<PAGE>
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, 2000
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------
Commission File Number 0-16668
-------
WSFS FINANCIAL CORPORATION
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(302)792-6000
----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 4, 2000:
Common Stock, par value $.01 per share 10,512,744
-------------------------------------- -----------------------
(Title of Class) (Shares Outstanding)
<PAGE>
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2000 and 1999 (Unaudited)................................ 3
Consolidated Statement of Condition as of June 30, 2000
(Unaudited) and December 31, 1999....................................... 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited)...................................... 5
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 2000 and 1999 (Unaudited)......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 21
PART II. Other Information
Item 1. Legal Procedings........................................................ 22
Item 2. Changes in Securities................................................... 22
Item 3. Default Upon Senior Securities.......................................... 22
Item 4. Submission of Matters to a Vote of Security Holders..................... 22
Item 5. Other Information....................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................ 22
Signatures ..................................................................... 23
</TABLE>
<PAGE>
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited)
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ........................ $ 19,686 $ 16,138 $ 38,821 $ 32,465
Interest on mortgage-backed securities ............ 5,475 7,791 12,095 15,803
Interest and dividends on investment securities ... 843 573 1,548 1,151
Other interest income ............................. 4,662 2,663 13,139 4,935
-------- -------- -------- --------
30,666 27,165 65,603 54,354
-------- -------- -------- --------
Interest expense:
Interest on deposits .............................. 9,985 8,406 18,420 16,444
Interest on Federal Home Loan Bank advances ....... 5,359 5,961 12,646 12,460
Interest on federal funds purchased and securities
sold under agreement to repurchase .............. 1,976 1,933 4,104 4,045
Interest on trust preferred borrowings ............ 1,235 1,003 2,378 1,990
Interest on other borrowed funds .................. 209 91 399 185
-------- -------- -------- --------
18,764 17,394 37,947 35,124
-------- -------- -------- --------
Net interest income ............................... 11,902 9,771 27,656 19,230
Provision for loan losses ......................... 217 249 445 512
-------- -------- -------- --------
Net interest income after provision for loan losses 11,685 9,522 27,211 18,718
-------- -------- -------- --------
Other income:
Loan and lease servicing fees ..................... 656 903 1,475 1,736
Rental income on operating leases, net ............ 170 3,603 3,492 6,975
Deposit service charges ........................... 1,708 1,271 3,179 2,482
Credit/debit card and ATM income .................. 1,320 972 2,494 1,651
Securities gains (losses) ......................... 2 -- (2,464) 1
Gain from note receivable ......................... 818 -- 818 --
Other income ...................................... 1,706 461 2,084 936
-------- -------- -------- --------
6,380 7,210 11,078 13,781
-------- -------- -------- --------
Other expenses:
Salaries, benefits and other compensation ......... 7,581 4,837 13,787 9,419
Equipment expense ................................. 1,094 784 2,079 1,494
Data processing and operations expenses ........... 1,590 1,420 3,330 2,755
Occupancy expense ................................. 1,038 840 1,988 1,629
Marketing expense ................................. 803 375 1,580 708
Professional fees ................................. 886 379 1,545 732
Net costs of assets acquired through foreclosure .. 115 119 261 144
Other operating expense ........................... 2,640 1,805 5,050 3,511
-------- -------- -------- --------
15,747 10,559 29,620 20,392
-------- -------- -------- --------
Income before taxes, cumulative effect of change in
accounting principle and minority interest ....... 2,318 6,173 8,669 12,107
Less minority interest ............................ (856) -- (2,087) --
-------- -------- -------- --------
Income before taxes and cumulative effect of change
in accounting principle ......................... 3,174 6,173 10,756 12,107
Income tax provision .............................. 808 1,605 2,996 3,148
-------- -------- -------- --------
Income before cumulative effect of change
in accounting principle ......................... 2,366 4,568 7,760 8,959
Cumulative effect of change in accounting principle
net of $837,000 in income tax ................... -- -- (1,256) --
-------- -------- -------- --------
Net income ........................................ $ 2,366 $ 4,568 $ 6,504 $ 8,959
======== ======== ======== ========
Basic earnings per share:
Income before cumulative effect of change in
accounting principle ............................ 0.22 $ 0.40 $ 0.71 $ 0.79
Cumulative effect of change in accounting principle -- -- (0.11) --
-------- -------- -------- --------
Net income ........................................ 0.22 $ 0.40 $ 0.60 $ 0.79
======== ======== ======== ========
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle ............................ $ 0.22 $ 0.40 $ 0.71 $ 0.78
Cumulative effect of change in accounting principle -- -- (0.11) --
-------- -------- -------- --------
Net Income ........................................ $ 0.22 $ 0.40 $ 0.60 $ 0.78
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
(Dollars in Thousands)
Assets
<S> <C> <C>
Cash and due from banks .................................................. $ 63,896 $ 59,166
Federal funds sold and securities purchased under agreements to resell ... 11,100 --
Interest-bearing deposits in other banks ................................. 7,086 8,026
Investment securities held-to-maturity ................................... 11,887 8,612
Investment securities available-for-sale ................................. 42,752 28,861
Mortgage-backed securities held-to-maturity .............................. 117,331 258,825
Mortgage-backed securities available-for-sale ............................ 244,562 188,924
Investment in reverse mortgages, net ..................................... 34,192 28,103
Loans held-for-sale ...................................................... 10,917 24,558
Loans, net of allowance for loan losses of $23,308 at June 30, 2000
and $23,024 at December 31, 1999 ....................................... 915,840 856,627
Vehicles under operating leases, net ..................................... 207,110 220,209
Stock in Federal Home Loan Bank of Pittsburgh, at cost ................... 28,500 28,500
Assets acquired through foreclosure ...................................... 1,338 1,061
Premises and equipment ................................................... 15,871 14,621
Accrued interest and other assets ........................................ 32,566 27,727
----------- -----------
Total assets ............................................................. $ 1,744,948 $ 1,753,820
=========== ===========
Liabilities, Minority Interest and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ........................................... $ 138,336 $ 119,754
Money market and interest-bearing demand ............................. 175,326 79,321
Savings .............................................................. 271,699 258,854
Time ................................................................. 281,810 278,051
----------- -----------
Total retail deposits .............................................. 867,171 735,980
Jumbo certificates of deposit ........................................ 32,078 24,645
Brokered certificates of deposit ..................................... 176,625 149,465
----------- -----------
Total deposits ..................................................... 1,075,874 910,090
Federal funds purchased and securities sold under agreements to repurchase 113,941 143,941
Federal Home Loan Bank advances .......................................... 363,000 515,000
Trust preferred borrowings ............................................... 50,000 50,000
Other borrowed funds ..................................................... 21,477 13,524
Accrued expenses and other liabilities ................................... 22,513 20,006
----------- -----------
Total liabilities ........................................................ 1,646,805 1,652,561
----------- -----------
Minority Interest ........................................................ 3,704 5,106
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding ............................................... -- --
Common stock $.01 par value, 20,000,000 shares authorized; issued
14,797,513 at June 30, 2000 and 14,797,513 at December 31, 1999 ...... 148 148
Capital in excess of par ................................................. 58,185 58,185
Accumulated other comprehensive loss ..................................... (2,054) (3,265)
Retained earnings ........................................................ 88,736 83,000
Treasury stock at cost, 4,264,769 shares at June 30, 2000 and
3,528,269 shares at December 31, 1999 ................................ (50,576) (41,915)
----------- -----------
Total stockholders' equity ............................................... 94,439 96,153
----------- -----------
Total liabilities, minority interest and stockholders' equity ............ $ 1,744,948 $ 1,753,820
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
--------- ---------
(Unaudited)
(Dollars in Thousands)
Operating activities:
<S> <C> <C>
Net income .................................................................. $ 6,504 $ 8,959
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan, lease and residual value losses ....................... 5,577 1,520
Depreciation, accretion and amortization .................................. 1,863 1,606
Increase in accrued interest receivable and other assets .................. (628) (547)
Origination of loans held-for-sale ........................................ (48,077) (21,654)
Proceeds from sales of loans held-for-sale ................................ 72,764 19,821
Increase in accrued interest payable and other liabilities ................ 2,441 9,930
Increase in reverse mortgage capitalized interest, net .................... (11,619) (3,293)
Minority interest in net income ........................................... (2,087) --
Loss on sale of mortgage-backed securities available-for-sale ............. 4,566 --
Other, net ................................................................ 553 139
--------- ---------
Net cash provided by operating activities ................................... 31,857 16,481
--------- ---------
Investing activities:
Net decrease in interest-bearing deposits in other banks .................... 940 3,592
Maturities of investment securities ......................................... 4,659 1,203
Sales of investment securities available-for-sale ........................... 10,275 --
Purchases of investment securities held-to-maturity ......................... (5,952) (295)
Purchases of investment securities available-for-sale ....................... (25,109) --
Sales of mortgage-backed securities available-for-sale ...................... 146,039 --
Repayments of mortgage-backed securities held-to-maturity ................... 15,849 74,314
Repayments of mortgage-backed securities available-for-sale ................. 19,013 39,907
Purchases of mortgage-backed securities held-to-maturity .................... -- (74,786)
Purchases of mortgage-backed securities available-for-sale .................. (101,490) (58,862)
Repayments of reverse mortgages ............................................. 9,660 7,420
Disbursements for reverse mortgages ......................................... (4,065) (4,543)
Purchase of loans ........................................................... (28,265) (7,959)
Net (increase) decrease in loans ............................................ (43,631) 2,431
Net increase in operating leases ............................................ ( 8,582) (30,961)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ............... -- (3,250)
Sales of assets acquired through foreclosure, net ........................... 14,878 8,218
Premises and equipment, net ................................................. (2,525) (2,405)
--------- ---------
Net cash provided by (used for) investing activities ............................ 1,694 (45,976)
--------- ---------
Financing activities:
Net increase in demand and savings deposits ................................. 134,994 41,648
Net increase in time deposits ............................................... 38,115 19,697
Receipts from FHLB borrowings ............................................... 394,000 65,000
Repayments of FHLB borrowings ............................................... (546,000) (75,000)
Receipts from reverse repurchase agreements ................................. 20,000 17,270
Repayments of reverse repurchase agreements ................................. (45,000) (35,775)
Repayments of Federal funds purchased ...................................... (5,000) --
Repayments of other borrowings .............................................. (52) --
Dividends paid on common stock .............................................. (768) (684)
Issuance of common stock .................................................... -- 355
Purchase of treasury stock, net of reissuance ............................... (8,661) (4,383)
Minority Interest ........................................................... 651 --
--------- ---------
Net cash provided by (used for) financing activities ............................ (17,721) 28,128
--------- ---------
Increase (decrease) in cash and cash equivalents ................................ 15,830 (1,367)
Cash and cash equivalents at beginning of period ................................ 59,166 76,748
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 74,996 $ 75,381
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the quarter ....................................... $ 35,420 $ 30,930
Cash paid (refunded) for income taxes, net ...................................... 1,449 741
Loans and leases transferred to assets acquired through foreclosure ............. 17,183 5,539
Net change in accumulated other comprehensive income ............................ 1,211 (3,083)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
WSFS Financial Corporation (the Corporation) is a thrift holding company
headquartered in the state of Delaware. The Corporation has two wholly-owned
subsidiaries, Wilmington Savings Fund Society, FSB, (the Bank or WSFS) a thrift
conducting business in the Mid-Atlantic region and WSFS Capital Trust I, a
company formed to issue Trust Preferred Securities to be invested in Junior
Subordinated Debentures of the Corporation. The consolidated financial
statements include the accounts of the parent company, WSFS Capital Trust I, the
Bank and its wholly-owned subsidiaries: WSFS Credit Corporation (WCC), 838
Investment Group, Inc. and Star States Development Company, (SSDC) as well as
its non-wholly-owned, but majority controlled subsidiaries: CustomerOne
Financial Network, Inc. and Wilmington National Finance, Inc., formerly
Community Credit Corporation.
The consolidated statement of condition as of June 30, 2000, the
consolidated statement of operations for the three and six months ended June 30,
2000 and 1999 and the consolidated statement of cash flows for the six months
ended June 30, 2000 and 1999 are unaudited and include all adjustments solely of
a normal recurring nature which management believes are necessary for a fair
presentation. All significant intercompany transactions are eliminated in
consolidation. Certain reclassifications have been made to prior period's
financial statements to conform them to the June 30, 2000 presentation. The
results of operations for the three and six month periods ended June 30, 2000
are not necessarily indicative of the expected results for the full year ended
December 31, 2000. The accompanying unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Corporation's 1999 Annual Report.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data).
<TABLE>
<CAPTION>
For the three months For the six months
Ended June 30, Ended June 30,
2000 1999 2000 1999
--------- ------- -------- --------
Numerator:
<S> <C> <C> <C> <C>
Income before cumulative effect of change in accounting principle . $2,366 $4,568 $7,760 $8,959
Cumulative effect of change in accounting principle ............... -- -- (1,256) -
--------- ------- -------- --------
Net income ...................................................... $2,366 $4,568 $6,504 $8,959
========= ======= ======== ========
Denominator:
Denominator for basic earnings per share -
weighted average shares ........................................ 10,654 11,305 10,894 11,385
Effect of dilutive securities:
Employee stock options ........................................ 19 59 17 80
--------- ------- -------- --------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise of stock options ............................... 10,673 11,364 10,911 11,465
========= ======= ======== ========
Basic earnings per share:
Income before cumulative effect of change in accounting principle . $ 0.22 $ 0.40 $ 0.71 $ 0.79
Cumulative effective of change in accounting principle .......... - - (0.11) -
--------- ------- -------- --------
Net income ...................................................... $ 0.22 $ 0.40 $ 0.60 $ 0.79
========= ======= ======== ========
Diluted earnings per share:
Income before cumulative effect of change in accounting principle $ 0.22 $ 0.40 $ 0.71 $ 0.78
Cumulative effective of change in accounting principle ........... - - (0.11) -
--------- ------- -------- --------
Net income ...................................................... $ 0.22 $ 0.40 $ 0.60 $ 0.78
========= ======= ======== ========
</TABLE>
The Corporation had 442,725 and 147,080 anti-dilutive common stock options
outstanding at June 30, 2000 and 1999, respectively. They are not included in
the calculation of diluted earnings per share for the periods presented.
<PAGE>
3. INVESTMENTS IN NON-WHOLLY OWNED SUBSIDIARIES
In August 1999, WSFS Financial Corporation invested $5.5 million in
CustomerOne Financial Network, Inc. (C1FN), a St. Louis, Missouri based
corporation formed in 1998 for the express purpose of providing
direct-to-marketing, servicing, internet development and technology management
for "branchless" financial services. At June 30, 2000, WSFS is the single
largest shareholder in C1FN, has majority control through a voting trust and
shares in 42% of the operating results. In addition, WSFS received warrants for
the purchase of an additional 20% ownership of C1FN, as well as the option and
under certain circumstances the obligation to invest an additional $5.4 million
in the year 2000, at current offered ownership prices. This option expired on
July 5, 2000 with no additional investment being made. As a result of this
investment, C1FN's internet-only banking structure became part of
everbank.com(TM), a division of WSFS. C1FN and WSFS manage the operations of
everbank.com(TM). Everbank.com(TM) began marketing internet-only banking to a
national clientele in November of 1999.
Additionally, in November 1999, the Corporation expanded the home
equity lending business of Community Credit Corporation (CCC) which initially
started operations in 1994. CCC was renamed Wilmington National Finance, Inc.
(WNFI) and WSFS retained a 51% ownership with the remainder held by WNFI's new
executives retained to lead the expansion of WNFI. WSFS also has warrants to
obtain an additional 15% ownership in WNFI. Both C1FN and WNFI are consolidated
into the financial statements of WSFS Financial Corporation. The portion of
equity and operating results attributable to investors in C1FN and WNFI, other
than WSFS, are reported as minority interest. During the quarter, WNFI's
accumulated deficit exceeded the common equity. Therefore, as a result of WSFS'
preferred stock investment, WSFS began recognizing 100% of the net loss. Once
this startup company begins recognizing income, WSFS will recognize 100% of the
earnings to the point of recovering recognized losses in excess of 51%.
4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2000, the Corporation adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS Nos. 137 and 138. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of derivatives
depends on the derivative and the resulting designation. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of certain foreign currency
exposures. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Corporation has elected earlier adoption as
permitted under this standard.
The Corporation's only derivative that requires separate accounting under
SFAS 133 is an interest-rate cap with a notional amount of $50 million which
limits 3-month LIBOR to 6% for ten years ending December 1, 2008. The cap is
being used to hedge the cash flows of $50 million in trust preferred floating
debt. The cap was recorded at the date of purchase in other assets, at a cost of
$2.4 million. The fair market value (FMV), which at inception is equal to the
cost, is broken into two components: the intrinsic value and the time value of
the option. The cap will be marked-to-market quarterly, with changes in the
intrinsic value of the cap, net of tax, included in a separate component of
other comprehensive income and changes in the time value of the option included
in interest expense as required under SFAS 133. In addition, the ineffective
portion, if any, will be expensed in the period in which ineffectiveness is
determined. It has been determined that the hedge is highly effective and can
reasonably be expected to remain so. Management is not aware of any events that
would result in the reclassification into earnings of gains and losses that are
currently reported in accumulated other comprehensive income except for the
change in the FMV of the interest rate cap which pertains to the time value of
the hedging instrument. The FMV is estimated using the calculated FMV of similar
instruments.
<PAGE>
The following depicts the change in fair market value of the interest rate
cap:
<TABLE>
<CAPTION>
Carrying Value Changes in Carrying Value
At January 1, Fair Market At June 30,
2000 Value 2000
---------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Intrinsic value $ 2,813 $ (279) $ 2,534(1)
Time value 2,131 (206)(2) 1,925
------------ ----------- ----------
$ 4,944 $ (485) $ 4,459
============ =========== ==========
</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.
The corporation reclassified $72.5 million in investments and mortgage-backed
securities from held-to-maturity to available-for-sale. Of the $72.5 million
transferred, $55.4 million was sold at a loss of $1.3 million, net of tax. In
accordance with SFAS No. 133, this loss was included in the statement of
operations as a cumulative effect of a change in accounting principle.
5. COMPREHENSIVE INCOME
The following schedule depicts other comprehensive income as required
by SFAS No. 130:
<TABLE>
<CAPTION>
For the three months For the six months
Ended June 30, Ended June 30,
---------------------- --------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ............................................. $ 2,366 $ 4,568 $ 6,504 $ 8,959
Other Comprehensive Income:
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period ....... 420 (2,574) (1,964) (3,084)
Net unrealized holding loss arising during the period
on derivatives used for cash flow hedge ............ 105 -- (181) --
Reclassification for (gains) losses included in income . (1) -- 1,528 (1)
------- ------- ------- -------
Total comprehensive income, before other comprehensive
income that resulted from the cumulative effect of a
change in accounting principle .................... 2,890 1,994 5,887 5,874
Net unrealized gain on derivatives used for cash flow
hedging as a result of adopting SFAS No. 133 ....... -- -- 1,828 --
------- ------- ------- -------
Total comprehensive income ............................. $ 2,890 $ 1,994 $ 7,715 $ 5,874
======= ======= ======= =======
</TABLE>
<PAGE>
WSFS FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (Company or Corporation) is a savings and
loan holding company headquartered in Wilmington, Delaware. Substantially all of
the Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the Bank or WSFS). The long-term goal of the Corporation is to
maintain its high-performing financial services company status by focusing on
its core banking business while developing unique profitable niches in
complementary businesses which may operate outside the Bank's geographical
footprint. Founded in 1832, WSFS is one of the oldest financial institutions in
the country. It has operated under the same name and charter serving the
residents of Delaware for over 167 years. WSFS is the largest thrift institution
headquartered in Delaware and among the four largest financial institutions in
the state on the basis of total deposits traditionally garnered in-market. The
Corporation's primary market area is the Mid-Atlantic region of the United
States which is characterized by a diversified manufacturing and service
economy.
The Bank provides residential and commercial real estate, commercial
and consumer lending services, as well as cash management services funding these
activities primarily with retail deposits and borrowings. The banking operations
of WSFS are presently conducted from 26 retail banking offices located in
Northern Delaware and Southeastern Pennsylvania. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC).
Fully owned subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; and 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system.
In addition, the Bank has majority control of two non-wholly owned
subsidiaries, CustomerOne Financial Network (C1FN) and Wilmington National
Finance, Inc. (WNFI). See Footnote 3 of the Consolidated Financial Statements
for further discussion.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets declined $8.9 million during the first six months of 2000 to
$1.7 billion at June 30, 2000. The decrease in assets reflects a decline of
$85.9 million in mortgage-backed securities between June 30, 2000 and December
31, 1999. This was offset in part by increases of $45.6 million in net loans
(including held for sale), and $32.1 million in investment securities, cash and
cash equivalents. The decline in mortgage-backed securities resulted primarily
from a deleveraging strategy in which the Corporation divested of certain
investments securities and residential mortgages with below market interest
rates, thereby repositioning the balance sheet to allow room for higher yielding
loans and share buybacks. As a result, the Corporation sold approximately $126.5
million in investments and mortgage-backed securities. The Corporation also sold
an additional $24.1 million in mortgage-backed securities and experienced
principal repayments totaling $34.9 million. These decreases were partially
offset by purchases of $101.5 million. Net loans reflected originations of
$214.5 million offset in part by $45.9 million in sales ($25.0 million related
to deleveraging strategy) with the remainder representing principal repayments.
The increase in investments reflect purchases of $31.1 million in investment
securities, and increases in cash and cash equivalents of $33.0 million, offset
in part by the sales and maturities of $14.8 million in investment securities.
Total liabilities decreased $5.8 million during the six-months ended June
30, 2000 to $1.6 billion. Total borrowings declined $174.0 million during the
period as proceeds from the investment and loan sales were used to repay $152.0
million in FHLB advances and $22.0 million in other borrowed funds. These
declines were offset in part by a $165.8 million growth
<PAGE>
in deposits. Deposit growth reflects an increase of $108.2 million deposits at
everbank.com including the purchase of $37.0 million in nondollar denominated
deposits. In addition, brokered deposits at WSFS increased $27.2 million during
the increase first six-month period.
Capital Resources
Stockholders' equity decreased $1.7 million between December 31, 1999 and
June 30, 2000. This decrease reflects the purchase of 741,500 treasury shares,
at $8.7 million ($11.76 per share average). At June 30, 2000, the Corporation
held in its treasury 4,264,769 shares of its common stock at a cost of $50.6
million. This decline in equity was partially offset by net income of $6.5
million for the first six months of 2000.
A table presenting the Bank's consolidated capital position relative to the
minimum regulatory requirements as of June 30, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
----------------------- ------------------- ------------------------
Percentage of Percentage of Percentage of
Amount Assets Amount Assets Amount Assets
------ -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) ........ $149,190 12.86% $92,787 8.00% $115,984 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 141,135 8.08 69,839 4.00 87,299 5.00
Tangible Capital (to Tangible
Assets) .......................... 141,039 8.08 26,188 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 141,135 12.17 46,393 4.00 69,590 6.00
</TABLE>
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary-actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. At June 30, 2000 the Bank was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
Liquidity
The OTS requires institutions, such as the Bank, to maintain a 4.0% minimum
liquidity ratio of cash and qualified assets to net withdrawable deposits and
borrowings due within one year. At June 30, 2000, the Bank's liquidity ratio was
7.6% compared to 6.4% at December 31, 1999. Management monitors liquidity daily
and maintains funding sources to meet unforeseen changes in cash requirements.
It is the policy of the Bank to maintain cash and investments at least slightly
above required levels. The Corporation's primary financing sources are deposits,
repayments of loans and investment securities, sales of loans and borrowings. In
addition, the Corporation's liquidity requirements can be accomplished through
the use of its borrowing capacity from the FHLB of Pittsburgh, the sale of
certain securities and the pledging of certain loans for other lines of credit.
Management believes these sources are sufficient to maintain the required and
prudent levels of liquidity.
<PAGE>
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>
June 30, December 31,
2000 1999
--------- ------------
(Dollars in Thousands)
Nonaccruing loans:
<S> <C> <C>
Commercial .............................................. $ 2,828 $ 2,630
Consumer ................................................ 208 310
Commercial mortgage ..................................... 2,475 1,808
Residential mortgage .................................... 2,781 2,617
Construction ............................................ - -
--------- --------
Total nonaccruing loans ...................................... 8,292 7,365
Nonperforming investments in real estate ..................... - -
Assets acquired through foreclosure .......................... 1,338 1,061
--------- --------
Total nonperforming assets ................................... $ 9,630 $ 8,426
========= ========
Restructured loans ........................................... $ - $ -
========= ========
Past due loans and leases:
Residential mortgages ................................... $ 635 $ 333
Commercial and commercial mortgages ..................... 242 504
Consumer ................................................ 204 249
--------- --------
Total past due loans ......................................... $ 1,081 $ 1,086
========= ========
Ratios:
Nonperforming loans/leases to total
loans/leases (1) ..................................... 0.72% 0.67%
Allowance for loan/lease losses to total gross
loans/leases (1)...................................... 2.13 2.22
Nonperforming assets to total assets .................... .55 .48
Loan loss/lease loss allowance to nonaccruing
loans/leases (2)...................................... 287.36 322.56
Loan/lease and foreclosed asset allowance to total
nonperforming assets (2) .............................. 250.17 284.96
</TABLE>
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets increased $1.2 million between December 31, 1999 and
June 30, 2000. During the second quarter a $2.6 million commercial loan
relationship was placed on nonaccrual status. The net increase in nonaccruing
loans was $927,000 between December 31, 1999 and June 30, 2000. An analysis of
the change in the balance of nonperforming assets is presented on the following
page.
<PAGE>
<TABLE>
<CAPTION>
Analysis of change in balance:
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
---------------- -----------------
(In Thousands)
<S> <C> <C>
Beginning balance......................................... $ 8,426 $ 11,083
Additions ........................................... 19,233 20,562
Collections/sales ................................... (16,958) (18,930)
Transfers to accrual/restructured status............. (501) (2,937)
Transfers to investment in real estate............... -
Provisions, charge-offs, other adjustments........... (570) (1,352)
----------- -----------
Ending balance............................................ $ 9,630 $ 8,426
========== ==========
</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 the Bank are
the same as those which would result from a regulatory examination.
INTEREST SENSITIVITY
The matching of maturities or repricing periods of interest
rate-sensitive assets and liabilities to ensure a favorable interest rate spread
and mitigate exposure to fluctuations in interest rates is the Corporation's
primary focus for achieving its asset/liability management strategies.
Management regularly reviews interest-rate sensitivity of the Corporation and
adjusts sensitivity within acceptable tolerance ranges established by
management. Interest rate-sensitive assets of the Corporation include cash flows
that relate to the principal of the operating lease portfolio, which are
interest-rate sensitive. At June 30, 2000, interest-earning assets exceeded
interest-bearing liabilities that mature within one year (interest-sensitive
gap) by $6.5 million. The Corporation's interest-sensitive assets as a
percentage of interest-sensitive liabilities within the one-year window
increased to 100.8% at June 30, 2000 compared to 97.7% at December 31, 1999.
Likewise, the one-year interest-sensitive gap as a percentage of total assets
increased to a .37% from a negative 1.03% at December 31, 1999. The change is
the result of the Corporation's continuing effort to effectively manage interest
rate risk.
COMPARISON FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Results of Operations
The Corporation recorded net income of $2.4 million or $.22 per share for
the second quarter of 2000. This compares to $4.6 million or $.40 per share for
the same quarter last year. Results for the second quarter reflect several
unusual items including a $3.4 million pretax charge for residual losses on the
Corporation's automobile leasing portfolio, a consequence of the continued
weakness in the used car market. In addition, startup losses on the
Corporation's two new subsidiaries, WNFI and C1FN amounted to $923,000 after
tax. These items were partially offset by a $2.3 million favorable adjustment to
the value of the Corporation's reverse mortgage portfolio resulting from
improved cash flow from the portfolio, driven primarily by continued favorable
real estate markets, especially in California. In addition, results were
favorably affected by a partial recovery on a fully reserved note receivable and
the demutualization of two insurance company holdings which aggregated $1.0
million.
Net income for the six months ended June 30, 2000 was $6.5 million or $.60
per diluted share. This compares to $9.0 million or $.78 per share for the same
quarter last year. Results for the first six months of 2000 reflect several
large items including a $4.7 million pretax loss on the sale of approximately
$127 million in securities and loans as part of the Company's de-leverage/share
buyback program. Results also included a $3.1 million pretax loss on the
Corporations start-up initiatives, WNFI and C1FN. In addition to the above
mentioned charge to the leasing portfolio, the Corporation also recognized an
additional $400,000 provision for losses on off-lease automobile inventory in
the first quarter of 2000. These unfavorable items were partially offset by an
$8.1 million increase to interest income resulting from an adjustment to the
value of the Company's reverse mortgage portfolio.
<PAGE>
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 June 30,
---------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------
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)............ $ 621,760 $ 12,715 8.18% $ 515,497 $ 10,398 8.07%
Commercial loans ................ 120,186 2,426 8.92 94,900 1,742 8.45
Consumer loans................... 185,175 4,385 9.52 166,155 3,949 9.53
------- --------- ---------- ----------
Total loans.................... 927,121 19,526 8.55 776,552 16,089 8.43
Mortgage-backed securities (5)........ 326,044 5,475 6.72 498,032 7,791 6.26
Loans held-for-sale (3)............... 7,537 160 8.49 2,626 49 7.46
Investment securities (5)............. 47,027 843 7.17 36,630 573 6.26
Other interest-earning assets ........ 74,278 4,662 24.83 87,580 2,663 12.03
------------ --------- --------- -----------
Total interest-earning assets.... 1,382,007 30,666 8.96 1,401,420 27,165 7.83
-------- -----------
Allowance for loan losses............. (23,432) (23,551)
Cash and due from banks............... 52,776 42,049
Vehicles under operating lease, net... 214,136 217,442
Other noninterest-earning assets...... 37,995 35,934
------------ -----------
Total assets..................... $ 1,663,482 $1,673,294
============ ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 133,117 1,235 3.73 $ 71,711 377 2.11
Savings.......................... 268,768 2,534 3.79 236,334 1,756 2.98
Retail time deposits ............ 271,148 3,229 4.79 303,342 3,499 4.63
Jumbo certificates of deposits .. 39,252 568 5.82 74,715 965 5.18
Brokered certificates of deposit. 149,428 2,419 6.51 124,450 1,809 5.83
----------- -------- ---------- ----------
Total interest-bearing deposits 861,713 9,985 4.66 810,552 8,406 4.16
FHLB of Pittsburgh advances........... 376,654 5,359 5.72 453,571 5,961 5.27
Trust preferred borrowings............ 50,000 1,235 9.77 50,000 1,003 8.02
Other borrowed funds.................. 140,887 2,185 6.20 144,007 2,024 5.62
------------ --------- ----------- ----------
Total interest-bearing liabilities 1,429,254 18,764 5.25 1,458,130 17,394 4.77
--------- ----------
Noninterest-bearing demand deposits... 120,446 106,600
Other noninterest-bearing liabilities. 14,235 20,888
Minority interest .................... 3,969 -
Stockholders' equity.................. 95,578 87,676
------------ ------------
Total liabilities and stockholders'
equity........................ $ 1,663,482 $ 1,673,294
============ ===========
Deficit of interest-earning assets over
interest-bearing liabilities..... $ (47,247) $ (56,710)
============ ===========
Net interest and dividend income...... $ 11,902 $ 9,771
========= =========
Interest rate spread.................. 3.71% 3.06%
==== ====
Net interest margin................... 3.53% 2.87%
==== ====
Net interest and dividend income to
total average assets............. 2.93% 2.40%
==== ====
</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.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------
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)............ $ 612,448 $ 24,909 8.13% $ 519,291 $ 21,109 8.13%
Commercial loans ................ 117,518 4,678 8.83 94,140 3,406 8.39
Consumer loans................... 182,203 8,668 9.57 165,777 7,863 9.56
------- --------- ----------- ----------
Total loans.................... 912,169 38,255 8.51 779,208 32,378 8.46
Mortgage-backed securities (5)........ 366,040 12,095 6.61 502,329 15,803 6.29
Loans held-for-sale (3)............... 15,086 566 7.50 2,395 87 7.27
Investment securities (5)............. 44,109 1,548 7.02 36,856 1,151 6.25
Other interest-earning assets ........ 73,545 13,139 35.34 84,100 4,935 11.67
------------ --------- ----------- ----------
Total interest-earning assets.... 1,410,949 65,603 9.38 1,404,888 54,354 7.82
--------- ----------
Allowance for loan losses............. (23,391) (23,599)
Cash and due from banks............... 53,567 46,642
Vehicles under operating lease, net... 215,554 212,010
Other noninterest-earning assets...... 39,904 36,284
------------ -----------
Total assets..................... $1,696,583 $ 1,676,225
============ ===========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 109,470 1,781 3.27 $ 69,182 742 2.16
Savings.......................... 263,832 4,820 3.67 227,951 3,367 2.98
Retail time deposits ............ 271,889 6,358 4.70 315,019 7,415 4.75
Jumbo certificates of deposits .. 33,932 960 5.69 76,271 1,980 5.24
Brokered certificates of deposit. 144,127 4,501 6.28 98,071 2,940 6.05
------------ --------- ----------- ----------
Total interest-bearing deposits 823,250 18,420 4.50 786,494 16,444 4.22
FHLB of Pittsburgh advances........... 441,876 12,646 5.76 475,912 12,460 5.28
Trust preferred borrowings............ 50,000 2,378 9.41 50,000 1,990 7.96
Other borrowed funds.................. 146,266 4,503 6.16 151,957 4,230 5.57
----------- --------- ----------- ----------
Total interest-bearing liabilities 1,461,392 37,947 5.19 1,464,363 35,124 4.80
--------- ----------
Noninterest-bearing demand deposits... 116,829 104,030
Other noninterest-bearing liabilities. 17,278 20,171
Minority interest .................... 4,405 -
Stockholders' equity.................. 96,679 87,661
------------ -----------
Total liabilities and stockholders'
equity........................ $1,696,583 $ 1,676,225
============ ===========
Deficit of interest-earning assets over
interest-bearing liabilities..... $ (50,443) $ (59,475)
============ ===========
Net interest and dividend income...... $ 27,656 $ 19,230
========= ==========
Interest rate spread.................. 4.19% 3.02%
==== ====
Net interest margin................... 4.00% 2.82%
==== ====
Net interest and dividend income to
total average assets............. 3.33% 2,36%
==== ====
</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.
<PAGE>
Net interest income increased $2.1 million between the three months ended
June 30, 2000 and 1999. The increase was due primarily to a $2.3 million
interest income adjustment in the reverse mortgage portfolio. The adjustment to
the value of the portfolio was a result of improved cash flows driven by strong
residential real-estate markets and accelerated maturity events. The net
interest margin for the three months ended June 30, 2000 was 3.53%. If the $2.3
million adjustment were excluded from net interest income, the margin would be
2.86%, which is a decrease of 1 basis point from 2.87% for the three months
ended June 30, 1999. Total interest income, excluding the adjustment, increased
$1.2 million between comparable quarters. This change is attributed to the
increase in average loans of $150.6 million and a series of Federal Reserve
interest rate increases. This was partially offset by the decline in average
mortgage-backed securities of $172.0 million predominently from the sale of
securities related to the de-leverage program. Total interest expense increased
$1.45 million between the three months ended March 31, 2000 and 1999. The
increase was a result of the higher cost of borrowings and an increase in
average interest-bearing deposits of $51.2 million from June 30 1999. The higher
borrowing costs were offset partially by a decrease in FHLB advances of $77.0
million between comparable quarters.
Net interest income increased $8.4 million between the six months ended
June 30, 2000 and 1999. The increase was due primarily to a $8.1 million
interest income adjustment in the reverse mortgage portfolio. The adjustment to
the value of the portfolio was a result of improved cash flows driven by strong
residential real-estate markets and accelerated maturity events. The net
interest margin for the six months ended June 30, 2000 was 4.00%. If the $8.1
million adjustment were excluded from net interest income, the margin would be
2.85%, which is an increase of 3 basis points from 2.82% for the six months
ended June 30, 1999. Total interest income, excluding the adjustment, increased
$3.1 million between comparable periods. This change is attributed to the
increase in average loans of $133.0 million and a series of Federal Reserve
interest rate increases. This was partially offset by the decline in average
mortgage-backed securities of $136.3 million, predominantly from the sale of
securities related to the de-leverage program. Total interest expense increased
$2.8 million between the six months ended June 30, 2000 and 1999. The increase
was a result of the higher cost of borrowings and an increase in average
interest-bearing deposits of $36.8 million from June 30, 1999. The higher
borrowing costs was offset partially by a decrease in FHLB advances of $34.0
million between comparable periods.
Allowance for Loan/Lease Losses:
The Corporation maintains allowances for credit losses and charges losses
to these allowances when such losses are realized. The allowances for losses are
maintained at a level which management considers adequate to provide for losses
based upon an evaluation of known and inherent risks in the portfolios.
Management's evaluation is based upon a continuing review of the portfolios.
<PAGE>
The following table represents a summary of the changes in the allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Beginning balance ..................................... $23,024 $23,689
Provision for loan losses ............................. 445 512
Transfer .............................................. 175 --
Charge-offs:
Residential real estate .......................... 32 97
Commercial real estate (1) ....................... 28 196
Commercial ....................................... 53 8
Consumer (2) ..................................... 737 500
------- -------
Total charge-offs ............................. 850 801
------- -------
Recoveries:
Residential real estate .......................... 1 --
Commercial real estate (1) ............................ 187 48
Commercial ....................................... 41 9
Consumer (2) ..................................... 285 94
------- -------
Total recoveries .............................. 514 151
------- -------
Net charge-offs ....................................... 336 650
------- -------
Ending balance ........................................ $23,308 $23,551
======= =======
Net charge-offs to average gross loans outstanding, net
of unearned income (3) ............................. 0.07% 0.17%
======= =======
</TABLE>
(1) Includes commercial mortgages and construction loans.
(2) Includes finance-type leases.
(3) Ratio for the six months ended June 30, 2000 is annualized.
The following table represents a summary of the changes in the allowance
for lease credit losses during the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------ -----------------
(Dollars in Thousands)
<S> <C> <C>
Beginning balance ..................................... $1,467 $ 992
Provision for losses on vehicles under operating leases 44 432
Charge-offs ........................................... 393 321
Recoveries ............................................ 106 131
------ ------
Net charge-offs ....................................... 287 190
------ ------
Ending balance ........................................ $1,224 $1,234
====== ======
</TABLE>
<PAGE>
Other Income
Other income for the three months ended June 30, 2000 was $6.4 million or
$830,000 lower than the second quarter of 1999. The most significant factor
contributing to this variance was a $3.4 million charge for residual losses on
the Corporations automobile leasing portfolio. This was partially offset by
one-time gains of $818,000 on a fully reserved note receivable and $139,000 on
the demutualization of two mutual insurance company holdings. In addition, the
Corporation's two new startup initiatives, WNFI and C1FN added approximately
$977,000 of noninterest income during the quarter. Also, deposit service charges
increased $437,000 while credit/debit and ATM income grew $348,000. These
increases reflect increases in deposit accounts and the deposit service charge
fee schedule along with increased card usage and the growth in the ATM network.
Other income for the six months ended June 30, 2000 was $11.1 million or
$2.7 million lower than the same period last year. The major factors
contributing to this decrease was a $3.8 million additional charge for residual
losses and the loss of $2.5 million on the sale of investments and
mortgage-backed securities in the first quarter. This sale was part of the
deleverage plan discussed previously. This decrease was partially offset by the
above mentioned one-time gains totaling $1.0 million along with increases of
$843,000 in credit/debit card and ATM income and $697,000 in deposit service
charges. In addition WNFI and C1FN added $1.2 million of noninterest income to
the first six months of 2000.
Other Expenses
Other expenses for the quarter were $15.7 million or $5.2 million above the
second quarter of last year. Other expenses for the first six months of 2000
grew $9.2 million to $29.6 million. This increase, associated with salary
related expenses, marketing, premises and equipment expenses and data processing
expenses, relate to the opening of four new retail offices, ATM expansion and
startup expenses, including legal and consulting fees for two new subsidiaries,
WNFI and C1FN. These two subsidiaries added approximately $3.8 million and $6.9
million in additional expenses to the consolidated results for the three and six
month periods, respectively.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. Income taxes are accounted for in
accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences". The Corporation recorded
a provision for income taxes during the three and six months ended June 30, 2000
of $808,000 and $ 2.2 million, respectively, compared to an income tax provision
of $1.6 million and $3.1 million, for the comparable periods of 1999. The
effective tax rates for the three and six months ended June 30, 2000 were 25%
and 25%, respectively, compared to 26% and 26%, for the comparable periods in
1999. These effective rates reflect the recognition in the financial statements
of certain tax benefits, including the benefits related to the reverse mortgage
portfolio, and the fifty-percent interest income exclusion on an ESOP loan.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2000, the Corporation adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities". A provision of SFAS 133 affords the opportunity to
reclassify investment securities between held-to-maturity, available-for-sale
and trading. At adoption, the corporation reclassified $72.5 million in
investments and mortgage-backed securities from held-to-maturity to
available-for-sale. Of the $72.5 million transferred, $55.4 million was sold at
a loss of $1.3 million, net of tax. In accordance with SFAS No. 133, this loss
was included in the statement of operations as a cumulative effect of a change
in accounting principle.
In addition, the difference at January 1, 2000 between the fair value and
carrying value of $2.2 million, net of tax, relating to an interest rate cap is
included in comprehensive income as a cumulative change in accounting principle.
SEGMENT INFORMATION
Under the definition of SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" the Corporation has four operating segments
at June 30, 2000: Wilmington Savings Fund Society, FSB (Bank), WSFS Credit
Corporation (WCC), CustomerOne Financial network, Inc. (C1FN) and Wilmington
National Finance, Inc. (WNFI). C1FN and WNFI are not wholly-owned, but are
majority-controlled subsidiaries started in 1999. Only the Bank and WCC were
operating segments at June 30, 1999.
The Bank segment provides financial products through its branch network to
consumer and commercial customers. The WSFS Credit Corporation segment provides
auto loans and leases indirectly through unrelated auto dealerships within the
Mid-Atlantic region. C1FN is a start-up company in which the Bank has voting
control and shares in 42% of the operating results at June 30, 2000. C1FN
<PAGE>
provides direct-to-customer marketing, servicing, Internet development and
technology management for "branchless" financial services. WSFS and C1FN are
engaged in a joint effort through a division of the Bank, everbank.com, to
provide internet banking on a national level. WNFI, a 51% owned subsidiary,
which began operations in December 1999, is engaged in home equity lending.
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 and six
months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
----------------------------------------------------------------------------------------
2000 1999
------------------------------------------------- ----------------------------------
Bank WCC C1FN WNFI Total Bank WCC Total
---- --- ---- ---- ----- ---- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
External customer revenues:
Interest income................ $ 28,756 $ 447 $ 1,315 $ 148 $ 30,666 $ 26,670 $ 495 $ 27,165
Other income .................. 5,050 353(1) 163 814 6,380 3,155 4,055(1) 7,210
--------- ------- ------- -------- --------- ---------- -------- --------
Total external customer revenues .. 33,806 800 1,478 962 37,046 29,825 4,550 34,375
--------- ------- ------- -------- --------- ---------- -------- --------
Intersegment revenues:
Interest income................ 3,417 - - 24 3,441 34 - 34
Other income .................. 82 3 - - 85 23 1 24
--------- ------- ------- -------- --------- ---------- -------- --------
Total intersegment revenues ....... 3,499 3 - 24 3,526 57 1 58
--------- ------- ------- -------- --------- ---------- -------- --------
Total revenue...................... 37,305 803 1,478 986 40,572 29,882 4,551 34,433
External customer expenses:
Interest expense............... 17,672 - 1,000 92 18,764 17,394 - 17,394
Other expenses ................ 11,089 457 1,788 1,743 15,077 9,807 376 10,183
Other depreciation and
amortization ............. 723 19 105 40 887 606 19 625
--------- ------- ------- -------- --------- ---------- -------- --------
Total external customer expenses .. 29,484 476 2,893 1,875 34,728 27,807 395 28,202
--------- ------- ------- -------- --------- ---------- -------- --------
Intersegment expenses:
Interest expense............... 24 3,417(2) - - 3,441 - 34 34
Other expenses ................ 3 22 60 - 85 1 23 24
--------- ------- ------- -------- --------- ---------- -------- --------
Total intersegment expenses ....... 27 3,439 60 - 3,526 1 57 58
--------- ------- ------- -------- --------- ---------- -------- --------
Total expenses .................... 29,511 3,915 2,953 1,875 38,254 27,808 452 28,260
Income before taxes and
extraordinary items............ 7,794 (3,112) (1,475) (889) 2,318 2,074 4,099 6,173
========= ======= ======= ======== ========= ========== ======== ========
Provision for income taxes ........ 808 1,605
Less: minority interest ........... (856) -
Cumulative effect of change in
Accounting principle ........... - -
--------- --------
Consolidated net income $ 2,366 $ 4,568
========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
----------------------------------------------------------------------------------------
2000 1999
------------------------------------------------- ----------------------------------
Bank WCC C1FN WNFI Total Bank WCC Total
---- --- ---- ---- ----- ---- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
External customer revenues:
Interest income................ $ 62,882 $ 892 $ 1,681 $ 148 $ 65,603 $ 53,330 $ 1,024 $ 54,354
Other income .................. 5,935 3,965(1) 175 1,003 11,078 6,053 7,728(1) 13,781
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Total external customer revenues .. 68,817 4,857 1,856 1,151 76,681 59,383 8,752 68,135
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Intersegment revenues:
Interest income................ 6,773 - - 44 6,817 3,008 - 3,008
Other income .................. 165 6 - - 171 45 3 48
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Total intersegment revenues ....... 6,938 6 - 44 6,988 3,053 3 3,056
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Total revenue...................... 75,755 4,863 1,856 1,195 83,669 62,436 8,755 71,191
External customer expenses:
Interest expense............... 36,632 - 1,214 101 37,947 35,124 - 35,124
Other expenses ................ 21,094 911 3,431 2,911 28,347 18,864 854 19,718
Other depreciation and
amortization ............. 1,410 38 205 65 1,718 1,146 40 1,186
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Total external customer expenses .. 59,136 949 4,850 3,077 68,012 55,134 894 56,028
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Intersegment expenses:
Interest expense............... 44 6,773(2) - - 6,817 - 3,008 3,008
Other expenses ................ 6 45 120 - 171 3 45 48
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Total intersegment expenses ....... 50 6,818 120 - 6,988 3 3,053 3,056
---------- --------- -------- -------- ---------- ---------- ---------- ----------
Total expenses .................... 59,186 7,767 4,970 3,077 75,000 55,137 3,947 59,084
Income before taxes and
extraordinary items............ 16,569 (2,904) (3,114) (1,882) 8,669 7,299 4,808 12,107
========== ========= ======== ======== ========== ========== ========== ==========
Provision for income taxes ........ 2,996 3,148
Less: minority interest ........... (2,087) -
Cumulative effect of change in
Accounting principle ........... (1,256) -
---------- ----------
Consolidated net income ........... $ 6,504 $ 8,959
========== ==========
Segment assets..................... $1,608,339 $ 251,239 $124,758 $ 12,511 $1,996,847 $1,662,650 $ 246,640 $1,909,290
Elimination intersegment
receivables..................... (251,899) (229,275)
---------- ----------
Consolidated assets................ $1,744,948 $1,680,015
========== ==========
</TABLE>
(1) Operating lease income net of depreciation and loss provision.
(2) Inter-segment interest based on the Corporations weighted average wholesale
borrowing costs which was 6.19 and 5.57 for the three months ended June 30,
2000 and 1999, respectively and 6.12% and 5.56% for the six months ended
June 30, 2000 and 1999, respectively.
<PAGE>
FORWARD LOOKING STATEMENTS
Within this discussion and analysis we have included certain "forward
looking statements" concerning the future operations of the Corporation. It is
management's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing the Corporation of the protections of such safe
harbor with respect to all "forward looking statements" contained in our
financial statements. We have used "forward looking statements" to describe the
future plans and strategies including our expectations of the Corporation's
future financial results. Management's ability to predict results or the effect
of future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Delaware, mid-Atlantic region and the country as a whole, loan delinquency
rates, and changes in federal and state regulation, among others. These factors
should be considered in evaluating the "forward looking statements", and undue
reliance should not be placed on such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13A "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
on the net portfolio value ratio of an immediate change in interest rates in 100
basis point increments. The net portfolio value ratio is defined as the net
present value of assets minus liabilities, and plus or minus off-balance sheet
contracts divided by the net present value of assets. The chart below is the
estimated impact of immediate changes in interest rates on net interest margin
and the net portfolio value ratio at the specified levels at June 30, 2000 and
1999, calculated in compliance with Thrift Bulletin No. 13A:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------------------
2000 1999 (1)
Change in % Change in % Change in
Interest Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (2) Value Ratio(3) Margin (2) Value Ratio (3)
------------- ------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C>
+300 5% 5.05% 1% 5.25%
+200 2% 5.56% 1% 6.08%
+100 1% 6.09% 1% 6.95%
0 0% 6.62% 0% 7.86%
-100 -2% 7.22% -1% 9.00%
-200 -3% 7.99% -2% 10.28%
-300 -5% 9.01% -4% 11.61%
</TABLE>
(1) June 30, 1999 has been restated to reflect the change in valuation of core
deposit intangibles.
(2) This column represents the percentage difference between net interest
margin in a stable interest rate environment and net interest margin as
projected in the various rate increments.
(3) This column represents the net portfolio value ratio of the Company in a
stable interest rate environment and the net portfolio value ratio as
projected in the various rate increments.
The Company's primary objective in managing interest risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while maximizing the yield /cost spread on the
Company's asset/liability structure. The Company relies primarily on its
asset/liability structure to control interest rate risk.
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Procedings
None.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)(b) None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: August 10, 2000 \s\ MARVIN N. SCHOENHALS
---------------------------------
Marvin N. Schoenhals
Chairman, President
and Chief Executive Officer
Date: August 10, 2000 \s\ MARK A. TURNER
---------------------------------
Mark A. Turner
Executive Vice President and
Chief Financial Officer
