UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
- ----------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
(302)792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of May 6, 2002:
Common Stock, par value $.01 per share 9,094,242
- -------------------------------------- ---------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three Months
Ended March 31, 2002 and 2001 (Unaudited).......................... 3
Consolidated Statement of Condition as of March 31, 2002
(Unaudited) and December 31, 2001.................................. 4
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 (Unaudited)................................ 5
Notes to the Consolidated Financial Statements for the Three
Months Ended March 31, 2002 and 2001 (Unaudited)................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations..........................................12
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk............21
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PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders................21
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Item 6. Exhibits and Reports on Form 8-K...................................21
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Signatures ...................................................................22
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended
March 31,
------------------------
2002 2001
---- ----
(Unaudited)
(In Thousands, Except per Share Data)
Interest income:
Interest and fees on loans ........................................... $ 20,622 $ 20,573
Interest on mortgage-backed securities ............................... 4,106 6,012
Interest and dividends on investment securities ...................... 242 455
Interest on investments in reverse mortgages ......................... 6,994 1,784
Other interest income ................................................ 413 794
-------- --------
32,377 29,618
-------- --------
Interest expense:
Interest on deposits ................................................. 4,625 10,688
Interest on Federal Home Loan Bank advances .......................... 4,528 3,206
Interest on federal funds purchased and securities
sold under agreements to repurchase ................................ 536 809
Interest on Trust Preferred borrowings ............................... 636 964
Interest on other borrowings ......................................... 100 127
-------- --------
10,425 15,794
-------- --------
Net interest income ....................................................... 21,952 13,824
Provision for loan losses ................................................. 755 393
-------- --------
Net interest income after provision for loan losses ....................... 21,197 13,431
-------- --------
Other income:
Loan servicing fee income ............................................ 811 647
Deposit service charges .............................................. 2,082 1,966
Credit/debit card and ATM income ..................................... 1,855 1,550
Gain on sales of loans ............................................... 11,844 2,917
Other income ......................................................... 1,116 970
-------- --------
17,708 8,050
-------- --------
Other expenses:
Salaries, benefits and other compensation ............................ 13,300 8,605
Equipment expense .................................................... 1,377 1,016
Data processing and operation expense ............................... 1,282 1,097
Occupancy expense .................................................... 1,246 1,309
Marketing expense .................................................... 656 755
Professional fees .................................................... 1,143 582
ATM fraud (recovery) loss ............................................ (198) 421
Other operating expenses ............................................. 3,793 3,022
-------- --------
22,599 16,807
-------- --------
Income before minority interest, taxes and cumulative effect of change
in accounting principle ................................................. 16,306 4,674
Less minority interest .................................................... 2,405 (747)
-------- --------
Income before taxes and cumulative effect of change in accounting principle 13,901 5,421
Income tax provision ...................................................... 5,178 1,701
-------- --------
Income before cumulative effect of change in accounting principle ......... 8,723 3,720
Cumulative effect of change in accounting principle, net of $469,000 in tax 703 -
-------- --------
Net income ................................................................ $ 9,426 $ 3,720
======== ========
Basic earnings per share:
Income before cumulative effect of change in accounting principle ......... $ 0.95 $ 0.37
Cumulative effective of a change in accounting principle, net of tax ..... 0.08 -
-------- --------
Net income ................................................................ $ 1.03 $ 0.37
======== ========
Diluted earnings per share:
Income before cumulative effect of change in accounting principle ......... $ 0.93 0.37
Cumulative effective of change in accounting principle ................... 0.08 -
-------- --------
Net income ................................................................ $ 1.01 $ 0.37
======== ========
The accompanying notes are an integral part of these financial statements
-3-
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
(In Thousands)
Assets
Cash and due from banks ....................................................... $ 96,975 $ 104,813
Federal funds sold and securities purchased under agreements to resell ........ 8,100 65,779
Interest-bearing deposits in other banks ...................................... 15,097 28,360
Investment securities held-to-maturity ........................................ 11,634 12,396
Investment securities available-for-sale ...................................... 1,774 1,798
Mortgage-backed securities held-to-maturity ................................... 59,327 70,285
Mortgage-backed securities available-for-sale ................................. 347,300 291,439
Investment in reverse mortgages, net .......................................... 35,570 33,939
Loans held-for-sale ........................................................... 67,086 84,741
Loans, net of allowance for loan losses of $20,995 at March 31, 2002
and $21,597 at December 31, 2001 ............................................ 1,052,394 1,030,631
Stock in Federal Home Loan Bank of Pittsburgh, at cost ........................ 23,500 28,750
Assets acquired through foreclosure ........................................... 325 432
Premises and equipment ........................................................ 15,938 16,438
Accrued interest and other assets ............................................. 36,292 28,824
Loans, operating leases and other assets of discontinued operations ........... 96,753 115,295
----------- -----------
Total assets .................................................................. $ 1,868,065 $ 1,913,920
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ................................................ $ 179,551 $ 171,801
Money market and interest-bearing demand .................................. 322,033 327,635
Savings ................................................................... 317,687 313,246
Time ...................................................................... 304,769 303,059
Jumbo certificates of deposit - retail .................................... 12,615 9,695
----------- -----------
Total retail deposits ................................................... 1,136,655 1,125,436
Jumbo certificates of deposit - other ..................................... 15,113 12,334
Brokered certificates of deposit .......................................... - 8,347
----------- -----------
Total deposits .......................................................... 1,151,768 1,146,117
Federal funds purchased and securities sold under agreements to repurchase .... 45,000 45,000
Federal Home Loan Bank advances ............................................... 455,000 520,000
Trust Preferred borrowings .................................................... 50,000 50,000
Other borrowed funds .......................................................... 30,725 30,480
Accrued expenses and other liabilities ........................................ 22,270 16,519
----------- -----------
Total liabilities ............................................................. 1,754,763 1,808,116
----------- -----------
Minority Interest ............................................................. 5,010 5,801
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding .................................................... - -
Common stock $.01 par value, 20,000,000 shares authorized; issued
14,826,011 at March 31, 2002 and 14,823,651 at December 31, 2001 .......... 148 148
Capital in excess of par value ................................................ 59,136 59,079
Accumulated other comprehensive income ........................................ 2,893 3,146
Retained earnings ............................................................. 117,014 107,950
Treasury stock at cost, 5,709,469 shares at March 31, 2002 and 5,677,169 shares
at December 31, 2001 ...................................................... (70,899) (70,320)
----------- -----------
Total stockholders' equity .................................................... 108,292 100,003
----------- -----------
Total liabilities minority interest and stockholders' equity .................. $ 1,868,065 $ 1,913,920
=========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
2002 2001
--------- ---------
(Unaudited)
(In Thousands)
Operating activities:
Net income ............................................................................. $ 9,426 $ 3,720
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Provision for loan losses ............................................................ 755 393
Depreciation, accretion and amortization ............................................. 1,136 729
Increase in accrued interest receivable and other assets ............................. (7,412) (5,066)
Origination of loans held-for-sale ................................................... (300,952) (88,000)
Proceeds from sales of loans held-for-sale ........................................... 317,659 70,892
Increase in accrued interest payable and other liabilities ........................... 5,650 2,415
Increase in reverse mortgage capitalized interest, net ............................... (8,165) (1,742)
Minority interest in net income ...................................................... 2,405 (747)
Other, net ........................................................................... 33 2,983
--------- ---------
Net cash provided by (used for) operating activities ................................. 20,535 (14,423)
--------- ---------
Investing activities:
Net decrease (increase) in interest-bearing deposits in other banks ................... 13,263 (14,320)
Maturities of investment securities .................................................... 807 8,045
Sales of investment securities available-for-sale ...................................... - 500
Repayments of mortgage-backed securities held-to-maturity .............................. 10,885 4,529
Repayments of mortgage-backed securities available-for-sale ............................ 71,466 33,202
Purchases of mortgage-backed securities available-for-sale ............................. (128,875) (76,364)
Repayments on reverse mortgages ........................................................ 9,386 4,021
Disbursements for reverse mortgages .................................................... (1,681) (1,855)
Sales of loans ......................................................................... 5,986 -
Purchase of loans ...................................................................... (13,664) (1,497)
Net (increase) decrease in loans ....................................................... (13,795) 13,186
Net decrease in stock of Federal Home Loan Bank of Pittsburgh .......................... 5,250 11,950
Receipts from investment in real estate ................................................ - 270
Sales of assets acquired through foreclosure, net ...................................... 166 229
Premises and equipment, net ............................................................ (603) (802)
--------- ---------
Net cash used for investing activities .................................................. (41,409) (18,906)
--------- ---------
Financing activities:
Net increase in demand and savings deposits ............................................ 6,869 60,152
Net (decrease) increase in time deposits .............................................. (938) 11,949
Receipts from FHLB borrowings .......................................................... 170,000 45,000
Repayments of FHLB borrowings .......................................................... (235,000) (65,000)
Net decrease in obligations under capital lease ........................................ (36) (30)
Dividends paid on common stock ......................................................... (362) (405)
Issuance of common stock ............................................................... 57 6
Purchase of treasury stock, net of reissuance .......................................... (579) (1,938)
Minority Interest ...................................................................... (3,196) (28)
--------- ---------
Net cash (used for) provided by financing activities ..................................... (63,185) 49,706
--------- ---------
(Decrease) increase in cash and cash equivalents ......................................... (84,059) 16,377
Change in net assets from discontinued operations ........................................ 18,542 18,014
Cash and cash equivalents at beginning of period ......................................... 170,592 91,349
--------- ---------
Cash and cash equivalents at end of period ............................................... $ 105,075 $ 125,740
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the quarter ................................................ $ 10,106 $ 13,805
Cash paid for income taxes, net .......................................................... 3,528 2,098
Loans and transferred to assets acquired through foreclosure ............................. 40 324
Net change in other comprehensive income ................................................. (253) 1,660
The accompanying notes are an integral part of these financial statements.
-5-
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the parent
company, WSFS Capital Trust I, WSFS and its wholly-owned subsidiaries, 838
Investment Group, Inc. and Star States Development Company (SSDC) as well as not
wholly-owned, but majority controlled subsidiaries, Wilmington National Finance,
Inc. (WNF) and CustomerOne Financial Network, Inc. (C1FN), see Note 4 for
further discussion of non-wholly owned subsidiaries.
As discussed in Note 3 of the financial statements, the results of WSFS
Credit Corporation (WCC), the Corporation's wholly owned indirect auto financing
and leasing subsidiary, are presented as discontinued operations, retroactively
restated for all periods presented.
The consolidated statement of condition at March 31, 2002, the consolidated
statement of operations for the three months ended March 31, 2002 and 2001 and
the consolidated statement of cash flows for the three months ended March 31,
2002 and 2001 are unaudited, and include all adjustments solely of a normal
recurring nature which management believes are necessary for a fair
presentation. Certain reclassifications have been made to the prior year's
financial statements for conformity with the current year's presentation. All
significant intercompany transactions are eliminated in consolidation. The
results of operations for the three-month period ended March 31, 2002 is not
necessarily indicative of the expected results for the full year ending December
31, 2002. Such statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and applicable to
the banking industry. The accompanying unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Corporation's 2001 Annual Report.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months ended
March 31,
-------------------
2002 2001
-------- --------
(In Thousands, Except per
Share Data)
Numerator:
- ----------
Income before cumulative effect of a change in accounting principle ........... $ 8,723 $ 3,720
Cumulative effect of a change in accounting principle, net of $469,000 in tax . 703 -
-------- --------
Net income .................................................................... $ 9,426 $ 3,720
======== ========
Denominator:
- ------------
Denominator for basic earnings per share - weighted average shares .......... 9,133 10,117
Employee stock options ...................................................... 183 54
-------- --------
Denominator for diluted earnings per share - adjusted weighted average shares
and assumed exercise ...................................................... 9,316 10,171
======== ========
Earnings per share:
- -------------------
Basic:
Income before cumulative effect of a change in accounting principle ........... $ 0.95 $ 0.37
Cumulative effect of a change in accounting principle, net of $469,000 in tax . 0.08 -
-------- --------
Net income .................................................................... $ 1.03 $ 0.37
======== ========
Diluted:
Income before cumulative effect of a change in accounting principle ........... $ 0.93 $ 0.37
Cumulative effect of a change in accounting principle, net of $469,000 in tax . 0.08 -
-------- --------
Net income .................................................................... $ 1.01 $ 0.37
======== ========
Outstanding common stock equivalents having no dilutive effect ................ 53,720 530,048
-6-
3. Discontinued Operations of a Business Segment
The operations of WSFS Credit Corporation (WCC) were discontinued in 2000.
Accordingly, the results of WCC's operations, are treated as Discontinued
Operations of a Business Segment, and shown separate from the Company's results
of continuing operations in reported results of the Corporation. WCC, which had
4,012 lease contracts and 1,585 loan contracts at March 31, 2002, no longer
accepts new applications but continues to service existing loans and leases
until their maturity. Management estimates that substantially all loan and lease
contracts will mature by the end of December 2003.
In December 2000, the Corporation established a $6.2 million pretax reserve
to absorb expected future losses of WCC. As used vehicle values continued to
deteriorate, $3.1 million was added to this reserve in 2001 for the expected
losses in the business during its wind-down.
Due to the uncertainty of a number of factors, including residual values,
interest rate volatility and credit quality, this reserve is reevaluated
quarterly with adjustments, if necessary, recorded as income/losses on wind-down
of discontinued operations. The balance of reserves residual losses represents
management's best estimate of losses inherent to the remaining portfolio.
The following chart depicts the loans, operating leases and other assets of
discontinued operations at March 31, 2002 and December 31, 2001:
At March 31, At December 31,
2002 2001
-------- --------
(In Thousands)
Vehicles under operating leases, net ............................. $ 86,261 $102,288
Net loans ........................................................ 13,392 16,131
Other noncash .................................................... 3,424 3,241
assets
Less:
Reserve for losses of
discontinued operations...................................... 6,324 6,365
-------- --------
Loans, operating leases and other assets of
discontinued operations ........................................ $ 96,753 $115,295
======== ========
The following table depicts the net income from discontinued operations for the
three months ended March 31, 2002 and 2001:
For the three months Ended March 31,
------------------------------------
2002 2001
------- -------
(In thousands)
Interest income ...................... $ 302 $ 559
Allocated interest expense (1) ....... 755 2,992
------- -------
Net interest expense ................. (453) (2,433)
Loan and lease servicing fee income .. 132 149
Rental income on operating leases, net 610 2,678
Other income ......................... 4 4
------- -------
746 2,831
Other operating expenses ........... 334 526
------- -------
(Loss) income before taxes ........... (41) (128)
Reserve for discontinued operations .. 41 128
------- -------
Income from discontinued operations .. $ - $ -
======= =======
(1) Allocated interest expense for the three months ended March 31, 2001 was
based on the Company's average wholesale borrowing rate of 6.22% which
approximated a marginal funding cost of this business. Beginning in
December 2001, the allocated interest expense is based on a direct
matched-maturity funding of the net non-cash assets of discontinued
operations. The average borrowing rate for the first quarter of 2002 was
2.88%
-7-
4. INVESTMENTS IN NONWHOLLY-OWNED SUBSIDIARIES
The Corporation consolidates two non-wholly owned subsidiaries, CustomerOne
Financial Network, Inc. (C1FN) and Wilmington National Finance, Inc. (WNF).
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999 WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. WSFS originally invested $5.5 million, which had a book
value of $2.3 million at March 31, 2002 including approximately $1 million in
goodwill. WSFS currently has a 28% interest in C1FN, and warrants to acquire
additional ownership under certain circumstances, but exercises majority control
through a voting trust. Therefore, the results of C1FN are and will continue to
be consolidated into WSFS. C1FN paid a management fee to WSFS of $120,000 for
both the quarters ended March 31, 2002 and 2001 and are partially eliminated in
consolidation.
Under the terms of its agreement with WSFS, C1FN had the right to acquire
the deposits and business of Everbank if C1FN obtained its own depository
institution charter. C1FN has recently concluded that it is likely that
sufficient capital cannot be raised on a timely basis. As a result, C1FN
withdrew their application to the Office of Thrift Supervision (OTS) for a
separate thrift charter in April 2002. WSFS and C1FN are considering their
remaining options which include the sale of the division. Preservation or
enhancement of WSFS' investment in this case would depend on the sale price.
Other possibilities include a write-off of WSFS' investment in C1FN. In this
case, other costs, which are not expected to be material, may result. The
ultimate strategy and degree of success cannot be determined at this time.
C1FN/Everbank is currently a relatively low margin business. If
C1FN/Everbank is sold or otherwise exited, the Corporation would likely
experience an improvement in performance ratios such as the efficiency ratio,
net interest margin and the return on average assets and equity, as well as
capital ratios.
WNF is a 51% owned subsidiary and began operations in December 1999. In
addition, WSFS holds warrants to purchase an additional 14% ownership. WNF is a
nonconforming mortgage banker generally dealing in higher grade subprime loans.
WNF solicits and originates its loans primarily as a result of referrals through
independent mortgage brokers, although direct-to-consumer originations accounted
for 6% and 14% of total originations for the three months ended March 31, 2002
and 2001, respectively. WNF originates all loans and sells its originations to
investors, typically well known regional banks or national finance companies, on
a whole loan, servicing-released basis for cash premiums only (no
securitizations). Mortgage loans are sold with very limited recourse beyond the
standard representations and warranties.
WNF has a centralized secondary marketing function which analyzes the
product offerings of the various end investors, consolidates the investors'
underwriting guidelines into the product parameters that WNF offers to its
brokers and ultimately sells WNF's originations to the end investors. Between
the time loans are originated and sold, they are warehoused on WNF's balance
sheet. WSFS provides temporary financing for the loans through a warehouse line
of credit with an adjustable rate based on the one-month FHLB Advance rate plus
90 basis points. This line is limited to $135 million but could increase to $150
million on a temporary basis. At March 31, 2002, $57.7 million was outstanding
on this line. For the quarters ended March 31, 2002 and 2001, loans remained in
the warehouse for an average of 27 and 33 days, respectively before being sold.
The percentage of loans in the warehouse that were 45 days old or greater were
2.15% at March 31, 2002 and 3.82% at March 31, 2001. WNF's total assets at March
31, 2002 and 2001 were $71.8 million and $33.6 million, respectively. For the
three months ended March 31, 2002, WNF added $1.7 million to the net income of
the Corporation compared to $190,000 for the year ended March 31, 2000. At March
31, 2001, WSFS also held $3.0 million in preferred stock of WNF.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Corporation has an interest-rate cap with a notional amount of $50
million, which limits 3-month LIBOR to 6% for ten years ending December 1, 2008.
The cap is being used to hedge the cash flows of $50 million in
-8-
trust preferred floating rate debt. The cap was recorded at the date of purchase
in other assets, at a cost of $2.4 million. The fair market value (FMV), which
at inception is equal to the cost, has two components: the intrinsic value and
the time value of the option. The cap is marked-to-market quarterly, with
changes in the intrinsic value of the cap, net of tax, included in a separate
component of other comprehensive income and changes in the time value of the
option included directly in interest expense as required under SFAS 133. In
addition, the ineffective portion, if any, is expensed in the period in which
ineffectiveness is determined. It has been determined that the hedge is highly
effective and can reasonably be expected to remain so. Management is not aware
of any events that would result in the reclassification into earnings of gains
and losses that are currently reported in accumulated other comprehensive income
except for the change in the FMV of the interest rate cap, which pertains to the
time value of the hedging instrument. The fair value is estimated using a
standard sophisticated option model and quoted prices for similar instruments.
Everbank enters into short-term forward foreign exchange contracts to
provide an effective fair value hedge on the foreign currency denominated
deposits from fluctuations that may occur in world currency markets. At March
31, 2002 and 2001, the Everbank had entered into such contracts with a notional
amount of $66.2 million and $48.2 million, respectively. During the three months
ended March 31, 2002 and 2001, the expense associated with these hedging
contracts was almost entirely offset by changes in the fair value of the world
currency denominated deposits. There was no material impact on other income.
The following depicts the change in fair market value of the Company's
derivatives:
2002 2001
---------------------------------- -----------------------------------
At At At At
January 1, Change March 31, January 1, Change March 31,
---------- ------ --------- ---------- ------ ---------
(In Thousands)
Interest Rate Cap:
- ------------------
Intrinsic value (1) $ 589 $ 269 $ 858(1) $ 193 $ (67) $ 126(1)
Time value (2) 1,945 (58)(2) 1,887 1,804 70(2) 1,874
------- --------- ------- -------- ------- -------
Total $ 2,534 $ 211 $ 2,745 $ 1,997 $ 3 $ 2,000
======= ======= ======= ======= ======= =======
Foreign Exchange Contracts
- --------------------------
Time Value $ (395) $ 1,396 $ 1,001 $ 1,385 $(3,504) $(2,119)
======= ======= ======= ======= ======= =======
(1) Included in other comprehensive income, net of taxes.
(2) Included in interest expense on the hedged item (trust preferred
borrowings).
6. COMPREHENSIVE INCOME
The following schedule depicts other comprehensive income in accordance
SFAS No. 130:
Three Months Ended March 31,
----------------------------
2002 2001
-------- -------
(In Thousands)
Net income ........................................................ $ 9,426 $ 3,720
Other comprehensive income:
Net unrealized holding (losses) gains on securities
available-for-sale arising during the period .................. (427) 1,704
Net unrealized holding (losses) gains arising during the period
on derivatives used for cash flow hedge .................... 175 (44)
Reclassification adjustment for gains included in net income .. (1) -
------- -------
Total comprehensive income ........................................ $ 9,173 $ 5,380
======= =======
-9-
7. TAXES ON INCOME
The Corporation accounts for income taxes in accordance with SFAS No. 109,
which requires the recording of deferred income taxes that reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Management has assessed allowances on the deferred income taxes due to
limitations imposed by the Internal Revenue Code and uncertainties, including
the timing of settlement and realization of these differences.
The Internal Revenue Service (IRS) is examining the Company's U.S. income
tax returns for the periods ended December 31,1995 through 1999. As part of the
examination the IRS issued a Notice of Proposed Adjustment related to the
utilization of certain net operating loss carryovers. At the end of March 2002,
the Corporation settled an appeal of this Notice of Proposed Adjustment. The
settlement did not have a material impact on the financial statements of the
Corporation. Management does not expect the outcome of the ongoing examination
to have a material impact on the financial statements of the Corporation.
8. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation had three operating segments
during the three months ended March 31, 2002 and 2001: WSFS, C1FN and WNF. C1FN
and WNF are not wholly-owned, but are majority-controlled subsidiaries that
began operating in 1999. As majority controlled subsidiaries, they are included
in consolidated financial statements, including segment reporting.
The WSFS segment provides financial products to consumer and commercial
customers within its geographical footprint through its branch network. WSFS has
a 28% interest in C1FN, but, retains majority control of C1FN through a voting
trust. C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for "branchless" financial services. WSFS
and C1FN are engaged in joint effort through a division of WSFS, Everbank, to
provide Internet banking on a national level. WNF, a 51% owned subsidiary, is
engaged in sub-prime home equity mortgage banking. WNF conducts activities on
national level and aggregates loans primarily through brokers and sells them to
investors.
Reportable segments are business units that offer different services to
distinct customers. The reportable segments are managed separately because they
operate under different regulations and provide services to distinct customers.
The Corporation evaluates performance based on pretax ordinary income and
allocates resources based on these results. Segment information for the three
months ended March 31, 2002 and 2001 follow:
-10-
At or For the Three Months Ended March 31,
--------------------------------------------------------------------------------
2002 2001
-------------------------------------- ---------------------------------------
(In Thousands)
WSFS C1FN WNF Total WSFS C1FN WNF Total
---- ---- --- ----- ---- ---- --- -----
External customer revenues:
Interest income $27,733 $ 2,893 $ 1,751 $32,377 $25,517 $ 3,515 $ 586 $29,618
Other income 5,053 1,011 11,644 17,708 4,626 633 2,791 8,050
------- ------- ------- ------- ------- ------- ------- -------
Total external customer revenues 32,786 3,904 13,395 50,085 30,143 4,148 3,377 37,668
------- ------- ------- ------- ------- ------- ------- -------
Intersegment revenues:
Interest income 600 - 6 606 417 - 14 431
Other income 66 - 54 120 120 - - 120
------- ------- ------- ------- ------- ------- ------- -------
Total intersegment revenues 666 - 60 726 537 - 14 551
------- ------- ------- ------- ------- ------- ------- -------
Total revenue 33,452 3,904 13,455 50,811 30,680 4,148 3,391 38,219
External customer expenses:
Interest expense 9,078 1,345 2 10,425 13,201 2,591 2 15,794
Other expenses 12,300 2,696 7,237 22,233 11,282 2,399 2,587 16,268
Other depreciation and
amortization 854 133 134 1,121 774 90 68 932
------- ------- ------- ------- ------- ------- ------- -------
Total external customer expenses 22,232 4,174 7,373 33,779 25,257 5,080 2,657 32,994
------- ------- ------- ------- ------- ------- ------- -------
Intersegment expenses:
Interest expense 6 - 600 606 14 - 417 431
Other expenses - 120 - 120 - 120 - 120
------- ------- ------- ------- ------- ------- ------- -------
Total intersegment expenses 6 120 600 726 14 120 417 551
------- ------- ------- ------- ------- ------- ------- -------
Total expenses 22,238 4,294 7,973 34,505 25,271 5,200 3,074 33,545
Income before minority interest,
taxes and cumulative effect of
change in accounting principle $11,214 $ (390) $ 5,482 $16,306 $ 5,409 $(1,052) $ 317 $ 4,674
------- ------- ------- ------- ------- ------- ------- -------
Minority interest 2,405 (747)
Provision for income taxes 5,178 1,701
Cumulative effect of a change in
accounting principle 703 -
------- -------
Consolidated net income $ 9,426 $ 3,720
======= =======
====================================================================================================================================
Mortgage backed securities $ 158,280 $ 248,347 $ - $ 406,627 $ 175,054 $ 205,579 $ - $ 380,633
Total segment assets $1,560,960 $ 301,840 $ 71,843 $1,934,643 $1,557,009 $ 245,854 33,608 1,836,471
Elimination of intersegment
receivables (66,578) (39,747)
---------- ----------
Total consolidated assets $1,868,065 $1,796,724
========== ==========
Deposits $1,019,244 $ 293,589 $ - $1,312,833 $1,034,842 $ 236,254 $ - $1,271,096
Elimination of intersegment
deposits (161,065) (78,900)
---------- ----------
Total Consolidated deposits $1,151,768 $1,192,196
========== ==========
Segment liabilities $1,454,255 $ 295,265 $ 65,016 $1,814,536 $1,455,631 237,307 $ 32,952 1,725,890
Elimination of intersegment
liabilities (59,773) (34,488)
---------- ----------
Consolidated liabilities $1,754,763 $1,691,402
========== ==========
Capital expenditures $ 194 $ 28 $ 392 $ 614 $ 618 $ 173 $ 42 $ 833
====================================================================================================================================
-11-
ITEM 2. WSFS FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (WSFS). Founded in 1832, WSFS is one of the oldest financial
institutions in the country. As a federal savings bank which was formerly
chartered as a state mutual savings bank, WSFS enjoys broader investment powers
than most other financial institutions. These grandfathered powers have allowed
WSFS to diversify its revenue sources to a greater extent than most savings
banks. WSFS has served the residents of the Delaware Valley for 170 years. WSFS
is the largest thrift institution headquartered in Delaware and among the three
or four largest financial institutions in the state on the basis of total
deposits traditionally garnered in-market. The Corporation's primary market area
is the mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The long-term goal of the
Corporation is to maintain its high-performing financial services company status
by focusing on its core banking business while occasionally developing
profitable niches in highly-synergistic businesses that have a strategic fit.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services. Lending
activities are funded primarily with retail deposit services and borrowings. At
March 31, 2001 there were 22 retail banking offices located in northern Delaware
and southeastern Pennsylvania in which WSFS conducted banking operations. In
January 2002 for strategic reasons, WSFS transferred five in-store branch
offices that were outside of its core footprint to another financial
institution. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC).
The Corporation has two consolidated subsidiaries, WSFS and WSFS Capital
Trust I, and no unconsolidated subsidiaries or off-balance sheet entities.
Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), which is engaged primarily in indirect motor vehicle leasing;
and 838 Investment Group, Inc., which markets various third party insurance
products and securities through WSFS' branch system. An additional subsidiary,
Star States Development Company (SSDC), is currently inactive. In addition to
the wholly owned subsidiaries, the Corporation consolidates two non-wholly owned
subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and Wilmington National
Finance, Inc. (WNF). See footnote 4 of the financial statements for a further
discussion.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets decreased $45.9 million during the first three months of 2002
to $1.9 billion at March 31, 2002. This decrease occurred predominantly in cash
and liquid investments, which declined $78.8 million during the quarter. These
funds were redirected to pay down borrowings, fund the $44.9 million increase in
mortgage backed securities, and the $21.8 million in net loan growth. In
addition, loans, operating leases and other assets of discontinued operations
decreased $18.5 million during the quarter, predominantly due to run-off in the
loan and lease portfolios. Loans held for sale also decreased $17.7 million
during the quarter.
Total liabilities decreased $53.4 million during the first quarter of 2002,
to $1.8 billion. Total borrowings decreased as $65.0 million in Federal Home
Loan Bank advances matured during the quarter. This decline was offset in part
by retail deposit growth of $11.2 million during the quarter.
Capital Resources
Stockholders' equity increased $8.3 million between December 31, 2001 and
March 31, 2002. This increase reflects net income of $9.4 million for the first
quarter of 2002, partially offset by the purchase of 37,300 shares of treasury
stock for $641,000 ($17.18 per share average). At March 31, 2002, the
Corporation held 5,709,469 shares
-12-
of its common stock in its treasury at a cost of $70.9 million. In addition, the
Corporation declared a cash dividend of $362,000.
Below is a table presenting the Bank's consolidated capital position
relative to the minimum regulatory requirements as of March 31, 2002 (dollars in
thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
-------------------------- ------------------------ ------------------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ -------- ------ ---------- ------ ---------
Total Capital
(to Risk-Weighted Assets) ........ $160,145 12.82% $99,931 8.00% $124,914 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 150,194 8.03 74,803 4.00 93,504 5.00
Tangible Capital (to Tangible
Assets) .......................... 150,194 8.03 28,051 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 150,194 12.02 N/A N/A 74,948 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. At March 31, 2002 the Bank was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
Liquidity
In accordance with Thrift Bulletin 77, the OTS requires institutions such as
WSFS to maintain adequate liquidity to assure safe and sound operation. At March
31, 2002, WSFS' liquidity ratio of cash and qualified assets to net withdrawable
deposits and borrowings due within one year was 5.6% compared to 10.8% at
December 31, 2001. Management monitors liquidity daily and maintains funding
sources to meet unforeseen changes in cash requirements. The Corporation's
primary financing sources are deposits, repayments of loans and investment
securities, sales of loans and borrowings. In addition, the Corporation's
liquidity requirements can be accomplished through the use of its borrowing
capacity from the FHLB of Pittsburgh, the sale of certain securities and the
pledging of certain loans for other lines of credit. Management believes these
sources are sufficient to maintain the required and prudent levels of liquidity.
INVESTMENT IN REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Since reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence, and the
mortgage balance consists of cash advanced, interest compounded over the life of
the loan and a premium which represents a portion of the shared appreciation in
the home's value, if any, or a percentage of the value of the residence.
At March 31, 2002, the Corporation's net investment in reverse mortgages
totaled $35.6 million. The yield for the three months ended March 31, 2002 was
84.09 % compared to 20.86% for the first quarter of 2001. This increase in yield
reflects very strong actual cash flows from the portfolio. These cash flows have
been driven by the continued strong housing market and a higher repayment rate,
which is consistent with the seasoning of the portfolio. The yields can vary
significantly from period to period depending on actual and estimated cash
flows. Management currently expects the long-term yield to be approximately 26%.
Since funding and
-13-
operating costs associated with reverse mortgages are relatively small and
stable, any change in reverse mortgage revenue can have a significant effect on
the Corporation's pre-tax income.
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets,
restructured loans and past due loans at the dates indicated. Past due loans are
loans contractually past due 90 days or more as to principal or interest
payments but which remain on accrual status because they are considered well
secured and in the process of collection.
March 31, December 31,
2002 2001
---- ----
(In thousands)
Nonaccruing loans:
Commercial ....................................... $2,127 $1,330
Consumer ......................................... 446 306
Commercial mortgages ............................. 2,214 1,928
Residential mortgages ............................ 3,126 3,618
Construction ..................................... 331 351
------ ------
Total nonaccruing loans ............................... 8,244 7,533
Assets acquired through foreclosure ................... 325 432
------ ------
Total nonperforming assets ............................ $8,569 $7,965
====== ======
Past due loans and leases:
Residential mortgages ............................ $ 282 $ 88
Commercial and commercial mortgages .............. 113 767
Consumer ......................................... 230 244
------ ------
Total past due loans .................................. $ 625 $1,099
====== ======
Ratios:
Nonperforming loans to total loans (1) ........... 0.77% 0.72%
Allowance for loan losses to total gross loans (1) 1.95% 2.05%
Nonperforming assets to total assets ............. 0.46% 0.42%
Loan loss allowance to nonaccruing loans (2) ..... 251.44% 277.77%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ....................... 244.49% 265.48%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $604,000 between March 31, 2002 and December
31, 2001. This increase resulted primarily from a $797,000 increase in
nonaccruing commercial loans offset by a decrease of $492,000 in nonaccruing
residential mortgages. The decrease in nonaccruing residential mortgages
resulted from a sale of a pool of identified problem residential mortgages. An
analysis of the change in the balance of nonperforming assets is presented on
the following page.
Three Months Ended Year Ended
March 31, 2002 December 31, 2001
--------------- ------------------
(In Thousands)
Beginning balance .............................. $ 7,965 $ 8,965
Additions ................................. 3,212 7,386
Collections/sales ......................... (1,641) (5,596)
Transfers to accrual/restructured status... (401) (1,542)
Charge-offs / write-downs ...................... (566) (1,248)
------- -------
Ending balance ................................. $ 8,569 $ 7,965
======= =======
-14-
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those which would result from a regulatory examination.
INTEREST RATE SENSITIVITY
The matching of maturities or repricing periods of interest rate-sensitive
assets and liabilities to ensure a favorable interest rate spread and mitigate
exposure to fluctuations in interest rates is the Corporation's primary focus
for achieving its asset/liability management strategies. Management regularly
reviews interest-rate sensitivity of the Corporation and adjusts sensitivity
within acceptable tolerance ranges established by management. Interest
rate-sensitive assets of the Corporation excluded cash flows from discontinued
operations as well as the interest rate-sensitive funding for these assets of
$100 million in FHLB Advances. At March 31, 2002, interest-earning assets
exceeded interest-bearing liabilities that mature within one year
(interest-sensitive gap) by $66.3 million. The Corporation's interest-sensitive
assets as a percentage of interest-sensitive liabilities within one-year
decreased to 108.27% at March 31, 2002 compared to 114.42% at December 31, 2001.
Likewise, the one-year interest-sensitive gap as a percentage of total assets
decreased to 3.55% from 6.09% at December 31, 2001. The change is the result of
the Corporation's continuing effort to effectively manage interest rate risk.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions is the test
specified by OTS Thrift Bulletin No. 13A "Management of Interest Rate Risk,
Investment Securities and Derivatives Activities." This test measures the impact
on the net portfolio value of an immediate change in interest rates in 100 basis
point increments. Net portfolio value is defined as the net present value of the
estimated cash flows from assets and liabilities. The table below is the
estimated impact of immediate changes in interest rates on the Company's net
interest margin and net portfolio value at the specified levels at March 31,
2002 and 2001, calculated in compliance with Thrift Bulletin No. 13A:
At March 31,
-----------------------------------------------------------------------
2002 2001
---------------------------------- ---------------------------------
Changes in % change in % change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin(1) Value Ratio (2) Margin(1) Value Ratio (2)
---------------- ---------------- ----------------- -- ---------------- ----------------
+300 6% 9.16% 6% 6.20%
+200 4 9.26 4 6.24
+100 2 9.32 2 6.28
0 - 9.38 - 6.50
-100 -3 9.17 -1 6.88
-200(3) -8 8.96 -3 7.42
-300(3) -16 8.92 -4 8.07
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various rate
environment changes.
(2) The net portfolio value of the Company in a stable interest rate environment
and the net portfolio value as projected under the various rate environment
changes.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points may not be
particularly meaningful at March 31, 2002 given the historically low
absolute level of interest rates at that time.
-15-
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while maximizing the yield/cost spread on the
Company's asset/liability structure. The Company relies primarily on its
asset/liability structure to control interest rate risk.
COMPARISON FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Results of Operations
The Corporation reported net income of $9.4 million, or $1.01 per diluted
share, for the three months ended March 31, 2002 compared $3.7 million, or $0.37
per diluted share, for the first quarter of 2001. The results in the first
quarter of 2002 include an after-tax increase in income of $3.0 million, or
$0.32 per share, resulting from an unusually high performance of the
Corporation's reverse mortgage portfolio. In addition, the Corporation
recognized $703,000, net of taxes, or $0.08 per share, in income related to the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142.
In addition to the above mentioned significant items, net income was
favorably affected by an $8.9 million increase in gains on the sales of loans
reflecting the growth in the Corporation's mortgage banking subsidiary, WNF. Net
interest income, excluding the additional reverse mortgage income, grew $3.1
million, the result of a favorable mix of earning assets and funding, combined
with the favorable interest rate environment.
-16-
Net Interest Income
The table below provides information concerning the balances, yields and
rates on interest-earning assets and interest-bearing liabilities during the
periods indicated.
For the three months ended March 31
-------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
--------- ---------- --------- ----------- ---------- ----------
(In Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............ $ 671,464 $ 11,759 7.00% $ 632,889 $12,775 8.07%
Commercial loans ................ 196,160 2,904 6.49 147,719 2,949 8.75
Consumer loans................... 197,100 4,047 8.33 174,862 4,209 9.76
---------- --------- ----------- -------
Total loans.................... 1,064,724 18,710 7.13 955,470 19,933 8.46
Mortgage-backed securities (5)........ 355,768 4,106 4.62 365,877 6,012 6.57
Loans held-for-sale (3)............... 72,169 1,912 10.60 25,182 640 10.17
Investment securities (5)............. 13,912 242 6.96 24,603 455 7.40
Investment in reverse mortgages....... 33,269 6,994 84.09 34,209 1,784 20.86
Other interest-earning assets ........ 55,511 413 3.01 56,450 794 5.70
---------- --------- ---------- -------
Total interest-earning assets.... 1,595,353 32,377 8.19 1,461,791 29,618 8.18
--------- -------
Allowance for loan losses............. (21,481) (21,587)
Cash and due from banks............... 93,746 63,902
Net loans and leases of discontinued
operations ......................... 104,695 190,389
Other noninterest-earning assets...... 63,335 46,148
---------- ----------
Total assets..................... $1,835,648 $1,740,643
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 310,282 974 1.27 $ 257,171 2,432 3.84
Savings.......................... 313,479 826 1.07 300,057 2,588 3.50
Retail time deposits ............ 301,245 2,642 3.56 297,546 3,876 5.28
Jumbo certificates of deposits .. 21,305 173 3.29 21,975 319 5.89
Brokered certificates of deposit. 556 10 7.29 130,464 2,173 6.75
---------- ------- --------- -------
Total interest-bearing deposits 946,867 4,625 1.98 1,007,213 11,388 4.59
FHLB of Pittsburgh advances........... 465,222 5,281 4.60 335,333 4,997 6.04
Trust preferred borrowings............ 50,000 636 5.16 50,000 964 7.71
Other borrowed funds.................. 79,902 636 3.19 94,397 1,437 6.09
Cost of funding discontinued operations (753) (2,992)
---------- ------- ---------- -------
Total interest-bearing liabilities 1,541,991 10,425 2.70 1,486,943 15,794 4.25
------- -------
Noninterest-bearing demand deposits... 163,603 129,809
Other noninterest-bearing liabilities. 18,369 18,176
Minority interest .................... 6,247 5,373
Stockholders' equity.................. 105,438 100,342
---------- ----------
Total liabilities and stockholders'
equity........................ $1,835,648 $1,740,643
========== ==========
Excess/(deficit) of interest-earning assets
over interest-bearing liabilities $ 53,362 $ (25,152)
========== ==========
Net interest and dividend income...... $21,952 $13,824
======= =======
Interest rate spread.................. 5.49% 3.93%
Net interest margin................... 5.57% 3.86%
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes commercial mortgage loans.
(5) Includes securities available-for-sale.
-17-
Net interest income increased $8.1 million during the three months ended
March 31, 2002 compared to the first quarter of 2001. The increase reflects $5.2
million in income growth on reverse mortgages resulting from very strong cash
flows driven by a continued strong housing market and higher prepayment rates,
consistent with a seasoning of the portfolio. The net interest margin for the
three months ended March 31, 2002 was 5.49% compared to 3.93% in the first
quarter of 2001. Total interest income, excluding the additional reverse
mortgage income, increased $3.1 million between comparable quarters. The
increase is attributed to growth in interest earning assets and a change to a
more favorable mix of earning assets and funding.
The yields from reverse mortgages can vary significantly from period to
period depending on actual and estimated cash flows. Management currently
expects the future long-term yield to be approximately 26%. Since funding and
operating costs associated with reverse mortgages are relatively small and
stable, any change in reverse mortgage revenue can have a significant effect on
the Corporation's pre-tax income.
Allowance for Loan Losses:
The Corporation maintains allowances for credit losses and charges losses
to these allowances when such losses are realized. The determination of the
allowance for loan losses requires significant management judgement reflecting
management's best estimate of probable loan losses related to specifically
identified loans as well as probable loan losses in the remaining loan
portfolio. Management's evaluation is based upon a continuing review of these
portfolios. Consideration is also given to examinations performed by regulatory
authorities.
Management establishes the loan loss allowance in accordance with guidance
provided in the Securities and Exchange Commission's Staff Accounting Bulletin
102 (SAB 102). Its methodology for assessing the appropriateness of the
allowance consists of several key elements, which include: specific allowances
for identified problem loans; formula allowances for commercial and commercial
real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans, in cases where
management has identified significant conditions or circumstances related to a
specific credit that management believes indicate the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans are
calculated by applying loss factors to outstanding loans in each case based on
the internal risk grade of loans. Changes in risk grades of both performing and
nonperforming loans affect the amount of the formula allowance. Loss factors by
risk grade have a basis in WSFS' historical loss experience for such loans and
may be adjusted for significant factors that, in management's judgment, affect
the collectability of the portfolio as of the evaluation date. (See discussion
of historical loss adjustment factors below.)
Pooled loans are loans that are usually smaller, not-individually-graded
and homogenous in nature, such as consumer installment loans and residential
mortgages. Pooled loan loss allowances are based on historical net charge-offs
for six years which management believes approximates an average business cycle.
The average loss allowance per homogenous pool is based on the product of
average annual historical loss rate and the average estimated duration of the
pool multiplied by the pool balances. These separate risk pools are then
assigned a reserve for losses based upon this historical loss information, as
adjusted for historical loss adjustment factors. Historical loss adjustment
factors are based upon management's evaluation of various current conditions.
The evaluation of the inherent loss with respect to these more current
conditions is subject to a higher degree of uncertainty because they are not
identified with specific credits. The more current conditions, evaluated in
connection with the adjustment factors, include an evaluation of the following:
o General economic and business conditions affecting WSFS' key lending areas,
o Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
-18-
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan origination,
servicing and risk management processes.
WSFS' loan officers and risk managers meet monthly to discuss and review these
conditions, and also risks associated with individual problem loans. By
assessing the probable estimated losses inherent in the loan portfolio on a
monthly basis, management is able to adjust specific and inherent loss estimates
based upon the availability of more recent information.
The following table represents a summary of the changes in the allowance
for loan losses during the periods indicated.
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
------------------ --------------
(In Thousands)
Beginning balance .................................. $21,597 $21,423
Provision for loan losses .......................... 755 393
Charge-offs:
Residential real estate ....................... 598 18
Commercial real estate (1) .................... 284 -
Commercial .................................... 145 168
Consumer ...................................... 430 245
------- -------
Total charge-offs .......................... 1,457 431
------- -------
Recoveries:
Residential real estate ....................... - -
Commercial real estate (1) ......................... 21 26
Commercial .................................... 10 74
Consumer ...................................... 69 33
------- -------
Total recoveries ........................... 100 133
------- -------
Net charge-offs .................................... 1,357 298
------- -------
Ending balance ..................................... $20,995 $21,518
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (2) ......... 0.51% 0.12%
======= =======
(1) Includes commercial mortgages and construction loans.
(2) Ratios for the three months ended March 31, 2002 and 2001 are annualized.
Chargeoffs increased $1.0 million during the first quarter of 2002 compared
to the same quarter in 2001. Of this increase, $597,000 resulted from a pool of
troubled residential mortgages that have been subsequently sold. In addition,
$284,000 in chargeoffs resulted from a nonperforming commercial mortgage.
Other Income
Other income for the three months ended March 31, 2002 was $17.7 million
compared to $8.1 million for the first quarter of 2001. This increase was mainly
due to an increase of $8.9 million in the gains on the sales of loans during the
first quarter of 2002 compared to the first quarter of 2001. This increase
reflects the expansion of WNF's market share within existing regions and growth
due to geographical expansion into new regions enhanced by the current refinance
market. Other fee income increased $731,000 for the three months ended March 31,
2002 and reflected higher credit and debit card usage, the expansion of the ATM
network, and growth in loans and deposits.
-19-
Other Expenses
Other expenses for the quarter ended March 31, 2002 were $22.6 million or
$5.8 million above the first quarter of 2001. The majority of this increase
resulted from a $4.7 million increase in salaries, benefits and other
compensation expenses of which $4.0 million related to the expansion of WNF and
$404,000 resulted from the Corporation's Technology, Organizational and Process
Simplification (TOPS) process reengineering program. In addition, other
operating expenses increased $771,000 in the first quarter of 2002 over the
first quarter of 2001 almost entirely due to the growth of the Corporation's two
newer subsidiaries, WNF and C1FN. Professional fees also increased $561,000 and
included $463,000 in TOPS related consulting fees. These increases were
partially offset by the recovery of $198,000 in ATM fraud losses. This amount
represented a partial recovery of previously reported fraud losses related to an
armored car carrier that was incurred in the first quarter of 2001.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. Income taxes are accounted for in
accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences". The Corporation recorded
a provision for income taxes during the first quarter of 2002 of $ 5.6 million
compared to $1.7 million for the same period in 2001. The effective tax rates
for the first quarter of 2002 and 2001 were 37% and 31%, respectively.
The effective rates reflect the recognition of certain tax benefits in the
financial statements including those benefits from the acquisition and
subsequent merger of a reverse mortgage lender into the Corporation and from a
fifty-percent interest income exclusion on an ESOP loan. While the income has
increased for the comparable periods, a lower proportion has a favorable tax
effect resulting in an increased effective tax rate.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly.
Commitments and Contingencies
In April 2002 the Company entered into a contract with Metavante
Corporation to provide data processing and other related services. The projected
amount of future minimum payments contractually due for the nest five years is
as follows
2002................................ $ 145,000
2003................................ 1,775,000
2004................................ 1,805,000
2005................................ 1,835,000
2006................................ 1,865,000
Thereafter.......................... 8,601,000
Cumulative Effect of a Change in Accounting Principle
On January 1, 2002 the Corporation adopted Statement of Accounting
Standards (SFAS) 142, Goodwill and Other Intangible Assets. Statement 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion 17, Intangible Assets. It addresses
how intangible assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should be accounted
for in financial statements upon their acquisition. Statement 142 also addresses
how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. Under this standard
goodwill can no longer be amortized but instead must be tested for impairment
and its value adjusted accordingly. Negative goodwill is required to be taken
into earnings immediately.
The Corporation had $1.2 million in negative goodwill associated with the
purchase of Providential Home Income Plan, Inc., a former subsidiary that has
subsequently been merged into the Bank. As a result of adopting
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this standard, the Corporation recognized $703,000 in income as a cumulative
effect of a change in accounting principle, net of $469,000 in income tax. Prior
to adoption, the Corporation had been accreting $36,000 per quarter into
interest income.
In addition, the Corporation has $958,000 in goodwill related to its
investment in C1FN, which, consistent with SFAS 142, will be evaluated for
impairment in the second quarter of 2002. Amortization of this goodwill ended
January 1, 2002 and totaled $19,000 for the first quarter of 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement 143, Accounting for Asset
Retirement Obligations. Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. Statement 143 is effective for fiscal years beginning
after June 15, 2002. Management has not yet determined the impact, if any, to
earnings, financial condition or equity upon adoption of this statement.
FORWARD LOOKING STATEMENTS
Within this report and financial statements, management has included
certain "forward looking statements" concerning the future operations of the
Corporation. It is management's desire to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward looking statements"
contained in its financial statements.. Management has used "forward looking
statements" to describe the future plans and strategies including expectations
of the Corporation's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Delaware, the mid-Atlantic region and the country as
a whole, loan delinquency rates, uncertainty of estimates and changes in federal
and state regulation, among other factors. These factors should be considered in
evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Incorporated herein by reference from Item 2, of this quarterly
report on Form 10-Q.
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Corporation's Annual Stockholder's Meeting (the Meeting)
held on April 25, 2002, all of the nominees for director proposed by the
Corporation were elected. The votes cast for each nominee were as follows:
For Withheld
--- --------
Charles G. Cheleden............... 7,505,124 48,677
Joseph R. Julian.................. 7,522,120 31,681
Dale E. Wolf...................... 7,502,975 50,826
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: May 10, 2002 /s/MARVIN N. SCHOENHALS
--------------------------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: May 10, 2002 /s/MARK A. TURNER
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Mark A. Turner
Chief Operating Officer and Chief Financial Officer
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