UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- ------------------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
- ------------------------------------------ ----------------------------------
(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of November 5, 2002:
Common Stock, par value $.01 per share 9,093,622
- -------------------------------------- ---------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
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Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three and Nine Months
Ended September 30, 2002 and 2001 (Unaudited)...................................... 3
Consolidated Statement of Condition as of September 30, 2002
(Unaudited) and December 31, 2001.................................................. 5
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 (Unaudited)............................................ 6
Notes to the Consolidated Financial Statements for the Three and Nine
Months Ended September 30, 2002 and 2001 (Unaudited)............................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.......................................................... 19
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 36
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Item 4. Disclosure Controls and Procedures.................................................. 36
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PART II. Other Information
Item 1. Legal Proceedings.................................................................... 36
-----------------
Item 2. Changes in Securities and Uses of Proceeds........................................... 36
------------------------------------------
Item 3. Defaults upon Senior Securities...................................................... 36
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.................................. 36
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Item 5. Other Information.................................................................... 36
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Item 6. Exhibits and Reports on Form 8-K. .................................................. 36
--------------------------------
Signatures .................................................................................... 37
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ...................... 38
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Unaudited)
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans ............................... $ 20,443 $ 20,386 $ 60,602 $ 61,141
Interest on mortgage-backed securities ................... 1,985 2,388 5,802 7,891
Interest and dividends on investment securities .......... 194 282 649 864
Interest on investments in reverse mortgages ............. 1,995 3,324 13,092 8,258
Other interest income .................................... 200 732 747 1,884
-------- -------- -------- --------
24,817 27,112 80,892 80,038
-------- -------- -------- --------
Interest expense:
Interest on deposits ..................................... 2,918 5,971 9,060 21,009
Interest on Federal Home Loan Bank advances .............. 4,545 4,234 13,676 10,788
Interest on federal funds purchased and securities
sold under agreements to repurchase .................... 760 907 2,011 2,550
Interest on Trust Preferred borrowings ................... 568 1,280 2,054 3,048
Interest on other borrowed funds ......................... 127 102 327 314
-------- -------- -------- --------
8,918 12,494 27,128 37,709
-------- -------- -------- --------
Net interest income ........................................... 15,899 14,618 53,764 42,329
Provision for loan losses ..................................... 507 677 1,718 1,370
-------- -------- -------- --------
Net interest income after provision for loan losses ........... 15,392 13,941 52,046 40,959
-------- -------- -------- --------
Other income:
Loan servicing fee income ................................ 821 865 2,380 2,260
Deposit service charges .................................. 2,224 2,165 6,435 6,266
Credit/debit card and ATM income ......................... 2,379 1,836 6,079 5,046
Gain on sales of loans ................................... 19,612 5,532 45,025 12,532
Other income ............................................. 431 463 1,627 1,526
-------- -------- -------- --------
25,467 10,861 61,546 27,630
-------- -------- -------- --------
Other expenses:
Salaries, benefits and other compensation ................ 14,411 9,169 39,249 25,245
Equipment expense ........................................ 1,233 985 3,627 2,868
Data processing and operations expenses .................. 914 916 2,756 2,747
Occupancy expense ........................................ 1,271 1,203 3,606 3,629
Marketing expense ........................................ 433 340 1,323 1,155
Professional fees ........................................ 1,065 437 3,193 1,294
Net costs of assets acquired through foreclosure ......... 127 (6) 180 65
ATM fraud (recovery) loss ................................ (31) (56) (262) 312
In-store branch net write off ............................ -- -- -- 1,114
Other operating expense .................................. 3,406 2,535 9,077 7,963
-------- -------- -------- --------
22,829 15,523 62,749 46,392
-------- -------- -------- --------
Income from continuing operations before minority interest,
taxes and cumulative effect of change in accounting principle 18,030 9,279 50,843 22,197
Less minority interest ........................................ 5,273 802 11,321 802
-------- -------- -------- --------
Income from continuing operations before taxes and cumulative
effect of change in accounting principle ................... 12,757 8,477 39,522 21,395
Income tax provision .......................................... 4,267 2,877 14,229 6,995
-------- -------- -------- --------
Income from continuing operations before cumulative effect of
change in accounting principle ............................. 8,490 5,600 25,293 14,400
Cumulative effect of change in accounting principle,
net of tax ................................................ -- -- 703 --
-------- -------- -------- --------
Income from continuing operations ............................. 8,490 5,600 25,996 14,400
Loss on wind-down of discontinued operations, net of tax ..... (563) -- (563) --
Income (loss) on discontinued operations of businesses
held-for-sale, net of tax ................................... 818 (97) 659 (471)
Gain on sale of United Asian Bank, net of tax ................. 737 -- 737 --
-------- -------- -------- --------
Net income .................................................... $ 9,482 $ 5,503 $ 26,829 $ 13,929
======== ======== ======== ========
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------- -------- -------- -------
(Unaudited)
(In Thousands, Except Per Share Data)
Basic earnings per share:
Income from continuing operations before cumulative effect of
change in accounting principle ................................. $ 0.93 $ 0.60 $ 2.77 $ 1.48
Cumulative effect of change in accounting principle, net of tax... -- -- 0.08 --
------- ------- ------- -------
Income from continuing operations ................................ 0.93 0.60 2.85 1.48
Loss on wind-down of discontinued operations, net of tax ......... (0.06) -- (0.06) --
Income (loss) on discontinued operations of businesses
held-for-sale, net of tax ...................................... 0.09 (0.01) 0.08 (0.05)
Gain on sale of United Asian Bank, net of tax .................... 0.08 -- 0.08 --
------- ------- ------- -------
Net income ....................................................... $ 1.04 $ 0.59 $ 2.95 $ 1.43
======= ======= ======= =======
Diluted earnings per share:
Income from continuing operations before cumulative effect of
change in accounting principle .................................. $ 0.89 $ 0.59 $ 2.67 $ 1.47
Cumulative effect of change in accounting principle, net of tax... -- -- 0.08 --
------- ------- ------- -------
Income from continuing operations ................................ 0.89 0.59 2.75 1.47
Loss on wind-down of discontinued operations, net of tax ......... (0.06) -- (0.06) --
Income (loss) on discontinued operations of businesses
held-for-sale, net of tax ...................................... 0.08 (0.01) 0.07 (0.05)
Gain on sale of United Asian Bank, net of tax .................... 0.08 -- 0.08 --
------- ------- ------- -------
Net income ....................................................... $ 0.99 $ 0.58 $ 2.84 $ 1.42
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
September 30, December 31,
2002 2001
----------- -----------
(Unaudited)
(In Thousands)
Assets
Cash and due from banks .................................................. $ 160,470 $ 104,813
Federal funds sold and securities purchased under agreements to resell ... -- 65,779
Interest-bearing deposits in other banks ................................. 1,991 28,360
Investment securities held-to-maturity ................................... 11,446 12,396
Investment securities available-for-sale ................................. -- 1,798
Mortgage-backed securities held-to-maturity .............................. 45,033 70,285
Mortgage-backed securities available-for-sale ............................ 111,666 291,439
Investments of business held-for-sale .................................... 317,591 --
Investment in reverse mortgages, net ..................................... 32,977 33,939
Loans held-for-sale ...................................................... 148,129 84,741
Loans, net of allowance for loan losses of $21,663 at September 30, 2002
and $21,597 at December 31, 2001 ....................................... 1,002,375 1,030,631
Loans of business held-for-sale, net of allowance for
loan losses of $342 at September 30, 2002 ............................. 18,390 --
Stock in Federal Home Loan Bank of Pittsburgh, at cost ................... 23,250 28,750
Assets acquired through foreclosure ...................................... 1,133 432
Premises and equipment ................................................... 14,828 16,438
Accrued interest and other assets ........................................ 26,435 28,824
Other assets of business held-for-sale ................................... 4,017 --
Loans, operating leases and other assets of discontinued operations ...... 61,731 115,295
----------- -----------
Total assets ............................................................. $ 1,981,462 $ 1,913,920
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ........................................... $ 171,554 $ 171,801
Money market and interest-bearing demand ............................. 98,880 327,635
Savings .............................................................. 297,126 313,246
Time ................................................................. 276,645 303,059
Jumbo certificates of deposit - retail ............................... -- 9,695
----------- -----------
Total retail deposits .............................................. 844,205 1,125,436
Jumbo certificates of deposit - other ................................ 23,920 12,334
Brokered certificates of deposit ..................................... -- 8,347
----------- -----------
Total deposits excluding businesses held-for-sale .................. 868,125 1,146,117
Deposits of business held-for-sale ................................... 340,155 --
----------- -----------
Total deposits ................................................... 1,208,280 1,146,117
Federal funds purchased and securities sold under agreements to repurchase 84,500 45,000
Federal Home Loan Bank advances .......................................... 445,000 520,000
Trust Preferred borrowings ............................................... 50,000 50,000
Other borrowed funds ..................................................... 41,341 30,480
Accrued expenses and other liabilities ................................... 19,534 16,519
Other liabilities of business held-for-sale .............................. 1,490 --
----------- -----------
Total liabilities ........................................................ 1,850,145 1,808,116
----------- -----------
Minority Interest ........................................................ 9,113 5,801
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding ............................................... -- --
Common stock $.01 par value, 20,000,000 shares authorized; issued
14,838,891 at September 30, 2002 and 14,823,651 at December 31, 2001 . 148 148
Capital in excess of par value ........................................... 59,299 59,079
Accumulated other comprehensive income ................................... 924 3,146
Retained earnings ........................................................ 133,508 107,950
Treasury stock at cost, 5,745,269 shares at September 30, 2002
and 5,677,169 shares at December 31, 2001 ............................ (71,675) (70,320)
----------- -----------
Total stockholders' equity ............................................... 122,204 100,003
----------- -----------
Total liabilities, minority interest and stockholders' equity ............ $ 1,981,462 $ 1,913,920
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
2002 2001
------------ --------------
(Unaudited)
(In Thousands)
Operating activities:
Net income ................................................................... $ 26,829 $ 13,929
Adjustments to reconcile net income to net cash used for operating activities:
Provision for loan, lease and residual value losses ...................... 1,718 1,591
Depreciation, accretion and amortization ................................. 5,845 3,126
Increase in accrued interest receivable and other assets ................. (3,725) (5,941)
Decrease in accrued interest receivable and other assets of
businesses held-for-sale .............................................. 1,467 --
Origination of loans held-for-sale ....................................... (1,198,829) (383,361)
Proceeds from sales of loans held-for-sale ............................... 1,087,173 363,966
Increase in accrued interest payable and other liabilities ............... 3,883 2,955
Increase in accrued interest payable and other liabilities of
businesses held-for-sale .............................................. 297 --
Gain on sale of segment held-for-sale .................................... (1,229) --
Increase in reverse mortgage capitalized interest, net ................... (14,253) (8,137)
Minority interest in net income (loss) ................................... 9,007 (1,382)
Other, net ............................................................... 139 293
----------- -----------
Net cash used for operating activities ....................................... (81,678) (12,961)
----------- -----------
Investing activities:
Net decrease (increase) in interest-bearing deposits in other banks .......... 7,374 (16,349)
Maturities of investment securities .......................................... 1,118 13,344
Sales of investment securities available-for-sale ............................ 1,485 500
Repayments of mortgage-backed securities held-to-maturity .................... 24,935 24,096
Repayments of mortgage-backed securities available-for-sale .................. 33,521 152,659
Purchases of mortgage-backed securities available-for-sale ................... (93,715) (221,875)
Net increase in investments of businesses held-for-sale ...................... (62,520) --
Repayments of reverse mortgages .............................................. 21,075 12,264
Disbursements for reverse mortgages .......................................... (4,689) (5,397)
Sales of loans ............................................................... 5,986 --
Sale of loans - United Asian Bank ............................................ 15,828 --
Purchase of loans ............................................................ (28,878) (1,105)
Net decrease (increase) in loans ............................................. 57,711 (56,971)
Net decrease in loans of businesses held-for-sale ............................ 4,621
Net decrease in stock of Federal Home Loan Bank of Pittsburgh ................ 5,500 6,950
Receipts from investment in real estate ...................................... -- 270
Sales of assets acquired through foreclosure, net ............................ 420 613
Premises and equipment, net .................................................. (2,431) (1,254)
----------- -----------
Net cash used for investing activities ....................................... (12,659) (92,255)
----------- -----------
Financing activities:
Net increase in demand and savings deposits .................................. 8,412 128,288
Net increase (decrease) in time deposits ..................................... 20,627 (86,693)
Net increase in deposits of businesses held-for-sale ......................... 52,705 --
Sale of deposits - United Asian Bank ......................................... (7,322) --
Receipts from FHLB borrowings ................................................ 476,000 215,000
Repayments of FHLB borrowings ................................................ (551,000) (135,000)
Receipts from reverse repurchase agreements .................................. 200,000 --
Repayments of reverse repurchase agreements .................................. (185,000) --
Net increase in federal funds purchased ...................................... 24,500 --
Repayments of capital leases ................................................. (170) (89)
Dividends paid on common stock ............................................... (1,271) (1,175)
Issuance of common stock ..................................................... 220 94
Purchase of treasury stock, net of reissuance ................................ (1,355) (15,727)
Minority interest ............................................................ (5,695) 112
----------- -----------
Net cash provided by financing activities .................................... 30,651 104,810
----------- -----------
Decrease in cash and cash equivalents from continuing operations ............. (63,686) (406)
Change in net assets from discontinued operations ............................ 53,564 59,699
Cash and cash equivalents at beginning of period ............................. 170,592 91,349
----------- -----------
Cash and cash equivalents at end of period ................................... $ 160,470 $ 150,642
=========== ===========
6
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Nine Months Ended September 30,
-------------------------------
2002 2001
-------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest ........................................ $ 29,468 $ 44,375
Cash paid for income taxes, net ............................... 17,095 3,763
Loans transferred to assets acquired through foreclosure ...... 1,167 607
Net change in unrealized (losses) gains on securities
available-for-sale, net of tax ............................. (2,222) 3,319
Investments transferred to businesses held-for-sale ........... 260,160 --
Loans, net of allowance transferred to businesses held-for-sale 36,135 --
Other assets transferred to businesses held-for-sale .......... 5,780 --
Deposits transferred to businesses held-for-sale .............. 298,170 --
Other liabilities transferred to businesses held-for-sale ..... 1,193 --
The accompanying notes are an integral part of these financial statements.
7
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the parent
company, WSFS Capital Trust I, WSFS and its wholly-owned subsidiaries, WSFS
Investment Group, Inc. and WSFS REIT, as well as non-wholly-owned, but majority
controlled subsidiaries, Wilmington Finance, Inc. (WF) and CustomerOne Financial
Network, Inc. (C1FN). See Note 5 for further discussion of non-wholly-owned
subsidiaries and Note 10 for a discussion of subsequent events.
As discussed in Note 3 of the financial statements, the results of WSFS
Credit Corporation (WCC), the Corporation's wholly owned indirect auto financing
and leasing subsidiary, is presented as discontinued operations, and presented
separately for all periods.
As discussed in Note 4 of the financial statements, in June 2002, agreements
were signed to sell C1FN and the related interest in WSFS' Everbank Division.
The sale was completed in November 2002. In addition, in June 2002 WSFS signed
an agreement for the sale of its United Asian Bank Division (UAB). The sale of
UAB was completed in September 2002. In accordance with Statement of Financial
Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the major classes of assets and liabilities of businesses
held for sale are presented separately on the statement of condition for
September 30, 2002 and the statement of cash flow for the nine months ended
September 30, 2002. Income and losses from these businesses have been presented
as income (losses) of businesses held-for-sale, and presented separately for all
periods. The gain on the sale of UAB is presented separately on the statement of
operations, net of tax.
The consolidated statement of condition at September 30, 2002, the
consolidated statement of operations for the three and nine months ended
September 30, 2002 and 2001 and the consolidated statement of cash flows for the
nine months ended September 30, 2002 and 2001 are unaudited and include all
adjustments solely of a normal recurring nature which management believes are
necessary for a fair presentation. Certain reclassifications have been made to
prior year's financial statements for conformity with the current year's
presentation. All significant intercompany transactions are eliminated in
consolidation. The results of operations for the three- and nine-month periods
ended September 30, 2002 are not necessarily indicative of the expected results
for the full year ending December 31, 2002. Such statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and applicable to the banking industry. The accompanying unaudited
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Corporation's 2001 Annual Report.
8
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
(In Thousands, except per share data)
Numerator:
- ----------
Income from continuing operations before cumulative effect of change
in accounting principle ........................................... $ 8,490 $ 5,600 $ 25,293 $ 14,400
Cumulative effect of change in accounting principle, net of tax ..... -- -- 703 --
--------- --------- ---------- ----------
Income from continuing operations .................................... 8,490 5,600 25,996 14,400
Loss on wind-down of discontinued operations, net of tax ............. (563) -- (563) --
Income (loss) on discontinued operations of businesses
held for sale, net of tax ......................................... 818 (97) 659 (471)
Gain on sale of United Asian Bank, net of tax ........................ 737 -- 737 --
--------- --------- ---------- ----------
Net income ........................................................... $ 9,482 $ 5,503 $ 26,829 $ 13,929
========= ========= ========== ==========
Denominator:
- ------------
Denominator for basic earnings per share - weighted average shares ... 9,088 9,303 9,106 9,725
Employee stock options ............................................... 456 172 336 91
--------- --------- ---------- ----------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ....................................... 9,544 9,475 9,442 9,816
========= ========= ========== ==========
Earnings per share:
- -------------------
Basic:
Income from continuing operations before cumulative effect of change
in accounting principle ............................................ $ 0.93 $ 0.60 $ 2.77 $ 1.48
Cumulative effect of change in accounting principle, net of tax ...... -- -- 0.08 --
--------- --------- ---------- ----------
Income from continuing operations .................................... 0.93 0.60 $ 2.85 1.48
Loss on wind-down of discontinued operations, net of tax ............. (0.06) -- (0.06) --
Income (loss) on discontinued operations of businesses
held for sale, net of tax .......................................... 0.09 (0.01) 0.08 (0.05)
Gain on sale of United Asian Bank, net of tax ........................ 0.08 -- 0.08 --
--------- --------- ---------- ----------
Net income ........................................................... $ 1.04 $ 0.59 $ 2.95 $ 1.43
========= ========= ========== ==========
Diluted:
Income from continuing operations before cumulative effect of change
in accounting principle ............................................ $ 0.89 $ 0.59 $ 2.67 $ 1.47
Cumulative effect of change in accounting principle, net of tax ...... -- -- 0.08 --
----------
Income from continuing operations .................................... 0.89 0.59 2.75 1.47
Loss on wind-down of discontinued operations, net of tax ............. (0.06) -- (0.06) --
Income (loss) on discontinued operations of businesses
held for sale, net of tax .......................................... 0.08 (0.01) 0.07 (0.05)
Gain on sale of United Asian Bank, net of tax ........................ 0.08 -- 0.08 --
--------- --------- ---------- ----------
Net income ........................................................... $ 0.99 $ 0.58 $ 2.84 $ 1.42
========= ========= ========== ==========
Outstanding common stock equivalents having no dilutive effect ....... -- 132 -- 138
3. Discontinued Operations of a Business Segment
The operations of WSFS Credit Corporation (WCC) were discontinued in
December 2000. Accordingly, the results of WCC's operations are treated as
Discontinued Operations of a Business Segment, and shown separately from the
results of continuing operations of the Corporation. WCC, which had 2,860 lease
contracts and 1,206 loan contracts at September 30, 2002, no longer accepts new
applications but continues to service existing loans and leases until their
maturity. Management estimates that substantially all loan and lease contracts
will mature by the end of December 2004.
In December 2000, the Corporation established a $6.2 million pretax
reserve to absorb expected future net losses of WCC. As used vehicle values
continued to deteriorate in 2001, $3.1 million was added to this reserve in
December of 2001 for the expected losses in the business during its wind-down
period. Actual residual losses for the first nine months of 2002 have been
reasonably consistent with the Company's expectations at December 31, 2001.
9
In addition, in the third quarter of 2002, an additional reserve for
discontinued operations of $563,000 was established as a result of changes in
estimates used to calculate WCC's deferred taxes.
Due to the uncertainty of a number of factors, including residual
values, interest rates, credit quality and operating costs, this reserve is
reevaluated quarterly with adjustments, if necessary, recorded as income/losses
on wind-down of discontinued operations. At September 30, 2002, there were
approximately $52 million of contract residuals outstanding for which management
has estimated approximately $7.4 million in future losses. Management has
inherently provided for these losses through a combination of expected operating
results of WCC (excluding residual losses), reserves for residual losses and
reserves for discontinued operations.
The following chart presents the operating leases, loans and other
assets of discontinued operations at September 30, 2002 and December 31, 2001:
At September 30, At December 31,
2002 2001
-------- --------
(In Thousands)
Vehicles under operating leases, net of reserves $ 57,666 $102,288
Loans ........................................... 9,091 16,131
Other noncash assets ............................ 1,639 3,241
Less:
Reserve for losses of discontinued operations 6,665 6,365
-------- --------
Loans, operating leases and other assets of
discontinued operations ....................... $ 61,731 $115,295
======== ========
The following table presents the net income from discontinued
operations for the three and nine months ended September 30, 2002 and 2001:
For the three months ended September 30, For the nine months ended September 30,
---------------------------------------- ---------------------------------------
2002 2001 2002 2001
------- ------- ------- -------
(In Thousands)
Interest income ......................... $ 223 $ 444 $ 792 $ 1,493
Allocated interest expense (1) .......... 572 2,192 1,974 7,790
------- ------- ------- -------
Net interest expense .................... (349) (1,748) (1,182) (6,297)
Loan and lease servicing fee income ..... 72 (29) 292 177
Rental income on operating leases, net .. 635 1,856 1,860 6,841
Other income ............................ 1 3 7 13
------- ------- ------- -------
Net revenues .......................... 359 82 977 734
Other operating expenses .............. 380 403 975 1,367
------- ------- ------- -------
Income (loss) before taxes .............. (21) (321) 2 (633)
(Credit) charge to reserve for losses on
discontinued operations .............. 21 456 (2) 858
Income tax provision .................... 563 135 563 225
------- ------- ------- -------
Income from discontinued operations ..... $ (563) $ -- $ (563) $ --
======= ======= ======= =======
(1) Allocated interest expense for the three and nine months ended
September 30, 2001 was based on the Company's annual average wholesale
borrowings rate of 5.66% and 5.97%, respectively, which approximated a
marginal funding cost of this business. Beginning in December 2001, the
allocated interest expense is based on a direct matched-maturity funding of
the net non-cash assets of discontinued operations. The average borrowing
rate for the three and nine months ended September 30, 2002 was 2.97% and
2.82%, respectively.
10
4. INVESTMENTS IN NON-WHOLLY-OWNED SUBSIDIARIES
The Corporation consolidates two non-wholly-owned subsidiaries,
CustomerOne Financial Network, Inc. (C1FN) and Wilmington Finance, Inc. (WF).
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999, WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. Consistent with the manner in which the segment is managed
and operated, information in this report labelled "C1FN" generally represents
the profoma combined results of C1FN and WSFS' Everbank Division (the
C1FN/Everbank segment). WSFS originally invested $5.5 million, which through
cumulative operating losses, has diminished to a book value of $1.5 million at
September 30, 2002 including approximately $1 million in goodwill. At September
30, 2002, WSFS had a 28% ownership interest in C1FN but had a 51% controlling
interest through a voting trust. Therefore, the results of C1FN were
consolidated into WSFS. C1FN was charged a service fee by WSFS of $1.5 million
and $2.5 million for the three months and nine months ended September 30, 2002,
respectively, compared to $120,000 and $360,000 for the comparable periods in
2001. This service fee is partially eliminated in consolidation.
In June 2002, WSFS entered into an agreement with a privately held
holding company of a federally chartered savings bank for the sale of C1FN and
related interests in WSFS' Everbank Division. On November 5, 2002, WSFS
completed the sale of its interest in C1FN/Everbank. See Notes 9 and 10 to the
financial statements for further discussion.
WF is a 51% owned subsidiary of WSFS and began operations in December
1999. At September 30, 2002, WSFS held warrants to purchase an additional 14%
ownership interest in WF for $855,000. WF is a mortgage banker generally dealing
in higher-grade subprime loans. WF solicits and originates its loans primarily
as a result of referrals through independent mortgage brokers, although
direct-to-consumer originations accounted for 6.4% and 5.8% of total
originations for the three and nine months ended September 30, 2002,
respectively, compared to 3.05% and 5.25% for the respective periods in 2001. WF
originates all loans and sells its originations to investors, typically well
known regional banks or national finance companies, on a whole loan,
servicing-released basis for cash premiums only (no securitizations). Mortgage
loans are sold with very limited recourse beyond the standard market
representations and warranties.
WF has a centralized secondary market function which analyzes the
product needs of the various end investors, consolidates the investors'
underwriting guidelines into the product parameters that WF offers to its
brokers and ultimately sells WF's originations to the end investors. Between the
time loans are originated and sold, they are warehoused on WF's balance sheet.
WSFS provides temporary financing for the loans through a warehouse line of
credit with an adjustable rate generally based on the one-month FHLB Advance
rate plus a margin. This line of credit is limited to $135 million but can
increase to $200 million on a temporary basis. At September 30, 2002, $ 141.2
million was outstanding on this line. The average age of unsold loans at
September 30, 2002 was 10 days compared to 11 days at September 30, 2001. The
percentage of loans in the warehouse that were 45 days old or greater were 3% at
September 30, 2002 and 0.8% at September 30, 2001. WF's total assets at
September 30, 2002 and 2001 were $166 million and $52 million, respectively. For
the three and nine months ended September 30, 2002, WF added $3.4 million and
$7.2 million, respectively, to the net income of the Corporation, compared to
$720,000 and $1.7 million for the respective periods in 2001. At September 30,
2002, WSFS also held $3.0 million in preferred stock of WF. WSFS purchased $1.95
million of WF loans during the nine months ended September 30, 2002, as compared
to $22.9 million for the same period in 2001. See Note 10 of the financial
statements for a discussion of subsequent events.
11
The following table provides certain additional WF production and sales
statistics for the periods indicated:
For the Three Months Ended September 30, For the Nine Months Ended September 30,
---------------------------------------- ---------------------------------------
2002 2001 2002 2001
---------- ---------- ------------ ----------
(Dollars in Thousands)
Origination Dollars $ 486,845 $ 150,363 $ 1,126,840 $ 369,694
Origination Units 3,636 1259 8,892 3054
Average mortgage balance $ 133 $ 119 $ 127 $ 121
Weighted average note rate 7.95 % 8.80 % 8.28 % 8.78 %
Weighted average CLTV 1 84 % 82 % 83 % 81 %
Weighted average credit score 633 639 645 632
Percentage of second liens 6 % 9 % 7 % 8 %
Sales $ 433,444 $ 142,268 $ 1,062,623 $ 347,710
Sales margin 4.51 % 3.94 % 4.21 % 3.87 %
Average days of loan in warehouse 24 29 25 30
1 Combined Loan-To-Value represents the mortgage amount plus any senior liens
(or junior liens if also originated by WF) divided by the appraised value of
the property.
On November 7, 2002, WSFS announced that a definitive agreement was
signed with American General Finance, Inc. for the sale of WF. See Note 10 for
further discussion.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Corporation has an interest-rate cap with a notional amount of $50
million, which limits 3-month LIBOR to 6% for the ten years ending December 1,
2008. The cap is being used to hedge the cash flows on $50 million in trust
preferred floating rate debt. The cap was recorded at the date of purchase in
other assets, at a cost of $2.4 million.
Prior to July 1, 2002 the fair market value (FMV), which at inception
was equal to the cost, had two components: the intrinsic value and the time
value of the option. The cap was marked-to-market quarterly, with changes in the
intrinsic value of the cap, net of tax, included in a separate component of
other comprehensive income and changes in the time value of the option included
directly in interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, was expensed in the period in which ineffectiveness
is determined. It has been determined that the hedge is highly effective and can
reasonably be expected to remain so.
On July 1, 2002, as a result of a change in the guidance from the
Financial Accounting Standards Board, the Corporation dedesignated the original
cash flow hedge and redesignated the interest rate cap so that the entire change
in the market value of the cap is included in other comprehensive income. On
July 1, 2002, $29,000, which represented the intrinsic value of the dedesignated
cap, remained in other comprehensive income. This amount will be amortized
straight line into interest expense over the remaining life of the cap. As part
of redesignating the new cash flow hedge, the method of assessing effectiveness
was changed to be based on the total changes in the interest rate cap's cash
flows, and not just the changes in intrinsic value, as was the basis of
assessing effectiveness under the dedesignated hedging relationship. As a result
of the change in the methodology for assessing effectiveness, the hedging
relationship is considered to be perfectly effective and can reasonably be
expected to remain so. Therefore, all of the changes in the interest rate cap's
fair value are recorded in other comprehensive income.
On July 1, 2002, which was the inception of the redesignated hedging
relationship, the fair value of the interest rate cap, (which consists of
multiple "caplets"), was $1.6 million and this amount was allocated to the
respective "caplets" on a fair value basis. The change in each "caplet's"
respective allocated fair value amount is reclassified out of other
comprehensive income and into interest expense when each of the quarterly
interest payments are made on the trust preferred debt. No amount was
transferred into interest expense during the third quarter of 2002 since the
related "caplet" had a FMV of zero allocated to it. The redesignation of the
cash flow hedge provides a more systematic method for amortizing the cost of the
cap against earnings.
12
Management is not aware of any events that would result in the
reclassification into earnings of gains and losses that are currently reported
in accumulated other comprehensive income except for those discussed above. The
fair value is estimated using a standard option model.
Everbank enters into short-term forward exchange contracts to provide
an effective fair value hedge on the foreign currency denominated deposits from
fluctuations that may occur in world currency markets. At September 30, 2002 and
2001, Everbank had entered into such contracts with notional amounts of $113.3
million and $56.6 million, respectively. During the Nine months ended September
30, 2002 and 2001, the expense associated with these hedging contracts was
almost entirely offset by changes in the fair value of the world currency
denominated deposits. There was no material impact on other income.
The following depicts the change in fair market value of the Company's
derivatives:
2002 2001
-------------------------------------- ----------------------------------------
At At At
January 1, Change September 30, January 1, Change September 30,
---------- ------ ------------- ---------- ------ -------------
(In Thousands)
Interest Rate Cap:
------------------
Intrinsic value - dedesignated cap $ 589 $ (589) $ -- $ 193 $ (190) $ 3 (1)
Time value - dedesignated cap.... 1,945 (1,945) -- 1,804 (259)(2) 1,545
Redesignated cap.................. -- 835 835(1) -- -- --
------- ------- -------- ------- -------- --------
Total............................. $ 2,534 $ (1,699) $ 835 $ 1,997 $ (449) $ 1,548
======= ======= ======== ======= ======== ========
Foreign Exchange Contracts
--------------------------
Time Value.................. $ (395) $ 1,666 $ 1,271 $ 1,385 $ (1,003) $ 382
======= ========== ======== ======= ========= ========
(1) Included in other comprehensive income, net of taxes.
(2) Included in interest expense on the hedged item (trust preferred
borrowings).
6. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive
income as required by SFAS No. 130:
For the three months For the nine months
ended September 30, ended September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income ........................................ $ 9,482 $ 5,503 $ 26,829 $ 13,929
Other Comprehensive Income:
Net unrealized holding (losses) gains on securities
available-for-sale arising during the period,
net of taxes .................................. (443) 1,569 (270) 3,443
Net unrealized holding losses arising during the
period on derivatives used for cash flow hedge,
net of taxes .................................. (559) (535) (913) (124)
Reclassification adjustment for gains included in
net income, net of taxes ..................... (1,025) -- (1,039) --
-------- -------- -------- --------
Total comprehensive income ........................ $ 7,455 $ 6,537 $ 24,607 $ 17,248
======== ======== ======== ========
13
7. TAXES ON INCOME
The Corporation accounts for income taxes in accordance with SFAS No.
109, which requires the recording of deferred income taxes that reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Management has assessed valuation allowances on the deferred income
taxes due to, among other things, limitations imposed by Internal Revenue Code
and uncertainties, including the timing of settlement and realization of these
differences.
On August 16, 2002 the Internal Revenue Service concluded the
examination of the Corporation's federal income tax returns for the years
through December 31, 2000. The income tax provision for the three and nine
months ended September 30, 2002, was reduced by $894,000 primarily as a result
of the favorable resolution.
8. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation had two operating segments
during the three and nine months ended September 30, 2002 and 2001: WSFS and WF.
WF is not wholly-owned, but is a majority-controlled subsidiary. As a
majority-controlled subsidiary, it is included in consolidated financial
statements, including segment reporting. Generally, reportable segments are
business units that are managed separately, operate under different regulations
and offer different services to distinct customer bases. The Corporation
evaluates performance based on pretax ordinary income and allocates resources
based on these results.
The WSFS segment provides financial products to consumer and commercial
customers within its geographical footprint through its branch network. WF, a
51% owned subsidiary, is engaged in sub-prime home equity mortgage banking. WF
conducts activity on a national level and aggregates loans primarily through
brokers and sells them to investors. Because C1FN is classified as a business
held-for-sale, it is no longer considered a segment. For a further discussion of
C1FN, see Notes 9 and 10 of the financial statements. For a further discussion
of WF, see Note 10 of the financial statements.
14
Segment information for the three and nine months ended September 30,
2002 follows:
For the three months ended September 30,
--------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
(In Thousands)
WSFS WF Total WSFS WF Total
---- -- ----- ---- -- -----
External customer revenues:
Interest income $ 22,304 $ 2,513 $ 24,817 $ 26,090 $ 1,022 $ 27,112
Other income 5,958 19,509 25,467 5,262 5,599 10,861
--------- -------- ---------- --------- -------- -----------
Total external customer revenues 28,262 22,022 50,284 31,352 6,621 37,973
--------- -------- ---------- --------- -------- -----------
Intersegment revenues:
Interest income 874 7 881 526 7 533
Other income - 34 34 - - -
--------- -------- ---------- --------- -------- -----------
Total Intersegment revenues 874 41 915 526 7 533
--------- -------- ---------- --------- -------- -----------
Total revenue 29,136 22,063 51,199 31,878 6,628 38,506
External customer expenses:
Interest expense 8,918 - 8,918 12,494 - 12,494
Other expenses 11,980 10,248 22,228 11,322 4,008 15,330
Other depreciation and amortization 928 180 1,108 778 92 870
--------- -------- ---------- --------- -------- -----------
Total external customer expenses 21,826 10,428 32,254 24,594 4,100 28,694
--------- -------- ---------- --------- -------- -----------
Intersegment expenses:
Interest expense 7 874 881 7 526 533
Other expenses 34 - 34 - - -
--------- -------- ---------- --------- -------- -----------
Total Intersegment expenses 41 874 915 7 526 533
Total expenses 21,867 11,302 33,169 24,601 4,626 29,227
--------- -------- ---------- --------- -------- -----------
Income from continuing operations before
minority interest and taxes $ 7,269 $10,761 $ 18,030 $ 7,277 $ 2,002 $ 9,279
--------- -------- ---------- --------- -------- -----------
Less minority interest 5,273 802
Income tax provision 4,267 2,877
Loss on wind-down of discontinued (563) -
operations, net of tax
Income (loss) on discontinued operations 818 (97)
of business held-for-sale, net of tax
Gain on sale of United Asian Bank, net of tax 737 -
---------- -----------
Consolidated net income $ 9,482 $ 5,503
========== ===========
15
For nine months ended September 30,
-----------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
(In Thousands)
WSFS WF Total WSFS WF Total
---- -- ----- ---- -- -----
External customer revenues:
Interest income $ 74,652 $ 6,240 $ 80,892 $ 77,615 $ 2,423 $ 80,038
Other income 16,722 44,824 61,546 14,682 12,948 27,630
--------- -------- --------- --------- ------- --------
Total external customer revenues 91,374 51,064 142,438 92,297 15,371 107,668
--------- -------- --------- --------- ------- --------
Intersegment revenues:
Interest income 2,081 18 2,099 1,477 43 1,520
Other income - 112 112 - 320 320
--------- -------- --------- --------- ------- --------
Total intersegment revenues 2,081 130 2,211 1,477 363 1,840
--------- -------- --------- --------- ------- --------
Total revenue 93,455 51,194 144,649 93,774 15,734 109,508
External customer expenses:
Interest expense 27,128 - 27,128 37,709 - 37,709
Other expenses 35,768 25,542 61,310 34,534 10,345 44,879
Other depreciation and
amortization 2,689 468 3,157 2,647 236 2,883
--------- -------- --------- --------- ------- --------
Total external customer expenses 65,585 26,010 91,595 74,890 10,581 85,471
--------- -------- --------- --------- ------- --------
Intersegment expenses:
Interest expense 18 2,081 2,099 43 1,477 1,520
Other expenses 112 - 112 320 - 320
--------- -------- --------- --------- ------- --------
Total intersegment expenses 130 2,081 2,211 363 1,477 1,840
--------- -------- --------- --------- ------- --------
Total expenses 65,715 28,091 93,806 75,253 12,058 87,311
Income from continuing operations
before minority interest, taxes and
cumulative effect of change in
accounting principle $ 27,740 $ 23,103 $ 50,843 $ 18,521 $ 3,676 $ 22,197
--------- -------- --------- --------- ------- --------
Less minority interest 11,321 802
Income tax provision 14,229 6,995
Cumulative effect of change in accounting
principle, net of tax 703 -
Loss on wind-down of discontinued (563) -
operations, net of tax
Income (loss) from discontinued
operations of business held for
sale, net of tax 659 (471)
Gain on Sale of United Asian Bank,
net of tax 737 -
--------- --------
Consolidated net income $ 26,829 $ 13,929
========= ========
- --------------------------------------------------------------------------------------------------------------
At September 30, 2002 At September 30, 2001
--------------------------------- -----------------------------------
(In Thousands)
WSFS WF Total WSFS(1) WF Total
---- -- ----- ---- -- -----
Mortgage backed securities $ 156,699 $ - $ 156,699 $ 144,693 $ - $ 144,693
Investments of businesses held for $ 317,591 $ - $ 317,591 $ 265,776 $ - $ 265,776
Segment Assets $1,975,705 $ 165,972 $2,141,677 $1,868,254 $ 52,162 $1,920,416
Elimination intersegment receivables (160,215) (57,250)
----------
Consolidated assets $1,981,462 $1,863,166
========== ==========
Total deposits $1,208,280 $ - $1,208,280 $1,152,289 $ - $1,152,289
Segment liabilities $1,851,282 $ 148,539 $1,999,821 $1,908,420 $ 48,742 $1,957,162
Elimination intersegment liabilities (149,676) (196,188)
---------- ----------
Consolidated liabilities $1,850,145 $1,760,974
========== ==========
Capital expenditures $ 1,830 $ 1,024 $ 2,854 $ 1,680 $ 436 $ 2,116
(1) For comparative purposes, the 2001 balances for C1FN have been included in
WSFS.
16
9. BUSINESSES HELD FOR SALE
In June 2002, agreements were signed with a privately-held holding
company of a federally chartered savings bank for the sale of C1FN and related
interests in WSFS' Everbank Division. Consistent with the manner in which the
segment is managed and operated, information in this report labelled "C1FN"
generally represents the profoma combined results of C1FN and WSFS' Everbank
Division (the C1FN/Everbank segment).
Everbank was started with C1FN in the fourth quarter of 1999 as a joint
initiative in internet and branchless banking. Under the terms of its management
agreement with WSFS, C1FN had the right to acquire the deposits and business of
Everbank if C1FN obtained its own depository institution charter. In April 2002,
C1FN concluded that it was likely that sufficient capital could not be raised on
a timely basis and withdrew its application to the Office of Thrift Supervision
(OTS) for a separate thrift charter. In June 2002, the above agreements of sale
were signed. On November 5, 2002, WSFS completed the sale of C1FN/Everbank. See
Note 10 of the financial statements for a further discussion.
In addition, in June 2002, WSFS signed an agreement for the sale of its
United Asian Bank Division (UAB). UAB was started in April 2000 as a single
branch to serve the Korean and Asian communities of Elkins Park, Pennsylvania
and the surrounding area. The sale, which was completed in September of 2002 and
resulted in an after tax gain of $737,000, included $8.6 million in deposits and
$15.8 million in loans in addition to branch fixed assets and the lease
obligations.
These transactions are consistent with recent strategic actions of WSFS
to simplify its operations and better focus resources and capital on WSFS' core
bank.
In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the major classes of assets and liabilities of
C1FN/Everbank are presented separately on the statement of condition as of
September 30,2002. Gains/losses from these businesses have been presented as
gains/losses of businesses held-for-sale, and presented separately for all
periods. The gain on the sale of UAB is presented separately on the statement of
operations, net of tax. The average balance sheet is presented with total assets
and liabilities of businesses held-for sale displayed separately.
The following table presents the net income from businesses held-for-sale
for the three and nine months ended September 30, 2002 and 2001:
For the Three Months Ended September 30, 2002 For the Three Months Ended September 30, 2001
----------------------------------------------- -----------------------------------------------
C1FN UAB Consolidated C1FN UAB Consolidated
------- ------- ------------ ------- ------- ------------
(In Thousands)
Interest income ......................... $ 2,225 $ 330 $ 2,555 $ 3,686 $ 250 $ 3,936
Interest expense ........................ 1,549 22 1,571 2,462 42 2,504
------- ------- ------- ------- ------- -------
Net interest income ................... 676 308 984 1,224 208 1,432
Provision for loan losses ............... 90 18 108 119 (50) 69
------- ------- ------- ------- ------- -------
Net interest income after provision for
loan losses ......................... 586 290 876 1,105 258 1,363
Other income ............................ 2,999 8 3,007 814 37 851
Other expenses .......................... 2,841 334 3,175 2,754 312 3,066
------- ------- ------- ------- ------- -------
Income before minority interest and taxes 744 (36) 708 (835) (17) (852)
Minority interest ....................... (622) -- (622) (685) -- (685)
------- ------- ------- ------- ------- -------
Income before taxes ..................... 1,366 (36) 1,330 (150) (17) (167)
Tax expense (benefit) ................... 526 (14) 512 (63) (7) (70)
------- ------- ------- ------- ------- -------
Net income .............................. $ 840 $ (22) $ 818 $ (87) $ (10) $ (97)
======= ======= ======= ======= ======= =======
17
For the Nine Months Ended September 30, 2002 For the Nine Months Ended September 30, 2001
-------------------------------------- ----------------------------------------------
C1FN UAB Consolidated C1FN UAB Consolidated
--------- ---------- ------------ --------- -------- ------------
(In Thousands)
Interest income ......................... $ 8,022 $ 949 $ 8,971 $ 10,985 $ 658 $ 11,643
Interest expense ........................ 4,315 86 4,401 7,733 143 7,876
-------- -------- -------- -------- -------- --------
Net interest income ................... 3,707 863 4,570 3,252 515 3,767
Provision for loan losses ............... 197 57 254 213 8 221
-------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses ......................... 3,510 806 4,316 3,039 507 3,546
Other income ............................ 5,255 51 5,306 2,100 81 2,181
Other expenses .......................... 9,810 1,059 10,869 7,846 858 8,704
-------- -------- -------- -------- -------- --------
Income before minority interest and taxes (1,045) (202) (1,247) (2,707) (270) (2,977)
Minority interest ....................... (2,314) -- (2,314) (2,184) -- (2,184)
-------- -------- -------- -------- -------- --------
Income before taxes ..................... 1,269 (202) 1,067 (523) (270) (793)
Tax expense (benefit) ................... 488 (80) 408 (214) (108) (322)
-------- -------- -------- -------- -------- --------
Net income .............................. $ 781 $ (122) $ 659 $ (309) $ (162) $ (471)
======== ======== ======== ======== ======== ========
10. SUBSEQUENT EVENTS
On November 5, 2002, WSFS completed the previously announced sale of
its C1FN/Everbank branchless national banking segment to Alliance Capital
Partners, Inc., the privately-held parent company of First Alliance Bank, a
federally chartered savings bank.
This transaction included total assets of $342.8 million, of which
$14.2 million were loans. Deposits were $340.1 million. As anticipated, WSFS
expects to record a modest gain in the fourth quarter 2002 related to the
operation and sale of this segment.
In addition, on November 7, 2002, WSFS announced that a definitive
agreement has been signed with American General Finance, Inc. for the sale of
WSFS' majority-owned subsidiary, Wilmington Finance, Inc.
The sale price is based on a premium to book value at closing. WSFS
expects its share of the total transaction proceeds to be approximately $78
million. WSFS expects to recognize a gain on the sale of approximately $42
million after tax, or $4.40 per WSFS share. At September 30, 2002 WF had assets
of approximately $166 million, consisting primarily of mortgage loans
held-for-sale. Over the 12 months ended September 30, 2002 WSFS has recognized
$8.1 million, or $0.86 per WSFS share as its portion of the profitability of WF.
The WF transaction is expected to close in early 2003 and is subject to
customary closing conditions. Since the sale came as the result of an
unsolicited offer, WF was not classified as a business held-for-sale.
18
ITEM 2. WSFS FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (WSFS). Founded in 1832, WSFS is one of the oldest financial
institutions in the country. As a federal savings bank, which was formerly
chartered as a state mutual savings bank, WSFS enjoys broader revenue powers
than most savings banks. WSFS has served the residents of the Delaware Valley
for 170 years. WSFS is the largest thrift institution headquartered in Delaware
and among the four largest financial institutions in the state on the basis of
total deposits traditionally garnered in-market. The Corporation's primary
market area is the mid-Atlantic region of the United States which is
characterized by a diversified manufacturing and service economy. The long-term
goal of the Corporation is to maintain its high-performing financial services
company status by focusing on its core banking business while occasionally
developing profitable niches in highly-synergistic businesses that have a
strategic fit.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services. Lending
activities are funded primarily with retail deposit services and borrowings. At
September 30, 2002 there were 21 retail banking offices located in northern
Delaware and southeastern Pennsylvania through which WSFS conducted banking
operations. In January 2002, for strategic reasons, WSFS transferred five
in-store branch offices that were outside of its core footprint to another
financial institution. Deposits are insured to their legal maximum by the
Federal Deposit Insurance Corporation (FDIC).
The Corporation has two consolidated subsidiaries, WSFS and WSFS
Capital Trust I, and no unconsolidated subsidiaries or off-balance sheet
entities. Fully-owned subsidiaries of WSFS include WSFS Credit Corporation
(WCC), which was engaged primarily in indirect motor vehicle leasing; WSFS
Investment Group, Inc., which markets various third party insurance products and
securities through the WSFS' branch system and WSFS REIT, which is currently
inactive. In addition to the wholly-owned subsidiaries, the Corporation
consolidates two non-wholly-owned subsidiaries, CustomerOne Financial Network,
Inc. (C1FN) and Wilmington Finance, Inc. (WF). See Notes 4 and 10 of the
financial statements for a further discussion.
As reported previously, WSFS continues its strategy to refocus its
capital and resources on its core community banking operation, primarily in the
Delaware market. As a result, Management regularly reviews business investments
and asset portfolios to determine whether continued investment in those lines of
business or assets are in the best interest of WSFS and its stockholders. As a
result of such reviews in the recent past, the Corporation has discontinued the
operations of its indirect automobile finance business (WSFS Credit
Corporation), exited non-core branches in Pennsylvania sold the C1FN/Everbank
national branchless banking segment, and on November 7, 2002, entered into an
agreement to sell its mortgage banking subsidiary, Wilmington Finance, Inc. As
part of this strategic focus, management continues to review investments in
various businesses, operating lines, and assets, and may determine to exit or
sell interest in such businesses, operating lines and assets. Such sales, if
they were to occur, may result in WSFS incurring losses or gains, which may be
material in amount.
19
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $67.5 million during the first nine months of 2002
to $2.0 billion at September 30, 2002. The majority of this growth occurred in
cash and investments, including investments of businesses held-for-sale, which
grew $76.1 million during the year. In addition, loans held-for-sale increased
$63.4 million during the nine months ended September 30, 2002, resulting from an
increase in loan originations at the Corporations mortgage banking subsidiary,
Wilmington National, Inc. These increases were partially offset by decreases of
$53.6 million in operating leases, loans and other assets of discontinued
operations, due to run-off in the WCC loan and lease portfolios. In addition,
$15.8 million of loans were sold as part of the UAB Sale.
Total liabilities increased $42.0 million between December 31, 2001 and
September 30, 2002, to $1.9 billion. Deposits (including deposits of business
held-for-sale) increased $62.2 million during the first nine months of 2002, net
of the $8.5 million decline resulting from the sale of UAB. Partially offsetting
this increase was the maturity of $8.3 million in brokered deposits.
Capital Resources
Stockholders' equity increased $22.2 million between December 31, 2001 and
September 30, 2002. This increase reflects net income of $26.8 million for the
first nine months of 2002, partially offset by the purchase of 73,100 shares of
treasury stock for $1.4 million ($19.38 per share average). At September 30,
2002, the Corporation held 5,745,269 shares of its common stock in its treasury
at a cost of $71.7 million. In addition, the Corporation declared cash dividends
totaling $1.3 million during the nine months ended September 30, 2002. The
increase in stockholders' equity was also partially offset by a decline of $2.2
million in other comprehensive income resulting primarily from the sale of
mortgage-backed securities and the decline in the fair value of the interest
rate cap.
Below is a table presenting the Bank's consolidated capital position
relative to the minimum regulatory requirements as of September 30, 2002
(dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
-------------------------- ---------------------- --------------------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ -------- ------ --------- -------- --------
Total Capital
(to Risk-Weighted Assets) ........ $183,066 14.16% $103,413 8.00% $129,267 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 172,560 8.66 79,690 4.00 99,612 5.00
Tangible Capital (to Tangible
Assets) .......................... 172,560 8.66 29,884 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 172,560 13.35 N/A N/A 77,560 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory actions and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. At September 30, 2002 the Bank was in
compliance with regulatory capital requirements and was deemed a
"well-capitalized" institution.
20
Liquidity
The OTS requires institutions such as WSFS to maintain adequate liquidity to
assure safe and sound operation. At September 30, 2002, WSFS' liquidity ratio of
cash and qualified assets to net withdrawable deposits and borrowings due within
one year was 18.4% compared to 10.8% at December 31, 2001. Liquidity was higher
than usual at December 31, 2001 as a result of prefunding certain borrowings for
January 2002. The September 30, 2002 liquidity was unusually high due to the
sale of mortgage-backed securities at Everbank and the subsequent investment in
short-term notes and increased deposits at banks. Management monitors liquidity
daily and maintains funding sources to meet unforeseen changes in cash
requirements. The Corporation's primary financing sources are deposits,
repayments of loans and investment securities, sales of loans, borrowings and
net earnings. In addition, the Corporation's liquidity needs can be met through
the use of its borrowing capacity from the FHLB of Pittsburgh, the sale of
certain securities and the pledging of certain loans for other lines of credit.
Management believes all these sources are sufficient to maintain the required
and prudent levels of liquidity.
INVESTMENT IN REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Because reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence, and the
mortgage balance consists of cash advanced, interest compounded over the life of
the loan and a premium which represents a portion of the shared appreciation in
the home's value, if any, or a percentage of the value of the residence.
The Corporation had a net investment in reverse mortgages of $33.0
million at September 30, 2002. The Corporation accounts for its investment in
reverse mortgages in accordance with the October 1, 1992 Securities and Exchange
Commission staff memorandum entitled "Accounting for Pools of Uninsured
Residential Real Estate Contracts." The memorandum requires grouping individual
reverse mortgages into "pools" and recognizing income based on the estimated
effective yield of the pool. The Corporation's investment in reverse mortgages
is grouped into two pools based on geography and origination date (the "1993
Pool" and the "1994 Pool"). In computing the effective yield of each, the
Corporation must project cash flows of the pool using actuarial projections of
the life expectancy of the individual contract holders, other estimates of
timing of cash flows and changes in the collateral value of the residence. At
each reporting date, a new economic forecast is made of the cash flows of each
pool of reverse mortgages. The effective yield of each pool is recomputed, and
income is adjusted retroactively and prospectively to reflect the revised rate
of return. Because of this quasi-market-value-based accounting, the recorded
value of reverse mortgage assets include significant risk associated with both
estimations and real estate market conditions, and therefore income can vary
significantly from reporting period to reporting period.
As indicated, a projection of future net cash flows requires making
assumptions and estimates about current values and future appreciation of house
values, mortality rates and mobility rates. Assumptions are also made to factor
the time it takes to liquidate the receivable after a maturity event has
occurred. These assumptions are made at a point in time and are based on
historical experiences and expected economic conditions. It should be noted that
reverse mortgages are a relatively new product and therefore only a limited
amount of historical data exists on which to base future expectations. As with
any estimates about the future, these assumptions are subjective, and will
change as market conditions or the portfolio experience dictates. Accordingly,
actual results may differ materially from the assumptions used in the model.
Based on the estimate of the future net cash flows as of the third
quarter, a charge of $0.2 million against interest income was recognized
(cumulative "catch up" adjustment.) This was due to the actual cash flow
experience as well as slower repayment rates (death and moveout) than previously
predicted by the Corporation's cash flow model. In the third quarter the
Corporation made no changes to the assumptions regarding future repayment rates,
future home appreciation rates, and collection times. The yield for the third
quarter of 2002 was 23%, reasonably consistent with previous expectations of the
long term yield on the portfolio.
As discussed, the book value of reverse mortgages is sensitive to a
number of factors including the Corporation's estimate of the following key
variables:
21
o Current Collateral Value
o Future Collateral Appreciation Rate
o Repayment Rate
o Collection Time
Listed below is a discussion of each factor impacting future cash flow
estimates, noting current assumptions, historical experience and, where
appropriate, management's best estimate of the sensitivity of the value to a
change in the assumption. Indications of sensitivity are presented in tabular
form. The market value sensitivities to combined changes in the assumptions
listed below may not necessarily be additive due to the interdependency of the
variables. The data provided in the tables are not meant to capture the full
range of possibilities of changes in value given changes in assumptions. Also,
these sensitivities may not have a linear extrapolation beyond the sensitivities
provided. Sensitivity tables provided herein are based on the Corporation's
internal models and, as such, are subject to risks associated with internally
generated models. Finally, any summation of value may not be indicative of the
value that could be obtained in a sale between a willing buyer and seller.
Current Collateral Value Estimates
To assess the current market value of the collateral as of the
reporting date, the Corporation utilizes an "18-month look-back" approach, which
calculates the compounded annualized appreciation rates since origination on the
homes that were actually sold and collected during the previous 18-month period.
This rate is used as a proxy for, and is applied to the remaining houses in the
pool. The most recent 18-month look-back calculated a 3.06% compounded annual
growth rate of appreciation for the 1994 Pool and a 1.82% compounded annual
growth rate of appreciation for 1993 Pool. The Corporation has experienced a
substantial improvement over the last few quarters in the estimate of current
collateral values from the "18-month look-back" approach as a result of the
recent strong residential housing market. In the third quarter, the Company
performed drive-by appraisals on reverse mortgage collateral. The results
suggest current collateral values which, in aggregate, may be significantly in
excess of the "18-month look back" method. However, in its internal modeling,
WSFS continues to use the "18-month look back" method for consistency and
because WSFS has no empirical data to evaluate the accuracy of the drive-by
appraisals. The following table illustrates the proforma pre-tax change to the
carrying value of the reverse mortgages when the estimate of collateral values
at September 30, 2002 is adjusted by the noted percentages.
Proforma Adjustment to
Reverse Mortgage Carrying Value
Change in Current ------------------------------------------------
Collateral Values 1993 Pool 1994 Pool Total
- ------------------------------ -------------- ------------------ --------------
(Dollars in Millions)
-3% $ (.4) $(.6) $(1.0)
-2% (.3) (.4) (.7)
-1% (.2) (.2) (.4)
+1% .2 .2 .4
+2% .3 .4 .7
+3% .4 .6 1.0
+10% 1.5 2.0 3.5
Future Collateral Appreciation Rate Estimates
To estimate future home appreciation rates, third party macroeconomic
forecasting firms are utilized in addition to the Corporation's own historical
experience relative to the overall market. Over the long term, the Corporation
estimates that the 1994 Pool will appreciate at approximately 1% per year and
the 1993 Pool at 0% per year. In the short term, the
22
Corporation uses assessments of the economic factors that influence housing
prices to determine appreciation rates. Based on current economic factors and
outside forecasting sources, the Corporation is currently forecasting no (0%)
appreciation in the first year forward, a market value decline in year 2 of 5%,
and a market value decline in year 3 of 3% for both pools. The following table
shows the proforma adjustments to carrying value when applying a parallel shift
to the current appreciation rate estimates in all future years.
Proforma Adjustment to
Reverse Mortgage Carrying Value
Change in Annual -----------------------------------------------
Appreciation Rates 1993 Pool 1994 Pool Total
- -------------------------------- ------------- ------------------ --------------
(Dollars in Millions)
-3% $ (2.3) $ (2.0) $ (4.3)
-2% (1.5) (1.4) (2.9)
-1% (.8) (.7) (1.5)
+1% .8 .7 1.5
+2% 1.7 1.4 3.1
+3% 2.5 2.2 4.7
Repayment Rate Estimates
Repayment rates are a combination of mortality rates and mobility
(moveout) rates and together constitute loan "maturity events." For mortality
rates the Corporation uses 85% of the 1980 U.S. Census Bureau mortality tables
based on the ages of homeowners in the portfolio. For mobility rates, the
Corporation uses its historical experience. The Corporation's recent historical
experience (average of last 5 years' experience) indicates a 12.9% total annual
repayment rate for the 1993 pool and 11.8% total annual repayment rate for the
1994 pool. Based on this experience the Corporation estimates future repayment
rates of 13% and 11.5%, respectively. A given change in the annual estimated
repayment rate would result in an adjustment to the carrying value as follows:
Proforma Adjustment to
Reverse Mortgage Carrying Value
Change in Annual ------------------------------------------------
Repayment Rate 1993 Pool 1994 Pool Total
---------------------- ------------- ------------------ ---------------
(Dollars in Millions)
-3% $ (1.7) $ (4.4) $ (6.1)
-2% (1.1) (2.9) (4.0)
-1% (.5) (1.4) (1.9)
+1% .5 1.4 1.9
+2% 1.0 2.6 3.6
+3% 1.5 3.9 5.4
23
Collection Time Estimates
Collection time represents the time it takes to receive cash after a
maturity event. The Corporation's historical experience, measured monthly, has
predominantly varied between seven and thirteen months. Recent experience shows
a favorable trend as a result of the strong housing market. The Corporation's
current estimates are eight months for the 1994 Pool and ten months for 1993
Pool. A given change in the estimated collection time would result in an
adjustment to the carrying value as follows:
Proforma Adjustment to
Reverse Mortgage Carrying Value
Change in ----------------------------------------------
Collection Time 1993 Pool 1994 Pool Total
-------------------------------- ------------- ------------------ -------------
(Dollars in Millions)
Unfavorable 3 Months $ (.3) $ (1.8) $ (2.1)
Unfavorable 2 Months (.2) (1.2) (1.4)
Unfavorable 1 Month (.1) (.6) (.7)
Favorable 1 Month .1 .6 .7
Favorable 2 Months .2 1.3 1.5
Favorable 3 Months .4 2.0 2.4
Portfolio Cash Flows and Carrying Value
In addition to the above Corporation estimated variables, the current
book value of reverse mortgages is sensitive to the assumed discount rate
applied to expected future cash flows estimated from the reverse mortgage
portfolios. The SEC prescribed accounting requires the book value of the
portfolio to be determined by discounting all future cash flow estimates by the
internal rate of return (or "Effective Yield") to be generated by the portfolio
(and taking into account both past actual and future estimated portfolio cash
flows). The annualized Effective Yield for the three months ended September 30,
2002 on the 1993 Pool is 8.34%, while the annualized Effective Yield on the 1994
Pool is 35.12%. The weighted average yield is approximately 23% and is, by
definition, the expected long-term yield on the portfolio.
Based on the Corporation's current estimates of Current Collateral
Value, Future Collateral Appreciation Rates, Repayment Rates and Collection
Times, the Corporation's cash flow model projects the following net cash flows
to result from its reverse mortgage portfolios in the periods identified.
Net Inflows
-------------------------------------
1993 Pool 1994 Pool Total
--------- --------- -----
(Dollars in Millions)
Three months ending December 31, 2002 $ 1.0 $ 1.2 $ 3.2
2003......................... 3.3 6.0 9.3
2004........................ 2.3 7.2 9.5
2005........................ 2.1 6.6 8.7
2006......................... 1.9 6.3 8.2
2007-2011.................... 7.7 26.5 34.2
2012-2016.................... 4.4 17.4 21.8
2017-2021.................... 1.9 8.9 10.8
Thereafter................... .7 4.7 5.4
24
The following table depicts the addition to (reduction of) the $33
million reverse mortgage carrying value at September 30, 2002 that would result
were the expected cash flows estimated from the Corporation's reverse mortgage
portfolios (above) discounted to the present value at discount rates other than
the SEC prescribed methodology. Market indications of a discount rate on similar
instruments written more recently are estimated to be around 5%.
Proforma Adjustment to
Reverse Mortgage Carrying Value
Assumed ------------------------------------------------
Discount Rate 1993 Pool 1994 Pool Total
- -------------------------- ------------- ------------------ ---------------
(Dollars in Millions)
25% $ (7.1) $6.3 $(.8)
20% (5.8) 10.6 4.8
15% (4.0) 16.7 12.7
10% (1.4) 25.8 24.4
5% 2.5 40.5 43.0
3% 4.7 48.9 53.6
Based on Company assumptions about long-term funding costs, direct and
indirect operating costs and incremental taxes, reverse mortgages had a positive
impact on the Corporation of $0.09 per share in the third quarter of 2002
compared to $0.19 per share for the third quarter of 2001. For the nine months
ended September 30, 2002, reverse mortgages had an positive impact of $0.71 per
share, compared to $0.43 per share for the same period in 2001.
The Corporation is not originating new reverse mortgages. The average
life of the existing portfolio is estimated to be 7.7 years under current cash
flow assumptions.
25
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets
and past due loans at the dates indicated including businesses held-for-sale for
both periods presented. Past due loans are loans contractually past due 90 days
or more as to principal or interest payments but which remain on accrual status
because they are considered well secured and in the process of collection.
September 30, December 31,
2002 2001
------------- ------------
(Dollars in Thousands)
Nonaccruing loans:
Commercial ................................. $2,355 $1,330
Consumer ................................... 490 306
Commercial mortgage ........................ 890 1,928
Residential mortgage ....................... 3,810 3,618
Construction ............................... 199 351
------ ------
Total nonaccruing loans ......................... 7,744 7,533
Assets acquired through foreclosure ............. 1,133 432
------ ------
Total nonperforming assets ...................... $8,877 $7,965
====== ======
Past due loans:
Residential mortgages ...................... $ 511 $ 88
Commercial and commercial mortgages ........ 47 767
Consumer ................................... 17 244
------ ------
Total past due loans ............................ $ 575 $1,099
====== ======
Ratios:
Nonaccruing loans to total loans (1) ....... 0.74% 0.72%
Allowance for loan losses to gross loans (1) 2.11% 2.05%
Nonperforming assets to total assets ....... 0.45% 0.42%
Loan loss allowance to nonaccruing loans (2) 280.72% 277.77%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ................. 247.38% 265.48%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $913,000 during the nine months ended
September 30, 2002. The increase is due primarily to the foreclosure of one
commercial real property valued at $800,000. During the third quarter, two
commercial loans with an aggregate balance of $532,000 were placed on nonaccrual
status. Commercial additions were offset in part by a $205,000 payoff of a
nonaccruing loan The increase in residential nonaccruals included $420,000 in
loans held for sale that were placed on nonaccrual during the third quarter. The
following is an analysis of the change in nonperforming assets:
For the Nine
Months Ended For the Year Ended
September 30, 2002 December 31, 2001
--------------------- ------------------
(In Thousands)
Beginning balance................................ $ 7,965 $ 8,965
Additions .................................. 6,777 7,386
Collections................................. (3,260) (5,596)
Transfers to accrual/restructured status.... (1,222) (1,542)
Charge-offs / write-downs................... (1,383) (1,248)
--------- -------
Ending balance................................... $ 8,877 $ 7,965
========= ========
26
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those which would result from a regulatory examination.
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest
rate-sensitive assets and liabilities to ensure a favorable interest rate spread
and mitigate exposure to fluctuations in interest rates is the Corporation's
primary tool for achieving its asset/liability management strategies. Management
regularly reviews the interest-rate sensitivity of the Corporation and adjusts
the sensitivity within acceptable tolerance ranges established by management. At
September 30, 2002, interest-earning assets exceeded interest-bearing
liabilities that mature within one year (interest-sensitive gap) by $99.5
million. The Corporation's interest-sensitive assets as a percentage of
interest-sensitive liabilities within the one-year window decreased to 111% at
September 30, 2002 compared to 114% at December 31, 2001. Likewise, the one-year
interest-sensitive gap as a percentage of total assets decreased to 5.02% from
6.09% at December 31, 2001. The change is the result of the Corporation's
continuing effort to effectively manage interest rate risk. Interest
rate-sensitive assets of the Corporation excluded cash flows from discontinued
operations as well as the interest rate-sensitive funding for these assets of
approximately $75 million in FHLB advances.
Market risk is the risk of loss from adverse changes in the market
prices and rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending, investing, and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13A "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
on the net portfolio value ratio of an immediate change in interest rates in 100
basis point increments. The net portfolio value ratio is defined as the net
present value of the estimated cash flows from assets and liabilities as a
percentage of net present value of cash flows from total assets (or the net
present value of equity). The table below is the estimated impact of immediate
changes in interest rates on the Company's net interest margin and net portfolio
value ratio at the specified levels at September 30, 2002 and 2001, calculated
in compliance with Thrift Bulletin No. 13A:
At September 30,
-------------------------------------------------------------------
2002 2001
------------------------------- ------------------------------
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value Ratio (2) Margin (1) Value Ratio (2)
------------- ------------ --------------- ------------ ----------------
+300 9% 9.62% 7% 8.68%
+200 6% 9.48% 4% 8.72%
+100 3% 9.28% 2% 8.79%
0 0% 9.02% 0% 8.86%
-100 -4% 8.46% -2% 8.84%
-200 (3) N/A N/A -5% 8.89%
-300 (3) N/A N/A -7% 8.92%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate change environments.
(2) The net portfolio value ratio of the Company in a stable interest rate
environment and the net portfolio value ratio as projected under the
various rate change environments.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points are not
deemed meaningful at September 30, 2002 given the historically low absolute
level of interest rates at that time.
27
COMPARISON FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Results of Operations
The Corporation recorded net income of $9.5 million or $.99 per diluted
share for the third quarter of 2002. This compares to $5.5 million or $.58 per
diluted share for the same quarter last year. The results for the third quarter
of 2002 are due to the fundamentally strong performance at WSFS' community bank
and WF. WF provided $3.4 million in net income or $0.35 per diluted share for
the third quarter of 2002, which compares to $720,000 or $0.08 per diluted share
for the third quarter of 2001. In addition, included in these results is the
recognition of $894,000, or $0.09 per share tax benefit primarily as the result
of the favorable resolution of tax authority examinations in the third quarter
2002. This was partially offset by an income tax provision of $419,000,
resulting from additional state taxes, net of federal tax benefit, that WCC is
expected to owe due to tax law changes in the State of New Jersey. While the
operations of WCC are reflected as discontinued operations, the additional tax
provision, resulting from the change in the tax law, has been reflected in
income from continuing operations pursuant to SFAS 109, Accounting for Income
Taxes, paragraph 27. Also during the quarter, an additional reserve for
discontinued operations of $563,000 which was established as a result of changes
in assumptions used to calculate WCC's deferred taxes. The consolidated results
in the third quarter of 2002 also included a $737,000 after tax gain on the
previously announced sale of the Corporation's United Asian Bank Division (UAB).
Further, C1FN/Everbank, the Corporation's joint initiative in branchless banking
which is under agreement to be sold, showed a $840,000 after tax positive impact
on WSFS in the third quarter as a result of the sale of securities at a gain and
other temporary fees. Both the C1FN/Everbank and UAB performance are included in
results of businesses held-for-sale.
Net income for the nine months ended September 30, 2002 was $26.8
million or $2.84 per diluted share. This compares to $13.9 million or $1.42 per
share for the comparable period last year. The results for the first nine months
of 2002 include the continued strong performance of the community bank and WF.
WF provided $7.2 million in net income or $0.77 per diluted share for the nine
months ended September 2002 which compares to $1.7 million or $0.18 per diluted
share for the same period in 2001. Also, the reverse mortgage portfolio
contributed $6.7 million pretax, or $4.0 million, after tax, ($.43 per diluted
share), more than the expected long-term yield of this portfolio. Consistent
with the quarterly results, the nine months ended September 30, 2002 included
the recognition of $894,000, or $0.09 per share in tax benefit primarily as the
result of the favorable resolution of tax authority examinations in the third
quarter 2002. This was partially offset by the previously mentioned income tax
provision of $419,000 at WCC and an additional reserve for discontinued
operations of $563,000. The consolidated results for the first nine months of
2002 also included a $737,000 after tax gain on the previously announced sale of
UAB. Further, C1FN/Everbank, the Corporation's joint initiative in branchless
banking, showed a $781,000, after tax positive impact on WSFS for the nine
months ended September 30, 2002, as a result of the sale of securities at a gain
and other temporary fees. The Corporation also recognized $703,000, net of
taxes, or $.08 per share, in income related to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142 in the first quarter of 2002.
28
Net Interest Income
The following tables provide information concerning the balances, yields
and rates on interest-earning assets and interest-bearing liabilities during the
periods indicated.
Three Months Ended September 30,
---------------------------------------------------------------------------------
2002 2001(6)
------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
------- -------- ----- ------- -------- ------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Real estate loans (4).................$ 631,533 $ 10,893 6.90% $ 643,584 $ 12,247 7.61%
Commercial loans ..................... 199,871 3,045 6.52 151,760 2,793 7.94
Consumer loans........................ 192,752 3,943 8.12 187,198 4,244 8.99
---------- --------- ---------- --------
Total loans......................... 1,024,156 17,881 7.10 982,542 19,284 7.97
Mortgage-backed securities (5)............. 152,445 1,985 5.21 153,383 2,388 6.23
Loans held-for-sale (3).................... 108,966 2,562 9.40 37,948 1,102 11.62
Investment securities (5).................. 11,417 194 6.80 15,964 282 7.07
Investment in reverse mortgages............ 35,142 1,995 22.71 35,058 3,324 37.93
Other interest-earning assets ............. 25,631 200 3.10 61,370 732 4.73
---------- -------- ---------- --------
Total interest-earning assets......... 1,357,757 24,817 7.40 1,286,265 27,112 8.52
-------- --------
Allowance for loan losses.................. (21,439) (21,492)
Cash and due from banks.................... 142,104 84,424
Net assets from discontinued operations.... 70,718 150,537
Assets of businesses held-for-sale......... 347,816 290,920
Other noninterest-earning assets........... 43,205 47,600
---------- ----------
Total assets..........................$1,940,161 $1,838,254
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand......................$ 91,320 112 0.49 $ 84,500 209 0.98
Savings............................... 305,648 722 0.94 306,651 1,688 2.18
Retail time deposits ................. 259,565 1,966 3.00 267,049 3,335 4.95
Jumbo certificates of deposits ....... 18,425 118 2.54 27,545 304 4.38
Brokered certificates of deposit...... - - - 34,283 571 6.61
-------- ------------ ---------- ----------
Total interest-bearing deposits..... 674,958 2,918 1.72 720,028 6,107 3.36
FHLB of Pittsburgh advances................ 434,946 5,118 4.60 417,033 5,887 5.52
Trust preferred borrowings................. 50,000 568 4.45 50,000 1,280 10.02
Other borrowed funds....................... 131,860 886 2.69 99,972 1,412 5.65
Cost of funding discontinued operations.... (572) (2,192)
---------- ---------- ---------- ----------
Total interest-bearing liabilities.... 1,291,764 8,918 2.76 1,287,033 12,494 3.88
---------- ----------
Noninterest-bearing demand deposits... 160,856 139,077
Liabilities of businesses held-for-sale 341,862 286,984
Other noninterest-bearing liabilities. 18,356 21,485
Minority interest ........................ 7,994 4,484
Stockholders' equity...................... 119,329 99,191
---------- ----------
Total liabilities and stockholders'
equity.................................. $1,940,161 $1,838,254
========== ==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities............................. $ 65,993 $ (768)
========== ==========
Net interest and dividend income.......... $ 15,899 $ 14,618
========= ==========
Interest rate spread...................... 4.64% 4.64%
===== =====
Net interest margin....................... 4.77% 4.64%
===== =====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes commercial mortgage loans.
(5) Includes securities available-for-sale
(6) For comparative purposes, balances of C1FN and UAB are shown as businesses
held-for sale in 2001.
29
Nine Months Ended September 30,
---------------------------------------------------------------------------------
2002 2001(6)
------------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
------- -------- ----- ------- -------- ------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 642,274 $ 33,760 7.01% $ 631,414 $ 37,663 7.95%
Commercial loans ................... 193,605 8,629 6.46 148,491 8,401 8.22
Consumer loans...................... 191,736 11,814 8.24 178,091 12,499 9.38
------- ----------- ----------- -----------
Total loans....................... 1,027,615 54,203 7.14 957,996 58,563 8.27
Mortgage-backed securities (5)........... 139,536 5,802 5.54 166,874 7,891 6.30
Loans held-for-sale (3).................. 85,173 6,400 10.02 32,396 2,578 10.61
Investment securities (5)................ 12,443 648 6.94 16,309 864 7.06
Investment in reverse mortgages.......... 34,666 13,092 50.35 34,067 8,258 32.32
Other interest-earning assets ........... 30,868 747 3.24 47,379 1,884 5.32
------------ ----------- ---------- -----------
Total interest-earning assets....... 1,330,301 80,892 8.19 1,255,021 80,038 8.59
----------- -----------
Allowance for loan losses................ (21,253) (21,501)
Cash and due from banks.................. 116,734 74,492
Net assets from discontinued operations.. 87,210 170,566
Assets of businesses held-for-sale....... 325,881 262,924
Other noninterest-earning assets......... 51,044 44,619
------------ ----------
Total assets........................ $1,889,917 $1,786,121
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand.................... $ 88,731 324 0.49 $ 81,209 766 1.26
Savings............................. 309,297 2,292 0.99 301,720 6,231 2.76
Retail time deposits ............... 253,319 6,153 3.25 268,992 10,314 5.13
Jumbo certificates of deposits ..... 13,807 282 2.73 26,028 958 4.92
Brokered certificates of deposit.... 183 10 7.31 78,309 3,940 6.73
---------- ---------- --------- --------
Total interest-bearing deposits... 665,337 9,061 1.82 756,258 22,209 3.93
FHLB of Pittsburgh advances.............. 451,011 15,650 4.58 368,399 15,991 5.72
Trust preferred borrowings............... 50,000 2,054 5.42 50,000 3,048 8.04
Other borrowed funds..................... 109,979 2,337 2.83 96,554 4,251 5.87
Cost of funding discontinued operations.. (1,974) (7,790)
---------- ---------- ---------- --------
Total interest-bearing liabilities.. 1,276,327 27,128 2.83 1,271,211 37,709 3.96
---------- --------
Noninterest-bearing demand deposits...... 158,808 134,164
Liabilities of businesses held-for-sale.. 316,644 256,566
Other noninterest-bearing liabilities.... 18,592 19,311
Minority interest ....................... 6,672 4,829
Stockholders' equity..................... 112,874 100,040
---------- ----------
Total liabilities and stockholders'
equity................................. $1,889,917 $1,786,121
========== ==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities............................ $ 53,974 $ (16,190)
========== ==========
Net interest and dividend income......... $ 53,764 $ 42,329
=========== ===========
Interest rate spread..................... 5.36% 4.63%
===== =====
Net interest margin...................... 5.47% 4.59%
===== =====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes commercial mortgage loans.
(5) Includes securities available-for-sale
(6) For comparative purposes, balances of C1FN and UAB are shown as businesses
held-for-sale in 2001.
30
The following discussion of net interest income includes interest
income, interest expense and its corresponding interest earning assets and
interest bearing liabilities of businesses held-for-sale consistent with the
average balance sheet presentation above.
Net interest income for the three months ended September 30, 2002
increased $1.3 million compared to the same period in 2001, and the net interest
margin for the three months ended September 30, 2002 was 4.77% compared to 4.64%
in the third quarter of 2001. Total interest income decreased $2.3 million
between comparable quarters. Although total interest-earning assets increased by
$71.5 million between the quarters, driven by an increase in average loans and
loans held-for-sale of $112.6 million, the yield on interest earning assets
declined 21 basis points between comparable quarters, driven by a series of
continuing interest rate decreases and a decrease in the reverse mortgage yield
from 37.93% to 22.71% between comparable quarters. Management expects the
long-term average yield of reverse mortgages in the future to be closer to 25%.
However, as in the past, returns on reverse mortgages can vary significantly
between periods as they are affected by actual and estimated housing prices and
the timing of cash flows. Total interest expense for the three months ended
September 30, 2002 decreased $3.6 million compared to the third quarter of 2001.
The decrease was a result of the lower cost of borrowings due mainly to the
continuing interest rate decreases, as maturing deposits and borrowings were
replaced at lower rates. Total interest-bearing liabilities actually increased
by $4.7 million between periods. The rate on interest bearing liabilities
declined 1.12% between periods.
Net interest income for the nine months ended September 30, 2002
increased $11.4 million compared to the same period in 2001. The increase was
due primarily to lower borrowing costs. The net interest margin for the nine
months ended September 30, 2002 was 5.47%, compared to 4.59% for the nine months
ended September 30, 2001. Total interest income increased $0.9 million between
comparable periods. This change is attributed to the increase in the reverse
mortgage income between periods of $4.8 million, offset by a decrease in income
from average mortgage-backed securities and investment securities and the effect
of the aforementioned interest rate changes. Total interest expense decreased
$10.6 million when comparing the nine months ended September 30, 2002 with the
same period in 2001. The decrease was a result of the lower cost of funding due
to the aforementioned interest rate decreases.
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The determination of
the allowance for loan losses requires significant management judgment
reflecting management's best estimate of probable loan losses related to
specifically identified loans as well as probable loan losses in the remaining
loan portfolio. Management's evaluation is based upon a continuing review of
these portfolios, with consideration given to examinations performed by
regulatory authorities.
Management establishes the loan loss allowance in accordance with
accounting principles generally accepted in the United States of America and the
guidance provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the
allowance consists of several key elements which include: specific allowances
for identified problem loans; formula allowances for commercial and commercial
real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans in cases where
management has identified significant conditions or circumstances related to a
specific credit that management believes indicate the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans
are calculated by applying loss factors to outstanding loans in each case based
on the internal risk grade of loans. Changes in risk grades of both performing
and nonperforming loans affect the amount of the formula allowance. Loss factors
by risk grade have a basis in WSFS' historical loss experience for such loans
and may be adjusted for significant factors that, in management's judgment,
affect the collectability of the portfolio as of the evaluation date. (See
discussion of historical loss adjustment factors below.)
Pooled loans are loans that are usually smaller,
not-individually-graded and homogenous in nature, such as consumer installment
loans and residential mortgages. Pooled loan loss allowances are based on
historical net charge-offs for Nine years which management believes approximates
an average business cycle. The average loss allowance per homogenous pool is
based on the product of average annual historical loss rate and the average
estimated duration of the pool multiplied by the pool balances. These separate
risk pools are then assigned a reserve for losses based upon this historical
loss information, as adjusted for historical loss adjustment factors. Historical
loss adjustment factors are based upon
31
management's evaluation of various current conditions. The evaluation of the
inherent loss with respect to these more current conditions is subject to a
higher degree of uncertainty because they are not identified with specific
credits. The more current conditions, evaluated in connection with the
adjustment factors, include an evaluation of the following:
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet monthly to discuss and review
these conditions and risks associated with individual problem loans. By
assessing the probable estimated losses inherent in the loan portfolio on a
monthly basis, management is able to adjust specific and inherent loss estimates
based upon the availability of more recent information. The provision for loan
losses from continuing operations increased from $1.4 million for the first nine
months of 2001 to $1.7 million for the first nine months of 2002, primarily a
result of growth in commercial loans from period to period.
The following table represents a summary of the changes in the allowance
for loan losses during the periods indicated.
Nine Months Ended Nine Months Ended
September 30, 2002(1) September 30, 2001(1)
---------------------- ---------------------
(Dollars in Thousands)
Beginning balance ..................................... $21,597 $21,423
Provision for loan losses of continuing operations..... 1,718 1,370
Provision for loan losses, Businesses held-for-sale ... 254 221
Charge-offs:
Residential real estate .......................... 626 99
Commercial real estate (2) ....................... 333 195
Commercial........................................ 421 706
Consumer ......................................... 1,073 765
------- -------
Total charge-offs.............................. 2,453 1,765
------- -------
Recoveries:
Residential real estate .......................... 12 1
Commercial real estate (2) ....................... 177 61
Commercial ....................................... 420 88
Consumer.......................................... 280 102
------- -------
Total recoveries .............................. 889 252
------- -------
Net charge-offs ....................................... 1,564 1,513
------- -------
Ending balance......................................... $22,005 $21,501
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (3).............. 0.30% 0.30%
======= =======
(1) Includes businesses held for sale
(2) Includes commercial mortgage and construction loans.
(3) Ratio for the nine months ended September 30, 2002 and 2001 is annualized.
32
Other Income
Other income for the quarter ended September 30, 2002 was $25.5 million
compared to $10.9 million for the third quarter of 2001. This increase was
mainly due to an increase of $14.1 million in gains on the sales of loans during
the second quarter of 2002 compared to the second quarter of 2001. This increase
reflects the continued expansion of WF's market share within existing regions
and growth due to geographical expansion into new regions enhanced by the
current mortgage refinance market. In addition, credit/debit card and ATM income
increased $543,000 over the same period in 2001. This reflects higher credit and
debit card usage and the expansion of the ATM network.
Other income for the nine months ended September 30, 2002 was $61.5
million compared to $27.6 million for the same period in 2001. Consistent with
the quarter, this improvement was mainly due to a $32.5 million increase in
gains on the sale of loans, which was predominantly attributable to WF. The
remainder of the growth in other income for the nine months ended September 30,
2002 reflected higher credit and debit card usage, the expansion of the ATM
network, and growth in loans and deposits.
Other Expenses
Other expenses for the quarter ended September 30, 2002 were $22.8
million or $7.3 million above the third quarter of 2001. The majority of this
increase resulted from a $5.2 million increase in salaries, benefits and other
compensation expenses, of which $5.1 million related to the expansion of WF.
Professional fees increased $628,000 over the same period of 2001, which
included consulting fees of $452,000 related to the Corporation's Technology,
Organizational and Process Simplification (TOPS) process reengineering program.
Other expenses for the nine months ended September 30, 2002 were $62.7
million compared to $46.4 million for the same period of 2001. This increase,
consistent with the quarter, was mainly due to a $14.0 million increase in
salaries, benefits and other compensation expenses, of which $12.6 million
related to the expansion of WF. Professional fees increased $1.9 million over
the first nine months of 2001. Consulting fees related to the Corporation's TOPS
process reengineering program were $1.4 million. Note however, that there was a
non-cash charge of $1.1 million recorded in the second quarter of 2001, in
connection with the exit of six in-store branch offices in southeastern
Pennsylvania.
In addition, under the previously announced Technology, Organizational
and Process Simplification Plan (TOPS), an initiative designed to simplify the
organization, better integrate technology solutions and re-engineer certain back
office processes, the Corporation incurred $66,000 in expenses, net of cost
savings, in the third quarter of 2002 and $1.1 million during the first nine
months of 2002. These net expenses primarily consisted of consulting fees and
severance charges, partially offset by personnel cost savings. Net of tax, this
amounted to $42,000, or $0.00 per share, for the third quarter of 2002 and
$721,000, or $0.08 per share, for the nine months ended September 30, 2002.
Consistent with previous announcements, the projected savings coming from the
TOPS initiative are expected to offset costs during the second half of 2002.
When fully implemented in mid-2003, the TOPS program is expected to result in
total annual pre-tax cost savings of approximately $3.0 million to $3.5 million,
or $0.19 to $0.23 per share, after tax. Related to TOPS, on October 13, 2002
WSFS converted its entire core processing system to a new platform. The
conversion was deemed successful and management continues to monitor the
integrity of the data from the new system.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income
tax return and separate state income tax returns. Income taxes are accounted for
in accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences." The Corporation recorded
a provision for income taxes from continuing operations during the three and
nine months ended September 30, 2002 of $4.3 million and $14.2 million,
respectively, compared to an income tax provision of $2.9 million and $7.0
million, for the comparable periods of 2001. The effective tax rates from
continuing operations for the three and nine months ended September 30, 2002
were 33% and 36%, respectively, compared to 34% and 33%, for the comparable
periods in 2001.
The income tax provision for the three and nine months ended September
30, 2002, was reduced by $894,000 primarily as a result of the favorable
resolution of tax authority examinations and tax return settlements in the third
quarter of 2002. This was partially offset by an income tax provision of
$419,000, resulting from additional state taxes, net of federal tax benefit,
that WCC is expected to owe due to tax law changes in the State of New Jersey.
While the operations
33
of WCC are reflected as discontinued operations, the additional tax provision,
resulting from the change in the tax law, has been reflected in income from
continuing operations pursuant to SFAS 109, Accounting for Income Taxes,
paragraph 27.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2002 the Corporation adopted SFAS 142, Goodwill and Other
Intangible Assets. Statement 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion 17,
Intangible Assets. It also addresses how intangible assets that are acquired
individually or with a group of other assets (i.e. those not acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. Statement 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Under this standard goodwill can no longer be amortized
but instead must be tested for impairment and its value adjusted accordingly.
Negative goodwill is required to be taken into earnings immediately upon
adoption.
The Corporation had $1.2 million in negative goodwill associated with
the 1994 purchase of Providential Home Income Plan, Inc., a former subsidiary
that was subsequently merged into the Bank. As a result of adopting this
standard, the Corporation recognized income of $703,000 in the first quarter of
2002 as a cumulative effect of a change in accounting principle, net of $469,000
in income tax. Prior to adoption, the Corporation had been accreting $36,000 per
quarter into interest income.
In addition, at September 30, 2002, Corporation had $958,000 in
goodwill related to its investment in C1FN. Given the sale of C1FN at a premium
to book value, management has determined that no impairment adjustment is
necessary. Prior to January 1, 2002, the Corporation had been amortizing $19,000
of goodwill per quarter into expense.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement 143, Accounting for Asset
Retirement Obligations. Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. Statement 143 is effective for fiscal years beginning
after June 15, 2002. Management has not yet determined the impact, if any, to
earnings, financial condition or equity upon adoption of this statement.
In April 2002, the FASB issued SFAS No. 145 Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
The provisions of this Statement related to the rescission of Statement
4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or
loss on extinguishment of debt that was classified as an extraordinary item in
prior periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified. Early application
of the provisions of this Statement related to the rescission of Statement 4 is
encouraged.
34
The provisions in paragraphs 8 and 9(c) of this Statement related to
Statement 13 shall be effective for transactions occurring after May 15, 2002,
with early application encouraged. All other provisions of this Statement shall
be effective for financial statements issued on or after May 15, 2002, with
early application encouraged.
Early application of the provisions of this Statement may be as of the
beginning of the fiscal year or as of the beginning of the interim period in
which this Statement is issued. Management does not expect the adoption of this
Statement to have an impact on the Corporation's earnings, financial condition
or equity.
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities This Statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
The provisions of this Statement are to be applied prospectively for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. Management does not expect the adoption of this
Statement to have an impact on the Corporation's earnings, financial condition
or equity.
In October 2002, the FASB issued Statement No. 147, Acquisitions of
Certain Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
within the scope of this Statement. In addition, this Statement amends Statement
No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that Statement
No. 144 requires for other long-lived assets that are held and used.
With some exceptions, the requirements of Statement No. 147 are
effective October 1, 2002. The adoption of this Statement did not have an impact
on the Bank's earnings, financial condition, or equity.
FORWARD LOOKING STATEMENTS
Within this report and financial statements, management has
included certain "forward looking statements" concerning the future operations
of the Corporation. It is management's desire to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward looking statements"
contained in our financial statements. Management has used "forward looking
statements" to describe the future plans and strategies including expectations
of the Corporation's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Delaware, mid-Atlantic region and the country as a
whole, loan delinquency rates, and uncertainty of estimates and changes in
federal and state regulation, among other factors. These factors should be
considered in evaluating the "forward looking statements," and undue reliance
should not be placed on such statements. Actual results may differ materially
from management expectations. WSFS Financial Corporation does not undertake and
specifically disclaims any obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly
report on Form 10-Q.
Item 4. Disclosure Controls and Procedures
----------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) under the Securities Exchange Act of
1934 (the "Exchange Act")) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
Changes in internal controls. There were no significant changes in the
Registrant's internal controls or other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at September 30, 2002. From time to time, the Company is party
to legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
Item 2. Changes in Securities and Uses of Proceeds
------------------------------------------
Not applicable
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350
(b) Reports on 8-K
(i) On November 6, 2002 the Registrant filed a Form 8-K pursuant to
items 5 and 7 announcing the sale of its C1FN/Everbank branchless
national banking segment.
(ii) On November 7, 2002 the Registrant filed a Form 8-K pursuant to
items 5 and 7 announcing that it had entered into a definitive
agreement to sell its majority interest in Wilmington Finance,
Inc., an originator and seller of non-conforming loans, majority
owned by the Registrant.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: November 14, 2002 /S/ MARVIN N. SCHOENHALS
-----------------------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: November 14, 2002 /S/MARK A. TURNER
-----------------------------------------------
Mark A. Turner
Chief Operating Officer and Chief Financial Officer
37
WSFS FINANCIAL CORPORATION
Wilmington, Delaware
CERTIFICATION
Pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
I, Marvin N. Schoenhals, Chairman, President and Chief Executive
Officer of WSFS Financial Corporation (the "Company"), hereby certify that:
1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, of the Company;
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in the report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14(c)) for the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within the
Company, particularly during the period in which the report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
report (the "Evaluation Date"); and
(c) presented in the report my conclusions about the effectiveness of the
disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in the report
whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /S/ MARVIN N. SCHOENHALS
----------------------------
Marvin N. Schoenhals
Chairman President and Chief
Executive Officer
38
WSFS FINANCIAL CORPORATION
Wilmington, Delaware
CERTIFICATION
Pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
I, Mark A. Turner, Chief Operating Officer and Chief Financial Officer,
of WSFS Financial Corporation (the "Company"), hereby certify that:
1. I have reviewed the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, of the Company;
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in the report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14(c)) for the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to me by others within the
Company, particularly during the period in which the report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
report (the "Evaluation Date"); and
(c) presented in the report my conclusions about the effectiveness of the
disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in the report
whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /S/ MARK A. TURNER
---------------------------
Mark A. Turner
Chief Operating Officer and
Chief Financial Officer
39