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| WSFS > SEC Filings for WSFS > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
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
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., and also owns a majority interest in 1st Reverse Financial Services, LLC ("1st Reverse") Montchanin has one consolidated subsidiary, Cypress Capital Management, LLC ("Cypress"). For additional information on the Company or any of our subsidiaries, see Note 1, Basis of presentation, to the Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
The following discussion may contain statements which are not historical facts and are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are based on various assumptions, some of which may be beyond the company's control, are subject to risks and uncertainties and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, those related to the economic environment, particularly in the market areas in which the company operates, the volatility of the financial securities markets, including changes with respect to the market value of our financial assets, changes in government regulations affecting financial institutions, and potential expenses associated therewith, changes resulting from our participation in the CPP, including additional conditions that may be imposed in the future on participating companies, and the costs associated with resolving any problem loans and other risks and uncertainties discussed in documents filed by WSFS Financial Corporation with the Securities and Exchange Commission from time to time. The Corporation does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Corporation.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for loan losses, contingencies (including indemnifications), and deferred taxes. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The following are critical accounting policies that involve more significant judgments and estimates:
Allowance for Loan Losses
We maintain allowances for 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,
Deferred Taxes
We account for income taxes in accordance with Statement of Financial Account Standards ("SFAS") No. 109, Accounting for Income Taxes ("SFAS 109"), which requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 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.
Fair Value Measurements
On January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. See Note 9, Fair Value of Financial Assets.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Our total assets increased $155.4 million, or 5%, during the six months ended June 30, 2009. Total loans increased $72.7 million, or 3%, primarily attributable to a $97.1 million, or 6%, increase in commercial and commercial real estate loans offset by a decrease in residential loans of $19.4 million, or 5%. The decrease in residential mortgages is mainly due to pay-downs in the portfolio and our decision to sell more of our new originated loans and record a gain on sale. Mortgage-backed securities increased $51.7 million, or 10%. Finally, cash and cash equivalents increased $28.6 million, or 11%. This included a $16.7 million, or 29%, increase in cash and due from banks, and an $11.9 million, or 6%, increase in cash in non-owned ATMs.
Total liabilities increased $100.1 million, or 3%, between December 31, 2008 and June 30, 2009 to $3.3 billion. This increase was mainly due to an increase in deposits of $250.6 million, or 12%. This included increases of $274.0 million, or 16%, in customer deposits and $21.7 million, or 7%, in brokered certificates of deposit. These increases in customer deposits improved our funding mix as deposit growth reduced more-costly wholesale funding needs. As a result, both Federal Home Loan Bank (FHLB) advances and other jumbo certificates of deposit decreased $179.2 million, or 22%, and $45.1 million, or 43%, respectively.
Capital Resources
Stockholders' equity increased $55.3 million between December 31, 2008 and June 30, 2009. This increase was mainly due to the sale of senior preferred stock to the U.S. Department of the Treasury under its Capital Purchase Program (CPP) totaling $52.6 million. In addition, accumulated other comprehensive loss decreased $3.7 million during the first six months of 2009 mainly due to an increase of the fair value of securities available for sale. Also contributing to the increase was $939,000 from the issuance of common stock and employee stock option activity and net income of $624,000. Partially offsetting these increases was the declaration of common and preferred dividends totaling $1.5 million and $819,000, respectively, during the six months ended June 30, 2009.
Below is a table comparing the Bank's consolidated capital position to the minimum regulatory requirements as of June 30, 2009 (dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
% of % of % of
Amount Assets Amount Assets Amount Assets
Total Capital
(to Risk-Weighted
Assets) $ 324,412 11.15 % $ 232,689 8.00 % $ 290,861 10.00 %
Core Capital (to
Adjusted
Total Assets) 289,514 8.08 143,296 4.00 179,120 5.00
Tangible Capital (to
Tangible
Assets) 289,514 8.08 53,736 1.50 N/A N/A
Tier 1 Capital (to
Risk-Weighted
Assets) 289,514 9.95 116,344 4.00 174,516 6.00
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Liquidity
We manage our liquidity risk and funding needs through our treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the OTS. We comply with guidance promulgated under Thrift Bulletin 77 that requires thrift institutions to maintain adequate liquidity to assure safe and sound operations.
As a financial institution, the Bank has ready access to several sources to fund growth and meet its liquidity needs. Among these are: net income, deposit programs, loan repayments, borrowing from the FHLB, repurchase agreements and the brokered deposit market. The Bank's branch expansion is intended to enter us into new, but contiguous, markets, attract new customers and provide funding for its business loan growth. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration, AAA-rated, mortgage-backed securities and Agency notes that are positioned to provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. Management believes these sources are sufficient to maintain the required and prudent levels of liquidity.
During the six months ended June 30, 2009, cash and cash equivalents increased $28.6 million to $277.1 million. There was a $214.9 million increase in cash provided through increases in demand, savings and time deposits. In addition, we sold 52,625 shares of senior preferred stock to the U.S Treasury, resulting in an increase in cash of $52.6 million. Further, we had an increase in cash of $19.3 million provided by operating activities. Partially offsetting these increases was net borrowings from the FHLB, which decreased $179.2 million during the six months ended June 30, 2009, resulting in a decrease in cash. Also, our mortgage-backed security portfolio decreased cash by $44.2 million as a result of purchases in order to minimize earnings dilution related to the additional capital raised offset in part by repayments and sales. Finally, net loan growth resulted in the use of $88.0 million in cash, which was primarily the result of the successful implementation of specific strategies designed to increase corporate and small business lending.
NONPERFORMING ASSETS
The following table shows our nonperforming assets and past due loans at the dates indicated. Nonperforming assets include nonaccruing loans, nonperforming real estate investments, 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.
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June 30, December 31,
2009 2008
(In Thousands)
Nonaccruing loans:
Commercial $ 5,430 $ 986
Consumer 1,023 352
Commercial mortgage 2,033 5,748
Residential mortgage 6,202 4,753
Construction 49,822 16,595
Total nonaccruing loans 64,510 28,434
Assets acquired through foreclosure 8,073 4,471
Troubled debt restructuring 7,312 2,855
Total nonperforming assets $ 79,895 $ 35,760
Past due loans:(1)
Residential mortgages 727 1,313
Commercial and commercial mortgages 238 -
Consumer 111 26
Total past due loans $ 1,076 $ 1,339
Ratios:
Nonaccruing loans to total loans (2) 2.54 % 1.15 %
Allowance for loan losses to total loans (2) 1.63 % 1.26 %
Nonperforming assets to total assets 2.23 % 1.04 %
Loan loss allowance to nonaccruing loans (3) 55.65 % 108.30 %
Loan and foreclosed asset allowance to total
nonperforming assets (3) 44.93 % 86.11 %
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(1) Past due loans are accruing loans which are contractually past due 90 days or more as to principal or interest. These loans are well secured and in the process of collection.
(2) Total loans exclude loans held for sale.
(3) Total applicable allowance represents general valuation allowances only.
Nonperforming assets increased $44.1 million between December 31, 2008 and June 30, 2009. As a result, nonperforming assets as a percentage of total assets increased from 1.04% at December 31, 2008 to 2.23% at June 30, 2009. The increase was attributed to six construction projects totaling $35.1 million and three commercial construction projects totaling $3.6 million. Also the $4.4 million increase in troubled debt restructuring (TDR) reflects our continued efforts to work with homeowners with a goal to both keep them in their homes an optimize the bank's returns. The entire TDR balance is made up of restructured mortgage and consumer debt.
For the
For the six year ended
months ended December 31,
June 30 2009 2008
(In Thousands)
Beginning balance of nonperforming assets $ 35,760 $ 31,809
Additions 64,207 42,000
Collections (3,805 ) (20,422 )
Transfers to accrual (4,912 ) (1,345 )
Charge-offs / write-downs, net (11,305 ) $ (16,282 )
Ending balance of nonperforming assets $ 79,945 $ 35,760
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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.
The matching of maturities or repricing periods of interest rate-sensitive
assets and liabilities to promote a favorable interest rate spread and mitigate
exposure to fluctuations in interest rates is our primary tool for achieving our
asset/liability management strategies. Management regularly reviews our
interest-rate sensitivity and adjusts the sensitivity within acceptable
tolerance ranges established by management. At June 30, 2009, interest-earning
liabilities exceeded interest-bearing assets that mature or reprice within one
year (interest-sensitive gap) by $8.6 million. Our interest-sensitive assets as
a percentage of interest-sensitive liabilities within the one-year window
decreased from 107.1% at March 31, 2009 to 99.6% at June 30, 2009. Likewise, the
one-year interest-sensitive gap as a percentage of total assets changed to
(0.24)% at June 30, 2009 from 3.65% at March 31, 2009. The change in sensitivity
since March 31, 2009 is the result of the current interest rate environment and
our continuing effort to effectively manage interest rate risk.
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in its lending, investing, and funding activities. To that end, management actively monitors and manages its interest rate risk exposure. One measure, required to be performed by OTS-regulated institutions, is the test specified by OTS Thrift Bulletin No. 13a "Management of Interest Rate Risk, Investment Securities and Derivative Activities." This test measures the impact of an immediate change in interest rates in 100 basis point increments on the net portfolio value ratio. The net portfolio value ratio is defined as the net present value of the estimated cash flows from assets and liabilities as a percentage of net present value of cash flows from total assets (or the net present value of equity). The table below shows the estimated impact of immediate changes in interest rates on our net interest margin and net portfolio value ratio at the specified levels at June 30, 2009 and 2008, calculated in compliance with Thrift Bulletin No. 13a:
At June 30,
2009 2008
Net % Change in
Change in % Change in Portfolio Net Net Portfolio
Interest Rate Net Interest Value Ratio Interest Value Ratio
(Basis Points) Margin (1) (2) Margin (1) (2)
+300 0% 8.66% 2% 10.03%
+200 -2% 9.23% 1% 10.11%
+100 -4% 9.51% 0% 10.26%
0 0% 9.73% 0% 10.41%
-100 -6% 9.75% -2% 10.94%
-200 (3) NMF NMF -3% 11.02%
-300 (3) NMF NMF -4% 11.35%
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(1) The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.
(2) The net portfolio value ratio of the Company in a stable interest rate environment and the net portfolio value ratio as projected under the various rate change environments.
(3) Sensitivity indicated by a decrease of 200 or 300 basis points is not deemed meaningful at June 30, 2009 given the low absolute level of interest rates at that time.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
Results of Operations
We recorded a net loss of $2.3 million ($3.9 million pre-tax) or a loss of $.50 per common share for the second quarter of 2009. This compares to net income of $6.7 million ($10.4 million pre-tax) or $1.07 per diluted common share for the same quarter last year. Earnings for the second quarter of 2009 were impacted by an increase in the provision for loan loss to $12.0 million compared to $2.4 million in the second quarter of 2009. This increase was the result of several factors, including risk grade migration and collateral depreciation in the commercial loan portfolio as well as continuing economic weakness, particularly in the residential construction and land development portfolio. In addition, noninterest expenses increased $9.8 million mainly due to a number of non-routine items in the second quarter of 2009 (discussed further in the noninterest expense section) combined with franchise growth as we added seven new branches and relocated an eighth. Net interest income for the second quarter of 2009 was $26.4 million, a $4.0 million increase, compared to $22.4 million for the second quarter of 2009.
Net income for the first six months of 2009 was $624,000 or a loss of $.10 per common share due to the effects of preferred stock dividends. This compares to net income of $13.9 million ($20.6 million pre-tax) or $2.22 per diluted common share for the same six months of 2008. Consistent with the quarterly results, earnings for the first six months of 2009 were impacted by a $19.7 million provision for loan loss, an increase of $14.8 million over the first six months of 2008. In addition, noninterest expenses increased $13.2 million over the first six months of 2008 mainly due to the previously mentioned non-routine items (discussed further in the noninterest expense section) and franchise growth. Net interest income for the first six months of 2009 improved by $6.9 million in comparison to the first six months of 2008.
Net Interest Income
The following tables provide information concerning the balances, yields and
rates on interest-earning assets and interest-bearing liabilities during the
periods indicated.
Three Months Ended June 30,
2009 2008
Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Rate (1) Balance Dividends Rate (1)
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans $ 791,884 $ 9,161 4.63 % $ 754,051 $ 11,407 6.05 %
Residential real estate loans 414,985 5,660 5.46 438,132 6,339 5.79
Commercial loans 1,057,167 13,747 5.25 821,889 12,446 6.12
Consumer loans 301,613 3,788 5.04 276,695 4,272 6.21
Total loans 2,565,649 32,356 5.09 2,290,767 34,464 6.07
Mortgage-backed securities (4) 570,740 6,948 4.87 463,196 5,715 4.94
Investment securities (4) (5) 47,606 535 4.50 31,698 202 2.55
Other interest-earning assets 39,668 - 0.00 42,829 414 3.89
Total interest-earning assets 3,223,663 39,839 4.98 2,828,490 40,795 5.81
Allowance for loan losses (36,726 ) (26,998 )
Cash and due from banks 59,263 62,679
Cash in non-owned ATMs 182,696 174,223
Bank owned life insurance 59,624 58,283
Other noninterest-earning
assets 93,649 68,784
Total assets $ 3,582,169 $ 3,165,461
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
. . .
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