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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, 2004
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 by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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. 33,489,529 shares of stock, par
value of $.01 per share, outstanding at October 18, 2004.
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
III. Market Risk and Interest Rate Sensitivity Management .................................................. 19
IV. Liquidity ............................................................................................. 19-20
V. Capital Resources ..................................................................................... 20
VI. Results of Operations
Comparison for the Three-Month Periods Ended September 30, 2004 and September, 2003
Net Income .......................................................................................... 21
Net Interest Income ................................................................................. 21-24
Noninterest Income .................................................................................. 24-25
Noninterest Expense ................................................................................. 25-26
Provision for Income Taxes .......................................................................... 26
Comparison for the Nine-Month Periods Ended September 30, 2004 and September 30, 2003
Net Income .......................................................................................... 26
Net Interest Income ................................................................................. 26
Noninterest Income .................................................................................. 27
Noninterest Expense ................................................................................. 27
Provision for Income Taxes .......................................................................... 28
VII. Financial Condition
Marketable Securities ............................................................................... 28
Loans Receivable, Net ............................................................................... 28
Loan Commitments .................................................................................... 28
Loan Quality ........................................................................................ 28
Non-Performing Assets ............................................................................... 29
Allowance for Loan Losses ........................................................................... 29
Allocation of the Allowance for Loan Losses ......................................................... 30
Deposits ............................................................................................ 30
Other Borrowings .................................................................................... 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................................... 30
Item 4. Controls and Procedures .............................................................................. 30
Part II. Other Information ...................................................................................... 31
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity 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 ...................................................................................................... 32
Exhibits - Certifications ....................................................................................... 33-36
2
Part I. Financial Information.
Part 1, Item 1 Financial Statements.
(Balance of this page is intentionally left blank)
3
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
September 30, December 31,
2004 2003
------------- ------------
(In thousands, except share data)
(Unaudited)
Assets
Cash and cash equivalents $ 86,937 $ 100,016
Marketable securities 2,365,765 2,489,770
FHLB stock 94,060 97,982
Loans receivable, net 2,559,827 2,397,640
Loans held for sale, net 15,832 17,011
Loan servicing rights 2,322 2,528
Investment in real estate and other joint ventures 21,833 20,773
Premises and equipment, net of accumulated
depreciation of $42,762 and $45,261 47,595 49,789
Accrued interest receivable 24,296 23,597
Goodwill 18,332 17,881
Intangible assets 2,605 2,881
Deferred tax asset, net 7,752 9,059
Bank-owned life insurance 95,616 92,522
Other assets 9,215 8,453
----------- -----------
Total assets $ 5,351,987 $ 5,329,902
=========== ===========
Liabilities and Stockholders' Equity
Deposits $ 2,874,356 $ 2,720,915
Other borrowings 1,952,471 2,110,681
Escrow 819 2,568
Accrued interest payable 9,062 10,009
Postretirement benefit obligation 2,272 2,248
Income taxes payable 2,153 2,586
Trust preferred debentures 46,392 46,392
Other liabilities 41,407 32,270
----------- -----------
Total liabilities 4,928,932 4,927,669
----------- -----------
Preferred stock, 10,000,000 shares authorized but unissued
Common stock, $ .01 par value, authorized 100,000,000 shares,
43,042,917 shares issued and 33,455,945 outstanding at September
30, 2004, 43,031,041 shares issued
and 33,247,630 shares outstanding at December 31, 2003 429 425
Paid in capital 357,449 353,530
Retained earnings 253,735 241,668
Accumulated other comprehensive loss (4,351) (8,502)
Employee stock ownership plan (13,391) (13,423)
Recognition and retention plans (4,206) (4,206)
Paid in capital from obligations under Rabbi Trust, 546,572 shares at
September 30, 2004 and 495,826 shares at December 31, 2003 9,326 8,457
Treasury stock shares held in Rabbi Trust at cost, 546,572 shares at
September 30, 2004 and 563,162 shares at December 31, 2003 (9,326) (9,240)
Treasury stock, 9,586,972 shares at September 30, 2004
and 9,716,075 shares at December 31, 2003 (166,610) (166,476)
----------- -----------
Total stockholders' equity 423,055 402,233
----------- -----------
Total liabilities and stockholders' equity $ 5,351,987 $ 5,329,902
=========== ===========
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,
-------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- ---------
(In thousands, except share data)
(Unaudited)
Interest Income:
Loans $ 35,718 $ 36,447 $103,457 $ 111,039
Marketable securities and interest-earning cash 26,080 24,430 75,987 80,197
-------- -------- -------- ---------
Total interest income 61,798 60,877 179,444 191,236
-------- -------- -------- ---------
Interest Expense:
Deposits and escrow 13,571 13,272 37,817 41,221
Borrowed funds 20,702 20,217 60,074 61,739
-------- -------- -------- ---------
Total interest expense 34,273 33,489 97,891 102,960
-------- -------- -------- ---------
Net interest income 27,525 27,388 81,553 88,276
Provision for loan losses 1,113 2,014 3,916 6,499
-------- -------- -------- ---------
Net interest income after provision for loan losses 26,412 25,374 77,637 81,777
-------- -------- -------- ---------
Noninterest Income:
Banking service and account fees 5,393 4,307 15,191 11,620
Financial services fees 3,145 2,795 7,841 7,188
Residential mortgage banking 161 3,031 1,732 5,631
Bank-owned life insurance 1,031 1,081 3,094 3,369
(Loss) gain on securities and derivatives, net (1,061) 881 5,628 6,471
Other 751 (600) 539 (2,528)
-------- -------- -------- ---------
Total noninterest income 9,420 11,495 34,025 31,751
-------- -------- -------- ---------
Noninterest Expense:
Salaries and benefits 12,561 12,515 38,015 35,751
Equipment expense 1,704 1,813 5,261 5,433
Occupancy expense 1,902 1,756 5,793 5,507
Marketing 1,365 1,374 3,674 3,680
Amortization of intangible assets 190 207 579 518
Outside services 1,205 1,274 3,928 3,853
Communications and supplies 1,207 1,230 3,822 3,852
Borrowing prepayment penalties - - 4,704 -
Acquisition expense 176 - 3,335 -
Other 2,306 2,894 6,835 9,123
-------- -------- -------- ---------
Total noninterest expense 22,616 23,063 75,946 67,717
-------- -------- -------- ---------
Income before income taxes 13,216 13,806 35,716 45,811
Income tax expense 2,867 3,946 10,216 13,219
-------- -------- -------- ---------
Net income $ 10,349 $ 9,860 $ 25,500 $ 32,592
======== ======== ======== =========
Basic earnings per share $ 0.32 $ 0.31 $ 0.80 $ 0.99
======== ======== ======== =========
Diluted earnings per share $ 0.31 $ 0.30 $ 0.77 $ 0.96
======== ======== ======== =========
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
STOCK CAPITAL EARNINGS INCOME (LOSS) PLAN PLAN (RRP)
-------- --------- --------- ------------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Balance at December 31, 2002 $ 404 $ 315,636 $ 245,388 $ 11,710 $ (14,460) $ (6,977)
Net income 32,592
Dividends paid at $.33 per share (10,820)
Exercised stock options (514,748 shares) 5 4,998
5% Common stock dividend (2,027,332
shares at fair value) 16 30,466 (30,517)
Unrealized losses on securities, net of
income tax of $(7,760) (11,795)
Comprehensive income
Earned portion of RRP 254
Tax benefit on exercised options 1,258
Treasury stock purchased (3,348,398
shares)
Dividend reinvestment plan, net (309)
-------- --------- --------- --------- --------- ---------
Balance at September 30, 2003 $ 425 $ 352,049 $ 236,643 $ (85) $ (14,460) $ (6,723)
======== ========= ========= ========= ========= =========
Balance at December 31, 2003 $ 425 $ 353,530 $ 241,668 $ (8,502) $ (13,423) $ (4,206)
Net income 25,500
Dividends paid at $.42 per share (13,433)
Exercised stock options (208,315 shares) 4 3,181
Unrealized gains on securities, net of
income tax of $2,642 4,151
Comprehensive income
ESOP stock committed for release 32
Tax benefit on exercised options 1,552
Treasury stock adjustment
Dividend reinvestment plan, net (378)
Reclassification for obligations under
Rabbi Trust (436)
-------- --------- --------- --------- --------- ---------
Balance at September 30, 2004 $ 429 $ 357,449 $ 253,735 $ (4,351) $ (13,391) $ (4,206)
======== ========= ========= ========= ========= =========
PAID IN
CAPITAL
FROM TREASURY
OBLIGATIONS STOCK
UNDER PURCHASED
RABBI IN RABBI TREASURY COMPREHENSIVE
TRUST TRUST STOCK TOTAL INCOME
----------- --------- --------- ----------- -------------
Balance at December 31, 2002 $ - $ - $ (98,819) $ 452,882
Net income 32,592 $ 32,592
Dividends paid at $.33 per share (10,820)
Exercised stock options (514,748 shares) 5,003
5% Common stock dividend (2,027,332
shares at fair value) (35)
Unrealized losses on securities, net of
income tax of $(7,760) (11,795) (11,795)
----------
Comprehensive income $ 20,797
==========
Earned portion of RRP 254
Tax benefit on exercised options 1,258
Treasury stock purchased (3,348,398
shares) (55,320) (55,320)
Dividend reinvestment plan, net (309)
--------- --------- --------- -----------
Balance at September 30, 2003 $ - $ - $(154,139) $ 413,710
========= ========= ========= ===========
Balance at December 31, 2003 $ 8,457 $ (9,240) $(166,476) $ 402,233
Net income 25,500 $ 25,500
Dividends paid at $.42 per share (13,433)
Exercised stock options (208,315 shares) 3,185
Unrealized gains on securities, net of
income tax of $2,642 4,151 4,151
----------
Comprehensive income $ 29,651
==========
ESOP stock committed for release 32
Tax benefit on exercised options 1,552
Treasury stock adjustment (134) (134)
Dividend reinvestment plan, net (378)
Reclassification for obligations under
Rabbi Trust 869 (86) 347
--------- --------- --------- -----------
Balance at September 30, 2004 $ 9,326 $ (9,326) $(166,610) $ 423,055
========= ========= ========= ===========
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,
--------------------------------
2004 2003
----------- -----------
(In thousands)
(Unaudited)
Cash flows from operating activities:
Net income $ 25,500 $ 32,592
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 3,916 6,499
Net depreciation, amortization and accretion 5,858 7,274
Loans originated for sale (146,380) (385,418)
Proceeds from sales of loans originated for sale 149,296 392,187
Origination of loan servicing rights (552) (1,037)
Net gain on sales of interest-earning assets (9,370) (13,600)
Gain on the sale of foreclosed real estate (251) (157)
Loss from joint ventures 60 3,219
(Increase) decrease in accrued interest receivable (645) 1,419
(Decrease) increase in accrued interest payable (947) 1,738
Amortization of intangibles 579 518
Earned ESOP expense 2,170 2,177
Earned RRP expense 1,622 1,733
(Gain) loss on the sale of premises and equipment (9) 345
Benefit for deferred income taxes (1,335) 670
(Decrease) increase in income taxes payable (433) 3,870
Other, net 9,568 3,903
----------- -----------
Net cash provided by operating activities 38,647 57,932
----------- -----------
Cash flows from investing activities:
Proceeds from maturities, sales, and principal reductions
of marketable securities 2,003,848 3,366,585
Purchase of marketable securities (1,865,515) (3,243,947)
Loan originations less principal payments on loans (116,384) (106,130)
Acquisition of loans (53,042) -
Investments in real estate held for investment and other joint ventures (1,456) (8,177)
Proceeds on real estate and premises and equipment 1,616 1,904
Purchases of premises and equipment, net (2,260) (4,763)
(Payments for) net proceeds from acquired business (422) 15,159
----------- -----------
Net cash (used in) provided by investing activities (33,615) 20,631
7
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
For the Nine Months Ended
September 30,
----------------------------
2004 2003
--------- ---------
(In thousands)
(Unaudited)
Cash flows from financing activities:
Net increase in deposits 148,323 140,683
Proceeds from other borrowings 25,000 340,000
Payments and maturities of other borrowings (365,025) (528,401)
Net increase in other short-term borrowings 185,966 39,818
Net decrease in escrow (1,749) (2,098)
Net proceeds from issuance of Trust Preferred Securities - 14,719
Cash dividends (13,433) (10,820)
Cash in lieu of stock dividend - (35)
Dividend reinvestment plan (378) (309)
Payments to acquire treasury stock - (55,320)
Proceeds from the exercise of stock options 3,185 5,003
--------- ---------
Net cash used in financing activities (18,111) (56,760)
--------- ---------
Net (decrease) increase in cash and cash equivalents (13,079) 21,803
Cash and cash equivalents at beginning of period 100,016 96,088
--------- ---------
Cash and cash equivalents at end of period $ 86,937 $ 117,891
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 98,839 $ 101,221
Income taxes 10,543 7,954
Cash received during the period for:
Income taxes 69 255
Non-cash investing activities:
Transfers from loans to foreclosed real estate 778 1,368
Fair value of assets acquired (non-cash) - 6,000
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) Basis of Presentation and 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, Waypoint Service Corporation, Waypoint Brokerage Services, Inc.,
and Waypoint Insurance Group, Inc. Waypoint Bank is the sole owner of Waypoint
Investment Corporation and C.B.L. Service Corporation. All significant
intercompany transactions and balances are eliminated in consolidation.
The accompanying interim consolidated 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,
2004 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2004 or any other interim period. It is suggested that
these consolidated financial statements be read in conjunction with Waypoint
Financial's 2003 Annual Report on Form 10-K.
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 49 through 82 of the 2003 Annual Report on Form 10-K.
Waypoint Financial accounts for Stock Option Plans under Accounting Principles
Board Opinion No. 25, and, accordingly, compensation expense 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):
For the three months For the nine months
ended September 30 ended September 30
-------------------------- ----------------------------
2004 2003 2004 2003
----------- --------- ---------- -----------
Net Income
As reported $ 10,349 $ 9,860 $ 25,500 $ 32,592
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of related
tax effects (271) (275) (847) (852)
----------- --------- ---------- -----------
Pro forma $ 10,078 $ 9,585 $ 24,653 $ 31,740
Basic earnings per share
As reported $ 0.32 $ 0.31 $ 0.80 $ 0.99
Pro forma $ 0.32 $ 0.30 $ 0.78 $ 0.97
Diluted earnings per share
As reported $ 0.31 $ 0.30 $ 0.77 $ 0.96
Pro forma $ 0.30 $ 0.29 $ 0.75 $ 0.94
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)
(2) Pending Acquisition
On March 9, 2004, Waypoint Financial announced that Sovereign Bancorp, Inc.,
parent company of Sovereign Bank, had reached a definitive agreement to acquire
Waypoint Financial. The transaction is valued at approximately $980 million,
with each share of Waypoint common stock being entitled to receive $28.00 in
cash, 1.262 shares of Sovereign common stock, or a combination thereof per
share, subject to election and allocation procedures which are intended to
ensure that, in the aggregate, 70% of the Waypoint shares will be exchanged for
Sovereign common stock and 30% will be exchanged for cash. Waypoint Financial
incurred acquisition expenses of $3.3 million relating to advisory services
during the nine-month period ended September 30, 2004 associated with the
pending acquisition. The transaction is expected to close by January 31, 2005,
and is subject to approval by various regulatory agencies and Waypoint
shareholders. Waypoint Financial is obligated to pay an additional $5.7 million
of acquisition expenses relating to contingent advisory services upon
consummation of the transaction.
(3) Recently Issued Accounting Guidance
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. FIN 46 Revised (FIN 46R), issued in December 2003, replaces FIN 46.
FIN 46R requires public entities to apply FIN 46 or FIN 46R to all entities that
are considered special-purpose entities in practice and under the FASB
literature that was applied before the issuance of FIN 46 by the end of the
first reporting period that ends after December 15, 2003. Waypoint Financial
does not have any investments in entities it believes are variable interest
entities for which the Company is the primary beneficiary. Accordingly, Waypoint
Financial's adoption of FIN 46 and FIN 46R did not result in the consolidation
of any variable interest entities.
In October 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," (SFAS 132R). SFAS
132R amends SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 132.
SFAS 132R revised employers' disclosures about pension plans and other
postretirement benefit plans. It did not change the measurement or recognition
of those plans required by SFAS Nos. 87, 88 and 106. While retaining the
disclosure requirements of SFAS No. 132, which it replaced, SFAS 132R requires
additional disclosures about assets, obligations, cash flows, and net periodic
benefit costs of defined benefit plans and other defined benefit postretirement
plans. The provisions of SFAS 132R are generally effective for financial
statements with fiscal years ending after December 15, 2003. The interim period
disclosures required by this statement are effective for interim periods
beginning after December 15, 2003. Waypoint Financial has complied with the
required provisions of SFAS 132R. The interim period disclosures required by
this statement are omitted as they are deemed immaterial to Waypoint Financial's
consolidated financial condition and results of operations for the periods
presented.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Medicare Act") was enacted. The Medicare Act
introduced both a Medicare prescription drug benefit and a federal subsidy to
sponsors of retiree health care plans that provide a benefit at least
actuarially equivalent to the Medicare benefit. Waypoint has elected to defer
accounting for the effects of the Medicare Act due to significant uncertainties
concerning how actuarial equivalency will be determined, how the subsidy payment
system will operate, and expected results of voluntary benefit elections of plan
participants. Accordingly, the accumulated post-retirement benefit obligation
and net periodic benefit cost do not reflect the effects of the Medicare Act.
On May 19, 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FAS 106-2). FAS 106-2 is effective for the
interim period beginning July 1, 2004, and provides that an employer shall
measure the accumulated post-retirement benefit obligation and net periodic
post-retirement benefit cost taking into account any subsidy received under the
Act.
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)
As of September 30, 2004, Waypoint Financial has not yet been able to conclude
whether the benefits provided by its post-retirement benefit plan are
actuarially equivalent to Medicare Part D under the Act. Accordingly, the
accumulated post-retirement benefit obligation and the net periodic
post-retirement benefit gain related to Waypoint Financial's post-retirement
benefit plan do not reflect any amounts associated with the subsidy.
(4) Earnings Per Share
Basic earnings per share is based on the total weighted average shares
outstanding for a given period. Diluted earnings per share is based on total
weighted average shares outstanding, and also assumes the exercise or conversion
of all potentially dilutive instruments currently outstanding. The computations
for basic and diluted earnings per share for the three-month and nine-month
periods ended September 30 are as follows:
Per Share
Income Shares Amount
----------- ---------- ---------
For the three-month period ended September 30, 2004
Basic earnings per share $ 10,349 31,872,000 $ 0.32
Dilutive effect of stock options and grants 1,224,000 (.01)
----------- ---------- --------
Diluted earnings per share $ 10,349 33,096,000 $ 0.31
=========== ========== ========
For the three-month period ended September 30, 2003
Basic earnings per share $ 9,860 32,070,000 $ 0.31
Dilutive effect of stock options and grants 1,066,000 (.01)
----------- ---------- --------
Diluted earnings per share $ 9,860 33,136,000 $ 0.30
=========== ========== ========
Per Share
Income Shares Amount
----------- ---------- ---------
For the nine-month period ended September 30, 2004
Basic earnings per share $ 25,500 31,743,000 $ 0.80
Dilutive effect of stock options and grants 1,216,000 (.03)
----------- ---------- --------
Diluted earnings per share $ 25,500 32,959,000 $ 0.77
=========== ========== ========
For the nine-month period ended September 30, 2003
Basic earnings per share $ 32,592 32,848,000 $ 0.99
Dilutive effect of stock options and grants 1,005,000 (.03)
----------- ---------- --------
Diluted earnings per share $ 32,592 33,853,000 $ 0.96
=========== ========== ========
For the three-month and nine-month periods ended September 30, 2004, no
anti-dilutive options were excluded from the computation of diluted earnings per
share because the exercise prices were less than the average market price of the
common shares during the respective periods. However, for the three months ended
September 30, 2003 and the nine months ended September 30, 2003, excluded from
the computation of diluted earnings per share were anti-dilutive options of
21,605 shares and 68,535 shares, respectively, because the exercise prices were
greater than the average market price of the common shares during the respective
periods.
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)
(5) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for trading and available-for-sale securities by major
security type were as follows:
As of September 30, 2004
--------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available-for-sale:
U.S. Government and agencies $ 384,820 $ 179 $ (4,769) $ 380,230
Corporate bonds 40,648 - (1,344) 39,304
Municipal securities 80,061 2,724 (362) 82,423
Equity securities 95,604 51 (4,709) 90,946
Mortgage-backed securities:
Commercial mortgage-backed securities 19,239 - (27) 19,212
Agency PC's & CMO's 1,061,401 6,370 (7,846) 1,059,925
Private issue CMO's 686,110 6,302 (3,415) 688,997
---------- ---------- ---------- ----------
Total mortgage-backed securities 1,766,750 12,672 (11,288) 1,768,134
---------- ---------- ---------- ----------
Total securities available-for-sale 2,367,883 15,626 (22,472) 2,361,037
Trading:
Rabbi Trust deferred compensation investments (a) 4,728 - - 4,728
---------- ---------- ---------- ----------
Total trading securities 4,728 - - 4,728
---------- ---------- ---------- ----------
Total marketable securities $2,372,611 $ 15,626 $ (22,472) $2,365,765
========== ========== ========== ==========
As of September 30, 2004
--------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
Available-for-sale:
U.S. Government and agencies $ 458,029 $ 1,164 $ (3,334) $ 455,859
Corporate bonds 66,342 - (4,462) 61,880
Municipal securities 83,201 3,301 (404) 86,098
Equity securities 153,708 4,186 (1,780) 156,114
Mortgage-backed securities:
Commercial 82,471 6 (358) 82,119
Agency PC's & CMO's 933,350 1,929 (5,342) 929,937
Private issue CMO's 722,617 151 (8,697) 714,071
----------- --------- ---------- -----------
Total mortgage-backed securities 1,738,438 2,086 (14,397) 1,726,127
----------- --------- ---------- -----------
Total securities available-for-sale 2,499,718 10,737 (24,377) 2,486,078
Trading:
Rabbi Trust deferred compensation investments (a) 3,692 - - 3,692
----------- --------- ---------- -----------
Total trading securities 3,692 - - 3,692
----------- --------- ---------- -----------
Total marketable securities $ 2,503,410 $ 10,737 $ (24,377) $ 2,489,770
=========== ========= ========== ===========
(a) Consists primarily of equity and mutual fund investments.
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)
The following table presents Waypoint Financial's unrealized losses at September
30, 2004 relating to its investment securities classified as available-for-sale.
Less than 12 months 12 months or longer Total
------------------------ ------------------------ ------------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
Available for sale:
U.S. Government and agencies $ 245,013 $ 3,385 $ 59,498 $ 1,384 $ 304,511 $ 4,769
Corporate bonds - - 39,250 1,344 39,250 1,344
Municipal securities 2,148 23 11,813 340 13,961 362
Equity securities 35,371 586 34,825 4,123 70,196 4,709
Mortgage-backed securities:
Commercial mortgage-backed
securities 19,212 27 - - 19,212 27
Agency PC's & CMO's 257,664 3,410 77,733 4,436 335,397 7,846
Private issue CMO's 218,783 715 91,907 2,699 310,690 3,415
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities 495,659 4,152 169,640 7,135 665,299 11,288
---------- ---------- ---------- ---------- ---------- ----------
Total securities available for
sale $ 778,191 $ 8,146 $ 315,026 $ 14,326 $1,093,217 $ 22,472
========== ========== ========== ========== ========== ==========
At September 30, 2004, Waypoint Financial held marketable securities with an
aggregate book value of $329.3 million that were in an unrealized loss position
for 12 months or longer. For these securities, the aggregated unrealized loss
totaled $14.3 million, the weighted-average estimated life was 6.8 years, and
the weighted-average duration of the impairment was 22 months. Waypoint
Financial has the intent and ability, in terms of liquidity and capital
strength, to hold these securities until their forecasted fair values recover at
least up to the cost of the investments.
During the three-month period ended September 30, 2004, Waypoint Financial sold
one marketable security with a book value of $20.1 million that was impaired on
the date of sale. The recognized loss on the sale of the security totaled
$18,000 and the average duration of the impairment was 3 months. During the
nine-month period ended September 30, 2004, Waypoint Financial sold marketable
securities with a book value of $107.5 million that were impaired on the date of
sale. The recognized loss on the sale of the securities during this period
totaled $1.4 million. The sales were executed as part of management's interest
rate risk strategy.
Waypoint Financial periodically reviews investment securities classified as
available-for-sale for potential impairment and records other than temporary
impairment in accordance with SFAS No. 115. This includes a review of the fair
value of each investment security in relation to its book value, the current
grade of the security, the dividend, interest and principal paying status of the
security and other significant events. At September 30, 2004, the weighted
average market value to book value ratio for all securities with unrealized loss
positions for 12 months or longer was 95.7%, with no individual security having
a market value to book value ratio less than 89.5%. Based on management's
review, no investment securities were determined to be other than temporarily
impaired, and as a result no impairment charges were recorded in income during
the quarter ended September 30, 2004.
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)
(6) Loans Receivable, Net
The following table presents the composition of loans receivable, net, as of the
dates indicated:
September 30, December 31,
2004 2003
------------- ------------
Residential mortgage loans (principally conventional):
Secured by 1-4 family residences $ 283,286 $ 347,679
Construction (net of undistributed
portion of $24,186 and $25,580) 21,061 25,500
----------- -----------
304,347 373,179
Less:
Unearned (premium) discount (1,886) 6
Net deferred loan origination fees 2,030 2,321
----------- -----------
Total residential mortgage loans 304,203 370,852
----------- -----------
Commercial loans:
Commercial real estate 767,450 651,139
Commercial business 361,128 343,129
Construction and site development
(net of undistributed portion of
$30,211 and $54,163) 105,471 103,611
----------- -----------
1,234,049 1,097,879
Less:
Net deferred loan origination fees 1,651 1,853
----------- -----------
Total commercial loans 1,232,398 1,096,026
----------- -----------
Consumer and other loans:
Manufactured housing 84,715 93,323
Home equity and second mortgage 609,836 561,937
Indirect automobile 215,001 174,416
Other 121,627 106,968
----------- -----------
1,031,179 936,644
Plus (minus):
Net deferred loan origination fees (684) (1,035)
Deferred dealer costs 22,756 23,584
----------- -----------
Total consumer and other loans 1,053,251 959,193
----------- -----------
Less: Allowance for loan losses 30,025 28,431
----------- -----------
Loans receivable, net $ 2,559,827 $ 2,397,640
=========== ===========
Loans having an aggregate carrying value of $325,825,000 and $404,365,000 were
pledged as collateral for FHLB advances at September 30, 2004 and December 31,
2003, respectively.
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
$321,151,000 and $340,937,000 at September 30, 2004 and December 31, 2003,
respectively.
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)
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, 2004 and 2003.
Waypoint Financial sold mortgage loans totaling $147,559,000 and $385,743,000
during the nine-month periods ended September 30, 2004 and September 30, 2003,
respectively. Waypoint Financial did not exchange loans for mortgage-backed
securities during the nine-month periods ended September 30, 2004 and September
30, 2003.
Investor custodial balances maintained in connection with the foregoing mortgage
servicing rights totaled $1,194,000 at September 30, 2004 and $3,836,000 at
December 31, 2003.
(7) Deposits
The following table presents the composition of deposits as of the dates
indicated:
September 30, December 31,
2004 2003
------------ ------------
Savings $ 228,318 $ 252,072
Time 1,436,639 1,408,970
Transaction 911,651 560,520
Money market 297,748 499,353
----------- -----------
Total deposits $ 2,874,356 $ 2,720,915
=========== ===========
(8) Other Borrowings
The following table presents the composition of Waypoint Financial's other
borrowings as of the dates indicated:
September 30, December 31,
2004 2003
------------ ------------
FHLB advances $1,723,841 $ 1,827,627
Repurchase agreements 228,630 278,054
Other - 5,000
---------- -----------
Total other borrowings $1,952,471 $ 2,110,681
========== ===========
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)
(9) Derivatives
Waypoint Financial uses derivative financial instruments as part of an overall
interest rate risk management strategy primarily to manage its exposure due 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's derivative portfolio includes derivative instruments that
are designated in fair value hedging relationships and other derivatives that
are not accounted for as hedges under SFAS No. 133.
The following table summarizes Waypoint Financial's derivatives designated as
hedges under SFAS No. 133 as of September 30, 2004 and December 31, 2003:
Year of Notional
Number Maturity Year of Call Amount Fair Value
-------- --------- ------------ -------- ----------
As of September 30, 2004:
Callable interest rate swaps 29 2008-2018 2004-2005 $295,000 $ (542)
Regular interest rate swaps 1 2005 - 50,000 602
Forward loan sale commitments 60 - - 6,837 (56)
--------
Total $ 4
========
As of December 31, 2003:
Callable interest rate swaps 27 2006-2018 2003 $270,000 $ (5,577)
Regular interest rate swaps 6 2004-2005 - 200,000 4,752
Forward loan sale commitments 58 - - 6,429 (17)
--------
Total $ (842)
========
For the nine-month periods ended September 30, 2004 and 2003, ineffectiveness
with the callable interest rate swap hedging relationship was recognized but was
insignificant to earnings. The regular interest rate swap and the forward loan
sale commitment on closed loan hedging relationships were 100% effective for the
nine-month periods ended September 30, 2004 and September 30, 2003. Accordingly,
no ineffectiveness was recognized in earnings associated with these hedging
relationships.
Summary information regarding other derivative activities at September 30, 2004
and December 31, 2003 follows:
Notional
Number Amount Fair Value
------ -------- ----------
As of September 30, 2004:
Interest rate cap 1 $250,000 $ 1,243
Interest rate lock commitments 69 9,018 22
Forward loan sale commitments 69 9,018 (58)
--------
Total $ 1,207
========
As of December 31, 2003:
Interest rate cap 1 $250,000 $ 3,287
Interest rate lock commitments 54 5,523 18
Forward loan sale commitments 54 5,523 (29)
--------
Total $ 3,276
========
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)
The interest rate cap has a 2008 maturity date and a strike rate of 5.5% based
on one-month Libor. Waypoint Financial recognized a loss of $1,681,000 for the
three-month period ending September 30, 2004 and a loss of $2,044,000 for the
nine-month period ending September 30, 2004 on the fair value of the interest
rate cap agreement.
For the nine-month periods ended September 30, 2004 and September 30, 2003,
gains and losses associated with interest rate lock commitments and forward loan
sale commitments were recognized but were insignificant to earnings.
(Balance of this page is intentionally left blank.)
17
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
2003 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
Waypoint Financial's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements filed in Waypoint Financial's
2003 Annual Report on Form 10-K. The preparation of financial statements in
accordance with accounting principles generally accepted in the United States
requires management to make estimates that require assumptions about highly
uncertain matters and could vary sufficiently to cause a material effect on
Waypoint Financial's financial condition or results of operations. We have
identified accounting for the allowance for loan losses, goodwill, benefit plans
and accounting for income taxes as our most critical accounting policies. These
critical accounting policies, including the nature of the estimates and types of
assumptions used, are described in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Waypoint Financial's 2003
Annual Report on Form 10-K.
18
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, 2004 As of December 31, 2003
------------------------------ -----------------------------
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 12.86% 5.68% 6.22% 5.53%
+200 9.40 6.05 4.05 5.85
+100 5.84 6.50 1.77 6.34
0 - 6.58 - 6.54
(100) (7.11) 5.75 (3.10) 6.09
(200) (12.28) 4.93 (6.63) 5.21
(1) The percentage change in this column represents an increase (decrease) in
net interest income for 12 months in a stable interest rate environment
versus net interest income for 12 months in the various rate scenarios.
(2) The net portfolio value ratio in this column represents net portfolio
value of Waypoint Financial in various rate scenarios, divided by the
present value of expected net cash flows from existing assets in those
same scenarios. Net portfolio value is defined as the present value of
expected net cash flows from existing assets, minus the present value of
expected net cash flows from existing liabilities, plus or minus the
present value of expected net cash flows from existing off-balance-sheet
contracts.
Simulation results are influenced by a number of estimates and assumptions with
regard to embedded options, prepayment behaviors, pricing strategies and
cashflows. 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, 2004, Waypoint Financial experienced
growth in net loans receivable totaling $162.2 million, which was funded by
growth in deposits totaling $153.4 million and a portion of net cash provided by
operations, which totaled $38.7 million during this period. Waypoint Financial's
securities including FHLB stock decreased $127.9 million during the nine months
ended September 30, 2004, which combined with a portion of net cash provided by
operations, facilitated a decrease of $158.2 million in borrowings. At September
30, 2004, Waypoint Financial had $1,723.8 million in FHLB loans outstanding, a
decrease of $103.8 million during the nine months then ended.
At September 30, 2004, Waypoint Financial held marketable securities that were
in an unrealized loss position. These securities had an aggregate book value of
$1,115.7 million and a weighted-average estimated life of 4.8 years. Waypoint
has the intent and the ability to hold these securities until their market
values recover up to at least their cost basis.
19
Please see Note 5 in the Notes to Consolidated Financial Statements for a
detailed discussion of Waypoint Financial's marketable securities.
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, 2004 and September 30, 2003.
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
Waypoint had $423.1 million in stockholders' equity or 7.90% of total assets at
September 30, 2004, as compared to $402.2 million or 7.55% of total assets at
December 31, 2003. Notable changes in stockholders' equity for the nine months
ended September 30, 2004 included increases of $25.5 million from net income,
$4.6 million from activity related to employer stock plans, and $4.2 million
from an increase in the market value of available-for-sale securities (net of
taxes). Offsetting these increases were dividends paid to shareholders totaling
$13.4 million.
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, 2004, and
December 31, 2003, 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"
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ----- ------ -----
(in thousands) (in thousands) (in thousands)
As of September 30, 2004
Total Capital
(to Risk Weighted Assets) $433,871 12.4% $279,702 8.0% $349,628 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 403,846 11.6 139,851 4.0 209,777 6.0
Tier 1 Capital
(to Average Assets) 403,846 7.5 215,615 4.0 269,519 5.0
As of December 31, 2003
Total Capital
(to Risk Weighted Assets) $432,167 13.1% $263,756 8.0% $329,695 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 402,653 12.2 131,878 4.0 197,817 6.0
Tier 1 Capital
(to Average Assets) 402,653 7.4 216,609 4.0 270,762 5.0
A reconciliation of Waypoint Bank's regulatory capital to capital using United
States generally accepted accounting principles (GAAP) as of September 30, 2004
follows:
TIER 1
TANGIBLE (CORE) RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ------- ----------
GAAP capital at Waypoint Financial $423,055 $423,055 $423,055
Capital attributed to affiliates (10,493) (10,493) (10,493)
GAAP capital at Waypoint Bank 412,562 412,562 412,562
Capital adjustments:
Unrealized gains, net of taxes, on securities available for sale 4,344 4,344 4,344
Allowance for loan losses - - 30,025
Certain intangible assets (12,785) (12,785) (12,785)
Disallowed servicing assets (275) (275) (275)
-------- -------- --------
Regulatory capital at Waypoint Bank $403,846 $403,846 $433,871
======== ======== ========
20
VI. Results of Operations
COMPARISON FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER
30, 2003
NET INCOME
Net income for the three months ended September 30, 2004 was $10.3 million or
$.31 per share as compared to $9.9 million or $.30 per share for the three
months ended September 30, 2003. The calculation of earnings per share is
presented in Note (4) 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 after provision for loan losses totaled $26.4 million during
the quarter ended September 30, 2004, up from $25.4 million for the quarter
ended September 30, 2003. The increase in net interest income after provision
for loan losses came primarily from improvements in balance sheet mix and
continued strong credit quality in the loan portfolio. Regarding asset mix, the
average balance of loans increased $126.9 million for the quarter ended
September 30, 2004 versus the comparable prior quarter, while the average
balance of marketable securities decreased $165.4 million. This trend reflects
Waypoint Financial's strategy of decreasing the marketable securities portfolio
through repayments and maturities while replacing these assets with loan
balances. Within liabilities, the average balance of deposits increased $257.6
million during the quarter ended September 30, 2004 versus the comparable prior
period, while average borrowings decreased $335.7 million as Waypoint Financial
replaced wholesale funding on the balance sheet with deposit growth. These
favorable trends were partially offset by the cumulative effects of record high
prepayments during 2003 and early in 2004 on mortgage loans and mortgage-backed
securities. In the current environment, yields on new loan and security assets
acquired into portfolio are at lower rates relative to assets being replaced.
These impacts resulted in the net interest margin ratio (tax-equivalent)
decreasing to 2.22% for the current quarter versus 2.28% for the quarter ended
September 30, 2003.
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, 2004 and
September 30, 2003. 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, 2004 and September 30, 2003.
Pursuant to management's evaluation of the adequacy of Waypoint's allowance for
loan losses, the provision for loan losses totaled $1.1 million for the quarter
ended September 30, 2004 versus $2.0 million for the quarter 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.
21
TABLE 1A AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
(THREE-MONTH PERIODS)
For the three months ended,
----------------------------------------------------------------------------
September 30, 2004 September 30, 2003
Rate --------------------------------- ---------------------------------------
as of Average Average
September Average Yield/ Average Yield/
30, 2004 Balance Interest (2) Cost Balance Interest (2) Cost
--------- ----------- ------------ ------- ----------- ----------- -------
(All dollar amounts are in thousands)
Assets:
Interest-earning assets:
Loans, net (1) (5) 5.71% $ 2,580,943 $ 35,924 5.49% $ 2,454,060 $ 36,646 5.90%
Marketable securities 4.26 2,503,764 26,492 4.24 2,669,174 25,270 3.59
Other interest-earning assets 1.41 41,261 104 1.25 81,321 174 0.90
---- ----------- -------- ---- ----------- -------- ----
Total interest-earning assets 4.98 5,125,968 62,520 4.84 5,204,555 62,090 4.90
---- -------- ---- -------- ----
Noninterest-earning assets 316,603 306,916
----------- -----------
Total assets $ 5,442,571 $ 5,511,471
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits 0.25 $ 234,364 140 0.24 $ 256,108 267 0.41
Time deposits 2.84 1,422,781 10,012 2.79 1,403,613 11,007 3.11
Transaction and money market deposits 1.20 1,197,329 3,415 1.15 937,199 1,992 0.85
Escrow 1.00 1,718 4 0.82 2,798 6 0.87
Borrowed funds 4.02 2,128,247 20,702 3.81 2,463,967 20,217 3.28
---- ----------- -------- ---- ----------- -------- ----
Total interest-bearing liabilities 2.78 4,984,439 34,273 2.71 5,063,685 33,489 2.60
---- -------- ---- -------- ----
Noninterest-bearing liabilities 49,008 46,552
----------- -----------
Total liabilities 5,033,447 5,110,237
Stockholders' equity 409,124 401,234
----------- -----------
Total liabilities and
stockholders' equity $ 5,442,571 $ 5,511,471
=========== ===========
Net interest income, tax-equivalent 28,247 28,601
Interest rate spread, tax-equivalent (3) 2.20% 2.13% 2.30%
==== ==== ====
Net interest-earning assets $ 141,529 $ 140,870
=========== ===========
Net interest margin, tax-equivalent (4) 2.22% 2.28%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.03 x 1.03 x
==== ====
Adjustment to reconcile tax-equivalent
net interest income to net interest income (722) (1,213)
Net interest income before
-------- --------
provision for loan losses $ 27,525 $ 27,388
======== ========
(1) Includes income recognized on deferred loan fees and costs of $171,000 for
the three months ended September 30, 2004, and $620,000 for the three
months ended September 30, 2003.
(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.
22
TABLE 1B AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
(NINE-MONTH PERIODS)
For the nine months ended,
--------------------------------------------------------------------------------------
September 30, 2004 September 30, 2003
-------------------------------------- ------------------------------------------
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) $ 2,502,365 $ 104,057 5.51% $ 2,412,371 $111,584 6.15%
Marketable securities 2,489,133 77,248 4.16 2,702,746 82,761 4.19
Other interest-earning assets 50,782 341 1.01 70,689 488 1.03
----------- --------- ---- ----------- -------- ----
Total interest-earning assets 5,042,280 181,646 4.79 5,185,806 194,833 5.07
--------- ---- -------- ----
Noninterest-earning assets 345,109 249,873
----------- -----------
Total assets $ 5,387,389 $ 5,435,679
=========== ===========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Savings deposits $ 242,203 398 0.22 $ 258,717 895 0.46
Time deposits 1,389,167 29,265 2.81 1,398,260 35,713 3.42
Transaction and money market deposits 1,124,611 8,140 0.97 847,306 4,589 0.72
Escrow 2,584 14 0.76 3,684 24 0.88
Borrowed funds 2,174,562 60,074 3.63 2,457,176 61,739 3.35
----------- --------- ---- ----------- -------- ----
Total interest-bearing liabilities 4,933,127 97,891 2.62 4,965,143 102,960 2.75
--------- ---- -------- ----
Noninterest-bearing liabilities 47,934 50,918
----------- -----------
Total liabilities 4,981,061 5,016,061
Stockholders' equity 406,328 419,618
----------- -----------
Total liabilities and
stockholders' equity $ 5,387,389 $ 5,435,679
=========== ===========
Net interest income, tax-equivalent 83,755 91,873
Interest rate spread, tax-equivalent (3) 2.17% 2.32%
==== ====
Net interest-earning assets $ 109,153 $ 220,663
=========== ===========
Net interest margin, tax-equivalent (4) 2.24% 2.40%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.02 x 1.04 x
=========== ===========
Adjustment to reconcile tax-equivalent
(2,202) (3,597)
Net interest income before
--------- --------
provision for loan losses $ 81,553 $ 88,276
--------- --------
(1) Includes income recognized on deferred loan fees and costs of $497,000 for
the nine months ended September 30, 2004, and $1,845,000 for the nine months
ended September 30, 2003.
(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 2 RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended September 30, 2004 Nine Months Ended September 30, 2004
Compared to Compared to
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
Increase (Decrease) Increase (Decrease)
-------------------------------------- --------------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(Dollar amounts in thousands)
Interest-earning assets:
Loans, net $ 3,258 $ (3,980) $ (722) $ 4,125 $(11,652) $ (7,527)
Marketable securities 486 736 1,222 (5,055) (458) (5,513)
Other interest-earning assets (38) (32) (70) (138) (9) (147)
-------- -------- -------- -------- -------- --------
Total interest-earning assets 3,706 (3,276) 430 (1,068) (12,119) (13,187)
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings deposits (12) (115) (127) (37) (460) (497)
Time deposits 329 (1,324) (995) (135) (6,313) (6,448)
Transaction and money market deposits 642 781 1,423 2,553 998 3,551
Escrow (3) 1 (2) (10) - (10)
Borrowed funds 428 57 485 (1,067) (598) (1,665)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 1,384 (600) 784 1,304 (6,373) (5,069)
-------- -------- -------- -------- -------- --------
Change in net interest income $ 2,322 $ (2,676) $ (354) $ (2,372) $ (5,746) $ (8,118)
======== ======== ======== ======== ======== ========
NONINTEREST INCOME
The table below presents a comparison of noninterest income for the three-month
and nine-month periods ended September 30, 2004 and 2003.
TABLE 3 CHANGES IN NONINTEREST INCOME
Three months ended September 30
------------------------------------------------------------------------
2004 2003 Change %
-------- -------- --------- ------
(Dollar amounts in thousands)
Banking services and account fees $ 5,393 $ 4,307 $ 1,086 25.2%
Financial services fees 3,145 2,795 350 12.5
Residential mortgage banking 161 3,031 (2,870) (94.7)
Bank-owned life insurance 1,031 1,081 (50) (4.6)
Gain on securities and derivatives, net (1,061) 881 (1,942) (220.4)
Other 751 (600) 1,351 225.2
-------- -------- -------- -----
Total $ 9,420 $ 11,495 $ (2,075) (18.1)%
======== ======== ======== =====
Nine months ended September 30
------------------------------------------------------------------------
2004 2003 Change %
-------- -------- --------- ------
(Dollar amounts in thousands)
Banking services and account fees $ 15,191 $ 11,620 $ 3,571 30.7%
Financial services fees 7,841 7,188 653 9.1
Residential mortgage banking 1,732 5,631 (3,899) (69.2)
Bank-owned life insurance 3,094 3,369 (275) (8.2)
Gain on securities and derivatives, net 5,628 6,471 (843) (13.0)
Other 539 (2,528) 3,067 121.3
-------- -------- -------- -----
Total $ 34,025 $ 31,751 $ 2,274 7.2%
======== ======== ======== =====
24
Noninterest income was $9.4 million for the current quarter, as compared to
$11.5 million for the quarter ended September 30, 2003, with notable changes
between these periods as follows:
- - Banking services and account fees totaled $5.4 million for the current
quarter, up $1.1 million primarily due to increased overdraft fees, service
charges, and commercial fees. These trends reflect increased account and
transaction volumes, pricing increases, and increased service offerings.
- - Financial services fees totaled $3.1 million, up $.3 million primarily due to
increased benefits consulting fees.
- - Net residential mortgage banking revenue totaled $.2 million, down $2.8
million. Within this category, net gains on the sale of loans decreased $2.3
million and loan servicing activities including valuation adjustments resulted
in a net revenue decrease of $.5 million. The loan sale results reflect both a
sales volume decrease and a decrease in the average gain per dollar of loan
principal sold. These experiences were consistent with trends currently being
reported for the mortgage banking industry as a whole.
- - Gains on securities and derivatives decreased $1.9 million primarily due to a
recognized loss of $1.7 million during the current quarter on the valuation of
an interest rate cap that does not receive hedge accounting treatment. The
valuation of this instrument resulted in a gain of $.4 million during the
comparable prior quarter.
- - Other income resulted in a net gain of $.8 million during the current quarter
versus a loss of $.6 million for the comparable prior quarter. This change
resulted primarily from Waypoint's investment in certain low income housing
tax credit ("LIHTC") partnerships, which contributed a net gain of $.5 million
for the current period versus a net loss of $.5 million for the comparable
prior period. During the current period, Waypoint recorded a $.7 million
partial recovery of previous write-downs to the equity-method valuation of its
largest LIHTC partnership pursuant to the renegotiation of its management
services contract.
NONINTEREST EXPENSE
The following table presents a comparison of noninterest expense for the
three-month and nine-month periods ended September 30, 2004 and 2003.
TABLE 4 CHANGES IN NONINTEREST EXPENSE
Three months ended September 30
-------------------------------------------------------
2004 2003 Change %
------- ------- ------- ------
(Dollar amounts in thousands)
Salaries and benefits $12,561 $12,515 $ 46 0.4%
Equipment expense 1,704 1,813 (109) (6.0)
Occupancy expense 1,902 1,756 146 8.3
Marketing 1,365 1,374 (9) (0.7)
Amortization of intangible assets 190 207 (17) (8.2)
Outside services 1,205 1,274 (69) (5.4)
Communications and supplies 1,207 1,230 (23) (1.9)
Borrowing prepayment penalties - - - -
Acquisition expense 176 - 176 -
Other 2,306 2,894 (588) (20.3)
------- ------- ------- ------
Total $22,616 $23,063 $ (447) (1.9)%
======= ======= ======= ======
Nine months ended September 30
--------------------------------------------------------
2004 2003 Change %
------- ------- ------- -------
(Dollar amounts in thousands)
Salaries and benefits $38,015 $35,751 $ 2,264 6.3%
Equipment expense 5,261 5,433 (172) (3.2)
Occupancy expense 5,793 5,507 286 5.2
Marketing 3,674 3,680 (6) (0.2)
Amortization of intangible assets 579 518 61 11.8
Outside services 3,928 3,853 75 1.9
Communications and supplies 3,822 3,852 (30) (0.8)
Borrowing prepayment penalties 4,704 - 4,704 -
Acquisition expense 3,335 - 3,335 -
Other 6,835 9,123 (2,288) (25.1)
------- ------- ------- ------
Total $75,946 $67,717 $ 8,229 12.2%
======= ======= ======= ======
25
Noninterest expense was $22.6 million for the quarter ended September 30, 2004
versus $23.1 million for the quarter ended September 30, 2003. Notable changes
in the quarter ended September 30, 2004 relative to the quarter ended September
30, 2003 included:
- - Salaries and benefits expense totaled $12.6 million, up $.1 million. Increases
from expansion in the banking franchise, annual merit increases and increased
benefit costs were substantially offset by attrition in non-essential
operational positions in advance of the Sovereign integration of Waypoint.
- - Legal and integration expenses associated with the Sovereign acquisition
totaled $.2 million, with no corresponding expenses in the comparable prior
quarter.
- - Other expenses decreased $.6 million, which was spread over a number of other
expense categories that are being managed downward in advance of the
integration with Sovereign.
PROVISION FOR INCOME TAXES
Income tax expense for the current quarter totaled $2.9 million, resulting in an
effective tax rate of 21.7% on income before taxes of $13.2 million. For the
quarter ended September 30, 2003, income taxes were $3.9 million, resulting in
an effective tax rate of 28.6% on income before taxes of $13.8 million. The
decrease in the effective tax rate for the current quarter reflected a $.7
million tax benefit that resulted from changes in Waypoint's estimate of
contingency reserves maintained to recognize uncertainty associated with various
income tax positions. Waypoint reassesses its tax reserves on a periodic basis
and upon the occurrence of significant events such as the filing of federal and
primary state corporate income tax returns, changes in relevant corporate tax
statutes, communications from tax authorities, etc.
COMPARISON FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30,
2003
NET INCOME
Net income for the nine months ended September 30, 2004 was $25.5 million or
$.77 per share as compared to $32.6 million or $.96 per share for the nine
months ended September 30, 2003. The calculation of earnings per share is
presented in Note (4) 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 after provision for loan losses totaled $77.6 million for
the nine months ended September 30, 2004, which represents a decrease of $4.2
million from $81.8 million for the nine months ended September 30, 2003. The
decrease in net interest income came primarily from the cumulative effects of
record high prepayments during 2003 and the early months of 2004 on mortgage
loans and mortgage-backed securities. In the current environment, yields on new
loan and security assets acquired into portfolio are at lower rates relative to
assets being replaced. This trend was exacerbated by aggressive pricing by key
competitors in Waypoint's market for both loans and deposits, which resulted in
spread compression. These impacts, which were partially reduced by favorable mix
improvements in the asset and liability portfolios, resulted in the net interest
margin ratio (tax-equivalent) decreasing to 2.25% for the nine months ended
September 30, 2004 from 2.40% for the nine months ended September 30, 2003.
Within Waypoint Financial's asset mix, the average balance of loans increased
$90.0 million for the nine months ended September 30, 2004 versus the comparable
prior period, while the average balance of marketable securities decreased
$213.6 million. This trend reflects Waypoint Financial's strategy of decreasing
the marketable securities portfolio through repayments and maturities while
replacing these assets with loan balances. Within liabilities, the average
balance of deposits increased $251.7 million during the nine months ended
September 30, 2004 versus the comparable prior period, while average borrowings
decreased $282.6 million as Waypoint Financial replaced wholesale funding on the
balance sheet with deposit growth.
Pursuant to management's evaluation of the adequacy of Waypoint's allowance for
loan losses, the provision for loan losses decreased to $3.9 million for the
nine months ended September 30, 2004 from $6.5 million for the nine 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.
26
NONINTEREST INCOME
Noninterest income was $34.0 million for the nine months ended September 30,
2004, up $2.3 million or 7.2% from $31.7 million for the comparable prior
period. Notable changes in the nine months ended September 30, 2004 versus the
nine months ended September 30, 2003 included:
- - Banking services and account fees totaled $15.2 million, up $3.6 million on
increased overdraft and NSF fees, ATM and debit card fees and commercial
credit and other fees. These trends reflect increased account and transaction
volumes, pricing increases, and increased service offerings.
- - Financial services fees totaled $7.8 million, up $.6 million. Within this
category, insurance fees from Waypoint Benefits Consulting which was acquired
April 1, 2003 increased $1.4 million and property and casualty insurance fees
increased $.2 million. Partially offsetting these increases was a $1.0 million
decrease in title insurance fees due to the slowdown in mortgage banking
activity during 2004.
- - Residential mortgage banking income totaled $1.7 million, down $3.9 million.
Within this category, net gains on the sale of loans decreased $4.5 million as
refinancing activity slowed significantly during the current period due to
rising mortgage interest rates. The decrease in net selling gains was
partially offset by a $.6 million improvement in loan servicing income to
breakeven net revenue in the current period, including the effects of
valuation adjustments to capitalized loan servicing assets, versus a net loss
in the comparable prior period.
- - Gains on securities and derivatives were $5.6 million in the current period,
down $.8 million. Waypoint Financial recognized a $1.7 million loss in the
current period and a $.7 million loss in the comparable prior period on the
fair value of an interest rate cap that was acquired to manage interest rate
risk associated with the valuation of marketable securities.
- - Other income resulted in a net gain of $.5 million during the current period
versus a loss of $2.5 million in the comparable prior period. This increase in
revenue of $3.0 million included a decrease of $1.8 million in losses from
equity investments in LIHTC partnerships. During the current period, Waypoint
recorded a $.7 million partial recovery of previous write-downs to the
equity-method valuation of its largest LIHTC partnership pursuant to the
renegotiation of its management services contract. In the comparable prior
period, LIHTC results were unfavorably impacted by adjustments recognized upon
management's assessment of partnership valuations at that time. Losses from
investments in LIHTC partnerships are substantially offset by related tax
credits and tax benefits recognized on the investment losses. Other income was
also impacted by Waypoint's investment in certain Small Business Investment
Corporation partnerships, which resulted in a $.1 million net gain in the
current period versus a net loss of $1.5 million for the comparable prior
period.
NONINTEREST EXPENSE
Noninterest expense was $75.9 million for the nine months ended September 30,
2004, up $8.2 million from $67.7 million for the nine months ended September 30,
2003. Notable changes in the nine months ended September 30, 2004 versus the
nine months ended September 30, 2003 included:
- - Salaries and benefits expense totaled $38.0 million, up $2.3 million.
Increases from expansion in the banking franchise, annual merit increases and
increased benefit costs were partially offset by attrition in non-essential
operational positions during the second and third quarters in advance of the
Sovereign integration of Waypoint.
- - Waypoint Financial incurred $4.7 million in borrowing prepayment expenses
during the first quarter of 2004 to extinguish $125.0 million of FHLB
fixed-rate advances and replace this funding with variable-rate borrowing,
which was expected to result in a breakeven impact on income before taxes
within 2004 while decreasing interest expense and improving net interest
margin. There were no corresponding expenses in the comparable prior period.
- - Acquisition expenses associated with the Sovereign acquisition of Waypoint
Financial totaled $3.3 million during the current period with no corresponding
expenses in the comparable prior period. The acquisition expenses of $3.3
million included $2.9 million in investment advisory fees and $.4 million in
legal and other expenses associated with the acquisition.
- - Other expenses decreased $2.3 million, which included a $1.1 million decrease
in loan servicing and other non-deferrable loan costs. The remaining decrease
of $1.2 million was spread over various expense categories, which are
generally being managed downward in advance of the integration with Sovereign.
27
PROVISION FOR INCOME TAXES
Income tax expense for the nine months ended September 30, 2004 totaled $10.2
million, or an effective tax rate of 28.6% on income before taxes of $35.7
million. This compares to income taxes of $13.2 million and an effective tax
rate of 28.9% on income before taxes of $45.8 million.
VII. Financial Condition
MARKETABLE SECURITIES
Marketable securities totaled $2.366 billion at September 30, 2004, a decrease
of $124.0 million from $2.490 billion at December 31, 2003 as Waypoint Financial
applied net security repayments and prepayments to pay down borrowings. Note (5)
of the Notes to Consolidated Financial Statements presents the composition of
the marketable securities portfolio and related information as of September 30,
2004 and December 31, 2003.
LOANS RECEIVABLE, NET
Waypoint Financial continued to increase the weighting of commercial and
consumer loans in the loan portfolio during the nine months ended September 30,
2004. Gross commercial loans increased $136.2 million or 12.4% to $1.234 billion
and gross consumer and other loans increased $94.5 million or 10.1% to $1.031
billion at September 30, 2004. Waypoint Financial attributes the substantial
growth in the commercial loan portfolio primarily to improved economic
conditions and to continued effective sales and marketing efforts. The growth in
consumer loans included $49.8 million of home equity-secured consumer loans
acquired from Sovereign Bank during the third quarter of 2004. Waypoint elected
to acquire these Pennsylvania- and Maryland-originated loans to supplement
consumer loan growth within Waypoint's core market. Offsetting these increases,
residential mortgage loans decreased $68.8 million or 18.4% as Waypoint
Financial continued to sell substantially all residential mortgage originations
and prepayments on mortgage loans held in portfolio continued at a historically
high level during the first and second quarters of 2004. The composition of
loans receivable, net is included in Note (6) of the accompanying Notes to
Consolidated Financial Statements.
LOAN COMMITMENTS
Waypoint Financial issues loan commitments to prospective borrowers conditioned
on the occurrence of certain events. Commitments are made in writing on
specified terms and conditions and are generally honored for up to 60 days from
approval. Waypoint Financial had loan commitments and unadvanced loans and lines
of credit totaling $816.5 million at September 30, 2004 and $709.3 million at
December 31, 2003. Discussion regarding the composition and funding of loan
commitments is presented in Note (14) of the consolidated financial statements
in the 2003 Annual Report on Form 10-K.
LOAN QUALITY
Waypoint Financial continued to maintain sound credit quality in the loan
portfolio during the nine months ended September 30, 2004. Management attributes
this performance to consistently strong underwriting standards and credit and
collections management. Waypoint Financial follows a comprehensive loan policy
that details credit underwriting, credit management and loan loss provisioning
techniques.
Non-performing loans totaled $15.2 million or 0.59% of total loans as of
September 30, 2004 as compared to $18.2 million or 0.76% of total loans as of
December 31, 2003. Waypoint Financial's allowance for loan losses was $30.0
million or 1.16% of total loans as of September 30, 2004 as compared to $28.4
million or 1.17% of total loans as of December 31, 2003. Net loan charge-offs as
a percentage of average loans outstanding totaled 0.19% on an annualized basis
for the nine months ended September 30, 2004 as compared to 0.26% for the nine
months ended September 30, 2003.
28
NON-PERFORMING ASSETS
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more and still accruing, and other non-performing assets
as of the dates indicated:
As of As of
September 30, 2004 December 31, 2003
------------------ -----------------
(Amounts in thousands)
Non-accrual residential mortgage loans $ 271 $ 443
Non-accrual commercial loans 7,646 8,173
Non-accrual other loans 414 90
----------- -----------
Total non-accrual loans 8,331 8,706
Loans 90 days or more delinquent and still accruing 6,903 9,498
----------- -----------
Total non-performing loans 15,234 18,204
Total foreclosed other assets 558 313
Total foreclosed real estate 136 472
----------- -----------
Total non-performing assets $ 15,928 $ 18,989
=========== ===========
Total non-performing loans to total loans 0.59% 0.76%
=========== ===========
Allowance for loan losses to non-performing loans 197.09% 156.18%
=========== ===========
Total non-performing assets to total assets 0.30% 0.36%
=========== ===========
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,
2004 2003 2004 2003
------------ ------------ ------------- -------------
(Amounts in thousands)
Balance at beginning of period $ 29,553 $ 28,818 $ 28,431 $ 27,506
Provision for loan losses 1,113 2,014 3,916 6,499
Charge-offs:
Residential mortgage loans (101) (134) (290) (453)
Commercial loans (67) (552) (164) (1,665)
Consumer and other loans (984) (1,139) (2,882) (3,641)
---------- ---------- ---------- ----------
Total charge-offs (1,152) (1,825) (3,336) (5,759)
---------- ---------- ---------- ----------
Recoveries:
Residential mortgage loans 23 40 58 121
Commercial loans 311 9 430 301
Consumer and other loans 177 235 526 623
---------- ---------- ---------- ----------
Total recoveries 511 284 1,014 1,045
---------- ---------- ---------- ----------
Net charge-offs (641) (1,541) (2,322) (4,714)
---------- ---------- ---------- ----------
Balance at end of period $ 30,025 $ 29,291 $ 30,025 $ 29,291
========== ========== ========== ==========
Annualized net charge-offs
to average loans outstanding 0.10% 0.26% 0.19% 0.26%
========== ========== ========== ==========
Allowance for loan losses as
a percentage of total loans 1.16% 1.21% 1.16% 1.21%
========== ========== ========== ==========
29
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, 2004 As of December 31, 2003
------------------------------ -----------------------------
(Dollar amounts in thousands)
% of Total % of Total
Amount Reserves Amount Reserves
------- -------- -------- ---------
Residential mortgage loans $ 896 2.98% $ 1,099 3.86%
Commercial loans 23,507 78.29 20,455 71.95
Consumer and other loans 5,622 18.73 6,877 24.19
------- ------ ------- ------
Total $30,025 100.00% $28,431 100.00%
======= ====== ======= ======
DEPOSITS
During the nine months ended September 30, 2004, deposits increased $153.4
million to $2.874 billion from $2.721 billion at December 31, 2003. Within the
deposit portfolio, Waypoint Financial experienced substantial growth in its
lower-cost transaction deposits, which increased $351.1 million . This growth in
transaction deposit balances resulted from a combination of pricing incentives
and increased marketing and sales emphasis on this deposit product line. Time
deposits were also up $27.7 million. Partially offsetting this growth was a
combined decrease of $225.4 million in money market and savings deposits. The
composition of the deposit portfolio is included in Note (7) of the accompanying
Notes to Consolidated Financial Statements.
OTHER BORROWINGS
Other borrowings decreased $158.2 million to $1.952 billion as of September 30,
2004 from $2.111 billion as of December 31, 2003. As noted previously, Waypoint
Financial funded this decrease with net repayments and prepayments of marketable
securities and with cash provided by operating activities. The composition of
the borrowing portfolio is included in Note (8) of the accompanying Notes to
Consolidated Financial Statements.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Reference Item 2, Section III.
Item 4 Controls and Procedures
Waypoint Financial's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation of the effectiveness of its disclosure
controls and procedures pursuant to Rule 13(a)-15(b), that Waypoint Financial's
disclosure controls and procedures (as defined in Rule 13a-15(e)) are effective
in ensuring that all material information required to be filed in this quarterly
report has been made known in a timely manner.
There were no changes in Waypoint Financial's internal controls over financial
reporting that occurred during the fiscal quarter ending September 30, 2004 that
have materially affected, or are reasonably likely to materially affect,
Waypoint Financial's internal controls over financial reporting.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity 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 October 22, 2004, reported third quarter
financial results and the declaration of a regular
quarterly cash dividend.
31
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 8, 2004
32