-----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, Wf9Yx0ahH0az/DPy0eT/SvVZvyjANl7yqmLiOWbmV/lWL4W2Kdi274f/aRvJ3XIV 3tljrvNWetdKrrGNyJ8q+w== 0000950128-04-001075.txt : 20041108 0000950128-04-001075.hdr.sgml : 20041108 20041108162237 ACCESSION NUMBER: 0000950128-04-001075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAYPOINT FINANCIAL CORP CENTRAL INDEX KEY: 0001034650 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 251872581 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22399 FILM NUMBER: 041126027 BUSINESS ADDRESS: STREET 1: 235 N SECOND ST CITY: HARRISBURG STATE: PA ZIP: 17101 BUSINESS PHONE: 7172364041 MAIL ADDRESS: STREET 1: 235 N SECOND ST CITY: HARRISBURG STATE: PA ZIP: 17101 FORMER COMPANY: FORMER CONFORMED NAME: HARRIS FINANCIAL INC DATE OF NAME CHANGE: 19970226 10-Q 1 j1008801e10vq.txt WAYPOINT BANK UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 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: 0-22399 WAYPOINT FINANCIAL CORP. ------------------------ (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1872581 ------------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 235 North Second Street, P.O. Box 1711, Harrisburg, Pennsylvania 17105 ----------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) 717-236-4041 ------------ (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the Bank's classes of common stock, as of the latest practicable date. 33,489,529 shares of stock, par value of $.01 per share, outstanding at October 18, 2004. CONTENTS Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition ................................................................ 4 Consolidated Statements of Income ............................................................................. 5 Consolidated Statements of Shareholders' Equity ............................................................... 6 Consolidated Statements of Cash Flows ......................................................................... 7-8 Notes to Consolidated Financial Statements .................................................................... 9-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I. Forward-Looking Statements ............................................................................ 18 II. Critical Accounting Policies .......................................................................... 18 III. Market Risk and Interest Rate Sensitivity Management .................................................. 19 IV. Liquidity ............................................................................................. 19-20 V. Capital Resources ..................................................................................... 20 VI. Results of Operations Comparison for the Three-Month Periods Ended September 30, 2004 and September, 2003 Net Income .......................................................................................... 21 Net Interest Income ................................................................................. 21-24 Noninterest Income .................................................................................. 24-25 Noninterest Expense ................................................................................. 25-26 Provision for Income Taxes .......................................................................... 26 Comparison for the Nine-Month Periods Ended September 30, 2004 and September 30, 2003 Net Income .......................................................................................... 26 Net Interest Income ................................................................................. 26 Noninterest Income .................................................................................. 27 Noninterest Expense ................................................................................. 27 Provision for Income Taxes .......................................................................... 28 VII. Financial Condition Marketable Securities ............................................................................... 28 Loans Receivable, Net ............................................................................... 28 Loan Commitments .................................................................................... 28 Loan Quality ........................................................................................ 28 Non-Performing Assets ............................................................................... 29 Allowance for Loan Losses ........................................................................... 29 Allocation of the Allowance for Loan Losses ......................................................... 30 Deposits ............................................................................................ 30 Other Borrowings .................................................................................... 30 Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................................... 30 Item 4. Controls and Procedures .............................................................................. 30 Part II. Other Information ...................................................................................... 31 Item 1. Legal Proceedings Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures ...................................................................................................... 32 Exhibits - Certifications ....................................................................................... 33-36
2 Part I. Financial Information. Part 1, Item 1 Financial Statements. (Balance of this page is intentionally left blank) 3 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Consolidated Statements of Financial Condition
September 30, December 31, 2004 2003 ------------- ------------ (In thousands, except share data) (Unaudited) Assets Cash and cash equivalents $ 86,937 $ 100,016 Marketable securities 2,365,765 2,489,770 FHLB stock 94,060 97,982 Loans receivable, net 2,559,827 2,397,640 Loans held for sale, net 15,832 17,011 Loan servicing rights 2,322 2,528 Investment in real estate and other joint ventures 21,833 20,773 Premises and equipment, net of accumulated depreciation of $42,762 and $45,261 47,595 49,789 Accrued interest receivable 24,296 23,597 Goodwill 18,332 17,881 Intangible assets 2,605 2,881 Deferred tax asset, net 7,752 9,059 Bank-owned life insurance 95,616 92,522 Other assets 9,215 8,453 ----------- ----------- Total assets $ 5,351,987 $ 5,329,902 =========== =========== Liabilities and Stockholders' Equity Deposits $ 2,874,356 $ 2,720,915 Other borrowings 1,952,471 2,110,681 Escrow 819 2,568 Accrued interest payable 9,062 10,009 Postretirement benefit obligation 2,272 2,248 Income taxes payable 2,153 2,586 Trust preferred debentures 46,392 46,392 Other liabilities 41,407 32,270 ----------- ----------- Total liabilities 4,928,932 4,927,669 ----------- ----------- Preferred stock, 10,000,000 shares authorized but unissued Common stock, $ .01 par value, authorized 100,000,000 shares, 43,042,917 shares issued and 33,455,945 outstanding at September 30, 2004, 43,031,041 shares issued and 33,247,630 shares outstanding at December 31, 2003 429 425 Paid in capital 357,449 353,530 Retained earnings 253,735 241,668 Accumulated other comprehensive loss (4,351) (8,502) Employee stock ownership plan (13,391) (13,423) Recognition and retention plans (4,206) (4,206) Paid in capital from obligations under Rabbi Trust, 546,572 shares at September 30, 2004 and 495,826 shares at December 31, 2003 9,326 8,457 Treasury stock shares held in Rabbi Trust at cost, 546,572 shares at September 30, 2004 and 563,162 shares at December 31, 2003 (9,326) (9,240) Treasury stock, 9,586,972 shares at September 30, 2004 and 9,716,075 shares at December 31, 2003 (166,610) (166,476) ----------- ----------- Total stockholders' equity 423,055 402,233 ----------- ----------- Total liabilities and stockholders' equity $ 5,351,987 $ 5,329,902 =========== ===========
See accompanying notes to consolidated financial statements. 4 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Consolidated Statements of Income
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2004 2003 2004 2003 -------- -------- -------- --------- (In thousands, except share data) (Unaudited) Interest Income: Loans $ 35,718 $ 36,447 $103,457 $ 111,039 Marketable securities and interest-earning cash 26,080 24,430 75,987 80,197 -------- -------- -------- --------- Total interest income 61,798 60,877 179,444 191,236 -------- -------- -------- --------- Interest Expense: Deposits and escrow 13,571 13,272 37,817 41,221 Borrowed funds 20,702 20,217 60,074 61,739 -------- -------- -------- --------- Total interest expense 34,273 33,489 97,891 102,960 -------- -------- -------- --------- Net interest income 27,525 27,388 81,553 88,276 Provision for loan losses 1,113 2,014 3,916 6,499 -------- -------- -------- --------- Net interest income after provision for loan losses 26,412 25,374 77,637 81,777 -------- -------- -------- --------- Noninterest Income: Banking service and account fees 5,393 4,307 15,191 11,620 Financial services fees 3,145 2,795 7,841 7,188 Residential mortgage banking 161 3,031 1,732 5,631 Bank-owned life insurance 1,031 1,081 3,094 3,369 (Loss) gain on securities and derivatives, net (1,061) 881 5,628 6,471 Other 751 (600) 539 (2,528) -------- -------- -------- --------- Total noninterest income 9,420 11,495 34,025 31,751 -------- -------- -------- --------- Noninterest Expense: Salaries and benefits 12,561 12,515 38,015 35,751 Equipment expense 1,704 1,813 5,261 5,433 Occupancy expense 1,902 1,756 5,793 5,507 Marketing 1,365 1,374 3,674 3,680 Amortization of intangible assets 190 207 579 518 Outside services 1,205 1,274 3,928 3,853 Communications and supplies 1,207 1,230 3,822 3,852 Borrowing prepayment penalties - - 4,704 - Acquisition expense 176 - 3,335 - Other 2,306 2,894 6,835 9,123 -------- -------- -------- --------- Total noninterest expense 22,616 23,063 75,946 67,717 -------- -------- -------- --------- Income before income taxes 13,216 13,806 35,716 45,811 Income tax expense 2,867 3,946 10,216 13,219 -------- -------- -------- --------- Net income $ 10,349 $ 9,860 $ 25,500 $ 32,592 ======== ======== ======== ========= Basic earnings per share $ 0.32 $ 0.31 $ 0.80 $ 0.99 ======== ======== ======== ========= Diluted earnings per share $ 0.31 $ 0.30 $ 0.77 $ 0.96 ======== ======== ======== =========
See accompanying notes to consolidated financial statements. 5 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
EMPLOYEE RECOGNITION ACCUMULATED STOCK AND COMMON PAID IN RETAINED COMPREHENSIVE OWNERSHIP RETENTION STOCK CAPITAL EARNINGS INCOME (LOSS) PLAN PLAN (RRP) -------- --------- --------- ------------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Balance at December 31, 2002 $ 404 $ 315,636 $ 245,388 $ 11,710 $ (14,460) $ (6,977) Net income 32,592 Dividends paid at $.33 per share (10,820) Exercised stock options (514,748 shares) 5 4,998 5% Common stock dividend (2,027,332 shares at fair value) 16 30,466 (30,517) Unrealized losses on securities, net of income tax of $(7,760) (11,795) Comprehensive income Earned portion of RRP 254 Tax benefit on exercised options 1,258 Treasury stock purchased (3,348,398 shares) Dividend reinvestment plan, net (309) -------- --------- --------- --------- --------- --------- Balance at September 30, 2003 $ 425 $ 352,049 $ 236,643 $ (85) $ (14,460) $ (6,723) ======== ========= ========= ========= ========= ========= Balance at December 31, 2003 $ 425 $ 353,530 $ 241,668 $ (8,502) $ (13,423) $ (4,206) Net income 25,500 Dividends paid at $.42 per share (13,433) Exercised stock options (208,315 shares) 4 3,181 Unrealized gains on securities, net of income tax of $2,642 4,151 Comprehensive income ESOP stock committed for release 32 Tax benefit on exercised options 1,552 Treasury stock adjustment Dividend reinvestment plan, net (378) Reclassification for obligations under Rabbi Trust (436) -------- --------- --------- --------- --------- --------- Balance at September 30, 2004 $ 429 $ 357,449 $ 253,735 $ (4,351) $ (13,391) $ (4,206) ======== ========= ========= ========= ========= ========= PAID IN CAPITAL FROM TREASURY OBLIGATIONS STOCK UNDER PURCHASED RABBI IN RABBI TREASURY COMPREHENSIVE TRUST TRUST STOCK TOTAL INCOME ----------- --------- --------- ----------- ------------- Balance at December 31, 2002 $ - $ - $ (98,819) $ 452,882 Net income 32,592 $ 32,592 Dividends paid at $.33 per share (10,820) Exercised stock options (514,748 shares) 5,003 5% Common stock dividend (2,027,332 shares at fair value) (35) Unrealized losses on securities, net of income tax of $(7,760) (11,795) (11,795) ---------- Comprehensive income $ 20,797 ========== Earned portion of RRP 254 Tax benefit on exercised options 1,258 Treasury stock purchased (3,348,398 shares) (55,320) (55,320) Dividend reinvestment plan, net (309) --------- --------- --------- ----------- Balance at September 30, 2003 $ - $ - $(154,139) $ 413,710 ========= ========= ========= =========== Balance at December 31, 2003 $ 8,457 $ (9,240) $(166,476) $ 402,233 Net income 25,500 $ 25,500 Dividends paid at $.42 per share (13,433) Exercised stock options (208,315 shares) 3,185 Unrealized gains on securities, net of income tax of $2,642 4,151 4,151 ---------- Comprehensive income $ 29,651 ========== ESOP stock committed for release 32 Tax benefit on exercised options 1,552 Treasury stock adjustment (134) (134) Dividend reinvestment plan, net (378) Reclassification for obligations under Rabbi Trust 869 (86) 347 --------- --------- --------- ----------- Balance at September 30, 2004 $ 9,326 $ (9,326) $(166,610) $ 423,055 ========= ========= ========= ===========
See accompanying notes to consolidated financial statements. 6 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, -------------------------------- 2004 2003 ----------- ----------- (In thousands) (Unaudited) Cash flows from operating activities: Net income $ 25,500 $ 32,592 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,916 6,499 Net depreciation, amortization and accretion 5,858 7,274 Loans originated for sale (146,380) (385,418) Proceeds from sales of loans originated for sale 149,296 392,187 Origination of loan servicing rights (552) (1,037) Net gain on sales of interest-earning assets (9,370) (13,600) Gain on the sale of foreclosed real estate (251) (157) Loss from joint ventures 60 3,219 (Increase) decrease in accrued interest receivable (645) 1,419 (Decrease) increase in accrued interest payable (947) 1,738 Amortization of intangibles 579 518 Earned ESOP expense 2,170 2,177 Earned RRP expense 1,622 1,733 (Gain) loss on the sale of premises and equipment (9) 345 Benefit for deferred income taxes (1,335) 670 (Decrease) increase in income taxes payable (433) 3,870 Other, net 9,568 3,903 ----------- ----------- Net cash provided by operating activities 38,647 57,932 ----------- ----------- Cash flows from investing activities: Proceeds from maturities, sales, and principal reductions of marketable securities 2,003,848 3,366,585 Purchase of marketable securities (1,865,515) (3,243,947) Loan originations less principal payments on loans (116,384) (106,130) Acquisition of loans (53,042) - Investments in real estate held for investment and other joint ventures (1,456) (8,177) Proceeds on real estate and premises and equipment 1,616 1,904 Purchases of premises and equipment, net (2,260) (4,763) (Payments for) net proceeds from acquired business (422) 15,159 ----------- ----------- Net cash (used in) provided by investing activities (33,615) 20,631
7 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued)
For the Nine Months Ended September 30, ---------------------------- 2004 2003 --------- --------- (In thousands) (Unaudited) Cash flows from financing activities: Net increase in deposits 148,323 140,683 Proceeds from other borrowings 25,000 340,000 Payments and maturities of other borrowings (365,025) (528,401) Net increase in other short-term borrowings 185,966 39,818 Net decrease in escrow (1,749) (2,098) Net proceeds from issuance of Trust Preferred Securities - 14,719 Cash dividends (13,433) (10,820) Cash in lieu of stock dividend - (35) Dividend reinvestment plan (378) (309) Payments to acquire treasury stock - (55,320) Proceeds from the exercise of stock options 3,185 5,003 --------- --------- Net cash used in financing activities (18,111) (56,760) --------- --------- Net (decrease) increase in cash and cash equivalents (13,079) 21,803 Cash and cash equivalents at beginning of period 100,016 96,088 --------- --------- Cash and cash equivalents at end of period $ 86,937 $ 117,891 ========= ========= Supplemental disclosures: Cash paid during the period for: Interest on deposits, advances and other borrowings (includes interest credited to deposit accounts) $ 98,839 $ 101,221 Income taxes 10,543 7,954 Cash received during the period for: Income taxes 69 255 Non-cash investing activities: Transfers from loans to foreclosed real estate 778 1,368 Fair value of assets acquired (non-cash) - 6,000
See accompanying notes to financial statements. 8 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) (1) Basis of Presentation and Accounting Policies The Consolidated Financial Statements include the accounts of Waypoint Financial Corp. ("Waypoint Financial", "the Company", or "the Registrant") and its wholly-owned subsidiaries Waypoint Bank, Waypoint Financial Investment Corporation, Waypoint Service Corporation, Waypoint Brokerage Services, Inc., and Waypoint Insurance Group, Inc. Waypoint Bank is the sole owner of Waypoint Investment Corporation and C.B.L. Service Corporation. All significant intercompany transactions and balances are eliminated in consolidation. The accompanying interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals necessary for a fair presentation of the results of interim periods, have been made. Operating results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004 or any other interim period. It is suggested that these consolidated financial statements be read in conjunction with Waypoint Financial's 2003 Annual Report on Form 10-K. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented on pages 49 through 82 of the 2003 Annual Report on Form 10-K. Waypoint Financial accounts for Stock Option Plans under Accounting Principles Board Opinion No. 25, and, accordingly, compensation expense has not been recognized in the accompanying financial statements. Had compensation expense for these plans been recorded in the financial statements of Waypoint Financial consistent with the fair value provisions of Statement 123, net income and net income per share would have been reduced to the following pro-forma amounts (in thousands, except per-share data):
For the three months For the nine months ended September 30 ended September 30 -------------------------- ---------------------------- 2004 2003 2004 2003 ----------- --------- ---------- ----------- Net Income As reported $ 10,349 $ 9,860 $ 25,500 $ 32,592 Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects (271) (275) (847) (852) ----------- --------- ---------- ----------- Pro forma $ 10,078 $ 9,585 $ 24,653 $ 31,740 Basic earnings per share As reported $ 0.32 $ 0.31 $ 0.80 $ 0.99 Pro forma $ 0.32 $ 0.30 $ 0.78 $ 0.97 Diluted earnings per share As reported $ 0.31 $ 0.30 $ 0.77 $ 0.96 Pro forma $ 0.30 $ 0.29 $ 0.75 $ 0.94
9 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) (2) Pending Acquisition On March 9, 2004, Waypoint Financial announced that Sovereign Bancorp, Inc., parent company of Sovereign Bank, had reached a definitive agreement to acquire Waypoint Financial. The transaction is valued at approximately $980 million, with each share of Waypoint common stock being entitled to receive $28.00 in cash, 1.262 shares of Sovereign common stock, or a combination thereof per share, subject to election and allocation procedures which are intended to ensure that, in the aggregate, 70% of the Waypoint shares will be exchanged for Sovereign common stock and 30% will be exchanged for cash. Waypoint Financial incurred acquisition expenses of $3.3 million relating to advisory services during the nine-month period ended September 30, 2004 associated with the pending acquisition. The transaction is expected to close by January 31, 2005, and is subject to approval by various regulatory agencies and Waypoint shareholders. Waypoint Financial is obligated to pay an additional $5.7 million of acquisition expenses relating to contingent advisory services upon consummation of the transaction. (3) Recently Issued Accounting Guidance In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46 Revised (FIN 46R), issued in December 2003, replaces FIN 46. FIN 46R requires public entities to apply FIN 46 or FIN 46R to all entities that are considered special-purpose entities in practice and under the FASB literature that was applied before the issuance of FIN 46 by the end of the first reporting period that ends after December 15, 2003. Waypoint Financial does not have any investments in entities it believes are variable interest entities for which the Company is the primary beneficiary. Accordingly, Waypoint Financial's adoption of FIN 46 and FIN 46R did not result in the consolidation of any variable interest entities. In October 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits," (SFAS 132R). SFAS 132R amends SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 132. SFAS 132R revised employers' disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by SFAS Nos. 87, 88 and 106. While retaining the disclosure requirements of SFAS No. 132, which it replaced, SFAS 132R requires additional disclosures about assets, obligations, cash flows, and net periodic benefit costs of defined benefit plans and other defined benefit postretirement plans. The provisions of SFAS 132R are generally effective for financial statements with fiscal years ending after December 15, 2003. The interim period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. Waypoint Financial has complied with the required provisions of SFAS 132R. The interim period disclosures required by this statement are omitted as they are deemed immaterial to Waypoint Financial's consolidated financial condition and results of operations for the periods presented. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Medicare Act") was enacted. The Medicare Act introduced both a Medicare prescription drug benefit and a federal subsidy to sponsors of retiree health care plans that provide a benefit at least actuarially equivalent to the Medicare benefit. Waypoint has elected to defer accounting for the effects of the Medicare Act due to significant uncertainties concerning how actuarial equivalency will be determined, how the subsidy payment system will operate, and expected results of voluntary benefit elections of plan participants. Accordingly, the accumulated post-retirement benefit obligation and net periodic benefit cost do not reflect the effects of the Medicare Act. On May 19, 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FAS 106-2). FAS 106-2 is effective for the interim period beginning July 1, 2004, and provides that an employer shall measure the accumulated post-retirement benefit obligation and net periodic post-retirement benefit cost taking into account any subsidy received under the Act. 10 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) As of September 30, 2004, Waypoint Financial has not yet been able to conclude whether the benefits provided by its post-retirement benefit plan are actuarially equivalent to Medicare Part D under the Act. Accordingly, the accumulated post-retirement benefit obligation and the net periodic post-retirement benefit gain related to Waypoint Financial's post-retirement benefit plan do not reflect any amounts associated with the subsidy. (4) Earnings Per Share Basic earnings per share is based on the total weighted average shares outstanding for a given period. Diluted earnings per share is based on total weighted average shares outstanding, and also assumes the exercise or conversion of all potentially dilutive instruments currently outstanding. The computations for basic and diluted earnings per share for the three-month and nine-month periods ended September 30 are as follows:
Per Share Income Shares Amount ----------- ---------- --------- For the three-month period ended September 30, 2004 Basic earnings per share $ 10,349 31,872,000 $ 0.32 Dilutive effect of stock options and grants 1,224,000 (.01) ----------- ---------- -------- Diluted earnings per share $ 10,349 33,096,000 $ 0.31 =========== ========== ======== For the three-month period ended September 30, 2003 Basic earnings per share $ 9,860 32,070,000 $ 0.31 Dilutive effect of stock options and grants 1,066,000 (.01) ----------- ---------- -------- Diluted earnings per share $ 9,860 33,136,000 $ 0.30 =========== ========== ========
Per Share Income Shares Amount ----------- ---------- --------- For the nine-month period ended September 30, 2004 Basic earnings per share $ 25,500 31,743,000 $ 0.80 Dilutive effect of stock options and grants 1,216,000 (.03) ----------- ---------- -------- Diluted earnings per share $ 25,500 32,959,000 $ 0.77 =========== ========== ======== For the nine-month period ended September 30, 2003 Basic earnings per share $ 32,592 32,848,000 $ 0.99 Dilutive effect of stock options and grants 1,005,000 (.03) ----------- ---------- -------- Diluted earnings per share $ 32,592 33,853,000 $ 0.96 =========== ========== ========
For the three-month and nine-month periods ended September 30, 2004, no anti-dilutive options were excluded from the computation of diluted earnings per share because the exercise prices were less than the average market price of the common shares during the respective periods. However, for the three months ended September 30, 2003 and the nine months ended September 30, 2003, excluded from the computation of diluted earnings per share were anti-dilutive options of 21,605 shares and 68,535 shares, respectively, because the exercise prices were greater than the average market price of the common shares during the respective periods. 11 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) (5) Marketable Securities The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for trading and available-for-sale securities by major security type were as follows:
As of September 30, 2004 -------------------------------------------------------- Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- Available-for-sale: U.S. Government and agencies $ 384,820 $ 179 $ (4,769) $ 380,230 Corporate bonds 40,648 - (1,344) 39,304 Municipal securities 80,061 2,724 (362) 82,423 Equity securities 95,604 51 (4,709) 90,946 Mortgage-backed securities: Commercial mortgage-backed securities 19,239 - (27) 19,212 Agency PC's & CMO's 1,061,401 6,370 (7,846) 1,059,925 Private issue CMO's 686,110 6,302 (3,415) 688,997 ---------- ---------- ---------- ---------- Total mortgage-backed securities 1,766,750 12,672 (11,288) 1,768,134 ---------- ---------- ---------- ---------- Total securities available-for-sale 2,367,883 15,626 (22,472) 2,361,037 Trading: Rabbi Trust deferred compensation investments (a) 4,728 - - 4,728 ---------- ---------- ---------- ---------- Total trading securities 4,728 - - 4,728 ---------- ---------- ---------- ---------- Total marketable securities $2,372,611 $ 15,626 $ (22,472) $2,365,765 ========== ========== ========== ==========
As of September 30, 2004 -------------------------------------------------------- Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value ----------- ---------- ---------- ---------- Available-for-sale: U.S. Government and agencies $ 458,029 $ 1,164 $ (3,334) $ 455,859 Corporate bonds 66,342 - (4,462) 61,880 Municipal securities 83,201 3,301 (404) 86,098 Equity securities 153,708 4,186 (1,780) 156,114 Mortgage-backed securities: Commercial 82,471 6 (358) 82,119 Agency PC's & CMO's 933,350 1,929 (5,342) 929,937 Private issue CMO's 722,617 151 (8,697) 714,071 ----------- --------- ---------- ----------- Total mortgage-backed securities 1,738,438 2,086 (14,397) 1,726,127 ----------- --------- ---------- ----------- Total securities available-for-sale 2,499,718 10,737 (24,377) 2,486,078 Trading: Rabbi Trust deferred compensation investments (a) 3,692 - - 3,692 ----------- --------- ---------- ----------- Total trading securities 3,692 - - 3,692 ----------- --------- ---------- ----------- Total marketable securities $ 2,503,410 $ 10,737 $ (24,377) $ 2,489,770 =========== ========= ========== ===========
(a) Consists primarily of equity and mutual fund investments. 12 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) The following table presents Waypoint Financial's unrealized losses at September 30, 2004 relating to its investment securities classified as available-for-sale.
Less than 12 months 12 months or longer Total ------------------------ ------------------------ ------------------------ Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses ---------- ---------- ---------- ---------- ---------- ---------- Available for sale: U.S. Government and agencies $ 245,013 $ 3,385 $ 59,498 $ 1,384 $ 304,511 $ 4,769 Corporate bonds - - 39,250 1,344 39,250 1,344 Municipal securities 2,148 23 11,813 340 13,961 362 Equity securities 35,371 586 34,825 4,123 70,196 4,709 Mortgage-backed securities: Commercial mortgage-backed securities 19,212 27 - - 19,212 27 Agency PC's & CMO's 257,664 3,410 77,733 4,436 335,397 7,846 Private issue CMO's 218,783 715 91,907 2,699 310,690 3,415 ---------- ---------- ---------- ---------- ---------- ---------- Total mortgage-backed securities 495,659 4,152 169,640 7,135 665,299 11,288 ---------- ---------- ---------- ---------- ---------- ---------- Total securities available for sale $ 778,191 $ 8,146 $ 315,026 $ 14,326 $1,093,217 $ 22,472 ========== ========== ========== ========== ========== ==========
At September 30, 2004, Waypoint Financial held marketable securities with an aggregate book value of $329.3 million that were in an unrealized loss position for 12 months or longer. For these securities, the aggregated unrealized loss totaled $14.3 million, the weighted-average estimated life was 6.8 years, and the weighted-average duration of the impairment was 22 months. Waypoint Financial has the intent and ability, in terms of liquidity and capital strength, to hold these securities until their forecasted fair values recover at least up to the cost of the investments. During the three-month period ended September 30, 2004, Waypoint Financial sold one marketable security with a book value of $20.1 million that was impaired on the date of sale. The recognized loss on the sale of the security totaled $18,000 and the average duration of the impairment was 3 months. During the nine-month period ended September 30, 2004, Waypoint Financial sold marketable securities with a book value of $107.5 million that were impaired on the date of sale. The recognized loss on the sale of the securities during this period totaled $1.4 million. The sales were executed as part of management's interest rate risk strategy. Waypoint Financial periodically reviews investment securities classified as available-for-sale for potential impairment and records other than temporary impairment in accordance with SFAS No. 115. This includes a review of the fair value of each investment security in relation to its book value, the current grade of the security, the dividend, interest and principal paying status of the security and other significant events. At September 30, 2004, the weighted average market value to book value ratio for all securities with unrealized loss positions for 12 months or longer was 95.7%, with no individual security having a market value to book value ratio less than 89.5%. Based on management's review, no investment securities were determined to be other than temporarily impaired, and as a result no impairment charges were recorded in income during the quarter ended September 30, 2004. 13 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) (6) Loans Receivable, Net The following table presents the composition of loans receivable, net, as of the dates indicated:
September 30, December 31, 2004 2003 ------------- ------------ Residential mortgage loans (principally conventional): Secured by 1-4 family residences $ 283,286 $ 347,679 Construction (net of undistributed portion of $24,186 and $25,580) 21,061 25,500 ----------- ----------- 304,347 373,179 Less: Unearned (premium) discount (1,886) 6 Net deferred loan origination fees 2,030 2,321 ----------- ----------- Total residential mortgage loans 304,203 370,852 ----------- ----------- Commercial loans: Commercial real estate 767,450 651,139 Commercial business 361,128 343,129 Construction and site development (net of undistributed portion of $30,211 and $54,163) 105,471 103,611 ----------- ----------- 1,234,049 1,097,879 Less: Net deferred loan origination fees 1,651 1,853 ----------- ----------- Total commercial loans 1,232,398 1,096,026 ----------- ----------- Consumer and other loans: Manufactured housing 84,715 93,323 Home equity and second mortgage 609,836 561,937 Indirect automobile 215,001 174,416 Other 121,627 106,968 ----------- ----------- 1,031,179 936,644 Plus (minus): Net deferred loan origination fees (684) (1,035) Deferred dealer costs 22,756 23,584 ----------- ----------- Total consumer and other loans 1,053,251 959,193 ----------- ----------- Less: Allowance for loan losses 30,025 28,431 ----------- ----------- Loans receivable, net $ 2,559,827 $ 2,397,640 =========== ===========
Loans having an aggregate carrying value of $325,825,000 and $404,365,000 were pledged as collateral for FHLB advances at September 30, 2004 and December 31, 2003, respectively. Waypoint Financial conducts certain residential mortgage banking activities including the origination of mortgage loans for securitization or sale to investors and the servicing of mortgage loans for investors. Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans totaled $321,151,000 and $340,937,000 at September 30, 2004 and December 31, 2003, respectively. 14 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) Waypoint Financial's investment in loan servicing rights is included in the accompanying consolidated statement of financial condition. Waypoint Financial did not purchase or sell any mortgage servicing rights during the nine-month periods ended September 30, 2004 and 2003. Waypoint Financial sold mortgage loans totaling $147,559,000 and $385,743,000 during the nine-month periods ended September 30, 2004 and September 30, 2003, respectively. Waypoint Financial did not exchange loans for mortgage-backed securities during the nine-month periods ended September 30, 2004 and September 30, 2003. Investor custodial balances maintained in connection with the foregoing mortgage servicing rights totaled $1,194,000 at September 30, 2004 and $3,836,000 at December 31, 2003. (7) Deposits The following table presents the composition of deposits as of the dates indicated:
September 30, December 31, 2004 2003 ------------ ------------ Savings $ 228,318 $ 252,072 Time 1,436,639 1,408,970 Transaction 911,651 560,520 Money market 297,748 499,353 ----------- ----------- Total deposits $ 2,874,356 $ 2,720,915 =========== ===========
(8) Other Borrowings The following table presents the composition of Waypoint Financial's other borrowings as of the dates indicated:
September 30, December 31, 2004 2003 ------------ ------------ FHLB advances $1,723,841 $ 1,827,627 Repurchase agreements 228,630 278,054 Other - 5,000 ---------- ----------- Total other borrowings $1,952,471 $ 2,110,681 ========== ===========
15 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) (9) Derivatives Waypoint Financial uses derivative financial instruments as part of an overall interest rate risk management strategy primarily to manage its exposure due to fluctuations in market interest rates. This exposure includes the impact of changing interest rates on cash flows from interest-bearing assets and liabilities, as well as the impact of changing interest rates on the market value of interest-bearing assets and liabilities. Waypoint Financial's derivative portfolio includes derivative instruments that are designated in fair value hedging relationships and other derivatives that are not accounted for as hedges under SFAS No. 133. The following table summarizes Waypoint Financial's derivatives designated as hedges under SFAS No. 133 as of September 30, 2004 and December 31, 2003:
Year of Notional Number Maturity Year of Call Amount Fair Value -------- --------- ------------ -------- ---------- As of September 30, 2004: Callable interest rate swaps 29 2008-2018 2004-2005 $295,000 $ (542) Regular interest rate swaps 1 2005 - 50,000 602 Forward loan sale commitments 60 - - 6,837 (56) -------- Total $ 4 ======== As of December 31, 2003: Callable interest rate swaps 27 2006-2018 2003 $270,000 $ (5,577) Regular interest rate swaps 6 2004-2005 - 200,000 4,752 Forward loan sale commitments 58 - - 6,429 (17) -------- Total $ (842) ========
For the nine-month periods ended September 30, 2004 and 2003, ineffectiveness with the callable interest rate swap hedging relationship was recognized but was insignificant to earnings. The regular interest rate swap and the forward loan sale commitment on closed loan hedging relationships were 100% effective for the nine-month periods ended September 30, 2004 and September 30, 2003. Accordingly, no ineffectiveness was recognized in earnings associated with these hedging relationships. Summary information regarding other derivative activities at September 30, 2004 and December 31, 2003 follows:
Notional Number Amount Fair Value ------ -------- ---------- As of September 30, 2004: Interest rate cap 1 $250,000 $ 1,243 Interest rate lock commitments 69 9,018 22 Forward loan sale commitments 69 9,018 (58) -------- Total $ 1,207 ======== As of December 31, 2003: Interest rate cap 1 $250,000 $ 3,287 Interest rate lock commitments 54 5,523 18 Forward loan sale commitments 54 5,523 (29) -------- Total $ 3,276 ========
16 WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (All dollar amounts presented in the tables are in thousands, except per share data) (Unaudited) The interest rate cap has a 2008 maturity date and a strike rate of 5.5% based on one-month Libor. Waypoint Financial recognized a loss of $1,681,000 for the three-month period ending September 30, 2004 and a loss of $2,044,000 for the nine-month period ending September 30, 2004 on the fair value of the interest rate cap agreement. For the nine-month periods ended September 30, 2004 and September 30, 2003, gains and losses associated with interest rate lock commitments and forward loan sale commitments were recognized but were insignificant to earnings. (Balance of this page is intentionally left blank.) 17 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying interim consolidated financial statements for Waypoint Financial Corp. and Subsidiaries. This discussion should be read in conjunction with the 2003 Annual Report on Form 10-K. Current performance does not guarantee and may not be indicative of similar performance in the future. I. Forward-Looking Statements In addition to historical information, this report contains forward-looking statements. The forward-looking statements contained in the following sections are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, interest rate trends, the general economic climate in Waypoint Financial's market area and the country as a whole, Waypoint Financial's ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state regulation. Readers should not place undue reliance on these forward-looking statements, as they reflect management's analysis only as of the date of this report. Waypoint Financial has no obligation to update or revise these forward-looking statements to reflect events or circumstances that occur after the date of this report. Readers should carefully review the risk factors described in other documents that Waypoint Financial files periodically with the Securities and Exchange Commission. II. Critical Accounting Policies Waypoint Financial's significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements filed in Waypoint Financial's 2003 Annual Report on Form 10-K. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates that require assumptions about highly uncertain matters and could vary sufficiently to cause a material effect on Waypoint Financial's financial condition or results of operations. We have identified accounting for the allowance for loan losses, goodwill, benefit plans and accounting for income taxes as our most critical accounting policies. These critical accounting policies, including the nature of the estimates and types of assumptions used, are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in Waypoint Financial's 2003 Annual Report on Form 10-K. 18 III. Market Risk and Interest Rate Sensitivity Management Waypoint Financial monitors its interest rate risk position by utilizing simulation analysis. Net interest income fluctuations and the net portfolio value ratio are determined in various interest rate scenarios and monitored against acceptable limitations established by management and approved by the Board of Directors. Such rate scenarios include "ramped" rate changes adjusting rates in +/- 100 basis point (bp) increments resulting in projected changes to net interest income over the next 12 months and immediate rate shocks resulting in projected net portfolio value ratios as indicated in the following table:
As of September 30, 2004 As of December 31, 2003 ------------------------------ ----------------------------- Change in Percent change Net Percent change Net interest rates in net interest portfolio in net interest portfolio (in basis points) income (1) ratio (2) income (1) ratio (2) - ------------------- --------------- --------- --------------- --------- +300 12.86% 5.68% 6.22% 5.53% +200 9.40 6.05 4.05 5.85 +100 5.84 6.50 1.77 6.34 0 - 6.58 - 6.54 (100) (7.11) 5.75 (3.10) 6.09 (200) (12.28) 4.93 (6.63) 5.21
(1) The percentage change in this column represents an increase (decrease) in net interest income for 12 months in a stable interest rate environment versus net interest income for 12 months in the various rate scenarios. (2) The net portfolio value ratio in this column represents net portfolio value of Waypoint Financial in various rate scenarios, divided by the present value of expected net cash flows from existing assets in those same scenarios. Net portfolio value is defined as the present value of expected net cash flows from existing assets, minus the present value of expected net cash flows from existing liabilities, plus or minus the present value of expected net cash flows from existing off-balance-sheet contracts. Simulation results are influenced by a number of estimates and assumptions with regard to embedded options, prepayment behaviors, pricing strategies and cashflows. As of these dates, the net portfolio ratio fell within the "minimal risk" category established under OTS guidelines for interest rate risk measurement. IV. Liquidity Waypoint Financial meets its liquidity needs by either reducing its assets or increasing its liabilities. Sources of asset liquidity include short-term investments, securities available for sale, maturing and repaying loans, and monthly cash flows from mortgage-backed securities. The loan portfolio provides an additional source of liquidity due to Waypoint Financial's participation in the secondary mortgage market and resulting ability to sell loans as necessary. Waypoint Financial also meets its liquidity needs by attracting deposits and utilizing borrowing arrangements with the FHLB of Pittsburgh and the Federal Reserve Bank of Philadelphia for short and long-term loans as well as other short-term borrowings. Waypoint Financial also occasionally uses brokered deposits to supplement other sources of funds to the extent such deposits are determined to have more favorable interest cost and risk characteristics at the time of purchase relative to other sources of funding. During the nine months ended September 30, 2004, Waypoint Financial experienced growth in net loans receivable totaling $162.2 million, which was funded by growth in deposits totaling $153.4 million and a portion of net cash provided by operations, which totaled $38.7 million during this period. Waypoint Financial's securities including FHLB stock decreased $127.9 million during the nine months ended September 30, 2004, which combined with a portion of net cash provided by operations, facilitated a decrease of $158.2 million in borrowings. At September 30, 2004, Waypoint Financial had $1,723.8 million in FHLB loans outstanding, a decrease of $103.8 million during the nine months then ended. At September 30, 2004, Waypoint Financial held marketable securities that were in an unrealized loss position. These securities had an aggregate book value of $1,115.7 million and a weighted-average estimated life of 4.8 years. Waypoint has the intent and the ability to hold these securities until their market values recover up to at least their cost basis. 19 Please see Note 5 in the Notes to Consolidated Financial Statements for a detailed discussion of Waypoint Financial's marketable securities. Waypoint Bank is required by OTS regulations to maintain sufficient liquidity to ensure its safe and sound operation. Waypoint Bank had sufficient liquidity during the nine-month periods ended September 30, 2004 and September 30, 2003. The sources of liquidity previously discussed are deemed by management to be sufficient to fund outstanding loan commitments and meet other obligations. V. Capital Resources Waypoint had $423.1 million in stockholders' equity or 7.90% of total assets at September 30, 2004, as compared to $402.2 million or 7.55% of total assets at December 31, 2003. Notable changes in stockholders' equity for the nine months ended September 30, 2004 included increases of $25.5 million from net income, $4.6 million from activity related to employer stock plans, and $4.2 million from an increase in the market value of available-for-sale securities (net of taxes). Offsetting these increases were dividends paid to shareholders totaling $13.4 million. Under OTS regulations a savings association must satisfy three minimum capital requirements: Total capital, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets. Savings associations must meet all of the standards in order to comply with the capital requirements. At September 30, 2004, and December 31, 2003, Waypoint Bank met all three minimum capital requirements to be well capitalized. RISK-BASED CAPITAL RATIOS AND LEVERAGE RATIOS WAYPOINT BANK
Minimum Requirement Minimum Requirement to Actual for Capital Adequacy be "Well Capitalized" --------------------- -------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------- ----- ------ ----- (in thousands) (in thousands) (in thousands) As of September 30, 2004 Total Capital (to Risk Weighted Assets) $433,871 12.4% $279,702 8.0% $349,628 10.0% Tier 1 Capital (to Risk Weighted Assets) 403,846 11.6 139,851 4.0 209,777 6.0 Tier 1 Capital (to Average Assets) 403,846 7.5 215,615 4.0 269,519 5.0 As of December 31, 2003 Total Capital (to Risk Weighted Assets) $432,167 13.1% $263,756 8.0% $329,695 10.0% Tier 1 Capital (to Risk Weighted Assets) 402,653 12.2 131,878 4.0 197,817 6.0 Tier 1 Capital (to Average Assets) 402,653 7.4 216,609 4.0 270,762 5.0
A reconciliation of Waypoint Bank's regulatory capital to capital using United States generally accepted accounting principles (GAAP) as of September 30, 2004 follows:
TIER 1 TANGIBLE (CORE) RISK-BASED CAPITAL CAPITAL CAPITAL -------- ------- ---------- GAAP capital at Waypoint Financial $423,055 $423,055 $423,055 Capital attributed to affiliates (10,493) (10,493) (10,493) GAAP capital at Waypoint Bank 412,562 412,562 412,562 Capital adjustments: Unrealized gains, net of taxes, on securities available for sale 4,344 4,344 4,344 Allowance for loan losses - - 30,025 Certain intangible assets (12,785) (12,785) (12,785) Disallowed servicing assets (275) (275) (275) -------- -------- -------- Regulatory capital at Waypoint Bank $403,846 $403,846 $433,871 ======== ======== ========
20 VI. Results of Operations COMPARISON FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 NET INCOME Net income for the three months ended September 30, 2004 was $10.3 million or $.31 per share as compared to $9.9 million or $.30 per share for the three months ended September 30, 2003. The calculation of earnings per share is presented in Note (4) of the accompanying Notes to Consolidated Financial Statements. The following paragraphs include a discussion of the components of net income. NET INTEREST INCOME Waypoint Financial's principle source of revenue is net interest income, which represents the difference between interest income generated by earning assets such as loans and marketable securities and interest expense on interest-bearing liabilities such as deposits and borrowings. Net interest income can be significantly impacted by movements in market interest rates. Net interest income after provision for loan losses totaled $26.4 million during the quarter ended September 30, 2004, up from $25.4 million for the quarter ended September 30, 2003. The increase in net interest income after provision for loan losses came primarily from improvements in balance sheet mix and continued strong credit quality in the loan portfolio. Regarding asset mix, the average balance of loans increased $126.9 million for the quarter ended September 30, 2004 versus the comparable prior quarter, while the average balance of marketable securities decreased $165.4 million. This trend reflects Waypoint Financial's strategy of decreasing the marketable securities portfolio through repayments and maturities while replacing these assets with loan balances. Within liabilities, the average balance of deposits increased $257.6 million during the quarter ended September 30, 2004 versus the comparable prior period, while average borrowings decreased $335.7 million as Waypoint Financial replaced wholesale funding on the balance sheet with deposit growth. These favorable trends were partially offset by the cumulative effects of record high prepayments during 2003 and early in 2004 on mortgage loans and mortgage-backed securities. In the current environment, yields on new loan and security assets acquired into portfolio are at lower rates relative to assets being replaced. These impacts resulted in the net interest margin ratio (tax-equivalent) decreasing to 2.22% for the current quarter versus 2.28% for the quarter ended September 30, 2003. Table 1 presents, on a tax-equivalent basis, Waypoint Financial's average asset and liability balances, interest rates, interest income and interest expense for each of the three-month and nine-month periods ended September 30, 2004 and September 30, 2003. Table 2 presents a rate-volume analysis of changes in net interest income on a tax-equivalent basis for the three and nine-month periods ended September 30, 2004 and September 30, 2003. Pursuant to management's evaluation of the adequacy of Waypoint's allowance for loan losses, the provision for loan losses totaled $1.1 million for the quarter ended September 30, 2004 versus $2.0 million for the quarter ended September 30, 2003. Waypoint Financial's provision expense and allowance for loan losses are discussed in further detail in the Asset Quality section of this report. 21 TABLE 1A AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE SUMMARY (THREE-MONTH PERIODS)
For the three months ended, ---------------------------------------------------------------------------- September 30, 2004 September 30, 2003 Rate --------------------------------- --------------------------------------- as of Average Average September Average Yield/ Average Yield/ 30, 2004 Balance Interest (2) Cost Balance Interest (2) Cost --------- ----------- ------------ ------- ----------- ----------- ------- (All dollar amounts are in thousands) Assets: Interest-earning assets: Loans, net (1) (5) 5.71% $ 2,580,943 $ 35,924 5.49% $ 2,454,060 $ 36,646 5.90% Marketable securities 4.26 2,503,764 26,492 4.24 2,669,174 25,270 3.59 Other interest-earning assets 1.41 41,261 104 1.25 81,321 174 0.90 ---- ----------- -------- ---- ----------- -------- ---- Total interest-earning assets 4.98 5,125,968 62,520 4.84 5,204,555 62,090 4.90 ---- -------- ---- -------- ---- Noninterest-earning assets 316,603 306,916 ----------- ----------- Total assets $ 5,442,571 $ 5,511,471 =========== =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings deposits 0.25 $ 234,364 140 0.24 $ 256,108 267 0.41 Time deposits 2.84 1,422,781 10,012 2.79 1,403,613 11,007 3.11 Transaction and money market deposits 1.20 1,197,329 3,415 1.15 937,199 1,992 0.85 Escrow 1.00 1,718 4 0.82 2,798 6 0.87 Borrowed funds 4.02 2,128,247 20,702 3.81 2,463,967 20,217 3.28 ---- ----------- -------- ---- ----------- -------- ---- Total interest-bearing liabilities 2.78 4,984,439 34,273 2.71 5,063,685 33,489 2.60 ---- -------- ---- -------- ---- Noninterest-bearing liabilities 49,008 46,552 ----------- ----------- Total liabilities 5,033,447 5,110,237 Stockholders' equity 409,124 401,234 ----------- ----------- Total liabilities and stockholders' equity $ 5,442,571 $ 5,511,471 =========== =========== Net interest income, tax-equivalent 28,247 28,601 Interest rate spread, tax-equivalent (3) 2.20% 2.13% 2.30% ==== ==== ==== Net interest-earning assets $ 141,529 $ 140,870 =========== =========== Net interest margin, tax-equivalent (4) 2.22% 2.28% ==== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.03 x 1.03 x ==== ==== Adjustment to reconcile tax-equivalent net interest income to net interest income (722) (1,213) Net interest income before -------- -------- provision for loan losses $ 27,525 $ 27,388 ======== ========
(1) Includes income recognized on deferred loan fees and costs of $171,000 for the three months ended September 30, 2004, and $620,000 for the three months ended September 30, 2003. (2) Interest income and yields are shown on a tax equivalent basis using an effective tax rate of 35%. (3) Represents the difference between the average yield on interest-earning assets and the average cost on interest-bearing liabilities. (4) Represents the annualized net interest income before the provision for loan losses divided by average interest-earning assets. (5) Includes loans on nonaccrual status and loans held for sale. 22 TABLE 1B AVERAGE BALANCE SHEETS, RATES AND INTEREST INCOME AND EXPENSE SUMMARY (NINE-MONTH PERIODS)
For the nine months ended, -------------------------------------------------------------------------------------- September 30, 2004 September 30, 2003 -------------------------------------- ------------------------------------------ Average Average Average Yield/ Average Yield/ Balance Interest (2) Cost Balance Interest (2) Cost ----------- ----------- ------- ----------- ------------ ------- (All dollar amounts are in thousands) Assets: Interest-earning assets: Loans, net (1) (5) $ 2,502,365 $ 104,057 5.51% $ 2,412,371 $111,584 6.15% Marketable securities 2,489,133 77,248 4.16 2,702,746 82,761 4.19 Other interest-earning assets 50,782 341 1.01 70,689 488 1.03 ----------- --------- ---- ----------- -------- ---- Total interest-earning assets 5,042,280 181,646 4.79 5,185,806 194,833 5.07 --------- ---- -------- ---- Noninterest-earning assets 345,109 249,873 ----------- ----------- Total assets $ 5,387,389 $ 5,435,679 =========== =========== Liabilities and stockholders' equity: Interest-bearing liabilities: Savings deposits $ 242,203 398 0.22 $ 258,717 895 0.46 Time deposits 1,389,167 29,265 2.81 1,398,260 35,713 3.42 Transaction and money market deposits 1,124,611 8,140 0.97 847,306 4,589 0.72 Escrow 2,584 14 0.76 3,684 24 0.88 Borrowed funds 2,174,562 60,074 3.63 2,457,176 61,739 3.35 ----------- --------- ---- ----------- -------- ---- Total interest-bearing liabilities 4,933,127 97,891 2.62 4,965,143 102,960 2.75 --------- ---- -------- ---- Noninterest-bearing liabilities 47,934 50,918 ----------- ----------- Total liabilities 4,981,061 5,016,061 Stockholders' equity 406,328 419,618 ----------- ----------- Total liabilities and stockholders' equity $ 5,387,389 $ 5,435,679 =========== =========== Net interest income, tax-equivalent 83,755 91,873 Interest rate spread, tax-equivalent (3) 2.17% 2.32% ==== ==== Net interest-earning assets $ 109,153 $ 220,663 =========== =========== Net interest margin, tax-equivalent (4) 2.24% 2.40% ==== ==== Ratio of interest-earning assets to interest-bearing liabilities 1.02 x 1.04 x =========== =========== Adjustment to reconcile tax-equivalent (2,202) (3,597) Net interest income before --------- -------- provision for loan losses $ 81,553 $ 88,276 --------- --------
(1) Includes income recognized on deferred loan fees and costs of $497,000 for the nine months ended September 30, 2004, and $1,845,000 for the nine months ended September 30, 2003. (2) Interest income and yields are shown on a tax equivalent basis using an effective tax rate of 35%. (3) Represents the difference between the average yield on interest-earning assets and the average cost on interest-bearing liabilities. (4) Represents the annualized net interest income before the provision for loan losses divided by average interest-earning assets. (5) Includes loans on nonaccrual status and loans held for sale. 23 TABLE 2 RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
Three Months Ended September 30, 2004 Nine Months Ended September 30, 2004 Compared to Compared to Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003 Increase (Decrease) Increase (Decrease) -------------------------------------- -------------------------------------- Volume Rate Net Volume Rate Net -------- -------- -------- -------- -------- -------- (Dollar amounts in thousands) Interest-earning assets: Loans, net $ 3,258 $ (3,980) $ (722) $ 4,125 $(11,652) $ (7,527) Marketable securities 486 736 1,222 (5,055) (458) (5,513) Other interest-earning assets (38) (32) (70) (138) (9) (147) -------- -------- -------- -------- -------- -------- Total interest-earning assets 3,706 (3,276) 430 (1,068) (12,119) (13,187) -------- -------- -------- -------- -------- -------- Interest-bearing liabilities: Savings deposits (12) (115) (127) (37) (460) (497) Time deposits 329 (1,324) (995) (135) (6,313) (6,448) Transaction and money market deposits 642 781 1,423 2,553 998 3,551 Escrow (3) 1 (2) (10) - (10) Borrowed funds 428 57 485 (1,067) (598) (1,665) -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities 1,384 (600) 784 1,304 (6,373) (5,069) -------- -------- -------- -------- -------- -------- Change in net interest income $ 2,322 $ (2,676) $ (354) $ (2,372) $ (5,746) $ (8,118) ======== ======== ======== ======== ======== ========
NONINTEREST INCOME The table below presents a comparison of noninterest income for the three-month and nine-month periods ended September 30, 2004 and 2003. TABLE 3 CHANGES IN NONINTEREST INCOME
Three months ended September 30 ------------------------------------------------------------------------ 2004 2003 Change % -------- -------- --------- ------ (Dollar amounts in thousands) Banking services and account fees $ 5,393 $ 4,307 $ 1,086 25.2% Financial services fees 3,145 2,795 350 12.5 Residential mortgage banking 161 3,031 (2,870) (94.7) Bank-owned life insurance 1,031 1,081 (50) (4.6) Gain on securities and derivatives, net (1,061) 881 (1,942) (220.4) Other 751 (600) 1,351 225.2 -------- -------- -------- ----- Total $ 9,420 $ 11,495 $ (2,075) (18.1)% ======== ======== ======== =====
Nine months ended September 30 ------------------------------------------------------------------------ 2004 2003 Change % -------- -------- --------- ------ (Dollar amounts in thousands) Banking services and account fees $ 15,191 $ 11,620 $ 3,571 30.7% Financial services fees 7,841 7,188 653 9.1 Residential mortgage banking 1,732 5,631 (3,899) (69.2) Bank-owned life insurance 3,094 3,369 (275) (8.2) Gain on securities and derivatives, net 5,628 6,471 (843) (13.0) Other 539 (2,528) 3,067 121.3 -------- -------- -------- ----- Total $ 34,025 $ 31,751 $ 2,274 7.2% ======== ======== ======== =====
24 Noninterest income was $9.4 million for the current quarter, as compared to $11.5 million for the quarter ended September 30, 2003, with notable changes between these periods as follows: - - Banking services and account fees totaled $5.4 million for the current quarter, up $1.1 million primarily due to increased overdraft fees, service charges, and commercial fees. These trends reflect increased account and transaction volumes, pricing increases, and increased service offerings. - - Financial services fees totaled $3.1 million, up $.3 million primarily due to increased benefits consulting fees. - - Net residential mortgage banking revenue totaled $.2 million, down $2.8 million. Within this category, net gains on the sale of loans decreased $2.3 million and loan servicing activities including valuation adjustments resulted in a net revenue decrease of $.5 million. The loan sale results reflect both a sales volume decrease and a decrease in the average gain per dollar of loan principal sold. These experiences were consistent with trends currently being reported for the mortgage banking industry as a whole. - - Gains on securities and derivatives decreased $1.9 million primarily due to a recognized loss of $1.7 million during the current quarter on the valuation of an interest rate cap that does not receive hedge accounting treatment. The valuation of this instrument resulted in a gain of $.4 million during the comparable prior quarter. - - Other income resulted in a net gain of $.8 million during the current quarter versus a loss of $.6 million for the comparable prior quarter. This change resulted primarily from Waypoint's investment in certain low income housing tax credit ("LIHTC") partnerships, which contributed a net gain of $.5 million for the current period versus a net loss of $.5 million for the comparable prior period. During the current period, Waypoint recorded a $.7 million partial recovery of previous write-downs to the equity-method valuation of its largest LIHTC partnership pursuant to the renegotiation of its management services contract. NONINTEREST EXPENSE The following table presents a comparison of noninterest expense for the three-month and nine-month periods ended September 30, 2004 and 2003. TABLE 4 CHANGES IN NONINTEREST EXPENSE
Three months ended September 30 ------------------------------------------------------- 2004 2003 Change % ------- ------- ------- ------ (Dollar amounts in thousands) Salaries and benefits $12,561 $12,515 $ 46 0.4% Equipment expense 1,704 1,813 (109) (6.0) Occupancy expense 1,902 1,756 146 8.3 Marketing 1,365 1,374 (9) (0.7) Amortization of intangible assets 190 207 (17) (8.2) Outside services 1,205 1,274 (69) (5.4) Communications and supplies 1,207 1,230 (23) (1.9) Borrowing prepayment penalties - - - - Acquisition expense 176 - 176 - Other 2,306 2,894 (588) (20.3) ------- ------- ------- ------ Total $22,616 $23,063 $ (447) (1.9)% ======= ======= ======= ======
Nine months ended September 30 -------------------------------------------------------- 2004 2003 Change % ------- ------- ------- ------- (Dollar amounts in thousands) Salaries and benefits $38,015 $35,751 $ 2,264 6.3% Equipment expense 5,261 5,433 (172) (3.2) Occupancy expense 5,793 5,507 286 5.2 Marketing 3,674 3,680 (6) (0.2) Amortization of intangible assets 579 518 61 11.8 Outside services 3,928 3,853 75 1.9 Communications and supplies 3,822 3,852 (30) (0.8) Borrowing prepayment penalties 4,704 - 4,704 - Acquisition expense 3,335 - 3,335 - Other 6,835 9,123 (2,288) (25.1) ------- ------- ------- ------ Total $75,946 $67,717 $ 8,229 12.2% ======= ======= ======= ======
25 Noninterest expense was $22.6 million for the quarter ended September 30, 2004 versus $23.1 million for the quarter ended September 30, 2003. Notable changes in the quarter ended September 30, 2004 relative to the quarter ended September 30, 2003 included: - - Salaries and benefits expense totaled $12.6 million, up $.1 million. Increases from expansion in the banking franchise, annual merit increases and increased benefit costs were substantially offset by attrition in non-essential operational positions in advance of the Sovereign integration of Waypoint. - - Legal and integration expenses associated with the Sovereign acquisition totaled $.2 million, with no corresponding expenses in the comparable prior quarter. - - Other expenses decreased $.6 million, which was spread over a number of other expense categories that are being managed downward in advance of the integration with Sovereign. PROVISION FOR INCOME TAXES Income tax expense for the current quarter totaled $2.9 million, resulting in an effective tax rate of 21.7% on income before taxes of $13.2 million. For the quarter ended September 30, 2003, income taxes were $3.9 million, resulting in an effective tax rate of 28.6% on income before taxes of $13.8 million. The decrease in the effective tax rate for the current quarter reflected a $.7 million tax benefit that resulted from changes in Waypoint's estimate of contingency reserves maintained to recognize uncertainty associated with various income tax positions. Waypoint reassesses its tax reserves on a periodic basis and upon the occurrence of significant events such as the filing of federal and primary state corporate income tax returns, changes in relevant corporate tax statutes, communications from tax authorities, etc. COMPARISON FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003 NET INCOME Net income for the nine months ended September 30, 2004 was $25.5 million or $.77 per share as compared to $32.6 million or $.96 per share for the nine months ended September 30, 2003. The calculation of earnings per share is presented in Note (4) of the accompanying Notes to Consolidated Financial Statements. The following paragraphs include a discussion of the components of net income. NET INTEREST INCOME Net interest income after provision for loan losses totaled $77.6 million for the nine months ended September 30, 2004, which represents a decrease of $4.2 million from $81.8 million for the nine months ended September 30, 2003. The decrease in net interest income came primarily from the cumulative effects of record high prepayments during 2003 and the early months of 2004 on mortgage loans and mortgage-backed securities. In the current environment, yields on new loan and security assets acquired into portfolio are at lower rates relative to assets being replaced. This trend was exacerbated by aggressive pricing by key competitors in Waypoint's market for both loans and deposits, which resulted in spread compression. These impacts, which were partially reduced by favorable mix improvements in the asset and liability portfolios, resulted in the net interest margin ratio (tax-equivalent) decreasing to 2.25% for the nine months ended September 30, 2004 from 2.40% for the nine months ended September 30, 2003. Within Waypoint Financial's asset mix, the average balance of loans increased $90.0 million for the nine months ended September 30, 2004 versus the comparable prior period, while the average balance of marketable securities decreased $213.6 million. This trend reflects Waypoint Financial's strategy of decreasing the marketable securities portfolio through repayments and maturities while replacing these assets with loan balances. Within liabilities, the average balance of deposits increased $251.7 million during the nine months ended September 30, 2004 versus the comparable prior period, while average borrowings decreased $282.6 million as Waypoint Financial replaced wholesale funding on the balance sheet with deposit growth. Pursuant to management's evaluation of the adequacy of Waypoint's allowance for loan losses, the provision for loan losses decreased to $3.9 million for the nine months ended September 30, 2004 from $6.5 million for the nine months ended September 30, 2003. Waypoint Financial's provision expense and allowance for loan losses are discussed in further detail in the Asset Quality section of this report. 26 NONINTEREST INCOME Noninterest income was $34.0 million for the nine months ended September 30, 2004, up $2.3 million or 7.2% from $31.7 million for the comparable prior period. Notable changes in the nine months ended September 30, 2004 versus the nine months ended September 30, 2003 included: - - Banking services and account fees totaled $15.2 million, up $3.6 million on increased overdraft and NSF fees, ATM and debit card fees and commercial credit and other fees. These trends reflect increased account and transaction volumes, pricing increases, and increased service offerings. - - Financial services fees totaled $7.8 million, up $.6 million. Within this category, insurance fees from Waypoint Benefits Consulting which was acquired April 1, 2003 increased $1.4 million and property and casualty insurance fees increased $.2 million. Partially offsetting these increases was a $1.0 million decrease in title insurance fees due to the slowdown in mortgage banking activity during 2004. - - Residential mortgage banking income totaled $1.7 million, down $3.9 million. Within this category, net gains on the sale of loans decreased $4.5 million as refinancing activity slowed significantly during the current period due to rising mortgage interest rates. The decrease in net selling gains was partially offset by a $.6 million improvement in loan servicing income to breakeven net revenue in the current period, including the effects of valuation adjustments to capitalized loan servicing assets, versus a net loss in the comparable prior period. - - Gains on securities and derivatives were $5.6 million in the current period, down $.8 million. Waypoint Financial recognized a $1.7 million loss in the current period and a $.7 million loss in the comparable prior period on the fair value of an interest rate cap that was acquired to manage interest rate risk associated with the valuation of marketable securities. - - Other income resulted in a net gain of $.5 million during the current period versus a loss of $2.5 million in the comparable prior period. This increase in revenue of $3.0 million included a decrease of $1.8 million in losses from equity investments in LIHTC partnerships. During the current period, Waypoint recorded a $.7 million partial recovery of previous write-downs to the equity-method valuation of its largest LIHTC partnership pursuant to the renegotiation of its management services contract. In the comparable prior period, LIHTC results were unfavorably impacted by adjustments recognized upon management's assessment of partnership valuations at that time. Losses from investments in LIHTC partnerships are substantially offset by related tax credits and tax benefits recognized on the investment losses. Other income was also impacted by Waypoint's investment in certain Small Business Investment Corporation partnerships, which resulted in a $.1 million net gain in the current period versus a net loss of $1.5 million for the comparable prior period. NONINTEREST EXPENSE Noninterest expense was $75.9 million for the nine months ended September 30, 2004, up $8.2 million from $67.7 million for the nine months ended September 30, 2003. Notable changes in the nine months ended September 30, 2004 versus the nine months ended September 30, 2003 included: - - Salaries and benefits expense totaled $38.0 million, up $2.3 million. Increases from expansion in the banking franchise, annual merit increases and increased benefit costs were partially offset by attrition in non-essential operational positions during the second and third quarters in advance of the Sovereign integration of Waypoint. - - Waypoint Financial incurred $4.7 million in borrowing prepayment expenses during the first quarter of 2004 to extinguish $125.0 million of FHLB fixed-rate advances and replace this funding with variable-rate borrowing, which was expected to result in a breakeven impact on income before taxes within 2004 while decreasing interest expense and improving net interest margin. There were no corresponding expenses in the comparable prior period. - - Acquisition expenses associated with the Sovereign acquisition of Waypoint Financial totaled $3.3 million during the current period with no corresponding expenses in the comparable prior period. The acquisition expenses of $3.3 million included $2.9 million in investment advisory fees and $.4 million in legal and other expenses associated with the acquisition. - - Other expenses decreased $2.3 million, which included a $1.1 million decrease in loan servicing and other non-deferrable loan costs. The remaining decrease of $1.2 million was spread over various expense categories, which are generally being managed downward in advance of the integration with Sovereign. 27 PROVISION FOR INCOME TAXES Income tax expense for the nine months ended September 30, 2004 totaled $10.2 million, or an effective tax rate of 28.6% on income before taxes of $35.7 million. This compares to income taxes of $13.2 million and an effective tax rate of 28.9% on income before taxes of $45.8 million. VII. Financial Condition MARKETABLE SECURITIES Marketable securities totaled $2.366 billion at September 30, 2004, a decrease of $124.0 million from $2.490 billion at December 31, 2003 as Waypoint Financial applied net security repayments and prepayments to pay down borrowings. Note (5) of the Notes to Consolidated Financial Statements presents the composition of the marketable securities portfolio and related information as of September 30, 2004 and December 31, 2003. LOANS RECEIVABLE, NET Waypoint Financial continued to increase the weighting of commercial and consumer loans in the loan portfolio during the nine months ended September 30, 2004. Gross commercial loans increased $136.2 million or 12.4% to $1.234 billion and gross consumer and other loans increased $94.5 million or 10.1% to $1.031 billion at September 30, 2004. Waypoint Financial attributes the substantial growth in the commercial loan portfolio primarily to improved economic conditions and to continued effective sales and marketing efforts. The growth in consumer loans included $49.8 million of home equity-secured consumer loans acquired from Sovereign Bank during the third quarter of 2004. Waypoint elected to acquire these Pennsylvania- and Maryland-originated loans to supplement consumer loan growth within Waypoint's core market. Offsetting these increases, residential mortgage loans decreased $68.8 million or 18.4% as Waypoint Financial continued to sell substantially all residential mortgage originations and prepayments on mortgage loans held in portfolio continued at a historically high level during the first and second quarters of 2004. The composition of loans receivable, net is included in Note (6) of the accompanying Notes to Consolidated Financial Statements. LOAN COMMITMENTS Waypoint Financial issues loan commitments to prospective borrowers conditioned on the occurrence of certain events. Commitments are made in writing on specified terms and conditions and are generally honored for up to 60 days from approval. Waypoint Financial had loan commitments and unadvanced loans and lines of credit totaling $816.5 million at September 30, 2004 and $709.3 million at December 31, 2003. Discussion regarding the composition and funding of loan commitments is presented in Note (14) of the consolidated financial statements in the 2003 Annual Report on Form 10-K. LOAN QUALITY Waypoint Financial continued to maintain sound credit quality in the loan portfolio during the nine months ended September 30, 2004. Management attributes this performance to consistently strong underwriting standards and credit and collections management. Waypoint Financial follows a comprehensive loan policy that details credit underwriting, credit management and loan loss provisioning techniques. Non-performing loans totaled $15.2 million or 0.59% of total loans as of September 30, 2004 as compared to $18.2 million or 0.76% of total loans as of December 31, 2003. Waypoint Financial's allowance for loan losses was $30.0 million or 1.16% of total loans as of September 30, 2004 as compared to $28.4 million or 1.17% of total loans as of December 31, 2003. Net loan charge-offs as a percentage of average loans outstanding totaled 0.19% on an annualized basis for the nine months ended September 30, 2004 as compared to 0.26% for the nine months ended September 30, 2003. 28 NON-PERFORMING ASSETS The following table sets forth information regarding non-accrual loans, loans delinquent 90 days or more and still accruing, and other non-performing assets as of the dates indicated:
As of As of September 30, 2004 December 31, 2003 ------------------ ----------------- (Amounts in thousands) Non-accrual residential mortgage loans $ 271 $ 443 Non-accrual commercial loans 7,646 8,173 Non-accrual other loans 414 90 ----------- ----------- Total non-accrual loans 8,331 8,706 Loans 90 days or more delinquent and still accruing 6,903 9,498 ----------- ----------- Total non-performing loans 15,234 18,204 Total foreclosed other assets 558 313 Total foreclosed real estate 136 472 ----------- ----------- Total non-performing assets $ 15,928 $ 18,989 =========== =========== Total non-performing loans to total loans 0.59% 0.76% =========== =========== Allowance for loan losses to non-performing loans 197.09% 156.18% =========== =========== Total non-performing assets to total assets 0.30% 0.36% =========== ===========
ALLOWANCE FOR LOAN LOSSES The following table summarizes the activity in Waypoint Financial's allowance for loan losses for the periods indicated:
For the For the three months ended nine months ended ------------------------------ ------------------------------ September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------ ------------ ------------- ------------- (Amounts in thousands) Balance at beginning of period $ 29,553 $ 28,818 $ 28,431 $ 27,506 Provision for loan losses 1,113 2,014 3,916 6,499 Charge-offs: Residential mortgage loans (101) (134) (290) (453) Commercial loans (67) (552) (164) (1,665) Consumer and other loans (984) (1,139) (2,882) (3,641) ---------- ---------- ---------- ---------- Total charge-offs (1,152) (1,825) (3,336) (5,759) ---------- ---------- ---------- ---------- Recoveries: Residential mortgage loans 23 40 58 121 Commercial loans 311 9 430 301 Consumer and other loans 177 235 526 623 ---------- ---------- ---------- ---------- Total recoveries 511 284 1,014 1,045 ---------- ---------- ---------- ---------- Net charge-offs (641) (1,541) (2,322) (4,714) ---------- ---------- ---------- ---------- Balance at end of period $ 30,025 $ 29,291 $ 30,025 $ 29,291 ========== ========== ========== ========== Annualized net charge-offs to average loans outstanding 0.10% 0.26% 0.19% 0.26% ========== ========== ========== ========== Allowance for loan losses as a percentage of total loans 1.16% 1.21% 1.16% 1.21% ========== ========== ========== ==========
29 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table sets forth the composition of the allowance for loan losses as of the dates indicated:
As of September 30, 2004 As of December 31, 2003 ------------------------------ ----------------------------- (Dollar amounts in thousands) % of Total % of Total Amount Reserves Amount Reserves ------- -------- -------- --------- Residential mortgage loans $ 896 2.98% $ 1,099 3.86% Commercial loans 23,507 78.29 20,455 71.95 Consumer and other loans 5,622 18.73 6,877 24.19 ------- ------ ------- ------ Total $30,025 100.00% $28,431 100.00% ======= ====== ======= ======
DEPOSITS During the nine months ended September 30, 2004, deposits increased $153.4 million to $2.874 billion from $2.721 billion at December 31, 2003. Within the deposit portfolio, Waypoint Financial experienced substantial growth in its lower-cost transaction deposits, which increased $351.1 million . This growth in transaction deposit balances resulted from a combination of pricing incentives and increased marketing and sales emphasis on this deposit product line. Time deposits were also up $27.7 million. Partially offsetting this growth was a combined decrease of $225.4 million in money market and savings deposits. The composition of the deposit portfolio is included in Note (7) of the accompanying Notes to Consolidated Financial Statements. OTHER BORROWINGS Other borrowings decreased $158.2 million to $1.952 billion as of September 30, 2004 from $2.111 billion as of December 31, 2003. As noted previously, Waypoint Financial funded this decrease with net repayments and prepayments of marketable securities and with cash provided by operating activities. The composition of the borrowing portfolio is included in Note (8) of the accompanying Notes to Consolidated Financial Statements. Item 3 Quantitative and Qualitative Disclosures about Market Risk Reference Item 2, Section III. Item 4 Controls and Procedures Waypoint Financial's Chief Executive Officer and Chief Financial Officer have concluded, based on an evaluation of the effectiveness of its disclosure controls and procedures pursuant to Rule 13(a)-15(b), that Waypoint Financial's disclosure controls and procedures (as defined in Rule 13a-15(e)) are effective in ensuring that all material information required to be filed in this quarterly report has been made known in a timely manner. There were no changes in Waypoint Financial's internal controls over financial reporting that occurred during the fiscal quarter ending September 30, 2004 that have materially affected, or are reasonably likely to materially affect, Waypoint Financial's internal controls over financial reporting. 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other information. None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of the Company's Chief Executive Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Company's Chief Financial Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Company's Chief Executive Officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Company's Chief Financial Officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K 1. Incorporated by reference, the Company's Report on Form 8-K dated October 22, 2004, reported third quarter financial results and the declaration of a regular quarterly cash dividend. 31 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WAYPOINT FINANCIAL CORP. (Registrant) By /s/ David E. Zuern ------------------- David E. Zuern President and Chief Executive Officer By /s/ James H. Moss ----------------- James H. Moss, Senior Executive Vice President and Chief Financial Officer Dated: November 8, 2004 32 EX-31.1 2 j1008801exv31w1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13A-15 OR 15D-15 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David E. Zuern, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Waypoint Financial Corp.; (2) Based on my knowledge, this 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ David E. Zuern - ------------------ David E. Zuern, President and Chief Executive Officer November 8, 2004 33 EX-31.2 3 j1008801exv31w2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13A-15 OR 15D-15 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James H. Moss, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Waypoint Financial Corp.; (2) Based on my knowledge, this 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ James H. Moss - ----------------- James H. Moss, Senior Executive Vice President and Chief Financial Officer November 8, 2004 34 EX-32.1 4 j1008801exv32w1.txt EXHIBIT 32.1 Exhibit 32.1 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 Quarterly Report on Form 10-Q of Waypoint Financial Corp. (the "Company") for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David E. Zuern, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The 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 the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David E. Zuern - ------------------ David E. Zuern, President and Chief Executive Officer November 8, 2004 35 EX-32.2 5 j1008801exv32w2.txt EXHIBIT 32.2 Exhibit 32.2 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 Quarterly Report on Form 10-Q of Waypoint Financial Corp. (the "Company") for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James H. Moss, Senior Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The 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 the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ James H. Moss - ----------------- James H. Moss, Senior Executive Vice President and Chief Financial Officer November 8, 2004 36 -----END PRIVACY-ENHANCED MESSAGE-----