UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 0-16668
--------------------------------
WSFS FINANCIAL CORPORATION
--------------------------------
Delaware 22-2866913
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
838 Market Street, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of March 16, 2000 was $92,607,346. For purposes of this calculation
only, affiliates are deemed to be directors, executive officers and beneficial
owners of greater than 5% of the outstanding shares.
As of March 16, 2000, there were issued and outstanding 10,947,744 shares of
the registrant's common stock.
-------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 27, 2000 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
Item 1. Business .................................................................... 3
Item 2. Properties .................................................................. 23
Item 3. Legal Proceedings............................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders........................... 26
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 27
Item 6. Selected Financial Data....................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 29
Item 8. Financial Statements and Supplementary Data................................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 90
Part III
Item 10. Directors and Executive Officers of the Registrant............................ 90
Item 11. Executive Compensation........................................................ 90
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 90
Item 13. Certain Relationships and Related Transactions................................ 90
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 91
Signatures.................................................................... 94
-2-
PART I
Item 1. Business
GENERAL
WSFS Financial Corporation (Company or Corporation) is a savings and
loan holding company headquartered in Wilmington, Delaware. Substantially all of
the Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the Bank or WSFS). The long-term goal of the Corporation is to
maintain its high-performing financial services company status by focusing on
its core banking business while developing unique profitable niches in
complementary businesses which may operate outside the Bank's geographical
footprint. Founded in 1832, WSFS is one of the oldest financial institutions in
the country. It has operated under the same name and charter serving the
residents of Delaware for over 167 years. WSFS is the largest thrift institution
headquartered in Delaware and among the four largest financial institutions in
the state on the basis of total deposits traditionally garnered in-market. The
Corporation's primary market area is the Mid-Atlantic region of the United
States which is characterized by a diversified manufacturing and service
economy.
The Bank provides residential and commercial real estate, commercial
and consumer lending services, as well as cash management services funding these
activities primarily with retail deposits and borrowings. The banking operations
of WSFS are presently conducted from 24 retail banking offices located in
Northern Delaware and Southeastern Pennsylvania. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC).
Fully owned subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; and 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system. An additional subsidiary, Star States
Development Company (SSDC), is currently inactive having sold its final parcel
of land in 1998.
In August 1999, WSFS Financial Corporation invested $5.5 million in
CustomerOne Financial Network, Inc (C1FN), a St Louis, Missouri based
corporation formed in 1998 for the express purpose of providing
direct-to-consumer marketing, servicing, internet development and technology
management for "branchless" financial services. At December 31, 1999, WSFS is
C1FN's largest single shareholder, has majority control through a voting trust
and is currently sharing in 43% of operating results. In addition, WSFS received
warrants for the purchase of 20% additional ownership of C1FN, as well as the
opportunity and under certain circumstances the obligation to invest an
additional $5.4 million in the year 2000, at current offered ownership prices.
As a result of this investment, C1FN's internet-only banking structure became
part of everbank.comtm, a division of WSFS. C1FN and WSFS manage the operations
of everbank.com(TM). Everbank.comtm began marketing internet-only banking to a
national clientele in November of 1999.
Additionally, in November 1999, the Corporation expanded the home
equity lending business of Community Credit Corporation (CCC) which began
operations in 1994. CCC was renamed Wilmington National Finance, Inc. (WNFI) and
WSFS retained a 51% ownership with the remainder held by WNFI's new executives
retained to lead the expansion of WNFI. WSFS also has warrants to obtain an
additional 15% ownership in WNFI. Both C1FN and WNFI are consolidated into the
financial statements of the Corporation. See Note 19 of the consolidated
financial statements, "Investments in Non-wholly Owned Subsidiaries", for
further discussion.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the Office of Thrift Supervision (OTS), the FDIC and the
Federal Reserve Board. This supervision and regulation is intended primarily for
the protection of depositors. See the "Regulation" section for a further
discussion of certain of these regulatory requirements.
The Corporation recorded net income of $19.7 million for the year ending
December 31, 1999, compared to $16.5 million and $16.4 million in 1998 and 1997,
respectively.
-3-
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Condensed average balance sheets for each of the last three years and
analyses of net interest income and changes in net interest income due to
changes in volume and rate are presented in "Results of Operations" included in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) are incorporated herein by reference.
-4-
INVESTMENT ACTIVITIES
The Company's short-term investment portfolio is intended to provide
collateral for borrowings and to meet liquidity requirements. Book values of
investment securities and short-term investments by category, stated in dollar
amounts and as a percent of total assets, follow:
December 31,
--------------------------------------------------------------------------
1999 1998 1997
----------------------- --------------------- --------------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
------ ---------- ------ ---------- ------ --------
(Dollars In Thousands)
Held-to-Maturity:
Corporate bonds............................. $ 6,855 0.4% $ 6,059 0.4% $12,030 1.0%
U.S. Government and agencies................ - - - - 15,000 0.8
State and political subdivisions ........... 1,757 0.1 1,583 0.1 1,534 0.1
------- ----- ------- ------ ------- -----
8,612 0.5 7,642 0.5 28,564 1.9
------- ----- ------- ------ ------- -----
Available-for-Sale:
U.S. Government and agencies................ 28,436 1.6 30,219 1.9 50,091 3.3
Other investments........................... 425 - - - - -
------- ----- ------- ------ ------- -----
28,861 1.6 30,219 1.9 50,091 3.3
------- ----- ------- ------ ------- -----
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell.............. - - 20,900 1.3 25,279 1.7
Interest-bearing deposits in other banks (1) 8,026 0.5 7,518 0.4 28,892 1.9
------- ----- ------- ------ ------- -----
8,026 0.5 28,418 1.7 54,171 3.6
------- ----- ------- ------ ------- -----
$45,499 2.6% $ 66,279 4.1% $132,826 8.8%
======= ===== ======== ====== ======== =====
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
In 1999, the Bank purchased $18 million in U.S. Government securities,
of which $18 million was classified as available-for-sale, and $2 million in
corporate bonds which were classified as held-to-maturity. In addition, there
were sales of U.S. Government securities totaling $20 million. There is also a
sale on $9.7 million of U.S. Government securities, classified as
available-for-sale, from which a loss of $289,000 has been accrued in 1999. This
sale settled in January 2000. The reduction in corporate bonds since 1997 has
been primarily due to maturities and calls. In 1998, the Bank purchased $20
million in U.S. Government securities, of which $10 million was classified as
available-for-sale, and there were sales and calls of U.S. Government securities
totaling $20 million and $25 million, respectively. In 1997, the Bank purchased
$105 million in U.S. Government securities of which $90 million was classified
as available for sale. Of these securities, $40 million was sold in 1997.
-5-
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1999. Substantially all of the related interest and dividends
represent taxable income. Yields on tax-exempt investments are calculated on the
basis of actual yields and not on a tax-equivalent basis, since the effect of
the equivilization is immaterial.
At December 31, 1999
--------------------
Amount Yield
------ -----
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
Within one year............................... $ 218 6.60%
After one but within five years............... 1,563 6.56
After five but within ten years............... 1,884 6.32
After ten years............................... 3,190 8.92
-------
6,855 7.59
-------
State and political subdivisions (1):
After ten years............................... 1,757 7.55
-------
Total debt securities, held-to-maturity......... 8,612 7.58
-------
Available-for-Sale:
U.S. Government and agencies:
Within one year.............................. 3,059 5.86
After one but within five years.............. 25,377 6.02
-------
28,436 6.01
-------
Other investments:
Within one year.............................. 425
-------
Total debt securities, available-for-sale....... 28,861 5.91
-------
Short-term investments:
Interest-bearing deposits in other banks...... 8,026 4.03
-------
Total short-term investments.................... 8,026 4.03
-------
$45,499 5.90%
=======
(1) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since the effect would be immaterial.
In addition to the foregoing investment securities, the Company has
maintained an investment portfolio of mortgage-backed securities, which
increased dramatically after 1993 as the Company implemented investment growth
strategies during subsequent years. Purchases of mortgage-backed securities,
including collateralized mortgage obligations, in 1999 totaled $171 million, of
which $76 million was classified as available-for-sale and $95 million was
classified as held-to-maturity. There is a sale of $24.6 million of
collateralized mortgage obligations, from which a loss of $730,000 has been
accrued in 1999. This sale settled in January 2000. Reductions in the other
categories, for all years, were due to principal repayments.
-6-
The following table sets forth the book values of mortgage-backed
securities and their related weighted average stated rates at the end of the
last three fiscal years.
December 31,
---------------------------------------------------------------------
1999 1998 1997
----------------- -------------------- -------------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
------ ------ ------ ------ ------ -----
Held-to-Maturity:
Collateralized mortgage obligations......... $191,839 6.65% $175,619 6.78% $151,982 7.30%
GNMA ....................................... 852 6.48 1,044 6.93 1,299 7.16
FHLMC....................................... 33,036 6.15 42,337 6.16 55,822 6.17
FNMA........................................ 31,065 6.23 40,881 6.26 53,134 6.26
Other....................................... 2,033 5.31 5,977 7.36 12,663 7.50
-------- ---- -------- ---- -------- ------
$258,825 6.53% $265,858 6.61% $274,900 6.88%
======== ==== ======== ==== ======== ======
Available-for-Sale:
Collateralized mortgage obligations ........ $173,544 6.43% $168,997 6.54% $57,374 7.26%
FHLMC....................................... 143 6.61 - - - -
GNMA........................................ 15,237 5.40 24,229 6.11 - -
-------- ---- -------- ---- ------- ------
$188,924 6.34% $193,226 6.49% $57,374 7.26%
======== ==== ======== ==== ======= ======
CREDIT EXTENSION ACTIVITIES
Traditionally, the majority of a typical thrift institution's loan
portfolio has consisted of first mortgage loans on residential properties.
However, as a result of various legislative and regulatory changes since 1980,
the commercial and consumer lending powers of the Bank have increased
substantially. Consequently, the Bank initiated a diversification strategy in
fiscal year 1984 which included a significant increase in commercial real estate
lending. Commercial real estate lending was temporarily discontinued in 1990 and
only originations required by previous funding commitments were made. In 1994,
the Bank began to originate small business and commercial real estate loans in
its primary market area. The Bank's current lending activity is concentrated on
lending to consumers and small businesses in the Mid-Atlantic Region of the
United States.
-7-
The following table sets forth the composition of the Corporation's
loan/lease portfolio by type of loan/lease at each of the dates indicated. Other
than as disclosed below, the Company had no concentrations of loans/leases
exceeding 10% of total loans/leases at December 31, 1999:
December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ----------------- ----------------- ---------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- -------- ------- --------- ------- -------- ------- -------- --------
(Dollars in Thousands)
Residential real estate (1) .... $393,243 35.7% $291,110 30.2% $287,349 30.7% $279,060 33.8% $276,926 35.0%
Commercial real estate:
Commercial mortgage ............ 201,559 18.3 226,063 23.5 238,533 25.5 278,935 33.8 293,979 37.1
Construction ................... 21,561 2.0 11,642 1.2 12,553 1.3 27,056 3.3 29,959 3.8
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total commercial real estate . 223,120 20.3 237,705 24.7 251,086 26.8 305,991 37.1 323,938 40.9
Commercial ..................... 115,931 10.5 97,524 10.1 94,686 10.1 28,602 3.5 23,894 3.0
Consumer ....................... 175,785 16.0 165,660 17.2 159,432 17.0 135,552 16.4 114,265 14.4
Finance leases ................. 60,985 7.4 98,840 12.5
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross loans .................... 908,079 82.5 791,999 82.2 792,553 84.6 810,190 98.2 837,863 105.8
Less:
Unearned income ................ 3,870 0.4 4,642 0.5 3,240 0.3 13,102 1.6 21,512 2.7
Allowance for loan losses ...... 23,024 2.1 23,689 2.5 24,850 2.7 24,241 2.9 24,167 3.1
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans .................... 881,185 80.0 763,668 79.2 764,463 81.6 772,847 93.7 792,184 100.0
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Vehicles under operating leases,
net .......................... 220,209 20.0 199,967 20.8 172,115 18.4 52,036 6.3 - -
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans and vehicles under
operating leases .............. $1,101,394 100.0% $963,635 100.0% $936,578 100.0% $824,883 100.0% $792,184 100.0%
========== ===== ======== ===== ======== ===== ======== ===== ======== =====
- -----------------
(1) Includes $24,572, $3,103, $2,222, $773, and $4,401of residential mortgage
loans held-for-sale at December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
-8-
The following table sets forth information as of December 31, 1999
regarding the dollar amount of loans and leases maturing in the Company's
portfolios, including scheduled repayments of principal, based on contractual
terms to maturity. In addition, the table sets forth the dollar amount of loans
maturing during the indicated periods, based on whether the loan has a fixed- or
adjustable-rate as well as leases maturing during the indicated periods. Loans
and leases having no stated maturity or repayment schedule are reported in the
one year or less category.
Less than One to Over
One Year Five Years Five Years Total
----------- ------------ ---------- ---------
(In Thousands)
Real estate loans (1)..................... $ 40,135 $ 159,524 $ 370,571 $ 570,230
Construction loans........................ 7,281 11,165 3,115 21,561
Commercial loans.......................... 27,414 30,766 57,751 115,931
Consumer loans ........................... 64,400 69,101 42,284 175,785
---------- ---------- --------- -----------
$ 139,230 $ 270,556 $ 473,721 $ 883,507
========== ========== ========= ===========
Rate sensitivity:
Fixed................................... $ 58,203 $ 180,848 $ 197,135 $ 436,186
Adjustable.............................. 81,027 89,708 276,586 447,321
---------- ---------- --------- ----------
139,230 270,556 473,721 883,507
---------- ---------- --------- ----------
Vehicles under operating leases, net 67,383 152,826 - 220,209
---------- ---------- --------- ----------
Gross loans and net operating leases $ 206,613 $ 423,382 $ 473,721 $1,103,716
========== ========== ========= ==========
- --------------
(1) Includes commercial mortgage loans; does not include loans held-for-sale.
The above schedule does not include any prepayment assumptions.
Although prepayments tend to be highly dependent upon the current interest rate
environment, management believes that the actual repricing and maturity of the
loan and lease portfolio is significantly shorter than is reflected in the above
table as a result of prepayments.
Residential Real Estate Lending. WSFS originates residential mortgage
loans with loan-to-value ratios up to 97%; however, the Bank generally requires
private mortgage insurance for up to 30% of the mortgage amount on mortgage
loans whose loan-to-value ratio exceeds 80%. The Bank does not have any
significant concentrations of such insurance with any one insurer. On a very
limited basis, the Bank originates loans with loan-to-value ratios exceeding 80%
without a private mortgage insurance requirement. At December 31, 1999, the
balance of all such loans was approximately $20.2 million. Generally,
residential mortgage loans originated or purchased are underwritten and
documented in accordance with standard underwriting criteria published by FHLMC
to assure maximum eligibility for subsequent sale in the secondary market;
however, unless loans are specifically designated for sale, the Company holds
newly originated loans in portfolio for long-term investment. Among other
things, title insurance is required, insuring the priority of its lien, and fire
and extended coverage casualty insurance for the properties securing the
residential loans. All properties securing residential loans made by the Bank
are appraised by independent appraisers selected by the Bank and subject to
review in accordance with Bank standards.
The majority of residential real estate adjustable-rate loans currently
originated have interest rates that adjust yearly, after an initial period, with
the change in rate limited to two percentage points at any adjustment date. The
adjustments are generally based upon a margin (currently 2.75 percent) over the
weekly average yield on U.S. Treasury securities adjusted to a constant
maturity, as published by the Federal Reserve Board.
Generally, the maximum rate on these loans is up to six percent above
the initial interest rate. The Bank generally underwrites adjustable-rate loans
under standards consistent with private mortgage insurance and secondary market
criteria. The Bank does not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization. Consistent with industry
practice in its market area, the Bank has typically originated adjustable-rate
mortgage loans with initially discounted interest rates. All such loans are
underwritten at the fully-indexed rate.
The retention of adjustable-rate mortgage loans in the Bank's loan
portfolio helps mitigate the Bank's risk to changes in interest rates. However,
there are unquantifiable credit risks resulting from potential increased costs
to the borrower as a result of the repricing of adjustable-rate mortgage loans.
It is possible that during periods of rising interest rates, the risk of default
on adjustable-rate mortgage loans may increase due to the upward adjustment of
interest costs to the borrower. Further, although
-9-
adjustable-rate mortgage loans allow the Bank to increase the sensitivity of its
asset base to changes in interest rates, the extent of this interest sensitivity
is limited by the periodic and lifetime interest rate adjustment limitations.
Accordingly, there can be no assurance that yields on the Bank's adjustable-rate
mortgages will adjust sufficiently to compensate for increases in the Bank's
cost of funds during periods of extreme interest rate increases.
The original contractual loan payment period for residential loans
originated is normally 10 to 30 years. Because borrowers may refinance or prepay
their loans without penalty, such loans normally remain outstanding for a
substantially shorter period of time. First mortgage loans customarily include
"due-on-sale" clauses on adjustable- and fixed-rate loans, which are provisions
giving the institutions the right to declare a loan immediately due and payable
in the event the borrower sells or otherwise disposes of the real property
subject to the mortgage. Due-on-sale clauses are an important means of adjusting
the rate on existing fixed-rate mortgage loans to current market rates. The Bank
enforces due-on-sale clauses through foreclosure and other legal proceedings to
the extent available under applicable laws.
Commercial Real Estate and Commercial Lending. Federal savings banks,
are generally permitted to invest up to 400% of its total regulatory capital in
nonresidential real estate loans and up to 20% of its assets in commercial
loans. As a federal savings bank which was formerly chartered as a Delaware
savings bank, however, the Bank has certain additional lending authority. From
1991 to 1993, the Bank had been operating under a Capital Plan and was subject
to the terms and conditions of a Capital Directive. Consequently, WSFS had
discontinued the origination of commercial real estate and construction loans
other than renewal of performing loans or funding outstanding commitments.
Beginning in 1994, after the Plan and Directive were lifted, the Bank began to
originate commercial real estate loans and commercial construction loans in its
primary market area.
WSFS offers commercial real estate mortgage loans on multi-family and
other commercial real estate. Generally, loan-to-value ratios for such loans do
not exceed 80% of appraised value at origination. As a result of subsequent
changes in the real estate market, however, current loan-to-value ratios on
certain loans could effectively be in excess of 80%.
The Bank offers commercial construction loans to developers. These
loans are made as "construction/permanent" loans, which provides for
disbursement of loan funds during construction and automatic conversion to
mini-permanent loans (1-5 years) upon completion of construction. Such
construction loans are made on a short-term basis, usually not exceeding two
years, with interest rates indexed to the WSFS prime rate and adjusted
periodically as the Bank's prime rate changes. The loan appraisal process
includes the same criteria as required for permanent mortgage loans as well as
completed plans, specifications, comparables and cost estimates. These items are
used, prior to approval of the credit, as a basis to determine the appraised
value of the subject property when completed. Policy requires that all
appraisals are to be reviewed independently of the commercial lending area.
Generally, the loan-to-value ratio for construction loans does not exceed 75%.
The initial interest rate on the permanent portion of the financing is
determined based upon the prevailing market rate at the time of conversion to
the permanent loan. At December 31, 1999, $43.5 million was committed for
construction loans, of which $21.6 million had been disbursed.
The Bank's commercial lending, excluding real estate loans, includes
loans for the purpose of financing equipment acquisitions, expansion, working
capital and other business purposes. These loans generally range in amounts up
to approximately $5.0 million, and their terms range from less than one year to
seven years. The loans generally carry variable interest rates indexed to the
Bank's prime rate or LIBOR at the time of closing. The Bank intends to continue
originating commercial loans to small businesses in its market area.
Commercial, commercial mortgages and construction lending entail
significant risk as compared with residential mortgage lending. These loans
typically involve larger loan balances concentrated in single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the commercial real estate market or in
the economy generally. The majority of the Bank's commercial and commercial real
estate loans is concentrated in Delaware and surrounding areas.
Construction loans involve risks attributable to the fact that loan
funds are advanced as the construction progresses. The valuation of the
underlying collateral can be difficult to quantify prior to the completion of
the construction due to uncertainties inherent in construction such as ever
changing construction costs, delays arising from labor or material shortages and
other unpredictable contingencies. The Bank attempts to mitigate these risks and
plan for these contingencies through additional analysis and monitoring of its
construction projects.
-10-
Federal law limits the extensions of credit to any one borrower to 15%
of unimpaired capital, or 25%, if the additional incremental 10% is secured by
readily marketable collateral having a market value that can be determined by
reliable and continually available pricing. A single large extension of credit
by the Bank would be limited by this 15% of capital restriction, except if the
extension of credit would be fully or partially secured by U.S. treasury
securities. Extensions of credit include outstanding loans as well as
contractual commitments to advance funds, such as standby letters of credit, but
do not include unfunded loan commitments. In April 1997, the bank originated a
$35.5 million loan to refinance an employee stock ownership plan ("ESOP") loan
of a company. Approximately 80% of the loan is secured by discounted U.S.
treasury securities. The portion of the loan that is secured by U.S. treasury
securities is exempt from the above lending limits. At December 31, 1999, no
borrower had collective outstandings exceeding the above limits.
Consumer Lending. The primary consumer credit products, excluding
leases, of the Company are equity secured installment loans and home equity
lines of credit. With a home equity line of credit the borrower is granted a
line of credit up to 100% of the appraised value (net of any senior mortgages)
of the residence. This line of credit is secured by a mortgage on the borrower's
property and can be drawn upon at any time. At December 31, 1999, the Bank had
extended a total of $83.7 million in home equity lines of credit, of which $26.4
million had been drawn at the date. Home equity lines of credit offer federal
income tax advantages (in certain circumstances the interest paid on a home
equity loan can be deductible) and the convenience of checkbook access as well
as revolving credit features. Over the past few years, however, home equity
lines of credit have decreased as low interest rates offered on first and second
mortgage loans have enabled consumers to refinance their mortgages and
consolidate debt. Although home equity lines of credit expose the Company to the
risk that falling collateral values may leave it inadequately secured, the
Company has not had any significant adverse experience to date.
Operating Leases. Through its WSFS Credit Corporation ("WCC")
subsidiary, the Company originates operating leases on new motor vehicles
through a network of unaffiliated dealers in the Mid-Atlantic states. In the
typical operating lease transaction, the Company acquires title to the vehicle
from the dealer and leases the vehicle to the customer on terms such that the
total lease payments will equal the projected economic depreciation on the
vehicle during the lease term plus a financing charge. The customer assumes
responsibility for all other costs of ownership. At the end of the lease, the
customer has the option of either acquiring the vehicle at an agreed upon price
or surrendering the vehicle to WCC. In the event the vehicle is surrendered, the
Company promptly sells the vehicle in order to recoup its investment. In
addition to credit risks, operating leases expose the Company to the risk that
the resale value of the leased vehicle will be less than the residual value
estimated at the beginning of the lease. The Company's operating leases are
generally for terms of 36 to 60 months and the average estimated residual value
of the vehicles under lease is approximately 58% of their Manufactures Suggested
Retail Price. At December 31, 1999, the Company had $220.2 million in vehicles
under operating leases, net of reserves for credit losses and losses on resale
of off-lease vehicles. Due to expected softness in the resale market of certain
vehicles, the Company took a charge of $1.0 million during the year ended
December 31, 1999 for likely losses on resales of leased vehicles.
-11-
The table below sets forth consumer loans by type, in dollar amounts and
percentages, at the dates indicated.
December 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- -------------------- ------------------- -------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- ------- ------- -------- ------- -------- -------
Equity secured installment loans $97,491 55.5% $87,503 52.8% $78,975 49.6% $ 63,803 47.1%
Home equity lines of credit.... 26,446 15.0 27,799 16.8 31,110 19.5 33,267 24.5
Automobile..................... 30,728 17.5 32,729 19.8 32,959 20.7 26,456 19.5
Unsecured lines of credit...... 11,370 6.5 10,444 6.3 9,466 5.9 7,448 5.5
Other.......................... 9,750 5.5 7,185 4.3 6,922 4.3 4,578 3.4
-------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans .......... $175,785 100.0% $165,660 100.0% $159,432 100.0% $135,552 100.0%
======== ===== ======== ===== ======== ===== ======== =====
[RESTUBBED TABLE]
December 31,
--------------------
1995
--------------------
Amount Percent
-------- --------
Equity secured installment loans $ 52,793 46.2%
Home equity lines of credit.... 36,817 32.2
Automobile..................... 12,701 11.1
Unsecured lines of credit...... 7,017 6.2
Other.......................... 4,937 4.3
-------- -----
Total consumer loans .......... $114,265 100.0%
======== =====
-12-
Loan and Lease Originations, Purchase and Sales. WSFS has traditionally
engaged in lending activities primarily in Delaware and contiguous areas of
neighboring states although, as a federal savings bank, the Bank may originate,
purchase and sell loans throughout the United States. WSFS has also purchased
limited amounts of loans from outside its normal lending area when such
purchases are deemed appropriate and consistent with the Bank's overall
practices. The Bank originates fixed-rate and adjustable-rate residential real
estate loans through banking offices. In addition, WSFS has established
relationships with correspondent banks, mortgage brokers and real estate
developers for loan referrals.
During 1999, WSFS originated $110 million of residential real estate
loans compared to 1998 originations of $129 million. From time to time, the Bank
has purchased whole loans and loan participations in accordance with its ongoing
asset and liability management objectives. In addition, increases in residential
real estate loans from correspondents and brokers primarily in the mid-atlantic
region of the United States totaled $75 million for the year ended December 31,
1999, $10 million for 1998 and $10 million for 1997. Residential real estate
loan sales totaled $29 million in 1999, $75 million in 1998 and $26 million in
1997. While the Bank generally intends to hold loans for the foreseeable future,
WSFS, beginning in 1989, has undertaken to sell newly originated fixed-rate
mortgage loans in the secondary market to control the interest sensitivity of
its balance sheet. During the second half of 1993 the Corporation began to hold
for investment certain of its fixed-rate mortgage loans, with terms under 30
years, consistent with current asset/liability management strategies.
The Bank serviced for others approximately $236 million of residential
loans at December 31, 1999 compared to $237 million at December 31, 1998. The
Company also services residential loans for its portfolio totaling $357 million
and $255 million at December 31, 1999 and 1998.
The Bank originates commercial real estate and commercial loans through
the Bank's commercial lending department. Commercial loans are made for the
purpose of financing equipment acquisitions, expansion, working capital and
other business purposes and also include business loans secured by
nonresidential real estate. During 1999, the Bank originated $125 million of
commercial and commercial real estate loans compared to $124 million in 1998.
These amounts represent gross contract amounts and do not reflect amounts
outstanding on such loans.
The Bank's consumer lending is conducted primarily through the branch
offices and is supported by a consumer credit department credit investigation
unit. WSFS originates a variety of consumer credit products, including home
improvement loans, home equity lines of credit, automobile loans, credit cards,
unsecured lines of credit and other secured and unsecured personal installment
loans. During 1999, such consumer loan originations aggregated $94 million
compared to $92 million in 1998. Additionally, WSFS Credit Corporation
originated approximately $81 million of operating leases in 1999 and $78 million
in 1998. See "Consumer Lending" for a further discussion regarding consumer loan
originations.
All loans to one borrower exceeding $1.0 million in aggregate must be
approved by a management loan committee. Minutes of the management loan
committee meetings and individual loans exceeding $3.0 million approved by the
management loan committee are subsequently reviewed by the Executive Committee
and Board of Directors of WSFS, with separate approval needed for all loans to
any borrower who has direct or indirect outstanding commitments in excess of
$3.0 million or for any additional advances or extensions on loans previously
classified by the Bank's regulatory authorities or the Bank's Risk Management
Department. Officers of the Bank have authority to approve smaller loans in
graduated amounts, depending upon their experience and management position.
Fee Income from Lending Activities. The Bank realizes interest and loan
fee income from lending activities, including fees for originating loans and for
servicing loans and loan participations sold. The institution also receive
commitment fees for making commitments to originate construction, residential
and commercial real estate loans. Additionally, loan fees related to existing
loans are received, which include prepayment charges, late charges and
assumption fees.
The Bank offers a range of loan commitments for which fees are charged
depending on lengths of the commitment periods. As part of the loan application,
the borrower in some instances, also pays the Bank for out-of-pocket costs in
reviewing the application, whether or not the loan is closed. The interest rate
charged on the mortgage loan is normally the prevailing rate at the time the
loan application is approved.
-13-
Loan fees that are considered adjustments of yield in accordance with
generally accepted accounting principles are reflected in interest income and
represented an immaterial amount of interest income during the three years ended
December 31, 1999. Loan fees other than those considered adjustments of yield
are reported as loan fee income, a component of other income.
LOAN AND LEASE LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations can be negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its portfolios to identify problem
loans and leases as promptly as possible and take actions immediately which will
minimize losses. To accomplish this, the Bank's Risk Management Department
monitors the asset quality of the Company's loan, lease and investment in real
estate portfolios and reports such information to the Credit Policy Committee
the Audit Committee of the Board of Directors and the Controller's Department.
SUBSIDIARIES
The Corporation has two subsidiaries, Wilmington Savings Fund Society,
FSB (WSFS or Bank) and WSFS Capital Trust I. WSFS Capital Trust I was formed in
1998 to issue Trust Preferred Securities. The Trust invested all of the proceeds
from the sale of the Trust Preferred Securities in Junior Subordinated
Debentures of the Corporation. The Corporation used the proceeds from the Junior
Subordinated Debentures for general corporate purposes, including the redemption
of its 11% Senior Notes due 2005 on December 31, 1998.
At December 31, 1999, WSFS had three wholly-owned, first-tier
subsidiaries which were engaged in leasing, insurance investment products, and
securities sales, as well as real estate development. WSFS is the sole investor
in and primary lender to its non-bank subsidiaries. At December 31, 1999, it had
$224.1 million invested in the equity of these companies and had lent them an
additional $23.0 million.
WSFS Credit Corporation (WCC) which commenced operations in 1974,
provides leasing for consumer and business motor vehicles and equipment as well
as consumer loans. Prior to 1988, its business had been concentrated in the
northern Delaware area, but in 1988 it began expanding its motor vehicle leasing
base by originating leases through automobile dealerships in Pennsylvania, New
Jersey and Maryland as well as Delaware. In 1996 WCC expanded its market area to
parts of western Maryland and West Virginia. WCC underwrites all leases
originated through unaffiliated automobile dealers in accordance with
underwriting criteria generally consistent with those of the Bank and the
leasing industry. WCC's total assets at December 31, 1999 and 1998 were $247.9
million and $226.3 million, respectively.
838 Investment Group, Inc. (formerly Star States Financial Services,
Inc.) was formed in 1989. This subsidiary markets various investment and
insurance products, such as single-premium annuities and whole life policies,
and securities to Bank customers primarily through the Bank's branch system.
Star States Development Company was formed in March 1985 with the
objective of engaging in residential real estate projects through either
wholly-owned subsidiaries or investments in joint ventures. Star States
Development Company's investments in the projects were in the form of
nonrecourse, first mortgage loans, in return for which Star States Development
Company was entitled to receive repayment of principal and interest, and to
share, at an agreed upon percentage, in the profits of the project. In 1998,
Star States Development Company sold its remaining parcel of land and is
currently inactive.
Providential Home Income Plan, Inc. (Providential) was a San
Francisco-based reverse mortgage lender. The Bank acquired Providential in
November 1994 for approximately $24.4 million. The acquisition was accounted for
by the purchase method of accounting; accordingly, Providential's results are
included in the Corporation's consolidated statement of operations
-14-
for the period in which it is owned. The management and operations of
Providential were merged into the Bank in November 1996.
In August 1999, WSFS Financial Corporation invested $5.5 million in
CustomerOne Financial Network, Inc (C1FN), a St Louis, Missouri based
corporation formed in 1998 for the express purpose of providing
direct-to-consumer marketing, servicing, internet development and technology
management for "branchless" financial services. At December 31, 1999, WSFS is
C1FN's largest single shareholder, has majority control through a voting trust
and is currently sharing in 43% of operating results. In addition, WSFS received
warrants for the purchase of 20% additional ownership of C1FN, as well as the
opportunity and under certain circumstances the obligation to invest an
additional $5.4 million in the year 2000, at current offered ownership prices.
As a result of this investment, C1FN's internet-only banking structure became
part of everbank.comtm, a division of WSFS. C1FN and WSFS manage the operations
of everbank.com(TM). Everbank.comtm began marketing internet-only banking to a
national clientele in November of 1999.
Additionally, in November 1999, the Corporation expanded the home
equity lending business of Community Credit Corporation (CCC) which began
operations in 1994. CCC was renamed Wilmington National Finance, Inc. (WNFI) and
WSFS retained a 51% ownership with the remainder held by WNFI's new executives
retained to lead the expansion of WNFI. WSFS also has warrants to obtain an
additional 15% ownership in WNFI. Both C1FN and WNFI are consolidated into the
financial statements of the Corporation. See Note 19 of the consolidated
financial statements, "Investments in Non-wholly Owned Subsidiaries", for
further discussion.
SOURCES OF FUNDS
The Bank funds operations through retail and wholesale deposit growth
as well as through various borrowing sources, including repurchase agreements,
federal funds purchased and advances from the Federal Home Loan Bank (FHLB) of
Pittsburgh. Loan repayments and investment maturities also provide sources of
funds. Loan repayments and investment maturities provide a relatively stable
source of funds while certain deposit flows tend to be more susceptible to
market conditions. Borrowings are used to fund wholesale asset growth,
short-term funding of lending activities when loan demand exceeds projections,
or when deposit inflows or outflows are less than or greater than expected. On a
long-term basis, borrowings may be used to match against specific loans or
support business expansion.
Deposits. The Bank offers various deposit programs to its customers,
including savings accounts, demand deposits, interest-bearing demand deposits,
money market deposit accounts and certificates of deposits. The Bank also offers
Christmas clubs, Individual Retirement Accounts and Keogh Accounts. In addition,
the Bank accepts negotiable rate certificates with balances in excess of
$100,000 from individuals, businesses and municipalities in Delaware.
The Bank is the second largest independent banking institution
headquartered and operating in Delaware. It primarily attracts deposits through
its system of 24 branches. Seventeen of these branches are located in northern
Delaware's New Castle County, the Bank's primary market. These branches maintain
approximately 109,000 total account relationships with approximately 42,400
total households, or 22% of all households in New Castle County, Delaware. The
eighteenth branch is in the state capital, Dover, located in central Delaware's
Kent County. The six remaining branches are located in Southern Pennsylvania.
-15-
The following table sets forth the amount of certificates of deposit of
$100,000 or more by time remaining until maturity at the period indicated.
December 31,
Maturity Period 1999
- ---------------- ------------
(In Thousands)
Less than 3 months...................... $21,956
Over 3 months to 6 months............... 9,028
Over 6 months to 12 months.............. 11,442
Over 12 months.......................... 3,606
-------
$46,032
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As a member of the FHLB of Pittsburgh, the Bank is authorized to
apply for advances on the security of their capital stock in the FHLB and
certain of their residential mortgages and other assets (principally securities
which are obligations of or guaranteed by the United States Government),
provided certain standards related to creditworthiness have been met. As a
member institution, the Bank is required to hold capital stock in the FHLB of
Pittsburgh in an amount at least equal to 1% of the aggregate unpaid principal
of their home mortgage loans, home purchase contracts, and similar obligations
at the beginning of each year, or 5% of their outstanding advances, whichever is
greater.
The Bank also sells securities under agreements to repurchase with
various brokers as an additional source of funding. When entering into these
transactions, the Bank is generally required to pledge either government
securities or mortgage-backed securities as collateral for the borrowings.
In 1998, the Company issued $50.0 million in trust preferred securities
due December 11, 2028, part of which was used to pay down the $29.1 million in
11% Senior Notes. See Note 9 of the Consolidated Financial Statements for a
further discussion of the Notes.
REGULATION
Regulation of the Company
General. The Company is a registered savings and loan holding company
and is subject to Office of Thrift Supervision (OTS) regulation, examination,
supervision and reporting requirements. As a subsidiary of a holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
other affiliates.
Activities Restrictions. Because the Company became a unitary savings
and loan holding company prior to May 4, 1999, there generally are no
restrictions on its activities. If the Company were to acquire another thrift
and operate it as a separate entity, it would become subject to the activities
restrictions on multiple holding companies. Among other things, no multiple
savings and loan holding company or subsidiary thereof which is not a savings
association may commence, or continue after a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management services
for a subsidiary savings association; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless
the Director of OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies. Those activities
described in (vii) above also must be approved by the Director of OTS prior to
being engaged in by a multiple savings and loan holding company.
-16-
Transactions with Affiliates; Tying Arrangements Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls or is under common control with the savings association or
any subsidiary of the savings association that would be deemed a financial
subsidiary of a national bank. In a holding company context, the parent holding
company of a savings association (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and limit the aggregate of all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) lend or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association. Savings associations are also
prohibited from extending credit, offering services, or fixing or varying the
consideration for any extension of credit or service on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or that the customer not obtain services from a competitor of the
institution, subject to certain limited exceptions.
Restrictions on Acquisitions. Unless the acquiror was a unitary savings
and loan holding company on May 4, 1999 (or became a unitary savings and loan
holding company pursuant to an application pending as of that date), no company
may acquire control of the Company unless the company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under the Bank Holding Company Act of 1956 as
amended by the Gramm-Leach-Bliley Act (See "Financial Modernization
Legislation"). Financial holding companies may engage in activities that the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board"),
in consultation with the Secretary of the Treasury, has determined to be
financial in nature or incidental to a financial activity or complementary to a
financial activity provided that the complementary activity does not pose a risk
to safety and soundness. Financial holding companies that were not previously
bank holding companies may continue to engage in limited non-financial
activities for up to ten years after the effective date of the
Gramm-Leach-Bliley Act (with provision for extension for up to five additional
years by the Federal Reserve Board) provided that the financial holding company
is predominantly engaged in financial activities.
Savings and loan holding companies are prohibited from acquiring,
without prior approval of the Director of OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof, or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Under certain circumstances,
a savings and loan holding company is permitted to acquire, with the approval of
the Director of OTS, up to 15% of the voting shares of an under-capitalized
savings association pursuant to a "qualified stock issuance" without that
savings association being deemed controlled by the holding company. Except with
the prior approval of the Director of OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock, may also acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the company involved controls a
savings institution which operated a home or branch office in the state of the
association to be acquired as of March 5, 1987; (ii) the acquirer is authorized
to acquire control of the savings association pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act; or (iii) the
statutes of the state in which the association to be acquired is located
specifically permit institutions to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The laws of Delaware do not specifically authorize
out-of-state savings associations or their holding companies to acquire
Delaware-chartered savings associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent the Bank from entering into other states by
mergers or branching. OTS regulations permit federal associations to branch in
any state or states of the United States and its territories. Except in
supervisory cases or when interstate branching is otherwise permitted by state
law
-17-
or other statutory provision, a federal association may not establish an
out-of-state branch unless the federal association qualifies as a "domestic
building and loan association" under ss.7701(a)(19) of the Internal Revenue Code
or as a "qualified thrift lender" under the Home Owners' Loan Act and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association or qualified thrift lender. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Regulation of the Bank
General. As a federally chartered savings institution, the Bank is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. The OTS periodically examines the Bank for compliance with
regulatory requirements. The FDIC also has the authority to conduct special
examinations of the Bank as the insurer of deposits. The Bank must file reports
with OTS describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "Tier 1" or "core" capital equal to 4% of adjusted total assets (or 3%
if the institution is rated composite 1 under the OTS examiner rating system),
and "total" capital (a combination of core and "supplementary" capital) equal to
8% of risk-weighted assets. In addition, OTS regulations impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital.
The OTS capital rule defines Tier 1 or core capital as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits of mutual institutions and "qualifying supervisory goodwill," less
intangible assets other than certain supervisory goodwill and, subject to
certain limitations, mortgage and non-mortgage servicing rights and purchased
credit card relationships. Tangible capital is given the same definition as core
capital but does not include qualifying supervisory goodwill and is reduced by
the amount of all the savings institution's intangible assets except for limited
amounts of mortgage servicing rights. The OTS capital rule requires that core
and tangible capital be reduced by an amount equal to a savings institution's
debt and equity investments in "nonincludable" subsidiaries engaged in
activities not permissible to national banks, other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies.
Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, increased by certain goodwill amounts
and by a prorated portion of the assets of unconsolidated includable
subsidiaries in which the savings institution holds a minority interest.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the savings institution's minority investments in
unconsolidated includable subsidiaries and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At December 31, 1999, the Bank was
in compliance with both the core and tangible capital requirements.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to-value
ratios not exceeding 80%, fixed-rate multi-family first mortgages not more than
90 days past due with loan-to-value ratios not exceeding 80% (75% if rate is
adjustable), and annual net operating income equal to not less than 120% of debt
service (115% if loan is adjustable) and certain qualifying loans for the
construction of one- to four-family residences pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer loans,
-18-
non-qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100% risk-weight.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loan and lease loss allowances. The OTS
risk-based capital standards require savings institutions with more than a
"normal" level of interest rate risk to maintain additional total capital. A
savings institution's interest rate risk is measured in terms of the sensitivity
of its "net portfolio value" to changes in interest rates. A savings association
with more than normal interest rate risk is required to deduct an interest rate
risk component equal to one-half of the excess of its measured interest rate
risk over the normal level from its total capital for purposes of determining
its compliance with the OTS risk-based capital guidelines. At December 31, 1999,
the Bank was in compliance with the OTS risk-based capital requirements.
Loans to Directors, Officers and 10% Stockholders. Under Section 22(h)
of the Federal Reserve Act, loans to an executive officer or director or to a
greater than 10% stockholder of a savings association and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the association's loans to one borrower
limit (generally equal to 15% of the institution's unimpaired capital and
surplus) and all loans to all such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans,
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, loans to directors, executive officers and principal stockholders must
be made on terms substantially the same as offered in comparable transactions to
other persons unless the loan is made pursuant to a compensation or benefit plan
that is widely available to employees and does not discriminate in favor of
insiders. Section 22(h) also prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors. Savings associations
are subject to the requirements and restrictions of Section 22(g) of the Federal
Reserve Act which requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval for such extensions of credit by the board of
directors of the institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits to such
officers. Section 106 of the Bank Holding Company Act (BHCA) prohibits
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Dividend Restrictions. Savings associations must submit notice to the
OTS prior to making a capital distribution (which includes cash dividends, stock
repurchases and payments to shareholders of another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the association's
common or preferred stock or debt counted as its regulatory capital, or (c) the
association is a subsidiary of a holding company. A savings association must
make application to the OTS to pay a capital distribution if (x) the association
would not be adequately capitalized following the distribution, (y) the
association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
Deposit Insurance. The Bank may be charged semi-annual
premiums by the FDIC for federal insurance on its insurable deposit accounts up
to applicable regulatory limits. The FDIC may establish an assessment rate for
deposit insurance premiums which protects the insurance fund and considers the
fund's operating expenses, case resolution expenditures, income and effect of
the assessment rate on the earnings and capital of members.
-19-
The assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution by the FDIC which
is determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well-capitalized,
adequately-capitalized or undercapitalized -- using the same percentage criteria
as in the prompt corrective action regulations. See "Prompt Corrective Action."
Within each capital group, institutions will be assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund.
Because the Bank Insurance Fund (BIF) achieved its statutory reserve
ratio of 1.25% of insured deposits, the FDIC has eliminated deposit insurance
premiums for most BIF members. The FDIC, however, continues to assess BIF member
institutions to fund interest payments on certain bonds issued by the Financing
Corporation (FICO), an agency of the federal government established to help fund
takeovers of insolvent thrifts. Until December 31, 1999, BIF members were
assessed at approximately one-fifth the rate at which Savings Association
Insurance Fund (SAIF) members were assessed. After December 31, 1999, BIF and
SAIF members are being assessed at the same rate of 2.12 basis points on
deposits.
Prompt Corrective Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), federal banking regulators are
required to take prompt corrective action if an institution fails to satisfy
certain minimum capital requirements, including a leverage limit, a risk-based
capital requirement, and any other measure deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. An institution that
fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. "Significantly
undercapitalized" institutions and their holding companies may become subject to
more severe sanctions including limitations on asset growth, restrictions on
capital distributions by the holding company and possible divestiture
requirements. Institutions generally must be placed in receivership within
specified periods of time after they become "critically undercapitalized".
Under the OTS regulations implementing the prompt corrective action
provisions of FDICIA, the OTS measures a savings institution's capital adequacy
on the basis of its total risk-based capital ratio (the ratio of its total
capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). A savings institution that is not
subject to an order or written directive to meet or maintain a specific capital
level is deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 CAMEL rating). An "undercapitalized institution"
is a savings institution that has (i) a total risk-based capital ratio less than
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1
CAMELS rating). A "significantly undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a ratio of tangible
equity to total assets of less than 2.0%.
Federal Home Loan Bank System. The Bank is a member of the
FHLB System, which consists of 12 district FHLBs subject to supervision and
regulation by the Federal Housing Finance Board (FHFB). The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Pittsburgh, the Bank is required to acquire and hold shares of capital
stock in the FHLB of Pittsburgh in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase contracts,
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB of Pittsburgh, whichever is greater. WSFS was in
compliance with this requirement with an investment in FHLB of Pittsburgh stock
at December 31, 1999, of $28.5 million. The FHLB of Pittsburgh offers advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB of Pittsburgh. Long term advances may
only be made for the purpose of providing funds for residential housing finance.
-20-
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The Bank was in compliance with applicable liquidity requirements
at December 31, 1999.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $44.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement may be to reduce the amount of the institution's
interest-earning assets. As of December 31, 1999 the Bank met its reserve
requirements.
Financial Modernization Legislation
On November 12, 1999, President Clinton signed legislation which could
have a far-reaching impact on the financial services industry. The
Gramm-Leach-Bliley ("G-L-B") Act authorizes affiliations between banking,
securities and insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial activities. Among the new
activities that will be permitted to qualifying bank holding companies are
securities and insurance brokerage, securities underwriting, insurance
underwriting and merchant banking. The Federal Reserve Board, in consultation
with the Department of Treasury, may approve additional financial activities for
bank holding companies. National bank subsidiaries will be permitted to engage
in similar financial activities but only on an agency basis unless they are one
of the 50 largest banks in the country. National bank subsidiaries will be
prohibited from insurance underwriting, real estate development and, for at
least five years, merchant banking. The G-L-B Act prohibits future acquisitions
of existing unitary savings and loan holding companies, like the Company, and
firms which are engaged in commercial activities and limits the permissible
activities of unitary holding companies formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal Home Loan
Bank System. The G-L-B Act imposes new capital requirements on the Federal Home
Loan Banks and authorizes them to issue two classes of stock with differing
dividend rates and redemption requirements. The G-I-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute $300 million to
pay interest on certain government obligations in favor of a 20% of net earnings
formula. The G-L-B Act expands the permissible uses of Federal Home Loan Bank
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the Federal Home Loan Bank
voluntary for federal savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and the amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
-21-
The Company is unable to predict the impact of the G-L-B Act
on its operations at this time. Although the G-L-B Act reduces the range of
companies which may acquire control of the Company and with which the Company
may affiliate, it may facilitate affiliations with companies in the financial
services industry.
-22-
Item 2. Properties
The following table sets forth the location and certain additional
information regarding the Company's offices and other material properties at
December 31, 1999.
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ---------- --------------- --------
(In Thousands)
WSFS:
Main Office (1)(5) Owned $1,518 $294,143
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 2003 100 54,293
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2001 11 20,570
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 2003 17 68,796
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 2003 14 63,753
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 2003 11 89,306
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2000 24 57,500
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Claymont Branch Owned 84 18,864
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch Leased 2003 25 37,563
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(4) Leased 2007 369 61,284
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 15 64,646
144 N. DuPont Hwy.
New Castle, DE 19720
-23-
Net Book Value
Of Property
Owned/ Date Lease Or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------- ---------- --------------- --------
(In Thousands)
Stanton Leased 2001 199 7,686
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Leased 2003 218 15,001
Inside Genaurdi's at Peoples Plaza
Routes 40 and 896, Newark, DE 19702
Middletown Square Shopping Center Leased 2004 76 12,977
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover (3) Leased 2000 154 14,394
Inside Metro Food Market
Rt 134 & White Oak Road
Dover, DE 19901
Pottstown Leased 2003 215 1,253
Inside Genaurdi's Family Market
1400 North Charlotte St.
Pottstown, PA 19461
Royersford Leased 2003 218 978
Inside Genuardi's Family Markets
Limerick Square
70 Buckwater Rd., Suite 211
Royersford, PA 19468
Glen Mills Leased 2003 275 2,382
Inside Genaurdi's Family Market
475 Glen Eagle Square
Glen Mills, PA 19342
University of Delaware-Trabant University Center Leased 2003 183 2,244
17 West Main Street
Newark, DE 19716
Brandywine
Inside Genaurdi's Family Market Leased 2004 203 17,327
2522 Foulk Road
Wilmington, DE 19810
Wal-Mart
Route 40 & Wilton Boulevard Leased 2004 281 883
New Castle, DE 19720
Chesterbrook
Inside Genaurdi's Family Market Leased 2004 146 567
500 Chesterbrook Boulevard
Wayne, PA 19087
Kimberton
Inside Genaurdi's Family Market Leased 2004 235 873
Maple Lawn Shopping Center
542 Kimberton Road
Phoenixville, PA 19460
King of Prussia
Inside Genaurdi's Family Market Leased 2004 178 2,807
150 E. Beidler Road
King of Prussia, PA 19406
Operations Center Owned 1,189 N/A
2400 Philadelphia Pike
Wilmington, DE 19703
-24-
Net Book Value
Of Property
Owned/ Date Lease Or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------- ---------- --------------- --------
(In Thousands)
Community Credit Corporation* Leased 2002 2 N/A
- -----------------------------
Penn Mart Shopping Center
10 Penn Mart Shopping Center
New Castle, DE 19720
Leased 2004 20 N/A
Marchwood Shopping Center
4 Marchwood Road
Exton, PA 19341
WSFS Credit Corporation* Leased 2002 287 N/A
- ------------------------
30 Blue Hen Drive --------
Suite 200 $910,090
Newark, DE 19713 ========
*Represents location without ATM.
(1) Includes location of executive offices and approximately $149.5 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and
equipment totaled $14.6 million at December 31, 1999.
(3) In February 1996, the Bank acquired $10.5 million of deposits from another
financial institution located in Dover, Delaware. These deposits were
transferred to the Bank's branch located inside the Metro Food Market in
Dover.
(4) Includes the Company's Education and Development Center.
(5) Includes deposits of CustomerOne Financial Network, Inc.
-25-
Item 3. Legal Proceedings
There are no material legal proceedings to which the Company or the
Bank is a party or to which any of its property is subject except as discussed
in Note 14 to the Consolidated Financial Statements.
Item 4. Submissions of Matters To a Vote of Security Holders
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1999 through the solicitation of
proxies or otherwise.
-26-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock
MarketSM under the symbol WSFS. At December 31, 1999, the Corporation had 2,083
registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly
period within the two most recent fiscal years. The Corporation paid quarterly
dividends of $.03 per share or $.12 per share in total for 1999. The Corporation
paid dividends of $.09 per share in 1998 resulting from quarterly dividend
payments of $.03 per share commencing in the second quarter. Prior to 1998,
there were no dividends declared or paid on the Common Stock since the first
quarter of 1990.
The closing market price of the common stock at December 31, 1999 was
$12 5/8.
Stock Price Range
-----------------------------
Low High
------- -------
1999 1st $14 5/8 $17 3/8
2nd 13 5/8 16
3rd 13 7/8 15 3/8
4th 11 7/8 15 1/4
1998 1st $17 5/8 $22
2nd 20 1/4 24 1/8
3rd 15 3/8 21 7/8
4th 12 3/8 18 1/2
-27-
Item 6. Selected Financial Data
1999 1998 1997 1996 1995
---------- ---------- ---------- --------- ----------
(Dollars in Thousands,
Except Per Share Data)
At December 31,
Total assets..................................... $1,753,820 $1,635,710 $1,515,217 $1,357,635 $1,218,826
Net loans (1).................................... 881,185 763,668 764,463 772,847 792,184
Vehicles under operating leases, net............. 220,209 199,967 172,115 52,036 -
Investment securities (2)........................ 37,473 37,861 78,655 18,933 28,772
Investment in reverse mortgages, net............. 28,103 31,293 32,109 35,796 35,614
Other investments................................ 36,526 51,418 74,523 47,337 52,128
Mortgage-backed securities (2)................... 447,749 459,084 330,274 365,252 237,132
Deposits ........................................ 910,090 858,300 766,966 744,886 724,030
Borrowings (3)................................... 672,465 622,409 615,578 489,819 370,795
Senior notes..................................... - - 29,100 29,100 29,850
Trust Preferred Borrowings....................... 50,000 50,000 - - -
Stockholders' equity ............................ 96,153 85,752 86,759 75,788 73,546
Number of full-service branches (4).............. 24 20 16 16 14
For the Year Ended December 31,
Interest income.................................. $110,180 $108,232 $109,935 $ 101,223 $ 99,936
Interest expense................................. 71,370 71,114 69,817 58,862 58,067
Other income .................................... 26,634 24,693 19,616 11,193 22,615
Other expenses .................................. 44,500 36,443 35,236 32,345 37,341
Income before taxes, extraordinary item and
minority interest ........................... 19,940 24,288 22,965 19,522 25,740
Income before extraordinary item and
minority interest ........................... 18,737 17,973 16,389 16,356 27,008
Net income ...................................... 19,709 16,512 16,389 16,356 27,008
Earnings per share:
Basic:
Income before extraordinary item.............. $1.74 $1.46 $1.31 $1.18 $1.86
Loss on extinguishment of debt .................... - (0.12) - - -
------- ------ -------- ------- -------
Net income ................................... $1.74 $ 1.34 $1.31 $1.18 $1.86
======= ====== ======== ======= =======
Diluted:
Income before extraordinary item.............. 1.73 1.44 1.29 1.16 1.84
Loss on extinguishment of debt ............... - (0.12) - - -
------- ------ ------- ------- -------
Net income ................................... $1.73 $1.32 $1.29 $1.16 $1.84
======= ====== ======= ======= =======
Interest rate spread............................. 3.06% 2.96% 3.10% 3.22% 3.14%
Net interest margin.............................. 2.84 2.88 3.13 3.56 3.57
Return on average equity......................... 22.15 19.24 20.25 21.19 45.68
Return on average assets......................... 1.17 1.16 1.11 1.28 2.21
Average equity to average assets................. 5.27 6.03 5.48 6.06 4.84
- --------------
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances, securities sold under agreement to
repurchase and municipal bond repurchase obligations. The municipal bond
repurchase obligation was called in 1996.
(4) During 1995, the WSFS wholly-owned subsidiary, Fidelity Federal, sold the
deposits of four branches resulting in a net pre-tax gain of $14.2 million
and an after-tax gain of $12.4 million. The remaining assets, liabilities
and equity were merged into WSFS. Additionally, during 1995 WSFS opened two
new branches with deposits acquired from other institutions. WSFS opened
two branches in 1996 and four branches in both 1998 and 1999.
-28-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the Bank or WSFS). The long-term goal of the Corporation is to
maintain its high-performing financial services company status by focusing on
its core banking business while developing unique profitable niches in
complementary businesses which may operate outside the Bank's geographical
footprint. Founded in 1832, WSFS is one of the oldest financial institutions in
the country. As a federal savings bank which was formerly chartered as a state
mutual savings bank, WSFS enjoys broader investment powers than other financial
institutions. These grandfathered powers have allowed the Bank to diversify its
revenue sources to a greater extent than most savings banks. It has served the
residents of Delaware for over 167 years. WSFS is the largest thrift institution
headquartered in Delaware and among the four largest financial institutions in
the state on the basis of total deposits traditionally garnered in-market. The
Corporation's primary market area is the Mid-Atlantic region of the United
States which is characterized by a diversified manufacturing and service
economy.
The Bank provides residential and commercial real estate, commercial
and consumer lending services, as well as cash management services funding these
activities primarily with retail deposits and borrowings. The banking operations
of WSFS are presently conducted from 24 retail banking offices located in
Northern Delaware and Southeastern Pennsylvania. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC).
Fully owned subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; and 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system. An additional subsidiary, Star States
Development Company (SSDC), is currently inactive having sold its final parcel
of land in 1998.
In August 1999, WSFS Financial Corporation invested $5.5 million in
CustomerOne Financial Network, Inc (C1FN), a St Louis, Missouri based
corporation formed in 1998 for the express purpose of providing
direct-to-consumer marketing, servicing, internet development and technology
management for "branchless" financial services. At December 31, 1999, WSFS is
C1FN's largest single shareholder, has majority control through a voting trust
and is currently sharing in 43% of operating results. In addition, WSFS received
warrants for the purchase of 20% additional ownership of C1FN, as well as the
opportunity and under certain circumstances the obligation to invest an
additional $5.4 million in the year 2000, at current offered ownership prices.
As a result of this investment, C1FN's internet-only banking structure became
part of everbank.com(TM), a division of WSFS. C1FN and WSFS manage the
operations of everbank.com(TM). Everbank.com(TM) began marketing internet-only
banking to a national clientele in November of 1999.
Additionally, in November 1999, the Corporation expanded the home
equity lending business of Community Credit Corporation (CCC) which began
operations in 1994. CCC was renamed Wilmington National Finance, Inc. (WNFI) and
WSFS retained a 51% ownership with the remainder held by WNFI's new executives
retained to lead the expansion of WNFI. WSFS also has warrants to obtain an
additional 15% ownership in WNFI. Both C1FN and WNFI are consolidated into the
financial statements of the Corporation. See Note 19 of the consolidated
financial statements, "Investments in Non-wholly Owned Subsidiaries", for
further discussion.
The following discussion focuses on the major components of the
Company's operations and presents an overview of the significant changes in the
Corporation's results of operations for the past three fiscal years and
financial condition during the past two fiscal years. This discussion should be
reviewed in conjunction with the Consolidated Financial Statements and Notes
thereto presented elsewhere in this Annual Report.
-29-
RESULTS OF OPERATIONS
The Corporation recorded net income of $19.7 million for the year
ending December 31, 1999, compared to $16.5 million and $16.4 million in 1998
and 1997, respectively. Included in the annual results were nonrecurring and
unusual items (discussed below) that net, added approximately $1.7 million to
net income or $0.15 to earnings per share. Earnings for 1998 were impacted by an
extraordinary charge of $1.5 million, net of tax, on the early extinguishment of
$29.1 million in 11% Senior Notes. Adjusting for the extraordinary charge in
1998 and the nonrecurring and unusual items in 1999, net income amounted to
$18.0 million for both years. Earnings per share, however, grew 10% to $1.58 as
a result of share buybacks.
Net Interest Income. Net interest income remains the most significant
component of operating income to the Corporation. Net interest income is reliant
upon the levels of interest-earning assets and interest-bearing liabilities and
the difference or "spread" between the respective yields earned and rates paid.
The interest rate spread is influenced by regulatory, economic and competitive
factors that affect interest rates, loan demand and deposit flows. The level of
nonperforming loans can also impact the interest rate spread by reducing the
overall yield on the loan portfolio.
The Corporation classifies substantially all leases originated by its
vehicle leasing subsidiary to operating leases in accordance with Statement of
Financial Standards No. 13. Accordingly, income on these leases, has been
presented as other income, consistent with the operating lease treatment. The
increasing magnitude of such assets in recent years has had a negative impact on
the net interest margin.
Net interest income increased to $38.8 million in 1999 compared with
$37.1 million in 1998. Total interest income increased $1.9 million, between
1998 and 1999 primarily due to an increase in average balances for
mortgage-backed securities of $69.1 million over the previous year. In addition,
the average total loan balances increased $42.1 million above the prior year's
level. Partially offsetting the benefit to net interest income attributable to
the increase in balances was the general decline in average interest rates in
1999 versus 1998. The average yield on mortgage-backed securities declined to
6.31% from 6.44% while the average yield on total loans declined to 8.46% from
9.11%, between 1999 and 1998.
Total interest expense increased $256,000 between 1998 and 1999 as a
result of the growth in interest-bearing deposits by an average of $85.7
million. This was partially offset by a 42 basis point drop on the average rate
paid on deposits, 4.21% in 1999 versus 4.63% in 1998, due to favorable repricing
of deposit rates. In addition, interest expense related to borrowed funds
declined $367,000 in 1999 as a result of the reduced rate environment. At the
end of 1998, the Company reduced long-term borrowing rates by issuing $50.0
million in lower-cost trust preferred securities as replacement financing for
its 11% Senior Notes.
Between 1997 and 1998, interest income decreased $1.7 million, while
interest expense increased $1.3 million. The primary decrease in interest income
was related to the decline in average loan balances of $22.4 million and the
declining interest rate environment. The decline in average loan balances was
more than offset by the growth in mortgage-backed securities of $35.8 million.
However, the average yield on mortgage-backed securities of 6.44% was 267 basis
points below the average yield on total loans of 9.11%. The increase in interest
expense was primarily due to the growth in interest-bearing deposits by an
average of $32.5 million. This increase in Deposits was used to fund growth in
operating leases and mortgage-backed securities. This was partially offset by a
decline in the average rate paid on deposits to 4.63% from 4.70%, between 1998
and 1997.
The following table sets forth certain information regarding changes in
net interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in the rates for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in
volume (change in volume multiplied by prior year rate); (ii) changes in rates
(change in rate multiplied by prior year volume); and (iii) net change. Changes
due to the combination of rate and volume changes (changes in volume multiplied
by changes in rate) are allocated proportionately between changes in rate and
changes in volume.
-30-
Year Ended December 31,
------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------- ------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars In Thousands)
Interest income:
Real estate loans (1).......................... $2,259 $ (4,208) $(1,949) $ (5,824) $ (961) $(6,785)
Commercial loans .............................. 851 (460) 391 2,543 (437) 2,106
Consumer loans................................. 652 (397) 255 1,195 (334) 861
Loans held-for-sale............................ 59 (33) 26 98 - 98
Mortgage-backed securities..................... 4,356 (552) 3,804 2,357 (1,450) 907
Investment securities ......................... (679) 5 (674) 218 13 231
Other.......................................... (1,799) 1,894 95 (95) 974 879
------ ------- ------- -------- ------- -------
5,699 (3,751) 1,948 492 (2,195) (1,703)
------ ------- ------- -------- ------- -------
Interest expense:
Deposits:
Money market and interest-bearing demand..... 227 (260) (33) 70 (48) 22
Savings...................................... 1,525 (19) 1,506 845 503 1,348
Retail time deposits......................... (1,979) (2,081) (4,060) (892) (354) (1,246)
Jumbo certificates of deposit ............... 878 (165) 713 1,035 (65) 970
Brokered certificates of deposit ............ 2,981 (484) 2,497 5 (64) (59)
FHLB of Pittsburgh advances.................... 2,920 (1,484) 1,436 1,747 (560) 1,187
Senior notes and trust preferred borrowings.... 1,461 (1,028) 433 562 (129) 433
Other borrowed funds........................... (2,083) (153) (2,236) (1,191) (167) (1,358)
------ ------- ------- -------- ------- -------
5,930 (5,674) 256 2,181 (884) 1,297
------ ------- ------- -------- ------- -------
Net change, as reported............................ (231) 1,923 1,692 (1,689) (1,311) (3,000)
------ ------- ------- -------- ------- -------
Tax-equivalent effect (2) ......................... (2) (79) (81) 329 (31) 298
------ ------- ------- -------- ------- -------
Net change, tax-equivalent basis................... $ (233) $ 1,844 $ 1,611 $ (1,360) $(1,342) $(2,702)
====== ======= ======= ======== ======= =======
- --------------
(1) Includes commercial mortgage loans.
(2) The tax-equivalent income adjustment relates primarily to a commercial
loan.
-31-
The following table, in thousands except yield and rate data, provides
information regarding the average balances of, and yields/rates on,
interest-earning assets and interest-bearing liabilities during the periods
indicated:
Year Ended December 31,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate(1)
--------- ---------- --------- ----------- --------- ---------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 535,623 $ 43,440 8.11% $509,422 $ 45,389 8.91%
Commercial loans ................... 98,440 7,278 8.55 89,330 6,887 9.08
Consumer loans...................... 168,778 16,065 9.52 161,969 15,810 9.76
------- --------- ----------- --------
Total loans.................... 802,841 66,783 8.46 760,721 68,086 9.11
Mortgage-backed securities (5).......... 484,254 30,540 6.31 415,141 26,736 6.44
Loans held-for-sale (3)................. 3,739 259 6.93 2,935 233 7.94
Investment securities (5)............... 36,792 2,342 6.37 47,430 3,016 6.36
Other interest-earning assets........... 77,705 10,256 13.20 104,485 10,161 9.72
--------- --------- ----------- ---------
Total interest-earning assets....... 1,405,331 110,180 7.92 1,330,712 108,232 8.23
--------- ---------
Allowance for loan losses............... (23,589) (24,541)
Cash and due from banks................. 50,640 29,040
Vehicles under operating leases, net ... 218,170 179,844
Other noninterest-earning assets........ 37,373 33,576
---------- ------------
Total assets........................ $1,687,925 $1,548,631
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing demand $ 70,400 $ 1,495 2.12% $ 60,746 $ 1,528 2.52%
Savings............................. 239,034 7,471 3.13 189,744 5,965 3.14
Retail time deposits................ 301,738 14,151 4.69 341,257 18,211 5.34
Jumbo certificates of deposits ..... 62,532 3,287 5.26 45,924 2,574 5.60
Brokered certificates of deposits... 114,006 6,738 5.91 64,302 4,241 6.60
---------- ---------- ---------- -------
Total interest-bearing deposits 787,710 33,142 4.21 701,973 32,519 4.63
FHLB of Pittsburgh advances............. 473,458 25,221 5.33 419,849 23,785 5.67
Senior notes and trust preferred borrowings 50,000 4,181 8.36 34,201 3,748 10.96
Other borrowed funds.................... 156,544 8,826 5.64 193,315 11,062 5.72
---------- --------- ----------- --------
Total interest-bearing liabilities.. 1,467,712 71,370 4.86 1,349,338 71,114 5.27
---------- --------
Noninterest-bearing demand deposits..... 105,883 84,631
Other noninterest-bearing liabilities... 25,343 21,246
Stockholders' equity.................... 88,987 93,416
---------- ------------
Total liabilities and stockholders'
equity ......................... $1,687,925 $1,548,631
========== ==========
Excess (deficit) of interest-earning assets
over interest-bearing liabilities... $(62,381) $ (18,626)
========== ==========
Net interest and dividend income........ $38,810 $37,118
=========== =======
Interest rate spread.................... 3.06% 2.96%
====== =====
Interest rate margin.................... 2.84% 2.88%
====== =====
Net interest and dividend income to
total average assets................ 2.37% 2.48%
===== =====
[RESTUBBED TABLE]
Year Ended December 31,
-----------------------------------
1997
----------------------------------
Average Yield/
Balance Interest Rate(1)
-------- --------- --------
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 574,596 $ 52,174 9.08%
Commercial loans ................... 58,661 4,781 9.73
Consumer loans...................... 149,855 14,949 9.98
---------- ---------
Total loans.................... 783,112 71,904 9.30
Mortgage-backed securities (5).......... 379,315 25,829 6.81
Loans held-for-sale (3)................. 1,698 135 7.95
Investment securities (5)............... 43,968 2,785 6.33
Other interest-earning assets........... 102,043 9,282 9.10
---------- ---------
Total interest-earning assets....... 1,310,136 109,935 8.46
---------
Allowance for loan losses............... (24,145)
Cash and due from banks................. 17,552
Vehicles under operating leases, net ... 135,848
Other noninterest-earning assets........ 36,123
----------
Total assets........................ $1,475,514
==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing demand $ 57,918 $ 1,506 2.60%
Savings............................. 162,041 4,617 2.85
Retail time deposits................ 357,837 19,457 5.44
Jumbo certificates of deposits ..... 27,492 1,604 5.83
Brokered certificates of deposits... 64,226 4,300 6.70
---------- -----------
Total interest-bearing deposits 669,514 31,484 4.70
FHLB of Pittsburgh advances............. 388,866 22,598 5.81
Senior notes and trust preferred borrowings 29,100 3,315 11.39
Other borrowed funds.................... 214,310 12,420 5.80
---------- -----------
Total interest-bearing liabilities.. 1,301,790 69,817 5.36
----------
Noninterest-bearing demand deposits..... 71,950
Other noninterest-bearing liabilities... 20,850
Stockholders' equity.................... 80,924
----------
Total liabilities and stockholders'
equity ......................... $1,475,514
==========
Excess (deficit) of interest-earning assets
over interest-bearing liabilities... $ 8,346
==========
Net interest and dividend income........ $ 40,118
========
Interest rate spread.................... 3.10%
====
Interest rate margin.................... 3.13%
====
Net interest and dividend income to
total average assets................ 2.78%
====
- -------------------
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes commercial mortgage loans.
(5) Includes securities available-for-sale.
-32-
Provision for Loan Losses. The Corporation considers, among other
things, identifiable and inherent risks in its loan portfolio in periodically
establishing the amount of the provision for loan losses and the amount of the
allowance for loan losses. Such risks are determined based upon an ongoing
review of the loan portfolio, which includes the identification and assessment
of adverse situations that may affect borrowers' debt servicing ability, an
analysis of overall portfolio quality and prior loan loss experience as well as
an appraisal of current economic conditions. Accordingly, the allowance for loan
losses is maintained at a level which management deems adequate to provide for
potential losses.
The Corporation's continued efforts to resolve and collect problem
loans, including nonaccrual and restructured loans favorably impacted the
provision. This was evident in 1999 as the provision for loan loss of $1.0
million decreased from $1.1 million in 1998. The allowance for loan loss was
$23.0 million at December 31, 1999, a 3% decrease from the level reported at
December 31, 1998.
The Corporation will continue to adjust the provision for loan losses
periodically as necessary to maintain the allowance at what is deemed to be an
adequate level, based on the previously discussed criteria. As the provision is
primarily a function of credit quality, changes in the provision for loan losses
are contingent upon the economic conditions of the Corporation's market area and
the economic prospects of borrowers.
Other Income. Included in other income for the fourth quarter 1999 were
the following items: $1.0 million in securities losses on the sale of $34.3
million of investment securities and a $1.0 million loss on the designated sale
of loans held-for-sale. These below-market-yielding investments and loans were
purchased and originated in a lower rate environment, and are expected to be
replaced by higher-yielding assets in 2000 to better position the Corporation
for the current higher interest rate environment. In addition, the Corporation
also posted a $1.0 million charge for the estimated residual value losses on
certain leased vehicles within WSFS Credit Corporation's prime vehicle leasing
portfolio. Finally, the Corporation recorded a gain of $425,000 from the value
of common stock received on the demutualization of an insurance company in which
the Corporation was a policyholder. Excluding the above-mentioned items, other
income increased $4.5 million during 1999 to $29.2 million. Other income,
excluding the above-mentioned items, included increases of $2.7 million in
operating lease revenue and $1.2 million in debit/credit card and ATM income.
These increases resulted from a 10% growth in the operating lease portfolio, and
the expansion of the Bank's ATM network. At December 31, 1999, the Bank derived
income from 1,049 ATMs compared to 757 at December 31, 1998.
Other income increased $5.1 million between 1997 and 1998 to $24.7
million in 1998. Consistent with 1999 results, this increase was largely
attributable to growth in the Corporation's average operating lease portfolio
during 1998. As a result, the net rental income from operating leases increased
$2.8 million during the year. In addition, debit/credit and ATM income increased
$1.2 million as a result of expansion of the ATM network.
Other Expenses. Other expenses of $44.5 million, increased $8.1 million
during 1999 from 1998. Expenses increased mainly in salaries, equipment expense,
professional fees and data processing and operations expense. These increases
were attributable to investments in retail banking offices, ATMs, and
improvements in technology. As part of this investment the Corporation added
four new branch offices during the year. In addition, expenses of $1.9 million
from the not wholly-owned C1FN and WNFI investments have been incorporated into
other expenses. The unowned portion of the results of these subsidiaries has
been eliminated through minority interest, on an after-tax basis, in the
consolidated statement of operations.
Other expenses increased $1.2 million between 1997 and 1998 to $36.4
million. Expense rose primarily due to increases in salaries excluding stock
appreciation rights (SARs), equipment, data processing and operating expenses,
occupancy and other operating expenses. These increases were associated with the
continued investment in new retail banking offices, our ATM network and
technological enhancements. As part of this investment the Corporation added
four new branch offices and 36 new owned-and-operated ATMs as well as
establishing a large number of relationships with independent service
organizations to provide funding for ATMs nationwide. These increases in
expenses were offset in part by expenses associated with SARs, which declined
$2.8 million during the year. SARs are similar to stock options, but, unlike
stock options, accounting for SARs requires a charge to operating expenses as
the stock price changes above the exercise price. This decline largely reflects
the lower stock price at December 31, 1998 as compared to December 31, 1997. In
addition, other expenses were favorably affected by lower costs associated with
foreclosed assets. This decrease was attributable to an improvement in the level
of nonperforming assets during the year.
-33-
Income Taxes. The Corporation recorded a $1.2 million tax provision for
the year ended December 31, 1999 compared to tax provisions of $5.5 million and
$6.6 million for the years ended December 31, 1998 and 1997, respectively. The
provision for income taxes includes federal, state, and local income taxes that
are currently payable and those currently deferred because of temporary
differences between the financial reporting bases and the tax reporting bases of
assets and liabilities.
The years 1999, 1998 and 1997 include $5.1 million, $2.7 million, and
$1.8 million in acquired tax benefits, respectively. The increase in tax
benefits resulted primarily from a change in the tax code and an expiration of a
holding period related to built-in losses of an acquired subsidiary. As a result
of the change in tax code, certain tax benefits, which were previously offset by
a valuation allowance, are now recognizable based upon the continued
profitability of the WSFS consolidated group.
Approximately $19 million in gross deferred tax assets of the
Corporation at December 31, 1999 is related to built-in losses on reverse
mortgages that are attributable to a former subsidiary, Providential Home Income
Plan, Inc. (Providential). Management has continued to provide substantial
valuation allowances on these deferred tax assets due to limitations imposed by
the Internal Revenue Code and uncertainties, including the timing of settlement
and realization on these assets. As historical data accumulates, management
continues to obtain more information on which to base the potential recognition
of these assets.
The Corporation analyzes its projection of taxable income on an ongoing
basis and makes adjustments to its provision (benefit) for income taxes,
accordingly. For additional information regarding the Corporation's tax
provision and net operating loss carryforwards, see Note 12 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
Total assets grew $118.1 million or 7.2% during 1999 to $1.8 billion.
This growth occurred predominantly in loans and vehicles under operating leases,
partially offset by a decline in federal funds sold and securities purchased
under agreements to resell and mortgage-backed securities. Total liabilities
grew $102.6 million during the year to $1.7 billion at December 31, 1999. This
increase occurred primarily in deposits and borrowings. Stockholders' equity
increased $10.4 million to $96.2 million at December 31, 1999. This increase
resulted primarily from earnings, offset in part by the acquisition of treasury
stock.
Investments. Between December 31, 1998 and 1999, total investments
declined $18.5 million. During 1999, federal funds sold decreased $20.9 million.
In addition, investments in reverse mortgages decreased $3.2 million, primarily
due to collections. These decreases were partially offset by the purchase of an
additional $5.5 million in stock in Federal Home Loan Bank (FHLB) of Pittsburgh.
Mortgage-backed Securities. Investments in mortgage-backed securities
decreased $11.3 million during 1999 to $447.7 million. During 1999, the
Corporation purchased $171.3 million in collateralized mortgage obligations,
however, these purchases were more than offset by principal repayments of $176.4
million and a decline of $4.3 million in the fair market value of
mortgage-backed securities available-for-sale.
Loans. Net loans, including loans held-for-sale, increased $117.5
million between December 31, 1998 and 1999. This increase was primarily due to a
$102.1 million increase in residential mortgages. The growth in residential
mortgages was a result of a shift to the adjustable-rate lending environment in
late 1999, as interest rates increased. The Corporation has traditionally
retained adjustable-rate mortgages in its portfolio. In addition, commercial and
consumer loans increased $19.3 million and $10.1 million, respectively.
Partially offsetting these increases was a $21.1 million decrease in commercial
mortgages, mainly resulting from $23.9 million in loan payoffs that occurred in
the first quarter of 1999.
-34-
Vehicles Under Operating Leases. Vehicles under operating leases grew
$20.2 million during 1999. This increase resulted primarily from originations
during the year.
Deposits. Deposits grew $51.8 million during 1999 to $910.1 million.
This growth was largely attributable to a net inflow of deposits of $26.8
million and interest credited to deposits of $25.0 million. The table below
depicts the changes in deposits over the last three years:
Year Ended December 31,
----------------------------------------
1999 1998 1997
-------- ------------ -------
(In Millions)
Beginning balance.............................. $ 858.3 $ 767.0 $ 744.9
Interest credited.............................. 25.0 24.4 23.7
Deposit inflows (outflows), net................ 26.8 66.9 (1.6)
-------- ------- -------
Ending balance................................. $ 910.1 $ 858.3 $ 767.0
======== ======= =======
Borrowings. Total borrowings increased $50.1 million between December
31, 1998 and 1999. Approximately $55.0 million in borrowings from the Federal
Home Loan Bank were added during the year as well as $4.6 million in sweep
repurchase agreements. These increases were offset in part by a $9.6 million
decline in federal funds purchased and securities sold under agreement to
repurchase.
Stockholders' Equity. Stockholders' equity increased $10.4 million to
$96.2 million at December 31, 1999. This increase included $19.7 million in net
income offset in part by the acquisition of 335,500 shares of treasury stock for
$4.9 million and dividends of $1.4 million declared and paid to stockholders. In
addition net unrealized losses on securities available-for-sale increased $3.5
million during 1999.
ASSET/LIABILITY MANAGEMENT
The primary asset/liability management goal of the Corporation is to
manage and control its interest rate risk, thereby reducing its exposure to
fluctuations in interest rates, and achieving sustainable growth in net interest
income over the long term. Other objectives of asset/liability management
include: (1) ensuring adequate liquidity and funding, (2) maintaining a strong
capital base and (3) maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the
maturities or repricing periods of interest-sensitive assets and liabilities to
ensure a favorable interest rate spread. Management regularly reviews the
Corporation's interest-rate sensitivity, and uses a variety of strategies as
needed to adjust that sensitivity within acceptable tolerance ranges established
by management. Changing the relative proportions of fixed-rate and
adjustable-rate assets and liabilities is one of the primary strategies utilized
by the Corporation to accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
-35-
The repricing and maturities of the Corporation's interest-rate
sensitive assets and interest-rate sensitive liabilities at December 31, 1999
are set forth in the following table:
Less than One to Over
One Year Five Years Five Years Total
---------- ---------- ---------- -------
(Dollars in Thousands)
Interest-rate sensitive assets:
Real estate loans (1)............................... $ 226,215 $ 164,363 $ 201,215 $ 591,793
Commercial loans.................................... 51,693 15,964 48,274 115,931
Consumer loans and leases........................... 64,494 69,008 42,282 175,784
Vehicles under operating leases..................... 68,083 154,414 - 222,497
Mortgage-backed securities.......................... 281,814 115,982 49,953 447,749
Loans held-for-sale................................. 24,572 - - 24,572
Investment in reverse mortgages..................... 1,700 6,497 19,906 28,103
Investment securities............................... 28,655 1,563 6,831 37,049
Other investments................................... 36,526 - - 36,526
--------- -------- --------- ---------
783,752 527,791 368,461 1,680,004
--------- -------- --------- ---------
Interest-rate sensitive liabilities:
Money market and interest-bearing
demand deposits ................................. 18,640 - 60,681 79,321
Savings deposits.................................... 54,325 - 204,529 258,854
Retail time deposits................................ 217,689 57,516 2,846 278,051
Jumbo certificates of deposit....................... 23,309 1,336 - 24,645
Brokered certificates of deposit.................... 99,728 49,737 - 149,465
FHLB advances....................................... 300,000 215,000 - 515,000
Trust preferred borrowings and interest rate cap - - 50,000 50,000
Other borrowed funds................................ 88,165 69,300 - 157,465
--------- -------- --------- ---------
801,856 392,889 318,056 1,512,801
--------- -------- --------- ---------
Excess of interest-rate sensitive
assets over interest-rate sensitive liabilities
("interest-rate sensitive gap")..................... $ (18,104) $ 134,902 $ 50,405 $ 167,203
========= ========= ========= =========
Interest-rate sensitive assets/interest-rate sensitive
liabilities......................................... 97.74%
Interest-rate sensitive gap as a percent of total
assets.............................................. (1.03)%
(1) Includes commercial mortgage loans.
To provide a more accurate one-year gap position of the Corporation,
certain deposit classifications are based on the interest-rate sensitive
attributes and not on the contractual repricing characteristics of these
deposits. Management estimates, based on historical trends of the Bank's deposit
accounts, that 30% of money market and interest-bearing demand deposits are
sensitive to interest rate changes and that 12% of savings deposits are
sensitive to interest rate changes. Accordingly, these interest-sensitive
portions are classified in the less than one year category with the remainder in
the over five years category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index.
Deposit rates other than time deposit rates are variable, and changes
in deposit rates are typically subject to local market conditions and
management's discretion and are not indexed to any particular rate.
In November 1998, the Corporation purchased a ten-year interest rate
cap in order to limit its exposure on $50 million of variable rate trust
preferred securities issued in November 1998. This derivative instrument caps
3-month LIBOR (the base rate of the trust preferred) at 6.00%. The trust
preferred is classified in the over five-years category reflecting the inability
to price upward for the balance on the term of the interest rate cap.
Generally, during a period of rising interest rates, a positive gap
would result in an increase in net interest income while a negative gap would
adversely affect net interest income. However, the interest-sensitivity table
does not provide a comprehensive representation of the impact of interest rate
changes on net interest income. Each category of assets or liabilities will not
be affected equally or simultaneously by changes in the general level of
interest rates. Even assets and liabilities which contractually reprice within
the rate period may not, in fact, reprice at the same price or the same time or
with the same
-36-
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its
interest-sensitivity position throughout the year.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13A "Management of Interest Rate Risk,
Investment Securities and Derivatives Activities." This test measures the impact
on the net portfolio value of an immediate change in interest rates in 100 basis
point increments. Net portfolio value is defined as the net present value of
assets, liabilities, and off-balance sheet contracts. The chart below is the
estimated impact of immediate changes in interest rates on net interest margin
and net portfolio value at the specified levels at December 31, 1999 and 1998,
calculated in compliance with Thrift Bulletin No. 13A:
December 31,
------------------------------------------------------------------
1999(1) 1998(4)
-------------------------------- ------------------------------
Change in Interest % Change in % Change in
Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (2) Value (3) Margin (2) Value (3)
-------------- ---------- ------------- ----------- ---------
+300 4% 5.12% 1% 5.42%
+200 1 5.28 1 5.90
+100 1 5.45 1 6.40
0 0 5.75 0 6.94
-100 -1 5.82 -1 7.48
-200 -2 6.02 -2 8.06
-300 -3 6.22 -4 8.68
(1) Reflects a change with respect to the NPV value of demand deposits in 1999.
(2) This column represents the percentage difference between net interest margin
in a stable interest rate environment and net interest margin as projected
in the various rate increments.
(3) This column represents the net portfolio value of the Company in a stable
interest rate environment and the net portfolio value as projected in the
various rate increments.
(4) December 31, 1998 has been restated to reflect the interest-sensitive nature
of the operating lease portfolio.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while maximizing the yield/cost spread on the
Company's asset/liability structure. The Company relies primarily on its
asset/liability structure to control interest rate risk.
-37-
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming
real estate investments and assets acquired through foreclosure can negatively
affect the Corporation's results of operations. Nonaccruing loans are those on
which the accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in the opinion of management, collection is doubtful, or when
principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest. Past due loans are loans
contractually past due 90 days or more as to principal or interest payments but
which remain in accrual status because they are considered well secured and in
the process of collection.
-38-
The following table sets forth the Corporation's non-performing assets,
restructured loans and past due loans and leases at the dates indicated:
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans/nonperforming leases:
Commercial.................................... $ 2,630 $ 2,182 $ 1,216 $ 550 $ 563
Consumer...................................... 310 381 194 224 291
Commercial mortgages.......................... 1,808 2,383 3,919 3,243 2,527
Residential mortgages......................... 2,617 3,068 3,710 3,790 3,568
Construction.................................. - - 38 3,529 3,588
------- --------- ---------- -------- ---------
Total nonaccruing loans/nonperforming leases....... 7,365 8,014 9,077 11,336 10,537
Nonperforming investments in real estate........... - 76 989 1,500 1,252
Assets acquired through foreclosure................ 1,061 2,993 3,826 6,441 11,614
------- --------- ---------- -------- ---------
Total nonperforming assets......................... $ 8,426 $ 11,083 $ 13,892 $ 19,277 $ 23,403
======= ========= ========== ======== =========
Restructured loans................................. $ - $ - $ 4,740 $ 10,967 $ 17,393
======= ========= ========== ======== =========
Past due loans/leases:
Residential mortgages......................... $ 333 $ 247 $ 315 $ 328 $ 111
Commercial and commercial mortgages........... 504 2,654 1,909 832 789
Consumer...................................... 107 86 261 510 143
------- --------- ---------- -------- ---------
Total past due loans............................... $ 944 $ 2,987 $ 2,485 $ 1,670 $ 1,043
======= ========= ========== ======== =========
Ratio of nonaccruing loans/leases to total
loans/leases (1).............................. 0.67% 0.81% 0.95% 1.34% 1.30%
Ratio of allowance for loan/lease losses to gross
loans/leases(1)............................... 2.22 2.49 2.61 2.84 2.90
Ratio of nonperforming assets to total assets...... 0.48 0.68 0.92 1.42 1.92
Ratio of loan/lease losses allowance to nonaccruing
loans/leases (2).............................. 322.56 307.97 273.06 197.04 201.84
Ratio of loan/lease losses and foreclosed asset
allowance to total nonperforming assets (2)... 284.96 225.05 178.50 120.22 94.87
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
Total nonperforming assets decreased by $2.7 million between 1998 and
1999 and by $2.8 million between 1997 and 1998. In 1999, $18.9 million in
collections of such assets, $1.4 million in charge-offs/writedowns, and $2.9
million in transfers to accrual/restructured status contributed to the reduction
in nonperforming assets. Such decreases were offset by the addition of $20.6
million of assets that were not previously classified as nonperforming assets.
The decrease in the levels of nonperforming assets reflect management's
continued efforts to identify and resolve problem assets coupled with the
effects of the current economic environment.
-39-
An analysis of the change in the balance of nonperforming assets during
the last three fiscal years is presented below:
Year Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Beginning balance.................................... $ 11,083 $ 13,892 $ 19,277
Additions...................................... 20,562 18,809 20,090
Collections .................................. (18,930) (17,029) (23,337)
Transfers to accrual/restructured status....... (2,937) (2,880) (2,122)
Transfers to investment in real estate......... - - -
Charge-offs/write-downs........................ (1,352) (1,709) (16)
---------- --------- ---------
Ending balance....................................... $ 8,426 $ 11,083 $ 13,892
========== ========= =========
The level of nonaccruing loans and the nonperforming leases to total
loans/leases ratio decreased from .81% in 1998 to .67% in 1999. The
nonperforming assets to total assets ratio decreased from .68% in 1998 to .48%
in 1999. Both the continued reduction in nonaccruing assets and nonperforming
loans and the increase in total loans/leases and assets, contributed to the
improved ratios.
In 1999, assets acquired through foreclosure reductions of $1.9 million
accounted for the majority of the decrease in total nonperforming assets.
Allowance for Loan/Lease Losses. The Corporation maintains allowances
for credit losses and charges losses to these allowances when such losses are
considered probable. The allowances for losses are maintained at a level which
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the portfolios. Management's
evaluation is based upon a continuing review of the portfolios, which include
factors such as identification of adverse situations that may affect the
borrower's ability to repay, a review of overall portfolio quality, prior loss
experience and an assessment of current and expected economic conditions.
Changes in economic conditions and economic prospects of debtors can occur
quickly, and as a result, impact the estimates made by management.
Additionally, each quarter, management evaluates the collectibility of
each loan and lease in the nonperforming portfolio and the fair value of each
asset in the assets acquired through foreclosure category. The most frequent
forms of collateral for loans and foreclosed assets are income-producing
properties, business-owned real estate and personal residences. The value of
such collateral is frequently verified through the use of outside appraisals.
Appraisals of collateral, together with the value of guarantees and the worth of
other collateral, are combined to recognize current losses, write-downs of
foreclosed assets, and to reserve for potential future losses.
-40-
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated:
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance.................................... $23,689 $24,850 $24,241 $24,167 $21,700
Provision for loan losses............................ 1,004 1,080 1,533 1,687 1,403
Balance at acquisition for discounted
commercial mortgages............................. - - - - 2,600
Reclass to allowance for vehicles under operating
lease ............................................ - - (259) - -
Reclass from allowance for ORE losses................ - - 848 - -
Charge-offs:
Residential real estate.......................... 172 210 193 185 154
Commercial real estate (1)....................... 692 608 520 416 814
Commercial ...................................... 437 648 169 605 404
Consumer (2)..................................... 1,016 1,153 859 607 826
------- ------- ------- ------- -------
Total charge-offs.................................... 2,317 2,619 1,741 1,813 2,198
------- ------- ------- ------- -------
Recoveries:
Residential real estate.......................... - 12 2 15 1
Commercial real estate (1)....................... 271 123 95 4 293
Commercial....................................... 116 74 22 15 169
Consumer (2)..................................... 261 169 109 166 199
------- ------- ------- ------- -------
Total recoveries..................................... 648 378 228 200 662
------- ------- ------- ------- -------
Net charge-offs...................................... 1,669 2,241 1,513 1,613 1,536
------- ------- ------- ------- -------
Ending balance....................................... $23,024 $23,689 $24,850 $24,241 $24,167
======= ======= ======= ======= =======
Net charge-offs to average gross
loans outstanding, net
of unearned income............................... 0.21% 0.29% 0.19% 0.21% 0.20%
======= ======= ======= ======= =======
(1) Includes commercial mortgage and construction loans.
(2) Includes finance-type leases.
The table below represents a summary of changes in the allowance for
operating lease credit losses during the periods indicated:
1999 1998 1997 1996 (1)
---- ---- ---- -----
(In Thousands)
Beginning balance.................................... $992 $1,097 $ 499 $ -
Provision for losses on vehicles under operating leases 864 547 976 328
Reclass from allowance for loan losses .............. - - 259 -
Transfer from residual reserve....................... - - - 362
Charge-offs.......................................... 667 909 791 273
Recoveries........................................... 278 257 154 82
------ ------ ------- -------
Net charge-offs...................................... 389 652 637 191
------ ------ ------- -------
Ending balance....................................... $1,467 $ 992 $ 1,097 $ 499
====== ====== ======= =======
(1) Operating-lease activity began in 1996.
-41-
The provision for loan losses declined $76,000 between 1998 and 1999.
This decrease reflected a general improvement in the quality of the loan
portfolio. The provision for losses on vehicles under operating leases increased
$317,000 between 1998 and 1999. This increase was due to the growth in the lease
portfolio, and anticipated decline in residual value.
Net charge-offs decreased $572,000 between 1998 and 1999. Individual
charge-offs of $178,000, $132,000 and $76,000, all of which were secured by
commercial real estate, represented the most substantial charge-offs occurring
in 1999. In 1998, the most substantial charge-offs included a $314,000
charge-off of a commercial real estate secured by an office building facility
and a $216,000 charge-off of a commercial loan secured by both real estate and
business assets.
The allowance for credit losses is allocated by major portfolio type.
As these portfolios have matured, they have become a source of historical data
in projecting delinquencies and loss exposure; however, such allocations are not
indicative of where future losses will occur. The allocation of the allowance
for loan and lease losses by portfolio type at the end of each of the last five
fiscal years, and the percentage of outstandings in each category to total gross
outstandings at such dates follow:
December 31,
---------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate.......... $ 1,389 41.7% $ 229 36.5% $ 525 36.0% $ 326 34.4% $ 409 32.7%
Commercial real estate........... 8,240 25.3 10,398 30.1 11,280 31.8 12,697 37.8 13,663 38.8
Commercial....................... 9,983 13.1 11,751 12.4 11,663 12.0 10,068 3.5 9,180 2.9
Consumer (1)..................... 3,412 19.9 1,311 21.0 1,382 20.2 1,150 24.3 915 25.6
--------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans...................... $ 23,024 100.0 $23,689 100.0% $24,850 100.0% $24,241 100.0% $24,167 100.0%
========= ===== ======= ===== ======= ===== ======= ===== ======= =====
Operating leases................. $ 1,467 100.0% $ 992 100.0% $ 1,097 100.0% $ 499 100.0%
========= ===== ======= ===== ======= ===== ======= =====
(1) Includes finance-type leases.
LIQUIDITY
As required by the OTS, institutions under its supervision must
maintain a 4.0% minimum liquidity ratio of cash and qualified assets to net
withdrawable deposits and borrowings due within one year. The liquidity ratios
of the Bank were 6.4% and 10.6% at December 31, 1999 and 1998, respectively.
Management monitors liquidity daily and maintains funding sources to
meet unforeseen changes in cash requirements. It is the policy of the Bank to
maintain cash and investments at least slightly above required levels. The
Corporation's primary financing sources are deposits, repayments of loans and
investment securities, sales of loans and borrowings. In addition, the
Corporation's liquidity requirements can be accomplished through the use of its
borrowing capacity from the FHLB of Pittsburgh, the sale of certain securities
and the pledging of certain loans for other lines of credit. Management believes
these sources are sufficient to maintain the required and prudent levels of
liquidity. At December 31, 1999 and 1998, the Bank had outstanding FHLB advances
of $515.0 million and $460.0 million, respectively.
The Corporation routinely enters into commitments requiring the future
outlay of funds. Effective March 1, 1997, the Bank entered into a new 5-year
agreement with its data processing facilities management company. Under the
terms of this agreement, an average minimum payment of approximately $4.5
million per year for 2000 and 2001 has been committed. The aforementioned
commitment, as well as loan commitments, are expected to be met through
traditional funding sources, such as deposits, short-term borrowings, advances
from the FHLB and principal repayments on loans and investments.
During 1999, financing activities provided cash and cash equivalents of
$101.6 million while operating and investing activities used $5.4 million and
$113.8 million, respectively. The cash provided by financing activities resulted
primarily from additional borrowings from the FHLB and increases in demand and
savings deposits. This cash was used to fund the purchase of investment
securities and mortgage-backed securities, as well as the repayment of other
borrowings, and a net increase in loan volume.
-42-
In 1998, operating and financing activities provided $20.8 million and
$98.6 million of cash and cash equivalents, respectively, while investing
activities used $95.3 million. The cash provided by financing activities
resulted primarily from additional FHLB advances, increases in demand and time
deposits, and the issuance of trust preferred securities. This cash was utilized
to fund the purchase of investment securities and mortgage-backed securities, as
well as the repayment of other borrowings, and a net increase in vehicles under
operating leases. During 1997, the operating and financing activities provided
$15.7 million and $141.9 million of cash and cash equivalents, respectively,
while investing activities used $155.0 million. The funds provided by financing
activities reflect the additional FHLB advances and securities sold under
agreement to repurchase. This cash was used to fund the purchase of investment
securities and mortgage-backed securities, as well as for the repayment of other
borrowings and a net increase in assets leased to others.
CAPITAL RESOURCES
Federal laws, among other things, require the OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as the Bank to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted" assets and total "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as
well as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well-capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 1999, the Bank is classified as well-capitalized and is
in compliance with all regulatory capital requirements. Management anticipates
that the Bank will continue to be classified as well-capitalized. For additional
information concerning the Bank's regulatory capital compliance see Note 10 to
the Consolidated Financial Statements.
As part of capital management, the corporation from time to time
purchases its own shares of common stock to be included in its treasury. Since
1996, the Board of Directors has approved four separate stock repurchase
programs to reacquire common stock outstanding. As part of these programs, the
Corporation acquired 1.6 million shares in 1996, 507,000 shares in 1997, 1.0
million shares in 1998 and 340,000 shares in 1999. At December 31, 1999, the
Corporation held 3.5 million shares of its common stock in the treasury. The
Corporation may continue repurchasing shares in 2000.
IMPACT OF INFLATION AND CHANGING PRICES
The Corporation's Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased costs of the Corporation's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Corporation are
monetary. As a result, interest rates have a greater impact on the Corporation's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or the same extent as the price of
goods and services.
-43-
ACCOUNTING DEVELOPMENTS
In June 1998 the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which was
amended in July 1999 by SFAS No. 137. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of derivatives depends on the derivative and the resulting
designation. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of certain foreign currency exposures. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company has
determined that the impact of this statement, including its provisions for the
potential reclassifications of investment securities, on operations, financial
condition and equity, will not have a material impact.
YEAR 2000
Banking, by its nature, is a very data processing intensive industry.
Year 2000 issues resulted from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a calendar date
after December 31, 1999. These potential shortcomings could have resulted in a
system failure or miscalculations causing disruptions of operation, including
among other things, a temporary inability to process transactions, calculate
interest payments, track important customer information, provide convenient
access to this information, or engage in normal business operations.
As a result of the rollover to the Year 2000, WSFS experienced no
significant technological related problems and more importantly no adverse
customer impact. There remain however, some critical dates that could affect
future computer operations. These dates include March 31, 2000 and December 31,
2000, which are the first times that quarterly and yearly information will be
processed. While there can be no assurances that these dates will be handled
properly, given the successful rollover to the Year 2000 and our plan to
effectively manage the remaining critical dates, management believes WSFS is
well prepared to handle all remaining Year 2000 issues.
WSFS is subject to the regulation and supervision of various banking
regulators, whose oversight includes providing specific timetables, programs and
guidance regarding Year 2000 issues. Regulatory examination of the WSFS' Year
2000 programs were conducted periodically and reports are submitted by the Bank
to the banking regulators and the Board of Directors on a periodic basis.
From a technology perspective, WSFS uses application software systems
and receives technical support from one of the world's largest data processing
providers to financial institutions, for nearly its entire critical customer
accounting applications. This company has extensive resources dedicated at their
corporate level to assist their financial institution customers, including WSFS,
in the effort to become Year 2000 compliant.
From a cost perspective, WSFS was already involved in upgrading its
technology infrastructure and therefore, many potential Year 2000 issues were
avoided by the replacement of old systems with new technology. WSFS' approach to
the Year 2000 issue was to develop an effective plan and monitor progress
closely, thereby minimizing exposure to adverse customer and shareholder impact
while satisfying all regulatory requirements. As of December 31, 1999, WSFS had
incurred $3.4 million in expenses related to the Year 2000 issue and anticipates
spending an additional $100,000 in future periods. A large portion of costs
associated with Year 2000 issues was met from existing resources through a
reprioritization of the technology department initiatives with the remainder
representing incremental costs.
-44-
FORWARD LOOKING STATEMENTS
Within this annual report and financial statements we have included
certain "forward looking statements" concerning the future operations of the
Corporation. It is management's desire to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward looking statements"
contained in our financial statements and annual report. We have used "forward
looking statements" to describe the future plans and strategies including our
expectations of the Corporation's future financial results. Management's ability
to predict results or the effect of future plans and strategy is inherently
uncertain. Factors that could affect results include interest rate trends,
competition, the general economic climate in Delaware, the mid-Atlantic region
and the country as a whole, loan delinquency rates, and changes in federal and
state regulation, among others. These factors should be considered in evaluating
the "forward looking statements", and undue reliance should not be placed on
such statements.
-45-
Item 8. Financial Statements and Supplementary Data
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:
Independent Auditors' Report ......................................... 47
WSFS Financial Corporation (and Subsidiaries):
Management's Statement on Financial Reporting................... 48
Consolidated Statement of Operations ........................... 49
Consolidated Statement of Condition............................. 50
Consolidated Statement of Changes in Stockholders' Equity....... 51
Consolidated Statement of Cash Flows............................ 52
Notes to the Consolidated Financial Statements.................. 54
(b) The following supplementary data is set forth in this Annual Report
on Form 10-K on the following page:
Quarterly Financial Summary (unaudited)............................ 89
-46-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of WSFS Financial Corporation:
We have audited the accompanying consolidated statement of condition of
WSFS Financial Corporation and subsidiaries (the Corporation) as of December 31,
1999 and 1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WSFS
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
- --------------------------
January 19, 2000
Philadelphia, Pennsylvania
-47-
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of WSFS Financial Corporation (the Corporation) is
responsible for the preparation, integrity and fair presentation of its
published financial statements. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and, as
such, include amounts that are based on judgments and estimates of management.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can only provide reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the degree of
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with generally accepted accounting
principles. This assessment was based on criteria for effective internal control
over financial reporting described in "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes the Corporation maintained an
effective internal control structure over financial data, presented in
accordance with generally accepted accounting principles.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation
as safety and soundness laws and regulations.
The Corporation assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that WSFS Financial Corporation complied, in all material
respects, with the designated laws and regulations related to safety and
soundness as of December 31, 1999.
/s/ MARVIN N. SCHOENHALS /s/ MARK A. TURNER
- -------------------------- -----------------------------
Marvin N. Schoenhals Mark A. Turner
Chairman, President & Executive Vice President
Chief Executive Officer & Chief Financial Officer
-48-
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
------------------------------------------
1999 1998 1997
--------------- -------------- --------
(Dollars In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans.............................................. $ 67,042 $ 68,319 $ 72,039
Interest on mortgage-backed securities.................................. 30,540 26,736 25,829
Interest and dividends on investment securities......................... 2,342 3,016 2,785
Other interest income................................................... 10,256 10,161 9,282
-------- -------- ---------
110,180 108,232 109,935
-------- -------- ---------
Interest expense:
Interest on deposits .................................................. 33,142 32,519 31,484
Interest on Federal Home Loan Bank advances............................ 25,221 23,785 22,598
Interest on federal funds purchased and securities sold under
agreements to repurchase............................................. 8,356 10,686 12,040
Interest on senior notes and trust preferred borrowings................ 4,181 3,748 3,315
Interest on other borrowings........................................... 470 376 380
-------- -------- ---------
71,370 71,114 69,817
-------- -------- ---------
Net interest income..................................................... 38,810 37,118 40,118
Provision for loan losses............................................... 1,004 1,080 1,533
-------- -------- ---------
Net interest income after provision for loan losses..................... 37,806 36,038 38,585
-------- -------- ---------
Other income:
Loan and lease servicing fee income .................................... 3,515 3,440 3,165
Rental income on operating leases, net................................. 13,569 11,911 9,089
Deposit service charges................................................ 5,464 4,371 4,248
Credit/debit card and ATM income ...................................... 3,914 2,724 1,531
Securities gains (losses) ............................................. (602) 305 165
Gain (loss) on sale of loans........................................... (993) 638 144
Other income........................................................... 1,767 1,304 1,274
-------- -------- ---------
26,634 24,693 19,616
-------- -------- ---------
Other expenses:
Salaries, benefits and other compensation.............................. 20,100 15,758 17,073
Equipment expense...................................................... 3,249 2,093 1,452
Data processing and operations expense................................. 5,896 5,179 4,540
Occupancy expense...................................................... 3,435 3,000 2,793
Marketing expense...................................................... 1,575 1,288 1,212
Professional fees...................................................... 2,437 1,581 1,374
Net costs of assets acquired through foreclosure....................... 286 737 1,056
Other operating expenses............................................... 7,522 6,807 5,736
-------- -------- ---------
44,500 36,443 35,236
-------- -------- ---------
Income before taxes, extraordinary item and minority interest.......... 19,940 24,288 22,965
Income tax provision ................................................. 1,203 6,315 6,576
-------- -------- ---------
Income before extraordinary item and minority interest................. 18,737 17,973 16,389
Loss on extinguishment of debt, net of $787,000 in income tax.......... - 1,461 -
-------- -------- ---------
Income before minority interest........................................ 18,737 16,512 16,389
Less minority interest................................................. (972) - -
-------- -------- ---------
Net income............................................................. $ 19,709 $ 16,512 $ 16,389
======== ========= =========
Earnings per share:
Basic:
Income before extraordinary item ................................. $ 1.74 $ 1.46 $ 1.31
Loss on extinguishment of debt.................................... - (0.12) -
-------- --------- --------
Net income ................................................... $ 1.74 $ 1.34 $ 1.31
======== ========= ========
Diluted:
Income before extraordinary item ................................. $ 1.73 $ 1.44 $ 1.29
Loss on extinguishment of debt.................................... - (0.12) -
---------- --------- --------
Net income ................................................... $ 1.73 $ 1.32 $ 1.29
========== ========= ========
The accompanying notes are an integral part of these financial statements.
-49-
CONSOLIDATED STATEMENT OF CONDITION
December 31,
-------------------------------
1999 1998
------------ ---------
(In Thousands)
Assets
Cash and due from banks....................................................... $ 59,166 $ 55,848
Federal funds sold and securities purchased under agreements to resell........ - 20,900
Interest-bearing deposits in other banks...................................... 8,026 7,518
Investment securities held-to-maturity (market value: 1999-$8,420, 1998-$8,050) 8,612 7,642
Investment securities available-for-sale...................................... 28,861 30,219
Mortgage-backed securities held-to-maturity (market value: 1999-$250,079,
1998-$266,797) ............................................................ 258,825 265,858
Mortgage-backed securities available-for-sale................................. 188,924 193,226
Investment in reverse mortgages, net.......................................... 28,103 31,293
Loans held-for-sale........................................................... 24,558 3,084
Loans, net of allowance for loan losses of $23,024 at December 31, 1999 and
$23,689 at December 31, 1998................................................ 856,627 760,584
Vehicles under operating leases, net of allowance for lease credit losses of
$1,467 at December 31, 1999 and $992 at December 31, 1998................... 220,209 199,967
Stock in Federal Home Loan Bank of Pittsburgh, at cost........................ 28,500 23,000
Assets acquired through foreclosure........................................... 1,061 2,993
Premises and equipment........................................................ 14,621 11,919
Accrued interest and other assets............................................. 27,727 21,659
---------- ----------
Total assets.................................................................. $1,753,820 $1,635,710
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand................................................... $ 119,754 $ 108,418
Money market and interest-bearing demand .................................... 79,321 68,208
Savings...................................................................... 258,854 218,334
Time......................................................................... 278,051 333,419
---------- ----------
Total retail deposits .............................................. 735,980 728,379
Jumbo certificates of deposit................................................ 24,645 65,453
Brokered certificates of deposit............................................. 149,465 64,468
---------- ----------
Total deposits..................................................... 910,090 858,300
Federal funds purchased and securities sold under agreements to repurchase ... 143,941 153,505
Federal Home Loan Bank advances............................................... 515,000 460,000
Trust preferred borrowings.................................................... 50,000 50,000
Other borrowed funds.......................................................... 13,524 8,904
Accrued expenses and other liabilities........................................ 20,006 19,249
---------- ----------
Total liabilities............................................................. 1,652,561 1,549,958
---------- ----------
Commitments and contingencies
Minority Interest............................................................. 5,106 -
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding, .................................................... - -
Common stock $.01 par value, 20,000,000 shares authorized; issued 14,797,513
at December 31, 1999, and 14,695,688 at December 31, 1998................... 148 147
Capital in excess of par value ............................................... 58,185 57,696
Accumulated other comprehensive income (loss)................................. (3,265) 236
Retained earnings............................................................ 83,000 64,657
Treasury stock at cost, 3,528,269 shares at December 31, 1999 and 3,192,769
shares at December 31, 1998................................................. (41,915) (36,984)
---------- ----------
Total stockholders' equity.................................................... 96,153 85,752
---------- ----------
Total liabilities, minority interest and stockholders' equity................. $1,753,820 $1,635,710
========== ==========
The accompanying notes are an integral part of these financial statements.
-50-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital Other Total
Common in Excess Comprehensive Retained Treasury Stockholders'
Stock of Par Value Income Loss Earnings Stock Equity
---------- ------------ ------------- --------- --------- -------------
(In Thousands)
Balance, January 1, 1997..................... $ 146 $57,289 $ 166 $32,863 $(14,676) $ 75,788
Comprehensive income:
Net income.............................. - - - 16,389 - 16,389
Other comprehensive income(1)........... - - 213 - - 213
Total comprehensive income .................. - - - - - 16,602
Exercise of common stock options ............ - 180 - - - 180
Treasury Stock at cost, 507,409 shares ...... - - - - (5,811) (5,811)
-------- ------- ------- ------- ---------- ---------
Balance, December 31, 1997 .................. 146 57,469 379 49,252 (20,487) 86,759
Comprehensive income:
Net income.............................. - - - 16,512 - 16,512
Other comprehensive income (1).......... - - (143) - - (143)
Total comprehensive income................... - - - - - 16,369
Cash Dividend, $.09 per share ............... - (1,107) - (1,107)
Exercise of common stock options ............ 1 227 - - - 228
Treasury Stock at cost, 1,030,160 shares(2) . - - - - (16,497) (16,497)
-------- ------- ------- ------- --------- --------
Balance, December 31, 1998 .................. 147 57,696 236 64,657 (36,984) 85,752
Comprehensive income:
Net income.............................. - - - 19,709 - 19,709
Other comprehensive income (1).......... - - (3,501) - - (3,501)
Total comprehensive income................... - - - - - 16,208
Cash Dividend, $.12 per share................ - - - (1,366) - (1,366)
Exercise of common stock options ............ 1 388 - - - 389
Treasury Stock at cost, 335,500 shares (3) .. - - - - (4,931) (4,931)
Increase in investment in subsidiary ........ - 101 - - - 101
-------- ------- ------- -------- --------- --------
Balance, December 31, 1999 ................. $ 148 $58,185 $(3,265) $83,000 $(41,915) $ 96,153
............................................ ======== ======= ======= ======== ========= ========
(1) Other Comprehensive Income:
1999 1998 1997
----- ------ -----
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period ........ $(3,892) $ 55 $ 320
Less: reclassification adjustment for gains (losses)
included in income................................... (391) 198 107
------- ----- -----
Other comprehensive income (loss)........................ $(3,501) $(143) $ 213
======= ===== =====
(2) Net of reissuances of 4,800 shares
(3) Net of reissuances of 4,500 shares
The accompanying notes are an integral part of these financial statements.
-51-
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1999 1998 1997
------ ------ ------
(In Thousands)
Operating activities:
Net income............................................................. $ 19,709 $ 16,512 $ 16,389
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan, lease and residual value losses ............. 4,020 2,313 2,509
Depreciation, accretion and amortization ......................... 3,366 2,875 (861)
Decrease (increase) in accrued interest receivable and other assets (3,247) 1,496 4,703
Origination of loans held-for-sale ............................... (56,011) (58,398) (27,605)
Proceeds from sales of loans held-for-sale........................ 32,528 58,008 26,509
Increase (decrease) in accrued interest payable and other liabilities 538 2,236 (1,908)
Increase in reverse mortgage capitalized interest, net ........... (7,052) (5,525) (4,372)
Loss on extinguishment of debt.................................... - 2,248 -
Minority Interest in net income................................... (972) - -
Other, net ....................................................... 1,711 (994) 372
--------- --------- ---------
Net cash provided by (used for) operating activities................. (5,410) 20,771 15,736
--------- --------- ---------
Investing activities:
Net (increase) decrease of interest-bearing deposits in other banks (508) 21,474 (23,190)
Maturities of investment securities .............................. 16,577 41,070 5,528
Sales of investment securities available-for-sale................. 20,000 20,059 40,030
Purchases of investment securities held-to-maturity............... (2,295) (10,000) (15,046)
Purchases of investment securities available-for-sale............. (34,148) (10,000) (89,956)
Sales of mortgage-backed securities available-for-sale ........... - 29,875 13,295
Repayments of mortgage-backed securities available-for-sale....... 67,963 44,344 8,205
Repayments of mortgage-backed securities held-to-maturity ........ 108,436 151,661 92,029
Purchases of mortgage-backed securities held-to-maturity ......... (101,369) (145,178) (52,131)
Purchases of mortgage-backed securities available-for-sale........ (69,881) (210,288) (26,651)
Repayments on reverse mortgages................................... 19,878 16,603 19,023
Disbursements for reverse mortgages............................... (9,456) (10,058) (10,546)
Sales of loans.................................................... - 16,781 7,556
Purchase of loans ................................................ (74,721) (10,479) (11,030)
Net decrease (increase) in loans ................................ (22,442) (8,007) 8,422
Net increase in operating leases.................................. (38,347) (39,979) (125,863)
Net increase in stock of Federal Home Loan Bank of Pittsburgh .... (5,500) (2,748) (4,117)
Receipts from investments in real estate ........................ - 1,252 -
Sales of assets acquired through foreclosure, net ................ 17,190 12,996 13,819
Premises and equipment, net .................................... (5,156) (4,720) (4,325)
Other, net........................................................ - - (2)
--------- --------- ---------
Net cash used for investing activities................................ (113,779) (95,342) (154,950)
--------- --------- ---------
(Continued on next page)
-52-
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- ------
(In Thousands)
Financing activities:
Net increase in demand and savings deposits.............................. 67,537 80,739 25,350
Net increase (decrease) in time deposits ................................ (11,598) 11,328 (3,506)
Receipts from FHLB borrowings ........................................... 210,000 884,000 765,000
Repayments of FHLB borrowings ........................................... (155,000) (824,000) (687,699)
Receipts from reverse repurchase agreements.............................. 111,211 259,771 543,157
Repayments of reverse repurchase agreements ............................. (125,775) (313,965) (494,762)
Receipts from Federal funds purchased.................................... 317,800 - -
Repayments of Federal funds purchased.................................... (312,800) - -
Dividends paid on common stock........................................... (1,366) (1,107) -
Issuance of common stock ................................................ 389 228 180
Extinguishment of senior notes .......................................... - (30,548) -
Proceeds from issuance of trust preferred borrowings, net of costs....... - 48,624 -
Purchase of treasury stock, net of re-issuance........................... (4,931) (16,497) (5,811)
Increase in investment in subsidiary..................................... 101 - -
Minority interest........................................................ 6,039 - -
---------- --------- ---------
Net cash provided by financing activities................................ 101,607 98,573 141,909
---------- --------- ---------
Increase (decrease) in cash and cash equivalents ........................ (17,582) 24,002 2,695
Cash and cash equivalents at beginning of period ........................ 76,748 52,746 50,051
----------- --------- ---------
Cash and cash equivalents at end of period .............................. $ 59,166 $ 76,748 $ 52,746
=========== ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid in interest during the year ................................... $ 68,231 $ 72,048 $ 68,611
Cash paid (refund) in income taxes, net ................................. 1,041 2,233 (538)
Loans transferred to assets acquired through foreclosure ................ 16,192 9,704 9,655
Net change in unrealized gains (losses) on securities available-for-sale,
net of tax (3,501) (143) 213
The accompanying notes are an integral part of these financial statements.
-53-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company organized under the laws of the State of Delaware. The Corporation's
principal wholly-owned subsidiary, Wilmington Savings Fund Society, FSB (WSFS or
Bank), is a federal savings bank organized under the laws of the United States
which conducts operations from 24 retail banking offices located in Northern
Delaware and Southeastern Pennsylvania.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the adequacy of the allowances for loan and lease losses and the valuations
of other real estate owned, deferred tax assets, investment in reverse mortgages
and contingencies.
Basis of Presentation
The consolidated financial statements include the accounts of the
parent company, WSFS Capital Trust I, the Bank and its wholly-owned
subsidiaries, WSFS Credit Corporation (WCC), 838 Investment Group, Inc. and Star
States Development Company (SSDC) as well as not wholly-owned, but majority
controlled subsidiaries, Wilmington National Finance, Inc. (WNFI), formerly
Community Credit Corporation, and CustomerOne Financial Network, Inc. (C1FN).
WSFS Capital Trust I was formed in 1998 to sell Trust Preferred
Securities. The Trust invested all of the proceeds from the sale of the Trust
Preferred Securities in Junior Subordinated Debentures of the Corporation. The
Corporation used the proceeds from the Junior Subordinated Debentures for
general corporate purposes, including the redemption of its 11% Senior Notes due
2005 on December 31, 1998.
WCC is engaged primarily in indirect motor vehicle leasing. The related
leases are accounted for as operating leases or direct financing leases. 838
Investment Group, Inc. markets various insurance and securities products to Bank
customers through the Bank's branch system. SSDC was originally formed to
acquire, develop and market improved and unimproved real estate either through
wholly-owned subsidiaries or investments in joint ventures. SSDC sold its
remaining parcel of land in 1998 and is currently inactive.
In August 1999, the Bank acquired stock in C1FN, a company formed in
1998 to provide direct-to-customer marketing, servicing, Internet development
and technology management for "branchless" financial services. WSFS has the
opportunity and under certain circumstances the obligation to invest additional
funds. WSFS has majority control of C1FN, through a voting trust, and a 43%
economic interest at December 31, 1999. As a result of this investment, C1FN's
internet-only banking structure became part of everbank.comtm, a division of
WSFS. C1FN and WSFS manage the operations of everbank.com(TM) . Everbank.comtm
began marketing internet-only banking to a national clientele in November of
1999. Also, during November of 1999, the Corporation expanded the home equity
lending business of Community Credit Corporation (CCC). CCC was renamed
Wilmington National Finance, Inc. and WSFS retained a 51% ownership with the
remainder held by WNFI executives. In addition, WSFS has warrants to purchase an
additional 15% of WNFI's equity.
Certain reclassifications have been made to the prior years' financial
statements to conform them to the current year's presentation. All significant
intercompany transactions are eliminated in consolidation.
-54-
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks, federal funds sold and securities purchased under
agreements to resell. Generally, federal funds are purchased and sold for
periods ranging up to ninety days.
Debt and Equity Securities
Investments in equity securities that have a readily determinable fair
value and investments in debt securities are classified into three categories
and accounted for as follows:
o Debt securities that the enterprise positively intends to hold to
maturity are classified as "held-to-maturity" and reported at amortized
cost.
o Debt and equity securities purchased with the intention of selling them
in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in
earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity.
There were no investment and mortgage-backed securities classified as
"trading" during 1999, 1998 and 1997.
Debt and equity securities include mortgage-backed securities,
corporate and municipal bonds, U.S. Government and agency securities and certain
equity securities. Premiums and discounts on debt and equity securities
held-to-maturity and available-for-sale are recognized in interest income using
a level yield method over the period to expected maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses. The specific
identification method is used to determine realized gains and losses on sales of
investment and mortgage-backed securities. All sales are made without recourse.
Loans
Loans are stated net of deferred fees and costs and unearned discounts.
Loan interest income is accrued using various methods which approximate a
constant yield. Loan origination and commitment fees and direct loan origination
costs are deferred and recognized over the life of the related loans using a
level yield method over the period to maturity.
Impaired loans are measured based on the present value of expected
future discounted cash flows, the market price of the loan or the fair value of
the underlying collateral if the loan is collateral dependent. Impaired loans
include loans within the Corporation's commercial, commercial mortgage and
commercial construction portfolios. The Company's policy for recognition of
interest income on impaired loans is the same as for nonaccrual loans discussed
below.
Nonaccrual Loans
Nonaccrual loans are those on which the accrual of interest has ceased.
Loans are placed on nonaccrual status immediately if, in the opinion of
management, collection is doubtful, or when principal or interest is past due 90
days or more and collateral is insufficient to cover principal and interest.
Interest accrued but not collected at the date a loan is placed on nonaccrual
status is reversed and charged against interest income. In addition, the
amortization of net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Subsequent cash receipts are applied either to the
outstanding principal
-55-
or recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest. Loans are returned to an accrual
status when the borrower's ability to make periodic principal and interest
payments has returned to normal (i.e. - brought current with respect to
principal or interest or restructured) and the paying capacity of the borrower
and/or the underlying collateral is deemed sufficient to cover principal and
interest in accordance with the Corporation's previously established
loan-to-value policies.
Allowances for Loss
The allowances for loan and lease losses are maintained at a level
which management considers adequate to provide for potential losses based upon
an evaluation of known and inherent risks in the loan and lease portfolios.
Management's evaluation is based upon a continuing review of each portfolio
which includes factors such as identification of adverse situations that may
affect the borrower's ability to repay, a review of overall portfolio quality,
prior loan loss experience and an assessment of current and expected economic
conditions. Allowances for estimated losses on investments in real estate and
assets acquired through foreclosure are provided if the carrying value exceeds
the fair value less estimated disposal costs. Consideration is also given to
examinations performed by regulatory authorities.
Changes in economic conditions and economic prospects of borrowers can
occur quickly, and as a result, impact the estimates made by management. These
estimates are continually reviewed, and as adjustments become necessary, they
are included in operations in the period in which they become known. Identified
losses on specific loans, leases, investments in real estate or assets acquired
through foreclosure are charged against the applicable allowance.
Assets Held-for-Sale
Assets held-for-sale include loans held-for-sale and motor vehicles
that have been returned to the Corporation upon the expiration of their lease
terms. Assets held-for-sale are carried at the lower of cost or market.
Vehicles Under Operating Leases
Vehicles under operating leases are stated at cost less accumulated
depreciation and estimated credit losses. Depreciation expense is computed on a
straight-line basis over the life of the lease, excluding estimated residual
value. Accelerated methods are used in depreciating certain assets for income
tax purposes.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the
recorded investment in the loan or fair value less estimated disposal costs.
Costs subsequently incurred to improve the assets are included in the carrying
value provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. "Net costs
of assets acquired through foreclosure" includes costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life.
Accelerated methods are used in depreciating certain assets for income tax
purposes.
-56-
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are treated as financings, with the
obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements
remain in the asset accounts.
Income Taxes
The provision for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement basis and tax bases of assets and liabilities.
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1999 1998 1997
---- ---- ----
(In Thousands, except per share data)
Numerator:
Income before extraordinary item ......... $19,709 $17,973 $16,389
Loss on extinguishment of debt ........... - 1,461 -
------- ------- -------
Net income..................................... $19,709 $16,512 $16,389
======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares ................... 11,352 12,317 12,508
Effect of dilutive securities:
Employee stock options..................... 53 186 196
------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise........................... 11,405 12,503 12,704
======= ======= =======
Earnings per share:
Basic:
Income before extraordinary item ....... $ 1.74 $ 1.46 $ 1.31
Loss on extinguishment of debt.......... - (0.12) -
------- ------- -------
Net income .................................. $ 1.74 $ 1.34 $ 1.31
======= ======= =======
Diluted:
Income before extraordinary item........ $ 1.73 $ 1.44 $ 1.29
Loss on extinguishment of debt.......... - (0.12) -
------- ------- -------
Net income .................................. $ 1.73 $ 1.32 $ 1.29
======= ======= =======
-57-
2. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------ ----------- -----
(In Thousands)
Available-for-sale securities:
December 31, 1999:
U.S. Government and agencies.................. $ 28,573 $ - $ 137 $28,436
Other investments............................. 425 - - 425
-------- ---------- -------- --------
$ 28,998 $ - $ 137 $28,861
======== =========== ======== =======
December 31, 1998:
U.S. Government and agencies.................. $ 30,000 $ 219 $ - $30,219
======== =========== ======== =======
Held-to-maturity:
December 31, 1999:
Corporate bonds............................... $ 6,855 $ - $ 194 $ 6,661
State and political subdivisions............... 1,757 2 - 1,759
-------- ---------- --------- ---------
$ 8,612 $ 2 $ 194 $ 8,420
======== ========== ========= ========
December 31, 1998:
Corporate bonds............................... $ 6,059 $ 55 $ 12 $ 6,102
State and political subdivisions.............. 1,583 365 - 1,948
-------- ---------- --------- --------
$ 7,642 $ 420 $ 12 $ 8,050
======== ========== ========= ========
Securities with book values aggregating $24.5 million at December 31,
1999 are pledged as collateral for securities sold under agreements to
repurchase and the Bank's treasury, tax and loan account with the Federal
Reserve. Accrued interest receivable relating to investment securities was
$595,000 and $609,000 at December 31, 1999 and 1998, respectively.
Substantially, all of the interest and dividends on investment securities
represented taxable income.
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 1999 were as follows:
Held-to-Maturity Available-for-Sale
------------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ------- ---------- -------
(In Thousands)
Within one year ....................................... $ 218 $ 217 $ 3,484 $ 3,484
After one year but within five years................... 1,563 1,530 25,514 25,377
After five but within ten years........................ 1,884 1,767 - -
After ten years........................................ 4,947 4,906 - -
------- ------- ------- -------
$ 8,612 $ 8,420 $28,998 $28,861
======= ======= ======= =======
Proceeds from the sales of investments available-for-sale during 1999
were $20.0 million, with losses of $9,000 realized on these sales. There is also
a sale on $9.7 million of investment securities, classified as
available-for-sale, for which a loss of $289,000 has been accrued in 1999. This
sale settled in January 2000. Proceeds from the sale of investments during
-58-
1998 and 1997 were $20.1 million and $40.0 million, respectively. Gains of
$30,000 and $91,000 were realized on these sales in 1998 and 1997, respectively.
During 1997, the $1.3 million in state and political subdivision bonds,
previously classified as available-for-sale, were reclassified as
held-to-maturity due to the lack of an active market in these securities and the
difficulty in obtaining timely market valuations for these securities. There
were no sales of securities classified as held-to-maturity, nor other transfers
between categories of investment securities during 1999, 1998 and 1997.
3. MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- ---------- ------
(In Thousands)
Available-for-sale securities:
December 31, 1999:
Collateralized mortgage obligations ................ $178,290 $ - $ 4,746 $173,544
GNMA............................................ 15,376 - 139 15,237
FHLMC........................................... 143 - - 143
-------- ------- --------- --------
$193,809 $ - $ 4,885 $188,924
======== ======= ========= ========
Weighted average yield......................... 6.34%
December 31, 1998:
Collateralized mortgage obligations ........... $168,637 $ 583 $ 223 $168,997
GNMA........................................... 24,444 - 215 24,229
-------- -------- --------- --------
$193,081 $ 583 $ 438 $193,226
======== ======== ========= ========
Weighted average yield......................... 6.49%
Held-to-maturity securities:
December 31, 1999:
Collateralized mortgage obligations............ $191,839 $ 62 $ 6,562 $185,339
FNMA........................................... 31,065 - 1,019 30,046
GNMA........................................... 852 12 - 864
FHLMC.......................................... 33,036 3 1,184 31,855
Other......................................... 2,033 - 58 1,975
-------- -------- --------- --------
$258,825 $ 77 $ 8,823 $250,079
======== ======== ========= ========
Weighted average yield......................... 6.53%
December 31, 1998:
Collateralized mortgage obligations............ $175,619 $ 1,497 $ 149 $176,967
FNMA........................................... 40,881 - 258 40,623
GNMA........................................... 1,044 26 - 1,070
FHLMC.......................................... 42,337 29 36 42,330
Other......................................... 5,977 - 170 5,807
-------- -------- --------- --------
$265,858 $ 1,552 $ 613 $266,797
======== ======== ========= ========
Weighted average yield......................... 6.61%
-59-
At December 31, 1999, mortgage-backed securities with book values
aggregating $425.3 million were pledged as collateral for retail customer
repurchase agreements, Federal Home Loan Bank Advances and securities sold under
agreements to repurchase. Accrued interest receivable relating to
mortgage-backed securities was $2.5 million and $2.6 million at December 31,
1999 and 1998, respectively. There were no sales of mortgage-backed securities
in 1999, however there was a sale at December 31, 1999 on $24.6 million in
collateralized mortgage obligations, classified as available-for-sale, for which
a loss of $730,000 has been accrued in 1999. This sale settled in January 2000.
During 1998, the Bank sold $29.6 million in collateralized mortgage obligations,
classified as available-for-sale, resulting in a gain of $235,000. In 1997, the
Bank sold $12.7 million in adjustable-rate GNMA securities, classified as
available-for-sale, resulting in a gain of $64,000. There were no other sales of
mortgage-backed securities, nor transfers between categories of mortgage-backed
securities during 1999, 1998 and 1997.
4. LOANS
December 31,
1999 1998
------- -------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) .................................................. $368,671 $288,007
Other ..................................................................... 206,512 227,624
Real estate construction loans.................................................. 38,273 24,534
Commercial loans................................................................ 119,875 100,526
Consumer loans................................................................. 175,785 165,660
-------- -------
909,116 806,351
Less:
Loans in process ............................................................... 25,609 17,455
Unearned income ................................................................ 3,856 4,623
Allowance for loan losses ...................................................... 23,024 23,689
-------- --------
$856,627 $760,584
======== ========
The Corporation had impaired loans of approximately $2.0 million at
December 31, 1999 compared to $874,000 at December 31, 1998. The average
recorded investment in impaired loans was $1.5 million, $5.4 million and $8.6
million during 1999, 1998 and 1997, respectively. The allowance for losses on
impaired loans was $295,000 at December 31, 1999, as compared to $131,000 at
December 31, 1998. There was no interest income recognized on impaired loans for
the year ended December 31, 1999 compared to $465,000 and $652,000 for the years
ended December 31, 1998 and 1997, respectively.
The total amounts of loans serviced for others were $236.4 million, $237.9
million, and $207.8 million at December 31, 1999, 1998 and 1997, respectively.
Accrued interest receivable on loans outstanding was $5.0 million, $4.4
million and $5.1 million at December 31, 1999, 1998 and 1997, respectively.
Nonaccruing loans aggregated $7.4 million, $8.0 million and $9.1 million at
December 31, 1999, 1998 and 1997, respectively. If interest on all such loans
had been recorded, net interest income would have increased by $591,000 in 1999,
$767,000 in 1998, and $922,000 in 1997.
-60-
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
------------------------------
1999 1998 1997
-------- ------- -----
(In Thousands)
Beginning balance .............................................................. $23,689 $24,850 $24,241
Transfer to allowance for vehicles under operating leases.................. - - (259)
Transfer from assets acquired through foreclosure reserve ................. - - 848
Provision for loan losses................................................. 1,004 1,080 1,533
Loans charged-off ......................................................... (2,317) (2,619) (1,741)
Recoveries................................................................ 648 378 228
------- ------- -------
Ending balance ................................................................. $23,024 $23,689 $24,850
======= ======= =======
5. VEHICLES UNDER OPERATING LEASES
The Corporation leases motor vehicles through its indirect auto leasing
subsidiary, WSFS Credit Corporation. Vehicles are leased through a network of
unrelated auto dealerships primarily in Delaware, Pennsylvania, New Jersey, and
Maryland. At December 31, 1999 and 1998, substantially all leased assets were
accounted for using the operating lease method.
Year Ended December 31,
1999 1998
-------- -----
(In Thousands)
Motor vehicles under operating leases, gross............................... $274,840 $233,866
-------- --------
Less:
Allowance for lease credit losses.......................................... (1,467) (992)
Accumulated depreciation.................................................. (53,164) (32,907)
-------- --------
Motor vehicles under operating leases, net ............................... $220,209 $199,967
======== ========
Motor vehicles held-for-sale or lease (net)................................ $ 2,154 $ 939
======== ========
Minimum future rentals under operating leases at December 31, 1999 are as
follows:
(In Thousands)
2000 .................................... 50,867
2001..................................... 36,151
2002..................................... 19,178
2003..................................... 6,709
2004..................................... 1,645
Thereafter............................... 83
--------
Total................................ $114,633
========
-61-
A summary of changes in the allowance for lease credit losses follows:
Year Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Beginning balance.................................... $ 992 $ 1,097 $ 499
Provision for losses on vehicles under operating leases 864 547 976
Transfer from allowance for loan losses ............. - - 259
Charge-offs ......................................... (667) (909) (791)
Recoveries .......................................... 278 257 154
------- ------- -------
Ending balance....................................... $ 1,467 $ 992 $ 1,097
======= ======= =======
6. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31,
-------------------------
1999 1998
-------- --------
(In Thousands)
Real estate .............................. $ 1,182 $ 2,978
Other .................................... 208 405
------- -------
1,390 3,383
Less:
Allowance for losses...................... 329 390
------- -------
$ 1,061 $ 2,993
======= =======
A summary of changes in the allowance for losses follows:
Year Ended December 31,
------------------------------
1999 1998 1997
------- ------ -----
(In Thousands)
Beginning balance.................................................. $ 390 $ 11 $ 1,925
Provision for losses ............................................ - (258) -
Net (charge-offs) recoveries .................................... (61) 126 (555)
Transfer to/from investment in real estate....................... - 511 (511)
Transfer to allowance for loan losses............................ - - (848)
--------- --------- --------
Ending balance .................................................... $ 329 $ 390 $ 11
========= ========= ========
-62-
7. PREMISES AND EQUIPMENT
December 31,
---------------------------
1999 1998
------ ------
(In Thousands)
Land ........................................................ $ 720 $ 720
Buildings ................................................... 6,773 6,598
Leasehold improvements ...................................... 5,503 4,088
Furniture and equipment ..................................... 17,104 13,854
------- --------
30,100 25,260
Less:
Accumulated depreciation .................................... 15,479 13,341
------- --------
$14,621 $ 11,919
======= ========
The Corporation occupies certain premises and operates certain equipment
under noncancelable leases with terms ranging from 1 to 25 years. These leases
are accounted for as operating leases. Accordingly, lease costs are expensed as
incurred. Rent expense was $1.5 million in 1999, $1.2 million in 1998, and $1.0
million in 1997. Future minimum payments under these leases at December 31, 1999
are as follows:
(In Thousands)
2000 ............................................... $1,487
2001 ............................................... 1,333
2002 ............................................... 1,217
2003 ............................................... 1,078
2004 ............................................... 669
Thereafter ............................................. 1,574
------
Total future minimum lease payments ........... $7,358
======
-63-
8. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more which aggregate $46,032,401 and $90,287,516 at December 31,
1999 and 1998, respectively.
The following is a summary of deposits by category, including a summary
of the remaining time to maturity for time deposits:
December 31,
-----------------------------
1999 1998
---------- --------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ........................................ $ 119,754 $ 108,418
Money market and interest-bearing demand .......................... 79,321 68,208
--------- ---------
Total money market and demand .................................. 199,075 176,626
--------- ---------
Savings .............................................................. 258,854 218,334
-------- ---------
Retail certificates of deposits by maturity:
Less than one year ................................................ 217,554 253,851
One year to two years ............................................. 42,248 56,139
Two years to three years .......................................... 8,452 11,518
Three years to four years.......................................... 5,096 4,773
Four years to five years........................................... 1,854 3,952
Over five years.................................................... 2,847 3,186
--------- ---------
Total time certificates ........................................ 278,051 333,419
--------- ---------
Jumbo certificates of deposit by maturity:
Less than one year ................................................ 23,309 59,057
One year to two years ............................................. 908 5,080
Two years to three years .......................................... 324 897
Three years to four years.......................................... - 318
Four years to five years........................................... 104 101
--------- ---------
Total time certificates ........................................ 24,645 65,453
--------- ---------
Brokered certificates of deposit by maturity:
Less than one year ................................................ 99,529 24,900
One year to two years ............................................. 49,936 24,707
Two years to three years .......................................... - 14,861
--------- ---------
Total time certificates ........................................ 149,465 64,468
--------- ---------
Total deposits ........................................................ $ 910,090 $ 858,300
========= =========
-64-
Interest expense by category follows:
Year Ended December 31,
---------------------------------------
1999 1998 1997
---------- ---------- ------
(In Thousands)
Money market and interest-bearing demand .............................. $ 1,495 $ 1,528 $ 1,506
Savings ............................................................... 7,471 5,965 4,617
Time .................................................................. 14,151 18,211 19,457
-------- ------- --------
Total interest expense on retail deposits 23,117 25,704 25,580
Jumbo certificates of deposit ......................................... 3,287 2,574 1,604
Brokered certificates of deposit ...................................... 6,738 4,241 4,300
-------- ------- --------
Total interest expense on deposits $ 33,142 $32,519 $ 31,484
======== ======== ========
-65-
9. BORROWED FUNDS
Maximum
Amount
Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
-------- --------- ----------- ----------- ------------
(Dollars in Thousands)
1999
----
FHLB advances............................................ $515,000 5.63% $525,000 $473,458 5.33%
Trust preferred borrowings............................... 50,000 9.06 50,000 50,000 8.36
Federal funds purchased and securities
sold under agreements to repurchase ................... 143,941 6.10 159,641 145,096 5.76
Other borrowings ........................................ 13,524 4.14 16,103 11,448 4.11
1998
----
FHLB advances............................................ $460,000 5.32% $460,000 $419,849 5.67%
Senior notes and trust preferred borrowings.............. 50,000 8.32 73,100 34,201 10.96
Federal funds purchased and securities
sold under agreements to repurchase ................... 153,505 5.60 210,000 184,310 5.80
Other borrowings ........................................ 8,904 4.10 11,160 9,005 4.18
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 4.70% to 6.60% at December 31, 1999 are due as follows
(dollars in thousands):
Weighted
Average
Amount Rate
------ --------
(Dollars in Thousands)
2000.............................. $ 205,000 5.64%
2001.............................. 35,000 6.33
2002.............................. 65,000 4.86
----------
$ 305,000
==========
Also outstanding at December 31, 1999 are advances of $40.0 million and
$25.0 million, maturing in 2000 and 2002, respectively, which reprice quarterly
based upon the 3-month LIBOR rate. The Bank also has an additional advance of
$75.0 million, which is convertible on a quarterly basis (at the discretion of
the FHLB) to a variable rate advance based upon the 3-month LIBOR rate, after an
initial fixed term, and advances of $40.0 million and $30.0 million which are
currently fixed at 5.55% and 5.47%, respectively, but become variable if 3-month
LIBOR reaches 6.50% or 6.25%, respectively. The Bank has the option to prepay
these three advances at predetermined times or rates. Pursuant to collateral
agreements with the FHLB, advances are secured by qualifying first mortgage
loans, collateralized mortgage obligations, FHLB stock and an interest-bearing
demand deposit account with the FHLB.
As a member of the FHLB of Pittsburgh, the Bank is required to acquire
and hold shares of capital stock in the FHLB of Pittsburgh in an amount at least
equal to 1% of the aggregate unpaid principal of its home mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or 5%
of its advances (borrowings) from the FHLB of Pittsburgh, whichever is greater.
WSFS was in compliance with this requirement with an investment in FHLB of
Pittsburgh stock at December 31, 1999, of $28.5 million.
-66-
Senior Notes and Trust Preferred Borrowings
In December 1993, the Corporation issued $32.0 million of 11% Senior
Notes (the Notes). The Corporation repurchased and extinguished $750,000 and
$2.2 million of the notes outstanding during 1996 and 1995, respectively. In
1998, the Corporation repurchased and extinguished $29.1 million in senior notes
recording an extraordinary loss on extinguishment of debt of $1.5 million, net
of $787,000 in tax benefit.
On November 20, 1998, the Corporation issued $50.0 million of trust
preferred securities, due at December 1, 2028, pursuant to a shelf registration
under the Securities Act of 1933 under which the Corporation may sell, from time
to time, up to $75.0 million in aggregate purchase price of trust preferred
securities. These securities were issued at a floating rate of 250 basis points
over 3-month LIBOR, repricing quarterly. The maturity date on these securities
may be shortened to a date not earlier than December 1, 2003 if certain
conditions are met.
The trust preferred securities were issued by a specially formed
subsidiary of the Corporation, a Delaware statutory trust, which invested the
proceeds in junior subordinated debentures to be issued by the Corporation. The
net proceeds from the sale of trust preferred securities were used as
replacement financing for the early retirement of the Corporation's 11% Senior
Notes, due 2005. The Corporation expects to benefit from significantly reduced
long-term financing costs and the flexibility of additional Bank regulatory
capital.
The Corporation also entered into an agreement to limit the interest
rate exposure in the trust preferred securities by purchasing an interest rate
cap, which provides a ceiling on 3-month LIBOR of 6.00% for the first ten years.
This will limit the interest rate exposure on the trust preferred securities to
no more than 8.50% through the first ten years. The cost of this
interest rate cap was $2.4 million, which, prior to the adoption of SFAS 133,
will be amortized over the ten-year period as a yield adjustment. The effective
rate of the trust preferred securities including amortization of transactional
costs and amortization of the cost of the interest rate cap was 9.06% at
December 31, 1999. The Corporation will receive the benefit of this cap in the
year 2000, as 3-month LIBOR exceeded 6.00% at the last repricing date of
December 1, 1999.
Securities Sold Under Agreements to Repurchase
During 1999, the Bank sold securities under agreements to repurchase as
a short-term funding source. At December 31, 1999, securities sold under
agreements to repurchase had fixed rates ranging from 5.24% to 6.76%. The
underlying securities are mortgage-backed securities and U.S. Government and
agency securities with book and market values aggregating
-67-
$149.8 million and $147.6 million, respectively, at December 31, 1999.
Securities sold under agreements to repurchase with the corresponding carrying
and market values of the underlying securities are due as follows:
Collateral
---------------------------------------------
Carrying Market Accrued
Borrowing Rate Value Value Interest
------------- ---------- ----------- ----------- -------------
(Dollars in Thousands)
1999
- ----
Up to 30 days.................... $ 20,000 5.60% $ 20,790 $ 20,790 $ 465
30 to 90 days.................... 25,000 5.24 27,036 26,649 138
Over 90 days..................... 93,941 6.48 101,939 100,180 575
--------- ----- --------- --------- -------
$138,941 6.13% $149,765 $ 147,619 $ 1,178
======== ===== ======== ========= =======
1998
- ----
30 to 90 days.................... $ 18,505 5.10% $ 21,453 $ 21,318 $ 122
Over 90 days..................... 135,000 5.66 141,338 141,382 954
--------- ----- -------- --------- -------
$ 153,505 5.60% $162,791 $ 162,700 $ 1,076
========= ===== ======== ========= =======
Other Collateralized Borrowings
Collateralized borrowings of $13.5 and $8.9 million at December 31,
1999 and 1998, respectively, consisted of outstanding retail repurchase
agreements, contractual arrangements under which portions of certain securities
are sold on an overnight basis to retail customers under agreements to
repurchase. At December 31, 1999 such borrowings were collateralized by
collateralized mortgage obligations. The average rate on these borrowings during
1999 was 4.11%.
10. STOCKHOLDERS' EQUITY
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions, such as the Bank, must maintain "tangible" capital equal to 1.5%
of adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk-weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. At December 31, 1999, and 1998 the Bank was in
compliance with regulatory capital requirements and was deemed a
"well-capitalized" institution.
-68-
A table presenting the Bank's consolidated capital position as of
December 31, 1999 and 1998 follows:
To Be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
-------------------- ----------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- -----------
(Dollars in Thousands)
As of December 31, 1999:
Total Capital (to Risk-Weighted Assets).... $145,383 12.80% $ 90,838 8.00% $ 113,547 10.00%
Core Capital (to Adjusted Tangible Assets). 136,81 17.80 70,174 4.00 87,718 5.00
Tangible Capital (to Tangible Assets)...... 136,638 7.79 26,313 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted Assets)... 136,811 12.05 N/A N/A 68,128 6.00
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets).... $123,430 11.87% $ 83,164 8.00% $ 103,955 10.00%
Core Capital (to Adjusted Tangible Assets). 115,907 7.09 65,378 4.00 81,722 5.00
Tangible Capital (to Tangible Assets)...... 115,544 7.07 24,511 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted Assets)... 115,907 11.15 N/A N/A 62,373 6.00
The Corporation has a simple capital structure with one class of $ .01 par
common stock outstanding, each share having equal voting rights. In addition,
the Corporation has authorized 7,500,000 shares of $0.01 par preferred stock. No
preferred stock was outstanding at December 31, 1999 and 1998. The trust
preferred securities issued in 1998 qualify for tier 1 capital. The Bank is
prohibited from paying any dividend or making any other capital distribution if,
after making the distribution, the Bank would be undercapitalized within the
meaning of the OTS Prompt Corrective Action regulations. Since 1996, the Board
of Directors has approved four separate stock repurchase programs to reacquire
common shares. As part of these programs, the Corporation acquired 1.7 million
shares in 1996, 507,000 shares in 1997, 1.0 million shares in 1998 and 340,000
shares in 1999. At December 31, 1999, the Corporation held 3.5 million shares of
its common stock in the treasury.
The Holding Company
Although the holding company does not have significant assets or engage
in significant operations separate from the banking subsidiary, the Corporation
has agreed to cause the Bank's required regulatory capital level to be
maintained by infusing sufficient additional capital as necessary. To that end,
the Corporation issued the 11% Senior Notes described in Note 9. These notes
were called in December 1998. In November 1998, the Corporation issued $50
million of Trust Preferred Securities at a variable interest rate of 250 basis
points over the three-month LIBOR. At December 31, 1999, the rate on these
securities was 8.50% with a scheduled maturity of December 1, 2028. The
effective rate of these securities, including amortization of issuance costs and
amortization of the cost of the interest rate cap was 9.06% at December 31,
1999. These securities were issued by WSFS Financial Corporation's subsidiary,
WSFS Capital Trust I, and the proceeds from the issue were invested in Junior
Subordinate Debentures issued by WSFS Financial Corporation. These securities
are treated as borrowings with the interest included in interest expense on the
consolidated statement of operations. The Corporation purchased an interest rate
cap that effectively limits 3-month LIBOR to 6.00%. See Note 9 for additional
information. The proceeds were used to extinguish the 11% Senior Notes and for
general corporate purposes.
Pursuant to federal laws and regulations, the Bank's ability to engage
in transactions with affiliated corporations is limited, and the Bank generally
may not lend funds to nor guarantee indebtedness of the Corporation.
-69-
11. EMPLOYEE BENEFIT PLANS
Employee 401(k) Savings Plan
Certain subsidiaries of the Corporation maintain a qualified plan in
which employees may participate. Participants in the plan may elect to direct a
portion of their wages into investment accounts which include professionally
managed mutual and money market funds and the Corporation's common stock. The
principal and earnings thereon are tax deferred until withdrawn, generally. The
Company matches a portion of the employees' contributions and also periodically
makes discretionary contributions, based on Company performance, into the plan
for the benefit of employees. The Corporation's contributions to the plan on
behalf of its employees resulted in an expense of $670,000, $616,000, and
$564,000 in 1999, 1998 and 1997, respectively. The plan purchased 75,000, 50,000
and 33,000 shares of common stock of the Corporation during 1999, 1998, and
1997, respectively.
All Company contributions are made in the form of the Corporation's
common stock.
Postretirement Benefits
The Corporation shares certain costs of providing health and life
insurance benefits to retired employees (and their eligible dependents).
Substantially all employees may become eligible for these benefits if they reach
normal retirement age while working for the Corporation.
The Corporation accounts for its obligations under the provisions of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 106 requires that the costs of these benefits be recognized
over an employee's active working career.
-70-
The following disclosures are in accordance with SFAS No. 132,
"Employer's Disclosure About Pensions and Other Postretirement Benefits":
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year......................................... $ 1,428 $ 1,350 $ 1,332
Service Cost.................................................................... 43 40 36
Interest cost................................................................... 93 91 93
Actuarial loss (gain)........................................................... (404) 44 (14)
Benefits paid .................................................................. (102) (97) (97)
-------- -------- -------
Benefit obligation at end of year......................................... $ 1,058 $ 1,428 $ 1,350
======== ======== =======
Change in plan assets:
Fair value of plan assets at beginning of year.................................. $ - $ - $ -
Employer contributions ......................................................... 102 97 97
Benefits paid .................................................................. (102) (97) (97)
-------- -------- -------
Fair value of plan assets at end of year.................................. $ - $ - $ -
======== ======== =======
Funded Status:
Funded status................................................................... $(1,058) $ (1,428) $(1,350)
Unrecognized transition (asset) obligation...................................... 797 859 920
Unrecognized net (gain) loss.................................................... (332) 72 28
-------- -------- -------
Net amount recognized..................................................... $ (593) $ (497) $ (402)
======== ======== =======
1999 1998 1997
---- ---- ----
Components of net periodic benefit cost:
Service cost.................................................................... $ 43 $ 40 $ 36
Interest cost................................................................... 93 91 93
Amortization of transition (asset) obligation .................................. 61 61 61
Amortization of net (gain) loss ................................................ - - -
-------- -------- -------
Net periodic benefit cost................................................. $ 197 $ 192 $ 190
======== ======== =======
Sensitivity analysis:
Effect of +1% on service cost plus interest cost................................ $ 2 $ 2 $ 3
Effect of -1% on service cost plus interest cost................................ - (2) (3)
Effect of +1% on APBO........................................................... 1 31 30
Effect of -1% on APBO........................................................... (1) (35) (36)
1999 1998 1997
---- ---- ----
Assumptions used to value the Accumulated Postretirement Benefit
Obligation (APBO):
Discount rate............................................................ 7.50% 6.75% 7.00%
Health care cost trend rate.............................................. 7.50% 8.00% 8.50%
The Corporation assumes that the average annual rate of increase for
medical benefits will decrease by one-half of 1% per year and stabilizes in the
year 2005, and thereafter, at an average increase of 5% per annum. The costs
incurred for retirees' health care are limited since certain current and all
future retirees are restricted to an annual medical premium cap indexed since
1995 by the lesser of 4% or the actual increase in medical premiums paid by the
Corporation. For 1999 this annual premium cap amounted to $1,776 per retiree.
-71-
12. TAXES ON INCOME
The Corporation and its subsidiaries file a consolidated federal income
tax return and separate state income tax returns. The income tax provision
(benefit) consists of the following:
Year Ended December 31,
------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Current income taxes from operations:
Federal taxes .................................................... $ 733 $ 1,217 $ (931)
State and local taxes............................................. 672 1,389 1,208
Deferred income taxes:
Federal taxes .................................................... (202) 3,709 6,175
State and local taxes ............................................ - - 124
------- ------- -------
Subtotal ................................................... $ 1,203 $ 6,315 $ 6,576
Current taxes from extraordinary item:
Federal taxes on debt extinguishment ............................. - (787) -
------- ------- -------
$ 1,203 $ 5,528 $ 6,576
======= ======= =======
Current federal income taxes include taxes on income that cannot be
offset by net operating loss carryforwards.
Based on the Corporation's history of prior earnings and its
expectations of the future, management believes that operating income and the
reversal pattern of its temporary differences will, more likely than not, be
sufficient to settle a net deferred tax liability of $300,000 at December 31,
1999. Adjustments to the valuation allowance were made in 1999, 1998, and 1997
as a result of continued operating earnings of the WSFS consolidated group.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The following
is a summary of the significant components of the Corporation's deferred tax
assets and liabilities as of December 31, 1999 and December 31, 1998:
1999 1998
---------- ----------
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation.......................................... $(29,344) $(25,205)
Other............................................................. (1,849) (134)
--------- --------
Total deferred tax liabilities.................................... (31,193) (25,339)
--------- --------
Deferred tax assets:
Bad debt deductions............................................... 9,992 9,287
Tax credit carryforwards.......................................... 2,930 2,259
Net operating loss carryforwards.................................. 15,284 14,761
Loan fees......................................................... 215 283
Provisions for losses on reverse mortgages........................ 13,069 15,199
Other............................................................. 4,266 2,924
--------- --------
Total deferred tax assets.............................................. 45,756 44,713
--------- --------
Valuation allowance........................................... (14,902) (21,800)
--------- --------
Net deferred tax asset (liability)..................................... $ (339) $ (2,426)
========= ========
-72-
Approximately $19 million of the Corporation's deferred tax assets are
related to Providential's write-downs and income on its portfolio of reverse
mortgages. Management has assessed substantial valuation allowances on these
deferred tax assets due to limitations imposed by the Code and uncertainties,
including the timing of when these assets are realized.
Included in the preceding table above is the effect of certain
temporary differences for which no deferred tax expense or benefit was
recognized. Such items consisted primarily of unrealized gains and losses on
certain investments in debt and equity securities accounted for under SFAS No.
115.
Net operating loss carryforwards of $102.0 million remain at December
31, 1999. There are also alternative minimum tax credit carryforwards and
general business credit carryforwards of approximately $2.9 million at December
31, 1999 which can be used to offset regular taxes in future years. The
expiration dates and amounts of such carryforwards and credits are listed below:
NOL's
---------------------------- Credit
Federal State Carryforwards
----------- -------------- --------------
(In Thousands)
2002........................ $ - $ 2,279 $ -
2003........................ - 4,385 -
2004........................ 609 9,891 -
2005........................ 3,850 10,918 -
2006........................ 1,098 1,811 -
2007........................ - 4,405 -
2008........................ 6,517 4,745 -
2010........................ 6,755 2,293 -
2011........................ - 5,873 -
2012........................ - 20 -
2013........................ - 306 -
2014........................ - 298 -
2017........................ - 13,218 -
2018........................ 8,218 14,552 29
2019........................ - - 29
Unlimited................... - - 2,872
-------- -------- -------
$ 27,047 $ 74,994 $ 2,930
======== ======== =======
The Corporation's ability to use its federal NOLs to offset future
income is subject to restrictions enacted in Section 382 of the Internal Revenue
Code. These restrictions would limit the Corporation's future use of its NOLs if
there are significant Ownership Changes, in or acquisitions of, the
Corporation's stock (referred to herein as an "Ownership Change"). The
utilization of approximately $16.6 million of net operating loss carryforwards
is limited to approximately $1.5 million each year as a result of such
"Ownership Changes" in a former subsidiary's stock.
-73-
A reconciliation setting forth the differences between the effective
tax rate of the Corporation and the U.S. Federal Statutory tax rate is as
follows:
Year Ended December 31,
-----------------------------------
1999 1998 1997
---- ---- ----
Statutory federal income tax rate .................. 35.0% 35.0% 35.0%
State tax net of federal tax benefit................ 2.2 3.7 3.8
Interest income 50% excludable...................... (3.8) (3.3) (2.6)
Utilization of loss carryforwards and
valuation allowance adjustments.............. (28.2) (9.4) (7.6)
Other............................................... .8 - -
----- ---- ----
Effective tax rate ................................. 6.0 % 26.0% 28.6%
===== ==== ====
13. STOCK OPTION PLANS
The Corporation has stock options outstanding under two stock option
plans (collectively, Option Plans) for officers, directors and employees of the
Corporation and its subsidiaries. The 1986 Stock Option Plan (1986 Plan) expired
on November 26, 1996, the tenth anniversary of its effective date. As a result,
no future awards may be granted under the 1986 Plan. The 1997 Stock Option Plan
(1997 Plan) was approved by shareholders in April 1997 to replace the expired
1986 Plan. The 1997 Plan will terminate on the tenth anniversary of its
effective date, after which no awards may be granted. A total of 625,000 awards
may be granted under the 1997 Plan. At December 31, 1999 there were 136,775
shares available for future grants under the 1997 Plan.
The Option Plans provide for the granting of incentive stock options as
defined in Section 422 of the Internal Revenue Service Code as well as
nonincentive stock options (collectively, stock options), Phantom Stock Awards
and stock appreciation rights. All awards are to be granted at not less than the
market price of the Corporation's common stock on the date of the grant and
expire no later than ten years from the grant date. All stock options granted
prior to October 1996 are exercisable one year from the date of grant. All stock
options granted after October 1996 are exercisable one year from grant date and
vest in 20% per annum increments. All awards generally become immediately
exercisable in the event of a change in control, as defined, of the Corporation.
The Corporation also had Stock Appreciation Rights (SARs) which expired
in November 1999. SARs allowed an optionee to surrender the award in
consideration for payment by the Corporation of an amount equal to the excess of
the fair market value of the common stock over the option price of the SARs. The
Corporation recorded credits related to SARs of $147,000 and $261,000 in 1999
and 1998 respectively, and expenses of $2.5 million in 1997. There were no SAR's
outstanding at December 31, 1999.
-74-
A summary of the status of the Corporation's Stock Option Plans as of
December 31, 1999, 1998 and 1997, and changes during the years then ending is
presented below:
1999 1998 1997
------------------------------ --------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ---------------- ---------- ---------------- ------- ---------------
Stock Options:
Outstanding at beginning of year 333,655 $ 11.55 334,915 $ 7.96 316,005 $ 4.72
Granted 296,225 14.75 96,900 17.47 78,700 17.75
Exercised (101,825) 3.59 (73,100) 2.43 (55,090) 3.27
Canceled - - (25,060) 13.07 (4,700) 9.44
--------- -------- --------
Outstanding at end of year 528,055 $ 14.88 333,655 $ 11.55 334,915 $ 7.96
Exercisable at end of year 82,830 136,435 180,695
Weighted-average fair value
of awards granted $ 6.15 $ 6.88 $ 6.93
SARs:
Outstanding at beginning of year 97,510 $ 1.65 190,658 $ 1.75 273,075 $ 1.99
Granted - - - - - -
Exercised (97,510) 1.65 (93,148) 1.85 (82,417) 2.54
Canceled - - - - - -
--------- -------- --------
Outstanding at end of year - - 97,510 $ 1.65 190,658 $ 1.75
Exercisable at end of year - - 97,510 182,658
The Black-Scholes option pricing model was used to determine the
grant-date fair-value of options. Significant assumptions used in the model
included a weighted average risk-free rate of return of 5.6% in 1999, 4.6% in
1998 and 6.1% in 1997; expected option life of 6 years for all three years'
awards; and expected stock price volatility of 35% for both 1999 and 1998 awards
and 25% for 1997 awards. Cash dividends of $.12 per share were assumed for 1999
and 1998 awards.
SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123)
encourages, but does not require, the adoption of fair-value accounting for
stock-based compensation to employees. The Company, as permitted, has elected
not to adopt the fair value accounting provisions of SFAS 123, and has instead
continued to apply APB Opinion 25 and related interpretations in accounting for
the plans and to provide the required proforma disclosures of SFAS 123. Had the
grant-date fair-value provisions of SFAS 123 been adopted, the Corporation would
have recognized compensation expense of $812,000 in 1999, $349,000 in 1998, and
$250,000 in 1997 related to its Option Plans. As a result, proforma net income
of the Corporation would have been $19.1 million in 1999, $16.2 million in 1998,
and $16.2 million in 1997, and proforma diluted earnings per share would have
been $1.68 in 1999, $1.29 in 1998 and $1.27 in 1997.
The effects on proforma net income and diluted earnings per share of
applying the disclosure requirement of SFAS 123 in past years may not be
representative of the future proforma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.
-75-
The following table summarizes all stock options outstanding and
exercisable for both the 1986 and 1997 Stock Option Plans as of December 31,
1999, segmented by range of exercise prices:
Outstanding Exercisable
------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise
Number Price Contractual Life Number Price
------------ ----------- ---------------- ------- ----------
Stock Options:
$1.88-$3.76 7,050 $2.19 1.2 years 7,050 $ 2.19
$9.40-$11.29 58,880 9.59 6.9 years 28,800 9.61
$11.29-$13.17 12,300 12.75 7.4 years 4,920 12.75
$13.17-$15.05 295,225 14.75 9.6 years - -
$15.05-$16.93 3,500 15.95 8.9 years 500 16.25
$16.93-$18.81 151,100 17.93 8.5 years 41,560 18.13
-------- ----- --------- -------- -----
Total 528,055 $14.88 8.8 years 82,830 $13.48
======== ========
14. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 1999, the Corporation had commitments to extend credit
of $147.8 million. Consumer lines of credit totaled $65.8 million of which $57.2
million was secured by real estate. Outstanding letters of credit were $1.4
million and outstanding commitments to make or acquire mortgage loans aggregated
$23.0 million of which approximately $15.2 million were at fixed rates ranging
from 5.75% to 8.75%, and approximately $7.7 million were at variable rates
ranging from 5.25% to 8.50%. All mortgage commitments are expected to have
closing dates within a six month period. In addition, the Corporation has a
commitment to providing a line of credit to WNFI in the amount of $45.0 million
initially, which can be increased to $135.0 million contingent upon achieving
certain financial goals.
Computer Operations
In February 1997, the Bank entered into a five-year contract with
ALLTEL, the Company that has been managing data processing operations since
1988. Under the terms of the new contract, this data processing facilities
management company will also manage the on-site "back office" functions of
deposit and loan operations for the Bank. The projected amount of future minimum
payments contractually due is as follows:
2000 ................................. $4,457,000
2001 ................................. 4,457,000
2002.................................. 743,000
-76-
Equity Holdings
In September 1999, to achieve its goal of being an efficient entrant
into Internet-only banking activities, the Company made a $5.5 million equity
investment in Customer One Financial Network, Inc. (C1FN). The Company has
agreed and is obligated to invest an additional $5.4 million, in the year 2000,
contingent upon C1FN attaining certain sales and operating criteria.
In November 1999, the Bank entered into an equity agreement with
Wilmington National Finance, Inc. (WNFI) to conduct a sub-prime home equity
lending operation. As part of that agreement, in the year 2000, the Company is
required to invest $1.6 million upon WNFI meeting certain operating criteria.
Legal Proceedings
In the ordinary course of business, the Corporation, Bank and its
subsidiaries are subject to legal actions which involve claims for monetary
relief. Based upon information presently available to management and its
counsel, it is management's opinion that any legal and financial responsibility
arising from such claims will not have a material adverse effect on the
Corporation's results of operations.
In February 1994, a class-action complaint was filed against the
Corporation's former subsidiary, Providential, a company purchased by WSFS in
November 1994, in the United States District Court, Northern District of
California. In July 1994, the District Court issued an Order Granting Motion to
Compel Arbitration, which also dismissed the case and held that the Court was
without authority to order that arbitration proceed as a class action. In August
1994, the plaintiffs filed an appeal with the United States Court of Appeals for
the Ninth Circuit. On August 20, 1997, the Ninth Circuit issued a ruling
dismissing plaintiffs' appeal for lack of jurisdiction. On February 25, 1998,
the Ninth Circuit issued an order denying plaintiffs' petition for rehearing and
suggestions for rehearing en banc. On October 5, 1998, the U.S. Supreme Court
denied hearing an appeal by the plaintiffs seeking a class action suit. These
plaintiffs may still make claims against the Company individually, but only
through separate cases in binding arbitration and not as a single class action
case in federal court. The Corporation believes that all such claims and actions
are without merit and intends to defend itself vigorously.
The Bank, as successor to Providential, may from time-to-time be
involved in arbitration or litigation with the borrowers or with the heirs of
borrowers. Some kinds of disputes may delay or impair the Bank's ability to
liquidate its collateral promptly after maturity of a reverse mortgage loan.
Because reverse mortgages are a relatively new and uncommon product, there can
be no assurances regarding how courts or arbitrators may apply existing legal
principles to the interpretation and enforcement of the terms and conditions of
the Bank's reverse mortgage loans.
Financial Instruments With Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business primarily to meet the financing
needs of its customers. These financial instruments involve, to varying degrees,
elements of credit risk that are not recognized in the Consolidated Statement of
Condition.
Exposure to loss for commitments to extend credit and standby letters
of credit written is represented by the contractual amount of those instruments.
The Corporation generally requires collateral to support such financial
instruments in excess of the contractual amount of those instruments and
essentially uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
-77-
The following represents a summary of off-balance sheet financial
instruments at year-end:
December 31,
----------------------
1999 1998
-------- -----
(In Thousands)
Financial instruments with contract amounts which represent potential credit
risk:
Construction loan commitments ........................................... $21,931 $ 17,689
Commercial mortgage loan commitments .................................... 4,955 1,772
Commercial loan commitments ............................................. 30,686 15,636
Commercial standby letters of credit .................................... 1,406 3,597
Residential mortgage loan commitments ................................... 22,996 23,145
Consumer lines of credit ................................................ 65,838 66,208
Mortgage warehouse line ................................................. 135,000 -
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit
written are conditional commitments issued to guarantee the performance of a
customer to a third party. The Corporation evaluates each customer's
creditworthiness and obtains collateral based on management's credit evaluation
of the counterparty.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a
variety of factors. In certain cases, fair values represent quoted market prices
for identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions regarding the amount and timing of estimated
future cash flows which are discounted to reflect current market rates and
varying degrees of risk. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year-end
or that will be realized in the future. In November 1998, the Corporation
purchased an interest rate cap in order to limit its exposure on $50.0 million
of variable trust preferred securities issued in November 1998. The cap has a
notional amount of $50.0 million and had an initial term of 10 years. This
derivative instrument caps 3-month LIBOR (the base rate of the trust preferred)
at 6.00% for 10 years, thus limiting the Company's exposure to rising interest
rates on the Trust Preferred offering.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and short-term investments: For cash and short-term investments,
including due from banks, federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits with other banks, the
carrying amount is a reasonable estimate of fair value.
Investment and mortgage-backed securities: Fair value for investment
securities is based on quoted market prices, where available. If a quoted market
price is not available, fair value is estimated using quoted prices for similar
securities.
-78-
Investment in reverse mortgages: The fair value of the Corporation's
investment in reverse mortgages is based on discounted net cash flows. The
discount rate utilized in determining such fair value is based on current rates
of similar instruments with comparable maturities.
Loans: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type: commercial, commercial
mortgages, construction, residential mortgages and consumer. The fair value of
residential mortgage loans is estimated using quoted market prices for sales of
whole loans with similar characteristics such as repricing dates, product type
and size. For residential loans that reprice frequently, the carrying amount
approximates fair value. The fair value of direct financing leases is based upon
recent market prices of sales of similar receivables. The fair value of other
types of loans for which quoted market prices are not available is estimated by
discounting expected future cash flows using the current rates at which similar
loans would be made to borrowers with comparable credit ratings and for similar
remaining maturities. The fair value of nonperforming loans is based on recent
external appraisals. Estimated cash flows, discounted using a rate commensurate
with current rates and the risk associated with the estimated cash flows, are
utilized if appraisals are not available.
Interest rate cap: The fair value is estimated using quoted prices for
similar instruments.
Deposit liabilities: The fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, money market and
interest-bearing demand deposits and savings deposits, is equal to the amount
payable on demand. The carrying value of variable rate time deposits and time
deposits that reprice frequently also approximates fair value. The fair value of
the remaining time deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits with comparable remaining maturities.
Borrowed funds: Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
Off-balance sheet instruments: The fair value of off-balance sheet
instruments, including commitments to extend credit and standby letters of
credit, is estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflects the present
creditworthiness of the counterparties.
The carrying amount and estimated fair value of the Corporation's
financial instruments are as follows:
December 31,
--------------------------------------------------------
1999 1998
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- --------- ---------
(In Thousands)
Financial assets:
Cash and short-term investments................. $ 67,192 $67,192 $ 84,266 $ 84,266
Investment securities........................... 37,473 37,281 37,861 38,269
Mortgage-backed securities...................... 447,749 439,003 459,084 460,023
Investment in reverse mortgages................. 28,103 29,003 31,293 31,493
Loans, net...................................... 881,185 885,499 763,668 783,344
Interest rate cap............................... 2,131 4,944 2,370 2,196
Financial liabilities:
Deposits........................................ 910,090 910,661 858,300 860,272
Borrowed funds.................................. 722,465 686,288 672,409 662,953
-79-
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows:
December 31,
-----------------------
1999 1998
-------- ------
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit................ $ 806 $ 582
Standby letters of credit................... 14 36
16. INVESTMENT IN AND ACQUISITION OF REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Since reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence, and the
mortgage balance consists of cash advanced, interest compounded over the life of
the loan and a premium which represents a portion of the shared appreciation in
the home's value, if any, or a percentage of the value of the residence.
The Corporation accounts for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages; the effective yield of each pool is recomputed, and income is
adjusted retroactively and prospectively to reflect the revised rate of return.
Accordingly, these reverse mortgage assets present significant risk associated
with estimation
In November 1994, the Corporation purchased Providential Home Income
Plan, Inc., a California-based reverse mortgage lender, for approximately $24.4
million. Providential's assets at acquisition primarily consisted of cash and
its investment in reverse mortgages (the "1994 Pool"). Providential's available
liquidity was utilized to fund most of the purchase price. The acquisition was
accounted for by the purchase method of accounting; accordingly, Providential's
results have been included in the Corporation's consolidated statement of
operations since the acquisition date. In November 1996 the management and
operations of Providential were merged into the Bank. The carrying value of the
reverse mortgages was $11.4 million and $10.8 million at December 31, 1999 and
December 31, 1998, respectively. Of the 600 loans that comprise the 1994 pool at
December 31, 1999, all are located in California.
In 1993, the Corporation acquired a pool of reverse mortgages (the
"1993 Pool") from the FDIC and another lender. The Corporation's investment in
this pool of reverse mortgages totaled $16.7 million and $20.5 million at
December 31, 1999 and December 31, 1998, respectively. Of the 377 loans that
comprise the 1993 Pool at December 31, 1999, 307 loans, or 81%, are located in
Delaware, New Jersey, Pennsylvania and Maryland.
-80-
At December 31, 1999, the Corporation's estimate of net cash flows from
each pool of reverse mortgages was as follows:
Net Inflows (Outflows)
-------------------------------------------
1994 Pool 1993 Pool Total
--------- --------- -----
(In Thousands)
Year ending:
- -----------
2000........................................................ $ 5,310 $ 105 $ 5,415
2001........................................................ 4,203 1,663 5,866
2002........................................................ 4,514 1,751 6,265
2003........................................................ 4,730 1,806 6,536
2004........................................................ 4,869 1,829 6,698
2005-2009................................................... 24,665 8,612 33,277
2010-2014................................................... 21,004 6,218 27,222
2015-2019................................................... 13,986 3,369 17,355
Thereafter.................................................. 10,499 1,807 12,306
The effective yield used to accrue investment income on the
Corporation's investment in reverse mortgages is sensitive to changes in
collateral values and other actuarial and prepayment assumptions. Future
estimated changes in collateral values in 1999 are as follows for each pool:
1994 1993
Pool Pool
---- ----
Year ended December 31, 2000......................... 2.00% 1.00%
Year ended December 31, 2001......................... 2.00 1.00
Thereafter........................................... 2.00 1.00
In making these estimates of current and expected collateral values,
the Corporation considers its own experience with reverse mortgages that have
matured and expected rates of future appreciation in housing prices. The
projections also incorporate actuarial estimates of contract terminations using
mortality tables published by the Office of the Actuary of the United States
Bureau of Census adjusted for expected prepayments and relocations.
The changes in collateral values and actuarial assumptions resulted in
an effective yield of approximately 36.73% on the 1994 Pool and increased income
by $5.5 million during 1999 over the anticipated effective yield at January 1,
1999. Included in this increase was a cumulative positive catch-up adjustment of
$3.6 million. The effective yield on the 1993 Pool was 5.42% in 1999, reflecting
a $3.6 million decrease in income over the anticipated effective yield at
January 1, 1999, which includes a cumulative negative catch-up adjustment of
$3.0 million.
-81-
The effect on the yield and income assuming no changes in collateral
values or a 1% annual reduction in the aforementioned projected future changes
of collateral values is presented below for the year ended December 31, 1999:
1994 Pool 1993 Pool
-------------------------------- --------------------------------
1% annual 1% annual
reduction reduction
No future in the projected No future in the projected
changes in future changes changes in future changes
collateral in collateral collateral in collateral
values values values values
------------ ------------------ ------------- ---------------
(Dollars in Thousands)
Effective yield................................ 35.46% 36.10% 4.81% 4.81%
Effect on income of reverse mortgages.......... $(1,286) $ (647) $ (1,050) $ (1,050)
The cumulative catch-up adjustments included in the above reductions in
income are $820,000 and $411,000, respectively, at January 1, 1999 for the 1994
Pool. The cumulative catch-up adjustments included in the above reductions in
income are $897,000 and $897,000, respectively, at January 1, 1999 for the 1993
Pool.
17. SEGMENT INFORMATION
Under the definition of SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information, the Corporation had four operating segments
in 1999: Wilmington Savings Fund Society, FSB (Bank), WSFS Credit Corporation,
(WCC), CustomerOne Financial Network, Inc. (C1FN) and Wilmington National
Finance, Inc. (WNFI). C1FN and WNFI are not wholly-owned, but are
majority-controlled subsidiaries started in 1999.
The Bank segment provides financial products through its branch network
to consumer and commercial customers. The WSFS Credit Corporation segment
provides auto loans and leases indirectly through unrelated auto dealerships
within the Mid-Atlantic region. C1FN is a start-up company in which the Bank has
voting control and shares in 43% of the operating results at December 31, 1999.
C1FN provides direct-to-customer marketing, servicing, Internet development and
technology management for "branchless" financial services. WSFS and C1FN are
engaged in a joint effort through a division of the Bank, everbank.comtm to
provide internet banking on a national level. WNFI, a 51% owned subsidiary which
began operations in December 1999, is engaged in home equity lending.
Reportable segments are business units that offer different
services to distinct customers. The reportable segments are managed separately
because they operate under different regulations and provide services to
distinct customers. The Corporation evaluates performance based on pre-tax
ordinary income and allocates resources based on these results. Segment
information for the years ended December 31, 1999, 1998, and 1997 follow:
-82-
For the year ended December 31, 1999:
Bank WCC C1FN(3) WNFI Total
----------- ---------- ---- ---- ---------
(In Thousands)
External customer revenues:
Interest income....................... $ 108,011 $ 1,996 $ 173 $ - $ 110,180
Other income ......................... 11,577 15,055(1) 2 - 26,634
---------- ---------- --------- ---------- ---------
Total external customer revenues ......... 119,588 17,051 175 - 136,814
---------- ---------- --------- ---------- ---------
Intersegment revenues:
Interest income....................... 12,514(2) - - 7 12,521
Other income ......................... 130 6 - - 136
---------- ---------- --------- ---------- ---------
Total intersegment revenues .............. 12,644 6 - 7 12,657
---------- ---------- --------- ---------- ---------
Total revenue............................. 132,232 17,057 175 7 149,471
---------- ---------- --------- ---------- ---------
External customer expenses:
Interest expense...................... 71,354 - 16 - 71,370
Other expenses ....................... 39,351 1,754 1,687 198 42,990
Other depreciation and
amortization .................... 2,378 78 58 - 2,514
---------- ---------- --------- ---------- ---------
Total external customer expenses ......... 113,083 1,832 1,761 198 116,874
---------- ---------- --------- ---------- ---------
Intersegment expenses:
Interest expense...................... 7 12,514(2) - - 12,521
Other expenses ....................... 6 90 40 - 136
---------- ---------- --------- ---------- ---------
Total intersegment expenses .............. 13 12,604 40 - 12,657
---------- ---------- --------- ---------- ---------
Total expenses ........................... 113,096 14,436 1,801 198 129,531
---------- ---------- --------- ---------- ---------
Income before taxes and minority
interest.............................. 19,136 2,621 (1,626) (191) 19,940
Provision for income taxes ............... 1,203
Minority interest ........................ (972)
---------
Consolidated net income .................. $ 19,709
=========
Segment assets .......................... 1,723,243 247,873 18,091 2,383 $1,991,590
Elimination of intersegment receivables.. (237,770)
----------
Consolidated assets ..................... $1,753,820
==========
Capital expenditures...................... $ 4,207 $ 67 $ 894 $ 70 $ 5,238
(continued on next page)
-83-
For the year ended December 31, 1998:
Bank WCC Total
--------------- ------------ -----------
(In Thousands)
External customer revenues:
Interest income.................................................... $ 105,833 $ 2,399 $ 108,232
Other income ...................................................... 11,243 13,450(1) 24,693
---------- ---------- ----------
Total external customer revenues ...................................... 117,076 15,849 132,925
---------- ---------- ----------
Intersegment revenues:
Interest income.................................................... 11,339(2) - 11,339
Other income ...................................................... 20 7 27
---------- ---------- ----------
Total intersegment revenues ........................................... 11,359 7 11,366
---------- ---------- ----------
Total revenue.......................................................... 128,435 15,856 144,291
---------- ---------- ----------
External customer expenses:
Interest expense .................................................. 71,114 - 71,114
Other expenses..................................................... 33,118 2,556 35,674
Other depreciation and amortization................................ 1,768 81 1,849
---------- ---------- ----------
Total external customer expenses ...................................... 106,000 2,637 108,637
---------- ---------- ----------
Intersegment expense:
Interest expense................................................... - 11,339(2) 11,339
Other expenses..................................................... 7 20 27
---------- ---------- ----------
Total intersegment expenses ........................................... 7 11,359 11,366
---------- ---------- ----------
Total expenses ........................................................ 106,007 13,996 120,003
---------- ---------- ----------
Income before taxes and extraordinary item............................. 22,428 1,860 24,288
Provision for income taxes ............................................ 6,315
Loss on extinquishment of debt, net
of tax .............................................................. 1,461
-----------
Consolidated net income ............................................... $ 16,512
===========
Segment assets......................................................... 1,622,848 226,305 $ 1,849,153
Elimination of intersegment receivables................................ (213,443)
-----------
Consolidated assets.................................................... $ 1,635,710
===========
Capital expenditures................................................... $ 4,744 $ 24 $ 4,768
(continued on next page)
-84-
For the year ended December 31, 1997:
Bank WCC Total
----------- ----------- ----------
(In Thousands)
External customer revenues:
Interest income....................... $ 107,265 $ 2,670 $ 109,935
Other income ......................... 8,788 10,828(1) 19,616
---------- ---------- ----------
Total external customer revenues ......... 116,053 13,498 129,551
---------- ---------- ----------
Intersegment revenues:
Interest income....................... 9,066(2) - 9,066
Other income ......................... 20 9 29
---------- ---------- ----------
Total intersegment revenues .............. 9,086 9 9,095
---------- ---------- ----------
Total revenue............................. 125,139 13,507 138,646
---------- ---------- ----------
External customer expenses:
Interest expense ..................... 69,817 - 69,817
Other expenses........................ 33,349 1,978 35,327
Other depreciation and amortization .. 1,335 107 1,442
---------- ---------- ----------
Total external customer expenses ......... 104,501 2,085 106,586
---------- ---------- ----------
Intersegment expenses:
Interest expense...................... - 9,066(2) 9,066
Other expenses ....................... 9 20 29
---------- ---------- ----------
Total intersegment expenses .............. 9 9,086 9,095
---------- ---------- ----------
Total expenses............................ 104,510 11,171 115,681
---------- ---------- ----------
Income before taxes and extraordinary item 20,629 2,336 22,965
Provision for income taxes ............... 6,576
Loss on extinquishment of debt, net
of tax ................................. -
----------
Consolidated net income .................. $ 16,389
==========
Segment assets............................ 1,502,732 203,522 $1,706,254
Elimination of intersegment receivables... (191,037)
----------
Consolidated assets....................... $1,515,217
==========
Capital expenditures...................... $ 4,424 $ 23 $ 4,447
(1) Operating lease income net of depreciation and loss provisions.
(2) Intersegment interest based on the Corporation's weighted average wholesale
borrowing cost which was 5.62% 5.96%, and 6.06%, for the years ended
December 31, 1999, 1998 and 1997, respectively.
(3) Includes the results of C1FN from September 1, 1999 through December 31,
1999, the period of WSFS' ownership.
(4) Includes the results of WNFI from December 1, 1999, its date of inception.
-85-
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
Year Ended December 31,
--------------------------------
1999 1998
------- -------
(In Thousands)
Assets:
Cash ...................................................................... $ 7,185 $ 15,225
Investment in the Bank .................................................... 134,653 116,144
Investment in interest rate cap ........................................... 2,131 2,370
Investment in capital trust................................................ 1,547 1,547
Other assets............................................................... 1,667 2,201
--------- ---------
Total assets ................................................................... $ 147,183 $ 137,487
========= =========
Liabilities and stockholders' equity:
Borrowings................................................................. $ 50,000 $ 50,000
Interest payable........................................................... 382 495
Other liabilities.......................................................... 648 1,240
--------- ---------
Total liabilities.......................................................... 51,030 51,735
--------- ---------
Stockholders' equity:
Common stock .............................................................. 148 147
Capital in excess of par value ............................................ 58,185 57,696
Comprehensive income....................................................... (3,265) 236
Retained earnings ......................................................... 83,000 64,657
Treasury stock ............................................................ (41,915) (36,984)
--------- ---------
Total stockholders' equity ................................................ 96,153 85,752
--------- ---------
Total liabilities and stockholders' equity...................................... $ 147,183 $ 137,487
========= =========
Condensed Statement of Operations
Year Ended December 31,
--------------------------------
1999 1998 1997
------- -------- ------
(In Thousands)
Income:
Interest income ........................................................... $ 876 $ 850 $ 524
Other income............................................................... 93 91 62
-------- -------- --------
969 941 586
-------- -------- --------
Expenses:
Interest expense........................................................... 4,284 3,748 3,201
Other operating expenses................................................... (1,116) (934) (801)
-------- -------- --------
3,168 2,814 2,400
-------- -------- --------
Loss before equity in undistributed income of the Bank and extraordinary item... (2,199) (1,873) (1,814)
Equity in undistributed income of the Bank ..................................... 21,908 19,846 18,203
-------- -------- --------
Income before extraordinary item................................................ 19,709 17,973 16,389
Loss on extinguishment of debt, net of taxes .................................. - 1,461 -
-------- -------- --------
Net income ..................................................................... $ 19,709 $ 16,512 $ 16,389
======== ======== ========
-86-
Condensed Statement of Cash Flows
Year Ended December 31,
--------------------------------
1999 1998 1997
------- -------- ------
(In Thousands)
Operating activities:
Net income ................................................................ $ 19,709 $ 16,512 $ 16,389
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of the Bank ................................ (21,908) (19,846) (18,203)
Amortization .............................................................. 286 135 115
Loss on extinguishment of debt............................................. - 2,248 -
(Increase) decrease in other assets........................................ 487 (600) 721
Increase (decrease) in other liabilities................................... (706) 98 4
-------- -------- --------
Net cash used for operating activities ......................................... (2,132) (1,453) (974)
-------- -------- --------
Investing activities:
Decrease in investment in Bank............................................. - 12,000 7,972
Investment in interest rate cap ........................................... - (2,390) -
Investment in capital trust ............................................... - (1,547) -
-------- -------- --------
Net cash provided by investing activities....................................... - 8,063 7,972
-------- -------- --------
Financing activities:
Issuance of common stock .................................................. 389 228 180
Proceeds from issuance of trust preferred borrowings, net of costs......... - 48,624 -
Extinguishment of senior notes............................................. - (30,548) -
Dividends paid on common stock ............................................ (1,366) (1,107) -
Treasury stock, net of reissuance ......................................... (4,931) (16,497) (5,811)
-------- -------- --------
Net cash provided by (used for) financing activities ........................... (5,908) 700 (5,631)
-------- -------- --------
Increase (decrease) in cash .................................................... (8,040) 7,310 1,367
Cash at beginning of period .................................................... 15,225 7,915 6,548
-------- -------- --------
Cash at end of period .......................................................... $ 7,185 $ 15,225 $ 7,915
======== ======== ========
-87-
19. INVESTMENTS IN NON WHOLLY-OWNED SUBSIDIARIES
In August 1999, WSFS Financial Corporation invested $5.5 million in
CustomerOne Financial Network, Inc (C1FN), a St Louis, Missouri based
corporation formed in 1998 for the express purpose of providing
direct-to-consumer marketing, servicing, internet development and technology
management for "branchless" financial services. WSFS is the single largest
shareholder in C1FN, has majority control through a voting trust and shares in
43% of the operating results of C1FN at December 31, 1999. In addition, WSFS
received warrants for the purchase of 20% additional ownership of C1FN, as well
as the opportunity and under certain circumstances the obligation to invest an
additional $5.4 million in the year 2000, at current offered ownership prices.
As a result of this investment, C1FN's internet-only banking structure became
part of everbank.com(TM), a division of WSFS. C1FN and WSFS manage the
operations of everbank.com.(TM) Everbank.com(TM) began marketing internet-only
banking to a national clientele in November of 1999.
Additionally, in November 1999, the Corporation expanded the home
equity lending business of Community Credit Corporation (CCC) which initially
started operations in 1994. CCC was renamed Wilmington National Finance, Inc.
(WNFI) and WSFS retained a 51% ownership with the remainder held by WNFI's new
executives retained to lead the expansion of WNFI. WSFS also has warrants to
obtain an additional 15% ownership in WNFI. Both C1FN and WNFI are consolidated
into the financial statements of WSFS Financial Corporation. The portion of
equity and operating results attributable to investors in C1FN and WNFI, other
than WSFS, are reported as minority interest.
-88-
QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/99 9/30/99 6/30/99 3/31/99 12/31/98 9/30/98 6/30/98 3/31/98
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income............ $ 28,603 $ 27,223 $ 27,165 $ 27,189 $ 26,915 $ 27,314 $ 26,941 $ 27,062
Interest expense........... 18,659 17,587 17,394 17,730 18,040 18,213 17,541 17,320
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income ....... 9,944 9,636 9,771 9,459 8,875 9,101 9,400 9,742
Provision for loan losses.. 233 259 249 263 142 189 172 577
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 9,711 9,377 9,522 9,196 8,733 8,912 9,228 9,165
Other income .............. 5,375 7,478 7,210 6,571 6,432 6,401 5,863 5,997
Other expenses............. 13,116 10,992 10,559 9,833 9,114 9,085 9,070 9,174
-------- -------- -------- -------- -------- -------- -------- --------
Income before taxes ....... 1,970 5,863 6,173 5,934 6,051 6,228 6,021 5,988
Income tax provision ...... (3,469) 1,524 1,605 1,543 1,574 1,619 1,565 1,557
-------- -------- -------- -------- -------- -------- -------- --------
Income before extraordinary
item and minority interest 5,439 4,339 4,568 4,391 4,477 4,609 4,456 4,431
Loss on extinguishment of
debt, net of tax ........ - - - - 1,461 - - -
Less minority interest..... (799) (173) - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income ................ $ 6,238 $ 4,512 $ 4,568 $ 4,391 $ 3,016 $ 4,609 $ 4,456 $ 4,431
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic:
Income before extraordinary
item ................... $ .55 $ .40 $ .40 $ .38 $ .37 $ .37 $ .36 $ .36
Loss on extinguishment of
debt.................... - - - - (.12) - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income............... $ .55 $ .40 $ .40 $ .38 $ .25 $ .37 $ .36 $ .36
======== ======== ======== ======== ======== ======== ======== ========
Diluted:
Income before extraordinary
item ................... $ .55 $ .40 $ .40 $ .38 $ .37 $ .37 $ .35 $ .35
Loss on extinguishment of
debt.................... - - - - (.12) - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income............... $ .55 $ .40 $ .40 $ .38 $ .25 $ .37 $ .35 $ .35
======== ======== ======== ======== ======== ======== ======== ========
-89-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10 through 13 are incorporated by the following references from the
indicated pages of the Proxy Statement for the 2000 Annual Meeting of
Stockholders:
Page
----
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 4-9
ITEM 11. EXECUTIVE COMPENSATION 10-18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 2,6,7
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 18
-90-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements listed on the index set forth in Item 8 of this
Annual Report on Form 10-K are filed as part of this Annual Report.
Financial statement schedules are not required under the related instructions
of the Securities and Exchange Commission or are inapplicable and, therefore,
have been omitted.
The following exhibits are incorporated by reference herein or annexed to this
Annual Report:
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Registrant's Certificate of Incorporation, as amended is
incorporated herein by reference to Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
3.2 Bylaws of WSFS Financial Corporation are incorporated herein by
reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form S-1 (File No. 33-45762) filed with the
Commission on February 24, 1992.
4.1 Certificate of Trust of WSFS Capital Trust I, incorporated herein
by reference to Exhibit 4.2 to the Registration Statement on Form
S-3, Registration Nos. 333-56015, 333-56015-01 and 333-56015-02
filed by WSFS Financial Corporation, WSFS Capital Trust I and WSFS
Capital Trust II (the "Registration Statement").
4.2 Trust Agreement of WSFS Capital Trust I, incorporated herein by
reference to Exhibit 4.4 to the Registration Statement.
4.3 Amended and Restated Trust Agreement of WSFS Capital I,
incorporated herein by reference to Exhibit 4.1 to WSFS Financial
Corporation's Current Report on Form 8-K/A, filed with the
Securities and Exchange Commission on November 20, 1998 ("Form
8-K/A")
4.4 Form of Trust Preferred Security Certificate of WSFS Capital Trust
I, incorporated herein by reference to Exhibit 4.3 to the Form
8-K/A.
4.5 Trust Preferred Securities Guarantee Agreement, incorporated
herein by reference to the Form 8-K/A. Commission on November 20,
1998.
-91-
4.6 Form of Junior Subordinated Indenture between WSFS Financial
Corporation and Wilmington Trust Company, as trustee, incorporated
herein by reference to Exhibit 4.1 to the Registration Statement.
4.7 Officers' Certificate and Company Order for Floating Rate Junior
Subordinated Debentures due December 1, 2028, incorporated herein
by reference to Exhibit 4.2 to the Form 8-K/A.
4.8 Form of Floating Rate Junior Subordinated Debenture, incorporated
herein by reference to Exhibit 4.5 to the Form 8-K/A.
4.9 First Amendment to the Amended and Restated Trust Agreement of
WSFS Capital Trust I.
10.1 Employment Agreement between WSFS Financial Corporation and
Wilmington Savings Fund Society, Federal Savings Bank and Marvin
N. Schoenhals is incorporated herein by reference to Exhibit 10.1
of Registrant's Registration Statement on Form S-4 (File No.
33-76470) filed with the Commission on March 15, 1994.
10.2 Wilmington Savings Fund Society, Federal Savings Bank 1986 Stock
Option Plan, as amended is incorporated herein by reference to
Exhibit 4.1 of Registrant's Registration Statement on Form S-8
(File No. 33-56108) filed with the Commission on December 21,
1992.
10.3 WSFS Financial Corporation, 1994 Short Term Management Incentive
Plan Summary Plan Description is incorporated herein by reference
to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
10.4 Employment Agreement dated September 20, 1996 by and between
Wilmington Savings Fund Society, Federal Savings Bank and Thomas
E. Stevenson is incorporated herein by reference to Exhibit 10.5
of the Annual Report on Form 10-K for the year ended December 31,
1996
10.5 Employment Agreement dated November 8, 1996 by and between
Wilmington Savings fund Society, Federal Savings Bank and Joseph
M. Murphy is incorporated herein by reference to Exhibit 10.6 of
the Annual Report on Form 10-K for the year ended December 31,
1996.
10.6 Wilmington Savings Fund Society, Federal Savings Bank 1997 Stock
Option Plan is incorporated herein by reference to the
Registrant's Registration Statement on Form S-8 (File No.
333-26099) filed with the Commission on April 29, 1997.
-92-
10.7 Employment Agreement dated May 6, 1997 by and between Wilmington
Savings Fund Society, Federal Savings Bank and Karl L. Johnston is
incorporated herein by reference to exhibit 10.8 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.8 Amendment and Extension to the Employment Agreement between WSFS
Financial Corporation and Wilmington Savings Fund Society, Federal
Savings Bank and Marvin N. Schoenhals dated April 24, 1997 is
incorporated herein by reference to exhibit 10.9 of the
Registrant's Annual Report of Form 10K for the year ended December
1997.
21 Attachment A Subsidiaries of Registrant.
23 Attachment B Consent of KPMG LLP
27 Attachment C Financial Data Schedule
(b) The following reports on Form 8K were filed during the fourth quarter 1998:
December 28, 1999, the registrant filed a Form 8-K reporting under Item
5, Other Events, the press release announcing:
On December 7, 1999, WSFS Financial Corporation issued a press release
announcing an initiative to expand its home equity lending business
through Community Credit Corporation ("CCC"), a wholly-controlled
operating subsidiary of its primary subsidiary, Wilmington Savings Fund
Society, F.S.B. ("WSFS"), a federally chartered thrift.
On December 13, 1999 WSFS Financial Corporation issued a press release
announcing that everbank.com, a division of WSFS, is open for public
transactions.
-93-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: March 23, 2000 BY: /s/ MARVIN N. SCHOENHALS
------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 23, 2000 BY: /s/ MARVIN N. SCHOENHALS
------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive
Officer
Date: March 23, 2000 BY: /s/ CHARLES G. CHELEDEN
------------------------------
Charles G. Cheleden
Vice Chairman and Director
Date: March 23, 2000 BY:
------------------------------
John F. Downey
Director
Date: March 23, 2000 BY: /s/ LINDA C. DRAKE
------------------------------
Linda C. Drake
Director
Date: March 23, 2000 BY: /s/ DAVID E. HOLLOWELL
------------------------------
David E. Hollowell
Director
Date: March 23, 2000 BY: /s/ JOSEPH R. JULIAN
------------------------------
Joseph R. Julian
Director
-94-
Date: March 23, 2000 BY: /s/ THOMAS P. PRESTON
------------------------------
Thomas P. Preston
Director
Date: March 23, 2000 BY: /s/ CLAIBOURNE D. SMITH
------------------------------
Claibourne D. Smith
Director
Date: March 23, 2000 BY: /s/ EUGENE W. WEAVER
------------------------------
Eugene W. Weaver
Director
Date: March 23, 2000 BY: /s/ R. TED WESCHLER
------------------------------
R. Ted Weschler
Director
Date: March 23, 2000 BY: /s/ DALE E. WOLF
------------------------------
Dale E. Wolf
Director
Date: March 23, 2000 BY: /s/ MARK A. TURNER
------------------------------
Mark A. Turner
Executive Vice President and
Chief Financial Officer
Date: March 23, 2000 BY: /s/ ROBERT A. KUEHL
------------------------------
Robert A. Kuehl
Senior Vice President and Controller
-95-