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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 September 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. 35,711,215 shares of stock,
--------------------------
par value of $.01 per share, outstanding at September 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
September 30, December 31,
2002 2001
----------------- -----------------
(In thousands, except share data)
(Unaudited)
Assets
Cash and cash equivalents $ 89,462 $ 116,583
Marketable securities available-for-sale 3,216,270 2,552,360
Loans receivable, net 2,357,862 2,462,218
Loans held for sale, net 13,656 42,453
Loan servicing rights 3,543 4,782
Investment in real estate and other joint ventures 15,568 12,813
Premises and equipment, net of accumulated
depreciation of $38,247 and $37,534 44,029 43,931
Accrued interest receivable 24,859 28,298
Goodwill 10,302 10,302
Other intangible assets 1,796 3,262
Deferred tax asset, net - 1,516
Other assets 95,975 95,225
------------- -------------
Total assets $ 5,873,322 $ 5,373,743
============= =============
Liabilities and Stockholders' Equity
Deposits $ 2,545,515 $ 2,537,269
Other borrowings 2,341,638 2,291,987
Escrow 1,534 4,662
Accrued interest payable 12,937 12,620
Postretirement benefit obligation 2,448 2,809
Deferred tax liability 8,427 -
Income taxes payable 1,600 380
Securities in process 464,337 20,000
Other liabilities 27,671 17,801
------------- -------------
Total liabilities 5,406,107 4,887,528
------------- -------------
Preferred stock, 10,000,000 shares authorized but unissued
Common stock, $.01 par value, authorized 100,000,000 shares,
40,330,772 shares issued and 35,711,215 outstanding
at September 30, 2002, 40,163,477 shares issued
and 39,176,840 shares outstanding at December 31, 2001 404 402
Paid in capital 312,870 312,009
Retained earnings 240,931 215,600
Accumulated other comprehensive income (loss) 15,719 (280)
Employee stock ownership plan (15,640) (15,640)
Recognition and retention plans (10,089) (9,954)
Treasury stock, 4,619,557 shares at September 30, 2002
and 986,637 shares at December 31, 2001 (76,980) (15,922)
------------- -------------
Total stockholders' equity 467,215 486,215
------------- -------------
Total liabilities and stockholders' equity $ 5,873,322 $ 5,373,743
============= =============
See accompanying notes to consolidated financial statements.
3
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- --------- ---------- ---------
(In thousands, except share data)
(Unaudited)
Interest Income:
Loans $ 40,833 $ 48,741 $ 125,824 $ 150,657
Marketable securities and interest-earning cash 29,154 32,015 85,800 99,231
----------- ---------- ---------- ---------
Total interest income 69,987 80,756 211,624 249,888
----------- ---------- ---------- ---------
Interest Expense:
Deposits and escrow 18,089 25,349 55,317 85,471
Borrowed funds 21,370 26,447 64,072 79,976
----------- ---------- ---------- ---------
Total interest expense 39,459 51,796 119,389 165,447
----------- ---------- ---------- ---------
Net interest income 30,528 28,960 92,235 84,441
Provision for loan losses 3,085 1,599 8,755 5,297
----------- ---------- ---------- ---------
Net interest income after provision for loan losses 27,443 27,361 83,480 79,144
----------- ---------- ---------- ---------
Noninterest Income:
Service charges on deposits 1,959 1,489 5,397 4,766
Other service charges, commissions, fees 3,249 3,073 9,434 7,899
Loan servicing, net (974) (144) (776) 155
Gain on securities and derivatives 4,353 334 8,629 2,213
Gain on sale of loans 913 1,201 2,560 2,924
Other 1,825 1,642 6,040 3,225
----------- ---------- ---------- ---------
Total noninterest income 11,325 7,595 31,284 21,182
----------- ---------- ---------- ---------
Noninterest Expense:
Salaries and benefits 11,173 9,846 33,220 29,292
Equipment expense 1,780 1,793 5,338 5,333
Occupancy expense 1,649 1,627 4,795 4,931
Advertising and public relations 1,097 579 3,278 1,923
FDIC insurance 111 121 335 379
Income from real estate operations (31) (69) (317) (490)
Amortization of goodwill - 262 - 786
Amortization of other intangible assets 489 489 1,469 1,469
Professional fees and outside services 762 717 2,179 2,221
Supplies, telephone and postage 1,186 1,261 3,510 4,307
Other 3,360 2,523 9,774 7,503
----------- ---------- ---------- ---------
Total noninterest expense 21,576 19,149 63,581 57,654
----------- ---------- ---------- ---------
Income before income taxes 17,192 15,807 51,183 42,672
Income tax expense 4,919 5,304 14,648 13,633
----------- ---------- ---------- ---------
Net Income $ 12,273 $ 10,503 $ 36,535 $ 29,039
=========== ========== ========== =========
Basic earnings per share $ 0.35 $ 0.28 $ 1.02 $ 0.78
=========== ========== ========== =========
Diluted earnings per share $ 0.34 $ 0.28 $ 0.99 $ 0.77
=========== ========== ========== =========
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
Stock Capital Earnings Income (Loss) Plan Plan (RRP)
---------- ---------- ------------- --------------- --------- ------------
(In thousands, except share data)
(Unaudited)
Balance at December 31, 2000 $ 391 $295,008 $189,745 $(16,327) $(16,365) $ (427)
Net income 29,039
Dividends paid at $.255 per share (9,994)
Exercised stock options 2 1,724
Unrealized gains on securities, net
of income tax of $14,590 27,095
Comprehensive income
ESOP stock committed for release 319 110
Earned portion of RRP 16 (11)
Treasury stock purchased (212,500 shares)
Dividend reinvestment plan, net (214)
Stock released as compensation (32)
------- -------- -------- -------- -------- --------
Balance at September 30, 2001 $ 393 $296,821 $208,790 $ 10,768 $(16,255) $ (438)
======= ======== ======== ======== ======== ========
Balance at December 31, 2001 $ 402 $312,009 $215,600 $ (280) $(15,640) $ (9,954)
Net income 36,535
Dividends paid at $.30 per share (11,204)
Exercised stock options 2 1,149
Unrealized gains on securities, net
of income tax of $8,615 15,999
Comprehensive income
Earned portion of RRP (135)
Treasury stock purchased (3,632,920 shares)
Dividend reinvestment plan, net (288)
------- -------- -------- -------- -------- --------
Balance at September 30, 2002 $ 404 $312,870 $240,931 $ 15,719 $(15,640) $(10,089)
======= ======== ======== ======== ======== ========
Treasury Comprehensive
Stock Total Income
---------- -------- ---------------
Balance at December 31, 2000 $ (6,457) $445,568
Net income 29,039 $ 29,039
Dividends paid at $.255 per share (9,994)
Exercised stock options 1,726
Unrealized gains on securities, net
of income tax of $14,590 27,095 27,095
--------
Comprehensive income $ 56,134
========
ESOP stock committed for release 429
Earned portion of RRP 5
Treasury stock purchased (212,500 shares) (2,684) (2,684)
Dividend reinvestment plan, net 96 (118)
Stock released as compensation (32)
-------- --------
Balance at September 30, 2001 $ (9,045) $491,034
======== ========
Balance at December 31, 2001 $(15,922) $486,215
Net income 36,535 $ 36,535
Dividends paid at $.30 per share (11,204)
Exercised stock options 1,151
Unrealized gains on securities, net
of income tax of $8,615 15,999 15,999
--------
Comprehensive income $ 52,534
========
Earned portion of RRP (135)
Treasury stock purchased (3,632,920 shares) (61,058) (61,058)
Dividend reinvestment plan, net (288)
-------- --------
Balance at September 30, 2002 $(76,980) $467,215
======== ========
5
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30,
-------------------------------
2002 2001
-------------- -------------
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net income $ 36,535 $ 29,039
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 8,755 5,297
Net depreciation, amortization and accretion 5,510 5,995
Loans originated for sale (229,013) (142,226)
Proceeds from sales of loans originated for sale 260,370 147,493
Origination of loan servicing rights (791) 623
Net gain on loans and securities (11,189) (5,137)
Gain on the sale of foreclosed real estate (447) (614)
(Income) loss from joint ventures (1,048) 635
Decrease in accrued interest receivable 3,439 4,000
Increase (decrease) in accrued interest payable 317 (2,909)
Amortization of intangibles 1,469 2,255
Earned ESOP expense 1,339 410
Earned RRP expense 2,228 8
Loss (gain) on the sale of premises and equipment 76 (412)
Increase in deferred tax liability 9,943 17,135
Increase in income taxes payable 1,220 6,279
Other, net (4,895) (15,534)
------------ ------------
Net cash provided by operating activities 83,818 52,337
------------ ------------
Cash flows from investing activities:
Proceeds from maturities, sales, and principal reductions
of marketable securities 1,725,523 795,377
Purchase of marketable securities (1,906,140) (1,250,325)
Loans sold - 31,334
Principal payments on loans less loan originations 90,780 44,154
Investments in real estate held for investment and other joint ventures (2,099) 82
Proceeds from sales of real estate and premises and equipment 2,263 6,023
Purchases of premises and equipment, net (4,636) (5,449)
Purchase of bank-owned life insurance - (60,000)
------------ ------------
Net cash used in investing activities (94,309) (438,804)
6
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
For the Nine Months Ended
September 30,
-------------------------------
2002 2001
-------------- --------------
(In thousands)
(Unaudited)
Cash flows from financing activities:
Net increase (decrease) in deposits 8,246 (182,275)
Net increase in other borrowings 49,651 574,440
Net decrease in escrow (3,128) (3,635)
Dividend reinvestment plan, net (288) (118)
Cash dividends (11,204) (9,994)
Payments to acquire treasury stock (61,058) (2,684)
Proceeds from the exercise of stock options 1,151 1,726
------------ -------------
Net cash (used in) provided by financing activities (16,630) 377,460
------------ -------------
Net decrease in cash and cash equivalents (27,121) (21,565)
Cash and cash equivalents at beginning of period 116,583 99,837
------------ -------------
Cash and cash equivalents at end of period $ 89,462 $ 78,272
============ =============
Supplemental disclosures:
Cash paid during the period for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 119,072 $ 168,356
Income taxes 13,541 7,354
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 1,377 $ 1,135
Increase in securities in process 444,337 -
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., Waypoint Insurance Group (formerly 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 nine-month period ended September 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.
In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain Financial
Institutions." SFAS 147 requires companies that have acquired certain financial
institution businesses cease amortizing all goodwill previously amortized (SFAS
72 "Goodwill") and subject it to annual impairment tests. Waypoint Financial
does not have any goodwill that meets the requirements of SFAS 147.
(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.
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)
Waypoint Financial recorded certain liabilities associated with merger-related
costs. Remaining merger liabilities totaled $722,000 at September 30, 2002 and
$1,811,000 at December 31, 2001, and consisted entirely of compensation and
benefit plan costs. Waypoint Financial expects remaining accrued unpaid merger
costs to be immaterial at December 31, 2002.
(4) Earnings Per Share
The following table shows the calculation of basic earnings per share and
diluted earnings per share. The table excludes the effect of anti-dilutive
shares, which totaled 79,068 and 170,557 shares, respectively, for the three-
month periods ended September 30, 2002 and 2001, and 79,068 and 304,067 shares,
respectively, for the nine-month periods ended September 30, 2002 and 2001.
Per Share
Income Shares Amount
----------------------------------------------
For the three months ended September 30, 2002:
Basic earnings per share:
Income available to common shareholders $ 12,273 34,982,336 $ 0.35
Dilutive effect of employee and director stock options 990,038 (0.01)
----------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 12,273 35,972,374 $ 0.34
==============================================
For the three months ended September 30, 2001:
Basic earnings per share:
Income available to common shareholders $ 10,503 37,555,818 $ 0.28
Dilutive effect of employee and director stock options 402,925 -
----------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 10,503 37,958,743 $ 0.28
==============================================
Per Share
Income Shares Amount
----------------------------------------------
For the nine months ended September 30, 2002:
Basic earnings per share:
Income available to common shareholders $ 36,535 35,936,738 $ 1.02
Dilutive effect of employee and director stock options 986,253 (0.03)
----------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 36,535 36,922,991 $ 0.99
==============================================
For the nine months ended September 30, 2001:
Basic earnings per share:
Income available to common shareholders $ 29,039 37,455,196 $ 0.78
Dilutive effect of employee and director stock options 360,240 (0.01)
----------------------------------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 29,039 37,815,436 $ 0.77
==============================================
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 September 30, 2002
--------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------------------------------------------------------------
Available for sale:
U.S. Government and agencies $ 301,201 $ 6,875 $ (6) $ 308,070
Corporate bonds 78,093 108 (7,784) 70,417
Municipal securities 96,254 5,387 - 101,641
FHLB stock 99,096 - - 99,096
Equity securities 90,292 6,303 (39) 96,556
Asset-backed securities 66,229 1,172 - 67,401
Mortgage-backed securities:
Commercial 24,479 91 - 24,570
Agency PC's & CMO's 1,482,515 9,402 (143) 1,491,774
Private issue CMO's 952,134 4,939 (328) 956,745
-------------- -------------- -------------- --------------
Total mortgage-backed securities 2,459,128 14,432 (471) 2,473,089
-------------- -------------- -------------- --------------
Total securities available for sale $ 3,190,293 $ 34,277 $ (8,300) $ 3,216,270
============== ============== ============== ==============
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:
September 30, December 31,
2002 2001
----------------- -----------------
Residential mortgage loans (principally conventional):
Secured by 1-4 family residences $ 794,429 $ 1,025,688
Construction (net of undistributed
portion of $27,861 and $34,676) 27,727 36,040
----------------- -----------------
822,156 1,061,728
Less:
Unearned discount 122 159
Net deferred loan origination fees 4,499 5,116
----------------- -----------------
Total residential mortgage loans 817,535 1,056,453
----------------- -----------------
Commercial loans:
Commercial real estate 515,821 484,894
Commercial business 334,853 272,389
Construction and site development
(net of undistributed portion of
$18,350 and $26,015) 24,615 25,428
----------------- -----------------
875,289 782,711
Less:
Net deferred loan origination fees 1,115 1,171
----------------- -----------------
Total commercial loans 874,174 781,540
----------------- -----------------
Consumer and other loans:
Manufactured housing 107,375 97,243
Home equity and second mortgage 351,592 322,182
Indirect automobile 137,392 127,258
Other 72,956 78,075
----------------- -----------------
669,315 624,758
Plus:
Net deferred loan origination fees (2,972) (2,185)
Dealer reserve 26,559 24,721
----------------- -----------------
Total consumer and other loans 692,902 647,294
----------------- -----------------
Less: Allowance for loan losses 26,749 23,069
----------------- -----------------
Loans receivable, net $ 2,357,862 $ 2,462,218
================= =================
Loans having a carrying value of $1,059,226,000 were pledged as collateral for
FHLB advances at September 30, 2002.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans totaled $540,135,000 at September 30, 2002 and $633,138,000 at
December 31, 2001. Investor custodial balances maintained in connection with the
foregoing mortgage servicing rights totaled $10,724,000 at September 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 nine-month
periods ended September 30, 2002 and 2001.
Waypoint Financial sold mortgage loans totaling $257,810,000 and $178,173,000
during the nine-month periods ended September 30, 2002 and September 30, 2001,
respectively. Waypoint Financial did not exchange loans for mortgage-backed
securities during the nine-month periods ended September 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 to expense 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 nine month periods
ended September 30, ended September 30,
---------------------------------- --------------------------------
2002 2001 2002 2001
--------------- --------------- ------------- ---------------
Reported net income $ 12,273 $ 10,503 $ 36,535 $ 29,039
Pro forma adjustment to eliminate
amortization of goodwill - 262 - 786
--------------- --------------- ------------- ---------------
Pro forma net income $ 12,273 $ 10,765 $ 36,535 $ 29,825
=============== =============== ============= ===============
Reported diluted earnings per share $ 0.34 $ 0.28 $ 0.99 $ 0.77
Pro forma adjustment to eliminate
amortization of goodwill - - - 0.02
--------------- --------------- ------------- ---------------
Pro forma diluted earnings per share $ 0.34 $ 0.28 $ 0.99 $ 0.79
=============== =============== ============= ===============
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, Waypoint Financial's goodwill was not impaired as of January 1,
2002.
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:
September 30, December 31,
2002 2001
----------------- ----------------
Acquisition cost of deposit intangible assets $ 13,713 $ 13,713
Less: accumulated amortization 11,917 10,451
----------------- ----------------
Carrying value of deposit intangible assets $ 1,796 $ 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:
September 30, December 31,
2002 2001
------------------ ------------------
Savings $ 245,927 $ 220,344
Time 1,527,221 1,444,723
Transaction 390,673 340,568
Money market 381,694 531,634
------------------ ------------------
Total deposits $2,545,515 $ 2,537,269
================== ==================
(10) Other Borrowings
The following table presents the composition of Waypoint Financial's other
borrowings as of the dates indicated:
September 30, December 31,
2002 2001
----------------- -----------------
FHLB advances $ 2,001,154 $ 1,842,170
Repurchase agreements 340,460 449,770
Other 24 47
----------------- -----------------
Total other borrowings $ 2,341,638 $ 2,291,987
================= =================
(11) Securities in Process
Securities in process represents securities acquired in the ordinary course of
business that have not settled as of the dates presented. Waypoint Financial
held $464,337,000 of securities in process at September 30, 2002. This balance
primarily reflects the advance purchase of securities in anticipation of
continued rapid prepayments on mortgage-backed securities. As of the date of
this report, $314,275,000 of these securities have settled and the remaining
$150,062,000 are scheduled to settle by November 30, 2002.
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)
(12) Derivative Instruments
Waypoint Financial, in the normal course of its business, uses derivative
financial instruments to economically hedge its exposure to fluctuations in
market interest rates. This exposure includes the impact of changing interest
rates on cash flows from interest-bearing assets and liabilities, as well as the
impact of changing interest rates on the market value of interest-bearing assets
and liabilities.
Waypoint Financial uses callable interest rate swaps (Callable Swaps) that are
matched to fixed rate callable certificates of deposits (Callable CD's). This
hedging relationship was designated as a fair value hedge upon adoption of SFAS
133. Under the terms of the Callable Swaps, Waypoint Financial receives fixed
rate payments and pays variable rate payments based on one-month USD LIBOR. The
fixed interest rate payments received by Waypoint Financial as a result of the
swap is passed on to the holder of the Callable CD's, which effectively converts
the Callable CD's to variable rate. Each Callable Swap is callable by the
counterparty on the same dates that the Callable CD's are callable by Waypoint
Financial. Changes in the fair value of the callable interest rate swaps are
highly effective in offsetting changes in the fair value of the Callable CD's
and as a result, earnings were not impacted by gains or losses on callable
interest rate swaps.
Waypoint Financial also uses interest rate swaps that do not have call option
features ("regular swaps"). The regular swaps are matched to fixed rate FHLB
borrowings and were designated as fair value hedges at the inception of the
instruments. Under the terms of the regular swaps, Waypoint Financial receives
fixed rate payments and pays variable rate payments based on one-month USD
LIBOR. The fixed interest payments received by Waypoint Financial as a result of
the regular swap is passed on to the FHLB, which effectively converts the
borrowings to variable rate. Changes in the fair value of the regular swaps are
highly effective in offsetting changes in the fair value of the FHLB borrowings
and as a result, earnings were not impacted by gains or losses on regular swaps.
The following table summarizes Waypoint Financial's derivative financial
instruments as of September 30, 2002 and December 31, 2001:
Year of Notional
Number Maturity Year of Call Amount Fair Value
---------- --------------- --------------- ----------------- ---------------
As of September 30, 2002:
Callable interest rate swaps 10 2009-2012 2002-2003 $125,000,000 $ 2,027,000
Regular interest rate swaps 7 2003-2005 - 300,000,000 13,208,000
Loan commitments, net 496 2002 - 66,644,000 (60,000)
---------------
Total $ 15,175,000
===============
As of December 31, 2001:
Callable interest rate swaps 8 2006-2011 2002 $105,000,000 $ (1,203,000)
Regular interest rate swaps 7 2003-2005 - 300,000,000 5,398,000
Loan commitments, net 589 2002 - 69,233,000 (60,000)
---------------
Total $ 4,135,000
===============
During the three-month period ended September 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 September 30,
2002, had a notional amount of $300,000,000. Prior to settlement, Waypoint
recognized an increase in fair value of $2,978,000, which was reported in net
gain on securities and derivatives.
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. Critical Accounting Policies
This section describes Waypoint Financial's critical accounting policies which
involve accounting estimates that: a) require assumptions about highly uncertain
matters, and b) would change sufficiently to cause a material effect on the
Corporation's financial condition or results of operations.
Allowance for Loan Losses. In originating loans, Waypoint Financial recognizes
that losses will be experienced on loans and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. Waypoint
Financial maintains an allowance for loan losses to absorb losses inherent in
the loan portfolio. The allowance for loan losses represents management's
estimate of probable losses based on information available as of the date of the
financial statements. The allowance for loan losses is based on management's
evaluation of the collectibility of the loan portfolio, including past loan loss
experience, known and inherent losses, information about specific borrower
situations and estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management in its determination of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes a review
of historical losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review Waypoint Financial's allowance for loan
losses and may require Waypoint Financial to make additional provisions for
estimated losses based upon judgments different from those of management.
In establishing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans. Waypoint Financial segregates the loan
portfolio according to risk characteristics (i.e., mortgage loans, home equity,
commercial and consumer). Loss factors are derived using Waypoint Financial's
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
In addition, management uses factors that cannot be associated with specific
credit or loan categories. These factors include management's subjective
evaluation of local and national economic and business conditions, portfolio
concentration and changes in the character and size of the loan portfolio. The
allowance methodology reflects management's objective that the overall allowance
appropriately reflects a margin for the imprecision necessarily inherent in
estimates of expected credit losses.
15
Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while Waypoint Financial believes it has
established its existing allowance for loan losses in conformity with generally
accepted accounting principles, there can be no assurance that regulators, in
reviewing Waypoint Financial's loan portfolio, will not request Waypoint
Financial to increase its allowance for loan losses. In addition, because future
events affecting borrowers and collateral cannot be predicted with certainty,
there can be no assurance that the existing allowance for loan losses is
adequate or that increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect Waypoint Financial's
financial condition and results of operations.
Waypoint Financial's allowance for loan losses is highly sensitive to the
assumptions used in estimating expected credit losses. For example, if under its
current methodology, Waypoint Financial changed the detailed assumptions
underlying its allowance for loan loss estimate as of September 30, 2002 such
that its allowance for loan losses as a percentage of total loans increased or
decreased by 10%, the following results would occur:
Reported as of Estimated as if Estimated as if
or for the the required the required
three months ended allowance allowance
September 30, 2002 decreased 10% increased 10%
------------------ ------------- -------------
Allowance for loan losses $ 26,749 $ 24,074 $ 29,424
Allowance for loan losses as a %
of total loans 1.13% 1.02% 1.24%
Provision for loan losses $ 3,085 $ 410 $ 5,760
Net income $ 12,273 $ 13,905 $ 10,641
Earnings per share $ 0.34 $ 0.39 $ 0.30
Change in earnings per share as a % 14.71% (11.76)%
Goodwill. As described in Note 7 in the Notes to Consolidated Financial
Statements, Waypoint Financial has goodwill that is subject to annual impairment
evaluation under SFAS 142. Waypoint Financial applies the market approach under
SFAS 142 for impairment measurement which is highly sensitive to underlying
assumptions. As an example, if the assumptions underlying the market approach
changed such that goodwill was deemed to be impaired by 10% of its carrying
value, net income for the three months ended September 30, 2002 would be reduced
by $1.0 million or $0.03 per share.
16
III. Market Risk and Interest Rate Sensitivity Management
Waypoint Financial monitors its 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 September 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 8.83 % 5.01 % 1.73 % 5.61 %
+200 6.88 5.75 0.95 6.58
+100 3.45 6.13 0.71 7.21
0 - 6.02 - 7.77
(100) (3.09) 5.43 (0.96) 7.59
(200) (6.14) 4.05 (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 cash
flows. At September 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.
17
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 nine months ended September 30, 2002, Waypoint
Financial's deposits increased $8.2 million. At September 30, 2002, Waypoint
Financial also had brokered deposits of $170.9 million outstanding at an average
interest rate of 2.36% 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 September
30, 2002, Waypoint Financial had $2,001.2 million in FHLB loans outstanding at a
weighted average interest rate of 3.82%, an increase of $159.0 million from
$1,842.2 million at a weighted average interest rate of 4.11% on December 31,
2001. Waypoint Financial was required to purchase additional FHLB stock totaling
$6.9 million due to increased FHLB loans outstanding during the nine months
ended September 30, 2002. Waypoint Financial had available FHLB lines of credit
totaling $725.7 million as of September 30, 2002 versus $875.8 million as of
December 31, 2001.
Proceeds from loan and securities sales represent a substantial source of funds
to Waypoint Financial. These sources amounted to $952.6 million and $581.5
million during the nine-month periods ended September 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 nine months ended
September 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 $663.9 million to $3,216.3
million at September 30, 2002 from $2,552.4 million at December 31, 2001. This
increase was primarily due to advance purchases of securities in anticipation of
continued rapid prepayments on mortgage-backed securities and a related
tightening of supply for acceptable instruments. Waypoint Financial expects this
increase to be substantially reversed by December 31, 2002.
Loan demand resulted in total originations of $911.5 million in the nine months
ended September 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 $104.3 million
to $2,357.9 million at September 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 nine-month periods ended September 30, 2002 and September 30, 2001.
The sources of liquidity previously discussed are deemed by management to be
sufficient to fund outstanding loan commitments and meet other obligations.
18
V. Capital Resources
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 September 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 September 30, 2002 Amount Ratio Amount Ratio Amount Ratio
------------------------ -------------- ----- -------------- ----- -------------- -----
(in thousands) (in thousands) (in thousands)
Total Capital
(to Risk Weighted Assets) $ 429,228 13.6% $ 253,389 8.0% $ 316,736 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 399,644 12.6 126,694 4.0 190,042 6.0
Tier 1 Capital
(to Average Assets) 399,644 7.7 208,624 4.0 260,779 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
September 30, 2002 follows:
Tier 1
Tangible (Core) Risk-based
Capital Capital Capital
------------- ------------- --------------
GAAP capital at Waypoint Financial $ 467,215 $ 467,215 $ 467,215
Capital attributed to affiliates (41,186) (41,186) (41,186)
------------- ------------- --------------
GAAP capital at Waypoint Bank 426,029 426,029 426,029
Capital adjustments:
Unrealized gains, net of taxes, on securities available for sale (15,739) (15,739) (15,739)
Allowance for loan losses - - 26,749
Certain intangible assets (10,391) (10,391) (10,391)
Disallowed servicing assets (255) (255) (255)
Allowable unrealized gains, net of taxes, on equity securities available
for sale - - 2,835
------------- ------------- --------------
Regulatory capital at Waypoint Bank $ 399,644 $ 399,644 $ 429,228
============= ============= ==============
19
VI. Results of Operations
Comparison for the Three-Month Periods Ended September 30, 2002 and September
30, 2001
Net Income
Net income for the three months ended September 30, 2002 was $12,273,000, which
represented an increase of $1,770,000 or 16.9% from $10,503,000 reported for the
three months ended September 30, 2001. The increase in net income included an
increase of $82,000 in net interest income after provision for loan losses, an
increase of $3,730,000 in noninterest income, and a decrease of $385,000 in
income tax expense. These increases to net income were offset by an increase of
$2,427,000 in noninterest 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 $30,528,000 for the
three months ended September 30, 2002, which represents an increase of
$1,568,000 or 5.4% from $28,960,000 for the three months ended September 30,
2001. Provision expense for loan losses increased $1,486,000 or 92.9% to
$3,085,000 for the three months ended September 30, 2002 from $1,599,000 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 September 30, 2002 and September 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 September 30, 2002 and
September 30, 2001.
Net interest income before provision expense for loan losses, on a tax
equivalent basis, totaled $31,452,000 for the three months ended September 30,
2002, which represents an increase of $1,721,000 or 5.8%, from $29,731,000 for
the three months ended September 30, 2001. This increase reflected an
unfavorable volume variance of $1,709,000 and a favorable rate variance of
$3,430,000 for the three months ended September 30, 2002 versus the comparable
prior period.
For the three months ended September 30, 2002, the yield on interest-earning
assets was 5.68%, representing a 99 basis points decrease from the comparable
prior period. At the same time, the cost of funds decreased 122 basis points to
3.31% for the three months ended September 30, 2002. As a result, the interest
spread increased by 23 basis points to 2.37% and the net interest margin ratio
increased by 13 basis points to 2.56% during the three months ended September
30, 2002 versus the comparable prior period.
The improvement in Waypoint Financial's net interest margin resulted primarily
from disciplined deposit pricing and prudent balance sheet management activities
which offset downward asset yield repricing. Net interest income was also
significantly enhanced by a substantial increase in Waypoint Financial's
leveraged investment portfolio.
20
Table 1 Average Balance Sheets, Rates and Interest Income and Expense Summary
For the three months ended,
----------------------------------------------------------------------
September 30, 2002 September 30, 2001
----------------------------------------------------------------------
Rate
as of Average Average
September Average (1) (2) Yield/ Average (1) (2) Yield/
30, 2002 Balance Interest Cost Balance Interest Cost
----------- ----------------------------------------------------------------------
(All dollar amounts are in thousands)
Assets:
Interest-earning assets:
Loans 6.65% $ 2,389,203 $ 41,063 6.81% $ 2,570,317 $ 48,967 7.62%
Marketable securities - taxable 4.47 2,464,440 27,635 4.68 2,207,784 30,681 5.56
Marketable securities - tax-free 7.66 100,819 1,980 7.86 74,928 1,558 8.32
Other interest-earning assets 2.14 43,981 232 2.14 33,658 321 3.81
--------- ----------------------------------------------------------------------
Total interest-earning assets 5.60 4,998,443 70,910 5.68 4,886,687 81,527 6.67
--------- -------------------- --------------------
Noninterest-earning assets 208,040 210,857
------------- -----------
Total assets $ 5,206,483 $ 5,097,544
============= ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits 1.05% $ 246,138 $ 703 1.11% $ 216,498 $ 1,013 1.87%
Time deposits 4.01 1,512,463 15,699 4.04 1,403,521 19,261 5.49
NOW and money market accounts 0.84 772,044 1,681 0.86 855,012 5,070 2.37
Escrow 0.76 3,278 5 0.63 4,921 6 0.49
Borrowed funds 4.04 2,157,652 21,370 3.88 2,096,890 26,446 5.04
--------- ----------------------------------------------------------------------
Total interest-bearing liabilities 3.37 4,691,575 39,458 3.31 4,576,842 51,796 4.53
--------- -------------------- --------------------
Noninterest-bearing liabilities 46,777 42,112
------------- -----------
Total liabilities 4,738,352 4,618,954
Stockholders' equity 468,131 478,590
------------- -----------
Total liabilities and
stockholders' equity $ 5,206,483 $ 5,097,544
============= ===========
Net interest income, tax-equivalent 31,452 29,731
---------- ------------
Interest rate spread, tax-equivalent (3) 2.23% 2.37% 2.14%
========= ========= ==========
Net interest-earning assets $ 306,868 $ 309,845
============= ===========
Net interest margin, tax-equivalent (4) 2.56% 2.43%
========== ==========
Ratio of interest-earning assets
to interest-bearing liabilities 1.07 x 1.07 x
============= ===========
Adjustment to reconcile tax-equivalent
net interest income to net interest
income (924) (771)
---------- ----------
Net interest income before provision for
loan losses $ 30,528 $ 28,960
========== ==========
(1) Includes net expense recognized on deferred loan fees and costs of $133,000
for the three months ended September 30, 2002, and $175,000 for the three
months ended September 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 1b - Average Balance Sheets, Rates and Interest Income and Expense Summary
For the nine months ended,
----------------------------------------------------------------------------
September 30, 2002 September 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 $ 2,427,497 $ 126,441 6.93% $ 2,618,116 $ 151,314 7.71%
Marketable securities - taxable 2,425,050 81,131 4.70 2,092,413 94,696 6.03
Marketable securities - tax-free 98,401 5,995 8.12 73,200 4,620 8.42
Other interest-earning assets 54,660 773 1.89 43,557 1,532 4.69
----------------------------------------------------------------------------
Total interest-earning assets 5,005,608 214,340 5.75 4,827,286 252,162 6.96
-------------------- ---------------------
Noninterest-earning assets 206,695 178,164
-------------- ------------
Total assets $ 5,212,303 $ 5,005,450
============== ============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 237,696 $ 2,155 1.19% $ 217,050 $ 3,709 2.28%
Time deposits 1,513,605 47,622 4.22 1,468,621 62,894 5.71
NOW and money market accounts 790,528 5,518 0.93 835,808 18,845 3.01
Escrow 4,991 22 0.58 6,716 24 0.48
Borrowed funds 2,147,662 64,072 3.94 1,968,628 79,975 5.42
----------------------------------------------------------------------------
Total interest-bearing liabilities 4,694,482 119,389 3.38 4,496,823 165,447 4.91
-------------------- ---------------------
Noninterest-bearing liabilities 44,363 46,016
-------------- ------------
Total liabilities 4,738,845 4,542,839
Stockholders' equity 473,458 462,611
-------------- ------------
Total liabilities and
stockholders' equity $ 5,212,303 $ 5,005,450
============== ============
Net interest income, tax-equivalent 94,951 86,715
----------- -----------
Interest rate spread, tax-equivalent (3) 2.37% 2.05%
======== =======
Net interest-earning assets $ 311,126 $ 330,463
============== ============
Net interest margin, tax-equivalent (4) 2.58% 2.40%
======== =======
Ratio of interest-earning assets
to interest-bearing liabilities 1.07 x 1.07 x
============== ============
Adjustment to reconcile tax-equivalent net
interest income to net interest income (2,716) (2,274)
----------- -----------
Net interest income before provision for
loan losses $ 92,235 $ 84,441
=========== ===========
(1) Includes net expense recognized on deferred loan fees and costs of $421,000
for the nine months ended September 30, 2002, and $839,000 for the nine
months ended September 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.
22
Table 2 Rate/Volume Analysis of Changes in Net Interest Income
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
Compared to Compared to
Three Months Ended September 30, 2001 Nine Months Ended September 30, 2001
Increase (Decrease) Increase (Decrease)
---------------------------------------- ---------------------------------------
Volume Rate Net Volume Rate Net
---------- ---------- ---------- ----------- ---------- ----------
(Dollar amounts in thousands)
Interest-earning assets:
Loans, net $ (3,151) $ (4,753) $ (7,904) $ (10,410) $ (14,463) $ (24,873)
Marketable securities - taxable 2,824 (5,870) (3,046) 11,803 (25,368) (13,565)
Marketable securities - tax-free 512 (90) 422 1,545 (170) 1,375
Other interest-earning assets 79 (168) (89) 320 (1,079) (759)
--------- --------- --------- ---------- --------- ---------
Total interest-earning assets 264 (10,881) (10,617) 3,258 (41,080) (37,822)
--------- --------- --------- ---------- --------- ---------
Interest-bearing liabilities:
Savings deposits 129 (439) (310) 137 (1,691) (1,554)
Time deposits 1,502 (5,064) (3,562) 1,486 (16,758) (15,272)
NOW and money market deposits (448) (2,941) (3,389) (1,091) (12,236) (13,327)
Escrow (2) 1 (1) (6) 4 (2)
Borrowed funds 792 (5,868) (5,076) 4,876 (20,779) (15,903)
--------- --------- --------- ---------- --------- ---------
Total interest-bearing liabilities 1,973 (14,311) (12,338) 5,402 (51,460) (46,058)
--------- --------- --------- ---------- --------- ---------
Change in net interest income $ (1,709) $ 3,430 $ 1,721 $ (2,144) $ 10,380 $ 8,236
========= ========= ========= ========== ========= =========
Waypoint Financial's average loan balances decreased $181.1 million or 7.0% to
$2.389 billion during the three months ended September 30, 2002 from $2.570
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
September 30, 2002 and December 31, 2001.) The yield on average loans decreased
81 basis points to 6.81% for the three months ended September 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.
Waypoint Financial's average marketable securities increased $282.5 million or
12.4% to $2.565 billion during the three months ended September 30, 2002 from
$2.283 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 85 basis points
to 4.80% for the three months ended September 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 $55.6 million or 2.2% to $2.531 billion during the
three-month period ending September 30, 2002 from $2.475 billion for the
comparable prior quarter. The cost of average deposits decreased 124 basis
points to 2.86% during the three months ended September 30, 2002 primarily due
to the decrease in market rates during the nine-month period ended September 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.
23
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 $3,085,000 for
the three months ended September 30, 2002, which represents an increase of
$1,486,000 or 92.9%, from the $1,599,000 provision recorded for the three months
ended September 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 nine-month
periods ended September 30, 2002 and September 30, 2001.
Table 3 Changes in Noninterest Income
Three months ended September 30
---------------------------------------------------
2002 2001 Change %
--------- --------- -------- ---------
(Dollar amounts in thousands)
Service charges on deposits $ 1,959 $ 1,489 $ 470 31.6
Other service charges, commissions, fees 3,249 3,073 176 5.7
Loan servicing, net (974) (144) (830) (576.4)
Gain on securities and derivatives 4,353 334 4,019 1,203.3
Gain on sale of loans 913 1,201 (288) (24.0)
Other 1,825 1,642 183 11.1
-------- -------- -------- ---------
Total $ 11,325 $ 7,595 $ 3,730 49.1
======== ======== ======== =========
Nine months ended September 30
---------------------------------------------------
2002 2001 Change %
-------- -------- -------- ---------
(Dollar amounts in thousands)
Service charges on deposits $ 5,397 $ 4,766 $ 631 13.2
Other service charges, commissions, fees 9,434 7,899 1,535 19.4
Loan servicing, net (776) 155 (931) (600.6)
Gain on securities and derivatives 8,629 2,213 6,416 289.9
Gain on sale of loans 2,560 2,924 (364) (12.4)
Other 6,040 3,225 2,815 87.3
-------- -------- -------- ---------
Total $ 31,284 $ 21,182 $ 10,102 47.7
======== ======== ======== =========
Total noninterest income increased $3,730,000 or 49.1% to $11,325,000 for the
three months ended September 30, 2002 compared to $7,595,000 for the three
months ended September 30, 2001 as a result of the following:
. Service charges on deposits totaled $1,959,000, up $470,000 or 31.6%
from the comparable prior quarter due to a $387,000 increase in
overdraft and NSF fees and an $82,000 increase in commercial deposit
fees.
. Other service charges, commissions and fees increased $176,000 or 5.7%
to $3,249,000 from the comparable prior quarter. Within this income
category, ATM fees were $1,031,000 (up $188,000), fees from insurance
services were $914,000 (up $137,000), brokerage fees were $621,000
(down $254,000 as branch platform sales of brokerage products decreased
with sales and marketing efforts primarily targeted to deposits),
commercial service and other fees were $412,000 (up $16,000), and trust
fees were $271,000 (up $89,000).
. Mortgage loan servicing resulted in a net loss of $974,000 versus a
loss of $144,000 in the comparable prior quarter. The increase in the
loss of $830,000 was due to an increase in the impairment reserve
associated with the quarterly market valuation of Waypoint's mortgage
loan servicing rights.
. Gains on securities and derivatives totaled $4,353,000, up $4,019,000,
primarily due to a $2,978,000 improvement in the fair value of an
interest rate swap that was settled in the current quarter.
24
. Net gains on the sale of loans totaled $913,000, down $288,000
primarily due to less favorable market pricing during the current
quarter.
. Other income included curtailment gains associated with benefit plan
liabilities totaling $361,000 for the current period and $479,000 for
the comparable prior period.
Noninterest Expense
The following table presents noninterest expense for the three-month and
nine-month periods ended September 30, 2002 and September 30, 2001:
Table 4 Changes in Noninterest Expense
Three months ended September 30
--------------------------------------------------
2002 2001 Change %
-------- -------- -------- --------
(Dollar amounts in thousands)
Salaries and benefits $ 11,173 $ 9,846 $ 1,327 13.5
Equipment expense 1,780 1,793 (13) (0.7)
Occupancy expense 1,649 1,627 22 1.4
Advertising and public relations 1,097 579 518 89.5
FDIC insurance 111 121 (10) (8.3)
Income from real estate operations (31) (69) 38 55.1
Amortization of goodwill - 262 (262) (100.0)
Amortization of other intangible assets 489 489 - -
Professional fees and outside services 762 717 45 6.3
Supplies, telephone and postage 1,186 1,261 (75) (5.9)
Other 3,360 2,523 837 33.2
-------- -------- -------- ---------
Total $ 21,576 $ 19,149 $ 2,427 12.7
======== ======== ======== =========
Nine months ended September 30
--------------------------------------------------
2002 2001 Change %
-------- -------- -------- --------
(Dollar amounts in thousands)
Salaries and benefits $ 33,220 $ 29,292 $ 3,928 13.4
Equipment expense 5,338 5,333 5 0.1
Occupancy expense 4,795 4,931 (136) (2.8)
Advertising and public relations 3,278 1,923 1,355 70.5
FDIC insurance 335 379 (44) (11.6)
Income from real estate operations (317) (490) 173 35.3
Amortization of goodwill - 786 (786) (100.0)
Amortization of other intangible assets 1,469 1,469 - -
Professional fees and outside services 2,179 2,221 (42) (1.9)
Supplies, telephone and postage 3,510 4,307 (797) (18.5)
Other 9,774 7,503 2,271 30.3
-------- -------- -------- --------
Total $ 63,581 $ 57,654 $ 5,927 10.3
======== ======== ======== ========
Total noninterest expense increased $2,427,000 or 12.7% to $21,576,000 for the
three months ended September 30, 2002 from $19,149,000 for the three months
ended September 30, 2001. The net increase in noninterest expense is
attributable to the following:
. Salaries and benefits expense totaled $11,173,000, up $1,327,000 or
13.5% from the comparable prior quarter. Within this expense category,
salaries and wages totaled $6,576,000 (up $429,000 due to staff
additions in various business lines and annual merit increases),
incentive and bonus compensation totaled $1,550,000 (down $36,000),
stock compensation from the Recognition and Retention Plan (RRP)
totaled $471,000 (due to the December 2001 adoption of the RRP), ESOP
expense totaled $455,000 (up $208,000 due to the adoption of the
Waypoint ESOP), and payroll taxes and employee benefits totaled
$1,915,000 (up $162,000 due to increased benefit plan administration
costs).
25
. Advertising and public relations expense totaled $1,097,000, up
$518,000 primarily on increased media advertising and core deposit
promotions.
. Other noninterest expense totaled $3,360,000, up $837,000 from the
comparable prior quarter. This expense category included customer
account servicing expenses of approximately $1,106,000 (up $109,000 on
increased loan servicing expenses), OTS fees of $208,000 (up $14,000),
director compensation of $533,000 (up $391,000 due to the December
2001 adoption of the RRP), charitable contributions of $377,000 (up
$138,000 on contributions qualified for tax credits), and various
other expenses totaling $1,136,000 (up $307,000 including expenses
associated with Waypoint's planned information system conversion).
Provision for Income Taxes
Income tax expense totaled $4,919,000 for the three months ended September 30,
2002, which resulted in an effective tax rate of 28.6% on income before taxes of
$17,192,000. During the three months ended September 30, 2001, Waypoint
Financial recorded $5,304,000 of income tax expense resulting in an effective
tax rate of 33.6% on income before taxes of $15,807,000. 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 Nine-Month Periods Ended September 30, 2002 and September 30,
2001
Net Income or Loss
Net income for the nine months ended September 30, 2002 was $36,535,000, which
represented an increase of $7,496,000 or 25.8% from $29,039,000 reported for the
nine months ended September 30, 2001. The increase in net income included an
increase of $4,336,000 in net interest income after provision for loan losses
and an increase of $10,102,000 in noninterest income, which were offset by an
increase of $5,927,000 in noninterest expense and an increase of $1,015,000 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 $83,480,000 for the
nine months ended September 30, 2002, which represents an increase of $4,336,000
or 5.5% from $79,144,000 for the nine months ended September 30, 2001. Provision
expense for loan losses increased $3,458,000 or 65.3% to $8,755,000 for the nine
months ended September 30, 2001 from $5,297,000 for the comparable prior period.
The paragraphs below present an analysis of the components of net interest
income on a tax-equivalent basis.
Table 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 nine-month periods ended September 30, 2002 and September 30, 2001.
Table 2 presents a rate-volume analysis of changes in net interest income, on a
tax-equivalent basis for the nine-month periods ended September 30, 2002 and
September 30, 2001.
Net interest income before provision expense for loan losses, on a tax
equivalent basis, totaled $94,951,000 for the nine months ended September 30,
2002, which represents an increase of $8,236,000 or 9.5%, from $86,715,000 for
the nine months ended September 30, 2001. This increase reflected an unfavorable
volume variance of $2,144,000 and a favorable rate variance of $10,380,000 for
the nine months ended September 30, 2002 versus the comparable prior period.
For the nine months ended September 30, 2002, the yield on interest-earning
assets was 5.75%, representing a 121 basis points decrease from the comparable
prior period. At the same time, the cost of funds decreased 153 basis points to
3.38% for the nine months ended September 30, 2002. As a result, the interest
spread increased by 32 basis points to 2.37% and the net interest margin ratio
increased by 18 basis points to 2.58% during the nine months ended September 30,
2002 versus the comparable prior period.
Waypoint Financial's average loan balances decreased $190.6 million or 7.3% to
$2.427 billion during the nine months ended September 30, 2002 from $2.618
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
26
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 September 30, 2002 and December 31, 2001.) The
yield on average loans decreased 78 basis points to 6.93% for the nine months
ended September 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.
Waypoint Financial's average marketable securities increased $357.8 million or
16.5% to $2.523 billion during the nine months ended September 30, 2002 from
$2.166 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 128 basis points
to 4.83% for the nine months ended September 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 $20.4 million or 0.8% to $2.542 billion during the
nine-month period ending September 30, 2002 from $2.521 billion for the
comparable prior period. The cost of average deposits decreased 162 basis
points to 2.90% during the nine months ended September 30, 2002 primarily due to
the decrease in market rates during this period. 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 $8,755,000 for
the nine months ended September 30, 2002, which represents an increase of
$3,458,000 or 65.3%, from the $5,297,000 provision recorded for the nine months
ended September 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
Total noninterest income increased $10,102,000 or 47.7% to $31,284,000 for the
nine months ended September 30, 2002 compared to $21,182,000 for the nine months
ended September 30, 2001 as a result of the following:
. Service charges on deposits totaled $5,397,000, up $631,000 or 13.2%
from the comparable prior period due to a $370,000 increase in
overdraft and NSF fees and a $274,000 increase in commercial deposit
fees.
. Other service charges, commissions and fees increased $1,535,000 or
19.4% to $9,434,000 from the comparable prior nine-month period.
Within this category, ATM fees were $2,945,000 (up $493,000), fees
from insurance services were $2,563,000 (up $684,000), brokerage fees
were $2,163,000 (up $266,000), commercial service fees were $1,047,000
(down $159,000), and trust fees were $716,000 (up $251,000).
. Mortgage loan servicing resulted in a loss of $776,000, down $931,000
due primarily to an increase in the impairment reserve associated with
the quarterly market valuation of Waypoint's mortgage loan servicing
valuation.
. Gains on securities and derivatives totaled $8,629,000, up $6,416,000,
primarily due to improvements in the fair value of interest rate swaps
totaling $4,612,000.
. Net gains on the sale of loans totaled $2,560,000, down $364,000 from
the prior year's nine-month period on tighter loan sale pricing.
. Other income totaled $6,040,000, up $2,815,000 from the comparable
prior nine-month period. Within this income category, income from Bank
Owned Life Insurance (BOLI) totaled $3,507,000, an increase of
$2,014,000, due to the income on a BOLI investment of $60 million made
in July 2001. Income from joint ventures totaled $1,305,000 during the
current nine-month period, up $2,039,000, due to an equity increase in
a joint venture investment, from a loss of $674,000 in the comparable
prior period. Also, the
27
current nine-month period contained $361,000 in curtailment gains
associated with benefit plan liabilities versus $926,000 in gains in
the comparable prior nine months. Lastly, the current period included
a legal settlement of $227,000 related to a branch relocation suit.
Noninterest Expense
Total noninterest expense increased $5,927,000 or 10.3% to $63,581,000 for the
nine months ended September 30, 2002 from $57,654,000 for the nine months ended
September 30, 2001. The net increase in noninterest expense is attributable to
the following:
. Salaries and benefits expense totaled $33,220,000, up $3,928,000 or
13.4% from the comparable prior nine-month period. Within this expense
category, salaries and wages totaled $19,342,000 (up $1,147,000 due to
staff additions in various business lines and annual merit increases),
incentive and bonus compensation totaled $4,855,000 (up $754,000 on
increased product sales and the continued enhancement of "pay for
performance" compensation practices), stock compensation from the
Recognition and Retention Plan (RRP) totaled $1,569,000 (up $1,569,000
due to the December 2001 adoption of the RRP), ESOP expense totaled
$1,339,000 (up $651,000 due to the adoption of the Waypoint ESOP), and
payroll taxes and employee benefits totaled $5,811,000 (down $188,000
due to the streamlining of benefit plans during 2001).
. Advertising and public relations expense totaled $3,278,000, up
$1,355,000 on increased media advertising and core deposit promotions.
. Amortization of goodwill was $0, down $786,000 due to the elimination
of goodwill amortization in connection with the adoption of SFAS 142
effective January 1, 2002.
. Supplies, telephone, and postage expenses totaled $3,510,000, down
$797,000 primarily on printing costs.
. Other noninterest expense totaled $9,774,000, up $2,271,000 from the
comparable prior period. This expense category included customer
account servicing expenses of $3,278,000 (down $73,000), OTS fees of
$598,000 (up $54,000), director compensation of $1,519,000 (up
$1,037,000 due to the December 2001 adoption of the RRP), charitable
contributions of $1,030,000 (up $401,000 on contributions qualified
for tax credits), and various other expenses totaling $3,349,000 (up
$852,000 including expenses associated with Waypoint's planned
information system conversion).
Provision for Income Taxes
Income tax expense totaled $14,648,000 for the nine months ended September 30,
2002, which resulted in an effective tax rate of 28.6% on income before taxes of
$51,183,000. During the nine months ended September 30, 2001, Waypoint Financial
recorded $13,633,000 of income tax expense, which resulted in an effective tax
rate of 31.9% on income before taxes of $42,672,000. The decrease in the
effective tax rate in the nine-month period ended September 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.
28
VIII. Asset Quality
Loans Receivable, Net
Loans receivable, net, totaled $2.358 billion at September 30, 2002 and $2.462
billion at December 31, 2001. 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. At September
30, 2002, Waypoint Financial had loan commitments and unadvanced loans and lines
of credit totaling $595.1 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.
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
September 30, 2002 December 31, 2001
-------------------------------------
(Amounts in thousands)
Non-accrual residential mortgage loans $ 744 $ 1,345
Non-accrual commercial loans 10,456 6,185
Non-accrual other loans 219 706
------------ ------------
Total non-accrual loans 11,419 8,236
Loans 90 days or more delinquent and still accruing 10,467 14,660
------------ ------------
Total non-performing loans 21,886 22,896
Total foreclosed other assets 166 666
Total foreclosed real estate 399 804
------------ ------------
Total non-performing assets $ 22,451 $ 24,366
============ ============
Total non-performing loans to total loans 0.92% 0.92%
============ ============
Allowance for loan losses to non-performing loans 122.22% 100.76%
============ ============
Total non-performing assets to total assets 0.38% 0.45%
============ ============
Waypoint Financial experienced a decrease of $1.9 million in non-performing
assets during the nine-month period ended September 30, 2002, which includes a
$1.0 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 nine months ended September 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 nine months ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
--------------------------- --------------------------
(Amounts in thousands)
Balance at beginning of period $ 25,201 $ 22,668 $ 23,069 $ 22,586
Provision for loan losses 3,085 1,599 8,755 5,297
Charge-offs:
Residential mortgage loans (196) (271) (759) (475)
Commercial loans (679) (270) (2,188) (2,176)
Consumer and other loans (1,058) (1,265) (3,245) (3,373)
-------- -------- -------- --------
Total charge-offs (1,933) (1,806) (6,192) (6,024)
-------- -------- -------- --------
Recoveries:
Residential mortgage loans 102 - 150 20
Commercial loans 21 86 286 252
Consumer and other loans 273 335 681 751
-------- -------- -------- --------
Total recoveries 396 421 1,117 1,023
-------- -------- -------- --------
Net charge-offs (1,537) (1,385) (5,075) (5,001)
-------- -------- -------- --------
Balance at the end of period $ 26,749 $ 22,882 $ 26,749 $ 22,882
======== ======== ======== ========
Annualized net charge-offs
to average loans outstanding 0.26% 0.22% 0.28% 0.25%
======== ======== ======== ========
Allowance for loan losses as
a percentage of total loans 1.13% 0.90% 1.13% 0.90%
======== ======== ======== ========
Waypoint Financial increased its provision for loan losses during the
three-month and nine-month periods ended September 30, 2002 relative to the
comparable prior periods in response to growth in its commercial and consumer
loan portfolios and to reflect higher inherent losses due to general economic
conditions.
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 September 30, 2002 As of December 31, 2001
-------------------------------------------------
(Dollar amounts in thousands)
% of Total % of Total
Amount Reserves Amount Reserves
--------- ---------- -------- ----------
Residential mortgage loans $ 1,354 5.06% $ 1,867 8.09%
Commercial loans 18,690 69.87 15,722 68.15
Consumer and other loans 4,584 17.14 4,529 19.64
General 2,121 7.93 951 4.12
------- ------- ------- -------
Total $26,749 100.00% $23,069 100.00%
======= ======= ======= =======
30
Item 3 Market Risk
Reference Item 2, Section III.
Item 4 Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures within 90 days of the filing date of this
quarterly report, and, based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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.
99.3 Certification of the Company's Chief Executive
Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as adopted
pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
99.4 Certification of the Company's Chief Financial
Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as adopted
pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
1. Incorporated by reference Report on Form 8-K
dated August 22, 2002, which announced the
completion of the repurchase of 1,896,000 shares
authorized February 22, 2002 and the
authorization to repurchase up to an additional
1,800,000 shares or approximately 5% of the
Registrant's outstanding shares.
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.,
Chairman and Chief Executive Officer
By /s/ James H. Moss
-----------------
James H. Moss,
Executive Vice President
and Chief Financial Officer
Dated: November 13, 2002
33