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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, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to_______________________
Commission File Number: 0-22399
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. 33,666,050 shares of stock,
par value of $.01 per share, outstanding at September 30, 2003.
CONTENTS
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition................................. 4
Consolidated Statements of Income.............................................. 5
Consolidated Statements of Shareholders' Equity................................ 6
Consolidated Statements of Cash Flows.......................................... 7-8
Notes to Consolidated Financial Statements..................................... 9-17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
I. Forward-Looking Statements.............................................. 18
II. Critical Accounting Policies............................................ 18-19
III. Market Risk and Interest Rate Sensitivity Management.................... 19-20
IV. Liquidity............................................................... 20
V. Capital Resources....................................................... 20-21
VI. Results of Operations
Comparison for the Three-Month Periods Ended September 30, 2003 and September 30, 2002
Net Income.......................................................... 21
Net Interest Income................................................. 21-25
Noninterest Income.................................................. 25-26
Noninterest Expense................................................. 27
Provision for Income Taxes.......................................... 27
Comparison for the Nine-Month Periods Ended September 30, 2003 and September 30, 2002
Net Income.......................................................... 28
Net Interest Income................................................. 28
Noninterest Income.................................................. 28
Noninterest Expense................................................. 28-29
Provision for Income Taxes.......................................... 29
VII. Financial Condition
Marketable Securities............................................... 29
Loans Receivable, Net............................................... 29
Loan Commitments.................................................... 29
Loan Quality........................................................ 29
Non-Performing Assets............................................... 30
Allowance for Loan Losses........................................... 30
Allocation of the Allowance for Loan Losses......................... 31
Deposits............................................................ 31
Other Borrowings.................................................... 31
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 31
Item 4. Controls and Procedures............................................. 31
Part II. Other Information........................................................... 32
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures............................................................................ 33
Exhibits - Certifications............................................................. 34-37
Part I. Financial Information.
2
Part 1, Item 1 Financial Statements (Unaudited)
As discussed in Note 2, this filing contains restated financial statements for
prior periods. The accompanying consolidated statement of income for the nine
months ended September 30, 2003 includes restated balances for the six months
ended June 30, 2003. Also, the accompanying consolidated statements of income
for the three and nine months ended September 30, 2002 and the consolidated
statement of financial condition as of December 31, 2002, and December 31, 2001
have been restated to reflect a correction of the accounting for certain benefit
plans. These plans include primarily indexed retirement benefit plans for
several current and former officers and directors. These plans were implemented
in conjunction with bank-owned life insurance programs sold and administered by
an outside party. Prior to the restatement, Waypoint Financial accounted for
these plans under a matching methodology thereby accruing the expense related to
the benefit plans in the same period as the revenue associated with the related
life insurance assets in the bank-owned life insurance programs. During July
2003, the Office of the Comptroller of the Currency released a bank accounting
advisory that included guidance related to the accounting for indexed retirement
benefit plans. Management initiated an internal review of its indexed retirement
benefit plans and determined that the matching methodology for these plans is
not in accordance with accounting principles generally accepted in the United
States of America. Management concluded that these plans should be accounted for
under Accounting Principles Board Opinion 12, as amended by SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS
106 requires that the net present value of the benefit payments be accrued over
the service period of the individual and be fully accrued at full eligibility
date. The total liability for these plans at September 30, 2003 was $8.6
million. The restated amounts accrued under these plans were $7.9 million at
December 31, 2002, and $7.0 million at December 31, 2001. These restated amounts
are reflected in other liabilities in the accompanying consolidated statements
of financial condition. Waypoint Financial recognized associated salaries and
benefits expense restated for these plans totaling $297,306 during the three
month periods ended September 30, 2002, and $1,062,618 and $891,917 for the nine
month periods ended September 30, 2003 and 2002, respectively. No restatement
adjustment was required for the three month period ended September 30, 2003.
These restated amounts are included in salaries and benefits expense in the
accompanying consolidated statements of income
As a result of the cumulative effect of the restatement, retained has been
reduced by $3,985,000, $3,789,000 and $3,501,000 as of July 1, 2003, December
31, 2002, and December 31, 2001, respectively.
(Balance of this page is intentionally left blank)
3
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, December 31,
2003 2002
---------- ----------
(In thousands, except share data)
(Unaudited)
(RESTATED)
ASSETS
Cash and cash equivalents $ 117,891 $ 96,088
Marketable securities held-to-maturity 50,000 --
Marketable securities available-for-sale 2,617,038 2,792,112
Loans receivable, net 2,390,740 2,310,106
Loans held for sale, net 30,002 30,328
Loan servicing rights 2,644 3,167
Investment in real estate and other joint ventures 20,091 14,811
Premises and equipment, net of accumulated
depreciation of $43,833 and $41,062 48,835 48,826
Accrued interest receivable 25,166 26,585
Goodwill 17,808 10,302
Other intangible assets 2,815 1,676
Income taxes receivable -- 72
Deferred tax asset, net 3,592 --
Other assets 103,196 90,940
----------- -----------
Total assets $ 5,429,818 $ 5,425,013
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 2,630,393 $ 2,453,390
Other borrowings 2,273,446 2,414,480
Escrow 1,250 3,348
Accrued interest payable 12,034 10,295
Postretirement medical benefit obligation 2,306 2,310
Deferred tax liability -- 3,683
Income taxes payable 3,798 --
Other liabilities 49,032 55,523
----------- -----------
Total liabilities 4,972,259 4,943,029
----------- -----------
Trust Preferred Securities 43,849 29,102
Preferred stock, 10,000,000 shares authorized
but unissued
Common stock, $ .01 par value, authorized
100,000,000 shares, 42,675,765 shares issued
and 33,666,050 outstanding at September 30, 2003,
42,527,490 shares issued and 36,437,316 shares
outstanding at December 31, 2002 425 404
Paid in capital 352,049 315,636
Retained earnings 236,643 245,388
Accumulated other comprehensive (loss) income (85) 11,710
Employee stock ownership plan (14,460) (14,460)
Recognition and retention plans (6,723) (6,977)
Treasury stock, 9,009,715 shares at September 30, 2003
and 6,090,174 shares at December 31, 2002 (154,139) (98,819)
----------- -----------
Total stockholders' equity 413,710 452,882
----------- -----------
Total liabilities and stockholders' equity $ 5,429,818 $ 5,425,013
=========== ===========
See accompanying notes to consolidated financial statements.
4
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands, except share data)
(Unaudited)
(RESTATED) (RESTATED)
Interest Income:
Loans $ 36,447 $ 40,833 $ 111,039 $ 125,824
Marketable securities and interest-earning cash 24,430 29,154 80,197 85,800
--------- --------- --------- ---------
Total interest income 60,877 69,987 191,236 211,624
--------- --------- --------- ---------
Interest Expense:
Deposits and escrow 13,272 18,089 41,221 55,317
Borrowed funds 20,217 21,370 61,739 64,072
--------- --------- --------- ---------
Total interest expense 33,489 39,459 102,960 119,389
--------- --------- --------- ---------
Net interest income 27,388 30,528 88,276 92,235
Provision for loan losses 2,014 3,085 6,499 8,755
--------- --------- --------- ---------
Net interest income after provision for loan
losses 25,374 27,443 81,777 83,480
--------- --------- --------- ---------
Noninterest Income:
Banking service and account fees 4,307 3,403 11,620 9,389
Financial services fees 2,795 1,811 7,188 5,447
Residential mortgage banking 3,031 (77) 5,631 1,768
Bank-owned life insurance 1,081 1,126 3,369 3,507
Gain on securities and derivatives, net 881 4,353 6,471 8,629
Other (600) 715 (2,528) 2,550
--------- --------- --------- ---------
Total noninterest income 11,495 11,331 31,751 31,290
--------- --------- --------- ---------
Noninterest Expense:
Salaries and benefits 12,515 11,178 35,751 33,520
Equipment expense 1,813 1,779 5,433 5,338
Occupancy expense 1,756 1,641 5,507 4,777
Marketing 1,374 1,097 3,680 3,278
Amortization of intangible assets 207 490 518 1,470
Outside services 1,274 1,203 3,853 3,460
Communications and supplies 1,230 1,186 3,852 3,510
Other 2,894 2,979 9,123 8,501
--------- --------- --------- ---------
Total noninterest expense 23,063 21,553 67,717 63,854
--------- --------- --------- ---------
Income before income taxes 13,806 17,221 45,811 50,916
Income tax expense 3,946 4,930 13,219 14,544
--------- --------- --------- ---------
Net Income $ 9,860 $ 12,291 $ 32,592 $ 36,372
========= ========= ========= =========
Basic earnings per share $ 0.31 $ 0.33 $ 0.99 $ 0.96
========= ========= ========= =========
Diluted earnings per share $ 0.30 $ 0.33 $ 0.96 $ 0.94
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
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(LOSS)
------ -------- -------- ------------- --------- ----------- -------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Balance at December 31, 2001
(RESTATED) $402 $312,009 $212,099 $ (280) $(15,640) $ (9,954) $ (15,922) $482,714
Net income (RESTATED) 36,372 36,372 $ 36,372
Dividends paid at $.29 per
share (11,204) (11,204)
Exercised stock options
(205,507 shares) 2 1,149 1,151
Unrealized gains on
securities, net of
income tax of $8,615 15,999 15,999 15,999
--------
Comprehensive income $ 52,371
========
Earned portion of RRP (135) (135)
Treasury stock purchased
(3,814,566 shares) (61,058) (61,058)
Dividend reinvestment plan, net (288) (288)
---- -------- -------- -------- -------- -------- --------- --------
Balance at September 30, 2002
(RESTATED) $404 $312,870 $237,267 $ 15,719 $(15,640) $(10,089) $ (76,980) $463,551
==== ======== ======== ======== ======== ======== ========= ========
Balance at December 31, 2002
(RESTATED) $404 $315,636 $245,388 $ 11,710 $(14,460) $(6,977) $ (98,819) $452,882
Net income (RESTATED) 32,592 32,592 $ 32,592
Dividends paid at $.33 per
share (10,820) (10,820)
Exercised stock options
(514,748 shares) 5 4,998 5,003
5% Common stock dividend
(2,027,332 shares at fair
value) 16 30,466 (30,517) (35)
Unrealized losses on
securities, net of
income tax benefit of $7,760 (11,795) (11,795) (11,795)
--------
Comprehensive income $ 20,797
========
Earned portion of RRP 254 254
Tax benefit on exercised
options 1,258 1,258
Treasury stock purchased
(3,348,398 shares) (55,320) (55,320)
Dividend reinvestment plan, net (309) (309)
---- -------- -------- -------- -------- -------- --------- --------
Balance at September 30, 2003 $425 $352,049 $236,643 $ (85) $(14,460) $ (6,723) $(154,139) $413,710
==== ======== ======== ======== ======== ======== ========= ========
See accompanying notes to consolidated financial statements.
6
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended
September 30,
-----------------------------
2003 2002
----------- -----------
(In thousands)
(Unaudited)
(RESTATED)
Cash flows from operating activities:
Net income $ 32,592 $ 36,372
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 6,499 8,755
Net depreciation, amortization and accretion 7,274 5,510
Loans originated for sale (385,418) (229,013)
Proceeds from sales of loans originated for sale 392,187 260,370
Origination of loan servicing rights (1,037) (791)
Net gain on loans and securities (13,600) (11,189)
Gain on the sale of foreclosed real estate (157) (447)
Loss (Income) from joint ventures 3,219 (1,048)
Decrease in accrued interest receivable 1,419 3,439
Increase in accrued interest payable 1,738 317
Amortization of intangibles 518 1,469
Earned ESOP expense 2,177 1,339
Earned RRP expense 1,733 2,228
Loss on the sale of premises and equipment 345 76
Provision for deferred income tax 670 9,838
Increase in income taxes payable 3,870 1,220
Other, net 3,903 (4,627)
----------- -----------
Net cash provided by operating activities 57,932 83,818
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and principal reductions
of marketable securities 2,906,185 1,033,335
Proceeds from sales of marketable securities available for sale 460,400 692,188
Purchase of marketable securities held to maturity (50,000) --
Purchase of marketable securities available for sale (3,193,947) (1,906,140)
Loan (originations) net of principal payments on loans (106,130) 90,780
Investments in real estate held for investment and other joint
ventures (8,177) (2,099)
Proceeds on real estate and premises and equipment 1,904 2,263
Purchases of premises and equipment, net (4,763) (4,636)
Net proceeds from banking and other acquisitions 15,159 --
----------- -----------
Net cash provided by (used in) investing activities 20,631 (94,309)
7
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
For the Nine Months Ended
September 30,
-------------------------
2003 2002
--------- ---------
(In thousands)
(Unaudited)
(RESTATED)
Cash flows from financing activities:
Proceeds from deposits 140,683 8,246
Proceeds from other borrowings 340,000 584,000
Payments and maturities of other borrowings (528,401) (905,000)
Net increase in other short-term borrowings 39,818 370,651
Net decrease in escrow (2,098) (3,128)
Net proceeds from issuance of Trust Preferred Securities 14,719 --
Cash dividends (10,820) (11,204)
Cash in lieu of stock dividend (35) --
Dividend reinvestment plan (309) (288)
Payments to acquire treasury stock (55,320) (61,058)
Proceeds from the exercise of stock options 5,003 1,151
--------- ---------
Net cash (used in) financing activities (56,760) (16,630)
--------- ---------
Net increase (decrease) in cash and cash equivalents 21,803 (27,121)
Cash and cash equivalents at beginning of period 96,088 116,583
--------- ---------
Cash and cash equivalents at end of period $ 117,891 $ 89,462
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 101,221 $ 119,072
Income taxes 7,954 13,541
Cash received during the period for:
Income taxes $ 255 $ --
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 1,368 $ 1,377
Increase in securities in process -- 444,337
See accompanying notes to financial statements.
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)
(1) Summary of Significant Accounting Policies
The Consolidated Financial Statements include the accounts of Waypoint Financial
Corp. ("Waypoint Financial", "the Company", or "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 Group, Inc., 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,
2003 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2003 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 51 through 83 of the amended 2002 Annual Report on Form
10-K/A.
Stock-Based Compensation
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148). SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation" (SFAS 123) to provide alternative
methods of transition for an entity that voluntarily changes to the fair
value-based method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of SFAS 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Waypoint Financial
has not elected to change to the fair-value method of accounting for stock-based
compensation but has complied with the disclosure requirements herein.
Waypoint Financial accounts for Stock Option Plans under Accounting Principles
Board Opinion No. 25, and, accordingly, compensation expense generally has not
been recognized in the accompanying financial statements. Had compensation
expense for these plans been recorded in the financial statements of Waypoint
Financial consistent with the fair value provisions of Statement 123, net income
and net income per share would have been reduced to the following pro-forma
amounts (in thousands, except per-share data):
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)
For the three month periods For the nine month periods
ended September 30, ended September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net Income
(RESTATED) (RESTATED)
As reported $9,860 $12,291 $32,592 $36,372
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, (1) net
of related tax effects
(275) (580) (852) (1,743)
--------- --------- --------- ---------
Pro forma
$9,585 $11,711 $31,740 $34,629
========= ========= ========= =========
Basic earnings per share
As reported $0.31 $0.33 $0.99 $0.96
Pro forma $0.30 $0.32 $0.97 $0.92
Diluted earnings per share
As reported $0.30 $0.33 $0.96 $0.94
Pro forma $0.29 $0.31 $0.94 $0.89
- -------------------
(1) All awards refers to awards granted, modified, or settled in fiscal
periods beginning December 15, 1994 - that is, awards for which the
fair value was required to be measured under Statement 123.
(2) Restatement
The accompanying consolidated statements of income for the three and nine months
ended September 30, 2002 and the consolidated statement of financial condition
as of December 31, 2002 have been restated to reflect a correction of the
accounting for certain benefit plans. Please refer to Notes 1 and 16 in the
Notes to Consolidated Financial Statements of the Company's Form 10-K/A for the
year ended December 31, 2002 for detailed discussions regarding the restatement
adjustments.
The following tables represent the impact of the restatement on balances as
reported, adjusted and restated for the periods described above.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2002
-------------------------------------------
AS REPORTED ADJUSTED RESTATED
----------- -------- --------
Deferred tax liability $ 6,106 $ (2,423) $ 3,683
Other liabilities 49,311 6,212 55,523
Total liabilities 4,939,240 3,789 4,943,029
Retained earnings 249,177 (3,789) 245,388
Total stockholders' equity 456,671 (3,789) 452,882
Total liabilities and stockholders' equity 5,425,013 0 5,425,013
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 2001
-------------------------------------------
AS REPORTED ADJUSTED RESTATED
----------- -------- --------
Deferred tax asset $ 1,516 $ 2,238 $ 3,754
Total assets 5,373,734 2,238 5,375,981
Other liabilities 37,801 5,739 43,540
Total liabilities 4,887,528 5,739 4,893,267
Retained earnings 215,600 (3,501) 212,099
Total stockholders' equity 486,215 (3,501) 482,714
Total liabilities and stockholders' equity 5,373,743 2,238 5,375,981
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)
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------
AS REPORTED ADJUSTED RESTATED
----------- -------- --------
Salaries and benefits $ 11,207 $ (29) $ 11,178
Total noninterest expense 21,582 (29) 21,553
Income before income taxes 17,192 29 17,221
Income tax expense 4,919 11 4,930
Net income 12,273 18 12,291
Basic earnings per share $ .33 $ .00 $ .33
Diluted earnings per share .33 .00 .33
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------
AS REPORTED ADJUSTED RESTATED
----------- -------- --------
Salaries and benefits $ 33,252 $ 268 $ 33,520
Total noninterest expense 63,586 268 63,854
Income before income taxes 51,184 (268) 50,916
Income tax expense 14,648 (104) 14,544
Net income 36,536 (164) 36,372
Basic earnings per share $ .96 $ .00 $ .96
Diluted earnings per share .94 .00 .94
The Company's consolidated statement of income for the nine months ended
September 30, 2003 includes restated balances for the six months ended June 30,
2003. The restatement adjustments for the six months ended June 30, 2003 are
presented in Note 2 of the Notes to the Consolidated Financial Statements of the
Company's amended report on Form 10Q/A for the quarter ended June 30, 2003.
(3) Recently Issued Accounting Guidance
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to interests in variable interest entities created after January 31,
2003. For public enterprises such as Waypoint Financial, with an interest in a
variable interest entity created before February 1, 2003, the Interpretation is
applied to the enterprise no later than the end of the first interim or annual
reporting period ending after December 15, 2003. The Interpretation requires
certain disclosures in financial statements issued after January 31, 2003 if it
is reasonably possible that an enterprise will consolidate or disclose
information about variable interest entities when the Interpretation becomes
effective. The application of this Interpretation is not expected to result in
consolidation of any variable interest entities.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" for certain
decisions made by the FASB Derivatives Implementation Group. In particular, SFAS
149 (1)
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)
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an underlying to
conform it to language used in FASB Interpretation No. 45, and (4) amends
certain other existing pronouncements. This Statement is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. In addition, most provisions of SFAS 149 are to
be applied prospectively. Waypoint Financial's adoption of SFAS 149 did not have
a material impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150).
SFAS 150 establishes standards for the classification and measurement of
financial instruments with characteristics of both liabilities and equity. As of
the date of this report, the FASB has deferred indefinitely the effective date
of this standard as it relates to Trust Preferred Securities. Waypoint Financial
believes its adoption of SFAS 150 will result in a reclassification of the Trust
Preferred Securities to liabilities in the consolidated statements of financial
condition. Payments on the Trust Preferred Securities continue to be classified
as interest expense in the consolidated statements of income.
(4) Earnings Per Share
The following table shows the calculation of basic and diluted earnings per
share.
Per Share
Income Shares Amount
--------- ---------- -------
For the three months ended September 30, 2003:
Basic earnings per share:
Income available to common shareholders $ 9,860 32,070,345 $ 0.31
Dilutive effect of employee and director stock options 1,065,572 (0.01)
--------- ---------- -------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 9,860 33,135,917 $ 0.30
========= ========== ========
For the three months ended September 30, 2002 (RESTATED):
Basic earnings per share:
Income available to common shareholders $ 12,291 36,731,453 $ 0.33
Dilutive effect of employee and director stock options 1,039,540 --
---------- ---------- -------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 12,291 37,770,993 $ 0.33
========== ========== ========
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)
Per Share
Income Shares Amount
--------- ---------- -------
For the nine months ended September 30, 2003:
Basic earnings per share:
Income available to common shareholders $ 32,592 32,847,937 $ 0.99
Dilutive effect of employee and director stock options 1,005,477 (0.03)
---------- ---------- --------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 32,592 33,853,414 $ 0.96
========== ========== ========
For the nine months ended September 30, 2002 (RESTATED):
Basic earnings per share:
Income available to common shareholders $ 36,372 37,733,575 $ 0.96
Dilutive effect of employee and director stock options 1,035,566 (0.02)
---------- ---------- --------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 36,372 38,769,141 $ 0.94
========== ========== ========
Excluded from the computation of diluted earnings per share were anti-dilutive
options of 21,605 shares and 83,021 shares for the three months ended September
30, 2003 and September 30, 2002, respectively, and 68,535 shares and 83,021
shares for the nine months ended September 30, 2003 and September 30, 2002,
respectively, because the exercise prices were greater than the average market
price of the common shares during the respective period.
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)
(Unaudited)
(5) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for held for maturity and available-for-sale securities by
major security type were as follows:
As of September 30, 2003
-----------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Held to maturity:
U.S. Government and agencies $ 50,000 $ 31 $ -- $ 50,031
---------- ---------- ---------- ----------
Total securities held to maturity $ 50,000 $ 31 $ -- $ 50,031
========== ========== ========== ==========
Available for sale:
U.S. Government and agencies $ 372,454 $ 2,365 $ (2,149) $ 372,670
Corporate bonds 66,350 -- (6,287) 60,063
Municipal securities 83,339 3,671 (1,050) 85,960
FHLB stock 1,935 -- -- 1,935
Equity securities 267,892 4,534 (844) 271,582
Asset-backed securities 16,637 -- (24) 16,613
Mortgage-backed securities:
Agency PC's & CMO's 938,148 5,925 (5,406) 938,667
Private issue CMO's 868,790 2,040 (1,282) 869,548
---------- ---------- ---------- ----------
Total mortgage-backed securities 1,806,938 7,965 (6,688) 1,808,215
---------- ---------- ---------- ----------
Total securities available for sale $2,615,545 $ 18,535 $ (17,042) $2,617,038
========== ========== ========== ==========
As of December 31, 2002
----------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for sale:
U.S. Government and agencies $ 337,316 $ 7,469 $ (16) $ 344,769
Corporate bonds 78,089 78 (10,951) 67,216
Municipal securities 94,235 4,475 -- 98,710
FHLB stock 109,807 -- -- 109,807
Equity securities 125,173 6,260 (507) 130,926
Asset-backed securities 43,677 1,167 -- 44,844
Mortgage-backed securities:
Commercial 23,599 803 -- 24,402
Agency PC's & CMO's 1,054,131 7,948 (1,229) 1,060,850
Private issue CMO's 905,110 5,976 (498) 910,588
---------- ---------- ---------- ----------
Total mortgage-backed securities 1,982,840 14,727 (1,727) 1,995,840
---------- ---------- ---------- ----------
Total securities available for sale $2,771,137 $ 34,176 $ (13,201) $2,792,112
========== ========== ========== ==========
14
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,
2003 2002
----------- -----------
Residential mortgage loans (principally conventional):
Secured by 1-4 family residences $ 382,757 $ 697,505
Construction (net of undistributed
portion of $36,180 and $27,535) 24,705 23,636
----------- -----------
407,462 721,141
Less:
Unearned discount 8 95
Net deferred loan origination fees 2,585 3,616
----------- -----------
Total residential mortgage loans 404,869 717,430
----------- -----------
Commercial loans:
Commercial real estate 628,290 533,088
Commercial business 344,857 307,655
Construction and site development
(net of undistributed portion of
$58,423 and $15,974) 96,456 53,774
----------- -----------
1,069,603 894,517
Less:
Net deferred loan origination fees 1,845 1,308
----------- -----------
Total commercial loans 1,067,758 893,209
----------- -----------
Consumer and other loans:
Manufactured housing 96,037 106,098
Home equity and second mortgage 556,003 360,102
Indirect automobile 163,197 138,530
Other 109,227 98,887
----------- -----------
924,464 703,617
Plus:
Net deferred loan origination fees (1,156) (2,489)
Dealer reserve 24,096 25,845
----------- -----------
Total consumer and other loans 947,404 726,973
----------- -----------
Less: Allowance for loan losses 29,291 27,506
----------- -----------
Loans receivable, net $ 2,390,740 $ 2,310,106
=========== ===========
Loans having a carrying value of $501,354,000 were pledged as collateral for
FHLB advances at September 30, 2003.
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. Mortgage loans
serviced for others are not included in the accompanying consolidated statements
of financial condition. The unpaid principal balances of these loans totaled
$352,735,000 at September 30, 2003 and $476,990,000 at December 31, 2002.
15
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, 2003 and 2002.
Waypoint Financial sold mortgage loans totaling $385,743,000 and $257,810,000
during the nine-month periods ended September 30, 2003 and September 30, 2002,
respectively. Waypoint Financial did not exchange loans for mortgage-backed
securities during the nine-month periods ended September 30, 2003 and 2002.
Investor custodial balances maintained in connection with the foregoing mortgage
servicing rights totaled $4,902,000 at September 30, 2003 and $10,831,000 at
December 31, 2002.
(7) Deposits
The following table presents the composition of deposits as of the dates
indicated:
September 30, December 31,
2003 2002
---------- ----------
Savings $ 249,715 $ 250,780
Time 1,404,178 1,452,973
Transaction 545,540 379,211
Money market 430,960 370,426
---------- ----------
Total deposits $2,630,393 $2,453,390
========== ==========
(8) Other Borrowings
The following table presents the composition of Waypoint Financial's other
borrowings as of the dates indicated:
September 30, December 31,
2003 2002
---------- ----------
FHLB advances $1,966,362 $2,041,558
Repurchase agreements 307,084 372,897
Other -- 25
---------- ----------
Total other borrowings $2,273,446 $2,414,480
========== ==========
(10) Acquisition
On September 26, 2003, Waypoint Financial completed the acquisition of two
banking branches located in Chambersburg, Pennsylvania. As a result of this
acquisition, Waypoint Financial acquired loans totaling $4,473,000, deposits
totaling $29,385,000, and goodwill totaling $3,031,000. Waypoint Financial
accounted for this transaction as the acquisition of a business. This
acquisition is not expected to have a material impact on Waypoint Financial's
results of operations. Accordingly, disclosures regarding pro-forma results of
operations have been omitted.
(11) Reclassifications
Certain amounts in the 2002 condensed financial statements and notes have been
reclassified to conform to the 2003 presentation.
16
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)
(12) Stock Dividend
Waypoint Financial declared a 5% stock dividend on July 17, 2003, which was
distributed August 15, 2003 to shareholders of record on August 1, 2003.
Accordingly, all share and per-share information reported herein has been
adjusted to reflect the impact of this stock dividend. In addition,
shareholders' equity accounts have been adjusted to reflect the issuance of
2,027,332 shares in connection with this stock dividend.
(Balance of this page is intentionally left blank.)
17
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
amended 2002 Annual Report on Form 10-K/A. 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) could vary sufficiently to cause a material effect on Waypoint
Financial'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
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. Commercial loans are evaluated individually to determine the
required allowance for loan losses and to evaluate for potential impairment of
such loans under SFAS 114.
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
18
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.
The allowance review methodology is based on information known at the time of
the review. Changes in factors underlying the assessment could have a material
impact on the amount of the allowance that is necessary and the amount of
provision to be charged against earnings. Such changes could impact future
results.
Goodwill. 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. Changes in assumptions and results due to economic conditions,
industry factors and reporting unit performance and cash flow projections could
result in different assessments of the fair values of reporting units and could
result in impairment charges in the future.
Benefit Plans. Waypoint Financial maintains compensation and benefit plans for
employees and directors. Certain benefit plans require the use of estimates that
are highly sensitivity to underlying assumptions. Changes in interest rates,
mortality experience, health care costs, or other underlying assumptions could
significantly change estimated plan liabilities and affect Waypoint Financial's
financial condition and results of operations.
Income Taxes. Waypoint Financial accounts for income taxes using the asset and
liability method. The objective of the asset and liability method is to
establish deferred tax assets and liabilities for temporary differences between
the financial reporting and tax basis of Waypoint Financial's assets and
liabilities based on enacted tax rates expected to be in effect when such
amounts are realized or settled. Future actual tax rates when temporary
differences are realized in income or expense could be different than the
expected tax rates used by Waypoint Financial.
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, 2003 As of December 31, 2002
---------------------------------- -----------------------------------
Change in Percent change Net Percent change Net
interest rates in net interest portfolio In net interest portfolio
(In basis points) income (1) ratio (2) income (1) ratio (2)
-------------------------- ---------------- ---------------- ----------------- ----------------
+300 8.22% 5.66% 6.95% 5.29%
+200 5.94 5.58 5.22 5.91
+100 3.26 6.18 3.62 6.20
0 -- 6.36 -- 6.30
(100) (4.54) 5.85 (3.45) 5.27
(200) (9.34) 5.36 (6.74) 3.72
(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
19
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. As of these dates, the net portfolio ratio fell within the "minimal
risk" category established under OTS guidelines for interest rate risk
measurement.
IV. Liquidity
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. Waypoint Financial also 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, 2003, marketable securities decreased
$125.1 million, which was offset by a decrease of $141.0 million in borrowings.
Loans receivable, net increased by $80.6 million and cash and cash equivalents
increased $21.8 million, funded by growth in deposits totaling $177.0 million.
Waypoint Financial also used its excess funding to acquire treasury stock
totaling $55.3 million. At September 30, 2003, Waypoint Financial had $1,966.4
million in FHLB loans outstanding, a decrease of $75.2 million during the nine
months then ended.
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, 2003 and September 30, 2002.
The sources of liquidity previously discussed are deemed by management to be
sufficient to fund outstanding loan commitments and meet other obligations.
V. Capital Resources
Stockholders' equity at September 30, 2003, totaled $413.7 million compared to
$452.9 million at December 31, 2002, a decrease of $39.2 million. Stockholders'
equity was increased by net income of $32.6 million and by stock plan activity
totaling $6.4 million. Offsetting these increases were treasury stock purchases
of $55.3 million, cash dividends of $10.8 million, a decrease in Waypoint
Financial's unrealized gains on available for sale securities of $11.8 million,
net of tax, and $.3 million in dividend reinvestment activity.
Under OTS regulations a savings association must satisfy three minimum capital
requirements: Total capital, Tier 1 capital to risk weighted assets and Tier 1
capital to average assets. Savings associations must meet all of the standards
in order to comply with the capital requirements. At September 30, 2003, and
December 31, 2002, 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, 2003 Amount Ratio Amount Ratio Amount Ratio
------------------------ ------------- ----- -------- ----- --------- -----
(in thousands) (in thousands) (in thousands)
Total Capital
(to Risk Weighted Assets) $429,540 12.9% $265,381 8.0% $331,726 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 398,588 12.0 132,691 4.0 199,036 6.0
Tier 1 Capital
(to Average Assets) 398,588 7.4 215,549 4.0 269,437 5.0
20
As of December 31, 2002
-----------------------
(RESTATED)
Total Capital
(to Risk Weighted Assets) $437,843 13.6% $257,395 8.0% $321,744 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 407,730 12.7 128,697 4.0 193,046 6.0
Tier 1 Capital
(to Average Assets) 407,730 7.6 210,333 4.0 262,916 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, 2003 follows:
TIER 1
TANGIBLE (CORE) RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- ---------
GAAP capital at Waypoint Financial $ 413,710 $ 413,710 $ 413,710
Capital attributed to affiliates (1,224) (1,224) (1,224)
--------- --------- ---------
GAAP capital at Waypoint Bank 412,486 412,486 412,486
Capital adjustments:
Unrealized gains, net of taxes, on securities available for sale (639) (639) (639)
Allowance for loan losses -- -- 29,291
Certain intangible assets (12,960) (12,960) (12,960)
Disallowed servicing assets (299) (299) (299)
Allowable unrealized gains, net of taxes, on equity securities available
for sale -- -- 1,661
--------- --------- ---------
Regulatory capital at Waypoint Bank $ 398,588 $ 398,588 $ 429,540
========= ========= =========
VI. Results of Operations
COMPARISON FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER
30, 2002
NET INCOME
Net income for the three months ended September 30, 2003 was $9.9 million or
$.30 per share as compared to $12.3 million or $.33 per share for the three
months ended September 30, 2002. The decrease in net income per share of $2.4
million resulted primarily from reduced net interest income, which is discussed
below. Waypoint's earnings per share was favorably impacted by treasury stock
repurchases during the twelve months ended September 30, 2003, which
substantially reduced the amount of equivalent shares outstanding. The
calculation of earnings per share is presented in Note 5 of the accompanying
Notes to Consolidated Financial Statements. 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 $27.4 million for
the quarter ended September 30, 2003, as compared to $30.5 million recorded
during the quarter ended September 30, 2002. The decrease in net interest income
came primarily from the effects of record high prepayments on mortgage loans and
mortgage-backed securities. Waypoint experienced a negative impact on its margin
from net premium amortization of $1.2 million as compared to net discount
accretion of $1.7 million for the quarter ended September 30, 2002. Waypoint
believes that its exposure to rapid premium amortization will be significantly
reduced going forward based on its remaining investment mix and slowing
prepayment speeds. As part of its strategic initiatives, Waypoint also reduced
its
21
investment portfolio and repaid certain short term borrowings, which had a
negative impact on net interest income and the margin. As a result of these
various impacts, the net interest margin ratio (tax-equivalent) decreased to
2.28% for the quarter ended September 30, 2003, as compared to 2.56% for the
quarter ended September 30, 2002.
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 and nine-month periods ended September 30, 2003 and
September 30, 2002. Table 2 presents a rate-volume analysis of changes in net
interest income on a tax-equivalent basis for the three and nine-month periods
ended September 30, 2003 and September 30, 2002.
Provision expense for loan losses decreased to $2.0 million for the current
quarter relative to $3.1 million recorded for the quarter ended September 30,
2002. The provision for loan losses decreased for the quarter ended September
30, 2003 versus the comparable prior period, reflecting in part an improvement
in economic conditions within Waypoint Financial's lending markets during the
twelve months ended September 30, 2003. Waypoint Financial's provision expense
and allowance for loan losses are discussed in further detail in the Asset
Quality section of this report.
(Balance of this page is intentionally blank)
22
TABLE 1a AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
For the three months ended,
---------------------------------------------------------------------
September 30, 2003 September 30, 2002
--------------------------------- ----------------------------------
Rate
as of Average Average
September 30, Average Yield/ Average Yield/
30, 2003 Balance Interest(2) Cost Balance Interest(2) Cost
------------- ---------- ----------- ------- --------- ----------- -------
(All dollar amounts are in thousands)
Assets:
Interest-earning assets:
Loans, net(1)(5) 5.74% $2,454,060 $36,646 5.90% $2,389,203 $41,063 6.81%
Marketable securities 4.07 2,669,174 25,270 3.59 2,565,259 29,615 4.68
Other interest-earning assets 0.87 81,321 174 0.90 43,981 232 2.14
---- ---------- ------- ---- ---------- ------- ----
Total interest-earning assets 4.82 5,204,555 62,090 4.90 4,998,443 70,910 5.68
---- ------- ---- ------- ----
Noninterest-earning assets 306,916 208,040
---------- ----------
Total assets $5,511,471 $5,206,483
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits 0.42% $ 256,108 $ 267 0.41% $ 246,138 $ 703 1.11%
Time deposits 3.10 1,403,613 11,007 3.11 1,512,463 15,699 4.04
Transaction and money market deposits 0.91 937,199 1,992 0.85 772,044 1,682 0.86
Escrow 1.09 2,798 6 0.87 3,278 5 0.63
Borrowed funds 3.84 2,463,967 20,217 3.28 2,157,652 21,370 3.88
---- ---------- ------- ---- --------- ------- ----
Total interest-bearing liabilities 2.88 5,063,685 33,489 2.60 4,691,575 39,459 3.31
---- ------- ---- ------- ----
Noninterest-bearing liabilities 46,552 50,441
---------- ----------
Total liabilities 5,110,237 4,742,016
Stockholders' equity 401,234 464,467
---------- ----------
Total liabilities and Stockholders' equity $5,511,471 $5,206,483
========== ==========
Net interest income, tax-equivalent 28,601 31,451
Interest rate spread, tax-equivalent(3) 1.94% 2.30% 2.37%
==== ==== ====
Net interest-earning assets $ 140,870 $ 306,868
========== ==========
Net interest margin, tax-equivalent(4) 2.28% 2.57%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.03 x 1.07 x
==== ====
Adjustment to reconcile tax-equivalent
net interest income to net interest income (1,213) (923)
------- -------
Net interest income before provision for
loan losses $27,388 $30,528
======= =======
- ----------------
(1) Includes net income (expense) recognized on deferred loan fees and costs of
$620,000 for the three months ended September 30, 2003, and $(133,000) for
the three months ended September 30, 2002.
(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.
(5) Includes loans on nonaccrual status and loans held for sale.
23
TABLE 1b - AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
For the nine months ended,
---------------------------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------------------ -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest(2) Cost Balance Interest(2) Cost
---------- ----------- ------- ---------- ----------- -------
(All dollar amounts are in thousands)
Assets:
Interest-earning assets:
Loans, net(1)(5) $2,412,371 $111,584 6.15% $2,427,497 $126,441 6.93%
Marketable securities 2,702,746 82,761 4.19 2,523,451 87,126 4.70
Other interest-earning assets 70,689 488 1.03 54,660 773 1.89
---------- -------- ---- ---------- -------- ----
Total interest-earning assets 5,185,806 194,833 5.07 5,005,608 214,340 5.75
-------- ---- ---------- -------- ----
Noninterest-earning assets 249,873 206,695
---------- ----------
Total assets $5,435,679 $5,212,303
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 258,717 $ 895 0.46% $ 237,696 $ 2,155 1.19%
Time deposits 1,398,260 35,713 3.42 1,513,605 47,622 4.22
Transaction and money market deposits 847,306 4,589 0.72 790,528 5,518 0.93
Escrow 3,684 24 0.88 4,991 22 0.58
Borrowed funds 2,457,176 61,739 3.35 2,147,662 64,072 3.94
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities 4,965,143 102,960 3.38 4,694,482 119,389 3.38
-------- ---- -------- ----
Noninterest-bearing liabilities 50,918 48,027
---------- ----------
Total liabilities 5,016,061 4,742,509
Stockholders' equity 419,618 469,794
---------- ----------
Total liabilities and stockholders' equity $5,435,679 $5,212,303
========== ==========
Net interest income, tax-equivalent 91,873 94,951
-------- --------
Interest rate spread, tax-equivalent(3) 2.32% 2.37%
==== ====
Net interest-earning assets $ 220,663 $ 311,126
========= ==========
Net interest margin, tax-equivalent(4) 2.40% 2.58%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.04 x 1.07 x
==== ==========
Adjustment to reconcile tax-equivalent net
interest income to net interest income (3,597) (2,716)
-------- --------
Net interest income before provision for
loan losses $ 88,276 $ 92,235
======== ========
- ------------
(1) Includes net income (expense) recognized on deferred loan fees and costs of
$1,845,000 for the nine months ended September 30, 2003, and ($421,000) for
the nine months ended September 30, 2002.
(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.
24
TABLE 2 RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
Compared to Compared to
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
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
============== ============= ============ ============ ============= =============
NONINTEREST INCOME
The table below presents noninterest income for the three-month and nine-month
periods ended September 30, 2003 and September 30, 2002.
TABLE 3 CHANGES IN NONINTEREST INCOME
Three months ended September 30
-------------------------------------------------------
2003 2002 Change %
----------- ------------ ------------ -----------
(Dollar amounts in thousands)
Banking services and account fees $ 4,307 $ 3,403 $ 904 26.6%
Financial services fees 2,795 1,811 984 54.3
Residential mortgage banking 3,031 (77) 3,108 4,036.4
Bank-owned life insurance 1,081 1,126 (45) (4.0)
Gain on securities and derivatives, net 881 4,353 (3,472) (79.8)
Other (600) 715 (1,315) (183.9)
----------- ------------ ------------ -----------
Total $ 11,495 $ 11,331 $ 164 (15.0)%
=========== ============ ============ ============
25
Nine months ended September 30
-------------------------------------------------------
2003 2002 Change %
----------- ------------ ------------ -----------
(Dollar amounts in thousands)
Banking services and account fees $ 11,620 $ 9,389 $ 2,231 23.8%
Financial services fees 7,188 5,447 1,741 32.0
Residential mortgage banking 5,631 1,768 3,863 218.5
Bank-owned life insurance 3,369 3,507 (138) (3.9)
Gain on securities and derivatives, net 6,471 8,629 (2,158) (25.0)
Other (2,528) 2,550 (5,078) (199.1)
-------- -------- -------- ------
Total $ 31,751 $ 31,290 $ 461 1.5%
======== ======== ======== ======
Noninterest income was $11.5 million for the quarter ended September 30, 2003,
as compared to $11.3 million for the quarter ended September 30, 2002. Notable
changes in the quarter ended September 30, 2003 versus the quarter ended
September 30, 2002 included:
o Banking service and account fees increased to $4.3 million, up $.9
million primarily on increased overdraft and NSF fees, increased
monthly service charges and ATM/debit card fees, and increased
commercial deposit fees.
o Financial services fees increased to $2.8 million, up $1.0 million.
Within this category, insurance fees were $2.1 million, up $1.2
million. This increase in insurance fees included $1.0 million from
Waypoint Benefits Consulting, acquired on April 1, 2003, and an
increase of $.2 million from title insurance fees. These increases were
partly offset by a decrease of $.3 million in retail brokerage fees on
decreased sales of alternative investment products and decreased
commissioned transaction volume.
o Residential mortgage banking income totaled $3.0 million, up from a
loss of $.1 million. Within this category, net gains on the sale of
loans totaled $2.8 million, up $1.9 million on higher selling volume
and wider average transaction gains during the current quarter. Loan
servicing activities contributed $.2 million in net revenue, including
a valuation recovery on mortgage servicing rights of $.6 million,
versus a net servicing loss of $1.0 million in the comparable prior
quarter.
o Gains on securities and derivatives were $.9 million in the current
quarter, down $3.5 million. During the current period, Waypoint
Financial recognized a $.4 million gain on the fair value of an
interest rate cap that does not receive hedge accounting treatment. The
interest rate cap was acquired during the second quarter of 2003 to
manage interest rate risk associated with the valuation of marketable
securities.
o Other totaled a net loss of $.6 million, down from a net gain of $.7
million in the comparable prior quarter. Waypoint's investment in low
income housing tax credit partnerships resulted in a loss of $.5
million during the current quarter versus a loss of $.1 million in the
comparable prior quarter. Waypoint also experienced a loss of $.3
million during the current quarter on the disposition of a branch
associated with a relocation. During the comparable prior quarter,
Waypoint also recorded a curtailment gain of $.4 million related to
benefit plan liabilities.
(Balance of this page is intentionally left blank)
26
NONINTEREST EXPENSE
The following table presents a comparison of noninterest expense for the
three-month and nine-month periods ended September 30, 2003 and 2002.
TABLE 4 CHANGES IN NONINTEREST EXPENSE
Three months ended September 30
-----------------------------------------------------
2003 2002 Change %
----------- ----------- ----------- -----------
(Dollar amounts in thousands)
Salaries and benefits $ 12,515 $11,178 $ 1,337 12.0%
Equipment expense 1,813 1,779 34 1.9
Occupancy expense 1,756 1,641 115 7.0
Marketing 1,374 1,097 277 25.3
Amortization of intangible assets 207 490 (283) (57.8)
Outside services 1,274 1,203 71 5.9
Communications and supplies 1,230 1,186 44 3.7
Other 2,894 2,979 (85) (2.9)
----------- ----------- ----------- -----------
Total $ 23,063 $ 21,553 $ 1,510 7.0%
=========== =========== =========== ===========
Nine months ended September 30
-----------------------------------------------------
2003 2002 Change %
----------- ----------- ----------- -----------
(Dollar amounts in thousands)
Salaries and benefits $ 35,751 $ 33,520 $ 2,231 6.7%
Equipment expense 5,433 5,338 95 1.8
Occupancy expense 5,507 4,777 730 15.3
Marketing 3,680 3,278 402 12.3
Amortization of intangible assets 518 1,470 (952) (64.8)
Outside services 3,853 3,460 393 11.4
Communications and supplies 3,852 3,510 342 9.7
Other 9,123 8,501 622 7.3
----------- ----------- ----------- -----------
Total $ 67,717 $ 63,854 $ 3,863 6.0%
=========== =========== =========== ===========
Noninterest expense was $23.1 million for the quarter ended September 30, 2003,
up $1.5 million or 7.0% from $21.6 million for the quarter ended September 30,
2002. Notable changes in the quarter ended September 30, 2003 relative to the
quarter ended September 30, 2002 included:
o Salaries and benefits expense totaled $12.5 million, up $1.3 million
primarily due to increased performance incentives, annual merit raises,
and staffing increases in the banking and financial services business
lines.
o Marketing expenses were up $.3 million, primarily on media advertising.
o Amortization of intangible assets was down $.3 million as identified
intangible assets associated with certain Maryland branches became
fully amortized in September, 2002.
PROVISION FOR INCOME TAXES
Income tax expense for the current quarter totaled $3.9 million, or an
effective tax rate of 28.6% on income before taxes of $13.8 million. This
compares to income taxes of $4.9 million or an effective tax rate of 28.6% on
income before taxes of $17.2 million for the quarter ended September 30, 2002.
27
COMPARISON FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30,
2002
NET INCOME
Net income for the nine months ended September 30, 2003 was $32.6 million or
$.96 per share as compared to $36.4 million or $.94 per share for the nine
months ended September 30, 2002. The increase in net income per share of $.02
resulted primarily from treasury stock repurchases during the twelve months
ended September 30, 2003, which substantially reduced the amount of equivalent
shares outstanding. The calculation of earnings per share is presented in Note 5
of the accompanying Notes to Consolidated Financial Statements. The following
paragraphs include a discussion of the components of net income.
NET INTEREST INCOME
Net interest income before provision for loan losses totaled $88.3 million for
the nine months ended September 30, 2003, which represents a decrease of $3.9
million or 4.2% from $92.2 million for the nine months ended September 30, 2002.
Waypoint experienced a decrease of $5.0 million in its margin from the effects
of rapid prepayments on the mix of marketable securities held during each
comparable period. Specifically, the marketable securities portfolio experienced
expense from net premium amortization of $.3 million during the nine months
ended September 30, 2003 as compared to income from net discount accretion of
$4.7 million for the nine months ended September 30, 2002. Waypoint believes
that its exposure to rapid premium amortization will be significantly reduced
going forward based on its remaining investment mix and slowing prepayment
speeds. Primarily as a result of this impact, the net interest margin ratio
(tax-equivalent) decreased to 2.40% for the nine months ended September 30,
2003, as compared to 2.58% for the nine months ended September 30, 2002.
NONINTEREST INCOME
Noninterest income was $31.8 million for the nine months ended September 30,
2003, up $.5 million or 1.5% from $31.3 million for the comparable prior period.
Notable changes in the nine months ended September 30, 2003 versus the nine
months ended September 30, 2002 included:
o Banking services and account fees totaled $11.6 million, up $2.2
million on increased overdraft and NSF fees, ATM fees, monthly service
charges and commercial deposit fees.
o Financial services fees totaled $7.2 million, up $1.7 million. Within
this category, insurance fees were $5.1 million, up $2.6 million.
Insurance fees increased $1.6 million due to the April 1, 2003
acquisition of Waypoint Benefits Consulting and $.7 million on
increased title insurance fees. These increases were partially offset
by a decrease of $.9 million in retail brokerage fees on decreased
sales of alternative investment products and decreased commissioned
transaction volume.
o Residential mortgage banking income totaled $5.6 million, up $3.8
million. Within this category, net gains on the sale of loans totaled
$6.2 million, up $3.7 million on historically high refinancing activity
and increased average gains per loan sale during the current period.
Net loss on loan servicing decreased by $.1 million, to $.6 million.
The rapid refinancing of mortgage loans serviced for others resulted in
net losses on loan servicing in both periods by decreasing servicing
revenue and increasing expense from the amortization of capitalized
loan servicing rights.
o Gains on securities and derivatives were $6.5 million in the period,
down $2.2 million. During the current period, Waypoint Financial
recognized a $.7 million loss on the fair value of an interest rate cap
that was acquired during 2003 to manage interest rate risk associated
with the valuation of marketable securities.
o Other noninterest income totaled a net loss of $2.5 million, down from
a gain of $2.6 million in the comparable prior period. This net change
of $5.1 million resulted primarily from Waypoint Financial's equity
investment in an SBIC partnership, which resulted in a $1.5 million
loss in the current period versus a $1.5 million gain in the comparable
prior period. Also, losses from low income housing partnerships
increased $1.5 million, although these partnership losses were
substantially offset by tax credits and deductions that were applied to
reduce corporate income tax expense during the period.
NONINTEREST EXPENSE
Noninterest expense was $67.7 million for the nine months ended September 30,
2003, up $3.9 million or 6.0% from $63.8 million for the comparable prior
28
period. Notable changes in the nine months ended September 30, 2003 relative to
the nine months ended September 30, 2002 included:
o Salaries and benefits expense totaled $35.7 million, up $2.2 million.
Increases for annual merit raises, staffing increases in the banking
and financial services business lines, and increased benefits expense
for health insurance and employer matching contributions for Waypoint's
defined contribution retirement plan ("401K plan") were partially
offset by increased capitalized costs on higher loan origination
volume.
o Occupancy and equipment expense increased a combined $.7 million on
banking and financial services expansion and increased maintenance
expenses associated with the harsh 2003 winter conditions.
o Amortization of other intangible assets was down $1.0 million as
identified intangible assets associated with certain Maryland branches
became fully amortized in September, 2002.
o Other noninterest expense totaled $9.1 million, up $.6 million from the
comparable prior period, primarily due to increased loan expenses
associated with growth in the commercial and consumer loan portfolios.
PROVISION FOR INCOME TAXES
Income tax expense for the nine months ended September 30, 2003 totaled $13.2
million, or an effective tax rate of 28.8% on income before taxes of $45.8
million. This compares to income taxes of $14.5 million and an effective tax
rate of 28.6% for the comparable prior period.
VII. Financial Condition
MARKETABLE SECURITIES
Marketable securities, excluding cash accounts, totaled $2.667 billion at
September 30, 2003 and $2.792 billion at December 31, 2002. This decrease of
$125.1 million during the nine months ended September 30, 2003 resulted from
Waypoint's use of a portion of securities prepayments to retire borrowings
rather than to reinvest in other securities. This action was in keeping with
Waypoint's strategy of decreasing reliance on investments and borrowings. Note
(6) of the Notes to Consolidated Financial Statements presents the composition
of the marketable securities portfolio as of September 30, 2003 and December 31,
2002.
LOANS RECEIVABLE, NET
Waypoint experienced strong growth in its commercial and consumer loan
portfolios during the nine months ended September 30, 2003. Commercial loans
increased $175.1 million or 19.6% and consumer and other loans increased $220.8
million or 31.4% during the nine-month period ended September 30, 2003.
Partially offsetting these increases, residential mortgage loans decreased
$313.7 million or 43.5% during the same period. Year-to-date 2003, Waypoint
continued to sell substantially all residential mortgage originations and
prepayments continued at a historically high level on mortgage loans held in
portfolio. The composition of loans receivable, net is included in Note (7) 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. Waypoint Financial had loan commitments and unadvanced loans and lines
of credit totaling $781.0 million at September 30, 2003 and $638.5 million at
December 31, 2002. Discussion regarding the composition and funding of loan
commitments is presented in Note (15) of the consolidated financial statements
in the amended 2002 Annual Report on Form 10-K/A.
LOAN QUALITY
During the nine months ended September 30, 2003, Waypoint Financial continued to
maintain excellent credit quality in its loan portfolio. Management attributes
this performance to strong underwriting standards and credit and collections
management, as well as a diversified economy in its local market area. Waypoint
Financial follows a comprehensive loan policy that details credit underwriting,
credit management and loan loss provisioning techniques.
29
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, 2003 December 31, 2002
-------------------- ---------------------
(Amounts in thousands)
Non-accrual residential mortgage loans $ 445 $ 792
Non-accrual commercial loans 8,597 9,331
Non-accrual consumer and other loans 90 126
------- -------
Total non-accrual loans 9,132 10,249
Loans 90 days or more delinquent and still accruing 8,788 9,743
------- -------
Total non-performing loans 17,920 19,992
Total foreclosed other assets 639 505
Total foreclosed real estate 725 492
------- -------
Total non-performing assets $19,284 $20,989
======= =======
Total non-performing loans to total loans 0.74% 0.86%
======= =======
Allowance for loan losses to non-performing loans 163.45% 137.59%
======= =======
Total non-performing assets to total assets 0.36% 0.39%
======= =======
ALLOWANCE FOR LOAN LOSSES
The following table summarizes the activity in Waypoint Financial's allowance
for loan losses for the periods indicated:
For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(Amounts in thousands)
Balance at beginning of period $ 28,818 $ 25,201 $ 27,506 $ 23,069
Provision for loan losses 2,014 3,085 6,499 8,755
Charge-offs:
Residential mortgage loans (134) (196) (453) (759)
Commercial loans (552) (679) (1,665) (2,188)
Consumer and other loans (1,139) (1,058) (3,641) (3,245)
-------- -------- -------- --------
Total charge-offs (1,825) (1,933) (5,759) (6,192)
-------- -------- -------- --------
Recoveries:
Residential mortgage loans 40 102 121 150
Commercial loans 9 21 301 318
Consumer and other loans 235 273 623 649
-------- -------- -------- --------
Total recoveries 284 396 1,045 1,117
-------- -------- -------- --------
Net charge-offs (1,541) (1,537) (4,714) (5,075)
-------- -------- -------- --------
Balance at the end of period $ 29,291 $ 26,749 $ 29,291 $ 26,749
======== ======== ======== ========
Annualized net charge-offs
to average loans outstanding 0.26% 0.26% 0.26% 0.29%
======== ======== ======== ========
Allowance for loan losses as
a percentage of total loans 1.21% 1.13% 1.21% 1.13%
======== ======== ======== ========
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 September 30, 2003 As of December 31, 2002
--------------------------------- ----------------------------------
(Dollar amounts in thousands)
% of Total % of Total
Amount Reserves Amount Reserves
--------------- --------------- -------------- ----------------
Residential mortgage loans $ 703 2.40% $ 1,201 4.37%
Commercial loans 19,389 66.19 19,235 69.93
Consumer and other loans 6,237 21.29 4,424 16.08
General 2,962 10.11 2,646 9.62
--------------- --------------- -------------- ----------------
Total $ 29,291 100.00% $ 27,506 100.00%
=============== =============== ============== ================
DEPOSITS
Waypoint's deposit portfolio increased to $2.630 billion during the quarter
ended September 30, 2003, up from $2.453 billion at December 31, 2002. Within
the deposit portfolio, Waypoint experienced substantial growth in its core
deposits, which include savings, transaction, and money market deposit accounts.
Core deposits increased $225.8 million or 22.6% for the nine-month period ended
September 30, 2003. Time deposits decreased $48.8 million during the same
period. The composition of the deposit portfolio is included in Note (8) of the
accompanying Notes to Consolidated Financial Statements.
OTHER BORROWINGS
Other borrowings decreased to $2.273 billion as of September 30, 2003, down
$141.0 million from $2.414 billion as of December 31, 2002. Note (9) of the
accompanying Notes to Consolidated Financial Statements presents the composition
of borrowings as of September 30, 2003 and December 31, 2002.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Reference Item 2, Section III.
Item 4 Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Waypoint Financial's Chief Executive Officer and Chief Financial Officer
have concluded that Waypoint Financial's disclosure controls and procedures
(as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as
amended), based on their evaluation of these controls and procedures as of
a date within (90) days prior to the filing date of this Form 10-Q, are
effective.
(b) Changes in Internal Controls
There have been no significant changes in Waypoint Financial's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation thereof, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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
31.1 Certification of the Company's Chief
Executive Officer pursuant to Rule 13a-15
or 15d-15 of the Securities Exchange Act
of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's Chief
Financial Officer pursuant to Rule 13a-15
or 15d-15 of the Securities Exchange Act
of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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, the Company's
Report on Form 8-K dated September 29,
2003, reported that Waypoint Bank
completed the acquisition of two bank
branches in Chambersburg, Pennsylvania.
2. Incorporated by reference, the Company's
Report on Form 8-K dated October 23,
2003, reported third quarter financial
results, the declaration of a regular
quarterly cash dividend and announced
planned restatements of previously
reported financial statements.
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/ David E. Zuern
--------------------------------
David E. Zuern,
President and
Chief Executive Officer
By /s/ James H. Moss
--------------------------------
James H. Moss,
Senior Executive Vice President
and Chief Financial Officer
Dated: November 14, 2003
33