UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 November 5, 2001: Common Stock, par value $.01 per share 9,146,482 - -------------------------------------- ------------------------- (Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION FORM 10-Q INDEX <TABLE> <CAPTION> PART I. Financial Information Page ---- <S> <C> <C> Item 1. Financial Statements Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited)...................................... 3 Consolidated Statement of Condition as of September 30, 2001 (Unaudited) and December 31, 2000.................................................. 5 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 (Unaudited)............................................ 6 Notes to the Consolidated Financial Statements for the Three and Nine Months Ended September 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 </TABLE> 2
WSFS FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Unaudited) (Dollars in Thousands, except per share data) <S> <C> <C> <C> <C> Interest income: Interest and fees on loans........................... $ 20,776 $ 20,284 $ 62,076 $ 58,212 Interest on mortgage-backed securities............... 5,777 6,610 17,867 18,705 Interest and dividends on investment securities...... 290 883 1,094 2,433 Interest on investments in reverse mortgages......... 3,324 3,742 8,258 15,461 Other interest income................................ 881 783 2,386 2,202 ----------- ---------- ---------- ---------- 31,048 32,302 91,681 97,013 ----------- ---------- ---------- ---------- Interest expense: Interest on deposits................................. 8,475 12,087 28,885 30,507 Interest on Federal Home Loan Bank advances.......... 4,234 3,128 10,788 11,407 Interest on federal funds purchased and securities sold under agreement to repurchase................. 907 1,191 2,550 3,867 Interest on trust preferred borrowings............... 1,280 699 3,048 2,239 Interest on other borrowed funds..................... 102 146 314 404 ----------- ---------- ---------- ---------- 14,998 17,251 45,585 48,424 ----------- ---------- ---------- ---------- Net interest income.................................. 16,050 15,051 46,096 48,589 Provision for loan losses............................ 746 227 1,591 672 ----------- ---------- ---------- ---------- Net interest income after provision for loan losses.. 15,304 14,824 44,505 47,917 ----------- ---------- ---------- ---------- Other income: Loan servicing fee income ........................... 895 559 2,331 1,587 Deposit service charges.............................. 2,211 1,867 6,390 5,046 Credit/debit card and ATM income .................... 2,001 1,469 5,417 3,963 Securities losses ................................... - - - (2,325) Gain on sale of loans ............................... 5,675 1,420 12,820 1,972 Other income......................................... 930 667 2,853 2,852 ----------- ---------- ---------- ---------- 11,712 5,982 29,811 13,095 ----------- ---------- ---------- ---------- Other expenses: Salaries, benefits and other compensation............ 10,346 8,563 28,732 21,737 Equipment expense.................................... 1,146 1,110 3,323 3,132 Data processing and operations expenses.............. 1,226 956 3,523 4,286 Occupancy expense.................................... 1,337 1,130 3,976 3,111 Marketing expense.................................... 574 624 1,957 2,203 Professional fees.................................... 661 721 1,879 2,213 Net (recovery) costs of assets acquired through foreclosure........................................ (6) 100 65 263 ATM fraud (recovery) losses.......................... (56) - 312 - In-store branch net write off........................ - - 1,114 - Other operating expense.............................. 3,361 3,018 10,215 7,948 ----------- ---------- ---------- ---------- 18,589 16,222 55,096 44,893 ----------- ---------- ---------- ---------- Income from continuing operations before minority interest, taxes and cumulative effect of change in accounting principle............................ 8,427 4,584 19,220 16,119 Less minority interest............................... 117 (780) (1,382) (2,867) ----------- ---------- ---------- ---------- Income from continuing operations before taxes and cumulative effect of change in accounting principle.......................................... 8,310 5,364 20,602 18,986 Income tax provision................................. 2,807 1,326 6,673 5,421 ----------- ---------- ---------- ---------- Income from continuing operations before cumulative effect of change in accounting principle........... 5,503 4,038 13,929 13,565 Cumulative effect of change in accounting principle net of $837,000 in income tax...................... - - - (1,256) ----------- ---------- ---------- ---------- Income from continuing operations.................... 5,503 4,038 13,929 12,309 Income (loss) from discontinued operations, net of taxes........................................... - 31 - (1,736) ----------- ---------- ---------- ---------- Net income........................................... $ 5,503 $ 4,069 $ 13,929 $ 10,573 =========== ========== ========== ========== </TABLE> 3
WSFS FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Continued) <TABLE> <CAPTION> Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Unaudited) (Dollars in Thousands, except per share data) <S> <C> <C> <C> <C> Basic earnings per share: Income from continuing operations before cumulative effect of change in accounting principle........... $ 0.59 $ 0.39 $ 1.43 $ 1.26 Cumulative effect of change in accounting principle, net of taxes....................................... - - - (0.12) -------- -------- -------- -------- Income from continuing operations.................... 0.59 0.39 1.43 1.14 Loss from discontinued operations, net of taxes...... - _ - (0.16) -------- -------- -------- -------- Net income .......................................... $ 0.59 $ 0.39 $ 1.43 $ 0.98 ======== ======== ======== ======== Diluted earnings per share: Income from continuing operations before cumulative effect of change in accounting principle........... $ 0.58 $ 0.39 $ 1.42 $ 1.26 Cumulative effect of change in accounting principle, net of taxes....................................... - - - (0.12) -------- -------- -------- -------- Income from continuing operations.................... 0.58 0.39 1.42 1.14 Loss from discontinued operations, net of taxes...... - - - (0.16) -------- -------- -------- -------- Net income .......................................... $ 0.58 $ 0.39 $ 1.42 $ 0.98 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements 4
WSFS FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CONDITION <TABLE> <CAPTION> September 30, December 31, 2001 2000 ------------- ------------ (Unaudited) (Dollars in Thousands) Assets <S> <C> <C> Cash and due from banks................................................ $ 94,342 $ 87,849 Federal funds sold and securities purchased under agreements to resell. 56,300 3,500 Interest-bearing deposits in other banks............................... 23,667 7,318 Investment securities held-to-maturity................................. 14,365 14,746 Investment securities available-for-sale............................... 1,623 14,994 Mortgage-backed securities held-to-maturity............................ 83,364 107,663 Mortgage-backed securities available-for-sale.......................... 305,358 232,055 Investment in reverse mortgages, net................................... 35,061 33,683 Loans held-for-sale.................................................... 43,697 23,313 Loans, net of allowance for loan losses of $21,501 at September 30, 2001 and $21,423 at December 31, 2000................................ 995,210 940,178 Stock in Federal Home Loan Bank of Pittsburgh, at cost................. 21,550 28,500 Assets acquired through foreclosure.................................... 533 630 Premises and equipment................................................. 16,740 16,788 Accrued interest and other assets...................................... 31,304 28,348 Net assets of discontinued operations.................................. 140,052 199,751 ---------- ---------- Total assets........................................................... $1,863,166 $1,739,316 ========== ========== Liabilities, Minority Interest and Stockholders' Equity Liabilities: Deposits: Noninterest-bearing demand......................................... $ 151,706 $ 139,128 Money market and interest-bearing demand........................... 327,541 244,120 Savings............................................................ 310,594 289,382 Time............................................................... 302,255 282,839 Jumbo certificates of deposit - retail............................. 9,391 5,611 ---------- ---------- Total retail deposits............................................ 1,101,487 961,080 Jumbo certificates of deposit...................................... 17,483 13,419 Brokered certificates of deposit................................... 33,319 147,092 ---------- ---------- Total deposits................................................... 1,152,289 1,121,591 Federal funds purchased and securities sold under agreements to repurchase........................................................... 69,300 69,300 Federal Home Loan Bank advances........................................ 431,000 351,000 Trust preferred borrowings............................................. 50,000 50,000 Other borrowed funds................................................... 34,327 23,338 Accrued expenses and other liabilities................................. 24,058 21,065 ---------- ---------- Total liabilities...................................................... 1,760,974 1,636,294 ---------- ---------- Minority Interest...................................................... 4,606 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 14,821,875 at September 30, 2001 and 14,813,403 at December 31, 2000.................................................... 148 148 Capital in excess of par .............................................. 59,079 58,985 Accumulated other comprehensive income ................................ 3,516 197 Retained earnings ..................................................... 105,163 92,409 Treasury stock at cost, 5,677,169 shares at September 30, 2001 and 4,629,769 shares at December 31, 2000 ............................... (70,320) (54,593) ---------- ---------- Total stockholders' equity............................................. 97,586 97,146 ---------- ---------- Total liabilities and stockholders' equity............................. $1,863,166 $1,739,316 ========== ========== </TABLE> The accompanying notes are an integral part of these financial statements 5
WSFS FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2001 2000 ---- ---- (Unaudited) (Dollars in Thousands) <S> <C> <C> Operating activities: Net income ............................................................. $ 13,929 $ 10,573 Adjustments to reconcile net income to cash (used for) provided by operating activities: Provision for loan losses ............................................ 1,591 672 Depreciation, accretion and amortization ............................. 3,126 2,033 Increase in accrued interest receivable and other assets.............. (5,941) (3,541) Origination of loans held-for-sale.................................... (383,361) (123,130) Proceeds from sales of loans held-for-sale............................ 363,966 127,006 Increase in accrued interest payable and other liabilities............ 2,955 8,524 Increase in reverse mortgage capitalized interest, net ............... (8,137) (15,311) Minority interest in net income....................................... (1,382) (2,867) Loss on sale of mortgage-backed securities-available for sale......... - 4,419 Other, net ........................................................... 293 2,115 ---------- ---------- Net cash (used for) provided by operating activities.................... (12,961) 10,493 ---------- ---------- Investing activities: Net increase in interest-bearing deposits in other banks ............... (16,349) (228) Maturities of investment securities .................................... 13,344 6,771 Sales of investment securities available-for-sale ...................... 500 10,275 Sales of mortgage-backed securities available-for-sale ................. - 146,545 Purchases of investment securities available-for-sale................... - (8,952) Purchases of investment securities available-for-sale................... - (28,068) Repayments of mortgage-backed securities held-to-maturity .............. 24,096 20,748 Repayments of mortgage-backed securities available-for-sale ............ 152,659 43,680 Purchases of mortgage-backed securities available-for-sale.............. (221,875) (150,845) Repayments of reverse mortgages ........................................ 12,264 15,563 Disbursements for reverse mortgages .................................... (5,397) (6,011) Sales of loans.......................................................... - (43,300) Purchase of loans ...................................................... (1,105) (34,340) Net increase in loans .................................................. (56,971) (1,683) Net decrease in stock of Federal Home Loan Bank of Pittsburgh........... 6,950 - Receipts from investment in real estate ................................ 270 - Sales of assets acquired through foreclosure, net....................... 613 1,227 Premises and equipment, net............................................. (1,254) (3,732) ---------- ---------- Net cash used for investing activities...................................... (92,255) (32,350) ---------- ---------- Financing activities: Net increase in demand and savings deposits............................. 128,288 174,026 Net (decrease) increase in time deposits ............................... (86,693) 41,738 Receipts from FHLB borrowings .......................................... 215,000 510,500 Repayments of FHLB borrowings........................................... (135,000) (676,000) Receipts from reverse repurchase agreements ............................ - 46,588 Repayments of reverse repurchase agreements ............................ - (69,641) Repayments of Federal funds purchased, net.............................. - (5,000) Repayments of other borrowings.......................................... (89) (80) Dividends paid on common stock.......................................... (1,175) (1,191) Issuance of common stock ............................................... 94 88 Purchase of treasury stock, net of reissuance........................... (15,727) (10,286) Minority Interest....................................................... 112 653 ---------- ---------- Net cash provided by financing activities................................... 104,810 11,395 ---------- ---------- Decrease in cash and cash equivalents from continuing operations............ (406) (10,462) Change in net assets from discontinued operations .......................... 59,699 18,402 Cash and cash equivalents at beginning of period ........................... 91,349 59,166 ---------- ---------- Cash and cash equivalents at end of period ................................. $ 150,642 $ 67,106 ========== ========== Supplemental Disclosure of Cash Flow Information: - ------------------------------------------------- Cash paid for interest during the quarter .................................. $ 44,375 $ 53,156 Cash paid for income taxes, net............................................. 3,763 1,722 Loans transferred to assets acquired through foreclosure ................... 607 1,105 Net change in unrealized gains on securities available for sale, net of tax. 3,319 2,306 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 </TABLE> 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 NINE MONTHS ENDED SEPTEMBER 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 September 30, 2001, the consolidated statement of operations for the three and nine months ended September 30, 2001 and 2000 and the consolidated statement of cash flows for the nine months ended September 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 nine-month periods ended September 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). <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, --------------------- ------------------- 2001 2000 2001 2000 --------------------- ------------------- <S> <C> <C> <C> <C> Numerator: - ---------- Income from continuing operations before cumulative effect of change in accounting principle.............................. $5,503 $4,038 $13,929 $13,565 Cumulative effect of change in accounting principle, net of tax benefit.......................................... - - - (1,256) ------ ------ ------- ------- Income from continuing operations............................. 5,503 4,038 13,929 12,309 Income (loss) from discontinued operations, net of taxes...... - 31 - (1,736) ------ ------ ------- ------- Net income ................................................... $5,503 $4,069 $13,929 $10,573 ====== ====== ======= ======= Denominator: - ------------ Denominator for basic earnings per share - weighted average shares ................................ 9,303 10,507 9,725 10,764 Employee stock options ................................ 172 11 91 14 ------ ------ ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed exercise .. 9,475 10,518 9,816 10,778 ====== ====== ======= ======= Earnings per share: - ------------------- Basic: Income from continuing operations before cumulative effect of change in accounting principle.............................. $ 0.59 $ 0.39 $ 1.43 $ 1.26 Cumulative effect of change in accounting principle, net of tax benefit.......................................... - - - (0.12) ------ ------ ------- ------- Income from continuing operations............................. 0.59 0.39 1.43 1.14 Loss from discontinued operations, net of taxes............... - - - (0.16) ------ ------ ------- ------- Net income ................................................... $ 0.59 $ 0.39 $ 1.43 $ 0.98 ====== ====== ======= ======= Earnings per share: - ------------------- Diluted: Income from continuing operations before cumulative effect of change in accounting principle.............................. $ 0.58 $ 0.39 $ 1.42 $ 1.26 Cumulative effective of change in accounting principle........ - - - (0.12) ------ ------ ------- ------- Income from continuing operations............................. 0.58 0.39 1.42 1.14 Loss from discontinued operations, net of taxes............... - - - (0.16) ------ ------ ------- ------- Net income ................................................... $ 0.58 $ 0.39 $ 1.42 $ 0.98 ====== ====== ======= ======= Outstanding common stock having no dilutive effect............ 132 604 138 573 </TABLE> 7
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 5,388 lease contracts and 2,049 loan contracts at September 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 accounting principles generally accepted in the United States of America. As a result, net operating income of $31,000 and a net operating loss of $1.7 million for the three and nine months ended September 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 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 September 30, 2001 and December 31, 2000: <TABLE> <CAPTION> At September 30, At December 31, 2001 2000 ---------------------------------------- (In Thousands) <S> <C> <C> Net loans................................................ $ 19,175 $ 27,877 Vehicles under operating leases, net..................... 122,803 175,745 Premises and equipment................................... 60 131 Other Assets 4,541 3,931 Less: Reserve for losses of discontinued operations........ 5,311 6,169 Other liabilities.................................... 1,216 1,764 -------- -------- Net assets of discontinued operations.................... $140,052 $199,751 ======== ======== </TABLE> 8
The following table depicts the net income from discontinued operations for the three and nine months ended September 30, 2001 and 2000: <TABLE> <CAPTION> For the three months For the nine months Ended September 30, ended September 30, --------------------- --------------------- 2001 2000 2001 2000 ------ ------ ------ ------ (In Thousands) <S> <C> <C> <C> <C> Interest income........................ $ 444 $ 518 $ 1,493 $ 1,411 Allocated interest expense (1)......... 2,192 3,537 7,790 10,311 ------- -------- ------- --------- Net interest expense................... (1,748) (3,019) (6,297) (8,900) ------- -------- ------- --------- Loan and lease servicing fee income ... (29) 202 177 650 Rental income on operating leases, net. 1,856 3,353 6,841 6,845 Other income........................... 3 12 13 38 ------- -------- ------- --------- 1,830 3,567 7,031 7,533 Other operating expenses............... 403 496 1,367 1,445 ------- -------- ------- --------- (Loss) income before taxes............. (321) 52 (633) (2,812) ------- -------- ------- --------- Reserve for discontinued operations ... 456 - 858 - Income tax provision (benefit)........ 135 21 225 (1,076) ------- -------- ------- --------- Income from discontinued operations.... $ - $ 31 $ - $ (1,736) ======= ======== ======= ========= </TABLE> (1) Allocated interest expense based on the Company's annual average wholesale borrowings rate which was 5.66% and 6.45% for the three months ended September 30, 2001and 2000, respectively, and 5.97% and 6.22% for the nine months ended September 30, 2001 and 2000, respectively. 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. Currently, WSFS has an economic ownership of 28% in C1FN. WSFS, the single largest shareholder in C1FN retains control of C1FN through a voting trust and therefore consolidates the results of C1FN into the operating results of WSFS. WSFS will continue to have control until everbank.com(TM) obtains a separate banking charter at which time, 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 is marked-to-market quarterly, with changes in the intrinsic value of the cap, net of tax, included in a separate component of other comprehensive income and changes in the time value of the option included in interest expense as required under SFAS 133. In addition, the ineffective portion, if any, will be expensed in the period in which ineffectiveness is determined. It has been determined that the hedge is highly effective and can reasonably be expected to remain so. Management is not aware of any events that would result in the reclassification into earnings of gains and losses that are currently reported in accumulated other comprehensive income except for the change in the FMV of the interest rate cap which pertains to the time value of the hedging instrument. The 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: <TABLE> <CAPTION> For the nine months ended --------------------------------------------------------------------------------- 2001 2000 -------------------------------------- -------------------------------------- at at at at January 1 Activity September 30 January 1 Activity September 30 --------- -------- ------------ --------- -------- ------------ (In Thousands) <S> <C> <C> <C> <C> <C> <C> Intrinsic value (1) $ 193 $ (190) $ 3(1) $ 2,813 $ (979) $1,834(1) Time value (2) 1,804 (259)(2) 1,545 2,131 (250)(2) 1,881 ------ ------ ------ ------- ------- ------ Total $1,997 $ (449) $1,548 $ 4,944 $(1,229) $3,715 ====== ====== ====== ======= ======= ====== </TABLE> (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. 6. TAXES ON INCOME The Corporation accounts for income taxes in accordance with SFAS No. 109, which requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management has assessed allowances on the deferred income taxes due to limitations imposed by the Internal Revenue Code and uncertainties, including the timing of settlement and realization of these differences. The Internal Revenue Service (IRS) is examining the Company's U.S. income tax returns for the periods ended December 31, 1995 through 1999. In October 2001, the IRS issued a Notice of Proposed Adjustment related to the utilization of certain net operating loss carryovers. The Corporation intends to appeal this Notice. Management believes adjustments, if any, which may be required will not be material to the financial statements. Income taxes have been settled with the IRS for all years through 1994. 10
7. COMPREHENSIVE INCOME The following schedule depicts other comprehensive income as required by SFAS No. 130: <TABLE> <CAPTION> For the three months For the nine months ended September 30, ended September 30, ------------------------------ --------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income ............................................. $ 5,503 $ 4,069 $ 13,929 $ 10,573 Other Comprehensive Income: Net unrealized holding gains (losses) on securities available-for-sale arising during the period........ 1,569 1,550 3,443 (414) Net unrealized holding losses arising during the period on derivatives used for cash flow hedge...... (535) (455) (124) (636) Reclassification for gains included in income........... - - - 1,528 ------- ------- -------- -------- Total comprehensive income, before other comprehensive income that resulted from the cumulative effect of a change in accounting principle........................ 6,537 5,164 17,248 11,051 Net unrealized gain on derivatives used for cash flow hedging as a result of adopting SFAS No. 133.......... - - - 1,828 ------- ------- -------- -------- Total comprehensive income.............................. $ 6,537 $ 5,164 $ 17,248 $ 12,879 ======= ======= ======== ======== </TABLE> 8. 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 that started operating 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(TM), 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 September 30, 2001 and 2000 and the nine months ended September 30, 2001 and 2000 follow: 11
<TABLE> <CAPTION> For the Three Months Ended September 30, ----------------------------------------------------------------------------------- 2001 2000 -------------------------------------- --------------------------------------- (In Thousands) WSFS C1FN WNF Total WSFS C1FN WNF Total ---- ---- --- ----- ---- ---- --- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> External customer revenues: Interest income $ 26,339 $ 3,687 $ 1,022 $ 31,048 $ 29,548 $ 2,665 $ 89 $ 32,302 Other income 5,300 813 5,599 11,712 4,295 240 1,447 5,982 -------- ------- ------- -------- -------- -------- ------ -------- Total external customer revenues 31,639 4,500 6,621 42,760 33,843 2,905 1,536 38,284 -------- ------- ------- -------- -------- -------- ------ -------- Intersegment revenues: Interest income 526 - 7 533 - - 335 335 Other income 120 - - 120 66 - - 66 -------- ------- ------- -------- -------- -------- ------ -------- Total Intersegment revenues 646 - 7 653 66 - 335 401 -------- ------- ------- -------- -------- -------- ------ -------- Total revenue 32,285 4,500 6,628 43,413 33,909 2,905 1,871 38,685 External customer expenses: Interest expense 12,535 2,463 - 14,998 15,038 1,935 278 17,251 Other expenses 11,576 2,756 4,008 18,340 11,173 2,169 2,164 15,506 Other depreciation and amortization 787 116 92 995 740 145 58 943 -------- ------- ------- -------- -------- -------- ------ -------- Total external customer expenses 24,898 5,335 4,100 34,333 26,951 4,249 2,500 33,700 -------- ------- ------- -------- -------- -------- ------ -------- Intersegment expenses: Interest expense 7 - 526 533 335 - - 335 Other expenses - 120 - 120 6 60 - 66 -------- ------- ------- -------- -------- -------- ------ -------- Total Intersegment expenses 7 120 526 653 341 60 - 401 -------- ------- ------- -------- -------- -------- ------ -------- Total expenses 24,905 5,455 4,626 34,986 27,292 4,309 2,500 34,101 Income (loss) before taxes and extraordinary item $ 7,380 $ (955) $ 2,002 $ 8,427 $ 6,617 $ (1,404) $ (629) $ 4,584 -------- ------- ------- -------- -------- -------- ------ -------- Provision for income taxes 2,807 1,326 Income from discontinued operations, net of taxes - 31 Minority Interest 117 (780) -------- ------- Consolidated net income $ 5,503 $ 4,069 -------- ------- </TABLE> 12
<TABLE> <CAPTION> For the Nine Months Ended September 30, ----------------------------------------------------------------------------------- 2001 2000 -------------------------------------- --------------------------------------- (In Thousands) WSFS C1FN WNF Total WSFS C1FN WNF Total ---- ---- --- ----- ---- ---- --- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> External customer revenues: Interest income $ 78,285 $ 10,985 $ 2,411 $ 91,681 $ 92,113 $ 4,346 $ 554 $ 97,013 Other income 14,443 2,100 13,268 29,811 10,230 415 2,450 13,095 --------- -------- ------- ---------- --------- -------- ------- ---------- Total external customer revenues 92,728 13,085 15,679 121,492 102,343 4,761 3,004 110,108 --------- -------- ------- ---------- --------- -------- ------- ---------- Intersegment revenues: Interest income 1,475 - 55 1,530 - - 62 62 Other income 360 - - 360 195 - - 195 --------- -------- ------- ---------- --------- -------- ------- ---------- Total Intersegment revenues 1,835 - 55 1,890 195 - 62 257 --------- -------- ------- ---------- --------- -------- ------- ---------- Total revenue 94,563 13,085 15,734 123,382 102,538 4,761 3,066 110,365 External customer expenses: Interest expense 37,850 7,733 2 45,585 44,896 3,149 379 48,424 Other expenses 35,709 7,750 10,345 53,804 32,345 5,540 5,075 42,960 Other depreciation and amortization 2,338 309 236 2,883 2,132 350 123 2,605 --------- -------- ------- ---------- --------- -------- ------- ---------- Total external customer expenses 75,897 15,792 10,583 102,272 79,373 9,039 5,577 93,989 --------- -------- ------- ---------- --------- -------- ------- ---------- Intersegment expenses: Interest expense 55 - 1,475 1,530 62 - - 62 Other expenses - 360 - 360 15 180 - 195 --------- -------- ------- ---------- --------- -------- ------- ---------- Total Intersegment expenses 55 360 1,475 1,890 77 180 - 257 --------- -------- ------- ---------- --------- -------- ------- ---------- Total expenses 75,952 16,152 12,058 104,162 79,450 9,219 5,577 94,246 Income (loss) before taxes and extraordinary item $ 18,611 $ (3,067) $ 3,676 $ 19,220 $ 23,088 $ (4,458) $(2,511) $ 16,119 --------- -------- ------- ---------- --------- -------- ------- --------- Provision for income taxes 6,673 5,421 Loss from discontinued operations, net of taxes - (1,736) Minority Interest (1,382) (2,867) Cumulative effect of change in accounting principle - (1,256) ---------- ---------- Consolidated net income $ 13,929 $ 10,573 ---------- ---------- Segment assets $1,572,993 $ 295,261 $ 52,162 $1,920,416 $1,632,384 $157,243 $ 20,383 $1,810,010 Elimination intersegment receivables (57,250) (28,038) ---------- ---------- Consolidated assets $1,863,166 $1,781,972 ========== ========== Capital expenditures $ 1,196 $ 484 $ 436 $ 2,116 $ 2,616 $ 559 $ 304 $ 3,479 </TABLE> 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 status as a high-performing financial services company 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. An additional subsidiary, Star States Development Company, is currently inactive. 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 a further discussion. FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY Financial Condition Total assets increased $123.9 million during the first nine months of 2001 to $1.863 billion at September 30, 2001. Asset growth included $75.4 million in net loans, (including held for sale). This included increases of $27.1 million in commercial real estate, $21.6 million in consumer loans and $16.3 million in commercial loans. Residential loans, excluding loans held-for-sale, decreased by $9.6 million reflecting management's continued strategy to change the mix of loans to higher margin relationships. Loans held-for-sale increased $20.4 million, the result of higher volume at WNF. In addition, investment securities and short-term investments increased $55.4 million while mortgage-backed securities increased $49.0 million. 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. These increases were partially offset by decreases of $59.7 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 $7.0 million, mainly due to redemptions. 14
Total liabilities increased $124.7 million between December 31, 2000 and September 30, 2001, to $1.761 billion. Total retail deposits increased $140.4 million, including an increase of $102.9 million at C1FN/everbank. Deposits at C1FN totaled $286.1 million or approximately 26% of the Corporations retail deposit base. The remaining increase of $37.5 million in retail deposits occurred at WSFS, mainly in core deposit relationships (demand deposits, money market and savings accounts). This reflects management's continued strategy to increase core deposit relationships. Partially offsetting this increase was a $113.8 million decline in brokered deposits, due to maturities. During the first nine months of 2001 the Corporation replaced this funding source with borrowings from the FHLB, which increased $80.0 million and the previously mentioned core deposit growth. Capital Resources Stockholders' equity increased $440,000 between December 31, 2000 and September 30, 2001. This increase reflects net income of $13.9 million for the first nine months of 2001. In addition, other comprehensive income increased $3.3 million. These increases were partially offset by the purchase of 1,052,400 treasury shares for $15.8 million ($15.00 per share average). At September 30, 2001, the Corporation held in its treasury 5,677,169 shares of its common stock at a cost of $70.3 million. The following table presents the WSFS consolidated capital position relative to the minimum regulatory requirements as of September 30, 2001 (dollars in thousands): <TABLE> <CAPTION> 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 ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> Total Capital (to Risk-Weighted Assets) ........ $146,577 12.06% $97,269 8.00% $121,587 10.00% Core Capital (to Adjusted Tangible Assets).................. 137,041 7.34 74,632 4.00 93,290 5.00 Tangible Capital (to Tangible Assets) .......................... 137,041 7.34 27,987 1.50 N/A N/A Tier 1 Capital (to Risk-Weighted Assets)........................... 137,041 11.27 N/A N/A 72,952 6.00 </TABLE> Under Office of Thrift Supervision (OTS) capital regulations, savings institutions such as WSFS must at a minimum 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 September 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 September 30, 2001, WSFS' liquidity ratio of cash and qualified assets to net withdrawable deposits and borrowings due within one year was 11.1% 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 maintained through the use of its borrowing capacity at the FHLB of Pittsburgh, the sale of certain securities and the pledging of certain loans and 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. <TABLE> <CAPTION> September 30, December 31, 2001 2000 ---- ---- (Dollars in Thousands) <S> <C> <C> Nonaccruing loans: Commercial .............................................. $ 2,447 $ 2,766 Consumer ................................................ 285 383 Commercial mortgage ..................................... 2,906 2,272 Residential mortgage .................................... 2,907 2,704 Construction ............................................ 354 210 ---------- ---------- Total nonaccruing loans ...................................... 8,899 8,335 Assets acquired through foreclosure .......................... 533 630 ---------- ---------- Total nonperforming assets ................................... $ 9,432 $ 8,965 ========== ========== Past due loans: Residential mortgages ................................... $ 300 $ 449 Commercial and commercial mortgages ..................... 1,215 790 Consumer ............................................. 99 199 ---------- ---------- Total past due loans ......................................... $ 1,614 $ 1,438 ========== ========== Ratios: Nonperforming loans to total loans (1) .................. 0.88% 0.87% Allowance for loan losses to total gross Loans (1)............................................. 2.11 2.22 Nonperforming assets to total assets .................... .51 .52 Loan loss allowance to nonaccruing loans (2)............. 234.03 248.81 Loan and foreclosed asset allowance to total Nonperforming assets (2) .............................. 223.27 234.01 </TABLE> (1) Total loans exclude loans held for sale. (2) The applicable allowance represents general valuation allowances only. Nonperforming assets increased $467,000 between December 31, 2000 and September 30, 2001. During the third quarter of 2001 a $1.1 million commercial mortgage loan was placed on nonaccrual status. The net increase in nonaccruing loans was $564,000 between December 31, 2000 and September 30, 2001. An analysis of the change in the balance of nonperforming assets is presented on the following page. 16
<TABLE> <CAPTION> Analysis of change in nonperforming assets: Nine Months Ended Year Ended September 30, 2001 December 31, 2000 -------------------- ----------------- (In Thousands) <S> <C> <C> Beginning balance......................................... $ 8,965 $ 8,159 Additions ........................................... 5,230 8,332 Collections/sales ................................... (2,631) (4,323) Transfers to accrual/restructured status............. (1,169) (1,227) Charge-offs / write-downs............................ (963) (1,976) --------- --------- Ending balance............................................ $ 9,432 $ 8,965 ========= ========= </TABLE> 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 $142 million for these assets have been included. At September 30, 2001, interest-bearing liabilities exceeded interest-earning assets that mature within one year (interest-sensitive gap) by $10.5 million. The Corporation's interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window increased to 98.77% at September 30, 2001 compared to 75.88% at December 31, 2000. Likewise, the one-year interest-sensitive gap as a percentage of total assets increased to a negative .56% at September 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 September 30, 2001 and 2000, calculated in compliance with Thrift Bulletin No. 13A: 17
September 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% 8.68% 7% 6.01% +200 4% 8.72% 4% 6.17% +100 2% 8.79% 2% 6.37% 0 0% 8.86% 0% 6.57% -100 -2% 8.84% -2% 6.83% -200 -5% 8.89% -4% 7.28% -300 -7% 8.92% -6% 7.98% (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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 Results of Operations The Corporation recorded net income of $5.5 million or $.58 per diluted share for the third quarter of 2001. This compares to $4.1 million or $.39 per diluted share for the same quarter last year. Financial results for the third quarter of 2000 included income from discontinued operations of $31,000, net of taxes. Income from continuing operations for the three months ended September 30, 2000 was $4.0 million or $.39 per diluted share. The strong results for the third quarter of 2001 are due primarily to the growth in net interest income, which increased $1.0 million between quarters. This increase reflects deposit growth affected by a continued 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 $720,000, after tax, for the quarter compared to an after tax loss of $393,000 for the third quarter of last year. Net income for the nine months ended September 30, 2001 was $13.9 million or $1.42 per diluted share. This compares to $10.6 million or $.98 per share for the comparable period last year. Financial results for the first nine months of 2000 included an after tax charge of $1.7 million for losses from discontinued operations. Income from continuing operations for the nine months ended September 30, 2000 was $12.3 million or $1.14 per diluted share. The increase in net income for the nine months ended September 30, 2001 compared to the same period in 2000 reflect $1.7 million in net income from WNF compared to an after tax loss of $1.3 million for the same period of 2000. In addition, the results for the nine months ended September 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 $2.5 million decline in net interest income. Net interest income was affected by reverse mortgage income, which decreased $7.2 million between comparable periods due to considerably larger yield adjustments recorded in the first nine months 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 nine months ended September 30, 2001 also included a $1.1 million pretax charge for the exiting of six in-store branches in southeastern Pennsylvania. 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. <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Interest Rate(1) Balance Interest Rate(1) ------- -------- ------- -------- -------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Assets Interest-earning assets: Loans (2) (3): Real estate loans (4)............... $ 650,460 $ 12,371 7.61% $ 631,118 $ 13,047 8.27% Commercial loans ................... 164,580 2,978 7.76 126,292 2,579 8.88 Consumer loans...................... 191,494 4,307 8.92 168,987 4,226 9.65 ---------- --------- ----------- --------- Total loans....................... 1,006,534 19,656 7.93 926,397 19,852 8.70 Mortgage-backed securities (5)........... 396,079 5,777 5.83 376,969 6,610 7.01 Loans held-for-sale (3).................. 39,560 1,120 11.32 15,459 432 11.18 Investment securities (5)................ 16,147 290 7.16 54,773 883 6.45 Investment in reverse mortgages.......... 35,058 3,324 37.93 34,481 3,742 43.41 Other interest-earning assets ........... 77,373 881 4.52 40,201 783 7.75 ---------- --------- ----------- --------- Total interest-earning assets....... 1,570,751 31,048 7.98 1,448,280 32,302 9.00 Allowance for loan losses................ (21,657) (22,475) Cash and due from banks.................. 84,424 53,858 Net assets of discontinued operations.... 150,537 226,569 Other noninterest-earning assets......... 54,199 45,070 ---------- ----------- Total assets........................ $1,838,254 $ 1,751,302 ========== =========== Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing deposits: Money market and interest- bearing demand.................... $ 313,281 2,118 2.68 $ 190,313 2,017 4.22 Savings............................. 310,820 1,720 2.20 278,351 2,878 4.11 Retail time deposits ............... 306,170 3,795 4.92 280,604 3,598 5.10 Jumbo certificates of deposits ..... 35,885 407 4.50 27,725 374 5.37 Brokered certificates of deposit.... 34,283 571 6.61 189,679 3,220 6.75 ---------- --------- ----------- --------- Total interest-bearing deposits... 1,000,439 8,611 3.41 966,672 12,087 4.97 FHLB of Pittsburgh advances.............. 417,033 5,887 5.60 347,804 5,321 6.09 Trust preferred borrowings............... 50,000 1,280 10.16 50,000 1,142 8.94 Other borrowed funds..................... 99,972 1,412 5.65 142,207 2,238 6.20 Cost of funding discontinued operations.. (2,192) (3,537) ---------- --------- ----------- --------- Total interest-bearing liabilities.. 1,567,444 14,998 3.83 1,506,683 17,251 4.58 --------- --------- Noninterest-bearing demand deposits...... 145,506 122,276 Other noninterest-bearing liabilities.... 21,629 21,561 Minority interest ....................... 4,484 3,190 Stockholders' equity..................... 99,191 97,592 ---------- ----------- Total liabilities and stockholders' equity........................... $1,838,254 $ 1,751,302 ========== =========== Excess (deficit) of interest-earning assets over interest-bearing liabilities......................... $ 3,307 $ (58,403) ========== =========== Net interest and dividend income......... $ 16,050 $ 15,051 ========== =========== Interest rate spread..................... 4.15% 4.42% ==== ==== Net interest margin...................... 4.16% 4.24% ==== ==== Net interest and dividend income to total average assets................ 3.55% 3.50% ==== ==== </TABLE> (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
<TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Interest Rate(1) Balance Interest Rate(1) ------- -------- ------- -------- -------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Assets Interest-earning assets: Loans (2)(3): Real estate loans (4)............... $ 639,799 $ 37,885 7.90% $ 618,717 $ 38,104 8.21% Commercial loans ................... 155,511 8,934 8.30 120,464 7,257 8.85 Consumer loans...................... 181,445 12,644 9.32 163,800 12,001 9.79 ---------- --------- ----------- --------- Total loans....................... 976,755 59,463 8.23 902,981 57,362 8.60 Mortgage-backed securities (5)........... 384,191 17,867 6.20 369,710 18,705 6.75 Loans held-for-sale (3).................. 33,591 2,613 10.37 15,211 850 7.45 Investment securities (5)................ 20,062 1,094 7.27 47,691 2,433 6.80 Investment in reverse mortgages.......... 34,066 8,258 32.32 32,641 15,461 63.16 Other interest-earning assets ........... 63,666 2,386 5.01 41,284 2,202 7.12 ---------- --------- ----------- --------- Total interest-earning assets....... 1,512,331 91,681 8.16 1,409,518 97,013 9.26 --------- --------- Allowance for loan losses................ (21,611) (22,580) Cash and due from banks.................. 74,492 53,665 Net assets of discontinued operations.... 170,566 233,751 Other noninterest-earning assets......... 50,343 38,948 ---------- ---------- Total assets........................ $1,786,121 $1,713,302 ========== ========== Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing deposits: Money market and interest- bearing demand.................... $ 286,026 6,873 3.21 $ 136,615 3,798 3.71 Savings............................. 305,592 6,330 2.77 268,707 7,698 3.83 Retail time deposits ............... 304,178 11,657 5.12 274,815 9,958 4.84 Jumbo certificates of deposits ..... 34,033 1,285 5.05 31,848 1,334 5.60 Brokered certificates of deposit.... 78,309 3,940 6.73 159,421 7,719 6.47 ---------- --------- ---------- --------- Total interest-bearing deposits 1,008,138 30,085 3.99 871,406 30,507 4.68 FHLB of Pittsburgh advances.............. 368,399 15,991 5.80 410,290 17,967 5.85 Trust preferred borrowings............... 50,000 3,048 8.04 50,000 3,520 9.25 Other borrowed funds..................... 96,554 4,251 5.87 144,903 6,741 6.20 Cost of funding discontinued operations.. (7,790) (10,311) ---------- --------- ---------- --------- Total interest-bearing liabilities....... 1,523,091 45,585 3.99 1,476,599 48,424 4.37 --------- ---------- --------- Noninterest-bearing demand deposits...... 138,357 118,657 Other noninterest-bearing liabilities.... 19,804 17,063 Minority interest ....................... 4,829 3,997 Stockholders' equity..................... 100,040 96,986 ---------- ---------- Total liabilities and stockholders' equity........................... $1,786,121 $1,713,302 ========== ========== Deficit of interest-earning assets over interest-bearing liabilities........ $ (10,760) $ (67,081) ========== ========== Net interest and dividend income......... $ 46,096 $ 48,589 ========== ========= Interest rate spread..................... 4.17% 4.89% ==== ==== Net interest margin...................... 4.14% 4.68% ==== ==== Net interest and dividend income to total average assets................ 3.50% 3.85% ==== ==== </TABLE> (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 September 30, 2001 increased $1.0 million compared to the same period in 2000. However, the net interest margin for the three months ended September 30, 2001 was 4.16% compared to 4.24% in the third quarter of 2000, as total interest-earning assets averaged $122.5 million more in 2001. Total interest income decreased $1.3 million between comparable quarters. While the average assets increased from the third quarter of 2000, yields in most asset categories decreased significantly due to a series of Federal Reserve rate decreases. The yield on interest earning assets declined 102 basis points between comparable quarters, decreasing from 9.00% in 2000 to 7.98% in 2001, as short-term and maturing assets were replaced at lower rates. Total interest expense for the three months ended September 30, 2001 decreased $2.3 million compared to the third quarter of 2000. The decrease was mainly the result of the lower deposit yields resulting from the series of Federal Reserve interest rate decreases and the maturities of higher yielding brokered CDs. The yield on interest-bearing liabilities declined 75 basis points between periods. Net interest income for the nine months ended September 30, 2001 decreased $2.5 million compared to the same period in 2000. The decrease was due primarily to $8.2 million in additional interest income adjustments in the reverse mortgage portfolio in 2000, which yielded 63.16% in 2000 compared to 32.32% in 2001. 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 net interest margin for the nine months ended September 30, 2001 was 4.14%, compared to 4.68% for the nine months ended September 30, 2000. Total interest income decreased $5.3 million between comparable periods. This change is attributed to the previously mentioned reverse mortgage adjustment, partially offset by the increase in average loans and loans-held-for-sale of $92.2 million. Total interest expense decreased $2.8 million in comparing the nine months ended September 30, 2001 with the same period in 2000. The decrease was a result of the lower cost of deposits and borrowings due to the series of Federal Reserve interest rate reductions and a decrease in average borrowings of $90.2 million from September 30, 2000. This was offset partially by an increase in average interest-bearing deposits of $136.7 million between comparable periods, however higher yielding brokered CDs actually decreased by $81.1 million, while money market and interest-bearing demand accounts increased on average by $149.4 million. Savings deposits also increased $36.9 million between 2000 and 2001. The yield on interest-bearing liabilities decreased 38 basis points between comparable periods. Allowance for Loan Losses The Corporation maintains allowances for loan 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. <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 ------------------ ------------------ (Dollars in Thousands) <S> <C> <C> Beginning balance ............................................ $21,423 $22,223 Provision for loan losses .................................... 1,591 672 Balance at acquisition for purchased credit card portfolio.... - 175 Charge-offs: Residential real estate ................................. 99 125 Commercial real estate (1) .............................. 195 156 Commercial............................................... 706 507 Consumer ................................................ 765 775 ------- ------- Total charge-offs..................................... 1,765 1,563 ------- ------- Recoveries: Residential real estate ................................. 1 5 Commercial real estate (1) .............................. 61 243 Commercial .............................................. 88 57 Consumer................................................. 102 280 ------- ------- Total recoveries ..................................... 252 585 ------- ------- Net charge-offs .............................................. 1,513 978 ------- ------- Ending balance................................................ $21,501 $22,902 ======= ======= Net charge-offs to average gross loans outstanding, net of unearned income (2)..................... 0.21% 0.14% ======= ======= </TABLE> (1) Includes commercial mortgages and construction loans. (2) Ratio for the nine months ended September 30, 2001 and 2000 is annualized. Other Income Other income for the three months ended September 30, 2001 was $11.7 million compared to $6.0 million for the third quarter of 2000. This improvement was mainly due to a $4.3 million increase in gains on the sale of loans, which was predominantly attributable to WNF. Credit/debit card and ATM income grew $532,000 due to the continued expansion of WSFS' ATM network and customer card usage. Deposit service charges increased $344,000 in 2001, in comparison to the corresponding period in 2000, mainly due to a 22% increase in retail deposits. Other income for the nine months ended September 30, 2001 was $29.8 million compared to $13.1 million for the same period in 2000. Consistent with the quarter, this improvement was mainly due to a $10.8 million increase in gains on the sale of loans, which was mainly attributable to WNF. In addition, there were no securities losses during the first nine months of 2001 compared to a $2.3 million loss during the first nine months of 2000. Credit/debit card and ATM income grew $1.5 million due to the continued expansion of WSFS' ATM network and customer card usage. Deposit service charges increased $1.3 million in 2001, in comparison to the corresponding period in 2000, mainly due to increased retail deposits. 22
Other Expenses Other expenses for the quarter ended September 30, 2001 were $18.6 million or $2.4 million above the third quarter of 2000. This increase was mainly due to expected higher expenses from the Corporation's two newer initiatives, WNF and C1FN. These two subsidiaries added $2.4 million in additional expenses to the consolidated results compared to the third quarter of 2000. Excluding these two initiatives, expenses were relatively flat in the third quarter of 2001 in comparison to the same period in the prior year. Other expenses for the nine months ended September 30, 2001 were $55.1 million compared to $44.9 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 $7.5 million in additional expenses to the consolidated results compared to the first nine months of 2000. In addition, other expenses for the nine months ended September 30, 2001 included a non-cash charge of $1.1 million in connection with a planned exit of six in-store branch offices in southeastern Pennsylvania. Income Taxes The Corporation and its subsidiaries file a consolidated federal income tax return and separate state income tax returns. Income taxes are accounted for in accordance with SFAS No. 109, which requires the recording of deferred income taxes for tax consequences of "temporary differences". The Corporation recorded a provision for income taxes during the three and nine months ended September 30, 2001 of $2.8 million and $6.7 million, respectively, compared to an income tax provision of $1.3 million and $4.3 million, respectively, for the comparable periods of 2000. The effective tax rates for the three and nine months ended September 30, 2001 were 34% and 33%, respectively, compared to 25% for each of the comparable periods in 2000. Excluding the impact of the loss from discontinued operations, the effective rates for the three and nine months ended September 30, 2000 were 25% and 27%, respectively. The effective rates for the three and nine months ended September 30, 2001 have increased from the comparable periods of 2000 primarily due to certain reductions in the deferred tax valuation allowances made in 2000 that are not applicable in 2001. For 2001, management has determined that the remaining portion of deferred tax valuation allowances are appropriate with regards to the current IRS examination. The effective tax rates in the financial statements reflect the recognition of certain tax benefits, including the acquisition and subsequent merger of a reverse mortgage lender into the Corporation; and the fifty-percent interest income exclusion on an ESOP loan. The Corporation analyzes its projections of taxable income on an ongoing basis and makes adjustments to its provision for income taxes accordingly. Cumulative Effect of a Change in Accounting Principle On January 1, 2000, the Corporation adopted 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 $1.8 million, net of tax, relating to an interest rate cap is included in comprehensive income as a cumulative change in accounting principle. RECENT ACCOUNTING PRONOUNCEMENTS 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. 23
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 was no impact on earnings, financial condition, or equity as a result of the 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 expect a material impact on earnings, financial condition, or equity upon adoption of Statement No. 142. In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for fiscal years beginning after June 15, 2002. Management has not yet determined the impact, if any, to earnings, financial condition or equity upon adoption of this statement. In August 2001, the FASB issued Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Management has not yet determined the impact, if any, to earnings, financial condition or equity upon adoption of this statement. FORWARD LOOKING STATEMENTS Within this 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: November 9, 2001 /s/ MARVIN N. SCHOENHALS ----------------------------------------- Marvin N. Schoenhals Chairman, President and Chief Executive Officer Date: November 9, 2001 /s/ MARK A. TURNER ----------------------------------------- Mark A. Turner Chief Operating Officer and Chief Financial Officer 26