liabilities:  The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits and savings deposits, is assumed to be equal to the amount payable on demand. The carrying value of variable rate time deposits and time deposits that reprice frequently also approximates fair value. The fair value of the remaining time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits with comparable remaining maturities.

 
20

 

       Borrowed Funds: Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Off-Balance Sheet Instruments:  The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, is estimated using the fees currently charged to enter into similar agreements with comparable remaining terms and reflects the present creditworthiness of the counterparties.

The book value and estimated fair value of our financial instruments are as follows:

   
June 30, 2010
 
December 31, 2009
 
   
Book Value
 
Fair Value
 
Book Value
 
Fair Value
 
   (In Thousands)
                         
   Financial assets:
                            
   Cash and cash equivalents
 
$
322,127
 
$
322,127
 
$
321,749
 
$
321,749
 
   Investment securities (HTM and AFS)
   
45,026
   
45,011
   
45,517
   
45,479
 
   Mortgage-backed securities (AFS and Trading)
   
755,591
   
755,591
   
681,242
   
681,242
 
   Loans, net
   
2,460,003
   
2,475,222
   
2,479,155
   
2,487,129
 
   Bank-owned life insurance
   
60,669
   
60,669
   
60,254
   
60,254
 
   Stock in Federal Home Loan Bank of Pittsburgh
   
39,305
   
39,305
   
39,305
   
39,305
    
   Accrued interest receivable
   
11,948
   
11,948
   
12,407
   
12,407
 
                           
   Financial liabilities:
                         
   Deposits
   
2,628,782
   
2,639,148
   
2,561,871
   
2,572,418
 
   Borrowed funds
   
819,865
   
813,978
   
854,809
   
858,896
 
   Accrued interest payable
   
8,551
   
8,551
   
4,240
   
4,240
 

The estimated fair value of our off-balance sheet financial instruments is as follows:

   
June 30, 2010
 
December 31, 2009
 
   (In Thousands)
             
   Off-balance sheet instruments:
             
   Commitments to extend credit
 
$
3,816
 
$
5,071
 
   Standby letters of credit
   
165
   
317
 

10.  FAIR VALUE OF FINANCIAL ASSETS
 
Effective January 1, 2008, we adopted the provisions of FASB ASC 820-10 (“ASC 820-10”) (Formerly SFAS No. 157, Fair Value Measurements and Financial Accounting Standards Board Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157), for financial assets and financial liabilities. This adoption did not have a material impact on our financial statements.
 
ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 
Level 1:
Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

 
Level 2:
Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.
 
 
 
21

 

 
 
Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of our financial assets carried at fair value effective January 1, 2008. The table below presents the balances of assets measured at fair value as of June 30, 2010 (there are no material liabilities measured at fair value):

   
Quoted Prices in Active Markets for Identical Asset
   
Significant
Other
Observable Inputs
   
Significant
Unobservable
Inputs
   
Total
 
Description
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Fair Value
 
   
(In Thousands)
Assets Measured at Fair Value on a Recurring Basis
                             
Available-for-sale securities:
                             
   Collateralized mortgage obligations
 
$
   
$
608,896
 
$
   
$
608,896
 
   FNMA
   
     
47,506
   
     
47,506
 
   FHLMC
   
     
41,128
   
     
41,128
 
   GNMA
   
     
45,940
   
     
45,940
 
   U.S. Government and agencies
   
     
41,308
   
     
41,308
 
   State and political subdivisions
   
     
3,670
   
   
 
3,670
 
Reverse mortgages
   
     
   
(509)
     
(509)
 
Trading Securities
   
     
   
12,121
     
12,121
 
Total assets measured at fair value on a recurring basis
   
     
788,448
   
11,612
     
800,060
 
Assets Measured at Fair Value on a Nonrecurring Basis
                             
Impaired Loans
   
     
61,355
   
     
61,355
 
Total assets measured at fair value on a nonrecurring basis
 
$
   
$
61,355
 
$
   
$
61,355
 

Fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Available for sale securities. As of June 30, 2010, securities classified as available for sale are reported at fair value using Level 2 inputs.  Included in the Level 2 total are approximately $41.3 million in Federal Agency debentures, $281.3 million in Federal Agency MBS, $462.1 million of private label MBS, and $3.7 million in municipal bonds.  Agency and MBS securities are predominately AAA-rated.  We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 as our fixed income securities are not exchange traded, and all are priced by correlation to observed market data.  For these securities we obtain fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.

 
22

 

Trading securities. The amount included in the trading securities category represents the fair value of a BBB-rated traunche of a reverse mortgage security. There has never been an active market for these securities. As such, we classify these trading securities as Level 3 under ASC 820-10. As prescribed by ASC 820-10 management used various observable and unobservable inputs to develop a range of likely fair value prices where this security would be exchanged in an orderly transaction between market participants at the measurement date.   The unobservable inputs reflect management’s assumptions about the assumptions that market participants would use in pricing this asset. Included in these inputs were the median of a selection of other BBB-rated securities as well as quoted market prices from higher rated traunches of this asset class. As a result, the value assigned to this security is determined primarily through a discounted cash flow analysis. All of these assumptions require a significant degree of management judgment.

Reverse Mortgages.  The amount of our investment in reverse mortgages represents the estimated fair value of future cash flows of the reverse mortgages at a rate deemed appropriate for these mortgages, based on the market rate for similar collateral.  The projected cash flows depend on assumptions about life expectancy of the mortgagee and the future changes in collateral values.  Due to the significant amount of management judgment and the unobservable input calculations, these reverse mortgages have been classified as Level 3.

The changes in Level 3 assets measured at fair value are summarized as follows:

     
Trading
Reverse
Total
     
Securities
Mortgages
 
       
(In Thousands)
 
           
   Balance at December 31, 2008
 
$
10,816
$             (61)
$         10,755 
   Total net income (losses) for the period included in net income
   
1,367
(464)
903
   Purchases, sales, issuances, and settlements, net
   
(5)
(5)
   Balance at December 31, 2009
   
12,183
           (530)
         11,653
   Total net losses for the period included in net income
   
(62)
(76)
(138)
   Purchases, sales, issuances, and settlements, net
   
97
97
   Balance at June 30, 2010
 
$
12,121
  $           (509)
     $        11,612

Impaired loans. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross amount of $76.4 million and $73.2 million at June 30, 2010 and December 31, 2009, respectively.  The valuation allowance on impaired loans was $15.0 million, as of June 30, 2010 and $11.8 million as of December 31, 2009.
 
11.  INDEMNIFICATIONS AND GUARANTEES
 
Secondary Market Loan Sales.  We generally do not sell loans with recourse except to the extent arising from standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances first payment defaults by borrowers.  These are customary repurchase provisions in the secondary market for conforming mortgage loan sales.  We typically sell fixed-rate, conforming first mortgage loans (including reverse mortgages) in the secondary market as part of our ongoing asset/liability management program.  Loans held-for-sale are carried at the lower of cost or market of the aggregate or in some cases individual loans.  Gains and losses on sales of loans are recognized at the time of the sale.

As is customary in such sales, we provide indemnifications to the buyers under certain circumstances.  These indemnifications may include the repurchase of loans by us.  Repurchases and losses are rare, and no provision is made for losses at the time of sale.

Swap Guarantees.  We entered into agreements with three 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 smaller financial

 
23

 

institutions like us to provide access to interest rate swap transactions for our customers without creating the swap ourselves.

At June 30, 2010 there were fifty variable-rate swap transactions between the third party financial institutions and our customers, compared to forty-four at December 31, 2009.  The initial notional amount aggregated approximately $215.4 million at June 30, 2010 compared with $209.6 million at December 31, 2009.  At June 30, 2010 maturities ranged from approximately four months to twelve years.  The aggregate market value of these swaps to the customers was a liability of $20.5 million at June 30, 2010 and $12.6 million at December 31, 2009.  At June 30, 2010 all of the swap transactions were in a paying position to third-party financial institutions.

12.  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 FASB ASC 715, Compensation – Retirement Benefits (“ASC 715”) (Formerly SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions). ASC 715 requires that the costs of these benefits be recognized over an Associate’s active working career.  Disclosures are in accordance with ASC 715.

The following disclosures of the net periodic benefit cost components of postretirement benefits were measured at January 1, 2010 and 2009:

 
Three months ended
June 30,
   
Six months ended
June 30,
 
(In Thousands)
2010
 
2009
   
2010
 
2009
 
     
     
Service cost
$            43
 
$        40
   
$           85
 
$              80
 
Interest cost
38
 
35
   
76
 
70
 
Amortization of transition obligation
15
 
15
   
30
 
30
 
Net loss recognition
3
 
5
   
6
 
9
 
       Net periodic benefit cost
$            99
 
$       95
   
$         197
 
$            189
 

13.  NONINTEREST EXPENSES

During the six months ended June 30, 2010, the Company recorded a $4.5 million non-routine charge, as follows:

On February 19, 2010, WSFS reported in a regulatory filing that an executive of an armored car company that served as a vendor for several of Cash Connect’s customers (the “Courier”), engaged in embezzlement.  In the first quarter of 2010, the Company recorded a $4.5 million loss related to funds not immediately recoverable by Cash Connect.  A full recovery of this amount is expected to be recorded in the third quarter.  For further discussion see Note 15 Subsequent Events.  This charge is included in noninterest expenses in the Consolidated Statement of Operations for the six months ended June 30, 2010.

During the six months ended June 30, 2009, we incurred $5.7 million of charges we consider to be non-routine.  These charges are included in noninterest expenses in the Consolidated Statement of Operations and include the following:

·  
A $1.6 million charge resulting from management’s decision to conduct an orderly wind-down of 1st Reverse.  The charge represents the write-off of all related goodwill and intangibles, uncollectible receivables and our remaining investment in that subsidiary (reflected in other operating expenses).

 
24

 

·  
A $1.7 million insurance premium charged by the FDIC representing our share of the special assessment levied on the banking industry at June 30, 2009 (reflected in FDIC expenses).

·  
A $1.5 million charge related to the previously disclosed fraudulent wire transfer activity affecting the accounts of two customers ($1.3 million reflected in other operating expense and $201,000 reflected in Professional fees).

·  
A $953,000 expense related to due diligence on an acquisition prospect in which discussions were terminated (reflected in Professional fees).

14.  STOCK AND COMMON STOCK WARRANTS
 
The Company entered into a purchase agreement with the U.S. Treasury on January 23, 2009, pursuant to which the Company issued and sold 52,625 shares of the Company’s fixed-rate cumulative perpetual preferred stock for a total purchase price of $52.6 million, and a 10-year warrant to purchase 175,105 shares of the Company’s common stock at an exercise price of $45.08 per share. The Company is paying the Treasury Department a five percent dividend annually for each of the first five years of the investment and a nine percent dividend thereafter until the shares are redeemed. The cumulative dividend for the preferred stock is accrued for and payable on February 15, May 15, August 15 and November 15 of each year. The Company has declared and paid $1.3 million in preferred stock dividends during the six months ended June 30, 2010.
 
The Company allocated total proceeds of $52.6 million, based on the relative fair value of preferred stock and common stock warrants, to preferred stock for $51.9 million and common stock warrants for $693,000, respectively, on January 23, 2009. The preferred stock discount will be accreted, on an effective yield method, to preferred stock over five years. The Company has accreted a total of $69,000 during the six months ended June 30, 2010 relating to the discount on preferred stock.
 
The preferred stock is nonvoting, except for class voting rights on certain matters that could affect the shares adversely. It may be redeemed by us for the liquidation preference ($1,000 per share), plus accrued but unpaid dividends, with the Treasury’s approval. The warrants are exercisable immediately and subject to certain anti-dilution and other adjustments.

The Company completed a private placement of stock to Peninsula Investment Partners, L.P. (Peninsula) on September 24, 2009, pursuant to which the Company issued and sold 862,069 shares of common stock for a total purchase price of $25.0 million, and a 10-year warrant to purchase 129,310 shares of the Company’s common stock at an exercise price of $29.00 per share.  The warrants are immediately exercisable.

The Company allocated total proceeds of $25.0 million, based on the relative fair value of common stock and common stock warrants, to common stock for $23.5 million and common stock warrants for $1.5 million on  September 24, 2009.

15.  SUBSEQUENT EVENTS

The Company has evaluated all subsequent events and has identified a subsequent event requiring disclosure.

On July 23, 2010, we were advised that we would recover all of our funds that were involved in the previously reported incident of alleged fraud and theft by an executive of a New York armored car company.

As previously disclosed, on February 9, 2010, we were advised that an executive of an armored car company based in Mount Vernon, New York, was arrested and charged with fraud and theft in connection with an ATM vault cash program.  This same armored car company also served as an armored carrier for several customers of Cash Connect, a division of the Bank that also provides ATM vault cash services.  In our March 31, 2010 Form 10-Q, we reported a loss of $4.5 million related to funds not immediately recoverable by Cash Connect.

 
25

 

Recent events have allowed management to conclude that recovery of the loss is probable and expects that proceeds will be received in early August and therefore a full recovery will be recorded in the third quarter of 2010.


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 in the United States continuously-operating under the same name. As a federal savings bank, which was formerly chartered as a state mutual savings bank, we enjoy broader investment powers than most other financial institutions. We have served the residents of the Delaware Valley for over 178 years. We are the largest thrift institution headquartered in Delaware and the fourth largest financial institution in the state on the basis of total deposits traditionally garnered in-market. Our primary market area is the mid-Atlantic region of the United States, which is characterized by a diversified manufacturing and service economy. Our long-term strategy is to serve small and mid-size businesses through loans, deposits, investments, and related financial services, and to gather retail core deposits. Our 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 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 40 banking offices located in Delaware (35), Pennsylvania (4), and Virginia (1) and through our website at www.wsfsbank.com.

We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc. (“Montchanin”). We also have one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”). WSFS Bank has a fully-owned subsidiary, WSFS Investment Group, Inc., which markets various third-party insurance products and securities through the Bank’s retail banking system.

Montchanin has one consolidated subsidiary, Cypress Capital Management, LLC (“Cypress”).  Cypress is a Wilmington-based Registered Investment Advisory firm serving high net-worth individuals and institutions.  Cypress had approximately $464 million in assets under management at June 30, 2010.

On June 24, 2010, we entered into a Stock Purchase Agreement with National Penn Bancshares, Inc. (“National Penn”) pursuant to which we will purchase all of the issued and outstanding shares of Christiana Bank & Trust Company (“CBT”), a Delaware banking corporation and wholly owned subsidiary of National Penn for a total purchase price of $34.5 million in cash.  As a result of the transaction, we estimate we will acquire approximately $161 million in deposits, approximately $115 million in performing loans and approximately $6 billion in trust assets under administration or management.  Completion of the transaction is subject to the receipt of all required regulatory approvals and certain other standard closing conditions.  Immediately after the closing of the stock purchase, CBT will be merged with and into WSFS Bank.  We anticipate that the closing will occur in the fourth quarter of 2010.

FORWARD-LOOKING STATEMENTS

Within this Quarterly Report on Form 10-Q and exhibits thereto, management has included certain “forward-looking statements” concerning the future operations of WSFS Financial Corporation.  It is management’s desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  This statement is for the express purpose of availing the Company of the protections of such safe harbor with respect to all “forward-looking statements” contained in its financial statements.  Management has used “forward-looking statements” to describe the future plans and strategies including expectations of our future financial results.

 
26

 

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 Consolidated Financial Statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for loan losses, contingencies (including indemnifications), and deferred taxes. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following are critical accounting policies that involve more significant judgments and estimates:

Allowance for Loan Losses

We maintain allowances for loan losses and charge losses to these allowances when realized. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of probable loan losses related to specifically identified loans as well as the inherent risk of loss for those in the remaining loan portfolio. Our evaluation is based upon a continuing review of the portfolio, with consideration given to evaluations resulting from examinations performed by regulatory authorities.

Contingencies (Including Indemnifications)

In the ordinary course of business we are subject to legal actions, which involve claims for monetary relief. Based upon information presently available to us and our counsel, it is our opinion that any legal and financial responsibility arising from such claims will not have a material adverse effect on our financial condition and 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 Bank, as successor to originators of reverse mortgages is, from time to time, involved in arbitration or litigation with various parties including borrowers or the heirs of borrowers. Because reverse mortgages are a relatively new and uncommon product, there can be no assurances about how the courts or arbitrators may apply existing legal principles to the interpretation and enforcement of the terms and conditions of the Bank’s reverse mortgage obligations.

Deferred Taxes

We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes (“ASC 740”), which requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We continually assess the need for valuation allowances on deferred income tax assets that may result from, among other things,

 
27

 

limitations imposed by Internal Revenue Code and uncertainties, including the timing of settlement and realization of these differences.  No valuation allowance is required as of June 30, 2010 and December 31, 2009.

Fair Value Measurements

We adopted FASB ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. See Note 10, Fair Value of Financial Assets.

Goodwill and Other Intangible Assets

In accordance with FASB ASC 805, Business Combinations, and FASB ASC 350, Intangibles—Goodwill and Other, all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value.  We consider our accounting policies related to goodwill and other intangible assets to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex.  As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.

The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third-party sources, when available.  When third-party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques.  The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes.

Goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value.  Intangible assets that have finite useful lives will continue to be amortized over their useful lives and are periodically evaluated for impairment.  As of June 30, 2010, goodwill totaled $10.9 million, the majority of which is in the WSFS Bank reporting unit and is the result of a branch acquisition in 2008.  In addition, amortizing intangibles totaled $2.5 million as of June 30, 2010.

Goodwill is tested for impairment using a two-step process that begins with an estimation of fair value.  The first step compares the estimated fair value of our reporting units with their carrying amounts, including goodwill.  If the estimated fair value exceeds its carrying amount, goodwill is not considered impaired.  However, if the carrying amount exceeds its estimated fair value, a second step would be performed that would compare the implied fair value to the carrying amount of goodwill.  An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other variables.  Estimated cash flows extend five years into the future and, by their nature, are difficult to estimate over such an extended time-frame.  Factors that may significantly affect the estimates include, but are not limited to, balance sheet growth assumptions, credit losses in our investment and loan portfolios, competitive pressures in our market area, changes in customer base and customer product preferences, changes in revenue growth trends, cost structure, changes in discount rates, conditions in the banking sector, and general economic variables.

We review our goodwill and intangibles for impairment annually.  Goodwill and intangibles are also tested for impairment between annual tests if an event occurs or circumstances change that would cause a reduction in the fair value below its carrying value.  As of December 31, 2009, we retained a third-party valuation firm to assist in our Step 1 test for potential goodwill impairment of the WSFS Bank reporting unit.  The valuation incorporated both income and market based analyses and indicated the fair value of our WSFS Bank reporting unit was 3.7% above the carrying amount, therefore in accordance with FASB ASC 350-20-35-6; the Step 2 analysis was not required.

As of June 30, 2010, goodwill and other intangible assets were not considered impaired; however, changing economic conditions that may adversely affect our performance and stock price could result in impairment, which could adversely affect earnings in the future.

 
28

 

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $43.4 million, or 1%, during the six months ended June 30, 2010.  This increase was primarily due to mortgage-backed securities which increased $74.3 million, or 11%. Offsetting this increase was a decrease in total loans of $19.2 million, or less than 1%. The decrease in loans was mainly attributable to residential mortgage loans which decreased $13.6 million from December 31, 2009, which was mainly the result of loan sales totaling $35.9 million during the six months ended June 30, 2010. Offsetting the decrease in residential loans was an increase in commercial and commercial real estate loans of $10.1 million due to the addition of new customer relationships, despite continued intentional decline in construction and land development loans (“CLD”) of $39.9 million.

Total liabilities increased $30.4 million, or 1%, between December 31, 2009 and June 30, 2010 to $3.5 billion.  This increase was mainly due to an $89.9 million, or 4% increase in customer deposits, as well as an increase in other jumbo certificates of deposit of $22.7 million, or 33%. The increases in customer deposits improved our funding mix as deposit growth reduced our use of wholesale funding, which resulted in a decrease in Federal Home Loan Bank (“FHLB”) advances of $41.1 million, or 7%. Finally, brokered deposits decreased by $45.7 million, or 13%.

Capital Resources

Stockholders’ equity increased $12.9 million between December 31, 2009 and June 30, 2010.  This increase was mainly due to a $10.8 million increase of the fair value of securities available-for-sale taken through other comprehensive income.  Also contributing to the increase was net income of $3.8 million as well as an increase of $1.1 million related to equity based incentive plans.  Partially offsetting these increases was the payment of common and preferred dividends of $1.7 million and $1.3 million, respectively, during the six months ended June 30, 2010.  At June 30, 2010, the Bank was in compliance with regulatory capital requirements and is considered a “well-capitalized” institution. Additionally, the Company holds $29 million of funds which support its cash needs and can be contributed as capital to the Bank to support its balance sheet and growth.

Below is a table comparing the Bank’s consolidated capital position to the minimum regulatory requirements as of June 30, 2010 (dollars in thousands):

   
Consolidated
Bank Capital
 
For Capital
Adequacy Purposes
 
To be Well-Capitalized
Under Prompt Corrective
Action Provisions
 
   
Amount
 
% of
Assets
 
Amount
 
% of
Assets
 
Amount
 
% of
Assets
 
Total Capital
        (to Risk-Weighted Assets)
 
$
364,417
 
12.51
%
$
233,031
 
8.00
%
$
291,288
 
10.00
%
  Core Capital (to Adjusted
     Total Assets)
   
327,873
 
8.69
   
151,000
 
4.00
   
188,750
 
5.00
 
  Tangible Capital (to Tangible
     Assets)
   
327,873
 
8.69
   
56,625
 
1.50
   
N/A
 
N/A
 
  Tier 1 Capital (to Risk-Weighted
     Assets)
   
327,873
 
11.26
   
116,515
 
4.00
   
174,773
 
6.00
 

Under Office of Thrift Supervision (“OTS”) capital regulations, savings institutions such as the Bank must maintain “tangible” capital equal to 1.5% of adjusted total assets, “core” capital equal to 4.0% of adjusted total assets, “Tier 1” capital equal to 4.0% of risk weighted assets and “total” or “risk-based” capital (a combination of core and “supplementary” capital) equal to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our bank’s financial statements.



 
29

 

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.

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, retail deposit programs, loan repayments, borrowing from the FHLB, repurchase agreements, access to the Fed Discount Window, and the brokered deposit market as well as other wholesale funding avenues. 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 mortgage-backed securities and Agency notes that 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, 2010, cash and cash equivalents increased $378,000 to $322.1 million.  The increase was a result of the following: a $99.3 million increase in cash provided through increases in demand and savings deposits; repayments on mortgage-backed securities available-for-sale of $90.5 million; the sale of mortgage-backed securities available-for-sale of $46.0 million; an increase in cash of $33.6 million provided by operating activities; and an increase of $19.4 million in time deposits.  Offsetting these increases in cash were purchases of mortgage-backed securities available-for-sale which used cash of $192.7 million and a decrease in brokered deposits which resulted in the use of $46.1 million in cash.  Repayments of net borrowings from the FHLB decreased cash by $41.1 million during the six months ended June 30, 2010.

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, assets acquired through foreclosure and restructured loans. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are 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,
 
   
2010
 
2009
 
   
(In Thousands)
 
 Nonaccruing loans:
         
   Commercial
 
$
17,097
 
$
8,328
 
   Consumer
   
4,279
   
818
   
   Commercial mortgage
   
5,142
   
2,156
 
   Residential mortgage
   
11,163
   
9,958
 
   Construction
   
31,078
   
44,681
 
               
   Total nonaccruing loans
   
68,759
   
65,941
 
   Assets acquired through foreclosure
   
9,428
   
8,945
 
   Troubled debt restructurings accruing
   
7,638
   
7,274
 
               
   Total nonperforming assets
 
$
85,825
 
$
82,160
 
               
               
               

 
 
30

 
 

   
June 30,
 
December 31,
 
   
2010
 
2009
 
   
(In Thousands)
 
   Past due loans:(1)
             
   Residential mortgages
 
$
1,028
 
$
1,221
 
   Commercial and commercial mortgages
   
400
   
105
 
   Consumer
   
   
97
 
               
   Total past due loans
 
$
1,428
 
$
1,423
 
               
   Ratios:
             
   Nonaccruing loans to total loans (2)
   
2.74
%
 
2.61
%
   Allowance for loan losses to total loans (2)
   
2.48
%
 
2.12
%
   Nonperforming assets to total assets
   
2.26
%
 
2.19
%
   Loan loss allowance to nonaccruing loans (3)
   
68.67
%
 
63.10
%
   Loan loss allowance to total nonperforming assets (3)
   
55.01
%
 
50.64
%
               

(1)   Past due loans are accruing loans which are contractually past due 90 days or more as to principal or interest. These loans are well secured and in the process of collection.
(2)  Total loans exclude loans held for sale.
(3)   Total applicable allowance represents general valuation allowances only.


Nonperforming assets increased only $3.7 million between December 31, 2009 and June 30, 2010.  As a result, nonperforming assets as a percent of total assets increased to 2.26% at June 30, 2010 from 2.19% at December 31, 2009.  New nonperforming loans in commercial business and retail lending categories slightly outpaced the reduction of nonperforming construction loans.  Nonperforming construction loans decreased by $13.6 million during the six months ended June 30, 2010 and reflect the impact of our proactive asset disposition efforts.  Further, $4 million of additional nonperforming assets sales are expected to close in the third quarter of 2010.

The following table summarizes the changes in nonperforming assets during the period indicated:

 
For the six
 months ended
June 30, 2010
 
For the year ended
December 31, 2009
 
 
(In Thousands)
 
Beginning balance
$
82,160
 
$
35,760
 
Additions
 
33,607
 
)
100,925
 
Collections
 
(13,534
)
 
(19,133
)
Transfers to accrual
 
(284
)
 
(6,236
)
Charge-offs / write-downs, net
 
(16,124
)
$
(29,156
)
Ending balance
$
85,825
 
$
82,160
 

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.

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 the Board of Directors. At June 30, 2010, interest-bearing assets exceeded interest-earning liabilities that mature or reprice within one year (interest-sensitive gap) by $171.8 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window increased from 106.1% at March 31, 2010 to 109.0% at June 30, 2010. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 4.53% at June 30, 2010 from 3.14% at March 31, 2010. The change in sensitivity since March 31, 2010 reflects current interest rate environment and our continuing effort to effectively manage interest rate risk.

 
31

 

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, 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, 2010 and 2009, calculated in compliance with Thrift Bulletin No. 13a:

 
 
At June 30,
   
2010
 
2009
Change in
Interest Rate
(Basis Points)
 
% Change in
Net Interest
Margin (1)
 
Net Portfolio
Value Ratio
(2)
 
% Change in
Net Interest
Margin (1)
 
Net Portfolio
Value Ratio
(2)
 
                   
+300
 
+6%
 
9.74%
 
0%
 
8.66%
 
+200
 
+4%
 
10.07%
 
-2%
 
9.23%
 
+100
 
+2%
 
10.08%
 
-4%
 
9.51%
 
0
 
0%
 
10.01%
 
0%
 
9.73%
 
-100
 
-7%
 
9.35%
 
-6%
 
9.75%
 
-200
(3)
NMF
 
NMF
 
NMF
 
NMF
 
-300
(3)
NMF
 
NMF
 
NMF
 
NMF
 
                   

(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.
(3)
Sensitivity indicated by a decrease of 200 or 300 basis points is not deemed meaningful at June 30, 2010 given the low absolute level of interest rates at that time.

We also engage in other business activities that are sensitive to changes in interest rates.  For example, mortgage banking revenues and expenses can fluctuate with changing interest rates.  These fluctuations are difficult to model and estimate.






















 
32

 

COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

Results of Operations

We recorded net income of $3.3 million or earnings per diluted common share of $0.36 for the second quarter of 2010.  This compares to a net loss of $2.3 million or a loss per common share of $0.50 in the second quarter of 2009.  Earnings for the second quarter of 2010 were impacted by a higher net interest margin as funding costs continued to decrease while the yields on assets stabilized as a result of active pricing management and a favorable shift in the funding mix towards lower costing, non-maturity deposits.  As a result, the net interest margin increased 35 basis points from 3.31% for the quarter ended June 30, 2009 to 3.66% for the three months ended June 30, 2010.  In addition, noninterest expenses decreased $3.2 million to $27.7 million mainly due to a number of non-routine items totaling $5.7 million during the second quarter of 2009; discussed further in Note 13 to the Consolidated Financial Statements.  Additionally, the provision for loan loss decreased $1.4 million to $10.6 during the second quarter of 2010 compared to $12.0 million for the second quarter of 2009 as a result of lower levels of credit deterioration and charge-offs during the second quarter of 2010.  Partially offsetting these increases was a $645,000 decrease in loan fee income as a result of the wind-down of 1st Reverse during the latter part of 2009 and decreased securities gains of $619,000.

Net income for the first six months of 2010 was $3.8 million or $0.34 per diluted common share.  This compares to net income of $624,000 or a loss of $0.10 per common share due to the effects of preferred stock dividends for the six months ended June 30, 2009.  Consistent with the quarterly results, earnings for the first six months of 2010 were impacted by a higher net interest margin.  Net interest margin increased 44 basis points from 3.18% for the six months ended June 30, 2009 to 3.62% for the six months ended June 30, 2010.  Partially offsetting this increase was an increase of $2.4 million in the provision for loan loss as well as an increase in noninterest expenses of $2.0 million due to the $4.5 million non-routine charge recorded in the first quarter of 2010 as discussed in Note 13 to the Consolidated Financial Statements.

 
33

 

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,
 
   
2010
   
2009
 
   
Average
 
Interest &
 
Yield/
   
Average
 
Interest &
 
Yield/
 
   
Balance
 
Dividends
 
Rate (1)
   
Balance
 
Dividends
 
Rate (1)
 
   
(Dollars in Thousands)
 
   Assets:
                                   
   Interest-earning assets:
                                   
   Loans (2) (3):
                                   
   Commercial real estate loans
 
$
736,103
 
$
8,920
 
4.85
%
 
$
791,884
 
$
9,161
 
4.63
%
    Residential real estate loans
   
346,373
   
4,391
 
5.07
     
414,985
   
5,660
 
5.46
 
    Commercial loans
   
1,143,086
   
14,694
 
5.18
     
1,057,167
   
13,747
 
5.25
 
    Consumer loans
   
294,582
   
3,605
 
4.91
     
301,613
   
3,788
 
5.04
 
       Total loans
   
2,520,144
   
31,610
 
5.06
     
2,565,649
   
32,356
 
5.09
 
   Mortgage-backed securities (4)
   
780,044
   
9,639
 
4.94
     
570,740
   
6,948
 
4.87
 
   Investment securities (4) (5)
   
45,117
   
199
 
1.76
     
47,606
   
535
 
4.50
 
   Other interest-earning assets
   
39,831
   
6
 
0.06
     
39,668
   
-
 
0.00
 
       Total interest-earning assets
   
3,385,136
   
41,454
 
4.93
     
3,223,663
   
39,839
 
4.98
 
   Allowance for loan losses
   
(59,630
)
             
(36,726
)
         
   Cash and due from banks
   
59,252
               
59,263
           
   Cash in non-owned ATMs
   
250,372
               
182,696
           
   Bank owned life insurance
   
60,526
               
59,624
           
   Other noninterest-earning assets
   
114,427
               
93,649
           
       Total assets
 
$
3,810,083
             
$
3,582,169
           
                                     
   Liabilities and Stockholders’ Equity:
                                   
   Interest-bearing liabilities:
                                   
   Interest-bearing deposits:
                                   
   Interest-bearing demand
 
$
260,857
 
$
109
 
0.17
%
 
$
233,035
 
$
153
 
0.26
%
   Money market
   
601,982
   
1,103
 
0.73
     
363,952
   
1,018
 
1.12
 
   Savings
   
242,465
   
123
 
0.20
     
224,595
   
122
 
0.22
 
   Retail time deposits
   
662,100
   
3,445
 
2.09
     
655,484
   
5,194
 
3.18
 
       Total interest-bearing retail deposits
   
1,767,404
   
4,780
 
1.08
     
1,477,066
   
6,487
 
1.76
 
   Jumbo certificates of deposits
   
89,565
   
452
 
2.02
     
75,467
   
473
 
2.51
 
   Brokered certificates of deposit
   
328,651
   
539
 
0.66
     
338,163
   
563
 
0.67
 
       Total interest-bearing deposits
   
2,185,620
   
5,771
 
1.06
     
1,890,696
   
7,523
 
1.60
 
   FHLB of Pittsburgh advances
   
606,335
   
4,017
 
2.62
     
712,243
   
4,804
 
2.67
 
   Trust preferred borrowings
   
67,011
   
348
 
2.05
     
67,011
   
465
 
2.75
 
   Other borrowed funds
   
177,351
   
620
 
1.40
     
209,426
   
667
 
1.27
 
       Total interest-bearing liabilities
   
3,036,317
   
10,756
 
1.42
     
2,879,376
   
13,459
 
1.87
 
   Noninterest-bearing demand deposits
   
435,820
               
390,516
           
   Other noninterest-bearing liabilities
   
25,988
               
33,018
           
   Stockholders’ equity
   
311,958
               
279,259
           
   Total liabilities and stockholders’ equity
 
$
3,810,083
             
$
3,582,169
           
                                     
                                     
   Excess of interest-earning assets over interest-bearing liabilities
 
$
348,819
             
$
344,287
           
   Net interest and dividend income
       
$
30,698
             
$
26,380
     
                                     
    Interest rate spread
             
3.51
%
             
3.11
%
   Net interest margin
             
3.66
%
             
3.31
%

(1)
Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.
(2)
Nonperforming loans are included in average balance computations.
(3)
Balances are reflected net of unearned income.
(4)
Includes securities available-for-sale at fair value.
(5)
Includes reverse mortgages.



 
34

 


   
Six Months Ended June 30,
 
   
2010
   
2009
 
   
Average
 
Interest &
 
Yield/
   
Average
 
Interest &
 
Yield/
 
   
Balance
 
Dividends
 
Rate (1)
   
Balance
 
Dividends
 
Rate (1)
 
   
(Dollars in Thousands)
 
   Assets:
                                   
   Interest-earning assets:
                                   
   Loans (2) (3):
                                    
   Commercial real estate loans
 
$
740,283
 
$
17,493
 
4.73
%
 
$
801,011
 
$
18,625
 
4.65
%
    Residential real estate loans
   
350,982
   
8,992
 
5.12
     
420,046
   
11,711
 
5.58
 
    Commercial loans
   
1,133,793
   
29,121
 
5.20
     
1,015,360
   
25,829
 
5.17
 
    Consumer loans
   
297,133
   
7,227
 
4.90
     
299,969
   
7,565
 
5.09
 
       Total loans
   
2,522,191
   
62,833
 
5.03
     
2,536,386
   
63,730
 
5.07
 
   Mortgage-backed securities (4)
   
743,939
   
18,671
 
5.02
     
573,879
   
14,284
 
4.98
 
   Investment securities (4) (5)
   
45,147
   
502
 
2.22
     
48,285
   
632
 
2.62
 
   Other interest-earning assets
   
39,914
   
6
 
0.03
     
39,724
   
 
0.00
 
       Total interest-earning assets
   
3,351,191
   
82,012
 
4.93
     
3,198,274
   
78,646
 
4.95
 
   Allowance for loan losses
   
(58,166
)
             
(34,718
)
         
   Cash and due from banks
   
61,074
               
57,763
           
   Cash in non-owned ATMs
   
251,459
               
178,006
           
   Bank owned life insurance
   
60,426
               
59,518
           
   Other noninterest-earning assets
   
114,951
               
93,651
           
       Total assets
 
$
3,780,935
             
$
3,552,494
           
                                     
   Liabilities and Stockholders’ Equity:
                                   
   Interest-bearing liabilities:
                                   
   Interest-bearing deposits:
                                   
   Interest-bearing demand
 
$
256,909
 
$
219
 
0.17
%
 
$
223,686
 
$
357
 
0.32
%  
   Money market
   
595,844
   
2,294
 
0.78
     
349,461
   
2,046
 
1.18
 
   Savings
   
236,065
   
235
 
0.20
     
220,414
   
280
 
0.26
 
   Retail time deposits
   
666,763
   
7,387
 
2.23
     
652,043
   
10,680
 
3.30
 
       Total interest-bearing retail deposits
   
1,755,581
   
10,135
 
1.16
     
1,445,604
   
13,363
 
1.86
 
   Jumbo certificates of deposits
   
81,075
   
873
 
2.17
     
85,175
   
978
 
2.32
 
   Brokered certificates of deposit
   
333,230
   
1,057
 
0.64
     
334,076
   
1,511
 
0.91
 
       Total interest-bearing deposits
   
2,169,886
   
12,065
 
1.12
     
1,864,855
   
15,852
 
1.71
 
   FHLB of Pittsburgh advances
   
605,646
   
7,994
 
2.63
     
731,096
   
10,145
 
2.76
 
   Trust preferred borrowings
   
67,011
   
677
 
2.01
     
67,011
   
1,060
 
3.15
 
   Other borrowed funds
   
176,703
   
1,235
 
1.40
     
218,854
   
1,318
 
1.20
 
       Total interest-bearing liabilities
   
3,019,246
   
21,971
 
1.46
     
2,881,816
   
28,375
 
1.97
 
   Noninterest-bearing demand deposits
   
425,553
               
371,297
           
   Other noninterest-bearing liabilities
   
25,793
               
29,995
           
   Stockholders’ equity
   
310,343
               
269,386
           
   Total liabilities and stockholders’ equity
 
$
3,780,935
             
$
3,552,494
           
                                     
                                     
   Excess of interest-earning assets over interest-bearing liabilities
 
$
331,945
             
$
316,458
           
   Net interest and dividend income
       
$
60,041
             
$
50,271
     
                                     
   Interest rate spread
             
3.47
%
             
2.98
%
   Net interest margin
             
3.62
%
             
3.18
%

(1)
Weighted average yields have been computed on a tax-equivalent basis using a 35% effective tax rate.
(2)
Nonperforming loans are included in average balance computations.
(3)
Balances are reflected net of unearned income.
(4)
Includes securities available-for-sale at fair value.
(5)
Includes reverse mortgages.

 
35

 

Net interest income for the second quarter of 2010 improved by $4.3 million, or 16% compared to the second quarter of 2009. The net interest margin for the second quarter of 2010 was 3.66%, up 35 basis points compared to 3.31% for the second quarter of 2009. During the quarter, net interest margin improved as the yield on interest earning assets remained stable and the costs of interest bearing liabilities declined by 45 basis points compared to the second quarter 2010. The net interest margin continued to improve due to the Company’s ongoing active pricing management and the ability to maintain our yield on earning assets. A favorable change in the retail funding mix resulted from the growth in lower-costing, non-maturity deposits coupled with relatively little growth in higher-costing retail time deposits.

Net interest income for the six-month period ending June 30, 2010 was $60.0 million compared to $50.3 million for the same period in 2009. Consistent with the quarterly trend discussed above, the increase in net interest income was the result our active pricing management and improved funding mix. The net interest margin for the first six months of 2010 was 3.62%, up 44 basis points from the same period in 2009.

Allowance for Loan Losses

We maintain allowances for loan losses and charge losses to these allowances when realized. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of probable loan losses related to specifically identified loans as well as the inherent risk of loss for those in the remaining loan portfolio. Our evaluation is based upon a continuing review of the portfolio, with consideration given to evaluations resulting from examinations performed by regulatory authorities.

We established our loan loss allowance in accordance with guidance provided in the Securities and Exchange Commission’s Staff Accounting Bulletin 102 (“SAB 102”). Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified problem loans; formula allowances for commercial and commercial real estate loans; and allowances for pooled homogenous loans.

Specific reserves are established for certain loans in cases where management has identified significant conditions or circumstances related to a specific credit that indicate the probability that a loss has been incurred.

The formula allowances for commercial and commercial real estate loans are calculated by applying estimated loss factors to outstanding loans based on the internal risk grade of loans. For low risk commercial and commercial real estate loans the portfolio is pooled, based on internal risk grade, and estimates are based on a ten-year net charge-off history. Higher risk and criticized loans have loss factors that are derived from an analysis of both the probability of default and the probability of loss should default occur. Loss adjustment factors are applied based on criteria discussed below. As a result, changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance.

Pooled loans are loans that are usually smaller, not-individually-graded and homogenous in nature, such as consumer installment loans and residential mortgages. Loan loss allowances for pooled loans are based on a ten-year net charge-off history. The average loss allowance per homogenous pool is based on the product of average annual historical loss rate and the estimated duration of the pool multiplied by the pool balances. These separate risk pools are 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.

·
General economic and business conditions affecting the Bank’s key lending areas,
·
Credit quality trends,
·
Recent loss experience in particular segments of the portfolio,
·
Collateral values and loan-to-value ratios,
·
Loan volumes and concentrations, including changes in mix,
·
Seasoning of the loan portfolio,
·
Specific industry conditions within portfolio segments,
·
Bank regulatory examination results, and

 
36

 

·
Other factors, including changes in quality of the loan origination, servicing and risk management processes.

Our loan officers and risk managers meet at least quarterly to discuss and review these conditions and risks associated with individual problem loans.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for such losses.  We also give consideration to the results of these regulatory agency examinations.

 The provision for loan losses was $10.6 million in the quarter ending June 30, 2010 compared to $12.0 million in the same quarter of 2009.  The decrease showed continued stabilization during the second quarter.  The provision for loan losses for the first six months ending June 30, 2010 was $22.0 million compared to $19.7 million for the six months ending June 30, 2009. This increase is the result of the Company providing reserves in excess of net charge-offs, the migration of loans to a higher risk rating, collateral depreciation and an increase in the consumer loan provision due to the continued recession and extended period of unemployment.  In addition, during the second quarter of 2010, in response to the impact of the continued recession and unemployment, we increased the loss factor for our consumer loan portfolio.  This change increased the provision by $1.1 million during the quarter.

The table below represents a summary of changes in the allowance for loan losses during the periods indicated.

       
Six months ended June 30,
     
       
2010
     
2009
     
       
(Dollars in Thousands)
     
   Beginning balance
     
$
53,446
     
$
31,189
     
   Provision for loan losses
       
22,004
       
19,650
     
                           
   Charge-offs:
                         
Residential real estate
       
1,101
       
494
     
Commercial real estate
       
1,220
       
184
     
Construction
       
3,718
       
5,323
     
Commercial
       
5,462
       
2,486
     
Overdrafts
       
1,285
       
563
     
Consumer
       
2,580
       
769
     
 Total charge-offs
       
15,366
       
9,819
     
                           
   Recoveries:
                         
Residential real estate
       
17
       
26
     
Commercial real estate
       
2
       
4
     
Construction
       
948
       
30
     
Commercial
       
116
       
72
     
Overdrafts
       
1,006
       
230
     
Consumer
       
83
       
33
     
 Total recoveries
       
2,172
       
395
     
                           
   Net charge-offs
       
13,194
       
9,424
     
   Ending balance
     
$
62,256
     
$
41,415
     
                           
Net charge-offs to average gross loans outstanding, net of unearned income (1)
       
1.05
%
     
0.75
%
   

(1)
Ratio for six months ended June 30, 2010 and June 30, 2009 are annualized.

 
37

 

Noninterest Income

Noninterest income for the quarter ended June 30, 2010 was $12.4 million compared to $12.7 million for the second quarter of 2009.  This decrease was mainly attributable to decreases in loan fees (primarily related to the closure of 1st Reverse in 2009) of $645,000 and net securities gains of $619,000.  The decrease in net securities gains is mainly due to the $622,000 favorable mark-to-market adjustment on our BBB+ bonds (discussed elsewhere within this document) during the second quarter of 2009.  Partially offsetting these decreases was a $768,000 increase in credit/debit card and ATM income mainly due to an increase in prime-based bailment fees at Cash Connect (our ATM division) and growth in deposit accounts.
 
 
For the six months ended June 30, 2010, noninterest income was $23.6 million, or a slight decrease of $191,000, or less than 1%, over the same period in 2009.  Similar to the quarterly comparison, the main reason for this decrease was lower loan fee income of $1.2 million (again, due to closure of 1st Reverse in 2009).  In addition, securities gains decreased $1.0 million for the six months ended June 30, 2010.  Offsetting these decreases was an increase in credit/debit card and ATM income of $1.4 million, and represents growth in this area over the past year.    Also, investment advisory income and deposit service charges increased by $169,000 and $135,000, respectively.

Noninterest Expense

Noninterest expense for the quarter ended June 30, 2010 was $27.7 million, a decrease of $3.2 million, or 10%, over the $31.0 million reported for the same period in 2009.  This decrease is due to several non-routine items recorded during the quarter ended June 30, 2009 totaling $5.7 million.  For further discussion of non-routine charges see Note 13 to the Consolidated Financial Statements.  Partially offsetting these 2009 non-routine items was an increase of $1.2 million during 2010 related to loan workout and OREO expense and reflects our active asset disposition efforts and prudent write-downs to expected sales values.  In addition, FDIC expense increased by $509,000 during 2010 and professional fees were up $512,000 in 2010 and included $164,000 of expenses related to the recently announced acquisition of Christiana Bank and Trust.

Noninterest expense for the six months ended June 30, 2010 was $57.4 million, an increase of $2.0 million or 4% over the $55.3 million reported for the same period in 2009.  Both periods included non-routine charges.  For further discussion of non-routine charges see Note 13 to the Consolidated Financial Statements.  Separate from the non-routine charges, loan workout and OREO expense increased $1.6 million from the six months ended June 30, 2009 and, consistent with the quarter, reflect our asset disposition efforts.  In addition, 2010 expenses include $776,000 of consulting expenses related to our Creating Opportunities for Revenues and Expenses (“CORE”) efficiency program.   Lastly, FDIC expenses for the first six months of 2010 were $687,000 higher than the same period of 2009.

Income Taxes

The Company and its subsidiaries file a consolidated Federal income tax return and separate state income tax returns.   Income taxes are accounted for in accordance with ASC 740, which requires the recording of deferred income taxes for tax consequences of temporary differences.  We recorded an income tax provision of $1.5 million and $427,000 during the three and six months ended June 30, 2010, respectively, compared to an income tax benefit of $1.6 million and $1.6 million for the same periods in 2009. The first quarter of 2010 and 2009 included tax benefits of $899,000 and $854,000, respectively, resulting from a decrease in the Company’s income tax reserve due to the expiration of the statute of limitations on certain tax items.  This benefit will not be recognized in future years.  The Company’s effective tax rate, excluding the statute of limitations related benefit, was 31.3% for both the three and six months ended June 30, 2010 compared to 40.7% and 75.5% during the same periods in 2009.

The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income (includes a fifty-percent interest income exclusion on a loan to an Employee Stock Ownership Plan) and Bank-Owned Life Insurance (“BOLI”) income.  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.

 
38

 

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009 the FASB issued new guidance impacting FASB ASC 860, Transfers and Servicing (“ASC 860”) (Formerly SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140). This new standard amends derecognition guidance and eliminates the concept of qualifying special-purpose entities. The new standard was effective on January 1, 2010.  The adoption of this standard did not have a material impact on our Consolidated Financial Statements.

In June 2009, the FASB issued new guidance impacting FASB ASC 810-10, Consolidation (Formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)). The new standard amends previous guidance to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The pronouncement was effective January 1, 2010 and we have determined that adoption of the new standard did not have a material impact on our Consolidated Financial Statements.

In January 2010, the FASB issued an update (Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements) impacting FASB ASC 820, Fair Value Measurements and Disclosures. The update provides clarification regarding existing disclosures and requires additional disclosures regarding fair value measurements.  Specifically, the guidance now requires reporting entities to disclose the amounts of significant transfers between levels and the reasons for the transfers.  In addition, the reconciliation should present separate information about purchases, sales, issuances and settlements.  A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value. The new standard is effective for reporting periods beginning after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements which is not effective until reporting periods beginning after December 15, 2010.  There was no transfer into or out of Level 1 or Level 2 of the fair value hierarchy in the first six months of 2010.  Adoption of the not yet adopted section of this guidance is not expected to have a material impact on our Consolidated Financial Statements.

In February 2010, the FASB issued an update (Accounting Standards update No. 2010-09, Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements) impacting FASB ASC 855, Subsequent Events (“ASC 855”).  This update addresses the conflict of requirements with the SEC’s reporting requirements and clarifies the definition of “revised financial statements.”  Specifically, this update removes the “reviewed through date” disclosure requirements for companies deemed to be an SEC filer.  The adoption of this guidance did not have a material impact on our financial statements.

RECENT LEGISLATION

On November 17, 2009 the Federal Reserve adopted a final ruling regarding Regulation E, otherwise known as the Electronic Fund Transfer Act.  This ruling limits our ability to assess fees for overdrafts on ATM or one-time debit transactions without receiving prior consent from our customers who have opted-in to our overdraft service.  This act became effective on July 1, 2010 and we have taken steps to be in compliance with these regulations.

On June 28, 2010 the Board of Directors of the FDIC adopted a final ruling extending the Transaction Account Guarantee (“TAG”) program to December 31, 2010 as well as to allow the Board to use its discretion to extend the program for a period of time not to exceed December 31, 2011 without additional rulemaking if economic conditions warrant such an extension.   We have chosen to participate in the extension program.

On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) into law.  This legislation makes extensive changes to the laws regulating financial services firms and requires significant rule-making.  In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action.  While the full effects of the legislation on us cannot yet be determined, this legislation was opposed by the American Bankers Association and is generally perceived as negatively impacting the banking industry.  This legislation may result in higher compliance and other costs, reduced revenues and higher capital and liquidity requirements, among other things, which could adversely affect our business.

 
39

 

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.

Part II.    OTHER INFORMATION

Item 1.     Legal Proceedings

We are not engaged in any legal proceedings of a material nature at June 30, 2010. 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

The following risk factors are in addition to the risk factors previously disclosed under Item 1A. of the Company’s Form 10-K for the year ended December 31, 2009, previously filed with the Securities and Exchange Commission.

We may not realize the anticipated benefits from our proposed acquisition of Christiana Bank & Trust Company.

On June 24, 2010, we entered into a stock purchase agreement with National Penn Bancshares, Inc. pursuant to which we will purchase all of the issued and outstanding shares of its wholly owned subsidiary, Christiana Bank & Trust Company, or CBT.  CBT will thereafter be merged with and into WSFS Bank. We anticipate that the acquisition of CBT will accelerate our position in the trust and custody businesses and to increase our noninterest income as well as further solidify our market business in an attractive Delaware submarket.  The success of this transaction, however, will depend on, among other things, our ability to realize anticipated cost savings and to combine the businesses of WSFS Bank and CBT in a manner that permits growth opportunities and does not materially disrupt the existing customer relationships of CBT nor result in decreased revenues resulting from any loss of customers. If we are not able to successfully achieve these objectives, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

WSFS Bank and CBT have operated and, until the completion of the acquisition, will continue to operate, independently. Certain CBT employees may not be employed by us after the acquisition. In addition, CBT employees that we wish to retain may elect to terminate their employment as a result of the acquisition, which could delay or disrupt the integration process. It is possible that the integration process could result in the disruption of CBT’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the acquisition.

 
40

 

       The stock purchase agreement with National Penn may be terminated in accordance with its terms and the acquisition of CBT may not be completed.

The stock purchase agreement with National Penn is subject to a number of conditions which must be fulfilled in order to close. Those conditions include receipt of regulatory approvals, the continued accuracy of certain representations and warranties by both parties, absence of injunctions, and the performance by both parties of certain covenants and agreements. There can be no assurance that the conditions to closing the Merger will be fulfilled or that the Merger will be completed.

Regulatory approvals for the CBT acquisition may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.

Before the CBT acquisition may be completed, various approvals or consents must be obtained from the federal bank regulatory and other authorities. These governmental entities may impose conditions on the completion of the CBT acquisition or require changes to the terms of the stock purchase agreement. Although we do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the transactions contemplated in the stock purchase agreement or imposing additional costs on or limiting our revenues, any of which might have a material adverse effect on us following the CBT acquisition. There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any unanticipated conditions will be imposed.

Our nonperforming assets show a significant increase over the past 18 months.  Further increases will have an adverse effect on our earnings.
 
Our nonperforming assts (which consist of nonaccrual loans, assets acquired through foreclosure and troubled debt restructurings), totaled $85.8 million at June 30, 2010, which is an increase of $50.0 million, or 140%, over the $35.8 million in nonperforming assets at December 31, 2008.  Our nonperforming assets adversely affect our net income in various ways.  We do not record interest income on nonaccrual loans and assets acquired through foreclosure.  We must establish an allowance for loan losses that reserves for losses inherent in the loan portfolio that are both probable and reasonably estimable through current period provisions for loan losses.  From time to time, we also write down the value of properties in our portfolio of assets acquired through foreclosure to reflect changing market values.  Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to assets acquired through foreclosure.  The resolution of nonperforming assets requires the active involvement of management, which can distract management from its overall supervision of operations and other income producing activities.  Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance for loan losses accordingly, which will have an adverse effect on our earnings.
 
Changes in interest rates and other factors beyond our control could have an adverse impact on our earnings.
 
Our operating income and net income depend to a greater extent on our net interest margin, which is the difference between the interest yields we receive on loans, securities and other interest-earning assets and the interest rates we pay on interest-bearing deposits and other liabilities.  The net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.  When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income.  Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.  These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental regulatory agencies, including the Federal Reserve.
 
We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact.  As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations.  The results of our interest rate sensitivity
 

 
41

 

simulation models depend upon a number of assumptions which may prove to be not accurate.  There can be no assurance that we will be able to successfully manage our interest rate risk.  Increases in market rates and adverse changes in the local residential real estate market, the general economy or consumer confidence would likely have a significant adverse impact on our non-interest income, as a result of reduced demand for residential mortgage loans that we make on a pre-sold basis.
 
The soundness of other financial institutions could adversely affect us.

       Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.  There is no assurance that any such losses would not materially and adversely affect our results of operations.

Financial reforms and related regulations may affect our business activities, financial position and profitability.
 
 
The Dodd-Frank Act, signed into law on July 21, 2010, makes extensive changes to the laws regulating financial services firms and requires significant rulemaking. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. We are currently reviewing the impact the legislation will have on our business.
 
 
The legislation charges the federal banking agencies, including the Federal Reserve and the OCC with drafting and implementing enhanced supervision, examination and capital standards for depository institutions and their holding companies. The enhanced requirements include, among other things, changes to capital, leverage and liquidity standards and numerous other requirements. The Dodd-Frank Act also authorizes various new assessments and fees, expands supervision and oversight authority over nonbank subsidiaries, increases the standards for certain covered transactions with affiliates and requires the establishment of minimum leverage and risk-based capital requirements for insured depository institutions. The Dodd-Frank Act will eliminate the OTS, which is currently our primary regulator, and will transfer the OTS’s rulemaking and supervisory functions to, among other agencies, the Federal Reserve and OCC.  Our primary federal regulator will become the Federal Reserve and the Bank’s primary federal regulator will be the OCC. In addition, the Dodd-Frank Act contains several provisions that change the manner in which deposit insurance premiums are assessed and which could increase the FDIC deposit insurance premiums paid by us. The Dodd-Frank Act also requires the SEC to complete studies and develop rules regarding various investor protection issues, including shareholder access to proxy solicitations.
 
 
The Dodd-Frank Act establishes a new, independent Consumer Financial Protection Bureau which will have broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. States will be permitted to adopt stricter consumer protection laws and state attorney generals can enforce consumer protection rules issued by the Bureau.
 
 
The changes resulting from the Dodd-Frank Act, as well as the regulations promulgated by federal agencies, may impact the profitability of our business activities, require changes to certain of its business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes.
 
 

 
 

 

 
42

 

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds
 
There were no shares repurchased during the quarter ended June 30, 2010.

Item 3.          Defaults upon Senior Securities

Not applicable

Item 4.          [Reserved]

Not applicable

Item 5.    Other Information

Not applicable

Item 6.    Exhibits
         
 
(a)
(b)
Exhibit 2.1 - Stock Purchase Agreement between WSFS Financial Corporation and National Penn Bancshares, Inc. dated as of June 24, 2010
Exhibit 31.1 – Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(c)
Exhibit 31.2 – Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(d)
Exhibit 32 – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   

 
43

 

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:
July 30, 2010
 
/s/ Mark A. Turner
 
     
Mark A. Turner
 
     
President and Chief Executive Officer
 


Date:
July 30, 2010
 
/s/ Stephen A. Fowle
 
     
Stephen A. Fowle
 
     
Executive Vice President and
 
     
Chief Financial Officer
 

44