10-Q 1 f10q_033110-0312.htm FORM 10-Q f10q_033110-0312.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
March 31, 2010
     
OR
     
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   
EXCHANGE ACT OF 1934
     
For the transition period from
 
to
 
     
     
Commission File Number  0-16668
     
     
WSFS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
 
22-2866913
(State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization)
 
Identification Number)
     
500 Delaware Avenue, Wilmington, Delaware
 
19801
(Address of principal executive offices)
 
(Zip Code)
     
(302) 792-6000
Registrant’s telephone number, including area code:
     
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),   ____ Yes_____ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [  ]                                                      Accelerated filer [X]
Non-accelerated filer [  ]                                                      Smaller reporting company [   ]
(Do not check if smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes [  ]      No [X]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 3, 2010:
 
Common Stock, par value $.01 per share
 
7,097,024
(Title of Class)
 
(Shares Outstanding)

 
 

 

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX


PART I. Financial Information



       
Page
Item 1.
 
Financial Statements (Unaudited)
   
         
   
Consolidated Statement of Operations for the Three Months
   
   
Ended March 31, 2010 and 2009
 
3
         
   
Consolidated Statement of Condition as of March 31, 2010
   
   
and December 31, 2009
 
4
         
   
Consolidated Statement of Cash Flows for the Three  Months Ended
   
   
March 31, 2010 and 2009
 
5
         
   
Notes to the Consolidated Financial Statements for the Three
   
   
Months Ended March 31, 2010 and 2009
 
6
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
 
23
   
and Results of Operations
   
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
34
         
Item 4.
 
Controls and Procedures
 
34
         
         
PART II. Other Information
         
Item 1.
 
Legal Proceedings
 
34
         
Item 1A.
 
Risk Factors
 
34
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
34
         
Item 3.
 
Defaults upon Senior Securities
 
34
         
Item 4.
 
[Reserved]
 
34
         
Item 5.
 
Other Information
 
34
         
Item 6.
 
Exhibits
 
34
         
Signatures
     
35
         
Exhibit 31.1
 
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
         
Exhibit 31.2
 
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
         
Exhibit 32
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   



 
2

 

WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS


 
Three months ended March 31,
 
 
2010
   
2009
 
 
(Unaudited)
 
 
(In Thousands, Except Per Share Data)
 
Interest income:
             
Interest and fees on loans
$
31,223
   
$
31,374
 
Interest on mortgage-backed securities
 
9,032
     
7,336
 
Interest and dividends on investment securities
 
303
     
97
 
   
40,558
     
38,807
 
Interest expense:
             
Interest on deposits
 
6,294
     
8,329
 
Interest on Federal Home Loan Bank advances
 
3,977
     
5,341
 
Interest on trust preferred borrowings
 
329
     
595
 
Interest on other borrowings
 
615
     
651
 
   
11,215
     
14,916
 
Net interest income
 
29,343
     
23,891
 
Provision for loan losses
 
11,410
     
7,653
 
Net interest income after provision for loan losses
 
17,933
     
16,238
 
               
Noninterest income:
             
Credit/debit card and ATM income
 
4,370
     
3,702
 
Deposit service charges
 
3,879
     
3,817
 
Loan fee income
 
680
     
1,250
 
Investment advisory income
 
604
     
531
 
Mortgage banking activities, net
 
252
     
202
 
Bank owned life insurance income
 
196
     
210
 
Security gains
 
     
423
 
Other income
 
1,160
     
966
 
   
11,141
     
11,101
 
Noninterest expenses:
             
Salaries, benefits and other compensation
 
11,986
     
12,331
 
Non-routine ATM loss
 
4,491
     
 
Occupancy expense
 
2,562
     
2,436
 
FDIC expenses
 
1,643
     
1,465
 
Equipment expense
 
1,469
     
1,579
 
Data processing and operations expenses
 
1,286
     
1,121
 
Professional Fees
 
1,170
     
962
 
Net costs of assets acquired through foreclosure
 
743
     
500
 
Marketing Expense
 
704
     
727
 
Other operating expense
 
3,579
     
3,253
 
   
29,633
     
24,374
 
(Loss) income before taxes
 
(559
)
   
2,965
 
Income tax (benefit) provision
 
(1,073
)
   
25
 
Net income
 
514
     
 2,940
 
Dividends on preferred stock and accretion of discount
 
692
     
513
 
Net (loss) income allocable to common stockholders
$
(178
)
 
$
2,427
 
               
Earnings per share:
             
Basic
$
(0.03
)
 
$
0.39
 
Diluted
$
(0.03
)
 
$
0.39
 

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

 
3

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

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

 
4

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


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

 
5

 

WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)

1. BASIS OF PRESENTATION

Our consolidated Financial Statements include the accounts of WSFS Financial Corporation (“the Company”, “our Company”, “we”, “our” or “us”), Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”) and Montchanin Capital Management, Inc. (“Montchanin”) and its wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”). We also have one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”). WSFS Bank has a fully-owned subsidiary, WSFS Investment Group, Inc., which markets various third-party insurance products and securities products to Bank customers through WSFS’ retail banking system.  Founded in 1832, the Bank is one of the ten oldest banks continuously operating under the same name in the United States.

We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services.  In addition, we offer a variety of wealth management and trust services through WSFS Trust and Wealth Management.  Lending activities are funded primarily with retail deposits and borrowings.  The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximum.  We serve our customers primarily from our 41 banking offices located in Delaware (36), Pennsylvania (4) and Virginia (1) and through our website at www.wsfsbank.com.

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

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

Accounting for Stock-Based Compensation

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

The Stock Incentive Plans provide for the granting of incentive stock options as defined in Section 422 of the Internal Revenue Code as well as non-incentive stock options (collectively, “Stock Options”). Additionally, the 2005 Plan provides for the granting of stock appreciation rights, performance awards, restricted stock and restricted stock unit awards, deferred stock units, dividend equivalents, other stock-based awards and cash awards. All Stock Options are to be granted at not less than the market price of our Corporation’s common stock on the date of the grant. All Stock Options granted during 2010 vest in 25% per annum increments, start to become exercisable one year from the grant date and expire five years from the grant date. Generally, all awards become immediately exercisable in the event of a change in control, as defined within the Stock Incentive Plans.

 
 
6

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

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

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

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

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

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

During the first quarter of 2010, we granted 26,089 options with a five-year life and a four-year vesting period.  The Black-Scholes option-pricing model was used to determine the grant date fair value of options.  Significant assumptions used in the model included a weighted-average risk-free rate of return of 1.8% for 2010; an expected option life of three and three-quarters years; and an expected stock price volatility of 43.3% in 2010.  For the purposes of this option-pricing model, a dividend yield of 1.6% was assumed.  The expected option life was determined based on the mid-point between the vesting date and the end of the contractual term.

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

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

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

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

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

2. EARNINGS PER SHARE

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

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

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

 
8

 

3. INVESTMENT SECURITIES

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

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

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

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

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

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

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

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

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

 
10

 

4. MORTGAGE-BACKED SECURITIES

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

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

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

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

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

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

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

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

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

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



 
12

 

5. IMPAIRED LOANS

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

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

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

6. COMPREHENSIVE INCOME

The following schedule reconciles net income to total comprehensive income:

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

7. TAXES ON INCOME

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

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

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

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

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

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

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

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

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

 
14

 

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


 
15

 

For the three months ended March 31, 2009 (In Thousands)
                   
   
WSFS
   
Cash Connect
   
1st Reverse
   
Trust & Wealth Management
   
Total
 
                               
External customer revenues:
                             
Interest income
  $ 38,807     $ -     $ -     $ -     $ 38,807  
Noninterest income
    7,346       2,777       556       422       11,101  
Total external customer revenues
    46,153       2,777       556       422       49,908  
                                         
Inter-segment revenues:
                                       
Interest income
    165       -       -       -       165  
Noninterest income
    725       71       -       -       796  
Total inter-segment revenues
    890       71       -       -       961  
                                         
Total revenue
    47,043       2,848       556       422       50,869  
                                         
External customer expenses:
                                       
Interest expense
    14,916       -       -       -       14,916  
Noninterest expenses
    21,509       1,074       1,069       722       24,374  
Provision for loan loss
    7,653       -       -       -       7,653  
Total external customer expenses
    44,078       1,074       1,069       722       46,943  
                                         
Inter-segment expenses
                                       
Interest expense
    -       156       9       -       165  
Noninterest expenses
    112       187       63       434       796  
Total inter-segment expenses
    112       343       72       434       961  
                                         
Total expenses
    44,190       1,417       1,141       1,156       47,904  
                                         
Income (loss) before taxes and extraordinary items
  $ 2,853     $ 1,431     $ (585 )   $ (734 )   $ 2,965  
                                         
Income tax provision
                                    25  
Consolidated net income
                                  $ 2,940  
                                         
Cash and cash equivalents
  $ 55,984     $ 144,737     $ 442     $ 685     $ 201,848  
Other segment assets
    3,324,547       14,620       386       1,906       3,341,459  
                                         
Total segment assets
  $ 3,380,531     $ 159,357     $ 828     $ 2,591     $ 3,543,307  
                                         
Capital expenditures
  $ 1,877     $ -     $ -     $ 11     $ 1,888  


 
16

 

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 nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available.  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 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 March 31, 2010.  Based on the above, we have determined there was no other-than-temporary impairment related to our FHLB stock investment as of March 31, 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.

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.


 
17

 

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

   
March 31, 2010
   
December 31, 2009
 
   
Book Value
   
Fair Value
   
Book Value
   
Fair Value
 
(In Thousands)
                       
Financial assets:
                       
Cash and cash equivalents
  $ 323,000     $ 323,000     $ 321,749     $ 321,749  
Investment securities
    45,024       45,008       45,517       45,479  
Mortgage-backed securities
    759,743       759,743       681,242       681,242  
Loans, net
    2,464,839       2,486,771       2,479,155       2,487,129  
Bank-owned life insurance
    60,450       60,450       60,254       60,254  
Stock in Federal Home Loan Bank of Pittsburgh
    39,305       39,305       39,305       39,305  
Accrued interest receivable
    12,261       12,261       12,407       12,407  
                                 
Financial liabilities:
                               
Deposits
    2,617,411       2,636,744       2,561,871       2,572,418  
Borrowed funds
    858,680       852,244       854,809       858,896  
Accrued interest payable
    6,178       6,178       4,240       4,240  

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

   
Mar. 31, 2010
   
Dec. 31, 2009
 
(In Thousands)
           
Off-balance sheet instruments:
           
Commitments to extend credit
  $ 4,010     $ 5,071  
Standby letters of credit
    214       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.

 
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.



 
18

 


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 March 31, 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
 
$
 —
 
$
600,202
 
 $
 
$
600,202
   
    FNMA
   
 —
   
59,451
   
   
59,451
   
    FHLMC
   
   
42,616
   
   
42,616
   
    GNMA
   
   
45,291
   
   
45,291
   
    U.S. Government and agencies
   
   
41,266
   
   
41,266
   
    State and political subdivisions
   
 —
   
3,670
   
 
$
3,670
   
Reverse mortgages          
     (468  
(468
 
Trading Securities
         
   
12,183
   
12,183
   
Total assets measured at fair value on a recurring basis
 
$
 —
 
$
792,496
 
$
11,715
 
$
804,211
   
Assets Measured at Fair Value on a Nonrecurring Basis
                           
Impaired Loans
 
$
 —
 
$
60,381
 
$
 —
 
$
60,381
   
Total assets measured at fair value on a nonrecurring basis
 
$
 —
 
$
60,381
 
$
 —
 
$
60,381
   

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 March 31, 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, $274.1 million in Federal Agency MBS, $477.5 million of private Label MBS, and $3.7 million in municipal bonds.  Agency and MBS securities are predominately AAA-rated.  We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 as, with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data.  For these securities we obtain fair value measurements from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors.

Securities classified as available for sale as of December 31, 2009 were also reported at fair value using Level 2 inputs.  Included under the Level 2 designation was approximately $41.3 million in Federal Agency debentures, $240.2 million in Federal Agency MBS, $424.8 million of Private Label MBS, and $3.7 million in municipal bonds.  Agency and MBS securities were predominately AAA-rated and designated Level 2 pursuant to ASC 820-10.  As discussed above, almost all were fixed income securities, none were exchange traded, and all were priced by correlation to observed market data.

Trading securities. The amount included in the trading securities category represents the fair value of a BBB-rated traunche of a reverse mortgage security. There has never been an active market for these securities. As such, we classify these trading securities as Level 3 under ASC 820-10. As prescribed by ASC 820-10 management used various observable and unobservable inputs to develop a range of likely fair value prices where this security would be exchanged in an orderly transaction between market participants at the
 
 
 
19

 
 
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 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 income (losses) for the period included in net income
          13       13  
Purchases, sales, issuances, and settlements, net
          49       49  
Balance at March 31, 2010
  $ 12,183      $ (468 )    $ 11,715  

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 $71.4 million and $73.2 million at March 31, 2010 and December 31, 2009, respectively.  The valuation allowance on impaired loans was $11.0 million, as of March 31, 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.  During the first quarter of 2010, we had no repurchases under these indemnifications.

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

At March 31, 2010 there were forty-two 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 $190.7 million at March 31, 2010 compared with $209.6 million at December 31, 2009.  At March 31, 2010 maturities ranged from approximately seven months to twelve years.  The aggregate market value of these swaps to the customers was a liability of $13.2 million at March 31, 2010 and $12.6 million at December 31, 2009.  At March 31, 2010 all of the swap transactions were in a paying position to third-party financial institutions.
 
 
 
20

 
 
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 March 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
             
Service cost
  $ 42     $ 40  
Interest cost
    38       35  
Amortization of transition obligation
    15       15  
Net loss recognition
    3       4  
Net periodic benefit cost
  $ 98     $ 94  

13.  NONINTEREST EXPENSES

During the three months ended March 31, 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 armored car company that serves 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 gain is expected to be recorded in future periods as funds are received or recovery becomes certain.

Based on a publicly available court-appointed receiver’s report filed March 1, 2010, the Courier and its related entities had payables and amounts due to customers (including Cash Connect) listed at $68.6 million.  This report also shows the Courier and related entities in the receivership held assets of approximately $57 million; slightly more than half consisted of cash, with the remaining amount comprised of receivables and fixed assets with uncertain liquidation value and collectability.  The receiver also indicated some of the entities in receivership may have value as ongoing enterprises.  Additionally, the receiver’s report referenced a number of additional business entities directly or indirectly related to the named executive that are currently under research by the receiver.

This charge is included in noninterest expenses in the Consolidated Statement of Operations.  There were no material non-routine charges recorded during the three months ended March, 31, 2009.

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 $658,000 in preferred stock dividends during the three months ended March 31, 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
 
 
 
21

 
 
preferred stock discount will be accreted, on an effective yield method, to preferred stock over five years. The Company has accreted a total of $34,000 during the three months ended March 31, 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.
 

15.  SUBSEQUENT EVENTS 
 
The Company has evaluated all subsequent events and has not identified any subsequent events requiring recognition or disclosures in the financial statements.



 
22

 

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 41 banking offices located in Delaware (36), Pennsylvania (4), and Virginia (1) and through our website at www.wsfsbank.com.

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

Montchanin has one consolidated subsidiary, Cypress Capital Management, LLC (“Cypress”).  Cypress is a Wilmington-based investment advisory firm serving high net-worth individuals and institutions.  Cypress had approximately $469 million in assets under management at March 31, 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.  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
 
 
 
23

 
 
judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Allowance for Loan Losses

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

Contingencies (Including Indemnifications)

In the ordinary course of business we are subject to legal actions, which involve claims for monetary relief. Based upon information presently available to us and our counsel, it is our opinion that any legal and financial responsibility arising from such claims will not have a material adverse effect on our results of operations.

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, 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 March 31, 2010.

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.
 
 
 
24

 

 
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 March 31, 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 $2.6 million as of March 31, 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 March 31, 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.


FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $63.8 million, or 2%, during the three months ended March 31, 2010.  Mortgage-backed securities increased $78.5 million, or 12%, and cash and cash equivalents increased $1.3 million, or less than 1%.  This included a $3.2 million, or 6% increase in cash and due from banks, offset by a $1.6 million, or 1%, decrease in cash in non-owned ATMs.  Total loans decreased $14.3 million, or less than 1%, which was primarily attributable to residential mortgage loan sales of $18.3 million.  However, commercial and commercial real estate loans (together commercial loans) increased $3.3 million mainly due to the addition of new customer relationships.

Total liabilities increased $59.1 million, or 2%, between December 31, 2009 and March 31, 2010 to $3.5 billion.  This increase was mainly due to a $63.3 million, or 3% increase, in customer deposits.  These increases in customer deposits improved our funding mix as deposit growth reduced our use of wholesale funding.  As a result, Federal Home Loan Bank (FHLB) advances increased by a nominal $2.3 million and brokered deposits decreased by $17.9 million, or 5%.

Capital Resources

Stockholders’ equity increased $4.7 million between December 31, 2009 and March 31, 2010.  This increase was mainly due to a $5.1 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 $514,000 as well as an increase of $608,000 related to equity based incentive plans.  Partially offsetting these increases was the payment of common and preferred dividends of $850,000 and $658,000, respectively, during the three months ended March 31, 2010.  At March 31, 2010, the Bank was in compliance with regulatory capital requirements and is considered a “well-capitalized” institution.
 
 
 
25

 
 
Below is a table comparing the Bank’s consolidated capital position to the minimum regulatory requirements as of March 31, 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)
 
$
361,296
 
12.33
%
$
234,503
 
8.00
%
$
293,128
 
10.00
%
Core Capital (to Adjusted
    Total Assets)
   
324,539
 
8.55
   
152,902
 
4.00
   
189,877
 
5.00
 
Tangible Capital (to Tangible
    Assets)
   
324,539
 
8.55
   
56,963
 
1.50
   
N/A
 
N/A
 
Tier 1 Capital (to Risk-Weighted
    Assets)
   
324,539
 
11.07
   
117,251
 
4.00
   
175,877
 
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.

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 three months ended March 31, 2010, cash and cash equivalents increased $1.3 million to $323.0 million.  The increase was a result of the following: a $56.9 million increase in cash provided through increases in demand, savings and time deposits; repayments on mortgage-backed securities available-for-sale of $46.4 million; and an increase in cash of $15.6 million provided by operating activities.  Net borrowings from the FHLB also increased cash by $2.3 million during the three months ended March 31, 2010.  Offsetting these increases in cash were purchases of mortgage-backed securities available-for-sale which used cash of $116.3 million and net loan growth which resulted in the use of $3.9 million in cash.


 
26

 

 
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 mortgage and home equity consumer debt. 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.

   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(In Thousands)
 
Nonaccruing loans:
           
Commercial
  $ 10,987     $ 8,328  
Consumer
    2,616       818  
Commercial mortgage
    5,115       2,156  
Residential mortgage
    8,694       9,958  
Construction
    36,354       44,681  
                 
Total nonaccruing loans
    63,766       65,941  
Assets acquired through foreclosure
    10,711       8,945  
Troubled debt restructuring
    7,595       7,274  
                 
Total nonperforming assets
  $ 82,072     $ 82,160  
                 
Past due loans:(1)
               
Residential mortgages
    448       1,221  
Commercial and commercial mortgages
          105  
Consumer
    225       97  
                 
Total past due loans
  $ 673     $ 1,423  
                 
Ratios:
               
Nonaccruing loans to total loans (2)
    2.53 %     2.61 %
Allowance for loan losses to total loans (2)
    2.27 %     2.12 %
Nonperforming assets to total assets
    2.15 %     2.19 %
Loan loss allowance to nonaccruing loans (3)
    72.25 %     63.10 %
Loan loss allowance to total nonperforming assets (3)
    56.13 %     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 decreased slightly between December 31, 2009 and March 31, 2010.  As a result, nonperforming assets as a ratio of total assets improved to 2.15% at March 31, 2010 from 2.19% at December 31, 2009.  New nonperforming assets were offset by collections and charge-offs on existing assets.


 
27

 

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

   
For the three
 months ended
March 31, 2010
   
For the year ended December 31, 2009
 
   
(In Thousands)
 
Beginning balance
  $ 82,160     $ 35,760  
Additions
    15,191       100,925  
Collections
    (7,019 )     (19,133 )
Transfers to accrual
    (94 )     (6,236 )
Charge-offs / write-downs, net
    (8,166 )     (29,156 )
Ending balance
  $ 82,072     $ 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. However, there can be no assurance that the levels or the categories of problem loans and assets established by the Bank are the same as those which would result from a regulatory examination.


INTEREST SENSITIVITY

The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. Management regularly reviews our interest-rate sensitivity and adjusts the sensitivity within acceptable tolerance ranges established by the Board of Directors. At March 31, 2010, interest-bearing assets exceeded interest-earning liabilities that mature or reprice within one year (interest-sensitive gap) by $119.9 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window increased from 96.5% at December 31, 2009 to 106.1% at March 31, 2010. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to 3.14% at March 31, 2010 from (1.97)% at December 31, 2009. The change in sensitivity since December 31, 2009 reflects current interest rate environment and our continuing effort to effectively manage interest rate risk.

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, 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 March 31, 2010 and 2009, calculated in compliance with Thrift Bulletin No. 13a:


 
28

 

 

 
 
At March 31,
   
2010
 
2009
Change in
Interest Rate
(Basis Points)
 
% Change in
Net Interest Margin (1)
 
Net Portfolio Value (2)
 
% Change in
Net Interest  Margin (1)
 
Net Portfolio Value (2)
 
                   
+300
 
   +5%
 
9.35%
 
1%
 
8.65%
 
+200
 
   +4%
 
9.72%
 
-1%
 
8.79%
 
+100
 
   +2%
 
9.76%
 
-4%
 
8.90%
 
0
 
    0%
 
9.67%
 
0%
 
8.93%
 
-100
 
   -6%
 
9.42%
 
-1%
 
9.17%
 
-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 March 31, 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.

During the first quarter of 2010 we executed $125 million of intermediate-term (approximately four year average) FHLB Advances in order to reduce the sensitivity of our net interest income to increases in market interest rates.


COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

Results of Operations

We recorded net income of $514,000 for the first quarter of 2010.  After subtracting preferred stock dividends, this resulted in a loss per common share of $0.03.  This compares to net income of $2.9 million or earnings per diluted common share of $0.39 in the first quarter of 2009. Earnings for the first quarter of 2010 were impacted by a higher net interest margin as a result of deposit pricing management, improvements in the funding mix as deposit growth has replaced higher cost wholesale funding needs and a stable yield on our interest earning assets during the period.  As a result, the net interest margin increased 52 basis points from 3.05% at March 31, 2009 to 3.57% at March 31, 2010.  In addition, noninterest income increased slightly to $11.1 million even with a decline in loan fee income of $570,000 mainly due to the wind down of 1st Reverse during the fourth quarter of 2009.  Partially offsetting these increases was the provision for loan loss of $11.4 million which increased by $3.7 million compared to a provision for loan loss of $7.7 million during the first quarter of 2009.  This increase was the result of a risk grade migration in the commercial loan portfolio, charge-offs taken during the quarter and continuing declines in value of collateral. In addition, non-interest expenses increased $5.3 million during the first quarter of 2010 mainly due to the charge taken as a result of a non-routine ATM loss discussed further in Note 13 of the Consolidated Financial Statements and increases due to growth in the Company’s banking franchise, including the addition of two new branches and the renovation/relocation of three branches during the past twelve months and the addition of several senior-level Associates in the second half of 2009 to support growth and credit administration.


 
29

 

 
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 March 31,
 
   
2010
   
2009
 
   
Average
   
Interest &
   
Yield/
   
Average
   
Interest &
   
Yield/
 
   
Balance
   
Dividends
   
Rate (1)
   
Balance
   
Dividends
   
Rate (1)
 
Assets:
                                   
Interest-earning assets:
                                   
Loans: (2)(3)
                                   
Commercial real estate loans
  $ 744,510     $ 8,573       4.61 %   $ 810,238     $ 9,463       4.67 %
Residential real estate loans
    355,643       4,603       5.18       425,165       6,052       5.69  
Commercial loans
    1,124,398       14,427       5.23       973,088       12,081       5.08  
Consumer loans
    299,711       3,620       4.90       298,306       3,778       5.14  
Total loans
    2,524,262       31,223       4.99       2,506,797       31,374       5.05  
Mortgage-backed securities (4)
    707,432       9,032       5.11       577,054       7,336       5.09  
Investment securities (4)(5)
    45,180       303       2.68       48,971       97       0.79  
Other interest-earning assets
    39,998                   39,782              
Total interest-earning assets
    3,316,872       40,558       4.92       3,172,604       38,807       4.93  
                                                 
Allowance for loan losses
    (56,686 )                     (32,687 )                
Cash and due from banks
    62,928                       56,194                  
Cash in non-owned ATMs
    252,546                       173,316                  
Bank owned life insurance
    60,324                       59,411                  
Other noninterest-earning assets
    115,480                       93,651                  
Total assets
  $ 3,751,464                     $ 3,522,489                  
                                                 
Liabilities and Stockholders' Equity:
                                               
Interest-bearing liabilities:
                                               
Interest bearing deposits:
                                               
Interest-bearing demand
  $ 252,916     $ 111       0.18 %   $ 214,234     $ 204       0.39 %
Money market
    589,638       1,192       0.82       334,810       1,028       1.25  
Savings
    229,593       112       0.20       216,187       158       0.30  
Customer time deposits
    671,477       3,942       2.38       648,563       5,486       3.43  
Total interest-bearing customer deposits
    1,743,624       5,357       1.25       1,413,794       6,876       1.97  
Other jumbo certificates of deposit
    72,490       420       2.35       94,991       504       2.15  
Brokered deposits
    337,860       517       0.62       329,943       949       1.17  
Total interest-bearing deposits
    2,153,974       6,294       1.19       1,838,728       8,329       1.84  
                                                 
FHLB of Pittsburgh advances
    604,950       3,977       2.63       750,158       5,341       2.85  
Trust preferred borrowings
    67,011       329       1.96       67,011       595       3.55  
Other borrowed funds
    176,050       615       1.40       228,386       651       1.14  
  Total interest-bearing liabilities
    3,001,985       11,215       1.49       2,884,283       14,916       2.07  
Noninterest-bearing demand deposits
    415,172                       351,864                  
Other noninterest-bearing liabilities
    25,595                       26,941                  
Stockholders' equity
    308,712                       259,401                  
Total liabilities and stockholders' equity
  $ 3,751,464                     $ 3,522,489                  
                                                 
Excess of interest-earning assets
                                               
over interest-bearing liabilities
  $ 314,887                     $ 288,321                  
                                                 
Net interest and dividend income
          $ 29,343                     $ 23,891          
                                                 
Interest rate spread
                    3.43 %                     2.86 %
                                                 
Net interest margin
                    3.57 %                     3.05 %
(1)
Weighted average yields are annualized and have been computed on a tax-equivalent basis using a 35% effective tax rate.
(2)
Nonperforming loans are included in average balance computations.
(3)
Balances are reflected net of unearned income.
(4)
Includes securities available-for-sale.
(5)
Includes reverse mortgages.

 
30

 

Net interest income for the first quarter of 2010 improved by $5.4 million, or 23% compared to the first quarter of 2009.  The net interest margin for the first quarter of 2010 was 3.57%, up 52 basis points (0.52%) compared to 3.05% for the first quarter of 2009.  During the quarter, net interest margin improved as the yield on earning assets remained stable and the costs of interest bearing liabilities declined by 58 basis points (0.58%) compared to the first quarter 2009.  The net interest margin improved due to the Company’s active deposit rate management as interest rates decreased in nearly every deposit category during the first quarter.  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.

Allowance for Loan Losses

We maintain allowances for credit losses and charge losses to these allowances when such losses are identified. The determination of the allowance for loan losses requires significant judgment reflecting management’s best estimate of probable loan losses related to specifically identified loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based upon a continuing review of these portfolios.

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

Specific reserves are established for certain loans in cases where management has identified significant conditions or circumstances related to a specific credit that 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 lower 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
·  
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, independent auditors and loan review consultants periodically review our allowance for such losses. The provision for loan losses was $11.4 million in the first quarter of 2010 compared to $7.7 million in the first quarter of 2009 and $12.7 million in the fourth quarter of 2009. This level of provisioning reflects a risk grade migration in the commercial loan portfolio, charge-offs taken during the quarter, continuing declines in value of collateral and loan growth.


 
31

 

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

   
Three months ended March 31,
 
   
2010
   
2009
 
   
(Dollars in Thousands)
 
             
Beginning balance
  $ 53,446     $ 31,189  
Provision for loan losses
    11,410       7,653  
                 
Charge-offs:
               
Residential real estate
    637       305  
Commercial real estate (1)
    3,358       2,060  
Commercial
    2,387       446  
Overdrafts
    1,043       280  
Consumer
    1,597       317  
Total charge-offs
    9,022       3,408  
                 
Recoveries:
               
Residential real estate
    5       24  
Commercial real estate (1)
    260       22  
Commercial
    34       17  
Overdrafts
    909       116  
Consumer
    10       18  
Total recoveries
    1,218       197  
                 
Net charge-offs
    7,804       3,211  
Ending balance
  $ 57,052     $ 35,631  
                 
Net charge-offs to average gross loans outstanding, net of unearned income (2)
    1.24 %     0.51 %

 
(1)   Includes commercial mortgage and construction loans.
 
(2)   Ratios for the three months ended March 31, 2010 and March 31, 2009 are annualized.

Noninterest Income

Noninterest income of $11.1 million was essentially flat in comparison to the first quarter of 2009.  Loan fees were $570,000 less during the first quarter of 2010, mainly due to 1st Reverse Financial Services, LLC (1st Reverse) which had $556,000 less in loan fees during the period, as the wind-down of this business was completed by the end of 2009.  In addition, we did not sell any securities during the first quarter of 2010, compared to gains of $423,000 during the first quarter of 2009.  Mostly offsetting these decreases was a $668,000 increase in credit/debit card and ATM income reflecting increased bailment fees from Cash Connect.

Noninterest Expense

Noninterest expense for the quarter ended March 31, 2010 was $29.6 million compared to $24.4 million for the first quarter of 2009, an increase of $5.3 million, or 22%.  The majority of the increase is due to a non-routine charge related to WSFS’ Cash Connect (ATM services) division in the amount of $4.5 million.  For further discussion on the non-routine charge see Note 13, Noninterest Expenses.  Additionally and partially offsetting this increase, there was a $1.1 million decrease in expenses related to 1st Reverse during the first quarter of 2010.  Excluding these two items, noninterest expenses increased $1.9 million during the first quarter of 2010.  This increase was partly due to additional write-downs on REO of $457,000 compared to the first quarter of 2009 and $438,000 of consulting expense during the first quarter of 2010 related to our Creative Opportunities for Revenues and Expenses (CORE) efficiency program.  The remainder of the increase is due to growth in our banking franchise, including the addition of two new branches and the renovation/relocation of three branches during the past twelve months and the addition of several senior-level Associates during the period to support growth and credit administration.


 
32

 

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 benefit of $1.1 million during the three months ended March 31, 2010 compared to an income tax provision of $25,000 for the same period 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 statue of limitations on certain tax items.  This benefit will not be recognized in future years.  The Company’s effective tax rate, excluding the statue of limitations related benefit, was 31.2% for the three months ended March 31, 2010 and 32.5% during the same period 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.

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 quarter 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 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 will become effective on July 1, 2010.

 
 
33

 
 
On April 13, 2010 the Board of Directors of the FDIC approved an interim ruling extending the Transaction Account Guarantee (“TAG”) program to December 31, 2010 as well as allow the Board to use its discretion to extend the program to the end of 2011 without additional rulemaking if economic conditions warrant such an extension.   We have chosen to participate in the extension program.

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 March 31, 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

Our management does not believe there have been any material changes to the risk factors previously disclosed under Item 1A. of the Company’s Form 10-K for the year ended December 31, 2009, previously filed with the Securities and Exchange Commission.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

There were no shares repurchased during the quarter ended March 31, 2010.

Item 3.        Defaults upon Senior Securities

Not applicable

Item 4.        [Reserved]

Not applicable

Item 5.        Other Information

Not applicable

Item 6. Exhibits
 
(a)
Exhibit 31.1 – Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(b)
Exhibit 31.2 – Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
(c)
Exhibit 32 – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
34

 


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:
May 10, 2010
  /s/ Mark A. Turner  
     
Mark A. Turner
 
     
President and Chief Executive Officer
 


Date:
May 10, 2010
  /s/ Stephen A. Fowle  
     
Stephen A. Fowle
 
     
Executive Vice President and
 
     
Chief Financial Officer
 


35