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 (Bank or 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. WSFS has served the
residents of the Delaware Valley for 171 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 strategy of the Corporation is
to improve its status as a high-performing financial services company by
focusing on its core community banking business.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as retail deposit and cash management
services. Lending activities are funded primarily with retail deposits and
borrowings. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC). WSFS conducted operations from its main office,
two operations centers and 21 retail banking offices, located in northern
Delaware and southeastern Pennsylvania. In 2002, for strategic reasons, WSFS
transferred 6 branch offices that were outside of its core footprint to other
financial institutions.
The Corporation has two consolidated subsidiaries, WSFS and WSFS Capital
Trust I. The Corporation has 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;
WSFS Investment Group, Inc. (formerly 838 Investment Group, Inc.), which markets
various third-party insurance products and securities through WSFS' branch
system; and WSFS Reit, Inc., which holds qualifying real estate assets and may
be used in the future to raise capital. An additional subsidiary, Star States
Development Company (SSDC), was dissolved in 2002.
In 2000, the Board of Directors of the Corporation approved plans to
discontinue the operations of WCC. WCC, which had 2,317 lease contracts and
1,052 loan contracts at December 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 2004. See the Discontinued Operations section of Management's
Discussion and Analysis and Note 2 to the Financial Statements for a detailed
discussion.
In addition to the wholly owned subsidiaries, WSFS had consolidated two
non-wholly owned subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and
Wilmington Finance, Inc. (WF). C1FN, a 21% owned subsidiary engaged in Internet
and branchless banking, was sold in November 2002. WF, a majority owned
subsidiary, engaged in sub-prime residential mortgage banking, was sold in
January 2003. Both subsidiaries are therefore classified as businesses
held-for-sale in the Financial Statements. See the Businesses Held-for-Sale
section of this Management's Discussion and Analysis, and Note 3 to the
Financial Statements for a further discussion.
These divestitures are consistent with recent strategic actions of WSFS to
simplify its operations and better focus resources and capital on WSFS' core
bank.
RESULTS OF OPERATIONS
The Corporation recorded net income of $101.1 million for the year ended
December 31, 2002, compared to $17.1 million and $11.0 million in 2001 and 2000,
respectively. Income from continuing operations was $88.0 million, $17.8 million
and $18.5 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Net Income for the year ended December 31, 2002 included an after
tax gain of $66.6 million on the sale of substantially all of the Corporation's
investment in a $33 million reverse mortgage portfolio (see Note 6 to the
Financial Statements for a further discussion). In addition, the results for
2002 included an after tax gain of $737,000 on the sale of the Bank's United
Asian Bank division (UAB) and a $187,000 after tax gain on the sale of
C1FN/Everbank. See the Businesses Held-for- Sale section of this Management's
Discussion and Analysis and Note 3 to the Financial Statements for a further
discussion.
Net Interest Income. Net interest income is the most significant component
of operating income to the Corporation. Net interest income relies upon the
levels of interest-earning assets and interest-bearing liabilities and the
difference or "spread" between the respective yields earned and rates paid. The
interest rate spread is influenced by regulatory, economic and competitive
factors that affect interest rates, loan demand and deposit flows. The level of
nonperforming loans can also impact the interest rate spread by reducing the
overall yield on the loan portfolio.
Net interest income increased $6.5 million, or 12%, to $61.3 million in
2002 compared to $54.7 million in 2001. Total interest income decreased $6.6
million between 2001 and 2002, primarily due to a decrease in the yield on total
loans and
7
mortgage-backed securities of 106 basis points and 90 basis points,
respectively, between 2001 and 2002. This decline in yield was responsible for a
$7.9 million decrease in net interest income. Average ambient interest rates
were significantly lower in 2002 than in 2001. These declines were offset in
part by a $2.9 million increase in net interest income from a higher yield on
reverse mortgages in 2002. For further discussion of reverse mortgages, see the
Investment in Reverse Mortgages discussion included in this Management's
Discussion and Analysis and Note 6 to the Financial Statements.
Total interest expense, excluding the expense to fund discontinued
operations and businesses held-for-sale, decreased $13.2 million from 2001 to
2002 primarily due to a decrease in the average yield on deposits of 184 basis
points from 3.63% to 1.79%, and a decrease in the level of interest-bearing
deposits of $63.7 million. The decline in interest expense was significantly
affected by the aforementioned decline in interest rates in 2002, as longer-term
borrowing and deposits matured and were replaced at substantially lower rates.
Between 2000 and 2001, interest income decreased $19.6 million, while
interest expense decreased $12.9 million. The decrease in interest income was
primarily due to a decrease in mortgage-backed securities balances of $130.4
million between 2000 and 2001, resulting in a $9.0 million decrease in interest
income, and a decrease in yield on the reverse mortgages from 58.92% to 29.54%
between 2000 and 2001. This decline in yield on reverse mortgages was
responsible for a $9.2 million decrease in interest income. These decreases were
offset in part by an increase in average total loans of $61.0 million. In
addition, overall rates were lower in 2001 than in 2000. The decrease in
interest expense was the result of the decrease in brokered certificates of
deposit by an average of $99.1 million, and by a $39.7 million decrease in
average other borrowings. The average rates on deposits decreased 104 basis
points from 4.67% to 3.63%, while rates on Federal Home Loan Bank (FHLB)
advances and other borrowings decreased 24 basis points and 76 basis points,
respectively. The average yield on the trust preferred borrowings also decreased
259 basis points, from 9.23% to 6.64%. All decreases in yield are primarily due
to interest rates decreasing as much as 475 basis points during 2001.
The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in the rates for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in
volume (change in volume multiplied by prior year rate); (ii) changes in rates
(change in rate multiplied by prior year volume); and (iii) net change. Changes
due to the combination of rate and volume changes (changes in volume multiplied
by changes in rate) are allocated proportionately between changes in rate and
changes in volume.
Year Ended December 31,
---------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
--------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest income:
Real estate loans (1) ..................... $ 1,126 $ (6,081) $ (4,955) $ 1,375 $ (2,704) $ (1,329)
Commercial loans .......................... 3,198 (2,609) 589 2,271 (1,173) 1,098
Consumer loans ............................ 771 (1,912) (1,141) 1,541 (1,106) 435
Loans held-for-sale ....................... 95 (96) (1) (438) 163 (275)
Mortgage-backed securities ................ (999) (1,349) (2,348) (8,189) (816) (9,005)
Investment securities ..................... (313) 12 (301) (1,098) (241) (1,339)
Investment in reverse mortgages ........... (2,792) 5,729 2,937 903 (10,057) (9,154)
Other ..................................... (538) (877) (1,415) 1,049 (1,041) 8
-------- -------- -------- -------- -------- --------
Favorable (Unfavorable) ....................... 548 (7,183) (6,635) (2,586) (16,975) (19,561)
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
Money market and interest-bearing demand 80 (560) (480) 171 (690) (519)
Savings ................................. 42 (4,545) (4,503) 1,129 (4,402) (3,273)
Retail time deposits .................... (250) (4,680) (4,930) 35 205 240
Jumbo certificates of deposit - nonretail (262) (425) (687) (270) (337) (607)
Brokered certificates of deposit ........ (4,463) 319 (4,144) (6,673) 286 (6,387)
FHLB of Pittsburgh advances ............... 2,643 (4,275) (1,632) (71) (1,033) (1,104)
Trust Preferred borrowings ................ - (766) (766) - (1,329) (1,329)
Other borrowed funds ...................... 876 (3,089) (2,213) (2,274) (953) (3,227)
Cost of funding discontinued operations ... 3,429 3,372 6,801 3,623 1,003 4,626
Cost of funding businesses held-for-sale .. 1,041 (1,650) (609) (1,059) (263) (1,322)
-------- -------- -------- -------- -------- --------
Unfavorable (favorable) ....................... 3,136 (16,299) (13,163) (5,389) (7,513) (12,902)
-------- -------- -------- -------- -------- --------
Net change (unfavorable) favorable ............ $ (2,588) $ 9,116 $ 6,528 $ 2,803 $ (9,462) $ (6,659)
======== ======== ======== ======== ======== ========
(1) Includes commercial mortgage loans.
8
The following table provides information regarding the average balances of, and
yields/rates on interest-earning assets and interest-bearing liabilities during
the periods indicated:
Year Ended December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------ -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)......... $ 652,391 $ 44,573 6.83% $ 637,679 $ 49,528 7.77% $ 620,590 $ 50,857 8.19%
Commercial loans.............. 196,343 11,693 6.44 151,200 11,104 7.99 123,589 10,006 8.87
Consumer loans................ 190,212 15,538 8.17 181,535 16,679 9.19 165,219 16,244 9.83
---------- ---------- --------- ---------- ---------- ----------
Total loans.............. 1,038,946 71,804 7.02 970,414 77,311 8.08 909,398 77,107 8.60
Mortgage-backed securities (5).. 142,250 7,608 5.35 159,242 9,956 6.25 289,660 18,961 6.55
Loans held-for-sale (3)......... 3,013 214 7.10 1,923 215 11.18 6,400 490 7.66
Investment securities (5)....... 14,292 890 6.23 19,297 1,191 6.17 36,725 2,530 6.89
Investment in reverse mortgages. 26,328 13,092 49.73 34,375 10,155 29.54 32,771 19,309 58.92
Other interest-earning assets... 40,590 1,095 2.70 54,434 2,510 4.61 35,586 2,502 7.03
---------- ---------- --------- ---------- ---------- ----------
Total interest-earning assets. 1,265,419 94,703 7.57 1,239,685 101,338 8.27 1,310,540 120,899 9.31
---------- ---------- ----------
Allowance for loan losses......... (21,358) (21,470) (22,409)
Cash and due from banks........... 121,022 78,085 50,075
Loans, operating leases and other
assets of discontinued
operations...... ............. 79,479 159,989 228,544
Assets of businesses held-for-sale 371,830 311,806 119,880
Other noninterest-earning assets.. 51,020 42,440 38,473
---------- --------- ----------
Total assets.................. $1,867,412 $1,810,535 $1,725,103
========== ========== ==========
Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand.............. $ 90,585 $ 430 0.47% $ 82,678 $ 910 1.10% $ 72,954 $ 1,429 1.96%
Savings....................... 305,418 2,914 0.95 303,687 7,417 2.44 272,143 10,690 3.93
Retail time deposits.......... 260,858 8,267 3.17 265,969 13,197 4.96 265,247 12,957 4.88
Jumbo certificates of
deposit - nonretail......... 16,674 419 2.51 23,449 1,106 4.72 28,412 1,713 6.03
Brokered certificates of
deposit..................... 137 10 7.30 61,632 4,154 6.74 160,753 10,541 6.56
---------- ---------- --------- ---------- ---------- ----------
Total interest-bearing
deposits............... 673,672 12,040 1.79 737,415 26,784 3.63 799,509 37,330 4.67
FHLB of Pittsburgh advances..... 448,103 20,723 4.56 396,542 22,355 5.56 397,672 23,459 5.80
Trust preferred borrowings...... 50,000 2,599 5.13 50,000 3,365 6.64 50,000 4,694 9.23
Other borrowed funds............ 115,740 3,140 2.71 97,266 5,353 5.50 136,971 8,580 6.26
Cost of funding discontinued
operations.................... - (2,470) - (9,271) - (13,897)
Cost of funding businesses
held-for-sale................. - (2,598) - (1,989) - (667)
---------- ---------- --------- ---------- ---------- ----------
Total interest-bearing
liabilities................. 1,287,515 33,434 2.60 1,281,223 46,597 3.64 1,384,152 59,499 4.30
---------- ---------- ----------
Noninterest-bearing demand
deposits........................ 159,741 136,229 116,724
Liabilities of businesses
held-for-sale................... 271,864 269,402 103,015
Other noninterest-bearing
liabilities..................... 16,181 18,293 19,371
Minority interest................. 7,597 4,979 3,912
Stockholders' equity.............. 124,514 100,409 97,929
---------- --------- ----------
Total liabilities and
stockholders' equity........ $1,867,412 $1,810,535 $1,725,103
========== ========== ==========
Deficit of interest-earning
assets over interest-bearing
liabilities................... $ (22,096) $ (41,538) $ (73,612)
========== ========== ==========
Net interest and dividend income.. $ 61,269 $ 54,741 $ 61,400
========== ========== ==========
Interest rate spread.............. 4.97% 4.64% 5.01%
===== ===== =====
Interest rate margin.............. 4.93% 4.51% 4.77%
===== ===== =====
(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.
9
Provision for Loan Losses. The Corporation records a provision for loan
losses in order to maintain the allowance for loan losses at a level which
management considers its best estimate of known and probable inherent losses.
Management's evaluation is based upon a continuing review of the portfolio and
requires significant management judgment (see the Allowance for Loan Losses
section of Management's Discussion and Analysis). For the year ended December
31, 2002, the Corporation recorded a provision for loan losses from continuing
operations of $2.2 million compared to $1.9 million in 2001and $864,000 in 2000.
These increases reflect, among other things, the Company's loan growth, a change
in the mix to higher margin and higher risk loans, a weakening economic
environment in 2002, offset by an overall improvement in credit quality of the
Corporation's loan portfolio.
Noninterest Income. Noninterest income of $124.1 million in 2002, increased
$102.9 million, or 487% from 2001. This increase was almost entirely due to the
sale of the reverse mortgage portfolio. Substantially all of WSFS' $33 million
reverse mortgage portfolio was sold during the year resulting in a pretax gain
of $101.5 million. In addition, credit/debit card and ATM income grew $1.7
million during 2002 due to the continued expansion of WSFS' ATM servicing
division. At December 31, 2002, WSFS' CashConnect division (ATM unit) derived
income from 4,251 ATMs compared to 2,724 at December 31, 2001. Of these, WSFS
owned and operated 189 ATMs in 2002 and 177 ATMs in 2001.
Noninterest income of $21.1 million in 2001, increased $8.2 million, or 63%
from 2000. Deposit services charges increased $1.6 million to $8.6 million in
2001 primarily as a result of growth in retail deposits. Credit/debit card and
ATM income grew $1.2 million during 2001, due to the continued expansion of
WSFS' ATM servicing division and customer card usage. At December 31, 2001,
WSFS' CashConnect division derived income from 2,724 ATMs compared to 2,001 at
December 31, 2000. In 2000, noninterest income was negatively affected by a $4.4
million loss on the sale of securities. These losses were the result of the
Corporation's deleveraging strategy in which the Corporation sold below-market
yielding investments and repaid higher costing borrowings.
Noninterest expenses. Noninterest expenses of $51.6 million in 2002
increased $3.9 million or 8% from 2001. This increase was mainly due to a $2.7
million increase in salaries and benefits. Included in salaries and benefits was
$823,000 of expenses related to special management compensation and a special
contribution to the Company's 401(k) plan for all Associates, which were related
to the reverse mortgage sale. Also related to the reverse mortgage sale in 2002,
the Company took a $1.0 million charge for the establishment of a WSFS
charitable foundation to benefit the communities that WSFS serves. Expenses, net
of cost savings related to the Corporation's Technology, Organizational Process
Simplification process reengineering program (TOPS) were $1.1 million in 2002
compared to $433,000 in 2001. These net expenses primarily consisted of
consulting fees and severance charges, partially offset by personnel cost
savings and reduced technology expenses. Net of tax, this amounted to $744,000
or $0.08 per share, for the year 2002. When fully implemented in mid-2003, the
TOPS program is expected to result in total annual pretax savings of
approximately $3.0 million to $3.5 million since inception of the program. In
addition, noninterest expenses in 2001 included a charge of $1.1 million
connected with the exit of six in-store branch offices in southeastern
Pennsylvania.
Noninterest expenses of $47.7 million in 2001 increased $2.4 million or 5%
from 2000. The increases were mainly attributable to salaries and other expenses
which increased $1.7 million and $1.0 million, respectively, partially offset by
lower data processing and operations expense, which decreased by $925,000.
During the third quarter of 2000, the Corporation re-assumed all responsibility
for loan and deposit operations that were previously outsourced through the
Corporation's information technology provider. As a result, certain expenses
previously recorded as data processing were thereafter reflected in salaries and
benefit expense. Noninterest expenses for 2001 also include a charge of $1.1
million connected with the exit of six in-store branch offices in southeastern
Pennsylvania.
Income Taxes. The Corporation recorded a $51.6 million tax provision for
the year ended December 31, 2002 compared to $8.4 million and $276,000 for the
years ended December 31, 2001 and 2000, respectively. The effective tax rates
for continuing operations for the years ended December 31, 2002, 2001 and 2000
were 33.6%, 32.5% and 30.0%, respectively. The Corporation expects its effective
tax rate for continuing operations to be between 34% and 36% in 2003. The
provision for income taxes includes federal, state and local income taxes that
are currently payable or deferred because of temporary differences between the
financial reporting bases and the tax reporting bases of the assets and
liabilities. In 2002, the Internal Revenue Service (IRS) concluded an
examination of the Corporation's federal income tax returns for all years
through December 31, 2000. The income tax provision for the year ended December
31, 2002 was reduced by $894,000 primarily as a result of the resolution of tax
authority examinations and tax return settlements.
At December 31, 2002, approximately $4.7 million in gross deferred tax
assets of the Corporation are related to net operating losses and tax credits
attributable to a former subsidiary. Management has assessed a valuation
allowance on a portion of these deferred tax assets due to limitations imposed
by the Internal Revenue Code. Approximately $1.3 million in gross deferred tax
assets of the Corporation at December 31, 2002 are related to state tax net
operating losses. Management has established a valuation allowance on a portion
of these deferred tax assets due to such net operating losses expiring before
being utilized.
10
The Corporation analyzes its projection of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly. For
additional information regarding the Corporation's tax provision and net
operating loss carryforwards, see Note 14 to the Consolidated Financial
Statements.
FINANCIAL CONDITION
Total assets decreased $208.9 million, or 10.9%, during 2002 to $1.7
billion. This decrease was mainly due to the fourth quarter 2002 sale of C1FN,
which, at December 31, 2001, had $296.1 million in assets. The sale included
total assets of approximately $342.8 million and deposits of $340.1 million. In
addition, loans, operating leases and other assets of discontinued operations
decreased $67.9 million, the effect of maturities and repayments of loans and
leases at WCC. These decreases were partially offset by the November 22, 2002
sale of substantially all of WSFS' reverse mortgage portfolio, at a significant
premium. At December 31, 2001, this portfolio was valued at $33.9 million. In
selling this portfolio, WSFS received $128.0 million in cash, $10.0 million in
mortgage-backed securities classified as "trading" and an option to purchase
certain securities. At December 31, 2002, most of the proceeds of this sale were
held in cash and due from banks.
Investments. Between December 31, 2001 and December 31, 2002, total
investments decreased $47.8 million. This was mainly due to the sale of the
reverse mortgage portfolio. In addition C1FN, which was sold during 2002, had
$19.3 million of investments at December 31, 2001.
Mortgage-Backed Securities. During 2002, investments in mortgage-backed
securities decreased $213.5 million to $148.2 million. This decrease was mainly
due to the sale of C1FN. At December 31, 2001, C1FN had $240.9 million in
mortgage-backed securities.
Loans, net. Net loans, excluding loans held-for-sale, increased $45.2
million during 2002. This included increases of $17.3 million in residential
loans, $31.4 million in commercial real estate loans and $12.0 million in
commercial loans. Partially offsetting these increases were consumer loans,
which decreased $15.7 million. The decrease in consumer loans included $6.3
million of C1FN loans.
Retail Deposits. During 2002, retail deposits decreased $253.7 million to
$872.1 million. As a result of the previously mentioned sales of C1FN and UAB,
$348.6 million in deposits were sold. Excluding these sales, retail deposits
would have increased by $30.4 million in 2002. The table below depicts the
changes in retail deposits over the last three years:
Year Ended December 31,
--------------------------------------
2002 2001 2000
---- ---- ----
(In Millions)
Beginning balance................... $ 1,125.7 $ 961.1 $ 736.0
Interest credited................... 16.3 30.6 30.2
Deposits sold....................... (348.6) - -
Deposit inflows, net................ 78.7(1) 134.0 194.9
--------- --------- ----------
Ending balance...................... $ 872.1 $ 1,125.7 $ 961.1
========= ========= =========
(1) Includes $45.1 million in deposit increases at C1FN that were sold in
November 2002.
Borrowings. Total borrowings decreased by $129.5 million between December
31, 2001 and December 31, 2002. This decline reflects the payoff of borrowings
as more of the Bank's funding requirements were achieved through the growth in
stockholders' equity and the level of retail deposits. In addition, funding
requirements have decreased due to the sales of C1FN, UAB and reverse mortgages.
Stockholders' Equity. Stockholders' equity increased $82.7 million to
$182.7 million at December 31, 2002. This increase included $101.1 million in
net income. This was partially offset by the acquisition of 485,100 shares of
treasury stock for $15.2 million and dividends of $1.7 million paid to
stockholders. In addition, other comprehensive income decreased by $2.2 million
of which $2.0 million related to the sale of C1FN.
ASSET/LIABILITY MANAGEMENT
The primary asset/liability management goal of the Corporation is to
maximize its net interest income opportunities within the constraints of
managing interest rate risk; ensuring adequate liquidity and funding; and
maintaining a strong capital base.
In general, interest rate risk is mitigated by closely matching the
maturities or repricing periods of interest-sensitive assets and liabilities to
ensure a favorable interest rate spread. Management regularly reviews the
Corporation's interest-rate sensitivity, and uses a variety of strategies as
needed to adjust that sensitivity within acceptable tolerance ranges established
by management and the Board of Directors. Changing the relative proportions of
fixed-rate and adjustable-rate assets and liabilities is one of the primary
strategies utilized by the Corporation to accomplish this objective.
11
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period, and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
The repricing and maturities of the Corporation's interest-rate sensitive
assets and interest-rate sensitive liabilities at December 31, 2002 are set
forth in the following table:
Less than One to Over
One Year Five Years Five Years Total
--------- ---------- ---------- -----
(Dollars in Thousands)
Interest-rate sensitive assets (1):
Real estate loans (2)............................. $ 264,036 $ 255,324 $ 188,400 $ 707,759
Commercial loans.................................. 136,459 26,960 46,148 209,567
Consumer loans.................................... 61,819 60,979 59,053 181,852
Mortgage-backed securities........................ 71,680 71,976 4,582 148,238
Loans held-for-sale............................... 121,349 - - 121,349
Investment in reverse mortgages................... 497 1,160 (526) 1,131
Investment securities............................. 33,237 6,039 4,480 43,756
Other investments................................. 71,521 - - 71,521
--------- --------- ---------- ----------
760,598 422,438 302,137 1,485,173
--------- --------- ---------- ----------
Interest-rate sensitive liabilities:
Money market and interest-bearing
demand deposits ............................... 30,371 - 78,888 109,260
Savings deposits.................................. 106,222 - 186,695 292,917
Retail time deposits.............................. 212,699 73,809 431 286,939
Jumbo certificates of deposit-nonretail........... 24,437 1,887 - 26,324
FHLB advances..................................... 85,000 90,000 178,500 353,500
Trust preferred borrowings and interest rate cap.. 50,000 - - 50,000
Other borrowed funds.............................. 62,506 - - 62,506
--------- --------- ---------- ----------
571,234 165,696 444,514 1,181,445
--------- --------- ---------- ----------
Excess of interest-rate sensitive
assets over interest-rate sensitive liabilities
("interest-rate sensitive gap")................... $ 189,363 $ 256,742 $ (142,377) $ 303,728
========= ========== ========== ==========
Interest-rate sensitive assets/interest-rate
sensitive liabilities............................. 133.15%
Interest-rate sensitive gap as a percent of
total assets...................................... 11.11%
(1) Interest-sensitive assets of discontinued operations are excluded as well
as the interest-sensitive funding of discontinued operations through $50
million in FHLB advances as of December 31, 2002.
(2) Includes commercial mortgage, construction, and residential mortgage loans.
Generally, during a period of rising interest rates, a positive gap would
result in an increase in net interest income while a negative gap would
adversely affect net interest income. Conversely, during a period of falling
rates, a positive gap would result in a decrease in net interest income while a
negative gap would augment net interest income. However, the
interest-sensitivity table does not provide a comprehensive representation of
the impact of interest rate changes on net interest income. Each category of
assets or liabilities will not be affected equally or simultaneously by changes
in the general level of interest rates. Even assets and liabilities which
contractually reprice within the rate period may not, in fact, reprice at the
same price or the same time or with the same frequency. It is also important to
consider that the table represents a specific point in time. Variations can
occur as the Company adjusts its interest-sensitivity position throughout the
year.
To provide a more accurate one-year gap position of the Corporation,
certain deposit classifications are based on the interest-rate sensitive
attributes and not on the contractual repricing characteristics of these
deposits. Management estimates, based on historical trends of WSFS' deposit
accounts, that 35% of money market and 25% of interest-bearing demand deposits
are sensitive to interest rate changes and that 22% to 49% of savings deposits
are sensitive to interest rate changes. Accordingly, these interest-sensitive
portions are classified in the less than one-year category with the remainder in
the over five-year category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index.
12
Deposit rates other than time deposit rates are variable, and changes in
deposit rates are generally subject to local market conditions and management's
discretion and are not indexed to any particular rate.
The Corporation's gap position was particularly asset sensitive at December
31, 2002. This was primarily due to the sale of its reverse mortgages portfolio
on November 22, 2002, in which $33 million of mostly long-term assets were
exchanged for $138 million in primarily short-term assets. In the first quarter
of 2003, management undertook certain strategies to reduce its level of asset
sensitivity.
In 1998, the Corporation purchased a ten-year interest rate cap in order to
limit its exposure on $50 million of variable rate trust preferred securities
issued in 1998. This derivative instrument caps the 3-month LIBOR rate (the base
rate of the Trust Preferred borrowings) at 6.00%. The Trust Preferred borrowings
are classified in the less than one year category reflecting the ability to
adjust upward for the balance of the term of the interest rate cap. If the
three-month LIBOR rate equals or exceeds 6.00%, the Trust Preferred borrowing
takes on a fixed characteristic and therefore is classified in the period
corresponding to the cap's maturity.
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 net 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.
In 1993, the Corporation acquired a pool of reverse mortgages from the FDIC
and another lender. In November 1994, the Corporation purchased Providential
Home Income Plan, Inc., a California-based reverse mortgage lender, for
approximately $24.4 million. Providential's assets at acquisition primarily
consisted of cash and its investment in reverse mortgages. Providential's
results have been included in the Corporation's consolidated statement of
operations since the acquisition date.
The Corporation accounts for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation projected
the cash inflows and outflows of the pool including actuarial projections of the
life expectancy of the individual contract holder and changes in the collateral
values of the residence. At each reporting date, a new economic forecast was
made of the cash inflows and outflows of each pool of reverse mortgages; the
effective yield of each pool was recomputed, and income was adjusted
retroactively and prospectively to reflect the revised rate of return.
Accordingly, because of this market-value based accounting, the recorded value
of reverse mortgage assets included significant risk associated with estimations
and income varied significantly from reporting period to reporting period.
For the year ended December 31, 2002, the Corporation earned $13.1 million
in interest income on reverse mortgages as compared to $10.2 million in 2001 and
$19.3 million in 2000. The yield on the portfolio was 49.73% in 2002 compared to
29.54% in 2001 and 58.92% in 2000.
Capitalizing on the robust housing and interest rate markets, substantially
all of WSFS' $33 million reverse mortgage portfolio was sold, effective October
1, 2002, for a pretax gain of $101.5 million. The Corporation received $128
million in cash, $10 million in BBB rated mortgage-backed securities classified
as trading and options to acquire up to 49.9% of Class "O" certificates issued
in connection with mortgage-backed security SASCO RM-1 2002. Since this was the
sale of a financial asset, results are shown in continuing operations in the
accompanying Financial Statements, in accordance with accounting principles
generally accepted in the United States of America. Included in the net gain on
sale of reverse mortgages are amounts for transaction costs and other estimates
of costs of future obligations, including an estimated future payment due to a
participant in the value received for certain of the sold reverse mortgages,
under a pre-existing agreement. The remaining investment of $1.1 million at
December 31, 2002 represents a participation in reverse mortgages with a third
party and was not part of the previously mentioned sale.
In addition, on January 1, 2002, the Corporation adopted 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. 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
upon adoption.
The Corporation had $1.2 million in negative goodwill associated with the 1994
purchase of Providential Home Income Plan, Inc., a former subsidiary that was
subsequently merged into the Bank. As a result of adopting this standard, the
Corporation recognized income of $703,000 in the first quarter of 2002 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.
13
DISCONTINUED OPERATIONS
In 2000 the Board of Directors of WSFS Financial Corporation approved plans
to discontinue the operations of WCC. WCC, which had 2,317 lease contracts and
1,052 loan contracts at December 31, 2002, no longer accepts new applications
but will continue to service existing loans and leases until their maturity.
Management estimates that substantially all loan and lease contracts will mature
by the end of 2004.
In accordance with APB 30, which was the authoritative literature in 2000,
accounting for discontinued operations of a business segment at that time
required that the Company forecast operating results over he wind-down period
and accrue any expected net losses. The historic results of WCC's operations,
the accrual of expected losses to be incurred over the wind-down period, and the
future reported results of WCC are required to be treated as Discontinued
Operations of a Business Segment, and shown in a summary form separately from
the Company's results of continuing operations in reported results of the
Corporation. Prior periods are restated, as required by accounting principles
generally accepted in the United States of America.
As a result, net operating losses of $2.4 million for the year ended
December 31, 2000 were reclassified from continuing operations to discontinued
operations. In addition, a $6.2 million pretax reserve was established to absorb
expected future losses, primarily related to residual value losses on leases.
Consequently, the Corporation recognized an after tax charge of $2.2 million,
net of $4.0 million in tax benefits related to net operating loss carryforwards,
for the expected loss over the projected wind-down period.
During 2001 and 2002, as a result of the heavy incenting of new car
purchases by manufacturers and other factors both used car prices and WSFS'
exposure to residual values on its outstanding leases have continued to
deteriorate. Extensive analysis of remaining leases as of December 31, 2002 and
2001 indicated that additional reserves were needed for the expected losses in
the business during its wind-down. Accordingly, management recorded additional
provisions for these expected losses. These pretax provisions amounted to $2.0
million in 2002 and $3.1 million in 2001.
At December 31, 2002, there were $7.9 million in indirect loans and $44.7
million in indirect leases still outstanding. At December 31, 2002, WSFS had
exposure to $42.3 million in remaining used car residuals, for which it
estimates a loss of $8.9 million. Management has provided for this loss in the
financial statements. The Corporation now has reserves covering 21% of the
related residual exposure. Based on the scheduled maturities of leases,
management estimates by December 31, 2003 its residual exposure will be less
than $8 million and, by December 31, 2004, the exposure will be negligible. The
total loss of $2.8 million after tax, or $0.29 per diluted share from WSFS
Credit Corporation in 2002 includes the after-tax impact of the aforementioned
residual provision and additional reserves of $563,000 for tax expense
established as a result of changes in estimates used to calculate WCC's deferred
taxes.
Due to the uncertainty of a number of factors, including residual values,
interest rates, operating costs and credit quality, the reserve for discontinued
operations will be reevaluated quarterly with adjustments, if necessary,
recorded as income/losses on wind-down of discontinued operations.
BUSINESSES HELD-FOR-SALE
In September 2002, WSFS sold its United Asian Bank Division (UAB). UAB was
started in 2000 as a single branch to serve the Korean and Asian communities of
Elkins Park, Pennsylvania and the surrounding area. The sale resulted in an
after tax gain of $737,000, and included $8.6 million in deposits and $15.8
million in loans in addition to branch fixed assets and the lease obligations.
In November 2002, the Corporation completed the sale of C1FN and related
interests in its Everbank Division to Alliance Capital Partners, Inc., the
privately held parent company of First Alliance Bank, a federally chartered
savings bank. Everbank was started with C1FN in 1999 as a joint initiative in
Internet and branchless banking. Consistent with the manner in which the segment
was managed and operated, information in this report labeled "C1FN" generally
represents the pro forma combined results of C1FN and WSFS' Everbank Division
(the C1FN/Everbank segment). The sale included total assets of $342.8 million
and deposits of $340.1 million. WSFS recorded an after tax gain of $187,000 on
the sale.
Also in November 2002, WSFS signed a definitive agreement with American
General Finance, Inc. for the sale of WSFS' majority-owned subsidiary,
Wilmington Finance, Inc. (WF). WF is engaged in sub-prime residential mortgage
banking and conducts activity on a national level and aggregates loans primarily
through brokers and sells them to investors. The WF sale was completed on
January 2, 2003 (see Note 21 to the Financial Statements for a further
discussion of this transaction).
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, the major classes of assets and liabilities of WF are
presented separately on the statement of condition as of December 31, 2002. The
income (losses) from the operation of these three businesses (UAB, C1FN/Everbank
and WF) have been presented as income (losses) of businesses held-for-sale, and
presented separately for all periods presented.
14
The gains on the sale of UAB and C1FN are presented separately on the
statement of operations, net of tax. The average balance sheet is presented with
total assets and liabilities of businesses held-for-sale displayed separately.
The completion of these divestiture transactions is consistent with the
Company's strategic direction to focus resources and capital on WSFS' core
community bank in and around Delaware.
MARKET 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 as a percentage of the net
present value of assets. The following table 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 December 31, 2002 and 2001,
calculated in compliance with Thrift Bulletin No. 13A:
December 31,
-----------------------------------------------------------
2002 2001
---------------------------- ----------------------------
Change in Interest % Change in % Change in
Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value (2) Margin (1) Value (2)
- ------------------ ------------ ------------- ------------ -------------
+300 9% 12.86% 8% 8.93%
+200 6% 12.77% 4% 8.90%
+100 3% 12.62% 2% 8.82%
0 0% 12.32% 0% 8.75%
-100 -5% 11.60% -3% 8.34%
-200 (3) -12% 10.67% -6% 8.01%
-300 (3) -21% 10.79% -15% 7.82%
(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 December 31, 2002 and 2001 given the
historically low absolute level of interest rates at these times.
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.
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming real
estate investments and assets acquired through foreclosure can negatively affect
the Corporation's results of operations. Nonaccruing loans are those on which
the accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in the opinion of management, collection is doubtful, or when
principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest. Past due loans are loans
contractually past due 90 days or more as to principal or interest payments but
which remain in accrual status because they are considered well secured and in
the process of collection.
15
The following table sets forth the Corporation's non-performing assets and
past due loans at the dates indicated:
December 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans:
Commercial.................................... $ 2,242 $ 1,330 $ 2,766 $ 2,630 $ 2,182
Consumer...................................... 516 306 383 251 312
Commercial mortgages.......................... 326 1,928 2,272 1,808 2,383
Residential mortgages......................... 3,246 3,618 2,704 2,617 3,068
Construction.................................. 199 351 210 - -
------- ------- ------- ------- --------
Total nonaccruing loans............................ 6,529 7,533 8,335 7,306 7,945
Nonperforming investments in real estate........... - - - - 76
Assets acquired through foreclosure................ 904 432 630 853 2,588
------- ------- ------- ------- --------
Total nonperforming assets......................... $ 7,433 $ 7,965 $ 8,965 $ 8,159 $ 10,609
======= ======== ======= ======= ========
Past due loans:
Residential mortgages......................... $ 346 $ 88 $ 449 $ 333 $ 247
Commercial and commercial mortgages........... 95 767 790 504 2,654
Consumer...................................... 88 244 199 197 41
------- -------- ------- ------- --------
Total past due loans............................... $ 529 $ 1,099 $ 1,438 $ 1,034 $ 2,942
======= ======== ======= ======= ========
Ratio of nonaccruing loans to total
loans (1)..................................... 0.60% 0.72% 0.87% 0.85% 1.05%
Ratio of allowance for loan losses to gross
loans(1)...................................... 1.95% 2.05% 2.22% 2.58% 2.97%
Ratio of nonperforming assets to total assets...... 0.44% 0.42% 0.52% 0.47% 0.65%
Ratio of loan loss allowance to nonaccruing
loans (2)..................................... 324.49% 277.77% 248.81% 294.16% 286.13%
Ratio of loan loss and foreclosed asset
allowance to total nonperforming assets (2)... 285.03% 265.48% 234.01% 266.52% 216.73%
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
Non-performing assets decreased by $532,000 for the twelve months ended
December 31, 2002. The decline was a direct result of $8.4 million of new
non-performing assets being offset by $4.9 million of collections, $1.8 million
of loans transferred to accrual and $2.4 million of charge-offs/other transfers.
Nonperforming loans declined in most loan categories, particularly in commercial
mortgage loans which decreased $1.6 million. Foreclosed assets increased
primarily as a result of an $800,000 commercial mortgage loan being transferred
to foreclosed assets and subsequent write downs.
An analysis of the change in the balance of nonperforming assets during the
last three years is presented below:
Year Ended December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Beginning balance.......................................... $ 7,965 $ 8,965 $ 8,159
Additions............................................ 8,442 7,386 8,332
Collections ........................................ (4,854) (5,596) (4,323)
Transfers to accrual/restructured status............. (1,762) (1,542) (1,227)
Charge-offs/write-downs.............................. (2,358) (1,248) (1,976)
-------- -------- ----------
Ending balance............................................. $ 7,433 $ 7,965 $ 8,965
======== ======== ==========
The ratio of nonaccruing loans to total loans decreased from 0.72% in 2001
to 0.60% in 2002. The decrease was due to a reduction in nonaccruing loans, as
well as an increase in total loans for the year. The ratio of nonperforming
assets to total assets increased slightly from 0.42% in 2001 to 0.44% in 2002.
Although nonperforming assets decreased by $532,000 during 2002, total assets
decreased by $208 million due mainly to the sale of UAB and C1FN.
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
judgment 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, with consideration given to examinations performed
by regulatory authorities.
16
Management establishes the loan loss allowance in accordance with
accounting principles generally accepted in the United States of America and the
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 seven years which management believes approximates the 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, analyzed in
connection with the adjustment factors, include an evaluation of the following:
- - General economic and business conditions affecting WSFS' key lending areas,
- - Credit quality trends (including trends in nonperforming loans expected to
result from existing conditions),
- - Recent loss experience in particular segments of the portfolio,
- - Collateral values and loan-to-value ratios,
- - Loan volumes and concentrations, including changes in mix,
- - Seasoning of the loan portfolio,
- - Specific industry conditions within portfolio segments,
- - Bank regulatory examination results, and
- - 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 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. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for such losses. The Company
also gives consideration to the results of these regulatory agency examinations.
17
The table below represents a summary of changes in the allowance for loan
losses during the periods indicated:
Year Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance.................................... $ 21,597 $ 21,423 $ 22,223 $ 22,732 $ 24,057
Provision for loan losses............................ 2,243 1,865 864 1,004 385
Provision for loan losses - business held-for-sale... 211 347 30 - -
Sale of businesses held-for-sale..................... (269)
Balance at acquisition of credit card portfolio...... - - 175 - -
Charge-offs:
Residential real estate.......................... 725 106 133 172 210
Commercial real estate (1)....................... 333 195 376 692 608
Commercial....................................... 895 1,000 998 437 648
Consumer......................................... 1,551 1,031 1,002 720 504
-------- -------- -------- -------- --------
Total charge-offs.................................... 3,504 2,332 2,509 2,021 1,970
-------- -------- -------- -------- --------
Recoveries:
Residential real estate.......................... 76 1 6 - 12
Commercial real estate (1)....................... 181 61 252 271 123
Commercial....................................... 483 100 70 116 74
Consumer......................................... 434 132 312 121 51
-------- -------- -------- -------- --------
Total recoveries..................................... 1,174 294 640 508 260
-------- -------- -------- -------- --------
Net charge-offs...................................... 2,330 2,038 1,869 1,513 1,710
-------- -------- -------- -------- --------
Ending balance....................................... $ 21,452 $ 21,597 $ 21,423 $ 22,223 $ 22,732
-------- -------- -------- -------- --------
Net charge-offs to average gross loans outstanding,
net of unearned income........................... 0.22% 0.20% 0.20% 0.19% 0.23%
======== ======== ======== ======== ========
(1) Includes commercial mortgage and construction loans.
For the year ended December 31, 2002, the Corporation provided $2.2 million
for loan losses which was greater than amounts provided in 2001 and 2000. This
increase reflects, among other things, the Company's loan growth, a change in
the mix to relatively higher margin and higher risk loans, and a weakening
economic environment in 2002, offset in part by an overall improvement in credit
quality of the Corporation's loan portfolio.
The allowance for losses is allocated by major portfolio type. As these
portfolios have seasoned, they have become a source of historical data in
projecting loss exposure; however, such allocations may not be indicative of
where future losses will occur.
The allocation of the allowance for loan losses by portfolio type at the
end of each of the last five fiscal years, and the percentage of loans
outstandings in each category to total gross outstandings at such dates follow:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Amount Percent Amount(1) Percent Amount Percent Amount Percent Amount Percent
------ ------- --------- ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate.......... $ 3,620 38.2% $ 4,039 38.2% $ 1,754 43.2% $ 1,389 42.7% $ 229 37.7%
Commercial real estate........... 7,208 26.2 6,927 24.3 3,187 22.9 8,240 25.9 10,398 31.0
Commercial....................... 7,375 19.1 6,963 18.7 13,985 15.7 9,983 13.4 11,751 12.8
Consumer......................... 3,249 16.5 3,668 18.8 2,497 18.2 2,611 18.0 354 18.5
------- ----- ------- ----- ------- ---- ------- ------ ------- -----
Total............................ $21,452 100.0% $21,597 100.0% $21,423 100.0% $22,223 100.0% $22,732 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) The implementation of SAB 102 in 2001 led to a change in the allocation
methodologies for anticipated loan losses.
18
LIQUIDITY
In accordance with Thrift Bulletin 77, the OTS requires institutions, such
as WSFS, to maintain adequate liquidity to assure safe and sound operation.
WSFS' liquidity ratio of cash and qualified assets to net withdrawable deposits
and borrowings due within one year was 13.3% at December 31, 2002, compared to
10.8% at December 31, 2001. The increase in liquidity is due primarily to the
sale of the reverse mortgage portfolio, from which cash proceeds totaled $128
million. For further discussion of this sale, see Note 6 to the Financial
Statements. Management monitors liquidity daily and maintains funding sources to
meet unforeseen changes in cash requirements. The Corporation's primary funding
sources are operating earnings, 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 and other sources, 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. At December 31, 2002 and 2001, WSFS had outstanding
FHLB advances of $403.5 million and $520.0 million, respectively. At December
31, 2002, WSFS had the capacity to borrow up to $460.9 million.
The Corporation routinely enters into commitments requiring the future
outlay of funds. WSFS is currently engaged in a data processing contract with
Metavante Corporation. This contract commenced in October 2002 and expires in
2010, with future minimum payments of approximately $2.1 million annually. The
Corporation also has three years remaining on five-year commitments with
telecommunication companies. Under the terms of this agreement, the average
minimum payment for each of the remaining three years is $1.3 million. These
commitments, as well as loan commitments, are expected to be met through
traditional funding sources, such as operating earnings, deposits, short-term
borrowings, advances from the FHLB and principal repayments on loans and
investments.
During 2002, investing activities provide $37.9 million in cash and cash
equivalents, while operating and financing activities used $42.9 million and
$7.2 million, respectively. The cash provided by investing activities resulted
primarily from the sales of businesses held-for-sale, as well as the sales of
loans, investment securities, mortgage-backed securities, and reverse mortgages.
This cash was used primarily to repay borrowings and invest in investment
securities and mortgage-backed securities.
During 2001, financing activities provided cash and cash equivalents of
$159.1 million, while operating and investing activities used $52.4 million and
$113.0 million, respectively. The cash provided by financing activities resulted
primarily from additional FHLB advances and an increase in demand and savings
accounts. This cash was used primarily to fund loans and purchase
mortgage-backed securities. In 2000, operating and investing activities provided
cash and cash equivalents of $836,000 and $17.7 million, respectively, while
financing activities used $27.3 million. The cash provided by operating and
investing activities resulted primarily from the sales of loans held-for-sale
and mortgage-backed securities. This cash was used to fund the purchase of
mortgage-backed securities and to fund an increase in loans, as well as to repay
borrowings and purchase treasury stock.
The Corporation has not used, and has no intention to use any significant
off-balance sheet financing arrangements for liquidity purposes. The
Corporation's financial instruments with off-balance sheet risk are limited to
obligations to fund loans to customers pursuant to existing commitments and an
interest rate cap which limits the exposure to rising rates on $50 million of
trust preferred floating rate debt. In addition, WSFS has not had, and has no
intention to have, any significant transactions, arrangements or other
relationships with any unconsolidated, limited purpose entities that could
materially affect its liquidity or capital resources. Finally, WSFS has not
traded in, and does not intend to trade in commodity contracts.
CAPITAL RESOURCES
Federal laws, among other things, require the OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as WSFS to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted" assets and total "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well
as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well-capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 2002, WSFS is classified as well-capitalized and is in
compliance with all regulatory capital requirements. For additional information
concerning WSFS' regulatory capital compliance see Note 12 to the Financial
Statements.
19
As part of its capital management strategy, the Corporation from time to
time purchases its own shares of common stock to be included as treasury shares.
Since 1996, the Board of Directors has approved several stock repurchase
programs to reacquire common stock outstanding. As part of these programs, the
Corporation acquired approximately 490,000 shares in 2002, and 1.1 million
shares in both 2001 and 2000. At December 31, 2002, the Corporation held 6.2
million shares of its common stock as treasury shares. The Corporation intends
to continue repurchasing shares in 2003 depending on stock price and alternative
uses of capital.
As a result of the after tax gains of $66.5 million on the November 2002
sale of reverse mortgages and $42.2 million on the January 2003 sale of WF, the
Corporation has significantly increased its capital base. Management has
identified two primary short-term uses of that capital: share repurchases, and
investments in high-quality MBS securities and other investments. In the long
term however, proceeds from these sales are planned to be used to grow the core
community bank in Delaware.
IMPACT OF INFLATION AND CHANGING PRICES
The Corporation's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without consideration of the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased costs of the Corporation's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Corporation are monetary. As a result, interest rates have a greater impact on
the Corporation's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or the
same extent as the price of goods and services.
Recent Legislation
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Act"). The Securities and Exchange Commission (the "SEC") promulgated
certain regulations pursuant to the Act and will continue to propose additional
implementing or clarifying regulations as necessary in furtherance of the Act.
The passage of the Act and the regulations implemented by the SEC subjected
publicly-traded companies to additional and more comprehensive reporting
regulations and disclosure. These new regulations, which are intended to curtail
corporate fraud, require the chief executive officer and chief financial officer
of the Company to personally certify certain SEC filings and Financial
Statements and to certify as to the existence of disclosure controls and
procedures within the Company are designed to ensure that information required
to be disclosed by the Company in its SEC filings is processed, summarized and
reported accurately.
The Act and regulations promulgated thereunder by the SEC also impose
additional measures to be taken by the Company's officers, directors and outside
auditors and impose accelerated reporting requirements by officers and directors
of the Company in connection with certain changes in their equity holdings of
the Company. Implementation of and compliance with the Act and corresponding
regulations will likely increase the Company's operating expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement 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.
The provisions of Statement 142 are required to be applied starting with
fiscal years beginning after December 15, 2001, except that goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately to
the nonamortization and amortization provisions of the Statement. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not
previously been issued. Statement 142 is required to be applied at the beginning
of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date. On
January 1, 2002, the Corporation adopted Statement 142 and recognized $703,000,
net of tax, resulting from negative goodwill, as a cumulative change in
accounting principal.
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. The adoption of this statement on January 1, 2003 did not
have a material impact on earnings, financial condition or equity.
20
In August 2001, the FASB issued Statement 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Statement 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. Statement 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. Statement 144 also amends ARB 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. Statement 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. See Note 3 to
the Financial Statements for a description of the impact that the adoption of
Statement 144 had to the Company's earnings, financial condition or equity.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
The provisions of this Statement related to the rescission of Statement 4
shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss
on extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified. Early application
of the provisions of this Statement related to the rescission of Statement 4 is
encouraged.
The provisions in paragraphs 8 and 9(c) of this Statement related to
Statement 13 shall be effective for transactions occurring after May 15, 2002,
with early application encouraged. All other provisions of this Statement shall
be effective for financial statements issued on or after May 15, 2002, with
early application encouraged.
Early application of the provisions of this Statement may be as of the
beginning of the fiscal year or as of the beginning of the interim period in
which this Statement is issued. The adoption of this Statement did not have a
material impact on the Corporation's earnings, financial condition or equity.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are to be applied prospectively for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of this Statement did not have a material
impact on the Corporation's earnings, financial condition or equity.
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions, which amends Statement No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, Statement No.144, Accounting for
the Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to acquisitions
within the scope of this Statement. In addition, this Statement amends Statement
No. 144 to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that Statement
No. 144 requires for other long-lived assets that are held and used.
With some exceptions, the requirements of Statement No. 147 are effective
October 1, 2002. The adoption of this Statement did not have an impact on the
Bank's earnings, financial condition, or equity.
21
In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This Interpretation requires a guarantor
to include disclosure of certain obligations, and if applicable, at the
inception of the guarantee, recognize a liability for the fair value of other
certain obligations undertaken in issuing a guarantee. The recognition
requirement is effective for guarantees issued or modified after December 31,
2002. The application of this Interpretation did not have an impact on the
Bank's earnings, financial condition, or equity.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This Statement is effective for fiscal years ending after December 15, 2002,
except for financial reports containing condensed financial statements for
interim periods for which disclosure is effective for periods beginning after
December 15, 2002. The adoption of this Statement did not have an impact on the
Bank's earnings, financial condition, or equity.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application of
Accounting Research Bulletin No. 51 and applies immediately to any variable
interest entities created after January 31, 2003 and to variable interest
entities which interest is obtained after that date. Management anticipates that
the application of this Interpretation will not have an impact on the Bank's
earnings, financial condition, or equity.
FORWARD-LOOKING STATEMENTS
Within this annual 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 our 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, mid-Atlantic region and the country as a
whole, loan delinquency rates, operating risk, and uncertainty of estimates in
general, 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. Actual results may
differ materially from management expectations. WSFS Financial Corporation does
not undertake and specifically disclaims any obligation to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.
22
Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock
MarketSM under the symbol WSFS. At December 31, 2002, the Corporation had 1,653
registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly
period within the two most recent fiscal years as well as the quarterly
dividends paid.
The closing market price of the common stock at December 31, 2002 was
$32.97.
Stock Price Range
------------------------------
Low High Dividends
--------- ----------- ---------
2002 4th $26.05 $34.21 $ .05
3rd 20.65 32.00 .05
2nd 18.10 25.91 .05
1st 16.95 18.90 .04
-----
$ .19
=====
2001 4th $15.45 $18.25 $ .04
3rd 15.25 18.50 .04
2nd 12.38 17.55 .04
1st 11.88 13.81 .04
-----
$ .16
=====
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of WSFS Financial Corporation
We have audited the accompanying consolidated statement of condition of
WSFS Financial Corporation and subsidiaries (the Corporation) as of December 31,
2002 and 2001, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WSFS
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 6 to the Financial Statements, the Company adopted
Statement 142, "Goodwill and Other Intangible Assets" in 2002. As discussed in
Note 19 to the Financial Statements, the Company adopted Statement 133,
"Accounting for Derivative Instruments and Hedging Activities" in 2000.
/s/ KPMG LLP
January 20, 2003
Philadelphia, Pennsylvania
24
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of WSFS Financial Corporation (the Corporation) is
responsible for establishing and maintaining effective internal control over
financial reporting presented in conformity with accounting principles generally
accepted in the United States of America, including controls over the
safeguarding of assets. This internal control contains monitoring mechanisms,
and actions are taken to correct deficiencies identified.
There are inherent limitations in any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the Corporation's internal control over financial
reporting presented in conformity with accounting principles generally accepted
in the United States of America, including controls over the safeguarding of
assets, as of December 31, 2002. This assessment was based on criteria for
effective internal control over financial reporting established in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes, as of December 31, 2002 the Corporation maintained effective internal
control over financial reporting, presented in conformity with accounting
principles generally accepted in the United States of America, including
controls over the safeguarding of assets.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Office of Thrift Supervision as safety and soundness laws and regulations.
The Corporation assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that the Corporation complied, in all material respects,
with the designated laws and regulations related to safety and soundness for the
year ended December 31, 2002.
/s/ MARVIN N. SCHOENHALS /s/ MARK A. TURNER
Marvin N. Schoenhals Mark A. Turner
Chairman and President Chief Operating Officer
25
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
(Dollars in Thousands, Except per Share Data)
Interest income:
Interest and fees on loans.............................................. $ 72,018 $ 77,526 $ 77,597
Interest on mortgage-backed securities.................................. 7,608 9,956 18,961
Interest and dividends on investment securities......................... 890 1,191 2,530
Interest on investments in reverse mortgages............................ 13,092 10,155 19,309
Other interest income................................................... 1,095 2,510 2,502
--------- --------- ---------
94,703 101,338 120,899
--------- --------- ---------
Interest expense:
Interest on deposits .................................................. 12,040 25,554 37,330
Interest on Federal Home Loan Bank advances............................ 18,253 15,923 14,583
Interest on federal funds purchased and securities
sold under agreements to repurchase.................................. 2,683 3,353 4,801
Interest on trust preferred borrowings................................. 2,599 3,365 2,918
Interest on other borrowings........................................... 457 391 534
Cost of funding businesses held-for-sale............................... (2,598) (1,989) (667)
--------- --------- ---------
33,434 46,597 59,499
--------- --------- ---------
Net interest income..................................................... 61,269 54,741 61,400
Provision for loan losses............................................... 2,243 1,865 864
--------- --------- ---------
Net interest income after provision for loan losses..................... 59,026 52,876 60,536
--------- --------- ---------
Noninterest income:
Loan servicing fee income .............................................. 3,025 3,149 2,139
Deposit service charges................................................. 8,568 8,626 7,010
Credit/debit card and ATM income ....................................... 8,489 6,754 5,509
Securities gains (losses) .............................................. 23 4 (4,368)
Gain on sale of reverse mortgages....................................... 101,518 - -
Gain (loss) on sale of loans............................................ 443 420 (461)
Other income............................................................ 1,994 2,172 3,097
--------- --------- ---------
124,060 21,125 12,926
--------- --------- ---------
Noninterest expenses:
Salaries, benefits and other compensation............................... 25,653 22,987 21,272
Equipment expense....................................................... 4,185 3,594 3,508
Data processing and operations expense.................................. 3,815 3,648 4,573
Occupancy expense....................................................... 3,794 4,307 3,622
Marketing expense....................................................... 1,427 1,391 1,266
Professional fees....................................................... 3,621 1,901 2,216
Other operating expenses................................................ 9,122 9,861 8,821
--------- --------- ---------
51,617 47,689 45,278
--------- --------- ---------
Income from continuing operations before taxes and
cumulative effect of change in accounting principle................... 131,469 26,312 28,184
Income tax provision.................................................... 44,154 8,550 8,471
--------- --------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle.............................. 87,315 17,762 19,713
Cumulative effect of change in accounting principle, net of taxes....... 703 - (1,256)
--------- --------- ---------
Income from continuing operations....................................... 88,018 17,762 18,457
Loss from discontinued operations, net of taxes......................... - - (2,392)
Loss on wind-down of discontinued operations, net of taxes.............. (2,766) (2,026) (2,211)
Income (loss) on discontinued operations of businesses
held-for-sale, net of taxes........................................... 14,965 1,347 (2,835)
Gain on sale of businesses held-for-sale, net of taxes.................. 924 -
--------- --------- ---------
Net income.............................................................. $ 101,141 $ 17,083 $ 11,019
========= ========= =========
26
CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year Ended December 31,
---------------------------------------------
2002 2001 2000
--------- --------- ---------
(Dollars in Thousands, Except per Share Data)
Earnings per share:
Basic:
Income from continuing operations before cumulative effect of
change in accounting principle................................. $ 9.61 $ 1.85 $ 1.85
Cumulative effect of change in accounting principle,
net of tax benefit............................................. 0 .08 - (0.12)
--------- --------- ---------
Income from continuing operations................................. 9.69 1.85 1.73
Loss from discontinued operations, net of taxes................... - - (0.22)
Loss on wind-down of discontinued operations, net of tax benefit.. (0.30) (0.21) (0.21)
Income (loss) on businesses held-for-sale......................... 1.64 0.14 (0.27)
Gain on sale of businesses held-for-sale.......................... 0.10 - -
--------- --------- ---------
Net income ................................................... $ 11.13 $ 1.78 $ 1.03
========= ========= =========
Diluted:
Income from continuing operations before cumulative effect of
change in accounting principle.................................. $ 9.20 $ 1.83 $ 1.85
Cumulative effect of change in accounting principle,
net of tax benefit............................................. 0.07 - (0.12)
--------- --------- ---------
Income from continuing operations................................. 9.27 1.83 1.73
(Loss) from discontinued operations, net of taxes................. - - (0.22)
(Loss) on wind-down of discontinued operations, net of tax benefit (0.29) (0.21) (0.21)
Income (loss) on businesses held-for-sale......................... 1.57 0.14 (0.27)
Gain on sale of businesses held-for-sale.......................... 0.10 - -
--------- --------- ---------
Net income ................................................... $ 10.65 $ 1.76 $ 1.03
========= ========= =========
The accompanying notes are an integral part of these Financial Statements.
27
CONSOLIDATED STATEMENT OF CONDITION
December 31,
----------------------------------
2002 2001
------------ -----------
(In Thousands)
Assets
Cash and due from banks....................................................... $ 162,258 $ 104,813
Federal funds sold and securities purchased under agreements to resell........ 64,045 65,779
Interest-bearing deposits in other banks...................................... 7,476 28,360
Investment securities held-to-maturity
(market value: 2002-$11,797, 2001-$12,802).................................. 10,724 12,396
Investment securities available-for-sale...................................... 11,053 1,798
Mortgage-backed securities held-to-maturity
(market value: 2002-$40,481, 2001-$71,592).................................. 39,157 70,285
Mortgage-backed securities available-for-sale................................. 98,081 291,439
Mortgage-backed securities trading............................................ 11,000 -
Investment in reverse mortgages, net.......................................... 1,131 33,939
Loans held-for-sale........................................................... 3,516 84,741
Loans, net of allowance for loan losses of $21,452 at December 31, 200
and $21,597 at December 31, 2001............................................ 1,075,870 1,030,631
Loans of businesses held-for-sale ............................................ 117,646 -
Stock in Federal Home Loan Bank of Pittsburgh, at cost........................ 21,979 28,750
Assets acquired through foreclosure........................................... 904 432
Premises and equipment........................................................ 13,838 16,438
Accrued interest receivable and other assets.................................. 15,116 28,824
Other assets of businesses held-for-sale...................................... 3,810 -
Loans, operating leases and other assets of discontinued operations........... 47,396 115,295
---------- -----------
Total assets.................................................................. $ 1,705,000 $ 1,913,920
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand.................................................... $ 182,957 $ 171,801
Money market and interest-bearing demand ..................................... 109,259 327,635
Savings....................................................................... 292,917 313,246
Time.......................................................................... 236,793 266,514
Jumbo certificates of deposit - retail........................................ 50,146 46,536
----------- -----------
Total retail deposits .............................................. 872,072 1,125,732
Jumbo certificates of deposit - nonretail..................................... 26,324 12,038
Brokered certificates of deposit.............................................. - 8,347
----------- -----------
Total deposits..................................................... 898,396 1,146,117
Federal funds purchased and securities sold under agreements to repurchase ... 25,925 45,000
Federal Home Loan Bank advances............................................... 403,500 520,000
Trust preferred borrowings.................................................... 50,000 50,000
Other borrowed funds.......................................................... 36,581 30,480
Accrued expenses and other liabilities........................................ 37,219 16,519
Other liabilities of businesses held-for-sale................................. 57,862 -
----------- -----------
Total liabilities............................................................. 1,509,483 1,808,116
----------- -----------
Commitments and contingencies (see Note 16)
Minority Interest............................................................. 12,845 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
14,859,721 at December 31 2002, and 14,823,651 at December 31, 2001......... 149 148
Capital in excess of par value ............................................... 59,789 59,079
Accumulated other comprehensive income........................................ 904 3,146
Retained earnings............................................................ 207,358 107,950
Treasury stock at cost, 6,162,269 shares at December 31, 2002 and 5,677,169
shares at December 31, 2001................................................. (85,528) (70,320)
----------- -----------
Total stockholders' equity.................................................... 182,672 100,003
----------- -----------
Total liabilities, minority interest and stockholders' equity................. $ 1,705,000 $ 1,913,920
=========== ===========
The accompanying notes are an integral part of these Financial Statements.
28
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital Other Total
Common in Excess Comprehensive Retained Treasury Stockholders'
Stock of Par Value Income (Loss) Earnings Stock Equity
------ ------------ ------------- -------- -------- -------------
(In Thousands)
Balance, January 1, 2000 ................... $ 148 $ 58,185 $ (3,265) $ 83,000 $ (41,915) $ 96,153
Comprehensive income:
Net income ............................ - - - 11,019 - 11,019
Other comprehensive income (1) ........ - - 3,462 - - 3,462
---------
Total comprehensive income ................. 14,481
---------
Cash dividend, $0.15 per share ............. - - - (1,610) - (1,610)
Exercise of common stock options ........... - 103 - - - 103
Treasury stock at cost, 1,101,500
shares (2) ............................... - - - - (12,678) (12,678)
Increase in investment in subsidiary ....... - 697 - - - 697
--------- --------- --------- --------- ---------- ---------
Balance, December 31, 2000 ................. $ 148 $ 58,985 $ 197 $ 92,409 $ (54,593) $ 97,146
========= ========= ========= ========= ========== =========
Comprehensive income:
Net income ............................ - - - 17,083 - 17,083
Other comprehensive income (1) ........ - - 2,949 - - 2,949
---------
Total comprehensive income ................. 20,032
---------
Cash dividend, $0.16 per share ............. - - - (1,542) - (1,542)
Exercise of common stock options ........... - 94 - - - 94
Treasury stock at cost, 1,047,400 shares (3) - - - - (15,727) (15,727)
--------- --------- --------- --------- ---------- ---------
Balance, December 31, 2001 ................. $ 148 $ 59,079 $ 3,146 $ 107,950 $ (70,320) $ 100,003
========= ========= ========= ========= ========== =========
Comprehensive income:
Net income............................. - - - 101,141 - 101,141
Other comprehensive income (1)......... - - (2,242) - - (2,242)
---------
Total comprehensive income.................. 98,899
---------
Cash dividend, $0.19 per share.............. - - - (1,733) - (1,733)
Exercise of common stock options ........... 1 543 - - - 544
Treasury stock at cost, 485,100 shares (4).. - - - - (15,208) (15,208)
Tax benefit from exercises of common
stock options............................. - 167 - - - 167
--------- --------- --------- --------- ----------- ---------
Balance, December 31, 2002 ................. $ 149 $ 59,789 $ 904 $ 207,358 $ (85,528) $ 182,672
========= ========= ========= ========= ========== =========
(1) Other Comprehensive Income: 2002 2001 2000
---- ---- ----
Net unrealized holding (losses) gains
on securities available-for-sale
arising during the period net of
taxes (2002 - ($1.5) million, 2001
- $1.7 million, 2000 - $373,000)..... $ (2,511) $ 2,743 $ 608
Net unrealized holding (losses)
gains arising during the period on
derivatives used for cash flow
hedge, net of taxes (2002
- ($415,000), 2001 - $31,000
and 2000 - ($1.7) million)........... (771) 257 (1,703)
Reclassification for losses (gains)
included in income, net of taxes
(2002 - $637,000, 2001 - $31,000,
2000 - $(1.7) million).............. 1,040 (51) 2,729
--------- --------- --------
Total other comprehensive (loss)
income, before other comprehensive
income that resulted from the
cumulative effect of a change in
accounting principle, net of taxes... (2,242) 2,949 1,634
Net unrealized gain on derivatives
used for cash flow hedging as a
result of adopting SFAS No. 133,
net of $985,000 tax benefit.......... - - 1,828
--------- --------- --------
Total other comprehensive income (loss).. $ (2,242) $ 2,949 $ 3,462
========= ========= ========
(2) Net of reissuances of 5,000 shares
(3) Net of reissuances of 5,000 shares
(4) Net of reissuances of 5,000 shares
The accompanying notes are an integral part of these Financial Statements.
29
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
2002 2001 2000
------------ ----------- -----------
(In Thousands)
Operating activities:
Net income ..................................................... $ 101,141 $ 17,083 $ 11,019
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Provision for loan losses ................................. 2,243 2,212 894
Depreciation, accretion and amortization .................. 8,891 4,983 2,366
Decrease (increase) in accrued interest receivable
and other assets ........................................ 5,331 (3,176) (2,725)
Origination of loans held-for-sale ........................ (1,946,047) (624,481) (189,239)
Proceeds from sales of loans held-for-sale ................ 1,857,346 566,686 187,104
Gain on sale of reverse mortgage .......................... (101,518) - --
Gain on businesses held-for-sale .......................... (1,516) - --
Increase (decrease) in accrued interest payable and
other liabilities ....................................... 30,646 (5,640) 3,706
Increase in reverse mortgage capitalized interest, net .... (16,184) (10,003) (19,111)
Minority interest in net income ........................... 16,731 (189) (3,735)
Other, net ................................................ 86 122 10,557
----------- ----------- -----------
Net cash (used for) provided by operating activities ........... (42,850) (52,403) 836
----------- ----------- -----------
Investing activities:
Net (increase) decrease of interest-bearing deposits
in other banks .......................................... (176,987) (21,042) 708
Maturities of investment securities ....................... 182,467 90,349 9,155
Sales of investment securities available-for-sale ......... 1,788 644 36,199
Sales of mortgage-backed securities available-for-sale .... 128,316 4,095 219,235
Purchases of investment securities held-to-maturity ....... - - (8,952)
Purchases of investment securities available-for-sale ..... (241,110) (75,246) (27,962)
Repayments of mortgage-backed securities held-to-maturity . 30,747 37,116 25,383
Repayments of mortgage-backed securities available-for-sale 253,860 220,076 72,436
Purchases of mortgage-backed securities available-for-sale (261,658) (280,969) (210,376)
Purchases of mortgage-backed securities trading ........... (11,000) - -
Repayments on reverse mortgages ........................... 23,641 17,304 21,904
Disbursements for reverse mortgages ....................... (5,536) (7,413) (8,230)
Sale of reverse mortgages ................................. 133,576 - -
Sale of loans ............................................. 5,986 - -
Purchase of loans ......................................... (32,077) (24,512) (36,829)
Sale of businesses held-for-sale .......................... 14,332 - -
Net decrease (increase) in loans .......................... 71,767 (72,146) (69,183)
Net increase in loans of businesses held-for-sale ......... (83,397) - -
Net decrease (increase) in stock of Federal Home Loan
Bank of Pittsburgh ...................................... 6,771 (250) -
Payments for investment in real estate .................... - - (1,991)
Receipts from investments in real estate .................. - 270 -
Sales of assets acquired through foreclosure, net ......... 1,116 766 1,469
Premises and equipment, net ............................... (4,750) (1,992) (5,298)
----------- ----------- -----------
Net cash provided by (used for) investing activities ........... 37,852 (112,950) 17,668
----------- ----------- -----------
(Continued on next page)
30
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
-----------------------------------------
2002 2001 2000
------------ ----------- -----------
(In Thousands)
Financing activities:
Net increase in demand and savings deposits.............. $ 10,733 $ 147,319 $ 224,155
Net increase (decrease) in time deposits ............... 93,768 (115,715) (3,733)
Receipts from FHLB borrowings ........................... 825,356 370,000 692,500
Repayments of FHLB borrowings ........................... (941,856) (201,000) (856,500)
Receipts from reverse repurchase agreements.............. 257,063 - 46,588
Repayments of reverse repurchase agreements ............. (276,138) (24,300) (116,229)
Net decrease in federal funds purchased.................. - - (5,000)
Increase of other borrowing of businesses held-for-sale.. 50,000 - -
Net decrease in obligations under capital lease.......... (199) (125) (103)
Dividends paid on common stock........................... (1,733) (1,542) (1,610)
Issuance of common stock and exercise of employee
stock options ......................................... 711 94 103
Purchase of treasury stock, net of re-issuance........... (15,208) (15,727) (12,678)
Minority interest........................................ (9,687) 114 5,174
-------- --------- ---------
Net cash (used for) provided by financing activities..... (7,190) 159,118 (27,333)
-------- --------- ---------
Decrease in cash and cash equivalents from continuing
operations............................................. (12,188) (6,235) (8,829)
Change in net assets from discontinued operations........ 67,899 85,478 41,012
Cash and cash equivalents at beginning of period ........ 170,592 91,349 59,166
-------- --------- ---------
Cash and cash equivalents at end of period .............. $226,303 $ 170,592 $ 91,349
======== ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year .................. $39,119 $62,977 $79,377
Cash paid for income taxes, net ......................... 21,701 8,874 1,713
Loans transferred to assets acquired through
foreclosure............................................ 1,262 648 1,199
Net change in other comprehensive income................. (2,242) 2,949 3,462
Assets transferred from held-to-maturity to
available-for-sale upon adoption of SFAS No. 133:
Investment securities................................. - - 2,000
Mortgage-backed securities............................ - - 128,981
Loans, net of allowance, of businesses held-for-sale..... 117,646 - -
Other assets transferred to businesses held-for-sale..... 3,810 - -
Other liabilities transferred to businesses held-for-sale 7,862 - -
The accompanying notes are an integral part of these Financial Statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company organized under the laws of the State of Delaware. The Corporation's
principal wholly-owned subsidiary, Wilmington Savings Fund Society, FSB (the
Bank or WSFS), is a federal savings bank organized under the laws of the United
States which at December 31, 2002 conducted operations from its main office, two
operation centers and 21 retail banking offices located in northern Delaware and
southeastern Pennsylvania.
In preparing the Financial Statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The material estimates that are particularly
susceptible to significant changes in the near term relate to the allowance for
loan losses and the valuations of the interest rate cap, other real estate
owned, deferred tax assets, investment in reverse mortgages and the reserve for
discontinued operations.
Basis of Presentation
The consolidated Financial Statements include the accounts of the parent
company, WSFS Capital Trust I, WSFS and its wholly-owned subsidiaries, WSFS
Investment Group, Inc. (formerly 838 Investment Group, Inc.), WSFS Reit, Inc.
and WSFS Credit Corporation (WCC), as well as not wholly-owned, but majority
controlled and consolidated subsidiaries, Wilmington Finance, Inc. (WF) and
CustomerOne Financial Network, Inc. (C1FN). C1FN was sold in November 2002 and
WF was sold in January 2003. These subsidiaries were classified as businesses
held-for-sale and the statement of operations was retroactively restated for all
periods presented. WF was classified as a business held-for-sale on the
statement of condition at December 31, 2002. See Note 3 of the Financial
Statements for further discussion of Businesses Held-for-Sale and Note 21 of the
Financial Statements for a discussion of the WF sale. As discussed in Note 2 of
the Financial Statements, the results of WSFS Credit Corporation, the
Corporation's wholly owned indirect auto financing and leasing subsidiary, are
also presented as discontinued operations.
WSFS Capital Trust I was formed in 1998 to sell Trust Preferred Securities.
The Trust invested all of the proceeds from the sale of the Trust Preferred
Securities in Junior Subordinated Debentures of the Corporation. The Corporation
used the proceeds from the Junior Subordinated Debentures for general corporate
purposes, including the redemption of higher rate debt.
WSFS Investment Group, Inc. markets various third-party insurance and
securities products to Bank customers through WSFS' branch system.
WSFS Reit, Inc. is a real estate investment trust formed in 2002 to hold
qualifying real estate assets and may be used in the future as a vehicle to
raise capital.
Certain reclassifications have been made to the prior years' Financial
Statements to conform them to the current year's presentation. All significant
intercompany transactions are eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks, federal funds sold and securities purchased under
agreements to resell. Generally, federal funds are purchased and sold for
periods ranging up to ninety days.
Debt and Equity Securities
Investments in equity securities that have a readily determinable fair
value and investments in debt securities are classified into three categories
and accounted for as follows:
o Debt securities with the positive intention to hold to maturity are
classified as "held-to-maturity" and reported at amortized cost.
o Debt and equity securities purchased with the intention of selling them
in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in
earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity.
Debt and equity securities include mortgage-backed securities, corporate
and municipal bonds, U.S. Government and agency securities and certain equity
securities. Premiums and discounts on debt and equity securities
held-to-maturity and available-for-sale are recognized in interest income using
a level yield method over the period to expected maturity. The fair value of
debt and equity securities is primarily obtained from third-party pricing
services. Implicit in the valuation are estimated prepayments based on
historical and current market conditions.
32
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary,
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses. The specific
identification method is used to determine realized gains and losses on sales of
investment and mortgage-backed securities. All sales are made without recourse.
Investment in Reverse Mortgages
The Corporation accounts for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages; the effective yield of each pool is recomputed, and income is
adjusted retroactively and prospectively to reflect the revised rate of return.
Accordingly, because of this market-value based accounting the recorded value of
reverse mortgage assets include significant risk associated with estimations and
income recognition can vary significantly from reporting period to reporting
period.
Loans
Loans are stated net of deferred fees and costs and unearned discounts.
Loan interest income is accrued using various methods which approximate a
constant yield. Loan origination and commitment fees and direct loan origination
costs are deferred and recognized over the life of the related loans using a
level yield method over the period to maturity.
Impaired loans are measured based on the present value of expected future
discounted cash flows, the market price of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. Impaired loans
include loans within the Corporation's commercial, commercial mortgage and
commercial construction portfolios. The Company's policy for recognition of
interest income on impaired loans is the same as for nonaccrual loans discussed
below.
Nonaccrual Loans
Nonaccrual loans are those on which the accrual of interest has ceased.
Loans are placed on nonaccrual status immediately if, in the opinion of
management, collection is doubtful, or when principal or interest is past due 90
days or more and collateral is insufficient to cover principal and interest.
Interest accrued but not collected at the date a loan is placed on nonaccrual
status is reversed and charged against interest income. In addition, the
amortization of net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Subsequent cash receipts are applied either to the
outstanding principal or recorded as interest income, depending on management's
assessment of ultimate collectibility of principal and interest. Loans are
returned to an accrual status when the borrower's ability to make periodic
principal and interest payments has returned to normal (i.e. - brought current
with respect to principal or interest or restructured) and the paying capacity
of the borrower and/or the underlying collateral is deemed sufficient to cover
principal and interest in accordance with the Corporation's previously
established loan-to-value policies.
Allowances 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.
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
33
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 seven 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,
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. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses. The Company
also gives consideration to the results of these regulatory agency examinations.
Allowances for estimated losses on investments in real estate and assets
acquired through foreclosure are provided if the carrying value exceeds the fair
value less estimated disposal costs.
Assets Held-for-Sale
Assets held-for-sale include loans held-for-sale and are carried at the
lower of cost or market of the aggregate or in some cases individual assets.
Vehicles that have been returned to the Company upon the expiration of their
lease terms have been included in the net assets of discontinued operations.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the
recorded investment in the loan or fair value less estimated disposal costs.
Costs subsequently incurred to improve the assets are included in the carrying
value provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. Net costs
of assets acquired through foreclosure includes costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life. In
general, computer equipment, furniture and equipment and building renovations
are depreciated over 3, 5 and 10 years, respectively. Accelerated methods are
used in depreciating certain assets for income tax purposes.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are treated as financings, with the
obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements
remain in the asset accounts.
34
Income Taxes
The provision for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement basis and tax basis of assets and liabilities.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2002 2001 2000
---- ---- ----
(In Thousands, Except Per Share Data)
Numerator:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit .................... $ 87,315 $ 17,762 $ 19,713
Cumulative effect of change in accounting principle, net of tax benefit .... 703 - (1,256)
----------- ---------- ----------
Income from continuing operations .......................................... 88,018 17,762 18,457
Loss from discontinued operations, net of tax .............................. - - (2,392)
Loss on wind-down of discontinued operations, net of tax ................... (2,766) (2,026) (2,211)
Income (loss) from discontinued operations of businesses held-for-sale,
net of taxes ........................................................... 14,965 1,347 (2,835)
Gain on sale of businesses held-for-sale, net of tax ....................... 924 - -
----------- ---------- ----------
Net income ................................................................. $ 101,141 $ 17,083 $ 11,019
=========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares ................................................... 9,086 9,579 10,652
Effect of dilutive employee stock options ................................... 407 114 14
----------- ---------- ----------
Denominator for diluted earnings per share -.adjusted weighted average
shares and assumed exercise ............................................... 9,493 9,693 10,666
=========== ========== ==========
Earnings per share:
Basic:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit .................... $ 9.61 $ 1.85 $ 1.85
Cumulative effect of change in accounting principle, net of tax benefit .... 0.08 - (0.12)
----------- ---------- ----------
Income from continuing operations .......................................... 9.69 1.85 1.73
Loss from discontinued operations, net of tax .............................. - - (0.22)
Loss on wind-down of discontinued operations, net of tax ................... (0.30) (0.21) (0.21)
Income (loss) from discontinued operations of businesses held-for-sale,
net of taxes ........................................................... 1.64 0.14 (0.27)
Gain on sale of businesses held-for-sale, net of tax ....................... 0.10 - -
----------- ---------- ----------
Net income ................................................................. $ 11.13 $ 1.78 $ 1.03
=========== ========== ==========
Diluted:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit .................... $ 9.20 $ 1.83 $ 1.85
Cumulative effect of change in accounting principle, net of tax benefit .... 0.07 - (0.12)
----------- ---------- ----------
Income from continuing operations .......................................... 9.27 1.83 1.73
Loss from discontinued operations, net of tax .............................. - - (0.22)
Loss on wind-down of discontinued operations, net of tax ................... (0.29) (0.21) (0.21)
Income (loss) from discontinued operations of businesses held-for-sale,
net of taxes ........................................................... 1.57 0.14 (0.27)
Gain on sale of businesses held-for-sale, net of tax ....................... 0.10 - -
----------- ---------- ----------
Net income ................................................................. $ 10.65 $ 1.76 $ 1.03
=========== ========== ==========
Outstanding common stock equivalents having no dilutive effect, in thousands 4 146 562
35
Stock Options
At December 31, 2002, the Corporation had two stock-based employee
compensation plans which are described more fully in Note 15 to the Financial
Statements. The Corporation accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and Related Interpretations. No stock-based employee compensation
cost is reflected in the net income, as all options granted under those plans
had an exercise price at least equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share had the company applied the fair value
recognition provision of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
2002 2001 2000
---- ---- ----
(In Thousands, Except Per Share Data)
Income from continuing operations, as reported ................................ $ 88,018 $ 17,762 $ 18,457
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects ... (798) (851) (966)
---------- ---------- ----------
Pro forma income from continuing operations ................................... $ 87,220 $ 16,911 $ 17,491
========== ========== ==========
Earnings per share:
Basic:
Income from continuing operations ........................................... $ 9.69 $ 1.85 $ 1.73
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects . (0.09) (0.09) (0.09)
---------- ---------- ----------
Pro forma income from continuing operations ................................. $ 9.60 $ 1.76 $ 1.64
========== ========== ==========
Diluted:
Income from continuing operations ........................................... $ 9.27 $ 1.83 $ 1.73
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards, net of related tax effects . (0.08) (0.09) (0.09)
---------- ---------- ----------
Pro forma income from continuing operations ................................. $ 9.19 $ 1.74 $ 1.64
========== ========== ==========
2. Discontinued Operations of a Business Segment
In 2000, the Board of Directors of WSFS Financial Corporation approved
plans to discontinue the operations of WCC. WCC, which had 2,317 lease contracts
and 1,052 loan contracts at December 31, 2002, no longer accepts new
applications but will continue to service existing loans and leases until their
maturity. Management estimates that substantially all loan and lease contracts
will mature by the end of 2004.
In accordance with APB 30, which was the authoritative literature in 2000,
accounting for discontinued operations of a business segment at that time
required that the Company forecast operating results over the wind-down period
and accrue any expected net losses. The historic results of WCC's operations,
the accrual of expected losses to be incurred over the wind-down period, and the
future reported results of WCC are required to be treated as Discontinued
Operations of a Business Segment, and shown in summary form separately from the
Company's results of continuing operations in reported results of the
Corporation. Prior periods are restated, as required by accounting principles
generally accepted in the United States of America.
As a result, net operating losses of $2.4 million for the year ended
December 31, 2000 were reclassified from continuing operations to discontinued
operations. In addition, a $6.2 million pretax reserve was established to absorb
expected future losses, primarily related to residual value losses on leases.
Consequently, the Corporation recognized an after tax charge of $2.2 million,
net of $4.0 million in tax benefits related to net operating loss carryforwards,
for the expected loss over the projected wind-down period.
During 2001 and 2002, as a result of the heavy incenting of new car
purchases by manufacturers and other factors, both used car prices and WSFS'
exposure to residual values on its outstanding leases have continued to
deteriorate. Extensive analyses of remaining leases as of December 31, 2002 and
2001 indicated that additional reserves were needed for the expected losses in
the business during its wind-down. Accordingly, management recorded additional
provisions for these expected losses. These pretax provisions amounted to $2.0
million in 2002 and $3.1 million in 2001.
36
At December 31, 2002, there were $7.9 million in indirect loans and $44.7
million in indirect leases still outstanding. At December 31, 2002, WSFS had
exposure to $42.3 million in remaining used car residuals, for which it
estimates a loss of $8.9 million. Management has provided for this loss in the
Financial Statements. The Corporation now has reserves covering 21% of the
related residual exposure. Based on the scheduled maturities of leases,
management estimates by December 31, 2003 its residual exposure will be less
than $8.0 million and, by December 31, 2004, the exposure will be negligible.
The total loss of $2.8 million after tax, or $0.29 per diluted share from WSFS
Credit Corporation in 2002 includes the after-tax impact of the aforementioned
residual provision and additional reserves of $563,000 for tax expense
established as a result of changes in estimates used to calculate WCC's deferred
taxes.
Due to the uncertainty of a number of factors, including residual values,
interest rates, operating costs and credit quality, the reserve for discontinued
operations will be reevaluated quarterly with adjustments, if necessary,
recorded as income/losses on wind-down of discontinued operations.
The following chart depicts loans, operating leases and other assets of
discontinued operations at December 31, 2002 and 2001:
At December 31,
-------------------------
2002 2001
(In Thousands)
Vehicles under operating leases, net.............. $ 44,693 $102,288
Net loans......................................... 7,285 16,131
Other non-cash assets 2,367 3,241
Less:
Reserve for losses of
discontinued operations....................... 6,949 6,365
-------- --------
Loans, operating leases and other assets of
discontinued operations....................... $ 47,396 $115,295
======== ========
The following table depicts the net income (loss) from discontinued
operations for the years ended December 31, 2002, 2001 and 2000:
Year Ended December 31,
--------------------------------
2002 2001 2000
-------- --------- --------
(In Thousands)
Interest income ....................................... $ 974 $ 1,870 $ 1,998
Allocated interest expense (1) ........................ 2,470 9,271 13,897
-------- -------- --------
Net interest income (expense) ........................ (1,496) (7,401) (11,899)
Loan and lease servicing fee income ................... 379 301 723
Rental income on operating leases, net ................ 2,229 7,730 9,214
Other income .......................................... 7 14 42
-------- -------- --------
Net revenues ........................................ 1,119 644 (1,920)
Noninterest expenses .................................. 1,234 2,066 1,987
-------- -------- --------
(Loss) income before taxes ............................ (115) (1,422) (3,907)
Charges against the reserve for discontinued operations 115 1,422
Income tax provision (benefit) ....................... - - (1,515)
-------- -------- --------
(Loss) income from discontinued operations ............ $ - $ - $ (2,392)
(Loss) on wind-down of discontinued operations ........ (2,766) (2,026) (2,211)
-------- -------- --------
Total ............................................... $ (2,766) $ (2,026) $ (4,603)
======== ======== ========
(1) The allocated interest expense for 2002 is based on a direct
matched-maturity funding of the net non-cash assets of discontinued
operations. The average funding rate for 2002 was 2.87% on average net
assets of $86.0 million. Allocated interest expense for 2001 and 2000 was
based on the Company's annual average wholesale borrowings rate, which
approximated a marginal funding cost of this business segment, and was
5.65% and 6.28%, respectively.
37
3. BUSINESSES HELD-FOR-SALE
In September 2002, WSFS sold its United Asian Bank Division (UAB). UAB was
started in 2000 as a single branch to serve the Korean and Asian communities of
Elkins Park, Pennsylvania and the surrounding area. The sale resulted in an
after tax gain of $737,000, included $8.6 million in deposits and $15.8 million
in loans in addition to branch fixed assets and the lease obligations.
In November 2002, the Corporation completed the sale of C1FN and related
interests in its Everbank Division to Alliance Capital Partners, Inc., the
privately held parent company of First Alliance Bank, a federally chartered
savings bank. Everbank was started with C1FN in 1999 as a joint initiative in
Internet and branchless banking. Consistent with the manner in which the segment
was managed and operated, information in this report labeled "C1FN" generally
represents the profoma combined results of C1FN and WSFS' Everbank Division (the
C1FN/Everbank segment). The sale included total assets of $342.8 million and
deposits of $340.1 million. WSFS recorded an after tax gain of $187,000 on this
sale.
Under the provision of the agreement between sellers and buyers, certain
sale consideration was withheld in two separate escrow accounts pending the
resolution of certain events. WSFS' portion of these escrow amounts totaled
approximately $786,000. These amounts were not recognized by WSFS at December
31, 2002, as their receipt is not assured beyond a reasonable doubt. On March 6,
2003, management received credible information that approximately $175,000 of
the $786,000 in escrows would be forthcoming. As a result, management expects to
record the $175,000 into income in the first quarter of 2003. WSFS also provided
certain non-escrowed indemnifications to the sellers. Both of these
indemnifications are more fully discussed in Note 16 to the Financial
Statements, Commitments and Contingencies.
Also in November 2002, WSFS signed a definitive agreement with American
General Finance, Inc. for the sale of WSFS' majority-owned subsidiary,
Wilmington Finance, Inc. (WF). WF is engaged in sub-prime residential mortgage
banking. WF conducts activity on a national level and aggregates loans primarily
through brokers and sells them to investors. The WF sale was completed on
January 2, 2003 (see Note 21 to the Financial Statements for a further
discussion of this transaction).
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, the major classes of assets and liabilities of WF are
presented separately on the statement of condition as of December 31, 2002.
Income (losses) from these three businesses (UAB, C1FN/Everbank and WF) have
been presented as income/losses of businesses held-for-sale, and presented
separately for all periods presented.
The gains realized on the sale of C1FN and UAB are presented separately on
the statement of operations, net of tax. The average balance sheet is presented
with total assets and liabilities of businesses held-for-sale displayed
separately.
The following tables present the net income from businesses held-for-sale
for the years ended December 31, 2002, 2001 and 2000:
For the Year Ended December 31, 2002
---------------------------------------------------------
WF(1) C1FN UAB Total
----- ---- --- -----
(In Thousands)
Net interest income............................. $ 6,835 $ 3,738 $ 863 $ 11,436
Provision for loan losses ...................... - 154 57 211
-------- -------- -------- --------
Net interest income after provision............. 6,835 3,584 806 11,225
Noninterest income ............................. 74,163 5,797 51 80,011
-------- -------- -------- --------
Total revenues ................................. 80,998 9,381 857 91,236
Noninterest expenses............................ 40,113 10,842 1,059 52,014
-------- -------- -------- --------
Income before taxes and minority interest....... 40,885 (1,461) (202) 39,222
Minority interest .............................. 20,111 (3,380) - 16,731
-------- -------- -------- --------
Income before taxes ............................ 20,774 1,919 (202) 22,491
Provision for income taxes ..................... 7,997 (391) (80) 7,526
-------- -------- -------- --------
Income from businesses held-for-sale............ $ 12,777 $ 2,310 $ (122) $ 14,965
======== ======== ========= ========
Gain on sale of businesses held-for-sale........ $ NA $ 187 $ 737 $ 924
======== ======== ======== ========
(1) Includes $2.6 million in interest expense allocated to fund the average net
assets of $97.0 million of businesses held-for-sale. The rate of 2.68% is
based on the weighted average rate on other borrowed funds which
approximates the marginal funding rate for this niche business.
38
For the Year Ended December 31, 2001
---------------------------------------------
WF(1) C1FN UAB Total
--- ---- --- --------
(In Thousands)
Net interest income ..................... $ 1,773 $ 5,016 $ 760 $ 7,549
Provision for loan losses ............... - 329 18 347
-------- -------- -------- --------
Net interest income after provision ..... 1,773 4,687 742 7,202
Noninterest income ...................... 19,671 3,224 111 23,006
-------- -------- -------- --------
Total revenues .......................... 21,444 7,911 853 30,208
Noninterest expenses .................... 16,252 10,669 1,218 28,139
-------- -------- -------- --------
Income before taxes and minority interest 5,192 (2,758) (365) 2,069
Minority interest ....................... 2,119 (2,308) - (189)
-------- -------- -------- --------
Income before taxes ..................... 3,073 (450) (365) 2,258
Provision for income taxes .............. 1,245 (188) (146) 911
-------- -------- -------- --------
Income from businesses held-for-sale .... $ 1,828 $ (262) $ (219) $ 1,347
======== ======== ======== ========
(1) Includes $2.0 million in interest expense allocated to fund the average net
assets of $37.4 million of businesses held-for-sale. The rate of 5.32% is
based on the weighted average rate on other borrowed funds which
approximates the marginal funding rate for this niche business.
For the Year Ended December 31, 2000
--------------------------------------------
WF(1) C1FN UAB Total
--- ---- --- --------
(In Thousands)
Net interest income ..................... $ 454 $ 1,833 $ 263 $ 2,550
Provision for loan losses ............... - 30 - 30
-------- -------- --------- --------
Net interest income after provision ..... 454 1,803 263 2,520
Noninterest income ...................... 4,358 796 21 5,175
-------- -------- --------- --------
Total revenues .......................... 4,812 2,599 284 7,695
Noninterest expenses .................... 7,355 8,228 567 16,150
-------- -------- --------- --------
Income before taxes and minority interest (2,543) (5,629) (283) (8,455)
Minority interest ....................... (280) (3,455) - (3,735)
-------- -------- --------- --------
Income before taxes ..................... (2,263) (2,174) (283) (4,720)
Provision for income taxes .............. (893) (879) (113) (1,885)
-------- -------- --------- --------
Income from businesses held-for-sale .... $ (1,370) $ (1,295) $ (170) $ (2,835)
======== ======== ========= ========
(1) Includes $667,000 interest expense allocated to fund the average net assets
of $10.7 million of businesses held-for-sale. The rate of 6.26% is based on
the weighted average rate on other borrowed funds which approximates the
marginal funding rate for this niche business.
39
4. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ------
(In Thousands)
Available-for-sale securities:
December 31, 2002:
U.S. Government and agencies ..... $10,880 $ 173 $ - $11,053
======= ======= ======= =======
December 31, 2001:
Corporate bonds .................. $ 1,805 $ 1 $ 8 $ 1,798
======= ======= ======= =======
Held-to-maturity:
December 31, 2002:
Corporate bonds .................. $ 310 $ 8 $ 1 $ 317
State and political subdivisions.. 10,414 1,123 57 11,480
------- ------- ------- -------
$10,724 $ 1,131 $ 58 $11,797
======= ======= ======= =======
December 31, 2001:
Corporate bonds .................. $ 1,372 $ 6 $ 20 $ 1,358
State and political subdivisions.. 11,024 631 211 11,444
------- ------- ------- -------
$12,396 $ 637 $ 231 $12,802
======= ======= ======= =======
Securities with book values aggregating $8.2 million at December 31, 2002
were pledged as collateral for WSFS' Treasury Tax and Loan account with the
Federal Reserve Bank, securities sold under agreement to repurchase and certain
municipal deposits which require collateral. Accrued interest receivable
relating to investment securities was $227,000 and $211,000 at December 31, 2002
and 2001, respectively. Substantially all of the interest and dividends on
investment securities represented taxable income.
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 2002 were as follows:
Held-to-Maturity Available-for-Sale
------------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- ------
(In Thousands)
Within one year ............................... $ - $ - $ - $ -
After one year but within five years........... 4,618 5,311 10,880 11,053
After five but within ten years................ 1,557 1,885 - -
After ten years................................ 4,549 4,601 - -
--------- -------- ------- --------
$10,724 $11,797 $ 10,880 $ 11,053
======= ======= ======== ========
Proceeds from the sale of investment securities available-for-sale during
2002 were $1.8 million, with a loss of $15,000 realized on the sales. Corporate
and municipal bonds were called by the issuers totaling $1.8 million, with gains
of $2,000 realized on these calls. Proceeds from the sale of corporate bonds
available-for-sale of $306,000 resulted in a gain of $2,000, which was reported
as income from businesses held-for-sale. Also, C1FN owned $50 million in agency
notes when the company was sold in November 2002. For further discussion of the
sale of C1FN, see Note 3 to the Financial Statements. Proceeds from the sale of
investments during 2001 and 2000 were $644,000 and $36.1 million, respectively.
There were net losses of $49,000 realized in 2000. There was no gain or loss on
sales in 2001, however, corporate bond calls totaling $2.5 million resulted in a
net realized gain of $4,000. In 2000, the Company recorded a gain of $40,000 on
the sale of common stock received from the demutualization of insurance
companies of which WSFS was a policy holder. The cost basis for all investment
security sales was based on the specific identification method. There were no
sales of securities classified as held-to-maturity. With the adoption of
Statement of Financial Accounting Standards (SFAS) No. 133 in 2000, $2.0 million
of corporate bonds were reclassified from held-to-maturity to
available-for-sale.
40
5. MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -------
(In Thousands)
Available-for-sale securities:
December 31, 2002:
Collateralized mortgage obligations $ 83,099 $ 1,659 $ 23 $ 84,735
FNMA............................... 13,073 273 - 13,346
-------- -------- -------- --------
$ 96,172 $ 1,932 $ 23 $ 98,081
======== ======== ======== ========
Weighted average yield .............. 4.69%
December 31, 2001:
Collateralized mortgage obligations.. $257,618 $ 3,206 $ 40 $260,784
FNMA................................. 15,173 103 - 15,276
FHLMC................................ 15,200 - 61 15,139
GNMA................................. 230 10 - 240
-------- -------- -------- --------
$288,221 $ 3,319 $ 101 $291,439
======== ======== ======== ========
Weighted average yield .............. 5.47%
Held-to-maturity securities:
December 31, 2002:
Collateralized mortgage obligations.. $ 13,881 $ 345 $ - $ 14,226
FNMA ................................ 11,614 387 - 12,001
FHLMC ............................... 13,662 595 3 14,254
-------- -------- -------- --------
$ 39,157 $ 1,327 $ 3 $ 40,481
======== ======== ======== ========
Weighted average yield .............. 5.90%
December 31, 2001:
Collateralized mortgage obligations.. $ 31,889 $ 831 $ 80 $ 32,640
FNMA ................................ 18,355 254 - 18,609
FHLMC ............................... 20,041 305 3 20,343
-------- -------- -------- --------
$ 70,285 $ 1,390 $ 83 $ 71,592
======== ======== ======== ========
Weighted average yield .............. 6.20%
Trading Securities:
December 31, 2002:
Collateralized mortgage obligations.. $ 11,000 $ - $ - $ 11,000
-------- -------- -------- --------
$ 11,000 $ - $ - $ 11,000
======== ======== ======== ========
Weighted average yield .............. 4.42%
At December 31, 2002, mortgage-backed securities with book values
aggregating $62.3 million were pledged as collateral for retail customer
repurchase agreements, securities sold under agreements to repurchase and
certain municipal deposits which require collateral. Accrued interest receivable
relating to mortgage-backed securities was $715,000 and $2.1 million at December
31, 2002 and 2001, respectively. Proceeds from the sale of mortgage-backed
securities available-for-sale were $128.3 million in 2002, resulting in a gain
of $1.7 million (reported as income from businesses held-for-sale). Also during
2002, the Corporation sold a mortgage-backed security classified as
held-to-maturity with proceeds totaling $569,000 resulting in a gain of $36,000.
Because this sale occurred after the Corporation had collected more than 85% of
the principal outstanding at acquisition, the sale is considered a maturity per
SFAS 115. There were $70.8 million in mortgage-backed securities remaining on
the books of C1FN when they were sold in November 2002. For further discussion
of the sale of C1FN, see Note 3 to the Financial Statements. There were no other
sales of mortgage-backed securities classified as held-to-maturity, nor
transfers between categories of mortgage-backed securities in 2002.
41
In 2001, proceeds from the sale of mortgage-backed securities
available-for-sale were $4.1 million with no gains or losses realized on these
sales. During 2000, as part of a deleveraging strategy, WSFS received proceeds
of $180.3 million in collateralized mortgage obligations and $14.7 million in
adjustable rate GNMA securities, all classified as available-for-sale, resulting
in net losses of $6.4 million and gains of $3,000, respectively. The cost bases
of all mortgage-backed security sales are based on the specific identification
method. There were no sales of mortgage-backed securities classified as
held-to-maturity in 2000. With the adoption of SFAS No. 133, $129.0 million in
mortgage-backed securities were reclassified from held-to-maturity to
available-for-sale in 2000. In addition, there were proceeds of $24.3 million in
January 2000 from the sale of collateralized mortgage obligations for which a
loss of $730,000 was recognized in 1999. There were no other sales of
mortgage-backed securities, nor transfers between categories of mortgage-backed
securities during 2001 and 2000.
6. INVESTMENT IN AND ACQUISITION OF 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.
In 1993, the Corporation acquired a pool of reverse mortgages from the FDIC
and another lender. In 1994, the Corporation purchased Providential Home Income
Plan, Inc., a California-based reverse mortgage lender, for approximately $24.4
million. Providential's assets at acquisition primarily consisted of cash and
its investment in reverse mortgages. Providential's results have been included
in the Corporation's consolidated statement of operations since the acquisition
date.
The Corporation accounted for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation projected
the cash inflows and outflows of the pool including actuarial projections of the
life expectancy of the individual contract holder and changes in the collateral
values of the residence. At each reporting date, a new economic forecast was
made of the cash inflows and outflows of each pool of reverse mortgages; the
effective yield of each pool was recomputed, and income was adjusted
retroactively and prospectively to reflect the revised rate of return.
Accordingly, because of this market-value based accounting, the recorded value
of reverse mortgage assets included significant risk associated with
estimations, and income can vary significantly from reporting period to
reporting period.
For the year ended December 31, 2002, the Corporation earned $13.1 million
in interest income on reverse mortgages compared to $10.2 million in 2001 and
$19.3 million in 2000. The yield on the portfolio was 49.73% in 2002 compared to
29.54% in 2001 and 58.92% in 2000.
On November 22, 2002, substantially all of WSFS' $33 million reverse
mortgage portfolio was sold, effective October 1, 2002, for a pretax gain of
$101.5 million. The Corporation received $128 million in cash and $10 million in
BBB rated mortgage-backed securities classified as trading and options to
acquire up to 49.9% of the Class "O" certificates issued in connection with
mortgage-backed security SASCO RM-1 2002. Theses mortgage-backed securities were
part of a larger issuance of securities backed, in part, by the sold reverse
mortgages. Since this was the sale of a financial asset, results are shown in
continuing operations in the attached Financial Statements, in accordance with
accounting principles generally accepted in the United States of America.
Included in the net gain of reverse mortgages are amounts for transaction costs
and other estimates of costs of future obligations, including an estimated
future payment due to a participant in the value received for certain of the
sold reverse mortgages, under a pre-existing agreement. The remaining investment
of $1.1 million at December 31, 2002 represents a participation in reverse
mortgages with a third party and was not part of the previously mentioned sale.
The Corporation has retained the servicing of these reverse mortgages and
receives $35 per loan per month, or an estimated $240,000 for 2003. No excess
servicing rights were assigned.
On January 1, 2002, the Corporation adopted 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 also addresses how intangible assets that are acquired
individually or with a group of other assets (i.e. those not acquired in a
business combination) should be accounted for in Financial Statements upon their
acquisition. Statement 142 also addresses
42
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 upon adoption.
The Corporation had $1.2 million in negative goodwill associated with the
1994 purchase of Providential Home Income Plan, Inc., a former subsidiary that
was subsequently merged into the Bank. As a result of adopting this standard,
the Corporation recognized income of $703,000 in the first quarter of 2002 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.
7. LOANS
December 31,
--------------------------
2002 2001
---- ----
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) ................ $ 420,116 $ 403,154
Other ................................... 229,482 208,924
Real estate construction loans................ 67,251 56,050
Commercial loans.............................. 211,437 197,799
Consumer loans................................ 181,851 198,366
----------- -----------
1,110,137 1,064,293
Less:
Loans in process ............................. 10,959 8,695
Unearned income .............................. 1,856 3,370
Allowance for loan losses .................... 21,452 21,597
----------- -----------
Net loans................................ $ 1,075,870 $ 1,030,631
=========== ===========
The Corporation had impaired loans of approximately $7.0 million at
December 31, 2002 compared to $7.5 million at December 31, 2001. The average
recorded investment in impaired loans was $7.5 million, $8.1 million and $7.6
million during 2002, 2001 and 2000, respectively. The allowance for losses on
impaired loans was $1.0 million at December 31, 2002, as compared to $1.1
million at December 31, 2001. There was no interest income recognized on
impaired loans.
The total amount of loans serviced for others were $234.1 million, $262.2
million and $250.8 million at December 31, 2002, 2001 and 2000, respectively.
Accrued interest receivable on loans outstanding was $5.0 million at
December 31, 2002 and 2001, and $5.9 million at December 31, 2000.
Nonaccruing loans aggregated $6.5 million, $7.5 million and $8.3 million at
December 31, 2002, 2001 and 2000, respectively. If interest on all such loans
had been recorded in accordance with contractual terms, net interest income
would have increased by $599,090 in 2002, $939,000 in 2001 and $966,000 in 2000.
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
-----------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Beginning balance.......................................................... $21,597 $21,423 $22,223
Provision for loan losses............................................. 2,243 1,865 864
Provision for loan losses - businesses held-for-sale.................. 211 347 30
Balance at acquisition of credit card portfolio....................... - - 175
Sale of business held-for-sale........................................ (269) - -
Loans charged-off..................................................... (3,504) (2,332) (2,509)
Recoveries............................................................ 1,174 294 640
------- -------- -------
Ending balance............................................................. $21,452 $21,597 $21,423
======= ======= =======
43
8. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31,
----------------------------
2002 2001
---- ----
(In Thousands)
Real estate ........................................................ $ 904 $ 685
Less allowance for losses........................................... - 253
-------- --------
Ending balance..................................................... $ 904 $ 432
======== ========
A summary of changes in the allowance for foreclosed assets follows:
Year Ended December 31,
--------------------------------
2002 2001 2000
---- ---- -----
(In Thousands)
Beginning balance.................................................. $ 253 $ 273 $ 329
Net charge-offs ................................................. (253) 20 56
--------- -------- --------
Ending balance .................................................... $ - $ 253 $ 273
========== ========= ========
9. PREMISES AND EQUIPMENT
December 31,
------------
2002 2001
---- ----
(In Thousands)
Land ............................... $ 1,086 $ 1,086
Buildings .......................... 8,465 8,342
Leasehold improvements ............. 6,399 6,804
Furniture and equipment ............ 19,088 21,779
Renovations-in-process.............. 262 549
-------- -------
35,300 38,560
Less:
Accumulated depreciation ........... 21,462 22,122
-------- --------
$ 13,838 $ 16,438
======== ========
The Corporation occupies certain premises and operates certain equipment
under noncancelable leases with terms ranging from 1 to 25 years. These leases
are accounted for as operating leases. Accordingly, lease costs are expensed as
incurred. Rent expense was $2.0 million in 2002, $2.2 million in 2001, and $1.6
million in 2000. Future minimum payments under these leases at December 31, 2002
are as follows:
(In Thousands)
2003 ........................................... $ 1,777
2004 ........................................... 1,446
2005 ........................................... 1,238
2006 ........................................... 975
2007 ........................................... 706
Thereafter ......................................... 3,312
--------
Total future minimum lease payments ....... $ 9,454
========
44
10. DEPOSITS
The following is a summary of deposits by category, including a summary of
the remaining time to maturity for time deposits:
December 31,
-----------------------
2002 2001(1)
---- -------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ....................... $ 182,957 $ 171,801
Money market and interest-bearing demand ......... 109,259 327,635
---------- ----------
Total money market and demand .................. 292,216 499,436
---------- ----------
Savings .............................................. 292,917 313,246
---------- ----------
Retail certificates of deposits by maturity:
Less than one year ............................... 168,547 194,376
One year to two years ............................ 36,668 46,992
Two years to three years ......................... 26,445 16,611
Three years to four years ........................ 2,721 4,504
Four years to five years ......................... 2,097 2,805
Over five years .................................. 315 1,226
---------- ----------
Total retail time certificates ................. 236,793 266,514
---------- ----------
Jumbo certificates of deposit-retail, by maturity:
Less than one year ............................... 40,441 37,815
One year to two years ............................ 3,879 8,519
Two years to three years ......................... 5,530 -
Three years to four years ........................ 159 -
Four years to five years ......................... - 202
Over five years .................................. 137 -
---------- ----------
Total jumbo certificates of deposit-retail ..... 50,146 46,536
---------- ----------
Subtotal retail deposits ............................. 872,072 1,125,732
---------- ----------
Jumbo certificates of deposit nonretail, by maturity:
Less than one year ............................... 24,734 10,512
One year to two years ............................ 1,490 1,326
Two years to three years ......................... - 100
Three years to four years ........................ - 100
Four years to five years ......................... 100 -
---------- ----------
Total jumbo time certificates............ ...... 26,324 12,038
---------- ----------
Brokered certificates of deposit by maturity:
Less than one year .............................. - 8,347
---------- ----------
Total brokered time certificates ............... - 8,347
---------- ----------
Total deposits ....................................... $ 898,396 $1,146,117
========== ==========
(1) Includes deposits of businesses sold in 2002 totaling $293.2 million at
December 31, 2001.
Time deposits include certificates of deposit in denominations of $100,000
or more, which aggregated $76.5 million and $58.6 million at December 31, 2002
and 2001, respectively.
45
Interest expense, restated for continuing operations, by category follows:
Year Ended December 31,
2002 2001 2000
---- ---- ----
(In Thousands)
Money market and interest-bearing demand ...... $ 430 $ 910 $ 1,429
Savings ....................................... 2,914 7,417 10,690
Retail time deposits .......................... 8,267 13,197 12,957
------- ------- -------
Total retail interest expense ........... 11,611 21,524 25,076
------- ------- -------
Jumbo certificates of deposit - other.......... 419 1,106 1,713
Brokered certificates of deposit .............. 10 2,924 10,541
------- ------- -------
Total interest expense on deposits ...... $12,040 $25,554 $37,330
======= ======= =======
11. BORROWED FUNDS
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
------ ---- ------ ------ ------
(Dollars in Thousands)
2002
----
FHLB advances................................. $403,500 4.70% $480,000 $448,103 4.56%
Trust preferred borrowings.................... 50,000 3.97 50,000 50,000 5.13
Federal funds purchased and securities
sold under agreements to repurchase ........ 25,925 1.34 121,138 79,714 3.32
Other borrowed funds ......................... 36,581 1.00 42,640 36,026 1.27
2001
----
FHLB advances................................. $520,000 4.58% $520,000 $396,542 5.64%
Trust preferred borrowings.................... 50,000 5.60 50,000 50,000 6.64
Federal funds purchased and securities
sold under agreements to repurchase ........ 45,000 4.87 73,900 69,945 6.46
Other borrowed funds ......................... 30,480 1.40 37,193 27,321 3.06
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with fixed
rates ranging from 2.92% to 5.37% at December 31, 2002 are due as follows:
Weighted
Average
Amount Rate
------ --------
(Dollars in Thousands)
2003............................. $ 120,000 4.42%
2004............................. 90,000 4.78
2005............................. 15,000 5.01
2012............................. 33,500 4.22
----------
$ 258,500
==========
Four advances are outstanding at December 31, 2002 totaling $145.0 million,
with a weighted average rate of 4.96% maturing in 2008 and beyond. They are
convertible on a quarterly basis (at the discretion of the FHLB) to a variable
rate advance based upon the 3-month LIBOR rate, after an initial fixed term.
WSFS has the option to prepay these four advances at predetermined
46
times or rates. Pursuant to collateral agreements with the FHLB, advances are
secured by qualifying first mortgage loans, collateralized mortgage obligations,
FHLB stock and an interest-bearing demand deposit account with the FHLB.
As a member of the FHLB of Pittsburgh, WSFS is required to acquire and hold
shares of capital stock in the FHLB of Pittsburgh in an amount at least equal to
5% of its advances (borrowings) from the FHLB of Pittsburgh, plus 0.7% of the
unused borrowing capacity. WSFS was in compliance with this requirement with an
investment in FHLB of Pittsburgh stock at December 31, 2002, of $22.0 million.
Trust Preferred Borrowings
On November 20, 1998, the Corporation issued $50.0 million of Trust
Preferred securities, due on December 1, 2028, pursuant to a shelf registration
under the Securities Act of 1933. These securities were issued at a floating
rate of 250 basis points over 3-month LIBOR, repricing quarterly. The maturity
date on these securities may be shortened to a date not earlier than December 1,
2003 if certain conditions are met.
The Trust Preferred securities were issued by a subsidiary of the
Corporation, a Delaware statutory trust, which invested the proceeds in junior
subordinated debentures issued by the Corporation. The net proceeds from the
sale of Trust Preferred securities were used primarily as replacement financing
for the early retirement of other Corporation debt. The Corporation benefits
from reduced long-term financing costs and the flexibility of additional Bank
regulatory capital.
At the same time, the Corporation also entered into an agreement to limit
the interest rate exposure in the Trust Preferred securities by purchasing an
interest rate cap, which provides a ceiling on 3-month LIBOR of 6.00% for the
first ten years (expires November 2008). This limits the net interest rate
coupon (or cash paid) on the Trust Preferred securities to no more than 8.50%
through the first ten years. The cost of this interest rate cap was $2.4
million, which, prior to the adoption of SFAS 133, was to be amortized as a
yield adjustment over the ten-year period. On January 1, 2000, the Corporation
adopted SFAS No. 133 which changed the accounting treatment of the cap. See Note
19 to the Financial Statements for a further discussion. The effective
accounting rate of the Trust Preferred securities including amortization of
transactional costs and certain changes in value of the cap was 3.97% and 5.60%
at December 31, 2002 and 2001, respectively. The Corporation received payments
from the cap of $92,000 and $220,000 in 2001 and 2000, respectively. The
Corporation did not receive any payments in 2002.
Securities Sold Under Agreements to Repurchase
During 2002, WSFS sold securities under agreements to repurchase as a
short-term funding source. At December 31, 2002, securities sold under
agreements to repurchase had fixed rates ranging from 1.15% to 1.47%. The
underlying securities are mortgage-backed securities and U.S. Government
securities with a book value of $28.3 million at December 31, 2002. Securities
sold under agreements to repurchase with the corresponding carrying and market
values of the underlying securities are due as follows:
Collateral
---------------------------------------
Borrowing Carrying Market Accrued
Amount Rate Value Value Interest
--------- ---------- -------- -------- ---------
(Dollars in Thousands)
2002
- ----
Up to 30 days.................... $ 25,925 1.34% $ 28,291 $ 28,291 $ 151
========= ========= ========= ========
2001
- ----
Up to 30 days.................... $ 20,000 2.51% $ 20,823 $ 21,235 $ 108
Over 90 days..................... 25,000 6.76 31,786 32,422 176
--------- --------- ---------- --------
$ 45,000 4.87% $ 52,609 $ 53,657 $ 284
========= ========= ========= =======
47
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $36.6
million and $30.2 million at December 31, 2002 and 2001, respectively,
consisting of outstanding retail repurchase agreements, contractual arrangements
under which portions of certain securities are sold on an overnight basis to
retail customers under agreements to repurchase. Such borrowings were
collateralized by mortgaged-backed securities. The average rates on these
borrowings were 1.00% and 1.25% at December 31, 2002 and 2001, respectively.
Also included in other borrowed funds are capital leases totaling $287,000 at
December 31, 2001. The average rates on these capital leases was 16.83% at
December 31, 2001. The balance of capital leases outstanding at December 31,
2002 is included in businesses held-for-sale. See Note 3 to the Financial
Statements for a further discussion of businesses held-for-sale.
Cost of Funding Discontinued Operations and Businesses Held-For Sale
In order to properly estimate the results of continuing operations, certain
WSFS funding costs were allocated towards the funding of discontinued operations
and businesses held-for-sale. See Note 2 to the Financial Statements for further
discussion on discontinued operations, and Note 3 for businesses held-for-sale.
12. STOCKHOLDERS' EQUITY
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as WSFS, 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 WSFS'
Financial Statements. At December 31, 2002 and 2001, WSFS was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
The following table presents WSFS' consolidated capital position as of
December 31, 2002 and 2001:
To Be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
----------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
As of December 31, 2002:
Total Capital (to risk-weighted assets)...... $ 245,470 20.12% $ 97,583 8.00% $ 121,978 10.00%
Core Capital (to adjusted tangible assets)... 235,868 13.74 68,665 4.00 85,831 5.00
Tangible Capital (to tangible assets)........ 235,868 13.74 25,749 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets)..... 235,868 19.34 N/A N/A 73,187 6.00
As of December 31, 2001:
Total Capital (to risk-weighted assets)...... $ 151,356 11.98% $ 101,074 8.00% $ 126,343 10.00%
Core Capital (to adjusted tangible assets)... 141,229 7.37 76,680 4.00 95,850 5.00
Tangible Capital (to tangible assets)........ 141,229 7.37 28,755 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets)..... 141,229 11.18 N/A N/A 75,806 6.00
The Corporation has a simple capital structure with one class of $ .01 par
common stock outstanding, each share having equal voting rights. In addition,
the Corporation has authorized 7,500,000 shares of $0.01 par preferred stock. No
preferred stock was outstanding at December 31, 2002 and 2001. The Trust
Preferred securities issued in 1998 qualify as Tier 1 capital. WSFS is
prohibited from paying any dividend or making any other capital distribution if,
after making the distribution, WSFS would be undercapitalized within the meaning
of the OTS Prompt Corrective Action regulations. Since 1996, the Board of
Directors has approved several stock repurchase programs to reacquire common
shares. As part of these programs, the Corporation acquired approximately
490,000 shares in 2002 and 1.1 million shares in 2001. At December 31, 2002, the
Corporation held 6.2 million shares of its common stock in the treasury.
48
The Holding Company
Although the holding company does not have significant assets or engage in
significant operations separate from WSFS, the Corporation has agreed to cause
WSFS' required regulatory capital level to be maintained by infusing sufficient
additional capital as necessary. In November 1998, the Corporation issued $50
million of Trust Preferred securities at a variable interest rate of 250 basis
points over the 3-month LIBOR. At December 31, 2002, the coupon rate on these
securities was 3.92% with a scheduled maturity of December 1, 2028. The
Corporation purchased an interest rate cap that effectively limits 3-month LIBOR
to 6.00% until 2008. The effective rate of these securities, including
amortization of issuance costs and the cost of the interest rate cap was 4.0% at
December 31, 2002. The effective rate will vary, however, due to fluctuations in
interest rates. See Note 19 to the Financial Statements for further discussion
of the interest rate cap. These securities were issued by WSFS Financial
Corporation's subsidiary, WSFS Capital Trust I. The proceeds from the issue were
invested in Junior Subordinate Debentures issued by WSFS Financial Corporation.
These securities are treated as borrowings with the interest included in
interest expense on the consolidated statement of operations. See Notes 11 and
19 to the Financial Statements for additional information. The proceeds were
used primarily to extinguish higher rate debt and for general corporate
purposes.
Pursuant to federal laws and regulations, WSFS' ability to engage in
transactions with affiliated corporations is limited, and WSFS generally may not
lend funds to nor guarantee indebtedness of the Corporation.
13. ASSOCIATE (EMPLOYEE) BENEFIT PLANS
Associate 401(k) Savings Plan
Certain subsidiaries of the Corporation maintain a qualified plan in which
Associates may participate. Participants in the plan may elect to direct a
portion of their wages into investment accounts which include professionally
managed mutual and money market funds and the Corporation's common stock.
Generally, the principal and earnings thereon are tax deferred until withdrawn.
The Company matches a portion of the Associates' contributions and periodically
makes discretionary contributions based on Company performance into the plan for
the benefit of Associates. To that end, in December 2002, the Corporation set
aside $343,000 of its gain on the sale of reverse mortgages for a special
contribution to the Associate 401K plan. The Corporation's total contributions
to the plan on behalf of its Associates resulted in an expenditure of $848,000,
$892,000 and $848,000 for 2002, 2001, and 2000, respectively. The plan purchased
72,000, 91,000 and 105,000 shares of common stock of the Corporation during
2002, 2001, and 2000, respectively.
All Company contributions are made in the form of the Corporation's common
stock which Associates may transfer to various other investment vehicles without
any significant restrictions.
Postretirement Benefits
The Corporation shares certain costs of providing health and life insurance
benefits to retired Associates (and their eligible dependents). Substantially
all Associates may become eligible for these benefits if they reach normal
retirement age while working for the Corporation.
The Corporation accounts for its obligations under the provisions of SFAS
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
SFAS No. 106 requires that the costs of these benefits be recognized over an
Associate's active working career. Disclosures are in accordance with SFAS
No.132, Employer's Disclosure About Pensions and Other Postretirement Benefits
which standardized the applicable disclosure requirements.
49
The following disclosures are in accordance with SFAS No. 132:
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ................ $ 1,430 $ 1,086 $ 1,058
Service Cost ........................................... 59 37 36
Interest cost .......................................... 100 78 74
Actuarial loss ......................................... 298 364 47
Benefits paid .......................................... (72) (135) (129)
------- ------- -------
Benefit obligation at end of year ................ $ 1,815 $ 1,430 $ 1,086
======= ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year ........ $ - $ - $ -
Employer contributions ................................. 72 135 129
Benefits paid .......................................... (72) (135) (129)
------- ------- -------
Fair value of plan assets at end of year ........ $ - $ - $ -
======= ======= =======
Funded status:
Funded status .......................................... $(1,815) $(1,430) $(1,086)
Unrecognized transition obligation ..................... 613 675 736
Unrecognized net loss (gain) ........................... 407 109 (263)
------- ------- -------
Net amount recognized ............................ $ (795) $ (646) $ (613)
======= ======= =======
Components of net periodic benefit cost:
Service cost ........................................... $ 74 $ 60 $ 37
Interest cost .......................................... 119 100 78
Amortization of transition obligation .................. 61 61 61
Net loss (gain) recognition ............................ 13 - (8)
------- ------- -------
Net periodic benefit cost ........................ $ 267 $ 221 $ 168
======= ======= =======
Sensitivity analysis of healthcare cost trends:
Effect of +1% on service cost plus interest cost ....... $ 2 $ - $ -
Effect of -1% on service cost plus interest cost ....... (1) - -
Effect of +1% on APBO .................................. 9 5 2
Effect of -1% on APBO .................................. (3) (2) (1)
Assumptions used to value the Accumulated Postretirement
Benefit Obligation (APBO):
Discount rate ................................... 6.75% 7.25% 7.50%
Health care cost trend rate ..................... 6.00% 6.50% 7.00%
The Corporation assumes that the average annual rate of increase for
medical benefits will decrease by one-half of 1% per year and stabilizes at an
average increase of 5% per annum. The costs incurred for retirees' health care
are limited since certain current and all future retirees are restricted to an
annual medical premium cap indexed (since 1995) by the lesser of 4% or the
actual increase in medical premiums paid by the Corporation. For 2002, this
annual premium cap amounted to $1,896 per retiree.
50
14. TAXES ON INCOME
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. The income tax provision consists
of the following:
Year Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
From current operations:
Current income taxes:
Federal taxes ................................. $ 34,635 $ 5,017 $ 10,336
State and local taxes ......................... 3,543 1,039 541
Deferred income taxes:
Federal taxes ................................. 5,976 2,494 (2,406)
State and local taxes ......................... - - -
-------- -------- --------
Subtotal ................................ $ 44,154 $ 8,550 $ 8,471
From discontinued operations:
Current income taxes:
Federal taxes ................................. $ 9,247 $ 4,645 $ (5,360)
State and local taxes ......................... 778 174 202
Deferred income taxes:
Federal taxes ................................. (2,494) (6,307) (2,159)
State and local taxes ......................... (547) 1,308 (41)
-------- -------- --------
Subtotal ................................ $ 6,984 $ (180) $ (7,358)
Current taxes from adoption of accounting principle:
Federal taxes on SFAS 133 adoption ............ - - (837)
Federal taxes on SFAS 142 adoption ............ 469 - -
-------- -------- --------
Subtotal ................................ $ 469 $ - $ (837)
-------- -------- --------
Total ................................... $ 51,607 $ 8,370 $ 276
======== ======== ========
Current federal income taxes include taxes on income that cannot be offset
by net operating loss carryforwards.
Based on the Corporation's history of prior earnings and its expectations
of the future, management believes that operating income and the reversal
pattern of its temporary differences will, more likely than not, be sufficient
to realize a net deferred tax asset of $1.5 million at December 31, 2002.
Adjustments to the valuation allowance were made in 2002 to reflect the lapsing
of uncertainties related to certain tax benefits that were deemed to be
realizable as a result of the closure of an IRS examination along with the sale
of the reverse mortgage portfolio. Further adjustments to the valuation
allowance were made in 2002 related to previously unrecorded tax benefits
related to C1FN that were realizable as a result of the sale of Wilmington
Finance. This was offset by adjustments for benefits previously recognized for
state tax net operating losses that are not realizable due to changes in state
tax law enacted in 2002. The adjustments to the valuation allowance in 2001 were
based on the realization of certain state net operating loss tax benefits
relating to the discontinuance of the leasing company. The adjustments in 2000
were primarily the result of the lapsing of uncertainties associated with the
Corporation's ability to realize certain tax benefits related to the acquisition
of Providential Home Income Plan, Inc.
Deferred income taxes 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. The following is a
summary of the significant components of the Corporation's deferred tax assets
and liabilities as of December 31, 2002 and 2001:
51
2002 2001
--------- ----------
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation ........................ $(21,958) $(27,781)
Other ........................................... (18) (28)
Investments in non-wholly owned subsidiaries .... (4,866) -
Unrealized gains on available-for-sale securities (583) (654)
-------- --------
Total deferred tax liabilities ....................... (27,425) (28,463)
-------- --------
Deferred tax assets:
Bad debt deductions ............................. 16,591 15,290
Tax credit carryforwards ........................ 150 150
Net operating loss carryforwards ................ 5,778 6,255
Loan fees ....................................... 99 123
Provisions for losses on reverse mortgages ...... - 11,418
Discontinued operations ......................... 4,042 2,228
Reserves and other .............................. 3,201 1,502
Capital loss carryforwards ...................... 1,438 -
Investments in non-wholly owned subsidiaries .... - 730
-------- --------
Total deferred tax assets ............................ 31,299 37,696
-------- --------
Valuation allowance .................................. (2,377) (5,306)
-------- --------
Net deferred tax asset ............................... $ 1,497 $ 3,927
======== ========
Included in the table above is the effect of certain temporary differences
for which no deferred tax expense or benefit was recognized. Such items
consisted primarily of unrealized gains and losses on certain investments in
debt and equity securities accounted for under SFAS No. 115 and certain
adjustments in non-wholly owned subsidiaries. A decrease in 2002 for deferred
tax liabilities of investments in non-wholly owned subsidiaries for which no
deferred tax benefit was recognized was $434,000.
Approximately $4.7 million in gross deferred tax assets of the Corporation
at December 31, 2002 are related to net operating losses and tax credits
attributable to a former subsidiary. The Company has assessed a valuation
allowance on a portion of these deferred tax assets due to limitations imposed
by the Internal Revenue Code.
Approximately $1.3 million in gross deferred tax assets of the Corporation
at December 31, 2002 are related to state tax net operating losses. The Company
has assessed a valuation allowance on a portion of these deferred tax assets.
In 2002, the Internal Revenue Service (IRS) concluded an examination of the
Corporation's federal income tax returns for all the years ending December 31,
2000. The income tax provision for the year ended December 31, 2002 was reduced
by $894,000 primarily as a result of the favorable resolution of tax authority
examinations and tax return settlements.
Net operating loss carryforwards (NOLs) of $34.1 million remain at December
31, 2002. The expiration dates and amounts of such carryforwards are listed
below:
Federal State
------- -----
(In Thousands)
2007.............................. $ - $12,473
2008.............................. 6,172 -
2009.............................. 6,755 -
2018.............................. - 8,711
------- -------
$12,927 $21,184
======= =======
The Corporation's ability to use its federal NOLs to offset future income
is subject to restrictions enacted in Section 382 of the Internal Revenue Code.
These restrictions limit a company's future use of NOLs if there is a
significant ownership change in a
52
company's stock (an "Ownership Change"). The utilization of approximately $12.9
million of federal net operating loss carryforwards is limited to approximately
$1.3 million each year as a result of such Ownership Change in a former
subsidiary's stock.
A reconciliation setting forth the differences between the effective tax
rate of the Corporation and the U.S. Federal Statutory tax rate is as follows:
Year Ended December 31,
---------------------------
2002 2001 2000
---- ---- ----
Statutory federal income tax rate ............ 35.0% 35.0% 35.0%
State tax net of federal tax benefit.......... 1.5 5.0 12.8
Interest income 50% excludable................ (0.5) (2.9) (6.7)
Utilization of loss carryforwards and
valuation allowance adjustments........ (1.9) (3.3) (33.6)
Other......................................... (0.3) (0.9) (5.0)
---- ---- ----
Effective tax rate ........................... 33.8% 32.9% 2.5%
==== ==== ====
15. STOCK OPTION PLANS
The Corporation has stock options outstanding under two stock option plans
(collectively, "Option Plans") for officers, directors and Associates of the
Corporation and its subsidiaries. The 1986 Stock Option Plan ("1986 Plan")
expired in 1996, on the tenth anniversary of its effective date. As a result, no
future awards may be granted under the 1986 Plan. The 1997 Stock Option Plan
("1997 Plan") was approved by shareholders to replace the expired 1986 Plan. The
1997 Plan will terminate on the tenth anniversary of its effective date, after
which no awards may be granted. The number of shares reserved for issuance under
the 1997 Plan is 1,165,000. At December 31, 2002, there were 69,450 shares
available for future grants under the 1997 Plan.
The Option Plans provide for the granting of incentive stock options as
defined in Section 422 of the Internal Revenue Code as well as nonincentive
stock options (collectively, "Stock Options"), phantom stock awards and stock
appreciation rights. All awards are to be granted at not less than the market
price of the Corporation's common stock on the date of the grant and expire no
later than ten years from the grant date. All Stock Options granted after
October 1996 are exercisable one year from grant date and vest in 20% per annum
increments. Generally, all awards become immediately exercisable in the event of
a change in control, as defined within the Option Plans.
A summary of the status of the Corporation's Option Plans as of December
31, 2002, 2001 and 2000, and changes during the years then ended is presented
below:
2002 2001 2000
-------------------------- -------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of year 1,001,605 $ 14.42 826,345 $ 13.85 530,055 $ 14.88
Granted ........................ 125,075 30.83 196,500 16.51 372,700 12.30
Exercised ...................... (36,070) 14.35 (9,360) 9.44 (15,890) 6.53
Canceled ....................... (10,550) 14.28 (11,880) 13.41 (60,520) 15.09
--------- ------- -------
Outstanding at end of year ..... 1,080,060 16.33 1,001,605 14.42 826,345 13.84
Exercisable at end of year 466,194 14.55 312,589 156,484
Weighted-average fair value
of awards granted $ 8.73 $ 5.73 $ 4.69
The Black-Scholes option-pricing model was used to determine the grant-date
fair-value of options. Significant assumptions used in the model included a
weighted-average risk-free rate of return of 2.6% in 2002, 4.4% in 2001 and 6.0%
in 2000; expected option life of 6 years for all awards; and expected stock
price volatility of 26% in 2002, 24% in 2001, and 35% for 2000. For the purposes
of this option pricing model 1% was used as the expected dividend yield.
53
The Black-Scholes and other option-pricing models assume that options are
freely tradable and immediately vested. Since executive's options are not
transferable, have long vesting provisions, and are subject to trading black-out
periods imposed by the Company, the value calculated by the Black-Scholes model
may significantly overstate the true economic value of the options.
SFAS No. 123, Accounting for Stock-based Compensation, encourages, but does
not require, the adoption of fair-value accounting for stock-based compensation
to Associates. The Company, as permitted, has elected not to adopt the fair
value accounting provisions of SFAS 123, and has instead continued to apply
Accounting Principles Board Opinion 25 and related interpretations in accounting
for the Stock Plans and to provide the required pro forma disclosures of SFAS
123. Had the grant-date fair-value provisions of SFAS 123 been adopted, the
Corporation would have recognized compensation expense of $1.2 million in 2002,
and $1.3 million in both 2001 and 2000 related to its Option Plans. As a result,
pro forma income from continuing operations for the Corporation would have been
$ 87.2 million in 2002, $16.9 million in 2001 and $17.5 million in 2000. Pro
forma diluted earnings per share from continuing operations would have been
$9.19 in 2002, $1.74 in 2001 and $1.64 in 2000.
The effects on pro forma net income and diluted earnings per share of
applying the disclosure requirement of SFAS 123 in past years may not be
representative of the future pro forma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.
The following table summarizes all stock options outstanding and
exercisable for Option Plans as of December 31, 2002, segmented by range of
exercise prices:
Outstanding Exercisable
-------------------------------------------------------------------- -----------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise
Number Price Contractual Life Number Price
------ ---------------- ---------------- ------ -----------
Stock Options:
$ 6.68-$10.02 25,320 $ 9.44 3.8 years 25,320 $ 9.44
$10.02-$13.36 269,100 11.25 7.6 years 105,580 11.29
$13.36-$16.70 396,995 14.83 6.8 years 205,824 14.79
$16.70-$20.04 283,570 17.52 7.4 years 129,470 17.82
$30.06-$33.40 105,075 33.40 10.0 years - -
------- -------
Total 1,080,060 $16.33 7.4 years 466,194 $14.55
========= =======
16. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 2002, the Corporation had commitments to extend credit of
$189.3 million. Consumer lines of credit totaled $66.5 million of which $58.3
million was secured by real estate. Outstanding letters of credit were $4.3
million and outstanding commitments to make or acquire mortgage loans aggregated
$28.2 million. Approximately $17.6 million of which were at fixed rates ranging
from 3.88% to 7.50%, and approximately $10.6 million were at variable rates
ranging from 3.25% to 6.75%. All mortgage commitments are expected to have
closing dates within a six-month period.
Data Processing Operations
In September 2000, the Company entered into a five-year contract with
MCI/WorldCom and Integraph Corporation to manage network operations. The
projected amount of future minimum payments contractually due is as follows:
2003................................................ $1,242,000
2004................................................ 1,281,000
2005................................................ 1,238,000
54
In October 2002, the Company entered into a 7 1/2 year contract with
Metavante Corporation for data processing and other related services. The
projected amount of future minimum payments contractually due is as follows:
2003............................................... $2,023,762
2004............................................... 2,059,808
2005............................................... 2,095,854
2006............................................... 2,131,899
2007............................................... 2,167,945
2008............................................... 2,203,991
2009............................................... 2,240,037
2010............................................... 569,021
Legal Proceedings
In the ordinary course of business, the Corporation, Bank and its
subsidiaries are subject to legal actions which involve claims for monetary
relief. Based upon information presently available to the Corporation and its
counsel, it is the Corporation's opinion that any legal and financial
responsibility arising from such claims will not have a material adverse effect
on the Corporation's results of operations.
The Bank, as successor to originators, may from time to time be involved in
arbitration or litigation with the reverse mortgage loan borrowers or with the
heirs of borrowers. Because reverse mortgages are a relatively new and uncommon
product, there can be no assurances regarding how the courts or arbitrators may
apply existing legal principles to the interpretation and enforcement of the
terms and conditions of the Bank's reverse mortgage obligations.
Financial Instruments With Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business primarily to meet the financing needs of
its customers. To varying degrees, these financial instruments involve elements
of credit risk that are not recognized in the Consolidated Statement of
Condition.
Exposure to loss for commitments to extend credit and standby letters of
credit written is represented by the contractual amount of those instruments.
The Corporation generally requires collateral to support such financial
instruments in excess of the contractual amount of those instruments and
essentially uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
The following represents a summary of off-balance sheet financial
instruments at year-end:
December 31,
-----------------------
2002 2001
---- ----
(In Thousands)
Financial instruments with contract
amounts which represent potential
credit risk:
Construction loan commitments ................ $41,412 $38,334
Commercial mortgage loan commitments ......... 6,518 3,511
Commercial loan commitments .................. 42,373 41,554
Commercial standby letters of credit ......... 4,262 4,052
Residential mortgage loan commitments ........ 28,226 27,033
Consumer lines of credit ..................... 66,516 64,963
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit
written are conditional commitments issued to guarantee the performance of a
customer to a third-party. The Corporation evaluates each customer's
creditworthiness and obtains collateral based on management's credit evaluation
of the counterparty.
55
Indemnifications
Secondary Market Loan Sales. In the normal course of business, WSFS and its
subsidiaries sell loans in the secondary market. As is customary in such sales,
WSFS provides indemnification to the buyer under certain circumstances. This
indemnification may include the repurchase of loans by WSFS. In most cases
repurchases and losses are rare, and no provision is made for losses at the time
of sale. In other cases, primarily resulting from the activities at Wilmington
Finance, Inc., where repurchase and losses are probable and reasonably
estimable, provision is made in the Financial Statements for such estimated
losses.
Sale of C1FN/Everbank Segment. On November 5, 2002, the C1FN/Everbank
segment of WSFS was sold by WSFS and other shareholders of C1FN to Alliance
Capital Partners, Inc. and its subsidiary, First Alliance Bank, F.S.B. As is
customary in the sale of a privately-held business, certain indemnifications
were provided by the sellers in the event of costs, losses, damages, etc
(collectively, "Damages") incurred and successfully claimed by the buyer for
breaches of sellers' representations and warranties, sellers' failure to perform
under the transaction agreements, and the sellers' ownership and operation of
the business prior to sale, generally speaking. This indemnification extends for
one year from the sale date and is capped at $1,750,000 in the aggregate, which
has been placed in escrow. Buyer's damages must exceed $200,000 before any
initial claims may be made. WSFS' share of this indemnification escrow is
$611,000, which may be received by WSFS in the future if no claims are
successfully made against the indemnification. WSFS has not recognized this
portion of the sale consideration, as receipt of this amount is not assured
beyond a reasonable doubt. This amount, or portions thereof, will be recognized
if and when such assurance level is reached.
In addition to the above indemnification, WSFS separately provided
indemnification to the buyer for Damages, if any, that may result from C1FN
shareholders bringing claims against the buyer as a result of the Services
Agreement and amendments (collectively, "Services Agreements") between WSFS and
C1FN over the life of those arrangements. This indemnification was provided by
WSFS purely to facilitate the timely sale of C1FN/Everbank, and is not
specifically related to a change in an underlying asset or liability. This
indemnification extends for two years from the sale date and is capped at
approximately $8.2 million. WSFS is not aware of any claims under this
indemnification, and given the facts and circumstances surrounding both the
Services Agreements and the sale of C1FN, management of WSFS believes the
likelihood of any payments under this separate indemnification is very remote.
As a result of these circumstances, and the general nature of the
indemnification, no provision for loss has been made in WSFS' Financial
Statements at December 31, 2002.
Sale of Wilmington Finance, Inc. On November 7, 2002, agreements were
signed for the sale of WSFS' majority-owned subsidiary, Wilmington Finance, Inc.
(WF) to American General Finance, Inc. The transaction was completed on January
2, 2003. As is customary in the sale of a privately-held business, certain
indemnifications were provided by WSFS and the other shareholders of WF to the
buyer.
Indemnifications provided by the sellers to cover Damages incurred by, and
successfully claimed by the buyer and fall into 4 separate categories. These
include: (1) indemnification for sellers' ownership, which indemnification
extends indefinitely and is uncapped in amount; (2) indemnification for tax,
environmental, and benefit plan related issues, all of which indemnifications
extend for their respective statute of limitations and are uncapped in amount;
(3) breaches of sellers' representations and warranties and covenants in the
sale agreement (sellers' breaches indemnification), which extends for 18 months
from the sale date and are capped at the purchase price (approximately $123
million); and (4) protection to the buyer in the event of successful third-party
claims that result from the operation of the business prior to the sale date
(third-party claims indemnification). This third-party claims indemnification
includes time limits and dollar limits as follows: (i) for the first 12 months
after the sale the dollar limit is $57 million; (ii) from months 13 through 18
the dollar limit is $52 million; and (iii) from months 19 through 30 the dollar
limit is $32 million. Buyer must incur $2 million of damages and exhaust any
related reserves provided in the closing balance sheet before an initial dollar
claim may be made against the sellers for any third-party claims and sellers'
breaches indemnifications. Dollar liability is uncapped for the indemnifying
party if damages are due to willful misconduct, fraud, or bad faith.
Generally speaking, WSFS is proportionately liable for its ownership share
of WF (which is 65%, after the exercise of its warrant just prior to sale) of
the related successful claims under indemnification provisions, except that, in
order to facilitate the sale, WSFS agreed to assume a portion of the management
shareholders' indemnification obligations. This additional indemnification
totals as much as approximately $13 million and was assumed in exchange for a
payment of $225,000 from the management shareholders. Because such payment acts
like an insurance premium, WSFS will defer this $225,000 and accrete it to
income over the life of the 30-month arrangement.
56
WSFS is not aware of any claims to date made under the WF indemnification
provisions that could result in payment. Further, indemnifications provided in
the WF sale agreement are general in nature and not specifically related to the
changes in an underlying asset or liability. Any potential claims related to
indemnification on repurchased loans in the normal course of business have been
provided for in closing balance sheet and are further subject to the $2 million
indemnification threshold. Therefore, given these circumstances, any amounts
that may be paid under these indemnifications provisions are neither probable
nor reasonably estimable, or have a probability-weighted net present value of
zero. As such, no additional provision for losses or deferral of sale
consideration, other than the amounts above, are contemplated as of this date.
There can be no assurances that payments, if any, under all
indemnifications provided by the Corporation will not be material or any exceed
reserves that the Company may have established for such contingencies.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of
factors. In certain cases, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions regarding the amount and timing of estimated
future cash flows which are discounted to reflect current market rates and
varying degrees of risk. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year-end
or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-Term Investments: For cash and short-term investments,
including due from banks, federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits with other banks, the
carrying amount is a reasonable estimate of fair value.
Investments, Mortgage-Backed Securities: Fair value for investment and
mortgage-backed securities is based on quoted market prices, where available. If
a quoted market price is not available, fair value is estimated using quoted
prices for similar securities. The fair value of the Corporation's investment in
reverse mortgages is based on the net present value of estimated cash flows,
which have been updated to reflect recent external appraisals of the underlying
collateral.
Loans: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type: commercial, commercial
mortgages, construction, residential mortgages and consumer. For loans that
reprice frequently, the book value approximates fair value. The fair value of
other type of loans is estimated by discounting expected cash flows using the
current rates at which similar loans would be made to borrowers with comparable
credit ratings and for similar remaining maturities. The fair value of
nonperforming loans is based on recent external appraisals of the underlying
collateral. Estimated cash flows, discounted using a rate commensurate with
current rates and the risk associated with the estimated cash flows, are
utilized if appraisals are not available.
Interest Rate Cap: The fair value is estimated using a standard
sophisticated option model and quoted prices for similar instruments.
Short-Term Foreign Exchange Contracts: The fair value is estimated using
quoted prices for similar currency contracts.
Deposit Liabilities: The fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, money market and interest-bearing
demand deposits and savings deposits, is assumed to be equal to the amount
payable on demand. The carrying value of variable rate time deposits and time
deposits that reprice frequently also approximates fair value. The fair value of
the remaining time deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits with comparable remaining maturities.
Borrowed Funds: Rates currently available to the Corporation for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
Off-Balance Sheet Instruments: The fair value of off-balance sheet
instruments, including commitments to extend credit and standby letters of
credit, is estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflects the present
creditworthiness of the counterparties.
57
The book value and estimated fair value of the Corporation's financial
instruments are as follows:
December 31,
----------------------------------------------------
2002 2001
----------------------- -----------------------
Book Fair Book Fair
Value Value Value Value
--------- ---------- --------- ---------
(In Thousands)
Financial assets:
Cash and other investments...................... $ 256,889 $ 256,889 $ 261,641 $ 265,642
Investment securities........................... 21,777 22,850 14,194 14,600
Mortgage-backed securities...................... 148,238 149,562 361,724 363,031
Loans, net...................................... 1,079,386 1,100,478 1,115,372 1,133,354
Interest rate cap............................... 1,012 1,012 2,534 2,534
Short-term forward foreign exchange contracts... - - (395) (395)
Financial liabilities:
Deposits........................................ 898,396 901,581 1,146,117 1,148,960
Borrowed funds.................................. 516,006 533,672 645,480 644,222
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows:
December 31,
-------------------
2002 2001
---- ----
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit.......... $1,185 $1,104
Standby letters of credit............. 43 41
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
-------------------------
2002 2001
--------- ---------
(In Thousands)
Assets:
Cash ................................ $ 4,395 $ 5,869
Investment in the subsidiaries ...... 224,270 139,149
Investment in interest rate cap ..... 1,012 2,534
Investment in Capital Trust ......... 1,547 1,547
Other assets ........................ 1,703 1,177
--------- ---------
Total assets ............................. $ 232,927 $ 150,276
========= =========
Liabilities:
Borrowings .......................... $ 50,000 $ 50,000
Interest payable .................... 174 203
Other liabilities ................... 81 70
--------- ---------
Total liabilities ................... 50,255 50,273
--------- ---------
Stockholders' equity:
Common stock ........................ 149 148
Capital in excess of par value ...... 59,789 59,079
Comprehensive income ................ 904 3,146
Retained earnings ................... 207,358 107,950
Treasury stock ...................... (85,528) (70,320)
--------- ---------
Total stockholders' equity .......... 182,672 100,003
--------- ---------
Total liabilities and stockholders' equity $ 232,927 $ 150,276
========= =========
58
Condensed Statement of Operations
Year Ended December 31,
---------------------------------
2002 2001 2000
--------- ---------- ---------
(In Thousands)
Income:
Interest income ............................. $ 353 $ 362 $ 359
Noninterest income .......................... 144 187 234
--------- --------- ---------
497 549 593
--------- --------- ---------
Expenses:
Interest expense ............................ 2,667 3,421 4,787
Other operating expenses .................... (714) (1,111) (1,408)
--------- --------- ---------
1,953 2,310 3,379
--------- --------- ---------
Loss before equity in undistributed
income of WSFS.................................. (1,456) (1,761) (2,786)
Equity in undistributed income of WSFS ........... 102,597 18,844 13,805
--------- --------- ---------
Net income ....................................... $ 101,141 $ 17,083 $ 11,019
========= ========= =========
Condensed Statement of Cash Flows
Year Ended December 31,
-----------------------------------
2002 2001 2000
--------- ---------- ---------
(In Thousands)
Operating activities:
Net income ............................................. $ 101,141 $ 17,083 $ 11,019
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of WSFS ................. (102,597) (18,844) (13,805)
Amortization ........................................... 383 (93) 373
Decrease (increase) in other assets .................... 617 (169) (20)
Decrease in other liabilities .......................... (17) (209) (547)
--------- --------- ---------
Net cash used for operating activities ...................... (473) (2,232) (2,980)
--------- --------- ---------
Investing activities:
Decrease in investment in WSFS ......................... 16,000 22,500 12,374
--------- --------- ---------
Net cash provided by investing activities ................... 16,000 22,500 12,374
--------- --------- ---------
Financing activities:
Issuance of common stock ............................... 711 94 103
Unrealized gains in intrinsic value
of interest rate cap.................................. (771) 257 125
Dividends paid on common stock ......................... (1,733) (1,542) (1,610)
Treasury stock, net of reissuance ...................... (15,208) (15,727) (12,678)
--------- --------- ---------
Net cash used for financing activities ...................... (17,001) (16,918) (14,060)
--------- --------- ---------
(Decrease) increase in cash ................................. (1,474) 3,350 (4,666)
Cash at beginning of period ................................. 5,869 2,519 7,185
--------- --------- ---------
Cash at end of period ....................................... $ 4,395 $ 5,869 $ 2,519
========= ========= =========
59
19. 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 the ten years ending December 1,
2008. The cap is being used to hedge the cash flows on $50 million in 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) of the cap has two components: the intrinsic
value and the time value of the option. Prior to July 1, 2002, the cap was
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, was
expensed in the period in which ineffectiveness is determined.
On July 1, 2002, as a result of a change in the guidance from the FASB for
implementation of Statement 133, the Corporation dedesignated the original cash
flow hedge and redesignated the interest rate cap so that the entire change in
the market value of the cap now is included in other comprehensive income. As
part of redesignating the new cash flow hedge, the method of assessing
effectiveness was changed. It is now based on the total change to the interest
rate cap's cash flows, and not only the change to intrinsic value, as was the
basis of assessing effectiveness under the prior hedging designation. As a
result of the change in the methodology for assessing effectiveness, the hedging
relationship is considered to be perfectly effective and can reasonably be
expected to remain so. Therefore, the full change to the fair value of interest
rate cap is recorded in other comprehensive income.
At July 1, 2002, the inception date of the redesignated hedging
relationship, the fair value of the interest rate cap was $1.6 million. This
amount was allocated to the respective multiple "caplets" on a fair value basis.
The change in each "caplet's" respective allocated fair value amount is
reclassified out of other comprehensive income and into interest expense when
each of the quarterly interest payments is made on the Trust Preferred debt. The
redesignation of the cash flow hedge has the affect of providing a more
systematic method for amortizing the cost of the cap against earnings.
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 those discussed above. The
fair value of the cap is estimated using a standard option model and quoted
market prices of similar instruments.
Everbank entered into short-term forward 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 December 31, 2001 and
2000, Everbank had entered into such contracts with notional amounts of $60.4
million and $35.5 million, respectively. During 2002 and the years ended
December 31, 2001 and 2000, 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 noninterest income. On
November 5, 2002, WSFS sold C1FN/Everbank and therefore had no foreign exchange
contracts at December 31, 2002.
Related to its sale of reverse mortgages, the Corporation also acquired a
series of options to acquire up to 49.9% of the Class "O" certificates issued in
connection with mortgage-backed security SASCO RM-1 2002. The aggregate exercise
price of the series of options is $1.0 million. Because the net present value of
the estimated cash flows coming from WSFS' options on the highly illiquid Class
"O" certificates is significantly less than the $1.0 million exercise price,
WSFS has valued the option at $0 at December 31, 2002. The option will be
evaluated quarterly for any changes in the estimated valuation.
60
The following depicts the change in fair market value of the Company's
derivatives:
Carrying Value Carrying Value Carrying Value Carrying Value
at January 1, at December 31, at December 31, at December 31,
2000 Activity 2000 Activity 2001 Activity 2002
-------------- -------- --------------- -------- --------------- -------- ---------------
(In Thousands)
Interest rate cap:
Intrinsic Value
Dedesignated cap $ 2,813 $(2,620) $ 193(1) $ 396 $ 589(1) $ (589) $ -
Time Value
Dedesignated cap 2,131 (327)(2) 1,804 141(2) 1,945 (1,945) -
Redesignated cap - - - - - 1,012 1,012
----------- ------- -------- -------- -------- ------- --------
$ 4,944 $(2,947) $ 1,997 $ 537 $ 2,534 $(1,522) $ 1,012
======== ======= ======== ======== ======== ======== ========
Foreign Exchange Contracts
Time Value $ - $ 1,385 (3) $ 1,385 $(1,780)(3) $ (395) $ 395 $ N/A
=========== ======= ======== ======= ========= ======= ========
Options on class "O"
Certificates of MBS NA NA NA NA NA NA NA
(1) Included in other comprehensive income, net of taxes.
(2) Included in interest expense on the hedged item (Trust Preferred
borrowings).
(3) Included in noninterest income and offset by corresponding changes in
foreign currency denominated deposits.
An additional provision of SFAS 133 afforded the opportunity to reclassify
investment securities between held-to-maturity, available-for-sale and trading
at the date of adoption. Accordingly, on January 1, 2000, the Corporation
reclassified $131.0 million in investments and mortgage-backed securities from
held-to-maturity to available-for-sale and recorded an unrealized loss of $2.4
million net of tax. Of the $131.0 million transferred, $55.4 million was sold at
a loss of $1.3 million, net of tax, during the first quarter of 2000 (the
quarter of adoption). In accordance with SFAS No. 133, this loss was included in
the statement of operations as a cumulative effect of a change in accounting
principle.
20. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation consisted only of its core
community banking operations and had no other operating segments. Generally,
reportable segments are business units that are managed separately, operate
under different regulations and offer different services to distinct customer
bases. Previously, WCC, C1FN and WF were classified as operating segments,
however, as a result of the discontinuance of WCC, the sale of C1FN in November
of 2002 and the sale of WF in 2003 these businesses were classified as
discontinued operations or businesses held-for-sale and no longer considered
segments. For a further discussion of discontinued operations see Note 2 of the
Financial Statements and of businesses held-for-sale see Note 3 of the Financial
Statements.
21. Subsequent Events
On January 2, 2003, WSFS completed the sale of it's majority-owned subprime
mortgage banking subsidiary, WF to American General Finance, Inc. WSFS expects
to recognize an after-tax gain on the sale of $42.2 million, or approximately
$4.57 per diluted share in the first quarter of 2003. The sale included $148.2
million in assets, of which $117.6 million were residential mortgage loans
held-for-sale.
The sellers, including WSFS, provided certain indemnifications to the
buyer, as are customary in the sale of a privately-held business between
parties. The indemnifications are more fully disclosed in Note 16 to the
Financial Statements, Commitments and Contingencies.
61
QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended
-----------------------------------------------------------------------------------------------
12/31/02 9/30/02 6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income ............ $ 20,051 $ 22,303 $ 24,913 $ 27,436 $ 23,753 $ 26,089 $ 26,186 $ 25,310
Interest expense ........... 8,053 8,239 8,662 8,480 10,280 11,964 11,567 12,786
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income ........ 11,998 14,064 16,251 18,956 13,473 14,125 14,619 12,524
Provision for loan losses .. 525 507 504 707 495 677 400 293
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 11,473 13,557 15,747 18,249 12,978 13,448 14,219 12,231
Noninterest income ......... 107,355 5,953 5,728 5,024 5,726 5,452 5,343 4,604
Noninterest expenses ....... 14,878 12,401 12,312 12,026 11,887 11,411 12,929 11,462
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing
operations before
minority interest, taxes
and accounting change .... 103,950 7,109 9,163 11,247 6,817 7,489 6,633 5,373
--------- --------- --------- --------- --------- --------- --------- ---------
Income tax provision ....... 34,545 2,093 3,356 4,160 2,327 2,480 2,059 1,684
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing
operations before
accounting change ........ 69,405 5,016 5,807 7,087 4,490 5,009 4,574 3,689
Change in accounting
principles, net ......... - - - 703 - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing
operations .............. 69,405 5,016 5,807 7,790 4,490 5,009 4,574 3,689
Income from businesses
held-for-sale, net of tax 6,923 4,292 2,114 1,636 690 494 132 31
Loss on wind-down of
discontinued operations . (2,203) (563) - - (2,026) - - -
Gain on sale of businesses
held-for-sale ........... 187 737 - - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income ................. $ 74,312 $ 9,482 $ 7,921 $ 9,426 $ 3,154 $ 5,503 $ 4,706 $ 3,720
========= ========= ========= ========= ========= ========= ========= =========
Earnings per share:
Basic:
Income from continuing
operations before
accounting change ...... $ 7.69 $ 0.55 $ 0.64 $ 0.77 $ 0.49 $ 0.54 $ 0.47 $ 0.36
Change in accounting
principles, net.......... - - - 0.08 - - - -
--------- --------- --------- --------- ----------- --------- --------- ---------
Income from continuing
operations............. 7.69 0.55 0.64 0.85 0.49 0.54 0.47 0.36
Income from businesses
held-for-sale, net of tax 0.77 0.47 0.23 0.18 0.07 0.05 0.01 0.01
Loss on wind-down of
discontinued operations (0.25) (0.06) - - (0.22) - - -
Gain on sale of businesses
held-for-sale.......... 0.02 0.08 - - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income................. $ 8.23 $ 1.04 $ 0.87 $ 1.03 $ 0.34 $ 0.59 $ 0.48 $ 0.37
========= ========= ========= ========= ========= ========= ========= =========
QUARTERLY FINANCIAL SUMMARY (Unaudited) (continued)
Three Months Ended
-----------------------------------------------------------------------------------------------
12/31/02 9/30/02 6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Diluted:
Income from continuing
operations before
accounting change ....... $ 7.27 $ 0.52 $ 0.62 $ 0.76 $ 0.49 $ 0.53 $ 0.46 $ 0.36
Change in accounting
principles, net .......... - - - 0.08 - - - -
--------- --------- --------- --------- --------- --------- -------- ---------
Income from continuing
operations ............... 7.27 0.52 0.62 0.84 0.49 0.53 0.46 0.36
Income from businesses
held-for-sale, net of tax 0.73 0.45 0.22 0.17 0.07 0.05 0.01 0.01
Loss on wind-down of
discontinued operations . (0.23) (0.06) - - (0.22) - - -
Gain on sale of businesses
held-for-sale ........... 0.02 0.08 - - - - - -
--------- --------- --------- --------- --------- --------- -------- ---------
Net income ................. $ 7.79 $ 0.99 $ 0.84 $ 1.01 $ 0.34 $ 0.58 $ 0.47 $ 0.37
========= ========= ========= ========= ========= ========= ======== =========
62