10-K 1 f10k_123111-0312.htm FORM 10-K 12-31-11 WSFS FINANCIAL CORPORATION f10k_123111-0312.htm
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, 2011


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

Indicate 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   X        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, 2011 was $298,233,000. 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 8, 2012, there were issued and outstanding 8,703,945 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 26, 2012 are incorporated by reference in Part III hereof.
 
1
 
 

WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
 
 
 
 
 
 
 
Part I
Page
 
 
 
Item 1.
Business
Item 1A.
Risk Factors
27 
Item 1B.
Unresolved Staff Comments
36 
Item 2.
Properties
37 
Item 3.
Legal Proceedings
41 
Item 4.
Mine Safety Disclosures
42 
 
 
 
Part II
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
42 
of Equity Securities
Item 6.
Selected Financial Data
44 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
45 
Item 7A.
Quantitative and Qualitative Disclosure about Market Risk
63 
Item 8.
Financial Statements and Supplementary Data
65 
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
123 
Item 9A.
Controls and Procedures
123 
Item 9B.
Other Information
126 
 
 
 
Part III
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
126 
Item 11.
Executive Compensation
126 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
126 
Item 13.
Certain Relationships and Related Transactions and Director Independence
127 
Item 14.
Principal Accounting Fees and Services
127 
 
 
 
Part IV
 
 
 
Item 15.
Exhibits, Financial Statement Schedules
127 
 
Signatures
130 

 
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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, and exhibits thereto, contains estimates, predictions, opinions, projections and other statements that may be interpreted as “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995.  Such statements include, without limitation, references to our financial goals, management’s plans and objectives for future operations, financial and business trends, business prospects, and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations.  Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated.  Such risks and uncertainties include, but are not limited to, those related to the economic environment, particularly in the market areas in which the Company operates; the volatility of the financial and securities markets, including changes with respect to the market value of financial assets; changes in market interest rates, changes in government regulation affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules being issued in accordance with this statute and potential expenses associated therewith; changes resulting from our participation in the CPP including additional conditions that may be imposed in the future on participating companies; and the costs associated with resolving any problem loans and other risks and uncertainties, discussed in documents filed by WSFS Financial Corporation with the Securities and Exchange Commission from time to time.  Forward looking statements are as of the date they are made, and the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

PART I

ITEM 1. BUSINESS

OUR BUSINESS

WSFS Financial Corporation (the “Company” or “we”) is parent to Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”), the seventh oldest bank and trust company in the United States continuously operating under the same name. A fixture in this community, WSFS has been in operation for 180 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution that has grown to become the largest bank or thrift holding company in the State of Delaware, one of the top commercial lenders in the state, the third largest bank in terms of Delaware deposits and among the top 100 trust companies in the country.  For the third year in a row, our Associates (what we call our employees) ranked us the “Top Workplace” in Delaware and this fall Delaware News Journal’s readers voted us the “Top Bank” in the state.  We state our mission simply: We Stand for Service and Strengthening Our Communities.

Our core banking business is commercial lending funded by customer-generated deposits. We have built a $2.2 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 49 banking and trust offices located in Delaware (39), Pennsylvania (8), Virginia (1) and Nevada (1). We also offer a broad variety of consumer loan products, retail securities and insurance brokerage services through our retail branches.

We offer trust and wealth management services through Christiana Trust, Cypress Capital Management, LLC (Cypress), WSFS Investment Group brokerage and our Private Banking group.   The Christiana Trust division provides investment, fiduciary, agency and commercial domicile services from locations in Delaware and Nevada and has over $11 billion in assets under administration.  These services are provided to individuals and families as well as corporations and institutions.  The Christiana Trust division of
 
 
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WSFS Bank provides these services to customers locally, nationally and internationally making use of the advantages of its branch facilities in Delaware and Nevada. Cypress is an investment advisory firm that manages more than $500 million of portfolios for individuals, trusts, retirement plans and endowments.  WSFS Investment Group, Inc. markets various third-party insurance products and securities through the Bank’s retail banking system.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages more than $420 million in vault cash in more than 12,000 ATMs nationwide and also provides online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates over 415 ATMs for WSFS Bank, which owns, by far, 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, responsiveness and local decision making they want. The following factors summarize what we believe are our 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 recruitment, 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 Gallup, Inc. indicate:

·  
Our Associate Engagement scores consistently rank in the top quartile of companies polled. In 2011 our engagement ratio was 13.4, which means there are 13.4 engaged Associates for every disengaged Associate. This compares to a 2.6:1 ratio in 2003 and a national average of 1.47:1.  Gallup, Inc. defines “world-class” as 8:1.
 
·  
Customer surveys rank us in the top 10% of all companies Gallup, Inc. surveys. More than 44% of our customers ranked us a “five” out of “five,” strongly agreeing with the statement “I can’t imagine a world without WSFS” and nearly 70% of our customers ranked us a “five” out of “five”, strongly agreeing with the statement “WSFS is the perfect bank for me.”
 
 
4
 
 
By fostering a culture of engaged and empowered Associates, we believe we have become an employer of choice in our market. During each of the past five years, we were ranked among the top five “Best Places to Work” by The Wilmington News Journal. In 2011, for the third year in a row, we were recognized by the News Journal as the “Top Work Place” for large corporations in the State of Delaware. This year, a News Journal survey of its readers also ranked us the “Top Bank” in Delaware.

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 branches and other service outlets. Additionally, it frustrates bank employees who are no longer empowered to provide good and timely service to their customers.

WSFS Bank offers:

·  
One point of contact. Each of our Relationship Managers is 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, cash management and trust and wealth 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 a 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 rate of unemployment, median household income and rate of population growth all compare favorably to national averages.
 
 
(Most recent available statistics)
Delaware
 
National
Average
 
Unemployment (For December 2011) (1)
    7.4 %     8.5 %
Median Household Income (2006-2010) (2)
  $ 57,599     $ 51,914  
Population Growth (2000-2010) (3)
    14.6 %     9.7 %
(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


 
5
 
 


Balance Sheet Management

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

·  
Prudent capital levels. Maintaining prudent capital levels is key to our operating philosophy. At December 31, 2011, our tangible common equity ratio was 7.18%.  All regulatory capital levels for WSFS Bank maintained a meaningful cushion above well-capitalized levels. WSFS Bank’s Tier 1 capital ratio was 12.18% as of December 31, 2011, more than a $199 million cushion in excess of the 6% “well-capitalized” level, and our total risk-based capital ratio was 13.43%, more than $110 million above a “well-capitalized” level of 10.00%.
 
·  
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 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.   As of December 31, 2011, CLD loans represent only 3% of our total loans. In 2009 and 2010, we increased our portfolio monitoring and reporting sophistication and hired additional senior credit administration and asset disposition professionals to manage our portfolio.  We diversify 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 minimize 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 had no exposure to Freddie Mac or Fannie Mae preferred securities or Trust Preferred securities. Our securities purchases have been almost exclusively AAA-rated credits. This philosophy and pre-purchase due diligence has allowed us to avoid the significant investment write-downs taken by many of our bank peers (only $86,000 of other-than-temporary impairment charges recorded during this cycle to date).
 
However, we have been subject to many of the same pressures facing the banking industry.  The extended recession negatively impacted our customers and, as a result, impacted our credit costs and the measures of our credit quality. The measures we have taken strengthen our credit position by diversifying risk and limiting exposure, but do not insulate us from the effects of this recession.  However, we have been active in hiring experienced management for our credit and workout teams and have been active in managing our portfolio.  Over the past year we have seen continued asset quality stabilization and improvement in key asset quality indicators and a decrease in our total credit costs.
 
Disciplined 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 earn an adequate return relative to the risk we take. Mindful of this balance, we prudently but aggressively manage our shareholders’ capital.

Strong Performance Expectations and Alignment with Shareholder Priorities

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, in large part, based on driving performance in these areas. More details on these incentive plans are included in our proxy statement.

Over the past two years in particular we have invested in building our company in the wake of significant local market disruption.  This has enhanced our franchise and provided significant growth opportunity.  However, the rate of our earnings growth was likewise impacted. As we enter into 2012, we are
 
 
6
 
 
reaching the end of this strategic investment stage and have turned our focus to optimizing these ample investments and growing our bottom line, while continuing to improve asset quality.

Growth

      Our successful long-term trend in lending and deposit gathering, along with our Wealth Management Group’s success at growing assets under administration, has been the result of a focused strategy that provides the service, responsiveness and careful execution of a community bank and trust company in a consolidating marketplace. We will continue to grow by:
 
·  
  Developing talented, service-minded Associates. We have successfully recruited Associates with strong ties to, and the passion to serve their communities to enhance our service in existing markets and provide a strong start in new communities. We also focus efforts on developing talent and leadership from 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.
 
·  
  Development of new products through innovation and utilization of new technologies, including growing our on-line channels and mobile banking applications.
 
·  
  Continuing strong growth in commercial lending by:
 
o  
Offering local decision making by seasoned banking professionals.
o  
Execution of our community banking model that combines Stellar Service with the banking products and services our business customers’ demand.
o  
The addition of twelve seasoned lending professionals during the past two years that have helped us win customers in our Delaware and southeastern Pennsylvania markets.

·  
  Aggressively growing deposits. We have energized our retail branch strategy by combining Stellar Service with an expanded and updated branch network. We have implemented a number of additional measures to accelerate our deposit growth. We will continue to grow by:
 
o  
Offering our products through a significantly expanded and updated branch network.
o  
Providing a Stellar Service experience to our customers.
o  
Further expanding our commercial customer relationships with deposit and cash management products.
o  
Finding creative ways to build deposit market share such as targeted marketing programs.
o  
Selectively opening new branches, including in specific Southeastern Pennsylvania locations.

·  
  Over the next several years we expect our growth will be approximately 80% organic and 20% through acquisition, although each year’s growth will reflect the opportunities available to us at the time.

·   
  Exploring niche businesses. We are an organization with an entrepreneurial spirit and are open to the risk/reward proposition that comes with such businesses.
 
Values
Our values address 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 every day.
 
We are:
 
·  
Committed to always doing the right thing.
 
·  
Empowered to serve our customers and communities.
 
 
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·  
Dedicated to openness and candor.
 
·  
Driven to grow and improve.
 

 
Results

Our focus on these points of differentiation have allowed us to grow our core franchise and build value for our shareholders.  Since 2006, our commercial loans have grown from $1.4 billion to $2.2 billion, a strong 14% compound annual growth rate (CAGR). We grew net loans by 6% in 2011, a year of extremely weak loan growth nationally (only 2%). Over the same period, customer deposits have grown from $1.5 billion to $2.8 billion, a 21% 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 2001 would be worth $225 at December 31, 2011.  By comparison, $100 invested in the Dow Jones Total Market Index in 2001, would be worth $118 at December 31, 2011 and $100 invested in the Nasdaq Bank Index in 2001 would be worth $97 at December 31, 2011.

SUBSIDIARIES

We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc. (“Montchanin”) and one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”).

WSFS Bank has two wholly owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services, LLC (“Monarch”).  WSFS Investment Group, Inc., 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.  Monarch provides commercial domicile services which include employees, directors, sublease of office facilities and registered agent services in Delaware and Nevada.
 
Montchanin provides asset management services and 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 has $569 million in assets under management at December 31, 2011.

The Trust is our unconsolidated subsidiary, and was formed in 2005 to issue $67.0 million aggregate principal amount of Pooled Floating Rate Capital Securities.

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, 2011, our total securities portfolio had a fair value of $871.8 million. Our strategy has been to minimize credit risk in our securities portfolio.

The portfolio is comprised of:

·  
$38.8 million in Federal Agency debt securities with maturities of five years or less.
 
 
8
 
 
·  
$668.0 million of Government Sponsored Entity (“GSE”) mortgage-backed securities (“MBS”).  Of these, $193.7 million are collateralized mortgage obligations (“CMOs”) and $474.3 million are GSE MBS with 10-30 year original final maturities.
 
·  
$130.3 million in non-GSE MBS, of which $118.0 million are Non-Agency RE-REMIC MBS in 21 different issues.  These bonds are re-securitizations of existing issuers that create new senior/sub structures with added credit enhancement for the senior class.  All bonds purchased are senior class and were rated AAA at purchase in 2009 or later.  Four bonds are on “Credit Watch Negative” by S&P or Fitch.  Substantially all (more than 99%) of our non-GSE MBS were rated investment grade at December 31, 2011.

Our short-term investment portfolio is intended to keep our funds fully employed at a reasonable after-tax return, while maintaining acceptable credit, market and interest-rate risk limits, and providing the appropriate level of liquidity.  In addition, our short-term taxable investments provide collateral for various Bank obligations.  Our short-term municipal securities provide for a portion of our CRA investment program compliance.  The amortized cost of investment securities and short-term investments by category stated in dollar amounts and as a percent of total assets, follow:
 
 
 
At December 31,
 
 
 
2011 
 
 
2010 
 
 
2009 
 
 
 
 
 
Percent of
 
 
 
 
 
Percent of
 
 
 
 
 
Percent of
 
 
 
Amount
 
Assets
 
 
 
Amount
 
Assets
 
 
 
Amount
 
Assets
 
 
 
(Dollars in Thousands)
 
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
$
 
%
 
 
$
219 
 
%
 
 
$
709 
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse Mortgages (obligation)
 
 
(646)
 
 
 
 
 
(686)
 
 
 
 
 
(530)
 
 
State and political subdivisions
 
 
4,159 
 
0.1 
 
 
 
 
2,879 
 
0.1 
 
 
 
 
3,935 
 
0.1 
 
U.S. Government and agencies
 
 
38,776 
 
0.9 
 
 
 
 
49,691 
 
1.2 
 
 
 
 
40,695 
 
1.1 
 
 
 
 
42,289 
 
1.0 
 
 
 
 
51,884 
 
1.3 
 
 
 
 
44,100 
 
1.2 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in other banks
 
 
 
 
 
 
 
254 
 
 
 
 
 
1,090 
 
 —
 
 
 
$
42,298 
 
1.0 
%
 
 
$
52,357 
 
1.3 
%
 
 
$
45,899 
 
1.2 
%

During 2011, $12.1 million investment securities classified as available-for-sale were sold for a total gain on sale of $115,000.  There were no sales of investment securities classified as available-for-sale or held-to-maturity during 2010 or 2009, and as a result, there were no net gains or losses realized on sales for those years.  In 2011, investment securities totaling $719,000 were called by their issuers, all of which were obligations of state and political subdivisions.  Investment securities totaling $720,000, and again were all obligations of state and political subdivisions, were called by their issuers during 2010 and investment securities of $18.6 million (only $566,000 were obligations of state and political subdivisions) were called by their issuers in 2009.  The cost basis for each investment security sale was based on the specific identification method.
 
 
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The following table shows the terms to maturity and related weighted average yields of investment securities and short-term investments at December 31, 2011. Substantially all of the related interest and dividends represent taxable income.
 
 
 
At December 31, 2011
 
 
 
 
 
Weighted
 
 
 
Average
 
Amount
Yield (1)
 
 
 
(Dollars in Thousands)
 
Available-for-Sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse Mortgages (2):
 
 
 
 
 
 
Within one year
 
$
(646)
 
N/A    
 
 
 
 
 
 
 
 
State and political subdivisions (3):
 
 
 
 
 
 

Within one year
    555       4.07 %
After one but within five years
    1,290       4.26  
After five but within ten years
    2,000       2.11  
Over ten years
    314       4.50  
 
               
 
    4,159       3.22  
 
               
U.S. Government and agencies:
               
Within one year
    8,007       1.54  
After one but within five years
    30,769       0.86  
 
               
 
    38,776       1.00  
 
               
Total debt securities, available-for-sale
    42,289       1.22  
 
               
Short-term investments:
               
 
               
Interest-bearing deposits in other banks
    9        
 
               
Total short-term investments
    9        
 
               
Total debt securities and short-term investments
  $ 42,298       1.22 %

( 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 )
Reverse mortgages do not have contractual maturities.  We have included reverse mortgages in maturities within one year.
( 3 )
Yields on obligations of state and political subdivisions are not calculated on a tax-equivalent basis since the effect would be immaterial.

In addition to these investment securities, we have maintained an investment portfolio of mortgage-backed securities with an amortized cost basis of $810.7 million of which $12.4 million is classified as “trading”.  The trading security is BBB+ rated and was purchased in conjunction with a 2002 reverse mortgage securitization.  Furthermore, during 2010, we negotiated to purchase 100% of SASCO 2002-RM1 Class O certificates for $2.5 million.  The transaction closed on July 15, 2011.  As of December, 31 2011, the market value of the SASC 2002-RM1 O securities was determined in accordance with FASB ASC 820-10 (ASC 820), to be $3.9 million. Of the increase in market value, approximately $265,000 was included in interest income with the remainder of the change (approximately $1.0 million) included in other comprehensive income.  For
 
 
10
 
 
 
more information regarding these securities, see Note 4 to the Consolidated Financial Statements. At December 31, 2011, mortgage-backed securities with a fair value of $344.1 million were pledged as collateral, mainly for retail customer repurchase agreements and municipal deposits.  Accrued interest receivable for mortgage-backed securities was $2.6 million, $2.6 million and $2.8 million at December 31, 2011, 2010 and 2009, respectively.  During 2011, we sold mortgage-backed securities classified as available-for-sale of $323.8 million with net gains of $4.8 million.  Proceeds from the sale of mortgage-backed securities classified as available-for-sale totaled $154.7 million with a net gain on sale of $782,000 in 2010.  In 2009, proceeds from the sale of mortgage-backed securities classified as available-for-sale totaled $111.2 million with a net gain on sale of $2.0 million.  Net securities gains also included positive mark-to-market adjustments related to our trading BBB+ securities of $249,000 in 2010 and $1.4 million in 2009.  There was no impact for this mark-to-market adjustment in 2011.

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 years.
 
 
At December 31,
 
 
 
2011
   
2010
   
2009
 
 
 
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
 
 
 
(Dollars in thousands)
 
Available-for-Sale:
 
 
   
 
   
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
Collateralized mortgage obligations (1)
  $ 323,980       4.31 %   $ 490,946       5.14 %   $ 519,527       5.44 %
FNMA
    320,019       2.66       89,226       3.20       61,603       3.63  
FHLMC
    93,305       2.58       43,970       3.44       44,536       3.87  
GNMA
    60,991       2.82       65,849       3.52       46,629       4.32  
 
  $ 798,295       3.33 %   $ 689,991       4.63 %   $ 672,295       5.00 %
 
                                               
Trading:
                                               
 
                                               
Collateralized mortgage obligations
  $ 12,432       3.28 %   $ 12,432       3.32 %   $ 12,183       3.74 %
(1) Includes GSE CMOs available-for-sale.
                         

CREDIT EXTENSION ACTIVITIES

Over the past several years we have focused on growing 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. Since 2007, our commercial and industrial (“C&I”) loans have increased by $673.3 million, or 85%.  Our C&I loans, including owner-occupied commercial real estate loans, now account for nearly 54% of our loan portfolio in 2011 compared to 35% in 2007.  Based on the current market conditions, we expect our focus on growing C&I loans to continue into 2012 and beyond.

 
11
 
 

The following table shows the composition of our loan portfolio at year-end for the last five years.
 
   
 
 
 
 
At December 31,
 
 
 
2011
   
2010
   
2009
   
2008
   
2007
 
 
 
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
 
(Dollars in Thousands)
 
Types of Loans
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Commercial real estate:
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
   Commercial mortgage
  $ 626,739       23.1   $ 625,379       24.2   $ 524,380       21.2   $ 558,979       22.9   $ 465,928       20.9
   Construction
    106,268       3.9       140,832       5.5       231,625       9.3       251,508       10.3       276,939       12.4  
Total commercial real estate
    733,007       27.0       766,211       29.7       756,005       30.5       810,487       33.2       742,867       33.3  
Commercial
    1,460,812       53.9       1,239,102       48.1       1,120,807       45.2       942,920       38.6       787,539       35.3  
   Total commercial loans
    2,193,819       80.9       2,005,313       77.8       1,876,812       75.7       1,753,407       71.8       1,530,406       68.6  
Consumer loans:
                                                                               
   Residential real estate
    274,105       10.5       308,857       12.6       348,873       14.4       422,743       17.4       447,435       20.1  
   Consumer
    290,979       10.7       309,722       12.0       300,648       12.1       296,728       12.1       278,272       12.4  
Total consumer loans
    565,084       21.2       618,579       24.6       649,521       26.5       719,471       29.5       725,707       32.5  
 
                                                                               
Gross loans
  $ 2,758,903       102.1     $ 2,623,892       102.4     $ 2,526,333       102.2     $ 2,472,878       101.3     $ 2,256,113       101.1  
 
                                                                               
 
                                                                               
Less:
                                                                               
Deferred fees (unearned income)
    3,234       0.1       2,185       0.1       2,098       0.1       129       -       (715 )     -  
Allowance for loan losses
    53,080       2.0       60,339       2.3       53,446       2.1       31,189       1.3       25,252       1.1  
 
                                                                               
Net loans (1)
  $ 2,702,589       100.0 %   $ 2,561,368       100.0 %   $ 2,470,789       100.0 %   $ 2,441,560       100.0 %   $ 2,231,576       100.0 %
 
                                                                               
(1) Excludes $10,185, $14,522, $8,366, $2,275, and $2,404 of residential mortgage loans held-for-sale at December 31, 2011, 2010, 2009, 2008 and 2007, respectively.
 

 
12
 
 

The following tables show the remaining time 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 those with fixed interest rates and those with adjustable interest rates. The tables show loans by remaining contractual maturity. Loans may be pre-paid, so 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)
 
 
 
 
   
 
   
 
   
 
 
Commercial mortgage loans
  $ 121,277     $ 359,484     $ 145,980     $ 626,741  
Construction loans
    57,807       42,788       5,673       106,268  
Commercial loans
    477,854       662,239       320,718       1,460,811  
Residential real estate loans (1)
    18,648       36,774       218,683       274,105  
Consumer loans
    34,091       51,000       205,887       290,978  
 
  $ 709,677     $ 1,152,285     $ 896,941     $ 2,758,903  
 
                               
Rate sensitivity:
                               
   Fixed
  $ 99,329     $ 411,779     $ 336,274     $ 847,382  
   Adjustable (2)
    610,348       740,506       560,667       1,911,521  
   Gross loans
  $ 709,677     $ 1,152,285     $ 896,941     $ 2,758,903  
 
(1) Excludes loans held-for-sale.
 
 
(2) Includes hybrid adjustable-rate mortgages.
 
 

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.

Commercial, commercial mortgage and construction lending have higher levels 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 nearby areas.

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.

Our commercial mortgage portfolio was $626.7 million at December 31, 2011.  This portfolio is generally diversified by property type, with no type representing more than 29% of the portfolio.  The largest type is retail-related (shopping centers, malls and other retail) with balances of $177.2 million.  The average loan size of a loan in the commercial mortgage portfolio is $1.3 million and only 24 loans are greater than $5 million, with three loans greater than $10 million.  Management continues to monitor this portfolio closely through this economic cycle.

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 with automatic conversion to mini-permanent loans (1-5 years) upon completion of construction. These construction
 
 
13
 
 
 
loans are made on a short-term basis, usually not exceeding two years, with interest rates indexed to our WSFS prime rate, the “Wall Street” prime rate or London InterBank Offered Rate (“LIBOR”), in most cases, and are adjusted periodically as these rates change. The loan appraisal process includes the same evaluation criteria as required for permanent mortgage loans, but also takes into consideration: completed plans, specifications, comparables and cost estimates. Prior to approval of the credit, these criteria 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. At origination, the loan-to-value ratios for construction loans generally 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, 2011, $155.8 million was committed for construction loans, of which $106.3 million, or less than 4% of gross loans, was outstanding.

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 including weather. 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, 2011, our construction loans totaled $106.3 million, or less than 4% of our loan portfolio.  Residential construction and land development (“CLD”), one of the hardest-hit sectors through this economic cycle, represents only $39.6 million or 1.4% of the loan portfolio. Our commercial CLD portfolio was only $45.4 million, or 1.6% of total loans and our “land hold” loans, which are land loans not currently being developed, were only $21.2 million, or less than 1% of total loans, at December 31, 2011.

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

As of December 31, 2011, our commercial loan portfolio was $1.5 billion and represented 54% of our total loan portfolio.  These loans are diversified by industry, with no industry representing more than 10% of the portfolio.  There has been 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.

Federal law limits the extensions of credit to any one borrower to 15% of our unimpaired capital (approximately $67.0 million), or 25% if the difference is secured by 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, 2011, no borrower had collective outstandings exceeding these legal lending limits.  Only three commercial relationships, when all loans related to the relationship are combined, reach outstandings in excess of $25.0 million and these relationships are collateralized by real estate, company assets, U.S. Treasuries or, in one relationship, a CD held at the Bank.

Residential Real Estate Lending.

Generally, we 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%
 
 
14
 
 
 
without a private mortgage insurance requirement. At December 31, 2011, the balance of all such loans was approximately $3.4 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”) and other secondary market participants to assure maximum eligibility for subsequent sale in the secondary market. Typically, we sell only those loans originated specifically with the intention to sell on a “flow” basis.

To protect the propriety of our liens, we require title insurance be obtained. We also require fire, extended coverage casualty and flood insurance (where applicable) for properties securing residential loans. All properties securing our residential loans 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.

Usually, the maximum rate on these loans is 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 adjustable-rate mortgage loans in our loan portfolio help 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. 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.  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 had no repurchases during the year ended December 31, 2011.

We have a very limited amount of loans originated as subprime loans, $11.0 million, at December 31, 2011 (0.40% of total loans) and no negative amortizing loans or interest-only first mortgage loans.

 
15
 
 

Consumer Lending.

Our primary consumer credit products (excluding 1st mortgage loans) are home equity lines of credit and equity-secured installment loans. At December 31, 2011, home equity lines of credit outstanding totaled $192.9 million and equity-secured installment loans totaled $74.7 million. In total, these product lines represent 92.0% of total consumer loans. Some home equity products grant a borrower credit availability of up to 100% of the appraised value (net of any senior mortgages) of their residence. Maximum loan to value (“LTV”) limits are 80% for primary residences and 75% for all other properties.  At December 31, 2011, we had total commitments to extend $326.8 million in home equity lines of credit. Home equity lines of credit offer customers potential Federal income tax advantages, the convenience of checkbook access, revolving credit features for a portion of the loan’s life 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.  The risk on products like home equity loans is mitigated as they amortize over time.

Prior to 2009, 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 have increased over the past three years, mainly as a result of the deteriorating economy, job losses and declining home values.

 
16
 
 
 
    The following table shows our consumer loans at year-end, for the last five years.
 
 
At December 31,
  2011   2010    2009   2008   2007
 
 
 
   
Percent of
 
 
   
Percent of
 
 
   
Percent of
 
 
   
Percent of
 
 
   
Percent of
 
 
 
   
Total
 
 
   
Total
 
 
   
Total
 
 
   
Total
 
 
   
Total
 
 
 
   
Consumer
 
 
   
Consumer
 
 
   
Consumer
 
 
   
Consumer
 
 
   
Consumer
 
Amount
   
Loans
Amount
   
Loans
Amount
   
Loans
Amount
   
Loans
Amount
   
Loans
 
(Dollars in Thousands)
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Equity secured installment loans
  $ 74,721       25.7 %   $ 82,188       26.5 %   $ 102,727       34.2 %   $ 131,550       44.3 %   $ 147,551       53.0 %
Home equity lines of credit
    192,917       66.3       205,244       66.3       177,407       59.0       141,678       47.8       107,912       38.8  
Automobile
    1,011       0.3       1,097       0.4       1,135       0.4       1,134       0.4       1,159       0.4  
Unsecured lines of credit
    8,378       2.9       7,758       2.5       7,246       2.4       6,779       2.3       5,972       2.1  
Other
    13,952       4.8       13,435       4.3       12,133       4.0       15,587       5.2       15,678       5.7  
 
                                                                               
Total consumer loans
  $ 290,979       100.0 %   $ 309,722       100.0 %   $ 300,648       100.0 %   $ 296,728       100.0 %   $ 278,272       100.0 %
 
                                                                               

 
17
 
 

Loan Originations, Purchases 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 2011, we originated $238.8 million of residential real estate loans. This compares to originations of $290.7 million in 2010. 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 $2.3 million for the year ended December 31, 2011 and $10.0 million for 2010. Residential real estate loan sales totaled $107.4 million in 2011 and $153.1 million in 2010.  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, 2011, we serviced approximately $176.1 million of residential mortgage loans for others compared to $221.2 million at December 31, 2010. We also serviced residential mortgage loans for our own portfolio totaling $274.1 million and $308.9 million at December 31, 2011 and 2010, 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 2011, we originated $897.6 million of commercial and commercial real estate loans compared with $576.9 million in 2010. To reduce our exposure on certain types of these loans, and/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 $16.7 million and $34.5 million in 2011 and 2010, 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 began to offer reverse mortgages to our customers. The Bank’s activity has been limited to acting as a correspondent originator for these loans.  These reverse mortgages are government insured.  During 2011 we originated, and sold, $8.8 million in reverse mortgages compared to $18.6 million during 2010.

During the latter part of 2009, due to market conditions, we decided to conduct an orderly wind-down of our 1st Reverse Financial Services, LLC (“1st Reverse”) operations (discussed further in Note 21 of the Consolidated Financial Statements), which specialized in originating, and subsequently, selling government approved and insured reverse mortgage loans nationwide.

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, 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 $25 million.  In rare circumstances, we will approve
 
 
18
 
 
 
exceptions to the “House Limit” and our policy allows for only ten such relationships.  Currently we have five relationships exceeding this limit.  Those five relationships were approved to exceed the “House Limit” because of a combination of: the relationship contained several loans/borrowers that have no economic relationship (typically real estate investors with amounts diversified across a number of properties); the credit profile was deemed strong; and a long relationship history with the borrower(s). 

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 $1.2 million, $671,000, and $944,000 during 2011, 2010, and 2009, respectively.  Fee income was mainly due to fee accretion on new and existing loans (including the acceleration of the accretion on loans that paid early), loan growth and prepayment penalties.  The overall increase in fee income was the result of the growth in certain loan categories during 2011.

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 our opinion, 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 our 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 Loan Administration and 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 and Executive 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 and Investment Committee. Historically, we have had success in growing our loan portfolio. For example, during the year ended December 31, 2011, net loan growth resulted in the use of $189.7 million in cash. The loan growth was primarily due to our continued success increasing corporate and small business lending. We expect this trend to continue. While our loan-to-deposit ratio had been well above 100% for many years, during the past two years we made significant progress in decreasing this ratio through increased deposit growth.  As a result of this growth, our loan-to-total customer funding ratio was 94%, exceeding our 2012 strategic goal of 100% well ahead of schedule.  We have significant experience managing our funding needs through both borrowings and deposit growth.
 
 
19
 
 
 
As a financial institution, we have access to several sources of funding. Among these are:

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

Our recent branch expansion and renovation program has been focused on expanding our retail footprint in Delaware and southeastern Pennsylvania and attracting new customers in part to provide additional deposit growth. Customer deposit growth (deposits excluding brokered CDs) was strong, equaling $285.7 million, or 11%, during 2011.

Deposits. WSFS is the largest independent full-service bank and trust institution headquartered and operating in Delaware. The Bank primarily attracts deposits through its retail branch offices and loan production offices, in Delaware’s New Castle, Sussex and Kent counties, as well as nearby southeastern Pennsylvania and Annandale, Virginia.

We offer various deposit products 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.

Our growth in total deposits (including brokered CDs) of $324.5 million, or 12%, during 2011 compares favorably to the national average growth rate of 7% based on a recent Federal Reserve statistical release (FRB: H.8 Release dated February 17, 2012).

The following table shows the maturities of certificates of deposit of $100,000 or more as of December 31, 2011:
 
 
 
 
December 31,
 
 
 
 
 
 
 
Maturity Period
2011 
 
 
 
 
 
 
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
 
 
Less than 3 months
 
$
99,799 
 
 
 
 
Over 3 months to 6 months
 
 
42,314 
 
 
 
 
Over 6 months to 12 months
 
 
93,702 
 
 
 
 
Over 12 months
 
 
81,489 
 
 
 
 
 
 
$
317,304 
 
 
 

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. Outstanding advances from the FHLB of Pittsburgh had rates ranging from 0.14% to 4.45% at December 31, 2011. 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 purchase and hold shares of capital stock in the FHLB of
 
 
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Pittsburgh in an amount at least equal to 4.60% of our borrowings from them, plus 0.35% of our member asset value.  As of December 31, 2011, our FHLB stock investment totaled $35.8 million.

At December 31, 2011, we had $538.7 million in FHLB advances with a weighted average rate of 1.49%.  Included in this balance are $33.5 million of prior long-term advances with a weighted average rate of 4.22% that will mature in the second quarter of 2012.

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 2011, 2010 or 2009.  However the FHLB did repurchase $1.8 million of its capital stock in both 2011 and 2010.  However, in February of 2012 the FHLB of Pittsburgh declared and paid a 0.10% dividend on capital stock and approved additional repurchases of capital stock during the first quarter of 2012.

The FHLB of Pittsburgh is rated AA+, has a very high degree of government support and was in compliance with all regulatory capital requirements as of December 31, 2011.  Based on these and other factors, we have determined there was no other-than-temporary impairment related to our FHLB stock investment as of December 31, 2011.

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 with a scheduled maturity of June 1, 2035.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

During 2011 and 2010, we purchased federal funds as a short-term funding source. At December 31, 2011, we had purchased $25.0 million in federal funds at a rate of 0.38%, compared to $75.0 million in federal funds at a rate of 0.38% at December 31, 2010.

During 2011, we sold securities under agreements to repurchase as a funding source. At December 31, 2011, we sold $25.0 million of securities sold under agreements to repurchase with fixed rates of 2.98% and a scheduled maturity of January 1, 2015.  The underlying securities were mortgage-backed securities with a book value of $29.9 million as of December 31, 2011.

Temporary Liquidity Guarantee Program Debt
 
In October 2008, the Federal Deposit Insurance Corporation (“FDIC”) announced a new program—the Temporary Liquidity Guarantee Program (“TLGP”)—to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. In February 2009, we completed an offering of $30 million of qualifying senior bank notes covered by the TLGP. These borrowings matured and were repaid in February of 2012.

PERSONNEL

As of December 31, 2011, we had 767 full-time equivalent Associates (employees).  The Associates are not represented by a collective bargaining unit.  We believe our relationship with our Associates is very good, as evidenced by being named a “Top Workplace” by an independent survey of our Associates for the last six years.

 
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REGULATION

Overview

We are subject to extensive federal and state banking laws, regulations, and policies that are intended primarily for the protection of depositors, the FDIC’s Deposit Insurance Fund, and the banking system as a whole, not for the protection of our other creditors and shareholders. We have historically been examined, supervised and regulated primarily by the Office of Thrift Supervision (“OTS”). Effective July 21, 2011, the OTS was eliminated and the Office of the Comptroller of the Currency (“OCC”) became our Bank’s primary regulator and the Federal Reserve became the Company’s primary regulator.
 
The statutes enforced by, and regulations and policies of, these agencies affect most aspects of our business, including prescribing permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of our activities and various other requirements.
 
Our deposits are insured by the FDIC to the fullest extent allowed. As an insurer of bank deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally supervises the operations of all institutions to which it provides deposit insurance.

Financial Reform Legislation

Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies.
 
On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The new law also established an independent federal consumer protection bureau within the Federal Reserve. The following discussion summarizes significant aspects of the new law that may affect us. Significant implementing regulations have not been promulgated and therefore we cannot determine the full impact on our business and operations at this time.
 
The following aspects of the Dodd-Frank Act are related to the operations of our Bank:
 
 
 
The OTS was eliminated. The federal thrift charter has been preserved under OCC jurisdiction.
 
 
 
A new independent Consumer Financial Protection Bureau has been established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Smaller financial institutions, like our Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.
 
 
 
Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated, subject to various grandfathering and transition rules. Our trust preferred securities are grandfathered under this legislation.
 
 
 
The prohibition on payment of interest on demand deposits has been repealed.
 
 
 
State law is preempted only if it would have a discriminatory effect on a federal savings association or is preempted by any other federal law. The OCC must make a preemption determination on a case-by-case basis with respect to a particular state law or other state law with substantively equivalent terms.
 
 
 
Deposit insurance had been permanently increased to $250,000 and unlimited deposit insurance for noninterest-bearing transaction accounts extended through December 31, 2012.
 
 
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The deposit insurance assessment base has been changed to equal a depository institution’s total assets minus the sum of its average tangible equity during the assessment period.
 
 
 
The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35% of estimated annual insured deposits or assessment base; however, the FDIC was directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.
 
The following aspects of the Dodd-Frank Act are related to the operations of our Company:
 
 
 
Authority over savings and loan holding companies has been transferred to the Federal Reserve.
 
 
 
Leverage capital requirements and risk-based capital requirements applicable to depository institutions and bank holding companies have been extended to thrift holding companies following a five year grace period.
 
 
 
The Federal Deposit Insurance Act (“FDIA”) was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.
 
 
 
The Federal Reserve can require a grandfathered unitary thrift holding company that conducts commercial or manufacturing activities or other nonfinancial activities in addition to financial activities to conduct all or part of its financial activities in an intermediate savings and loan holding company.
 
 
 
The SEC was authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board. Proposed regulations of the SEC in this regard were struck down by the D.C. Circuit Court.  The SEC has proceeded however, in adopting revisions to Rule 14a-8 under the Exchange Act which may facilitate shareholder nominations in the future.
 
 
 
Public companies will be required to provide their shareholders with a nonbinding vote (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.
 
 
 
Additional provisions, including some not specifically aimed at thrifts and thrift holding companies, may nonetheless have an impact on us.
 
Some of these provisions have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. We expect that the Dodd-Frank Act will continue to increase our operating and compliance costs.  The specific impact of the Dodd-Frank Act on our current activities or new financial activities will be considered in the future, and our financial performance and the markets in which we operate will continue to depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act continue to be subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers, or the financial industry in general.

Regulation of the Company

General. We are a registered savings and loan holding company and have historically been subject to the regulation, examination, supervision and reporting requirements of the OTS. As result of the Dodd-Frank
 
 
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Act, effective July 21, 2011, all of the regulatory functions related to us, as a savings and loan holding company that had been under the jurisdiction of the OTS, transferred to the Federal Reserve.

We are also a public company with a class of stock subject to the reporting requirements of the United States Securities and Exchange Commission (the “SEC”). The filings we make with the SEC, 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 SEC has promulgated 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. Federal law generally prohibits a savings and loan holding company, without prior regulatory approval, from acquiring the ownership or control of any other savings institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares of the savings institution or savings and loan holding company. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the Federal Reserve.

The Federal Reserve may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies; and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Regulation of WSFS Bank

General. As a federally chartered savings institution, the Bank was historically subject to regulation by the OTS. On July 21, 2010, regulation of the Company shifted to OCC.  The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The OCC 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 OCC 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”
 
 
24
 
 
 
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 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, and “total” capital (a combination of core and “supplementary” capital) equal to 8% of risk-weighted assets. In addition, 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%. For purposes of these regulations, Tier 1 capital has the same definition as core capital.

The 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 non-withdrawable 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 institution’s intangible assets except for limited amounts of mortgage servicing assets. The 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, 2011, the Bank was in compliance with both the core and tangible capital requirements.

The risk weights assigned by the 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, 2011, the Bank was in compliance with the risk-based capital requirements.
 
Dividend Restrictions. OCC regulations govern capital distributions by savings institutions, which include cash dividends, stock repurchases and other transactions charged to the capital account of a savings institution to make capital distributions. A savings institution must file an application for OCC approval of the capital distribution if either (1) the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years, (2) the institution would not be at least adequately capitalized following the distribution, (3) the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition, or (4) the institution is not eligible for expedited treatment of its filings. If an application is not required to be filed,
 
 
25
 
 
 
savings institutions that are a subsidiary of a savings and loan holding company (as well as certain other institutions) must still file a notice with the OCC at least 30 days before the Board declares a dividend or approves a capital distribution.
 
An institution that either before or after a proposed capital distribution fails to meet its then-applicable minimum capital requirement or that has been notified that it needs more than normal supervision may not make any capital distributions without the prior written approval of the OCC. In addition, the OCC may prohibit a proposed capital distribution, which would otherwise be permitted by OCC regulations, if the OCC determines that such distribution would constitute an unsafe or unsound practice.
 
Under federal rules, an insured depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it is already undercapitalized. In addition, federal regulators have the authority to restrict or prohibit the payment of dividends for safety and soundness reasons. The FDIC also prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the FDIC. Our Bank is currently not in default in any assessment payment to the FDIC.
 
Insurance of Deposit Accounts. The Bank’s deposits are insured to the maximum extent permitted by the Deposit Insurance Fund. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OCC an opportunity to take such action.
 
Pursuant to the Dodd-Frank Act, the Federal Deposit Insurance Act was amended to increase the maximum deposit insurance amount from $100,000 to $250,000 and extended the unlimited deposit insurance coverage for non interest-bearing transaction accounts through December 31, 2012.  Prior to the Dodd-Frank Act, the unlimited coverage for non-interest-bearing deposit accounts had been provided on a temporary basis pursuant to the FDIC’s Transaction Account Guarantee Program established in October, 2008.  Institutions had been able to opt out of the provisions of the Transaction Account Guarantee Program but those that chose to participate were assessed an additional fee. The Transaction Account Guarantee Program expired on December 31, 2010.  The unlimited coverage is now applicable to all institutions and there is no longer a separate assessment.
 
The FDIC has adopted a risk-based premium system that provides for quarterly assessments. Under the system that was in place through March 31, 2011, each insured institution is placed in one of four risk categories depending on supervisory and capital considerations. Within its risk category, an institution is assigned to an initial base assessment rate that is then adjusted to determine its final assessment rate based on its brokered deposits, secured liabilities and unsecured debt, with less risky institutions paying lower assessments. In 2009, the FDIC required insured deposit institutions on December 30, 2009 to prepay 13 quarters of estimated insurance assessments.  This prepayment did not immediately affect our earnings. The prepaid assessment was recorded as a nonearning asset and the actual risk-based premium payments were recorded at the end of each quarter. In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize the predecessor to the Deposit Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2019.
 
On February 7, 2011, the FDIC issued a final rule to implement changes to its assessment base used to determine risk-based premiums for insured depository institutions as required under the Dodd-Frank Act and also changed the risk-based pricing system necessitated by changes to the assessment base. These changes took effect for the quarter beginning April 1, 2011.  Under the revised system, the assessment base was changed to equal average consolidated total assets less average tangible equity.  Institutions other than large and highly complex institutions are placed in one of four risk categories.
 
 
26
 
 
 
The FDIC assessment rates range from approximately 5 basis points to 35 basis points (depending on applicable adjustments for unsecured debt and brokered deposits) until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio reaches 1.15% and the reserve ratio for the immediately prior assessment period is less than 2.0%, the applicable assessment rates may range from 3 basis points to 30 basis points (subject to applicable adjustments for unsecured debt and brokered deposits). If the prior assessment period is equal to or greater than 2.0% and less than 2.5%, the assessment rates may range from 2 basis points to 28 basis points and if the prior assessment period is greater than 2.5%, the assessment rates may range from 1 basis point to 25 basis points.
 
Future changes in insurance premiums could have an adverse effect on the operating expenses and results of operations and we cannot predict what insurance assessment rates will be in the future.

The FDIC may terminate the deposit insurance of any insured depository institution, including us, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. Management is not aware of any existing circumstances that would result in termination of our deposit insurance.

Federal Reserve System. Pursuant to regulations of the Federal Reserve, a savings institution must maintain reserves against their transaction accounts. As of December 31, 2011, no reserves were required to be maintained on the first $11.5 million of transaction accounts, reserves of 3% were required to be maintained against the next $59.5 million of transaction accounts and a reserve of 10% against all remaining transaction accounts. This percentage is subject to adjustment by the Federal Reserve. 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.

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.
 
We may be required to pay significantly higher FDIC premiums, special assessments, or taxes that could adversely affect our earnings.
 
Market developments significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. As a result, we may be required to pay significantly higher premiums or additional special assessments or taxes that could adversely affect our earnings. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the levels imposed in 2010. Any future increases or required prepayments in FDIC insurance premiums may materially adversely affect our results of operations.

The prolonged deep recession, difficult market conditions and economic trends have adversely affected our industry and our business and may continue to do so.
 
We are particularly exposed to downturns in the Delaware, Mid-Atlantic and overall U.S. housing market. Continued declines in the housing market combined with a weak economy and elevated unemployment, have negatively impacted the credit performance of mortgage, construction and other 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 flat to downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively
 
 
27
 
 
impacted the credit performance of commercial and consumer credit, resulting in additional write-downs. 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. 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 may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.

Our nonperforming assets and problem loans are at an elevated level.  Significant increases from the current level, or greater than anticipated costs to resolve these credits, will have an adverse effect on our earnings.
 
Our nonperforming assets (which consist of nonaccrual loans, assets acquired through foreclosure and troubled debt restructurings), totaled $91.7 million at December 31, 2011, which is an increase of $55.9 million, or 156%, over the $35.8 million in nonperforming assets at December 31, 2008 and down slightly from December 31, 2010.  Our nonperforming assets adversely affect our net income in various ways.  We do not record interest income on nonaccrual loans and assets acquired through foreclosure.  We must establish an allowance for loan losses that reserves for losses inherent in the loan portfolio that are both probable and reasonably estimable through current period provisions for loan losses.  From time to time, we also write down the value of properties in our portfolio of assets acquired through foreclosure to reflect changing market values.  Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to assets acquired through foreclosure.  The resolution of nonperforming assets requires the active involvement of management, which can distract management from its overall supervision of operations and other income producing activities.  Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance for loan losses accordingly, which will have an adverse effect on our earnings.
 
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 a large portion 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, continued weakening in general economic conditions such as inflation, recession, unemployment or other factors beyond our control could negatively affect demand for loans, the performance of our borrowers and our financial results.
 
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
 
 
28
 
 
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 $2.2 billion at December 31, 2011, comprising 81% 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.
 
We are subject to extensive regulation which could have an adverse effect on our operations.
 
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily to protect depositors, the public, the FDIC’s Deposit Insurance Fund, and the banking system as a whole, not our shareholders. We have historically been subject to the regulation and supervision of the OTS. The Federal Reserve became the primary federal regulator for the Company and the OCC became the Bank’s primary regulator effective July 21, 2011. The banking laws, regulations and policies applicable to us govern matters ranging from the regulation of certain debt obligations, changes in the control of us and the maintenance of adequate capital to the general business operations conducted by us, including permissible types, amounts and terms of loans and investments, the amount of reserves held against deposits, restrictions on dividends, establishment of new offices and the maximum interest rate that may be charged by law.
 
We are subject to changes in federal and state banking statutes, regulations and governmental policies, and the interpretation or implementation of them. Regulations affecting banks and other financial institutions in particular are undergoing continuous review and frequently change and the ultimate effect of such changes cannot be predicted. Since we recently changed regulators, this risk is particularly heightened with us.  Regulations and laws may be modified at any time, and new legislation may be enacted that will affect us. Any changes in any federal and state law, as well as regulations and governmental policies could affect us in substantial and unpredictable ways, including ways that may adversely affect our business, results of operations, financial condition or prospects. In addition, federal and state banking regulators have broad authority to supervise our banking business, including the authority to prohibit activities that represent unsafe or unsound banking practices or constitute violations of statute, rule, regulation or administrative order. Failure to appropriately comply with any such laws, regulations or regulatory policies could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could adversely affect our business, results of operations, financial condition or prospects.
 
 
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            Recent legislative and regulatory actions may have a significant adverse effect on our operations. The Dodd-Frank Act has and will continue to result in sweeping changes in the regulation of financial institutions. As a result of this legislation, we face the following changes, among others:
 
 
 
The OTS has been eliminated and the OCC became the primary regulator. The federal thrift charter has been preserved under OCC jurisdiction.
 
 
 
A new independent Consumer Financial Protection Bureau has been established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Smaller financial institutions, like our Bank, will be subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.
 
 
 
Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated, subject to various grandfathering and transition rules. Our trust preferred securities are grandfathered under this legislation.
 
 
 
Repeal of the federal prohibitions on the payment of interest on demand deposits, thereby generally permitting depository institutions to pay interest on all deposit accounts
 
 
 
State law is preempted only if it would have a discriminatory effect on a federal savings association or is preempted by any other federal law. The OCC must make a preemption determination on a case-by-case basis with respect to a particular state law or other state law with substantively equivalent terms.
 
 
 
Deposit insurance had been permanently increased to $250,000 and unlimited deposit insurance for noninterest-bearing transaction accounts extended through January 1, 2013.
 
 
 
Deposit insurance assessment base calculation will equal a depository institution’s total assets minus the sum of its average tangible equity during the assessment period.
 
 
 
The minimum reserve ratio of the deposit insurance fund increased to 1.35% of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.
 
 
 
Authority over savings and loan holding companies has been transferred to the Federal Reserve.
 
 
 
Leverage capital requirements and risk-based capital requirements applicable to depository institutions and bank holding companies have been extended to thrift holding companies following a five year grace period.
 
 
 
The Federal Deposit Insurance Act (“FDIA”) was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.
 
 
 
The Federal Reserve can require a grandfathered unitary thrift holding company that conducts commercial or manufacturing activities or other nonfinancial activities in addition to financial activities to conduct all or part of its financial activities in an intermediate savings and loan holding company.
 
 
 
The SEC is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board.
 
 
30
 
 
 
 
 
 
Public companies will be required to provide their shareholders with a nonbinding vote (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.
 
 
 
Additional provisions, including some not specifically aimed at thrifts and thrift holding companies, will nonetheless have an impact on us.
 
Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues and changing the activities in which we choose to engage. Many of these and other provisions of the Dodd-Frank Act remain subject to regulatory rulemaking and implementation, the effects of which are not yet known. We may be forced to invest significant management attention and resources to make any necessary changes related to the Dodd-Frank Act and any regulations promulgated thereunder, which may adversely affect our business, results of operations, financial condition or prospects. We cannot predict the specific impact and long-term effects the Dodd-Frank Act and the regulations promulgated thereunder will have on our financial performance, the markets in which we operate and the financial industry generally.

In addition to changes resulting from the Dodd-Frank Act, recent proposals published by the Basel Committee on Banking Supervision (the “Basel Committee”), if adopted, could lead to significantly higher capital requirements, higher capital charges and more restrictive leverage and liquidity ratios. In July and December 2009, the Basel Committee published proposals relating to enhanced capital requirements for market risk and new capital and liquidity risk requirements for banks. On September 12, 2010, the Basel Committee announced an agreement on additional capital reforms that increases required Tier 1 capital and minimum Tier 1 common equity capital and requires banks to maintain an additional capital conservation buffer during times of economic prosperity. While the ultimate implementation of these proposals in the United States is subject to the discretion of U.S. bank regulators, these proposals, if adopted, could restrict our ability to grow during favorable market conditions or require us to raise additional capital, including through sales of common stock or other securities that may be dilutive to our shareholders. As a result, our business, results of operations, financial condition or prospects could be adversely affected.

Lastly, in late 2011, in conjunction with our change in regulators, we undertook a project to reduce the number of Pass grades in our loan rating system with a goal of recalibrating our loan rating classifications to current Office of the Comptroller of Currency and Federal Reserve Board standards and to better classify our Pass and Criticized loan categories.  This resulted in the elimination of our last Pass grade or our “pass/watch” grade.  The result of this grade elimination resulted in $67 million of previous “pass/watch” loans being reclassified to Criticized or Classified, with none going to nonaccrual status.  The impact of this project contributed to an incremental $2.1 million to the provision and allowance for loan losses in 2011.  As the OCC and the Bank become more familiar with each other, we cannot be certain there won’t be additional changes to our risk rating system in the future.  Additional recalibration of our risk rating categories may result in additional migration in loan ratings due to rewording differences in rating categories.  Any of these changes may have a material adverse effect on our future results of operations and financial position.
 
WSFS Bank has entered into a memorandum of understanding.
 
In December 2009, WSFS Bank entered into an informal memorandum of understanding (the “Understanding”) with our primary regulator. 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.
 
In accordance with the terms of the Understanding, WSFS Bank 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
 
 
31
 
 
dedicate additional staffing resources to this department; (iv) implement a revised internal review program; (v) obtain prior regulatory 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 management believes that we are in compliance with all provisions of the MOU, except for completion of the further reduction of criticized assets. However, under the provisions of the Dodd-Frank Act, we have new regulators who are not familiar with the Bank or our management.  As a result, there can be no assurance our new regulators will agree with the view of management as to the Bank’s progress on the Understanding.
 
A material failure to comply with the terms of the Understanding could subject the Bank to additional regulatory actions and further regulation, 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. Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. 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.
 
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. These additional restrictions may impede our ability to attract and retain qualified executive officers or cause other costs or hardships for us. 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 effect on our operations, revenue and financial condition, on the ability to pay dividends, our ability to attract and retain executive talent and restricts our ability to increase our cash dividends or undertake stock repurchase programs.

We are subject to liquidity risk.
 
Liquidity is essential to our business, as we use cash to fund loans and investments and other interest-earning assets and deposit withdrawals that occur in the ordinary course of our business. Our principle sources of liquidity include customer deposits, Federal Home Loan Bank borrowings, brokered CDs, sales of loans held for sale, repayments to the Bank of loans it makes to borrowers and paydowns and sales of investment securities. If our ability to obtain funds from these sources becomes limited or the costs to us of those funds increases, whether due to factors that affect us specifically, including our financial performance or the imposition of regulatory restrictions on us, or due to factors that affect the capital markets or other events, including weakening economic conditions or negative views and expectations about the prospects for the financial services industry as a whole, then, our ability to meet our obligations or grow our banking business would be adversely affected and our financial condition and results of operations could be harmed.
 
 
32
 
 

The market value of our mortgage-backed securities portfolio may be impacted by the level of interest rates and the credit quality and strength of the underlying collateral.
 
As of December 31, 2011, we owned mortgage-backed securities classified as available-for-sale with an aggregate historical cost of $810.7 million and an estimated fair value of $829.2 million.  Future changes in interest rates or the credit quality and strength of the underlying issuers or collateral may reduce the market value of these and other securities.
 
Our net interest income varies as a result of changes in interest rates as well as changes in interest rates across the yield curve. When interest rates are low, borrowers have an incentive to refinance into mortgages with longer initial fixed rate periods and fixed rate mortgages, causing our securities to experience faster prepayments. Increases in prepayments on our portfolio will cause our premium amortization to accelerate, lowering the yield on such assets. If this happens, we could experience a decrease in interest income, which may negatively impact our results of operations and financial position.
 
In addition, our portfolio of securities is subject to risk as a result of credit quality and the strength of the underlying issuers or their related collateral.  Any decrease in the value of the underlying collateral will likely decrease the overall value of our securities, affecting the Company’s equity and possibly impacting earnings.
 

Impairment of goodwill and/or intangible assets could require charges to earnings, which could result in a negative impact on our results of operations.  

Goodwill and other intangible assets arise when a business is purchased for an amount greater than the net fair value of its identifiable assets. We have recognized goodwill as an asset on the balance sheet in connection with several recent acquisitions.  At December 31, 2011, we had $34.3 million of goodwill and intangible assets.  We evaluate goodwill and intangibles for impairment at least annually by comparing fair value to carrying amount. Although we have determined that goodwill and other intangible assets were not impaired during 2011, a significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in impairment of goodwill or other intangible assets. If we were to conclude that a future write-down of the goodwill or intangible assets is necessary, then we would record the appropriate charge to earnings, which could be materially adverse to our results of operations and financial position.

Our Cash Connect Division relies on multiple financial and operational controls to track and settle the cash it provides to its customers in the ATM industry.

            The profitability of Cash Connect is reliant upon its ability to accurately and efficiently distribute, track, and settle large amounts of cash to its customers’ ATMs.  This depends on the successful implementation and monitoring of a comprehensive series of financial and operational controls. These controls are designed to help prevent, detect, and recover any potential loss of funds.  These controls require the implementation and maintenance of complex proprietary software, the ability to track and monitor an extensive network of armored car companies, and to settle large amounts of electronic funds transfer (“EFT”) funds from various ATM networks. It is possible for those associated with armored car companies, ATM networks and processors, ATM operators, or other parties to misappropriate funds belonging to Cash Connect.  Cash Connect has experienced such occurrences in the past. It is 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.

 
33
 
 
 
Changes in interest rates and other factors beyond our control could have an adverse impact on our earnings.
 
Our operating income and net income depend to a greater extent on our net interest margin, which is the difference between the interest yields we receive on loans, securities and other interest-earning assets and the interest rates we pay on interest-bearing deposits and other liabilities.  The net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.  When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income.  Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income.  These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions and monetary and fiscal policies of various governmental regulatory agencies, including the Federal Reserve.
 
We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact.  As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations.  The results of our interest rate sensitivity simulation models depend upon a number of assumptions which may prove to be not accurate.  There can be no assurance that we will be able to successfully manage our interest rate risk.  Increases in market rates and adverse changes in the local residential real estate market, the general economy or consumer confidence would likely have a significant adverse impact on our non-interest income, as a result of reduced demand for residential mortgage loans that we make on a pre-sold basis.
 
The soundness of other financial institutions could adversely affect us.
 
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.  There is no assurance that any such events would not materially and adversely affect our results of operations.
 
Our recent business strategy included significant investment in growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth and investment in branch infrastructure effectively.
 
We have pursued a significant growth strategy for our business. Our growth initiatives have required us to recruit experienced personnel to assist in such initiatives. Accordingly, the failure to retain such personnel would place significant limitations on our ability to successfully execute our growth strategy. In addition, as we expand our lending beyond our current market areas, we could incur additional risk related to those new market areas. We may not be able to expand our market presence in our existing market areas or successfully enter new markets.
 
The weak economy and low demand for credit may impact our ability to successfully execute our growth plan.  It could adversely affect our business, financial condition, results of operations, reputation and growth prospects. While we believe we have the executive management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or that we will successfully manage our growth.
 
We regularly evaluate potential acquisitions and expansion opportunities. If appropriate opportunities present themselves, we expect to engage in selected acquisitions or other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.
 
 
34
 
 
The recent downgrade of the U.S. Government’s credit rating by Standard & Poor’s could result in economic uncertainty and a significant rise in interest rates, either of which could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.
 
On August 2, 2011, legislation was enacted to increase the federal debt ceiling and to reduce future U.S. Government spending levels. Notwithstanding the passage of this legislation, there remains uncertainty about whether and when the U.S. Government will implement contemplated budget cuts, which has resulted in continued concerns that the U.S. Government could default on its obligations in the future. On August 5, 2011, Standard & Poor’s downgraded the U.S. Government’s credit rating for the first time in history as a result of its belief that the legislation was inadequate to address the country’s growing debt burden. Standard & Poor’s decision to downgrade the U.S. Government’s credit rating could create broader financial and global banking turmoil and uncertainty and could lead to a significant rise in interest rates. These events could cause the interest rates on our borrowings and our cost of capital to increase significantly and negatively impact performance of our investment portfolio. These adverse consequences could also extend to our customers and, as a result, could materially and adversely affect the ability of our borrowers to continue to pay their obligations as they become due and our ability to continue to originate loans on favorable terms. These consequences could be exacerbated if other statistical rating agencies, particularly Moody’s and Fitch, decide to downgrade the U.S. Government’s credit rating in the future. Furthermore, the downgrade of the U.S. Government’s credit rating could result in significant volatility in global stock markets, which could cause the market price of our common stock to decrease significantly. Any of these outcomes could have a material adverse effect on our business, financial condition, liquidity, results of operations and ability to make distributions to our shareholders.
 
The recent repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.
 
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act, which was signed into law on July 21, 2010. As a result, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits to compete for clients. We do not yet know what interest rates other institutions may offer. Our interest expense will increase and our net interest margin will decrease if we begin offering interest on demand deposits to attract additional customers or maintain current customers. Consequently, our business, results of operations, financial condition or prospects may be adversely and materially affected.
 
We may elect or need to seek additional capital in the future, but that capital may not be available when needed.
 
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In the future, we may elect to or need to raise additional capital. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on acceptable terms, or at all. If we cannot raise additional capital when needed, our ability to expand our operations through internal growth could be materially impaired.
 
Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.
 
From time to time, and particularly in the recent economic downturn, and negative sentiment towards banks, we have and may become party to various litigation claims and legal proceedings. Management evaluates these claims and proceedings to assess the likelihood of unfavorable outcomes and estimates, if possible, the amount of potential losses. We may establish a reserve, as appropriate, based upon our assessments and estimates in accordance with accounting policies. We base our assessments, estimates and disclosures on the information available to us at the time and rely on the judgment of our management with respect to those assessments, estimates and disclosures. Actual outcomes or losses may differ materially from assessments and estimates, which could adversely affect our reputation, financial condition and results of operations.

 
35
 
 
Our Christiana Trust division derives the majority of its revenue from noninterest income which consists of trust, investment and other servicing fees.  This business unit is subject to a number of risks which could impact its earnings or the company’s capital.   Among the risks are operational, compliance, reputational, fiduciary, business and strategic risks.
 
Operational or compliance risk entails inadequate or failed internal processes, people and systems or changes driven by external events.  Success in this business segment is highly dependent on reputation.  Damage to the Christiana Trust division’s or the company’s reputation from negative opinion in the marketplace could adversely impact both revenue and net income.  Such results could also be effected by the adverse effects of business decisions made by management or the board, improper implementation of business decisions by management or unexpected external events.  Unforeseen or unrecognized developments in the marketplace in which Christiana Trust operates could also negatively affect results.
 
This business segment is also subject to many other risks and uncertainties including:
 
·  
The health  of the US and International economies, soundness of financial institutions and other counterparties with which the Christiana Trust division conducts business, changes in trading volumes or in the financial markets in general, including the debt and equity markets or in client portfolios  whose values directly impact revenue, the effect of governmental actions on the Christiana Trust division, its competitors and counterparties and financial markets: changes in the regulatory environment and changes in tax laws, accounting requirements or interpretations that affect the Christiana Trust division or its clients.
 
·  
In addition, changes in the nature and activities of Christiana Trust division’s competition, success in maintaining existing business, continuing to generate new business, identifying and penetrating targeted markets,  managing compliance with legal, tax, regulatory requirements, maintaining a business mix with acceptable margins, the continuing ability to generate investment results that satisfy its clients and attract prospective clients, success in recruiting and retaining the necessary personnel to support business growth and maintain sufficient expertise to support complex products and services and management’s ability to effectively address risk management practices and controls, address operating risks including human errors or omissions, pricing or valuation of securities, fraud, system performance, systems interruptions or breakdowns in processes or internal controls, and success in controlling expenses all may have negative impact on operating results.

System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.
 
The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, damage our reputation and inhibit current and potential customers from our Internet banking services. Each year, we add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 
36
 
 

ITEM 2. PROPERTIES

The following table sets forth the location and certain additional information regarding our offices and other material properties as of December 31, 2011:
 
 
 
 
 
 
 
  Net Book Value
of Property or
Leasehold
Improvements (1)
 
 
 
 
 
 
 
 
 
 
 
 
Owned/
Leased
 
Date Lease Expires
 
 
Deposits
Location
 
 
 
 
 
 
 
 
 
 
(In Thousands)
WSFS Bank Center Branch
Leased
 
2025 
 
$650
 
$958,658
   Main Office
 
 
 
  500 Delaware Avenue
 
 
 
  Wilmington, DE   19801
 
 
 
Union Street Branch
Leased
 
2013 
 
62 
 
58,830 
  211 North Union Street
 
 
 
  Wilmington, DE   19805
 
 
 
Fairfax Shopping Center
 Leased
 
2048 
 
1,109 
 
96,163 
  2005 Concord Pike
 
 
 
  Wilmington, DE   19803
 
 
 
Branmar Plaza Shopping Center Branch (2)
Leased
 
2013 
 
N/A
 
N/A
  1812 Marsh Road
 
 
 
  Wilmington, DE   19810
 
 
 
Prices Corner Shopping Center Branch
Leased
 
2023 
 
439 
 
108,998 
  3202 Kirkwood Highway
 
 
 
  Wilmington, DE   19808
 
 
 
Pike Creek Shopping Center Branch
Leased
 
2015 
 
397 
 
122,310 
  4730 Limestone Road
 
 
 
  Wilmington, DE   19808
 
 
 
University Plaza Shopping Center Branch
Leased
 
2041 
 
1,078 
 
57,222 
  100 University Plaza
 
 
 
  Newark, DE   19702
 
 
 
College Square Shopping Center Branch
Leased
 
2026 
 
206 
 
135,798 
  115 College Square Drive
 
 
 
  Newark, DE   19711
 
 
 
Airport Plaza Shopping Center Branch
Leased
 
2013 
 
499 
 
76,577 
  144 N. DuPont Hwy.
 
 
 
  New Castle, DE   19720
 
 
 
Stanton Branch
Leased
 
2016 
 
12 
 
42,310 
  Inside ShopRite
 
 
 
  1600 W. Newport Pike
 
 
 
  Wilmington, DE   19804
 
 
 
Glasgow Branch
Leased
 
2012 
 
15 
 
39,078 
  2400 Peoples Plaza
 
 
 
  Routes 40 & 896
 
 
 
  Newark, DE   19702
 
 
 
Middletown Crossing Shopping Center
Leased
 
2027 
 
625 
 
65,078 
  400 East Main Street
 
 
 
  Middletown, DE   19709
 
 
 

 
37
 
 

 
 
 
 
 
 
 
  Net Book Value
of Property or
Leasehold
Improvements (1)
 
 
 
 
Owned/
Leased
 
Date Lease
Expires
 
 
 
 
 
 
 
 
Deposits
Location
 
 
 
 
 
 
 
 
 
 
(In Thousands)
Dover Branch
Leased
 
2060 
 
$398
 
$12,091
  Dover Mart Shopping Center
 
 
 
  290 South DuPont Highway
 
 
 
  Dover, DE   19901
 
 
 
West Dover Loan Office (3)
 
Leased
 
2019 
 
 
10 
  Greentree Office Center
 
 
 
 
 
 
  160 Greentree Drive
 
 
 
 
 
 
  Suite 103 & 105
 
 
 
 
 
 
  Dover, DE  19904
 
 
 
 
 
 
Blue Bell Loan Office
 
Leased
 
2012 
 
11 
 
5,226 
  721 Skippack Pike
 
 
 
 
  Suite 101
 
 
 
 
  Blue Bell, PA   19422
 
 
 
 
Glen Mills Branch
 
Leased
 
2040 
 
1,553 
 
20,417 
  395 Wilmington-West Chester Pike
 
 
 
 
  Glen Mills, PA   19342
 
 
 
 
Brandywine Branch
 
Leased
 
2014 
 
 
35,791 
  Inside Safeway Market
 
 
 
 
  2522 Foulk Road
 
 
 
 
  Wilmington, DE   19810
 
 
 
 
Operations Center (4)
 
Owned
 
 
 
550 
 
N/A
  2400 Philadelphia Pike
 
 
 
 
  Wilmington, DE   19703
 
 
 
 
Longwood Branch
 
Leased
 
2015 
 
25 
 
17,692 
  826 East Baltimore Pike
 
 
 
 
  Suite 7
 
 
 
 
  Kennett Square, PA  19348
 
 
 
 
Holly Oak Branch
 
Leased
 
2015 
 
 
27,710 
  Inside Super Fresh
 
 
 
 
  2105 Philadelphia Pike
 
 
 
 
  Claymont, DE 19703
 
 
 
 
Hockessin Branch
 
Leased
 
2030 
 
521 
 
112,793 
  7450 Lancaster Pike
 
 
 
 
  Wilmington, DE 19707
 
 
 
 
Lewes LPO
 
Leased
 
2018 
 
56 
 
46,803 
  Southpointe Professional Center
 
 
 
 
  1515 Savannah Road, Suite 103
 
 
 
 
  Lewes, DE   19958
 
 
 
 
Fox Run Shopping Center Branch
 
Leased
 
2025 
 
674 
 
93,244 
  210 Fox Hunt Drive
 
 
 
 
  Route 40 & 72
 
 
 
 
  Bear, DE  19701
 
 
 
 

 
38
 
 

 
 
 
 
 
 
 
  Net Book Value
of Property or
Leasehold
Improvements (1)
 
 
 
 
Owned/
Leased
 
Date Lease Expires
 
 
 
 
 
 
 
 
Deposits
Location
 
 
 
 
 
 
 
 
 
 
(In Thousands)
Camden Town Center Branch
 
Leased
 
2049 
 
$742
 
$44,046
  4566 S. DuPont Highway
 
 
 
 
  Camden, DE   19934
 
 
 
 
Rehoboth Branch
 
Leased
 
2029 
 
712 
 
53,201 
  Lighthouse Plaza
 
 
 
 
  19335 Coastal Highway
 
 
 
 
  Rehoboth, DE   19771
 
 
 
 
West Dover Branch
 
Owned
 
 
 
2,057 
 
40,161 
  1486 Forest Avenue
 
 
 
 
  Dover, DE   19904
 
 
 
 
Longneck Branch
 
Leased
 
2026 
 
1,006 
 
37,047 
  25926 Plaza Drive
 
 
 
 
  Millsboro, DE  19966
 
 
 
 
Smyrna Branch
 
Leased
 
2048 
 
1,041 
 
44,720 
  Simon’s Corner Shopping Center
 
 
 
 
  400 Jimmy Drive
 
 
 
 
  Smyrna, DE   19977
 
 
 
 
Oxford, LPO
 
Leased
 
2017 
 
 
10,055 
  59 South Third Street
 
 
 
 
  Suite 1
 
 
 
 
  Oxford, PA  19363
 
 
 
 
Greenville Branch
 
Owned
 
 
 
1,998 
 
388,868 
  3908 Kennett Pike
 
 
 
 
  Greenville, DE  19807
 
 
 
 
WSFS Bank Center (5)
 
Leased
 
2025 
 
2,603 
 
N/A
  500 Delaware Avenue
 
 
 
 
  Wilmington, DE  19801
 
 
 
 
Annandale, LPO
 
Leased
 
2017 
 
 
2,404 
  7010 Little River Tnpk.
 
 
 
 
  Suite 330
 
 
 
 
  Annandale, VA  22003
 
 
 
 
Oceanview Branch
 
Leased
 
2024 
 
1,129 
 
23,367 
  69 Atlantic Avenue
 
 
 
 
  Oceanview, DE   19970
 
 
 
 
Selbyville Branch
 
Leased
 
2013 
 
32 
 
8,135 
  38394 DuPont Boulevard
 
 
 
 
  Selbyville, DE  19975
 
 
 
 
Lewes Branch
 
Leased
 
2028 
 
253 
 
25,865 
  34383 Carpenters Way
 
 
 
 
  Lewes, DE  19958
 
 
 
 
Millsboro Branch
 
Leased
 
2029 
 
1,049 
 
11,990 
  26644 Center View Drive
 
 
 
 
  Millsboro, DE   19966
 
 
 
 

 
39
 
 

 
 
 
 
 
 
 
  Net Book Value
of Property or
Leasehold
Improvements (1)
 
 
 
 
Owned/
Leased
 
Date Lease
Expires
 
 
 
Location
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
(In Thousands)
Concord Square Branch
 
Leased
 
2016 
 
$37
 
$36,235
  4401 Concord Pike
 
 
 
 
  Wilmington, DE  19803
 
 
 
 
Crossroads Branch (6)
 
Leased
 
2013 
 
34 
 
17,420 
  2080 New Castle Avenue
 
 
 
 
  New Castle, DE  19720
 
 
 
 
Delaware City Branch
 
Owned
 
 
 
98 
 
8,420 
  145 Clinton Street
 
 
 
 
  Delaware City, DE  19706
 
 
 
 
West Newark Branch
 
Leased
 
2040 
 
1,457 
 
3,698 
  201 Suburban Plaza
 
 
 
 
  Newark, DE 19711
 
 
 
 
Lantana Shopping Center Branch (7)
 
Leased
 
2050 
 
41 
 
N/A
  6274 Limestone Road
 
 
 
 
  Hockessin, DE  19707