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 March 31, 2004
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate 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 May 3, 2004:
Common Stock, par value $.01 per share 7,224,420
- -------------------------------------- ---------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
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Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three Months
Ended March 31, 2004 and 2003 (Unaudited).......................................... 3
Consolidated Statement of Condition as of March 31, 2004
(Unaudited) and December 31, 2003.................................................. 5
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2004 and 2003 (Unaudited)................................................ 6
Notes to the Consolidated Financial Statements for the Three
Months Ended March 31, 2004 and 2003 (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........................... 26
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Item 4. Controls and Procedures ............................................................. 26
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PART II. Other Information
Item 1. Legal Proceedings.................................................................... 27
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Item 2. Changes in Securities, Uses of Proceed and Issuer Purchases of Equity Securities..... 27
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Item 3. Defaults upon Senior Securities...................................................... 27
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Item 4. Submission of Matters to a Vote of Security Holders.................................. 27
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Item 5. Other Information ................................................................... 27
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Item 6. Exhibits and Reports on Form 8-K..................................................... 27
--------------------------------
Signatures ................................................................................... 28
Exhibit 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .......... 29
Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ........... 31
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended March 31,
----------------------------
2004 2003
------- -------
(Unaudited)
(In Thousands)
Interest income:
Interest and fees on loans .................................... $18,100 $17,862
Interest on mortgage-backed securities ........................ 4,727 3,482
Interest and dividends on investment securities ............... 1,129 174
Other interest income ......................................... 206 389
------- -------
24,162 21,907
------- -------
Interest expense:
Interest on deposits .......................................... 1,793 2,479
Interest on Federal Home Loan Bank advances ................... 5,555 4,481
Interest on federal funds purchased and securities
sold under agreements to repurchase ......................... 133 140
Interest on trust preferred borrowings ........................ 496 496
Interest on other borrowings .................................. 305 96
------- -------
8,282 7,692
------- -------
Net interest income ................................................ 15,880 14,215
Provision for loan losses .......................................... 687 775
------- -------
Net interest income after provision for loan losses ................ 15,193 13,440
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Noninterest income:
Loan servicing fee income ..................................... 531 672
Deposit service charges ....................................... 2,335 1,905
Credit/debit card and ATM income .............................. 2,664 2,173
Securities gains .............................................. 222 -
Gains on sales of loans ....................................... 73 404
Bank owned life insurance income .............................. 479 -
Investment advisory income .................................... 538 -
Other income .................................................. 716 656
------- -------
7,558 5,810
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Noninterest expenses:
Salaries, benefits and other compensation ..................... 7,643 6,819
Equipment expense ............................................. 865 933
Data processing and operations expenses ....................... 762 677
Occupancy expense ............................................. 1,149 988
Marketing expense ............................................. 520 407
Professional fees ............................................. 522 501
Other operating expense ....................................... 1,777 2,645
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13,238 12,970
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Income from continuing operations before minority interest and taxes 9,513 6,280
Less minority interest ............................................. 45 -
------- -------
Income from continuing operations before taxes ..................... 9,468 6,280
Income tax provision ............................................... 3,286 2,199
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Income from continuing operations .................................. 6,182 4,081
Gain on sale of businesses held-for-sale, net of taxes ............. - 41,181
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Net income ......................................................... $ 6,182 $45,262
======= =======
(Continued on next page)
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
Three months ended March 31,
----------------------------
2004 2003
------- -------
(Unaudited)
Earnings per share:
Basic:
Income from continuing operations ........................ $ 0.84 $ 0.49
Gain on sale of businesses held-for-sale, net of taxes.... - 4.92
------- -------
Net income ............................................... $ 0.84 $ 5.41
======= =======
Diluted:
Income from continuing operations ........................ $ 0.79 $ 0.46
Gain on sale of businesses held-for-sale, net of taxes.... - 4.68
------- -------
Net income ............................................... $ 0.79 $ 5.14
======= =======
The accompanying notes are an integral part of these Financial Statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
(In Thousands)
Assets
Cash and due from banks ....................................................... $ 50,376 $ 46,709
Cash in non-owned ATMs ........................................................ 106,673 113,711
Interest-bearing deposits in other banks ...................................... 981 1,095
Investment securities held-to-maturity ........................................ 7,833 10,410
Investment securities available-for-sale ...................................... 107,285 106,078
Mortgage-backed securities held-to-maturity ................................... 21 1,814
Mortgage-backed securities available-for-sale ................................. 468,881 517,211
Mortgage-backed securities trading ............................................ 11,647 11,527
Loans held-for-sale ........................................................... 3,240 1,458
Loans, net of allowance for loan losses of $22,745 at March 31, 2004
and $22,386 at December 31, 2003 ............................................ 1,344,642 1,303,419
Bank owned life insurance ..................................................... 50,479 -
Stock in Federal Home Loan Bank of Pittsburgh, at cost ........................ 42,037 43,676
Assets acquired through foreclosure ........................................... 233 301
Premises and equipment ........................................................ 13,083 13,345
Accrued interest receivable and other assets .................................. 27,658 26,849
Loans, operating leases and other assets of discontinued operations ........... 6,147 9,474
----------- -----------
Total assets .................................................................. $ 2,241,216 $ 2,207,077
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ................................................ $ 223,490 $ 215,819
Money market and interest-bearing demand .................................. 121,564 118,151
Savings ................................................................... 320,354 316,976
Time ...................................................................... 183,638 192,037
Jumbo certificates of deposit - retail .................................... 41,618 40,076
----------- -----------
Total retail deposits ................................................... 890,664 883,059
Jumbo certificates of deposit - non-retail ................................ 44,411 40,274
Brokered certificates of deposit .......................................... 49,991 -
----------- -----------
Total deposits ........................................................ 985,066 923,333
Federal funds purchased and securities sold under agreements to repurchase .... 153,964 148,381
Federal Home Loan Bank advances ............................................... 798,239 843,296
Trust preferred borrowings .................................................... 51,547 50,000
Other borrowed funds .......................................................... 39,029 39,381
Accrued expenses and other liabilities ........................................ 14,753 14,648
----------- -----------
Total liabilities ............................................................. 2,042,598 2,019,039
----------- -----------
Minority Interest ............................................................. 191 46
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
15,140,899 at March 31, 2004 and 15,080,162 at December 31, 2003 .......... 151 151
Capital in excess of par value ................................................ 66,320 64,738
Accumulated other comprehensive income (loss) ................................. 2,483 (1,748)
Retained earnings ............................................................. 274,613 268,797
Treasury stock at cost, 7,778,869 shares at March 31, 2004 and 7,758,869 shares
at December 31, 2003 ...................................................... (145,140) (143,946)
----------- -----------
Total stockholders' equity .................................................... 198,427 187,992
----------- -----------
Total liabilities, minority interest and stockholders' equity ................. $ 2,241,216 $ 2,207,077
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31,
----------------------------
2004 2003
--------- ---------
(Unaudited)
(In Thousands)
Operating activities:
Net income ................................................................................. $ 6,182 $ 45,262
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for loan losses .............................................................. 687 775
Depreciation, accretion and amortization ............................................... 1,586 2,021
Increase in accrued interest receivable and other assets ............................... (2,760) (5,084)
Origination of loans held-for-sale ..................................................... (8,118) (14,128)
Proceeds from sales of loans held-for-sale ............................................. 6,314 15,281
Gain on sale of loans held-for-sale .................................................... (37) (350)
Gain on sale of loans .................................................................. (36) (54)
Gain on sale of investments ............................................................ (222) -
Minority interest in net income ........................................................ 45 -
Increase in accrued interest payable and other liabilities ............................. 105 1,574
Gain on businesses held-for-sale ....................................................... - (64,749)
Gain on assets acquired through foreclosure ............................................ (1) -
Deconsolidation of WSFS Capital Trust I ................................................ 1,547 -
(Increase) decrease in capitalized interest, net ....................................... (930) 278
--------- ---------
Net cash provided by (used for) operating activities ....................................... 4,362 (19,174)
--------- ---------
Investing activities:
Net decrease in interest-bearing deposits in other banks ................................... 114 6,296
Maturities of investment securities ........................................................ 2,585 105
Sales of mortgage-backed securities available-for-sale ..................................... 29,580 -
Repayments of mortgage-backed securities held-to-maturity .................................. 1,798 8,807
Repayments of mortgage-backed securities available-for-sale ................................ 37,672 39,660
Purchases of mortgage-backed securities available-for-sale ................................. (13,366) (440,937)
Repayments of reverse mortgages ............................................................ 382 348
Disbursements for reverse mortgages ........................................................ (134) (318)
Purchase of Cypress Capital Management LLC ................................................. (1,122) -
Sale of loans .............................................................................. 5,999 2,954
Purchase of loans .......................................................................... (3,120) (3,539)
Purchase of bank owned life insurance ...................................................... (50,000) -
Sale of businesses held-for-sale ........................................................... - 128,343
Net increase in loans ...................................................................... (44,627) (60,446)
Net decrease (increase) in stock of Federal Home Loan Bank of Pittsburgh ................... 1,639 (10,014)
Sales of assets acquired through foreclosure, net .......................................... 69 191
Premises and equipment, net ................................................................ (502) (399)
--------- ---------
Net cash used for investing activities ..................................................... (33,033) (328,949)
--------- ---------
Financing activities:
Net increase in demand and savings deposits ................................................ 14,110 22,463
Net increase (decrease) in time deposits ................................................... 47,218 (17,129)
Receipts from FHLB borrowings .............................................................. 732,000 564,200
Repayments of FHLB borrowings .............................................................. (777,057) (341,236)
Receipts from reverse repurchase agreements ................................................ 642,968 78,475
Repayments of reverse repurchase agreements ................................................ (642,385) (78,225)
Net increase in federal funds purchased .................................................... 5,000 59,000
Dividends paid on common stock ............................................................. (369) (432)
Issuance of common stock and exercise of employee stock options ............................ 1,582 290
Purchase of treasury stock, net of reissuance .............................................. (1,194) (28,990)
Minority interest .......................................................................... 100 (12,845)
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Net cash provided by financing activities .................................................. 21,973 245,571
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Decrease in cash and cash equivalents from continuing operations ........................... (6,698) (102,552)
Change in net assets from discontinued operations .......................................... 3,327 11,310
Cash and cash equivalents at beginning of period ........................................... 160,420 226,303
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Cash and cash equivalents at end of period ................................................. $ 157,049 $ 135,061
========= =========
(Continued on next page)
6
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Three months ended March 31,
----------------------------
2004 2003
-------- --------
(Unaudited)
(In Thousands)
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid for interest ....................................... $ 6,945 $ 7,143
Cash paid for income taxes, net .............................. 813 23,186
Loans transferred to assets acquired through foreclosure...... 620 168
Net change in other comprehensive income ..................... 4,231 (1,479)
Transfer of loans held-for-sale to loans ..................... 59 274
The accompanying notes are an integral part of these Financial Statements.
7
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated Financial Statements include the accounts of the
parent company (WSFS Financial Corporation), Wilmington Savings Fund Society,
FSB (Bank or WSFS) and Montchanin Capital Management, Inc. The Corporation also
has one unconsolidated affiliate, WSFS Capital Trust I. WSFS was founded in 1832
and is one of the oldest financial institutions in the country. 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). WSFS serves customers primarily from its main office and 23 retail
banking offices, located in Delaware and southeastern Pennsylvania. Montchanin
was formed in late 2003 to provide asset management services in the
Corporation's primary market area. 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.
Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), WSFS Investment Group, Inc. and WSFS Reit, Inc. As discussed
in Note 3 of the Financial Statements, the results of WCC, the Corporation's
wholly owned indirect auto financing and leasing subsidiary, are presented as
discontinued operations. WSFS Investment Group, Inc. was formed in 1989. This
subsidiary markets various third-party investment and insurance products, such
as single-premium annuities, whole life policies and securities primarily
through WSFS' retail banking system. WSFS Reit, Inc. is a real estate investment
trust formed in 2002 to hold qualifying real estate assets and may be used to
raise capital in the future.
In addition to the wholly owned subsidiaries, WSFS had consolidated one
non-wholly owned subsidiary, Wilmington Finance, Inc. (WF). WF, a majority owned
subsidiary engaged in sub-prime residential banking, was sold in January 2003.
This subsidiary is therefore classified as businesses held-for-sale in the
Financial Statements. See Note 4 of the Financial Statements for further
discussion of Businesses Held-for-Sale.
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 2003 Annual
Report.
Valuation of Stock Option Grants
At March 31, 2004, 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 these
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.
For the three months ended March 31,
------------------------------------
2004 2003
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(In Thousands, Except Per Share Data)
Income from continuing operations, as reported ............................................... $ 6,182 $ 4,081
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects .............. 161 184
-------- ---------
Pro forma income from continuing operations ............................................ $ 6,021 $ 3,897
========= =========
Earnings per share:
Basic:
- ------
Income from continuing operations, as reported ............................................... $ 0.84 $ 0.49
Less : Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects........ (0.02) (0.02)
-------- ---------
Pro forma income from continuing operations .................................................. $ 0.82 $ 0.47
======== =========
Diluted:
- --------
Income from continuing operations, as reported ............................................... $ 0.79 $ 0.46
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)
-------- ---------
Pro forma income from continuing operations .................................................. $ 0.77 $ 0.44
======== =========
8
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months ended March 31,
------------------------------------
2004 2003
--------- ---------
(In Thousands, Except Per Share Data)
Numerator:
- ----------
Income from continuing operations ..................................... $ 6,182 $ 4,081
Gain on sale of businesses held-for-sale, net of taxes................. - 41,181
-------- --------
Net income ............................................................ $ 6,182 $ 45,262
======== ========
Denominator:
- ------------
Denominator for basic earnings per share - weighted average shares..... 7,361 8,370
Effect of dilutive employee stock options ............................. 439 429
-------- --------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ........................................ 7,800 8,799
======== ========
Earnings per share:
- -------------------
Basic:
Income from continuing operations...................................... $ 0.84 $ 0.49
Gain on sale of businesses held-for-sale, net of taxes................. - 4.92
-------- --------
Net income ............................................................ $ 0.84 $ 5.41
======== ========
Diluted:
Income from continuing operations...................................... $ 0.79 $ 0.46
Gain on sale of businesses held-for-sale, net of taxes................. - 4.68
-------- ---------
Net income ............................................................ $ 0.79 $ 5.14
======== =========
Outstanding common stock equivalents having no dilutive effect......... - 103
9
3. Discontinued Operations of a Business Segment
WSFS Financial Corporation discontinued the operations of WCC in 2000.
WCC, which had 309 lease contracts and 445 loan contracts at March 31, 2004, 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 March 31,
2004, there were approximately $4.7 million of contract residuals outstanding
for which management has estimated approximately $871,000 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 March 31, 2004 and December 31, 2003:
At March 31, At December 31,
2004 2003
------ ------
(In Thousands)
Vehicles under operating leases, net of reserves.... $3,958 $6,542
Loans .............................................. 1,802 2,359
Other noncash assets ............................... 432 573
Less:
Reserve for losses of discontinued operations... 45 -
------ ------
Loans, operating leases and other assets of
discontinued operations .......................... $6,147 $9,474
====== ======
The following table presents the net income from discontinued
operations for the three months ended March 31, 2004 and 2003:
For the three months ended March 31,
------------------------------------
2004 2003
---- ----
(In Thousands)
Interest income........................................................ $ 54 $ 144
Allocated interest expense (1)......................................... 76 400
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Net interest expense................................................... (22) (256)
Loan and lease servicing fee income ................................... 37 111
Rental income on operating leases, net................................. 194 141
Other income........................................................... - 1
------- -------
Net revenues........................................................... 209 (3)
Noninterest expenses................................................... 111 180
------- -------
Income (loss) before taxes............................................. 98 (183)
(Credit) charge to the reserve for losses on discontinued operations .. (98) 183
Income tax provision .................................................. - -
------- -------
Income from discontinued operations.................................... $ - $ -
======= =======
(1) Allocated interest expense for the three months ended March 31, 2004 and
2003 was based on a direct matched-maturity funding of the non-cash assets
of discontinued operations. The average borrowing rates for the three
months ended March 31, 2004 and 2003 was 3.89% and 3.36%, respectively.
10
4. BUSINESSES HELD FOR SALE
In November 2002, the Corporation completed the sale of CustomerOne
Financial Network, Inc. (C1FN) and related interests in its Everbank Division.
In connection with that transaction, during the first quarter of 2003 WSFS
recognized an after tax-gain of $117,000 or $0.01 per diluted share.
In January 2003 WSFS sold its majority-owned subsidiary, Wilmington
Finance, Inc. (WF) and recognized an after tax-gain on the sale of $41.1 million
or $4.67 per diluted share during the first quarter of 2003. The sale included
$148.2 million in assets, of which $117.6 were residential mortgage loans
held-for-sale.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Corporation has an interest-rate cap with a notional amount of $50
million, which limits 3-month LIBOR to 6% for the ten years ending December 1,
2008. The cap is being used to hedge the cash flows on $50 million in trust
preferred floating rate debt. The cap was recorded at the date of purchase in
other assets, at a cost of $2.4 million. On July 1, 2002, the inception date of
the redesignated hedging relationship, using guidance from the FASB for
implementation of Statement 133, 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. The fair value of the cap is estimated using a standard option model.
The fair value of the interest rate cap at March 31, 2004 was $626,000.
While not meeting the definition of a derivative under SFAS 133,
related to its sale of reverse mortgages, in November 2002, the Corporation also
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 March 31,
2004. The option will be evaluated quarterly for any changes in the estimated
valuation.
The following depicts the change in fair market value of the Company's
derivatives:
2004 2003
------------------------------------ ----------------------------------
At At At At
January 1, Change March 31, January 1, Change March 31,
---------- ------ --------- ---------- ------ ---------
(In Thousands)
Interest Rate Cap...... $ 1,072 $ (446) $ 626(1) $ 1,012 $ (39) $ 973(1)
(1) Included in other comprehensive income, net of taxes.
11
6. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive income
as required by SFAS No. 130:
For the three months
ended March 31,
--------------------
(In Thousands)
Net income .......................................................... $ 6,182 $ 45,262
Other Comprehensive Income:
Net unrealized holding gain (losses) on securities
available-for-sale arising during the period,
net of taxes .................................................... 4,652 (1,452)
Net unrealized holding losses arising during the
period on derivatives used for cash flow hedge,
net of taxes .................................................... (276) (27)
Reclassification adjustment for gains included in net income,
net of taxes ................................................... (145) -
-------- --------
Total comprehensive income .......................................... $ 10,413 $ 43,783
======== ========
7. TAXES ON INCOME
The Corporation accounts for income taxes in accordance with SFAS No.
109, which requires the recording of deferred income taxes that reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Management has assessed valuation allowances on the deferred income
taxes due to, among other things, limitations imposed by Internal Revenue Code
and uncertainties, including the timing of settlement and realization of these
differences.
8. SEGMENT INFORMATION
Under the definition of SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," the Corporation has two operating segments
at March 31, 2004: Wilmington Savings Fund Society, FSB (Bank) and CashConnect,
the ATM division of WSFS.
The Bank segment provides financial products through its retail banking
offices to commercial and retail customers. The CashConnect segment provides
turnkey ATM services through strategic partnerships with several of the largest
networks, manufacturers, and service providers in the ATM industry. The balance
sheet category "Cash in non-owned ATMs" includes cash in which fee income is
earned through bailment arrangements with customers of CashConnect. Bailment
arrangements are typically renewed annually.
Reportable segments are business units that are managed separately and
offer different services to distinct customer bases. The Corporation evaluates
performance based on pre-tax ordinary income relative to resources used, and
allocates resources based on these results. Segment information for the three
months ended March 31, 2004 and 2003 follow:
12
For the three months March 31, 2004
------------------------------------
Bank CashConnect Total
---------- ---------- ----------
External customer revenues:
Interest income ............... $ 24,162 $ - $ 24,162
Non-interest income ........... 5,367 2,191 7,558
---------- ---------- ----------
Total external customer revenues... 29,529 2,191 31,720
---------- ---------- ----------
Intersegment revenues:
Interest income ............... 291 - 291
Non-interest income ........... 172 177 349
---------- ---------- ----------
Total intersegment revenues ....... 463 177 640
---------- ---------- ----------
Total revenue ..................... 29,992 2,368 32,360
---------- ---------- ----------
External customer expenses:
Interest expense .............. 8,282 - 8,282
Non-interest expenses ......... 12,557 616 13,173
Other depreciation and
amortization ............. 675 77 752
---------- ---------- ----------
Total external customer expenses... 21,514 693 22,207
---------- ---------- ----------
Intersegment expenses:
Interest expense .............. - 291 291
Non-interest expenses ......... 177 172 349
---------- ---------- ----------
Total intersegment expenses ....... 177 463 640
---------- ---------- ----------
Total expenses .................... 21,691 1,156 22,847
---------- ---------- ----------
Income before taxes and minority
interest ...................... 8,301 1,212 9,513
Provision for income taxes ........ 3,286
Minority interest ................. 45
----------
Consolidated net income ........... $ 6,182
==========
Segment assets .................... $2,131,720 $ 109,496 $2,241,216
Capital expenditures .............. $ 387 $ 147 $ 534
13
For the three months March 31, 2003
-----------------------------------
Bank CashConnect Total
---------- ---------- ----------
External customer revenues:
Interest income ........................ $ 21,907 $ - $ 21,907
Non-interest income .................... 4,088 1,722 5,810
---------- ---------- ----------
Total external customer revenues ........... 25,995 1,722 27,717
---------- ---------- ----------
Intersegment revenues:
Interest income ........................ 282 - 282
Non-interest income .................... 165 182 347
---------- ---------- ----------
Total intersegment revenues ................ 447 182 629
---------- ---------- ----------
Total revenue .............................. 26,442 1,904 28,346
---------- ---------- ----------
External customer expenses:
Interest expense ....................... 7,692 - 7,692
Non-interest expenses .................. 12,239 657 12,896
Other depreciation and
amortization ...................... 766 83 849
---------- ---------- ----------
Total external customer expenses ........... 20,697 740 21,437
---------- ---------- ----------
Intersegment expenses:
Interest expense ....................... - 282 282
Non-interest expenses .................. 182 165 347
---------- ---------- ----------
Total intersegment expenses ................ 182 447 629
---------- ---------- ----------
Total expenses ............................. 20,879 1,187 22,066
---------- ---------- ----------
Income before taxes and minority
interest ............................... 5,563 717 6,280
Provision for income taxes ................. 2,199
Gain on sale of businesses held-for-sale.... 41,181
----------
Consolidated net income .................... $ 45,262
==========
Segment assets ............................. $1,851,620 $ 86,486 $1,938,106
Capital expenditures ....................... $ 362 $ 25 $ 387
9. INDEMNIFICATIONS
Secondary Market Loan Sales. In the normal course of business, WSFS and
its subsidiaries sell loans in the secondary market. As is customary in such
sales, WSFS provides indemnification to the buyer under certain circumstances.
This indemnification may include the repurchase of loans by WSFS. In most cases
repurchases and losses are rare, and no provision is made for losses at the time
of sale.
Sale of C1FN/Everbank Segment. On November 5, 2002, the C1FN/Everbank
segment of WSFS was sold by WSFS and other shareholders of C1FN. In connection
with the sale, WSFS provided an 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 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 management of WSFS believes the likelihood of any payments
under this separate indemnification is very remote. As a result, no provision
for loss has been made in WSFS' financial statements at March 31, 2004.
Sale of Wilmington Finance, Inc. On January 2, 2003, WSFS completed the
sale of its majority-owned subsidiary, Wilmington Finance, Inc. (WF). 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.
14
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 remaining time limits and dollar limits as follows: (i) from months 16
through 18 the dollar limit is $52 million; and (ii) 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.
WSFS is not aware of any claims to date, or any potential future claims
made under the WF indemnification provisions that could result in payment. As
such, no provision for losses is 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.
10. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Postretirement Benefits
The Corporation shares certain costs of providing health and life
insurance benefits to retired Associates (and their eligible dependents).
Substantially all Associates may become eligible for these benefits if they
reach normal retirement age while working for the Corporation.
The Corporation accounts for its obligations under the provisions of
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. SFAS 106 requires that the costs of these benefits be recognized over
an Associate's active working career. Disclosures are in accordance with SFAS
No. 132 (Revised), Employer's Disclosure About Pensions and Other Postretirement
Benefits, that standardized the applicable disclosure requirements.
On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The
Act expanded Medicare to include, for the first time, coverage for prescription
drugs. The Corporation sponsors a retiree medical program and expects that this
legislation may eventually reduce its costs for this program.
At this point, the Corporation's investigation into its response to the
legislation is preliminary, as management awaits guidance from various
governmental and regulatory agencies concerning the requirements that must be
met to obtain these cost reductions as well as the manner in which such savings
should be measured. Based on this preliminary analysis, it appears that the
Corporation's retiree medical plan will need to be changed in order to qualify
for beneficial treatment under the Act.
Because of the uncertainties related to the Corporation's response to
this legislation and the appropriate accounting methodology for this event, the
Corporation has elected to defer financial recognition of this legislation until
the FASB issues final accounting guidance. When issued, that guidance could
require the Corporation to change previously reported information. This deferral
election is permitted under FASB Staff Position FAS 106-1.
15
The following disclosures are in accordance with SFAS No. 132 (Revised)
and were measured at January 1, 2004:
Components of net periodic benefit cost:
Three months ended March 31,
----------------------------
2004 2003
---- ----
Service cost................................ $ 24 $ 19
Interest cost............................... 31 30
Amortization of transition obligation....... 15 15
Net loss recognition........................ 5 3
--------- ---------
Net periodic benefit cost.............. $ 75 $ 67
========= =========
16
ITEM 2. WSFS FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (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 172 years. WSFS is the largest thrift
institution headquartered in Delaware and the fourth largest financial
institution in the state on the basis of total deposits traditionally garnered
in-market. 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. The Federal Deposit Insurance Corporation (FDIC) insures deposits to
their legal maximum. At March 31, 2004 WSFS conducted operations from, among
other locations, its main office, two operations centers and 23 retail banking
offices located in Delaware and southeastern Pennsylvania.
The Corporation has two consolidated subsidiaries, WSFS and Montchanin
Capital Management, Inc. The Corporation also has one unconsolidated affiliate,
WSFS Capital Trust I. 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 to raise capital
in the future.
WCC, which discontinued operations in 2000, had 309 lease contracts and
445 loan contracts at March 31, 2004. WCC 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 3 to the Financial
Statements.
In addition to the wholly owned subsidiaries, WSFS had consolidated a
non-wholly owned subsidiary, Wilmington Finance, Inc. (WF). WF, a majority owned
subsidiary, engaged in sub-prime residential mortgage banking and was sold in
January 2003. This subsidiary is therefore classified as businesses
held-for-sale in the Financial Statements. For a further discussion, see Note 4
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, investment in reverse mortgages and reverse mortgage bonds, the
reserve for discontinued operations, contingencies (including indemnifications),
and deferred 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.
17
Investment in Reverse Mortgages and Reverse Mortgage Bonds
The Corporation accounts for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
revere mortgages; the effective yield of each pool is recomputed, and income is
adjusted retroactively and prospectively to reflect the revised rate of return.
Accordingly, because of this market-value based accounting, the recorded value
of reverse mortgage assets include significant risk associated with estimations
and income recognition can vary significantly from reporting period to reporting
period.
The Corporation owns $11.6 million of SASCO RM-1 2002 securities,
including accrued interest, classified as "trading." These floating rate notes
represent the BBB traunche of the reverse mortgage securitization underwritten
by Lehman Brothers and carry a coupon rate of one-month LIBOR plus 300 basis
points. At the time of the acquisition of these securities, it was the
Corporation's intent to sell these securities in the near term. Therefore, based
on rules promulgated under SFAS 115, the securities were classified as
"trading." An active market for these securities has not developed since the
issuance, but it continues to be the intent of the Corporation to sell these
securities if and when an active market develops. Since there is no active
market for these securities, the Corporation has used the guidance under SFAS
115 to provide a reasonable estimate of fair value. The Corporation utilized
matrix pricing and a fundamental analysis of the actual cash flows of the
underlying reverse mortgages to estimate a reasonable fair value as of March 31,
2004. The Corporation also obtained a fair value estimate from an independent
securities dealer.
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 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 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, is from
time to time 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.
Deferred 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 $34.1 million during the first three months of 2004 to
$2.2 billion at March 31, 2004. During the first quarter of 2004 loans grew
$41.2 million to $1.3 billion reflecting the continued strong growth in
commercial and commercial real estate loans of $42.8 million. In addition,
consumer loans grew by $10.7 million during the same period. These increases
were partially offset by a decrease of $11.9 million in residential real estate
loans. During the quarter, the company purchased $50.0 million in Bank-Owned
Life Insurance (BOLI). This purchase enabled the Company to insure the lives of
certain senior managers. In addition to providing economic protection in the
event of the loss of key managers, the BOLI investment provides for the
possibility of better long-term
18
investment yields, enhanced by the tax-free build up of value and the tax free
returns upon ultimate distribution of proceeds, both provided for in the
Internal Revenue Code. The initial premium of $50.0 million was funded through
the liquidation of mortgage-backed securities (MBS). Loans, operating leases and
other assets of discontinued operations decreased $3.3 million, due to a
continued run-off in the WCC loan and lease portfolios.
Total liabilities increased $23.6 million between March 31, 2004 and
December 31, 2003, to $2.0 billion. This increase was mainly due to a $61.7
million increase in deposits. This included a $50.0 million increase in brokered
certificates of deposit, a $7.6 million increase in retail deposits and a $4.1
million increase in non-retail deposits. In addition, the Corporation
deconsolidated its trust preferred borrowings in the first quarter of 2004 as a
result of the implementation of Financial Accounting Standards Board (FASB)
Interpretation No. 46(R), Consolidation of Variable Interest Entities, which
resulted in an increase to trust preferred borrowings of $1.5 million. These
increases were partially offset by a $45.1 million decrease in Federal Home Loan
Bank advances, due to less reliance on this type of borrowing.
Capital Resources
Stockholders' equity increased $10.4 million between December 31, 2003
and March 31, 2004. This increase includes net income of $6.2 million and an
increase of $4.2 million in other comprehensive income during the first three
months of 2004. The increase in other comprehensive income was due to an
improvement in the fair values of mortgage-backed securities available-for-sale
partially offset by a slight decrease in the value of the interest rate cap. See
Note 6 to the Financial Statements for further discussion of the interest rate
cap. In addition, stockholders' equity increased by $1.5 million from the
exercise of common stock options and the recognition of the related tax benefit.
These increases were partially offset by the purchase of 25,000 shares of
treasury stock for $1.3 million ($51.47 per share average). At March 31, 2004,
the Corporation held 7,778,869 shares of its common stock in its treasury at a
cost of $145.1 million. In addition, the Corporation declared cash dividends
totaling $369,000 during the three months ended March 31, 2004.
Below is a table comparing the Bank's consolidated capital position
relative to the minimum regulatory requirements as of March 31, 2004 (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) .... $248,724 17.30% $115,031 8.00% $143,789 10.00%
Core Capital (to Adjusted
Total Assets) ................ 236,525 10.58 89,446 4.00 111,807 5.00
Tangible Capital (to Tangible
Assets) ...................... 236,525 10.58 33,542 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets) ...................... 236,525 16.45 57,516 4.00 86,273 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 March 31, 2004 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 7.9% at March 31, 2004, compared to 6.1%
at December 31, 2003. 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. 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.
March 31, December 31,
2004 2003
---- ----
(In Thousands)
Nonaccruing loans:
Commercial ................................. $1,674 $1,549
Consumer ................................... 268 240
Commercial mortgage ........................ 1,134 941
Residential mortgage ....................... 3,180 2,513
Construction ............................... - -
------ ------
Total nonaccruing loans ......................... 6,256 5,243
Assets acquired through foreclosure ............. 233 301
------ ------
Total nonperforming assets ...................... $6,489 $5,544
====== ======
Past due loans:
Residential mortgages ...................... $ 303 $ 915
Commercial and commercial mortgages ........ - 129
Consumer ................................... 65 148
------ ------
Total past due loans ............................ $ 368 $1,192
====== ======
Ratios:
Nonaccruing loans to total loans (1) ....... 0.46% 0.40%
Allowance for loan losses to gross loans (1) 1.66% 1.69%
Nonperforming assets to total assets ....... 0.29% 0.25%
Loan loss allowance to nonaccruing loans (2) 359% 422%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ................. 346% 399%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
20
Nonperforming assets increased $945,000 between March 31, 2004 and
December 31, 2003. The increase resulted primarily from a $667,000 increase in
residential mortgages and a $318,000 increase in commercial loans, partially
offset by a $68,000 decrease in assets acquired through foreclosure. An analysis
of the change in the balance of nonperforming assets is presented below:
For the Three
Months Ended For the Year Ended
March 31, 2004 December 31, 2003
-------------- -----------------
(In Thousands)
Beginning balance................................. $ 5,544 $ 7,433
Additions ................................... 2,112 7,299
Collections.................................. (699) (6,992)
Transfers to accrual/restructured status..... (220) (945)
Charge-offs / write-downs, net............... (248) (1,251)
---------- ---------
Ending balance.................................... $ 6,489 $ 5,544
========== =========
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
March 31, 2004, interest-bearing liabilities exceeded interest-earning assets
that mature within one year (interest-sensitive gap) by $91.2 million. The
Corporation's interest-sensitive assets as a percentage of interest-sensitive
liabilities within the one-year window increased to 91% at March 31, 2004
compared to 83% at December 31.2003. Likewise, the one-year interest-sensitive
gap as a percentage of total assets changed to -4.07% from -7.95% at December
31, 2003. The change in sensitivity since December 31, 2003 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 $15 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 March 31, 2004 and 2003, calculated in
compliance with Thrift Bulletin No. 13A:
21
At March 31,
---------------------------------------------------------------
2004 2003
-------------------------------- -----------------------------
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 -3% 9.60% -5% 10.81%
+200 -2% 9.74% -3% 11.05%
+100 -1% 9.83% -1% 11.24%
0 0% 9.88% 0% 11.18%
-100 -3% 9.67% -1% 10.78%
-200 (3) -12% 9.42% -6% 10.66%
-300 (3) -25% 9.88% -14% 11.16%
(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 March 31, 2004 and 2003 given the historically low
absolute level of interest rates at those times.
COMPARISON FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Results of Operations
The Corporation recorded net income of $6.2 million or $0.79 per
diluted share for the first quarter of 2004. This compares to $45.3 million or
$5.14 per diluted share for the same quarter last year. The results for the
first quarter of 2003 included a $41.1 million gain on the sale of Corporation's
sub-prime mortgage banking subsidiary, Wilmington Finance, Inc. (WF). Income
from continuing operations in the first quarter of 2003 was $4.1 million, or
$0.46 per diluted share.
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 March 31,
---------------------------------------------------------------------------------
2004 2003
------------------------------------ -------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
------- -------- ------- ------- -------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
Loans (2) (3):
Commercial real estate loans........ $ 386,911 $ 5,212 5.39% $ 290,345 $ 4,382 6.04 %
Residential real estate loans....... 452,886 6,124 5.41 436,033 6,936 6.36
Commercial loans ................... 304,227 3,505 4.92 213,764 2,983 6.11
Consumer loans...................... 194,168 3,226 6.68 185,067 3,480 7.63
---------- -------- ---------- --------
Total loans....................... 1,338,192 18,067 5.49 1,125,209 17,781 6.42
Mortgage-backed securities (4)........... 496,699 4,727 3.81 338,040 3,482 4.12
Loans held-for-sale (3).................. 1,174 33 11.24 5,460 81 5.93
Investment securities (4)................ 114,473 1,129 3.95 22,770 174 3.06
Other interest-earning assets ........... 46,643 206 1.78 80,078 389 1.97
---------- -------- ---------- --------
Total interest-earning assets....... 1,997,181 24,162 4.90 1,571,557 21,907 5.65
-------- --------
Allowance for loan losses................ (22,632) (21,592)
Cash and due from banks.................. 47,126 47,840
Cash in non-owned ATMs................... 103,257 82,164
Loans, operating leases and other
assets of discontinued operations...... 8,619 41,911
Bank owned life insurance................ 39,684 -
Other noninterest-earning assets......... 38,600 33,590
---------- ----------
Total assets........................ $2,211,835 $1,755,470
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand.................... $ 113,052 $ 66 0.23% $ 102,500 $ 106 0.42%
Savings............................. 317,396 329 0.42 299,737 480 0.65
Retail time deposits ............... 226,027 1,067 1.90 276,375 1,788 2.63
Jumbo certificates of deposits ..... 42,779 152 1.43 22,197 105 1.92
Brokered certificates of deposit.... 42,820 179 1.68 - - -
---------- -------- ---------- --------
Total interest-bearing deposits... 742,074 1,793 0.97 700,809 2,479 1.44
FHLB of Pittsburgh advances.............. 819,713 5,631 2.72 482,410 4,977 4.13
Trust preferred borrowings............... 50,000 496 3.92 50,000 496 3.97
Other borrowed funds..................... 186,780 438 0.94 81,274 236 1.16
Cost of funding discontinued
operations............................. - (76) - (496)
---------- -------- ---------- --------
Total interest-bearing liabilities.. 1,798,567 8,282 1.84 1,314,493 7,692 2.34
-------- --------
Noninterest-bearing demand deposits...... 205,803 170,266
Other noninterest-bearing liabilities.... 12,950 47,615
Minority interest ....................... 66 17
Stockholders' equity..................... 194,449 223,079
---------- ----------
Total liabilities and stockholders'
equity................................. $2,211,835 $1,755,470
========== ==========
Excess of interest-earning assets
over interest-bearing liabilities... $ 198,614 $ 257,064
========== ==========
Net interest and dividend income......... $ 15,880 $ 14,215
========= =========
Interest rate spread..................... 3.06% 3.31%
==== ====
Net interest margin...................... 3.24% 3.69%
==== ====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes securities available-for-sale.
23
Net interest income for the first quarter of 2004 was $15.9 million
compared to $14.2 million for the same quarter in 2003. Higher loan volumes and
higher mortgage backed securities (MBS) volumes drove this increase. These
higher volumes were partially offset by lower yields on loans and MBS. The yield
on earning assets for the first quarter of 2004 was 4.90% compared to 5.65% for
the first quarter of 2003. The lower yield on earning assets was due to a change
in the mix, as there was a higher percentage of earning assets in lower yielding
mortgage backed securities and investment securities in 2004. The net interest
margin for the first quarter of 2004 was 3.24% compared to 3.69% for the first
quarter of 2003, and was negatively impacted by yields on loans declining more
quickly than rates on interest bearing deposits. In addition, beginning late in
the fourth quarter 2003, the Company began to extend some of its wholesale
borrowings to longer maturities to become less liability sensitive in
anticipation of higher interest rates.
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 six years which management believes approximates an average
business cycle. The average loss allowance per homogenous pool is based on the
product of average annual historical loss rate and the average estimated
duration of the pool multiplied by the pool balances. These separate risk pools
are then assigned a reserve for losses based upon this historical loss
information, as adjusted for historical loss adjustment factors. Historical loss
adjustment factors are based upon management's evaluation of various current
conditions. The evaluation of the inherent loss with respect to these more
current conditions is subject to a higher degree of uncertainty because they are
not identified with specific credits. The more current conditions, evaluated in
connection with the adjustment factors, include an evaluation of the following:
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
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. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for such losses. The Company
also gives consideration to the results of these regulatory agency examinations.
The provision for loan losses from continuing operations decreased from $775,000
for the first three months of 2003 to $687,000 for the first three months of
2004, primarily a result of an overall improvement in credit quality of the
Corporation's loan portfolio.
24
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.
Three months ended Three months ended
March 31, 2004 March 31, 2003
-------------- --------------
(Dollars in Thousands)
Beginning balance ...................................... $ 22,386 $ 21,452
Provision for loan losses of continuing operations...... 687 775
Charge-offs:
Residential real estate ........................... 141 66
Commercial real estate (1) ........................ - -
Commercial......................................... 40 105
Consumer .......................................... 275 197
-------- --------
Total charge-offs............................... 456 368
-------- --------
Recoveries:
Residential real estate ........................... 25 -
Commercial real estate (1) ........................ - 40
Commercial ........................................ 83 21
Consumer........................................... 20 21
-------- --------
Total recoveries ............................... 128 82
-------- --------
Net charge-offs ........................................ 328 286
-------- --------
Ending balance.......................................... $ 22,745 $ 21,941
======== ========
Net charge-offs to average gross loans
outstanding, net of unearned income (2)............... 0.10% 0.10%
======== ========
(1) Includes commercial mortgage and construction loans.
(2) Ratio for the three months ended March 31, 2004 and 2003 is annualized.
Noninterest Income
Noninterest income for the quarter ended March 31, 2004 was $7.6
million compared to $5.8 million for the first quarter of 2003. This increase
was due to, among other things, fee income of $538,000 from Montchanin Capital
Management, Inc. for the quarter ended March 31, 2004. The Corporation, through
its subsidiary Montchanin Capital Management, Inc. acquired a 60% interest in
Cypress Capital Management during the first quarter of 2004 as part of its
wealth management strategy. This ownership interest accounted for the additional
fee income during the first quarter of 2004.
In addition, the increase in fee income in the first quarter of 2004
was due to income of $479,000 from the investment in Bank-Owned Life Insurance
(BOLI). In late January 2004, the Corporation insured the lives of certain
senior managers of WSFS under a BOLI program through MetLife. In addition to
providing economic protection in the event of the loss of key managers, the BOLI
investment provides the opportunity for better long-term investment yields.
These yields are enhanced by the tax-free build up of value and the tax-free
returns upon the ultimate distribution of proceeds, both provided for in the
Internal Revenue Code. Income from this long-term illiquid investment is shown
as noninterest income in accordance with Generally Accepted Accounting
Principles of the United States of America. This investment had the incremental
accounting impact of reducing net interest income and the net interest margin,
but enhancing fee income and reducing the effective tax rate from what they
otherwise would be.
The increase in fee income was also due to a $491,000 increase in
credit/debit card and ATM income and a $430,000 increase in service charges on
core deposit accounts during the first quarter of 2004 compared to the first
quarter of 2003. These increases were the result of higher ATM card usage
combined with the expansion of ATM activity and the result of underlying growth
in core deposit volumes.
25
Noninterest Expense
Noninterest expenses for the quarter ended March 31, 2004 were $13.2
million, or $268,000 above the $13.0 million for the same period of 2003.
Included in the first quarter 2004 results were $500,000 in operating expenses
related to Montchanin Capital Management, Inc. The results for the first quarter
of 2003 included $1.3 million of expenses recorded in connection with the sale
of WF, the Corporation's sub-prime mortgage banking subsidiary and $267,000 of
expenses related to the Corporation's Technology, Organizational and Process
Simplification Plan (TOPS). Excluding the above mentioned items, operating
expenses increased $1.4 million, primarily in salaries, benefits and other
compensation. This increase was a direct result of commercial loan growth and
the Corporation's branch expansion efforts.
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." During the first quarter
of 2004, the Corporation recorded a provision for income taxes from continuing
operations of $3.3 million compared to $2.2 million for the same period in 2003.
The effective tax rates from continuing operations for the first quarter of 2004
and 2003 were both approximately 35%.
The effective tax rates reflect the recognition of certain tax benefits
in the financial statements including those benefits from tax-exempt interest
income, Bank-Owned Life Insurance (BOLI) income in 2004 and from a fifty-percent
interest income exclusion on a loan to an Employee Stock Ownership Plan, along
with a provision for state income tax expense.
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision for income taxes
accordingly.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FIN 46(R), Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (the
Interpretation). The Interpretation requires the consolidation of entities in
which an enterprise absorbs a majority of the entity's expected losses, receives
a majority of the entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity. Previously,
entities were generally consolidated by an enterprise when it has a controlling
financial interest through ownership of a majority voting interest in the
entity. Application of this Interpretation is required in financial statements
of public entities that have interests in variable interest entities commonly
referred to as special purpose entities for periods ending after December 15,
2003. Application by public entities for all other types of entities is required
in financial statements for periods ending after March 15, 2004. As a result the
adoption of FIN 46(R), the Corporation deconsolidated WSFS Capital Trust I in
the first quarter of 2004. The result was an increase in the trust preferred
borrowings of $1.5 million.
FORWARD-LOOKING STATEMENTS
Within this report and financial statements, management has included
certain "forward-looking statements" concerning the future operations of the
Corporation. It is management's desire to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward-looking statements"
contained in our financial statements. Management has used "forward-looking
statements" to describe the future plans and strategies including expectations
of the Corporation's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Delaware, the mid-Atlantic region and the country as
a whole, loan delinquency rates, operating risk, uncertainty of estimates in
general, and changes in federal and state regulations, among other factors.
These factors should be considered in evaluating the "forward-looking
statements," and undue reliance should not be placed on such statements. Actual
results may differ materially from management expectations. WSFS Financial
Corporation does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly report
on Form 10-Q.
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
26
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
-----------------
The Company is not engaged in any legal proceedings of a material
nature at March 31, 2004. 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, Uses of Proceeds and Issuer Purchases of
---------------------------------------------------------------------
Equity Securities
-----------------
The following table lists purchases of Treasury Stock during the first quarter
of 2004.
Total Number of Maximum Number
Total Number Average Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Purchased per Share Announced Plans Under the Plan
--------- --------- --------------- -------------
January 1, to January 31, 2004 - - - 427,841
February 1, to February 29, 2004 - - - 427,841
March 1, to March 31, 2004 25,000 $51.47 25,000 402,841
------ ------
Total for the quarter ended March 31, 2004 25,000 $51.47
On August 7, 2003 the Board of Directors approved an authorization to
repurchase 10% of the Company's outstanding shares, or 748,841
shares.
There is no expiration date under the current Plan.
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 January 16, 2004, the Registrant filed a report on Form
8-K pursuant to item 5 to report that WSFS Financial
Corporation's position in connection with a Demand for
Arbitration filed against Wilmington Savings Fund Society,
FSB, the Company's wholly-owned subsidiary, by American
Homestead Mortgage Corp., was affirmed.
(2) On January 21, 2004, the Registrant filed a report on Form
8-K pursuant to items 7 and 12 to report earnings for the
quarter ended December 31, 2003.
27
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: May 10, 2004 /s/ MARVIN N. SCHOENHALS
---------------------------------------------------
Marvin N. Schoenhals
Chairman and President
Date: May 10, 2004 /s/ MARK A. TURNER
---------------------------------------------------
Mark A. Turner
Chief Operating Officer and Chief Financial Officer
28