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, 2002
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16668
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WSFS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19801
- ------------------------------------------ -------------------
(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 August 6, 2002:
Common Stock, par value $.01 per share 9,087,882
- -------------------------------------- -------------------
(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, 2002 and 2001 (Unaudited)...................................... 3
Consolidated Statement of Condition as of June 30, 2002
(Unaudited) and December 31, 2001............................................. 5
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 (Unaudited)............................................ 6
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 2002 and 2001 (Unaudited)............................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations..................................................... 18
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 33
----------------------------------------------------------
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350........... 34
(b) None.
Signatures .............................................................................. 35
2
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended June 30, Six months ended June 30,
----------------------------- ----------- ------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In Thousands, Except per Share data)
Interest income:
Interest and fees on loans...................... $ 20,173 $ 20,392 $ 40,159 $ 40,756
Interest on mortgage-backed securities.......... 2,186 2,630 3,817 5,503
Interest and dividends on investment securities. 218 286 455 582
Interest on investments in reverse mortgages.... 4,103 3,150 11,097 4,934
Other interest income........................... 201 538 547 1,153
---------- ---------- ----------- ----------
26,881 26,996 56,075 52,928
---------- ---------- ----------- ----------
Interest expense:
Interest on deposits............................ 2,896 6,986 6,142 15,040
Interest on Federal Home Loan Bank advances..... 4,603 3,347 9,131 6,553
Interest on federal funds purchased and securities
sold under agreement to repurchase......... 714 835 1,250 1,644
Interest on Trust Preferred borrowings.......... 850 804 1,486 1,768
Interest on other borrowings ................... 101 85 201 212
---------- ---------- ----------- ----------
9,164 12,057 18,210 25,217
---------- ---------- ----------- ----------
Net interest income.................................. 17,717 14,939 37,865 27,711
Provision for loan losses............................ 504 400 1,211 692
---------- ---------- ----------- ----------
Net interest income after provision for loan losses.. 17,213 14,539 36,654 27,019
---------- ---------- ----------- ----------
Other income:
Loan servicing fee income ...................... 768 770 1,559 1,395
Deposit service charges......................... 2,186 2,169 4,211 4,101
Credit/debit card and ATM income ............... 2,052 1,737 3,700 3,210
Gain on sales of loans ......................... 13,750 4,125 25,413 7,001
Other income.................................... 650 572 1,196 1,061
---------- ---------- ----------- ----------
19,406 9,373 36,079 16,768
---------- ---------- ----------- ----------
Other expenses:
Salaries, benefits and other compensation....... 12,590 8,556 24,838 16,076
Equipment expense............................... 1,201 1,017 2,394 1,883
Data processing and operations expenses......... 947 903 1,842 1,832
Occupancy expense............................... 1,217 1,222 2,335 2,426
Marketing expense............................... 454 398 890 815
Professional fees............................... 1,254 430 2,128 857
Net costs of assets acquired through foreclosure 23 27 53 72
ATM fraud (recovery) loss....................... (33) (53) (231) 368
In-store branch net write off................... - 1,114 - 1,114
Other operating expense......................... 2,431 3,020 5,111 5,187
---------- ---------- ----------- ----------
20,084 16,634 39,360 30,630
---------- ---------- ----------- ----------
Income from continuing operations before
minority interest, taxes and cumulative effect
of change in accounting principle 16,535 7,278 33,373 13,157
Less minority interest............................... 3,362 - 6,048 -
---------- ----------- ----------- -----------
Income from continuing operations before taxes and
cumulative effect of change
in accounting principle.................... 13,173 7,278 27,325 13,157
Income tax provision................................. 4,901 2,327 10,178 4,211
---------- ---------- ----------- ----------
Income from continuing operations before cumulative
effect of change in accounting principle... 8,272 4,951 17,147 8,946
Cumulative effect of change in accounting principle,
net of $469,000 in tax.................... - - 703 -
----------- --------- ----------- ----------
Income from continuing operations ................... 8,272 4,951 17,850 8,946
Loss on discontinued operations of businesses
held-for-sale.............................. (351) (245) (503) (520)
---------- ---------- ----------- ----------
Net income........................................... $ 7,921 $ 4,706 $ 17,347 $ 8,426
========== ========== =========== ==========
3
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(In Thousands, Except per Share data)
Basic earnings per share:
Income from continuing operations before
cumulative effect of
change in accounting principle ............... $ 0.91 $ 0.51 $ 1.88 $ 0.90
Cumulative effect of change in accounting principle,
net of tax.................................... - - 0.08 -
-------- -------- -------- --------
Income from continuing operations ................... 0.91 0.51 1.96 0.90
Loss on discontinued operations of businesses
held-for-sale................................. (0.04) (0.03) (0.06) (0.05)
-------- -------- -------- --------
Net income .......................................... $ 0.87 $ 0.48 $ 1.90 $ 0.85
======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations before
cumulative effect of
change in accounting principle ............... $ 0.88 $ 0.50 $ 1.82 $ 0.89
Cumulative effect of change in accounting
principle, net of tax......................... - - 0.08 -
-------- -------- -------- --------
Income from continuing operations ................... 0.88 0.50 1.90 0.89
Loss on discontinued operations of businesses
held-for-sale................................. (0.04) (0.02) (0.05) (0.05)
-------- -------- -------- --------
Net income .......................................... $ 0.84 $ 0.48 $ 1.85 $ 0.84
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
Assets (In Thousands)
Cash and due from banks................................................ $ 134,295 $ 104,813
Federal funds sold and securities purchased under agreements to resell. 45,100 65,779
Interest-bearing deposits in other banks............................... 669 28,360
Investment securities held-to-maturity................................. 11,677 12,396
Investment securities available-for-sale............................... - 1,798
Mortgage-backed securities held-to-maturity............................ 51,135 70,285
Mortgage-backed securities available-for-sale.......................... 91,738 291,439
Investments of businesses held-for-sale................................ 288,333 -
Investment in reverse mortgages, net................................... 36,018 33,939
Loans held-for-sale.................................................... 87,168 84,741
Loans, net of allowance for loan losses of $21,283 at June 30, 2002
and $21,597 at December 31, 2001................................... 1,014,174 1,030,631
Loans of businesses held-for-sale, net of allowance for loan losses
of $338 at June 30, 2002........................................... 36,330 -
Stock in Federal Home Loan Bank of Pittsburgh, at cost................. 23,250 28,750
Assets acquired through foreclosure.................................... 1,005 432
Premises and equipment................................................. 14,661 16,438
Accrued interest and other assets...................................... 22,102 28,824
Other assets of businesses held-for-sale............................... 7,414 -
Loans, operating leases and other assets of discontinued operations.... 78,708 115,295
----------- ----------
Total assets........................................................... $ 1,943,777 $1,913,920
=========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand......................................... $ 176,605 $ 171,801
Money market and interest-bearing demand........................... 94,859 327,635
Savings............................................................ 311,541 313,246
Time............................................................... 246,724 303,059
Jumbo certificates of deposit - retail............................. - 9,695
----------- ----------
Total retail deposits............................................ 829,729 1,125,436
Jumbo certificates of deposit - other.............................. 12,905 12,334
Brokered certificates of deposit................................... - 8,347
----------- ----------
Total deposits excluding businesses held-for-sale................ 842,634 1,146,117
Deposits of businesses held-for-sale............................... 321,356 -
----------- ----------
Total deposits.................................................. 1,163,990 1,146,117
Federal funds purchased and securities sold under agreements
to repurchase...................................................... 94,000 45,000
Federal Home Loan Bank advances........................................ 460,000 520,000
Trust Preferred borrowings............................................. 50,000 50,000
Other borrowed funds................................................... 36,843 30,480
Accrued expenses and other liabilities................................. 15,930 16,519
Other liabilities of businesses held-for-sale.......................... 1,390 -
----------- ----------
Total liabilities...................................................... 1,822,153 1,808,116
----------- ----------
Minority Interest...................................................... 6,531 5,801
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding............................................. - -
Common stock $.01 par value, 20,000,000 shares authorized; issued
14,829,251 at June 30, 2002 and 14,823,651 at December 31, 2001.... 148 148
Capital in excess of par value......................................... 59,189 59,079
Accumulated other comprehensive income ................................ 2,951 3,146
Retained earnings ..................................................... 124,480 107,950
Treasury stock at cost, 5,745,269 shares at June 30, 2002 and 5,677,169
shares at December 31, 2001 ....................................... (71,675) (70,320)
----------- ----------
Total stockholders' equity............................................. 115,093 100,003
----------- ----------
Total liabilities, minority interest and stockholders' equity.......... $ 1,943,777 $1,913,920
=========== ==========
The accompanying notes are an integral part of these financial statements.
5
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
2002 2001
----------- ------------
(Unaudited)
(In Thousands)
Operating activities:
Net income ................................................................. $ 17,347 $ 8,426
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Provision for loan, lease and residual value losses..................... 1,357 845
Depreciation, accretion and amortization ............................... 3,622 1,750
Decrease (increase) in accrued interest receivable and other assets..... 1,304 (1,769)
Increase in accrued interest receivable and other assets of businesses
held-for-sale........................................................ (1,634) -
Origination of loans held-for-sale...................................... (654,796) (227,924)
Proceeds from sales of loans held-for-sale.............................. 647,971 215,883
Increase in accrued interest payable and other liabilities.............. 567 4,289
Increase in accrued interest payable and other liabilities of
businesses held-for-sale............................................. 197 -
Increase in reverse mortgage capitalized interest, net ................. (12,263) (4,852)
Minority interest in net income(loss)................................... 4,355 (1,500)
Other, net ............................................................. 76 71
----------- ----------
Net cash provided by or (used for) operating activities..................... 8,103 (4,781)
----------- ----------
Investing activities:
Net decrease (increase) in interest-bearing deposits in other banks ........ 8,696 (7,155)
Maturities of investment securities ........................................ 843 11,429
Sales of investment securities available-for-sale .......................... 1,485 500
Repayments of mortgage-backed securities held-to-maturity .................. 18,893 14,241
Repayments of mortgage-backed securities available-for-sale ................ 18,651 88,376
Purchases of mortgage-backed securities available-for-sale.................. (59,093) (151,157)
Net increase in investments of businesses held-for-sale..................... (30,710) -
Repayments of reverse mortgages ............................................ 14,564 8,823
Disbursements for reverse mortgages ........................................ (3,209) (3,627)
Sales of loans.............................................................. 5,986 -
Purchase of loans .......................................................... (22,868) (7,181)
Net increase in loans ...................................................... (644) (18,280)
Net increase in loans of businesses held-for-sale.......................... (302) -
Net decrease in stock of Federal Home Loan Bank of Pittsburgh............... 5,500 8,700
Receipts from investment in real estate .................................... - 270
Sales of assets acquired through foreclosure, net........................... 288 481
Premises and equipment, net................................................. (1,517) (1,458)
----------- ----------
Net cash used for investing activities...................................... (43,437) (56,038)
----------- ----------
Financing activities:
Net increase in demand and savings deposits................................. 21,158 101,059
Net decrease in time deposits .............................................. (19,965) (53,632)
Net increase in deposits of businessess held-for-sale....................... 23,186 -
Receipts from FHLB borrowings .............................................. 391,000 165,000
Repayments of FHLB borrowings............................................... (451,000) (120,000)
Receipts from reverse repurchase agreements................................. 95,000 -
Repayments of reverse repurchase agreements................................. (80,000) -
Net increase in federal funds purchased..................................... 34,000 -
Repayments of capital leases................................................ (142) (56)
Dividends paid on common stock.............................................. (817) (802)
Issuance of common stock ................................................... 110 6
Purchase of treasury stock, net of reissuance............................... (1,355) (12,944)
Minority interest........................................................... (3,625) (27)
----------- ----------
Net cash provided by financing activities................................... 7,550 78,604
----------- ----------
(Decrease) increase in cash and cash equivalents from continuing operations. (27,784) 17,785
Change in net assets from discontinued operations .......................... 36,587 38,800
Cash and cash equivalents at beginning of period ........................... 170,592 91,349
----------- ----------
Cash and cash equivalents at end of period ................................. $ 179,395 $ 147,934
=========== ==========
6
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Six Months Ended June 30,
--------------------------------------
2002 2001
----------- ----------
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid for interest ..................................................... $ 19,698 $ 29,219
Cash paid for income taxes, net............................................. 10,024 2,131
Loans transferred to assets acquired through foreclosure ................... 872 507
Net change in unrealized (losses) gains on securities available-for-sale,
net of tax............................................................ (195) 2,285
Investments transferred to businesses held-for-sale......................... 260,160 -
Loans, net of allowance transferred to businesses held-for-sale............. 36,135 -
Other assets transferred to businesses held-for-sale........................ 5,780 -
Deposits transferred to businesses held-for-sale............................ 298,170 -
Other liabilities transferred to businesses held-for-sale................... 1,193 -
The accompanying notes are an integral part of these financial statements.
7
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the parent
company, WSFS Capital Trust I, WSFS and its wholly-owned subsidiaries, WSFS
Investment Group, Inc., formerly 838 Investment Group, Inc., and Star States
Development Company (SSDC) as well as non-wholly-owned, but majority controlled
subsidiaries, Wilmington Finance, Inc. (WF), formerly Wilmington National
Finance, Inc., and CustomerOne Financial Network, Inc. (C1FN). See Note 5 for
further discussion of non-wholly-owned subsidiaries.
As discussed in Note 3 of the financial statements, the results of WSFS
Credit Corporation (WCC), the Corporation's wholly owned indirect auto financing
and leasing subsidiary, are presented as discontinued operations, and presented
separately for all periods.
As discussed in Note 4 of the financial statements, in June 2002,
agreements were signed to sell C1FN and the related interest in WSFS' Everbank
Division. In addition, in June 2002 WSFS signed an agreement for the sale of its
United Asian Bank Division. In accordance with Statement of Financial Accounting
Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the major classes of assets and liabilities of C1FN/Everbank and United
Asian Bank Division are presented separately on the statement of condition for
June 30, 2002, the statement of cash flow for the six months ended June 30,
2002. Losses from these businesses have been presented as Losses of businesses
held-for-sale, and presented separately for all periods. The average balance
sheet is presented with all major assets and liabilities displayed separately.
The consolidated statement of condition at June 30, 2002, the consolidated
statement of operations for the three and six months ended June 30, 2002 and
2001 and the consolidated statement of cash flows for the six months ended June
30, 2002 and 2001 are unaudited and include all adjustments solely of a normal
recurring nature which management believes are necessary for a fair
presentation. Certain reclassifications have been made to 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, 2002 are not
necessarily indicative of the expected results for the full year ending December
31, 2002. Such statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and applicable to
the banking industry. The accompanying unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Corporation's 2001 Annual Report.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
2002 2001 2002 2001
------- ------- ------- --------
(Dollars in Thousands)
Numerator:
Income from continuing operations before cumulative effect of change
in accounting principle.................................................. $8,272 $4,951 $17,147 $8,946
Cumulative effect of change in accounting principle, net of $469,000 in tax. - - 703 -
------ ------ ------- -------
Income from continuing operations........................................... 8,272 4,951 17,850 8,946
Loss on businesses held-for-sale............................................ (351) (245) (503) (520)
------ ------ ------- -------
Net income ................................................................. $7,921 $4,706 $17,347 $ 8,426
====== ====== ======= =======
Denominator:
Denominator for basic earnings per share - weighted average shares.......... 9,097 9,764 9,115 9,940
Employee stock options...................................................... 364 75 286 67
------ ------ ------- -------
Denominator for diluted earnings per share - adjusted weighted average
shares and assumed exercise ............................................. 9,461 9,839 9,401 $10,007
====== ====== ======= =======
8
2. EARNINGS PER SHARE (continued)
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
2002 2001 2002 2001
------- ------- ------- --------
(Dollars in Thousands)
Earnings per share:
- ------------------
Basic:
Income from continuing operations before cumulative effect of change
in accounting principle................................................... $ 0.91 $ 0.51 $ 1.88 $ 0.90
Cumulative effect of change in accounting principle, net of tax ............ - 0.08 - -
------ ------ ------ ------
Income from continuing operations........................................... 0.91 0.51 $ 1.96 0.90
Loss on businesses held-for-sale............................................ (0.04) (0.03) (0.06) (0.05)
------ ------ ------ ------
Net income ................................................................. $ 0.87 $ 0.48 $ 1.90 $ 0.85
====== ====== ====== ======
Diluted:
Income from continuing operations before cumulative effect of change
in accounting principle................................................... $ 0.88 $ 0.50 $ 1.82 $ 0.89
Cumulative effect of change in accounting principle, net of tax ............ - - 0.08 -
------ ------ ------ ------
Income from continuing operations........................................... 0.88 0.50 1.90 0.89
Loss on businesses held-for-sale............................................ (0.04) (0.02) (0.05) (0.05)
------ ------ ------ ------
Net income ................................................................. $ 0.84 $ 0.48 $ 1.85 $ 0.84
====== ====== ====== ======
Outstanding common stock equivalents having no dilutive effect.............. - 464 - 526
3. Discontinued Operations of a Business Segment
The operations of WSFS Credit Corporation (WCC) were discontinued in
December 2000. Accordingly, the results of WCC's operations are treated as
Discontinued Operations of a Business Segment, and shown separately from the
results of continuing operations of the Corporation. WCC, which had 3,414 lease
contracts and 1,406 loan contracts at June 30, 2002, no longer accepts new
applications but continues to service existing loans and leases until their
maturity. Management estimates that substantially all loan and lease contracts
will mature by the end of December 2004.
In December 2000, the Corporation established a $6.2 million pretax reserve
to absorb expected future net losses of WCC. As used vehicle values continued to
deteriorate in 2001, $3.1 million was added to this reserve in December of 2001
for the expected losses in the business during its wind-down period. Actual
residual losses for the first six months of 2002 have been reasonably consistent
with the Company's expectations at December 31, 2001.
Due to the uncertainty of a number of factors, including residual values,
interest rates, credit quality and operating costs, this reserve is reevaluated
quarterly with adjustments, if necessary, recorded as income/losses on wind-down
of discontinued operations. At June 30, 2002, there were approximately $63
million of contract residuals outstanding for which management has estimated
approximately $9.6 million in future losses. Management has inherently provided
for these losses through a combination of expected positive operating results of
WCC (excluding residual losses), reserves for residual losses and reserves for
discontinued operations.
The following chart presents the operating leases, loans and other assets
of discontinued operations at June 30, 2002 and December 31, 2001:
At June 30, At December 31,
2002 2001
------------ ------------
(In Thousands)
Vehicles under operating leases, net of reserves ..... $ 71,020 $102,288
Loans ................................................ 11,253 16,131
Other noncash assets ................................. 2,180 3,241
Less:
Reserve for losses of discontinued operations(1).... 5,745 6,365
-------- --------
Loans, operating leases and other assets of
discontinued operations ............................ $ 78,708 $115,295
======== ========
(1) Reduction is due to a $600,000 transfer to the lease residual loss reserve
to cover current residual losses experienced.
9
The following table presents the net income from discontinued operations
for the three and six months ended June 30, 2002 and 2001:
For the three months For the six months
ended June 30, ended June 30,
-------------------------- ----------------------
2002 2001 2002 2001
--------- ---------- -------- --------
(In Thousands)
Interest income........................ $ 267 $ 490 $ 569 $ 1,049
Allocated interest expense (1)......... 647 2,606 1,402 5,598
------ ------- ------- -------
Net interest expense................... (380) (2,116) (833) (4,549)
Loan and lease servicing fee income ... 88 57 220 206
Rental income on operating leases, net. 615 2,308 1,225 4,986
Other income........................... 2 6 6 10
------ ------- ------- -------
Net revenues 325 255 618 653
Other operating expenses............. 304 438 638 964
------ ------- ------- -------
Income (loss) before taxes............. 21 (183) (20) (311)
(Credit) charge to reserve for losses
on discontinued operations .......... (21) 273 20 401
Income tax provision .................. - 90 - 90
------ ------- ------ -------
Income from discontinued operations.... $ - $ - $ - $ -
====== ======= ====== =======
(1) Allocated interest expense for the three and six months ended June 30, 2001
was based on the Company's annual average wholesale borrowings rate of
5.96% and 6.19%, respectively, which approximated a marginal funding cost
of this business. Beginning in December 2001, the allocated interest
expense is based on a direct matched-maturity funding of the net non-cash
assets of discontinued operations. The average borrowing rate for the three
and six months ended June 30, 2002 was 2.79% and 2.78%, respectively.
4. INVESTMENTS IN NON-WHOLLY-OWNED SUBSIDIARIES
The Corporation consolidates two non-wholly-owned subsidiaries, CustomerOne
Financial Network, Inc. (C1FN) and Wilmington Finance, Inc. (WF).
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999, WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. Consistent with the manner in which the segment is managed
and operated, information in this report labelled "C1FN" generally represent the
profoma combined results of C1FN and WSFS' Everbank Division (the
C1FN/Everbank.segment) WSFS originally invested $5.5 million, which through
cumulative operating losses, has diminished to a book value of $1.8 million at
June 30, 2002 including approximately $1 million in goodwill. Currently, WSFS
has a 21% ownership interest in C1FN, and warrants to acquire additional
ownership under certain circumstances, but exercises majority control through a
voting trust. Therefore, the results of C1FN are consolidated into WSFS. C1FN
was charged a service fee by WSFS of $940,000 and $1.1 million for the three
months and six months ended June 30, 2002, respectively, compared to $120,000
and $240,000 for the comparable periods in 2001. This service fee is partially
eliminated in consolidation. Under an agreement with C1FN, $500,000 of these
fees as of June 30, 2002 are deferred pending certain events. As a result, WSFS
has fully reserved for this amount pending further clarity that these amounts
will be received.
In June 2002, WSFS entered into an agreement with a privately held holding
company of a federally chartered savings bank for the sale of C1FN and related
interests in WSFS' Everbank Division. See Note 9 to the financial statements for
further discussion.
WF is a 51% owned subsidiary and began operations in December 1999. WSFS
holds warrants to purchase an additional 14% ownership interest for
approximately $850,000. WF is a mortgage banker generally dealing in
higher-grade subprime loans. WF solicits and originates its loans primarily as a
result of referrals through independent mortgage brokers, although
direct-to-consumer originations accounted for 4.9% and 5.3% of total
originations for the three and six months ended June 30, 2002, respectively,
compared to 8.1% and 10.3% for the respective periods in 2001. WF originates all
loans and sells its originations to investors, typically well known regional
banks or national finance companies, on a whole loan,
10
for cash premiums only (no securitizations). Mortgage loans are sold with very
limited recourse beyond the standard market representations and warranties.
WF has a centralized secondary market function which analyzes the product
needs of the various end investors, consolidates the investors' underwriting
guidelines into the product parameters that WF offers to its brokers and
ultimately sells WF's originations to the end investors. Between the time loans
are originated and sold, they are warehoused on WF's balance sheet. WSFS
provides temporary financing for the loans through a warehouse line of credit
with an adjustable rate generally based on the one-month FHLB Advance rate plus
90 basis points. This line is limited to $135 million but can increase to $150
million on a temporary basis. At June 30, 2002, $80.3 million was outstanding on
this line. The average age of unsold loans at June 30, 2002 was 9 days compared
to 8 days at June 30, 2001. The percentage of loans in the warehouse that were
45 days old or greater were 2.33% at June 30, 2002 and 0.74% at June 30, 2001.
WF's total assets at June 30, 2002 and 2001 were $95.9 million and $35.4
million, respectively. For the three and six months ended June 30, 2002, WF
added $2.2 million and $3.9 million, respectively, to the net income of the
Corporation, compared to $814,000 and $1.0 million for the respective periods in
2001. At June 30, 2002, WSFS also held $3.0 million in preferred stock of WF.
WSFS purchased $1.4 million of WF loans during the six months ended June 30,
2002, as compared to $17.9 million for the same period in 2001.
The following table provides certain additional WF production and sales
statistics for the periods indicated:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ------------ ----------- ----------
(Dollars in Thousands)
Origination Dollars $ 363,206 $ 136,767 $ 639,996 $ 219,332
Origination Units 3,026 1,093 5,256 1,859
Average mortgage balance $ 120,257 $ 125,132 $ 121,885 $ 117,783
Weighted average note rate 8.50% 8.44% 8.50% 8.77%
Weighted average CLTV 1 83% 79% 82% 80%
Weighted average credit score 630 655 636 648
Percentage of second liens 9% 7% 8% 8%
Sales $338,444 $ 129,098 $ 629,189 $ 205,442
Sales margin 4.03% 3.79% 4.02% 3.82%
Average days of loan in warehouse 24 27 25 29
1 Combined Loan-To-Value represents the mortgage amount plus any senior liens
(or junior liens if also originated by WF) divided by the appraised value of
the property.
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Corporation has an interest-rate cap with a notional amount of $50
million, which limits 3-month LIBOR to 6% for the ten years ending December 1,
2008. The cap is being used to hedge the cash flows on $50 million in trust
preferred floating rate debt. The cap was recorded at the date of purchase in
other assets, at a cost of $2.4 million. The fair market value (FMV), which at
inception is equal to the cost, has two components: the intrinsic value and the
time value of the option. The cap is marked-to-market quarterly, with changes in
the intrinsic value of the cap, net of tax, included in a separate component of
other comprehensive income and changes in the time value of the option included
directly in interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, is expensed in the period in which ineffectiveness
is determined. It has been determined that the hedge is highly effective and can
reasonably be expected to remain so. Management is not aware of any events that
would result in the reclassification into earnings of gains and losses that are
currently reported in accumulated other comprehensive income except for the
change in the FMV of the interest rate cap, which pertains to the time value of
the hedging instrument. The fair value is estimated using a standard option
model, affirmed by quoted prices for similar instruments.
11
Everbank enters into short-term forward exchange contracts to provide
an effective fair value hedge on the foreign currency denominated deposits from
fluctuations that may occur in world currency markets. At June 30, 2002 and
2001, Everbank had entered into such contracts with a notional amount of $91.5
million and $53.1 million, respectively. During the six months ended June 30,
2002 and 2001, the expense associated with these hedging contracts was almost
entirely offset by changes in the fair value of the world currency denominated
deposits. There was no material impact on other income.
The following depicts the change in fair market value of the Company's
derivatives:
2002 2001
------------------------------ -------------------------------------
At At At At
January 1, Change June 30, January 1, Change June 30,
---------- -------- -------- ---------- ---------- ----------
(In Thousands)
Interest Rate Cap:
-----------------
Intrinsic value (1)......... $ 589 $ (544) $ 45(1) $ 193 $ 632 $ 825(1)
Time value (2).............. 1,945 (340)(2) 1,605 1,804 200(2) 2,004
-------- ------ ------- ------- ------- -------
Total....................... $ 2,534 $ (884) $ 1,650 $ 1,997 $ 832 $ 2,829
======= ====== ======= ======= ======= =======
Foreign Exchange Contracts
--------------------------
Time Value.................. $ (395) $4,833 $ 4,438 $ 1,385 $ (2,499) $(1,114)
======= ====== ======= ======= ======== =======
(1) Included in other comprehensive income, net of taxes.
(2) Included in interest expense on the hedged item (trust preferred
borrowings).
On July 1, 2002, the Corporation redesignated the interest rate cap. As a
result, beginning July 1, 2002, the entire change in market value of the cap is
expected to be recognized in other comprehensive income with a portion
reclassified into earnings according to the value of the instrument's individual
quarterly caplets. Caplets are defined as the series of caps that limit the
interest rate of particular periods. This redesignation provides a more
systematic method for amortizing the cost of the cap against earnings.
6. COMPREHENSIVE INCOME
The following schedule reconciles net income to total comprehensive income
as required by SFAS No. 130:
For the three months For the six months
ended June 30, ended June 30,
-------------------- -------------------
2002 2001 2002 2001
-------- --------- -------- --------
Net income .......................................... $ 7,921 $ 4,706 $ 17,347 $ 8,426
Other Comprehensive Income:
Net unrealized holding gains on securities
available-for-sale arising during the period,
net of taxes..................................... 600 170 173 1,874
Net unrealized holding (losses) gains arising
during the period on derivatives used for
cash flow hedge, net of taxes..................... (529) 455 (354) 411
Reclassification adjustment for gains included in net
income, net of taxes.............................. (13) - (14) -
------- ------- -------- --------
Total comprehensive income........................... $ 7,979 $ 5,331 $ 17,152 $ 10,711
======= ======= ======== ========
12
7. TAXES ON INCOME
The Corporation accounts for income taxes in accordance with SFAS No. 109,
which requires the recording of deferred income taxes that reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Management has assessed substantial valuation allowances on the deferred
income taxes due to, among other things, limitations imposed by Internal Revenue
Code and uncertainties, including the timing of settlement and realization of
these differences. The IRS is in the process of finalizing examinations of the
Corporation's federal tax returns for the years through December 31, 2000.
Valuation allowances are evaluated periodically based on, among other things,
the occurrence or non-occurence of events, including results from tax authority
examinations and economic activities, which impact the likelihood that the
deferred tax benefits will be realized.
13
8. SEGMENT INFORMATION
Under the definition of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, the Corporation had two operating segments
during the three and six months ended June 30, 2002 and 2001: WSFS and WF. WF is
not wholly-owned, but is a majority controlled subsidiary. As a majority
controlled subsidiary, it is included in consolidated financial statements,
including segment reporting. Generally, reportable segments are business units
that are managed separately, operate under different regulations and offer
different services to distinct customer bases. The Corporation evaluates
performance based on pretax ordinary income and allocates resources based on
these results.
The WSFS segment provides financial products to consumer and commercial
customers within its geographical footprint through its branch network. WF, a
51% owned subsidiary, is engaged in sub-prime home equity mortgage banking. WF
conducts activity on a national level and aggregates loans primarily through
brokers and sells them to investors. Because C1FN is classified as a business
held-for-sale, it is no longer considered a segment. For a further discussion of
C1FN, see Note 9 of the financial statements.
Segment information for the three and six months ended June 30, 2002
follow:
For the three months ended June 30,
-----------------------------------------------------------------------
2002 2001
------------------------------------ ---------------------------------
(In Thousands)
WSFS WF Total WSFS WF Total
---- -- ----- ---- -- -----
External customer revenues:
Interest income $ 24,905 $ 1,976 $ 26,881 $ 26,182 $ 814 $ 26,996
Other income 5,735 13,671 19,406 4,815 4,558 9,373
---------- --------- ---------- ---------- --------- ---------
Total external customer revenues 30,640 15,647 46,287 30,997 5,372 36,369
---------- --------- ---------- ---------- --------- ---------
Intersegment revenues:
Interest income 605 5 610 532 22 554
Other income - 24 24 - 320 320
---------- -------- ---------- --------- -------- --------
Total Intersegment revenues 605 29 634 532 342 874
---------- --------- ---------- ---------- --------- ---------
Total revenue 31,245 15,676 46,921 31,529 5,714 37,243
External customer expenses:
Interest expense 9,164 - 9,164 12,057 - 12,057
Other expenses 11,467 8,057 19,524 12,436 3,749 16,185
Other depreciation and amortization 910 154 1,064 773 76 849
---------- --------- ---------- ---------- --------- ---------
Total external customer expenses 21,541 8,211 29,752 25,266 3,825 29,091
---------- --------- ---------- ---------- --------- ---------
Intersegment expenses:
Interest expense 5 605 610 22 532 554
Other expenses 24 - 24 320 - 320
---------- --------- ---------- ---------- --------- ---------
Total Intersegment expenses 29 605 634 342 532 874
Total expenses 21,570 8,816 30,386 25,608 4,357 29,965
---------- --------- ---------- ---------- --------- ---------
Income before minority interest and taxes $ 9,675 $ 6,860 $ 16,535 $ 5,921 $ 1,357 $ 7,278
---------- --------- ---------- ---------- --------- ---------
Less minority interest 3,362 -
Provision for income taxes 4,901
2,327
(Loss) from businesses held-for-sale (351) (245)
---------- ---------
Consolidated net income $ 7,921 $ 4,706
---------- ---------
14
For six months ended June 30,
----------------------------------------------------------------------
2002 2001
----------------------------------- ----------------------------------
(In Thousands)
WSFS WF Total WSFS WF Total
---- -- ----- ---- -- -----
External customer revenues:
Interest income $ 52,348 $ 3,727 $ 56,075 $ 51,527 $ 1,401 $ 52,928
Other income 10,764 25,315 36,079 9,419 7,349 16,768
--------- -------- --------- -------- -------- --------
Total external customer revenues 63,112 29,042 92,154 60,946 8,750 69,696
--------- -------- --------- -------- -------- --------
Intersegment revenues:
Interest income 1,207 11 1,218 951 36 987
Other income - 78 78 - 320 320
--------- -------- --------- -------- -------- --------
Total intersegment revenues 1,207 89 1,296 951 356 1,307
--------- -------- --------- -------- -------- --------
Total revenue 64,319 29,131 93,450 61,897 9,106 71,003
External customer expenses:
Interest expense 18,210 - 18,210 25,217 - 25,217
Other expenses 23,228 15,294 38,522 23,298 6,337 29,635
Other depreciation and
amortization 1,761 288 2,049 1,543 144 1,687
--------- -------- --------- -------- -------- --------
Total external customer expenses 43,199 15,582 58,781 50,058 6,481 56,539
--------- -------- --------- -------- -------- --------
Intersegment expenses:
Interest expense 11 1,207 1,218 36 951 987
Other expenses 78 - 78 320 - 320
--------- -------- --------- -------- -------- --------
Total intersegment expenses 89 1,207 1,296 356 951 1,307
--------- -------- --------- -------- -------- --------
Total expenses 43,288 16,789 60,077 50,414 7,432 57,846
Income (loss) before minority
interest, taxes and cumulative
effect of change in accounting
principle $ 21,031 $ 12,342 $ 33,373 $ 11,483 $ 1,674 $13,157
--------- -------- --------- -------- -------- --------
Less minority interest 6,048 -
Provision for income taxes 10,178 4,211
Cumulative effect of change in accounting
principle 703 -
(Loss) on businesses held for sale (503) (520)
--------- --------
Consolidated net income $ 17,347 $ 8,426
========= ========
- --------------------------------------------------------------------------------
At June 30, 2002 At June 30, 2001
--------------------------------- ---------------------------------
(In Thousands)
WSFS WF Total WSFS(1) WF Total
---- -- ----- ------- -- -----
Mortgage backed securities $ 142,873 $ - $ 142,873 $ 159,640 $ - $ 159,640
Investments of businesses held for
sale $ 288,333 $ - 288,333 $ 245,054 $ - $ 245,054
Segment Assets $1,937,950 $ 95,908 $2,033,858 $1,833,147 $35,384 $1,868,531
Elimination intersegment receivables (90,081) (35,159)
---------- ----------
Consolidated assets $1,943,777 $1,833,372
========== ==========
---------- ----------
Total deposits $1,163,990 $ - $1,163,990 $1,167,310 $ - $1,167,310
========== ==========
Segment liabilities $1,820,791 $ 84,978 $1,905,769 $1,733,393 $33,447 $1,766,840
Elimination intersegment liabilities (83,616) (31,963)
---------- ----------
Consolidated liabilities $1,822,153 $1,734,877
========== ==========
Capital expenditures $ 242 $ 843 $ 1,085 $ 1,237 $ 221 $ 1,458
(1). For comparative purposes, the 2001 balances for C1FN have been included in
WSFS
15
9. BUSINESSES HELD FOR SALE
In June 2002, agreements were signed with a privately-held holding company
of a federally chartered savings bank for the sale of CustomerOne Financial
Network, Inc. (C1FN) and related interests in WSFS' Everbank Division (the
C1FN/Everbank segment). As contemplated, the transaction would realize a modest
dollar premium to WSFS' current net investment in the C1FN/Everbank segment,
which was $1.8 million at June 30, 2002. The transaction is subject to
regulatory and other approvals as well as closing conditions. The transaction is
expected to close in the fourth quarter of 2002, however, no assurance can be
provided that all conditions to closing will be satisfied. If a sale of C1FN is
not consummated in a timely manner, it is likely that impairment of this
investment and other liquidation costs will result. Consistent with the manner
in which the segment is managed and operated, information in this report
labelled "C1FN" generally represent the profoma combined results of C1FN and
WSFS' Everbank Division (the C1FN/Everbank segment).
Everbank was started with C1FN in the fourth quarter of 1999 as a joint
initiative in internet and branchless banking. Under the terms of its management
agreement with WSFS, C1FN had the right to acquire the deposits and business of
Everbank if C1FN obtained its own depository institution charter. In April 2002,
C1FN concluded that it was likely that sufficient capital could not be raised on
a timely basis and withdrew its application to the Office of Thrift Supervision
(OTS) for a separate thrift charter. In June 2002, the above agreements of sale
were signed.
C1FN/Everbank is currently a relatively low margin business for WSFS. If
sold, WSFS would likely experience an improvement in performance ratios such as
efficiency ratio, net interest margin and return on average assets, as well as
capital ratios, but a modest deterioration in nonperforming assets ratios as a
result of a low level of loans to assets at C1FN/ Everbank.
In addition, in June 2002 WSFS signed an agreement for the sale of its
United Asian Bank Division (UAB). UAB was started in April 2000 as a single
branch to serve the Korean and Asian communities of Elkins Park, Pennsylvania
and the surrounding area. Approximately $10 million in deposits and $15 million
in loans will be included in the transaction, in addition to branch fixed assets
and the lease obligations. The sale, which includes an undisclosed deposit
premium, is expected to close late in the third quarter of 2002. The transaction
is subject to regulatory approvals and other customary closing conditions.
These planned sales are consistent with recent strategic actions of WSFS to
simplify its operations and better focus resources and capital on WSFS' core
bank.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, the major classes of assets and liabilities of
C1FN/Everbank and UAB are presented separately on the statement of condition,
and the average balance sheet as held-for-sale. losses from C1FN/Everbank and
UAB have been classified in a single line item, Loss of businesses held for
sale, and presented separately on the statement of operations for all periods
16
The following presents the balance sheet items for businesses held for
sale. December 2001 information has been included for comparative purposes
only:
At June 30, 2002 At December 31, 2001
-------------------------------- ---------------------------------
C1FN UAB Consolidated C1FN UAB Consolidated
-------- -------- ------------- -------- -------- ------------
(In Thousands)
Investments of businesses held-for-sale ......... $288,333 $ - $288,333 $260,160 $ - $ 260,160
Loans, net of business held-for-sale ............ 18,413 17,917 36,330 23,011 13,124 36,135
Other assets of businesses held-for-sale ........ 7,143 271 7,414 5,484 296 5,780
-------- -------- -------- -------- -------- --------
Total assets of businesses held-for-sale ...... $313,889 $ 18,188 $332,077 $288,655 13,420 $302,075
======== ======== ======== ======== ======== ========
Deposits of businesses held-for-sale ............ $311,448 $ 9,908 $321,356 $287,450 $ 10,720 $298,170
Other liabilities of businesses held-for sale ... 1,390 - 1,390 1,193 - 1,193
-------- -------- -------- -------- -------- --------
Total liabilities of businesses held for sale . $312,838 $ 9,908 $322,746 $288,643 $ 10,720 $299,363
======== ======== ======== ======== ======== ========
The following table presents the net income from businesses held-for-sale
for the three and six months ended June 30, 2002 and 2001:
For the Three Months For the Three Mnths
Ended June 30, 2002 Ended June 30, 2001
-------------------------------- ---------------------------------
C1FN UAB Consolidated C1FN UAB Consolidated
-------- -------- ------------- -------- -------- ------------
(In Thousands)
Interest income............................. $ 2,904 $ 329 $ 3,233 $ 3,783 $ 237 $ 4,020
Interest expense ........................... 1,421 30 1,451 2,679 58 2,737
--------- --------- --------- --------- -------- ---------
Net interest income....................... 1,483 299 1,782 1,104 179 1,283
Provision for loan losses.................. 77 21 98 52 - 52
--------- -------- --------- --------- -------- ---------
Net interest income after provision for
loan losses............................. 1,406 278 1,684 1,052 179 1,231
Other income................................ 1,245 19 1,264 655 22 677
Other expenses ............................. 4,610 321 4,931 2,767 301 3,068
--------- ------- --------- --------- -------- ---------
Income before minority interest and taxes... (1,959) (24) (1,983) (1,060) (100) (1,160)
Minority interest ........................... (1,411) - (1,411) (753) - (753)
--------- ------- --------- --------- -------- ---------
Income before taxes.......................... (548) (24) (572) (307) (100) (407)
Taxes........................................ (211) (10) (221) (122) (40) (162)
--------- ------- --------- --------- -------- ---------
Net income................................... $ (337) $ (14) $ (351) $ (185) $ (60) $ (245)
========= ======= ========= ========= ======== =========
For the Six Months For the Six Mnths
Ended June 30, 2002 Ended June 30, 2001
-------------------------------- ---------------------------------
C1FN UAB Consolidated C1FN UAB Consolidated
-------- -------- ------------- -------- -------- ------------
(In Thousands)
Interest income....................... $ 5,797 $ 619 $ 6,416 $ 7,298 $ 408 $ 7,706
Interest expense ..................... 2,766 64 2,830 5,270 101 5,371
--------- ------- --------- --------- -------- ---------
Net interest income................. 3,031 555 3,586 2,028 307 2,335
Provision for loan losses............ 107 39 146 95 58 153
--------- ------- --------- --------- -------- ---------
Net interest income after provision for
loan losses....................... 2,924 516 3,440 1,933 249 2,182
Other income.......................... 2,256 43 2,299 1,288 44 1,332
Other expenses ....................... 7,529 725 8,254 5,333 546 5,879
--------- ------- --------- --------- -------- ---------
Income before minority interest and taxes (2,349) (166) (2,515) (2,112) (253) (2,365)
Minority interest ..................... (1,692) - (1,692) (1,500) - (1,500)
--------- -------- --------- --------- -------- ---------
Income before taxes.................... (657) (166) (823) (612) (253) (865)
Taxes.................................. (254) (66) (320) (244) (101) (345)
--------- -------- --------- --------- -------- ---------
Net income $ (403) $ (100) $ (503) $ (368) $ (152) $ (520)
========= ======== ========== ========= ======== =========
17
ITEM 2. WSFS FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (WSFS). Founded in 1832, WSFS is one of the oldest financial
institutions in the country. As a federal savings bank which was formerly
chartered as a state mutual savings bank, WSFS enjoys broader revenue powers
than most savings banks. WSFS has served the residents of the Delaware Valley
for 170 years. WSFS is the largest thrift institution headquartered in Delaware
and among the four largest financial institutions in the state on the basis of
total deposits traditionally garnered in-market. The Corporation's primary
market area is the mid-Atlantic region of the United States which is
characterized by a diversified manufacturing and service economy. The long-term
goal of the Corporation is to maintain its high-performing financial services
company status by focusing on its core banking business while occasionally
developing profitable niches in highly-synergistic businesses that have a
strategic fit.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services. Lending
activities are funded primarily with retail deposit services and borrowings. At
June 30, 2002 there were 22 retail banking offices located in northern Delaware
and southeastern Pennsylvania through which WSFS conducted banking operations.
In January 2002, for strategic reasons, WSFS had transferred five in-store
branch offices that were outside of its core footprint to another financial
institution. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC).
The Corporation has two consolidated subsidiaries, WSFS and WSFS Capital
Trust I, and no unconsolidated subsidiaries or off-balance sheet entities.
Fully-owned subsidiaries of WSFS include WSFS Credit Corporation (WCC), which is
engaged primarily in indirect motor vehicle leasing; and WSFS Investment Group,
Inc. (formerly 838 Investment Group), which markets various third party
insurance products and securities through the WSFS' branch system. An additional
subsidiary, Star States Development Company (SSDC), is currently inactive. In
addition to the wholly-owned subsidiaries, the Corporation consolidates two
non-wholly-owned subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and
Wilmington Finance, Inc. (WF), formerly Wilmington National Finance Inc. See
footnote 4 of the financial statements for a further discussion.
As we have reported previously, WSFS continues its strategy to refocus its
capital and resources on its core community banking operation, primarily in the
Delaware market. As a result, we have regularly reviewed our business
investments and asset portfolios to determine whether continued investment in
those lines of business or assets are in the best interest of WSFS and its
stockholders. As a result of such reviews in the recent past, we have
discontinued the operations of our indirect automobile finance business (WSFS
Credit Corporation), exited non-core branches in Pennsylvania and entered into
agreements to sell our United Asian bank Division and the C1FN/Everbank national
branchless banking segment. As part of this strategic focus, we will continue to
review our investments in various businesses, operating lines, and assets, and
may determine to exit or sell our interest in such businesses, operating lines
and assets. Such sales, if they were to occur, may result in WSFS incurring
losses or gains, which may be material in amount.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $29.9 million during the first six months of 2002 to
$1.9 billion at June 30, 2002. Asset growth included $288.3 million in
investments of businesses held-for sale. This category is comprised of the
investments of C1FN Everbank and the United Asian Bank Division. In June 2002
agreements were signed to sell these businesses. In accordance with SFAS No.
144, the major classes of assets and liabilities from these businesses are
presented separately at June 30, 2002, while at December 31, 2001 the assets and
liabilities were displayed in their respective lines. The majority of this
increase came from reclassing mortgage-backed securities to investments of
businesses held-for-sale. As a result mortgage-backed securities decreased
$218.9 million. In addition, loans (including loans of businesses held-for-
18
sale) increased $22.3 million. These increases were partially offset by
decreases of $36.6 million in operating leases, loans and other assets of
discontinued operations, due to run-off in the WCC loan and lease portfolios.
Also, cash and liquid investments decreased by $18.9 million.
Total liabilities increased $14.0 million between December 31, 2001 and
June 30, 2002, to $1.8 billion. Deposits (including deposits of businesses
held-for-sale) increased $17.9 million during the first six months of 2002.
Partially offsetting this increase was the maturity of $8.3 million in brokered
deposits.
Capital Resources
Stockholders' equity increased $15.1 million between December 31, 2001 and
June 30, 2002. This increase reflects net income of $17.3 million for the first
six months of 2002, partially offset by the purchase of 73,100 shares of
treasury stock for $1.4 million ($19.38 per share average). At June 30, 2002,
the Corporation held 5,745,269 shares of its common stock in its treasury at a
cost of $71.7 million. In addition, the Corporation declared cash dividends
totaling $820,000 during the six months ended June 30, 2002.
Below is a table presenting the Bank's consolidated capital position
relative to the minimum regulatory requirements as of June 30, 2002 (dollars in
thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
---------------------- ---------------------- -----------------------
% of % of % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Total Capital
(to Risk-Weighted Assets) ........ $170,264 13.55% $100,526 8.00% $125,657 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 160,211 8.23 77,900 4.00 97,375 5.00
Tangible Capital (to Tangible
Assets) .......................... 160,211 8.23 29,212 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 160,211 12.75 N/A N/A 75,394 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 actions and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Bank's financial statements. At June 30, 2002 the Bank was in compliance
with regulatory capital requirements and was deemed a "well-capitalized"
institution.
Liquidity
In accordance with Thrift Bulletin 77, the OTS requires institutions such
as WSFS to maintain adequate liquidity to assure safe and sound operation. At
June 30, 2002, WSFS' liquidity ratio of cash and qualified assets to net
withdrawable deposits and borrowings due within one year was 4.5% compared to
10.8% at December 31, 2001. Liquidity was higher than usual at December 31, 2001
as a result of prefunding certain borrowings for January 2002. 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,
borrowings and net earnings. In addition, the Corporation's liquidity needs can
be met 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 all these sources are sufficient to maintain the
required and prudent levels of liquidity.
19
INVESTMENT IN REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Since reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence, and the
mortgage balance consists of cash advanced, interest compounded over the life of
the loan and a premium which represents a portion of the shared appreciation in
the home's value, if any, or a percentage of the value of the residence.
The Corporation had a net investment in reverse mortgages of $36.0 million
at June 30, 2002. The Corporation accounts for its investment in reverse
mortgages in accordance with the October 1, 1992 Securities and Exchange
Commission staff memorandum entitled "Accounting for Pools of Uninsured
Residential Real Estate Contracts." The memorandum requires grouping individual
reverse mortgages into "pools" and recognizing income based on the estimated
effective yield of the pool. The Corporation's investment in reverse mortgages
is grouped into two pools based on geography and origination date (the "1993
Pool" and the "1994 Pool"). In computing the effective yield of each, the
Corporation must project cash flows of the pool using actuarial projections of
the life expectancy of the individual contract holders, other estimates of
timing of cash flows and changes in the collateral value of the residence. At
each reporting date, a new economic forecast is made of the cash flows of each
pool of reverse mortgages. The effective yield of each pool is recomputed, and
income is adjusted retroactively and prospectively to reflect the revised rate
of return. Because of this quasi-market-value-based accounting, the recorded
value of reverse mortgage assets include significant risk associated with both
estimations and real estate market conditions, and therefore income can vary
significantly from reporting period to reporting period.
As indicated, a projection of future net cash flows requires making
assumptions and estimates about current values and future appreciation of house
values, mortality rates and mobility rates. Assumptions are also made to factor
the time it takes to liquidate the receivable after a maturity event has
occurred. These assumptions are made at a point in time and are based on
historical experiences and expected economic conditions. It should be noted that
reverse mortgages are a relatively new product and therefore only a limited
amount of historical data exists on which to base future expectations. As with
any estimates about the future, these assumptions are subjective, and will
change as market conditions or the portfolio experience dictates. Accordingly,
actual results may differ materially from the assumptions used in the model.
Based on the estimate of the future net cash flows as of the second
quarter, an additional $1.9 million of interest income was recognized
(cumulative "catch up" adjustment.) This was due to the actual experience and
the continued strong performance of the underlying collateral values as well as
faster repayment rates (death and moveout) than previously predicted by the
Corporation's cash flow model. In the second quarter the Corporation also made
changes to certain assumptions regarding future repayment rates and home
appreciation rates. These changes were based on an analysis of WSFS' historical
experience and third party forecasted data. Had these changes not been made,
$3.2 million of additional interest income for the quarter would have been
recognized instead of the $1.9 million.
As discussed, the book value of reverse mortgages is sensitive to a number
of factors including the Corporation's estimate of the following key variables:
o Current Collateral Value
o Future Collateral Appreciation Rate
o Repayment Rate
o Collection Time
Listed below is a discussion of each factor impacting future cash flow
estimates, noting current assumptions, historical experience and management's
best estimate of the sensitivity of the value to a change in the assumption,
presented in tabular form. The market value sensitivities to combined changes in
the assumptions listed below may not necessarily be additive due to the
interdependency of the variables. Also, these sensitivities may not have a
linear extrapolation beyond the sensitivities provided. Finally, sensitivity
tables provided herein, are based on the Corporation's internal models and, as
such, are subject to risks associated with internally generated models.
20
Current Collateral Value Estimates
To assess the current market value of the collateral as of the reporting
date, the Corporation utilizes an "18-month look-back" approach, which
calculates the compounded annualized appreciation rates since origination on the
homes that were actually sold and collected during the previous 18-month period.
This rate is used as a proxy for, and is applied to the remaining houses in the
Pool. The most recent 18-month look-back calculated a 3.13% compounded annual
growth rate of appreciation for the 1994 Pool and a 1.39% compounded annual
growth rate of appreciation for 1993 Pool. The Corporation has experienced a
substantial improvement over the last few quarters in the estimate of current
collateral values from the 18-month look-back approach as a result of the recent
strong residential housing market. The following table illustrates the proforma
pre-tax change to the carrying value of the reverse mortgages when the estimate
of collateral values at June 30, 2002 is adjusted by the noted percentages.
Proforma Adjustment to
Reverse Mortgage Carrying Value
-----------------------------------------------
Change in Current
Collateral Values 1993 Pool 1994 Pool Total
- --------------------------------------------------------------------------------
(Dollars in Millions)
-3% $(.5) $(.6) $(1.1)
-2% (.3) (.4) (.7)
-1% (.2) (.2) (.4)
+1% .2 .2 .4
+2% .3 .4 .7
+3% .5 .6 1.1
Future Collateral Appreciation Rate Estimates
To estimate future home appreciation rates, third party macroeconomic
forecasting firms are utilized in addition to the Corporation's own historical
experience relative to the overall market. Over the long term, the Corporation's
estimates that the 1994 Pool will appreciate at approximately 1% per year and
the 1993 Pool at 0% per year. In the short term, the Corporation uses
assessments of the economic factors that influence housing prices to determine
appreciation rates. Based on current economic factors and outside forecasting
sources, the Corporation is currently forecasting no (0%) appreciation in the
first year forward, a market value decline in year 2 of 5%, and a market value
decline in year 3 of 3% for both pools. The following table shows the proforma
adjustments to carrying value when applying a parallel shift to the current
appreciation rate estimates in all future years.
Proforma Adjustment to
Reverse Mortgage Carrying Value
---------------------------------------------
Change in Annual
Appreciation Rates 1993 Pool 1994 Pool Total
- --------------------------------------------------------------------------------
(Dollars in Millions)
-3% $ (2.0) $ (1.6) $ (3.6)
-2% (1.4) (1.1) (2.5)
-1% (.7) (.6) (1.3)
+1% .7 .6 1.3
+2% 1.5 1.2 2.7
+3% 2.3 1.7 4.0
21
Repayment Rate Estimates
Repayment rates are a combination of mortality rates and mobility (moveout)
rates and together constitute loan "maturity events." For mortality rates the
Corporation uses 85% of the 1980 U.S. Census Bureau mortality tables based on
the ages of homeowners in the portfolio. For the moveout rates, the Corporation
uses its historical experience. The Corporation's recent historical experience
(average of last 5 years' experience) indicates a 12.9% total annual repayment
rate for the 1993 pool and 11.8% total annual repayment rate for the 1994 pool.
Based on this experience the Corporation estimates future repayment rates of 13%
and 11.5%, respectively. A given change in the annual estimated repayment rate
would result in an adjustment to the carrying value as follows:
Proforma Adjustment to
Reverse Mortgage Carrying Value
---------------------------------------------
Change in Annual
Repayment Rate 1993 Pool 1994 Pool Total
- --------------------------------------------------------------------------------
(Dollars in Millions)
-3% $ (1.7) $ (4.5) $ (6.2)
-2% (1.1) (2.9) (4.0)
-1% (.6) (1.4) (2.0)
+1% .5 1.4 1.9
+2% 1.0 2.7 3.7
+3% 1.5 4.0 5.5
Collection Time Estimates
Collection time represents the time it takes to receive cash after a
maturity event. The Corporation's historical experience, measured monthly, has
predominantly varied between seven and thirteen months. Recent experience shows
a favorable trend as a result of the strong housing market. The Corporation's
current estimates are eight months for the 1994 Pool and ten months for 1993
Pool. A given change in the estimated collection time would result in an
adjustment to the carrying value as follows:
Proforma Adjustment to
Change in Reverse Mortgage Carrying Value
---------------------------------------------
Collection Time 1993 Pool 1994 Pool Total
- --------------------------------------------------------------------------------
(Dollars in Millions)
Unfavorable 3 Months $ (.3) $ (1.9) $ (2.2)
Unfavorable 2 Months (.2) (1.3) (1.5)
Unfavorable 1 Months (.1) (.7) (.8)
Favorable 1 Months .1 .7 .8
Favorable 2 Months .2 1.4 1.6
Favorable 3 Months .4 2.0 2.4
22
Portfolio Cash Flows and Carrying Value
In addition to the above Corporation estimated variables, the current book
value of reverse mortgages is sensitive to the assumed discount rate applied to
expected future cash flows estimated from the reverse mortgage portfolios. The
SEC prescribed accounting requires the book value of the portfolio to be
determined by discounting all future cash flow estimates by the internal rate of
return (or "Effective Yield") to be generated by the portfolio (and taking into
account both past actual and future estimated portfolio cash flows). The
annualized Effective Yield for the three months ended June 30, 2002 on the 1993
Pool is 8.14%, while the Effective Yield on the 1994 Pool is 39.45%. The
weighted average yield is approximately 26% and is, by definition, the expected
long-term yield on the portfolio.
Based on the Corporation's current estimates of Current Collateral Value,
Future Collateral Appreciation Rates, Repayment Rates and Collection Times, the
Corporation's cash flow model projects the following net cash flows to result
from its reverse mortgage portfolios in the periods identified.
Net Inflows
-----------------------------------------
1993 Pool 1994 Pool Total
--------- --------- -----
(Dollars in Millions)
Six months ending December 31, 2002 $ 2.6 $ 3.4 $ 6.0
2003......................... 3.0 8.0 11.0
2004......................... 2.1 7.1 9.2
2005......................... 1.9 6.4 8.3
2006......................... 1.8 6.1 7.9
2007-2011.................... 7.1 25.6 32.7
2012-2016.................... 4.0 16.7 20.7
2017-2021.................... 1.7 8.6 10.3
Thereafter................... .7 4.4 5.1
The following table depicts the addition to (reduction of) the $36 million
reverse mortgage carrying value that would result were the expected cash flows
estimated from the Corporation's reverse mortgage portfolios (above) discounted
to the present value at discount rates other than the SEC prescribed
methodology. Market indications of a discount rate on similar instruments
written more recently are estimated to be between 5% and 10%.
Proforma Adjustment to
Reverse Mortgage Carrying Value
----------------------------------------------
Assumed
Discount Rate 1993 Pool 1994 Pool Total
- --------------------------------------------------------------------------------
(Dollars in Millions)
25% $ (6.4) $8.3 $1.9
20% (5.2) 12.6 7.4
15% (3.5) 18.7 15.2
10% (1.1) 27.7 26.6
5% 2.6 42.1 44.7
Based on Company assumptions about funding costs, direct and indirect
operating costs and incremental taxes, reverse mortgages had an impact on the
Corporation of $0.21 per share in the second quarter of 2002 compared to $0.18
per share for the second quarter of 2001. For the six months ended June 30,
2002, reverse mortgages had an impact of $0.61 per share, compared to $0.25 per
share for the same period in 2001.
The Corporation is not originating new reverse mortgages. The average life
of the existing portfolio is estimated to be 7.6 years under current cash flow
assumptions.
23
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets and
past due loans at the dates indicated including businesses held-for-sale for
both periods presented. 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,
2002 2001
-------- ------------
(Dollars in Thousands)
Nonaccruing loans:
Commercial ................................... $2,171 $1,330
Consumer ..................................... 294 306
Commercial mortgage .......................... 928 1,928
Residential mortgage ......................... 3,507 3,618
Construction ................................. 199 351
------ ------
Total nonaccruing loans ........................... 7,099 7,533
Assets acquired through foreclosure ............... 1,005 432
------ ------
Total nonperforming assets ........................ $8,104 $7,965
====== ======
Past due loans:
Residential mortgages ........................ $ 407 $ 88
Commercial and commercial mortgages .......... 473 767
Consumer ..................................... 252 244
------ ------
Total past due loans .............................. $1,132 $1,099
====== ======
Ratios:
Nonaccruing loans to total loans (1) ......... 0.66% 0.72%
Allowance for loan losses to gross loans (1).. 2.01% 2.05%
Nonperforming assets to total assets ......... 0.42% 0.42%
Loan loss allowance to nonaccruing loans (2).. 304.56% 277.77%
Loan and foreclosed asset allowance to total
nonperforming assets (2) ................... 269.51% 265.48%
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased a modest $139,000 during the six months
ended June 30, 2002. The largest increase occurred in nonaccruing commercial
loans which increased $842,000 during the six month period. This increase
reflects the reclassification of several small commercial loans to nonaccruing
status. This increase was partially offset by reductions in the all other
categories of nonaccruing loans. Also during the first half of 2002, an $800,000
nonperforming commercial mortgage was transferred to foreclosed assets.
Following is an analysis of the change in nonperforming assets:
For the Six
Months Ended For the Year Ended
June 30, 2002 December 31, 2001
---------------- ------------------
(In Thousands)
Beginning balance......................................... $ 7,965 $ 8,965
Additions ........................................... 4,628 7,386
Collections.......................................... (2,656) (5,596)
Transfers to accrual/restructured status............. (581) (1,542)
Charge-offs / write-downs............................ (1,252) (1,248)
---------- ---------
Ending balance............................................ $ 8,104 $ 7,965
========== =========
24
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 tool for
achieving its asset/liability management strategies. Management regularly
reviews the interest-rate sensitivity of the Corporation and adjusts the
sensitivity within acceptable tolerance ranges established by management. At
June 30, 2002, interest-earning assets exceeded interest-bearing liabilities
that mature within one year (interest-sensitive gap) by $80.4 million. The
Corporation's interest