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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
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: 0-22399
WAYPOINT FINANCIAL CORP.
------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1872581
------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
235 North Second Street, P.O. Box 1711, Harrisburg, Pennsylvania 17105
- ---------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
717-236-4041
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the Bank's classes of
common stock, as of the latest practicable date. 37,373,487 shares of stock, par
value of $.01 per share, outstanding at June 30, 2002.
1
Part I. Financial Information.
Part 1, Item 1 Financial Statements (Unaudited).
(Balance of this page is intentionally left blank)
2
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, December 31,
2002 2001
--------------- ---------------
(In thousands, except share data)
(Unaudited)
Assets
- ------
Cash and cash equivalents $ 80,780 $ 116,583
Marketable securities available-for-sale 2,647,394 2,552,360
Loans receivable, net 2,361,565 2,462,218
Loans held for sale, net 15,563 42,453
Loan servicing rights 4,984 4,782
Investment in real estate and other joint ventures 14,871 12,813
Premises and equipment, net of accumulated
depreciation of $39,553 and $37,534 43,914 43,931
Accrued interest receivable 26,519 28,298
Goodwill 10,302 10,302
Other intangible assets 2,286 3,262
Deferred tax asset, net - 1,516
Other assets 93,599 95,225
------------- -------------
Total assets $ 5,301,777 $ 5,373,743
============= =============
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $ 2,542,776 $ 2,537,269
Other borrowings 2,171,775 2,291,987
Escrow 6,379 4,662
Accrued interest payable 12,168 12,620
Postretirement benefit obligation 2,880 2,809
Deferred tax liability 3,701 -
Income taxes payable 1,737 380
Other liabilities 80,326 37,801
------------- -------------
Total liabilities 4,821,742 4,887,528
------------- -------------
Preferred stock, 10,000,000 shares authorized but unissued
Common stock, $ .01 par value, authorized 100,000,000 shares,
40,302,957 shares issued and 37,373,487 outstanding
at June 30, 2002, 40,163,477 shares issued
and 39,176,840 shares outstanding at December 31, 2001 404 402
Paid in capital 312,780 312,009
Retained earnings 232,355 215,600
Accumulated other comprehensive income (loss) 7,938 (280)
Employee stock ownership plan (15,640) (15,640)
Recognition and retention plans (10,089) (9,954)
Treasury stock, 2,929,470 shares at June 30, 2002
and 986,637 shares at December 31, 2001 (47,713) (15,922)
------------- -------------
Total stockholders' equity 480,035 486,215
------------- -------------
Total liabilities and stockholders' equity $ 5,301,777 $ 5,373,743
============= =============
See accompanying notes to consolidated financial statements.
3
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(In thousands, except share data)
(Unaudited)
Interest Income:
Loans $ 41,767 $ 50,388 $ 84,991 $ 101,916
Marketable securities and interest-earning cash 28,087 33,609 56,646 67,216
----------- ----------- ----------- -----------
Total interest income 69,854 83,997 141,637 169,132
----------- ----------- ----------- -----------
Interest Expense:
Deposits and escrow 18,260 28,267 37,228 60,122
Borrowed funds 21,531 27,307 42,702 53,529
----------- ----------- ----------- -----------
Total interest expense 39,791 55,574 79,930 113,651
----------- ----------- ----------- -----------
Net interest income 30,063 28,423 61,707 55,481
Provision for loan losses 3,585 2,099 5,670 3,698
----------- ----------- ----------- -----------
Net interest income after provision for loan 26,478 26,324 56,037 51,783
losses
----------- ----------- ----------- -----------
Noninterest Income:
Service charges on deposits 1,787 1,746 3,438 3,277
Other service charges, commissions, fees 3,018 2,486 6,185 4,826
Loan servicing, net 442 92 198 299
Gain on securities 3,952 1,464 4,276 1,879
Gain on sale of loans 701 1,604 1,647 1,723
Other 2,845 354 4,215 1,583
----------- ----------- ----------- -----------
Total noninterest income 12,745 7,746 19,959 13,587
----------- ----------- ----------- -----------
Noninterest Expense:
Salaries and benefits 10,969 10,131 22,047 19,443
Equipment expense 1,788 1,791 3,558 3,539
Occupancy expense 1,579 1,633 3,146 3,303
Advertising and public relations 1,183 593 2,181 1,344
FDIC insurance 112 126 224 258
Income from real estate operations (171) (18) (286) (420)
Amortization of goodwill - 262 - 524
Amortization of other intangible assets 490 490 980 979
Professional fees and outside services 598 896 1,417 1,504
Supplies, telephone and postage 1,102 1,226 2,324 3,046
Other 3,637 2,591 6,415 4,981
----------- ----------- ----------- -----------
Total noninterest expense 21,287 19,721 42,006 38,501
----------- ----------- ----------- -----------
Income before income taxes 17,936 14,349 33,990 26,869
Income tax expense 5,171 4,382 9,729 8,329
----------- ----------- ----------- -----------
Net Income $ 12,765 $ 9,967 $ 24,261 $ 18,540
=========== =========== =========== ===========
Basic earnings per share $ 0.35 $ 0.27 $ 0.66 $ 0.50
=========== =========== =========== ===========
Diluted earnings per share $ 0.34 $ 0.26 $ 0.65 $ 0.49
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Employee Recognition
Accumulated Stock and
Common Paid In Retained Comprehensive Ownership Retention Treasury Comprehensive
Stock Capital Earnings Income (Loss) Plan Plan (RRP) Stock Total Income
-------- -------- -------- ------------- --------- ----------- --------- -------- -------------
(In thousands, except share data)
(Unaudited)
Balance at December 31, 2000 $ 391 $295,008 $189,745 $ (16,327) $(16,365) $ (427) $ (6,457) $445,568
Net income 18,540 18,540 $ 18,540
Dividends paid at $.17 per share (6,667) (6,667)
Exercised stock options 2 874 876
Unrealized gains on securities,
net of income tax of $6,343 11,779 11,779 11,779
---------
Comprehensive income $ 30,319
=========
ESOP stock committed for release 268 85 353
Earned portion of RRP 10 (14) (4)
Dividend reinvestment plan, net (147) 96 (51)
Stock released as compensation (26) (26)
-------- -------- -------- ---------- --------- --------- --------- --------
Balance at June 30, 2001 $ 393 $295,987 $201,618 $ (4,548) $(16,280) $ (441) $ (6,361) $470,368
======== ======== ======== ========== ========= ========= ========= ========
Balance at December 31, 2001 $ 402 $312,009 $215,600 $ (280) $(15,640) $ (9,954) $(15,922) $486,215
Net income 24,261 24,261 $ 24,261
Dividends paid at $.20 per share (7,506) (7,506)
Exercised stock options 2 944 946
Unrealized gains on securities,
net of income tax of $4,425 8,218 8,218 8,218
---------
Comprehensive income $ 32,479
=========
Earned portion of RRP (135) (135)
Treasury stock purchased
(1,942,833 shares) (31,791) (31,791)
Dividend reinvestment plan, net (173) (173)
-------- -------- -------- --------- --------- --------- --------- --------
Balance at June 30, 2002 $ 404 $312,780 $232,355 $ 7,938 $(15,640) $(10,089) $(47,713) $480,035
======== ======== ======== ========= ========= ========= ========= ========
5
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended
June 30,
------------------------------------
2002 2001
-------------- --------------
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net income $ 24,261 $ 18,540
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 5,670 3,698
Net depreciation, amortization and accretion 3,102 3,988
Loans originated for sale (167,452) (98,321)
Proceeds from sales of loans originated for sale 195,990 94,768
Origination of loan servicing rights (853) (111)
Net gain on loans and securities (5,923) (3,602)
Gain on the sale of foreclosed real estate (394) (478)
(Income) loss from joint ventures (1,137) 508
Decrease (increase) in accrued interest receivable 1,779 (348)
Decrease in accrued interest payable (452) (5,850)
Amortization of intangibles 980 1,503
Earned ESOP shares 884 327
Earned RRP shares 1,744 5
Loss (gain) on the sale of premises and equipment 72 (477)
Increase in income taxes payable 1,357 1,145
Other, net 10,947 (926)
------------- -------------
Net cash provided by operating activities 70,575 14,369
------------- -------------
Cash flows from investing activities:
Proceeds from maturities, sales, and principal reductions
of marketable securities 1,074,069 429,166
Purchase of marketable securities (1,118,016) (805,202)
Loans sold - 31,334
Principal payments on loans less loan originations 91,585 7,576
Investments in real estate held for investment and other joint ventures (1,418) 188
Proceeds on real estate and premises and equipment 1,971 4,471
Purchases of premises and equipment, net (3,058) (2,685)
------------- -------------
Net cash provided by (used in) investing activities 45,133 (335,152)
6
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
For the Six Months Ended
June 30,
----------------------------------
2002 2001
------------- -------------
(In thousands)
(Unaudited)
Cash flows from financing activities:
Net increase (decrease) in deposits 5,507 (95,652)
Net (decrease) increase in other borrowings (120,211) 441,685
Net increase in escrow 1,717 2,393
Dividend reinvestment plan, net (173) (51)
Cash dividends (7,506) (6,667)
Payments to acquire treasury stock (31,791) -
Proceeds from the exercise of stock options 946 876
------------- -------------
Net cash (used in) provided by financing activities (151,511) 342,584
------------- -------------
Net (decrease) increase in cash and cash equivalents (35,803) 21,801
Cash and cash equivalents at beginning of period 116,583 99,837
------------- -------------
Cash and cash equivalents at end of period $ 80,780 $ 121,638
============= =============
Supplemental disclosures:
Cash paid during the period for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 80,382 $ 119,501
Income taxes 8,365 7,750
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 1,039 $ 489
See accompanying notes to financial statements.
7
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands,
except per share data)
(Unaudited)
(1) Summary of Significant Accounting Policies
The Consolidated Financial Statements include the accounts of Waypoint Financial
Corp. ("the Registrant") and its wholly-owned subsidiaries Waypoint Bank,
Waypoint Financial Investment Corporation, New Service Corporation, Waypoint
Service Corporation, Waypoint Brokerage Services, Inc., Waypoint Insurance
Services, Inc., Owen Insurance Inc., Advanced Real Estate Associates, and
Lenders Support Group Inc. Waypoint Bank is the sole owner of the following
subsidiaries: Waypoint Investment Corporation, H.S. Service Corporation, First
Harrisburg Service Corporation, and C.B.L. Service Corporation. All significant
intercompany transactions and balances are eliminated in consolidation.
The accompanying interim financial statements have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation of the results of interim periods,
have been made. Operating results for the six-month period ended June 30, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002 or any other interim period.
The accounting policies followed in the presentation of interim financial
results are consistent with those followed on an annual basis. These policies
are presented on pages 58 through 91 of the 2001 Annual Report on Form 10-K.
(2) Recently Issued Accounting Guidance
On January 1, 2002, Waypoint Financial adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 establishes
criteria beyond that previously specified in SFAS 121 to determine when a
long-lived asset is held for sale. The adoption of SFAS 144 had no impact on
Waypoint Financial's financial condition or results of operations.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The
provisions of this statement relevant to Waypoint Financial become effective
January 1, 2003, and its adoption is expected to have no impact on Waypoint
Financial's financial condition or results of operations.
In July, 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 redefines the criteria required for
commitment to a plan to exit an activity or dispose of long-lived assets and
requires expense recognition at the time costs are "incurred." SFAS 146 also
requires the measurement and recognition of changes in estimated cash flows
associated with covered transactions. SFAS 146 is effective for Waypoint
Financial on January 1, 2003 and its adoption is expected to have no impact on
Waypoint Financial's financial condition or results of operations.
(3) Completion of Stock Conversion, Stock Offering, and Acquisition by Merger
On October 17, 2000, Harris Financial, MHC, the parent mutual holding company
for Harris Financial, Inc. completed a mutual-to-stock conversion. As a result
of this conversion, Harris Financial, MHC ceased to exist and Waypoint Financial
became the successor to Harris Financial, Inc. Also, on October 17, 2000
Waypoint Financial and York Financial merged, and this transaction has been
accounted for under the pooling-of-interests method of accounting.
Waypoint Financial recorded certain liabilities associated with merger-related
costs. Remaining merger liabilities totaled $902,000 at June 30, 2002 and
$1,811,000 at December 31, 2001, and consisted entirely of compensation and
benefit plan costs. Waypoint Financial expects to settle through payment
substantially all remaining accrued merger costs during 2002.
8
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands,
except per share data)
(Unaudited)
(4) Earnings Per Share
The following table shows the calculation of earnings per share to basic
earnings per share and diluted earnings per share.
Per Share
Income Shares Amount
------------------------------------------
For the three months ended June 30, 2002:
Basic earnings per share:
Income available to common shareholders $ 12,765 36,113,692 $ 0.35
Dilutive effect of employee and director stock options 1,120,276 (0.01)
------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 12,765 37,233,968 $ 0.34
==========================================
For the three months ended June 30, 2001:
Basic earnings per share:
Income available to common shareholders $ 9,967 37,414,415 $ 0.27
Dilutive effect of employee and director stock options 346,731 (0.01)
------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 9,967 37,761,146 $ 0.26
==========================================
Per Share
Income Shares Amount
------------------------------------------
For the six months ended June 30, 2002:
Basic earnings per share:
Income available to common shareholders $ 24,261 36,503,406 $ 0.66
Dilutive effect of employee and director stock options 979,371 (0.01)
------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 24,261 37,482,777 $ 0.65
==========================================
For the six months ended June 30, 2001:
Basic earnings per share:
Income available to common shareholders $ 18,540 37,386,827 $ 0.50
Dilutive effect of employee and director stock options 333,622 (0.01)
------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 18,540 37,720,449 $ 0.49
==========================================
9
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share
data)
(Unaudited)
(5) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for marketable securities by major security type were as
follows:
As of June 30, 2002
----------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
----------------------------------------------------------
Available for sale:
U.S. Government and agencies $ 319,906 $ 5,785 $ (119) $ 325,572
Corporate bonds 78,094 126 (8,013) 70,207
Municipal securities 99,265 2,952 (212) 102,005
FHLB stock 90,846 - - 90,846
Equity securities 91,491 4,272 (275) 95,488
Asset-backed securities 55,971 113 (65) 56,019
Mortgage-backed securities:
Commercial 30,348 - (42) 30,306
Agency PC's & CMO's 1,095,776 6,139 (2,829) 1,099,086
Private issue CMO's 772,226 6,656 (1,017) 777,865
----------- ---------- ---------- -----------
Total mortgage-backed securities 1,898,350 12,795 (3,888) 1,907,257
----------- ---------- ---------- -----------
Total securities available for sale $2,633,923 $ 26,043 $ (12,572) $2,647,394
=========== ========== ========== ===========
As of December 31, 2001
----------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
----------------------------------------------------------
Available for sale:
U.S. Government and agencies $ 522,531 $ 4,329 $ (1,502) $ 525,358
Corporate bonds 89,788 109 (7,222) 82,675
Municipal securities 82,734 1,962 (1,049) 83,647
FHLB stock 92,147 - - 92,147
Equity securities 118,392 6,110 (152) 124,350
Mortgage-backed securities:
Commercial 10,002 - (2) 10,000
Agency PC's & CMO's 852,239 816 (6,335) 846,720
Private issue CMO's 784,491 6,491 (3,519) 787,463
----------- ---------- ---------- -----------
Total mortgage-backed securities 1,646,732 7,307 (9,856) 1,644,183
----------- ---------- ---------- -----------
Total securities available for sale $2,552,324 $ 19,817 $ (19,781) $2,552,360
=========== ========== ========== ===========
10
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share
data)
(Unaudited)
(6) Loans Receivable, Net
The following table presents the composition of loans receivable, net, as of the
dates indicated:
June 30, December 31,
2002 2001
------------ -------------
Residential mortgage loans (principally conventional):
Secured by 1-4 family residences $ 852,385 $ 1,025,688
Construction (net of undistributed
portion of $32,432 and $34,676) 26,210 36,040
------------ -------------
878,595 1,061,728
Less:
Unearned discount 132 159
Net deferred loan origination fees 4,483 5,116
------------ -------------
Total residential mortgage loans 873,980 1,056,453
------------ -------------
Commercial loans:
Commercial real estate 499,379 484,894
Commercial business 309,873 272,389
Construction and site development
(net of undistributed portion of
$19,003 and $26,015) 26,354 25,428
------------ -------------
835,606 782,711
Less:
Net deferred loan origination fees 1,011 1,171
------------ -------------
Total commercial loans 834,595 781,540
------------ -------------
Consumer and other loans:
Manufactured housing 103,211 97,243
Home equity and second mortgage 339,024 322,182
Indirect automobile 138,960 127,258
Other 73,793 78,075
------------ -------------
654,988 624,758
Plus:
Net deferred loan origination fees (2,759) (2,185)
Dealer reserve 25,962 24,721
------------ -------------
Total consumer and other loans 678,191 647,294
------------ -------------
Less: Allowance for loan losses 25,201 23,069
------------ -------------
Loans receivable, net $ 2,361,565 $ 2,462,218
============ =============
Loans having a carrying value of $1,153,251,000 were pledged as collateral for
FHLB advances at June 30, 2002.
Waypoint Financial conducts certain residential mortgage banking activities
including the origination of mortgage loans for securitization or sale to
investors and the servicing of mortgage loans for investors. Waypoint Financial
also occasionally sells loans from its portfolio in the ordinary course of
business.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans totaled $590,206,000 at June 30, 2002 and $633,138,000 at December
31, 2001. Investor custodial balances maintained in connection with the
foregoing mortgage servicing rights totaled $10,672,000 at June 30, 2002 and
$17,367,000 at December 31, 2001.
11
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share
data)
(Unaudited)
Waypoint Financial's investment in loan servicing rights is included in the
accompanying consolidated statement of financial condition. Waypoint Financial
did not purchase or sell any mortgage servicing rights during the six-month
periods ended June 30, 2002 and 2001.
Waypoint Financial sold mortgage loans totaling $194,343,000 and $124,195,000
during the six-month periods ended June 30, 2002 and June 30, 2001,
respectively. Waypoint Financial did not exchange loans for mortgage-backed
securities during the six-month periods ended June 30, 2002 and 2001.
(7) Goodwill
Waypoint Financial adopted SFAS 142 "Goodwill and Other Intangible Assets" on
January 1, 2002. As required under the non-amortization approach defined in SFAS
142, Waypoint Financial ceased amortizing goodwill and any resulting charge to
results of operations as of January 1, 2002. Following is a comparison of the
results of operations as if the non-amortization approach was applied in all
periods presented:
For the three month periods For the six month periods
ended June 30, ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income $12,765 $ 9,967 $24,261 $18,540
Pro forma adjustment to eliminate
amortization of goodwill - 262 - 524
--------- --------- --------- ---------
Pro forma net income $12,765 $10,229 $24,261 $19,064
========= ========= ========= =========
Reported diluted earnings per share $ 0.34 $ 0.26 $ 0.65 $ 0.49
Pro forma adjustment to eliminate
amortization of goodwill - 0.01 - 0.02
--------- --------- --------- ---------
Pro forma diluted earnings per share $ 0.34 $ 0.27 $ 0.65 $ 0.51
========= ========= ========= =========
Waypoint Financial also evaluated its goodwill for impairment as of January 1,
2002 at the reporting unit level as prescribed in SFAS 142. Under this
evaluation, the fair value of Waypoint Financial's goodwill exceeded its
carrying value as of June 30, 2002, resulting in no charge to earnings for
impairment.
12
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share
data)
(Unaudited)
(8) Other Intangible Assets
Waypoint Financial held one major class of other intangible assets - deposit
intangibles - during the periods presented. The following summarizes other
intangible assets as of the dates indicated:
June 30, December 31,
2002 2001
---------- ------------
Acquisition cost of deposit intangible assets $ 13,713 $ 13,713
Less: accumulated amortization 11,427 10,451
---------- ----------
Carrying value of deposit intangible assets $ 2,286 $ 3,262
========== ==========
Weighted-average amortization period of deposit
intangible assets 7 years 7 years
Waypoint Financial did not acquire any deposit intangible assets or experience
any related impairment losses during the periods presented. Amortization expense
on deposit intangible assets is expected to total $1,588,000, $478,000,
$478,000, $478,000, and $240,000 for the years 2002, 2003, 2004, 2005, and 2006,
respectively.
(9) Deposits
The following table presents the composition of deposits as of the dates
indicated:
June 30, December 31,
2002 2001
---------- ------------
Savings $ 245,243 $ 220,344
Time 1,518,024 1,444,723
Transaction 364,965 340,568
Money market 414,544 531,634
---------- ----------
Total deposits $2,542,776 $2,537,269
========== ==========
(10) Other Borrowings
The following table presents the composition of Waypoint Financial's other
borrowings as of the dates indicated:
June 30, December 31,
2002 2001
---------- ------------
FHLB advances $1,815,752 $1,842,170
Repurchase agreements 355,999 449,770
Other 24 47
---------- ----------
Total other borrowings $2,171,775 $2,291,987
========== ==========
13
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables are in thousands, except per share
data)
(11) Other Liabilities
Other liabilities includes securities in process, which totaled $50,500,000 at
June 30, 2002 and $9,811,000 at December 31, 2001. Securities in process
represents securities acquired in the ordinary course of business that have not
settled as of the dates presented.
(12) Derivative Instruments
During the three-month period ended June 30, 2002, Waypoint Financial settled an
interest rate swap that did not qualify for hedge accounting treatment. This
swap, acquired during the three-month period ended March 31, 2002, had a
notional amount of $100,000,000. Prior to settlement, Waypoint recognized an
increase in fair value of $3,392,000, which was reported in net gain on
securities. During the three-month period ended March 31, 2002, Waypoint
Financial recognized a valuation loss on this swap totaling $1,759,000, which
was reported in net gain on securities.
14
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in its
accompanying interim consolidated financial statements for Waypoint Financial
Corp. and Subsidiaries. This discussion should be read in conjunction with the
2001 Annual Report on Form 10-K. Current performance does not guarantee and may
not be indicative of similar performance in the future.
I. Forward-Looking Statements
In addition to historical information, this report contains forward-looking
statements. The forward-looking statements contained in the following sections
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, interest rate trends, the general economic climate in Waypoint
Financial's market area and the country as a whole, Waypoint Financial's ability
to control costs and expenses, competitive products and pricing, loan
delinquency rates and changes in federal and state regulation. Readers should
not place undue reliance on these forward-looking statements, as they reflect
management's analysis only as of the date of this report. Waypoint Financial has
no obligation to update or revise these forward-looking statements to reflect
events or circumstances that occur after the date of this report. Readers should
carefully review the risk factors described in other documents that Waypoint
Financial files periodically with the Securities and Exchange Commission.
II. Financial Review
Waypoint Financial's assets consist primarily of 100% of the outstanding shares
of Waypoint Bank and various financial services subsidiaries. Waypoint Bank is
primarily engaged in the business of attracting deposits and investing these
deposits into loans secured by residential and commercial real property,
commercial business loans, consumer loans, and investment securities.
Waypoint Financial conducts its business through fifty-eight offices, including
fifty offices located in the five county south-central region of Pennsylvania
that includes Dauphin, York, Cumberland, Lancaster and Lebanon Counties, and
eight offices in Maryland. In addition, Waypoint Financial maintains an
operations center, a commercial services center, various loan production
offices, a commissioned mortgage origination staff, and, to a lesser extent, a
correspondent mortgage origination network. Waypoint Financial's wholly-owned
insurance agency, Owen Insurance Inc., operates its main office in York,
Pennsylvania and a second office in Camp Hill, Pennsylvania.
Waypoint Financial's net income depends primarily on its net interest income,
which is the difference between interest income on loans and investments and
interest expense on deposits and borrowings. Net interest income is a function
of Waypoint Financial's interest rate spread, which is the difference between
the average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-earning liabilities. Because of
this reliance on net interest income, Waypoint Financial's net income is
affected by changes in market interest rates and prevailing economic conditions.
The volatility of net interest income due to changes in market interest rates is
often referred to as "interest rate risk". Financial institutions that accept
and manage substantial degrees of interest rate risk are generally susceptible
to larger net interest income fluctuations when compared to peer institutions
that accept less interest rate risk. Accordingly, managing interest rate risk
successfully has a significant impact on Waypoint Financial's return on equity.
Waypoint Financial also generates non-interest income from fees and commissions
charged on customers' accounts, sales of brokerage and insurance products, trust
and asset management services, and mortgage banking activities including the
servicing of loans for others. Noninterest income also includes income on
bank-owned life insurance, gains and losses on sales of securities available for
sale, gains and losses on sales of real estate, equity in earnings of limited
partnership interests, and fees and service charges assessed on loan and deposit
transactions. Waypoint Financial's non-interest expenses primarily consist of
employee compensation and benefits, occupancy and equipment expense, advertising
and other operating expenses. Waypoint Financial's results of operations also
are affected by general economic and competitive conditions, notably changes in
market interest rates, government policies and regulations.
15
III. Market Risk and Interest Rate Sensitivity Management
Market risk is the risk of loss from adverse changes in market prices and rates.
In an effort to maintain control over such risks, management of Waypoint
Financial focuses its attention on managing the interest rate sensitivity of
assets and liabilities and controlling the volume of lending, securities,
deposit and borrowing activities. By managing the ratio of interest sensitive
assets to interest sensitive liabilities repricing in the same periods, Waypoint
Financial seeks to control the adverse effect of interest rate fluctuations.
Waypoint Financial's assets and liabilities are not directly exposed to foreign
currency or commodity price risk.
The Asset/Liability Committee monitors Waypoint Financial's interest rate risk
position by utilizing simulation analysis. Net interest income fluctuations and
the net portfolio value ratio are determined in various interest rate scenarios
and monitored against acceptable limitations established by management and
approved by the Board of Directors. Such rate scenarios include "ramped" rate
changes adjusting rates in +/- 100 basis point (bp) increments resulting in
projected changes to net interest income over the next 12 months and immediate
rate shocks resulting in projected net portfolio value ratios as indicated in
the following table:
As of June 30, 2002 As of December 31, 2001
--------------------------------- ----------------------------------
Change in Percent change Net Percent change Net
interest rates in net interest portfolio in net interest portfolio
(In basis points) income (1) value ratio (2) income (1) value ratio (2)
--------------------- --------------- --------------- --------------- ---------------
+300 3.73 % 5.24 % 1.73 % 5.61 %
+200 2.48 6.28 0.95 6.58
+100 1.24 6.98 0.71 7.21
0 - 7.15 - 7.77
(100) (2.06) 6.53 (0.96) 7.59
(200) (4.46) 5.03 (2.26) 6.99
(1) The percentage change in this column represents an increase
(decrease) in net interest income for 12 months in a stable interest rate
environment versus net interest income for 12 months in the various rate
scenarios.
(2) The net portfolio value ratio in this column represents net portfolio
value of Waypoint Financial in various rate scenarios, divided by the
present value of expected net cash flows from existing assets in those
same scenarios. Net portfolio value is defined as the present value of
expected net cash flows from existing assets, minus the present value of
expected net cash flows from existing liabilities, plus or minus the
present value of expected net cash flows from existing off-balance-sheet
contracts.
Simulation results are influenced by a number of estimates and assumptions with
regard to embedded options, prepayment behaviors, pricing strategies and
cashflows. At June 30, 2002 and December 31, 2001, both net interest income
variability and net portfolio value ratio results were within limits established
by the Board of Directors. Also, as of these dates, the net portfolio value
ratio fell within the "minimal risk" category established under OTS guidelines
for interest rate risk measurement. Assumptions and estimates used in simulation
analysis are inherently subjective and, as a consequence, results will neither
precisely estimate net interest income or net portfolio value nor precisely
measure the impact of higher or lower interest rates on net interest income or
net portfolio value ratio. The results of these simulations are reported to
Waypoint Financial's Board of Directors on a monthly basis.
Waypoint Financial also uses certain derivative financial instruments from time
to time to manage interest rate risk associated with certain financial assets
and liabilities that Waypoint Financial places in its portfolios in the ordinary
course of business. A detailed discussion of Waypoint Financial's derivative
financial instruments is contained on pages 87 and 88 of the 2001 Annual Report
on Form 10-K.
16
IV. Liquidity
The primary purpose of asset/liability management is to maintain adequate
liquidity and a desired balance between interest sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash flow
requirements of customers wanting to withdraw or borrow funds for their personal
or business needs. Interest rate sensitivity management focuses on consistent
growth of net interest income in times of fluctuating interest rates. Management
must coordinate its management of liquidity and interest rate sensitivity
because decisions involving one may influence the other.
Waypoint Financial meets its liquidity needs by either reducing its assets or
increasing its liabilities. Sources of asset liquidity include short-term
investments, securities available for sale, maturing and repaying loans, and
monthly cash flows from mortgage-backed securities. The loan portfolio provides
an additional source of liquidity due to Waypoint Financial's participation in
the secondary mortgage market and resulting ability to sell loans as necessary.
Waypoint Financial also meets its liquidity needs by attracting deposits and
utilizing borrowing arrangements with the FHLB of Pittsburgh and the Federal
Reserve Bank of Philadelphia for short- and long-term loans as well as other
short-term borrowings.
Deposits represent Waypoint Financial's primary source of funds. Waypoint
Financial occasionally uses brokered deposits to supplement other sources of
funds to the extent such deposits are determined to have more favorable interest
cost and risk characteristics at the time of purchase relative to other sources
of funding. During the six months ended June 30, 2002, Waypoint Financial's
deposits increased $5.5 million. At June 30, 2002, Waypoint Financial also had
brokered deposits of $161.1 million outstanding at an average interest rate of
2.45% as compared to $205.0 million outstanding at December 31, 2001 at an
average interest rate of 2.64%. To supplement deposit-gathering efforts,
Waypoint Financial borrows from the FHLB of Pittsburgh. At June 30, 2002,
Waypoint Financial had $1,815.8 million in FHLB loans outstanding at a weighted
average interest rate of 4.06%, a decrease of $26.4 million from $1,842.2
million at a weighted average interest rate of 4.11% on December 31, 2001.
Waypoint Financial redeemed FHLB stock totaling $1.3 million due to a decrease
in FHLB loans outstanding during the six months ended June 30, 2002.
Proceeds from loan and securities sales represent a substantial source of funds
to Waypoint Financial. These sources amounted to $669.8 million and $555.3
million during the six-month periods ended June 30, 2002 and 2001, respectively.
Generally, Waypoint Financial's principal use of funds is to invest in
commercial and consumer loans. In addition, during the six months ended June 30,
2002, Waypoint Financial utilized leverage strategies to deploy available
capital. These strategies resulted in expansion of the investment portfolio
through the purchase of available-for-sale securities. The carrying value of
securities available for sale increased $95.0 million to $2,647.4 million at
June 30, 2002 from $2,552.4 million at December 31, 2001.
Loan demand resulted in total originations of $610.2 million in the six months
ended June 30, 2002. Waypoint Financial's local economic environment has
remained resilient in 2002 and this has had a favorable effect on the volume of
originations. During the period, the loan portfolio decreased by $100.6 million
to $2,361.6 million at June 30, 2002 from $2,462.2 million at December 31, 2001.
The loan decrease resulted from mortgage loan repayments and prepayments, which
offset growth in commercial and consumer loans.
Waypoint Bank is required by OTS regulations to maintain sufficient liquidity to
ensure its safe and sound operation. Waypoint Bank had sufficient liquidity
during the six-month periods ended June 30, 2002 and June 30, 2001. The sources
of liquidity previously discussed are deemed by management to be sufficient to
fund outstanding loan commitments and meet other obligations.
17
V. Capital Resources
Stockholders' equity at June 30, 2002, totaled $480.0 million compared to $486.2
million at December 31, 2001, a decrease of $6.2 million. Stockholders' equity
was increased by net income of $24.3 million, by an increase in Waypoint
Financial's unrealized gains on available for sale securities, net of tax
effect, of $8.2 million, and by stock option exercises of $.9 million.
Offsetting these increases were cash dividends of $7.5 million, treasury stock
purchases of $31.8 million, and various other net decreases totaling $.3
million.
Under OTS regulations a savings association must satisfy three minimum capital
requirements: core capital, tangible capital and risk-based capital. Savings
associations must meet all of the standards in order to comply with the capital
requirements. At June 30, 2002, and December 31, 2001, Waypoint Bank met all
three minimum capital requirements to be well capitalized.
Risk-based Capital Ratios and Leverage Ratios
WAYPOINT BANK Minimum Requirement Minimum Requirement to
Actual for Capital Adequacy be "Well Capitalized"
------------------- -------------------- ---------------------
As of June 30, 2002 Amount Ratio Amount Ratio Amount Ratio
------------------- ------ ----- ------ ----- ------ -----
(in thousands) (in thousands) (in thousands)
Total Capital
(to Risk Weighted Assets) $429,577 13.9% $246,487 8.0% $308,108 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 402,380 13.1 123,243 4.0 184,865 6.0
Tier 1 Capital
(to Average Assets) 402,380 7.7 209,100 4.0 261,375 5.0
As of December 31, 2001
-----------------------
Total Capital
(to Risk Weighted Assets) $434,847 14.6% $238,377 8.0% $297,971 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 409,125 13.7 119,189 4.0 178,783 6.0
Tier 1 Capital
(to Average Assets) 409,125 8.1 202,703 4.0 253,379 5.0
A reconciliation of Waypoint Bank's regulatory capital to capital using
accounting principles generally accepted in the United States (GAAP) as of June
30, 2002 follows:
Tier 1
Tangible (Core) Risk-based
Capital Capital Capital
----------- ----------- -----------
GAAP capital at Waypoint Financial $ 480,035 $ 480,035 $ 480,035
Capital attributed to affiliates (58,414) (58,414) (58,414)
---------- ---------- ----------
GAAP capital at Waypoint Bank 421,621 421,621 421,621
Capital adjustments:
Unrealized losses, net of taxes, on securities available for sale (7,961) (7,961) (7,961)
Allowance for loan losses - - 25,201
Certain intangible assets (10,880) (10,880) (10,880)
Disallowed servicing assets (400) (400) (400)
Allowable unrealized gains, net of taxes, on equity securities available for sale - - 1,996
---------- ---------- ----------
Regulatory capital at Waypoint Bank $ 402,380 $ 402,380 $ 429,577
========== ========== ==========
18
X. Results of Operations
Comparison for the Three-Month Periods Ended June 30, 2002 and June 30, 2001
Net Income
Net income for the three months ended June 30, 2002 was $12,765,000, which
represented an increase of $2,798,000 or 28.1% from $9,967,000 reported for the
three months ended June 30, 2001. The increase in net income included an
increase of $154,000 in net interest income after provision for loan losses and
an increase of $4,999,000 in noninterest income. These increases in income were
offset by an increase of $1,566,000 in noninterest expense and an increase of
$789,000 in income tax expense. The following paragraphs include a discussion of
the components of net income.
Net Interest Income
Waypoint Financial's principle source of revenue is net interest income, which
represents the difference between interest income generated by earning assets
such as loans and marketable securities and interest expense on interest-bearing
liabilities such as deposits and borrowings. Net interest income can be
significantly impacted by movements in market interest rates.
Net interest income before provision for loan losses totaled $30,063,000 for the
three months ended June 30, 2002, which represents an increase of $1,640,000 or
5.8% from $28,423,000 for the three months ended June 30, 2001. Provision
expense for loan losses increased $1,486,000 or 70.8% to $3,585,000 for the
three months ended June 30, 2002 from $2,099,000 for the comparable prior
period. The paragraphs below present an analysis of the components of net
interest income on a tax-equivalent basis.
Table 1 presents, on a tax-equivalent basis, Waypoint Financial's average asset
and liability balances, interest rates, interest income and interest expense for
each of the three-month periods ended June 30, 2002 and June 30, 2001. Table 2
presents a rate-volume analysis of changes in net interest income on a
tax-equivalent basis for the three-month periods ended June 30, 2002 and June
30, 2001.
Net interest income before provision expense for loan losses, on a tax
equivalent basis, totaled $31,281,000 for the three months ended June 30, 2002,
which represents an increase of $2,123,000 or 7.3%, from $29,158,000 for the
three months ended June 30, 2001. This increase reflected a favorable volume
variance of $38,000 and a favorable rate variance of $2,085,000 for the three
months ended June 30, 2002 versus the comparable prior period.
For the three months ended June 30, 2002, the yield on interest-earning assets
was 5.71%, representing a 120 basis points decrease from the comparable prior
period. At the same time, the cost of funds decreased 147 basis points to 3.41%
for the three months ended June 30, 2002. As a result, the interest spread
increased by 27 basis points to 2.30% and the net interest margin ratio
increased by 13 basis points to 2.51% during the three months ended June 30,
2002 versus the comparable prior period.
The improvement in Waypoint Financial's net interest margin resulted primarily
from a substantial increase in the mix of higher-yielding commercial and
consumer loans within the loan portfolio. Also, Waypoint Financial's disciplined
deposit pricing strategy and aggressive funds management practices have
augmented the decrease in liability rates during the twelve-month period ended
June 30, 2002. Net interest income was also significantly enhanced by a
substantial increase in Waypoint Financial's leveraged investment portfolio.
19
Table 1 Average Balance Sheets, Rates and Interest Income and Expense Summary
For the three months ended,
-----------------------------------------------------------------------
Rate June 30, 2002 June 30, 2001
-----------------------------------------------------------------------
As of Average Average
June 30, Average (1) (2) Yield/ Average (1) (2) Yield/
2002 Balance Interest Cost Balance Interest Cost
---------- -----------------------------------------------------------------------
(All dollar amounts are in thousands)
Assets:
Interest-earning assets:
Loans 6.77% $ 2,409,525 $ 41,959 6.97% $ 2,634,941 $ 50,582 7.68%
Marketable securities - taxable 4.48 2,407,139 26,779 4.45 2,138,445 31,976 5.98
Marketable securities - tax-free 7.85 99,927 2,055 8.23 73,133 1,546 8.46
Other interest-earning assets 1.72 64,014 279 1.74 56,082 628 4.48
---------- --------------------------------------------------------------------
Total interest-earning assets 5.69 4,980,605 71,072 5.71 4,902,601 84,732 6.91
---------- ------------------ ------------------
Noninterest-earning assets 187,288 161,952
----------- -----------
Total assets $ 5,167,893 $ 5,064,553
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits 1.26 $ 242,488 $ 757 1.25% $ 217,739 $ 1,226 2.25%
Time deposits 4.25 1,525,972 15,704 4.12 1,452,024 20,753 5.72
NOW and money market accounts 0.89 788,109 1,790 0.91 854,857 6,278 2.94
Escrow 0.56 5,911 9 0.61 8,539 10 0.47
Borrowed funds 4.22 2,106,091 21,531 4.09 2,021,380 27,307 5.40
---------- --------------------------------------------------------------------
Total interest-bearing liabilities 3.52 4,668,571 39,791 3.41 4,554,539 55,574 4.88
---------- ------------------ ------------------
Noninterest-bearing liabilities 53,493 59,353
----------- -----------
Total liabilities 4,722,064 4,613,892
Stockholders' equity 445,829 450,661
----------- -----------
Total liabilities and
stockholders' equity $ 5,167,893 $ 5,064,553
=========== ===========
Net interest income, tax-equivalent 31,281 29,158
-------- --------
Interest rate spread, tax-equivalent (3) 2.16% 2.30% 2.03%
========== ======== =========
Net interest-earning assets $ 312,034 $ 348,062
=========== ===========
Net interest margin, tax-equivalent (4) 2.51% 2.38%
======== =========
Ratio of interest-earning assets
to interest-bearing liabilities 1.07 x 1.08 x
=========== ===========
Adjustment to reconcile tax-equivalent
net interest income to net interest income (1,218) (735)
Net interest income before -------- --------
provision for loan losses $ 30,063 $ 28,423
======== ========
(1) Includes net expense recognized on deferred loan fees and costs of $52,000
for the three months ended June 30, 2002, and $250,000 for the three months
ended June 30, 2001.
(2) Interest income and yields are shown on a tax-equivalent basis using an
effective tax rate of 35%.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
20
TABLE 1b - Average Balance Sheets, Rates and Interest Income and Expense Summary
For the six months ended,
-------------------------------------------------------------------------
June 30, 2002 June 30, 2001
-------------------------------------------------------------------------
Average Average
Average (1) (2) Yield/ Average (1) (2) Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------
(All dollar amounts are in thousands)
Assets:
Interest-earning assets:
Loans $2,446,961 $ 85,378 6.98% $ 2,642,410 $ 102,346 7.75%
Marketable securities - taxable 2,405,029 54,164 4.50 2,033,772 64,015 6.30
Marketable securities - tax-free 97,172 4,015 8.26 72,322 3,062 8.47
Other interest-earning assets 60,089 540 1.80 48,588 1,211 4.98
------------------------------------------------------------------------
Total interest-earning assets 5,009,251 144,097 5.75 4,797,092 170,634 7.11
----------------- -------------------
Noninterest-earning assets 186,992 166,011
---------- -----------
Total assets $5,196,243 $ 4,963,103
========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 233,404 $ 1,452 1.24% $ 214,772 $ 2,695 2.51%
Time deposits 1,514,185 31,923 4.22 1,504,269 43,633 5.80
NOW and money market accounts 799,924 3,837 0.96 825,953 13,775 3.34
Escrow 5,861 16 0.55 7,628 19 0.50
Borrowed funds 2,142,578 42,702 3.99 1,903,528 53,529 5.62
------------------------------------------------------------------------
Total interest-bearing liabilities 4,695,952 79,930 3.40 4,456,150 113,651 5.10
----------------- -------------------
Noninterest-bearing liabilities 49,005 42,125
---------- -----------
Total liabilities 4,744,957 4,498,275
Stockholders' equity 451,286 464,828
---------- -----------
Total liabilities and
stockholders' equity $5,196,243 $ 4,963,103
========== ===========
Net interest income, tax-equivalent 64,167 56,983
-------- ---------
Interest rate spread, tax-equivalent (3) 2.35% 2.01%
======= =======
Net interest-earning assets $ 313,299 $ 340,942
========== ===========
Net interest margin, tax-equivalent (4) 2.56% 2.38%
======= =======
Ratio of interest-earning assets
to interest-bearing liabilities 1.07 x 1.08 x
========== ===========
Adjustment to reconcile tax-equivalent net
interest income to net interest income (2,460) (1,502)
-------- ---------
Net interest income before provision for
loan losses $ 61,707 $ 55,481
======== =========
(1) Includes net expense recognized on deferred loan fees and costs of $315,000
for the six months ended June 30, 2002, and $665,000 for the six months
ended June 30, 2001.
(2) Interest income and yields are shown on a tax equivalent basis using an
effective tax rate of 35%.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
21
Table 2 Rate/Volume Analysis of Changes in Net Interest Income
Three Months Ended June 30, 2002 Six Months Ended June 30, 2002
Compared to Compared to
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001
Increase (Decrease) Increase (Decrease)
------------------------------------- --------------------------------------
Volume Rate Net Volume Rate Net
---------- --------- --------- ---------- --------- ---------
(Dollar amounts in thousands)
Interest-earning assets:
Loans, net $ (4,144) $ (4,479) $ (8,623) $ (7,241) $ (9,727) $(16,968)
Marketable securities - taxable 9,064 (14,261) (5,197) 10,431 (20,282) (9,851)
Marketable securities - tax-free 631 (122) 509 1,031 (78) 953
Other interest-earning assets 223 (572) (349) 236 (907) (671)
--------- -------- -------- --------- -------- --------
Total interest-earning assets 5,774 (19,434) (13,660) 4,457 (30,994) (26,537)
--------- -------- -------- --------- -------- --------
Interest-bearing liabilities:
Savings deposits 348 (817) (469) 217 (1,460) (1,243)
Time deposits 2,801 (7,850) (5,049) 285 (11,995) (11,710)
NOW and money market deposits (456) (4,032) (4,488) (421) (9,517) (9,938)
Escrow (7) 6 (1) (5) 2 (3)
Borrowed funds 3,050 (8,826) (5,776) 6,104 (16,931) (10,827)
--------- -------- -------- --------- -------- --------
Total interest-bearing liabilities 5,736 (21,519) (15,783) 6,180 (39,901) (33,721)
--------- -------- -------- --------- -------- --------
Change in net interest income $ 38 $ 2,085 $ 2,123 $ (1,723) $ 8,907 $ 7,184
========= ======== ======== ========= ======== ========
Waypoint Financial's average loan balances decreased $225.4 million or 8.6% to
$2.410 billion during the three months ended June 30, 2002 from $2.635 billion
for the comparable prior period. This decrease came primarily in mortgage loans,
which were partially offset by increases in commercial and consumer loans. This
change in the loan mix is a result of Waypoint Financial's emphasis on
increasing its investment in higher-yielding commercial and consumer loans.
Waypoint Financial also continued to decrease its investment in mortgage loans
by selling most of its residential mortgage loan originations into the secondary
market and by reallocating cash inflows from residential mortgage loan
repayments and prepayments toward funding other loans. (Note 6 in the Notes to
Consolidated Financial Statements presents comparative loan balances as of June
30, 2002 and December 31, 2001.) The yield on average loans decreased 71 basis
points to 6.97% for the three months ended June 30, 2002 versus the comparable
prior quarter. Average loan yields decreased primarily due to aggressive
reductions in short-term interest rates by the Federal Reserve Bank (FRB) during
2001. Throughout this period, yields on Waypoint Financial's variable and
adjustable rate loans in portfolio decreased as benchmark rate indices reset
with each FRB rate decrease. Also, rates on new commercial and consumer loan
products decreased in step with the market rate decreases. These rate decreases
were partially offset by improvements in the loan portfolio mix toward
higher-yielding loans.
22
Waypoint Financial's average marketable securities increased $295.5 million or
13.4% to $2.507 billion during the three months ended June 30, 2002 from $2.212
billion for the comparable prior period. This increase resulted from increased
leveraged investments and from the redeployment of cash inflows from residential
mortgage loan repayments and prepayments that were not required for other loan
investing. Yields on marketable securities decreased 146 basis points to 4.60%
for the three months ended June 30, 2002 versus the comparable prior period
primarily due to the decrease in market rates as described above in the loan
discussion.
Average deposits increased $31.9 million or 1.3% to $2.557 billion during the
three-month period ending June 30, 2002 from $2.525 billion for the comparable
prior quarter. The cost of average deposits decreased 162 basis points to 2.86%
during the three months ended June 30, 2002 primarily due to the decrease in
market rates during the six-quarter period ended June 30, 2002. Increases in
lower-cost savings and checking accounts also enhanced the reduction in deposit
funding costs as Waypoint Financial continued to enhance its sales and marketing
focus on these products.
For a comprehensive discussion on qualitative and quantitative disclosures
regarding market risk, refer to Management's Discussion and Analysis presented
earlier in this report.
Provision for Loan Losses
Waypoint Financial recognized provision for loan losses totaling $3,585,000 for
the three months ended June 30, 2002, which represents an increase of $1,486,000
or 70.8%, from the $2,099,000 provision recorded for the three months ended June
30, 2001. Waypoint Financial's provision expense and allowance for loan losses
are discussed in further detail in the Loan Quality section of this report.
Noninterest Income
The table below presents noninterest income for the three-month and six-month
periods ended June 30, 2002 and June 30, 2001.
Table 3 Changes in Noninterest Income
Three months ended June 30
--------------------------------------------------
2002 2001 Change %
--------- --------- --------- ---------
(Dollar amounts in thousands)
Service charges on deposits $ 1,787 $ 1,746 $ 41 2.3
Other service charges, commissions, fees 3,018 2,486 532 21.4
Loan servicing, net 442 92 350 380.4
Gain on securities 3,952 1,464 2,488 169.9
Gain on sale of loans 701 1,604 (903) (56.3)
Other 2,845 354 2,491 703.7
--------- --------- --------- ---------
Total $ 12,745 $ 7,746 $ 4,999 64.5
========= ========= ========= =========
Six months ended June 30
--------------------------------------------------
2002 2001 Change %
--------- --------- --------- ---------
(Dollar amounts in thousands)
Service charges on deposits $ 3,438 $ 3,277 $ 161 4.9
Other service charges, commissions, fees 6,185 4,826 1,359 28.2
Loan servicing, net 198 299 (101) (33.8)
Gain on securities 4,276 1,879 2,397 127.6
Gain on sale of loans 1,647 1,723 (76) (4.4)
Other 4,215 1,583 2,632 166.3
--------- --------- --------- ---------
Total $ 19,959 $ 13,587 $ 6,372 46.9
========= ========= ========= =========
23
Total noninterest income increased $4,999,000 or 64.9% to $12,745,000 for the
three months ended June 30, 2002 compared to $7,746,000 for the three months
ended June 30, 2001 as a result of the following:
. Service charges on deposits totaled $1,787,000, up $41,000 or 2.3% from
the comparable prior quarter due to an increase in collected overdraft
fees.
. Other service charges, commissions and fees increased $532,000 or 21.4% to
$3,018,000 from the comparable prior quarter. Within this income category,
ATM fees were $1,028,000 (up $160,000), fees from insurance services were
$705,000 (up $156,000), brokerage fees were $701,000 (up $205,000),
commercial service fees were $274,000 (down $40,000), and trust fees were
$243,000 (up $84,000).
. Net mortgage loan servicing income was $442,000, an increase of $350,000,
primarily due to a partial recovery in the impairment reserve associated
with the quarterly market valuation of Waypoint's mortgage loan servicing
rights.
. Gains on securities totaled $3,952,000, up $2,488,000, primarily due to a
$3,392,000 improvement in the fair value of an interest rate swap. This
swap was settled in the current quarter.
. Net gains on the sale of loans totaled $701,000, down $903,000, in large
part due to the comparable prior quarter reflecting a higher volume of
loans sold.
. Other income totaled $2,845,000, up $2,491,000 from the comparable prior
quarter. Within this income category, income from Bank Owned Life
Insurance (BOLI) totaled $1,178,000, an increase of $999,000 due to the
income on a BOLI investment made in July 2001. Also, income from joint
ventures totaled $1,283,000 during the current quarter, up $2,154,000 from
a loss in the comparable prior quarter. Also, the comparable prior quarter
included a $447,000 curtailment gain associated with benefit plan
liabilities.
Noninterest Expense
The following table presents noninterest expense for the three-month and
six-month periods ended June 30, 2002 and June 30, 2001:
Table 4 Changes in Noninterest Expense
Three months ended June 30
---------------------------------------------------
2002 2001 Change %
-------- -------- -------- ---------
(Dollar amounts in thousands)
Salaries and benefits $ 10,969 $ 10,131 $ 838 8.3
Equipment expense 1,788 1,791 (3) (0.2)
Occupancy expense 1,579 1,633 (54) (3.3)
Advertising and public relations 1,183 593 590 99.5
FDIC insurance 112 126 (14) (11.1)
Income from real estate operations (171) (18) (153) (850.0)
Amortization of goodwill - 262 (262) (100.0)
Amortization of other intangible assets 490 490 - -
Professional fees and outside services 598 896 (298) (33.3)
Supplies, telephone and postage 1,102 1,226 (124) (10.1)
Other 3,637 2,591 1,046 40.4
-------- -------- -------- --------
Total $ 21,287 $ 19,721 $ 1,566 7.9
======== ======== ======== ========
Six months ended June 30
---------------------------------------------------
2002 2001 Change %
-------- -------- -------- ---------
(Dollar amounts in thousands)
Salaries and benefits $ 22,047 $ 19,443 $ 2,604 13.4
Equipment expense 3,558 3,539 19 0.5
Occupancy expense 3,146 3,303 (157) (4.8)
Advertising and public relations 2,181 1,344 837 62.3
FDIC insurance 224 258 (34) (13.2)
Income from real estate operations (286) (420) 134 31.9
Amortization of goodwill - 524 (524) (100.0)
Amortization of other intangible assets 980 979 1 0.1
Professional fees and outside services 1,417 1,504 (87) (5.8)
Supplies, telephone and postage 2,324 3,046 (722) (23.7)
Other 6,415 4,981 1,434 28.8
-------- -------- -------- --------
Total $ 42,006 $ 38,501 $ 3,505 9.1
======== ======== ======== ========
24
Total noninterest expense increased $1,566,000 or 7.9% to $21,287,000 for the
three months ended June 30, 2002 from $19,721,000 for the three months ended
June 30, 2001. The net increase in noninterest expense is attributable to the
following:
. Salaries and benefits expense totaled $10,969,000, up $838,000 or 8.3%
from the comparable prior quarter. Within this expense category, salaries
and wages totaled $6,541,000 (up $255,000 due to staff additions in
various business lines and annual merit increases), incentive and bonus
compensation totaled $1,585,000 (up $115,000 on increased product sales
and the continued enhancement of "pay for performance" compensation
practices), stock compensation from the Recognition and Retention Plan
(RRP) totaled $484,000 (due to the December, 2001 adoption of the RRP),
ESOP expense totaled $478,000 (up $243,000 due to the adoption of the
Waypoint ESOP), and payroll taxes and employee benefits totaled $1,874,000
(down $79,000 due to the streamlining of benefit plans during 2001).
. Advertising and public relations expense totaled $1,183,000, up $590,000
primarily on increased media advertising and core deposit promotions.
. Income from real estate operations exceeded expenses by $171,000, up
$153,000 in net revenue from the comparable prior quarter.
. Amortization of goodwill was $0, down $262,000 due to the elimination of
goodwill amortization in connection with the adoption of SFAS 142
effective January 1, 2002.
. Amortization of other intangible assets was $490,000, unchanged from the
comparable prior quarter.
. Professional fees and outside services were $598,000, down $298,000
primarily on processing services and consulting fees.
. Supplies, telephone, and postage expenses totaled $1,102,000, down
$124,000 primarily on printing costs.
. Other noninterest expense totaled $3,637,000, up $1,046,000 from the
comparable prior quarter. This expense category included customer account
servicing expenses of approximately $1,091,000 (down $225,000 on decreased
loan servicing expenses), OTS fees of $195,000 (up $20,000), director fees
of $127,000 (up $35,000), director RRP grants of $391,000 (up $391,000 due
to the December 2001 adoption of the RRP), charitable contributions of
$412,000 (up $310,000 on contributions qualified for tax credits), and
various other expenses totaling $1,421,000 (up $545,000 on expenses
associated with Waypoint's planned information system conversion).
Provision for Income Taxes
Income tax expense totaled $5,171,000 for the three months ended June 30, 2002,
which resulted in an effective tax rate of 28.8% on income before taxes of
$17,936,000. During the three months ended June 30, 2001, Waypoint Financial
recorded $4,382,000 of income tax expense resulting in an effective tax rate of
30.5% on income before taxes of $14,349,000. The improvement in the effective
tax rate resulted primarily from increased tax-exempt income and increased tax
credits associated with certain contributions and partnership investments.
Comparison for the Six Month Periods Ended June 30, 2002 and June 30, 2001
Net Income or Loss
Net income for the six months ended June 30, 2002 was $24,261,000, which
represented an increase of $5,721,000 or 30.9% from $18,540,000 reported for the
six months ended June 30, 2001. The increase in net income included an increase
of $4,254,000 in net interest income after provision for loan losses and an
increase of $6,372,000 in noninterest income, which were offset by an increase
of $3,505,000 in noninterest expense and an increase of $1,400,000 in income tax
expense. The following paragraphs include a discussion of the components of net
income.
Net Interest Income
Net interest income after provision for loan losses totaled $56,037,000 for the
six months ended June 30, 2002, which represents an increase of $4,254,000 or
8.2% from $51,783,000 for the six months ended June 30, 2001. Provision expense
for loan losses increased $1,972,000 or 53.3% to $5,670,000 for the six months
ended June 30, 2001 from $3,698,000 for the comparable prior period. The
paragraphs below present an analysis of the components of net interest income on
a tax-equivalent basis.
25
Table 1b presents, on a tax-equivalent basis, Waypoint Financial's average asset
and liability balances, interest rates, interest income and interest expense for
each of the six-month periods ended June 30, 2002 and June 30, 2001. Table 2
presents a rate-volume analysis of changes in net interest income, on a
tax-equivalent basis for the six-month periods ended June 30, 2002 and June 30,
2001.
Net interest income before provision expense for loan losses, on a tax
equivalent basis, totaled $64,167,000 for the six months ended June 30, 2002,
which represents an increase of $7,184,000 or 12.6%, from $56,983,000 for the
six months ended June 30, 2001. This increase reflected a unfavorable volume
variance of $1,723,000 and a favorable rate variance of $8,907,000 for the six
months ended June 30, 2002 versus the comparable prior period.
For the six months ended June 30, 2002, the yield on interest-earning assets was
5.75%, representing a 136 basis points decrease from the comparable prior
period. At the same time, the cost of funds decreased 170 basis points to 3.40%
for the six months ended June 30, 2002. As a result, the interest spread
increased by 34 basis points to 2.35% and the net interest margin ratio
increased by 18 basis points to 2.56% during the six months ended June 30, 2002
versus the comparable prior period.
Waypoint Financial's average loan balances decreased $195.4 million or 7.4% to
$2.447 billion during the six months ended June 30, 2002 from $2.642 billion for
the comparable prior period. This decrease came primarily in mortgage loans,
which were partially offset by increases in commercial and consumer loans. This
change in the loan mix is a result of Waypoint Financial's emphasis on
increasing its investment in higher-yielding commercial and consumer loans.
Waypoint Financial also continued to decrease its investment in mortgage loans
by selling most of its residential mortgage loan originations into the secondary
market and by reallocating cash inflows from residential mortgage loan
repayments and prepayments toward funding other loans. (Note 6 in the Notes to
Consolidated Financial Statements presents comparative loan balances as of June
30, 2002 and December 31, 2001.) The yield on average loans decreased 77 basis
points to 6.98% for the six months ended June 30, 2002 versus the comparable
prior quarter. Average loan yields decreased primarily due to aggressive
reductions in short-term interest rates by the Federal Reserve Bank (FRB) during
2001. Throughout this period, yields on Waypoint Financial's variable and
adjustable rate loans in portfolio decreased as benchmark rate indices reset
with each FRB rate decrease. Also, rates on new commercial and consumer loan
products decreased in step with the market rate decreases. These rate decreases
were partially offset by improvements in the loan portfolio mix toward
higher-yielding loans.
Waypoint Financial's average marketable securities increased $396.1 million or
18.8% to $2.502 billion during the six months ended June 30, 2002 from $2.106
billion for the comparable prior period. This increase resulted from increased
leveraged investments and from the redeployment of cash inflows from residential
mortgage loan repayments and prepayments that were not required for other loan
investing. Yields on marketable securities decreased 172 basis points to 4.65%
for the six months ended June 30, 2002 versus the comparable prior period
primarily due to the decrease in market rates as described above in the loan
discussion.
Average deposits increased $2.5 million or 0.1% to $2.548 billion during the
six-month period ending June 30, 2002 from $2.545 billion for the comparable
prior quarter. The cost of average deposits decreased 180 basis points to 2.92%
during the six months ended June 30, 2002 primarily due to the decrease in
market rates during the six-quarter period ended June 30, 2002. Increases in
lower-cost savings, checking, and money market accounts also enhanced the
reduction in deposit funding costs as Waypoint Financial continued to enhance
its sales and marketing focus on these products.
For a comprehensive discussion on qualitative and quantitative disclosures
regarding market risk, refer to Management's Discussion and Analysis included in
the 2001 Annual Report on Form 10-K.
Provision for Loan Losses
Waypoint Financial recognized provision for loan losses totaling $5,670,000 for
the six months ended June 30, 2002, which represents an increase of $1,972,000
or 53.3%, from the $3,698,000 provision recorded for the six months ended June
30, 2001. Waypoint Financial's provision expense and allowance for loan losses
are discussed in further detail in the Loan Quality section of this report.
26
Noninterest Income
Total noninterest income increased $6,372,000 or 46.9% to $19,959,000 for the
six months ended June 30, 2002 compared to $13,587,000 for the six months ended
June 30, 2001 as a result of the following:
. Service charges on deposits totaled $3,438,000, up $161,000 or 4.9% from
the comparable prior period due to an increase in collected overdraft
fees.
. Other service charges, commissions and fees increased $1,359,000 or 28.2%
to $6,185,000 from comparable prior six-month period. Within this
category, ATM fees were $1,914,000 (up $305,000), fees from insurance
services were $1,649,000 (up $503,000), brokerage fees were $1,542,000 (up
$520,000), commercial service fees were $635,000 (down $175,000), and
trust fees were $445,000 (up $162,000).
. Net mortgage loan servicing income was $198,000, down $101,000, due
primarily to accelerated mortgage loan prepayments during the twelve-month
period ended June 30, 2002, which had the effect of reducing servicing fee
income.
. Gains on securities totaled $4,276,000, up $2,397,000, primarily due to a
$1,634,000 improvement in the fair value of an interest rate swap. This
swap was settled in the quarter ended June 30, 2002.
. Net gains on the sale of loans totaled $1,647,000, which was comparable to
the prior year's six-month period.
. Other income totaled $4,215,000, up $2,632,000 from the comparable
six-month period. Within this income category, income from Bank Owned Life
Insurance (BOLI) totaled $2,381,000, an increase of $2,023,000, due to the
income on a BOLI investment of $60 million made in July 2001. Also, income
from joint ventures totaled $1,122,000 during the current six-month
period, up $1,769,000 from a loss of $647,000 in the comparable prior
period. Also, the comparable prior six months included a $447,000
curtailment gain associated with benefit plan liabilities.
Noninterest Expense
Total noninterest expense increased $1,434,000 or 9.1% to $42,006,000 for the
six months ended June 30, 2002 from $38,501,000 for the six months ended June
30, 2001. The net increase in noninterest expense is attributable to the
following:
. Salaries and benefits expense totaled $22,047,000, up $2,604,000 or 13.4%
from the comparable prior six-month period. Within this expense category,
salaries and wages totaled $12,767,000 (up $719,000 due to staff additions
in various business lines and annual merit increases), incentive and bonus
compensation totaled $3,304,000 (up $789,000 on increased product sales
and the continued enhancement of "pay for performance" compensation
practices), stock compensation from the Recognition and Retention Plan
(RRP) totaled $1,097,000 (up $1,097,000 due to the December, 2001 adoption
of the RRP), ESOP expense totaled $884,000 (up $443,000 due to the
adoption of the Waypoint ESOP), and payroll taxes and employee benefits
totaled $3,896,000 (down $350,000 due to the streamlining of benefit plans
during 2001).
. Advertising and public relations expense totaled $2,181,000, up $837,000
on increased media advertising and core deposit promotions.
. Income from real estate operations exceeded expenses by $286,000, down
$134,000 in net revenue from the comparable prior period. During the first
six months of 2001, Waypoint Financial sold a historically high number of
foreclosed properties as part of its post-merger assimilation activities.
. Amortization of goodwill was $0, down $524,000 due to the elimination of
goodwill amortization in connection with the adoption of SFAS 142
effective January 1, 2002.
. Amortization of other intangible assets was $980,000, basically unchanged
from the comparable prior six-month period.
. Professional fees and outside services were $1,417,000, down $87,000
primarily on processing services and consulting fees.
. Supplies, telephone, and postage expenses totaled $2,324,000, down
$722,000 primarily on printing costs.
. Other noninterest expense totaled $6,415,000, up $1,434,000 from the
comparable prior six-month period. This expense category included customer
account servicing expenses of approximately $2,173,000 (down $626,000 on
decreased loan servicing expenses), OTS fees of $390,000 (up $40,000),
director fees of $340,000 (up $95,000), director RRP grants of $646,000
(up $646,000 due to the December 2001 adoption of the RRP), charitable
contributions of $653,000 (up $263,000 on contributions qualified for tax
credits), and various other expenses totaling $2,213,000 (up $545,000 on
expenses associated with Waypoint's planned information system
conversion).
27
Provision for Income Taxes
Income tax expense totaled $9,729,000 for the six months ended June 30, 2002,
which resulted in an effective tax rate of 28.6% on income before taxes of
$33,990,000. During the six months ended June 30, 2001, Waypoint Financial
recorded $8,329,000 of income tax expense, which resulted in an effective tax
rate of 31.0% on income before taxes of $26,869,000. The decrease in the
effective tax rate in the six-month period ended June 30, 2002 relative to the
comparable prior period is due primarily to an increase in tax-exempt income
from loans and securities, an increase in the deduction for dividends received,
and an increase in BOLI income.
XI. Financial Condition
Marketable Securities
Marketable securities, excluding the Federal Home Loan Bank cash account,
totaled $2.647 billion at June 30, 2002 and $2.552 billion at December 31, 2001.
Note (5) of the Notes to Consolidated Financial Statements presents the
composition of the marketable securities portfolio as of June 30, 2002 and
December 31, 2001.
Loans Receivable, Net
Loans receivable, net, totaled $2.362 billion at June 30, 2002 and $2.462
billion at December 31, 2001. The decrease of $100.7 million for the six months
ended June 30, 2002, reflects a reduction in first mortgage loans totaling
$183.1 million, which was offset by growth in commercial loans totaling $52.9
million and an increase in consumer and other loans totaling $31.4 million. Net
loans was also impacted by a reduction of $.2 million in net deferred loan fees
and an increase of $2.1 million in the allowance for loan losses. The loan
activity in 2002 reflects Waypoint Financial's continued focus on expanding its
commercial and consumer loan portfolios and reducing its relative investment in
residential mortgage loans through mortgage banking activities and the
reallocation of cash inflows from repayments and prepayments. A summary of loan
composition is included in Note (6) of the accompanying Notes to Consolidated
Financial Statements.
Loan Commitments. Waypoint Financial issues loan commitments to prospective
borrowers conditioned on the occurrence of certain events. Commitments are made
in writing on specified terms and conditions and are generally honored for up to
60 days from approval. At June 30, 2002, Waypoint Financial had loan commitments
and unadvanced loans and lines of credit totaling $586.8 million.
Loan Quality. Waypoint Financial has maintained excellent credit quality in its
loan portfolio. Management attributes this performance to strong underwriting
standards and credit and collections management, as well as a resilient economy
in its local market area. Waypoint Financial follows a comprehensive loan policy
that details credit underwriting, credit management and loan loss provisioning
techniques.
28
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans, loans delinquent 90 days or more and still accruing, and
other non-performing assets as of the dates indicated:
As of As of
June 30, 2002 December 31, 2001
--------------------------------------
(Amounts in thousands)
Non-accrual residential mortgage loans $ 746 $ 1,345
Non-accrual commercial loans 9,108 6,185
Non-accrual other loans 486 706
-------------- -------------
Total non-accrual loans 10,340 8,236
Loans 90 days or more delinquent and still accruing 10,642 14,660
-------------- -------------
Total non-performing loans 20,982 22,896
Total foreclosed other assets 282 666
Total foreclosed real estate 301 804
-------------- -------------
Total non-performing assets $ 21,565 $ 24,366
============== =============
Total non-performing loans to total loans 0.88% 0.92%
============== =============
Allowance for loan losses to non-performing loans 120.11% 100.76%
============== =============
Total non-performing assets to total assets 0.41% 0.45%
============== =============
Waypoint Financial experienced a decrease of $2.8 million in non-performing
assets during the six-month period ended June 30, 2002, which includes a $1.9
million decrease in non-performing loans and a $.9 million decrease in
foreclosed real estate and other assets. The improvement in non-performing loans
during this period can be attributed to continued emphasis on prudent loan
underwriting and aggressive collections management. The decrease in foreclosed
real estate and other assets reflects Waypoint Financial's effective management
of foreclosed assets and a favorable selling environment for foreclosed real
estate during the six months ended June 30, 2002.
29
Allowance for Loan Losses. The following table summarizes the activity in
Waypoint Financial's allowance for loan losses for the periods indicated:
For the For the
three months ended six months ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
--------------------------------- --------------------------------
(Amounts in thousands)
Balance at beginning of period $ 23,674 $ 22,219 $ 23,069 $ 22,586
Provision for loan losses 3,585 2,099 5,670 3,698
Charge-offs:
Residential mortgage loans (195) (83) (563) (204)
Commercial loans (1,114) (1,056) (1,509) (1,906)
Consumer and other loans (1,059) (934) (2,187) (2,108)
------------ ------------ ------------ ------------
Total charge-offs (2,368) (2,073) (4,259) (4,218)
------------ ------------ ------------ ------------
Recoveries:
Residential mortgage loans 45 - 48 20
Commercial loans 110 139 265 166
Consumer and other loans 155 284 408 416
------------ ------------ ------------ ------------
Total recoveries 310 423 721 602
------------ ------------ ------------ ------------
Net charge-offs (2,058) (1,650) (3,538) (3,616)
------------ ------------ ------------ ------------
Balance at the end of period $ 25,201 $ 22,668 $ 25,201 $ 22,668
============ ============ ============ ============
Annualized net charge-offs
to average loans outstanding 0.34% 0.25% 0.29% 0.27%
============ ============ ============ ============
Allowance for loan losses as
a percentage of total loans 1.06% 0.88% 1.06% 0.88%
============ ============ ============ ============
Waypoint Financial increased its provision for loan losses during the
three-month and six-month periods ended June 30, 2002 relative to the comparable
prior periods in recognition of increasing uncertainty in the economic
environment during 2002. This increased uncertainty raises the level of
difficulty in evaluating certain loans, particularly commercial loans.
Accordingly, Waypoint Financial increased the general portion of its allowance
for loan losses during the six-month period ended June 30, 2002 as noted in the
following table.
30
Allocation of the Allowance for Loan Losses. The following table sets forth the
composition of the allowance for loan losses as of the dates indicated:
As of June 30, 2002 As of December 31, 2001
----------------------------------------------------
(Dollar amounts in thousands)
% of Total % of Total
Amount Reserves Amount Reserves
---------- ---------- --------- ----------
Residential mortgage loans $ 1,441 5.72% $ 1,867 8.09%
Commercial loans 16,773 66.56 15,722 68.15
Consumer and other loans 4,386 17.40 4,529 19.64
General 2,601 10.32 951 4.12
---------- --------- ---------- ----------
Total $ 25,201 100.00% $ 23,069 100.00%
========== ========= ========== ==========
Deposits
During the six months ended June 30, 2002, deposits increased $5.5 million to
$2.543 billion from $2.537 billion at December 31, 2001. Within the deposit
portfolio, savings accounts increased $24.9 million to $245.2 million and
transaction accounts increased $24.4 million to $365.0 million. Offsetting this
favorable trend, money market accounts decreased $117.1 million to $414.5
million as customers shifted these funds to higher-rate time deposits and
alternative investment products. Management attributes this shift to customer
desire to enhance returns relative to historically low short-term interest
rates, which continue to dampen customer returns on money market accounts and
other short-term deposit products.
Other Borrowings
Note (10) of the Notes to Consolidated Financial Statements presents the
composition of borrowings as of June 30, 2002 and December 31, 2001. Waypoint
Financial had available FHLB lines of credit totaling $795.0 million as of June
30, 2002 versus $875.8 million as of December 31, 2001.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification of the Company's Chief Executive
Officer pursuant to 18 U. S. C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Company's Chief Financial
Officer pursuant to 18 U. S. C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Incorporated by reference Report on Form 8-K
dated May 31, 2002, which announced the
dismissal of Arthur Andersen LLP as the
Company's principal accountants effective May
28, 2002. Also announced was the engagement of
KPMG LLP as the Company's new principal
accountants effective May 28, 2002.
2. Incorporated by reference Report on Form 8-K
dated June 10, 2002, which announced the
appointment of David E. Zuern as President and
CEO of Waypoint Bank. The report also noted that
Mr. Zuern succeeds Charles C. Pearson, Jr., who
remains as Co-Chairman and CEO of Waypoint
Financial Corp.
32
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAYPOINT FINANCIAL CORP.
(Registrant)
By /s/ Charles C. Pearson, Jr.
---------------------------
Charles C. Pearson, Jr.,
Co-Chairman, President and
Chief Executive Officer
By /s/ James H. Moss
-----------------
James H. Moss,
Executive Vice President
and Chief Financial Officer
Dated: August 14, 2002
33