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 June 30, 2001
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission File Number 0-16668
-------
WSFS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
- ---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(302)792-6000
- --------------------------------------------------------------------------------
(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 August 6, 2001:
Common Stock, par value $.01 per share 9,310,634
- -------------------------------------- --------------------
(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 Six Months
Ended June 30, 2001 and 2000 (Unaudited)........................................... 3
Consolidated Statement of Condition as of June 30, 2001
(Unaudited) and December 31, 2000.................................................. 5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 (Unaudited)................................................. 6
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 2001 and 2000 (Unaudited).................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 25
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................................... 25
Signatures ................................................................................... 26
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
(Dollars in Thousands, except per share data)
Interest income:
Interest and fees on loans........................... $ 20,727 $ 19,239 $ 41,300 $ 37,928
Interest on mortgage-backed securities............... 6,079 5,475 12,091 12,095
Interest and dividends on investment securities...... 349 843 804 1,550
Interest on investments in reverse mortgages......... 3,150 3,953 4,934 11,720
Other interest income................................ 711 709 1,505 1,418
--------- --------- --------- ---------
31,016 30,219 60,634 64,711
--------- --------- --------- ---------
Interest expense:
Interest on deposits................................. 9,723 9,985 20,411 18,420
Interest on Federal Home Loan Bank advances.......... 3,347 3,269 6,553 8,279
Interest on federal funds purchased and securities
sold under agreement to repurchase................. 835 1,213 1,644 2,676
Interest on trust preferred borrowings............... 804 753 1,768 1,540
Interest on other borrowed funds..................... 85 127 212 258
--------- --------- --------- ---------
14,794 15,347 30,588 31,173
--------- --------- --------- ---------
Net interest income.................................. 16,222 14,872 30,046 33,538
Provision for loan losses............................ 452 217 845 445
--------- --------- --------- ---------
Net interest income after provision for loan losses.. 15,770 14,655 29,201 33,093
--------- --------- --------- ---------
Other income:
Loan servicing fee income ........................... 789 488 1,436 1,028
Deposit service charges.............................. 2,213 1,708 4,179 3,179
Credit/debit card and ATM income ................... 1,866 1,320 3,416 2,494
Securities gains (losses) .......................... - 141 - (2,325)
Gain on sale of loans ............................... 4,228 724 7,145 552
Gain from note receivable............................ - 818 - 818
Other income......................................... 954 827 1,924 1,367
--------- --------- --------- ---------
10,050 6,026 18,100 7,113
--------- --------- --------- ---------
Other expenses:
Salaries, benefits and other compensation............ 9,781 7,264 18,386 13,174
Equipment expense.................................... 1,161 1,063 2,177 2,022
Data processing and operations expenses.............. 1,201 1,590 2,298 3,330
Occupancy expense.................................... 1,330 1,034 2,639 1,981
Marketing expense.................................... 628 802 1,383 1,579
Professional fees.................................... 636 857 1,218 1,492
Net costs of assets acquired through foreclosure..... 27 70 72 163
ATM fraud (recovery) losses.......................... (53) - 368 -
In-store branch net write off........................ 1,114 - 1,114 -
Other operating expense.............................. 3,877 2,591 6,854 4,930
--------- --------- --------- ---------
19,702 15,271 36,509 28,671
--------- --------- --------- ---------
Income from continuing operations before minority
interest, taxes and cumulative effect of
change in accounting principle .................... 6,118 5,410 10,792 11,535
Less minority interest............................... (753) (856) (1,500) (2,087)
--------- --------- --------- ---------
Income from continuing operations before taxes and
cumulative effect of change in accounting
principle.......................................... 6,871 6,266 12,292 13,622
Income tax provision................................. 2,165 1,999 3,866 4,095
--------- --------- --------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle........... 4,706 4,267 8,426 9,527
Cumulative effect of change in accounting principle
net of $837,000 in income tax...................... - - - (1,256)
--------- --------- --------- ---------
Income from continuing operations.................... 4,706 4,267 8,426 8,271
Loss from discontinued operations, net of taxes...... - (1,901) - (1,767)
--------- --------- --------- ---------
Net income........................................... $ 4,706 $ 2,366 $ 8,426 $ 6,504
========= ========= ========= =========
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Continued)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited)
(Dollars in Thousands, except per share data)
Basic earnings per share:
Income from continuing operations before cumulative
effect of change in accounting principle............. $ 0.48 $ 0.40 $ 0.85 $ 0.87
Cumulative effect of change in accounting principle,
net of taxes......................................... - - - (0.11)
--------- --------- --------- ---------
Income from continuing operations...................... 0.48 0.40 0.85 0.76
Loss from discontinued operations, net of taxes........ - (0.18) - 0.16)
--------- --------- --------- ---------
Net income ............................................ $ 0.48 $ 0.22 $ 0.85 $ 0.60
========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations before cumulative
effect of change in accounting principle............. $ 0.48 $ 0.40 $ 0.84 $ 0.87
Cumulative effect of change in accounting principle,
net of taxes ........................................ - - - (0.11)
--------- --------- --------- ---------
Income from continuing operations...................... 0.48 0.40 0.84 0.76
Loss from discontinued operations, net of taxes........ - (0.18) - (0.16)
--------- --------- --------- ---------
Net income ............................................ $ 0.48 $ 0.22 $ 0.84 $ 0.60
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31,
2001 2000
---------- ---------
(Unaudited)
(Dollars in Thousands)
Assets
Cash and due from banks................................................ $ 88,680 $ 87,849
Federal funds sold and securities purchased under agreements to resell. 59,254 3,500
Interest-bearing deposits in other banks............................... 14,473 7,318
Investment securities held-to-maturity................................. 14,825 14,746
Investment securities available-for-sale............................... 3,004 14,994
Mortgage-backed securities held-to-maturity............................ 93,292 107,663
Mortgage-backed securities available-for-sale.......................... 297,308 232,055
Investment in reverse mortgages, net................................... 33,411 33,683
Loans held-for-sale.................................................... 36,350 23,313
Loans, net of allowance for loan losses of $21,566 at June 30, 2001
and $21,423 at December 31, 2000..................................... 963,531 940,178
Stock in Federal Home Loan Bank of Pittsburgh, at cost................. 19,800 28,500
Assets acquired through foreclosure.................................... 623 630
Premises and equipment................................................. 17,953 16,788
Accrued interest and other assets...................................... 28,153 28,348
Net assets of discontinued operations.................................. 161,500 199,751
---------- ----------
Total assets........................................................... $1,832,157 $1,739,316
========== ==========
Liabilities, Minority Interest and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand......................................... $ 155,569 $ 139,128
Money market and interest-bearing demand........................... 307,658 244,120
Savings............................................................ 308,599 289,382
Time............................................................... 309,353 282,839
Jumbo certificates of deposit - retail............................. 8,264 5,611
---------- ----------
Total retail deposits............................................ 1,089,443 961,080
Jumbo certificates of deposit...................................... 32,570 13,419
Brokered certificates of deposit................................... 45,297 147,092
---------- ----------
Total deposits................................................... 1,167,310 1,121,591
Federal funds purchased and securities sold under agreements to
repurchase .......................................................... 69,300 69,300
Federal Home Loan Bank advances........................................ 396,000 351,000
Trust preferred borrowings............................................. 50,000 50,000
Other borrowed funds................................................... 25,145 23,338
Accrued expenses and other liabilities................................. 25,907 21,065
---------- ----------
Total liabilities...................................................... 1,733,662 1,636,294
---------- ----------
Minority Interest...................................................... 4,376 5,876
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
14,813,403 at June 30, 2001 and 14,813,403 at December 31, 2000...... 148 148
Capital in excess of par .............................................. 58,991 58,985
Accumulated other comprehensive income ................................ 2,482 197
Retained earnings ..................................................... 100,035 92,409
Treasury stock at cost, 5,502,769 shares at June 30, 2001 and
4,629,769 shares at December 31, 2000 ............................... (67,537) (54,593)
---------- ----------
Total stockholders' equity............................................. 94,119 97,146
---------- ----------
Total liabilities and stockholders' equity............................. $1,832,157 $1,739,316
========== ==========
The accompanying notes are an integral part of these financial statements
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
-------------------------
2001 2000
---------- ----------
(Unaudited)
(Dollars in Thousands)
Operating activities:
Net income ............................................................. $ 8,426 $ 6,504
Adjustments to reconcile net income to cash (used for) provided by operating
activities:
Provision for loan losses ............................................ 845 445
Depreciation, accretion and amortization ............................. 1,750 1,507
Increase in accrued interest receivable and other assets.............. (1,769) (600)
Origination of loans held-for-sale.................................... (227,924) (48,077)
Proceeds from sales of loans held-for-sale............................ 215,883 73,316
Increase in accrued interest payable and other liabilities............ 4,838 2,970
Increase in reverse mortgage capitalized interest, net ............... (4,852) (11,619)
Minority interest in net income....................................... (1,500) (2,087)
Loss on sale of mortgage-backed securities-available for sale......... - 4,419
Other, net ........................................................... 71 147
---------- ----------
Net cash (used for) provided by operating activities........................ (4,232) 26,925
---------- ----------
Investing activities:
Net (increase) decrease in interest-bearing deposits in other banks .... (7,155) 940
Maturities of investment securities .................................... 11,429 4,659
Sales of investment securities available-for-sale ...................... 500 10,275
Sales of mortgage-backed securities available-for-sale ................. - 146,039
Purchases of investment securities available-for-sale................... - (5,952)
Purchases of investment securities available-for-sale................... - (25,109)
Repayments of mortgage-backed securities held-to-maturity .............. 14,241 15,849
Repayments of mortgage-backed securities available-for-sale ............ 88,376 19,013
Purchases of mortgage-backed securities available-for-sale.............. (151,157) (101,490)
Repayments of reverse mortgages ........................................ 8,823 9,660
Disbursements for reverse mortgages .................................... (3,627) (4,065)
Sales of loans.......................................................... (7,181) -
Purchase of loans ...................................................... - (28,265)
Net increase in loans .................................................. (18,280) (42,925)
Net decrease in stock of Federal Home Loan Bank of Pittsburgh........... 8,700 -
Receipts from investment in real estate ................................ 270 -
Sales of assets acquired through foreclosure, net....................... 481 372
Premises and equipment, net............................................. (1,458) (2,515)
---------- ----------
Net cash used for investing activities...................................... (56,038) (3,514)
---------- ----------
Financing activities:
Net increase in demand and savings deposits............................. 101,059 134,994
Net (decrease) increase in time deposits ............................... (53,632) 38,115
Receipts from FHLB borrowings .......................................... 165,000 394,000
Repayments of FHLB borrowings........................................... (120,000) (546,000)
Receipts from reverse repurchase agreements ............................ - 20,000
Repayments of reverse repurchase agreements ............................ - (45,000)
Repayments of Federal funds purchased................................... - (5,000)
Repayments of other borrowings.......................................... (56) (52)
Dividends paid on common stock.......................................... (802) (768)
Issuance of common stock ............................................... 6 -
Purchase of treasury stock, net of reissuance........................... (12,944) (8,661)
Minority Interest....................................................... (27) 651
---------- ----------
Net cash provided by (used for) financing activities........................ 78,604 (17,721)
---------- ----------
Increase in cash and cash equivalents from continuing operations............ 18,334 5,690
Change in net assets from discontinued operations .......................... 38,251 10,140
Cash and cash equivalents at beginning of period ........................... 91,349 59,166
---------- ----------
Cash and cash equivalents at end of period ................................. $ 147,934 $ 74,996
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the quarter .................................. $ 29,219 $ 35,131
Cash paid for income taxes, net............................................. 2,131 1,449
Loans transferred to assets acquired through foreclosure ................... 507 783
Net change in unrealized gains on securities available for sale, net of tax. 2,285 1,211
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
The accompanying notes are an integral part of these financial statements.
6
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the parent
company (Corporation or Company), WSFS Capital Trust I, Wilmington Savings Fund
Society, FSB (WSFS) and its wholly owned subsidiaries, 838 Investment Group,
Inc. and Star States Development Company (SSDC) as well as not wholly-owned, but
majority controlled subsidiaries, Wilmington National Finance, Inc. (WNF), and
CustomerOne Financial Network, Inc. (C1FN), see Note 4 of the financial
statements, within, for further discussion of nonwholly- owned subsidiaries.
As discussed in Note 3 of the financial statements within, the results of
WSFS Credit Corporation (WCC), the Corporation's wholly owned indirect auto
financing and leasing subsidiary, are presented as discontinued operations,
retroactively restated for all periods presented.
The consolidated statement of condition at June 30, 2001, the consolidated
statement of operations for the three and six months ended June 30, 2001 and
2000 and the consolidated statement of cash flows for the six months ended June
30, 2001 and 2000 are unaudited and include all adjustments solely of a normal
recurring nature which management believes are necessary for a fair
presentation. Certain reclassifications have been made to prior year's financial
statements for conformity with the current year's presentation. All significant
intercompany transactions are eliminated in consolidation. The results of
operations for the three- and six-month period ended June 30, 2001 are not
necessarily indicative of the expected results for the full year ended December
31, 2001. The financial statements include the accounts of WSFS Financial
Corporation. Such statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and applicable to
the banking industry. The accompanying unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Corporation's 2000 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 six months
Ended June 30 Ended June 30
-------------------- ------------------
2001 2000 2001 2000
-------------------- ------------------
Numerator:
Income from continuing operations before cumulative effect of
change in accounting principle................................ $4,706 $4,267 $8,426 $9,527
Cumulative effect of change in accounting principle, net of
tax benefit................................................... - - - (1,256)
------ ------ ------ ------
Income from continuing operations............................. 4,706 4,267 8,426 8,271
Loss from discontinued operations, net of taxes............... - (1,901) - (1,767)
------ ------ ------ ------
Net income ................................................... $4,706 $2,366 $8,426 $6,504
====== ====== ====== ======
Denominator:
Denominator for basic earnings per share -
weighted average shares ............................... 9,764 10,654 9,940 10,894
Employee stock options ............................... 75 19 67 17
------ ------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed exercise .. 9,839 10,673 10,007 10,911
====== ====== ====== ======
Earnings per share:
Basic:
Income from continuing operations before cumulative effect of
change in accounting principle................................ $ 0.48 $ 0.40 $ 0.85 $ 0.87
Cumulative effect of change in accounting principle, net of
tax benefit................................................... - - - (0.11)
------ ------ ------ ------
Income from continuing operations............................. 0.48 0.40 0.85 0.76
Loss from discontinued operations, net of taxes............... - (0.18) - (0.16)
------ ------ ------ ------
Net income ................................................... $ 0.48 $ 0.22 $ 0.85 $ 0.60
====== ====== ====== ======
7
For the three months For the six months
Ended June 30 Ended June 30
-------------------- ------------------
2001 2000 2001 2000
-------------------- ------------------
Earnings per share:
Diluted:
Income from continuing operations before cumulative effect of
change in accounting principle................................ $ 0.48 $ 0.40 $ 0.84 $ 0.87
Cumulative effective of change in accounting principle........ - - - (0.11)
------ ------ ------ ------
Income from continuing operations............................. 0.48 0.40 0.84 0.76
Loss from discontinued operations, net of taxes............... - (0.18) - (0.16)
------ ------ ------ ------
Net income ................................................... $ 0.48 $ 0.22 $ 0.84 $ 0.60
====== ====== ====== ======
Outstanding common stock having no dilutive effect............ 464 553 526 523
3. Discontinued Operations of a Business Segment
On December 21, 2000, the Board of Directors of WSFS Financial Corporation
approved plans to discontinue the operations of WSFS Credit Corporation (WCC),
the Company's indirect auto finance business segment. WCC, which had 6,200 lease
contracts and 2,268 loan contracts at June 30, 2001, no longer accepts new
applications but will continue to service existing loans and leases. Management
estimates that substantially all loan and lease contracts will mature by the end
of December 2003.
Accounting for discontinued operations of a business segment requires that
the Company forecast operating results over the wind-down period and immediately
accrue any expected net losses as a one time charge. The historic results of
WCC's operations, the one-time charge, 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 generally accepted accounting principles.
As a result, a net operating loss of $1.9 million and $1.8 million for the
three and six months ended June 30, 2000, respectively, were reclassified from
continuing operations to discontinued operations. In addition, the Corporation
established a $6.2 million pretax reserve in the fourth quarter of 2000 to
absorb expected future losses. This reserve is be reevaluated quarterly with
adjustments, if necessary, recorded as income/losses from discontinued
operations. Accounting for discontinued operations also requires that the net
assets (assets less third party liabilities) be reclassified on the balance
sheet to a single line item, Net assets of discontinued operations.
The following chart depicts the net assets of discontinued operations at
June 30, 2001 and December 31, 2000:
At June 30, At December 31,
2001 2000
-------------------------------
(In Thousands)
Net loans............................................. $ 22,168 $ 27,877
Vehicles under operating leases, net.................. 143,412 175,745
Premises and equipment................................ 66 131
Other Assets.......................................... 2,780 3,931
Less:
Reserve for losses of discontinued
operations...................................... 5,768 6,169
Other liabilities................................. 1,158 1,764
-------- --------
Net assets of discontinued operations $161,500 $199,751
======== ========
8
The following table depicts the net income from discontinued operations for
the three and six months ended June 30, 2001 and 2000:
For the three months Ended June 31, For the six months ended June 30,
----------------------------------- -----------------------------------
2001 2000 2001 2000
------- -------- ------- --------
(In Thousands)
Interest income........................ $ 490 $ 447 $ 1,049 $ 893
Allocated interest expense (1)......... 2,606 3,417 5,598 6,774
------- -------- ------- --------
Net interest expense................... (2,116) (2,970) (4,549) (5,881)
------- -------- ------- --------
Loan and lease servicing fee income ... 57 168 206 448
Rental income on operating leases, net. 2,308 170 4,986 3,492
Other income........................... 6 16 10 26
------- -------- ------- --------
2,371 354 5,202 3,966
Other operating expenses............. 438 476 964 949
------- -------- ------- --------
(Loss) income before taxes............. (183) (3,092) (311) (2,864)
Reserve for discontinued operations ... 273 - 401 -
Income tax provision (benefit)........ 90 (1,191) 90 (1,097)
------- -------- ------- --------
Income from discontinued operations.... $ - $ (1,901) $ - $ (1,767)
======= ======== ======= ========
(1) Allocated interest expense based on the Company's annual average wholesale
borrowings rate which was 5.96% and 6.19% for the three months ended June 30,
2001and 2000, respectively and 6.11% and 6.12% for the six months ended June 30,
2001 and 2000, respectfully.
4. INVESTMENTS IN NONWHOLLY-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-marketing, servicing, internet development and technology management
for "branchless" financial services. 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.
WSFS, the single largest shareholder in C1FN, has majority control through a
voting trust. For the six months ended June 30, 2001 it shared in 29% of the
operating results of C1FN. In addition, WSFS received warrants for the purchase
of 20% additional ownership of C1FN.
On December 29, 2000, C1FN received a $5.0 million investment from a third
party investor, with a conditional commitment to invest an additional $12.5
million if and when a separate bank charter is obtained for everbank.com(TM).
This investment effectively reduced WSFS' economic ownership of C1FN to 29%.
Since WSFS retains control of C1FN through a voting trust, the results of C1FN
will continue to be consolidated into the operating results of WSFS until
everbank.com(TM) obtains a separate banking charter. If and when
everbank.com(TM) obtains a banking charter, WSFS will no longer have control.
This investment will then be accounted for under the equity method.
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. (WNF)
which expanded its sales to a national level and now aggregates loans primarily
through brokers and sells them to investors. WSFS retained a 51% ownership with
the remainder held by WNF's executives retained to lead the expansion of WNF.
WSFS also has warrants to obtain an additional 15% ownership in WNF.
Both C1FN and WNF are consolidated into the financial statements of WSFS
Financial Corporation. The portion of equity and operating results attributable
to investors in C1FN and WNF, other than WSFS, are reported as minority
interest.
9
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Corporation's only derivative that requires separate accounting under
Statement of Accounting Standard (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, has two components: the
intrinsic value and the time value of the option. The cap will be
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 fair value
is estimated using the calculated FMV of similar instruments.
The following depicts the change in fair market value of the interest rate
cap:
For the six months ended
-------------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
at at at at
January 1 Change June 30 January 1 Change June 30
--------- ------ ------- --------- ------ -------
(In Thousands)
Intrinsic value (1) $ 193 $ 632 $ 825(1) $ 2,813 $ (279) $2,534(1)
Time value (2) 1,804 200(2) 2,004 2,131 (206)(2) 1,925
-------- ------ ------- -------- ------ ------
Total $ 1,997 $ 832 $ 2,829 $ 4,944 $ (485) $4,459
======== ====== ======= ======== ====== ======
(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 $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.
10
6. COMPREHENSIVE INCOME
The following schedule depicts other comprehensive income as required by
SFAS No. 130:
For the three months For the six months
ended June 30, ended June 30,
-------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income .............................................. $ 4,706 $ 2,366 $ 8,426 $ 6,504
Other Comprehensive Income:
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period......... 170 420 1,874 (1,964)
Net unrealized holding gains (losses) arising during the
period on derivatives used for cash flow hedge....... 455 105 411 (181)
Reclassification for (gains) losses included in income... - (1) - 1,528
-------- -------- -------- --------
Total comprehensive income, before other comprehensive
income that resulted from the cumulative effect of a
change in accounting principle...................... 5,331 2,890 10,711 5,887
Net unrealized gain on derivatives used for cash flow
hedging as a result of adopting SFAS No. 133......... - - - 1,828
-------- -------- -------- --------
Total comprehensive income............................... $ 5,331 $ 2,890 $ 10,711 $ 7,715
======== ======== ======== ========
7. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Corporation has three operating segments
in 2001: WSFS, C1FN and WNF. C1FN and WNF are not wholly-owned, but are
majority-controlled subsidiaries started in 1999. As majority controlled
subsidiaries, they are included in consolidated financial statements, including
segment reporting.
The operations of WCC, which provided auto loans and leases indirectly
through unrelated auto dealerships within the mid-atlantic region, were
discontinued in 2000. The segment information for 2000 has been restated.
The WSFS segment provides financial products within its geographical
footprint through its branch network to consumer and commercial customers.
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for "branchless" financial services. WSFS
and C1FN are engaged in a joint effort through a division of WSFS, everbank.com,
to provide Internet banking on a national level.
WNF is engaged in sub-prime home equity lending. WNF expanded sales on a
national level and now aggregates loans primarily through brokers and sells them
to investors.
Reportable segments are business units that offer different services to
distinct customers. The reportable segments are managed separately because they
operate under different regulations and provide services to distinct customers.
The Corporation evaluates performance based on pre-tax ordinary income and
allocates resources based on these results. Segment information for the three
months ended June 30, 2001 and 2000 and the six months ended June 30, 2001 and
2000 follow:
11
For the Three Months Ended June 30,
------------------------------------------------------------------------------------------
2001 2000
------------------------------------------ --------------------------------------------
(In Thousands)
WSFS C1FN WNF Total WSFS C1FN WNF Total
---- ---- --- ----- ---- ---- --- -----
External customer revenues:
Interest income $ 26,418 $ 3,783 $ 815 $ 31,016 $ 28,756 $ 1,315 $ 148 $ 30,219
Other income 4,518 654 4,878 10,050 5,049 163 814 6,026
-------- -------- -------- --------- -------- --------- ------- --------
Total external customer revenues 30,936 4,437 5,693 41,066 33,805 1,478 962 36,245
-------- -------- -------- --------- -------- --------- ------- --------
Intersegment revenues:
Interest income 451 - - 451 - - 24 24
Other income 120 - - 120 66 - - 66
-------- -------- -------- --------- -------- --------- ------- --------
Total Intersegment revenues 571 - - 571 66 - 24 90
-------- -------- -------- --------- -------- --------- ------- --------
Total revenue 31,507 4,437 5,693 41,637 33,871 1478 986 36,335
External customer expenses:
Interest expense 12,034 2,679 81 14,794 14,255 1,000 92 15,347
Other expenses 12,852 2,595 3,750 19,197 11,044 1,788 1,743 14,575
Other depreciation and amortization 778 103 76 957 768 105 40 913
-------- -------- -------- --------- -------- --------- ------- --------
Total external customer expenses 25,664 5,377 3,907 34,948 26,067 2,893 1,875 30,835
-------- -------- -------- --------- -------- --------- ------- --------
Intersegment expenses:
Interest expense - - 451 451 24 - - 24
Other expenses - 120 - 120 6 60 - 66
-------- -------- -------- --------- -------- --------- ------- --------
Total Intersegment expenses - 120 451 571 30 60 - 90
-------- -------- -------- --------- -------- --------- ------- --------
Total expenses 25,664 5,497 4,358 35,519 26,097 2,953 1,875 30,925
Income (loss) before taxes and
extraordinary item $ 5,843 $(1,060) $ 1,335 $ 6,118 $ 7,774 $ (1,475) $ (889) $ 5,410
-------- -------- -------- --------- -------- --------- ------- --------
Provision for income taxes 2,165 1,999
Loss on disposal of discontinued
operations - (1,901)
Minority Interest (753) (856)
--------- --------
Consolidated net income $ 4,706 $ 2,366
--------- --------
12
For the Six Months Ended June 30,
--------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------- --------------------------------------------
(In Thousands)
WSFS C1FN WNF Total WSFS C1FN WNF Total
---- ---- --- ----- ---- ---- --- -----
External customer revenues:
Interest income $ 51,935 $ 7,298 $ 1,401 60,634 $ 62,882 $ 1,681 $ 148 $ 64,711
Other income 9,144 1,287 7,669 18,100 5,935 175 1,003 7,113
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Total external customer revenues 61,079 8,585 9,070 78,734 68,817 1,856 1,151 71,824
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Intersegment revenues:
Interest income 868 - 36 904 - - 44 44
Other income 240 - 0 240 126 - - 126
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Total Intersegment revenues 1,108 - 36 1,144 126 - 44 170
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Total revenue 62,187 8,585 9,106 79,878 68,943 1,856 1,195 71,994
External customer expenses:
Interest expense 25,235 5,270 83 30,588 29,858 1,214 101 31,173
Other expenses 24,134 4,994 6,337 35,465 21,049 3,431 2,911 27,391
Other depreciation and
amortization 1,552 193 144 1,889 1,455 205 65 1,725
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Total external customer expenses 50,921 10,457 6,564 67,942 52,362 4,850 3,077 60,289
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Intersegment expenses:
Interest expense 36 - 868 904 44 - - 44
Other expenses - 240 - 240 6 120 - 126
---------- -------- -------- ---------- ---------- --------- ------- ----------
Total Intersegment expenses 36 240 868 1,144 50 120 - 170
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Total expenses 50,957 10,697 7,432 69,086 52,412 4,970 3,077 60,459
Income (loss) before taxes and
extraordinary item $ 11,230 $ (2,112) $ 1,674 10,792 $ 16,531 $ (3,114) $(1,882) $ 11,535
---------- ---------- -------- ---------- ---------- --------- ------- ----------
Provision for income taxes 3,866 4,095
Loss on disposal of discontinued
operations - (1,767)
Minority Interest (1,500) (2,087)
Cumulative effect of change in
accounting principle - (1,256)
---------- ----------
Consolidated net income 8,426 $ 6,504
---------- ----------
Segment assets $1,567,428 $ 269,084 $ 35,384 $1,871,896 $1,615,164 $ 124,758 $12,511 $1,752,433
Elimination intersegment receivables (39,739) (9,739)
---------- ----------
Consolidated assets $1,832,157 $1,742,694
========== ==========
Capital expenditures $ 878 $ 359 $ 221 $ 1,458 $ 2,349 $ 182 $ 119 $ 2,650
13
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 (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 WSFS' 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 169 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.
WSFS 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 27 retail banking offices located in
Northern Delaware and Southeastern Pennsylvania. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC).
Fully owned subsidiaries of WSFS include WSFS Credit Corporation (WCC),
which is engaged primarily in indirect motor vehicle leasing; and 838 Investment
Group, Inc., which markets various insurance products and securities through the
WSFS' branch system
On December 21, 2000, the Board of Directors approved plans to discontinue
the operations of WCC and as a result, has exited the indirect auto leasing
business. As discussed in Note 3 of the financial statements, the results of WCC
are presented as discontinued operations, retroactively restated for all periods
presented.
In addition, WSFS has majority control of two nonwholly-owned subsidiaries,
CustomerOne Financial Network (C1FN) and Wilmington National Finance, Inc.
(WNF). See Note 4 of the financial statements within, for further discussion.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $92.8 million during the first six months of 2001 to
$1.832 billion at June 30, 2001. Asset growth included $51.8 million in
investment securities and short-term investments and $50.9 million in
mortgage-backed securities. The increase in investment securities and short-term
investments was the result of placing available funds in liquid investments
until they can be re-directed into higher yielding assets or used for other
corporate purposes. Net loans, (including held for sale), increased $36.4
million. This included increases of $11.1 million in commercial loans, $10.1
million in commercial real estate and $9.6 million in consumer loans.
Residential loans, including loans held-for-sale, only increased by $5.9 million
reflecting management's continued strategy to change the mix of loans to higher
margin relationships. These increases were partially offset by decreases of
$38.3 million in net assets of discontinued operations, the effect of maturities
and repayments of loans and leases at the Corporation's wholly owned indirect
leasing subsidiary, WCC. In addition, stock in the Federal Home Loan Bank of
Pittsburgh (FHLB) decreased by $8.7 million, mainly due to redemptions.
14
Total liabilities increased $97.4 million between December 31, 2000 and June
30, 2001, to $1.734 billion. Total retail deposits increased $128.4 million,
including an increase of $76.9 million at C1FN/everbank. The remaining increase
of $51.5 million in retail deposits occurred at WSFS, which included increases
in all categories of retail deposits. This also reflects management's strategy
of increasing core deposit relationships (demand deposits, money market and
savings accounts). In addition, jumbo certificates of deposit increased $19.2
million. Partially offsetting this increase was a $101.8 million decline in
brokered deposits, mainly due to maturities. The Corporation replaced this
funding source with borrowings from the FHLB, which increased $45.0 million
during the first six months of 2001 and the above mentioned deposit growth.
Capital Resources
Stockholders' equity decreased $3.0 million between December 31, 2000 and
June 30, 2001. This decrease reflects the purchase of 878,000 treasury shares at
$13.0 million ($14.81 per share average). At June 30, 2001, the Corporation held
in its treasury 5,502,769 shares of its common stock at a cost of $67.5 million.
This decline in equity was partially offset by net income of $8.4 million for
the six months of 2001. In addition, other comprehensive income increased $2.2
million.
A table presenting the WSFS' consolidated capital position relative to the
minimum regulatory requirements as of June 30, 2001 (dollars in thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------------------- ------------------------ ------------------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ -------- ------ ------- ------ ------
Total Capital
(to Risk-Weighted Assets) ........ $149,536 12.55% $95,321 8.00% $119,151 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 140,303 7.65 73,319 4.00 91,649 5.00
Tangible Capital (to Tangible
Assets) .......................... 140,303 7.65 27,495 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 140,303 11.78 N/A N/A 71,491 6.00
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 the
WSFS' financial statements. At June 30, 2001 WSFS was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
Liquidity
In accordance with Thrift Bulletin 77, the OTS requires institutions, such
as WSFS to maintain adequate liquidity to assure safe and sound operation. At
June 30, 2001, WSFS' liquidity ratio of cash and qualified assets to net
withdrawable deposits and borrowings due within one year was 9.7% compared to
6.4% at December 31, 2000. Management monitors liquidity daily and maintains
funding sources to meet unforeseen changes in cash requirements. The
Corporation's primary financing sources are deposits, repayments of loans and
investment securities, sales of loans and borrowings. In addition, the
Corporation's liquidity requirements can be accomplished through the use of its
borrowing capacity from the FHLB of Pittsburgh, the sale of certain securities
and the pledging of certain loans for other lines of credit. Management believes
these sources are sufficient to maintain the required and prudent levels of
liquidity.
15
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.
June 30, December 31,
2001 2000
-------- --------
(Dollars in Thousands)
Nonaccruing loans:
Commercial .............................................. $ 2,587 $ 2,766
Consumer ................................................ 394 383
Commercial mortgage ..................................... 1,803 2,272
Residential mortgage .................................... 2,836 2,704
Construction ............................................ 541 210
-------- --------
Total nonaccruing loans ...................................... 8,161 8,335
Assets acquired through foreclosure .......................... 623 630
-------- --------
Total nonperforming assets ................................... $ 8,784 $ 8,965
======== ========
Past due loans:
Residential mortgages ................................... $ 891 $ 449
Commercial and commercial mortgages ..................... 1,929 790
Consumer ................................................ 52 199
-------- --------
Total past due loans ......................................... $ 2,872 $ 1,438
======== ========
Ratios:
Nonperforming loans to total loans (1) .................. 0.83% 0.87%
Allowance for loan losses to total gross
Loans (1)............................................. 2.18 2.22
Nonperforming assets to total assets .................... .48 .52
Loan loss loss allowance to nonaccruing loans (2)........ 255.99 248.81
Loan and foreclosed asset allowance to total
Nonperforming assets (2) .............................. 240.49 234.01
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased $181,000 between December 31, 2000 and June
30, 2001. This decrease resulted primarily from a $469,000 decrease in
nonaccruing commercial mortgages. An analysis of the change in the balance of
nonperforming assets is presented on the following page.
16
Analysis of change in nonperforming assets:
Six Months Ended Year Ended
June 30, 2001 December 31, 2000
---------------- -----------------
(In Thousands)
Beginning balance......................................... $ 8,965 $ 8,159
Additions ........................................... 2,916 8,332
Collections/sales ................................... (2,228) (4,323)
Transfers to accrual/restructured status............. (627) (1,227)
Charge-offs / write-downs............................ (242) (1,976)
-------- --------
Ending balance............................................ $ 8,784 $ 8,965
======== ========
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 WSFS 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 exclude cash flows
that relate to the discontinued operations (WCC), however, funding of $165.6
million for these assets have been included. At June 30, 2001, interest-bearing
liabilities exceeded interest-earning assets that mature within one year
(interest-sensitive gap) by $111.9 million. The Corporation's interest-sensitive
assets as a percentage of interest-sensitive liabilities within the one-year
window increased to 87.82% at June 30, 2001 compared to 75.88% at December 31,
2000. Likewise, the one-year interest-sensitive gap as a percentage of total
assets reduced to a negative 6.11% at June 30, 2001 from a negative 12.66% at
December 31, 2000. The change is the result of the Corporation's continuing
effort to effectively manage interest rate risk.
Market risk is the risk of loss from adverse changes in the 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, plus or minus off-balance sheet
contracts, divided by the net present value of assets. The chart on the
following page shows the estimated impact of immediate changes in interest rates
on net interest margin and the net portfolio value ratio at the specified levels
at June 30, 2001 and 2000, calculated in compliance with Thrift Bulletin No.
13A:
17
June 30,
--------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value Ratio(2) Margin (1) Value Ratio (2)
------------- ------------ --------------- ------------ ---------------
+300 7% 7.95% 7% 5.55%
+200 4% 8.14% 4% 5.86%
+100 2% 8.33% 2% 6.20%
0 0% 8.50% 0% 6.56%
-100 -2% 8.57% -2% 6.97%
-200 -5% 8.63% -4% 7.56%
-300 -7% 8.70% -6% 8.39%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected in the various rate
increments.
(2) 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.
COMPARISON FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Results of Operations
The Corporation recorded net income of $4.7 million or $.48 per diluted
share for the second quarter of 2001. This compares to $2.4 million or $.22 per
diluted share for the same quarter last year. Financial results for the second
quarter of 2000 included an after tax charge of $1.9 million for losses from
discontinued operations. Income from continuing operations for the three months
ended June 30, 2000 was $4.3 million or $.40 per diluted share.
The strong results for the second quarter of 2001 are due primarily to the
growth in interest income, which increased $1.4 million between quarters. The
increase in net interest income reflects deposit growth affected by declining
rate environment offset, in part, by slightly lower yields on the reverse
mortgage portfolio. In addition financial results were favorably affected by the
significantly improved performance of WNF which earned $814,000, after tax, for
the quarter compared to an after tax loss of $523,000 for the second quarter of
last year. Net income for the quarter also included a $1.1 million pretax charge
for the exiting of six in-store branches in southeastern Pennsylvania.
Net income for the six months ended June 30, 2001 was $8.4 million or $.84
per diluted share. This compares to $6.5 million or $.60 per share for the
comparable period last year. Financial results for the first six months of 2000
included an after tax charge of $1.8 million for losses from discontinued
operations. Income from continuing operations for the six months ended June 30,
2000 was $8.3 million or $.76 per diluted share.
The increase in net income for the six months ended June 30, 2001 compared
to the same period in 2000 reflect $1.0 million in net income from WNF compared
to an after tax loss of $950,000 for the same period of 2000. In addition, the
results for the six months ended June 30, 2000 included a $4.7 million pretax
loss on the sale of $127 million in securities and loans as part of the
Company's deleveraging program. Net income growth between periods was partially
offset by a $3.5 million decline in net interest income. Net interest income was
affected by reverse mortgage income, which decreased $6.8 million between
comparable periods due to considerably larger yield adjustments recorded in the
first half of 2000. Reverse mortgage yields can vary significantly between
periods as they are affected by actual and estimated housing prices and the
timing of cash flows. The reverse mortgage impact on net interest income was
partially offset by deposit growth and the declining interest rate environment.
Earnings for the six months ended June 30, 2001 were also impacted by the
previously mentioned $1.1 million pretax in-store branch write-off.
18
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 June 30,
---------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------
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)............ $ 635,851 $ 12,739 8.01% $ 621,760 $ 12,715 8.18%
Commercial loans ................ 154,050 3,007 8.45 120,186 2,426 8.92
Consumer loans................... 177,795 4,128 9.31 164,111 3,938 9.65
---------- --------- ---------- ---------
Total loans.................... 967,696 19,874 8.33 906,057 19,079 8.55
Mortgage-backed securities (5)........ 390,286 6,079 6.23 326,044 5,475 6.72
Loans held-for-sale (3)............... 35,872 853 9.51 7,537 160 8.49
Investment securities (5)............. 19,532 349 7.15 47,027 843 7.17
Investment in reverse mortgages....... 32,922 3,150 38.27 32,916 3,953 48.04
Other interest-earning assets ........ 56,947 711 5.01 41,362 709 6.89
---------- --------- ---------- ---------
Total interest-earning assets.... 1,503,255 31,016 8.33 1,360,943 30,219 8.97
--------- ---------
Allowance for loan losses............. (21,586) (22,698)
Cash and due from banks............... 74,925 52,776
Net assets of discontinued operations. 171,210 236,797
Other noninterest-earning assets...... 50,590 33,361
---------- ----------
Total assets..................... $1,778,394 $1,661,179
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 287,009 2,324 3.25 $ 133,117 1,235 3.73
Savings.......................... 305,782 2,021 2.65 263,768 2,534 3.79
Retail time deposits ............ 308,723 3,987 5.18 271,148 3,229 4.79
Jumbo certificates of deposits .. 44,087 560 5.09 39,252 568 5.82
Brokered certificates of deposit. 71,236 1,196 6.73 149,428 2,419 6.51
---------- --------- ---------- ---------
Total interest-bearing deposits 1,016,837 10,088 3.98 861,713 9,985 4.66
FHLB of Pittsburgh advances........... 351,934 5,105 5.82 376,654 5,359 5.72
Trust preferred borrowings............ 50,000 804 6.45 50,000 1,235 9.77
Other borrowed funds.................. 95,230 1,403 5.89 140,887 2,185 6.20
Cost of funding discontinued
operations.......................... (2,606) (3,417)
---------- --------- ---------- ---------
Total interest-bearing
liabilities ................... 1,514,001 14,794 3.91 1,429,254 15,347 4.30
--------- ---------
Noninterest-bearing demand deposits... 139,584 120,446
Other noninterest-bearing liabilities. 19,569 11,932
Minority interest .................... 4,641 3,969
Stockholders' equity.................. 100,599 95,578
---------- ----------
Total liabilities and
stockholders' equity........... $1,778,394 $1,661,179
========== ==========
Deficit of interest-earning assets
over interest-bearing liabilities... $ (10,746) $ (68,311)
========== ==========
Net interest and dividend income...... $ 16,222 $ 14,872
========= =========
Interest rate spread.................. 4.42% 4.67%
==== ====
Net interest margin................... 4.39% 4.45%
==== ====
Net interest and dividend income to
total average assets............. 3.71% 3.65%
==== ====
(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.
19
Six Months Ended June 30,
---------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------
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)............ $ 634,379 $ 25,516 8.04% $ 612,448 $ 24,909 8.13%
Commercial loans ................ 150,902 5,956 8.59 117,518 4,678 8.83
Consumer loans................... 176,337 8,336 9.53 161,179 7,775 9.70
---------- --------- ---------- ---------
Total loans.................... 961,618 39,808 8.40 891,145 37,362 8.64
Mortgage-backed securities (5)........ 378,149 12,091 6.39 366,040 12,095 6.61
Loans held-for-sale (3)............... 30,556 1,492 9.77 15,086 566 7.50
Investment securities (5)............. 22,053 804 7.29 44,109 1,550 7.02
Investment in reverse mortgages....... 33,562 4,934 29.40 31,712 11,720 73.92
Other interest-earning assets ........ 56,701 1,505 5.35 41,833 1,418 6.80
---------- --------- ---------- ---------
Total interest-earning assets.... 1,482,639 60,634 8.33 1,389,925 64,711 9.48
--------- ---------
Allowance for loan losses............. (21,587) (22,632)
Cash and due from banks............... 69,444 53,567
Net assets of discontinued operations. 180,746 237,379
Other noninterest-earning assets...... 48,381 35,853
---------- ---------- -
Total assets..................... $1,759,623 $1,694,092
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 272,173 4,755 3.52 $ 109,470 1,781 3.27
Savings.......................... 302,935 4,609 3.07 263,832 4,820 3.67
Retail time deposits ............ 303,166 7,863 5.23 271,889 6,358 4.70
Jumbo certificates of deposits .. 33,093 878 5.35 33,932 960 5.69
Brokered certificates of deposit. 100,686 3,369 6.75 144,127 4,501 6.28
---------- --------- ---------- ---------
Total interest-bearing deposits 1,012,053 21,474 4.28 823,250 18,420 4.50
FHLB of Pittsburgh advances........... 343,680 10,103 5.93 441,876 12,646 5.76
Trust preferred borrowings............ 50,000 1,768 7.03 50,000 2,378 9.41
Other borrowed funds.................. 94,816 2,841 5.99 146,266 4,503 6.16
Cost of funding discontinued
operations.......................... (5,598) (6,774)
---------- --------- ---------- ---------
Total interest-bearing liabilities.... 1,500,549 30,588 4.08 1,461,392 31,173 4.27
--------- ---------
Noninterest-bearing demand deposits... 134,723 116,829
Other noninterest-bearing liabilities. 18,875 14,787
Minority interest .................... 5,005 4,405
Stockholders' equity.................. 100,471 96,679
---------- ----------
Total liabilities and
stockholders' equity........... $1,759,623 $1,694,092
========== ==========
Deficit of interest-earning assets
over interest-bearing liabilities... $ (17,910) $ (71,467)
========== ==========
Net interest and dividend income...... $ 30,046 $ 33,538
========= ==========
Interest rate spread.................. 4.25% 5.21%
==== ====
Net interest margin................... 4.13% 4.91%
==== ====
Net interest and dividend income to
total average assets............. 3.48% 4.03%
==== ====
(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.
20
Net interest income for the three months ended June 30, 2001 increased $1.4
million compared to the same period in 2000. However, the net interest margin
for the three months ended June 30, 2001 was 4.39% compared to 4.45% in the
second quarter of 2000, as total interest-earning assets averaged $142.3 million
more in 2001. Total interest income increased $797,000 between comparable
quarters. This change is attributed to the increase in average loans and loans
held-for-sale of $90.0 million and an increase in average mortgage-backed
securities of $64.2 million. This was partially offset by a decrease in average
investment securities of $27.5 million, and a reduction in the reverse mortgage
yield from 48.04% to 38.27% between comparable quarters. Management expects the
long-term yield of reverse mortgages in the future to be closer to 25%. However,
as in the past, returns on reverse mortgages can vary significantly between
periods as they are affected by actual and estimated housing prices and the
timing of cash flows. The yield on interest earning assets declined 64 basis
points between comparable quarters. Total interest expense for the three months
ended June 30, 2001 decreased $553,000 compared to the second quarter of 2000.
The decrease was a result of the lower cost of borrowings due to a decrease in
the average borrowings of $70.4 million between comparable periods, and a series
of Federal Reserve interest rate decreases. The lower borrowing costs were
offset partially by an increase in average interest-bearing deposits of $155.0
million between periods. The rate on interest bearing liabilities declined 39
basis points between periods.
Net interest income the six months ended June 30, 2001 decreased $3.5
million compared to the same period in 2000. The decrease was due primarily to
$6.8 million in additional interest income adjustments in the reverse mortgage
portfolio in 2000. The net interest margin for the six months ended June 30,
2001 was 4.13%, compared to 4.91% for the six months ended June 30, 2000. Total
interest income decreased $4.1 million between comparable periods. This change
is attributed to the previously mentioned reverse mortgage adjustment, as well
as the decrease in average investment securities of $22.1 million, partially
offset by the increase in average loans and loans-held-for-sale of $86.0
million. Total interest expense decreased $585,000 in comparing the six months
ended June 30, 2001 with the same period in 2000. The decrease was a result of
the lower cost of borrowings due to the series of Federal Reserve interest rate
decreases and a decrease in average borrowings of $149.7 million from June 30,
2000. This was offset partially by an increase in average interest-bearing
deposits of $188.8 million between comparable periods.
Allowance for Loan 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
which include factors such as the identification of adverse situations that may
affect the borrower's ability to repay, a review of overall portfolio quality,
prior loss experience and an assessment of current and expected economic
conditions. Changes in economic conditions and economic prospects of debtors can
occur quickly, and as a result, impact the estimates made by management.
21
The following table represents a summary of the changes in the allowance for
loan losses during the periods indicated.
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
---------------- ----------------
(Dollars in Thousands)
Beginning balance ............................................ $21,423 $22,223
Provision for loan losses .................................... 845 445
Balance at acquisition for purchased credit card portfolio.... - 175
Charge-offs:
Residential real estate ................................. 92 32
Commercial real estate (1) .............................. - 28
Commercial............................................... 300 53
Consumer ................................................ 486 592
------- -------
Total charge-offs..................................... 878 705
------- -------
Recoveries:
Residential real estate ................................. 1 1
Commercial real estate (1) .............................. 41 187
Commercial .............................................. 81 41
Consumer................................................. 53 229
------- -------
Total recoveries ..................................... 176 458
------- -------
Net charge-offs .............................................. 702 247
------- -------
Ending balance................................................ $21,566 $22,596
======= =======
Net charge-offs to average gross loans
outstanding, net of unearned income (2)..................... 0.15% 0.06%
======= =======
(1) Includes commercial mortgages and construction loans.
(2) Ratio for the six months ended June 30, 2001 and 2000 is annualized.
Other Income
Other income for the three months ended June 30, 2001 was $10.0 million
compared to $6.0 million for the second quarter of 2000. This improvement was
mainly due to a $3.5 million increase in gains on the sale of loans, which was
predominantly attributable to WNF. Deposit service charges increased $505,000 in
2001, in comparison to the corresponding period in 2000, mainly due to a 25%
increase in retail deposits. Noninterest income at C1FN increased $493,000 over
the second quarter of 2000. These increases were partially offset by a $818,000
recovery on a fully reserved note receivable, which was recorded in the second
quarter of 2000.
Other income for the six months ended June 30, 2001 was $18.1 million
compared to $7.1 million for the same period in 2000. Consistent with the
quarter, this improvement was mainly due to a $6.6 million increase in gains on
the sale of loans, which was predominantly attributable to WNF. In addition,
there were no securities losses during the first six months of 2001 compared to
a $2.3 million loss during the first six months of 2000. Deposit service charges
increased $1.0 million in 2001, in comparison to the corresponding period in
2000, mainly due to increased retail deposits. Noninterest income at C1FN
increased $1.1 million over the first six months of 2000. These increases were
partially offset by a $818,000 recovery on a fully reserved note receivable,
which was recorded during the first six months of 2000.
22
Other Expenses
Other expenses for the quarter ended June 30, 2001 were $19.7 million or
$4.4 million above the second quarter of 2000. This increase was mainly due to
expected higher expenses from the Corporation's two newer initiatives, WNF and
C1FN, as these companies continue to grow. These two subsidiaries added $2.9
million in additional expenses to the consolidated results compared to the
second quarter of 2000. In addition, other expenses for the six months ended
June 30, 2001 included a non-cash charge of $1.1 million in connection with the
recently announced planned exit of six in-store branch offices in southeastern
Pennsylvania.
Other expenses for the six months ended June 30, 2001 were $36.5 million
compared to $28.7 million for the same period of 2000. This increase, as
previously discussed for the quarter, was mainly due to higher expenses from the
Corporation's two newer initiatives, WNF and C1FN. These two subsidiaries added
$5.1 million in additional expenses to the consolidated results compared to the
first six months of 2000. In addition, other expenses for the six months ended
June 30, 2001 included the above mentioned $1.1 million in-store branch net
write-off. Also during the first six months of 2001 a $368,000 ATM fraud loss
was recorded. This loss was the result of missing or misappropriated funds
related to an armored car carrier engaged to supply cash to ATM's operated by
customers of Cash Connect, the ATM division of WSFS.
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 six months ended June 30, 2001
of $2.2 million and $3.9 million, respectively, compared to an income tax
provision of $808,000 and $2.2 million, for the comparable periods of 2000. The
effective tax rates for the three and six months ended June 30, 2001 were 32%
and 31%, respectively, compared to 25% and 25%, for the comparable periods in
2000. Excluding the impact of the loss from discontinued operations, the
effective rates for the three and six months ended June 30, 2000 were 32% and
30%, respectively.
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 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 $131.0
million in investments and mortgage-backed securities from held-to-maturity to
available-for-sale. Of the $131.0 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, at January 1, 2000 the difference 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.
23
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This statement supercedes and replaces the
guidance in Statement 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, although it carries over most of Statement 125's
provisions without reconsideration. The statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending December 15, 2000. This statement is to be applied prospectively
with certain exceptions. Other than those exceptions, earlier retroactive
application of its accounting provisions is not permitted. There was no material
impact, based upon this Statement, to the Company's financial condition, equity,
results of operations, or disclosures.
In June 2001, the FASB issued Statement No. 141, Business Combinations. The
Statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of the Statement are to be accounted for
using the purchase method.
The provisions of the Statement apply to all business combinations initiated
after June 30, 2001. The Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. There is no expected impact on earnings, financial
condition, or equity upon adoption of Statement No. 141.
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
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. The Statement 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 the Statement 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. The Statement 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.
Management has not fully assessed the impact of adopting this standard, however,
management does not expected a material impact on earnings, financial condition,
or equity upon adoption of Statement No. 142.
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.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Incorporated herein by reference from Item 2, of this quarterly report on
Form 10-Q
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None.
25
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: August 10, 2001 /s/ MARVIN N. SCHOENHALS
-----------------------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: August 10, 2001 /s/ MARK A. TURNER
-----------------------------------------------
Mark A. Turner
Chief Operating Officer
and Chief Financial Officer
26