f10k_1231090-0312.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009

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
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)


500 Delaware Avenue, Wilmington, Delaware
   
19801
 
(Address of Principal Executive Offices)
   
(Zip Code)
 

Registrant’s Telephone Number, Including Area Code: (302) 792-6000
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicated by check if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. YES __   NO __X_
 
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES __   NO __X___
 
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 twelve 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 for such shorter period that the registrant was required to submit and post such files). Yes ___     No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (  )

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 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 ___

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes  ____ No __X___

The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of the registrant’s common stock as quoted on NASDAQ as of June 30, 2009 was $162,750,000. For purposes of this calculation only, affiliates are deemed to be directors, executive officers and beneficial owners of greater than 10% of the outstanding shares.

As of March 11, 2010, there were issued and outstanding 7,084,903 shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 29, 2010 are incorporated by reference in Part III hereof.

 
 

 

WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS


 
Part I
Page
     
Item 1.
Business
3
Item 1A.
Risk Factors
26
Item 1B.
Unresolved Staff Comments
32
Item 2.
Properties
33
Item 3.
Legal Proceedings
36
Item 4.
[Reserved]
36
 
 
Part II
 
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
36
Item 6.
Selected Financial Data
38
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 7A.
Quantitative and Qualitative Disclosure about Market Risk
59
Item 8.
Financial Statements and Supplementary Data
61
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
109
Item 9A.
Controls and Procedures
109
Item 9B.
Other Information
112
 
 
Part III
 
     
Item 10.
Directors, Executive Officers and Corporate Governance
112
Item 11.
Executive Compensation
112
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
112
Item 13.
Certain Relationships and Related Transactions and Director Independence
113
Item 14.
Principal Accounting Fees and Services
113
 
 
Part IV
 
     
Item 15.
Exhibits, Financial Statement Schedules
113
 
Signatures
116
     
     
     



 
- 2 -

 

PART I

FORWARD-LOOKING STATEMENTS
 
    Within this Annual Report on Form 10-K and exhibits thereto, management has included certain “forward-looking statements” concerning the future operations of WSFS Financial Corporation (“the Company,” “our Company,”  “WSFS” “we,” “our” or “us”). 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.

ITEM 1. BUSINESS

OUR BUSINESS

WSFS Financial Corporation is parent to Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”), one of the ten oldest banks in the United States continuously operating under the same name. A permanent fixture in this community, WSFS has been in operation for more than 177 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remain relevant. The Bank is a relationship-focused, locally-managed, community banking institution that has grown to become the largest thrift holding company in the State of Delaware, the second largest commercial lender in the state and the fourth largest bank in terms of Delaware deposits.  We state our mission simply: We Stand for Service and Strengthening Our Communities.

WSFS’ core banking business is commercial lending funded by customer-generated deposits. We have built a $1.9 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and offering a high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through commercial relationships and retail deposits in our 41 banking offices located in Delaware, southeastern Pennsylvania and Virginia. We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches.  In 2009, WSFS was the number one reverse mortgage originator in Delaware.

In 2005, we established our WSFS Trust and Wealth Management division (WSFS Trust). WSFS Trust was formed 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. We found that many competitors are not devoting human capital to clients with less than $5 million in investable assets, thereby creating an opportunity for WSFS Trust. This division is complemented by Cypress Capital Management, a Registered Investment Advisor, acquired by WSFS in 2004.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages more than $308 million in vault cash in more than 10,000 ATMs nationwide and also provides online reporting and ATM cash management, predictive cash ordering, armored

 
- 3 -

 
carrier management, ATM processing and equipment sales. Cash Connect also operates over 360 ATMs for WSFS Bank, which owns the largest branded ATM network in Delaware.

WSFS POINTS OF DIFFERENTIATION

While all banks offer similar products and services, we believe that WSFS has set itself apart from other banks in our market and the industry in general. Also, community banks including WSFS have been able to distinguish themselves from large national or international banks that fail to provide their customers with the service levels they want as reorganizations, government rescues and other big-bank problems distract their emphasis on the customer, especially in the current environment. The following factors summarize what we believe are those points of differentiation.

Building Associate Engagement and Customer Advocacy

Our business model is built on a concept called Human Sigma, which we have implemented in our strategy of “Engaged Associates delivering Stellar Service to create Customer Advocates”, resulting in a high performing, very profitable company. The Human Sigma model, identified by Gallup, Inc., begins with Associates who have taken ownership of their jobs and therefore perform at a higher level.  We invest significantly in training, development and talent management as our Associates are the cornerstone of our model.  This strategy motivates Associates, and unleashes innovation and productivity to engage our most valuable asset, our customers, by providing them Stellar Service experiences.  As a result, we create Customer Advocates, or customers who have built an emotional attachment to the Bank. Research studies continue to show a direct link between Associate engagement, customer engagement and a company’s financial performance.



Surveys conducted for us by a nationally recognized polling company indicate:

·  
Our Associate Engagement scores consistently rank in the top quartile of companies polled. In 2009 our engagement ratio was 17.5:1, which means there are 17.5 engaged Associates for every disengaged Associate. This compares to a 2.6:1 ratio in 2003 and a national average of 1.45:1.  Gallup defines “world-class” as 8:1.
 
·  
Customer surveys rank us in the top 10% of all companies Gallup surveys, a “world class” rating. More than 40% of our customers ranked us a “five” out of “five,” strongly agreeing with the statement “I can’t imagine a world without WSFS.”
 
We believe that by fostering a culture of engaged and empowered Associates, we have become an employer of choice in our market. During each of the past four years, WSFS was ranked among the top five “Best Places to Work” by The Wilmington News Journal.  In 2009 we were awarded the News Journal’s number one “Best Place to Work” for large corporations in the state of Delaware.

 
- 4 -

 
Community Banking Model

Our size and community banking model play a key role in our success. Our approach to business combines a service-oriented culture with a strong complement of products and services, all aimed at meeting the needs of our retail and business customers. We believe the essence of being a community bank means that we are:
 
·  
Small enough to offer customers responsive, personalized service and direct access to decision makers.
 
·  
Large enough to provide all the products and services needed by our target market customers.
 
As the financial services industry has consolidated, many independent banks have been acquired by national companies that have centralized their decision-making authority away from their customers and focused their mass-marketing to a regional or even national customer base. We believe this trend has frustrated smaller business owners who have become accustomed to dealing directly with their bank’s senior executives and discouraged retail customers who often experience deteriorating levels of service in the branches and other service outlets. Additionally, it frustrates bank Associates who are no longer empowered to provide good and timely service to their customers.

WSFS Bank offers:

·  
One point of contact. Our Relationship Managers are responsible for understanding his or her customers’ needs and bringing together the right resources in the Bank to meet those needs.
 
    ·  
A customized approach to our clients. We believe this gives us an advantage over our competitors who are too large or centralized to offer customized products or services.
 
    ·  
Products and services that our customers value. This includes a broad array of banking and cash management products, as well as a legal lending limit high enough to meet the credit needs of our customers, especially as they grow.
 
    ·  
Rapid response and a company that is easy to do business with. Our customers tell us this is an important differentiator from larger, in-market competitors.
 

Strong Market Demographics

Delaware is situated in the middle of the Washington, DC - New York corridor which includes the urban markets of Philadelphia and Baltimore. The state benefits from this urban concentration as well as from a unique political environment that has created favorable law and legal structure, a business-friendly environment and a fair tax system.  Additionally, Delaware is one of only seven states with a AAA bond rating from the three predominant rating agencies. Delaware’s demographics compare favorably to U.S. economic and demographic averages.

 
(Most recent available statistics)
 
 
Delaware
 
National Average
 
Unemployment (For December 2010) (1)
   
9.0
%
 
10.0
%
Median Household Income (Average 2008) (2)
 
$
58,380
 
$
52,029
 
Population Growth (2000-2009) (3)
   
13.0
%
 
9.1
%
House Price Depreciation (last twelve months) (4)
   
(5.14)
%
 
(4.66)
%
House Price Appreciation (last five years) (4)
   
11.68
%
 
6.38
%
Average GDP Growth (Average 2007-2008) (5)
   
(1.6)
%
 
0.7
%
               
(1) Bureau of Labor Statistics, Economy at a Glance
             
(2) U.S. Census Bureau, State & County Quick Facts
             
(3) U.S. Census Bureau, Population Estimates
             
(4) Federal Housing Finance Agency, All-Transaction Indexes
             
(5) Bureau of Economic Analysis, GDP by State
             


 
- 5 -

 
Balance Sheet Management

We put a great deal of focus on actively managing our balance sheet. This management manifests itself in:

·  
Prudent capital levels. Maintaining prudent capital levels is key to our operating philosophy. All regulatory capital levels exceed well-capitalized levels. Our Tier 1 capital ratio was 11% as of December 31, 2009, more than $140 million in excess of the 6% “well-capitalized” level.
 
·  
We maintain discipline in our lending, including planned portfolio diversification. Additionally, we take a proactive approach to identifying trends in our business and lending market and have responded proactively to areas of concern. For instance, in 2005 we limited our exposure to construction and land development (CLD) loans as we anticipated an end to the expansion in housing prices. We have also increased our portfolio monitoring and reporting sophistication and hired additional senior credit administration and asset disposition professionals to manage our portfolio.  We maintain diversification in our loan portfolio to limit our exposure to any single type of credit. Such discipline supplements careful underwriting and the benefits of knowing our customers.
 
·  
We seek to avoid credit risk in our investment portfolio and use this portion of our balance sheet primarily to help us manage liquidity and interest rate risk, while providing some marginal income. As a result, we have no exposure to Freddie Mac or Fannie Mae preferred securities or Trust Preferred securities. Our security purchases have been almost exclusively AAA-rated credits. This philosophy has allowed us to avoid the significant investment write-downs taken by many of our bank peers.
 

We have been subject to many of the same pressures facing the banking industry.  The extended recession has negatively impacted our customers and has driven increased provisioning and an increase in our delinquent loans, problem loans and charge-offs. The measures we have taken strengthen the Bank’s credit position by diversifying risk and limiting exposure, but do not insulate us from the effects of this recession.
 
Disciplined and Aggressive Capital Management

We understand that our capital (or shareholders’ equity) belongs to our shareholders. They have entrusted this capital to us with the expectation that it will be kept safe and with the expectation that it will earn an adequate return. As a result, we prudently but aggressively manage our shareholders’ capital with an eye to this balance.

Strong Performance Expectations

We are focused on high-performing long-term financial goals. We define “high-performing” as the top quintile of a relevant peer group in return on assets (ROA), return on equity (ROE) and earnings per share (EPS) growth.  Management incentives are paid, in large part, based on driving performance in these areas. A “Target” payment level is only achieved by reaching performance at the 60th percentile of a peer group of all publicly traded banks and thrifts in our size range. More details on this plan are included in our proxy statement.

As we navigate through this recession we are focused on strengthening our franchise to optimize financial performance when the recession subsides.  We are taking steps to strengthen net interest margin, enhance revenues and manage expenses as we continue to build our market share.





 
- 6 -

 

Growth

Our successful long-term trend in lending, deposit gathering and EPS have been the result of our focused strategy that provides the service and responsiveness of a community bank in a consolidating marketplace. We will continue to grow by:

 
·  Recruiting and developing talented, service-minded Associates. We have successfully recruited Associates with strong community ties to strengthen our existing markets and provide a strong start in new communities. We also focus efforts on developing talent and leadership in our current Associate base to better equip those Associates for their jobs and prepare them for leadership roles at WSFS.
 
 
·  Embracing the Human Sigma concept. We are committed to building Associate engagement and customer advocacy as a way to differentiate ourselves and grow our franchise.
 
 
·  Continuing strong growth in commercial lending by:
 
 
    o
  Selectively building a presence in contiguous markets.
 
    o
  Providing product solutions like Remote Deposit Capture to facilitate commercial banking outside of our primary market.
 
    o
  Offering our community banking model that combines Stellar Service with the banking products and services our business customers demand.

 
·  Aggressively growing deposits. In 2003, we energized our retail branch strategy by combining Stellar Service with an expanded and updated branch network. We have also implemented a number of additional measures to accelerate our deposit growth. Our three-year goal is to attain a 100% loan to customer funding (deposit) ratio.  We will continue to grow deposits by:
 
 
    o
  Opening new branches in Delaware and contiguous markets.
 
    o
  Renovating our retail branch network in our current footprint.
 
    o
  Further expanding our commercial customer relationships with deposit products.
 
    o
  Finding creative ways to build deposit market share such as targeted marketing programs.
 
    o
  Acquisitions such as the branch acquisition we completed in 2008. Over the next several years we intend to grow approximately 80% organically
  and 20% through acquisition, although each year’s growth will reflect the opportunities available then.

    ·  
Growing our Trust and Wealth Management division by leveraging the strong relationships we have with our current customer base promoting the “Delaware Advantage” and providing unparalleled service to modestly wealthy clients in our market.
  
    ·  
Exploring niche businesses. We are an organization with an entrepreneurial spirit and we are open to the risk/reward proposition that comes with niche businesses. We have developed a set of decision rules that will guide our consideration of future niche business opportunities.
 
Values
 
    We are:
 
    ·  Committed to always doing the right thing.
 
    ·  Empowered to serve our customers and communities.
 
    ·  Dedicated to openness and candor.
 
    ·  Driven to grow and improve.
 
    Our values speak to integrity, service, accountability, transparency, honesty, growth and desire to improve. They are the core of our culture, they make us who we are and we live them everyday.
 

 
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Results
 

Our focus on these points of differentiation has allowed us to grow our core franchise and build value for our shareholders.  Since 2005, our commercial loans have grown from $1.1 billion to $1.9 billion, a strong 16% compound annual growth rate (CAGR). Over the same period, customer deposits have grown from $1.2 billion to $2.1 billion, a 15% CAGR. More importantly, over the last decade, shareholder value has increased at a far greater rate than our banking peers and the market in general.  An investment of $100 in WSFS stock in 2000 would be worth $213 at December 31, 2009.  By comparison, $100 invested in the Dow Jones Total Market Index in 2000, would be worth $90 at December 31, 2009 and $100 invested in the Nasdaq Bank Index in 2000 would be worth $107 at December 31, 2009.

SUBSIDIARIES

We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc.

WSFS Bank has one wholly owned subsidiary, WSFS Investment Group, Inc., which markets various third-party investment and insurance products, such as single-premium annuities, whole life policies and securities primarily through the Bank’s retail banking system and directly to the public.

Montchanin Capital Management, Inc. (“Montchanin”) provides asset management services in our primary market area. Montchanin has one wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”). Cypress is a Wilmington-based investment advisory firm servicing high net-worth individuals and institutions and had approximately $458 million in assets under management at December 31, 2009.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY

Condensed average balance sheets for each of the last three years and analyses of net interest income and changes in net interest income due to changes in volume and rate are presented in “Results of Operations” included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

INVESTMENT ACTIVITIES

At December 31, 2009, WSFS’ total securities portfolio had a carrying value of $727.3 million. The Company’s strategy has been to avoid credit risk in our securities portfolio.  Our investment portfolio is intended to keep the Bank’s funds fully employed at the maximum after-tax return, while maintaining acceptable credit, market and interest-rate risk limits, and providing needed liquidity under current circumstances. In addition, our taxable investments provide collateral for various Bank obligations. Our municipal securities provide for a portion of the Bank’s CRA investment program.

·  
WSFS owns no CDOs, Bank Trust Preferred, Agency Preferred securities or equity securities in other FDIC insured banks or thrifts.
 
    The portfolio is comprised of:

·  
$40.7 million in Federal Agency debt securities with a maturity of four years or less.
 
·  
$238.5 million in “plain vanilla” Agency MBS. Of these, $85.8 million are sequential pay CMOs with no contingent cash flows and $152.7 million are Agency MBS with 10-30 year original final maturities.
 
·  
$433.8 million in Non-Agency MBS, including purchases of $172.0 million during 2009.  These MBS purchases were all short duration, super-senior tranches.  These bonds not only underwent significant internal pre-purchase due diligence using sophisticated models, but also were rated AAA during 2009, under

 
- 8 -

 

heightened rating agency scrutiny.  The remaining bonds are 90% 2005 vintage or earlier and the remainder is 2006 vintage.  They are predominately 15 year pass through cash flow with an average LTV of 39% (based on scheduled amortization and initial appraisal value) and average FICO scores greater the 700 at origination.

Of the 100 Non-Agency bonds, 28 bonds with a par value of $97.6 million were downgraded as of December 31, 2009. Based on stress tests of these 28 bonds using proprietary models of two independent companies, management believes the collection of the contractual principal and interest is probable in nearly all cases and therefore most of the unrealized losses are considered to be temporary.  The Bank took a charge of $86,000 due to other-than-temporary impairment on one security during 2009 and has not needed to take any other-than-temporary impairment charge to earnings prior to this year.

Amortized cost of investment securities and investments by category, stated in dollar amounts and as a percent of total assets, follow:

   
At December 31,
 
   
2009
   
2008
   
2007
 
       
Percent of
         
Percent of
         
Percent of
 
   
Amount
 
Assets
     
Amount
 
Assets
     
Amount
 
Assets
 
   
(Dollars in Thousands)
 
Held-to-Maturity:
                                       
                                         
State and political subdivisions
 
$
709
 
%
   
$
1,181
 
%
   
$
1,516
 
0.1
%
                                         
Available-for-Sale:
                                       
                                         
Reverse Mortgages
   
(530
)
       
(61
)
       
 2,037
 
0.1
 
State and political subdivisions
   
3,935
 
0.1
       
 4,020
 
0.1
       
 4,115
 
0.1
 
U.S. Government and agencies
   
40,695
 
1.1
       
 43,778
 
1.3
       
 20,477
 
0.6
 
     
44,100
 
1.2
       
 47,737
 
1.4
       
 26,629
 
0.8
 
Short-term investments:
                                       
                                         
Interest-bearing deposits in other banks
   
1,090
 
       
 216
 
 —
       
 1,078
 
 —
 
   
$
45,899
 
1.2
%
   
$
49,134
 
 1.4
%
   
$
29,223
 
 0.9
%

There were no sales of investment securities (excluding mortgage-backed securities) classified as available-for-sale during 2009, 2008 or 2007.  Investment securities totaling $18.6 million (including $566,000 of municipal bonds) were called by the issuers during 2009 and municipal bonds totaling $404,000 were called by the issuers during 2008. There were no net losses realized on sales in 2009, 2008 or 2007.   The cost basis for all investment security sales was based on the specific identification method. There were no sales of investment securities classified as held-to-maturity in 2009, 2008 or 2007.

The investment in reverse mortgages are reverse mortgage loans with contracts that require us to make monthly advances throughout the borrower’s life or until the borrower relocates, prepays or the home is sold, at which time the loan becomes due and payable. Reverse mortgages are nonrecourse obligations, which means that the loan repayments are generally limited to the net sale proceeds of the borrower’s residence.  We account for our investment in reverse mortgages by estimating the value of the future cash flows on the reverse mortgages at a rate deemed appropriate for these mortgages, based on the market rate for similar collateral. Actual cash flows from the maturity of these mortgage loans can result in significant volatility in the recorded value of reverse mortgage assets.


 
- 9 -

 

The following table shows the terms to maturity and related weighted average yields of investment securities and short-term investments at December 31, 2009. Substantially all of the related interest and dividends represent taxable income.

   
At December 31, 2009
 
   
 
Amount
 
Weighted
Average
Yield (1)
 
   
(Dollars in Thousands)
 
Held-to-Maturity:
           
             
State and political subdivisions (2):
           
Within one year
 
$
340
 
7.53
%
After one but within five years
   
 
 
After ten years
   
369
 
5.20
 
             
Total debt securities, held-to-maturity
   
709
 
6.32
 
             
Available-for-Sale:
           
             
Reverse Mortgages (3):
           
Within one year
 
 
(530
)
 
             
State and political subdivisions (2):
           
Within one year
   
825
 
3.84
 
After one but within five years
   
2,860
 
4.19
 
After five but within ten years
   
250
 
4.25
 
             
     
3,935
 
4.12
 
             
U.S. Government and agencies:
           
Within one year
 
 
10,569
 
2.97
 
After one but within five years
   
30,126
 
2.19
 
             
     
40,695
 
2.39
 
             
Total debt securities, available-for-sale
   
44,100
 
2.54
 
             
Total debt securities
   
44,809
 
2.60
 
             
Short-term investments:
           
             
Interest-bearing deposits in other banks
   
1,090
 
0.01
 
             
Total short-term investments
   
1,090
 
0.01
 
             
   
$
45,899
 
2.54
%

(1)
Reverse mortgages have been excluded from weighted average yield calculations because income can vary significantly from reporting period to reporting period due to the volatility of factors used to value the portfolio.
(2)
Yields on state and political subdivisions are not calculated on a tax-equivalent basis since the effect would be immaterial.
(3)
Reverse mortgages do not have contractual maturities.  We have included reverse mortgages in maturities within one year.

 
- 10 -

 

In addition to these investment securities, we have maintained a $684.5 million portfolio of mortgage-backed securities (of which $12.2 million is classified as “trading”) that are BBB+ rated and were purchased in conjunction with a 2002 reverse mortgage securitization. At December 31, 2009, mortgage-backed securities with a par value of $250.3 million were pledged as collateral for customer repurchase agreements and municipal deposits. Accrued interest receivable for mortgage-backed securities was $2.8 million, $2.1 million and $2.0 million at December 31, 2009, 2008 and 2007, respectively. Proceeds from the sale of mortgage-backed securities classified as available-for-sale totaled $111.5 million with a net gain on sale of $2.0 million in 2009.  There were no sales of mortgage-backed securities available-for-sale in 2008.  During 2007, proceeds from the sale of mortgage-backed securities classified as available-for-sale totaled $2.7 million with a net gain of $82,000.

The following table shows the amortized cost of mortgage-backed securities and their related weighted average contractual rates at the end of the last three fiscal years.

   
December 31,
 
   
2009
   
2008
     
2007
 
   
Amount
 
Rate
     
Amount
 
Rate
     
Amount
 
Rate
 
   
(Dollars in thousands)
 
Available-for-Sale:
                                       
                                         
Collateralized mortgage obligations (1)
 
$
519,527
 
5.44
%
   
$
419,177
 
 5.12
%
   
$
407,113
 
 4.97
%
FNMA
   
61,603
 
3.63
       
 35,578
 
4.19
       
 35,654
 
4.04
 
FHLMC
   
44,536
 
3.87
       
 30,477
 
4.44
       
 31,357
 
4.31
 
GNMA
   
46,629
 
4.32
       
 22,536
 
5.01
       
 15,923
 
4.73
 
   
$
672,295
 
5.00
%
   
$
507,768
 
 4.97
%
   
$
490,047
 
 4.85
%
                                         
Trading:
                                       
                                         
Collateralized mortgage obligations
 
$
12,183
 
3.74
%
   
$
10,816
 
 6.01
%
   
$
12,364
 
 7.79
%
(1) Includes Agency CMO’s available-for-sale.

CREDIT EXTENSION ACTIVITIES

Over the past several years we have focused on increasing the more profitable segments of our loan portfolio. Our current lending activity is concentrated on lending to small to mid-sized businesses in the mid-Atlantic region of the United States primarily in Delaware and contiguous counties in Pennsylvania, Maryland and New Jersey. In 2005, residential first mortgage loans comprised 25.8% of the loan portfolio, while the combination of commercial loans and commercial real estate loans made up 61.8%. In contrast, at December 31, 2009, residential first mortgage loans totaled only 14.4%, while commercial loans and commercial real estate loans have increased to a combined total of 75.7% of the loan portfolio. Traditionally, the majority of typical thrift institutions’ loan portfolios have consisted of first mortgage loans on residential properties.

 
- 11 -

 

The following table shows the composition of our loan portfolio at year-end for the last five years.



   
December 31,
 
   
2009
     
2008
     
2007
     
2006
     
2005
 
Types of Loans
 
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
 
   
(Dollars in Thousands)
 
                                                                     
Residential real estate (1)
 
$
357,250
 
14.4
%
   
$
425,018
 
17.4
%
   
$
449,853
 
20.1
%
   
$
474,871
 
23.5
%
   
$
457,651
 
25.8
%
Commercial real estate:
                                                                   
Commercial mortgage
   
524,380
 
21.2
       
558,979
 
 22.9
       
465,928
 
 20.9
       
422,089
 
20.9
       
410,552
 
23.1
 
Construction
   
231,625
 
9.3
       
251,508
 
10.3
       
276,939
 
12.4
       
241,931
 
12.0
       
178,418
 
10.0
 
Total commercial real estate
   
756,005
 
30.5
       
810,487
 
 33.2
       
742,867
 
 33.3
       
664,020
 
32.9
       
588,970
 
33.1
 
Commercial
   
1,120,807
 
45.2
       
942,920
 
38.6
       
787,539
 
 35.3
       
643,918
 
31.9
       
508,930
 
28.7
 
Consumer
   
300,648
 
12.1
       
296,728
 
 12.1
       
278,272
 
12.4
       
263,478
 
13.0
       
244,820
 
13.8
 
                                                                     
Gross loans
 
$
2,534,710
 
102.2
     
$
2,475,153
 
 101.3
     
$
2,258,531
 
 101.1
     
$
2,046,287
 
101.3
     
$
1,800,371
 
101.4
 
                                                                     
                                                                     
Less:
                                                                   
Deferred fees (unearned income)
   
2,109
 
0.1
       
129
 
 0.0
       
(701
)
 0.0
       
(838
)
0.0
       
(304
)
0.0
 
Allowance for loan losses
   
53,531
 
2.1
       
31,189
 
1.3
       
25,252
 
1.1
       
27,384
 
1.3
       
25,381
 
1.4
 
                                                                     
Net loans
 
$
2,479,070
 
100.0
%
   
$
2,443,835
 
100.0
%
   
$
2,233,980
 
100.0
%
   
$
2,019,741
 
100.0
   
$
1,775,294
 
100.0
%

(1) Includes $8,377, $2,275, $2,418, $925 and $438 of residential mortgage loans held-for-sale at December 31, 2009, 2008, 2007, 2006 and 2005.



 
- 12 -

 

The following tables show how much time remains until our loans mature. The first table details the total loan portfolio by type of loan. The second table details the total loan portfolio by loans with fixed interest rates and loans with adjustable interest rates. The tables show loans by contractual maturity. Loans may be pre-paid so that the actual maturity may be earlier than the contractual maturity. Prepayments tend to be highly dependent upon the interest rate environment. Loans having no stated maturity or repayment schedule are reported in the Less than One Year category.

   
Less than
 
One to
 
Over
     
   
One Year
 
Five Years
 
Five Years
 
Total
 
   
(Dollars in thousands)
 
                           
Real estate loans (1)
 
$
12,931
 
$
45,475
 
$
290,467
 
$
348,873
 
Commercial mortgage loans
   
139,228
   
247,997
   
137,155
   
524,380
 
Construction loans
   
187,270
   
21,856
   
22,499
   
231,625
 
Commercial loans
   
362,935
   
472,025
   
285,847
   
1,120,807
 
Consumer loans
   
201,333
   
46,817
   
52,498
   
300,648
 
   
$
903,697
 
$
834,170
 
$
788,466
 
$
2,526,333
 
                           
Rate sensitivity:
                         
Fixed
 
$
96,710
 
$
317,736
 
$
261,716
 
$
676,162
 
Adjustable (2)
   
806,987
   
516,434
   
526,750
   
1,850,171
 
Gross loans
 
$
903,697
 
$
834,170
 
$
788,466
 
$
2,526,333
 

(1)           Excludes loans held-for-sale.
(2)           Includes hybrid adjustable-rate mortgages.

Residential Real Estate Lending.

We generally originate residential first mortgage loans with loan-to-value ratios of up to 80% and require private mortgage insurance for up to 30% of the mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. We do not have any significant concentrations of such insurance with any one insurer. On a very limited basis, we originate or purchase loans with loan-to-value ratios exceeding 80% without a private mortgage insurance requirement. At December 31, 2009, the balance of all such loans was approximately $4.9 million.

Generally, our residential mortgage loans are underwritten and documented in accordance with standard underwriting criteria published by the Federal Home Loan Mortgage Corporation (“FHLMC”) to assure maximum eligibility for subsequent sale in the secondary market. Generally, we sell only those loans that are originated specifically with the intention to sell on a “flow” basis.  However, during 2009 we completed a bulk sale of $16.7 million in residential first mortgages in order to take advantage of market improvements and optimize our portfolio.

To protect the propriety of our liens, we require that title insurance be obtained. We also require fire, extended coverage casualty and flood insurance (where applicable) for properties securing residential loans. All properties securing residential loans made by us are appraised by independent, licensed and certified appraisers and are subject to review in accordance with our standards.

The majority of our adjustable-rate, residential real estate loans have interest rates that adjust yearly after an initial period. Typically, the change in rate is limited to two percentage points at each adjustment date. Adjustments are generally based upon a margin (currently 2.75%) over the weekly average yield on U.S. Treasury securities adjusted to a constant maturity, as published by the Federal Reserve Board.

 
- 13 -

 

Generally, the maximum rate on these loans is up to six percent above the initial interest rate. We underwrite adjustable-rate loans under standards consistent with private mortgage insurance and secondary market underwriting criteria. We do not originate adjustable-rate mortgages with payment limitations that could produce negative amortization.

The retention of adjustable-rate mortgage loans in our loan portfolio helps mitigate our risk to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of re-pricing adjustable-rate mortgage loans. It is possible that during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower. Further, although adjustable-rate mortgage loans allow us to increase the sensitivity of our asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on our adjustable-rate mortgages will adjust sufficiently to compensate for increases to our cost of funds during periods of extreme interest rate increases.

The original contractual loan payment period for residential loans is normally 10 to 30 years. Because borrowers may refinance or prepay their loans without penalty, these loans tend to remain outstanding for a substantially shorter period of time. First mortgage loans customarily include “due-on-sale” clauses on adjustable- and fixed-rate loans. This provision gives us the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage. Due-on-sale clauses are an important means of adjusting the rate on existing fixed-rate mortgage loans to current market rates. We enforce due-on-sale clauses through foreclosure and other legal proceedings to the extent available under applicable laws.

In general, loans are sold without recourse except for the repurchase right arising from standard contract provisions covering violation of representations and warranties or, under certain investor contracts, a default by the borrower on the first payment. We also have limited recourse exposure under certain investor contracts in the event a borrower prepays a loan in total within a specified period after sale, typically one year. The recourse is limited to a pro rata portion of the premium paid by the investor for that loan, less any prepayment penalty collectible from the borrower.

We have a very limited amount of subprime loans, $15.1 million, at December 31, 2009 (0.59% of loans) and no negative amortizing loans or interest only first mortgage loans. Subprime mortgage delinquencies of 10.15% in our small portfolio are a fraction of the national average of 26.67%, due to our underwriting and the seasoning of these loans.

Commercial Real Estate, Construction and Commercial Lending.

Pursuant to section 5(c) of the Home Owners’ Loan Act (“HOLA”) federal savings banks are generally permitted to invest up to 400% of their total regulatory capital in nonresidential real estate loans and up to 20% of its assets in commercial loans. As a federal savings bank that was formerly chartered as a Delaware savings bank, we have certain additional lending authority.

We offer commercial real estate mortgage loans on multi-family properties and other commercial real estate. Generally, loan-to-value ratios for these loans do not exceed 80% of appraised value at origination.

We offer commercial construction loans to developers. In some cases these loans are made as “construction/permanent” loans, which provides for disbursement of loan funds during construction and automatic conversion to mini-permanent loans (1-5 years) upon completion of construction. These construction loans are made on a short-term basis, usually not exceeding two years, with interest rates indexed to our prime rate, the “Wall Street” prime rate or London InterBank Offer Rate (“LIBOR”), in most cases, and are adjusted periodically as these rates change. The loan appraisal process includes the same evaluation criteria as required

 
- 14 -

 
for permanent mortgage loans, but also takes into consideration: completed plans, specifications, comparables and cost estimates. Prior to approval of the credit, these items are used as a basis to determine the appraised value of the subject property when completed. Our policy requires that all appraisals be reviewed independently from our commercial lending staff. Generally, at origination, the loan-to-value ratios for construction loans do not exceed 75%. The initial interest rate on the permanent portion of the financing is determined by the prevailing market rate at the time of conversion to the permanent loan. At December 31, 2009, $287.6 million was committed for construction loans, of which $231.6 million was outstanding.

The remainder of our commercial lending includes loans for working capital, financing equipment acquisitions, business expansion and other business purposes. These loans generally range in amounts up to $10 million (with a few loans higher), and their terms range from less than one year to seven years. The loans generally carry variable interest rates indexed to our Wall Street prime rate, national prime rate or LIBOR, at the time of closing.

Commercial, commercial mortgage and construction lending have a higher level of risk than residential mortgage lending. These loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and may be more subject to adverse conditions in the commercial real estate market or in the general economy. The majority of our commercial and commercial real estate loans are concentrated in Delaware and surrounding areas.

As of December 31, 2009 our commercial loan portfolio was $1.1 billion and represented 44% of our total loan portfolio.  These loans are diversified by industry, with no industry representing more than 10% of the portfolio (Retail Trades).  We have noticed some weakness in this portfolio primarily from smaller credits with most of these loans well below $1 million.  This weakness was mainly in the small business sector which has been affected by the prolonged economic downturn.

Our commercial real estate (CRE) portfolio was $524.4 million at December 31, 2009.  This portfolio is diversified by property type, with no type representing more than 28% of the portfolio.  The largest concentration is retail related (shopping centers, malls and other retail) with balances of $146.7 million.  The average loan size of the CRE portfolio is $1.6 million and we have only eight loans greater than $5 million with no loans greater than $10 million.  Most significant projects are located in our geographic footprint and while we have not experienced significant weakness to date, management continues to monitor this portfolio closely.

Construction loans involve additional risk because loan funds are advanced as construction projects progress. The valuation of the underlying collateral can be difficult to quantify prior to the completion of the construction. This is due to uncertainties inherent in construction such as changing construction costs, delays arising from labor or material shortages and other unpredictable contingencies. We attempt to mitigate these risks and plan for these contingencies through additional analysis and monitoring of our construction projects. Construction loans receive independent inspections prior to disbursement of funds.

As of December 31, 2009, our construction and land development (CLD) loans totaled $231.6 million, or only 9.3% of our loan portfolio. Since 2005, we have imposed limits on each category of residential and commercial CLD loans, as well as geographic sub-limits and a sub-limit on “land hold” CLD.  Residential CLD, one of the hardest hit sectors in today’s economy, represents only $109.6 million or 4.3% of the loan portfolio. Our average residential CLD loan is $1.3 million. Only five of our residential CLD loans exceeded $5 million in outstandings and our largest geographic concentration (Sussex County, Delaware) represents only $37.0 million.  Our commercial CLD portfolio was only $84.7 million or 3.3% of total loans.  We continue to reduce the amount of exposure we have to these types of loans.  We are recording very few new

 
- 15 -

 

CLD loans, the remaining amount of availability on existing loans is minimal and there are very few loans with interest reserves remaining.

Land loans were $113.6 million at December 31, 2009 including $50.6 million of “land hold” loans which are land loans not currently being developed.

Only nine commercial relationships have outstandings in excess of $20.0 million and each of these relationships is collateralized by real estate.

Federal law limits the extensions of credit to any one borrower to 15% of unimpaired capital, or 25% if the difference is secured by readily marketable collateral having a market value that can be determined by reliable and continually available pricing. Extensions of credit include outstanding loans as well as contractual commitments to advance funds, such as standby letters of credit, but do not include unfunded loan commitments. At December 31, 2009, no borrower had collective outstandings exceeding these limits.

Consumer Lending.

Our primary consumer credit products are home equity lines of credit and equity-secured installment loans. At December 31, 2009, home equity lines of credit totaled $177.4 million and equity-secured installment loans totaled $102.7 million. In total these product lines represent 93.2% of total consumer loans. Some home equity products granted a borrower credit availability of up to 100% of the appraised value (net of any senior mortgages) of their residence. Maximum LTV limits were reduced to 80% as of November 2008 and 75% as of June 2009.  At December 31, 2009, we had extended $284.9 million in home equity lines of credit. Home equity lines of credit offer customers potential Federal income tax advantages, the convenience of checkbook access and revolving credit features and are typically more attractive in the current low interest rate environment. Home equity lines of credit expose us to the risk that falling collateral values may leave us inadequately secured, while the risk on products like home equity loans is mitigated as they amortize over time.

Prior to 2008, we had not observed any significant adverse experience on home equity lines of credit or equity-secured installment loans but delinquencies and net charge-offs on these products increased over the past two years, mainly as a result of the deteriorating economy and declining home values.  Since 2008, we also increased our loan loss reserves related to consumer loans.

 
- 16 -

 

The following table shows our consumer loans at year-end, for the last five years.

   
December 31,
 
   
2009
     
2008
     
2007
     
2006
     
2005
 
 
 
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
     
Amount
 
Percent
 
   
(Dollars in Thousands)
 
                                                                     
Equity secured installment loans
 
$
102,727
 
34.2
%
   
$
131,550
 
 44.3
%
   
$
147,551
 
 53.0
%
   
$
141,708
 
 53.8
%
   
$
136,721
 
 55.8
%
Home equity lines of credit
   
177,407
 
59.0
       
 141,678
 
47.8
       
 107,912
 
38.8
       
 98,567
 
37.4
       
 85,505
 
34.9
 
Automobile
   
1,135
 
0.4
       
 1,134
 
0.4
       
 1,159
 
0.4
       
 1,702
 
0.7
       
 2,616
 
 1.1
 
Unsecured lines of credit
   
7,246
 
2.4
       
 6,779
 
2.3
       
 5,972
 
2.1
       
 11,361
 
4.3
       
 10,778
 
 4.4
 
Other
   
12,133
 
4.0
       
 15,587
 
5.2
       
 15,678
 
5.7
       
 10,140
 
3.8
       
 9,200
 
 3.8
 
                                                                     
                                                                     
Total consumer loans
 
$
300,648
 
100.0
%
   
$
296,728
 
 100.0
%
   
$
278,272
 
 100.0
%
   
$
263,478
 
 100.0.0
%
   
$
244,820
 
 100.0
%













 
- 17 -

 

Loan Originations, Purchase and Sales.

We have engaged in traditional lending activities primarily in Delaware and contiguous areas of neighboring states. As a federal savings bank, however, we may originate, purchase and sell loans throughout the United States. We have purchased limited amounts of loans from outside our normal lending area when such purchases are deemed appropriate. We originate fixed-rate and adjustable-rate residential real estate loans through our banking offices. In addition, we have established relationships with correspondent banks and mortgage brokers to originate loans.

During 2009, we originated $482.8 million of residential real estate loans. This compares to originations of $434.7 million in 2008. From time to time, we have purchased whole loans and loan participations in accordance with our ongoing asset and liability management objectives. Purchases of residential real estate loans from correspondents and brokers primarily in the mid-Atlantic region totaled $4.0 million for the year ended December 31, 2009 and $27.7 million for 2008. Residential real estate loan sales totaled $269.4 million in 2009 and $30.2 million in 2008.  We sell certain newly originated mortgage loans in the secondary market primarily to control the interest rate sensitivity of our balance sheet and to manage overall balance sheet mix. We hold certain fixed-rate mortgage loans for investment consistent with our current asset/liability management strategies.

At December 31, 2009, we serviced approximately $256.7 million of residential mortgage loans for others compared to $268.8 million at December 31, 2008. We also service residential mortgage loans for our own portfolio totaling $348.9 million and $422.7 million at December 31, 2009 and 2008, respectively.

We originate commercial real estate and commercial loans through our commercial lending division. Commercial loans are made for working capital, financing equipment acquisitions, business expansion and other business purposes. During 2009, we originated $502.7 million of commercial and commercial real estate loans compared with $870.4 million in 2008. To reduce our exposure on certain types of these loans, or to maintain relationships within internal lending limits, at times we will sell a portion of our commercial real estate loan portfolio, typically through loan participations. Commercial real estate loan sales totaled $23.5 million and $39.3 million in 2009 and 2008, respectively. These amounts represent gross contract amounts and do not necessarily reflect amounts outstanding on those loans.
 
Our consumer lending activity is conducted mainly through our branch offices. We originate a variety of consumer credit products including home improvement loans, home equity lines of credit, automobile loans, unsecured lines of credit and other secured and unsecured personal installment loans.

During 2006, we formed a new reverse mortgage initiative under the Bank’s retail leadership. While the Bank’s activity during 2009 has been limited to acting as a correspondent for these loans, our intention is to originate and underwrite our own reverse mortgages in the future.  We expect to sell most of these loans and not hold them in our portfolio. These reverse mortgages are government insured.  During 2009 we originated $46.9 million in reverse mortgages compared to $38.6 million during 2008, of which all were sold (does not include loan originated by 1st Reverse Financial Services, LLC).

During 2008, we acquired a majority interest in 1st Reverse Financial Services, LLC (1st Reverse), which specializes in originating and subsequently selling reverse mortgage loans nationwide. These reverse mortgages are government approved and insured.  During the latter part of 2009, we decided to conduct an orderly wind-down of 1st Reverse operations (discussed further in Note 20 of the Financial Statements).

All loans to one borrowing relationship exceeding $3.5 million must be approved by the Senior Management Loan Committee (“SLC”). The Executive Committee of the Board of Directors (“EC”) reviews the minutes of the SLC meetings. They also approve individual loans exceeding $5 million for customers with less than one year of significant loan history with the Bank and loans in excess of $7.5 million for customers with established borrowing relationships. Depending upon their experience and management position,

 
- 18 -

 

individual officers of the Bank have the authority to approve smaller loan amounts. Our credit policy includes a “House Limit” to one borrowing relationship of $20 million.  In extraordinary circumstances, we will approve exceptions to the “House Limit”.  Currently we have nine relationships that exceed this limit.  Those nine relationships were allowed to exceed the “House Limit” because either the relationship contained several loans/borrowers that have no economic relationship (typically real estate investors with amounts diversified across a number of properties) or the exposure was marginally in excess of the “House Limit” and the credit profile was deemed strong. 

Fee Income from Lending Activities.

    We earn fee income from lending activities, including fees for originating loans, servicing loans and selling loan participations.  We also receive fee income for making commitments to originate construction, residential and commercial real estate loans. Additionally, we collect fees related to existing loans which include prepayment charges, late charges, assumption fees and swap fees.

    We charge fees for making loan commitments.  Also as part of the loan application process, the borrower may pay us for out-of-pocket costs to review the application, whether or not the loan is closed.

    Most loan fees are not recognized in the Consolidated Statement of Operations immediately, but are deferred as adjustments of yield in accordance with U.S. generally accepted accounting principles and are reflected in interest income. Those fees represented interest income of $944,000, $1.1 million, and $124,000 during 2009, 2008, and 2007, respectively.  Fee income in 2009 was mainly due to fee accretion on existing loans (including the acceleration of the accretion on loans that paid early), loan growth and prepayment penalties. The increase in 2008 was mainly the result of several large prepayment penalties. Loan fees other than those considered adjustments of yield (such as late charges) are reported as loan fee income, a component of noninterest income.

LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES

Our results of operations can be negatively impacted by nonperforming assets, which include nonaccruing loans, nonperforming real estate investments, assets acquired through foreclosure and restructured loans. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and 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.

We endeavor to manage our portfolio to identify problem loans as promptly as possible and take immediate actions to minimize losses. To accomplish this, our Risk Management Department monitors the asset quality of our loan and investment in real estate portfolios and reports such information to the Credit Policy Committee, the Audit Committee of the Board of Directors and the Bank’s Controller’s Department.

SOURCES OF FUNDS

We manage our liquidity risk and funding needs through our treasury function and our Asset/Liability Committee. Historically, we have had success in growing our loan portfolio. For example, during the year ended December 31, 2009, net loan growth resulted in the use of $109.3 million in cash. The loan growth was primarily the result of our continued success increasing corporate and small business lending. Management expects this trend to continue. While our loan-to-deposit ratio has been well above 100% for many years, during 2009 we have made significant improvements to decrease this ratio through increased deposit growth.

 
- 19 -

 

Our long-term goal is 100% by 2012.  Management has significant experience managing its funding needs through borrowings and deposit growth.

As a financial institution, we have ready access to several sources of funding. Among these are:

·  
Deposit growth
·  
Brokered deposits
·  
Borrowing from the Federal Home Loan Bank (“FHLB”)
·  
Fed Discount Window access
·  
Other borrowings such as repurchase agreements
·  
Cash flow from securities and loan sales and repayments
·  
Net income.

Our current branch expansion and renovation program is focused on expanding our retail footprint in Delaware and attracting new customers to provide additional deposit growth. Customer deposit growth was strong, equaling $438.9 million, or 26%, between December 31, 2008 and December 31, 2009.

Deposits. We offer various deposit programs to our customers, including savings accounts, demand deposits, interest-bearing demand deposits, money market deposit accounts and certificates of deposits. In addition, we accept “jumbo” certificates of deposit with balances in excess of $100,000 from individuals, businesses and municipalities in Delaware.

WSFS is the second largest independent full service banking institution headquartered and operating in Delaware. The Bank primarily attracts deposits through its 41 banking offices. Twenty-four banking offices were located in northern Delaware’s New Castle County, WSFS’ primary market. These banking offices maintain approximately 167,000 total account relationships with approximately 65,000 total households. Seven banking offices are located in Delaware’s Sussex County. Five banking offices are located in central Delaware’s Kent County, three of which are in the state capital, Dover.  Four banking offices are located in nearby southeastern Pennsylvania and one banking office is located in Annandale, Virginia.

Growth in total deposits of $439.5 million, or 21% compares favorably to the national average growth rate of 6% based on a recent Federal Reserve statistical release (FRB: H.8 Release dated February 5, 2010).

The following table shows the maturity of certificates of deposit of $100,000 or more as of December 31, 2009:

 
Maturity Period
   December 31,
2009
 
 
   
   (In Thousands)
 
             
Less than 3 months
 
$
125,491
       
Over 3 months to 6 months
   
  42,597
       
Over 6 months to 12 months
   
  38,612
       
Over 12 months
      65,634
 
       
   
$
 
272,334
 
       







 
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    Borrowings. We utilize the following borrowing sources to fund operations:
 
    Federal Home Loan Bank Advances
 
    As a member of the Federal Home Loan Bank of Pittsburgh, we are able to obtain Federal Home Loan Bank (“FHLB”) advances. Advances from the FHLB of Pittsburgh had rates ranging from 0.26% to 5.45% at December 31, 2009. Pursuant to collateral agreements with the FHLB, the advances are secured by qualifying first mortgage loans, qualifying fixed-income securities, FHLB stock and an interest-bearing demand deposit account with the FHLB. We are required to acquire and hold shares of capital stock in the FHLB of Pittsburgh in an amount at least equal to 4.75% of its borrowings from them, plus 0.75% of our unused borrowing capacity. As of December 31, 2009, our FHLB stock investment totaled $39.3 million.
   
    At December 31, 2009 we had $613.1 million in FHLB advances with a weighted average rate of 2.59% maturing in 2010 and beyond. Six advances totaling $95.0 million are convertible on a quarterly basis (at the discretion of the FHLB) to a variable rate advance based upon the three-month LIBOR rate, after an initial fixed term. If any of these advances convert, WSFS has the option to prepay these advances at predetermined times or rates.
   
    In December 2008, the FHLB of Pittsburgh announced the suspension of both dividend payments and the repurchase of capital stock until such time as it becomes prudent to reinstate both. We received no dividends from the FHLB of Pittsburgh during 2009.
 
    Trust Preferred Borrowings
 
    In 2005, we issued $67.0 million aggregate principal amount of Pooled Floating Rate Securities at a variable interest rate of 177 basis points over the three-month LIBOR rate. The proceeds from this issuance were used to fund the redemption of $51.5 million of Floating Rate Capital Trust I Preferred Securities which had a variable interest rate of 250 basis points over the three-month LIBOR rate.
 
    Temporary Liquidity Guarantee Program (“TLGP”)
 
    During 2009, we participated in the FDIC’s TLGP Debt Guarantee Program.  Under this program we issued $30.0 million of unsecured debt with a coupon rate of 2.74% and a 3 year maturity.
 
    Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
 
    During 2009, we purchased federal funds as a short-term funding source. At December 31, 2009, we had purchased $75.0 million in federal funds at a rate of 0.38%. At December 31, 2008, we had purchased $50.0 million in federal funds at a rate of 0.38%.
 
    During 2009, we sold securities under agreements to repurchase as a funding source. At both December 31, 2009 and 2008, we had $25.0 million of securities sold under agreements to repurchase with a fixed rate of 4.87%. The underlying securities are mortgage-backed securities with a book value of $29.2 million at December 31, 2009.

PERSONNEL
 
    As of December 31, 2009 we had 643 full-time equivalent Associates (employees).  The Associates are not represented by a collective bargaining unit.  Management believes its relationship with its Associates is very good.




 
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REGULATION

Regulation of the Corporation

General. We are a registered savings and loan holding company and are subject to the regulation, examination, supervision and reporting requirements of the Office of Thrift Supervision (“OTS”). We are also a registered public company subject to the reporting requirements of the United States Securities and Exchange Commission. The filings we make with Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, are available on the investor relations page of our website at www.wsfsbank.com.

Sarbanes-Oxley Act of 2002. The Securities and Exchange Commission (the “SEC”) has promulgated new regulations pursuant to the Sarbanes-Oxley Act of 2002 (the “Act”) and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. Compliance with the Act and corresponding regulations has increased our expenses.
   
Restrictions on Acquisitions. A savings and loan holding company must obtain the prior approval of the Director of OTS before acquiring (i) control of any other savings association or savings and loan holding company or substantially all the assets thereof, or (ii) more than 5% of the voting shares of a savings association or holding company thereof which is not a subsidiary. Except with the prior approval of the Director of OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company’s stock, may also acquire control of any savings association, other than a subsidiary savings association, or of any other savings and loan holding company.

The OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state if: (i) the company involved controls a savings institution which operated a home or branch office in the state of the association to be acquired as of March 5, 1987; (ii) the acquirer is authorized to acquire control of the savings association pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the association to be acquired is located specifically permit institutions to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). The laws of Delaware do not specifically authorize out-of-state savings associations or their holding companies to acquire Delaware-chartered savings associations.

The statutory restrictions on the formation of interstate multiple holding companies would not prevent us from entering into other states by mergers or branching. OTS regulations permit federal associations to branch in any state or states of the United States and its territories. Except in supervisory cases or when interstate branching is otherwise permitted by state law or other statutory provision, a federal association may not establish an out-of-state branch unless the federal association qualifies as a “domestic building and loan association” under Section 7701(a)(19) of the Internal Revenue Code or as a “qualified thrift lender” under the Home Owners’ Loan Act and the total assets attributable to all branches of the association in the state would qualify such branches taken as a whole for treatment as a domestic building and loan association or qualified thrift lender. Federal associations generally may not establish new branches unless the association meets or exceeds minimum regulatory capital requirements. The OTS will also consider the association’s record of compliance with the Community Reinvestment Act of 1977 in connection with any branch application.

Recent Legislative and Regulatory Initiatives to Address the Current Financial and Economic Crisis   Congress, the United States Department of the Treasury (“Treasury”) and the federal banking regulators, including the FDIC, have taken broad action since early September 2008 to address volatility in the

 
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U.S. banking system and financial markets. See “Recent Legislation” under Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Regulation of WSFS Bank

General. As a federally chartered savings institution, the Bank is subject to extensive regulation by the Office of Thrift Supervision. The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The OTS periodically examines the Bank for compliance with regulatory requirements. The FDIC also has the authority to conduct special examinations of the Bank. The Bank must file reports with the OTS describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board.

Transactions with Affiliates; Tying Arrangements. The Bank is subject to certain restrictions in its dealings with us and our affiliates. Transactions between savings associations and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings association, generally, is any company or entity which controls or is under common control with the savings association or any subsidiary of the savings association that is a bank or savings association. In a holding company context, the parent holding company of a savings association (such as “WSFS Financial Corporation”) and any companies which are controlled by such parent holding company are affiliates of the savings association. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings association may (i) lend or otherwise extend credit to an affiliate that engages in any activity impermissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings association. Savings associations are also prohibited from extending credit, offering services, or fixing or varying the consideration for any extension of credit or service on the condition that the customer obtain some additional service from the institution or certain of its affiliates or that the customer not obtain services from a competitor of the institution, subject to certain limited exceptions.

Regulatory Capital Requirements. Under OTS capital regulations, savings institutions must maintain “tangible” capital equal to 1.5% of adjusted total assets, “Tier 1” or “core” capital equal to 4% of adjusted total assets (or 3% if the institution is rated composite 1 under the OTS examiner rating system), and “total” capital (a combination of core and “supplementary” capital) equal to 8% of risk-weighted assets. In addition, OTS regulations impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definition as core capital.

The OTS capital rule defines Tier 1 or core capital as common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual institutions and “qualifying supervisory goodwill,” less intangible assets other than certain supervisory goodwill and, subject to certain limitations, mortgage and non-mortgage servicing rights, purchased credit card relationships and credit-enhancing interest only strips. Tangible capital is given the same definition as core capital but does not include qualifying supervisory goodwill and is reduced by the amount of all the savings

 
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institution’s intangible assets except for limited amounts of mortgage servicing assets. The OTS capital rule requires that core and tangible capital be reduced by an amount equal to a savings institution’s debt and equity investments in “non-includable” subsidiaries engaged in activities not permissible to national banks, other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies. At December 31, 2009, the Bank was in compliance with both the core and tangible capital requirements.

The risk weights assigned by the OTS risk-based capital regulation range from 0% for cash and U.S. government securities to 100% for consumer and commercial loans, non-qualifying mortgage loans, property acquired through foreclosure, assets more than 90 days past due and other assets. In determining compliance with the risk-based capital requirement, a savings institution may include both core capital and supplementary capital in its total capital, provided the amount of supplementary capital included does not exceed the savings institution’s core capital. Supplementary capital is defined to include certain preferred stock issues, non-withdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments, general loan loss allowances up to 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair values. Total capital is reduced by the amount of the institution’s reciprocal holdings of depository institution capital instruments and all equity investments. At December 31, 2009, WSFS Bank was in compliance with the OTS risk-based capital requirements.

Dividend Restrictions. As the subsidiary of a savings and loan holding company, WSFS bank must submit notice to the OTS prior to making any capital distribution (which includes cash dividends and payments to shareholders of another institution in a cash merger). In addition, a savings association must make application to the OTS to pay a capital distribution if (x) the association would not be adequately capitalized following the distribution, (y) the association’s total distributions for the calendar year exceeds the association’s net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or (z) the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS.

Insurance of Deposit Accounts. The Bank’s deposits are insured to applicable limits by the FDIC (“Federal Deposit Insurance Corporation”).  The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into law on February 15, 2006, resulted in significant changes to the federal deposit insurance program: (i) effective March 31, 2006, the Bank Insurance Fund and the Savings Association Insurance Fund were merged into a new combined fund, called the Deposit Insurance Fund (“DIF”); (ii) the current $100,000 deposit insurance coverage will be indexed for inflation (with adjustments every five years, commencing January 1, 2011); and (iii) deposit insurance coverage for retirement accounts was increased to $250,000 per participant subject to adjustment for inflation. However, due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts until December 2013. In addition, the Reform Act gave the FDIC greater latitude in setting the assessment rates for insured depository institutions, which could be used to impose minimum assessments.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. No institution may pay a dividend if in default of the federal deposit insurance assessment.

For calendar year 2008, assessments ranged from five to 43 basis points of each institution’s deposit assessment base. Due to losses incurred by the DIF in 2008 from failed institutions, and anticipated future losses, the FDIC adopted an across the board seven-basis point increase in the assessment range for the first quarter of 2009. The FDIC made further refinements to its risk-based assessment system, as of April 1, 2009, that effectively made the range seven to 77.5 basis points. The FDIC may adjust the scale uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment rulemaking.

 
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The FDIC also imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital (capped at ten basis points of an institution’s deposit assessment base, as of June 30, 2009), in order to cover losses to the DIF. That special assessment was collected on September 30, 2009.

In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 on December 30, 2009. The assessment was calculated by taking the institution’s actual September 30, 2009 assessment base and increasing it quarterly by an estimated 5% annual growth rate through the end of 2012. The FDIC also adopted a uniform three basis point increase in assessment rates effective on January 1, 2011. Under GAAP accounting rules, the prepaid assessments would not immediately affect a bank’s earnings. Each institution records the entire amount of the prepaid assessment as a prepaid expense, an asset on its balance sheet, as of December 30, 2009, the date the payment was made.  As of December 31, 2009, and each quarter thereafter, each institution records an expense for its quarterly assessment invoiced on its quarterly statement and an offsetting credit to the prepaid assessment until the asset is exhausted.  The FDIC would also have the authority to exercise its discretion as supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC determines that the prepayment would significantly impair the institution’s liquidity or would otherwise create significant hardship.

Federal law also provides for the possibility that the FDIC may pay dividends to insured institutions once the DIF reserve ratio equals or exceeds 1.35% of estimated insured deposits.
 
The Federal Deposit Insurance Reform Act of 2005 provided the FDIC with authority to adjust the DIF ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%. The Restoration Plan adopted by the FDIC seeks to restore the DIF to a 1.15% ratio within a period of eight years.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. Management does not know of any practice, condition, or violation that might lead to termination of the deposit insurance of the Bank.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the SAIF. The FICO assessment rates, which are determined quarterly, averaged 1.06 basis points of assessable deposits in 2009. These assessments will continue until the FICO bonds mature in 2019.

Temporary Liquidity Guarantee Program. In November 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”). Under the TLG Program, the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012 (extended from June 30, 2012 by subsequent amendment), certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before October 31, 2009 (extended from June 30, 2009 by subsequent amendment) and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts (“IOLTA”) held at participating FDIC insured institutions through June 30, 2010 (extended from December 31, 2009, subject to an opt-out provision, by subsequent amendment). We have elected to participate in both guarantee programs and did not opt out of the six-month extension of the transaction account guarantee program.  In 2009, we issued $30.0 million of unsecured debt under this program.

 
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   Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, a savings institution must maintain reserves against their transaction accounts. As of December 31, 2009, no reserves were required to be maintained on the first $10.7 million of transaction accounts, reserves of 3% were required to be maintained against the next $55.2 million of transaction accounts and a reserve of 10% against all remaining transaction accounts. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement may reduce the amount of an institution’s interest-earning assets. As of December 31, 2009 we met our reserve requirements.


ITEM 1A. RISK FACTORS

The following are certain risks that management believes are specific to our business. This should not be viewed as an all inclusive list and the order is not intended as an indicator of the level of importance.

 
Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. economy or the U.S. banking system.
 
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”) which, among other measures, authorizes the U.S. Department of the Treasury (“Treasury”) to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies, under a troubled asset relief program, or “TARP.” The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. Under the TARP Capital Purchase Program (“CPP”), Treasury is purchasing equity securities from participating institutions. On January 23, 2009, as part of CPP, we sold (i) 52,625 shares of the Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant to purchase 175,105 shares of our Common Stock for an aggregate purchase price of $52.6 million in cash. The EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000. This increase is in place until the end of 2013 and is not covered by deposit insurance premiums paid by the banking industry.
 
The EESA followed, and has been followed by, numerous actions by the Board of Governors of the Federal Reserve System, the U.S. Congress, Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 2007. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. More recently, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. ARRA, more commonly known as the economic stimulus bill or economic recovery package, is intended to stimulate the economy and provides for broad infrastructure, education and health spending.
 
            On October 14, 2008, the FDIC announced the establishment of a temporary liquidity guarantee program to provide full deposit insurance for all non-interest bearing transaction accounts and guarantees of certain newly issued senior unsecured debt issued by FDIC-insured institutions and their holding companies. Insured institutions were automatically covered by this program from October 14, 2008 until December 5, 2008, unless they opted out prior to that date. Under the program, the FDIC will guarantee timely payment of newly issued senior unsecured debt issued on or before June 30, 2010. The debt includes all newly issued unsecured senior debt including promissory notes, commercial paper and inter-bank funding. The aggregate coverage for an institution may not exceed 125% of its debt outstanding on September 30, 2008 that was scheduled to mature before June 30, 2009, or, for certain insured institutions, 2% of liabilities as of September

 
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30, 2008. The guarantee will extend to June 30, 2012 even if the maturity of the debt is after that date. The Bank pays a fee equal to 300 basis points for its participation in the unsecured debt guarantee program.

The purpose of these legislative and regulatory actions is to stabilize the U.S. economy and banking system. The EESA, the ARRA and the other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
 
Higher Federal Deposit Insurance Corporation insurance premiums and assessments will adversely impact our earnings.
 
    FDIC insurance premiums have increased substantially in 2009 already, and we expect to pay significantly higher FDIC premiums in the future. A large number of bank failures have significantly depleted the deposit insurance fund and reduced the ratio of reserves to insured deposits. On May 22, 2009, the Federal Deposit Insurance Corporation adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment was payable on September 30, 2009. We recorded an expense of $1.7 million during the quarter ended June 30, 2009, to reflect the special assessment. The final rule permits the Federal Deposit Insurance Corporation to levy up to two additional special assessments of up to five basis points each during 2009 if the Federal Deposit Insurance Corporation estimates that the Deposit Insurance Fund reserve ratio will fall to a level that the Federal Deposit Insurance Corporation believes would adversely affect public confidence or to a level that will be close to or below zero. We participate in the FDIC’s Temporary Liquidity Guarantee Program, or TLG, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLG’s noninterest-bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. To the extent that these TLG assessments are insufficient to cover any loss or expenses arising from the TLG program, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLG program upon depository institution holding companies, as well. The FDIC has extended the TLG to June 30, 2010, and increased the fee to banks that elect to participate in the extension to 15 to 25 basis points, depending on the institution’s risk category. WSFS Bank elected to continue to participate in the TLG. These changes will cause our deposit insurance expense to increase. These actions could significantly increase our noninterest expense for the foreseeable future.
 
    Any further special assessments that the Federal Deposit Insurance Corporation levies will be recorded as an expense during the appropriate period. In addition, the Federal Deposit Insurance Corporation increased the general assessment rate and our prior credits for federal deposit insurance were fully utilized during the quarter ended June 30, 2009. Therefore, our Federal Deposit Insurance Corporation general insurance premium expense will increase compared to prior periods.
 
    On November 12, 2009, the FDIC issued a final rule requiring all banks to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30, 2009. Under the rule, the assessment rate for the fourth quarter of 2009 and for 2010 will be based on each bank’s base assessment rate in effect as of September 30, 2009, and the assessment rate for 2011 and 2012 will be equal to such September 30, 2009 assessment rate plus an additional three basis points. In addition, each institution’s base assessment rate for each period would be calculated using its assessment base as of September 30, 2009, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. Based on the final rule, we were required to make a payment of $21.3 million to the FDIC on December 30, 2009 and to record the pre-payment as a prepaid expense, which will be amortized to expense over three years. Whether this prepayment will provide sufficient funding is uncertain. There is no assurance the FDIC will not require additional funding from the banking system which may negatively impact us.

 

 

 
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The prolonged deep recession, difficult market conditions and economic trends have adversely affected our industry and our business.
 
We are particularly exposed to downturns in the U. S. housing market. Dramatic declines in the housing market over the past year, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans that resulted in significant write-downs of assets by many financial institutions. In addition, the values of real estate collateral supporting many loans have declined and may continue to decline. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased credit supply in part due to the reduction in non-bank providers of credit in the marketplace. This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Competition among depository institutions for deposits has increased significantly. Financial institutions have experienced decreased access to deposits or borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and stock price. We do not expect that the difficult market conditions will improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the industry. In particular, we may face the following risks in connection with these events:
 
   •  An increase in the number of borrowers unable to repay their loans in accordance with the original terms
     
 
 •
Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure is made more complex by these difficult market and economic conditions.
 
 
 
 •
We also may be required to pay even higher Federal Deposit Insurance Corporation premiums than the recently increased level, because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.
 
 
 
 •
Our ability to borrow from other financial institutions or the Federal Home Loan Bank on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events.
 
 
 
 •
We may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.
 
Concentration of loans in our primary market area, which has recently experienced an economic downturn, may increase risk.
 
Our success depends primarily on the general economic conditions in the State of Delaware, southeastern Pennsylvania and northern Virginia, as nearly all of our loans are to customers in this market. Accordingly, the local economic conditions in these markets have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans. As such, a continuation of the decline in real estate valuations in these markets would lower the value of the collateral securing those loans. In addition, a continued weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control could negatively affect our financial results.
 

 

 
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If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
 
    We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans, our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance could materially decrease our net income.
 
Our loan portfolio includes a substantial amount of commercial real estate and commercial and industrial loans. The credit risk related to these types of loans is greater than the risk related to residential loans.
 
    Our commercial loan portfolio, which includes commercial and industrial loans and commercial real estate loans, totaled $1.9 billion at December 31, 2009, comprising 74% of total loans. Commercial and industrial loans generally carry larger loan balances and involve a greater degree of risk of nonpayment or late payment than home equity loans or residential mortgage loans. Any significant failure to pay or late payments by our customers would hurt our earnings. The increased credit risk associated with these types of loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, and the effects of general economic conditions on income-producing properties. A significant portion of our commercial real estate and commercial and industrial loan portfolios includes a balloon payment feature. A number of factors may affect a borrower’s ability to make or refinance a balloon payment, including the financial condition of the borrower, the prevailing local economic conditions and the prevailing interest rate environment.
 
    Furthermore, commercial real estate loans secured by owner-occupied properties are dependent upon the successful operation of the borrower’s business. If the operating company suffers difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Loans secured by properties where repayment is dependent upon payment of rent by third party tenants or the sale of the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit. The collateral for our commercial loans that are secured by real estate are classified as 64% owner occupied properties and 36% non-owner occupied properties.
 
We are subject to extensive regulation which could have an adverse effect on our operations.
 
    We are subject to extensive regulation and supervision from the Office of Thrift Supervision and the FDIC. This regulation and supervision is intended primarily for the protection of the FDIC insurance fund, our depositors and borrowers, rather than for holders of our equity securities. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets and determination of the level of the allowance for loan losses. As a result of recent market conditions, we expect to face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
 
WSFS Bank has entered into a memorandum of understanding.
 
    In December 2009, WSFS Bank entered into an informal memorandum of understanding (the “Understanding”) with the OTS. An Understanding is characterized by bank regulatory agencies as an informal action that is neither published nor made publicly available by the agencies and is used when circumstances warrant a milder response than a formal regulatory action. Regulatory actions, such as this Understanding, are on the rise as a result of the current severe economic conditions and the related impact on the banking industry.
 

 
- 29 -

 

In accordance with the terms of the Understanding, WSFS Bank has agreed, among other things, to: (i) adopt and implement a written plan to reduce criticized assets; (ii) review and revise its policies regarding the identification, monitoring and managing the risks associated with loan concentrations for certain commercial loans and reduce concentration limits of such loans; (iii) review and revise credit administration policies and dedicate additional staffing resources to this department; (iv) implement a revised internal review program; (v) obtain prior OTS approval before increasing the amount of brokered deposits; and (vi) approve a written strategic business plan and compliance plan concerning the exercise of fiduciary powers.
 
We are committed to expeditiously addressing and resolving all the issues raised in the Understanding and the Board of Directors and management of WSFS Bank have already initiated actions to comply with its provisions. A material failure to comply with the terms of the Understanding could subject the Bank to additional regulatory actions and further regulation by the OTS, or result in a formal action or constraints on the Bank’s business, any of which may have a material adverse effect on our future results of operations and financial condition.
 
The fiscal, monetary and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations.
 
The Federal Reserve regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. It also can materially decrease the value of financial assets we hold, such as debt securities. Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Additionally, legislation has been introduced into each house of Congress proposing sweeping financial reforms, including the creation of a Consumer Financial Protection Agency with extensive powers. If enacted, the legislation would significantly alter not only how financial firms are regulated but also how they conduct their business. Changes in Federal Reserve policies and our regulatory environment generally are beyond our control, and we are unable to predict what changes may occur or the manner in which any future changes may affect our business, financial condition and results of operation.
 
The securities purchase agreement between us and Treasury permits Treasury to impose additional restrictions on us retroactively.
 
On January 23, 2009, as part of the TARP Capital Purchase Program (“CPP”), we entered into a securities purchase agreement with the Treasury pursuant to which we sold (i) 52,625 shares of the Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant to purchase 175,105 shares of our Common Stock for an aggregate purchase price of $52.6 million in cash. The Series A Preferred Stock is included in the calculation of Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Treasury warrant has a 10-year term and is immediately exercisable upon its issuance, with an exercise price, subject to anti-dilution adjustments, equal to $45.08 per share of the Common Stock. The securities purchase agreement we entered into with Treasury permits Treasury to unilaterally amend the terms of the securities purchase agreement to comply with any changes in federal statutes after the date of its execution. ARRA imposed additional executive compensation and expenditure limits on all current and future TARP recipients, including us, until we have repaid the Treasury. These additional restrictions may impede our ability to attract and retain qualified executive officers. ARRA also permits TARP recipients to repay the Treasury without penalty or requirement that additional capital be raised, subject to Treasury’s consultation with our primary federal regulator. The securities purchase agreement required that, for a period of three years, the Series A Preferred Stock could generally only be repaid if we raised additional capital to repay the securities and such capital qualified as Tier 1 capital.  The terms of the CPP also restrict our ability to increase dividends on our common stock and undertake stock repurchase programs.  Congress may impose additional restrictions in the future which may also apply retroactively. These restrictions may have a material adverse affect on our operations, revenue and financial condition, on the ability to pay dividends, our ability to attract and retain
 

 
- 30 -

 

executive talent and restricts our ability to increase our cash dividends or undertake stock repurchase programs.
 
We are subject to liquidity risk.
 
    Due to the continued growth in our lending operations, particularly in corporate and small business lending, our total loans have exceeded customer deposit funding. Changes in interest rates, alternative investment opportunities and other factors may make deposit gathering more difficult. Additionally, interest rate changes or disruptions in the capital markets may make the terms of the borrowings and brokered deposits less favorable and may make it difficult to sell securities when needed to provide additional liquidity. As a result, there is a risk that the cost of funding will increase or that we will not have sufficient funds to meet our obligations when they come due.
 
The market value of our securities portfolio may be impacted by the level of interest rates and the credit quality and strength of the underlying issuers and general liquidity in the market for investment securities.

    If a decline in market value of a security is determined to be other than temporary, under generally accepted accounting principles, we are required to write these securities down to their estimated fair value with the amount of impairment related to credit losses recognized in earnings while the amount of impairment related to all other factors is recognized in other comprehensive income. As of December 31, 2009, we owned securities classified as available for sale with an aggregate historical cost of $716.5 million and an estimated fair value of $713.9 million.  During the year ended December 31, 2009, we had one security that was determined to be other than temporarily impaired with a credit loss recognized in earnings of only $86,000, although we can give no assurance that we will not have additional other than temporarily impaired securities in the future.  Future changes in interest rates or the credit quality and strength of the underlying issuers may reduce the market value of these and other securities.  As a result, changes in values of securities affect our equity and may impact earnings.
 
            In addition, the value of our BBB+ rated mortgage-backed security is subject to market value fluctuations. To develop a range of likely fair value prices, our valuation is highly dependent upon various observable and unobservable inputs.  If the value of the observable inputs declines or as a result of economic conditions, management changes its assumptions regarding what market participants would use in pricing this asset, the value of this asset may decline.  As a result, we would record any market adjustments related to this asset as a charge to earnings.
 
We must evaluate whether any portion of our recorded goodwill is impaired. Impairment testing may result in a material, non-cash write-down of our goodwill assets and could have a material adverse impact on our results of operations.
 
 
At December 31, 2009 we had $13.7 million of goodwill and intangible assets.  We have recorded goodwill because we paid more for some of our businesses than the fair market value of the tangible and separately measurable intangible net assets of those businesses. We test our goodwill and other intangible assets with indefinite lives for impairment at least annually (or whenever events occur which may indicate possible impairment). Goodwill impairment begins with a comparison of the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, goodwill of the reporting unit is not considered impaired. If the fair value of the reporting unit is less than the carrying amount, a Step 2 impairment test is required. Determining the fair value of our reporting unit requires a high degree of subjective management assumptions. Any changes in key assumptions about our business and its prospects, changes in market conditions or other external factors, for impairment testing purposes could result in an impairment charge to earnings.

 

 
- 31 -

 

Our investment in the Federal Home Loan Bank of Pittsburgh (FHLB) stock may be subject to impairment charges in future periods if the financial condition of the FHLB declines further.
 

We are required to hold FHLB stock as a condition of membership in the FHLB.  Ownership of FHLB stock is restricted and there is no market for these securities.  As of December 31, 2009, the carrying value of our FHLB stock was $39.3 million. In 2009, the FHLB reported significant losses due to numerous factors, including other-than-temporary impairment charges on its portfolio of private-label mortgage-backed securities. The FHLB announced a capital restoration plan in February 2009 which restricts it from repurchasing or redeeming capital stock or paying dividends. If the FHLB financial condition continues to decline, other-than-temporary impairment charges related to our investment in FHLB stock may occur in future periods.  An additional discussion related to our evaluation of impairment of FHLB stock is included in Note 15 to the Consolidated Financial Statements.

Our Cash Connect Division relies on numerous couriers and armored car companies to transport its cash and fund the ATMs it services for our customers, and numerous networks to settle its cash.
 
 
            The profitability of Cash Connect is reliant upon its efficient distribution of large amounts of cash to its customers’ ATMs using an extensive network of couriers and armored car companies.  It is possible those associated with a courier or armored car company could misappropriate funds belonging to Cash Connect.  Cash Connect has experienced such occurrences in the past, including one in 2001 and potentially another in 2010.  For additional information see Note 22 to the Consolidated Financial Statements. In addition, Cash Connect settles its transactions through a number of national networks.  It is possible a network could fraudulently redirect the settlement of cash belonging to Cash Connect.  It is also possible Cash Connect would not have established proper policies, controls or insurance and, as a result, any misappropriation of funds could result in an impact to earnings.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 
- 32 -

 

ITEM 2. PROPERTIES

The following table shows information regarding offices and material properties held by us, and our subsidiaries, at December 31, 2009:
 
 
 
 
 
Location
 
 
Owned/
Leased
 
 
Date Lease
Expires
Net Book Value
of Property
or Leasehold
Improvements (1)
 
 
 
Deposits
       
         (In Thousands)
WSFS :
       
WSFS Bank Center Branch
   Main Office
  500 Delaware Avenue
  Wilmington, DE   19801
Leased
2011
$723
$1,054,959
Union Street Branch
  211 North Union Street
  Wilmington, DE   19805
Leased
2012
53
54,830
Trolley Square Branch
  1711 Delaware Ave
  Wilmington, DE   19806
Leased
2011
41
34,200
Fairfax Shopping Center (3)
  2005 Concord Pike
  Wilmington, DE   19803
Master Lease
 
7,780
88,805
Branmar Plaza Shopping Center Branch
  1812 Marsh Road
  Wilmington, DE   19810
Leased
2013
66
106,964
Prices Corner Shopping Center Branch
  3202 Kirkwood Highway
  Wilmington, DE   19808
Leased
2023
312
101,464
Pike Creek Shopping Center Branch
  4730 Limestone Road
  Wilmington, DE   19808
Leased
2015
583
101,840
University Plaza Shopping Center Branch
   100 University Plaza
  Newark, DE   19702
Leased
2026
1,244
50,620
College Square Shopping Center Branch
  Route 273 & Liberty Avenue
  Newark, DE   19711
Leased
2012
244
114,165
Airport Plaza Shopping Center Branch
  144 N. DuPont Hwy.
  New Castle, DE   19720
Leased
2013
607
70,354
Stanton Branch
  Inside ShopRite
  1600 W. Newport Pike
  Wilmington, DE   19804
Leased
2011
14
40,879
Glasgow Branch
  Inside Safeway at People Plaza
  Routes 40 & 896
  Newark, DE   19702
Leased
2012
24
34,972
Middletown Crossing Shopping Center
 400 East Main Street
 Middletown, DE   19709
Leased
2017
835
58,668
Dover Branch
  Dover Mart
  262 S. DuPont Highway
  Dover, DE   19901
Leased
2010
29
11,510
West Dover Loan Office
  Greentree Office Center
  160 Greentree Drive
  Suite 105
  Dover, DE   19904
Leased
2014
17
N/A

 
- 33 -

 
 
 
 
 
 
Location
 
 
Owned/
Leased
 
 
Date Lease
Expires
Net Book Value
of Property
or Leasehold
Improvements (1)
 
 
 
Deposits
       
         (In Thousands)
Blue Bell Loan Office
  721 Skippack Pike
  Suite 101
  Blue Bell, PA   19422
Leased
2012
$18
$8,993
Glen Eagle
  Inside Genaurdi’s  Family Market
  475 Glen Eagle Square
  Glen Mills, PA   19342
Leased
2024
9
13,751
University of Delaware-Trabant University  Center
  17 West Main Street
  Newark, DE   19716
Leased
2013
25
12,531
Brandywine Branch
  Inside Safeway Market
  2522 Foulk Road
  Wilmington, DE   19810
Leased
2014
9
34,849
Operations Center
  2400 Philadelphia Pike
  Wilmington, DE   19703
Owned
 
636
N/A
Longwood Branch
  Inside Genaurdi’s Family Market
  830 E. Baltimore Pike
  E. Marlboro, PA 19348
Leased
2010
33
15,876
Holly Oak Branch
  Inside Super Fresh
  2105 Philadelphia Pike
  Claymont, DE 19703
Leased
2015
22
28,358
Hockessin Branch
  7450 Lancaster Pike
  Wilmington, DE 19707
Leased
2015
511
89,418
Lewes LPO
  Southpointe Professional Center
  1515 Savannah Road, Suite 103
  Lewes, DE   19958
Leased
2013
84
N/A
Fox Run Shopping Center
  210 Fox Hunt Drive
  Bear, DE  19701
Leased
2015
812
67,230
Camden Town Center
  4566 S. Dupont Highway
  Camden, DE   19934
Leased
2024
879
32,656
Rehoboth Branch
  19335 coastal Highway
  Lighthouse Plaza
  Rehoboth, DE   19771
Leased
2028
859
50,166
Loan Operations
  30 Blue Hen Drive
  Suite 200
  Newark, DE   19713
Leased
2010 (4)
N/A
N/A
West Dover Branch
  1486 Forest Avenue
  Dover, DE   19904
Owned
 
2,134
32,416
Longneck Branch
  25926 Plaza Drive
  Millsboro, DE   19966
Leased
2026
1,157
35,557

 
- 34 -

 
 
 
 
 
 
 
Location
 
 
Owned/
Leased
 
 
Date Lease
Expires
Net Book Value
of Property
or Leasehold
Improvements (1)
 
 
 
Deposits
       
         (In Thousands)
Smyrna
  Simon’s Corner Shopping Center
  400 Jimmy Drive
  Smyrna, DE   19977
Leased
2028
$1,190
$34,561
Oxford, LPO
  59 South Third Street
  Suite 1
  Oxford, PA  19363
Leased
2011
24
7,527
Greenville
  3908 Kennett Pike
  Greenville, DE  19807
Owned
 
2,020
44,415
WSFS Bank Center (2)
  500 Delaware Avenue
  Wilmington, DE  19801
Leased
2019
1,837
N/A
Market Street Branch
  833 Market Street
  Wilmington, DE  19801
Leased
2010
35
20,698
Annandale, VA
  7010 Little River Tnpk.
  Suite 330
  Annandale, VA  22003
Leased
2011
12
834
Oceanview
  69 Atlantic Avenue
  Oceanview, DE   19970
Leased
2024
1,346
11,915
Selbyville
  Strawberry Center
  Unit 2
  Selbyville, DE  19975
Leased
2013
49
8,391
Lewes Branch
  34383 Carpenters Way
  Lewes, DE  19958
Leased
2028
313
18,258
Millsboro
  26644 Center View Drive
  Millsboro, DE   19966
Leased
2029
1,212
7,062
Concord Square
  4401 Concord Pike
  Wilmington, DE  19803
Leased
2011
57
27,893
Crossroads
  2080 New Castle Avenue
  New Castle, DE  19720
Leased
2013
57
16,779
Delaware City
  145 Clinton Street
  Delaware City, DE  19706
Owned
 
93
7,015
Governor’s Square
  1101 Governor’s Place
  Bear, DE  19701
Leased
2010
57
10,492
Glen Mills Shopping Center
  Route 202
  Glen Mills, PA  19342
Leased
2039
256
N/A
        $2,561,871 

- 35 -

 Location  Owned/
Leased
 Date Lease
Expires
 Net Book Value
of Property
or Leasehold
Improvements (1)
Deposits
      (In Thousands)
       
Cypress Capital Management, LLC
  1220 Market Street
  Suite 704
  Wilmington, DE  19801
Leased
2010
5
N/A
 
(1)
The net book value of all the Company’s investment in premise and equipment totaled $36.1 million at December 31, 2009.
(2)
Location of Corporate Headquarters and Montchanin Capital Management, Inc.
(3)
Includes Fairfax Branch office and shopping center which is under a master lease. Net book value represents the value of the entire facility.
(4)
This lease expired in February of 2010 and was not renewed.  The Company no longer occupies this property.


ITEM 3. LEGAL PROCEEDINGS

There are no material legal proceedings to be disclosed under this item.

ITEM 4. [Reserved]


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity and Related Stockholder Matters

Our Common Stock is traded on the NASDAQ Global Select Market under the symbol WSFS. At December 31, 2009, we had 1,122 registered common stockholders of record. The following table sets forth the range of high and low sales prices for the Common Stock for each full quarterly period within the two most recent fiscal years as well as the quarterly dividends paid.

The closing market price of our common stock at December 31, 2009 was $25.63.

Stock Price Range

     
Low
 
High
 
Dividends
 
2009
4th
 
$
24.16
 
$
30.18
 
$
0.12
 
 
3rd
 
$
26.00
 
$
32.70
 
$
0.12
 
 
2nd
 
$
20.78
 
$
33.85
 
$
0.12
 
 
1st
 
$
16.47
 
$
49.50
 
$
0.12
 
                 
$
0.48
 
                       
2008
4th
 
$
35.51
 
$
60.50
 
$
0.12
 
 
3rd
 
$
40.04
 
$
65.50
 
$
0.12
 
 
2nd
 
$
42.79
 
$
53.84
 
$
0.12
 
 
1st
 
$
41.12
 
$
54.17
 
$
0.10
 
                 
$
0.46
 
                       

 
- 36 -

 

COMPARATIVE STOCK PERFORMANCE GRAPH

The graph and table which follow show the cumulative total return on our Common Stock over the last five years compared with the cumulative total return of the Dow Jones Total Market Index and the Nasdaq Bank Index over the same period as obtained from Bloomberg L.P. Cumulative total return on our Common Stock or the index equals the total increase in value since December 31, 2004, assuming reinvestment of all dividends paid into the Common Stock or the index, respectively. The graph and table were prepared assuming $100 was invested on December 31, 2004 in our Common Stock and in each of the indexes. There can be no assurance that our future stock performance will be the same or similar to the historical stock performance shown in the graph below. We neither make nor endorse any predictions as to stock performance.


CUMULATIVE TOTAL SHAREHOLDER RETURN
COMPARED WITH PERFORMANCE OF SELECTED INDEXES
December 31, 2004 through December 31, 2009
 
 
 


 
Cumulative Total Return
 
2004
2005
2006
2007
2008
2009
             
WSFS Financial Corporation
$100
$103
$113
$85
$82
$45
Dow Jones Total Market Index
100
106
123
130
82
106
Nasdaq Bank Index
100
98
111
90
71
59


 
- 37 -

 

ITEM 6. SELECTED FINANCIAL DATA

   
2009
 
2008
 
2007
 
2006
 
2005
 
   
(Dollars in Thousands, Except Per Share Data)
 
At December 31,
                               
Total assets
 
$
3,748,507
 
$
3,432,560
 
$
3,200,188
 
$
2,997,396
 
$
2,846,752
 
Net loans (1)
   
2,479,155
   
2,443,835
   
2,233,980
   
2,019,741
   
1,775,294
 
Investment securities (2)
   
46,047
   
49,749
   
26,235
   
53,893
   
56,704
 
Investment in reverse mortgages, net
   
(530
)
 
(61
)
 
2,037
   
598
   
785
 
Other investments
   
40,395
   
39,521
   
46,615
   
41,615
   
46,466
 
Mortgage-backed securities (2)
   
681,242
   
498,205
   
496,492
   
516,711
   
620,323
 
Deposits
   
2,561,871
   
2,122,352
   
1,827,161
   
1,756,348
   
1,446,236
 
Borrowings (3)
   
787,798
   
999,734
   
1,068,149
   
935,668
   
1,127,997
 
Trust preferred borrowings
   
67,011
   
67,011
   
67,011
   
67,011
   
67,011
 
Stockholders’ equity
   
301,800
   
216,635
   
211,330
   
212,059
   
181,975
 
Number of full-service branches (4)
   
37
   
35
   
29
   
27
   
24
 
                                 
For the Year Ended December 31,
                               
Interest income
 
$
157,730
 
$
166,477
 
$
189,477
 
$
177,177
 
$
136,022
 
Interest expense
   
53,086
   
77,258
   
107,468
   
99,278
   
62,380
 
Noninterest income
   
50,241
   
45,989
   
48,166
   
40,305
   
34,653
 
Noninterest expenses
   
108,504
   
89,098
   
82,031
   
69,314
   
62,877
 
Provision (benefit) for income taxes
   
(2,093
)
 
6,950
   
13,474
   
15,660
   
14,847
 
Net Income
   
663
   
16,136
   
29,649
   
30,441
   
27,856
 
Dividends on preferred stock and accretion of discount
   
2,590
   
-
   
-
   
-
   
-
 
Net (loss) income allocable to common stockholders
   
(1,927
)
 
16,136
   
29,649
   
30,441
   
27,856
 
  Earnings (loss) per share allocable to common stockholders:
                               
     Basic
   
(0.30
)
 
2.62
   
4.69
   
4.59
   
4.10
 
     Diluted
   
(0.30
)
 
2.57
   
4.55
   
4.41
   
3.89
 
                                 
Interest rate spread
   
3.10
%
 
 2.94
%
 
2.80
%
 
2.70
%
 
2.91
%
Net interest margin
   
3.30
   
3.13
   
3.09
   
2.98
   
3.13
 
Efficiency ratio
   
69.56
   
65.36
   
62.48
   
58.09
   
57.46
 
Noninterest income as a percentage of total 
  revenue (5)
   
32.21
   
33.74
   
36.69
   
33.78
   
31.67
 
Return on average equity
   
0.24
   
7.30
   
14.34
   
15.42
   
14.78
 
Return on average assets
   
0.02
   
0.50
   
0.98
   
1.03
   
1.05
 
Average equity to average assets
   
7.86
   
6.86
   
6.87
   
6.68
   
7.10
 
Tangible equity to assets
   
7.72
   
5.88
   
6.52
   
7.00
   
6.33
 
Tangible common equity to assets
   
6.31
   
5.88
   
6.52
   
7.00
   
6.33
 
Ratio of nonperforming assets to total assets
   
2.19
   
1.04
   
0.99
   
0.14
   
0.12
 
                                 

(1)
Includes loans held-for-sale.
(2)
Includes securities available-for-sale and trading.
(3)
Borrowings consist of FHLB advances, securities sold under agreement to repurchase and other borrowed funds.
(4)
WSFS opened two branches in 2009, acquired six (keeping four open and closing two) in 2008, opened three branches and closed one branch in 2007, and opened three in 2006.
(5)
Computed on a fully tax-equivalent basis.



 
- 38 -

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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 fiduciary powers than most other financial institutions.  We have served the residents of the Delaware Valley for over 177 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 strategy of “Engaged Associates delivering Stellar Service to create Customer Advocates” focuses on exceeding customer expectations, delivering stellar service and building 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, which was formed during 2005.  Lending activities are funded primarily with retail deposits and borrowings. The Fede