UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File Number 0-16668
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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 November 7, 2003:
COMMON STOCK, PAR VALUE $.01 PER SHARE 7,431,773
- --------------------------------------- -------------------
(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
Nine Months Ended September 30, 2003 and 2002 (Unaudited)........3
Consolidated Statement of Condition as of September 30, 2003
(Unaudited) and December 31, 2002................................5
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 (Unaudited)...................6
Notes to the Consolidated Financial Statements for the
Three and Nine Months Ended September 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.........29
----------------------------------------------------------
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......................................31
Exhibit 32 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002......................................33
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(Unaudited)
(In Thousands)
INTEREST INCOME:
Interest and fees on loans ................................... $ 17,922 $ 17,930 $ 53,699 $ 54,362
Interest on mortgage-backed securities ....................... 2,759 1,985 10,306 5,801
Interest and dividends on investment securities .............. 283 193 739 650
Interest on investments in reverse mortgages ................. 1 1,995 (26) 13,092
Other interest income ........................................ 212 200 836 747
-------- -------- -------- --------
21,177 22,303 65,554 74,652
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits ......................................... 1,882 2,918 6,473 9,062
Interest on Federal Home Loan Bank advances .................. 5,167 4,545 14,593 13,676
Interest on federal funds purchased and securities
sold under agreements to repurchase ........................ 175 178 540 510
Interest on trust preferred borrowings ....................... 489 568 1,478 2,054
Interest on other borrowings ................................. 65 30 253 79
-------- -------- -------- --------
7,778 8,239 23,337 25,381
-------- -------- -------- --------
Net interest income ............................................... 13,399 14,064 42,217 49,271
Provision for loan losses ......................................... 525 507 2,025 1,718
-------- -------- -------- --------
Net interest income after provision for loan losses ............... 12,874 13,557 40,192 47,553
-------- -------- -------- --------
NONINTEREST INCOME:
Loan servicing fee income .................................... 796 821 2,225 2,380
Deposit service charges ...................................... 2,392 2,224 6,666 6,435
Credit/debit card and ATM income ............................. 2,498 2,379 7,200 6,079
Securities gains ............................................. 148 -- 337 23
Gains on sales of loans ...................................... 217 103 1,378 201
Other income ................................................. 491 426 1,846 1,587
-------- -------- -------- --------
6,542 5,953 19,652 16,705
-------- -------- -------- --------
NONINTEREST EXPENSES:
Salaries, benefits and other compensation .................... 6,371 6,076 19,957 18,434
Equipment expense ............................................ 927 1,062 2,783 3,164
Data processing and operations expenses ...................... 738 914 2,105 2,756
Occupancy expense ............................................ 1,006 948 2,978 2,815
Marketing expense ............................................ 433 312 1,254 939
Professional fees ............................................ 457 957 1,822 2,917
Other operating expense ...................................... 1,594 2,132 5,956 5,714
-------- -------- -------- --------
11,526 12,401 36,855 36,739
-------- -------- -------- --------
Income from continuing operations before taxes and cumulative
effect of change in accounting principle ....................... 7,890 7,109 22,989 27,519
Income tax provision .............................................. 2,562 2,093 7,944 9,609
-------- -------- -------- --------
Income from continuing operations before cumulative effect of
change in accounting principle ................................. 5,328 5,016 15,045 17,910
Cumulative effect of change in accounting principle,
net of taxes .................................................. -- -- -- 703
-------- -------- -------- --------
Income from continuing operations ................................. 5,328 5,016 15,045 18,613
Loss on wind-down of discontinued operations, net of taxes ........ -- (563) -- (563)
Income from discontinued operations of businesses
held-for-sale, net of taxes ............................... -- 4,292 -- 8,042
Gain on sale of businesses held-for-sale, net of taxes ............ -- 737 41,389 737
-------- -------- -------- --------
NET INCOME ........................................................ $ 5,328 $ 9,482 $ 56,434 $ 26,829
======== ======== ======== ========
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
2003 2002 2003 2002
------- ------- ------- --------
(Unaudited)
(In Thousands)
EARNINGS PER SHARE:
BASIC:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit ................. $ 0.70 $ 0.55 $ 1.91 $ 1.97
Cumulative effect of change in accounting principle, net of
tax benefit ........................................................... -- -- -- 0.08
------- ------- ------- -------
Income from continuing operations ........................................ 0.70 0.55 1.91 2.05
Loss on wind-down of discontinued operations,
net of taxes .......................................................... -- (0.06) -- (0.06)
Income from discontinued operations of businesses
held-for-sale, net of taxes ........................................... -- 0.47 -- 0.88
Gain on sale of businesses held-for-sale, net of taxes ................... -- 0.08 5.24 0.08
-------- -------- ------- --------
Net income ............................................................... $ 0.70 $ 1.04 $ 7.15 $ 2.95
======== ======== ======= ========
DILUTED:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit ................... $ 0.66 $ 0.53 1.80 $ 1.90
Cumulative effect of change in accounting principle, net of
tax benefit ........................................................... -- -- -- 0.08
-------- -------- ------- --------
Income from continuing operations ........................................ 0.66 0.53 1.80 1.98
Loss on wind-down of discontinued operations,
net of taxes .......................................................... -- (0.06) -- (0.06)
Income from discontinued operations of businesses
held-for-sale, net of taxes ........................................... -- 0.45 -- 0.85
Gain on sale of businesses held-for-sale, net of taxes ................... -- 0.08 4.94 0.08
-------- -------- ------- --------
Net income ............................................................... $ 0.66 $ 1.00 $ 6.74 $ 2.85
======== ======== ======= ========
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
September 30, December 31,
2003 2002
---------------------------
(Unaudited)
(In Thousands)
ASSETS
Cash and due from banks ................................................ $ 138,282 $ 162,258
Federal funds sold and securities purchased under agreements to resell . 10,000 64,045
Interest-bearing deposits in other banks ............................... 3,023 7,476
Investment securities held-to-maturity ................................. 20,852 10,724
Investment securities available-for-sale ............................... 52,191 11,053
Mortgage-backed securities held-to-maturity ............................ 17,705 39,157
Mortgage-backed securities available-for-sale .......................... 488,391 98,081
Mortgage-backed securities trading ..................................... 11,407 11,000
Investment in reverse mortgages, net ................................... 138 1,131
Loans held-for-sale .................................................... 13,263 3,516
Loans, net of allowance for loan losses of $22,293 at
September 30, 2003 and $21,452 at December 31, 2002 .................. 1,258,131 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 .................................... 1,118 904
Premises and equipment ................................................. 12,840 13,838
Accrued interest receivable and other assets ........................... 24,897 15,116
Other assets of businesses held-for-sale ............................... -- 3,810
Loans, operating leases and other assets of discontinued operations .... 14,042 47,396
----------- -----------
TOTAL ASSETS ........................................................... $ 2,106,043 $ 1,705,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand ............................................. $ 202,647 $ 182,957
Money market and interest-bearing demand ............................... 116,626 109,259
Savings ................................................................ 326,829 292,917
Time ................................................................... 201,154 236,793
Jumbo certificates of deposit - retail ................................. 43,623 50,146
----------- -----------
Total retail deposits .......................................... 890,879 872,072
Jumbo certificates of deposit - non-retail ............................. 30,340 26,324
----------- -----------
Total deposits ..................................................... 921,219 898,396
Federal funds purchased and securities sold under
agreements to repurchase ............................................ 109,172 25,925
Federal Home Loan Bank advances ........................................ 768,420 403,500
Trust preferred borrowings ............................................. 50,000 50,000
Other borrowed funds ................................................... 48,087 36,581
Accrued expenses and other liabilities ................................. 20,116 37,219
Other liabilities of businesses held-for-sale .......................... -- 57,862
----------- -----------
TOTAL LIABILITIES ...................................................... 1,917,014 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
15,067,342 at September 30, 2003 and 14,859,721 at December 31, 2002 151 149
Capital in excess of par value ......................................... 64,526 59,789
Accumulated other comprehensive (loss) income .......................... (842) 904
Retained earnings ...................................................... 262,582 207,358
Treasury stock at cost, 7,606,869 shares at September 30, 2003
and 6,162,269 shares at December 31, 2002 ............................ (137,388) (85,528)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................................. 189,029 182,672
----------- -----------
TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY .......... $ 2,106,043 $ 1,705,000
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30,
2003 2002
----------- -----------
(Unaudited)
(In Thousands)
OPERATING ACTIVITIES:
Net income ........................................................................... $ 56,434 $ 26,829
Adjustments to reconcile net income to net cash used for operating activities:
Provision for loan losses ............................................................ 2,025 1,718
Depreciation, accretion and amortization ............................................. 9,554 5,845
Increase in accrued interest receivable and other assets ............................. (9,296) (3,725)
Decrease in accrued interest receivable and other assets of businesses held-for-sale . -- 1,467
Origination of loans held-for-sale ................................................... (62,675) (1,198,829)
Proceeds from sales of loans held-for-sale ........................................... 79,098 1,087,173
(Decrease) increase in accrued interest payable and other liabilities ................ (17,223) 3,883
Increase in accrued interest payable and other liabilities of businesses held-for-sale -- 297
Gain on businesses held-for-sale ..................................................... (65,073) (1,229)
Decrease (increase) in reverse mortgage capitalized interest, net .................... 982 (14,253)
Minority interest in net income ...................................................... -- 9,007
Other, net ........................................................................... 51 139
----------- -----------
NET CASH USED FOR OPERATING ACTIVITIES ............................................... (6,123) (81,678)
----------- -----------
INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in other banks ............................. 4,453 7,374
Maturities of investment securities .................................................. 460 1,118
Sales of investment securities available-for-sale .................................... 10,957 1,485
Sales of mortgage-backed securities available-for-sale ............................... 66,592 --
Repayments of mortgage-backed securities held-to-maturity ............................ 21,286 24,935
Repayments of mortgage-backed securities available-for-sale .......................... 278,125 33,521
Purchases of investment securities available-for-sale ................................ (62,040) --
Purchases of mortgage-backed securities available-for-sale ........................... (744,605) (93,715)
Net increase in investments of businesses held-for-sale .............................. -- (62,520)
Repayments of reverse mortgages ...................................................... 3,335 21,075
Disbursements for reverse mortgages .................................................. (3,731) (4,689)
Sales of loans ....................................................................... 1,383 5,986
Sale of businesses held-for-sale ..................................................... 128,667 8,506
Purchase of loans .................................................................... (10,081) (28,878)
Net (increase) decrease in loans ..................................................... (202,437) 57,711
Net decrease in loans of businesses held-for-sale .................................... -- 4,621
Net (increase) decrease in stock of Federal Home Loan Bank of Pittsburgh ............. (17,784) 5,500
Sales of assets acquired through foreclosure, net .................................... 356 420
Premises and equipment, net .......................................................... (1,506) (2,431)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES ............................................... (526,570) (19,981)
----------- -----------
FINANCING ACTIVITIES:
Net increase in demand and savings deposits .......................................... 72,474 8,412
Net (decrease) increase in time deposits ............................................. (38,146) 20,627
Net increase in deposits of businesses held-for-sale ................................. -- 52,705
Receipts from FHLB borrowings ........................................................ 2,643,870 476,000
Repayments of FHLB borrowings ........................................................ (2,278,950) (551,000)
Receipts from reverse repurchase agreements .......................................... 478,354 200,000
Repayments of reverse repurchase agreements .......................................... (445,107) (185,000)
Net increase in federal funds purchased .............................................. 50,000 24,500
Net decrease in obligations under capital lease ...................................... -- (170)
Dividends paid on common stock ....................................................... (1,211) (1,271)
Issuance of common stock ............................................................. 4,739 220
Purchase of treasury stock, net of reissuance ........................................ (51,860) (1,355)
Minority interest .................................................................... (12,845) (5,695)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................................ 421,318 37,973
----------- -----------
Decrease in cash and cash equivalents from continuing operations ..................... (111,375) (63,686)
Change in net assets from discontinued operations .................................... 33,354 53,564
Cash and cash equivalents at beginning of period ..................................... 226,303 170,592
----------- -----------
Cash and cash equivalents at end of period ........................................... $ 148,282 $ 160,470
=========== ===========
6
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Nine months ended September 30,
2003 2002
----------- -----------
(Unaudited)
(In Thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
Cash paid for interest .............................................. $ 21,324 $ 29,468
Cash paid for income taxes, net ..................................... 56,895 17,095
Loans transferred to assets acquired through foreclosure ............ 486 1,167
Net change in other comprehensive income ............................ (1,746) (2,222)
Investments transferred to businesses held-for-sale ................. -- 260,160
Loans, net of allowance transferred to businesses held-for-sale...... -- 36,135
Other assets transferred to businesses held-for-sale ................ -- 5,780
Deposits transferred to businesses held-for-sale .................... -- 298,170
Other liabilities transferred to businesses held-for-sale ........... -- 1,193
The accompanying notes are an integral part of these Financial Statements.
7
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 nine months
ended September 30, ended September 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 ........................ $ 5,328 $ 5,016 $15,045 $17,910
Cumulative effect of change in accounting principle, net of tax benefit -- -- -- 703
------- ------- -------- ------
Income from continuing operations ..................................... 5,328 5,016 15,045 18,613
Loss on wind-down of discontinued operations, net of taxes ............ -- (563) -- (563)
Income from discontinued operations of businesses
held-for-sale, net of taxes ................................... -- 4,292 -- 8,042
Gain on sale of businesses held-for-sale, net of taxes ................ -- 737 41,389 737
------- ------- -------- ------
Net income ............................................................ $ 5,328 $ 9,482 $56,434 $26,829
======= ======= ======== ======
DENOMINATOR:
- -----------
Denominator for basic earnings per share - weighted average shares .... 7,573 9,088 7,897 9,106
Effect of dilutive employee stock options ............................. 485 378 470 318
------- ------- -------- ------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ........................................ 8,058 9,466 8,367 9,424
======= ======= ======== ======
EARNINGS PER SHARE:
- ------------------
BASIC:
Income from continuing operations before cumulative effect of change
in accounting principle, net of tax benefit ......................... $ 0.70 $ 0.55 $ 1.91 $ 1.97
Cumulative effect of change in accounting principle, net of tax benefit -- -- -- 0.08
------- ------- -------- ------
Income from continuing operations ..................................... 0.70 0.55 1.91 2.05
Loss on wind-down of discontinued operations, net of taxes ............ -- (0.06) -- (0.06)
Income from discontinued operations of businesses
held for sale, net of taxes ......................................... -- 0.47 -- 0.88
Gain on sale of businesses held-for-sale, net of taxes ................ -- 0.08 5.24 0.08
------- ------- -------- ------
Net income ............................................................ $ 0.70 $ 1.04 $ 7.15 $ 2.95
======= ======= ======== ======
DILUTED:
Income from continuing operations before cumulative effect of change
in accounting principle, net of tax benefit ......................... $ 0.66 $ 0.53 $ 1.80 $ 1.90
Cumulative effect of change in accounting principle, net of tax benefit -- -- -- 0.08
------- ------- -------- ------
Income from continuing operations ..................................... 0.66 0.53 1.80 1.98
Loss on wind-down of discontinued operations, net of taxes ............ -- (0.06) -- (0.06)
Income from discontinued operations of businesses
held for sale, net of taxes ................................... -- 0.45 -- 0.85
Gain on sale of businesses held-for-sale, net of taxes ................ -- 0.08 4.94 0.08
------- ------- -------- ------
Net income ............................................................ $ 0.66 $ 1.00 $ 6.74 $ 2.85
======= ======= ======== ======
Outstanding common stock equivalents having no dilutive effect ........ 1 -- 1 --
3. VALUATION OF STOCK OPTION GRANTS
At September 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 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 nine months
ended September 30, ended September 30,
----------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- -------
(In Thousands, Except Per Share Data)
Income from continuing operations, as reported ................................. $ 5,328 $ 5,016 $ 15,045 $18,613
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of
related tax effects .................................................. 173 165 555 560
-------- -------- -------- -------
Pro forma income from continuing operations ...................... $ 5,155 $ 4,851 $ 14,490 $18,053
Earnings per share:
Basic:
Income from continuing operations, as reported ................................. $ 0.70 $ 0.55 $ 1.91 $ 2.05
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) (0.08) (0.07)
-------- -------- -------- -------
Pro forma income from continuing operations .................................... $ 0.68 $ 0.53 $ 1.83 $ 1.98
======== ======== ======== =======
Diluted:
Income from continuing operations, as reported ................................. $ 0.66 $ 0.53 $ 1.80 $ 1.98
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) (0.07) (0.06)
-------- -------- -------- -------
Pro forma income from continuing operations .................................... $ 0.64 $ 0.51 $ 1.73 $ 1.92
======== ======== ======== =======
4. DISCONTINUED OPERATIONS OF A BUSINESS SEGMENT
WSFS Financial Corporation discontinued the operations of WCC in 2000. WCC,
which had 696 lease contracts and 630 loan contracts at September 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 September 30, 2003,
there were approximately $11.4 million of contract residuals outstanding for
which management has estimated approximately $2.2 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 September 30, 2003 and December 31, 2002:
At September 30, At December 31,
2003 2002
----------------------------------
(In Thousands)
Vehicles under operating leases, net of reserves ....... $ 9,691 $44,693
Loans .................................................. 3,137 7,285
Other noncash assets ................................... 1,260 2,367
Less:
Reserve for losses of discontinued operations ...... 46 6,949
------- -------
Loans, operating leases and other assets of
discontinued operations .............................. $14,042 $47,396
======= =======
10
The following table presents the net income from discontinued operations
for the three and nine months ended September 30, 2003 and 2002:
For the three months For the nine months
ended September 30, ended September 30,
----------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
(In Thousands)
Interest income ........................ $ 93 $ 223 $ 353 $ 792
Allocated interest expense (1) ......... 186 572 881 1,974
------- ------- ------- -------
Net interest expense ................... (93) (349) (528) (1,182)
Loan and lease servicing fee income .... 68 72 253 292
Rental income on operating leases, net . (469) 635 (519) 1,860
Other income ........................... (1) 1 1 7
------- ------- ------- -------
Net revenues ................... (495) 359 (793) 977
Noninterest expenses ................... 153 380 518 975
------- ------- ------- -------
(Loss) income before taxes ............. (648) (21) (1,311) 2
Charge (credit) to reserve for losses on
discontinued operations ............. 648 21 1,311 (2)
Income tax provision ................... -- 563 -- 563
------- ------- ------- -------
Income from discontinued operations .... $ -- $ (563) $ -- $ (563)
======= ======= ======= =======
______________
(1) Allocated interest expense for the three and nine months ended September
30, 2003 and 2002 was based on a direct matched-maturity funding of the
non-cash assets of discontinued operations. The average borrowing rates for
the three and nine months ended September 30, 2003 was 3.51% and 3.42%
compared to 2.97% and 2.82% 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. WSFS expects to receive
the final escrow payment during the fourth quarter of 2003 and therefore expects
to recognize the remaining escrowed amount as a gain on sale of businesses
held-for-sale in that period. 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 shown separately for all periods presented.
The gains realized on the sale of C1FN, WF and UAB 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 September 30, 2002. No activity was recorded in the
third quarter of 2003:
For the Three Months Ended September 30, 2002
---------------------------------------------
WF(1) C1FN UAB Total
----- ---- --- ----
(In Thousands)
Net interest income ........................ $ 1,834 $ 677 $ 308 $ 2,819
Provision for loan losses .................. -- 90 18 108
------- ------- ------- -------
Net interest income after provision ........ 1,834 587 290 2,711
Noninterest income ......................... 19,514 2,999 8 22,521
------- ------- ------- -------
Total revenues ............................. 21,348 3,586 298 25,232
Noninterest expenses ....................... 10,427 2,842 334 13,603
------- ------- ------- -------
Income before taxes and minority interest... 10,921 744 (36) 11,629
Minority interest .......................... 5,273 (622) -- 4,651
------- ------- ------- -------
Income before taxes ........................ 5,648 1,366 (36) 6,978
Provision for income taxes ................. 2,175 525 (14) 2,686
------- ------- ------- -------
Income from businesses held-for-sale ....... $ 3,473 $ 841 $ (22) $ 4,292
======= ======= ======= =======
(1) Includes $691,000 in interest expense allocated to fund the average net
assets of $102.7 million of businesses held-for-sale. The rate of 2.69% is
based on the weighted average rate on other borrowed funds, which
approximated the marginal funding rate for this niche business.
The following table presents the net income from businesses held-for-sale
for nine months ended September 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 nine moths ended September 30, 2003:
For the Nine Months Ended September 30, 2002
---------------------------------------------
WF(1) C1FN UAB Total
----- ---- --- ----
(In Thousands)
Net interest income ........................ $ 4,490 $ 3,708 $ 865 $ 9,063
Provision for loan losses .................. -- 197 57 254
------- ------- ------- -------
Net interest income after provision ........ 4,490 3,511 808 8,809
Noninterest income ......................... 44,841 5,255 51 50,147
------- ------- ------- -------
Total revenues ............................. 49,331 8,766 859 58,956
Noninterest expenses ....................... 26,010 9,811 1,058 36,879
------- ------- ------- -------
Income before taxes and minority interest... 23,321 (1,045) (199) 22,077
Minority interest .......................... 11,321 (2,314) -- 9,007
------- ------- ------- -------
Income before taxes ........................ 12,000 1,269 (199) 13,070
Provision for income taxes ................. 4,621 486 (79) 5,028
------- ------- ------- -------
Income from businesses held-for-sale ....... $ 7,379 $ 783 $ (120) $ 8,042
======= ======= ======= =======
(1) Includes $1.8 million in interest expense allocated to fund the average net
assets of $82.1 million of businesses held-for-sale. The rate of 2.88% 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 multi-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 a range from three to eleven years for this
transaction. As of September 30, 2003, WSFS estimates the maximum undiscounted
exposure on this agreement at $1.1 million. The total carrying value of the
liability associated with this commitment was $4,100 at September 30, 2003. The
underlying credit at September 30, 2003 was $9.2 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 September 30, 2003 was $804,000.
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.
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 September 30, 2002
Everbank had entered into such contracts with notional amounts of $113.3
million. During the nine months ended September 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 September 30, 2003.
While not meeting the definition of a derivative under SFAS 133, related to
its sale of reverse mortgages, in November 2002 the Corporation received as
consideration 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 September 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 September 30, January 1, Change September 30,
---------- ------- ------------- ---------- ------ -------------
(In Thousands)
INTEREST RATE CAP:
Intrinsic value - dedesignated cap......... $ - $ - $ - $ 589 $ (589) $ -
Time value - dedesignated cap.............. - - - 1,945 (1,945) -
Redesignated cap........................... 1,012 (208) 804 (1) - 835 835 (1)
------ ------ ------ ------- --------- ------
Total...................................... $1,012 $ (208) $ 804 $ 2,534 $ (1,699) $ 835
====== ====== ====== ======= ========= ======
FOREIGN EXCHANGE CONTRACTS
Time Value................................. N/A N/A N/A $ (395) $ 1,666 $1,271
======= ========= ======
(1) Included in other comprehensive income, net of taxes.
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 nine months
ended September 30, ended September 30,
------------------------ ----------------------
2003 2002 2003 2002
------- ------- ------- -------
(In Thousands)
Net income ................................................. $ 5,328 $ 9,482 $56,434 $ 26,829
Other Comprehensive Income:
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period,
net of taxes........................................ (620) (443) (1,399) (270)
Net unrealized holding losses arising during the
period on derivatives used for cash flow hedge,
net of taxes........................................ (53) (559) (138) (913)
Reclassification adjustment for gains included in net income,
net of taxes........................................... (92) (1,025) (209) (1,039)
------- ------- ------- -------
Total comprehensive income.................................. $ 4,563 $ 7,455 $54,688 $24,607
======= ======= ======= =======
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 in 2000, 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 including its
sale of reverse mortgages, 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. Since the indemnification period ended November 5, 2003 WSFS has not
received any indication that a claim will be filed or that it will not receive
payment. As a result, management expects to receive and record the payment in
the fourth quarter of 2003 as a gain on sale of businesses held-for-sale.
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 September 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 much as approximately $13 million and was assumed in exchange for a
payment of $225,000 from the management shareholders.
15
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 September 30, 2003 WSFS conducted operations
from, among other locations, its main office, two operations centers and 22
retail banking offices located in 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 696 lease contracts and 630
loan contracts at September 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 various parties
including 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 $401.0 million during the first nine months of 2003
to $2.1 billion at September 30, 2003. The investment in mortgage-backed
securities increased $369.3 million during the nine months ended September 30,
2003 as the Corporation redeployed some of its capital into agency and AAA rated
mortgage-backed securities. In addition, loans grew $182.3 million during the
first nine months of 2003 to $1.3 billion. This volume reflects the continued
strong growth in commercial and commercial real estate loans of $136.8 million.
Residential real estate loans also grew by $40.7 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. Cash and Federal Funds
Sold decreased $78.0 million due to re-directing these liquid investments into
higher yielding assets. Loans, operating leases and other assets of discontinued
operations decreased $33.4 million, due to a continued run-off in the WCC loan
and lease portfolios.
Total liabilities increased $407.5 million between December 31, 2002 and
September 30, 2003, to $1.9 billion. This increase was mainly due to a $364.9
million increase in Federal Home Loan Bank advances, primarily needed to fund
the increase in assets. Deposits increased by $22.8 million during the first
nine months of 2003, to $921.2 million. This included a $18.8 million increase
in retail deposits and a $4.0 million increase in non-retail deposits.
CAPITAL RESOURCES
Stockholders' equity increased $6.4 million between December 31, 2002 and
September 30, 2003. This increase reflects net income of $56.4 million for the
first nine months of 2003, partially offset by the purchase of 1.4 million
shares of treasury stock for $51.9 million ($35.82 per share average). At
September 30, 2003, the Corporation held 7,606,869 shares of its common stock in
its treasury at a cost of $137.4 million. In addition, the Corporation declared
cash dividends totaling $1.2 million during the nine months ended September 30,
2003. The increase in stockholders' equity was also partially offset by a
decline of $1.7 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 September 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)............ $239,431 17.95% $106,726 8.00% $133,408 10.00%
Core Capital (to Adjusted
Total Assets)........................ 228,009 10.81 84,371 4.00 105,464 5.00
Tangible Capital (to Tangible
Assets).............................. 228,009 10.81 31,639 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets).............................. 228,009 17.09 53,363 4.00 80,045 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory actions and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. At September 30, 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 10.0% at September 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.
September 30, December 31,
2003 2002
------ ------
(In Thousands)
Nonaccruing loans:
Commercial ....................................... $1,747 $2,242
Consumer ......................................... 425 516
Commercial mortgage .............................. 864 326
Residential mortgage ............................. 2,712 3,246
Construction ..................................... -- 199
------ ------
Total nonaccruing loans .................................. 5,748 6,529
Assets acquired through foreclosure ...................... 1,118 904
------ ------
Total nonperforming assets ............................... $6,866 $7,433
====== ======
Past due loans:
Residential mortgages ............................ $ 226 $ 346
Commercial and commercial mortgages .............. 67 95
Consumer ......................................... 153 88
------ ------
Total past due loans ..................................... $ 446 $ 529
====== ======
Ratios:
Nonaccruing loans to total loans (1) ............. 0.45% 0.60%
Allowance for loan losses to gross loans (1) ..... 1.74% 1.95%
Nonperforming assets to total assets ............. 0.33% 0.44%
Loan loss allowance to nonaccruing loans (2) ..... 383.21% 324.49%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ....................... 320.77% 285.03%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
20
Nonperforming assets decreased $567,000 during the nine months ended
September 30, 2003. The decline was due to reductions in residential and
commercial loans being partially offset by increases in commercial mortgages and
assets acquired through foreclosure. Residential and commercial loans declined
by $534,000 and $495,000, respectively, mainly due to collections. Commercial
mortgages increased primarily due to a $440,000 loan being placed on non-accrual
during the third quarter. Assets acquired through foreclosure increased $214,000
due to the addition of various residential properties totaling $338,000,
partially offset by the sale of four residential properties. The following is an
analysis of the change in nonperforming assets:
For the Nine
Months Ended For the Year Ended
September 30, 2003 December 31, 2002
------------------- ------------------
(In Thousands)
Beginning balance................................. $ 7,433 $ 7,965
Additions................................. 6,594 8,442
Collections............................... (4,797) (4,854)
Transfers to accrual/restructured status.. (828) (1,762)
Charge-offs / write-downs, net............ (1,536) (2,358)
------- -------
Ending balance.................................... $ 6,866 $ 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
September 30, 2003, interest-bearing liabilities exceeded interest-bearing
assets that mature within one year (interest-sensitive gap) by $216.4 million.
The Corporation's interest-sensitive assets as a percentage of
interest-sensitive liabilities within the one-year window decreased to 79% at
September 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
10.28% 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.
Market risk is the risk of loss from adverse changes in the market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing, and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13A "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
on the net portfolio value ratio of an immediate change in interest rates in 100
basis point increments. The net portfolio value ratio is defined as the net
present value of the estimated cash flows from assets and liabilities as a
percentage of net present value of cash flows from total assets (or the net
present value of equity). The table below is the estimated impact of immediate
changes in interest rates on the Company's net interest margin and net portfolio
value ratio at the specified levels at September 30, 2003 and 2002, calculated
in compliance with Thrift Bulletin No. 13A:
21
At September 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 -9% 8.70% 9% 9.62%
+200 -6% 9.05% 6% 9.48%
+100 -3% 9.35% 3% 9.28%
0 0% 9.57% 0% 9.02%
-100 -2% 9.38% -4% 8.46%
-200 (3) -8% 9.49% -11% 8.21%
-300 (3) -19% 10.24% -18% 8.08%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate change environments.
(2) The net portfolio value ratio of the Company in a stable interest rate
environment and the net portfolio value ratio as projected under the
various rate change environments.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points are not
deemed meaningful at September 30, 2003 and 2002 given the historically low
absolute level of interest rates at those times.
COMPARISON FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
RESULTS OF OPERATIONS
The Corporation recorded net income of $5.3 million or $0.66 per diluted
share for the third quarter of 2003. This compares to $9.5 million or $1.00 per
diluted share for the same quarter last year. Income from continuing operations
was $5.3 million, or $0.66 per diluted share, for the three months ended
September 30, 2003. This compares to $5.0 million, or $0.53 per diluted share,
for the third quarter of 2002. The third quarter of 2002 also included $2.0
million in interest income from reverse mortgages. Substantially all of WSFS'
reverse mortgages were sold effective October 1, 2002 at a pretax gain of $101.5
million.
Net income for the nine months ended September 30, 2003 was $56.4 million
or $6.74 per diluted share. This compares to $26.8 million or $2.85 per diluted
share for the comparable period last year. The results for the first nine months
of 2003 include a $41.3 million or $4.93 per diluted share 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 $15.0 million, or $1.80 per diluted share compared to $18.6
million, or $1.98 per diluted share in 2002. The first nine months of 2002,
however, included $13.1 million in interest income from reverse mortgages.
Substantially all of WSFS' reverse mortgages were sold effective October 1, 2002
at a 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 September 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)............... $ 796,869 $11,346 5.70% $ 635,542 $ 10,893 6.86%
Commercial loans ................... 260,972 3,106 5.08 199,871 3,045 6.52
Consumer loans...................... 187,536 3,330 7.04 192,670 3,943 8.12
---------- ------- ---------- --------
Total loans....................... 1,245,377 17,782 5.80 1,028,083 17,881 7.07
Mortgage-backed securities (6)........... 522,902 2,759 2.11 152,445 1,985 5.21
Loans held-for-sale (4).................. 9,416 140 5.95 2,777 49 7.06
Investment securities (6)................ 27,013 283 4.19 11,417 193 6.76
Investment in reverse mortgages.......... 306 1 1.31 35,142 1,995 22.71
Other interest-earning assets ........... 46,116 212 1.82 25,629 200 3.10
---------- ------- ---------- --------
Total interest-earning assets....... 1,851,130 21,177 4.64 1,255,493 22,303 7.20
-------- --------
Allowance for loan losses................ (22,485) (21,439)
Cash and due from banks.................. 140,233 142,104
Loans, operating leases and other
assets of discontinued operations...... 18,228 70,718
Assets of businesses held-for-sale....... -- 453,124
Other noninterest-earning assets......... 37,728 40,106
---------- -------------
Total assets........................ $2,024,834 $1,940,106
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand.................... $ 112,220 $ 63 0.22% $ 91,323 $ 112 0.49%
Savings............................. 318,515 359 0.45 305,738 722 0.94
Retail time deposits ............... 247,838 1,346 2.15 259,707 1,966 3.00
Jumbo certificates of deposits ..... 32,662 114 1.38 18,425 118 2.54
---------- ------- ---------- --------
Total interest-bearing deposits... 711,235 1,882 1.05 675,193 2,918 1.71
FHLB of Pittsburgh advances.............. 736,057 5,353 2.85 434,946 5,117 4.60
Trust preferred borrowings............... 50,000 489 3.83 50,000 568 4.45
Other borrowed funds..................... 112,537 240 0.85 134,777 887 2.63
Cost of funding discontinued operations.. (186) (572)
Cost of funding businesses held-for-sale. - (679)
---------- ------- ---------- --------
Total interest-bearing liabilities.. 1,609,829 7,778 1.93 1,294,916 8,239 2.55
------- --------
Noninterest-bearing demand deposits...... 196,155 161,071
Liabilities of businesses held-for-sale.. -- 345,158
Other noninterest-bearing liabilities.... 28,110 11,638
Minority interest ....................... -- 7,994
Stockholders' equity..................... 190,740 119,329
---------- ----------
Total liabilities and
stockholders' equity................... $2,024,834 $1,940,106
========== ==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities......................... $ 241,301 $ (39,423)
========== ==========
Net interest and dividend income...... $ 13,399 $ 14,064
========= ==========
Interest rate spread.................. 2.71% 4.65%
===== =====
Net interest margin................... 2.96% 4.57%
===== =====
(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
Nine Months Ended September 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)............... $ 762,275 $33,961 5.94% $ 642,281 $ 33,744 7.01%
Commercial loans ................... 239,244 9,203 5.54 193,605 8,628 6.45
Consumer loans...................... 186,031 10,204 7.33 191,735 11,829 8.25
---------- ------- ---------- --------
Total loans....................... 1,187,550 53,368 6.09 1,027,621 54,201 7.14
Mortgage-backed securities (6)........... 464,853 10,306 2.96 139,537 5,801 5.54
Loans held-for-sale (4).................. 6,201 331 7.12 3,187 161 6.74
Investment securities (6)................ 20,970 739 4.70 12,443 650 6.97
Investment in reverse mortgages.......... 848 (26) (4.09) 34,666 13,092 50.35
Other interest-earning assets ........... 55,830 836 2.00 30,868 747 3.24
---------- ------- ---------- --------
Total interest-earning assets....... 1,736,252 65,554 5.10 1,248,322 74,652 8.06
-------- --------
Allowance for loan losses................ (22,061) (21,253)
Cash and due from banks.................. 134,042 116,734
Loans, operating leases and other
assets of discontinued operations...... 29,803 87,210
Assets of businesses held-for-sale....... -- 413,336
Other noninterest-earning assets......... 33,421 45,550
---------- -------------
Total assets........................ $1,911,457 $1,889,899
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand.................... $ 106,595 $ 250 0.31% $ 88,731 $ 325 0.49%
Savings............................. 309,993 1,288 0.56 309,297 2,292 0.99
Retail time deposits ............... 259,940 4,603 2.37 253,319 6,154 3.25
Jumbo certificates of deposits ..... 27,887 332 1.59 13,807 281 2.72
Brokered certificates of deposits... - - - 183 10 7.31
---------- ------- ---------- --------
Total interest-bearing deposits... 704,415 6,473 1.23 665,337 9,062 1.82
FHLB of Pittsburgh advances.............. 632,776 15,474 3.22 451,011 15,650 4.58
Trust preferred borrowings............... 50,000 1,478 3.90 50,000 2,054 5.42
Other borrowed funds..................... 101,088 793 1.05 112,050 2,338 2.78
Cost of funding discontinued operations.. (881) (1,974)
Cost of funding businesses held-for-sale. - (1,749)
---------- ------- ---------- --------
Total interest-bearing liabilities.. 1,488,279 23,337 2.09 1,278,398 25,381 2.65
------- --------
Noninterest-bearing demand deposits...... 183,943 158,808
Liabilities of businesses held-for-sale.. -- 319,788
Other noninterest-bearing liabilities.... 35,102 13,359
Minority interest ....................... -- 6,672
Stockholders' equity..................... 204,133 112,874
---------- ----------
Total liabilities and
stockholders' equity................... $1,911,457 $1,889,899
========== ==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities......................... $ 247,973 $ (30,076)
========== ==========
Net interest and dividend income...... $ 42,217 $ 49,271
========= ==========
Interest rate spread.................. 3.01% 5.41%
===== =====
Net interest margin................... 3.31% 5.35%
===== =====
(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 third quarter of 2003 was $13.4 million
compared to $14.1 million for the same quarter in 2002; however the third
quarter of 2002 included $2.0 million in interest income from reverse mortgages.
Substantially all of WSFS' reverse mortgages were sold effective October 1, 2002
at a pretax gain of $101.5 million. The net interest margin of 2.96% for the
third quarter of 2003 declined from 4.57% for the third quarter of 2002. The
above-mentioned sale of reverse mortgages significantly affected the net
interest margin. The current interest rate environment in which loan and
investment rates reprice down by more than the funding cost also affected the
net interest margin. Finally, capital management activities including the active
share repurchases program and the purchase of Agency and AAA-rated
mortgage-backed securities (MBS) negatively impacted the net interest margin.
The yield on the MBS portfolio was 2.11% in the third quarter of 2003 versus
3.06% in the second quarter of 2003. This decline in the MBS yield was caused by
the faster than expected amortization of premiums on MBS as a result of the
significant amount of prepayments received during the quarter. Large prepayments
resulted from the declining rate environment in 2003. Mortgage rates have
recently risen from their historic lows. As a result, management estimates that
prepayments will slow and the Bank should experience a reduction in the
amortization of those premiums and a corresponding increase in the yields on
MBS. Absent further significant declines in interest rates, management expects
the yield on MBS in the fourth quarter to be between 2.50% and 2.90%.
Net interest income for the nine months ended September 30, 2003 was $42.2
million. This compares to $49.3 million for the same period in 2002. Net
interest income in 2002 included $13.1 million in interest income from reverse
mortgages. The net interest margin of 3.31% for the nine months ended September
30, 2003 declined from 5.35% for the same period in 2002. The decrease in the
net interest margin was significantly affected by the above-mentioned sale of
reverse mortgages. In addition, the current interest rate environment in which
loan and investment rates reprice down by more than the funding cost as well as
the purchase of MBS and share repurchases also negatively affected the net
interest margin.
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:
* General economic and business conditions affecting WSFS' key lending areas,
* Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
* Recent loss experience in particular segments of the portfolio,
* Collateral values and loan-to-value ratios,
* Loan volumes and concentrations, including changes in mix,
* Seasoning of the loan portfolio,
25
* Specific industry conditions within portfolio segments,
* Bank regulatory examination results, and
* Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet monthly to discuss and review
these conditions and risks associated with individual problem loans. By
assessing the probable estimated losses inherent in the loan portfolio on a
monthly basis, management is able to adjust specific and inherent loss estimates
based upon the availability of more recent information. The provision for loan
losses from continuing operations increased from $1.7 million for the first nine
months of 2002 to $2.0 million for the first nine 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.
Nine months ended Nine months ended
September 30, 2003 September 30, 2002(1)
------------------ ---------------------
(Dollars in Thousands)
Beginning balance ...................................... $21,452 $21,597
Provision for loan losses of continuing operations ..... 2,025 1,718
Provision for loan losses, businesses held-for-sale .... -- 254
Charge-offs:
Residential real estate ........................ 311 626
Commercial real estate (2) ..................... -- 333
Commercial ..................................... 653 421
Consumer ....................................... 605 1,073
------- -------
Total charge-offs ...................... 1,569 2,453
------- -------
Recoveries:
Residential real estate ........................ -- 12
Commercial real estate (2) ..................... 202 177
Commercial ..................................... 77 420
Consumer ....................................... 106 280
------- -------
Total recoveries ....................... 385 889
------- -------
Net charge-offs ........................................ 1,184 1,564
------- -------
Ending balance ......................................... $22,293 $22,005
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (3) .............. 0.13% 0.30%
======= =======
(1) Includes businesses held-for-sale.
(2) Includes commercial mortgage and construction loans.
(3) Ratio for the nine months ended September 30, 2003 and 2002 is annualized.
NONINTEREST INCOME
Noninterest income for the quarter ended September 30, 2003 was $6.5
million compared to $6.0 million for the third quarter of 2002. This increase
was mainly due to increases in service charges on core deposits and ATM fee
income, which were greater than the comparable quarter in 2002 by $168,000 and
$119,000, respectively. Securities gains increased $148,000 over the comparable
period in 2002. In addition, gains on sales of loans increased by $114,000 over
the same period in 2002. The gains resulted from the sale of $33.1 million in
residential loans during the third quarter of 2003.
Noninterest income for the nine months ended September 30, 2003 was $19.7
million compared to $16.7 million for the same period in 2002. This improvement
was mainly due to an increase of $1.2 million in gains on the sales of loans and
was the result of the high level of mortgage refinancing. The remainder of the
growth in noninterest income for the nine months ended September 30, 2003 was
mainly due to an increase of $1.1 million in credit/debit card and ATM fee
income compared to the same period in 2002. This reflects higher credit and
debit card usage combined with the expansion of the ATM business.
26
NONINTEREST EXPENSE
Noninterest expenses for the quarter ended September 30, 2003 were $11.5
million compared to $12.4 million in the third quarter of 2002. 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. Salaries,
benefits and other compensation expenses increased $295,000 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 loan
growth and the ATM business growth experienced recently.
Noninterest expenses for the nine months ended September 30, 2003 were
$36.9 million or $116,000 above the $36.7 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 from 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.
Management expects a modest increase in expenses in future quarters as the
Company opens new branches in Delaware. The Company expects to add three to four
branches by the end of 2004.
INCOME TAXES
The Corporation and its subsidiaries file a consolidated Federal income tax
return and separate state income tax returns. Income taxes are accounted for in
accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences." The Corporation recorded
a provision for income taxes from continuing operations during the three and
nine months ended September 30, 2003 of $2.6 million and $7.9 million,
respectively, compared to an income tax provision from continuing operations of
$2.1 million and $9.6 million, for the same periods in 2002. The effective tax
rates from continuing operations for the three and nine months ended September
30, 2003 were 32% and 35%, respectively, compared to 29% and 35%, 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. The income tax provision for the three and nine
months ended September 30, 2002 was reduced by $475,000 to reflect the favorable
resolution of tax authority examinations and tax return settlements that
occurred in the third quarter of 2002, net of additional state taxes resulting
from tax law changes in the State of New Jersey.
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
27
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.
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 September 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 adoption of this Statement did
not have an impact on the Corporation's earnings, financial condition, or
equity.
FORWARD-LOOKING STATEMENTS
Within this report and financial statements, management has included
certain "forward-looking statements" concerning the future operations of the
Corporation. It is management's desire to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward-looking statements"
contained in our financial statements. Management has used "forward-looking
statements" to describe the future plans and strategies including expectations
of the Corporation's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Delaware, 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.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report on
Form 10-Q.
ITEM 4. 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 arbitration hearing is scheduled
for December 2003.
The Company is not engaged in any legal proceedings of a material nature at
September 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) Exhibits and Reports on Form 8-K
(1) On July 23, 2003, the Registrant filed a report on Form 8-K
pursuant to items 7 and 12 to report earnings for the quarter
ended June 30, 2003.
(2) On August 8, 2003, the Registrant filed a report on Form 8-K
pursuant to items 5 and 7 to report that its Board of Directors
approved an open-market repurchase of up to an additional 10% of
the registrant's issued and outstanding 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: November 14, 2003 /s/ MARVIN N. SCHOENHALS
---------------------------------------------------
Marvin N. Schoenhals
Chairman and President
Date: November 14, 2003 /s/ MARK A. TURNER
---------------------------------------------------
Mark A. Turner
Chief Operating Officer and Chief Financial Officer
30