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 June 30, 2003
-------------------------------------------------
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
- --------------------------------------------------------------------------------
(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 by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 8, 2003:
Common Stock, par value $.01 per share 7,488,412
- -------------------------------------- ---------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2003 and 2002 (Unaudited)........................................... 3
Consolidated Statement of Condition as of June 30, 2003
(Unaudited) and December 31, 2002.................................................. 5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (Unaudited)................................................. 6
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 2003 and 2002 (Unaudited).................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.......................................................... 17
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 28
----------------------------------------------------------
Item 4. Controls and Procedures ............................................................. 29
-----------------------
PART II. Other Information
Item 1. Legal Proceedings.................................................................... 29
-----------------
Item 2. Changes in Securities and Uses of Proceeds........................................... 29
------------------------------------------
Item 3. Defaults upon Senior Securities...................................................... 29
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.................................. 29
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Item 5. Other Information ................................................................... 29
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Item 6. Exhibits and Reports on Form 8-K..................................................... 29
--------------------------------
Signatures .................................................................................... 30
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Unaudited)
(In Thousands)
Interest income:
Interest and fees on loans ............................. $ 17,915 $ 18,205 $ 35,777 $ 36,432
Interest on mortgage-backed securities ................. 4,065 2,186 7,547 3,816
Interest and dividends on investment securities ........ 205 218 456 457
Interest on investments in reverse mortgages ........... 50 4,103 (27) 11,097
Other interest income .................................. 235 201 624 547
-------- -------- -------- --------
22,470 24,913 44,377 52,349
-------- -------- -------- --------
Interest expense:
Interest on deposits ................................... 2,112 2,896 4,591 6,144
Interest on Federal Home Loan Bank advances ............ 4,945 4,603 9,426 9,131
Interest on federal funds purchased and securities
sold under agreements to repurchase .................. 225 714 365 1,250
Interest on trust preferred borrowings ................. 493 850 989 1,486
Interest on other borrowings ........................... 92 101 188 201
Cost of funding businesses held-for-sale ............... - (502) - (1,070)
-------- -------- -------- --------
7,867 8,662 15,559 17,142
-------- -------- -------- --------
Net interest income ......................................... 14,603 16,251 28,818 35,207
Provision for loan losses ................................... 725 504 1,500 1,211
-------- -------- -------- --------
Net interest income after provision for loan losses ......... 13,878 15,747 27,318 33,996
-------- -------- -------- --------
Noninterest income:
Loan servicing fee income .............................. 757 768 1,429 1,559
Deposit service charges ................................ 2,369 2,186 4,274 4,211
Credit/debit card and ATM income ....................... 2,529 2,052 4,702 3,700
Securities gains ....................................... 189 21 189 23
Gains on sales of loans ................................ 757 79 1,161 98
Other income ........................................... 699 622 1,355 1,161
-------- -------- -------- --------
7,300 5,728 13,110 10,752
-------- -------- -------- --------
Noninterest expenses:
Salaries, benefits and other compensation .............. 6,767 6,016 13,586 12,358
Equipment expense ...................................... 923 1,079 1,856 2,102
Data processing and operations expenses ................ 690 947 1,367 1,842
Occupancy expense ...................................... 984 926 1,972 1,867
Marketing expense ...................................... 414 313 821 627
Professional fees ...................................... 864 1,140 1,365 1,960
Other operating expense ................................ 1,717 1,891 4,362 3,582
-------- -------- -------- --------
12,359 12,312 25,329 24,338
-------- -------- -------- --------
Income from continuing operations before taxes and cumulative
effect of change in accounting principle ................. 8,819 9,163 15,099 20,410
Income tax provision ........................................ 3,183 3,356 5,382 7,516
-------- -------- -------- --------
Income from continuing operations before cumulative effect of
change in accounting principle ........................... 5,636 5,807 9,717 12,894
Cumulative effect of change in accounting principle,
net of taxes ............................................ - - - 703
-------- -------- -------- --------
Income from continuing operations ........................... 5,636 5,807 9,717 13,597
Income from discontinued operations of businesses
held-for-sale, net of taxes ............................... - 2,114 - 3,750
Gain on sale of businesses held-for-sale, net of taxes ...... 208 - 41,389 -
-------- -------- -------- --------
Net income .................................................. $ 5,844 $ 7,921 $ 51,106 $ 17,347
======== ======== ======== ========
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------- -------- ------- -------
(Unaudited)
Earnings per share:
Basic:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit .. $ 0.73 $ 0.64 $ 1.21 $ 1.41
Cumulative effect of change in accounting principle, net of
tax benefit ............................................ - - - 0.08
------- -------- ------- -------
Income from continuing operations ......................... 0.73 0.64 1.21 1.49
Income from discontinued operations of businesses
held-for-sale, net of taxes ............................ - 0.23 - 0.41
Gain on sale of businesses held-for-sale, net of taxes .... 0.02 - 5.13 -
------- -------- ------- -------
Net income ................................................ $ 0.75 $ 0.87 $ 6.34 $ 1.90
======= ======== ======= =======
Diluted:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit .... $ 0.68 $ 0.62 $ 1.13 $ 1.37
Cumulative effect of change in accounting principle, net of
tax benefit ............................................ - - - 0.08
------- -------- ------- -------
Income from continuing operations ......................... 0.68 0.62 1.13 1.45
Income from discontinued operations of businesses
held-for-sale, net of taxes ............................ - 0.22 - 0.40
Gain on sale of businesses held-for-sale, net of taxes .... 0.02 - 4.81 -
------- -------- ------- -------
Net income ................................................ $ 0.70 $ 0.84 $ 5.94 $ 1.85
======= ======== ======= =======
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31,
2003 2002
------------------------------
(Unaudited)
Assets (In Thousands)
Cash and due from banks ........................................... $ 144,982 $ 162,258
Federal funds sold and securities purchased under
agreements to resell .......................................... 15,000 64,045
Interest-bearing deposits in other banks .......................... 680 7,476
Investment securities held-to-maturity ............................ 10,710 10,724
Investment securities available-for-sale .......................... 2,028 11,053
Mortgage-backed securities held-to-maturity ....................... 22,083 39,157
Mortgage-backed securities available-for-sale ..................... 498,268 98,081
Mortgage-backed securities trading ................................ 11,289 11,000
Investment in reverse mortgages, net .............................. 466 1,131
Loans held-for-sale ............................................... 5,391 3,516
Loans, net of allowance for loan losses of $22,459 at June 30, 2003
and $21,452 at December 31, 2002 ................................ 1,197,700 1,075,870
Loans of businesses held-for-sale ................................. - 117,646
Stock in Federal Home Loan Bank of Pittsburgh, at cost ............ 39,763 21,979
Assets acquired through foreclosure ............................... 983 904
Premises and equipment ............................................ 12,835 13,838
Accrued interest receivable and other assets ...................... 27,433 15,116
Other assets of businesses held-for-sale .......................... - 3,810
Loans, operating leases and other assets of discontinued operations 23,566 47,396
----------- -----------
Total assets ...................................................... $ 2,013,177 $ 1,705,000
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand .................................... $ 202,021 $ 182,957
Money market and interest-bearing demand ...................... 110,420 109,259
Savings ....................................................... 315,895 292,917
Time .......................................................... 209,549 236,793
Jumbo certificates of deposit - retail ........................ 43,433 50,146
----------- -----------
Total retail deposits ....................................... 881,318 872,072
Jumbo certificates of deposit - non-retail .................... 21,956 26,324
----------- -----------
Total deposits ............................................ 903,274 898,396
Federal funds purchased and securities sold under
agreements to repurchase ...................................... 50,000 25,925
Federal Home Loan Bank advances ................................... 743,408 403,500
Trust preferred borrowings ........................................ 50,000 50,000
Other borrowed funds .............................................. 40,398 36,581
Accrued expenses and other liabilities ............................ 30,122 37,219
Other liabilities of businesses held-for-sale ..................... - 57,862
----------- -----------
Total liabilities ................................................. 1,817,202 1,509,483
----------- -----------
Minority Interest ................................................. - 12,845
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
14,885,031 at June 30, 2003 and 14,859,721 at December 31, 2002 149 149
Capital in excess of par value .................................... 60,401 59,789
Accumulated other comprehensive (loss) income ..................... (77) 904
Retained earnings ................................................. 257,639 207,358
Treasury stock at cost, 7,257,869 shares at June 30, 2003 and
6,162,269 shares at December 31, 2002 ......................... (122,137) (85,528)
----------- -----------
Total stockholders' equity ........................................ 195,975 182,672
----------- -----------
Total liabilities, minority interest and stockholders' equity ..... $ 2,013,177 $ 1,705,000
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30,
-------------------------
2003 2002
---- ----
(Unaudited)
(In Thousands)
Operating activities:
Net income .............................................................. $ 51,106 $ 17,347
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Provision for loan losses ........................................... 1,500 1,211
Depreciation, accretion and amortization ............................ 5,430 3,622
(Increase) decrease in accrued interest receivable and other assets . (12,298) 1,304
Increase in accrued interest receivable and other assets of
businesses held-for-sale .......................................... - (1,634)
Origination of loans held-for-sale .................................. (32,373) (654,796)
Proceeds from sales of loans held-for-sale .......................... 46,224 647,971
(Decrease) increase in accrued interest payable and other liabilities (7,177) 567
Increase in accrued interest payable and other liabilities of
businesses held-for-sale .......................................... - 197
Gain on businesses held-for-sale .................................... (65,073) -
Decrease (increase) in reverse mortgage capitalized interest, net ... 911 (12,263)
Minority interest in net income ..................................... - 4,355
Other, net .......................................................... 144 222
----------- -----------
Net cash (used for) provided by operating activities .................... (11,606) 8,103
----------- -----------
Investing activities:
Net decrease in interest-bearing deposits in other banks ................ 6,796 8,696
Maturities of investment securities ..................................... 105 843
Sales of investment securities available-for-sale ....................... 10,957 1,485
Sales of mortgage-backed securities available-for-sale .................. 12,929 -
Repayments of mortgage-backed securities held-to-maturity ............... 16,972 18,893
Repayments of mortgage-backed securities available-for-sale ............. 140,309 18,651
Purchases of investment securities available-for-sale ................... (2,031) -
Purchases of mortgage-backed securities available-for-sale .............. (558,211) (59,093)
Net increase in investments of businesses held-for-sale ................. - (30,710)
Repayments of reverse mortgages ......................................... 2,237 14,564
Disbursements for reverse mortgages ..................................... (2,648) (3,209)
Sales of loans .......................................................... 1,166 5,986
Sale of segments held-for-sale .......................................... 128,667 -
Purchase of loans ....................................................... (6,678) (22,868)
Net increase in loans ................................................... (134,016) (644)
Net increase in loans of businesses held-for-sale ....................... - (302)
Net (increase) decrease in stock of Federal Home Loan Bank of Pittsburgh. (17,784) 5,500
Sales of assets acquired through foreclosure, net ....................... 356 288
Premises and equipment, net ............................................. (682) (1,517)
----------- -----------
Net cash used for investing activities .................................. (401,556) (43,437)
----------- -----------
Financing activities:
Net increase in demand and savings deposits ............................. 47,019 21,158
Net decrease in time deposits ........................................... (38,325) (19,965)
Net increase in deposits of businesses held-for-sale .................... - 23,186
Receipts from FHLB borrowings ........................................... 1,607,503 391,000
Repayments of FHLB borrowings ........................................... (1,267,594) (451,000)
Receipts from reverse repurchase agreements ............................. 339,444 95,000
Repayments of reverse repurchase agreements ............................. (365,369) (80,000)
Net increase in federal funds purchased ................................. 50,000 34,000
Repayments of capital leases ............................................ - (142)
Dividends paid on common stock .......................................... (825) (817)
Issuance of common stock ................................................ 612 110
Purchase of treasury stock, net of reissuance ........................... (36,609) (1,355)
Minority interest ....................................................... (12,845) (3,625)
----------- -----------
Net cash provided by financing activities ............................... 323,011 7,550
----------- -----------
Decrease in cash and cash equivalents from continuing operations ........ (90,151) (27,784)
Change in net assets from discontinued operations ....................... 23,830 36,587
Cash and cash equivalents at beginning of period ........................ 226,303 170,592
----------- -----------
Cash and cash equivalents at end of period .............................. $ 159,982 $ 179,395
=========== ===========
6
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Six months ended June 30,
-------------------------
2003 2002
---- ----
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest ................................................... $ 14,125 $ 19,698
Cash paid for income taxes, net .......................................... 47,622 10,024
Loans transferred to assets acquired through foreclosure ................. 350 872
Net change in other comprehensive income ................................. (981) (195)
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 SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated Financial Statements include the accounts of the
parent company (WSFS Financial Corporation), WSFS Capital Trust I, Wilmington
Savings Fund Society, FSB (WSFS) and its wholly-owned subsidiaries, WSFS
Investment Group, Inc., WSFS Reit, Inc. and WSFS Credit Corporation (WCC). As
discussed in Note 4 of the Financial Statements, the results of WSFS Credit
Corporation, the Corporation's wholly owned indirect auto financing and leasing
subsidiary, are presented as discontinued operations. In addition, the
consolidated Financial Statements include the not wholly-owned, but majority
controlled, Wilmington Finance, Inc. (WF) and CustomerOne Financial Network,
Inc. (C1FN). C1FN was sold in November 2002 and WF was sold in January 2003.
These subsidiaries were classified as businesses held-for-sale and the Statement
of Operations was retroactively restated for all periods presented. WF was
classified as a business held-for-sale on the Statement of Condition at December
31, 2002. See Note 5 of the Financial Statements for further discussion of
Businesses Held-for-Sale.
WSFS Capital Trust I was formed in 1998 to sell Trust Preferred
Securities. The Trust invested all of the proceeds from the sale of the Trust
Preferred Securities in Junior Subordinated Debentures of the Corporation. The
Corporation used the proceeds from the Junior Subordinated Debentures for
general corporate purposes, including the redemption of higher rate debt.
WSFS Investment Group, Inc. markets various third-party insurance and
securities products to Bank customers through WSFS' branch system.
WSFS Reit, Inc. is a real estate investment trust formed in 2002 to
hold qualifying real estate assets and may be used in the future as a vehicle to
raise capital.
Certain reclassifications have been made to the prior years' Financial
Statements to conform them to the current year's presentation. All significant
intercompany transactions are eliminated in consolidation. The accompanying
unaudited financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Corporation's 2002 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 six months
ended June 30, ended June 30,
---------------------- ---------------------
2003 2002 2003 2002
--------- --------- ---------- -------
(In Thousands, Except Per Share Data)
Numerator:
- ----------
Income from continuing operations before cumulative effect of change
in accounting principle, net of tax benefit ......................... $ 5,636 $ 5,807 $ 9,717 $12,894
Cumulative effect of change in accounting principle, net of tax benefit - - - 703
--------- --------- ---------- -------
Income from continuing operations ...................................... 5,636 5,807 9,717 13,597
Income from discontinued operations of businesses held-for-sale,
net of taxes.......................................................... - 2,114 - 3,750
Gain on sale of businesses held-for-sale, net of taxes ................. 208 - 41,389 -
--------- --------- ---------- -------
Net income ............................................................. $ 5,844 $ 7,921 $ 51,106 $17,347
========= ========= ========== =======
Denominator:
- ------------
Denominator for basic earnings per share - weighted average shares ..... 7,756 9,097 8,061 9,115
Effect of dilutive employee stock options .............................. 563 364 547 286
--------- --------- ---------- -------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ......................................... 8,319 9,461 8,608 9,401
========= ========= ========== =======
Earnings per share:
- -------------------
Basic:
Income from continuing operations before cumulative effect of change
in accounting principle, net of tax benefit .......................... $ 0.73 $ 0.64 $ 1.21 $ 1.41
Cumulative effect of change in accounting principle, net of tax benefit - - - 0.08
--------- --------- ---------- -------
Income from continuing operations ...................................... 0.73 0.64 1.21 1.49
Income from discontinued operations of businesses
held for sale, net of taxes .......................................... - 0.23 - 0.41
Gain on sale of businesses held-for-sale, net of taxes ................. 0.02 - 5.13 -
--------- --------- ---------- -------
Net income ............................................................. $ 0.75 $ 0.87 $ 6.34 $ 1.90
========= ========= ========== =======
Diluted:
Income from continuing operations before cumulative effect of change
in accounting principle, net of tax benefit .......................... $ 0.68 $ 0.62 $ 1.13 $ 1.37
Cumulative effect of change in accounting principle, net of tax benefit. - - - .08
--------- --------- ---------- -------
Income from continuing operations ...................................... 0.68 0.62 1.13 1.45
Income from discontinued operations of businesses
held for sale, net of taxes ........................................ - 0.22 - 0.40
Gain on sale of businesses held-for-sale, net of taxes ................. 0.02 - 4.81 -
--------- --------- ---------- -------
Net income ............................................................. $ 0.70 $ 0.84 $ 5.94 $ 1.85
========= ========= ========== =======
Outstanding common stock equivalents having no dilutive effect ......... - - - -
3. VALUATION OF STOCK OPTION GRANTS
At June 30, 2003, the Corporation had two stock-based employee
compensation plans. The Corporation accounts for these plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and Related Interpretations. No stock-based employee
compensation cost is reflected in the net income, as all options granted under
those plans had an exercise price at least equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share had the company applied the fair
value recognition provision of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
9
For the three months For the six months
ended June 30, ended June 30,
------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
(In Thousands, Except Per Share Data)
Income from continuing operations, as reported ....................... $ 5,636 $ 5,807 $ 9,717 $ 13,597
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards,
net of related tax effects ................................. 186 193 382 395
------------ ------------ ------------ -------------
Pro forma income from continuing operations .......................... $ 5,450 $ 5,614 $ 9,335 $ 13,202
Earnings per share:
- -------------------
Basic:
- ------
Income from continuing operations, as reported ....................... $ 0.73 $ 0.64 $ 1.21 $ 1.49
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards,
net of related tax effects ............................... (0.02) (0.02) (0.05) (0.04)
------------ ------------ ------------ ----------
Pro forma income from continuing operations .......................... $ 0.71 $ 0.62 $ 1.16 $ 1.45
============ ============ ============ ==========
Diluted:
- --------
Income from continuing operations, as reported ....................... $ 0.68 $ 0.62 $ 1.13 $ 1.45
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards,
net of related tax effects .............................. (0.02) (0.02) (0.04) (0.04)
------------ ------------ ------------ ----------
Pro forma income from continuing operations .......................... $ 0.66 $ 0.60 $ 1.09 $ 1.41
============ ============ ============ ==========
4. Discontinued Operations of a Business Segment
WSFS Financial Corporation discontinued the operations of WCC in 2000.
WCC, which had 1,118 lease contracts and 786 loan contracts at June 30, 2003, no
longer accepts new applications but continues to service existing loans and
leases until their maturities. Management estimates that substantially all loan
and lease contracts will mature by the end of 2004.
In accordance with APB 30, which was the authoritative literature in
2000, accounting for discontinued operations of a business segment at that time
required that the Company forecast operating results over the wind-down period
and accrue any expected net losses. The historic results of WCC's operations,
the accrual of expected losses to be incurred over the wind-down period, and the
future reported results of WCC are required to be treated as Discontinued
Operations of a Business Segment, and shown in a summary form separately from
the Company's results of continuing operations in reported results of the
Corporation.
As a result, the Corporation has established a reserve to absorb
expected future net losses of WCC. Due to the uncertainty of a number of
factors, including residual values, interest rates, credit quality and operating
costs, this reserve is re-evaluated quarterly with adjustments, if necessary,
recorded as income/losses on wind-down of discontinued operations. At June 30,
2003, there were approximately $20.2 million of contract residuals outstanding
for which management has estimated approximately $4.2 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 table presents the operating leases, loans and other
assets of discontinued operations at June 30, 2003 and December 31, 2002:
At June 30, At December 31,
2003 2002
------- -------
(In Thousands)
Vehicles under operating leases, net of reserves... $19,190 $44,693
Loans ............................................. 4,368 7,285
Other noncash assets .............................. 2,774 2,367
Less:
Reserve for losses of discontinued operations.. 2,766 6,949
------- -------
Loans, operating leases and other assets of
discontinued operations ......................... $23,566 $47,396
======= =======
10
The following table presents the net income from discontinued
operations for the three and six months ended June 30, 2003 and 2002:
For the three months ended June 30, For the six months ended June 30,
----------------------------------- -------------------------------------
2003 2002 2003 2002
---- ---- ---- -----
(In Thousands)
Interest income........................ $ 116 $ 267 $ 260 $ 569
Allocated interest expense (1)......... 295 647 695 1,402
------- -------- -------- ----------
Net interest expense................... (179) (380) (435) (833)
Loan and lease servicing fee income ... 74 88 185 220
Rental income on operating leases, net. (191) 615 (50) 1,225
Other income........................... 1 2 2 6
------- -------- -------- ----------
Net revenues......................... (295) 325 (298) 618
Noninterest expenses................... 185 304 365 638
------- -------- -------- ----------
(Loss) income before taxes............. (480) 21 (663) (20)
Charge (credit) to reserve for losses on
discontinued operations ............ 480 (21) 663 20
Income tax provision .................. - - - -
------- -------- -------- ----------
Income from discontinued operations.... $ - $ - $ - $ -
======= ======== ======== ==========
(1)Allocated interest expense for the three and six months ended June 30, 2003
and 2002 was a direct matched-maturity funding of the non-cash assets of
discontinued operations. The average borrowing rates for the three and six
months ended June 30, 2003 was 3.44% and 3.39% compared to 2.79% and 2.78%
for the respective comparable periods in 2002.
5. BUSINESSES HELD FOR SALE
In September 2002, WSFS sold its United Asian Bank Division (UAB). UAB
was started in 2000 as a single branch to serve the Korean and Asian communities
of Elkins Park, Pennsylvania and the surrounding area. The sale resulted in an
after tax gain of $737,000 and included $8.6 million in deposits and $15.8
million in loans in addition to branch fixed assets and the lease obligations.
In November 2002, the Corporation completed the sale of C1FN and
related interests in its Everbank Division to Alliance Capital Partners, Inc.,
the privately held parent company of First Alliance Bank, a federally chartered
savings bank. Everbank was started with C1FN in 1999 as a joint initiative in
Internet and branchless banking. Consistent with the manner in which the segment
was managed and operated, information in this report labeled "C1FN" generally
represents the pro forma combined results of C1FN and WSFS' Everbank Division
(the C1FN/Everbank segment). The sale included total assets of $342.8 million
and deposits of $340.1 million. WSFS recorded an after tax gain of $187,000 on
this sale.
Under a provision of the agreement between sellers and buyers, certain
sale consideration was withheld in two separate escrow accounts pending the
resolution of certain events. WSFS' portion of these escrow amounts totaled
approximately $786,000. These amounts were not recognized by WSFS at December
31, 2002, as their receipt was not assured beyond a reasonable doubt. In March
2003, WSFS received $175,000 of the $786,000 held in escrow. As a result,
management recorded the $175,000 ($117,000 after taxes) as a gain on the sale of
businesses held-for-sale in the first quarter of 2003. See Note 10 of the
Financial Statements for further discussion.
Also in November 2002, WSFS signed a definitive agreement with American
General Finance, Inc. for the sale of WSFS' majority-owned subsidiary,
Wilmington Finance, Inc. (WF). WF is engaged in sub-prime residential mortgage
banking. The WF sale was completed on January 2, 2003 for an after tax gain of
$41.1 million in the first quarter 2003.
Under a provision of the agreement between sellers and buyers, certain
sale consideration was withheld in a separate escrow account pending the
resolution of certain events. In the second quarter 2003, WSFS received the
entire amount held in escrow. As a result, management recorded $325,000
($208,000 after taxes) as a gain on the sale of businesses held-for-sale in the
second quarter of 2003. See Note 10 of the Financial Statements for further
discussion.
In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, income/losses from these three businesses (UAB,
C1FN/Everbank and WF) have been presented as income/losses of businesses
held-for-sale, and presented separately for all periods presented.
The gains realized on the sale of C1FN and WF are presented 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.
11
The following table presents the net income from businesses
held-for-sale for the three months ended June 30, 2002. No activity other than
the $208,000 additional after tax gain on WF was recorded in the second quarter
of 2003:
For the Three Months Ended June 30, 2002
----------------------------------------
WF(1) C1FN UAB Total
------- ------- ------- -------
(In Thousands)
Net interest income ..................... $ 1,473 $ 1,483 $ 292 $ 3,248
Provision for loan losses ............... - 77 21 98
------- ------- ------- -------
Net interest income after provision ..... 1,473 1,406 271 3,150
Noninterest income ...................... 13,678 1,245 19 14,942
------- ------- ------- -------
Total revenues .......................... 15,151 2,651 290 18,092
Noninterest expenses .................... 8,212 4,170 321 12,703
------- ------- ------- -------
Income before taxes and minority interest 6,939 (1,519) (31) 5,389
Minority interest ....................... 3,362 (1,411) - 1,951
------- ------- ------- -------
Income before taxes ..................... 3,577 (108) (31) 3,438
Provision for income taxes .............. 1,378 (42) (12) 1,324
------- ------- ------- -------
Income from businesses held-for-sale .... $ 2,199 $ (66) $ (19) $ 2,114
======= ======= ======= =======
(1) Includes $502,000 in interest expense allocated to fund the average net
assets of $72.5 million of businesses held-for-sale. The rate of 2.77% is
based on the weighted average rate on other borrowed funds, which
approximates the marginal funding rate for this niche business.
The following table presents the net income from businesses
held-for-sale for six months ended June 30, 2002. No activity other than the
$41.3 million after tax gain on the sale of WF and the $117,000 additional
after tax gain on C1FN was recorded in the six moths ended June 2003:
For the Six Months Ended June 30, 2002
--------------------------------------
WF(1) C1FN UAB Total
------- ------- ------- -------
(In Thousands)
Net interest income ..................... $ 2,656 $ 3,031 $ 557 $ 6,244
Provision for loan losses ............... -- 107 39 146
------- ------- ------- -------
Net interest income after provision ..... 2,656 2,924 518 6,098
Noninterest income ...................... 25,327 2,256 43 27,626
------- ------- ------- -------
Total revenues .......................... 27,983 5,180 561 33,724
Noninterest expenses .................... 15,583 6,969 724 23,276
------- ------- ------- -------
Income before taxes and minority interest 12,400 (1,789) (163) 10,448
Minority interest ....................... 6,048 (1,692) -- 4,356
------- ------- ------- -------
Income before taxes ..................... 6,352 (97) (163) 6,092
Provision for income taxes .............. 2,446 (39) (65) 2,342
------- ------- ------- -------
Income from businesses held-for-sale .... $ 3,906 $ (58) $ (98) $ 3,750
======= ======= ======= =======
(1) Includes $1.1 million in interest expense allocated to fund the average net
assets of $71.8 million of businesses held-for-sale. The rate of 2.98% is
based on the weighted average rate on other borrowed funds, which
approximates the marginal funding rate for this niche business.
12
6. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
On May 7, 2003, WSFS entered into a Pledge and Security Agreement
(Agreement) that provides for the assumption of credit and market risk by WSFS
for the benefit of one party (Secured Party) in a four party swap transaction.
The Agreement guarantees payment upon the occurrence of an event of default by
the other party to the transaction. WSFS' obligation in the Agreement is in
conjunction with its participation in an underlying credit. WSFS' exposure under
the Agreement is defined as the amount payable to the Secured Party by the other
party, under the swap agreements, if the swap agreements were terminated on such
date by the Secured Party due to an event of default by the other party. The
terms of the performance guarantees range from three to eleven years for this
transaction. As of June 30, 2003, WSFS estimates the maximum undiscounted
exposure on this agreement at $1.3 million. The total carrying value of the
liability associated with this commitment was $5,000 at June 30, 2003. The
underlying credit at June 30, 2003 was $13.1 million.
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.
The fair market value (FMV) of the cap has two components: the
intrinsic value and the time value of the option. Prior to July 1, 2002, the cap
was marked-to-market quarterly, with changes in the intrinsic value of the cap,
net of tax, included as a separate component of other comprehensive income and
change in the time value of the option included directly as interest expense as
required under SFAS 133. In addition, the ineffective portion, if any, would
have been expensed in the period in which ineffectiveness was determined.
On July 1, 2002, as a result of a change in the guidance from the FASB
for implementation of Statement 133, the Corporation redesignated the original
cash flow hedge and redesignated the interest rate cap so that the entire change
in the market value of the cap now is included in other comprehensive income. As
part of redesignating the new cash flow hedge, the method of assessing
effectiveness was changed. It is now based on the total change to the interest
rate cap's cash flows, and not only the change to intrinsic value, as was the
basis of assessing effectiveness under the prior hedging designation. 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, the full change to the fair value of interest
rate cap is recorded in other comprehensive income. The fair value of the cap is
estimated using a standard option model. The fair value of the interest rate cap
at June 30, 2003 was $886,000.
On July 1, 2002, the inception date of the redesignated hedging
relationship, the fair value of the interest rate cap was $1.6 million. This
amount was allocated to the respective multiple "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 is made on the trust preferred debt. The
redesignation of the cash flow hedge has the effect of providing a more
systematic method for amortizing the cost of the cap against earnings.
Except for those above, management is not aware of any events that
would result in the reclassification of gains and losses that are currently
reported in accumulated other comprehensive income.
Everbank entered 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 June 30, 2002 Everbank
had entered into such contracts with notional amounts of $56.6 million. During
the six months ended June 30, 2002, 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 noninterest
income. WSFS sold C1FN/Everbank on November 5, 2002 and therefore had no foreign
exchange contracts at June 30, 2003.
Related to its sale of reverse mortgages, in November 2002 the
Corporation acquired a series of options to acquire up to 49.9% of Class "O"
certificates issued in connection with mortgage-backed security SASCO RM-1 2002.
The aggregate exercise price of the series of options is $1.0 million. Because
the net present value of the estimated cash flows coming from WSFS' option on
the highly illiquid Class "O" certificates is significantly less than the $1.0
million exercise price, WSFS has valued the option at $0 at June 30, 2003. The
option will be evaluated quarterly for any changes in the estimated valuation.
13
The following depicts the change in fair market value of the Company's
derivatives:
2003 2002
---------------------------------- ---------------------------------------
At At At At
January 1, Change June 30, January 1, Change June 30,
---------- ------ -------- ---------- ------ --------
(In Thousands)
Interest Rate Cap:
Intrinsic value - dedesignated cap $ - $ - $ - $ 589 $ (544) $ 45 (1)
Time value - dedesignated cap.... - - - 1,945 (340) (2) 1,605
Redesignated cap.................. 1,012 (126) 886 (1) - - -
-------- ------- ------ -------- -------- -------
Total............................. $ 1,012 $ (126) $ 886 $ 2,534 $ (884) $ 1,650
======== ======= ====== ======== ======== =======
Foreign Exchange Contracts
Time Value.................. N/A N/A N/A $ (395) $ 4,833 $ 4,438
======== ======= =======
Options on Class "O"
Certificates of MBS....... $ - $ - $ - N/A N/A N/A
(1) Included in other comprehensive income, net of taxes.
(2) Included in interest expense on the hedged item (trust preferred
borrowings).
7. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive
income as required by SFAS No. 130:
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
(In Thousands)
Net income ........................................ $ 5,844 $ 7,921 $ 51,106 $ 17,347
Other Comprehensive Income:
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period,
net of taxes .................................. 673 600 (779) 173
Net unrealized holding losses arising during the
period on derivatives used for cash flow hedge,
net of taxes .................................. (58) (529) (85) (354)
Reclassification adjustment for gains
included in net income, net of taxes ......... (117) (13) (117) (14)
-------- -------- -------- --------
Total comprehensive income ........................ $ 6,342 $ 7,979 $ 50,125 $ 17,152
======== ======== ======== ========
8. 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.
14
9. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation consists only of its core
community banking operations and has no other operating segments. Generally,
reportable segments are business units that are managed separately, operate
under different regulations and offer different services to distinct customer
bases. Previously, WCC, C1FN and WF were classified as operating segments,
however, as a result of the discontinuance of WCC, the sale of C1FN in November
of 2002 and the sale of WF in 2003 these businesses were classified as
discontinued operations or businesses held-for-sale and are no longer considered
segments. For a further discussion see Notes 4 and 5 of the Financial
Statements.
10. INDEMNIFICATIONS
Secondary Market Loan Sales. In the normal course of business, WSFS and
its subsidiaries sell loans in the secondary market. As is customary in such
sales, WSFS provides indemnification to the buyer under certain circumstances.
This indemnification may include the repurchase of loans by WSFS. In most cases
repurchases and losses are rare, and no provision is made for losses at the time
of sale. When repurchase and losses are probable and reasonably estimable,
provision is made in the Financial Statements for such estimated losses.
Sale of C1FN/Everbank Segment. On November 5, 2002, the C1FN/Everbank
segment of WSFS was sold by WSFS and other shareholders of C1FN to Alliance
Capital Partners, Inc. and its subsidiary, First Alliance Bank, F.S.B. As is
customary in the sale of a privately-held business, certain indemnifications
were provided by the sellers in the event of costs, losses, damages, etc
(collectively, "Damages") incurred and successfully claimed by the buyer for
breaches of sellers' representations and warranties, sellers' failure to perform
under the transaction agreements, and the sellers' ownership and operation of
the business prior to sale, generally speaking. This indemnification extends for
one year from the sale date and is capped at $1,750,000 in the aggregate, which
has been placed in escrow. Buyer's damages must exceed $200,000 before any
initial claims may be made. WSFS' share of this indemnification escrow is
$611,000, which may be received by WSFS in the future if no claims are
successfully made against the indemnification. WSFS has not recognized this
portion of the sale consideration, as receipt of this amount is not assured
beyond a reasonable doubt. This amount, or portions thereof, will be recognized
if and when such assurance level is reached.
In addition to the above indemnification, WSFS separately provided
indemnification to the buyer for Damages, if any, that may result from C1FN
shareholders bringing claims against the buyer as a result of the Services
Agreement and amendments (collectively, "Services Agreements") between WSFS and
C1FN over the life of those arrangements. This indemnification was provided by
WSFS purely to facilitate the timely sale of C1FN/Everbank, and is not
specifically related to a change in an underlying asset or liability. This
indemnification extends for two years from the sale date and is capped at
approximately $8.2 million. WSFS is not aware of any claims under this
indemnification, and given the facts and circumstances surrounding both the
Services Agreements and the sale of C1FN, management of WSFS believes the
likelihood of any payments under this separate indemnification is remote. As a
result of these circumstances, and the general nature of the indemnification, no
provision for loss has been made in WSFS' Financial Statements at June 30, 2003.
Sale of Wilmington Finance, Inc. On January 2, 2003, Wilmington
Finance, Inc. (WF), WSFS' majority-owned subsidiary was sold to American General
Finance, Inc. As is customary in the sale of a privately-held business, certain
indemnifications were provided by WSFS and the other shareholders of WF to the
buyer.
Indemnifications provided by the sellers, damages incurred by, and
successfully claimed by the buyer, fall into four separate categories. These
include: (1) indemnification for sellers' ownership, which indemnification
extends indefinitely and is uncapped in amount; (2) indemnification for tax,
environmental, and benefit plan related issues, all of which indemnifications
extend for their respective statute of limitations and are uncapped in amount;
(3) breaches of sellers' representations and warranties and covenants in the
sale agreement (sellers' breaches indemnification), which extends for 18 months
from the sale date and are capped at the purchase price (approximately $123
million); and (4) protection to the buyer in the event of successful third-party
claims that result from the operation of the business prior to the sale date
(third-party claims indemnification). This third-party claims indemnification
includes time limits and dollar limits as follows: (i) for the first 12 months
after the sale the dollar limit is $57 million; (ii) from months 13 through 18
the dollar limit is $52 million; and (iii) from months 19 through 30 the dollar
limit is $32 million. Buyer must incur $2 million of damages and exhaust any
related reserves provided in the closing balance sheet before an initial dollar
claim may be made against the sellers for any third-party claims and sellers'
breaches indemnifications. Dollar liability is uncapped for the indemnifying
party if damages are due to willful misconduct, fraud, or bad faith.
Generally speaking, WSFS is proportionately liable for its ownership
share of WF (which was 65%, after the exercise of its warrant just prior to
sale) of the related successful claims under indemnification provisions, except
that, in order to facilitate the sale, WSFS agreed to assume a portion of the
management shareholders' indemnification obligations. This additional
indemnification totals as
15
much as approximately $13 million and was assumed in exchange for a payment of
$225,000 from the management shareholders. Because such payment acts like an
insurance premium, WSFS will accrete the $225,000 to income over the life of the
30-month arrangement.
WSFS is not aware of any claims to date made under the WF
indemnification provisions that could result in payment. Further,
indemnifications provided in the WF sale agreement are general in nature and not
specifically related to the changes in an underlying asset or liability. Any
potential claims related to indemnification on repurchased loans in the normal
course of business have been provided for in the closing balance sheet and are
further subject to the $2 million indemnification threshold. Therefore, given
these circumstances, any amounts that may be paid under these indemnification
provisions are neither probable nor reasonably estimable, or have a
probability-weighted net present value of zero. As such, no additional provision
for losses or deferral of sale consideration, other than the amounts above, are
contemplated as of this date.
There can be no assurances that payments, if any, under all
indemnifications provided by the Corporation will not be material or exceed
reserves that the Company may have established for such contingencies.
16
ITEM 2. WSFS FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (the "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 (Bank or 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
investment powers than most other financial institutions. WSFS has served the
residents of the Delaware Valley for 171 years. WSFS is the largest thrift
institution headquartered in Delaware and among the three or 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 strategy of the Corporation is
to improve its status as a high-performing financial services company by
focusing on its core community banking business.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as retail deposit and cash management
services. Lending activities are funded primarily with retail deposits and
borrowings. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC). At June 30, 2003 WSFS conducted operations from
its main office, two operations centers and 21 retail banking offices located in
northern Delaware and southeastern Pennsylvania.
The Corporation has two consolidated subsidiaries, WSFS and WSFS
Capital Trust I. The Corporation has no unconsolidated subsidiaries or
off-balance sheet entities. Fully-owned and consolidated subsidiaries of WSFS
include WSFS Credit Corporation (WCC), which is engaged primarily in indirect
motor vehicle leasing; WSFS Investment Group, Inc. which markets various
third-party insurance products and securities through WSFS' branch system; and
WSFS Reit, Inc., which holds qualifying real estate assets and may be used in
the future to raise capital.
WCC, which discontinued operations in 2000, had 1,118 lease contracts
and 786 loan contracts at June 30, 2003. It no longer accepts new applications
but continues to service existing loans and leases until their maturities.
Management estimates that substantially all loan and lease contracts will mature
by the end of 2004. For a detailed discussion, see Note 4 to the Financial
Statements.
In addition to the wholly owned subsidiaries, WSFS had consolidated two
non-wholly owned subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and
Wilmington Finance, Inc. (WF). C1FN, a 21% owned subsidiary engaged in Internet
and branchless banking, was sold in November 2002. WF, a majority owned
subsidiary, engaged in sub-prime residential mortgage banking and was sold in
January 2003. For a further discussion, see Note 5 to the Financial Statements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the financial condition and results of
operations are based on the Consolidated Financial Statements, which are
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions effecting the reported amounts of
assets, liabilities, revenue and expenses. Management evaluates these estimates
and assumptions on an ongoing basis, including those related to the allowance
for loan losses, the reserve for discontinued operations and income taxes.
Management bases its estimates on historical experience and various other
factors and assumptions that are believed to be reasonable under the
circumstances. These form the bases for making judgments on the carrying value
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following are critical accounting policies that involve more
significant judgments and estimates:
Allowance for Loan Losses
The Corporation maintains allowances for credit losses and charges losses to
these allowances when realized. The determination of the allowance for loan
losses requires significant judgment reflecting management's best estimate of
probable loan losses related to specifically identified loans as well as those
in the remaining loan portfolio. Management's evaluation is based upon a
continuing review of these portfolios, with consideration given to evaluations
resulting from examinations performed by regulatory authorities.
Reserve for Discontinued Operations
The Corporation discontinued the operations of WCC in 2000. In
accordance with APB 30, which was the authoritative literature in 2000,
accounting for discontinued operations of a business segment required that the
Company forecast operating results over the wind-down period and accrue any
expected net losses. As a result, the Corporation has established a reserve to
absorb
17
expected future net losses of WCC. Due to the uncertainty of a number of
factors, including residual values, interest rates, credit quality and operating
costs, this reserve is re-evaluated quarterly with adjustments, if necessary,
recorded as income/losses on wind-down of discontinued operations.
Contingencies (Including Indemnifications)
In the ordinary course of business, the Corporation, Bank and its
subsidiaries are subject to legal actions which involve claims for monetary
relief. Based upon information presently available to the Corporation and its
counsel, it is the Corporation's opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on the Corporation's results of operations.
The Bank, as successor to originators of reverse mortgages, may from
time to time be involved in arbitration or litigation with the borrowers or with
the heirs of borrowers. Because reverse mortgages are a relatively new and
uncommon product, there can be no assurances regarding how the courts or
arbitrators may apply existing legal principles to the interpretation and
enforcement of the terms and conditions of the Bank's reverse mortgage
obligations.
Income Taxes
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 the Company's valuation allowances on deferred
income taxes resulting from, among other things, limitations imposed by Internal
Revenue Code and uncertainties, including the timing of settlement and
realization of these differences.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $308.2 million during the first six months of
2003 to $2.0 billion at June 30, 2003. The investment in mortgage-backed
securities increased $383.4 million during the six months ended June 30, 2003 as
the Corporation redeployed some of its capital into agency and AAA rated
mortgage-backed securities. In addition, loans grew $121.8 million during the
first six months of 2003 to $1.2 billion. This volume reflects the continued
strong growth in commercial and commercial real estate loans of $81.4 million.
Residential real estate loans also grew by $34.7 million during the same period.
These increases were partially offset by a decrease of $117.6 million in loans
of businesses held-for-sale resulting from the first quarter 2003 sale of the
Corporation's subprime mortgage banking subsidiary, WF, Inc. Cash and Federal
Funds Sold decreased $66.3 million due to re-directing these liquid investments
into higher yielding assets. Loans, operating leases and other assets of
discontinued operations decreased $23.8 million, due to a continued run-off in
the WCC loan and lease portfolios.
Total liabilities increased $307.7 million between December 31, 2002
and June 30, 2003, to $1.8 billion. This increase was mainly due to a $339.9
million increase in Federal Home Loan Bank advances, primarily needed to fund
the increase in assets. Deposits increased by $4.9 million during the first six
months of 2003, to $903.3 million. This included a $9.2 million increase in
retail deposits partially offset by a $4.3 million decline in non-retail
deposits.
Capital Resources
Stockholders' equity increased $13.3 million between December 31, 2002
and June 30, 2003. This increase reflects net income of $51.1 million for the
first six months of 2003, partially offset by the purchase of 1.1 million shares
of treasury stock for $36.7 million ($33.33 per share average). At June 30,
2003, the Corporation held 7,257,869 shares of its common stock in its treasury
at a cost of $122.1 million. In addition, the Corporation declared a cash
dividends totaling $825,000 during the six months ended June 30, 2003. The
increase in stockholders' equity was also partially offset by a decline of $1.0
million in other comprehensive income resulting primarily from the decline in
the fair values of mortgage-backed securities available-for-sale and the
interest rate cap. See Note 6 to the Financial Statements for further discussion
of the interest rate cap.
18
Below is a table comparing the Bank's consolidated capital position relative to
the minimum regulatory requirements as of June 30, 2003 (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) ........ $238,044 18.77% $101,445 8.00% $126,806 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 227,436 11.27 80,734 4.00 100,917 5.00
Tangible Capital (to Tangible
Assets) .......................... 227,436 11.27 30,275 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 227,436 17.94 N/A N/A 76,083 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 June 30, 2003 the Bank was in compliance
with regulatory capital requirements and was deemed a "well-capitalized"
institution.
Liquidity
In accordance with Thrift Bulletin 77, the OTS requires institutions,
such as WSFS, to maintain adequate liquidity to assure safe and sound operation.
WSFS' liquidity ratio of cash and qualified assets to net withdrawable deposits
and borrowings due within one year was 10.7% at June 30, 2003, compared to 13.3%
at December 31, 2002. The December 31, 2002 liquidity was high due to the sale
of the reverse mortgage portfolio, from which cash proceeds totaled $128
million. Management monitors liquidity daily and maintains funding sources to
meet unforeseen changes in cash requirements. The Corporation's primary funding
sources are operating earnings, deposits, repayments of loans and investment
securities, sales of loans and borrowings. In addition, the Corporation's
liquidity requirements can be satisfied through the use of its borrowing
capacity from the FHLB of Pittsburgh and other sources, the sale of certain
securities and the pledging of certain loans for other lines of credit.
Management believes these sources are sufficient to maintain the required and
prudent levels of liquidity.
19
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
December 31, 2002. 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.
June 30, December 31,
2003 2002
---- ----
(In Thousands)
Nonaccruing loans:
Commercial ................................. $3,823 $2,242
Consumer ................................... 448 516
Commercial mortgage ........................ 444 326
Residential mortgage ....................... 2,604 3,246
Construction ............................... -- 199
------ ------
Total nonaccruing loans ......................... 7,319 6,529
Assets acquired through foreclosure ............. 983 904
------ ------
Total nonperforming assets ...................... $8,302 $7,433
====== ======
Past due loans:
Residential mortgages ...................... $ 76 $ 346
Commercial and commercial mortgages ........ 230 95
Consumer ................................... 68 88
------ ------
Total past due loans ............................ $ 374 $ 529
====== ======
Ratios:
Nonaccruing loans to total loans (1) ....... 0.60% 0.60%
Allowance for loan losses to gross loans (1) 1.83% 1.95%
Nonperforming assets to total assets ....... 0.41% 0.44%
Loan loss allowance to nonaccruing loans (2) 303.22% 324.49%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ................. 267.32% 285.03%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
20
Nonperforming assets increased $869,000 during the six months ended
June 30, 2003. The increase was primarily due to one $1.9 million commercial
business loan being placed on nonaccrual status during the second quarter.
Commercial and consumer additions were partially offset by $2.4 million of
collections and $419,000 in charge-offs. Residential non-accruals declined
$642,000 primarily due to $398,000 of collections and $625,000 of various loans
returned to accrual status. The following is an analysis of the change in
nonperforming assets:
For the Six
Months Ended For the Year Ended
June 30, 2003 December 31, 2002
---------------- ------------------
(In Thousands)
Beginning balance.................................. $ 7,433 $ 7,965
Additions .................................... 4,356 8,442
Collections................................... (2,443) (4,854)
Transfers to accrual/restructured status...... (625) (1,762)
Charge-offs / write-downs..................... (419) (2,358)
---------- ---------
Ending balance..................................... $ 8,302 $ 7,433
========== =========
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
June 30, 2003, interest-bearing liabilities exceeded interest-bearing assets
that mature within one year (interest-sensitive gap) by $132.4 million. The
Corporation's interest-sensitive assets as a percentage of interest-sensitive
liabilities within the one-year window decreased to 86% at June 30, 2003
compared to 133% at December 31, 2002. Likewise, the one-year interest-sensitive
gap as a percentage of total assets decreased to negative 6.58% from 11.11% at
December 31, 2002. However, given the historically low-level of interest rates,
certain liabilities, while they have the contractual right to reprice lower, may
not have the practical ability to reprice as quickly or as much as earning
assets. Conversely, should interest rates increase, certain core funding
liabilities may increase at a slower pace or not as much as earning assets. The
change in sensitivity since December 31, 2002 is the result of the current
interest rate environment and 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 $30 million in FHLB
advances.
21
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 June 30, 2003 and 2002, calculated in
compliance with Thrift Bulletin No. 13A:
At June 30,
-----------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
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 -5% 10.03% 7% 9.65%
+200 -3% 10.25% 5% 9.65%
+100 -1% 10.43% 3% 9.59%
0 0% 10.50% 0% 9.46%
-100 -2% 10.10% -3% 9.09%
-200 (3) -7% 10.09% -9% 8.81%
-300 (3) -18% 11.03% -18% 8.69%
(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 June 30, 2003 and June 30, 2002 given the historically
low absolute level of interest rates at that time.
COMPARISON FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Results of Operations
The Corporation recorded net income of $5.8 million or $0.70 per
diluted share for the second quarter of 2003. This compares to $7.9 million or
$0.84 per diluted share for the same quarter last year. Income from continuing
operations was $5.6 million, or $0.68 per diluted share, for the three months
ended June 30, 2003. This compares to $5.8 million, or $0.62 per diluted share,
for the second quarter of 2002. The second quarter of 2002, however included
$4.1 million in pretax income from reverse mortgages. Substantially all of WSFS'
reverse mortgages were sold effective October 1, 2002 at a significant pretax
gain of $101.5 million.
Net income for the six months ended June 30, 2003 was $51.1 million or
$5.94 per diluted share. This compares to $17.3 million or $1.85 per diluted
share for comparable period last year. The results for the first six months of
2003 include a $41.3 million gain on the sale of the Corporation's subprime
mortgage banking subsidiary, Wilmington Finance, Inc. (WF). Excluding gains on
the sale of businesses, income from continuing operations was $9.7 million, or
$1.13 per diluted share compared to $13.6 million, or $1.45 per diluted share in
2002. The first six months of 2002, however, included $11.1 million in pretax
income from reverse mortgages. Substantially all of WSFS' reverse mortgages were
sold effective October 1, 2002 at a significant pretax gain of $101.5 million.
22
Net Interest Income
The following tables provide information concerning the balances,
yields and rates on interest-earning assets and interest-bearing liabilities
during the periods indicated.
Three Months Ended June 30,
----------------------------------------------------------------------------
2003 2002(1)
-------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(2) Balance Interest Rate (2)
------- -------- ------- ------- -------- --------
Assets: (Dollars in Thousands)
Interest-earning assets:
Loans (3) (4):
Real estate loans (5)............... $ 762,804 $11,330 5.94% $ 648,586 $ 11,315 6.98%
Commercial loans ................... 242,476 3,115 5.54 196,768 2,882 6.36
Consumer loans...................... 185,462 3,394 7.34 191,604 3,950 8.27
---------- ------- ---------- --------
Total loans....................... 1,190,742 17,839 6.09 1,036,958 18,147 7.11
Mortgage-backed securities (6)........... 531,584 4,065 3.06 151,894 2,186 5.76
Loans held-for-sale (4).................. 3,683 76 8.25 3,466 58 6.69
Investment securities (6)................ 14,176 205 5.78 12,328 218 7.07
Investment in reverse mortgages.......... 989 50 20.22 35,565 4,103 46.15
Other interest-earning assets ........... 41,672 235 2.26 26,247 201 3.07
---------- ------- ---------- --------
Total interest-earning assets....... 1,782,846 22,470 5.10 1,266,458 24,913 7.96
-------- --------
Allowance for loan losses................ (22,096) (21,160)
Cash and due from banks.................. 131,777 113,821
Loans, operating leases and other
assets of discontinued operations...... 29,529 86,589
Assets of businesses held-for-sale....... - 397,741
Other noninterest-earning assets......... 29,050 49,343
---------- -------------
Total assets........................ $1,951,106 $1,892,792
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand.................... $ 104,959 $ 83 0.32% $ 88,862 $ 106 0.48%
Savings............................. 311,521 448 0.58 311,666 758 0.98
Retail time deposits ............... 255,919 1,469 2.30 247,198 1,945 3.16
Jumbo certificates of deposits ..... 28,688 112 1.57 12,495 87 2.79
---------- ------- ---------- --------
Total interest-bearing deposits... 701,087 2,112 1.21 660,221 2,896 1.76
FHLB of Pittsburgh advances.............. 677,074 5,240 3.06 453,198 5,250 4.58
Trust preferred borrowings............... 50,000 493 3.90 50,000 850 6.73
Other borrowed funds..................... 109,107 317 1.16 118,698 815 2.75
Cost of funding discontinued operations.. (295) (647)
Cost of funding businesses held-for-sale. - (502)
---------- ------- ---------- --------
Total interest-bearing liabilities.. 1,537,268 7,867 2.05 1,282,117 8,662 2.70
------- --------
Noninterest-bearing demand deposits...... 185,123 160,714
Liabilities of businesses held-for-sale.. - 315,921
Other noninterest-bearing liabilities.... 29,763 14,583
Minority interest ....................... - 5,756
Stockholders' equity..................... 198,952 113,701
---------- ---------------
Total liabilities and
stockholders' equity................... $1,951,106 $1,892,792
========== ==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities......................... $ 245,578 $ (15,659)
========== ==============
Net interest and dividend income...... $ 14,603 $ 16,251
========= ==========
Interest rate spread.................. 3.05% 5.26%
===== =====
Net interest margin................... 3.34% 5.22%
===== =====
(1) For comparative purposes, balances of C1FN and UAB are shown as businesses
held-for-sale in 2002.
(2) Weighted average yields have been computed on a tax-equivalent basis.
(3) Nonperforming loans are included in average balance computations.
(4) Balances are reflected net of unearned income.
(5) Includes commercial mortgage loans.
(6) Includes securities available-for-sale
23
Six Months Ended June 30,
----------------------------------------------------------------------------
2003 2002(1)
-------------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(2) Balance Interest Rate (2)
------- -------- ------- ------- -------- --------
Assets: (Dollars in Thousands)
Interest-earning assets:
Loans (3) (4):
Real estate loans (5)............ $ 744,693 $22,648 6.08% $ 651,735 $22,851 7.01%
Commercial loans ................ 228,199 6,098 5.80 190,420 5,583 6.42
Consumer loans................... 185,265 6,873 7.48 191,219 7,886 8.32
---------- ------- ---------- -------
Total loans.................... 1,158,157 35,619 6.25 1,033,374 36,320 7.14
Mortgage-backed securities (6)........ 435,347 7,547 3.47 132,974 3,816 5.74
Loans held-for-sale (4)............... 4,566 158 6.92 3,400 112 6.59
Investment securities (6)............. 17,898 456 5.10 12,964 457 7.05
Investment in reverse mortgages....... 1,123 (27) (4.81) 34,424 11,097 64.47
Other interest-earning assets ........ 60,769 624 2.07 33,531 547 3.29
---------- ------- ---------- -------
Total interest-earning assets.... 1,677,860 44,377 5.36 1,250,667 52,349 8.46
------- -------
Allowance for loan losses............. (21,846) (21,159)
Cash and due from banks............... 130,896 103,839
Loans, operating leases and other
assets of discontinued operations... 35,686 95,592
Assets of businesses held-for-sale.... - 387,039
Other noninterest-earning assets...... 31,233 48,400
---------- ----------
Total assets..................... $1,853,829 $1,864,378
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 103,736 $ 187 0.36% $ 87,387 $ 213 0.49%
Savings.......................... 305,661 928 0.61 311,139 1,570 1.02
Retail time deposits ............ 266,090 3,259 2.47 250,124 4,188 3.38
Jumbo certificates of deposits .. 25,460 217 1.72 11,459 163 2.87
Brokered certificates of deposit. - - - 277 10 7.28
---------- ------- ---------- -------
Total interest-bearing
deposits..................... 700,947 4,591 1.32 660,386 6,144 1.88
FHLB of Pittsburgh advances........... 580,280 10,121 3.47 459,177 10,533 4.56
Trust preferred borrowings............ 50,000 989 3.93 50,000 1,486 5.91
Other borrowed funds.................. 95,268 553 1.16 100,500 1,451 2.89
Cost of funding discontinued
operations.......................... (695) (1,402)
Cost of funding businesses
held-for-sale....................... - (1,070)
---------- ------- ---------- -------
Total interest-bearing
liabilities.................... 1,426,495 15,559 2.18 1,270,063 17,142 2.70
------- -------
Noninterest-bearing demand deposits... 177,736 157,903
Liabilities of businesses held-for-sale - 306,585
Other noninterest-bearing liabilities. 38,657 14,235
Minority interest .................... - 6,000
Stockholders' equity.................. 210,941 109,592
---------- ---------
Total liabilities and stockholders'
equity.............................. $1,853,829 $1,864,378
========== ==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities......................... $ 251,365 $ (19,396)
========== ==========
Net interest and dividend income...... $28,818 $35,207
======= =======
Interest rate spread.................. 3.18% 5.76%
===== =====
Net interest margin................... 3.50% 5.72%
===== =====
(1) For comparative purposes, balances of C1FN and UAB are shown as businesses
held-for-sale in 2002.
(2) Weighted average yields have been computed on a tax-equivalent basis.
(3) Nonperforming loans are included in average balance computations.
(4) Balances are reflected net of unearned income.
(5) Includes commercial mortgage loans.
(6) Includes securities available-for-sale
24
Net interest income for the second quarter of 2003 was $14.6 million.
This compares to $16.3 million for the same quarter in 2002; however, the second
quarter of 2002 included $4.1 million in interest income from reverse mortgages.
Substantially all of WSFS' reverse mortgage were sold effective October 1, 2002
at a pretax gain of $101.5 million. The net interest margin of 3.34% for the
second quarter of 2003 declined from 5.22% for the second quarter of 2002. The
decrease in net interest margin was significantly affected by the
above-mentioned sale of reverse mortgages. The decrease in the net interest
margin was also negatively affected by the interest rate environment in which
loan and investment rates are able to reprice down by more than the funding
cost. Lastly, the net interest margin was negatively impacted by the active
share repurchase program and the purchase of agency and AAA rated
mortgage-backed securities (MBS).
Net interest income for the six months ended June 30, 2003 was $28.8
million. This compares to $35.2 million for the same period in 2002. Net
interest income in 2002 included $11.1 million in interest income from reverse
mortgages. The net interest margin of 3.50% for the six months ended June 30,
2003 declined from 5.72% for the same period in 2002. The decrease in net
interest margin was significantly affected by the above-mentioned sale of
reverse mortgages. The decrease in the net interest margin was also negatively
affected by the aforementioned interest rate environment in which loan and
investment rates are able to reprice down by more than the funding cost as well
as the purchase of mortgage-backed securities and share repurchases, as
described above.
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 seven 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 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.
25
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 $1.2 million for the first six
months of 2002 to $1.5 million for the first six months of 2003, primarily a
result of growth in commercial loans from period to period.
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The allowances for
losses are maintained at a level which management considers adequate to provide
for losses based upon an evaluation of known and inherent risks in the
portfolios. Management's evaluation is based upon a continuing review of the
portfolios.
The following table represents a summary of the changes in the
allowance for loan losses during the periods indicated.
Six months ended Six months ended
June 30, 2003 June 30, 2002
------------- -------------
(Dollars in Thousands)
Beginning balance .......................................... $21,452 $21,597
Provision for loan losses of continuing operations.......... 1,500 1,211
Provision for loan losses, businesses held-for-sale ........ - 146
Charge-offs:
Residential real estate ............................... 197 619
Commercial real estate (1) ............................ 29 333
Commercial............................................. 222 354
Consumer .............................................. 454 860
------- -------
Total charge-offs................................... 902 2,166
------- -------
Recoveries:
Residential real estate ............................... - 11
Commercial real estate (1) ............................ 230 176
Commercial ............................................ 71 410
Consumer............................................... 108 236
------- -------
Total recoveries ................................... 409 833
------- -------
Net charge-offs ............................................ 493 1,333
------- -------
Ending balance.............................................. $22,459 $21,621
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (2)................... 0.09% 0.25%
======= =======
(1) Includes commercial mortgage and construction loans.
(2) Ratio for the six months ended June 30, 2003 and 2002 is annualized.
Noninterest Income
Noninterest income for the quarter ended June 30, 2003 was $7.3 million
compared to $5.7 million for the second quarter of 2002. This increase was
mainly due to an increase of $678,000 in gains on the sales of loans compared to
second quarter of 2002. The second quarter 2003 gains resulted from the sales of
$27.8 in residential mortgages and were the result of the high level of mortgage
refinancing. In addition, credit/debit card and ATM income increased $477,000
over the same period in 2002. This reflects higher credit and debit card usage
combined with the expansion of the ATM network.
Noninterest income for the six months ended June 30, 2003 was $13.1
million compared to $10.8 million for the same period in 2002. Consistent with
the quarter, this improvement was mainly due to an increase of $1.1 million in
gains on the sales of loans. The remainder of the growth in noninterest income
for the six months ended June 30, 2003 was in credit/debit card and ATM income,
which increased $1.0 million over the same period in 2002.
Noninterest Expense
Noninterest expenses for the quarter ended June 30, 2003 were $12.4
million, which was relatively flat in comparison to the second quarter of 2002.
Salaries, benefits and other compensation expenses increased $751,000 over the
comparable period in 2002. This was due to higher levels of variable
compensation, which was a direct result of the profitable mortgage banking
activity, commercial
26
loan growth and the ATM business growth experienced recently. Professional fees,
data processing and equipment expenses decreased as a result of the successful
completion of the organization's Technology, Organizational and Process
Simplification Plan (TOPS) in the first quarter of 2003.
Noninterest expenses for the six months ended June 30, 2003 were $25.3
million or $991,000 above the $24.3 million for the same period of 2002. This
increase included $1.3 million of expenses incurred in connection with the sale
of WF, which included $663,000 of expenses related to special Associate
compensation and a $660,000 contribution to the WSFS charitable foundation to
benefit communities WSFS serves. Consistent with the quarter, these increases
were partially offset by cost savings form the TOPS program.
During the first quarter of 2003, the Corporation completed the
previously announced TOPS program, an initiative designed to simplify the
organization, better integrate technology solutions and re-engineer certain back
office processes.
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 six
months ended June 30, 2003 of $3.2 million and $5.4 million, respectively,
compared to an income tax provision from continuing operations of $3.4 million
and $7.5 million, for the same periods in 2002. The effective tax rates from
continuing operations for the three and six months ended June 30, 2003 was 36%
compared to 37% for the respective comparable periods in 2002.
The effective tax rates reflect the recognition of certain tax benefits
in the financial statements including those benefits from tax-exempt interest
income and from a fifty-percent interest income exclusion on a loan to an
Employee Stock Ownership Plan. While the income from continuing operations has
decreased for the comparable periods, the tax benefits have remained constant,
thereby reducing the Corporation's effective tax rate.
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 the accounting treatment of intangible
assets, acquired individually or with a group of other assets (i.e. those not
acquired in a business combination), in financial statements upon their
acquisition. Statement 142 also addresses the accounting treatment of goodwill
and other intangible assets after they have been initially recognized in the
financial statements. Under this standard, goodwill can no longer be amortized
but instead be tested for impairment and its value adjusted accordingly.
Negative goodwill was 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.
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 their 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 was effective for fiscal years beginning
after June 15, 2002. The adoption of this statement on January 1, 2003 did not
have a material impact on earnings, financial condition or equity of the
Corporation.
In June 2002, the FASB issued Statement 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 applied to exit or disposal activities that are
initiated after December 31, 2002. The adoption of this Statement did not have a
material impact on the Corporation's earnings, financial condition or equity.
27
In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation requires a guarantor
to include disclosure of certain obligations, and if applicable, at the
inception of the guarantee, recognize a liability for the fair value of other
certain obligations undertaken in issuing a guarantee. The recognition
requirement is effective for guarantees issued or modified after December 31,
2002. The application of this Interpretation did not have a material impact on
the Corporation's earnings, financial condition, or equity.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This Statement is effective for fiscal years ending after December 15, 2002,
except for financial reports containing condensed financial statements for
interim periods for which disclosure is effective for periods beginning after
December 15, 2002. The adoption of this Statement did not have an impact on the
Corporation's earnings, financial condition, or equity.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. This Interpretation clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities for which ownership interest is obtained after that date. Application
of this Interpretation did not have an impact on the Corporation's earnings,
financial condition, or equity.
In April 2003, the FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. With some exceptions, this Statement is effective for contracts
entered into or modified after June 30, 2003. The Company does not expect the
adoption of this Statement to have an impact on its earnings, financial
condition, or equity.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The Company does not expect the
adoption of this Statement to have an impact on its 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, the mid-Atlantic region and the country as
a whole, loan delinquency rates, operating risk, uncertainty of estimates in
general, and changes in federal and state regulations, among other factors.
These factors should be considered in evaluating the "forward-looking
statements," and undue reliance should not be placed on such statements. Actual
results may differ materially from management expectations. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report
on Form 10-Q.
28
Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) under the Securities Exchange Act of 1934
(the "Exchange Act")), the Company's principal executive officer and
the principal financial officer have concluded that as of the end of
the period covered by this Quarterly Report on Form 10-Q such
disclosure controls and procedures 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.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's internal
control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control
over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On March 25, 2003, a Demand for Arbitration (the "Demand") was filed
against Wilmington Savings Fund Society, FSB (the "Bank"), the
Company's wholly-owned subsidiary, in the Northeast Case Management
Center of the American Arbitration Association by American Homestead
Mortgage Corp. ("AHMC"). AHMC seeks an award of approximately $8.0
million under a 1994 agreement pursuant to which the Bank purchased
certain reverse mortgages from AHMC. AHMC claims it is entitled to a
portion of the net cash flow received by the Bank once the Bank
achieved a specified minimum return on its investment. The Company
believes that it achieved the specified minimum return on its
investment when it sold such loans as a part of the sale of a much
larger portfolio of reverse mortgage loans in November 2002. The
dispute relates to the price at which the AHMC portion of the
portfolio of reverse mortgage loans was sold. Without admitting or
denying any liability to AHMC, the Company believes that AHMC may be
entitled to less than $2.0 million under the terms of the 1994
agreement with AHMC, based on the actual price at which such loans
were sold, currently, and potentially more at a later date when
certain non-cash proceeds from the sale are received in cash. The
Company has accrued for its expected payments under its contract with
AHMC. The Company believes that the Demand is without merit and that
the ultimate disposition of the arbitration will not have a material
adverse effect on the financial condition and results of operations
of the Company taken as a whole. The Company intends to vigorously
defend against the Demand.
The Company is not engaged in any legal proceedings of a material
nature at June 30, 2003. 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 31 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) Exhibit 32 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(c) Reports on 8-K
(1) On July 23, 2003 the Registrant filed a Form 8-K pursuant to
items 5 and 7 announcing earnings for the second quarter of
2003.
(2) On August 8, 2003 the Registrant filed a Form 8-K pursuant
to items 5 and 7 announcing an authorization to repurchase
an additional 10% of its outstanding shares of common stock.
29
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: August 14, 2003 /s/MARVIN N. SCHOENHALS
--------------------------------------------------
Marvin N. Schoenhals
Chairman and President
Date: August 14, 2003 /s/MARK A. TURNER
---------------------------------------------------
Mark A. Turner
Chief Operating Officer and Chief Financial Officer
30