-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q/v6BS24W2lJPizu2JtKR5KWhKsF44otLXSQXS2Lw+QRg0uxA1sXI6T7HquD6C5K S+Gqu62+x0BZWUxQ1Ll+dQ== 0000946275-03-000212.txt : 20030327 0000946275-03-000212.hdr.sgml : 20030327 20030327170757 ACCESSION NUMBER: 0000946275-03-000212 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WSFS FINANCIAL CORP CENTRAL INDEX KEY: 0000828944 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222866913 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16668 FILM NUMBER: 03621710 BUSINESS ADDRESS: STREET 1: 838 MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19801 BUSINESS PHONE: 3027926000 MAIL ADDRESS: STREET 1: 838 MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19801 FORMER COMPANY: FORMER CONFORMED NAME: STAR STATES CORP DATE OF NAME CHANGE: 19920703 10-K 1 f10k_123102-0312.txt 10K 123102 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 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 ----------------------- Delaware 22-2866913 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 838 Market Street, Wilmington, Delaware 19899 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (302) 792-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 (Title of Class) 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 twelve 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES (X) NO ( ) --- --- The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the closing price of the registrant's common stock as quoted on the Nasdaq National Market(sm) as of March 14, 2003 was $169,324,015. For purposes of this calculation only, affiliates are deemed to be directors, executive officers and beneficial owners of greater than 5% of the outstanding shares. As of March 14, 2003, there were issued and outstanding 8,142,832 shares of the registrant's common stock. ------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 25, 2003 are incorporated by reference in Part III hereof. Portions of the 2002 Annual Report to shareholders are incorporated by reference in Part II. WSFS FINANCIAL CORPORATION TABLE OF CONTENTS Part I
Page ---- Item 1. Business .................................................................... 3 Item 2. Properties .................................................................. 21 Item 3. Legal Proceedings............................................................. 21 Item 4. Submission of Matters to a Vote of Security Holders........................... 21 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 22 Item 6. Selected Financial Data....................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................... 23 Item 8. Financial Statements and Supplementary Data................................... 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................................... 23 Part III Item 10. Directors and Executive Officers of the Registrant............................ 23 Item 11. Executive Compensation........................................................ 23 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters........................................... 24 Item 13. Certain Relationships and Related Transactions................................ 25 Item 14. Controls and Procedures....................................................... 25 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 25 Signatures.................................................................... 28 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002...... 30
-2- PART I FORWARD-LOOKING STATEMENTS Within this Annual Report on Form 10-K and Exhibits thereto, management has included certain "forward-looking statements" concerning the future operations of WSFS Financial Corporation (the "Company" or "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. Management has used "forward-looking statements" to describe the future plans and strategies including 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, operating risk, and uncertainty of estimates in general, and changes in federal and state regulation, among other factors. These factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. Actual results may differ materially from management expectations. WSFS Financial Corporation does not undertake and specifically disclaims any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. ITEM 1. BUSINESS - ----------------- GENERAL WSFS Financial Corporation (the "Company" or "Corporation") is a thrift holding company headquartered in Wilmington, Delaware. Substantially all of the Corporation's assets are held by its subsidiary, Wilmington Savings Fund Society, FSB (Bank or WSFS). Founded in 1832, WSFS is one of the oldest financial institutions in the country. As a federal savings bank, which was formerly chartered as a state mutual savings bank, WSFS enjoys broader investment powers than most other financial institutions. WSFS has served the residents of the Delaware Valley for 171 years. WSFS is the largest thrift institution headquartered in Delaware and among the three or four largest financial institutions in the state on the basis of total deposits traditionally garnered in-market. The Corporation's primary market area is the Mid-Atlantic region of the United States which is characterized by a diversified manufacturing and service economy. The long-term strategy of the Corporation is to improve its status as a high-performing financial services company by focusing on its core community banking business. WSFS provides residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. Lending activities are funded primarily with retail deposits and borrowings. Deposits are insured to their legal maximum by the Federal Deposit Insurance Corporation (FDIC). WSFS conducted operations from its main office, two operations centers and 21 retail banking offices, located in northern Delaware and southeastern Pennsylvania. In 2002, for strategic reasons, WSFS transferred 6 branch offices that were outside of its core footprint to other financial institutions. The Company's website is "www.wsfsbank.com". The Company makes available on its website, as soon as reasonably practicable after it electronically files with or furnishes such material to the Securities and Exchange Commission, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports pursuant to section 13(a) of the Exchange Act. The Corporation has two consolidated subsidiaries, WSFS and WSFS Capital Trust I. The Corporation has no unconsolidated subsidiaries or off-balance sheet entities. Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit Corporation (WCC), which is engaged primarily in indirect motor vehicle leasing; WSFS Investment Group, Inc. (formerly 838 Investment Group, Inc.), which markets various third-party insurance products and securities through -3- WSFS' branch system; and WSFS Reit, Inc., which holds qualifying real estate assets and may be used in the future to raise capital. An additional subsidiary, Star States Development Company (SSDC), was dissolved in 2002. In 2000, the Board of Directors of the Corporation approved plans to discontinue the operations of WCC. WCC, which had 2,317 lease contracts and 1,052 loan contracts at December 31, 2002, no longer accepts new applications but continues to service existing loans and leases until their maturity. Management estimates that substantially all loan and lease contracts will mature by the end of 2004. For a detailed discussion, see the Discontinued Operations section of Management's Discussion and Analysis ("MD&A") incorporated herein by reference at Part II, item 7 and Note 2 to the Financial Statements of the Corporation's 2002 Annual Report to Shareholders. In addition to the wholly owned subsidiaries, WSFS had consolidated two non-wholly owned subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and Wilmington Finance, Inc. (WF). C1FN, a 21% owned subsidiary engaged in Internet and branchless banking, was sold in November 2002. WF, a majority owned subsidiary, engaged in sub-prime residential mortgage banking and was sold in January 2003. Both subsidiaries are therefore classified as businesses held-for-sale in the Financial Statements. For a further discussion, see the Businesses Held-for-Sale section of the MD&A and Note 3 to the Financial Statements of the Corporations 2002 Annual Report to Shareholders. These divestitures are consistent with recent strategic actions of WSFS to simplify its operations and better focus resources and capital on WSFS' core bank. Competition WSFS is the second largest independent full service banking institution headquartered and operating in Delaware. It primarily attracts deposits through its system of branches, which numbered 21 at December 31, 2002. Eighteen branches are located in northern Delaware's New Castle County, WSFS' primary market. These branches maintain approximately 171,000 total account relationships with approximately 54,000 total households in New Castle County, or 28% of all households in New Castle County, Delaware. One branch is in the state capital, Dover, located in central Delaware's Kent County. Two other branches are located in southeastern Pennsylvania. The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions and credit unions in the Registrant's market area. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition comes from other insured financial institutions such as commercial banks, thrift institutions and credit unions. SUBSIDIARIES The Corporation has two subsidiaries, Wilmington Savings Fund Society, FSB (WSFS) and WSFS Capital Trust I. WSFS Capital Trust I was formed in 1998 to issue Trust Preferred Securities. The Trust invested all of the proceeds from the sale of the Trust Preferred Securities in Junior Subordinated Debentures of the Corporation. The Corporation used the proceeds from the Junior Subordinated Debentures for general corporate purposes, including the redemption of higher yielding debt. At December 31, 2002, WSFS had three wholly-owned, first-tier subsidiaries WSFS Investment Group (formerly 838 Investment Group, Inc.), WSFS Reit, Inc and WCC. In addition to the wholly owned subsidiaries, the Corporation consolidated a non-wholly owned subsidiary, Wilmington Finance (WF), the primary lender to its non-bank subsidiaries. WF was sold in January 2003 and is listed as a business held-for-sale at December 31, 2002. For a further discussion, see the businesses held for sale section of the MD&A and Note 3 to the Financial Statements of the Corporation's 2002 Annual Report. -4- 838 Investment Group, Inc. was formed in 1989. This subsidiary markets various third-party investment and insurance products, such as single-premium annuities, whole life policies and securities primarily through WSFS' branch system. WSFS Reit, Inc. is a real estate investment trust formed in 2002 to hold qualifying real estate assets. WCC is engaged primarily in indirect motor vehicle leasing. In 2000, the Board of Directors of the Corporation approved plans to discontinue the operations of WCC. WCC, which had 2,317 lease contracts and 1,052 loan contracts at December 31, 2002, no longer accepts new applications but continues to service existing loans and leases until their maturity. Management estimates that substantially all loan and lease contracts will mature by the end of 2004. For a detailed discussion, see the Discontinued Operations section of the MD&A and Note 2 to the Financial Statements of the Corporation's 2002 Annual Report. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY Condensed average balance sheets for each of the last three years and analyses of net interest income and changes in net interest income due to changes in volume and rate are presented in "Results of Operations" included in Item 7 of MD&A are incorporated herein by reference. INVESTMENT ACTIVITIES The Company's short-term investment portfolio is intended to provide collateral for borrowings and to meet liquidity requirements. Book values of investment securities and short-term investments by category, stated in dollar amounts and as a percent of total assets, follow:
December 31, ------------------------------------------------------------------------ 2002 2001 2000 --------------------- -------------------- ------------------- Percent Percent Percent of of of Amount Assets Amount Assets Amount Assets ------ ------- ------ ------- ------ ------- (Dollars In Thousands) Held-to-Maturity: - ----------------- Corporate bonds............................. $ 310 0.0% $ 1,372 0.1% $ 3,885 0.2% State and political subdivisions ........... 10,414 0.6 11,024 0.6 10,861 0.6 -------- --- -------- --- ------- --- 10,724 0.6 12,396 0.7 14,746 0.8 -------- --- -------- --- ------- --- Available-for-Sale: - ------------------- U.S. Government and agencies................ 11,053 0.7 - - 1,893 0.1 Corporate bonds............................. - - 1,798 0.1 13,101 0.8 -------- --- -------- --- ------- --- 11,053 0.7 1,798 0.1 14,994 0.9 -------- --- -------- --- ------- --- Short-term investments: - ----------------------- Federal funds sold and securities purchased under agreements to resell.............. 64,045 3.8 65,779 3.4 3,500 0.2 Interest-bearing deposits in other banks (1) 7,476 0.4 28,360 1.5 7,318 0.4 -------- -------- --- ------- 71,521 4.2 94,139 4.9 10,818 0.6 -------- --- -------- --- ------- --- $ 93,298 5.5% $108,333 5.7% $40,558 2.3% ======== === ======== === ======= ===
- ---------------------- (1) Interest-bearing deposits in other banks do not include deposits with a maturity greater than one year. During 2002, WSFS purchased $241.1 million in U.S. Government agency securities which were classified as available-for-sale. In addition, there were sales of $1.8 million in corporate bonds, and $2.6 million in corporate and municipal bond calls from which losses of $15,000 and gains of $2,000, respectively, were realized. There were also $50 million in investment securities on the books of C1FN when it was sold in November 2002. The remainder of the changes in 2002 resulted from repayments and maturities. In 2001, WSFS purchased $75 million in U.S. Treasury bills and $306,000 in corporate bonds all of which were classified as available-for-sale. In addition, there were sales of $644,000 in -5- corporate bonds and $3 million in corporate bond calls, from which gains of $9,000 and losses of $5,000 were realized. The remainder of the changes in 2001 resulted from repayments and maturities. In 2000, WSFS purchased $14 million in corporate bonds and $12 million in U.S. Government securities, all of which were classified as available-for-sale, and $9 million in municipal bonds which were classified as held-to-maturity. There was also a $2 million corporate bond which was reclassified from held-to-maturity to available-for-sale in 2000 with the adoption of SFAS No. 133 (see Note 19 of the Financial Statements for further discussion). In addition, there were sales of U.S. Government securities during 2000 totaling $25 million and a $750,000 corporate call, from which gains of $18,000 and losses of $67,000, respectively, were realized. There was also a sale of $10 million in U.S. Government securities in January 2000, for which no loss was recorded in 2000 as these securities had been marked-to-market in 1999. In addition, the Company recognized a gain of $40,000 on the sale of common stock received from the demutualization of insurance companies of which WSFS was a policyholder. The remainder of the changes during 2000 resulted from repayments and maturities. The following table sets forth the terms to maturity and related weighted average yields of investment securities and short-term investments at December 31, 2002. Substantially all of the related interest and dividends represent taxable income.
At December 31, 2002 Weighted Average Amount Yield ------ ----- (Dollars in Thousands) Held-to-Maturity: ----------------- Corporate bonds: After one but within five years......................... $ 124 6.93% After five but within ten years......................... 62 7.32 After ten years......................................... 124 7.52 ------- 310 7.24 ------- State and political subdivisions (1): After one but within five years......................... 4,494 7.18 After five but within ten years......................... 1,495 7.39 After ten years......................................... 4,425 6.30 ------- 10,414 6.84 ------- Total debt securities, held-to-maturity................... 10,724 6.85 ------- Available-for-Sale: ------------------- U.S. Government and agencies: After one but within five years......................... 11,053 2.51 ------- 11,053 2.51 ------- Total debt securities, available-for-sale................. 11,053 2.51 ------- Short-term investments: ----------------------- Federal funds sold and securities purchased under agreement to resell................................ 64,045 1.18 Interest-bearing deposits in other banks................ 7,476 0.95 ------- Total short-term investments.............................. 71,521 1.16 ------- $93,298 1.97% ======= ====
(1) Yields on state and political subdivisions are not calculated on a tax-equivalent basis since the effect would be immaterial. -6- In addition to the foregoing investment securities, the Company has maintained an investment portfolio of mortgage-backed securities. Purchases of mortgage-backed securities, including collateralized mortgage obligations, totaled $273 million in 2002. All purchases of mortgage-backed securities are classified as available-for-sale, except for $11 million which is being held in a trading account. These securities are part of the settlement of the reverse mortgage portfolio sale which is discussed further in Note 6 of the Financial Statements. There were also sales of $128 million in mortgage-backed securities, which resulted in a gain of $36,000. Finally, there were $71 million in mortgage-backed securities on the books of C1FN when they were sold in November 2002. In 2001, purchases of mortgage-backed securities totaled $281 million, all classified as available-for-sale. There were also sales of $4 million of mortgage-backed securities, which resulted in gains of $78,000. In 2000, purchases of mortgage-backed securities, totaled $210 million, all of which were classified as available-for-sale. There were also sales of $195 million of mortgage-backed securities, as part of a deleveraging strategy, which resulted in net losses of $6.5 million. In addition there was a sale of $24 million in mortgage-backed securities in January 2000 for which a loss of $730,000 was recognized in 1999. Reductions in the other categories, for all years, were due to principal repayments. The following table sets forth the book value of mortgage-backed securities and their related weighted average contractual rates at the end of the last three fiscal years.
December 31, -------------------------------------------------------------------------- 2002 2001 2000 -------------------- ---------------------- ------------------------ (Dollars in Thousands) Amount Rate Amount Rate Amount Rate ------ ------ ------ ------ ------ ----- Held-to-Maturity: - ----------------- Collateralized mortgage obligations ........ $ 13,881 6.90% $ 31,889 6.89% $ 56,091 6.75% FNMA........................................ 11,614 5.15 18,355 5.57 24,908 6.05 FHLMC....................................... 13,662 5.53 20,041 5.70 26,664 6.04 -------- ---- -------- ---- -------- ---- $ 39,157 5.90% $ 70,285 6.20% $107,663 6.41% ======== ==== ======== ==== ======== ==== Available-for-Sale: - ------------------- Collateralized mortgage obligations (1)..... $ 84,735 4.68% $260,784 5.51% $229,882 7.04% FNMA........................................ 13,346 4.74 15,276 5.45 1,141 7.25 FHLMC....................................... - - 15,138 4.84 1,032 7.76 GNMA........................................ - - 241 6.89 - - -------- ---- -------- ---- -------- ---- $ 98,081 4.69% $291,439 5.47% $232,055 7.04% ======== ==== ======== ==== ======== ==== Trading: - -------- Collateralized mortgage obligations (2)..... $ 11,000 4.42% $ - - $ - -% -------- ---- -------- ---- -------- ---- $ 11,000 4.42% $ - -% $ - -% ======== ==== ======== ==== ======== ====
(1) Includes $12.5 million and $21.3 million in private issues of Citicorp Mortgage Securities and Washington Mutual, respectively, all stated at their fair market value. (2) Includes $11.0 million in private issues from Structured Asset Securities Corporation stated at fair market value. -7- CREDIT EXTENSION ACTIVITIES Traditionally, the majority of a typical thrift institution's loan portfolio has consisted of first mortgage loans on residential properties. However, as a result of various legislative and regulatory changes since 1980, the commercial and consumer lending powers of WSFS have increased substantially. WSFS' current lending activity is more focused on lending to consumers and small businesses in and around the state of Delaware. -8- The following table sets forth the composition of the Corporation's loan portfolio by type of loan at the dates indicated. Other than as disclosed below, the Company had no concentrations of loans exceeding 10% of total loans at December 31, 2002:
December 31, --------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------ ----------------- --------------- --------------- ----------------- Types of Loans Amount Percent Amount Perecnt Amount Percent Amount Percent Amount Percent -------------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Residential real estate (1)...... $ 541,465 45.2% $ 487,845 43.7% $440,136 45.7% $393,243 45.7% $291,110 39.4% Commercial real estate: Commercial mortgage.............. 228,089 19.1% 208,286 18.7% 190,707 19.8% 201,559 23.4% 226,063 30.6% Construction..................... 59,555 5.0% 48,002 4.3% 30,183 3.1% 21,561 2.5% 11,642 1.51% ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Total commercial real estate.. 287,644 24.1% 256,288 23.0% 220,890 22.9% 223,120 25.9% 237,705 32.1% Commercial....................... 209,567 17.5% 197,790 17.7% 151,887 15.7% 115,931 13.5% 97,524 13.2% Consumer......................... 181,851 15.2% 198,366 17.8% 175,268 18.2% 154,857 18.0% 141,238 19.1% ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Gross loans...................... 1,220,527 102.0% 1,140,289 102.2% 988,181 102.5% 887,151 103.1% 767,577 103.8% Less: Unearned income.................. 2,043 0.2% 3,320 0.3% 3,268 0.3% 4,355 0.5% 5,383 0.7% Allowance for loan losses........ 21,452 1.8% 21,597 1.9% 21,423 2.2% 22,223 2.6% 22,732 3.1% ---------- ----- ---------- ----- -------- ----- -------- ----- -------- ----- Net loans........................ $1,197,032 100.0% $1,115,372 100.0% $963,490 100.0% $860,573 100.0% $739,462 100.0% ========== ===== ========== ===== ======== ===== ======== ===== ======== =====
(1) Includes $121,349, $84,691, $23,274, $24,572 and $3,103 of residential mortgage loans held-for-sale at December 31, 2002, 2001, 2000, 1999 and 1998, respectively. -9- The following table sets forth information as of December 31, 2002 regarding the amount of loans maturing in the Company's portfolios, including scheduled repayments of principal based on contractual terms to maturity. In addition, the table sets forth the amount of loans maturing during the indicated periods based on if the loan has a fixed or adjustable rate. Loans having no stated maturity or repayment schedule are reported in the one year or less category. Less than One to Over One Year Five Years Five Years Total -------- ---------- ---------- ----- (In Thousands) Real estate loans (1)... $ 57,364 $211,253 $379,588 $ 648,205 Construction loans...... 43,419 15,729 407 59,555 Commercial loans........ 48,192 79,554 81,821 209,567 Consumer loans ......... 61,488 61,299 59,064 181,851 -------- -------- -------- ---------- $210,463 $367,835 $520,880 $1,099,178 ======== ======== ======== ========== Rate sensitivity: Fixed................. $ 53,227 $176,034 $268,676 $ 497,937 Adjustable 157,236 191,801 252,204 601,241 -------- -------- -------- ---------- Gross loans $210,463 $367,835 $520,880 $1,099,178 ======== ======== ======== ========== (1) Includes commercial mortgage loans; does not include loans held-for-sale. The above schedule does not include any prepayment assumptions. Prepayments tend to be highly dependent upon the interest rate environment. Management believes that the actual repricing and maturity of the loan portfolio is significantly shorter than is reflected in the above table as a result of prepayments. Residential Real Estate Lending. WSFS originates residential mortgage loans with loan-to-value ratios up to 97%. WSFS generally requires private mortgage insurance for up to 30% of the mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. WSFS does not have any significant concentrations of such insurance with any one insurer. On a very limited basis, WSFS originates/purchases loans with loan-to-value ratios exceeding 80% without a private mortgage insurance requirement. At December 31, 2002, the balance of all such loans was approximately $17.4 million. Generally, residential mortgage loans are underwritten and documented in accordance with standard underwriting criteria published by Federal Home Loan Mortgage Corporation (FHLMC) to assure maximum eligibility for subsequent sale in the secondary market. However, unless loans are specifically designated for sale, the Company holds newly originated loans in its portfolio for long-term investment. Among other things, title insurance is required to insure the priority of its lien, and fire and extended coverage casualty insurance is required for the properties securing the residential loans. All properties securing residential loans made by WSFS are appraised by independent appraisers selected by WSFS and subject to review in accordance with WSFS standards. The majority of WSFS' residential real estate adjustable-rate loans have interest rates that adjust yearly, after an initial period. Usually the change in rate is limited to two percentage points at the adjustment date. Adjustments are generally based upon a margin (currently 2.75%) over the weekly average yield on U.S. Treasury securities adjusted to a constant maturity, as published by the Federal Reserve Board. Generally, the maximum rate on these loans is up to six percent above the initial interest rate. WSFS underwrites adjustable-rate loans under standards consistent with private mortgage insurance and secondary market criteria. WSFS does not originate adjustable-rate mortgages with payment limitations that could produce negative amortization. Consistent with industry practice in its market area, WSFS has typically originated adjustable-rate mortgage loans with discounted initial interest rates. The retention of adjustable-rate mortgage loans in WSFS' loan portfolio helps mitigate WSFS' risk to changes in interest rates. However, there are unquantifiable credit risks resulting from potential increased costs to the borrower as a result of repricing adjustable-rate mortgage loans. It is possible that during periods of -10- rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower. Further, although adjustable-rate mortgage loans allow WSFS to increase the sensitivity of its asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limitations. Accordingly, there can be no assurance that yields on WSFS' adjustable-rate mortgages will adjust sufficiently to compensate for increases in WSFS' cost of funds during periods of extreme interest rate increases. The original contractual loan payment period for residential loans is normally 10 to 30 years. Because borrowers may refinance or prepay their loans without penalty, such loans tend to remain outstanding for a substantially shorter period of time. First mortgage loans customarily include "due-on-sale" clauses on adjustable- and fixed-rate loans. This provision gives the institution the right to declare a loan immediately due and payable in the event the borrower sells or otherwise disposes of the real property subject to the mortgage. Due-on-sale clauses are an important means of adjusting the rate on existing fixed-rate mortgage loans to current market rates. WSFS enforces due-on-sale clauses through foreclosure and other legal proceedings to the extent available under applicable laws. In addition to loans originated for its own portfolio, WSFS originated nonconforming residential mortgage loans through its non wholly-owned subsidiary, Wilmington Finance, Inc. ("WF"). These loans were resold in the secondary market on a servicing released, limited recourse basis. They were originated using the underwriting guidelines of the various investors to which WF sells its loans. These loans are typically sold to investors within 15 to 45 days of origination. The mortgage loans that WF originates are fully amortizing, fixed or adjustable rate, first or second lien mortgage loans. They are secured by one-to four-family residential properties with loan-to-value ratios up to 100% and contractual terms of 10 to 30 years. With respect to each property securing a mortgage loan, the underwriting guidelines require, among other things, title insurance, fire and extended coverage casualty insurance, and a full appraisal by an independent appraiser selected and reviewed by WF. The majority of adjustable rate mortgage loans originated by WF are indexed to the six-month London Interbank Offered Rate (LIBOR) and have rates that adjust every six months after a initial fixed rate period of 24 to 36 months. Adjustments are limited to two percent at any adjustment date and eight percent over the life of the loan. In general, loans are sold without recourse except for the repurchase arising from standard contract provisions covering violation of representations and warranties or, under certain investor contracts, a default by the borrower on the first payment. The Company also has limited recourse exposure under certain investor contracts in the event a borrower prepays a loan in total within a specified period after sale, typically one year. The recourse is limited to a pro rata portion of the premium paid by the investor for that loan, less any prepayment penalty collectible from the borrower. Commercial Real Estate, Construction and Commercial Lending. Federal savings banks are generally permitted to invest up to 400% of their total regulatory capital in nonresidential real estate loans and up to 20% of its assets in commercial loans. As a federal savings bank which was formerly chartered as a Delaware savings bank, WSFS has certain additional lending authority. WSFS offers commercial real estate mortgage loans on multi-family properties and other commercial real estate. Generally, loan-to-value ratios for these loans do not exceed 80% of appraised value at origination. WSFS offers commercial construction loans to developers. In some cases these loans are made as "construction/permanent" loans, which provides for disbursement of loan funds during construction and automatic conversion to mini-permanent loans (1-5 years) upon completion of construction. These construction loans are made on a short-term basis, usually not exceeding two years, with interest rates indexed to the WSFS -11- prime rate, in most cases, and adjusted periodically as WSFS' prime rate changes. The loan appraisal process includes the same evaluation criteria as required for permanent mortgage loans, but also takes into consideration completed plans, specifications, comparables and cost estimates. Prior to approval of the credit, these items are used as a basis to determine the appraised value of the subject property when completed. Policy requires that all appraisals be reviewed independently of the commercial lending area. Generally, the loan-to-value ratios for construction loans do not exceed 75%. The initial interest rate on the permanent portion of the financing is determined by the prevailing market rate at the time of conversion to the permanent loan. At December 31, 2002, $101.0 million was committed for construction loans, of which $59.6 million had been disbursed. WSFS' commercial lending, excluding real estate loans, includes loans for the purpose of financing equipment acquisitions, expansion, working capital and other business purposes. These loans generally range in amounts up to $5 million, and their terms range from less than one year to seven years. The loans generally carry variable interest rates indexed to WSFS' prime rate, or LIBOR, at the time of closing. WSFS intends to continue originating commercial loans to small businesses in its market area. Commercial, commercial mortgage and construction lending have a higher level of risk as compared to residential mortgage lending. These loans typically involve larger loan balances concentrated in single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the successful operation of the related real estate project and may be more subject to adverse conditions in the commercial real estate market or in the economy generally. The majority of WSFS' commercial and commercial real estate loans are concentrated in Delaware and surrounding areas. Construction loans involve additional risk because loan funds are advanced as the construction progresses. The valuation of the underlying collateral can be difficult to quantify prior to the completion of the construction. This is due to uncertainties inherent in construction such as changing construction costs, delays arising from labor or material shortages and other unpredictable contingencies. WSFS attempts to mitigate these risks and plan for these contingencies through additional analysis and monitoring of its construction projects. Federal law limits the extensions of credit to any one borrower to 15% of unimpaired capital, or 25% if the difference is secured by readily marketable collateral having a market value that can be determined by reliable and continually available pricing. Extensions of credit include outstanding loans as well as contractual commitments to advance funds, such as standby letters of credit, but do not include unfunded loan commitments. WSFS had a $35.3 million loan to refinance an employee stock ownership plan ("ESOP") loan of a company. Approximately 80% of the loan is secured by discounted U.S. treasury securities. The portion of the loan that is secured by U.S. treasury securities is exempt from the above lending limits. At December 31, 2002, no borrower had collective outstandings exceeding the above limits. Consumer Lending. The primary consumer credit products of the Company are equity-secured installment loans and home equity lines of credit. At December 31, 2002, WSFS had equity secured installment loans totaling $123.7 million, which represented 68% of total consumer loans. A home equity line of credit grants borrowers a line of credit of up to 100% of the appraised value (net of any senior mortgages) of the residence. This line of credit is secured by a mortgage on the borrower's property and can be drawn upon at any time during the period of agreement. At December 31, 2002, WSFS had extended $89.4 million in home equity lines of credit, of which $31.5 million had been drawn at the date. Home equity lines of credit potentially offer federal income tax advantages, the convenience of checkbook access and revolving credit features. Although home equity lines of credit expose the Company to the risk that falling collateral values may leave it inadequately secured, the Company has not had any significant adverse experience to date. -12- The table below sets forth consumer loans by type, in amounts and percentages at the dates indicated.
December 31, ---------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------ ---------------- ---------------- ---------------- -------------- (Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Equity secured installment loans $123,655 68.1% $125,597 63.3% $113,686 64.8% $ 97,491 63.0% $ 87,503 61.9% Home equity lines of credit.... 31,512 17.3% 24,161 12.2% 24,408 13.9% 26,446 17.1% 27,799 19.7% Automobile..................... 11,728 6.4% 11,737 5.9% 9,762 5.6% 9,800 6.3% 8,307 5.9% Unsecured lines of credit...... 12,402 6.8% 20,156 10.2% 16,739 9.6% 11,370 7.3% 10,444 7.4% Other.......................... 2,554 1.4% 16,715 8.4% 10,673 6.1% 9,750 6.3% 7,185 5.1% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total consumer loans .......... $181,851 100.0% $198,366 100.0% $175,268 100.0% $154,857 100.0% $141,238 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
-13- Loan Originations, Purchase and Sales. WSFS has traditionally engaged in lending activities primarily in Delaware and contiguous areas of neighboring states. As a federal savings bank, however, WSFS may originate, purchase and sell loans throughout the United States. WSFS has purchased limited amounts of loans from outside its normal lending area when such purchases are deemed appropriate and consistent with WSFS' overall practices. WSFS originates fixed-rate and adjustable-rate residential real estate loans through its banking offices. In addition, WSFS has established relationships with correspondent banks and mortgage brokers to originate loans. During 2002, the Company originated $2.0 billion of residential real estate loans, of which $1.8 billion were from WF. This compares to originations of $693 million in 2001 of which WF represented $582 million. From time to time, WSFS has purchased whole loans and loan participations in accordance with its ongoing asset and liability management objectives. Purchases of residential real estate loans from correspondents and brokers primarily in the mid-Atlantic region totaled $62 million for the year ended December 31, 2002, $25 million for 2001 and $37 million for 2000. WSFS also periodically purchased residential mortgages from WF with the intention of holding such loans in its portfolio. These purchases totaled $19.1 million in 2002 and $25.0 million in 2001. Residential real estate loan sales totaled $1.8 billion in 2002, $566 million in 2001 and $145 million in 2000. While WSFS generally intends to hold loans for the foreseeable future, WSFS sells certain newly originated fixed-rate mortgage loans in the secondary market to control the interest rate sensitivity of its balance sheet. The Corporation holds for investment certain of its fixed-rate mortgage loans, with terms under 30 years, consistent with current asset/liability management strategies. At December 31, 2002, WSFS serviced approximately $234 million of residential loans for others compared to $262 million at December 31, 2001. The Company also services residential loans for its portfolio totaling $357 million and $350 million at December 31, 2002 and 2001, respectively. WSFS originates commercial real estate and commercial loans through its commercial lending division. Commercial loans are made for the purpose of financing equipment acquisitions, business expansion, working capital and other business purposes. During 2002, WSFS originated $198 million of commercial and commercial real estate loans compared with $262 million in 2001. These amounts represent gross contract amounts and do not reflect amounts outstanding on such loans. WSFS' consumer lending is conducted primarily through its branch offices. WSFS originates a variety of consumer credit products including home improvement loans, home equity lines of credit, automobile loans, credit cards, unsecured lines of credit and other secured and unsecured personal installment loans. During 2002, consumer loan originations amounted to $86 million compared to $128 million in 2001. All loans to one borrower exceeding $1 million must be approved by a management loan committee. Minutes of the management loan committee meetings and individual loans exceeding $3 million approved by the management loan committee are subsequently reviewed by the Executive Committee and Board of Directors of WSFS. Separate executive committee approval is needed for loans to any borrower who has direct or indirect outstanding commitments in excess of $5 million or for any advances or extensions on loans previously classified by banking regulators or WSFS' Risk Management Department. Individual Officers of WSFS have the authority to approve smaller loan amounts, depending upon their experience and management position. Fee Income from Lending Activities. WSFS earns interest and fee income from lending activities, including fees for originating loans, for servicing loans and for loan participations sold. The bank also receives fee income for making commitments to originate construction, residential and commercial real estate loans. Additionally, the bank collects fees related to existing loans which include prepayment charges, late charges and assumption fees. -14- WSFS charges fees for making loan commitments. Also as part of the loan application process, the borrower may pay WSFS for out-of-pocket costs to review the application, whether or not the loan is closed. Most loan fees are considered adjustments of yield in accordance with accounting principles generally accepted in the United States of America and are reflected in interest income. Those fees represented an immaterial amount of interest income during the three years ended December 31, 2002. Loan fees other than those considered adjustments of yield are reported as loan fee income, a component of noninterest income. All fee income on loans originated by WNF for sale to third-party investors, including origination fees, points collected from borrowers and sales premiums paid by investors, are recognized when loans are sold. Provisions are made for recourse obligations. LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES The Company's results of operations can be negatively impacted by nonperforming assets, which include nonaccruing loans, nonperforming real estate investments and assets acquired through foreclosure. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and collateral is insufficient to cover principal and interest. Interest accrued, but not collected at the date a loan is placed on nonaccrual status, is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management's assessment of ultimate collectibility of principal and interest. The Company endeavors to manage its portfolios to identify problem loans as promptly as possible and take actions immediately which will minimize losses. To accomplish this, WSFS' Risk Management Department monitors the asset quality of the Company's loan and investment in real estate portfolios and reports such information to the Credit Policy Committee, the Audit Committee of the Board of Directors and the Controller's Department. SOURCES OF FUNDS WSFS funds its operations through retail and wholesale deposit growth as well as through various borrowing sources, including repurchase agreements, federal funds purchased and advances from the Federal Home Loan Bank (FHLB) of Pittsburgh. Loan repayments and investment maturities also provide sources of funds. Loan repayments and investment maturities provide a relatively stable source of funds while certain deposit flows tend to be more susceptible to market conditions. Borrowings are used to fund wholesale asset growth, short-term funding of lending activities when loan demand exceeds projections, or when deposit inflows or outflows are less than or greater than expected. On a long-term basis, borrowings may be used to match against specific loans or support business expansion. Deposits. WSFS offers various deposit programs to its customers, including savings accounts, demand deposits, interest-bearing demand deposits, money market deposit accounts and certificates of deposits. In addition, WSFS accepts negotiable rate certificates with balances in excess of $100,000 from individuals, businesses and municipalities in Delaware. WSFS is the second largest independent full service banking institution headquartered and operating in Delaware. It primarily attracts deposits through its system of branches, which numbered 21 at December 31, 2002. Eighteen branches are located in northern Delaware's New Castle County, WSFS' primary market. These branches maintain approximately 171,000 total account relationships with approximately 54,000 total households, or 28% of all households -15- in New Castle County, Delaware. One branch is in the state capital, Dover, located in central Delaware's Kent County. Two other branches are located in southeastern Pennsylvania. The following table sets forth the amount of certificates of deposit of $100,000 or more by remaining maturity at the December 31, 2002: December 31, Maturity Period 2002 - --------------- ------------- (In Thousands) Less than 3 months...................... $46,997 Over 3 months to 6 months............... 9,427 Over 6 months to 12 months.............. 8,751 Over 12 months.......................... 11,295 ------- $76,470 ======= Borrowings. The Company utilizes several sources of borrowings to fund operations. As a member of the FHLB of Pittsburgh, WSFS is authorized to apply for advances on the security of their capital stock in the FHLB and certain of their residential mortgages and other assets (principally securities which are obligations of or guaranteed by the United States Government and mortgage-backed securities), provided certain standards related to creditworthiness have been met. As a member institution, WSFS is required to hold capital stock in the FHLB of Pittsburgh in an amount at least equal to 5% of their outstanding advances plus 0.7% of the Bank's unused borrowing capacity. WSFS also sells securities under agreements to repurchase with various brokers as an additional source of funding. When entering into these transactions, WSFS is generally required to pledge either government securities or mortgage-backed securities as collateral for the borrowings. In 1998, the Company issued $50.0 million in Trust Preferred securities due December 11, 2028. See Note 11 of the Consolidated Financial Statements for a discussion of the Trust Preferred securities. PERSONNEL As of December 31, 2002 the Registrant had 870 fulltime equivalent employees. The employees are not represented by a collective bargaining unit. Management believes its relationship with its employees is good. REGULATION Regulation of the Company Recent Legislation to Curtail Corporate Irregularities. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). The Securities and Exchange Commission (the "SEC") promulgated certain regulations pursuant to the Act and will continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subject to publicly-traded companies to additional and more cumbersome reporting regulations and disclosure. These new regulations, which are intended to curtail corporate fraud, require the chief executive officer and chief financial officer of the Company to personally certify certain SEC filings and Financial Statements and to certify as to the existence of disclosure controls and -16- procedures within the Company are designed to ensure that information required to be disclosed by the Company in its SEC filings is processed, summarized and reported accurately. The Act and regulations promulgated thereunder by the SEC also impose additional measures to be taken by the Company's officers, directors and outside auditors and impose accelerated reporting requirements by officers and directors of the Company in connection with certain changes in their equity holdings of the Company. Implementation of and compliance with the Act and corresponding regulations will likely increase the Company's expenses. General. The Company is a registered savings and loan holding company and is subject to Office of Thrift Supervision (OTS) regulation, examination, supervision and reporting requirements. As a subsidiary of a holding company, WSFS is subject to certain restrictions in its dealings with the Company and other affiliates. Activities Restrictions. Because the Company became a unitary savings and loan holding company prior to May 4, 1999, there generally are no restrictions on its activities. If the Company were to acquire another thrift and operate it as a separate entity, it would become subject to the activities restrictions on multiple holding companies. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association may commence, or continue after a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than: (i) furnishing or performing management services for a subsidiary savings association; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the Director of OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") as permissible for bank holding companies. Those activities described in (vii) above also must be approved by the Director of OTS prior to being engaged in by a multiple savings and loan holding company. Transactions with Affiliates; Tying Arrangements. Transactions between savings associations and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings association, generally, is any company or entity which controls or is under common control with the savings association or any subsidiary of the savings association that is a bank or savings association. In a holding company context, the parent holding company of a savings association (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings association. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings association may (i) lend or otherwise extend credit to an affiliate that engages in any activity impermissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings association. Savings associations are also prohibited from extending credit, offering services, or fixing or varying the consideration for any extension of credit or service on the condition that the customer obtain some additional service from the institution or certain of its affiliates or that the customer not obtain services from a competitor of the institution, subject to certain limited exceptions. Restrictions on Acquisitions. A savings and loan holding company must obtain the prior approval of the Director of OTS before acquiring, (i) control of any other savings association or savings and loan holding company or substantially all the assets thereof, or (ii) more than 5% of the voting shares of a savings association or holding company thereof which is not a subsidiary. -17- Under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the Director of OTS, up to 15% of the voting shares of an under-capitalized savings association pursuant to a "qualified stock issuance" without that savings association being deemed controlled by the holding company. Except with the prior approval of the Director of OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings association, other than a subsidiary savings association, or of any other savings and loan holding company. The Director of OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state if: (i) the company involved controls a savings institution which operated a home or branch office in the state of the association to be acquired as of March 5, 1987; (ii) the acquirer is authorized to acquire control of the savings association pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the association to be acquired is located specifically permit institutions to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). The laws of Delaware do not specifically authorize out-of-state savings associations or their holding companies to acquire Delaware-chartered savings associations. The statutory restrictions on the formation of interstate multiple holding companies would not prevent WSFS from entering into other states by mergers or branching. OTS regulations permit federal associations to branch in any state or states of the United States and its territories. Except in supervisory cases or when interstate branching is otherwise permitted by state law or other statutory provision, a federal association may not establish an out-of-state branch unless the federal association qualifies as a "domestic building and loan association" under Section 7701(a)(19) of the Internal Revenue Code or as a "qualified thrift lender" under the Home Owners' Loan Act and the total assets attributable to all branches of the association in the state would qualify such branches taken as a whole for treatment as a domestic building and loan association or qualified thrift lender. Federal associations generally may not establish new branches unless the association meets or exceeds minimum regulatory capital requirements. The OTS will also consider the association's record of compliance with the Community Reinvestment Act of 1977 in connection with any branch application. Regulation of WSFS General. As a federally chartered savings institution, WSFS is subject to extensive regulation by the OTS. The lending activities and other investments of WSFS must comply with various federal regulatory requirements. The OTS periodically examines WSFS for compliance with regulatory requirements. The FDIC also has the authority to conduct special examinations of WSFS as the insurer of deposits. WSFS must file reports with OTS describing its activities and financial condition. WSFS is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors. Certain of these regulatory requirements are referred to below or appear elsewhere herein. Regulatory Capital Requirements. Under OTS capital regulations, savings institutions must maintain "tangible" capital equal to 1.5% of adjusted total assets, "Tier 1" or "core" capital equal to 4% of adjusted total assets (or 3% if the institution is rated composite 1 under the OTS examiner rating system), and "total" capital (a combination of core and "supplementary" capital) equal to 8% of risk-weighted assets. In addition, OTS regulations impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definition as core capital. The OTS capital rule defines Tier 1 or core capital as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully -18- consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual institutions and "qualifying supervisory goodwill," less intangible assets other than certain supervisory goodwill and, subject to certain limitations, mortgage and non-mortgage servicing rights, purchased credit card relationships and credit-enhancing interest only strips. Tangible capital is given the same definition as core capital but does not include qualifying supervisory goodwill and is reduced by the amount of all the savings institution's intangible assets except for limited amounts of mortgage servicing assets. The OTS capital rule requires that core and tangible capital be reduced by an amount equal to a savings institution's debt and equity investments in "nonincludable" subsidiaries engaged in activities not permissible to national banks, other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies. At December 31, 2002, WSFS was in compliance with both the core and tangible capital requirements. The risk weights assigned by the OTS risk-based capital regulation range from 0% for cash and U.S. government securities to 100% for consumer and commercial loans, non-qualifying mortgage loans, property acquired through foreclosure, assets more than 90 days past due and other assets. In determining compliance with the risk-based capital requirement, a savings institution may include both core capital and supplementary capital in its total capital, provided the amount of supplementary capital included does not exceed the savings institution's core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments, general loan loss allowances up to 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair values. Total capital is reduced by the amount of the institution's reciprocal holdings of depository institution capital instruments and all equity investments. At December 31, 2002, WSFS was in compliance with the OTS risk-based capital requirements. Dividend Restrictions. As the subsidiary of a savings and loan holding company, WSFS must submit notice to the OTS prior to making any capital distribution (which includes cash dividends, stock repurchases and payments to shareholders of another institution in a cash merger). In addition, a savings association must make application to the OTS to pay a capital distribution if (x) the association would not be adequately capitalized following the distribution, (y) the association's total distributions for the calendar year exceeds the association's net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or (z) the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS. Deposit Insurance. WSFS may be charged semi-annual premiums by the FDIC for federal insurance on its insurable deposit accounts up to applicable regulatory limits. The FDIC may establish an assessment rate for deposit insurance premiums which protects the insurance fund and considers the fund's operating expenses, case resolution expenditures, income and effect of the assessment rate on the earnings and capital of members. The assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC which is determined by the institution's capital level and supervisory evaluations. Institutions are assigned to one of three capital groups -- well-capitalized, adequately-capitalized or undercapitalized. Within each capital group, institutions will be assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Because the Bank Insurance Fund (BIF) currently exceeds its statutory reserve ratio of 1.25% of insured deposits, most BIF members are not being charged FDIC deposit insurance premiums for the first six months of 2003. In the event that the BIF should fail to meet its statutory reserve ratio, the FDIC would be required to set semi-annual assessment rates for BIF members that are sufficient to increase the reserve ratio to 1.25% within one year or in accordance with such other schedule that the FDIC adopts by regulation to restore the reserve ratio in not more than 15 years. The FDIC continues to assess BIF member institutions to fund interest payments on certain bonds issued by the Financing Corporation (FICO), an agency of the federal government established to help fund takeovers of insolvent thrifts. Until December 31, 1999, BIF members were assessed at approximately one-fifth the rate at which Savings -19- Association Insurance Fund (SAIF) members were assessed. After December 31, 1999, BIF and SAIF members are being assessed at the same rate for debt service on the FICO bonds. Federal Reserve System. Pursuant to regulations of the Federal Reserve Board, a savings institution must maintain average daily reserves equal to 3% on the first $42.1 million of transaction accounts, plus 10% on the remainder. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement may be to reduce the amount of the institution's interest-earning assets. As of December 31, 2002 WSFS met its reserve requirements. -20- ITEM 2. PROPERTIES - ------------------ The following table sets forth the location and certain additional information regarding the Company's offices and other material properties at December 31, 2002.
Net Book Value Of Property Owned/ Date Lease or Leasehold Location Leased Expires Improvements (2) Deposits - -------- ------ ------- ---------------- -------- (In Thousands) --------------------------- WSFS: Main Office (1)(2) Owned $1,081 $211,623 9th & Market Streets Wilmington, DE 19899 Union Street Branch Leased 2003 95 50,957 3rd & Union Streets Wilmington, DE 19805 Trolley Square Branch Leased 2006 7 24,993 1711 Delaware Avenue Wilmington, DE 19806 Fairfax Shopping Center Branch Leased 2003 11 66,957 2005 Concord Pike Wilmington, DE 19803 Branmar Plaza Shopping Center Branch Leased 2003 9 63,991 1812 Marsh Road Wilmington, DE 19810 Prices Corner Shopping Center Branch Leased 2003 30 86,477 3202 Kirkwood Highway Wilmington, DE 19808 Pike Creek Shopping Center Branch Leased 2005 20 64,525 New Linden Hill & Limestone Roads Wilmington, DE 19808 University Plaza Shopping Center Branch Leased 2003 8 40,325 I-95 & Route 273 Newark, DE 19712 College Square Shopping Center Branch (4) Leased 2007 242 68,549 Route 273 & Liberty Avenue Newark, DE 19711 Airport Plaza Shopping Center Branch Leased 2013 15 68,171 144 N. DuPont Hwy. New Castle, DE 19720 Stanton Branch Leased 2006 112 10,909 Inside ShopRite at First State Plaza 1600 W. Newport Pike Wilmington, DE 19804 Glasgow Branch Leased 2008 162 18,863 Inside Genuardi's at Peoples Plaza Routes 40 & 896 Newark, DE 19804 Middletown Square Shopping Center Leased 2004 32 15,832 Inside Parkers Thriftway 701 N. Broad St. Middletown, DE 19709 Dover Branch Leased 2005 79 16,155 Inside Metro Food Market Rt 134 & White Oak Road Dover, DE 19901
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Net Book Value of Property Owned/ Date Lease or Leasehold Location Leased Expires Improvements (2) Deposits -------- ------ ------- ---------------- -------- (In Thousands) ------------------------------ WSFS (continued...): -------------------- Glen Eagle Branch Leased 2003 198 8,019 Inside Genaurdi's Family Market 475 Glen Eagle Square Glen Mills, PA 19342 University of Delaware-Trabant University Center Leased 2003 183 7,605 17 West Main Street Newark, DE 19716 Brandywine Branch Leased 2004 170 17,775 Inside Genaurdi's Family Market 2522 Foulk Road Wilmington, DE 19810 Wal-Mart Branch Leased 2004 257 3,841 Route 40 & Wilton Boulevard New Castle, DE 19720 Operations Center Owned 1,007 N/A 2400 Philadelphia Pike Wilmington, DE 19703 Longwood Branch Leased 2005 188 3,329 830 E. Baltimore Pike E. Marlborough, PA 19348 Holly Oak Branch Leased 2005 152 19,690 Inside Superfresh 2105 Philadelphia Pike Claymont, DE 19703 Elkins Park Branch (7) Leased 2005 - - More Shopping Center 7300 Old York Road Elkins Park, PA 19027 Hockessin Branch Leased 2015 577 29,810 7450 Lancaster Pike Wilmington, DE 19707 Dewey Beach-Loan Office Leased 2004 1 N/A Ocean Winds Village Dewey Beach, DE 19971 Middletown Crossing Shopping Center (6) Leased 2017 0 N/A Route 299 and Silver Lake Road Middletown, DE 19709 Fox Run Shopping Center (8) Leased 2006 126 N/A Bear, DE Wilmington National Finance: (5) -------------------------------- 6265 Southfront Road Leased 2005 - N/A Livermore, CA 1833 Centre Point Drive Leased 2005 - N/A Suite 123 Naperville, IL 60566 Suite 350 Leased 2005 - N/A 2260 Buler Pike Plymouth Meeting, PA 19462 University Plaza-Bellevue Leased 2005 - N/A 262 Chapman Road Newark, DE 175 Great Neck Road Leased 2003 - N/A Suite 407 Great Neck, NY
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Net Book Value of Property Owned/ Date Lease or Leasehold Location Leased Expires Improvements (2) Deposits -------- ------ ------- ---------------- -------- (In Thousands) ----------------------------- Wilmington National Finance (continued...): ------------------------------------------- Sunset Ridge Professional Plaza Leased 2004 - N/A 2920 N. Green Parkway Henderson, NY One University Plaza Leased 2004 - N/A 8301 JM Keynes Drive Suite 400 Charlotte, NC Suite 150 Leased 2004 - N/A 4800 River Green Parkway Duluth, GA WSFS Credit Corporation: ------------------------ 30 Blue Hen Drive Leased 2007 276 N/A Suite 200 Newark, DE 19713 Greenville, DE Property (3) Owned - 2,090 N/A ---------------------------- Wilmington Gateway: (3) ----------------------- 500 Delaware Ave. Owned - 5,663 N/A Wilmington, DE 19801 --------- $ 898,396 =========
(1) Includes location of executive offices. (2) The net book value of all the Company's investment in premises and equipment totaled $13.8 million at December 31, 2002. (3) The total includes building and building depreciation listed under Real Estate Held for Investment. (4) Includes the Company's Education and Development Center. (5) Subsidiary was sold on January 2, 2003. (6) Construction to begin in 2004. (7) Branch was sold on September 30, 2002. Office is now sublet to independent third-party. (8) Construction to begin in 2003. ITEM 3. LEGAL PROCEEDINGS - ------------------------- There are no material legal proceedings to which the Company or WSFS is a party or to which any of its property is subject except as discussed in Note 16 to the Consolidated Financial Statements. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matter was submitted to a vote of the stockholders during the fourth quarter of the fiscal year ended December 31, 2002 through the solicitation of proxies or otherwise. -23- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ----------------------------------------------------------------------------- The information contained under the section captioned "Market for Registrants Common Equity and Related Stockholder Matters" in the 2002 Annual Report to Stockholders (the "Annual Report") is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------
2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (Dollars in Thousands, Except Per Share Data) At December 31, --------------- Total assets............................. $1,705,000 $1,913,920 $1,739,316 $1,751,037 $1,631,319 Net loans (1)............................ 1,197,032 1,115,372 963,491 860,573 739,462 Investment securities (2)................ 21,777 14,194 29,740 37,473 37,861 Investment in reverse mortgages, net..... 1,131 33,939 33,683 28,103 31,293 Other investments........................ 93,500 122,889 39,318 36,526 51,418 Mortgage-backed securities (2)........... 148,238 361,724 339,718 447,749 459,084 Deposits ................................ 898,396 1,146,117 1,121,591 910,090 858,300 Borrowings (3)........................... 466,006 595,480 443,638 672,465 622,409 Trust preferred borrowings............... 50,000 50,000 50,000 50,000 50,000 Stockholders' equity .................... 182,672 100,003 97,146 96,153 85,752 Number of full-service branches (4)(5)... 21 27 28 24 20 For the Year Ended December 31, ------------------------------- Interest income.......................... $ 94,703 $ 101,338 $ 120,899 $ 108,012 $ 105,833 Interest expense......................... 33,434 46,597 59,499 58,840 59,775 Noninterest income ...................... 124,060 21,125 12,926 11,578 11,243 Noninterest expenses .................... 51,617 47,689 45,278 40,724 34,501 Income from continuing operations........ 88,018 17,762 18,457 18,587 15,388 Net income .............................. 101,141 17,083 11,019 19,709 16,512 Earnings per share: Basic: Income from continuing operations..... $ 9.69 $ 1.85 $ 1.73 $ 1.64 $ 1.25 Net income ........................... 11.13 1.78 1.03 1.74 1.34 Diluted: Income from continuing operations..... 9.27 1.83 1.73 1.63 1.23 Net income ........................... 10.65 1.76 1.03 1.73 1.32 Interest rate spread..................... 4.97% 4.64% 5.01% 3.90% 3.78% Net interest margin...................... 4.93 4.51 4.77 3.65 3.63 Return on average equity (6)............. 70.69 17.69 18.85 20.89 16.47 Return on average assets (6)............. 6.22 1.33 1.34 1.29 1.15 Average equity to average assets (6)..... 8.79 7.50 7.12 6.17 6.96
(1) Includes loans held-for-sale. (2) Includes securities available-for-sale. (3) Borrowings consist of FHLB advances and securities sold under agreement to repurchase. (4) WSFS closed one branch in 2001. WSFS opened four branches in 1998, 1999 and 2000. (5) Six branches were transferred to other financial institutions in 2002. (6) Based on continuing operations. -24- ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------ OF OPERATIONS ------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The information contained in the section captioned "Market Risk" in the Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLIMENTARY DISCLOSURES - ---------------------------------------------------------- The Registrant's financial statements listed in Item 15 herein are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The Information which appears under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal 1 - Election of Directors" in the Registrant's definitive proxy statement for the registrant's Annual Meeting of Stockholders to be held on April 24, 2003 (the "Proxy Statement") which was filed with the Securities and Exchange Commission on March 26, 2003, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The information which appears under the heading "Proposal 1 - Election of Directors" in the Proxy Statement is incorporated herein by reference. -25- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Principal Holders Thereof" of the Proxy Statement (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Proposal 1 -- Election of Directors -- Stock ownership of Management" of the Proxy Statement (c) Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. (d) Securities Authorized for Issuance Under Equity Compensation Plans Set forth below is information as of December 31, 2002 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
Equity Compensation Plan Information (a) (b) (c) Number of securities Number of Securities Weighted-Average remaining available for to be issued upon exercise price of future issuance under exercise of outstanding outstanding equity compensation plans Options, SARs and Options, SARs and (excluding securities Phantom Stock Awards Phantom Stock Awards reflected in column (a) -------------------- -------------------- ----------------------- Equity compensation plans approved by stockholders (1) 1,080,060 $ 14.55 69,450 Equity compensation plans not approved by stockholders n/a n/a n/a --------- ------- ------ TOTAL 1,080,060 $ 14.55 69,450 ========= ======= ======
(1) Plans approved by stockholders include the 1986 Stock Option Plan and the 1997 Stock Option Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information which appears under the heading "Business Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. -26- ITEM 14. CONTROLS AND PROCEDURES - -------------------------------- (a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Registrant's principal executive officer and principal financial officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal controls. There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a) Listed below are all financial statements and exhibits filed as part of this report, and are incorporated by reference. 1. The consolidated statements of Condition of WSFS Financial Corporation and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2002, together with the related notes and the independent auditors' report of KPMG, LLP, independent accountants. 2. Schedules omitted as they are not applicable. The following exhibits are incorporated by reference herein or annexed to this Annual Report: Exhibit Number Description of Document - ------ ----------------------- 3.1 Registrant's Certificate of Incorporation, as amended is incorporated herein by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 3.2 Bylaws of WSFS Financial Corporation are incorporated herein by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 (File No. 33-45762) filed with the Commission on February 24, 1992. 4.1 Certificate of Trust of WSFS Capital Trust I, incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-3, Registration Nos. 333-56015, 333-56015-01 and 333-56015-02 filed by WSFS Financial Corporation, WSFS Capital Trust I and WSFS Capital Trust II (the "Registration Statement"). 4.2 Trust Agreement of WSFS Capital Trust I, incorporated herein by reference to Exhibit 4.4 to the Registration Statement. -27- 4.3 Amended and Restated Trust Agreement of WSFS Capital I, incorporated herein by reference to Exhibit 4.1 to WSFS Financial Corporation's Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 20, 1998 ("Form 8-K/A"). 4.4 Form of Trust Preferred Security Certificate of WSFS Capital Trust I, incorporated herein by reference to Exhibit 4.3 to Form 8-K/A. 4.5 Trust Preferred Securities Guarantee Agreement, incorporated herein by reference to the Form 8-K/A filed with the Securities and Exchange Commission on November 20, 1998. 4.6 Form of Junior Subordinated Indenture between WSFS Financial Corporation and Wilmington Trust Company, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registration Statement. 4.7 Officers' Certificate and Company Order for Floating Rate Junior Subordinated Debentures due December 1, 2028, incorporated herein by reference to Exhibit 4.2 to the Form 8-K/A. 4.8 Form of Floating Rate Junior Subordinated Debenture, incorporated herein by reference to Exhibit 4.5 of the Form 8-K/A. 4.9 First Amendment to the Amended and Restated Trust Agreement of WSFS Capital Trust I. 10.1 Wilmington Savings Fund Society, Federal Savings Bank 1986 Stock Option Plan, as amended is incorporated herein by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-8 (File No. 33-56108) filed with the Commission on December 21, 1992. 10.2 WSFS Financial Corporation, 1994 Short Term Management Incentive Plan Summary Plan Description is incorporated herein by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.3 Amended and Restated Wilmington Savings Fund Society, Federal Savings Bank 1997 Stock Option Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 333-26099) filed with the Commission on April 29, 1997. 10.4 2000 Stock Option and Temporary Severance Agreement among Wilmington Savings Fund Society, Federal Savings Bank, WSFS Financial Corporation and Marvin N. -28-
Schoenhals on February 24, 2000 is incorporated herein by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 10.4.1 Severance Policy among Wilmington Savings Fund Society, Federal Savings Bank and certain Executives dated March 13, 2001, as amended is incorporated herein by reference to Exhibit 10.4.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001. 13 Portions of the Corporations 2002 Annual Report to Shareholders 21 Subsidiaries of Registrant. 23 Consent of KPMG LLP. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
Exhibits 10.1 through 10.5 represent management contracts or compensatory plan arrangements. (b) Reports on 8-K: On November 6, 2002 the Registrant filed a Form 8-K pursuant to items 5 and 7 announcing the sale of its C1FN/Everbank branchless national banking segment. On November 7, 2002 the Registrant filed a Form 8-K pursuant to items 5 and 7 announcing that it had entered into a definitive agreement to sell its majority interest in Wilmington Finance, Inc., an originator and seller of non-conforming loans, majority owned by the Registrant. On November 25, 2002, the Registrant filed a Form 8-K pursuant to items 5 and 7 announcing that it had sold substantially all of its reverse mortgage loans to an affiliate of Lehman Brothers, the global investment bank, for approximately $136 million, primarily in cash, after costs and expenses. On January 2, 2003, the Registrant announced it had closed the previously announced sale of its majority-owned subsidiary, Wilmington Finance, Inc., an originator and seller of non- conforming loans. -29- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 25, 2003 BY: /s/ Marvin N. Schoenhals ------------------------------ Marvin N. Schoenhals Chairman and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 25, 2003 BY: /s/ Marvin N. Schoenhals ----------------------------------- Marvin N. Schoenhals Chairman and President Date: March 25, 2003 BY: /s/ Charles G. Cheleden ----------------------------------- Charles G. Cheleden Vice Chairman and Director Date: March 25, 2003 BY: /s/ John F. Downey ----------------------------------- John F. Downey Director Date: March 25, 2003 BY: /s/ Linda C. Drake ----------------------------------- Linda C. Drake Director Date: March 25, 2003 BY: /s/ David E. Hollowell ----------------------------------- David E. Hollowell Director Date: March 25, 2003 BY: /s/ Joseph R. Julian ----------------------------------- Joseph R. Julian Director
-30-
Date: March 25, 2003 BY: /s/ Thomas P. Preston ----------------------------------- Thomas P. Preston Director Date: March 25, 2003 BY: /s/ Claibourne D. Smith ----------------------------------- Claibourne D. Smith Director Date: March 25, 2003 BY: ----------------------------------- Eugene W. Weaver Director Date: March 25, 2003 BY: /s/ R. Ted Weschler ----------------------------------- R. Ted Weschler Director Date: March 25, 2003 BY: /s/ Dale E. Wolf ----------------------------------- Dale E. Wolf Vice Chairman and Director Date: March 25, 2003 BY: /s/ Mark A. Turner ----------------------------------- Mark A. Turner Chief Operating Officer and Chief Financial Officer Date: March 25, 2003 BY: /s/ Robert F. Mack ----------------------------------- Robert F. Mack Senior Vice President and Controller
-31- WSFS FINANCIAL CORPORATION Wilmington, Delaware CERTIFICATION Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Marvin N. Schoenhals, Chairman, President and Chief Executive Officer of WSFS Financial Corporation (the "Company"), hereby certify that: 1. I have reviewed the Annual Report on Form 10-K for the year ended December 31, 2002, of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) for the Company and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 /s/Marvin N. Schoenhals --------------------------- Marvin N. Schoenhals Chairman and President -32- WSFS FINANCIAL CORPORATION Wilmington, Delaware CERTIFICATION Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Mark A. Turner, Chief Operating Officer and Chief Financial Officer, of WSFS Financial Corporation (the "Company"), hereby certify that: 1. I have reviewed the Annual Report on Form 10-K for the year ended December 31, 2002, of the Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the Financial Statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) for the Company and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within the those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other Associates who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 25, 2003 /s/Mark A. Turner ---------------------------- Mark A. Turner Chief Operating Officer and Chief Financial Officer -33- EX-13 3 ex-13.txt EXHIBIT-13 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL WSFS Financial Corporation (Company or Corporation) is a thrift holding company headquartered in Wilmington, Delaware. Substantially all of the Corporation's assets are held by its subsidiary, Wilmington Savings Fund Society, FSB (Bank or WSFS). Founded in 1832, WSFS is one of the oldest financial institutions in the country. As a federal savings bank which was formerly chartered as a state mutual savings bank, WSFS enjoys broader investment powers than most other financial institutions. WSFS has served the residents of the Delaware Valley for 171 years. WSFS is the largest thrift institution headquartered in Delaware and among the three or four largest financial institutions in the state on the basis of total deposits traditionally garnered in-market. The Corporation's primary market area is the Mid-Atlantic region of the United States which is characterized by a diversified manufacturing and service economy. The long-term strategy of the Corporation is to improve its status as a high-performing financial services company by focusing on its core community banking business. WSFS provides residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. Lending activities are funded primarily with retail deposits and borrowings. Deposits are insured to their legal maximum by the Federal Deposit Insurance Corporation (FDIC). WSFS conducted operations from its main office, two operations centers and 21 retail banking offices, located in northern Delaware and southeastern Pennsylvania. In 2002, for strategic reasons, WSFS transferred 6 branch offices that were outside of its core footprint to other financial institutions. The Corporation has two consolidated subsidiaries, WSFS and WSFS Capital Trust I. The Corporation has no unconsolidated subsidiaries or off-balance sheet entities. Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit Corporation (WCC), which is engaged primarily in indirect motor vehicle leasing; WSFS Investment Group, Inc. (formerly 838 Investment Group, Inc.), which markets various third-party insurance products and securities through WSFS' branch system; and WSFS Reit, Inc., which holds qualifying real estate assets and may be used in the future to raise capital. An additional subsidiary, Star States Development Company (SSDC), was dissolved in 2002. In 2000, the Board of Directors of the Corporation approved plans to discontinue the operations of WCC. WCC, which had 2,317 lease contracts and 1,052 loan contracts at December 31, 2002, no longer accepts new applications but continues to service existing loans and leases until their maturity. Management estimates that substantially all loan and lease contracts will mature by the end of 2004. See the Discontinued Operations section of Management's Discussion and Analysis and Note 2 to the Financial Statements for a detailed discussion. In addition to the wholly owned subsidiaries, WSFS had consolidated two non-wholly owned subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and Wilmington Finance, Inc. (WF). C1FN, a 21% owned subsidiary engaged in Internet and branchless banking, was sold in November 2002. WF, a majority owned subsidiary, engaged in sub-prime residential mortgage banking, was sold in January 2003. Both subsidiaries are therefore classified as businesses held-for-sale in the Financial Statements. See the Businesses Held-for-Sale section of this Management's Discussion and Analysis, and Note 3 to the Financial Statements for a further discussion. These divestitures are consistent with recent strategic actions of WSFS to simplify its operations and better focus resources and capital on WSFS' core bank. RESULTS OF OPERATIONS The Corporation recorded net income of $101.1 million for the year ended December 31, 2002, compared to $17.1 million and $11.0 million in 2001 and 2000, respectively. Income from continuing operations was $88.0 million, $17.8 million and $18.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net Income for the year ended December 31, 2002 included an after tax gain of $66.6 million on the sale of substantially all of the Corporation's investment in a $33 million reverse mortgage portfolio (see Note 6 to the Financial Statements for a further discussion). In addition, the results for 2002 included an after tax gain of $737,000 on the sale of the Bank's United Asian Bank division (UAB) and a $187,000 after tax gain on the sale of C1FN/Everbank. See the Businesses Held-for- Sale section of this Management's Discussion and Analysis and Note 3 to the Financial Statements for a further discussion. Net Interest Income. Net interest income is the most significant component of operating income to the Corporation. Net interest income relies upon the levels of interest-earning assets and interest-bearing liabilities and the difference or "spread" between the respective yields earned and rates paid. The interest rate spread is influenced by regulatory, economic and competitive factors that affect interest rates, loan demand and deposit flows. The level of nonperforming loans can also impact the interest rate spread by reducing the overall yield on the loan portfolio. Net interest income increased $6.5 million, or 12%, to $61.3 million in 2002 compared to $54.7 million in 2001. Total interest income decreased $6.6 million between 2001 and 2002, primarily due to a decrease in the yield on total loans and 7 mortgage-backed securities of 106 basis points and 90 basis points, respectively, between 2001 and 2002. This decline in yield was responsible for a $7.9 million decrease in net interest income. Average ambient interest rates were significantly lower in 2002 than in 2001. These declines were offset in part by a $2.9 million increase in net interest income from a higher yield on reverse mortgages in 2002. For further discussion of reverse mortgages, see the Investment in Reverse Mortgages discussion included in this Management's Discussion and Analysis and Note 6 to the Financial Statements. Total interest expense, excluding the expense to fund discontinued operations and businesses held-for-sale, decreased $13.2 million from 2001 to 2002 primarily due to a decrease in the average yield on deposits of 184 basis points from 3.63% to 1.79%, and a decrease in the level of interest-bearing deposits of $63.7 million. The decline in interest expense was significantly affected by the aforementioned decline in interest rates in 2002, as longer-term borrowing and deposits matured and were replaced at substantially lower rates. Between 2000 and 2001, interest income decreased $19.6 million, while interest expense decreased $12.9 million. The decrease in interest income was primarily due to a decrease in mortgage-backed securities balances of $130.4 million between 2000 and 2001, resulting in a $9.0 million decrease in interest income, and a decrease in yield on the reverse mortgages from 58.92% to 29.54% between 2000 and 2001. This decline in yield on reverse mortgages was responsible for a $9.2 million decrease in interest income. These decreases were offset in part by an increase in average total loans of $61.0 million. In addition, overall rates were lower in 2001 than in 2000. The decrease in interest expense was the result of the decrease in brokered certificates of deposit by an average of $99.1 million, and by a $39.7 million decrease in average other borrowings. The average rates on deposits decreased 104 basis points from 4.67% to 3.63%, while rates on Federal Home Loan Bank (FHLB) advances and other borrowings decreased 24 basis points and 76 basis points, respectively. The average yield on the trust preferred borrowings also decreased 259 basis points, from 9.23% to 6.64%. All decreases in yield are primarily due to interest rates decreasing as much as 475 basis points during 2001. The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest-earning assets and interest-bearing liabilities and changes in the rates for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rates (change in rate multiplied by prior year volume); and (iii) net change. Changes due to the combination of rate and volume changes (changes in volume multiplied by changes in rate) are allocated proportionately between changes in rate and changes in volume.
Year Ended December 31, --------------------------------------------------------------------- 2002 vs. 2001 2001 vs. 2000 --------------------------------- --------------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (Dollars in Thousands) Interest income: Real estate loans (1) ..................... $ 1,126 $ (6,081) $ (4,955) $ 1,375 $ (2,704) $ (1,329) Commercial loans .......................... 3,198 (2,609) 589 2,271 (1,173) 1,098 Consumer loans ............................ 771 (1,912) (1,141) 1,541 (1,106) 435 Loans held-for-sale ....................... 95 (96) (1) (438) 163 (275) Mortgage-backed securities ................ (999) (1,349) (2,348) (8,189) (816) (9,005) Investment securities ..................... (313) 12 (301) (1,098) (241) (1,339) Investment in reverse mortgages ........... (2,792) 5,729 2,937 903 (10,057) (9,154) Other ..................................... (538) (877) (1,415) 1,049 (1,041) 8 -------- -------- -------- -------- -------- -------- Favorable (Unfavorable) ....................... 548 (7,183) (6,635) (2,586) (16,975) (19,561) -------- -------- -------- -------- -------- -------- Interest expense: Deposits: Money market and interest-bearing demand 80 (560) (480) 171 (690) (519) Savings ................................. 42 (4,545) (4,503) 1,129 (4,402) (3,273) Retail time deposits .................... (250) (4,680) (4,930) 35 205 240 Jumbo certificates of deposit - nonretail (262) (425) (687) (270) (337) (607) Brokered certificates of deposit ........ (4,463) 319 (4,144) (6,673) 286 (6,387) FHLB of Pittsburgh advances ............... 2,643 (4,275) (1,632) (71) (1,033) (1,104) Trust Preferred borrowings ................ - (766) (766) - (1,329) (1,329) Other borrowed funds ...................... 876 (3,089) (2,213) (2,274) (953) (3,227) Cost of funding discontinued operations ... 3,429 3,372 6,801 3,623 1,003 4,626 Cost of funding businesses held-for-sale .. 1,041 (1,650) (609) (1,059) (263) (1,322) -------- -------- -------- -------- -------- -------- Unfavorable (favorable) ....................... 3,136 (16,299) (13,163) (5,389) (7,513) (12,902) -------- -------- -------- -------- -------- -------- Net change (unfavorable) favorable ............ $ (2,588) $ 9,116 $ 6,528 $ 2,803 $ (9,462) $ (6,659) ======== ======== ======== ======== ======== ========
(1) Includes commercial mortgage loans. 8 The following table provides information regarding the average balances of, and yields/rates on interest-earning assets and interest-bearing liabilities during the periods indicated:
Year Ended December 31, ------------------------------------------------------------------------------------------------ 2002 2001 2000 ------------------------------- ------------------------------ ------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate(1) Balance Interest Rate(1) Balance Interest Rate(1) ------- -------- ------- ------- -------- ------- ------- -------- ------- (Dollars in Thousands) Assets Interest-earning assets: Loans (2) (3): Real estate loans (4)......... $ 652,391 $ 44,573 6.83% $ 637,679 $ 49,528 7.77% $ 620,590 $ 50,857 8.19% Commercial loans.............. 196,343 11,693 6.44 151,200 11,104 7.99 123,589 10,006 8.87 Consumer loans................ 190,212 15,538 8.17 181,535 16,679 9.19 165,219 16,244 9.83 ---------- ---------- --------- ---------- ---------- ---------- Total loans.............. 1,038,946 71,804 7.02 970,414 77,311 8.08 909,398 77,107 8.60 Mortgage-backed securities (5).. 142,250 7,608 5.35 159,242 9,956 6.25 289,660 18,961 6.55 Loans held-for-sale (3)......... 3,013 214 7.10 1,923 215 11.18 6,400 490 7.66 Investment securities (5)....... 14,292 890 6.23 19,297 1,191 6.17 36,725 2,530 6.89 Investment in reverse mortgages. 26,328 13,092 49.73 34,375 10,155 29.54 32,771 19,309 58.92 Other interest-earning assets... 40,590 1,095 2.70 54,434 2,510 4.61 35,586 2,502 7.03 ---------- ---------- --------- ---------- ---------- ---------- Total interest-earning assets. 1,265,419 94,703 7.57 1,239,685 101,338 8.27 1,310,540 120,899 9.31 ---------- ---------- ---------- Allowance for loan losses......... (21,358) (21,470) (22,409) Cash and due from banks........... 121,022 78,085 50,075 Loans, operating leases and other assets of discontinued operations...... ............. 79,479 159,989 228,544 Assets of businesses held-for-sale 371,830 311,806 119,880 Other noninterest-earning assets.. 51,020 42,440 38,473 ---------- --------- ---------- Total assets.................. $1,867,412 $1,810,535 $1,725,103 ========== ========== ========== Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing deposits: Money market and interest- bearing demand.............. $ 90,585 $ 430 0.47% $ 82,678 $ 910 1.10% $ 72,954 $ 1,429 1.96% Savings....................... 305,418 2,914 0.95 303,687 7,417 2.44 272,143 10,690 3.93 Retail time deposits.......... 260,858 8,267 3.17 265,969 13,197 4.96 265,247 12,957 4.88 Jumbo certificates of deposit - nonretail......... 16,674 419 2.51 23,449 1,106 4.72 28,412 1,713 6.03 Brokered certificates of deposit..................... 137 10 7.30 61,632 4,154 6.74 160,753 10,541 6.56 ---------- ---------- --------- ---------- ---------- ---------- Total interest-bearing deposits............... 673,672 12,040 1.79 737,415 26,784 3.63 799,509 37,330 4.67 FHLB of Pittsburgh advances..... 448,103 20,723 4.56 396,542 22,355 5.56 397,672 23,459 5.80 Trust preferred borrowings...... 50,000 2,599 5.13 50,000 3,365 6.64 50,000 4,694 9.23 Other borrowed funds............ 115,740 3,140 2.71 97,266 5,353 5.50 136,971 8,580 6.26 Cost of funding discontinued operations.................... - (2,470) - (9,271) - (13,897) Cost of funding businesses held-for-sale................. - (2,598) - (1,989) - (667) ---------- ---------- --------- ---------- ---------- ---------- Total interest-bearing liabilities................. 1,287,515 33,434 2.60 1,281,223 46,597 3.64 1,384,152 59,499 4.30 ---------- ---------- ---------- Noninterest-bearing demand deposits........................ 159,741 136,229 116,724 Liabilities of businesses held-for-sale................... 271,864 269,402 103,015 Other noninterest-bearing liabilities..................... 16,181 18,293 19,371 Minority interest................. 7,597 4,979 3,912 Stockholders' equity.............. 124,514 100,409 97,929 ---------- --------- ---------- Total liabilities and stockholders' equity........ $1,867,412 $1,810,535 $1,725,103 ========== ========== ========== Deficit of interest-earning assets over interest-bearing liabilities................... $ (22,096) $ (41,538) $ (73,612) ========== ========== ========== Net interest and dividend income.. $ 61,269 $ 54,741 $ 61,400 ========== ========== ========== Interest rate spread.............. 4.97% 4.64% 5.01% ===== ===== ===== Interest rate margin.............. 4.93% 4.51% 4.77% ===== ===== =====
(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. 9 Provision for Loan Losses. The Corporation records a provision for loan losses in order to maintain the allowance for loan losses at a level which management considers its best estimate of known and probable inherent losses. Management's evaluation is based upon a continuing review of the portfolio and requires significant management judgment (see the Allowance for Loan Losses section of Management's Discussion and Analysis). For the year ended December 31, 2002, the Corporation recorded a provision for loan losses from continuing operations of $2.2 million compared to $1.9 million in 2001and $864,000 in 2000. These increases reflect, among other things, the Company's loan growth, a change in the mix to higher margin and higher risk loans, a weakening economic environment in 2002, offset by an overall improvement in credit quality of the Corporation's loan portfolio. Noninterest Income. Noninterest income of $124.1 million in 2002, increased $102.9 million, or 487% from 2001. This increase was almost entirely due to the sale of the reverse mortgage portfolio. Substantially all of WSFS' $33 million reverse mortgage portfolio was sold during the year resulting in a pretax gain of $101.5 million. In addition, credit/debit card and ATM income grew $1.7 million during 2002 due to the continued expansion of WSFS' ATM servicing division. At December 31, 2002, WSFS' CashConnect division (ATM unit) derived income from 4,251 ATMs compared to 2,724 at December 31, 2001. Of these, WSFS owned and operated 189 ATMs in 2002 and 177 ATMs in 2001. Noninterest income of $21.1 million in 2001, increased $8.2 million, or 63% from 2000. Deposit services charges increased $1.6 million to $8.6 million in 2001 primarily as a result of growth in retail deposits. Credit/debit card and ATM income grew $1.2 million during 2001, due to the continued expansion of WSFS' ATM servicing division and customer card usage. At December 31, 2001, WSFS' CashConnect division derived income from 2,724 ATMs compared to 2,001 at December 31, 2000. In 2000, noninterest income was negatively affected by a $4.4 million loss on the sale of securities. These losses were the result of the Corporation's deleveraging strategy in which the Corporation sold below-market yielding investments and repaid higher costing borrowings. Noninterest expenses. Noninterest expenses of $51.6 million in 2002 increased $3.9 million or 8% from 2001. This increase was mainly due to a $2.7 million increase in salaries and benefits. Included in salaries and benefits was $823,000 of expenses related to special management compensation and a special contribution to the Company's 401(k) plan for all Associates, which were related to the reverse mortgage sale. Also related to the reverse mortgage sale in 2002, the Company took a $1.0 million charge for the establishment of a WSFS charitable foundation to benefit the communities that WSFS serves. Expenses, net of cost savings related to the Corporation's Technology, Organizational Process Simplification process reengineering program (TOPS) were $1.1 million in 2002 compared to $433,000 in 2001. These net expenses primarily consisted of consulting fees and severance charges, partially offset by personnel cost savings and reduced technology expenses. Net of tax, this amounted to $744,000 or $0.08 per share, for the year 2002. When fully implemented in mid-2003, the TOPS program is expected to result in total annual pretax savings of approximately $3.0 million to $3.5 million since inception of the program. In addition, noninterest expenses in 2001 included a charge of $1.1 million connected with the exit of six in-store branch offices in southeastern Pennsylvania. Noninterest expenses of $47.7 million in 2001 increased $2.4 million or 5% from 2000. The increases were mainly attributable to salaries and other expenses which increased $1.7 million and $1.0 million, respectively, partially offset by lower data processing and operations expense, which decreased by $925,000. During the third quarter of 2000, the Corporation re-assumed all responsibility for loan and deposit operations that were previously outsourced through the Corporation's information technology provider. As a result, certain expenses previously recorded as data processing were thereafter reflected in salaries and benefit expense. Noninterest expenses for 2001 also include a charge of $1.1 million connected with the exit of six in-store branch offices in southeastern Pennsylvania. Income Taxes. The Corporation recorded a $51.6 million tax provision for the year ended December 31, 2002 compared to $8.4 million and $276,000 for the years ended December 31, 2001 and 2000, respectively. The effective tax rates for continuing operations for the years ended December 31, 2002, 2001 and 2000 were 33.6%, 32.5% and 30.0%, respectively. The Corporation expects its effective tax rate for continuing operations to be between 34% and 36% in 2003. The provision for income taxes includes federal, state and local income taxes that are currently payable or deferred because of temporary differences between the financial reporting bases and the tax reporting bases of the assets and liabilities. In 2002, the Internal Revenue Service (IRS) concluded an examination of the Corporation's federal income tax returns for all years through December 31, 2000. The income tax provision for the year ended December 31, 2002 was reduced by $894,000 primarily as a result of the resolution of tax authority examinations and tax return settlements. At December 31, 2002, approximately $4.7 million in gross deferred tax assets of the Corporation are related to net operating losses and tax credits attributable to a former subsidiary. Management has assessed a valuation allowance on a portion of these deferred tax assets due to limitations imposed by the Internal Revenue Code. Approximately $1.3 million in gross deferred tax assets of the Corporation at December 31, 2002 are related to state tax net operating losses. Management has established a valuation allowance on a portion of these deferred tax assets due to such net operating losses expiring before being utilized. 10 The Corporation analyzes its projection of taxable income on an ongoing basis and makes adjustments to its provision for income taxes accordingly. For additional information regarding the Corporation's tax provision and net operating loss carryforwards, see Note 14 to the Consolidated Financial Statements. FINANCIAL CONDITION Total assets decreased $208.9 million, or 10.9%, during 2002 to $1.7 billion. This decrease was mainly due to the fourth quarter 2002 sale of C1FN, which, at December 31, 2001, had $296.1 million in assets. The sale included total assets of approximately $342.8 million and deposits of $340.1 million. In addition, loans, operating leases and other assets of discontinued operations decreased $67.9 million, the effect of maturities and repayments of loans and leases at WCC. These decreases were partially offset by the November 22, 2002 sale of substantially all of WSFS' reverse mortgage portfolio, at a significant premium. At December 31, 2001, this portfolio was valued at $33.9 million. In selling this portfolio, WSFS received $128.0 million in cash, $10.0 million in mortgage-backed securities classified as "trading" and an option to purchase certain securities. At December 31, 2002, most of the proceeds of this sale were held in cash and due from banks. Investments. Between December 31, 2001 and December 31, 2002, total investments decreased $47.8 million. This was mainly due to the sale of the reverse mortgage portfolio. In addition C1FN, which was sold during 2002, had $19.3 million of investments at December 31, 2001. Mortgage-Backed Securities. During 2002, investments in mortgage-backed securities decreased $213.5 million to $148.2 million. This decrease was mainly due to the sale of C1FN. At December 31, 2001, C1FN had $240.9 million in mortgage-backed securities. Loans, net. Net loans, excluding loans held-for-sale, increased $45.2 million during 2002. This included increases of $17.3 million in residential loans, $31.4 million in commercial real estate loans and $12.0 million in commercial loans. Partially offsetting these increases were consumer loans, which decreased $15.7 million. The decrease in consumer loans included $6.3 million of C1FN loans. Retail Deposits. During 2002, retail deposits decreased $253.7 million to $872.1 million. As a result of the previously mentioned sales of C1FN and UAB, $348.6 million in deposits were sold. Excluding these sales, retail deposits would have increased by $30.4 million in 2002. The table below depicts the changes in retail deposits over the last three years: Year Ended December 31, -------------------------------------- 2002 2001 2000 ---- ---- ---- (In Millions) Beginning balance................... $ 1,125.7 $ 961.1 $ 736.0 Interest credited................... 16.3 30.6 30.2 Deposits sold....................... (348.6) - - Deposit inflows, net................ 78.7(1) 134.0 194.9 --------- --------- ---------- Ending balance...................... $ 872.1 $ 1,125.7 $ 961.1 ========= ========= ========= (1) Includes $45.1 million in deposit increases at C1FN that were sold in November 2002. Borrowings. Total borrowings decreased by $129.5 million between December 31, 2001 and December 31, 2002. This decline reflects the payoff of borrowings as more of the Bank's funding requirements were achieved through the growth in stockholders' equity and the level of retail deposits. In addition, funding requirements have decreased due to the sales of C1FN, UAB and reverse mortgages. Stockholders' Equity. Stockholders' equity increased $82.7 million to $182.7 million at December 31, 2002. This increase included $101.1 million in net income. This was partially offset by the acquisition of 485,100 shares of treasury stock for $15.2 million and dividends of $1.7 million paid to stockholders. In addition, other comprehensive income decreased by $2.2 million of which $2.0 million related to the sale of C1FN. ASSET/LIABILITY MANAGEMENT The primary asset/liability management goal of the Corporation is to maximize its net interest income opportunities within the constraints of managing interest rate risk; ensuring adequate liquidity and funding; and maintaining a strong capital base. In general, interest rate risk is mitigated by closely matching the maturities or repricing periods of interest-sensitive assets and liabilities to ensure a favorable interest rate spread. Management regularly reviews the Corporation's interest-rate sensitivity, and uses a variety of strategies as needed to adjust that sensitivity within acceptable tolerance ranges established by management and the Board of Directors. Changing the relative proportions of fixed-rate and adjustable-rate assets and liabilities is one of the primary strategies utilized by the Corporation to accomplish this objective. 11 The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest-rate sensitive" and by monitoring an institution's interest-sensitivity gap. An interest-sensitivity gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing within a defined period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets repricing within a defined period. The repricing and maturities of the Corporation's interest-rate sensitive assets and interest-rate sensitive liabilities at December 31, 2002 are set forth in the following table:
Less than One to Over One Year Five Years Five Years Total --------- ---------- ---------- ----- (Dollars in Thousands) Interest-rate sensitive assets (1): Real estate loans (2)............................. $ 264,036 $ 255,324 $ 188,400 $ 707,759 Commercial loans.................................. 136,459 26,960 46,148 209,567 Consumer loans.................................... 61,819 60,979 59,053 181,852 Mortgage-backed securities........................ 71,680 71,976 4,582 148,238 Loans held-for-sale............................... 121,349 - - 121,349 Investment in reverse mortgages................... 497 1,160 (526) 1,131 Investment securities............................. 33,237 6,039 4,480 43,756 Other investments................................. 71,521 - - 71,521 --------- --------- ---------- ---------- 760,598 422,438 302,137 1,485,173 --------- --------- ---------- ---------- Interest-rate sensitive liabilities: Money market and interest-bearing demand deposits ............................... 30,371 - 78,888 109,260 Savings deposits.................................. 106,222 - 186,695 292,917 Retail time deposits.............................. 212,699 73,809 431 286,939 Jumbo certificates of deposit-nonretail........... 24,437 1,887 - 26,324 FHLB advances..................................... 85,000 90,000 178,500 353,500 Trust preferred borrowings and interest rate cap.. 50,000 - - 50,000 Other borrowed funds.............................. 62,506 - - 62,506 --------- --------- ---------- ---------- 571,234 165,696 444,514 1,181,445 --------- --------- ---------- ---------- Excess of interest-rate sensitive assets over interest-rate sensitive liabilities ("interest-rate sensitive gap")................... $ 189,363 $ 256,742 $ (142,377) $ 303,728 ========= ========== ========== ========== Interest-rate sensitive assets/interest-rate sensitive liabilities............................. 133.15% Interest-rate sensitive gap as a percent of total assets...................................... 11.11%
(1) Interest-sensitive assets of discontinued operations are excluded as well as the interest-sensitive funding of discontinued operations through $50 million in FHLB advances as of December 31, 2002. (2) Includes commercial mortgage, construction, and residential mortgage loans. Generally, during a period of rising interest rates, a positive gap would result in an increase in net interest income while a negative gap would adversely affect net interest income. Conversely, during a period of falling rates, a positive gap would result in a decrease in net interest income while a negative gap would augment net interest income. However, the interest-sensitivity table does not provide a comprehensive representation of the impact of interest rate changes on net interest income. Each category of assets or liabilities will not be affected equally or simultaneously by changes in the general level of interest rates. Even assets and liabilities which contractually reprice within the rate period may not, in fact, reprice at the same price or the same time or with the same frequency. It is also important to consider that the table represents a specific point in time. Variations can occur as the Company adjusts its interest-sensitivity position throughout the year. To provide a more accurate one-year gap position of the Corporation, certain deposit classifications are based on the interest-rate sensitive attributes and not on the contractual repricing characteristics of these deposits. Management estimates, based on historical trends of WSFS' deposit accounts, that 35% of money market and 25% of interest-bearing demand deposits are sensitive to interest rate changes and that 22% to 49% of savings deposits are sensitive to interest rate changes. Accordingly, these interest-sensitive portions are classified in the less than one-year category with the remainder in the over five-year category. Deposit products with interest rates based on a particular index are classified according to the specific repricing characteristic of the index. 12 Deposit rates other than time deposit rates are variable, and changes in deposit rates are generally subject to local market conditions and management's discretion and are not indexed to any particular rate. The Corporation's gap position was particularly asset sensitive at December 31, 2002. This was primarily due to the sale of its reverse mortgages portfolio on November 22, 2002, in which $33 million of mostly long-term assets were exchanged for $138 million in primarily short-term assets. In the first quarter of 2003, management undertook certain strategies to reduce its level of asset sensitivity. In 1998, the Corporation purchased a ten-year interest rate cap in order to limit its exposure on $50 million of variable rate trust preferred securities issued in 1998. This derivative instrument caps the 3-month LIBOR rate (the base rate of the Trust Preferred borrowings) at 6.00%. The Trust Preferred borrowings are classified in the less than one year category reflecting the ability to adjust upward for the balance of the term of the interest rate cap. If the three-month LIBOR rate equals or exceeds 6.00%, the Trust Preferred borrowing takes on a fixed characteristic and therefore is classified in the period corresponding to the cap's maturity. INVESTMENT IN REVERSE MORTGAGES Reverse mortgage loans are contracts that require the lender to make monthly advances throughout the borrower's life or until the borrower relocates, prepays or the home is sold, at which time the loan becomes due and payable. Since reverse mortgages are nonrecourse obligations, the loan repayments are generally limited to the net sale proceeds of the borrower's residence, and the mortgage balance consists of cash advanced, interest compounded over the life of the loan and a premium which represents a portion of the shared appreciation in the home's value, if any, or a percentage of the value of the residence. In 1993, the Corporation acquired a pool of reverse mortgages from the FDIC and another lender. In November 1994, the Corporation purchased Providential Home Income Plan, Inc., a California-based reverse mortgage lender, for approximately $24.4 million. Providential's assets at acquisition primarily consisted of cash and its investment in reverse mortgages. Providential's results have been included in the Corporation's consolidated statement of operations since the acquisition date. The Corporation accounts for its investment in reverse mortgages in accordance with the instructions provided by the staff of the Securities and Exchange Commission entitled "Accounting for Pools of Uninsured Residential Reverse Mortgage Contracts" which requires grouping the individual reverse mortgages into "pools" and recognizing income based on the estimated effective yield of the pool. In computing the effective yield, the Corporation projected the cash inflows and outflows of the pool including actuarial projections of the life expectancy of the individual contract holder and changes in the collateral values of the residence. At each reporting date, a new economic forecast was made of the cash inflows and outflows of each pool of reverse mortgages; the effective yield of each pool was recomputed, and income was adjusted retroactively and prospectively to reflect the revised rate of return. Accordingly, because of this market-value based accounting, the recorded value of reverse mortgage assets included significant risk associated with estimations and income varied significantly from reporting period to reporting period. For the year ended December 31, 2002, the Corporation earned $13.1 million in interest income on reverse mortgages as compared to $10.2 million in 2001 and $19.3 million in 2000. The yield on the portfolio was 49.73% in 2002 compared to 29.54% in 2001 and 58.92% in 2000. Capitalizing on the robust housing and interest rate markets, substantially all of WSFS' $33 million reverse mortgage portfolio was sold, effective October 1, 2002, for a pretax gain of $101.5 million. The Corporation received $128 million in cash, $10 million in BBB rated mortgage-backed securities classified as trading and options to acquire up to 49.9% of Class "O" certificates issued in connection with mortgage-backed security SASCO RM-1 2002. Since this was the sale of a financial asset, results are shown in continuing operations in the accompanying Financial Statements, in accordance with accounting principles generally accepted in the United States of America. Included in the net gain on sale of reverse mortgages are amounts for transaction costs and other estimates of costs of future obligations, including an estimated future payment due to a participant in the value received for certain of the sold reverse mortgages, under a pre-existing agreement. The remaining investment of $1.1 million at December 31, 2002 represents a participation in reverse mortgages with a third party and was not part of the previously mentioned sale. In addition, on January 1, 2002, the Corporation adopted SFAS 142, Goodwill and Other Intangible Assets. Statement 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion 17, Intangible Assets. Under this Standard, goodwill can no longer be amortized but instead must be tested for impairment and its value adjusted accordingly. Negative goodwill is required to be taken into earnings immediately upon adoption. The Corporation had $1.2 million in negative goodwill associated with the 1994 purchase of Providential Home Income Plan, Inc., a former subsidiary that was subsequently merged into the Bank. As a result of adopting this standard, the Corporation recognized income of $703,000 in the first quarter of 2002 as a cumulative effect of a change in accounting principle, net of $469,000 in income tax. Prior to adoption, the Corporation had been accreting $36,000 per quarter into interest income. 13 DISCONTINUED OPERATIONS In 2000 the Board of Directors of WSFS Financial Corporation approved plans to discontinue the operations of WCC. WCC, which had 2,317 lease contracts and 1,052 loan contracts at December 31, 2002, no longer accepts new applications but will continue to service existing loans and leases until their maturity. Management estimates that substantially all loan and lease contracts will mature by the end of 2004. In accordance with APB 30, which was the authoritative literature in 2000, accounting for discontinued operations of a business segment at that time required that the Company forecast operating results over he wind-down period and accrue any expected net losses. The historic results of WCC's operations, the accrual of expected losses to be incurred over the wind-down period, and the future reported results of WCC are required to be treated as Discontinued Operations of a Business Segment, and shown in a 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 losses of $2.4 million for the year ended December 31, 2000 were reclassified from continuing operations to discontinued operations. In addition, a $6.2 million pretax reserve was established to absorb expected future losses, primarily related to residual value losses on leases. Consequently, the Corporation recognized an after tax charge of $2.2 million, net of $4.0 million in tax benefits related to net operating loss carryforwards, for the expected loss over the projected wind-down period. During 2001 and 2002, as a result of the heavy incenting of new car purchases by manufacturers and other factors both used car prices and WSFS' exposure to residual values on its outstanding leases have continued to deteriorate. Extensive analysis of remaining leases as of December 31, 2002 and 2001 indicated that additional reserves were needed for the expected losses in the business during its wind-down. Accordingly, management recorded additional provisions for these expected losses. These pretax provisions amounted to $2.0 million in 2002 and $3.1 million in 2001. At December 31, 2002, there were $7.9 million in indirect loans and $44.7 million in indirect leases still outstanding. At December 31, 2002, WSFS had exposure to $42.3 million in remaining used car residuals, for which it estimates a loss of $8.9 million. Management has provided for this loss in the financial statements. The Corporation now has reserves covering 21% of the related residual exposure. Based on the scheduled maturities of leases, management estimates by December 31, 2003 its residual exposure will be less than $8 million and, by December 31, 2004, the exposure will be negligible. The total loss of $2.8 million after tax, or $0.29 per diluted share from WSFS Credit Corporation in 2002 includes the after-tax impact of the aforementioned residual provision and additional reserves of $563,000 for tax expense established as a result of changes in estimates used to calculate WCC's deferred taxes. Due to the uncertainty of a number of factors, including residual values, interest rates, operating costs and credit quality, the reserve for discontinued operations will be reevaluated quarterly with adjustments, if necessary, recorded as income/losses on wind-down of discontinued operations. BUSINESSES HELD-FOR-SALE In September 2002, WSFS sold its United Asian Bank Division (UAB). UAB was started in 2000 as a single branch to serve the Korean and Asian communities of Elkins Park, Pennsylvania and the surrounding area. The sale resulted in an after tax gain of $737,000, and included $8.6 million in deposits and $15.8 million in loans in addition to branch fixed assets and the lease obligations. In November 2002, the Corporation completed the sale of C1FN and related interests in its Everbank Division to Alliance Capital Partners, Inc., the privately held parent company of First Alliance Bank, a federally chartered savings bank. Everbank was started with C1FN in 1999 as a joint initiative in Internet and branchless banking. Consistent with the manner in which the segment was managed and operated, information in this report labeled "C1FN" generally represents the pro forma combined results of C1FN and WSFS' Everbank Division (the C1FN/Everbank segment). The sale included total assets of $342.8 million and deposits of $340.1 million. WSFS recorded an after tax gain of $187,000 on the sale. Also in November 2002, WSFS signed a definitive agreement with American General Finance, Inc. for the sale of WSFS' majority-owned subsidiary, Wilmington Finance, Inc. (WF). WF is engaged in sub-prime residential mortgage banking and conducts activity on a national level and aggregates loans primarily through brokers and sells them to investors. The WF sale was completed on January 2, 2003 (see Note 21 to the Financial Statements for a further discussion of this transaction). In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the major classes of assets and liabilities of WF are presented separately on the statement of condition as of December 31, 2002. The income (losses) from the operation of these three businesses (UAB, C1FN/Everbank and WF) have been presented as income (losses) of businesses held-for-sale, and presented separately for all periods presented. 14 The gains on the sale of UAB and C1FN are presented separately on the statement of operations, net of tax. The average balance sheet is presented with total assets and liabilities of businesses held-for-sale displayed separately. The completion of these divestiture transactions is consistent with the Company's strategic direction to focus resources and capital on WSFS' core community bank in and around Delaware. 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 Derivatives Activities." This test measures the impact on the net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of the estimated cash flows from assets and liabilities as a percentage of the net present value of assets. The following table is the estimated impact of immediate changes in interest rates on the Company's net interest margin and net portfolio value at the specified levels at December 31, 2002 and 2001, calculated in compliance with Thrift Bulletin No. 13A: December 31, ----------------------------------------------------------- 2002 2001 ---------------------------- ---------------------------- Change in Interest % Change in % Change in Rate Net Interest Net Portfolio Net Interest Net Portfolio (Basis Points) Margin (1) Value (2) Margin (1) Value (2) - ------------------ ------------ ------------- ------------ ------------- +300 9% 12.86% 8% 8.93% +200 6% 12.77% 4% 8.90% +100 3% 12.62% 2% 8.82% 0 0% 12.32% 0% 8.75% -100 -5% 11.60% -3% 8.34% -200 (3) -12% 10.67% -6% 8.01% -300 (3) -21% 10.79% -15% 7.82% (1) The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate environment changes. (2) The net portfolio value of the Company in a stable interest rate environment and the net portfolio value as projected under the various rate environment changes. (3) Sensitivity indicated by a decrease of 200 and 300 basis points may not be particularly meaningful at December 31, 2002 and 2001 given the historically low absolute level of interest rates at these times. The Company's primary objective in managing interest rate 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. NONPERFORMING ASSETS Nonperforming assets, which include nonaccruing loans, nonperforming real estate investments and assets acquired through foreclosure can negatively affect the Corporation's results of operations. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectibility of principal and interest. Past due loans are loans contractually past due 90 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection. 15 The following table sets forth the Corporation's non-performing assets and past due loans at the dates indicated:
December 31, ------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (Dollars in Thousands) Nonaccruing loans: Commercial.................................... $ 2,242 $ 1,330 $ 2,766 $ 2,630 $ 2,182 Consumer...................................... 516 306 383 251 312 Commercial mortgages.......................... 326 1,928 2,272 1,808 2,383 Residential mortgages......................... 3,246 3,618 2,704 2,617 3,068 Construction.................................. 199 351 210 - - ------- ------- ------- ------- -------- Total nonaccruing loans............................ 6,529 7,533 8,335 7,306 7,945 Nonperforming investments in real estate........... - - - - 76 Assets acquired through foreclosure................ 904 432 630 853 2,588 ------- ------- ------- ------- -------- Total nonperforming assets......................... $ 7,433 $ 7,965 $ 8,965 $ 8,159 $ 10,609 ======= ======== ======= ======= ======== Past due loans: Residential mortgages......................... $ 346 $ 88 $ 449 $ 333 $ 247 Commercial and commercial mortgages........... 95 767 790 504 2,654 Consumer...................................... 88 244 199 197 41 ------- -------- ------- ------- -------- Total past due loans............................... $ 529 $ 1,099 $ 1,438 $ 1,034 $ 2,942 ======= ======== ======= ======= ======== Ratio of nonaccruing loans to total loans (1)..................................... 0.60% 0.72% 0.87% 0.85% 1.05% Ratio of allowance for loan losses to gross loans(1)...................................... 1.95% 2.05% 2.22% 2.58% 2.97% Ratio of nonperforming assets to total assets...... 0.44% 0.42% 0.52% 0.47% 0.65% Ratio of loan loss allowance to nonaccruing loans (2)..................................... 324.49% 277.77% 248.81% 294.16% 286.13% Ratio of loan loss and foreclosed asset allowance to total nonperforming assets (2)... 285.03% 265.48% 234.01% 266.52% 216.73%
(1) Total loans exclude loans held-for-sale. (2) The applicable allowance represents general valuation allowances only. Non-performing assets decreased by $532,000 for the twelve months ended December 31, 2002. The decline was a direct result of $8.4 million of new non-performing assets being offset by $4.9 million of collections, $1.8 million of loans transferred to accrual and $2.4 million of charge-offs/other transfers. Nonperforming loans declined in most loan categories, particularly in commercial mortgage loans which decreased $1.6 million. Foreclosed assets increased primarily as a result of an $800,000 commercial mortgage loan being transferred to foreclosed assets and subsequent write downs. An analysis of the change in the balance of nonperforming assets during the last three years is presented below:
Year Ended December 31, -------------------------------------------- 2002 2001 2000 ---- ---- ---- (In Thousands) Beginning balance.......................................... $ 7,965 $ 8,965 $ 8,159 Additions............................................ 8,442 7,386 8,332 Collections ........................................ (4,854) (5,596) (4,323) Transfers to accrual/restructured status............. (1,762) (1,542) (1,227) Charge-offs/write-downs.............................. (2,358) (1,248) (1,976) -------- -------- ---------- Ending balance............................................. $ 7,433 $ 7,965 $ 8,965 ======== ======== ==========
The ratio of nonaccruing loans to total loans decreased from 0.72% in 2001 to 0.60% in 2002. The decrease was due to a reduction in nonaccruing loans, as well as an increase in total loans for the year. The ratio of nonperforming assets to total assets increased slightly from 0.42% in 2001 to 0.44% in 2002. Although nonperforming assets decreased by $532,000 during 2002, total assets decreased by $208 million due mainly to the sale of UAB and C1FN. Allowance for Loan Losses. The Corporation maintains allowances for credit losses and charges losses to these allowances when such losses are realized. The determination of the allowance for loan losses requires significant management judgment reflecting management's best estimate of probable loan losses related to specifically identified loans as well as probable loan losses in the remaining loan portfolio. Management's evaluation is based upon a continuing review of these portfolios, with consideration given to examinations performed by regulatory authorities. 16 Management establishes the loan loss allowance in accordance with accounting principles generally accepted in the United States of America and the guidance provided in the Securities and Exchange Commission's Staff Accounting Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified problem loans; formula allowances for commercial and commercial real estate loans; and allowances for pooled homogenous loans. Specific reserves are established for certain loans in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss has been incurred. The formula allowances for commercial and commercial real estate loans are calculated by applying loss factors to outstanding loans in each case based on the internal risk grade of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors by risk grade have a basis in WSFS' historical loss experience for such loans and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. (See discussion of historical loss adjustment factors below). Pooled loans are loans that are usually smaller, not-individually-graded and homogenous in nature, such as consumer installment loans and residential mortgages. Pooled loan loss allowances are based on historical net charge-offs for seven years which management believes approximates the average business cycle. The average loss allowance per homogenous pool is based on the product of average annual historical loss rate and the average estimated duration of the pool multiplied by the pool balances. These separate risk pools are then assigned a reserve for losses based upon this historical loss information, as adjusted for historical loss adjustment factors. Historical loss adjustment factors are based upon management's evaluation of various current conditions. The evaluation of the inherent loss with respect to these more current conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The more current conditions, analyzed in connection with the adjustment factors, include an evaluation of the following: - - General economic and business conditions affecting WSFS' key lending areas, - - Credit quality trends (including trends in nonperforming loans expected to result from existing conditions), - - Recent loss experience in particular segments of the portfolio, - - Collateral values and loan-to-value ratios, - - Loan volumes and concentrations, including changes in mix, - - Seasoning of the loan portfolio, - - Specific industry conditions within portfolio segments, - - Bank regulatory examination results, and - - Other factors, including changes in quality of the loan origination, servicing and risk management processes. WSFS' loan officers and risk managers meet monthly to discuss and review these conditions and risks associated with individual problem loans. By assessing the probable estimated losses inherent in the loan portfolio on a monthly basis, management is able to adjust specific and inherent loss estimates based upon the availability of more recent information. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for such losses. The Company also gives consideration to the results of these regulatory agency examinations. 17 The table below represents a summary of changes in the allowance for loan losses during the periods indicated:
Year Ended December 31, -------------------------------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (Dollars in Thousands) Beginning balance.................................... $ 21,597 $ 21,423 $ 22,223 $ 22,732 $ 24,057 Provision for loan losses............................ 2,243 1,865 864 1,004 385 Provision for loan losses - business held-for-sale... 211 347 30 - - Sale of businesses held-for-sale..................... (269) Balance at acquisition of credit card portfolio...... - - 175 - - Charge-offs: Residential real estate.......................... 725 106 133 172 210 Commercial real estate (1)....................... 333 195 376 692 608 Commercial....................................... 895 1,000 998 437 648 Consumer......................................... 1,551 1,031 1,002 720 504 -------- -------- -------- -------- -------- Total charge-offs.................................... 3,504 2,332 2,509 2,021 1,970 -------- -------- -------- -------- -------- Recoveries: Residential real estate.......................... 76 1 6 - 12 Commercial real estate (1)....................... 181 61 252 271 123 Commercial....................................... 483 100 70 116 74 Consumer......................................... 434 132 312 121 51 -------- -------- -------- -------- -------- Total recoveries..................................... 1,174 294 640 508 260 -------- -------- -------- -------- -------- Net charge-offs...................................... 2,330 2,038 1,869 1,513 1,710 -------- -------- -------- -------- -------- Ending balance....................................... $ 21,452 $ 21,597 $ 21,423 $ 22,223 $ 22,732 -------- -------- -------- -------- -------- Net charge-offs to average gross loans outstanding, net of unearned income........................... 0.22% 0.20% 0.20% 0.19% 0.23% ======== ======== ======== ======== ========
(1) Includes commercial mortgage and construction loans. For the year ended December 31, 2002, the Corporation provided $2.2 million for loan losses which was greater than amounts provided in 2001 and 2000. This increase reflects, among other things, the Company's loan growth, a change in the mix to relatively higher margin and higher risk loans, and a weakening economic environment in 2002, offset in part by an overall improvement in credit quality of the Corporation's loan portfolio. The allowance for losses is allocated by major portfolio type. As these portfolios have seasoned, they have become a source of historical data in projecting loss exposure; however, such allocations may not be indicative of where future losses will occur. The allocation of the allowance for loan losses by portfolio type at the end of each of the last five fiscal years, and the percentage of loans outstandings in each category to total gross outstandings at such dates follow:
December 31, - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Amount Percent Amount(1) Percent Amount Percent Amount Percent Amount Percent ------ ------- --------- ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Residential real estate.......... $ 3,620 38.2% $ 4,039 38.2% $ 1,754 43.2% $ 1,389 42.7% $ 229 37.7% Commercial real estate........... 7,208 26.2 6,927 24.3 3,187 22.9 8,240 25.9 10,398 31.0 Commercial....................... 7,375 19.1 6,963 18.7 13,985 15.7 9,983 13.4 11,751 12.8 Consumer......................... 3,249 16.5 3,668 18.8 2,497 18.2 2,611 18.0 354 18.5 ------- ----- ------- ----- ------- ---- ------- ------ ------- ----- Total............................ $21,452 100.0% $21,597 100.0% $21,423 100.0% $22,223 100.0% $22,732 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) The implementation of SAB 102 in 2001 led to a change in the allocation methodologies for anticipated loan losses. 18 LIQUIDITY In accordance with Thrift Bulletin 77, the OTS requires institutions, such as WSFS, to maintain adequate liquidity to assure safe and sound operation. WSFS' liquidity ratio of cash and qualified assets to net withdrawable deposits and borrowings due within one year was 13.3% at December 31, 2002, compared to 10.8% at December 31, 2001. The increase in liquidity is due primarily to the sale of the reverse mortgage portfolio, from which cash proceeds totaled $128 million. For further discussion of this sale, see Note 6 to the Financial Statements. Management monitors liquidity daily and maintains funding sources to meet unforeseen changes in cash requirements. The Corporation's primary funding sources are operating earnings, 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 and other sources, 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. At December 31, 2002 and 2001, WSFS had outstanding FHLB advances of $403.5 million and $520.0 million, respectively. At December 31, 2002, WSFS had the capacity to borrow up to $460.9 million. The Corporation routinely enters into commitments requiring the future outlay of funds. WSFS is currently engaged in a data processing contract with Metavante Corporation. This contract commenced in October 2002 and expires in 2010, with future minimum payments of approximately $2.1 million annually. The Corporation also has three years remaining on five-year commitments with telecommunication companies. Under the terms of this agreement, the average minimum payment for each of the remaining three years is $1.3 million. These commitments, as well as loan commitments, are expected to be met through traditional funding sources, such as operating earnings, deposits, short-term borrowings, advances from the FHLB and principal repayments on loans and investments. During 2002, investing activities provide $37.9 million in cash and cash equivalents, while operating and financing activities used $42.9 million and $7.2 million, respectively. The cash provided by investing activities resulted primarily from the sales of businesses held-for-sale, as well as the sales of loans, investment securities, mortgage-backed securities, and reverse mortgages. This cash was used primarily to repay borrowings and invest in investment securities and mortgage-backed securities. During 2001, financing activities provided cash and cash equivalents of $159.1 million, while operating and investing activities used $52.4 million and $113.0 million, respectively. The cash provided by financing activities resulted primarily from additional FHLB advances and an increase in demand and savings accounts. This cash was used primarily to fund loans and purchase mortgage-backed securities. In 2000, operating and investing activities provided cash and cash equivalents of $836,000 and $17.7 million, respectively, while financing activities used $27.3 million. The cash provided by operating and investing activities resulted primarily from the sales of loans held-for-sale and mortgage-backed securities. This cash was used to fund the purchase of mortgage-backed securities and to fund an increase in loans, as well as to repay borrowings and purchase treasury stock. The Corporation has not used, and has no intention to use any significant off-balance sheet financing arrangements for liquidity purposes. The Corporation's financial instruments with off-balance sheet risk are limited to obligations to fund loans to customers pursuant to existing commitments and an interest rate cap which limits the exposure to rising rates on $50 million of trust preferred floating rate debt. In addition, WSFS has not had, and has no intention to have, any significant transactions, arrangements or other relationships with any unconsolidated, limited purpose entities that could materially affect its liquidity or capital resources. Finally, WSFS has not traded in, and does not intend to trade in commodity contracts. CAPITAL RESOURCES Federal laws, among other things, require the OTS to mandate uniformly applicable capital standards for all savings institutions. These standards currently require institutions such as WSFS to maintain a "tangible" capital ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of "risk-weighted" assets and total "risk-based" capital (a combination of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets. The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well as other requirements, established five capital tiers: well-capitalized, adequately capitalized, under capitalized, significantly under capitalized and critically under capitalized. A depository institution's capital tier depends upon its capital levels in relation to various relevant capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities. At December 31, 2002, WSFS is classified as well-capitalized and is in compliance with all regulatory capital requirements. For additional information concerning WSFS' regulatory capital compliance see Note 12 to the Financial Statements. 19 As part of its capital management strategy, the Corporation from time to time purchases its own shares of common stock to be included as treasury shares. Since 1996, the Board of Directors has approved several stock repurchase programs to reacquire common stock outstanding. As part of these programs, the Corporation acquired approximately 490,000 shares in 2002, and 1.1 million shares in both 2001 and 2000. At December 31, 2002, the Corporation held 6.2 million shares of its common stock as treasury shares. The Corporation intends to continue repurchasing shares in 2003 depending on stock price and alternative uses of capital. As a result of the after tax gains of $66.5 million on the November 2002 sale of reverse mortgages and $42.2 million on the January 2003 sale of WF, the Corporation has significantly increased its capital base. Management has identified two primary short-term uses of that capital: share repurchases, and investments in high-quality MBS securities and other investments. In the long term however, proceeds from these sales are planned to be used to grow the core community bank in Delaware. IMPACT OF INFLATION AND CHANGING PRICES The Corporation's Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without consideration of the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of the Corporation's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Corporation are monetary. As a result, interest rates have a greater impact on the Corporation's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or the same extent as the price of goods and services. Recent Legislation On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). The Securities and Exchange Commission (the "SEC") promulgated certain regulations pursuant to the Act and will continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act and the regulations implemented by the SEC subjected publicly-traded companies to additional and more comprehensive reporting regulations and disclosure. These new regulations, which are intended to curtail corporate fraud, require the chief executive officer and chief financial officer of the Company to personally certify certain SEC filings and Financial Statements and to certify as to the existence of disclosure controls and procedures within the Company are designed to ensure that information required to be disclosed by the Company in its SEC filings is processed, summarized and reported accurately. The Act and regulations promulgated thereunder by the SEC also impose additional measures to be taken by the Company's officers, directors and outside auditors and impose accelerated reporting requirements by officers and directors of the Company in connection with certain changes in their equity holdings of the Company. Implementation of and compliance with the Act and corresponding regulations will likely increase the Company's operating expenses. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement 142, Goodwill and Other Intangible Assets. Statement 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion 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. Statement 142 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 Statement 142 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. Statement 142 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. On January 1, 2002, the Corporation adopted Statement 142 and recognized $703,000, net of tax, resulting from negative goodwill, as a cumulative change in accounting principal. In June 2001, the FASB issued Statement 143, Accounting for Asset Retirement Obligations. Statement 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Statement 143 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. Statement 143 is effective for fiscal years beginning after June 15, 2002. The adoption of this statement on January 1, 2003 did not have a material impact on earnings, financial condition or equity. 20 In August 2001, the FASB issued Statement 144, Accounting for Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement 144 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 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. Statement 144 also amends ARB 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. Statement 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. See Note 3 to the Financial Statements for a description of the impact that the adoption of Statement 144 had to the Company's earnings, financial condition or equity. In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion 30 for classification as an extraordinary item shall be reclassified. Early application of the provisions of this Statement related to the rescission of Statement 4 is encouraged. The provisions in paragraphs 8 and 9(c) of this Statement related to Statement 13 shall be effective for transactions occurring after May 15, 2002, with early application encouraged. All other provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002, with early application encouraged. Early application of the provisions of this Statement may be as of the beginning of the fiscal year or as of the beginning of the interim period in which this Statement is issued. The adoption of this Statement did not have a material impact on the Corporation's earnings, financial condition or equity. In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The standard nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are to be applied prospectively for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of this Statement did not have a material impact on the Corporation's earnings, financial condition or equity. In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain Financial Institutions, which amends Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, Statement No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement No. 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement No. 72 to recognize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement. In addition, this Statement amends Statement No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that Statement No. 144 requires for other long-lived assets that are held and used. With some exceptions, the requirements of Statement No. 147 are effective October 1, 2002. The adoption of this Statement did not have an impact on the Bank's earnings, financial condition, or equity. 21 In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The application of this Interpretation did not have an impact on the Bank's earnings, financial condition, or equity. In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement is effective for fiscal years ending after December 15, 2002, except for financial reports containing condensed financial statements for interim periods for which disclosure is effective for periods beginning after December 15, 2002. The adoption of this Statement did not have an impact on the Bank's earnings, financial condition, or equity. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. This Interpretation clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities which interest is obtained after that date. Management anticipates that the application of this Interpretation will not have an impact on the Bank's earnings, financial condition, or equity. FORWARD-LOOKING STATEMENTS Within this annual report and financial statements, management has 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. Management has used "forward-looking statements" to describe the future plans and strategies including 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, operating risk, and uncertainty of estimates in general, and changes in federal and state regulation, among other factors. These factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. Actual results may differ materially from management expectations. WSFS Financial Corporation does not undertake and specifically disclaims any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 22 Market for Registrant's Common Equity and Related Stockholder Matters WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock MarketSM under the symbol WSFS. At December 31, 2002, the Corporation had 1,653 registered common stockholders of record. The following table sets forth the range of high and low sales prices for the Common Stock for each full quarterly period within the two most recent fiscal years as well as the quarterly dividends paid. The closing market price of the common stock at December 31, 2002 was $32.97. Stock Price Range ------------------------------ Low High Dividends --------- ----------- --------- 2002 4th $26.05 $34.21 $ .05 3rd 20.65 32.00 .05 2nd 18.10 25.91 .05 1st 16.95 18.90 .04 ----- $ .19 ===== 2001 4th $15.45 $18.25 $ .04 3rd 15.25 18.50 .04 2nd 12.38 17.55 .04 1st 11.88 13.81 .04 ----- $ .16 ===== 23 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of WSFS Financial Corporation We have audited the accompanying consolidated statement of condition of WSFS Financial Corporation and subsidiaries (the Corporation) as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WSFS Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 6 to the Financial Statements, the Company adopted Statement 142, "Goodwill and Other Intangible Assets" in 2002. As discussed in Note 19 to the Financial Statements, the Company adopted Statement 133, "Accounting for Derivative Instruments and Hedging Activities" in 2000. /s/ KPMG LLP January 20, 2003 Philadelphia, Pennsylvania 24 MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING To Our Stockholders: The management of WSFS Financial Corporation (the Corporation) is responsible for establishing and maintaining effective internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America, including controls over the safeguarding of assets. This internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified. There are inherent limitations in any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. Management assessed the Corporation's internal control over financial reporting presented in conformity with accounting principles generally accepted in the United States of America, including controls over the safeguarding of assets, as of December 31, 2002. This assessment was based on criteria for effective internal control over financial reporting established in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes, as of December 31, 2002 the Corporation maintained effective internal control over financial reporting, presented in conformity with accounting principles generally accepted in the United States of America, including controls over the safeguarding of assets. Management is also responsible for compliance with the federal laws and regulations concerning dividend restrictions and loans to insiders designated by the Office of Thrift Supervision as safety and soundness laws and regulations. The Corporation assessed its compliance with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes that the Corporation complied, in all material respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2002. /s/ MARVIN N. SCHOENHALS /s/ MARK A. TURNER Marvin N. Schoenhals Mark A. Turner Chairman and President Chief Operating Officer 25 CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, --------------------------------------------- 2002 2001 2000 --------- --------- --------- (Dollars in Thousands, Except per Share Data) Interest income: Interest and fees on loans.............................................. $ 72,018 $ 77,526 $ 77,597 Interest on mortgage-backed securities.................................. 7,608 9,956 18,961 Interest and dividends on investment securities......................... 890 1,191 2,530 Interest on investments in reverse mortgages............................ 13,092 10,155 19,309 Other interest income................................................... 1,095 2,510 2,502 --------- --------- --------- 94,703 101,338 120,899 --------- --------- --------- Interest expense: Interest on deposits .................................................. 12,040 25,554 37,330 Interest on Federal Home Loan Bank advances............................ 18,253 15,923 14,583 Interest on federal funds purchased and securities sold under agreements to repurchase.................................. 2,683 3,353 4,801 Interest on trust preferred borrowings................................. 2,599 3,365 2,918 Interest on other borrowings........................................... 457 391 534 Cost of funding businesses held-for-sale............................... (2,598) (1,989) (667) --------- --------- --------- 33,434 46,597 59,499 --------- --------- --------- Net interest income..................................................... 61,269 54,741 61,400 Provision for loan losses............................................... 2,243 1,865 864 --------- --------- --------- Net interest income after provision for loan losses..................... 59,026 52,876 60,536 --------- --------- --------- Noninterest income: Loan servicing fee income .............................................. 3,025 3,149 2,139 Deposit service charges................................................. 8,568 8,626 7,010 Credit/debit card and ATM income ....................................... 8,489 6,754 5,509 Securities gains (losses) .............................................. 23 4 (4,368) Gain on sale of reverse mortgages....................................... 101,518 - - Gain (loss) on sale of loans............................................ 443 420 (461) Other income............................................................ 1,994 2,172 3,097 --------- --------- --------- 124,060 21,125 12,926 --------- --------- --------- Noninterest expenses: Salaries, benefits and other compensation............................... 25,653 22,987 21,272 Equipment expense....................................................... 4,185 3,594 3,508 Data processing and operations expense.................................. 3,815 3,648 4,573 Occupancy expense....................................................... 3,794 4,307 3,622 Marketing expense....................................................... 1,427 1,391 1,266 Professional fees....................................................... 3,621 1,901 2,216 Other operating expenses................................................ 9,122 9,861 8,821 --------- --------- --------- 51,617 47,689 45,278 --------- --------- --------- Income from continuing operations before taxes and cumulative effect of change in accounting principle................... 131,469 26,312 28,184 Income tax provision.................................................... 44,154 8,550 8,471 --------- --------- --------- Income from continuing operations before cumulative effect of change in accounting principle.............................. 87,315 17,762 19,713 Cumulative effect of change in accounting principle, net of taxes....... 703 - (1,256) --------- --------- --------- Income from continuing operations....................................... 88,018 17,762 18,457 Loss from discontinued operations, net of taxes......................... - - (2,392) Loss on wind-down of discontinued operations, net of taxes.............. (2,766) (2,026) (2,211) Income (loss) on discontinued operations of businesses held-for-sale, net of taxes........................................... 14,965 1,347 (2,835) Gain on sale of businesses held-for-sale, net of taxes.................. 924 - --------- --------- --------- Net income.............................................................. $ 101,141 $ 17,083 $ 11,019 ========= ========= =========
26 CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year Ended December 31, --------------------------------------------- 2002 2001 2000 --------- --------- --------- (Dollars in Thousands, Except per Share Data) Earnings per share: Basic: Income from continuing operations before cumulative effect of change in accounting principle................................. $ 9.61 $ 1.85 $ 1.85 Cumulative effect of change in accounting principle, net of tax benefit............................................. 0 .08 - (0.12) --------- --------- --------- Income from continuing operations................................. 9.69 1.85 1.73 Loss from discontinued operations, net of taxes................... - - (0.22) Loss on wind-down of discontinued operations, net of tax benefit.. (0.30) (0.21) (0.21) Income (loss) on businesses held-for-sale......................... 1.64 0.14 (0.27) Gain on sale of businesses held-for-sale.......................... 0.10 - - --------- --------- --------- Net income ................................................... $ 11.13 $ 1.78 $ 1.03 ========= ========= ========= Diluted: Income from continuing operations before cumulative effect of change in accounting principle.................................. $ 9.20 $ 1.83 $ 1.85 Cumulative effect of change in accounting principle, net of tax benefit............................................. 0.07 - (0.12) --------- --------- --------- Income from continuing operations................................. 9.27 1.83 1.73 (Loss) from discontinued operations, net of taxes................. - - (0.22) (Loss) on wind-down of discontinued operations, net of tax benefit (0.29) (0.21) (0.21) Income (loss) on businesses held-for-sale......................... 1.57 0.14 (0.27) Gain on sale of businesses held-for-sale.......................... 0.10 - - --------- --------- --------- Net income ................................................... $ 10.65 $ 1.76 $ 1.03 ========= ========= =========
The accompanying notes are an integral part of these Financial Statements. 27 CONSOLIDATED STATEMENT OF CONDITION
December 31, ---------------------------------- 2002 2001 ------------ ----------- (In Thousands) Assets Cash and due from banks....................................................... $ 162,258 $ 104,813 Federal funds sold and securities purchased under agreements to resell........ 64,045 65,779 Interest-bearing deposits in other banks...................................... 7,476 28,360 Investment securities held-to-maturity (market value: 2002-$11,797, 2001-$12,802).................................. 10,724 12,396 Investment securities available-for-sale...................................... 11,053 1,798 Mortgage-backed securities held-to-maturity (market value: 2002-$40,481, 2001-$71,592).................................. 39,157 70,285 Mortgage-backed securities available-for-sale................................. 98,081 291,439 Mortgage-backed securities trading............................................ 11,000 - Investment in reverse mortgages, net.......................................... 1,131 33,939 Loans held-for-sale........................................................... 3,516 84,741 Loans, net of allowance for loan losses of $21,452 at December 31, 200 and $21,597 at December 31, 2001............................................ 1,075,870 1,030,631 Loans of businesses held-for-sale ............................................ 117,646 - Stock in Federal Home Loan Bank of Pittsburgh, at cost........................ 21,979 28,750 Assets acquired through foreclosure........................................... 904 432 Premises and equipment........................................................ 13,838 16,438 Accrued interest receivable and other assets.................................. 15,116 28,824 Other assets of businesses held-for-sale...................................... 3,810 - Loans, operating leases and other assets of discontinued operations........... 47,396 115,295 ---------- ----------- Total assets.................................................................. $ 1,705,000 $ 1,913,920 =========== =========== Liabilities and Stockholders' Equity Liabilities: Deposits: Noninterest-bearing demand.................................................... $ 182,957 $ 171,801 Money market and interest-bearing demand ..................................... 109,259 327,635 Savings....................................................................... 292,917 313,246 Time.......................................................................... 236,793 266,514 Jumbo certificates of deposit - retail........................................ 50,146 46,536 ----------- ----------- Total retail deposits .............................................. 872,072 1,125,732 Jumbo certificates of deposit - nonretail..................................... 26,324 12,038 Brokered certificates of deposit.............................................. - 8,347 ----------- ----------- Total deposits..................................................... 898,396 1,146,117 Federal funds purchased and securities sold under agreements to repurchase ... 25,925 45,000 Federal Home Loan Bank advances............................................... 403,500 520,000 Trust preferred borrowings.................................................... 50,000 50,000 Other borrowed funds.......................................................... 36,581 30,480 Accrued expenses and other liabilities........................................ 37,219 16,519 Other liabilities of businesses held-for-sale................................. 57,862 - ----------- ----------- Total liabilities............................................................. 1,509,483 1,808,116 ----------- ----------- Commitments and contingencies (see Note 16) Minority Interest............................................................. 12,845 5,801 Stockholders' Equity: Serial preferred stock $.01 par value, 7,500,000 shares authorized; none issued and outstanding...................................................... - - Common stock $.01 par value, 20,000,000 shares authorized; issued 14,859,721 at December 31 2002, and 14,823,651 at December 31, 2001......... 149 148 Capital in excess of par value ............................................... 59,789 59,079 Accumulated other comprehensive income........................................ 904 3,146 Retained earnings............................................................ 207,358 107,950 Treasury stock at cost, 6,162,269 shares at December 31, 2002 and 5,677,169 shares at December 31, 2001................................................. (85,528) (70,320) ----------- ----------- Total stockholders' equity.................................................... 182,672 100,003 ----------- ----------- Total liabilities, minority interest and stockholders' equity................. $ 1,705,000 $ 1,913,920 =========== ===========
The accompanying notes are an integral part of these Financial Statements. 28 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Capital Other Total Common in Excess Comprehensive Retained Treasury Stockholders' Stock of Par Value Income (Loss) Earnings Stock Equity ------ ------------ ------------- -------- -------- ------------- (In Thousands) Balance, January 1, 2000 ................... $ 148 $ 58,185 $ (3,265) $ 83,000 $ (41,915) $ 96,153 Comprehensive income: Net income ............................ - - - 11,019 - 11,019 Other comprehensive income (1) ........ - - 3,462 - - 3,462 --------- Total comprehensive income ................. 14,481 --------- Cash dividend, $0.15 per share ............. - - - (1,610) - (1,610) Exercise of common stock options ........... - 103 - - - 103 Treasury stock at cost, 1,101,500 shares (2) ............................... - - - - (12,678) (12,678) Increase in investment in subsidiary ....... - 697 - - - 697 --------- --------- --------- --------- ---------- --------- Balance, December 31, 2000 ................. $ 148 $ 58,985 $ 197 $ 92,409 $ (54,593) $ 97,146 ========= ========= ========= ========= ========== ========= Comprehensive income: Net income ............................ - - - 17,083 - 17,083 Other comprehensive income (1) ........ - - 2,949 - - 2,949 --------- Total comprehensive income ................. 20,032 --------- Cash dividend, $0.16 per share ............. - - - (1,542) - (1,542) Exercise of common stock options ........... - 94 - - - 94 Treasury stock at cost, 1,047,400 shares (3) - - - - (15,727) (15,727) --------- --------- --------- --------- ---------- --------- Balance, December 31, 2001 ................. $ 148 $ 59,079 $ 3,146 $ 107,950 $ (70,320) $ 100,003 ========= ========= ========= ========= ========== ========= Comprehensive income: Net income............................. - - - 101,141 - 101,141 Other comprehensive income (1)......... - - (2,242) - - (2,242) --------- Total comprehensive income.................. 98,899 --------- Cash dividend, $0.19 per share.............. - - - (1,733) - (1,733) Exercise of common stock options ........... 1 543 - - - 544 Treasury stock at cost, 485,100 shares (4).. - - - - (15,208) (15,208) Tax benefit from exercises of common stock options............................. - 167 - - - 167 --------- --------- --------- --------- ----------- --------- Balance, December 31, 2002 ................. $ 149 $ 59,789 $ 904 $ 207,358 $ (85,528) $ 182,672 ========= ========= ========= ========= ========== =========
(1) Other Comprehensive Income: 2002 2001 2000 ---- ---- ---- Net unrealized holding (losses) gains on securities available-for-sale arising during the period net of taxes (2002 - ($1.5) million, 2001 - $1.7 million, 2000 - $373,000)..... $ (2,511) $ 2,743 $ 608 Net unrealized holding (losses) gains arising during the period on derivatives used for cash flow hedge, net of taxes (2002 - ($415,000), 2001 - $31,000 and 2000 - ($1.7) million)........... (771) 257 (1,703) Reclassification for losses (gains) included in income, net of taxes (2002 - $637,000, 2001 - $31,000, 2000 - $(1.7) million).............. 1,040 (51) 2,729 --------- --------- -------- Total other comprehensive (loss) income, before other comprehensive income that resulted from the cumulative effect of a change in accounting principle, net of taxes... (2,242) 2,949 1,634 Net unrealized gain on derivatives used for cash flow hedging as a result of adopting SFAS No. 133, net of $985,000 tax benefit.......... - - 1,828 --------- --------- -------- Total other comprehensive income (loss).. $ (2,242) $ 2,949 $ 3,462 ========= ========= ======== (2) Net of reissuances of 5,000 shares (3) Net of reissuances of 5,000 shares (4) Net of reissuances of 5,000 shares The accompanying notes are an integral part of these Financial Statements. 29 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, ----------------------------------------- 2002 2001 2000 ------------ ----------- ----------- (In Thousands) Operating activities: Net income ..................................................... $ 101,141 $ 17,083 $ 11,019 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Provision for loan losses ................................. 2,243 2,212 894 Depreciation, accretion and amortization .................. 8,891 4,983 2,366 Decrease (increase) in accrued interest receivable and other assets ........................................ 5,331 (3,176) (2,725) Origination of loans held-for-sale ........................ (1,946,047) (624,481) (189,239) Proceeds from sales of loans held-for-sale ................ 1,857,346 566,686 187,104 Gain on sale of reverse mortgage .......................... (101,518) - -- Gain on businesses held-for-sale .......................... (1,516) - -- Increase (decrease) in accrued interest payable and other liabilities ....................................... 30,646 (5,640) 3,706 Increase in reverse mortgage capitalized interest, net .... (16,184) (10,003) (19,111) Minority interest in net income ........................... 16,731 (189) (3,735) Other, net ................................................ 86 122 10,557 ----------- ----------- ----------- Net cash (used for) provided by operating activities ........... (42,850) (52,403) 836 ----------- ----------- ----------- Investing activities: Net (increase) decrease of interest-bearing deposits in other banks .......................................... (176,987) (21,042) 708 Maturities of investment securities ....................... 182,467 90,349 9,155 Sales of investment securities available-for-sale ......... 1,788 644 36,199 Sales of mortgage-backed securities available-for-sale .... 128,316 4,095 219,235 Purchases of investment securities held-to-maturity ....... - - (8,952) Purchases of investment securities available-for-sale ..... (241,110) (75,246) (27,962) Repayments of mortgage-backed securities held-to-maturity . 30,747 37,116 25,383 Repayments of mortgage-backed securities available-for-sale 253,860 220,076 72,436 Purchases of mortgage-backed securities available-for-sale (261,658) (280,969) (210,376) Purchases of mortgage-backed securities trading ........... (11,000) - - Repayments on reverse mortgages ........................... 23,641 17,304 21,904 Disbursements for reverse mortgages ....................... (5,536) (7,413) (8,230) Sale of reverse mortgages ................................. 133,576 - - Sale of loans ............................................. 5,986 - - Purchase of loans ......................................... (32,077) (24,512) (36,829) Sale of businesses held-for-sale .......................... 14,332 - - Net decrease (increase) in loans .......................... 71,767 (72,146) (69,183) Net increase in loans of businesses held-for-sale ......... (83,397) - - Net decrease (increase) in stock of Federal Home Loan Bank of Pittsburgh ...................................... 6,771 (250) - Payments for investment in real estate .................... - - (1,991) Receipts from investments in real estate .................. - 270 - Sales of assets acquired through foreclosure, net ......... 1,116 766 1,469 Premises and equipment, net ............................... (4,750) (1,992) (5,298) ----------- ----------- ----------- Net cash provided by (used for) investing activities ........... 37,852 (112,950) 17,668 ----------- ----------- -----------
(Continued on next page) 30 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31, ----------------------------------------- 2002 2001 2000 ------------ ----------- ----------- (In Thousands) Financing activities: Net increase in demand and savings deposits.............. $ 10,733 $ 147,319 $ 224,155 Net increase (decrease) in time deposits ............... 93,768 (115,715) (3,733) Receipts from FHLB borrowings ........................... 825,356 370,000 692,500 Repayments of FHLB borrowings ........................... (941,856) (201,000) (856,500) Receipts from reverse repurchase agreements.............. 257,063 - 46,588 Repayments of reverse repurchase agreements ............. (276,138) (24,300) (116,229) Net decrease in federal funds purchased.................. - - (5,000) Increase of other borrowing of businesses held-for-sale.. 50,000 - - Net decrease in obligations under capital lease.......... (199) (125) (103) Dividends paid on common stock........................... (1,733) (1,542) (1,610) Issuance of common stock and exercise of employee stock options ......................................... 711 94 103 Purchase of treasury stock, net of re-issuance........... (15,208) (15,727) (12,678) Minority interest........................................ (9,687) 114 5,174 -------- --------- --------- Net cash (used for) provided by financing activities..... (7,190) 159,118 (27,333) -------- --------- --------- Decrease in cash and cash equivalents from continuing operations............................................. (12,188) (6,235) (8,829) Change in net assets from discontinued operations........ 67,899 85,478 41,012 Cash and cash equivalents at beginning of period ........ 170,592 91,349 59,166 -------- --------- --------- Cash and cash equivalents at end of period .............. $226,303 $ 170,592 $ 91,349 ======== ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid for interest during the year .................. $39,119 $62,977 $79,377 Cash paid for income taxes, net ......................... 21,701 8,874 1,713 Loans transferred to assets acquired through foreclosure............................................ 1,262 648 1,199 Net change in other comprehensive income................. (2,242) 2,949 3,462 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 Loans, net of allowance, of businesses held-for-sale..... 117,646 - - Other assets transferred to businesses held-for-sale..... 3,810 - - Other liabilities transferred to businesses held-for-sale 7,862 - -
The accompanying notes are an integral part of these Financial Statements. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES WSFS Financial Corporation (Company or Corporation) is a thrift holding company organized under the laws of the State of Delaware. The Corporation's principal wholly-owned subsidiary, Wilmington Savings Fund Society, FSB (the Bank or WSFS), is a federal savings bank organized under the laws of the United States which at December 31, 2002 conducted operations from its main office, two operation centers and 21 retail banking offices located in northern Delaware and southeastern Pennsylvania. In preparing the Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The material estimates that are particularly susceptible to significant changes in the near term relate to the allowance for loan losses and the valuations of the interest rate cap, other real estate owned, deferred tax assets, investment in reverse mortgages and the reserve for discontinued operations. Basis of Presentation The consolidated Financial Statements include the accounts of the parent company, WSFS Capital Trust I, WSFS and its wholly-owned subsidiaries, WSFS Investment Group, Inc. (formerly 838 Investment Group, Inc.), WSFS Reit, Inc. and WSFS Credit Corporation (WCC), as well as not wholly-owned, but majority controlled and consolidated subsidiaries, Wilmington Finance, Inc. (WF) and CustomerOne Financial Network, Inc. (C1FN). C1FN was sold in November 2002 and WF was sold in January 2003. These subsidiaries were classified as businesses held-for-sale and the statement of operations was retroactively restated for all periods presented. WF was classified as a business held-for-sale on the statement of condition at December 31, 2002. See Note 3 of the Financial Statements for further discussion of Businesses Held-for-Sale and Note 21 of the Financial Statements for a discussion of the WF sale. As discussed in Note 2 of the Financial Statements, the results of WSFS Credit Corporation, the Corporation's wholly owned indirect auto financing and leasing subsidiary, are also presented as discontinued operations. WSFS Capital Trust I was formed in 1998 to sell Trust Preferred Securities. The Trust invested all of the proceeds from the sale of the Trust Preferred Securities in Junior Subordinated Debentures of the Corporation. The Corporation used the proceeds from the Junior Subordinated Debentures for general corporate purposes, including the redemption of higher rate debt. WSFS Investment Group, Inc. markets various third-party insurance and securities products to Bank customers through WSFS' branch system. WSFS Reit, Inc. is a real estate investment trust formed in 2002 to hold qualifying real estate assets and may be used in the future as a vehicle to raise capital. Certain reclassifications have been made to the prior years' Financial Statements to conform them to the current year's presentation. All significant intercompany transactions are eliminated in consolidation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, federal funds sold and securities purchased under agreements to resell. Generally, federal funds are purchased and sold for periods ranging up to ninety days. Debt and Equity Securities Investments in equity securities that have a readily determinable fair value and investments in debt securities are classified into three categories and accounted for as follows: o Debt securities with the positive intention to hold to maturity are classified as "held-to-maturity" and reported at amortized cost. o Debt and equity securities purchased with the intention of selling them in the near future are classified as "trading securities" and are reported at fair value, with unrealized gains and losses included in earnings. o Debt and equity securities not classified in either of the above are classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, as a separate component of stockholders' equity. Debt and equity securities include mortgage-backed securities, corporate and municipal bonds, U.S. Government and agency securities and certain equity securities. Premiums and discounts on debt and equity securities held-to-maturity and available-for-sale are recognized in interest income using a level yield method over the period to expected maturity. The fair value of debt and equity securities is primarily obtained from third-party pricing services. Implicit in the valuation are estimated prepayments based on historical and current market conditions. 32 Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary, result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. The specific identification method is used to determine realized gains and losses on sales of investment and mortgage-backed securities. All sales are made without recourse. Investment in Reverse Mortgages The Corporation accounts for its investment in reverse mortgages in accordance with the instructions provided by the staff of the Securities and Exchange Commission entitled "Accounting for Pools of Uninsured Residential Reverse Mortgage Contracts" which requires grouping the individual reverse mortgages into "pools" and recognizing income based on the estimated effective yield of the pool. In computing the effective yield, the Corporation must project the cash inflows and outflows of the pool including actuarial projections of the life expectancy of the individual contract holder and changes in the collateral values of the residence. At each reporting date, a new economic forecast is made of the cash inflows and outflows of each pool of reverse mortgages; the effective yield of each pool is recomputed, and income is adjusted retroactively and prospectively to reflect the revised rate of return. Accordingly, because of this market-value based accounting the recorded value of reverse mortgage assets include significant risk associated with estimations and income recognition can vary significantly from reporting period to reporting period. Loans Loans are stated net of deferred fees and costs and unearned discounts. Loan interest income is accrued using various methods which approximate a constant yield. Loan origination and commitment fees and direct loan origination costs are deferred and recognized over the life of the related loans using a level yield method over the period to maturity. Impaired loans are measured based on the present value of expected future discounted cash flows, the market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. Impaired loans include loans within the Corporation's commercial, commercial mortgage and commercial construction portfolios. The Company's policy for recognition of interest income on impaired loans is the same as for nonaccrual loans discussed below. Nonaccrual Loans Nonaccrual loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal or recorded as interest income, depending on management's assessment of ultimate collectibility of principal and interest. Loans are returned to an accrual status when the borrower's ability to make periodic principal and interest payments has returned to normal (i.e. - brought current with respect to principal or interest or restructured) and the paying capacity of the borrower and/or the underlying collateral is deemed sufficient to cover principal and interest in accordance with the Corporation's previously established loan-to-value policies. Allowances for Loan Losses The Corporation maintains allowances for credit losses and charges losses to these allowances when such losses are realized. The determination of the allowance for loan losses requires significant management judgement reflecting management's best estimate of probable loan losses related to specifically identified loans as well as probable loan losses in the remaining loan portfolio. Management's evaluation is based upon a continuing review of these portfolios. Management establishes the loan loss allowance in accordance with guidance provided in the Securities and Exchange Commission's Staff Accounting Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the allowance consists of several key elements, which include: specific allowances for identified problem loans; formula allowances for commercial and commercial real estate loans; and allowances for pooled homogenous loans. Specific reserves are established for certain loans, in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss has been incurred. The formula allowances for commercial and commercial real estate loans are calculated by applying loss factors to outstanding loans in each case based on the internal risk grade of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors by risk grade have a basis in WSFS' historical loss experience 33 for such loans and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. (See discussion of historical loss adjustment factors below.) Pooled loans are loans that are usually smaller, not-individually-graded and homogenous in nature, such as consumer installment loans and residential mortgages. Pooled loan loss allowances are based on historical net charge-offs for seven years which management believes approximates an average business cycle. The average loss allowance per homogenous pool is based on the product of average annual historical loss rate and the average estimated duration of the pool multiplied by the pool balances. These separate risk pools are then assigned a reserve for losses based upon this historical loss information, as adjusted for historical loss adjustment factors. Historical loss adjustment factors are based upon management's evaluation of various current conditions. The evaluation of the inherent loss with respect to these more current conditions is subject to a higher degree of uncertainty because they are not identified with specific credits. The more current conditions, evaluated in connection with the adjustment factors, include an evaluation of the following: o General economic and business conditions affecting WSFS' key lending areas, o Credit quality trends (including trends in nonperforming loans expected to result from existing conditions), o Recent loss experience in particular segments of the portfolio, o Collateral values and loan-to-value ratios, o Loan volumes and concentrations, including changes in mix, o Seasoning of the loan portfolio, o Specific industry conditions within portfolio segments, o Bank regulatory examination results, and o Other factors, including changes in quality of the loan origination, servicing and risk management processes. WSFS' loan officers and risk managers meet monthly to discuss and review these conditions, and also risks associated with individual problem loans. By assessing the probable estimated losses inherent in the loan portfolio on a monthly basis, management is able to adjust specific and inherent loss estimates based upon the availability of more recent information. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. The Company also gives consideration to the results of these regulatory agency examinations. Allowances for estimated losses on investments in real estate and assets acquired through foreclosure are provided if the carrying value exceeds the fair value less estimated disposal costs. Assets Held-for-Sale Assets held-for-sale include loans held-for-sale and are carried at the lower of cost or market of the aggregate or in some cases individual assets. Vehicles that have been returned to the Company upon the expiration of their lease terms have been included in the net assets of discontinued operations. Assets Acquired Through Foreclosure Assets acquired through foreclosure are recorded at the lower of the recorded investment in the loan or fair value less estimated disposal costs. Costs subsequently incurred to improve the assets are included in the carrying value provided that the resultant carrying value does not exceed fair value less estimated disposal costs. Costs relating to holding the assets are charged to expense in the current period. An allowance for estimated losses is provided when declines in fair value below the carrying value are identified. Net costs of assets acquired through foreclosure includes costs of holding and operating the assets, net gains or losses on sales of the assets and provisions for losses to reduce such assets to fair value less estimated disposal costs. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Costs of major replacements, improvements and additions are capitalized. Depreciation expense is computed on the straight-line basis over the estimated useful lives of the assets or, for leasehold improvements, over the life of the related lease if less than the estimated useful life. In general, computer equipment, furniture and equipment and building renovations are depreciated over 3, 5 and 10 years, respectively. Accelerated methods are used in depreciating certain assets for income tax purposes. Securities Sold Under Agreements to Repurchase The Corporation enters into sales of securities under agreements to repurchase. Reverse repurchase agreements are treated as financings, with the obligation to repurchase securities sold reflected as a liability in the Consolidated Statement of Condition. The securities underlying the agreements remain in the asset accounts. 34 Income Taxes The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement basis and tax basis of assets and liabilities. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
2002 2001 2000 ---- ---- ---- (In Thousands, Except Per Share Data) Numerator: Income from continuing operations before cumulative effect of change in accounting principle, net of tax benefit .................... $ 87,315 $ 17,762 $ 19,713 Cumulative effect of change in accounting principle, net of tax benefit .... 703 - (1,256) ----------- ---------- ---------- Income from continuing operations .......................................... 88,018 17,762 18,457 Loss from discontinued operations, net of tax .............................. - - (2,392) Loss on wind-down of discontinued operations, net of tax ................... (2,766) (2,026) (2,211) Income (loss) from discontinued operations of businesses held-for-sale, net of taxes ........................................................... 14,965 1,347 (2,835) Gain on sale of businesses held-for-sale, net of tax ....................... 924 - - ----------- ---------- ---------- Net income ................................................................. $ 101,141 $ 17,083 $ 11,019 =========== ========== ========== Denominator: Denominator for basic earnings per share - weighted average shares ................................................... 9,086 9,579 10,652 Effect of dilutive employee stock options ................................... 407 114 14 ----------- ---------- ---------- Denominator for diluted earnings per share -.adjusted weighted average shares and assumed exercise ............................................... 9,493 9,693 10,666 =========== ========== ========== Earnings per share: Basic: Income from continuing operations before cumulative effect of change in accounting principle, net of tax benefit .................... $ 9.61 $ 1.85 $ 1.85 Cumulative effect of change in accounting principle, net of tax benefit .... 0.08 - (0.12) ----------- ---------- ---------- Income from continuing operations .......................................... 9.69 1.85 1.73 Loss from discontinued operations, net of tax .............................. - - (0.22) Loss on wind-down of discontinued operations, net of tax ................... (0.30) (0.21) (0.21) Income (loss) from discontinued operations of businesses held-for-sale, net of taxes ........................................................... 1.64 0.14 (0.27) Gain on sale of businesses held-for-sale, net of tax ....................... 0.10 - - ----------- ---------- ---------- Net income ................................................................. $ 11.13 $ 1.78 $ 1.03 =========== ========== ========== Diluted: Income from continuing operations before cumulative effect of change in accounting principle, net of tax benefit .................... $ 9.20 $ 1.83 $ 1.85 Cumulative effect of change in accounting principle, net of tax benefit .... 0.07 - (0.12) ----------- ---------- ---------- Income from continuing operations .......................................... 9.27 1.83 1.73 Loss from discontinued operations, net of tax .............................. - - (0.22) Loss on wind-down of discontinued operations, net of tax ................... (0.29) (0.21) (0.21) Income (loss) from discontinued operations of businesses held-for-sale, net of taxes ........................................................... 1.57 0.14 (0.27) Gain on sale of businesses held-for-sale, net of tax ....................... 0.10 - - ----------- ---------- ---------- Net income ................................................................. $ 10.65 $ 1.76 $ 1.03 =========== ========== ========== Outstanding common stock equivalents having no dilutive effect, in thousands 4 146 562
35 Stock Options At December 31, 2002, the Corporation had two stock-based employee compensation plans which are described more fully in Note 15 to the Financial Statements. The Corporation accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations. No stock-based employee compensation cost is reflected in the net income, as all options granted under those plans had an exercise price at least equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share had the company applied the fair value recognition provision of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
2002 2001 2000 ---- ---- ---- (In Thousands, Except Per Share Data) Income from continuing operations, as reported ................................ $ 88,018 $ 17,762 $ 18,457 Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects ... (798) (851) (966) ---------- ---------- ---------- Pro forma income from continuing operations ................................... $ 87,220 $ 16,911 $ 17,491 ========== ========== ========== Earnings per share: Basic: Income from continuing operations ........................................... $ 9.69 $ 1.85 $ 1.73 Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects . (0.09) (0.09) (0.09) ---------- ---------- ---------- Pro forma income from continuing operations ................................. $ 9.60 $ 1.76 $ 1.64 ========== ========== ========== Diluted: Income from continuing operations ........................................... $ 9.27 $ 1.83 $ 1.73 Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects . (0.08) (0.09) (0.09) ---------- ---------- ---------- Pro forma income from continuing operations ................................. $ 9.19 $ 1.74 $ 1.64 ========== ========== ==========
2. Discontinued Operations of a Business Segment In 2000, the Board of Directors of WSFS Financial Corporation approved plans to discontinue the operations of WCC. WCC, which had 2,317 lease contracts and 1,052 loan contracts at December 31, 2002, no longer accepts new applications but will continue to service existing loans and leases until their maturity. Management estimates that substantially all loan and lease contracts will mature by the end of 2004. In accordance with APB 30, which was the authoritative literature in 2000, accounting for discontinued operations of a business segment at that time required that the Company forecast operating results over the wind-down period and accrue any expected net losses. The historic results of WCC's operations, the accrual of expected losses to be incurred over the wind-down period, 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 losses of $2.4 million for the year ended December 31, 2000 were reclassified from continuing operations to discontinued operations. In addition, a $6.2 million pretax reserve was established to absorb expected future losses, primarily related to residual value losses on leases. Consequently, the Corporation recognized an after tax charge of $2.2 million, net of $4.0 million in tax benefits related to net operating loss carryforwards, for the expected loss over the projected wind-down period. During 2001 and 2002, as a result of the heavy incenting of new car purchases by manufacturers and other factors, both used car prices and WSFS' exposure to residual values on its outstanding leases have continued to deteriorate. Extensive analyses of remaining leases as of December 31, 2002 and 2001 indicated that additional reserves were needed for the expected losses in the business during its wind-down. Accordingly, management recorded additional provisions for these expected losses. These pretax provisions amounted to $2.0 million in 2002 and $3.1 million in 2001. 36 At December 31, 2002, there were $7.9 million in indirect loans and $44.7 million in indirect leases still outstanding. At December 31, 2002, WSFS had exposure to $42.3 million in remaining used car residuals, for which it estimates a loss of $8.9 million. Management has provided for this loss in the Financial Statements. The Corporation now has reserves covering 21% of the related residual exposure. Based on the scheduled maturities of leases, management estimates by December 31, 2003 its residual exposure will be less than $8.0 million and, by December 31, 2004, the exposure will be negligible. The total loss of $2.8 million after tax, or $0.29 per diluted share from WSFS Credit Corporation in 2002 includes the after-tax impact of the aforementioned residual provision and additional reserves of $563,000 for tax expense established as a result of changes in estimates used to calculate WCC's deferred taxes. Due to the uncertainty of a number of factors, including residual values, interest rates, operating costs and credit quality, the reserve for discontinued operations will be reevaluated quarterly with adjustments, if necessary, recorded as income/losses on wind-down of discontinued operations. The following chart depicts loans, operating leases and other assets of discontinued operations at December 31, 2002 and 2001: At December 31, ------------------------- 2002 2001 (In Thousands) Vehicles under operating leases, net.............. $ 44,693 $102,288 Net loans......................................... 7,285 16,131 Other non-cash assets 2,367 3,241 Less: Reserve for losses of discontinued operations....................... 6,949 6,365 -------- -------- Loans, operating leases and other assets of discontinued operations....................... $ 47,396 $115,295 ======== ======== The following table depicts the net income (loss) from discontinued operations for the years ended December 31, 2002, 2001 and 2000:
Year Ended December 31, -------------------------------- 2002 2001 2000 -------- --------- -------- (In Thousands) Interest income ....................................... $ 974 $ 1,870 $ 1,998 Allocated interest expense (1) ........................ 2,470 9,271 13,897 -------- -------- -------- Net interest income (expense) ........................ (1,496) (7,401) (11,899) Loan and lease servicing fee income ................... 379 301 723 Rental income on operating leases, net ................ 2,229 7,730 9,214 Other income .......................................... 7 14 42 -------- -------- -------- Net revenues ........................................ 1,119 644 (1,920) Noninterest expenses .................................. 1,234 2,066 1,987 -------- -------- -------- (Loss) income before taxes ............................ (115) (1,422) (3,907) Charges against the reserve for discontinued operations 115 1,422 Income tax provision (benefit) ....................... - - (1,515) -------- -------- -------- (Loss) income from discontinued operations ............ $ - $ - $ (2,392) (Loss) on wind-down of discontinued operations ........ (2,766) (2,026) (2,211) -------- -------- -------- Total ............................................... $ (2,766) $ (2,026) $ (4,603) ======== ======== ========
(1) The allocated interest expense for 2002 is based on a direct matched-maturity funding of the net non-cash assets of discontinued operations. The average funding rate for 2002 was 2.87% on average net assets of $86.0 million. Allocated interest expense for 2001 and 2000 was based on the Company's annual average wholesale borrowings rate, which approximated a marginal funding cost of this business segment, and was 5.65% and 6.28%, respectively. 37 3. BUSINESSES HELD-FOR-SALE In September 2002, WSFS sold its United Asian Bank Division (UAB). UAB was started in 2000 as a single branch to serve the Korean and Asian communities of Elkins Park, Pennsylvania and the surrounding area. The sale resulted in an after tax gain of $737,000, included $8.6 million in deposits and $15.8 million in loans in addition to branch fixed assets and the lease obligations. In November 2002, the Corporation completed the sale of C1FN and related interests in its Everbank Division to Alliance Capital Partners, Inc., the privately held parent company of First Alliance Bank, a federally chartered savings bank. Everbank was started with C1FN in 1999 as a joint initiative in Internet and branchless banking. Consistent with the manner in which the segment was managed and operated, information in this report labeled "C1FN" generally represents the profoma combined results of C1FN and WSFS' Everbank Division (the C1FN/Everbank segment). The sale included total assets of $342.8 million and deposits of $340.1 million. WSFS recorded an after tax gain of $187,000 on this sale. Under the provision of the agreement between sellers and buyers, certain sale consideration was withheld in two separate escrow accounts pending the resolution of certain events. WSFS' portion of these escrow amounts totaled approximately $786,000. These amounts were not recognized by WSFS at December 31, 2002, as their receipt is not assured beyond a reasonable doubt. On March 6, 2003, management received credible information that approximately $175,000 of the $786,000 in escrows would be forthcoming. As a result, management expects to record the $175,000 into income in the first quarter of 2003. WSFS also provided certain non-escrowed indemnifications to the sellers. Both of these indemnifications are more fully discussed in Note 16 to the Financial Statements, Commitments and Contingencies. Also in November 2002, WSFS signed a definitive agreement with American General Finance, Inc. for the sale of WSFS' majority-owned subsidiary, Wilmington Finance, Inc. (WF). WF is engaged in sub-prime residential mortgage banking. WF conducts activity on a national level and aggregates loans primarily through brokers and sells them to investors. The WF sale was completed on January 2, 2003 (see Note 21 to the Financial Statements for a further discussion of this transaction). In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the major classes of assets and liabilities of WF are presented separately on the statement of condition as of December 31, 2002. Income (losses) from these three businesses (UAB, C1FN/Everbank and WF) have been presented as income/losses of businesses held-for-sale, and presented separately for all periods presented. The gains realized on the sale of C1FN and UAB are presented separately on the statement of operations, net of tax. The average balance sheet is presented with total assets and liabilities of businesses held-for-sale displayed separately. The following tables present the net income from businesses held-for-sale for the years ended December 31, 2002, 2001 and 2000:
For the Year Ended December 31, 2002 --------------------------------------------------------- WF(1) C1FN UAB Total ----- ---- --- ----- (In Thousands) Net interest income............................. $ 6,835 $ 3,738 $ 863 $ 11,436 Provision for loan losses ...................... - 154 57 211 -------- -------- -------- -------- Net interest income after provision............. 6,835 3,584 806 11,225 Noninterest income ............................. 74,163 5,797 51 80,011 -------- -------- -------- -------- Total revenues ................................. 80,998 9,381 857 91,236 Noninterest expenses............................ 40,113 10,842 1,059 52,014 -------- -------- -------- -------- Income before taxes and minority interest....... 40,885 (1,461) (202) 39,222 Minority interest .............................. 20,111 (3,380) - 16,731 -------- -------- -------- -------- Income before taxes ............................ 20,774 1,919 (202) 22,491 Provision for income taxes ..................... 7,997 (391) (80) 7,526 -------- -------- -------- -------- Income from businesses held-for-sale............ $ 12,777 $ 2,310 $ (122) $ 14,965 ======== ======== ========= ======== Gain on sale of businesses held-for-sale........ $ NA $ 187 $ 737 $ 924 ======== ======== ======== ========
(1) Includes $2.6 million in interest expense allocated to fund the average net assets of $97.0 million of businesses held-for-sale. The rate of 2.68% is based on the weighted average rate on other borrowed funds which approximates the marginal funding rate for this niche business. 38
For the Year Ended December 31, 2001 --------------------------------------------- WF(1) C1FN UAB Total --- ---- --- -------- (In Thousands) Net interest income ..................... $ 1,773 $ 5,016 $ 760 $ 7,549 Provision for loan losses ............... - 329 18 347 -------- -------- -------- -------- Net interest income after provision ..... 1,773 4,687 742 7,202 Noninterest income ...................... 19,671 3,224 111 23,006 -------- -------- -------- -------- Total revenues .......................... 21,444 7,911 853 30,208 Noninterest expenses .................... 16,252 10,669 1,218 28,139 -------- -------- -------- -------- Income before taxes and minority interest 5,192 (2,758) (365) 2,069 Minority interest ....................... 2,119 (2,308) - (189) -------- -------- -------- -------- Income before taxes ..................... 3,073 (450) (365) 2,258 Provision for income taxes .............. 1,245 (188) (146) 911 -------- -------- -------- -------- Income from businesses held-for-sale .... $ 1,828 $ (262) $ (219) $ 1,347 ======== ======== ======== ========
(1) Includes $2.0 million in interest expense allocated to fund the average net assets of $37.4 million of businesses held-for-sale. The rate of 5.32% is based on the weighted average rate on other borrowed funds which approximates the marginal funding rate for this niche business.
For the Year Ended December 31, 2000 -------------------------------------------- WF(1) C1FN UAB Total --- ---- --- -------- (In Thousands) Net interest income ..................... $ 454 $ 1,833 $ 263 $ 2,550 Provision for loan losses ............... - 30 - 30 -------- -------- --------- -------- Net interest income after provision ..... 454 1,803 263 2,520 Noninterest income ...................... 4,358 796 21 5,175 -------- -------- --------- -------- Total revenues .......................... 4,812 2,599 284 7,695 Noninterest expenses .................... 7,355 8,228 567 16,150 -------- -------- --------- -------- Income before taxes and minority interest (2,543) (5,629) (283) (8,455) Minority interest ....................... (280) (3,455) - (3,735) -------- -------- --------- -------- Income before taxes ..................... (2,263) (2,174) (283) (4,720) Provision for income taxes .............. (893) (879) (113) (1,885) -------- -------- --------- -------- Income from businesses held-for-sale .... $ (1,370) $ (1,295) $ (170) $ (2,835) ======== ======== ========= ========
(1) Includes $667,000 interest expense allocated to fund the average net assets of $10.7 million of businesses held-for-sale. The rate of 6.26% is based on the weighted average rate on other borrowed funds which approximates the marginal funding rate for this niche business. 39 4. INVESTMENT SECURITIES
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ------ (In Thousands) Available-for-sale securities: December 31, 2002: U.S. Government and agencies ..... $10,880 $ 173 $ - $11,053 ======= ======= ======= ======= December 31, 2001: Corporate bonds .................. $ 1,805 $ 1 $ 8 $ 1,798 ======= ======= ======= ======= Held-to-maturity: December 31, 2002: Corporate bonds .................. $ 310 $ 8 $ 1 $ 317 State and political subdivisions.. 10,414 1,123 57 11,480 ------- ------- ------- ------- $10,724 $ 1,131 $ 58 $11,797 ======= ======= ======= ======= December 31, 2001: Corporate bonds .................. $ 1,372 $ 6 $ 20 $ 1,358 State and political subdivisions.. 11,024 631 211 11,444 ------- ------- ------- ------- $12,396 $ 637 $ 231 $12,802 ======= ======= ======= =======
Securities with book values aggregating $8.2 million at December 31, 2002 were pledged as collateral for WSFS' Treasury Tax and Loan account with the Federal Reserve Bank, securities sold under agreement to repurchase and certain municipal deposits which require collateral. Accrued interest receivable relating to investment securities was $227,000 and $211,000 at December 31, 2002 and 2001, respectively. Substantially all of the interest and dividends on investment securities represented taxable income. The scheduled maturities of investment securities held-to-maturity and securities available-for-sale at December 31, 2002 were as follows:
Held-to-Maturity Available-for-Sale ------------------------- ---------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ------ (In Thousands) Within one year ............................... $ - $ - $ - $ - After one year but within five years........... 4,618 5,311 10,880 11,053 After five but within ten years................ 1,557 1,885 - - After ten years................................ 4,549 4,601 - - --------- -------- ------- -------- $10,724 $11,797 $ 10,880 $ 11,053 ======= ======= ======== ========
Proceeds from the sale of investment securities available-for-sale during 2002 were $1.8 million, with a loss of $15,000 realized on the sales. Corporate and municipal bonds were called by the issuers totaling $1.8 million, with gains of $2,000 realized on these calls. Proceeds from the sale of corporate bonds available-for-sale of $306,000 resulted in a gain of $2,000, which was reported as income from businesses held-for-sale. Also, C1FN owned $50 million in agency notes when the company was sold in November 2002. For further discussion of the sale of C1FN, see Note 3 to the Financial Statements. Proceeds from the sale of investments during 2001 and 2000 were $644,000 and $36.1 million, respectively. There were net losses of $49,000 realized in 2000. There was no gain or loss on sales in 2001, however, corporate bond calls totaling $2.5 million resulted in a net realized gain of $4,000. In 2000, the Company recorded a gain of $40,000 on the sale of common stock received from the demutualization of insurance companies of which WSFS was a policy holder. The cost basis for all investment security sales was based on the specific identification method. There were no sales of securities classified as held-to-maturity. With the adoption of Statement of Financial Accounting Standards (SFAS) No. 133 in 2000, $2.0 million of corporate bonds were reclassified from held-to-maturity to available-for-sale. 40 5. MORTGAGE-BACKED SECURITIES
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- ---------- ------- (In Thousands) Available-for-sale securities: December 31, 2002: Collateralized mortgage obligations $ 83,099 $ 1,659 $ 23 $ 84,735 FNMA............................... 13,073 273 - 13,346 -------- -------- -------- -------- $ 96,172 $ 1,932 $ 23 $ 98,081 ======== ======== ======== ======== Weighted average yield .............. 4.69% December 31, 2001: Collateralized mortgage obligations.. $257,618 $ 3,206 $ 40 $260,784 FNMA................................. 15,173 103 - 15,276 FHLMC................................ 15,200 - 61 15,139 GNMA................................. 230 10 - 240 -------- -------- -------- -------- $288,221 $ 3,319 $ 101 $291,439 ======== ======== ======== ======== Weighted average yield .............. 5.47% Held-to-maturity securities: December 31, 2002: Collateralized mortgage obligations.. $ 13,881 $ 345 $ - $ 14,226 FNMA ................................ 11,614 387 - 12,001 FHLMC ............................... 13,662 595 3 14,254 -------- -------- -------- -------- $ 39,157 $ 1,327 $ 3 $ 40,481 ======== ======== ======== ======== Weighted average yield .............. 5.90% December 31, 2001: Collateralized mortgage obligations.. $ 31,889 $ 831 $ 80 $ 32,640 FNMA ................................ 18,355 254 - 18,609 FHLMC ............................... 20,041 305 3 20,343 -------- -------- -------- -------- $ 70,285 $ 1,390 $ 83 $ 71,592 ======== ======== ======== ======== Weighted average yield .............. 6.20% Trading Securities: December 31, 2002: Collateralized mortgage obligations.. $ 11,000 $ - $ - $ 11,000 -------- -------- -------- -------- $ 11,000 $ - $ - $ 11,000 ======== ======== ======== ========
Weighted average yield .............. 4.42% At December 31, 2002, mortgage-backed securities with book values aggregating $62.3 million were pledged as collateral for retail customer repurchase agreements, securities sold under agreements to repurchase and certain municipal deposits which require collateral. Accrued interest receivable relating to mortgage-backed securities was $715,000 and $2.1 million at December 31, 2002 and 2001, respectively. Proceeds from the sale of mortgage-backed securities available-for-sale were $128.3 million in 2002, resulting in a gain of $1.7 million (reported as income from businesses held-for-sale). Also during 2002, the Corporation sold a mortgage-backed security classified as held-to-maturity with proceeds totaling $569,000 resulting in a gain of $36,000. Because this sale occurred after the Corporation had collected more than 85% of the principal outstanding at acquisition, the sale is considered a maturity per SFAS 115. There were $70.8 million in mortgage-backed securities remaining on the books of C1FN when they were sold in November 2002. For further discussion of the sale of C1FN, see Note 3 to the Financial Statements. There were no other sales of mortgage-backed securities classified as held-to-maturity, nor transfers between categories of mortgage-backed securities in 2002. 41 In 2001, proceeds from the sale of mortgage-backed securities available-for-sale were $4.1 million with no gains or losses realized on these sales. During 2000, as part of a deleveraging strategy, WSFS received proceeds of $180.3 million in collateralized mortgage obligations and $14.7 million in adjustable rate GNMA securities, all classified as available-for-sale, resulting in net losses of $6.4 million and gains of $3,000, respectively. The cost bases of all mortgage-backed security sales are based on the specific identification method. There were no sales of mortgage-backed securities classified as held-to-maturity in 2000. With the adoption of SFAS No. 133, $129.0 million in mortgage-backed securities were reclassified from held-to-maturity to available-for-sale in 2000. In addition, there were proceeds of $24.3 million in January 2000 from the sale of collateralized mortgage obligations for which a loss of $730,000 was recognized in 1999. There were no other sales of mortgage-backed securities, nor transfers between categories of mortgage-backed securities during 2001 and 2000. 6. INVESTMENT IN AND ACQUISITION OF REVERSE MORTGAGES Reverse mortgage loans are contracts that require the lender to make monthly advances throughout the borrower's life or until the borrower relocates, prepays or the home is sold, at which time the loan becomes due and payable. Since reverse mortgages are nonrecourse obligations, the loan repayments are generally limited to the sale proceeds of the borrower's residence, and the mortgage balance consists of cash advanced, interest compounded over the life of the loan and a premium which represents a portion of the shared appreciation in the home's value, if any, or a percentage of the value of the residence. In 1993, the Corporation acquired a pool of reverse mortgages from the FDIC and another lender. In 1994, the Corporation purchased Providential Home Income Plan, Inc., a California-based reverse mortgage lender, for approximately $24.4 million. Providential's assets at acquisition primarily consisted of cash and its investment in reverse mortgages. Providential's results have been included in the Corporation's consolidated statement of operations since the acquisition date. The Corporation accounted for its investment in reverse mortgages in accordance with the instructions provided by the staff of the Securities and Exchange Commission entitled "Accounting for Pools of Uninsured Residential Reverse Mortgage Contracts" which requires grouping the individual reverse mortgages into "pools" and recognizing income based on the estimated effective yield of the pool. In computing the effective yield, the Corporation projected the cash inflows and outflows of the pool including actuarial projections of the life expectancy of the individual contract holder and changes in the collateral values of the residence. At each reporting date, a new economic forecast was made of the cash inflows and outflows of each pool of reverse mortgages; the effective yield of each pool was recomputed, and income was adjusted retroactively and prospectively to reflect the revised rate of return. Accordingly, because of this market-value based accounting, the recorded value of reverse mortgage assets included significant risk associated with estimations, and income can vary significantly from reporting period to reporting period. For the year ended December 31, 2002, the Corporation earned $13.1 million in interest income on reverse mortgages compared to $10.2 million in 2001 and $19.3 million in 2000. The yield on the portfolio was 49.73% in 2002 compared to 29.54% in 2001 and 58.92% in 2000. On November 22, 2002, substantially all of WSFS' $33 million reverse mortgage portfolio was sold, effective October 1, 2002, for a pretax gain of $101.5 million. The Corporation received $128 million in cash and $10 million in BBB rated mortgage-backed securities classified as trading and options to acquire up to 49.9% of the Class "O" certificates issued in connection with mortgage-backed security SASCO RM-1 2002. Theses mortgage-backed securities were part of a larger issuance of securities backed, in part, by the sold reverse mortgages. Since this was the sale of a financial asset, results are shown in continuing operations in the attached Financial Statements, in accordance with accounting principles generally accepted in the United States of America. Included in the net gain of reverse mortgages are amounts for transaction costs and other estimates of costs of future obligations, including an estimated future payment due to a participant in the value received for certain of the sold reverse mortgages, under a pre-existing agreement. The remaining investment of $1.1 million at December 31, 2002 represents a participation in reverse mortgages with a third party and was not part of the previously mentioned sale. The Corporation has retained the servicing of these reverse mortgages and receives $35 per loan per month, or an estimated $240,000 for 2003. No excess servicing rights were assigned. On January 1, 2002, the Corporation adopted SFAS 142, Goodwill and Other Intangible Assets. Statement 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion 17, Intangible Assets. It also addresses how intangible assets that are acquired individually or with a group of other assets (i.e. those not acquired in a business combination) should be accounted for in Financial Statements upon their acquisition. Statement 142 also addresses 42 how goodwill and other intangible assets should be accounted for after they have been initially recognized in the Financial Statements. Under this Standard, goodwill can no longer be amortized but instead must be tested for impairment and its value adjusted accordingly. Negative goodwill is required to be taken into earnings immediately upon adoption. The Corporation had $1.2 million in negative goodwill associated with the 1994 purchase of Providential Home Income Plan, Inc., a former subsidiary that was subsequently merged into the Bank. As a result of adopting this standard, the Corporation recognized income of $703,000 in the first quarter of 2002 as a cumulative effect of a change in accounting principle, net of $469,000 in income tax. Prior to adoption, the Corporation had been accreting $36,000 per quarter into interest income. 7. LOANS December 31, -------------------------- 2002 2001 ---- ---- (In Thousands) Real estate mortgage loans: Residential (1-4 family) ................ $ 420,116 $ 403,154 Other ................................... 229,482 208,924 Real estate construction loans................ 67,251 56,050 Commercial loans.............................. 211,437 197,799 Consumer loans................................ 181,851 198,366 ----------- ----------- 1,110,137 1,064,293 Less: Loans in process ............................. 10,959 8,695 Unearned income .............................. 1,856 3,370 Allowance for loan losses .................... 21,452 21,597 ----------- ----------- Net loans................................ $ 1,075,870 $ 1,030,631 =========== =========== The Corporation had impaired loans of approximately $7.0 million at December 31, 2002 compared to $7.5 million at December 31, 2001. The average recorded investment in impaired loans was $7.5 million, $8.1 million and $7.6 million during 2002, 2001 and 2000, respectively. The allowance for losses on impaired loans was $1.0 million at December 31, 2002, as compared to $1.1 million at December 31, 2001. There was no interest income recognized on impaired loans. The total amount of loans serviced for others were $234.1 million, $262.2 million and $250.8 million at December 31, 2002, 2001 and 2000, respectively. Accrued interest receivable on loans outstanding was $5.0 million at December 31, 2002 and 2001, and $5.9 million at December 31, 2000. Nonaccruing loans aggregated $6.5 million, $7.5 million and $8.3 million at December 31, 2002, 2001 and 2000, respectively. If interest on all such loans had been recorded in accordance with contractual terms, net interest income would have increased by $599,090 in 2002, $939,000 in 2001 and $966,000 in 2000. A summary of changes in the allowance for loan losses follows:
Year Ended December 31, ----------------------------------- 2002 2001 2000 ---- ---- ---- (In Thousands) Beginning balance.......................................................... $21,597 $21,423 $22,223 Provision for loan losses............................................. 2,243 1,865 864 Provision for loan losses - businesses held-for-sale.................. 211 347 30 Balance at acquisition of credit card portfolio....................... - - 175 Sale of business held-for-sale........................................ (269) - - Loans charged-off..................................................... (3,504) (2,332) (2,509) Recoveries............................................................ 1,174 294 640 ------- -------- ------- Ending balance............................................................. $21,452 $21,597 $21,423 ======= ======= =======
43 8. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31, ---------------------------- 2002 2001 ---- ---- (In Thousands) Real estate ........................................................ $ 904 $ 685 Less allowance for losses........................................... - 253 -------- -------- Ending balance..................................................... $ 904 $ 432 ======== ========
A summary of changes in the allowance for foreclosed assets follows:
Year Ended December 31, -------------------------------- 2002 2001 2000 ---- ---- ----- (In Thousands) Beginning balance.................................................. $ 253 $ 273 $ 329 Net charge-offs ................................................. (253) 20 56 --------- -------- -------- Ending balance .................................................... $ - $ 253 $ 273 ========== ========= ========
9. PREMISES AND EQUIPMENT December 31, ------------ 2002 2001 ---- ---- (In Thousands) Land ............................... $ 1,086 $ 1,086 Buildings .......................... 8,465 8,342 Leasehold improvements ............. 6,399 6,804 Furniture and equipment ............ 19,088 21,779 Renovations-in-process.............. 262 549 -------- ------- 35,300 38,560 Less: Accumulated depreciation ........... 21,462 22,122 -------- -------- $ 13,838 $ 16,438 ======== ======== The Corporation occupies certain premises and operates certain equipment under noncancelable leases with terms ranging from 1 to 25 years. These leases are accounted for as operating leases. Accordingly, lease costs are expensed as incurred. Rent expense was $2.0 million in 2002, $2.2 million in 2001, and $1.6 million in 2000. Future minimum payments under these leases at December 31, 2002 are as follows: (In Thousands) 2003 ........................................... $ 1,777 2004 ........................................... 1,446 2005 ........................................... 1,238 2006 ........................................... 975 2007 ........................................... 706 Thereafter ......................................... 3,312 -------- Total future minimum lease payments ....... $ 9,454 ======== 44 10. DEPOSITS The following is a summary of deposits by category, including a summary of the remaining time to maturity for time deposits: December 31, ----------------------- 2002 2001(1) ---- ------- (In Thousands) Money market and demand: Noninterest-bearing demand ....................... $ 182,957 $ 171,801 Money market and interest-bearing demand ......... 109,259 327,635 ---------- ---------- Total money market and demand .................. 292,216 499,436 ---------- ---------- Savings .............................................. 292,917 313,246 ---------- ---------- Retail certificates of deposits by maturity: Less than one year ............................... 168,547 194,376 One year to two years ............................ 36,668 46,992 Two years to three years ......................... 26,445 16,611 Three years to four years ........................ 2,721 4,504 Four years to five years ......................... 2,097 2,805 Over five years .................................. 315 1,226 ---------- ---------- Total retail time certificates ................. 236,793 266,514 ---------- ---------- Jumbo certificates of deposit-retail, by maturity: Less than one year ............................... 40,441 37,815 One year to two years ............................ 3,879 8,519 Two years to three years ......................... 5,530 - Three years to four years ........................ 159 - Four years to five years ......................... - 202 Over five years .................................. 137 - ---------- ---------- Total jumbo certificates of deposit-retail ..... 50,146 46,536 ---------- ---------- Subtotal retail deposits ............................. 872,072 1,125,732 ---------- ---------- Jumbo certificates of deposit nonretail, by maturity: Less than one year ............................... 24,734 10,512 One year to two years ............................ 1,490 1,326 Two years to three years ......................... - 100 Three years to four years ........................ - 100 Four years to five years ......................... 100 - ---------- ---------- Total jumbo time certificates............ ...... 26,324 12,038 ---------- ---------- Brokered certificates of deposit by maturity: Less than one year .............................. - 8,347 ---------- ---------- Total brokered time certificates ............... - 8,347 ---------- ---------- Total deposits ....................................... $ 898,396 $1,146,117 ========== ========== (1) Includes deposits of businesses sold in 2002 totaling $293.2 million at December 31, 2001. Time deposits include certificates of deposit in denominations of $100,000 or more, which aggregated $76.5 million and $58.6 million at December 31, 2002 and 2001, respectively. 45 Interest expense, restated for continuing operations, by category follows: Year Ended December 31, 2002 2001 2000 ---- ---- ---- (In Thousands) Money market and interest-bearing demand ...... $ 430 $ 910 $ 1,429 Savings ....................................... 2,914 7,417 10,690 Retail time deposits .......................... 8,267 13,197 12,957 ------- ------- ------- Total retail interest expense ........... 11,611 21,524 25,076 ------- ------- ------- Jumbo certificates of deposit - other.......... 419 1,106 1,713 Brokered certificates of deposit .............. 10 2,924 10,541 ------- ------- ------- Total interest expense on deposits ...... $12,040 $25,554 $37,330 ======= ======= ======= 11. BORROWED FUNDS
Maximum Amount Weighted Outstanding Average Average Weighted at Month Amount Interest Balance Average End Outstanding Rate End of Interest During the During the During the Period Rate Period Period Period ------ ---- ------ ------ ------ (Dollars in Thousands) 2002 ---- FHLB advances................................. $403,500 4.70% $480,000 $448,103 4.56% Trust preferred borrowings.................... 50,000 3.97 50,000 50,000 5.13 Federal funds purchased and securities sold under agreements to repurchase ........ 25,925 1.34 121,138 79,714 3.32 Other borrowed funds ......................... 36,581 1.00 42,640 36,026 1.27 2001 ---- FHLB advances................................. $520,000 4.58% $520,000 $396,542 5.64% Trust preferred borrowings.................... 50,000 5.60 50,000 50,000 6.64 Federal funds purchased and securities sold under agreements to repurchase ........ 45,000 4.87 73,900 69,945 6.46 Other borrowed funds ......................... 30,480 1.40 37,193 27,321 3.06
Federal Home Loan Bank Advances Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with fixed rates ranging from 2.92% to 5.37% at December 31, 2002 are due as follows: Weighted Average Amount Rate ------ -------- (Dollars in Thousands) 2003............................. $ 120,000 4.42% 2004............................. 90,000 4.78 2005............................. 15,000 5.01 2012............................. 33,500 4.22 ---------- $ 258,500 ========== Four advances are outstanding at December 31, 2002 totaling $145.0 million, with a weighted average rate of 4.96% maturing in 2008 and beyond. They are convertible on a quarterly basis (at the discretion of the FHLB) to a variable rate advance based upon the 3-month LIBOR rate, after an initial fixed term. WSFS has the option to prepay these four advances at predetermined 46 times or rates. Pursuant to collateral agreements with the FHLB, advances are secured by qualifying first mortgage loans, collateralized mortgage obligations, FHLB stock and an interest-bearing demand deposit account with the FHLB. As a member of the FHLB of Pittsburgh, WSFS is required to acquire and hold shares of capital stock in the FHLB of Pittsburgh in an amount at least equal to 5% of its advances (borrowings) from the FHLB of Pittsburgh, plus 0.7% of the unused borrowing capacity. WSFS was in compliance with this requirement with an investment in FHLB of Pittsburgh stock at December 31, 2002, of $22.0 million. Trust Preferred Borrowings On November 20, 1998, the Corporation issued $50.0 million of Trust Preferred securities, due on December 1, 2028, pursuant to a shelf registration under the Securities Act of 1933. These securities were issued at a floating rate of 250 basis points over 3-month LIBOR, repricing quarterly. The maturity date on these securities may be shortened to a date not earlier than December 1, 2003 if certain conditions are met. The Trust Preferred securities were issued by a subsidiary of the Corporation, a Delaware statutory trust, which invested the proceeds in junior subordinated debentures issued by the Corporation. The net proceeds from the sale of Trust Preferred securities were used primarily as replacement financing for the early retirement of other Corporation debt. The Corporation benefits from reduced long-term financing costs and the flexibility of additional Bank regulatory capital. At the same time, the Corporation also entered into an agreement to limit the interest rate exposure in the Trust Preferred securities by purchasing an interest rate cap, which provides a ceiling on 3-month LIBOR of 6.00% for the first ten years (expires November 2008). This limits the net interest rate coupon (or cash paid) on the Trust Preferred securities to no more than 8.50% through the first ten years. The cost of this interest rate cap was $2.4 million, which, prior to the adoption of SFAS 133, was to be amortized as a yield adjustment over the ten-year period. On January 1, 2000, the Corporation adopted SFAS No. 133 which changed the accounting treatment of the cap. See Note 19 to the Financial Statements for a further discussion. The effective accounting rate of the Trust Preferred securities including amortization of transactional costs and certain changes in value of the cap was 3.97% and 5.60% at December 31, 2002 and 2001, respectively. The Corporation received payments from the cap of $92,000 and $220,000 in 2001 and 2000, respectively. The Corporation did not receive any payments in 2002. Securities Sold Under Agreements to Repurchase During 2002, WSFS sold securities under agreements to repurchase as a short-term funding source. At December 31, 2002, securities sold under agreements to repurchase had fixed rates ranging from 1.15% to 1.47%. The underlying securities are mortgage-backed securities and U.S. Government securities with a book value of $28.3 million at December 31, 2002. Securities sold under agreements to repurchase with the corresponding carrying and market values of the underlying securities are due as follows:
Collateral --------------------------------------- Borrowing Carrying Market Accrued Amount Rate Value Value Interest --------- ---------- -------- -------- --------- (Dollars in Thousands) 2002 - ---- Up to 30 days.................... $ 25,925 1.34% $ 28,291 $ 28,291 $ 151 ========= ========= ========= ======== 2001 - ---- Up to 30 days.................... $ 20,000 2.51% $ 20,823 $ 21,235 $ 108 Over 90 days..................... 25,000 6.76 31,786 32,422 176 --------- --------- ---------- -------- $ 45,000 4.87% $ 52,609 $ 53,657 $ 284 ========= ========= ========= =======
47 Other Borrowed Funds Included in other borrowed funds are collateralized borrowings of $36.6 million and $30.2 million at December 31, 2002 and 2001, respectively, consisting of outstanding retail repurchase agreements, contractual arrangements under which portions of certain securities are sold on an overnight basis to retail customers under agreements to repurchase. Such borrowings were collateralized by mortgaged-backed securities. The average rates on these borrowings were 1.00% and 1.25% at December 31, 2002 and 2001, respectively. Also included in other borrowed funds are capital leases totaling $287,000 at December 31, 2001. The average rates on these capital leases was 16.83% at December 31, 2001. The balance of capital leases outstanding at December 31, 2002 is included in businesses held-for-sale. See Note 3 to the Financial Statements for a further discussion of businesses held-for-sale. Cost of Funding Discontinued Operations and Businesses Held-For Sale In order to properly estimate the results of continuing operations, certain WSFS funding costs were allocated towards the funding of discontinued operations and businesses held-for-sale. See Note 2 to the Financial Statements for further discussion on discontinued operations, and Note 3 for businesses held-for-sale. 12. STOCKHOLDERS' EQUITY Under Office of Thrift Supervision (OTS) capital regulations, savings institutions such as WSFS, must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of risk-weighted assets and "total" or "risk-based" capital (a combination of core and "supplementary" capital) equal to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on WSFS' Financial Statements. At December 31, 2002 and 2001, WSFS was in compliance with regulatory capital requirements and was deemed a "well-capitalized" institution. The following table presents WSFS' consolidated capital position as of December 31, 2002 and 2001:
To Be Well-Capitalized Consolidated For Capital Under Prompt Corrective Bank Capital Adequacy Purposes Action Provisions ----------------------- ---------------------- ----------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) As of December 31, 2002: Total Capital (to risk-weighted assets)...... $ 245,470 20.12% $ 97,583 8.00% $ 121,978 10.00% Core Capital (to adjusted tangible assets)... 235,868 13.74 68,665 4.00 85,831 5.00 Tangible Capital (to tangible assets)........ 235,868 13.74 25,749 1.50 N/A N/A Tier 1 Capital (to risk-weighted assets)..... 235,868 19.34 N/A N/A 73,187 6.00 As of December 31, 2001: Total Capital (to risk-weighted assets)...... $ 151,356 11.98% $ 101,074 8.00% $ 126,343 10.00% Core Capital (to adjusted tangible assets)... 141,229 7.37 76,680 4.00 95,850 5.00 Tangible Capital (to tangible assets)........ 141,229 7.37 28,755 1.50 N/A N/A Tier 1 Capital (to risk-weighted assets)..... 141,229 11.18 N/A N/A 75,806 6.00
The Corporation has a simple capital structure with one class of $ .01 par common stock outstanding, each share having equal voting rights. In addition, the Corporation has authorized 7,500,000 shares of $0.01 par preferred stock. No preferred stock was outstanding at December 31, 2002 and 2001. The Trust Preferred securities issued in 1998 qualify as Tier 1 capital. WSFS is prohibited from paying any dividend or making any other capital distribution if, after making the distribution, WSFS would be undercapitalized within the meaning of the OTS Prompt Corrective Action regulations. Since 1996, the Board of Directors has approved several stock repurchase programs to reacquire common shares. As part of these programs, the Corporation acquired approximately 490,000 shares in 2002 and 1.1 million shares in 2001. At December 31, 2002, the Corporation held 6.2 million shares of its common stock in the treasury. 48 The Holding Company Although the holding company does not have significant assets or engage in significant operations separate from WSFS, the Corporation has agreed to cause WSFS' required regulatory capital level to be maintained by infusing sufficient additional capital as necessary. In November 1998, the Corporation issued $50 million of Trust Preferred securities at a variable interest rate of 250 basis points over the 3-month LIBOR. At December 31, 2002, the coupon rate on these securities was 3.92% with a scheduled maturity of December 1, 2028. The Corporation purchased an interest rate cap that effectively limits 3-month LIBOR to 6.00% until 2008. The effective rate of these securities, including amortization of issuance costs and the cost of the interest rate cap was 4.0% at December 31, 2002. The effective rate will vary, however, due to fluctuations in interest rates. See Note 19 to the Financial Statements for further discussion of the interest rate cap. These securities were issued by WSFS Financial Corporation's subsidiary, WSFS Capital Trust I. The proceeds from the issue were invested in Junior Subordinate Debentures issued by WSFS Financial Corporation. These securities are treated as borrowings with the interest included in interest expense on the consolidated statement of operations. See Notes 11 and 19 to the Financial Statements for additional information. The proceeds were used primarily to extinguish higher rate debt and for general corporate purposes. Pursuant to federal laws and regulations, WSFS' ability to engage in transactions with affiliated corporations is limited, and WSFS generally may not lend funds to nor guarantee indebtedness of the Corporation. 13. ASSOCIATE (EMPLOYEE) BENEFIT PLANS Associate 401(k) Savings Plan Certain subsidiaries of the Corporation maintain a qualified plan in which Associates may participate. Participants in the plan may elect to direct a portion of their wages into investment accounts which include professionally managed mutual and money market funds and the Corporation's common stock. Generally, the principal and earnings thereon are tax deferred until withdrawn. The Company matches a portion of the Associates' contributions and periodically makes discretionary contributions based on Company performance into the plan for the benefit of Associates. To that end, in December 2002, the Corporation set aside $343,000 of its gain on the sale of reverse mortgages for a special contribution to the Associate 401K plan. The Corporation's total contributions to the plan on behalf of its Associates resulted in an expenditure of $848,000, $892,000 and $848,000 for 2002, 2001, and 2000, respectively. The plan purchased 72,000, 91,000 and 105,000 shares of common stock of the Corporation during 2002, 2001, and 2000, respectively. All Company contributions are made in the form of the Corporation's common stock which Associates may transfer to various other investment vehicles without any significant restrictions. Postretirement Benefits The Corporation shares certain costs of providing health and life insurance benefits to retired Associates (and their eligible dependents). Substantially all Associates may become eligible for these benefits if they reach normal retirement age while working for the Corporation. The Corporation accounts for its obligations under the provisions of SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 106 requires that the costs of these benefits be recognized over an Associate's active working career. Disclosures are in accordance with SFAS No.132, Employer's Disclosure About Pensions and Other Postretirement Benefits which standardized the applicable disclosure requirements. 49 The following disclosures are in accordance with SFAS No. 132:
2002 2001 2000 ---- ---- ---- (Dollars in Thousands) Change in benefit obligation: Benefit obligation at beginning of year ................ $ 1,430 $ 1,086 $ 1,058 Service Cost ........................................... 59 37 36 Interest cost .......................................... 100 78 74 Actuarial loss ......................................... 298 364 47 Benefits paid .......................................... (72) (135) (129) ------- ------- ------- Benefit obligation at end of year ................ $ 1,815 $ 1,430 $ 1,086 ======= ======= ======= Change in plan assets: Fair value of plan assets at beginning of year ........ $ - $ - $ - Employer contributions ................................. 72 135 129 Benefits paid .......................................... (72) (135) (129) ------- ------- ------- Fair value of plan assets at end of year ........ $ - $ - $ - ======= ======= ======= Funded status: Funded status .......................................... $(1,815) $(1,430) $(1,086) Unrecognized transition obligation ..................... 613 675 736 Unrecognized net loss (gain) ........................... 407 109 (263) ------- ------- ------- Net amount recognized ............................ $ (795) $ (646) $ (613) ======= ======= ======= Components of net periodic benefit cost: Service cost ........................................... $ 74 $ 60 $ 37 Interest cost .......................................... 119 100 78 Amortization of transition obligation .................. 61 61 61 Net loss (gain) recognition ............................ 13 - (8) ------- ------- ------- Net periodic benefit cost ........................ $ 267 $ 221 $ 168 ======= ======= ======= Sensitivity analysis of healthcare cost trends: Effect of +1% on service cost plus interest cost ....... $ 2 $ - $ - Effect of -1% on service cost plus interest cost ....... (1) - - Effect of +1% on APBO .................................. 9 5 2 Effect of -1% on APBO .................................. (3) (2) (1) Assumptions used to value the Accumulated Postretirement Benefit Obligation (APBO): Discount rate ................................... 6.75% 7.25% 7.50% Health care cost trend rate ..................... 6.00% 6.50% 7.00%
The Corporation assumes that the average annual rate of increase for medical benefits will decrease by one-half of 1% per year and stabilizes at an average increase of 5% per annum. The costs incurred for retirees' health care are limited since certain current and all future retirees are restricted to an annual medical premium cap indexed (since 1995) by the lesser of 4% or the actual increase in medical premiums paid by the Corporation. For 2002, this annual premium cap amounted to $1,896 per retiree. 50 14. TAXES ON INCOME The Corporation and its subsidiaries file a consolidated federal income tax return and separate state income tax returns. The income tax provision consists of the following:
Year Ended December 31, --------------------------------- 2002 2001 2000 ---- ---- ---- (In Thousands) From current operations: Current income taxes: Federal taxes ................................. $ 34,635 $ 5,017 $ 10,336 State and local taxes ......................... 3,543 1,039 541 Deferred income taxes: Federal taxes ................................. 5,976 2,494 (2,406) State and local taxes ......................... - - - -------- -------- -------- Subtotal ................................ $ 44,154 $ 8,550 $ 8,471 From discontinued operations: Current income taxes: Federal taxes ................................. $ 9,247 $ 4,645 $ (5,360) State and local taxes ......................... 778 174 202 Deferred income taxes: Federal taxes ................................. (2,494) (6,307) (2,159) State and local taxes ......................... (547) 1,308 (41) -------- -------- -------- Subtotal ................................ $ 6,984 $ (180) $ (7,358) Current taxes from adoption of accounting principle: Federal taxes on SFAS 133 adoption ............ - - (837) Federal taxes on SFAS 142 adoption ............ 469 - - -------- -------- -------- Subtotal ................................ $ 469 $ - $ (837) -------- -------- -------- Total ................................... $ 51,607 $ 8,370 $ 276 ======== ======== ========
Current federal income taxes include taxes on income that cannot be offset by net operating loss carryforwards. Based on the Corporation's history of prior earnings and its expectations of the future, management believes that operating income and the reversal pattern of its temporary differences will, more likely than not, be sufficient to realize a net deferred tax asset of $1.5 million at December 31, 2002. Adjustments to the valuation allowance were made in 2002 to reflect the lapsing of uncertainties related to certain tax benefits that were deemed to be realizable as a result of the closure of an IRS examination along with the sale of the reverse mortgage portfolio. Further adjustments to the valuation allowance were made in 2002 related to previously unrecorded tax benefits related to C1FN that were realizable as a result of the sale of Wilmington Finance. This was offset by adjustments for benefits previously recognized for state tax net operating losses that are not realizable due to changes in state tax law enacted in 2002. The adjustments to the valuation allowance in 2001 were based on the realization of certain state net operating loss tax benefits relating to the discontinuance of the leasing company. The adjustments in 2000 were primarily the result of the lapsing of uncertainties associated with the Corporation's ability to realize certain tax benefits related to the acquisition of Providential Home Income Plan, Inc. Deferred income taxes 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. The following is a summary of the significant components of the Corporation's deferred tax assets and liabilities as of December 31, 2002 and 2001: 51 2002 2001 --------- ---------- (In Thousands) Deferred tax liabilities: Accelerated depreciation ........................ $(21,958) $(27,781) Other ........................................... (18) (28) Investments in non-wholly owned subsidiaries .... (4,866) - Unrealized gains on available-for-sale securities (583) (654) -------- -------- Total deferred tax liabilities ....................... (27,425) (28,463) -------- -------- Deferred tax assets: Bad debt deductions ............................. 16,591 15,290 Tax credit carryforwards ........................ 150 150 Net operating loss carryforwards ................ 5,778 6,255 Loan fees ....................................... 99 123 Provisions for losses on reverse mortgages ...... - 11,418 Discontinued operations ......................... 4,042 2,228 Reserves and other .............................. 3,201 1,502 Capital loss carryforwards ...................... 1,438 - Investments in non-wholly owned subsidiaries .... - 730 -------- -------- Total deferred tax assets ............................ 31,299 37,696 -------- -------- Valuation allowance .................................. (2,377) (5,306) -------- -------- Net deferred tax asset ............................... $ 1,497 $ 3,927 ======== ======== Included in the table above is the effect of certain temporary differences for which no deferred tax expense or benefit was recognized. Such items consisted primarily of unrealized gains and losses on certain investments in debt and equity securities accounted for under SFAS No. 115 and certain adjustments in non-wholly owned subsidiaries. A decrease in 2002 for deferred tax liabilities of investments in non-wholly owned subsidiaries for which no deferred tax benefit was recognized was $434,000. Approximately $4.7 million in gross deferred tax assets of the Corporation at December 31, 2002 are related to net operating losses and tax credits attributable to a former subsidiary. The Company has assessed a valuation allowance on a portion of these deferred tax assets due to limitations imposed by the Internal Revenue Code. Approximately $1.3 million in gross deferred tax assets of the Corporation at December 31, 2002 are related to state tax net operating losses. The Company has assessed a valuation allowance on a portion of these deferred tax assets. In 2002, the Internal Revenue Service (IRS) concluded an examination of the Corporation's federal income tax returns for all the years ending December 31, 2000. The income tax provision for the year ended December 31, 2002 was reduced by $894,000 primarily as a result of the favorable resolution of tax authority examinations and tax return settlements. Net operating loss carryforwards (NOLs) of $34.1 million remain at December 31, 2002. The expiration dates and amounts of such carryforwards are listed below: Federal State ------- ----- (In Thousands) 2007.............................. $ - $12,473 2008.............................. 6,172 - 2009.............................. 6,755 - 2018.............................. - 8,711 ------- ------- $12,927 $21,184 ======= ======= The Corporation's ability to use its federal NOLs to offset future income is subject to restrictions enacted in Section 382 of the Internal Revenue Code. These restrictions limit a company's future use of NOLs if there is a significant ownership change in a 52 company's stock (an "Ownership Change"). The utilization of approximately $12.9 million of federal net operating loss carryforwards is limited to approximately $1.3 million each year as a result of such Ownership Change in a former subsidiary's stock. A reconciliation setting forth the differences between the effective tax rate of the Corporation and the U.S. Federal Statutory tax rate is as follows: Year Ended December 31, --------------------------- 2002 2001 2000 ---- ---- ---- Statutory federal income tax rate ............ 35.0% 35.0% 35.0% State tax net of federal tax benefit.......... 1.5 5.0 12.8 Interest income 50% excludable................ (0.5) (2.9) (6.7) Utilization of loss carryforwards and valuation allowance adjustments........ (1.9) (3.3) (33.6) Other......................................... (0.3) (0.9) (5.0) ---- ---- ---- Effective tax rate ........................... 33.8% 32.9% 2.5% ==== ==== ==== 15. STOCK OPTION PLANS The Corporation has stock options outstanding under two stock option plans (collectively, "Option Plans") for officers, directors and Associates of the Corporation and its subsidiaries. The 1986 Stock Option Plan ("1986 Plan") expired in 1996, on the tenth anniversary of its effective date. As a result, no future awards may be granted under the 1986 Plan. The 1997 Stock Option Plan ("1997 Plan") was approved by shareholders to replace the expired 1986 Plan. The 1997 Plan will terminate on the tenth anniversary of its effective date, after which no awards may be granted. The number of shares reserved for issuance under the 1997 Plan is 1,165,000. At December 31, 2002, there were 69,450 shares available for future grants under the 1997 Plan. The Option Plans provide for the granting of incentive stock options as defined in Section 422 of the Internal Revenue Code as well as nonincentive stock options (collectively, "Stock Options"), phantom stock awards and stock appreciation rights. All awards are to be granted at not less than the market price of the Corporation's common stock on the date of the grant and expire no later than ten years from the grant date. All Stock Options granted after October 1996 are exercisable one year from grant date and vest in 20% per annum increments. Generally, all awards become immediately exercisable in the event of a change in control, as defined within the Option Plans. A summary of the status of the Corporation's Option Plans as of December 31, 2002, 2001 and 2000, and changes during the years then ended is presented below:
2002 2001 2000 -------------------------- -------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Stock Options: Outstanding at beginning of year 1,001,605 $ 14.42 826,345 $ 13.85 530,055 $ 14.88 Granted ........................ 125,075 30.83 196,500 16.51 372,700 12.30 Exercised ...................... (36,070) 14.35 (9,360) 9.44 (15,890) 6.53 Canceled ....................... (10,550) 14.28 (11,880) 13.41 (60,520) 15.09 --------- ------- ------- Outstanding at end of year ..... 1,080,060 16.33 1,001,605 14.42 826,345 13.84 Exercisable at end of year 466,194 14.55 312,589 156,484 Weighted-average fair value of awards granted $ 8.73 $ 5.73 $ 4.69
The Black-Scholes option-pricing model was used to determine the grant-date fair-value of options. Significant assumptions used in the model included a weighted-average risk-free rate of return of 2.6% in 2002, 4.4% in 2001 and 6.0% in 2000; expected option life of 6 years for all awards; and expected stock price volatility of 26% in 2002, 24% in 2001, and 35% for 2000. For the purposes of this option pricing model 1% was used as the expected dividend yield. 53 The Black-Scholes and other option-pricing models assume that options are freely tradable and immediately vested. Since executive's options are not transferable, have long vesting provisions, and are subject to trading black-out periods imposed by the Company, the value calculated by the Black-Scholes model may significantly overstate the true economic value of the options. SFAS No. 123, Accounting for Stock-based Compensation, encourages, but does not require, the adoption of fair-value accounting for stock-based compensation to Associates. The Company, as permitted, has elected not to adopt the fair value accounting provisions of SFAS 123, and has instead continued to apply Accounting Principles Board Opinion 25 and related interpretations in accounting for the Stock Plans and to provide the required pro forma disclosures of SFAS 123. Had the grant-date fair-value provisions of SFAS 123 been adopted, the Corporation would have recognized compensation expense of $1.2 million in 2002, and $1.3 million in both 2001 and 2000 related to its Option Plans. As a result, pro forma income from continuing operations for the Corporation would have been $ 87.2 million in 2002, $16.9 million in 2001 and $17.5 million in 2000. Pro forma diluted earnings per share from continuing operations would have been $9.19 in 2002, $1.74 in 2001 and $1.64 in 2000. The effects on pro forma net income and diluted earnings per share of applying the disclosure requirement of SFAS 123 in past years may not be representative of the future pro forma effects on net income and EPS due to the vesting provisions of the options and future awards that are available to be granted. The following table summarizes all stock options outstanding and exercisable for Option Plans as of December 31, 2002, segmented by range of exercise prices:
Outstanding Exercisable -------------------------------------------------------------------- ----------- Weighted- Weighted- Weighted- Average Average Average Exercise Remaining Exercise Number Price Contractual Life Number Price ------ ---------------- ---------------- ------ ----------- Stock Options: $ 6.68-$10.02 25,320 $ 9.44 3.8 years 25,320 $ 9.44 $10.02-$13.36 269,100 11.25 7.6 years 105,580 11.29 $13.36-$16.70 396,995 14.83 6.8 years 205,824 14.79 $16.70-$20.04 283,570 17.52 7.4 years 129,470 17.82 $30.06-$33.40 105,075 33.40 10.0 years - - ------- ------- Total 1,080,060 $16.33 7.4 years 466,194 $14.55 ========= =======
16. COMMITMENTS AND CONTINGENCIES Lending Operations At December 31, 2002, the Corporation had commitments to extend credit of $189.3 million. Consumer lines of credit totaled $66.5 million of which $58.3 million was secured by real estate. Outstanding letters of credit were $4.3 million and outstanding commitments to make or acquire mortgage loans aggregated $28.2 million. Approximately $17.6 million of which were at fixed rates ranging from 3.88% to 7.50%, and approximately $10.6 million were at variable rates ranging from 3.25% to 6.75%. All mortgage commitments are expected to have closing dates within a six-month period. Data Processing Operations In September 2000, the Company entered into a five-year contract with MCI/WorldCom and Integraph Corporation to manage network operations. The projected amount of future minimum payments contractually due is as follows: 2003................................................ $1,242,000 2004................................................ 1,281,000 2005................................................ 1,238,000 54 In October 2002, the Company entered into a 7 1/2 year contract with Metavante Corporation for data processing and other related services. The projected amount of future minimum payments contractually due is as follows: 2003............................................... $2,023,762 2004............................................... 2,059,808 2005............................................... 2,095,854 2006............................................... 2,131,899 2007............................................... 2,167,945 2008............................................... 2,203,991 2009............................................... 2,240,037 2010............................................... 569,021 Legal Proceedings In the ordinary course of business, the Corporation, Bank and its subsidiaries are subject to legal actions which involve claims for monetary relief. Based upon information presently available to the Corporation and its counsel, it is the Corporation's opinion that any legal and financial responsibility arising from such claims will not have a material adverse effect on the Corporation's results of operations. The Bank, as successor to originators, may from time to time be involved in arbitration or litigation with the reverse mortgage loan borrowers or with the heirs of borrowers. Because reverse mortgages are a relatively new and uncommon product, there can be no assurances regarding how the courts or arbitrators may apply existing legal principles to the interpretation and enforcement of the terms and conditions of the Bank's reverse mortgage obligations. Financial Instruments With Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business primarily to meet the financing needs of its customers. To varying degrees, these financial instruments involve elements of credit risk that are not recognized in the Consolidated Statement of Condition. Exposure to loss for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Corporation generally requires collateral to support such financial instruments in excess of the contractual amount of those instruments and essentially uses the same credit policies in making commitments as it does for on-balance sheet instruments. The following represents a summary of off-balance sheet financial instruments at year-end: December 31, ----------------------- 2002 2001 ---- ---- (In Thousands) Financial instruments with contract amounts which represent potential credit risk: Construction loan commitments ................ $41,412 $38,334 Commercial mortgage loan commitments ......... 6,518 3,511 Commercial loan commitments .................. 42,373 41,554 Commercial standby letters of credit ......... 4,262 4,052 Residential mortgage loan commitments ........ 28,226 27,033 Consumer lines of credit ..................... 66,516 64,963 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit written are conditional commitments issued to guarantee the performance of a customer to a third-party. The Corporation evaluates each customer's creditworthiness and obtains collateral based on management's credit evaluation of the counterparty. 55 Indemnifications Secondary Market Loan Sales. In the normal course of business, WSFS and its subsidiaries sell loans in the secondary market. As is customary in such sales, WSFS provides indemnification to the buyer under certain circumstances. This indemnification may include the repurchase of loans by WSFS. In most cases repurchases and losses are rare, and no provision is made for losses at the time of sale. In other cases, primarily resulting from the activities at Wilmington Finance, Inc., where repurchase and losses are probable and reasonably estimable, provision is made in the Financial Statements for such estimated losses. Sale of C1FN/Everbank Segment. On November 5, 2002, the C1FN/Everbank segment of WSFS was sold by WSFS and other shareholders of C1FN to Alliance Capital Partners, Inc. and its subsidiary, First Alliance Bank, F.S.B. As is customary in the sale of a privately-held business, certain indemnifications were provided by the sellers in the event of costs, losses, damages, etc (collectively, "Damages") incurred and successfully claimed by the buyer for breaches of sellers' representations and warranties, sellers' failure to perform under the transaction agreements, and the sellers' ownership and operation of the business prior to sale, generally speaking. This indemnification extends for one year from the sale date and is capped at $1,750,000 in the aggregate, which has been placed in escrow. Buyer's damages must exceed $200,000 before any initial claims may be made. WSFS' share of this indemnification escrow is $611,000, which may be received by WSFS in the future if no claims are successfully made against the indemnification. WSFS has not recognized this portion of the sale consideration, as receipt of this amount is not assured beyond a reasonable doubt. This amount, or portions thereof, will be recognized if and when such assurance level is reached. In addition to the above indemnification, WSFS separately provided indemnification to the buyer for Damages, if any, that may result from C1FN shareholders bringing claims against the buyer as a result of the Services Agreement and amendments (collectively, "Services Agreements") between WSFS and C1FN over the life of those arrangements. This indemnification was provided by WSFS purely to facilitate the timely sale of C1FN/Everbank, and is not specifically related to a change in an underlying asset or liability. This indemnification extends for two years from the sale date and is capped at approximately $8.2 million. WSFS is not aware of any claims under this indemnification, and given the facts and circumstances surrounding both the Services Agreements and the sale of C1FN, management of WSFS believes the likelihood of any payments under this separate indemnification is very remote. As a result of these circumstances, and the general nature of the indemnification, no provision for loss has been made in WSFS' Financial Statements at December 31, 2002. Sale of Wilmington Finance, Inc. On November 7, 2002, agreements were signed for the sale of WSFS' majority-owned subsidiary, Wilmington Finance, Inc. (WF) to American General Finance, Inc. The transaction was completed on January 2, 2003. As is customary in the sale of a privately-held business, certain indemnifications were provided by WSFS and the other shareholders of WF to the buyer. Indemnifications provided by the sellers to cover Damages incurred by, and successfully claimed by the buyer and fall into 4 separate categories. These include: (1) indemnification for sellers' ownership, which indemnification extends indefinitely and is uncapped in amount; (2) indemnification for tax, environmental, and benefit plan related issues, all of which indemnifications extend for their respective statute of limitations and are uncapped in amount; (3) breaches of sellers' representations and warranties and covenants in the sale agreement (sellers' breaches indemnification), which extends for 18 months from the sale date and are capped at the purchase price (approximately $123 million); and (4) protection to the buyer in the event of successful third-party claims that result from the operation of the business prior to the sale date (third-party claims indemnification). This third-party claims indemnification includes time limits and dollar limits as follows: (i) for the first 12 months after the sale the dollar limit is $57 million; (ii) from months 13 through 18 the dollar limit is $52 million; and (iii) from months 19 through 30 the dollar limit is $32 million. Buyer must incur $2 million of damages and exhaust any related reserves provided in the closing balance sheet before an initial dollar claim may be made against the sellers for any third-party claims and sellers' breaches indemnifications. Dollar liability is uncapped for the indemnifying party if damages are due to willful misconduct, fraud, or bad faith. Generally speaking, WSFS is proportionately liable for its ownership share of WF (which is 65%, after the exercise of its warrant just prior to sale) of the related successful claims under indemnification provisions, except that, in order to facilitate the sale, WSFS agreed to assume a portion of the management shareholders' indemnification obligations. This additional indemnification totals as much as approximately $13 million and was assumed in exchange for a payment of $225,000 from the management shareholders. Because such payment acts like an insurance premium, WSFS will defer this $225,000 and accrete it to income over the life of the 30-month arrangement. 56 WSFS is not aware of any claims to date made under the WF indemnification provisions that could result in payment. Further, indemnifications provided in the WF sale agreement are general in nature and not specifically related to the changes in an underlying asset or liability. Any potential claims related to indemnification on repurchased loans in the normal course of business have been provided for in closing balance sheet and are further subject to the $2 million indemnification threshold. Therefore, given these circumstances, any amounts that may be paid under these indemnifications provisions are neither probable nor reasonably estimable, or have a probability-weighted net present value of zero. As such, no additional provision for losses or deferral of sale consideration, other than the amounts above, are contemplated as of this date. There can be no assurances that payments, if any, under all indemnifications provided by the Corporation will not be material or any exceed reserves that the Company may have established for such contingencies. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows which are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Short-Term Investments: For cash and short-term investments, including due from banks, federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value. Investments, Mortgage-Backed Securities: Fair value for investment and mortgage-backed securities is based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. The fair value of the Corporation's investment in reverse mortgages is based on the net present value of estimated cash flows, which have been updated to reflect recent external appraisals of the underlying collateral. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair value of other type of loans is estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available. Interest Rate Cap: The fair value is estimated using a standard sophisticated option model and quoted prices for similar instruments. Short-Term Foreign Exchange Contracts: The fair value is estimated using quoted prices for similar currency contracts. Deposit Liabilities: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits and savings deposits, is assumed to be equal to the amount payable on demand. The carrying value of variable rate time deposits and time deposits that reprice frequently also approximates fair value. The fair value of the remaining time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits with comparable remaining maturities. Borrowed Funds: Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Off-Balance Sheet Instruments: The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, is estimated using the fees currently charged to enter into similar agreements with comparable remaining terms and reflects the present creditworthiness of the counterparties. 57 The book value and estimated fair value of the Corporation's financial instruments are as follows:
December 31, ---------------------------------------------------- 2002 2001 ----------------------- ----------------------- Book Fair Book Fair Value Value Value Value --------- ---------- --------- --------- (In Thousands) Financial assets: Cash and other investments...................... $ 256,889 $ 256,889 $ 261,641 $ 265,642 Investment securities........................... 21,777 22,850 14,194 14,600 Mortgage-backed securities...................... 148,238 149,562 361,724 363,031 Loans, net...................................... 1,079,386 1,100,478 1,115,372 1,133,354 Interest rate cap............................... 1,012 1,012 2,534 2,534 Short-term forward foreign exchange contracts... - - (395) (395) Financial liabilities: Deposits........................................ 898,396 901,581 1,146,117 1,148,960 Borrowed funds.................................. 516,006 533,672 645,480 644,222
The estimated fair value of the Corporation's off-balance sheet financial instruments is as follows: December 31, ------------------- 2002 2001 ---- ---- (In Thousands) Off-balance sheet instruments: Commitments to extend credit.......... $1,185 $1,104 Standby letters of credit............. 43 41 18. PARENT COMPANY FINANCIAL INFORMATION Condensed Statement of Financial Condition December 31, ------------------------- 2002 2001 --------- --------- (In Thousands) Assets: Cash ................................ $ 4,395 $ 5,869 Investment in the subsidiaries ...... 224,270 139,149 Investment in interest rate cap ..... 1,012 2,534 Investment in Capital Trust ......... 1,547 1,547 Other assets ........................ 1,703 1,177 --------- --------- Total assets ............................. $ 232,927 $ 150,276 ========= ========= Liabilities: Borrowings .......................... $ 50,000 $ 50,000 Interest payable .................... 174 203 Other liabilities ................... 81 70 --------- --------- Total liabilities ................... 50,255 50,273 --------- --------- Stockholders' equity: Common stock ........................ 149 148 Capital in excess of par value ...... 59,789 59,079 Comprehensive income ................ 904 3,146 Retained earnings ................... 207,358 107,950 Treasury stock ...................... (85,528) (70,320) --------- --------- Total stockholders' equity .......... 182,672 100,003 --------- --------- Total liabilities and stockholders' equity $ 232,927 $ 150,276 ========= ========= 58 Condensed Statement of Operations
Year Ended December 31, --------------------------------- 2002 2001 2000 --------- ---------- --------- (In Thousands) Income: Interest income ............................. $ 353 $ 362 $ 359 Noninterest income .......................... 144 187 234 --------- --------- --------- 497 549 593 --------- --------- --------- Expenses: Interest expense ............................ 2,667 3,421 4,787 Other operating expenses .................... (714) (1,111) (1,408) --------- --------- --------- 1,953 2,310 3,379 --------- --------- --------- Loss before equity in undistributed income of WSFS.................................. (1,456) (1,761) (2,786) Equity in undistributed income of WSFS ........... 102,597 18,844 13,805 --------- --------- --------- Net income ....................................... $ 101,141 $ 17,083 $ 11,019 ========= ========= =========
Condensed Statement of Cash Flows
Year Ended December 31, ----------------------------------- 2002 2001 2000 --------- ---------- --------- (In Thousands) Operating activities: Net income ............................................. $ 101,141 $ 17,083 $ 11,019 Adjustments to reconcile net income to net cash used for operating activities: Equity in undistributed income of WSFS ................. (102,597) (18,844) (13,805) Amortization ........................................... 383 (93) 373 Decrease (increase) in other assets .................... 617 (169) (20) Decrease in other liabilities .......................... (17) (209) (547) --------- --------- --------- Net cash used for operating activities ...................... (473) (2,232) (2,980) --------- --------- --------- Investing activities: Decrease in investment in WSFS ......................... 16,000 22,500 12,374 --------- --------- --------- Net cash provided by investing activities ................... 16,000 22,500 12,374 --------- --------- --------- Financing activities: Issuance of common stock ............................... 711 94 103 Unrealized gains in intrinsic value of interest rate cap.................................. (771) 257 125 Dividends paid on common stock ......................... (1,733) (1,542) (1,610) Treasury stock, net of reissuance ...................... (15,208) (15,727) (12,678) --------- --------- --------- Net cash used for financing activities ...................... (17,001) (16,918) (14,060) --------- --------- --------- (Decrease) increase in cash ................................. (1,474) 3,350 (4,666) Cash at beginning of period ................................. 5,869 2,519 7,185 --------- --------- --------- Cash at end of period ....................................... $ 4,395 $ 5,869 $ 2,519 ========= ========= =========
59 19. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING The Corporation has an interest-rate cap with a notional amount of $50 million, which limits 3-month LIBOR to 6% for the ten years ending December 1, 2008. The cap is being used to hedge the cash flows on $50 million in Trust Preferred floating rate debt. The cap was recorded at the date of purchase in other assets, at a cost of $2.4 million. The fair market value (FMV) of the cap has two components: the intrinsic value and the time value of the option. Prior to July 1, 2002, the cap was marked-to-market quarterly, with changes in the intrinsic value of the cap, net of tax, included in a separate component of other comprehensive income and changes in the time value of the option included directly in interest expense as required under SFAS 133. In addition, the ineffective portion, if any, was expensed in the period in which ineffectiveness is determined. On July 1, 2002, as a result of a change in the guidance from the FASB for implementation of Statement 133, the Corporation dedesignated the original cash flow hedge and redesignated the interest rate cap so that the entire change in the market value of the cap now is included in other comprehensive income. As part of redesignating the new cash flow hedge, the method of assessing effectiveness was changed. It is now based on the total change to the interest rate cap's cash flows, and not only the change to intrinsic value, as was the basis of assessing effectiveness under the prior hedging designation. As a result of the change in the methodology for assessing effectiveness, the hedging relationship is considered to be perfectly effective and can reasonably be expected to remain so. Therefore, the full change to the fair value of interest rate cap is recorded in other comprehensive income. At July 1, 2002, the inception date of the redesignated hedging relationship, the fair value of the interest rate cap was $1.6 million. This amount was allocated to the respective multiple "caplets" on a fair value basis. The change in each "caplet's" respective allocated fair value amount is reclassified out of other comprehensive income and into interest expense when each of the quarterly interest payments is made on the Trust Preferred debt. The redesignation of the cash flow hedge has the affect of providing a more systematic method for amortizing the cost of the cap against earnings. 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 those discussed above. The fair value of the cap is estimated using a standard option model and quoted market prices of similar instruments. Everbank entered into short-term forward exchange contracts to provide an effective fair value hedge on the foreign currency denominated deposits from fluctuations that may occur in world currency markets. At December 31, 2001 and 2000, Everbank had entered into such contracts with notional amounts of $60.4 million and $35.5 million, respectively. During 2002 and the years ended December 31, 2001 and 2000, the expense associated with these hedging contracts was almost entirely offset by changes in the fair value of the world currency denominated deposits. There was no material impact on noninterest income. On November 5, 2002, WSFS sold C1FN/Everbank and therefore had no foreign exchange contracts at December 31, 2002. Related to its sale of reverse mortgages, the Corporation also acquired a series of options to acquire up to 49.9% of the Class "O" certificates issued in connection with mortgage-backed security SASCO RM-1 2002. The aggregate exercise price of the series of options is $1.0 million. Because the net present value of the estimated cash flows coming from WSFS' options on the highly illiquid Class "O" certificates is significantly less than the $1.0 million exercise price, WSFS has valued the option at $0 at December 31, 2002. The option will be evaluated quarterly for any changes in the estimated valuation. 60 The following depicts the change in fair market value of the Company's derivatives:
Carrying Value Carrying Value Carrying Value Carrying Value at January 1, at December 31, at December 31, at December 31, 2000 Activity 2000 Activity 2001 Activity 2002 -------------- -------- --------------- -------- --------------- -------- --------------- (In Thousands) Interest rate cap: Intrinsic Value Dedesignated cap $ 2,813 $(2,620) $ 193(1) $ 396 $ 589(1) $ (589) $ - Time Value Dedesignated cap 2,131 (327)(2) 1,804 141(2) 1,945 (1,945) - Redesignated cap - - - - - 1,012 1,012 ----------- ------- -------- -------- -------- ------- -------- $ 4,944 $(2,947) $ 1,997 $ 537 $ 2,534 $(1,522) $ 1,012 ======== ======= ======== ======== ======== ======== ======== Foreign Exchange Contracts Time Value $ - $ 1,385 (3) $ 1,385 $(1,780)(3) $ (395) $ 395 $ N/A =========== ======= ======== ======= ========= ======= ======== Options on class "O" Certificates of MBS NA NA NA NA NA NA NA
(1) Included in other comprehensive income, net of taxes. (2) Included in interest expense on the hedged item (Trust Preferred borrowings). (3) Included in noninterest income and offset by corresponding changes in foreign currency denominated deposits. An additional provision of SFAS 133 afforded the opportunity to reclassify investment securities between held-to-maturity, available-for-sale and trading at the date of adoption. Accordingly, on January 1, 2000, 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. 20. SEGMENT INFORMATION Under the definition of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, the Corporation consisted only of its core community banking operations and had no other operating segments. Generally, reportable segments are business units that are managed separately, operate under different regulations and offer different services to distinct customer bases. Previously, WCC, C1FN and WF were classified as operating segments, however, as a result of the discontinuance of WCC, the sale of C1FN in November of 2002 and the sale of WF in 2003 these businesses were classified as discontinued operations or businesses held-for-sale and no longer considered segments. For a further discussion of discontinued operations see Note 2 of the Financial Statements and of businesses held-for-sale see Note 3 of the Financial Statements. 21. Subsequent Events On January 2, 2003, WSFS completed the sale of it's majority-owned subprime mortgage banking subsidiary, WF to American General Finance, Inc. WSFS expects to recognize an after-tax gain on the sale of $42.2 million, or approximately $4.57 per diluted share in the first quarter of 2003. The sale included $148.2 million in assets, of which $117.6 million were residential mortgage loans held-for-sale. The sellers, including WSFS, provided certain indemnifications to the buyer, as are customary in the sale of a privately-held business between parties. The indemnifications are more fully disclosed in Note 16 to the Financial Statements, Commitments and Contingencies. 61 QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended ----------------------------------------------------------------------------------------------- 12/31/02 9/30/02 6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01 -------- ------- ------- ------- -------- ------- ------- ------- (In Thousands, Except Per Share Data) Interest income ............ $ 20,051 $ 22,303 $ 24,913 $ 27,436 $ 23,753 $ 26,089 $ 26,186 $ 25,310 Interest expense ........... 8,053 8,239 8,662 8,480 10,280 11,964 11,567 12,786 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income ........ 11,998 14,064 16,251 18,956 13,473 14,125 14,619 12,524 Provision for loan losses .. 525 507 504 707 495 677 400 293 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income after provision for loan losses 11,473 13,557 15,747 18,249 12,978 13,448 14,219 12,231 Noninterest income ......... 107,355 5,953 5,728 5,024 5,726 5,452 5,343 4,604 Noninterest expenses ....... 14,878 12,401 12,312 12,026 11,887 11,411 12,929 11,462 --------- --------- --------- --------- --------- --------- --------- --------- Income from continuing operations before minority interest, taxes and accounting change .... 103,950 7,109 9,163 11,247 6,817 7,489 6,633 5,373 --------- --------- --------- --------- --------- --------- --------- --------- Income tax provision ....... 34,545 2,093 3,356 4,160 2,327 2,480 2,059 1,684 --------- --------- --------- --------- --------- --------- --------- --------- Income from continuing operations before accounting change ........ 69,405 5,016 5,807 7,087 4,490 5,009 4,574 3,689 Change in accounting principles, net ......... - - - 703 - - - - --------- --------- --------- --------- --------- --------- --------- --------- Income from continuing operations .............. 69,405 5,016 5,807 7,790 4,490 5,009 4,574 3,689 Income from businesses held-for-sale, net of tax 6,923 4,292 2,114 1,636 690 494 132 31 Loss on wind-down of discontinued operations . (2,203) (563) - - (2,026) - - - Gain on sale of businesses held-for-sale ........... 187 737 - - - - - - --------- --------- --------- --------- --------- --------- --------- --------- Net income ................. $ 74,312 $ 9,482 $ 7,921 $ 9,426 $ 3,154 $ 5,503 $ 4,706 $ 3,720 ========= ========= ========= ========= ========= ========= ========= ========= Earnings per share: Basic: Income from continuing operations before accounting change ...... $ 7.69 $ 0.55 $ 0.64 $ 0.77 $ 0.49 $ 0.54 $ 0.47 $ 0.36 Change in accounting principles, net.......... - - - 0.08 - - - - --------- --------- --------- --------- ----------- --------- --------- --------- Income from continuing operations............. 7.69 0.55 0.64 0.85 0.49 0.54 0.47 0.36 Income from businesses held-for-sale, net of tax 0.77 0.47 0.23 0.18 0.07 0.05 0.01 0.01 Loss on wind-down of discontinued operations (0.25) (0.06) - - (0.22) - - - Gain on sale of businesses held-for-sale.......... 0.02 0.08 - - - - - - --------- --------- --------- --------- --------- --------- --------- --------- Net income................. $ 8.23 $ 1.04 $ 0.87 $ 1.03 $ 0.34 $ 0.59 $ 0.48 $ 0.37 ========= ========= ========= ========= ========= ========= ========= =========
QUARTERLY FINANCIAL SUMMARY (Unaudited) (continued)
Three Months Ended ----------------------------------------------------------------------------------------------- 12/31/02 9/30/02 6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01 -------- ------- ------- ------- -------- ------- ------- ------- (In Thousands, Except Per Share Data) Diluted: Income from continuing operations before accounting change ....... $ 7.27 $ 0.52 $ 0.62 $ 0.76 $ 0.49 $ 0.53 $ 0.46 $ 0.36 Change in accounting principles, net .......... - - - 0.08 - - - - --------- --------- --------- --------- --------- --------- -------- --------- Income from continuing operations ............... 7.27 0.52 0.62 0.84 0.49 0.53 0.46 0.36 Income from businesses held-for-sale, net of tax 0.73 0.45 0.22 0.17 0.07 0.05 0.01 0.01 Loss on wind-down of discontinued operations . (0.23) (0.06) - - (0.22) - - - Gain on sale of businesses held-for-sale ........... 0.02 0.08 - - - - - - --------- --------- --------- --------- --------- --------- -------- --------- Net income ................. $ 7.79 $ 0.99 $ 0.84 $ 1.01 $ 0.34 $ 0.58 $ 0.47 $ 0.37 ========= ========= ========= ========= ========= ========= ======== =========
62 EX-21 4 ex21.txt EX21- SUBSIDIARIES OF REGISTRANT
Exhibit 21 Subsidiaries of the Registrant ------------------------------ State or Percent Other Jurisdiction Parent Company Subsidiary Owned of Incorporation - -------------- ---------- ----- ---------------- WSFS Financial Corporation Wilmington Savings Fund Society, 100% United States Federal Savings Bank WSFS Capital Trust I 100% Delaware Wilmington Savings Fund WSFS Reit, Inc 100% Delaware Society, Federal Savings Bank WSFS Investment Group, Inc. 100% Delaware WSFS Credit Corporation 100% Delaware Wilmington Finance, Inc. 51% Delaware
EX-23 5 ex23.txt EX23 CONSENT OF KPMG LLP Consent of Independent Auditors ------------------------------- The Board of Directors WSFS Financial Corporation: We consent to incorporation by reference in the Registration Statements (No. 33-56108, No. 333-26099, 333-33713 and No. 333-40032) on Form S-8 of WSFS Financial Corporation of our report dated January 20, 2003, relating to the consolidated statement of condition of WSFS Financial Corporation and subsidiaries as of December 31, 2002, and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 annual report on Form 10-K of WSFS Financial Corporation. Our report refers to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." /s/ KPMG LLP - ------------ KPMG LLP Philadelphia, Pennsylvania March 25, 2003 EX-99 6 ex99-1.txt EX99-1 CERT. PURSUANT TO 18USC SEC 1350 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of WSFS Financial Corporation (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Marvin N. Schoenhals, Chairman, President and Chief Executive Officer, and Mark A. Turner, Chief Operating Officer and Chief Financial Officer (Principal Accounting Officer), hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) This annual report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Marvin N. Schoenhals /s/Mark A. Turner - ------------------------ ------------------- Marvin N. Schoenhals Mark A. Turner Chairman and President Chief Operating Officer and Chief Financial Officer March 25, 2003 -----END PRIVACY-ENHANCED MESSAGE-----