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”). We also have one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”). WSFS Bank has two fully-owned subsidiaries, WSFS Investment Group, Inc. (“WIG”) and Monarch Entity Services LLC (“Monarch”) and Montchanin has one wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”).

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 to personal and corporate customers through our Wealth Management division. Lending activities are funded primarily with customer deposits and borrowings. The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 51 offices located in Delaware (42), Pennsylvania (7), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report.

Amounts subject to significant estimates are items such as the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments, investment in reverse mortgage, income taxes and other-than-temporary impairments (“OTTI”). Among other effects, changes to such estimates 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 benefits 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 Securities and Exchange Commission (“SEC”) Regulation S-X. Rule 10-01 of Regulation S-X does not require us to include all information and notes for complete financial statements and prevailing practices within the banking industry. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC.

Whenever necessary, reclassifications have been made to prior period Consolidated Financial Statements to conform to the current period’s presentation. All significant intercompany transactions were eliminated in consolidation.

Accounting for Stock-Based Compensation

Stock-based compensation is accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Stock Compensation. After stockholder approval in 2005, the 1997 Stock Option Plan (“1997 Plan”) was replaced by the by the 2005 Incentive Plan (“2005 Plan”). Upon stockholder approval in 2013, the 2005 Incentive Plan was amended and replaced by the 2013 Incentive Plan (“2013 Plan”). No future awards may be granted under the 2005 Plan, however, we still have options outstanding under the 1997 Plan and 2005 Plan for our officers, directors and employees of us and our subsidiaries (“Associates”). The 2013 Plan will terminate on the tenth anniversary of its effective date, after which no awards may be granted. We have stock options outstanding under the 1997 Plan, 2005 Plan and 2013 Plan (collectively, “Stock Incentive Plans”). The number of shares reserved for issuance under the 2013 Plan is 698,845. At June 30, 2013, there were 548,845 shares available for future grants under the 2013 Plan.

With the exception of certain Performance Stock Awards, 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 2013 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 2013 and 2012 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. In addition, the Black-Scholes option-pricing model is used to determine the grant date fair value of stock options.

Stock Options

The following table provides information about our stock options outstanding for the three months ended June 30, 2013 and 2012:


	June 30, 2013					June 30, 2012
				Weighted-					Weighted-
				Average					Average
	Shares			Exercise Price		Shares			Exercise Price
Stock Options:
Outstanding at beginning of period		435,804		$	44.19		447,901		$	43.41
Granted (1)		400,000			49.52		55,477			38.93
Exercised		(13,647	)		37.79		(2,059	)		27.49
Forfeited		(13,081	)		47.50		(2,075	)		69.00

Outstanding at end of period		809,076			46.88		499,244			42.87

Exercisable at end of period		198,647		$	44.57		334,430		$	44.93

Weighted-average fair value of awards granted	$	14.93				$	12.57

(1)

Options granted in the second quarter of 2013 are more than were granted in the second quarter of 2012 due to additional one-time awards being granted under the 2013 Plan and the WSFS Financial Corporation Non-Plan Stock Option agreement. Both plans were approved by shareholders at the 2013 Annual Meeting of Stockholders on April 25, 2013.

The following table provides vesting information about our stock options outstanding for the three months ended June 30, 2013, and 2012:

June 30, 2013

June 30, 2012

Weighted-

Weighted-

Average

Average

Shares

Exercise
Price

Stock Options:

Unvested at beginning of period

237,861

43.92

110,137

38.53

Granted

400,000

49.52

55,477

38.93

Vested

(14,351

)

38.72

(800

)

35.12

Forfeited

(13,081

)

47.50

—

Unvested at end of period

610,429

47.63

164,814

38.68

Stock Options

The following table provides information about our stock options outstanding for the six months ended June 30, 2013, and 2012:


	June 30, 2013					June 30, 2012
				Weighted-					Weighted-
				Average					Average
	Shares			Exercise Price		Shares			Exercise Price
Stock Options:
Outstanding at beginning of period		335,730		$	42.14		416,886		$	43.52
Granted		522,357			49.09		88,307			39.66
Exercised		(35,930	)		33.80		(3,874	)		26.29
Forfeited		(13,081	)		47.50		(2,075	)		69.00

Outstanding at end of period		809,076			46.88		499,244			42.87

Exercisable at end of period		198,647		$	44.57		334,430		$	44.93

Weighted-average fair value of awards granted	$	13.94				$	12.50

The following table provides vesting information about our stock options outstanding for the six months ended June 30, 2013, and 2012:

June 30, 2013

June 30, 2012

Weighted-

Weighted-

Average

Average

Shares

Exercise
Price

Stock Options:

Unvested at beginning of period

157,298

38.57

112,258

36.08

Granted

522,357

49.09

88,307

39.66

Vested

(56,145

)

35.43

(35,751

)

32.94

Forfeited

(13,081

)

47.50

—

Unvested at end of period

610,429

47.63

164,814

38.68

The total amount of compensation cost to be recognized related to non-vested stock options as of June 30, 2013 was $6.9 million. The weighted-average period over which it is expected to be recognized is 4.1 years. We issue new shares upon the exercise of options.

On April 25, 2013 stockholders’ approved a change in future compensation for Mark A. Turner, President and CEO. As result, Mr. Turner was granted 250,000 non-statutory stock options with a longer and slower vesting schedule than our standard options, 40% vesting after the second year and 20% vesting in each of the following three years. Additionally, these options were awarded at an exercise price of 20% over the December 2012 market value (date in which framework of the plan was decided on). Upon the grant, Mr. Turner will no longer be eligible to receive any grants under any of our other stock based award programs for a period of five years.

Additionally, as a result of stockholder approval, 150,000 incentive stock options were issued to certain executive officers of the Company under the 2013 Plan. These options have the same vesting schedule and exercise price as the Non-Plan Stock Options granted to Mr. Turner.

Restricted Stock

We did not issue any restricted stock units or awards during the second quarter of 2013. We issued 11,357 restricted stock units and awards during the first six months of 2013 compared to 24,442 during the first six months of 2012. These awards vest over a four year period. These stock awards were made to certain executive officers. The total amount of compensation cost to be recognized relating to non-vested restricted stock as of June 30, 2013, was $2.1 million. The weighted-average period over which it is expected to be recognized is 2.0 years.

Performance Stock Awards

The Board approved a plan in which Marvin N. Schoenhals, Chairman of the Board, was granted 22,250 shares of restricted stock effective January 3, 2011, with a five-year performance vesting schedule starting at the end of the second year. These awards are based on acquiring new business relationships in which Mr. Schoenhals has played a meaningful role in helping us establish. These shares are subject to vesting in whole or in part based on the role Mr. Schoenhals plays in establishing new business relationships that, over a two year period of time achieve at least a 50% return on the investment of restricted stock cost. We recognized compensation expense of $69,000 related to this award during the second quarter of 2013 compared to $86,000 during the second quarter of 2012.

For the three months ended June 30, 2013, the effect of stock-based compensation, including stock options, restricted stock, stock awards, and performance stock, on salaries, benefits and other compensation was $837,000 pre-tax ($613,000 after tax) or $0.07 per share. This compares to $767,000 pre-tax ($537,000 after tax) or $0.06 per share during the three months ended June 30, 2012.

For the six months ended June 30, 2013, the effect of stock-based compensation, including stock options, restricted stock, stock awards, and performance stock, on salaries, benefits and other compensation was $1.8 million pre-tax ($1.4 million after tax) or $0.16 per share. This compares to $1.5 million pre-tax ($1.1 million after tax) or $0.12 per share during the six months ended June 30, 2012.