UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2866913
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
- ----------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(302)792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of November 3, 2000:
Common Stock, par value $.01 per share 10,382,744
- -------------------------------------- -----------------------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
Item 1. Financial Statements
Consolidated Statement of Operations for the Three and Nine Months
Ended September 30, 2000 and 1999 (Unaudited)..................................... 3
Consolidated Statement of Condition as of September 30, 2000
(Unaudited) and December 31, 1999................................................. 4
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited)........................................... 5
Notes to the Consolidated Financial Statements for the Three and Nine
Months Ended September 30, 2000 and 1999 (Unaudited).............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 21
PART II. Other Information
Item 1. Legal Procedings.................................................................... 22
Item 2. Changes in Securities............................................................... 22
Item 3. Default Upon Senior Securities...................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................................. 22
Item 5. Other Information................................................................... 22
Item 6. Exhibits and Reports on Form 8-K.................................................... 22
Signatures .................................................................................. 23
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended September 30, Nine months ended September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
(Dollars in Thousands, except per share data)
Interest income:
Interest and fees on loans ...................................... $ 20,802 $ 16,721 $ 59,623 $ 49,186
Interest on mortgage-backed securities .......................... 6,610 7,386 18,705 23,189
Interest and dividends on investment securities ................. 883 601 2,431 1,752
Other interest income ........................................... 4,525 2,515 17,664 7,450
-------- -------- -------- --------
32,820 27,223 98,423 81,577
-------- -------- -------- --------
Interest expense:
Interest on deposits ............................................ 12,087 8,278 30,507 24,722
Interest on Federal Home Loan Bank advances ..................... 5,321 5,980 17,967 18,440
Interest on federal funds purchased and securities
sold under agreement to repurchase ............................ 2,003 2,122 6,107 6,167
Interest on trust preferred borrowings .......................... 1,142 1,075 3,520 3,065
Interest on other borrowed funds ................................ 235 132 634 317
-------- -------- -------- --------
20,788 17,587 58,735 52,711
-------- -------- -------- --------
Net interest income ............................................. 12,032 9,636 39,688 28,866
Provision for loan losses ....................................... 227 259 672 771
-------- -------- -------- --------
Net interest income after provision for loan losses ............. 11,805 9,377 39,016 28,095
-------- -------- -------- --------
Other income:
Loan and lease servicing fees ................................... 761 833 2,236 2,569
Rental income on operating leases, net .......................... 3,353 3,795 6,845 10,770
Deposit service charges ......................................... 1,867 1,401 5,046 3,883
Credit/debit card and ATM income ................................ 1,469 1,072 3,963 2,723
Securities losses ............................................... -- (9) (2,464) (8)
Gain from note receivable ....................................... -- -- 818 --
Gain (loss) from sale of loans .................................. 1,420 (6) 1,972 16
Other income .................................................... 679 392 2,211 1,306
-------- -------- -------- --------
9,549 7,478 20,627 21,259
-------- -------- -------- --------
Other expenses:
Salaries, benefits and other compensation ....................... 8,882 5,056 22,669 14,475
Equipment expense ............................................... 1,139 782 3,218 2,276
Data processing and operations expenses ......................... 956 1,470 4,286 4,225
Occupancy expense ............................................... 1,133 857 3,121 2,486
Marketing expense ............................................... 624 447 2,204 1,155
Professional fees ............................................... 744 610 2,289 1,342
Net costs of assets acquired through foreclosure ................ 144 40 405 184
Other operating expense ......................................... 3,096 1,730 8,146 5,241
-------- -------- -------- --------
16,718 10,992 46,338 31,384
-------- -------- -------- --------
Income before taxes, cumulative effect of change in
accounting principle and minority interest ................. 4,636 5,863 13,305 17,970
Less minority interest .......................................... (780) (173) (2,867) (173)
-------- -------- -------- --------
Income before taxes and cumulative effect of change
in accounting principle .................................... 5,416 6,036 16,172 18,143
Income tax provision ............................................ 1,347 1,524 4,343 4,672
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle ................................................. 4,069 4,512 11,829 13,471
Cumulative effect of change in accounting principle
net of $837,000 in income tax ............................. -- -- (1,256) --
-------- -------- -------- --------
Net income ...................................................... $ 4,069 $ 4,512 $ 10,573 $ 13,471
======== ======== ======== ========
Basic earnings per share:
Income before cumulative effect of change in accounting principle $ 0.39 $ 0.40 $ 1.10 $ 1.19
Cumulative effect of change in accounting principle ............. -- -- (0.12) --
-------- -------- -------- --------
Net income ...................................................... $ 0.39 $ 0.40 $ 0.98 $ 1.19
======== ======== ======== ========
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.39 $ 0.40 $ 1.10 $ 1.18
Cumulative effect of change in accounting principle ............. -- -- (0.12) --
-------- -------- -------- --------
Net Income ...................................................... $ 0.39 $ 0.40 $ 0.98 $ 1.18
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
September 30, December 31,
2000 1999
----------- -----------
(Unaudited)
(Dollars in Thousands)
Assets
Cash and due from banks ........................................................... $ 62,006 $ 59,166
Federal funds sold and securities purchased under agreements to resell ............ 5,100 --
Interest-bearing deposits in other banks .......................................... 8,254 8,026
Investment securities held-to-maturity ............................................ 14,925 8,612
Investment securities available-for-sale .......................................... 42,024 28,861
Mortgage-backed securities held-to-maturity ....................................... 112,365 258,825
Mortgage-backed securities available-for-sale ..................................... 273,286 188,924
Investment in reverse mortgages, net .............................................. 33,966 28,103
Loans held-for-sale ............................................................... 19,910 24,558
Loans, net of allowance for loan losses of $22,798 at September 30, 2000
and $23,024 at December 31, 1999 ................................................ 938,071 856,627
Vehicles under operating leases, net .............................................. 192,621 220,209
Stock in Federal Home Loan Bank of Pittsburgh, at cost ............................ 28,500 28,500
Assets acquired through foreclosure ............................................... 1,159 1,061
Premises and equipment ............................................................ 16,234 14,621
Accrued interest and other assets ................................................. 35,540 27,727
----------- -----------
Total assets ...................................................................... $ 1,783,961 $ 1,753,820
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand .................................................... $ 132,180 $ 119,754
Money market and interest-bearing demand ...................................... 209,151 79,321
Savings ....................................................................... 281,013 258,854
Time .......................................................................... 279,207 278,051
----------- -----------
Total retail deposits ....................................................... 901,551 735,980
Jumbo certificates of deposit ................................................. 28,062 24,645
Brokered certificates of deposit .............................................. 187,025 149,465
----------- -----------
Total deposits .............................................................. 1,116,638 910,090
Federal funds purchased and securities sold under agreements to repurchase ........ 115,888 143,941
Federal Home Loan Bank advances ................................................... 349,500 515,000
Trust preferred borrowings ........................................................ 50,000 50,000
Other borrowed funds .............................................................. 23,529 13,524
Accrued expenses and other liabilities ............................................ 27,838 20,006
----------- -----------
Total liabilities ................................................................. 1,683,393 1,652,561
----------- -----------
Minority Interest ................................................................. 2,924 5,106
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
14,797,513 at September 30, 2000 and 14,797,513 at December 31, 1999 .......... 148 148
Capital in excess of par .......................................................... 58,273 58,185
Accumulated other comprehensive loss .............................................. (959) (3,265)
Retained earnings ................................................................. 92,383 83,000
Treasury stock at cost, 4,414,769 shares at September 30, 2000 and 3,528,269 shares
at December 31, 1999 .......................................................... (52,201) (41,915)
----------- -----------
Total stockholders' equity ........................................................ 97,644 96,153
----------- -----------
Total liabilities, minority interest and stockholders' equity ..................... $ 1,783,961 $ 1,753,820
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
----------------------------
2000 1999
--------- ---------
(Unaudited)
(Dollars in Thousands)
Operating activities:
Net income ................................................................... $ 10,573 $ 13,471
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan, lease and residual value losses .................... 6,545 2,358
Depreciation, accretion and amortization ............................... 2,563 2,429
Increase in accrued interest receivable and other assets ............... (3,575) (1,952)
Origination of loans held-for-sale ..................................... (123,130) (28,622)
Proceeds from sales of loans held-for-sale ............................. 127,006 26,091
Increase in accrued interest payable and other liabilities ............. 7,730 7,785
Increase in reverse mortgage capitalized interest, net ................. (15,311) (5,033)
Minority interest in net income ........................................ (2,867) --
Loss on sale of mortgage-backed securities available-for-sale .......... 4,566 --
Other, net ............................................................. 1,966 132
--------- ---------
Net cash provided by operating activities .................................... 16,066 16,659
--------- ---------
Investing activities:
Net (increase) decrease in interest-bearing deposits in other banks ...... (228) 6,109
Maturities of investment securities ...................................... 6,771 1,203
Sales of investment securities available-for-sale ........................ 10,275 20,000
Purchases of investment securities held-to-maturity ...................... (8,952) (295)
Purchases of investment securities available-for-sale .................... (28,068) (14,785)
Sales of mortgage-backed securities available-for-sale ................... 146,545 --
Repayments of mortgage-backed securities held-to-maturity ................ 20,748 95,517
Repayments of mortgage-backed securities available-for-sale .............. 43,680 58,545
Purchases of mortgage-backed securities held-to-maturity ................. -- (96,444)
Purchases of mortgage-backed securities available-for-sale ............... (150,845) (69,147)
Repayments of reverse mortgages .......................................... 15,563 14,162
Disbursements for reverse mortgages ...................................... (6,011) (7,215)
Purchase of loans ........................................................ (34,340) (26,384)
Net increase in loans .................................................... (49,918) (12,486)
Net increase in operating leases ......................................... ( 4,110) (37,446)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ............ -- (3,250)
Sales of assets acquired through foreclosure, net ........................ 23,112 12,593
Premises and equipment, net .............................................. (3,743) (3,124)
--------- ---------
Net cash used for investing activities ....................................... (19,521) (62,447)
--------- ---------
Financing activities:
Net increase in demand and savings deposits .............................. 174,026 41,447
Net increase in time deposits ............................................ 41,738 14,024
Receipts from FHLB borrowings ............................................ 510,500 65,000
Repayments of FHLB borrowings ............................................ (676,000) (75,000)
Receipts from reverse repurchase agreements .............................. 46,588 41,911
Repayments of reverse repurchase agreements .............................. (69,641) (35,775)
Repayments of Federal funds purchased ................................... (5,000) --
Repayments of other borrowings ........................................... (80) --
Dividends paid on common stock ........................................... (1,191) (1,025)
Issuance of common stock ................................................. 88 364
Purchase of treasury stock, net of reissuance ............................ (10,286) (4,383)
Minority Interest ........................................................ 653 (5,500)
--------- ---------
Net cash provided by financing activities .................................... 11,395 41,063
--------- ---------
Increase (decrease) in cash and cash equivalents ............................. 7,940 (4,725)
Cash and cash equivalents at beginning of period ............................. 59,166 76,748
--------- ---------
Cash and cash equivalents at end of period ................................... $ 67,106 $ 72,023
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the quarter .................................... $ 53,430 $ 46,097
Cash paid for income taxes, net .............................................. 1,722 891
Loans and leases transferred to assets acquired through foreclosure .......... 26,703 10,814
Net change in accumulated other comprehensive income ......................... 2,306 (3,151)
The accompanying notes are an integral part of these financial statements.
5
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
WSFS Financial Corporation (the Corporation) is a thrift holding company
headquartered in the state of Delaware. The Corporation has two wholly-owned
subsidiaries, Wilmington Savings Fund Society, FSB, (the Bank or WSFS) a thrift
conducting business in the Mid-Atlantic region and WSFS Capital Trust I, a
company formed to issue Trust Preferred Securities to be invested in Junior
Subordinated Debentures of the Corporation. The consolidated financial
statements include the accounts of the parent company, WSFS Capital Trust I, the
Bank and its wholly-owned subsidiaries: WSFS Credit Corporation (WCC), 838
Investment Group, Inc. and Star States Development Company, (SSDC) as well as
its non-wholly-owned, but majority controlled subsidiaries: CustomerOne
Financial Network, Inc. and Wilmington National Finance, Inc., formerly
Community Credit Corporation.
The consolidated statement of condition as of September 30, 2000, the
consolidated statement of operations for the three and nine months ended
September 30, 2000 and 1999 and the consolidated statement of cash flows for the
nine months ended September 30, 2000 and 1999 are unaudited and include all
adjustments solely of a normal recurring nature which management believes are
necessary for a fair presentation. All significant intercompany transactions are
eliminated in consolidation. Certain reclassifications have been made to prior
period's financial statements to conform them to the September 30, 2000
presentation. The results of operations for the three and nine month periods
ended September 30, 2000 are not necessarily indicative of the expected results
for the full year ended December 31, 2000. The accompanying unaudited financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Corporation's 1999 Annual Report.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data).
For the three months For the nine months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
Income before cumulative effect of change in accounting principle . $ 4,069 $ 4,512 $ 11,829 $13,471
Cumulative effect of change in accounting principle ............... -- -- (1,256) --
------- ------- ---------- -------
Net income ...................................................... $ 4,069 $ 4,512 $ 10,573 $13,471
======= ======= ========== =======
Denominator:
Denominator for basic earnings per share -
weighted average shares ........................................ 10,507 11,319 10,764 11,363
Effect of dilutive securities:
Employee stock options ........................................ 11 28 14 63
------- ------- ---------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise of stock options ............................... 10,518 11,347 10,778 11,426
======= ======= ========== =======
Basic earnings per share:
Income before cumulative effect of change in accounting principle . $ 0.39 $ 0.40 $ 1.10 $ 1.19
Cumulative effective of change in accounting principle .......... -- -- (0.12) --
------- ------- ---------- -------
Net income ...................................................... $ 0.39 $ 0.40 $ 0.98 $ 1.19
======= ======= ========== =======
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.39 $ 0.40 $ 1.10 $ 1.18
Cumulative effective of change in accounting principle ........... -- -- (0.12) --
------- ------- ---------- -------
Net income ...................................................... $ 0.39 $ 0.40 $ 0.98 $ 1.18
======= ======= ========== =======
The Corporation had 572,537 and 148,780 anti-dilutive common stock options
outstanding at September 30, 2000 and 1999, respectively. They are not included
in the calculation of diluted earnings per share for the periods presented.
6
3. INVESTMENTS IN NON-WHOLLY OWNED SUBSIDIARIES
In August 1999, WSFS Financial Corporation invested $5.5 million in
CustomerOne Financial Network, Inc. (C1FN), a St. Louis, Missouri based
corporation formed in 1998 for the express purpose of providing
direct-to-customer marketing, servicing, Internet development and technology
management for "branchless" financial services. At September 30, 2000, WSFS is
the single largest shareholder in C1FN, has majority control through a voting
trust and shares in 42% of the operating results. In addition, WSFS received
warrants for the purchase of an additional 20% ownership of C1FN, as well as the
option and under certain circumstances the obligation to invest an additional
$5.4 million in the year 2000, at current offered ownership prices. This option
expired on July 5, 2000 with no additional investment being made. As a result of
this investment, C1FN's internet-only banking structure became part of
everbank.com(TM), a division of WSFS. C1FN and WSFS manage the operations of
everbank.com(TM). Everbank.com(TM) began marketing internet-only banking to a
national clientele in November of 1999.
Additionally, in November 1999, the Corporation expanded the home equity
lending business of Community Credit Corporation (CCC) which initially started
operations in 1994. CCC was renamed Wilmington National Finance, Inc. (WNFI) and
WSFS retained a 51% ownership with the remainder held by WNFI's new executives
retained to lead the expansion of WNFI. WSFS also has warrants to obtain an
additional 15% ownership in WNFI. Both C1FN and WNFI are consolidated into the
financial statements of WSFS Financial Corporation. The portion of equity and
operating results attributable to investors in C1FN and WNFI, other than WSFS,
are reported as minority interest. During the quarter, WNFI's accumulated
deficit exceeded the common equity. Therefore, as a result of WSFS' preferred
stock investment, WSFS began recognizing 100% of the net loss. Once this startup
company begins recognizing income, WSFS will recognize 100% of the earnings to
the point of recovering recognized losses in excess of 51%.
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2000, the Corporation adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS Nos. 137 and 138. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of derivatives
depends on the derivative and the resulting designation. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of certain foreign currency
exposures. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Corporation has elected earlier adoption as
permitted under this standard.
The Corporation's only derivative that requires separate accounting under
SFAS 133 is an interest-rate cap with a notional amount of $50 million which
limits 3-month LIBOR to 6% for ten years ending December 1, 2008. The cap is
being used to hedge the cash flows of $50 million in trust preferred floating
debt. The cap was recorded at the date of purchase in other assets, at a cost of
$2.4 million. The fair market value (FMV), which at inception is equal to the
cost, is broken into two components: the intrinsic value and the time value of
the option. The cap is marked-to-market quarterly, with changes in the intrinsic
value of the cap, net of tax, included in a separate component of other
comprehensive income and changes in the time value of the option included in
interest expense as required under SFAS 133. In addition, the ineffective
portion, if any, will be expensed in the period in which ineffectiveness is
determined. It has been determined that the hedge is highly effective and can
reasonably be expected to remain so. Management is not aware of any events that
would result in the reclassification into earnings of gains and losses that are
currently reported in accumulated other comprehensive income except for the
change in the FMV of the interest rate cap which pertains to the time value of
the hedging instrument. The FMV is estimated using the calculated FMV of similar
instruments.
7
The following depicts the change in fair market value of the interest rate
cap:
Carrying Value Changes in Carrying Value
At January 1, Fair Market At September 30,
2000 Value 2000
-------------- --------------- ----------------
(In thousands)
Intrinsic value $ 2,813 $ (979) $ 1,834(1)
Time value 2,131 (250)(2) 1,881
------- ------- -------
$ 4,944 $(1,229) $ 3,715
======= ======= =======
1. Included in other comprehensive income, net of taxes.
2. Included in interest expense on the hedged item (trust preferred
borrowings).
An additional provision of SFAS 133 affords the opportunity to reclassify
investment securities between held-to-maturity, available-for-sale and trading
at the date of adoption. Accordingly, the Corporation reclassified $72.5 million
in investments and mortgage-backed securities from held-to-maturity to
available-for-sale. Of the $72.5 million transferred, $55.4 million was sold at
a loss of $1.3 million, net of tax, during 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.
5. COMPREHENSIVE INCOME
The following schedule depicts other comprehensive income as required by
SFAS No. 130:
For the three months For the nine months
ended September 30, ended September 30,
-------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
Net income ..................................................................... $ 4,069 $ 4,512 $ 10,573 $ 13,471
Other Comprehensive Income:
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period, net of taxes ................. 1,550 (72) (414) (3,156)
Net unrealized holding loss arising during the period
on derivatives used for cash flow hedge, net of taxes ...................... (455) -- (636) --
Reclassification for (gains) losses included in income, net of taxes .......... -- 6 1,528 5
-------- -------- -------- --------
Total comprehensive income, before other comprehensive income that
resulted from the cumulative effect of a change in accounting
principle, net of taxes .................................................... 5,164 4,446 11,051 10,320
Net unrealized gain on derivatives used for cash flow
hedging as a result of adopting SFAS No. 133, net of taxes ................. -- -- 1,828 --
-------- -------- -------- --------
Total comprehensive income ..................................................... $ 5,164 $ 4,446 $ 12,879 $ 10,320
======== ======== ======== ========
8
WSFS FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a savings and
loan holding company headquartered in Wilmington, Delaware. Substantially all of
the Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the Bank or WSFS). The long-term goal of the Corporation is to
maintain its high-performing financial services company status by focusing on
its core banking business while developing unique profitable niches in
complementary businesses which may operate outside the Bank's geographical
footprint. Founded in 1832, WSFS is one of the oldest financial institutions in
the country. It has operated under the same name and charter serving the
residents of Delaware for over 167 years. WSFS is the largest thrift institution
headquartered in Delaware and among the 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 Bank provides residential and commercial real estate, commercial
and consumer lending services, as well as cash management services funding these
activities primarily with retail deposits and borrowings. The banking operations
of WSFS are presently conducted from 26 retail banking offices located in
Northern Delaware and Southeastern Pennsylvania. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC).
Fully owned subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; and 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system.
In addition, the Bank has majority control of two non-wholly owned
subsidiaries, CustomerOne Financial Network (C1FN) and Wilmington National
Finance, Inc. (WNFI). See Footnote 3 of the Consolidated Financial Statements
for further discussion.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $30.1 million during the first nine months of 2000 to
$1.8 billion at September 30, 2000. The growth in assets reflects an increase of
$76.8 million in net loans (including held for sale), and $27.6 million in
investment securities, cash and cash equivalents. This was offset in part by a
decrease of $62.1 million in mortgage-backed securities, between September 30,
2000 and December 31, 1999. The increase in net loans reflected originations of
$313.2 million offset in part by $85.6 million in sales ($25.0 million related
to deleveraging strategy, which is discussed later) with the remainder
representing principal repayments. The increase in investments reflect purchases
of $37.0 million in investment securities offset in part by the sales and
maturities of $16.9 million in investment securities. The decline in
mortgage-backed securities resulted primarily from a deleveraging strategy in
which the Corporation divested of certain investments securities and residential
mortgages with below market interest rates, thereby repositioning the balance
sheet to allow room for higher yielding loans and share buybacks. As a result,
the Corporation sold approximately $126.5 million in mortgage-backed securities.
The Corporation also sold an additional $24.6 million in mortgage-backed
securities and experienced principal repayments totaling $64.4 million. These
decreases were partially offset by purchases of $150.8 million.
Total liabilities increased $30.8 million during the nine-months ended
September 30, 2000 to $1.7 billion. Total deposits increased $206.5 million,
including an increase of $142.1 million in deposits at everbank.com which
included the purchase of $37.0 million in nondollar denominated deposits. In
addition, brokered deposits at WSFS increased $37.6 million during
9
the nine-month period. These increases were offset in part by total borrowings
which declined $183.5 million during the period as proceeds from the investment
and loan sales were used to repay $165.5 million in FHLB advances.
Capital Resources
Stockholders' equity increased $1.5 million between December 31, 1999 and
September 30, 2000. This increase reflects net income of $10.6 million for the
nine months ended September 30, 2000. This increase in equity was partially
offset by the purchase of 891,500 treasury shares, at $10.3 million ($11.60 per
share average). At September 30, 2000, the Corporation held in its treasury
4,414,769 shares of its common stock at a cost of $52.2 million.
A table presenting the Bank's consolidated capital position relative to the
minimum regulatory requirements as of September 30, 2000 (dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------------------ ------------------------ ------------------------
Percentage of Percentage of Percentage of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Total Capital
(to Risk-Weighted Assets) ........ $148,489 12.46% $95,355 8.00% $119,193 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 140,071 7.85 71,364 4.00 89,204 5.00
Tangible Capital (to Tangible
Assets) .......................... 140,012 7.85 26,760 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 140,071 11.75 47,677 4.00 71,516 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary-actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. At September 30, 2000 the Bank was in compliance
with regulatory capital requirements and was deemed a "well-capitalized"
institution.
Liquidity
The OTS requires institutions, such as the Bank, to maintain a 4.0% minimum
liquidity ratio of cash and qualified assets to net withdrawable deposits and
borrowings due within one year. At September 30, 2000, the Bank's liquidity
ratio was 6.5% compared to 6.4% at December 31, 1999. Management monitors
liquidity daily and maintains funding sources to meet unforeseen changes in cash
requirements. It is the policy of the Bank to maintain cash and investments at
least slightly above required levels. The Corporation's primary financing
sources are deposits, repayments of loans and investment securities, sales of
loans and borrowings. In addition, the Corporation's liquidity requirements can
be accomplished through the use of its borrowing capacity from the FHLB of
Pittsburgh, the sale of certain securities and the pledging of certain loans for
other lines of credit. Management believes these sources are sufficient to
maintain the required and prudent levels of liquidity.
10
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets,
restructured loans and past due loans at the dates indicated. Past due loans are
loans contractually past due 90 days or more as to principal or interest
payments but which remain on accrual status because they are considered well
secured and in the process of collection.
September 30, December 31,
2000 1999
---- ----
(Dollars in Thousands)
Nonaccruing loans:
Commercial ....................................... $3,070 $2,630
Consumer ......................................... 232 310
Commercial mortgage .............................. 2,576 1,808
Residential mortgage ............................. 2,378 2,617
Construction ..................................... -- --
------ ------
Total nonaccruing loans ............................... 8,256 7,365
Nonperforming investments in real estate .............. -- --
Assets acquired through foreclosure ................... 1,159 1,061
------ ------
Total nonperforming assets ............................ $9,415 $8,426
====== ======
Restructured loans .................................... $ -- $ --
====== ======
Past due loans and leases:
Residential mortgages ............................ $ 384 $ 333
Commercial and commercial mortgages .............. 762 504
Consumer ......................................... 120 249
------ ------
Total past due loans .................................. $1,266 $1,086
====== ======
Ratios:
Nonperforming loans/leases to total
loans/leases (1) .............................. 0.71% 0.67%
Allowance for loan/lease losses to total gross
Loans/leases (1) .............................. 2.07 2.22
Nonperforming assets to total assets ............. .53 .48
Loan loss/lease loss allowance to nonaccruing
loans/leases (2) .............................. 281.54 322.56
Loan/lease and foreclosed asset allowance to total
Nonperforming assets (2) ....................... 249.46 284.96
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $989,000 between December 31, 1999 and
September 30, 2000. During the second quarter a $2.6 million commercial loan
relationship was placed on nonaccrual status. The net increase in nonaccruing
loans was $891,000 between December 31, 1999 and September 30, 2000. An analysis
of the change in the balance of nonperforming assets is presented on the
following page.
11
Analysis of change in balance:
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
------------------ -----------------
(In Thousands)
Beginning balance ............................. $ 8,426 $ 11,083
Additions ................................ 29,004 20,562
Collections/sales ........................ (25,689) (18,930)
Transfers to accrual/restructured status . (995) (2,937)
Transfers to investment in real estate ... --
Provisions, charge-offs, other adjustments (1,331) (1,352)
-------- --------
Ending balance ................................ $ 9,415 $ 8,426
======== ========
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those which would result from a regulatory examination.
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest
rate-sensitive assets and liabilities to ensure a favorable interest rate spread
and mitigate exposure to fluctuations in interest rates is the Corporation's
primary focus for achieving its asset/liability management strategies.
Management regularly reviews interest-rate sensitivity of the Corporation and
adjusts sensitivity within acceptable tolerance ranges established by
management. Interest rate-sensitive assets of the Corporation include cash flows
that relate to the principal of the operating lease portfolio, which are
interest-rate sensitive. At September 30, 2000, interest-earning assets exceeded
interest-bearing liabilities that mature within one year (interest-sensitive
gap) by $18.6 million. The Corporation's interest-sensitive assets as a
percentage of interest-sensitive liabilities within the one-year window
increased to 102.4% at September 30, 2000 compared to 97.7% at December 31,
1999. Likewise, the one-year interest-sensitive gap as a percentage of total
assets increased to a 1.04% from a negative 1.03% at December 31, 1999. The
change is the result of the Corporation's continuing effort to effectively
manage interest rate risk.
COMPARISON FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Results of Operations
The Corporation recorded net income of $4.1 million or $.39 per share for
the third quarter of 2000. This compares to $4.5 million or $.40 per share for
the same quarter last year. Results for the third quarter include a $2.0 million
favorable adjustment to the value of the Corporation's reverse mortgage
portfolio resulting from improved cash flow from the portfolio, driven primarily
by continued favorable real estate markets, especially in California. In
addition, startup losses on the Corporation's two new subsidiaries, WNFI and
C1FN amounted to $695,000 after tax.
Net income for the nine months ended September 30, 2000 was $10.6 million
or $.98 per diluted share. This compares to $13.5 million or $1.18 per diluted
share for the same period last year. Results for the first nine months of 2000
reflect several large items including a $4.6 million pretax loss on the sale of
approximately $127 million in securities and loans as part of the Company's
de-leverage/share buyback program. Results also include a $3.8 million pretax
charge for residual losses on the Corporation's automobile leasing portfolio, a
consequence of the continued weakness in the used car market. Also included is a
$4.3 million pretax loss on the Corporations start-up initiatives, WNFI and
C1FN. These unfavorable items were partially offset by an $10.1 million increase
to interest income resulting from adjustments to the value of the Company's
reverse mortgage portfolio.
12
Net Interest Income
The following tables provide information concerning the balances, yields
and rates on interest-earning assets and interest-bearing liabilities during the
periods indicated.
Three Months Ended September 30,
-----------------------------------------------------------------------------
2000 1999
--------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
------- --------- ----- ------- -------- ------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............ $ 631,118 $ 13,047 8.27% $ 528,715 $ 10,708 8.10%
Commercial loans ................ 126,292 2,579 8.88 99,101 1,858 8.47
Consumer loans................... 192,893 4,744 9.78 168,876 4,063 9.55
------- --------- ---------- ----------
Total loans.................... 950,303 20,370 8.69 796,692 16,629 8.49
Mortgage-backed securities (5)........ 376,969 6,610 7.01 471,919 7,386 6.26
Loans held-for-sale (3)............... 15,459 432 11.18 5,075 92 7.25
Investment securities (5)............. 54,773 883 6.45 38,322 601 6.27
Other interest-earning assets (6)..... 74,682 4,525 23.71 72,681 2,515 13.54
---------- --------- ---------- ----------
Total interest-earning assets.... 1,472,186 32,820 9.00 1,384,689 27,223 7.94
--------- ----------
Allowance for loan losses............. (23,192) (23,677)
Cash and due from banks............... 53,858 53,859
Vehicles under operating lease, net... 199,621 225,225
Other noninterest-earning assets...... 50,992 37,358
---------- ----------
Total assets..................... $1,753,465 $1,677,454
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 190,313 2,017 4.22 $ 71,537 373 2.07
Savings.......................... 278,351 2,878 4.11 244,088 1,925 3.13
Retail time deposits ............ 280,604 3,598 5.10 295,134 3,429 4.61
Jumbo certificates of deposits .. 27,725 374 5.37 67,663 898 5.27
Brokered certificates of deposit. 189,679 3,220 6.75 114,520 1,653 5.73
---------- -------- ----------- ----------
Total interest-bearing deposits 966,672 12,087 4.97 792,942 8,278 4.14
FHLB of Pittsburgh advances........... 347,804 5,321 6.09 450,000 5,980 5.27
Trust preferred borrowings............ 50,000 1,142 8.94 50,000 1,075 8.41
Other borrowed funds.................. 142,207 2,238 6.30 158,840 2,254 5.68
---------- --------- ----------- ----------
Total interest-bearing liabilities 1,506,683 20,788 5.52 1,451,782 17,587 4.85
--------- ----------
Noninterest-bearing demand deposits... 122,276 110,381
Other noninterest-bearing liabilities. 23,724 25,216
Minority interest .................... 3,190 1,751
Stockholders' equity.................. 97,592 88,324
---------- -----------
Total liabilities and stockholders'
equity........................ $1,753,465 $1,677,454
========== ==========
Deficit of interest-earning assets over
interest-bearing liabilities..... $ (34,497) $ (67,093)
========== =============
Net interest and dividend income...... $ 12,032 $ 9,636
========= =========
Interest rate spread.................. 3.48% 3.09%
==== ====
Net interest margin................... 3.35% 2.87%
==== ====
Net interest and dividend income to
total average assets............. 2.81% 2,37%
==== ====
(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.
(6) Includes reverse mortgages.
13
Nine Months Ended September 30,
2000 1999
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
------- -------- ----- ------- -------- -----
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............ $ 618,717 $ 38,104 8.21% $ 522,467 $ 31,817 8.12%
Commercial loans ................ 120,464 7,257 8.85 95,812 5,264 8.42
Consumer loans................... 185,792 13,412 9.64 166,821 11,926 9.56
------------ ---------- ---------- -----------
Total loans.................... 924,973 58,773 8.59 785,100 49,007 8.47
Mortgage-backed securities (5)........ 369,710 18,705 6.75 492,081 23,189 6.28
Loans held-for-sale (3)............... 15,211 850 7.45 3,298 179 7.24
Investment securities (5)............. 47,691 2,431 6.80 37,349 1,752 6.25
Other interest-earning assets (6)..... 73,925 17,664 31.39 80,495 7,450 12.20
------------ ---------- ---------- -----------
Total interest-earning assets.... 1,431,510 98,423 9.25 1,398,323 81,577 7.86
---------- -----------
Allowance for loan losses............. (23,324) (23,625)
Cash and due from banks............... 53,665 49,074
Vehicles under operating lease, net... 210,204 216,463
Other noninterest-earning assets...... 43,627 36,404
------------ ----------
Total assets..................... $1,715,682 $1,676,639
============ ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 136,615 3,798 3.71 $ 69,975 1,115 2.13
Savings.......................... 268,707 7,698 3.83 233,389 5,293 3.03
Retail time deposits ............ 274,815 9,958 4.84 308,318 10,844 4.70
Jumbo certificates of deposits .. 31,848 1,334 5.60 73,370 2,878 5.24
Brokered certificates of deposit. 159,421 7,719 6.47 103,614 4,592 5.93
------------ ---------- ---------- -----------
Total interest-bearing deposits 871,406 30,507 4.68 788,666 24,722 4.19
FHLB of Pittsburgh advances........... 410,290 17,967 5.85 467,180 18,440 5.28
Trust preferred borrowings............ 50,000 3,520 9.25 50,000 3,065 8.17
Other borrowed funds.................. 144,903 6,741 6.20 154,277 6,484 5.60
------------ ---------- ---------- -----------
Total interest-bearing liabilities 1,476,599 58,735 5.30 1,460,123 52,711 4.81
---------- -----------
Noninterest-bearing demand deposits... 118,657 106,170
Other noninterest-bearing liabilities. 19,443 21,872
Minority interest .................... 3,997 590
Stockholders' equity.................. 96,986 87,884
------------ -----------
Total liabilities and stockholders'
equity........................ $1,715,682 $1,676,639
============ ===========
Deficit of interest-earning assets over
interest-bearing liabilities..... $ (45,089) $ (61,800)
============ =============
Net interest and dividend income...... $ 39,688 $ 28,866
========= =========
Interest rate spread.................. 3.95% 3.05%
==== ====
Net interest margin................... 3.78% 2.83%
==== ====
Net interest and dividend income to
total average assets............. 4.69% 2,36%
==== ====
(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.
(6) Includes reverse mortgages.
14
Net interest income increased $2.4 million between the three months ended
September 30, 2000 and 1999. The increase was due primarily to a $2.0 million
interest income adjustment in the reverse mortgage portfolio. The adjustment to
the value of the portfolio was a result of improved cash flows driven by strong
residential real-estate markets and accelerated maturity events. The net
interest margin for the three months ended September 30, 2000 was 3.35%. If the
$2.0 million adjustment were excluded from net interest income, the margin would
be 2.81%, which is a decrease of 6 basis points from 2.87% for the three months
ended September 30, 1999. Total interest income, excluding the adjustment,
increased $3.6 million between comparable quarters. This change is attributed to
the increase in average loans of $153.6 million and a series of Federal Reserve
interest rate increases. This was partially offset by the decline in average
mortgage-backed securities of $95.0 million predominantly from the sale of
securities related to the de-leverage program. Total interest expense increased
$3.2 million between the three months ended September 30, 2000 and 1999. The
increase was a result of the higher cost of borrowings and an increase in
average interest-bearing deposits of $173.7 million from September 30, 1999. The
higher borrowing costs were offset partially by a decrease in FHLB advances of
$102.2 million between comparable quarters.
Net interest income increased $10.8 million between the nine months ended
September 30, 2000 and 1999. The increase was due primarily to a $10.1 million
interest income adjustment in the reverse mortgage portfolio. The adjustment to
the value of the portfolio was a result of improved cash flows driven by strong
residential real-estate markets and accelerated maturity events. The net
interest margin for the nine months ended September 30, 2000 was 3.78%. If the
$10.1 million adjustment were excluded from net interest income, the margin
would be 2.83%, which is equal to the nine months ended September 30, 1999.
Total interest income, excluding the adjustment, increased $6.7 million between
comparable periods. This change is attributed to the increase in average loans
of $139.9 million and a series of Federal Reserve interest rate increases. This
was partially offset by the decline in average mortgage-backed securities of
$122.4 million, predominantly from the sale of securities related to the
de-leverage program. Total interest expense increased $6.0 million between the
nine months ended September 30, 2000 and 1999. The increase was a result of the
higher cost of borrowings and an increase in average interest-bearing deposits
of $82.7 million from September 30, 1999. The higher borrowing costs was offset
partially by a decrease in FHLB advances of $56.9 million between comparable
periods.
Allowance for Loan/Lease Losses:
The Corporation maintains allowances for credit losses and charges losses
to these allowances when such losses are realized. The allowances for losses are
maintained at a level which management considers adequate to provide for losses
based upon an evaluation of known and inherent risks in the portfolios.
Management's evaluation is based upon a continuing review of the portfolios.
15
The following table represents a summary of the changes in the allowance
for loan losses during the periods indicated.
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------- ------------------
(Dollars in Thousands)
Beginning balance ..................................... $23,024 $23,689
Provision for loan losses ............................. 672 771
Transfer .............................................. 175 --
Charge-offs:
Residential real estate .......................... 125 164
Commercial real estate (1) ....................... 156 537
Commercial ....................................... 507 16
Consumer (2) ..................................... 949 754
------- -------
Total charge-offs ............................. 1,737 1,471
------- -------
Recoveries:
Residential real estate .......................... 5 --
Commercial real estate (1) ............................ 243 256
Commercial ....................................... 57 105
Consumer (2) ..................................... 359 192
------- -------
Total recoveries .............................. 664 553
------- -------
Net charge-offs ....................................... 1,073 918
------- -------
Ending balance ........................................ $22,798 $23,542
======= =======
Net charge-offs to average gross loans outstanding, net
of unearned income (3) ............................. 0.15% 0.16%
======= =======
(1) Includes commercial mortgages and construction loans.
(2) Includes finance-type leases.
(3) Ratio for the nine months ended September 30, 2000 is annualized.
The following table represents a summary of the changes in the allowance
for lease credit losses during the periods indicated:
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------- ------------------
(Dollars in Thousands)
Beginning balance ..................................... $1,467 $ 992
Provision for losses on vehicles under operating leases 44 648
Charge-offs ........................................... 539 501
Recoveries ............................................ 163 198
------ ------
Net charge-offs ....................................... 376 303
------ ------
Ending balance ........................................ $1,135 $1,337
====== ======
16
Other Income
Other income for the three months ended September 30, 2000 was $9.5
million or $2.1 million higher than the third quarter of 1999. The Corporation's
two new startup initiatives, WNFI and C1FN added approximately $1.7 million of
noninterest income during the quarter. In addition, deposit service charges
increased $466,000 while credit/debit and ATM income grew $397,000. These
increases reflect increases in deposit accounts and the deposit service charge
fee schedule along with increased card usage and the growth in the ATM network.
Other income for the nine months ended September 30, 2000 was $20.6 million
or $632,000 lower than the same period last year. The major factors contributing
to this decrease was a $3.8 million additional charge for residual losses and
the loss of $2.5 million on the sale of investments and mortgage-backed
securities in the first quarter. This sale was part of the deleverage plan
discussed previously. These decreases were partially offset by increases of $1.2
million in credit/debit card and ATM income and $1.2 million in deposit service
charges. In addition WNFI and C1FN added $2.9 million of noninterest income
during the first nine months of 2000.
Other Expenses
Other expenses for the quarter were $16.7 million or $5.7 million above the
third quarter of last year. Other expenses for the first nine months of 2000
grew $15.0 million to $46.3 million. This increase, associated with salary
related expenses, marketing, premises and equipment expenses and professional
fees, relate to the opening of four new retail offices, ATM expansion and
startup expenses, including legal and consulting fees, for the two new
subsidiaries WNFI and C1FN. These two subsidiaries added approximately $4.2
million and $11.1 million in additional expenses to the consolidated results for
the three and nine month periods, respectively.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. Income taxes are accounted for in
accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences". The Corporation recorded
a provision for income taxes during the three and nine months ended September
30, 2000 of $1.3 million and $ 4.3 million, respectively, compared to an income
tax provision of $1.5 million and $4.7 million, for the comparable periods of
1999. The effective tax rates for the three and nine months ended September 30,
2000 were 25% and 25%, respectively, compared to 25% and 26%, for the comparable
periods in 1999. These effective rates reflect the recognition in the financial
statements of certain tax benefits, including the benefits related to the
reverse mortgage portfolio, and the fifty-percent interest income exclusion on
an ESOP loan.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2000, the Corporation adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities". A provision of SFAS 133 affords the opportunity to
reclassify investment securities between held-to-maturity, available-for-sale
and trading. At adoption, the Corporation reclassified $72.5 million in
investments and mortgage-backed securities from held-to-maturity to
available-for-sale. Of the $72.5 million transferred, $55.4 million was sold at
a loss of $1.3 million, net of tax. 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.
In addition, the difference at January 1, 2000 between the fair value and
carrying value of $2.2 million, net of tax, relating to an interest rate cap is
included in comprehensive income as a cumulative change in accounting principle.
17
SEGMENT INFORMATION
Under the definition of SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" the Corporation has four operating segments
at September 30, 2000: Wilmington Savings Fund Society, FSB (Bank), WSFS Credit
Corporation (WCC), CustomerOne Financial network, Inc. (C1FN) and Wilmington
National Finance, Inc. (WNFI). C1FN and WNFI are not wholly-owned, but are
majority-controlled subsidiaries started in 1999. Only the Bank and WCC were
operating segments at September 30, 1999.
The Bank segment provides financial products through its branch network
to consumer and commercial customers. The WSFS Credit Corporation segment
provides auto loans and leases indirectly through unrelated auto dealerships
within the Mid-Atlantic region. C1FN is a start-up company in which the Bank has
voting control and shares in 42% of the operating results at September 30, 2000.
C1FN provides direct-to-customer marketing, servicing, Internet development and
technology management for "branchless" financial services. WSFS and C1FN are
engaged in a joint effort through a division of the Bank, everbank.com, to
provide internet banking on a national level. WNFI, a 51% owned subsidiary,
which began operations in December 1999, is engaged in home equity lending. The
reportable segments are managed as separate business units because they operate
under different regulations and provide services to distinct customers. The
Corporation evaluates performance based on pre-tax ordinary income and allocates
resources based on these results. Segment information for the three and nine
months ended September 30, 2000 and 1999 is as follows:
18
For the Three Months Ended September 30,
----------------------------------------------------------------------------
2000
----------------------------------------------------------------------------
Bank WCC C1FN WNFI Total
(Dollars in thousands)
External customer revenues:
Interest income..................... $ 29,231 $ 518 $ 2,665 $ 406 $ 32,820
Other income ....................... 4,295 3,567(1) 240 1,447 9,549
----------- ---------- --------- ---------- ---------
Total external customer revenues ....... 33,526 4,085 2,905 1,853 42,369
----------- ---------- --------- ---------- ---------
Intersegment revenues:
Interest income..................... 3,551 - - 18 3,569
Other income ....................... 83 2 - - 85
----------- ---------- --------- ---------- ---------
Total intersegment revenues ............ 3,634 2 - 18 3,654
----------- ---------- --------- ---------- ---------
Total revenue........................... 37,160 4,087 2,905 1,871 46,023
External customer expenses:
Interest expense.................... 18,575 - 1,935 278 20,788
Other expenses ..................... 11,250 479 2,109 2,164 16,002
Other depreciation and
amortization .................. 722 18 145 58 943
----------- ---------- --------- ---------- ---------
Total external customer expenses ....... 30,547 497 4,189 2,500 37,733
----------- ---------- --------- ---------- ---------
Intersegment expenses:
Interest expense.................... 18 3,551(2) - - 3,569
Other expenses ..................... 2 23 60 - 85
----------- ---------- --------- ---------- ---------
Total intersegment expenses ............ 20 3,574 60 - 3,654
----------- ---------- --------- ---------- ---------
Total expenses ......................... 30,567 4,071 4,249 2,500 41,387
Income (loss) before taxes and
extraordinary items................. 6,593 16 (1,344) (629) 4,636
=========== ========== ========= ========== ========
Provision for income taxes ............. 1,347
Less: minority interest ................ (780)
Cumulative effect of change in
Accounting principle ................ -
--------
Consolidated net income $ 4,069
========
19
[RESTUBBED TABLE]
For the Three Months Ended September 30,
----------------------------------------------------------
1999
----------------------------------------------------------
Bank WCC C1FN Total
(Dollars in thousands)
External customer revenues:
Interest income..................... $ 26,683 $ 494 46 $ 27,223
Other income ....................... 3,316 4,162 (1) - 7,478
---------- --------- ------- -----------
Total external customer revenues ....... 29,999 4,656 46 34,701
---------- --------- ------- -----------
Intersegment revenues:
Interest income..................... 3,220 - - 3,220
Other income ....................... 23 1 - 24
---------- --------- ------- -----------
Total intersegment revenues ............ 3,243 1 - 3,244
---------- --------- ------- -----------
Total revenue........................... 33,242 4,657 46 37,945
External customer expenses:
Interest expense.................... 17,586 - 1 17,587
Other expenses ..................... 9,873 416 358 10,647
Other depreciation and
amortization .................. 586 18 - 604
---------- --------- ------- -----------
Total external customer expenses ....... 28,045 434 359 28,838
---------- --------- ------- -----------
Intersegment expenses:
Interest expense.................... - 3,220(2) - 3,220
Other expenses ..................... 1 23 - 24
---------- --------- ------- -----------
Total intersegment expenses ............ 1 3,243 - 3,244
---------- --------- ------- -----------
Total expenses ......................... 28,046 3,677 359 32,082
Income (loss) before taxes and
extraordinary items................. 5,196 980 (313) 5,863
========= ======== ======= ==========
Provision for income taxes ............. 1,524
Less: minority interest ................ (173)
Cumulative effect of change in
Accounting principle ................ -
---------
Consolidated net income $ 4,512
=========
For the Nine Months Ended September 30,
----------------------------------------------------------------------------
2000
----------------------------------------------------------------------------
Bank WCC C1FN WNFI Total
---- --- ---- ---- -----
(Dollars in thousands)
External customer revenues:
Interest income..................... $ 92,113 $ 1,410 $ 4,346 $ 554 $ 98,423
Other income ....................... 10,230 7,532(1) 415 2,450 20,627
----------- ------------ --------- ---------- ----------
Total external customer revenues ....... 102,343 8,942 4,761 3,004 119,050
----------- ------------ --------- ---------- ----------
Intersegment revenues:
Interest income..................... 10,324 - - 62 10,386
Other income ....................... 248 8 - - 256
----------- ------------ --------- ---------- ----------
Total intersegment revenues ............ 10,572 8 - 62 10,642
----------- ------------ --------- ---------- ----------
Total revenue........................... 112,915 8,950 4,761 3,066 129,692
External customer expenses:
Interest expense.................... 55,207 - 3,149 379 58,735
Other expenses ..................... 32,344 1,390 5,540 5,075 44,349
Other depreciation and
amortization .................. 2,132 56 350 123 2,661
----------- ------------ --------- ---------- ----------
Total external customer expenses ....... 89,683 1,446 9,039 5,577 105,745
----------- ------------ --------- ---------- ----------
Intersegment expenses:
Interest expense.................... 62 10,324(2) - - 10,386
Other expenses ..................... 8 68 180 - 256
----------- ------------ --------- ---------- ----------
Total intersegment expenses ............ 70 10,392 180 - 10,642
----------- ------------ --------- ---------- ----------
Total expenses ......................... 89,753 11,838 9,219 5,577 116,387
Income (loss) before taxes and
extraordinary items................. 23,162 (2,888) (4,458) (2,511) 13,305
=========== ============ ========= ========== ==========
Provision for income taxes ............. 4,343
Less: minority interest ................ (2,867)
Cumulative effect of change in
Accounting principle ................ (1,256)
----------
Consolidated net income ................ $ 10,573
==========
Segment assets.......................... $1,633,942 $ 254,666 $ 157,243 $ 20,383 $2,066,234
Elimination intersegment receivables.... (282,273)
----------
Consolidated assets..................... $1,783,961
==========
20
[RESTUBBED TABLE]
For the Nine Months Ended September 30,
----------------------------------------------------------------
1999
----------------------------------------------------------------
Bank WCC C1FN Total
---- --- ---- -----
(Dollars in thousands)
External customer revenues:
Interest income..................... 80,013 $ 1,518 46 $ 81,577
Other income ....................... 9,369 11,890(1) - 21,259
--------- --------- ----- ----------
Total external customer revenues ....... 89,382 13,408 46 102,836
--------- --------- ----- ----------
Intersegment revenues:
Interest income..................... 9,271 - - 9,271
Other income ....................... 68 4 - 72
--------- --------- ----- ----------
Total intersegment revenues ............ 9,339 4 - 9,343
--------- --------- ----- ----------
Total revenue........................... 98,721 13,412 46 112,179
External customer expenses:
Interest expense.................... 52,710 - 1 52,711
Other expenses ..................... 28,737 1,270 358 30,365
Other depreciation and
amortization .................. 1,732 58 - 1,790
--------- --------- ----- ----------
Total external customer expenses ....... 83,179 1,328 359 84,866
--------- --------- ----- ----------
Intersegment expenses:
Interest expense.................... - 9,271(2) - 9,271
Other expenses ..................... 4 68 - 72
--------- --------- ----- ----------
Total intersegment expenses ............ 4 9,339 - 9,343
--------- --------- ----- ----------
Total expenses ......................... 83,183 10,667 359 94,209
Income (loss) before taxes and
extraordinary items................. 15,538 2,745 (313) 17,970
========= ======== =====
Provision for income taxes ............. 4,672
Less: minority interest ................ (173)
Cumulative effect of change in
Accounting principle ................ -
----------
Consolidated net income ................ $ 13,471
==========
Segment assets.......................... $1,681,097 $ 250,983 $ 3,825 $1,935,905
Elimination intersegment receivables.... (231,175)
----------
Consolidated assets..................... $1,704,730
==========
(1) Operating lease income net of depreciation and loss provision.
(2) Inter-segment interest based on the Corporations weighted average wholesale
borrowing costs which was 6.45 and 5.65 for the three months ended
September 30, 2000 and 1999, respectively and 6.22% and 5.56% for the nine
months ended September 30, 2000 and 1999, respectively.
FORWARD LOOKING STATEMENTS
Within this discussion and analysis we have 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. We have used "forward looking statements" to describe the
future plans and strategies including our 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, and changes in federal and state regulation, among others. These factors
should be considered in evaluating the "forward looking statements", and undue
reliance should not be placed on such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 Derivative Activities." This test measures the impact
on the net portfolio value ratio of an immediate change in interest rates in 100
basis point increments. The net portfolio value ratio is defined as the net
present value of assets minus liabilities, and plus or minus off-balance sheet
contracts divided by the net present value of assets. The chart below is the
estimated impact of immediate changes in interest rates on net interest margin
and the net portfolio value ratio at the specified levels at September 30, 2000
and 1999, calculated in compliance with Thrift Bulletin No. 13A:
September 30,
------------------------------------------------------------------------------
2000 1999 (1)
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (2) Value Ratio(3) Margin (2) Value Ratio (3)
------------- ----------- ----------- ---------- -------------
+300 6% 5.77% 2% 6.14%
+200 3% 6.08% 1% 6.85%
+100 2% 6.42% 1% 7.59%
0 0% 6.78% 0% 8.37%
-100 -2% 7.19% -1% 9.19%
-200 -3% 7.79% -3% 10.14%
-300 -5% 8.64% -4% 11.31%
(1) September 30, 1999 has been restated to reflect the change in valuation of
core deposit intangibles.
(2) This column represents the percentage difference between net interest
margin in a stable interest rate environment and net interest margin as
projected in the various rate increments.
(3) This column represents the net portfolio value ratio of the Company in a
stable interest rate environment and the net portfolio value ratio as
projected in the various rate increments.
The Company's primary objective in managing interest 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.
21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)(b) None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: November 10, 2000 \s\ MARVIN N. SCHOENHALS
---------------------------------------------
. Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: November 10, 2000 \s\ MARK A. TURNER
------------------------------------------------
Mark A. Turner
Executive Vice President and
Chief Financial Officer
23