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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16668
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WSFS FINANCIAL CORPORATION
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Delaware 22-2866913
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of 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 price of the registrant's common stock as
quoted on the Nasdaq National Market(sm) as of March 16, 2001 was $97,431,120.
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, 2001, there were issued and outstanding 10,038,634 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 26, 2001
are incorporated by reference in Part III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 24
Item 3. Legal Proceedings....................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders..................................... 27
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 28
Item 6. Selected Financial Data................................................................. 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 47
Item 8. Financial Statements and Supplementary Data............................................. 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 95
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... 95
Item 11. Executive Compensation.................................................................. 95
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 95
Item 13. Certain Relationships and Related Transactions......................................... 95
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 96
Signatures.............................................................................. 98
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PART I
Item 1. Business
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 (WSFS). Founded in 1832, WSFS is one of the oldest financial
institutions in the country. As a federal savings bank which was formerly
chartered as a state mutual savings bank, WSFS enjoys broader investment powers
than most other financial institutions. These grandfathered powers have allowed
WSFS to diversify its revenue sources to a greater extent than most savings
banks. WSFS has served the residents of the Delaware Valley for 169 years. WSFS
is the largest thrift institution headquartered in Delaware and among the four
largest financial institutions in the state on the basis of total deposits
traditionally garnered in-market. The Corporation's primary market area is the
Mid-Atlantic region of the United States which is characterized by a diversified
manufacturing and service economy. 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 WSFS' geographical footprint.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services funding these
activities primarily with retail deposits and borrowings. The banking operations
of WSFS are conducted from 28 retail banking offices located in northern
Delaware and southeastern Pennsylvania. Deposits are insured by the Federal
Deposit Insurance Corporation (FDIC).
Fully owned subsidiaries of WSFS include WSFS Credit Corporation (WCC),
which is engaged primarily in indirect motor vehicle leasing; and 838 Investment
Group, Inc., which markets various insurance products and securities through
WSFS' branch system. An additional subsidiary, Star States Development Company
(SSDC), is currently inactive having sold its final parcel of land in 1998.
On December 21, 2000, the Board of Directors of the Corporation approved
plans to discontinue the operations of WCC, and as a result, the Company has
exited the indirect auto leasing business. WCC, which had 7,300 lease contracts
and 2,700 loan contracts at December 31, 2000, no longer accepts new
applications but will continue to service its existing loans and leases.
Management estimates that substantially all loan and lease contracts will mature
by December 2003. As discussed in Note 2 of the Financial Statements, the
results of WCC are presented as discontinued operations, retroactively restated
for all periods presented.
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. As a result of this investment,
C1FN's Internet-only banking structure became part of everbank.com(TM), a
division of WSFS. C1FN assists in managing the operations of everbank.com(TM).
everbank.com(TM) began marketing Internet-only banking to a national clientele
in November of 1999.
WSFS is the single largest shareholder in C1FN, has majority control
through a voting trust and as a result, consolidates the results of C1FN in the
WSFS Financial Statements. For the year ended December 31, 2000 WSFS shared in
42% of the operating results of C1FN. In addition, WSFS holds warrants for the
purchase of 20% additional ownership of C1FN, as well as the option and under
certain circumstances the obligation to invest an additional $5.4 million in the
year 2000, at current offered ownership prices. This option expired on July 5,
2000 with no additional investment being made by WSFS.
On December 29, 2000, C1FN received a $5.0 million investment from a third
party investor with a conditional commitment to invest an additional $12.5
million if and when a separate bank charter is obtained for everbank.com(TM).
This investment effectively reduces WSFS' economic ownership of C1FN at December
31, 2000
-3-
from 42% to 29%. Since WSFS retains majority control of C1FN through a voting
trust, the results of C1FN will continue to be consolidated into the operating
results of WSFS until everbank.com(TM) obtains a separate banking charter.
Additionally, in November 1999, the Corporation expanded the local retail
home equity lending business of Community Credit Corporation (CCC) which began
operations in 1994. CCC was renamed Wilmington National Finance, Inc. (WNF)
which expanded its sales to a national level and now aggregates loans through
brokers and sells them to investors. WSFS retained a 51% ownership with the
remainder held by WNF's executives retained to lead the expansion of WNF. WSFS
also has warrants to obtain an additional 15% ownership in WNF. Both C1FN and
WNF are consolidated into the Financial Statements of the Corporation. See Note
19 of the 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.
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,
---------------------------------------------------------------------------
2000 1999 1998
---------------------- ----------------------- ----------------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
------ --------- ------ ---------- ------ ----------
(Dollars In Thousands)
Held-to-Maturity:
Corporate bonds............................. $3,885 0.2% $ 6,855 0.4% $ 6,059 0.4%
State and political subdivisions ........... 10,861 0.6 1,757 0.1 1,583 0.1
------- --- ------- --- ------ ---
14,746 0.8 8,612 0.5 7,642 0.5
------- --- ------ ---
Available-for-Sale:
U.S. Government and agencies................ 1,893 0.1 28,436 1.6 30,219 1.9
Corporate bonds............................. 13,101 0.8 - - - -
Other investments........................... - 425 - - -
------- --- ------- --- ------ ---
14,994 0.9 28,861 1.6 30,219 1.9
------- --- ------- --- ------ ---
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell.............. 3,500 0.2 - - 20,900 1.3
Interest-bearing deposits in other banks (1) 7,318 0.4 8,026 0.5 7,518 0.4
------- --- ------- --- ------ ---
10,818 0.6 8,026 0.5 28,418 1.7
------- --- ------- --- ------ ---
$40,558 2.3% $45,499 2.6% $66,279 4.1%
======= === ======= === ======= ===
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
In 2000, WSFS purchased $14 million in corporate bonds and $12 million in
U.S. Government securities, all of which were classified as available-for-sale,
and $9 million in municipal bonds which were classified as held-to-maturity.
There was also a $2 million corporate bond which was reclassified from
held-to-maturity to available-for-sale in 2000 with the adoption of SFAS No. 133
(see Note 20 of the Financial Statements for further discussion). In addition,
there were sales of U.S. Government securities totaling $25 million and a
$750,000 corporate call, from which gains of $18,000 and losses of $67,000 were
realized. There was also a sale of $10 million in U.S. Government securities in
January 2000, for which a loss of $289,000 was recognized in 1999, and a gain of
$40,000 on the sale of common stock received from the demutualization of
insurance companies of which WSFS was a policyholder. In 1999, WSFS purchased
$32 million in U.S. Government securities, and $2 million in corporate bonds,
all classified as available-for-sale, and $2 million in corporate bonds which
were initially classified as held-to-maturity but reclassified as available for
sale in 2000. In addition, there were sales of $20 million in U.S. Government
securities, also classified as available-for-sale. In 1998, WSFS 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. Losses of $9,000 and gains
of $30,000 were realized on the sales in 1999 and 1998, respectively. Reductions
in the other categories, for all years, were due to principal repayments.
-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, 2000. 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, 2000
--------------------
Amount Yield
------ ------
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
After one but within five years.............................................. $ 875 5.94%
After five but within ten years.............................................. 1,883 6.33
After ten years.............................................................. 1,127 7.30
-------
3,885 6.53
-------
State and political subdivisions (1):
After one but within five years.............................................. 2,449 7.27
After five but within ten years.............................................. 3,520 7.21
After ten years.............................................................. 4,892 6.03
-------
10,861 6.69
-------
Total debt securities, held-to-maturity........................................ 14,746 6.65
-------
Available-for-Sale:
U.S. Government and agencies:
Within one year............................................................. 1,848 5.86
After five but within ten years............................................. 45 7.31
-------
1,893 5.89
-------
Corporate bonds:
Within one year............................................................. 11,101 7.34
After ten years............................................................. 2,000 9.88
-------
13,101 7.72
-------
Total debt securities, available-for-sale...................................... 14,994 7.49
-------
Short-term investments:
Federal funds sold and securities purchased under agreement to resell 3,500 6.13
Interest-bearing deposits in other banks.................................... 7,318 5.58
-------
Total short-term investments................................................... 10,818 5.75
-------
$40,558 6.72%
=======
(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 2000 totaled $210 million, all
of which were classified as available-for-sale. There were also sales of $195
million of mortgage-backed securities, as part of a deleveraging strategy, which
resulted in a net loss of $6,451,000, and a sale of $24 million in
mortgage-backed securities in January 2000 for which a loss of $730,000 was
recognized in 1999. Reductions in the other categories, for all years, were due
to principal repayments.
-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,
---------------------------------------------------------------------------
2000 1999 1998
-------------------- ----------------------- ----------------------
(Dollars In Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
------ ------ ------ ------ ------ ------
Held-to-Maturity:
Collateralized mortgage obligations (1)..... $56,091 6.75% $191,839 6.65% $175,619 6.78%
FNMA........................................ 24,908 6.05 31,065 6.23 40,881 6.26
FHLMC....................................... 26,664 6.04 33,036 6.15 42,337 6.16
GNMA ....................................... - - 852 6.48 1,044 6.93
Other....................................... - - 2,033 5.31 5,977 7.36
-------- ---- -------- ---- -------- ----
$107,663 6.41% $258,825 6.53% $265,858 6.61%
======== ==== ======== ==== ======== ====
Available-for-Sale:
Collateralized mortgage obligations (2)..... $229,882 7.04% $173,544 6.43% $168,997 6.54%
FNMA........................................ 1,141 7.25 - - - -
FHLMC....................................... 1,032 7.76 143 6.61 - -
GNMA........................................ - - 15,237 5.40 24,229 6.11
-------- ---- -------- ---- -------- ----
$232,055 7.04% $188,924 6.34% $193,226 6.49%
======== ==== ======== ==== ======== ====
(1) Includes $31.0 million, at December 31, 2000, in private issues from
Residential Funding Mortgage securities, Inc. with a fair market value of
$31.0 million
(2) Includes $37.5 million, $11.9 million and $11.3 million in private issues
of Residential Funding Mortgage Securities, Inc., Countrywide Funding Corp.
and G.E. Capital Mortgage Services, Inc., respectively, all stated at the
fair market value.
CREDIT EXTENSION ACTIVITIES
Traditionally, the majority of a typical thrift institution's loan
portfolio has consisted of first mortgage loans on residential properties.
However, as a result of various legislative and regulatory changes since 1980,
the commercial and consumer lending powers of WSFS have increased substantially.
Consequently, WSFS 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, WSFS
began to originate small business and commercial real estate loans in its
primary market area. WSFS' 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
portfolio by type of loan at each of the dates indicated. Other than as
disclosed below, the Company had no concentrations of loans exceeding 10% of
total loans at December 31, 2000:
December 31,
---------------------------------------------------------------------------
2000 1999 1998
-------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
Residential real estate (1) ................ $440,136 45.7% $393,243 45.7% $291,110 39.4%
Commercial real estate:
Commercial mortgage ........................ 190,707 19.8% 201,559 23.4% 226,063 30.6%
Construction ............................... 30,183 3.1% 21,561 2.5% 11,642 1.5%
-------- ----- -------- ----- -------- -----
Total commercial real estate ............. 220,890 22.9% 223,120 25.9% 237,705 32.1%
Commercial ................................. 151,887 15.7% 115,931 13.5% 97,524 13.2%
Consumer ................................... 175,269 18.2% 154,857 18.0% 141,238 19.1%
-------- ----- -------- ----- -------- -----
Gross loans ................................ 988,182 102.5% 887,151 103.1% 767,577 103.8%
Less:
Unearned income ............................ 3,268 0.3% 4,355 0.5% 5,383 0.7%
Allowance for loan losses .................. 21,423 2.2% 22,223 2.6% 22,732 3.1%
-------- ----- -------- ----- -------- -----
Net loans .................................. $963,491 100.0% $860,573 100.0% $739,462 100.0%
======== ===== ======== ===== ======== =====
[RESTUBBED]
December 31,
------------------------------------------------
1997 1996
--------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars In Thousands)
Residential real estate (1) ................ $287,349 39.1% $279,060 40.1%
Commercial real estate:
Commercial mortgage ........................ 238,533 32.5% 278,935 40.1%
Construction ............................... 12,553 1.7% 27,056 3.9%
-------- ----- -------- -----
Total commercial real estate ............. 251,086 34.2% 305,991 44.0%
Commercial ................................. 94,686 12.9% 28,602 4.1%
Consumer ................................... 130,069 17.7% 111,615 16.0%
-------- ----- -------- -----
Gross loans ................................ 763,190 103.9% 725,268 104.2%
Less:
Unearned income ............................ 4,407 0.6% 5,667 0.8%
Allowance for loan losses .................. 24,057 3.3% 23,527 3.4%
-------- ----- -------- -----
Net loans .................................. $734,726 100.0% $696,074 100.0%
======== ===== ======== =====
(1) Includes $23,274, $24,572, $3,103, $2,222, and $773 of residential mortgage
loans held-for-sale at December 31, 2000, 1999, 1998, 1997, and 1996,
respectively.
-8-
The following table sets forth information as of December 31, 2000
regarding the dollar amount of loans maturing in the Company's portfolios,
including scheduled repayments of principal, based on contractual terms to
maturity. In addition, the table sets forth the dollar amount of loans maturing
during the indicated periods, based on whether the loan has a fixed- or
adjustable-rate. Loans having no stated maturity or repayment schedule are
reported in the one year or less category.
Less than One to Over
One Year Five Years Five Years Total
-------- ---------- ----------- --------
(In Thousands)
Real estate loans (1)..................... $ 34,505 $172,706 $400,359 $607,570
Construction loans........................ 11,683 11,926 6,574 30,183
Commercial loans.......................... 41,309 40,514 70,064 151,887
Consumer loans ........................... 63,019 60,258 51,991 175,268
-------- -------- -------- --------
$150,516 $285,404 $528,988 $964,908
======== ======== ======== ========
Rate sensitivity:
Fixed................................... $ 48,549 $192,432 $214,526 $455,507
Adjustable ............................. 101,967 92,972 314,462 509,401
-------- -------- -------- --------
150,516 285,404 528,988 964,908
-------- -------- -------- --------
Gross loans .............................. $150,516 $285,404 $528,988 $964,908
======== ======== ======== ========
(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 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, WSFS generally requires private mortgage insurance for up to 30%
of the mortgage amount on mortgage loans whose loan-to-value ratio exceeds 80%.
WSFS does not have any significant concentrations of such insurance with any one
insurer. On a very limited basis, WSFS originates/purchases loans with
loan-to-value ratios exceeding 80% without a private mortgage insurance
requirement. At December 31, 2000, the balance of all such loans was
approximately $16.4 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 WSFS are appraised by independent appraisers selected
by WSFS and subject to review in accordance with WSFS 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. WSFS generally underwrites adjustable-rate loans under
standards consistent with private mortgage insurance and secondary market
criteria. WSFS does not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization. Consistent with industry
practice in its market area, WSFS has typically originated adjustable-rate
mortgage loans with initially discounted interest rates. All such loans are
underwritten at the fully-indexed rate.
-9-
The retention of adjustable-rate mortgage loans in WSFS' loan portfolio
helps mitigate WSFS' risk to changes in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of 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 adjustable-rate mortgage loans
allow WSFS to increase the sensitivity of its asset base to changes in interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limitations. Accordingly, there can be no
assurance that yields on WSFS' adjustable-rate mortgages will adjust
sufficiently to compensate for increases in WSFS' cost of funds during periods
of extreme interest rate increases.
The original contractual loan payment period for residential loans
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. WSFS
enforces due-on-sale clauses through foreclosure and other legal proceedings to
the extent available under applicable laws.
In addition to loans originated for its own portfolio, WSFS originates
nonconforming residential mortgage loans through its non wholly-owned
subsidiary, Wilmington National Finance, Inc. ("WNF"), for resale into the
secondary market on a servicing release, limited recourse basis. These loans are
originated to the underwriting guidelines of the various investors to which WNF
sells its loans, and such loans are typically sold to investors within 15 to 45
days of origination.
The mortgage loans that WNF originates are fully amortizing, fixed or
adjustable rate, first or second lien mortgage loans on one-to four-family
residential properties with loan-to-value ratios up to 100% and contractual
terms of 10 to 30 years. With respect to each property securing a mortgage loan,
the underwriting guidelines require among other things, title insurance, fire
and extended coverage casualty insurance, and a full appraisal by an independent
appraisers selected and reviewed by WNF. The majority of adjustable rate
mortgage loans are originated by WNF are indexed to the six month London
Interbank Offered Rate (LIBOR) and have rates that adjust every 6 months after a
initial fixed rate period of 24 to 36 months, with the adjustments limited to
two percentage at any adjustment date and six percentage points over the live of
the loan.
In general, loans are sold without recourse except for the repurchase
arising from standard contract provisions covering violation of representations
and warranties or, under certain investor contracts a default by borrower on the
first payment due to the investor. The Company also has limited recourse
exposure under certain investor contracts in the event a borrower prepays a loan
in total within a specified period after sale, typically one year, with such
recourse limited to a pro rata portion of the premium paid by the investor for
that loan less any prepayment penalty collectible from the borrower.
Commercial Real Estate, Construction and Commercial Lending.
Federal savings banks, are generally permitted to invest up to 400% of
their total regulatory capital in nonresidential real estate loans and up to 20%
of its assets in commercial loans. As a federal savings bank which was formerly
chartered as a Delaware savings bank, however, WSFS has certain additional
lending authority.
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.
-10-
WSFS offers commercial construction loans to developers. In some cases
these loans are made as "construction/permanent" loans, which provides for
disbursement of loan funds during construction and automatic conversion to
mini-permanent loans (1-5 years) upon completion of construction. Such
construction loans are made on a short-term basis, usually not exceeding two
years, with interest rates indexed to the WSFS prime rate, in most cases, and
adjusted periodically as WSFS' prime rate changes. The loan appraisal process
includes the same evaluation criteria as required for permanent mortgage loans,
but also takes into consideration completed plans, specifications, comparables
and cost estimates. 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, 2000, $61.5 million was
committed for construction loans, of which $29.3 million had been disbursed.
WSFS' commercial lending, excluding real estate loans, includes loans for
the purpose of financing equipment acquisitions, expansion, working capital and
other business purposes. These loans generally range in amounts up to
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 WSFS'
prime rate or LIBOR at the time of closing. WSFS intends to continue originating
commercial loans to small businesses in its market area.
Commercial, commercial 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 WSFS' 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. WSFS attempts to mitigate these risks and plan for
these contingencies through additional analysis and monitoring of its
construction projects.
Federal law limits the extensions of credit to any one borrower to 15% of
unimpaired capital, or 25%, if the 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 WSFS 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, WSFS 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, 2000, no borrower had
collective outstandings exceeding the above limits.
Consumer Lending.
The primary consumer credit products of the Company are equity secured
installment loans and home equity lines of credit. At December 31, 2000, WSFS
had equity secured installment loans totaling $113.7 million, which represented
65% of consumer loans. 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, 2000, WSFS had
extended a total of $81.7 million in home equity lines of credit, of which $24.4
million had been drawn at the date. Home equity lines of credit potentially
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.
-11-
The table below sets forth consumer loans by type, in dollar amounts and
percentages, at the dates indicated.
December 31,
---------------------------------------------------------------------------
2000 1999 1998
-------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars In Thousands)
Equity secured installment loans .............. $113,687 64.8% $ 97,491 63.0% $ 87,503 61.9%
Home equity lines of credit.................... 24,408 13.9% 26,446 17.1% 27,799 19.7%
Automobile..................................... 9,762 5.6% 9,800 6.3% 8,307 5.9%
Unsecured lines of credit...................... 16,739 9.6% 11,370 7.3% 10,444 7.4%
Other.......................................... 10,673 6.1% 9,750 6.3% 7,185 5.1%
--------- ----- -------- ----- -------- -----
Total consumer loans .......................... $ 175,269 100.0% $154,857 100.0% $141,238 100.0%
========= ===== ======== ===== ======== =====
[RESTUBBED]
December 31,
------------------------------------------------
1997 1996
--------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars In Thousands)
Equity secured installment loans .............. $ 78,975 60.7% $ 63,803 57.1%
Home equity lines of credit.................... 31,110 23.9% 33,267 29.8%
Automobile..................................... 3,596 2.8% 2,519 2.3%
Unsecured lines of credit...................... 9,466 7.3% 7,448 6.7%
Other.......................................... 6,922 5.3% 4,578 4.1%
-------- ----- -------- -----
Total consumer loans .......................... $130,069 100.0% $111,615 100.0%
======== ===== ======== =====
-12-
Loan 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,
WSFS 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 WSFS' overall
practices. WSFS originates fixed-rate and adjustable-rate residential real
estate loans through banking offices. In addition, for the purpose of
originating loans, WSFS has established relationships with correspondent banks
and mortgage brokers.
During 2000, the Company originated $196 million of residential real estate
loans, of which $124 million were from WNF compared to 1999 originations of $110
million in total. From time to time, WSFS 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 $37 million for the year ended December 31, 2000, $75 million for
1999 and $10 million for 1998. Residential real estate loan sales totaled $145
million in 2000, $29 million in 1999 and $75 million in 1998. While WSFS
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.
WSFS serviced for others approximately $244 million of residential loans at
December 31, 2000 compared to $236 million at December 31, 1999. The Company
also services residential loans for its portfolio totaling $372 million and $357
million at December 31, 2000 and 1999.
WSFS originates commercial real estate and commercial loans through WSFS'
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 2000, WSFS originated $144 million of commercial and commercial real
estate loans compared to $125 million in 1999. These amounts represent gross
contract amounts and do not reflect amounts outstanding on such loans.
WSFS' consumer lending is conducted primarily through the branch offices.
WSFS originates a variety of consumer credit products, including home
improvement loans, home equity lines of credit, automobile loans, credit cards,
unsecured lines of credit and other secured and unsecured personal installment
loans. During 2000, such consumer loan originations aggregated $106 million
compared to $94 million in 1999. 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 WSFS' regulatory authorities or WSFS' Risk Management Department.
Officers of WSFS have authority to approve smaller loans in graduated amounts,
depending upon their experience and management position.
Fee Income from Lending Activities.
WSFS 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.
WSFS 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 WSFS 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, 2000. Loan fees other than those considered adjustments of yield
are reported as loan fee income, a component of other income.
All fee income on loans originated by WNF for sale to third party
investors, which includes origination fees and discount points collected from
borrowers and sales premiums paid by investors, are recognized in total upon
sale of the loans to the third party investors (less adequate provision for
recourse obligations).
LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations can be negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its portfolios to identify problem loans as
promptly as possible and take actions immediately which will minimize losses. To
accomplish this, WSFS' Risk Management Department monitors the asset quality of
the Company's loan and investment in real estate portfolios and reports such
information to the Credit Policy Committee the Audit Committee of the Board of
Directors and the Controller's Department.
SUBSIDIARIES
The Corporation has two subsidiaries, Wilmington Savings Fund Society, FSB
(WSFS) and WSFS Capital Trust I. WSFS Capital Trust I was formed in 1998 to
issue Trust Preferred Securities. The Trust invested all of the proceeds from
the sale of the Trust Preferred Securities in Junior Subordinated Debentures of
the Corporation. The Corporation used the proceeds from the Junior Subordinated
Debentures for general corporate purposes, including the redemption of its 11%
Senior Notes due 2005 on December 31, 1998.
At December 31, 2000, 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, 2000, 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 automobile dealers in accordance with underwriting criteria
generally consistent with those of WSFS and the leasing industry.
-14-
On December 21, 2000, the Board of Directors of the Corporation approved
plans to discontinue the operations of WCC, as a result, the Company has exited
the indirect auto leasing business. WCC, which had 7,300 lease contracts and
2,700 loan contracts at December 31, 2000, no longer accepts new applications
but will continue to service its existing loans and leases. Management estimates
that substantially all loan and lease contracts will mature by December 2003. As
discussed in Note 2 of the Financial Statements, the results of WCC are
presented as discontinued operations, retroactively restated for all periods
presented.
838 Investment Group, 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 WSFS'
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. WSFS 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 for the period in
which it is owned. The management and operations of Providential were merged
into WSFS in November 1996.
In August 1999, the 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. As a result of this investment, C1FN's Internet-only banking
structure became part of everbank.com(TM), a division of WSFS. C1FN assists in
managing the operations of everbank.com(TM). everbank.com(TM) began marketing
internet-only banking to a national clientele in November of 1999.
WSFS is the single largest shareholder in C1FN, has majority control
through a voting trust and, for the year ended December 31, 2000 WSFS shared in
42% of the operating results of C1FN. In addition, WSFS holds warrants for the
purchase of 20% additional ownership of C1FN, as well as the option and under
certain circumstances the obligation to invest an additional $5.4 million in the
year 2000, at the original WSFS ownership prices. This option expired on July 5,
2000 with no additional investment being made by WSFS.
On December 29, 2000, C1FN received a $5.0 million investment from a third
party investor, with a conditional commitment to invest an additional $12.5
million if and when a separate bank charter is obtained for everbank.com(TM).
This investment effectively reduces WSFS' economic ownership of C1FN at December
31, 2000 from 42% to 29%. Since WSFS retains majority control of C1FN through a
voting trust, the results of C1FN will continue to be consolidated into the
operating results of WSFS until everbank.com(TM) obtains a separate banking
charter.
Additionally, in November 1999, the Corporation expanded the local retail
home equity lending business of Community Credit Corporation (CCC) which
initially started operations in 1994. CCC was renamed Wilmington National
Finance, Inc. (WNF) which expanded its sales to a national level and now
aggregates loans primarily through brokers and sells them to investors. WSFS
retained a 51% ownership with the remainder held by WNF's executives retained to
lead the expansion of WNF. WSFS also has warrants to obtain an additional 15%
ownership in WNF. Both C1FN and WNF are consolidated into the financial
statements of the Corporation. See Note 19 of the Financial Statements,
"Investments in Non-wholly Owned Subsidiaries", for further discussion.
Both C1FN and WNF are consolidated into the Financial Statements of WSFS
Financial Corporation. The portion of equity and operating results attributable
to investors in C1FN and WNF other than WSFS are reported as minority interest.
-15-
SOURCES OF FUNDS
WSFS 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. WSFS offers various deposit programs to its customers, including
savings accounts, demand deposits, interest-bearing demand deposits, money
market deposit accounts and certificates of deposits. WSFS also offers Christmas
clubs, Individual Retirement Accounts and Keogh Accounts. In addition, WSFS
accepts negotiable rate certificates with balances in excess of $100,000 from
individuals, businesses and municipalities in Delaware.
WSFS is the second largest independent full service banking institution
headquartered and operating in Delaware. It primarily attracts deposits through
its system of 28 branches. Eighteen of these branches are located in northern
Delaware's New Castle County, WSFS' primary market. These branches maintain
approximately 131,000 total account relationships with approximately 54,200
total households, or 28% of all households in New Castle County, Delaware. The
nineteenth branch is in the state capital, Dover, located in central Delaware's
Kent County. The nine remaining branches are located in southeastern
Pennsylvania.
everbank.com(TM), a division of WSFS, jointly managed with C1FN, a
nonwholly owned subsidiary of WSFS, garners deposits nationally through its
Internet banking operations. everbank.com(TM) offers demand deposits, money
market deposits and certificates of deposits as well as nondollar denominated
deposits. Total deposts at everbankTM were $183.2 million at December 31, 2000.
-16-
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 2000
- --------------- -------------
(In Thousands)
Less than 3 months...................... $19,181
Over 3 months to 6 months............... 8,834
Over 6 months to 12 months.............. 13,377
Over 12 months.......................... 8,281
-------
$49,673
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As a member of the FHLB of Pittsburgh, WSFS is authorized to apply
for advances on the security of their capital stock in the FHLB and certain of
their residential mortgages and other assets (principally securities which are
obligations of or guaranteed by the United States Government), provided certain
standards related to creditworthiness have been met. As a member institution,
WSFS is required to hold capital stock in the FHLB of Pittsburgh in an amount at
least equal to 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.
WSFS also sells securities under agreements to repurchase with various
brokers as an additional source of funding. When entering into these
transactions, WSFS is generally required to pledge either government securities
or mortgage-backed securities as collateral for the borrowings.
In 1998, the Company issued $50.0 million in Trust Preferred securities due
December 11, 2028, part of the proceeds of which was used to pay off the $29.1
million in 11% Senior Notes. See Note 9 of the Consolidated Financial Statements
for a further discussion of the Trust Preferred securities.
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,
WSFS is subject to certain restrictions in its dealings with the Company and
other affiliates.
Activities Restrictions. Because the Company became a unitary savings and
loan holding company prior to May 4, 1999, there generally are no restrictions
on its activities. If the Company were to acquire another thrift and operate it
as a separate entity, it would become subject to the activities restrictions on
multiple holding companies. Among other things, no multiple savings and loan
holding company or subsidiary thereof which is not a savings association may
commence, or continue after a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than: (i) furnishing or performing management services for a subsidiary
savings association; (ii) conducting an insurance agency or escrow business;
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings institution; (iv) holding or managing properties used or
occupied by a subsidiary savings institution; (v) acting as trustee under deeds
of trust; (vi) those activities authorized by regulation as of March 5, 1987 to
be engaged in by multiple holding companies; or (vii) unless the Director of OTS
by regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the 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.
-17-
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.
-18-
The statutory restrictions on the formation of interstate multiple holding
companies would not prevent WSFS from entering into other states by mergers or
branching. OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
the federal association qualifies as a "domestic building and loan association"
under Section.7701(a)(19) of the Internal Revenue Code or as a "qualified thrift
lender" under the Home Owners' Loan Act and the total assets attributable to all
branches of the association in the state would qualify such branches taken as a
whole for treatment as a domestic building and loan association or qualified
thrift lender. Federal associations generally may not establish new branches
unless the association meets or exceeds minimum regulatory capital requirements.
The OTS will also consider the association's record of compliance with the
Community Reinvestment Act of 1977 in connection with any branch application.
Regulation of WSFS
General. As a federally chartered savings institution, WSFS is subject to
extensive regulation by the OTS. The lending activities and other investments of
WSFS must comply with various federal regulatory requirements. The OTS
periodically examines WSFS for compliance with regulatory requirements. The FDIC
also has the authority to conduct special examinations of WSFS as the insurer of
deposits. WSFS must file reports with OTS describing its activities and
financial condition. WSFS is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "Tier 1" or "core" capital equal to 4% of adjusted total assets (or 3%
if the institution is rated composite 1 under the OTS examiner rating system),
and "total" capital (a combination of core and "supplementary" capital) equal to
8% of risk-weighted assets. In addition, OTS regulations impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital.
The OTS capital rule defines Tier 1 or core capital as common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, minority interests in the equity accounts of fully
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, 2000, WSFS was in
compliance with both the core and tangible capital requirements.
-19-
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, 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 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, 2000,
WSFS 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 of 1956 (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.
-20-
Deposit Insurance. WSFS may be charged semi-annual premiums by the FDIC for
federal insurance on its insurable deposit accounts up to applicable regulatory
limits. The FDIC may establish an assessment rate for deposit insurance premiums
which protects the insurance fund and considers the fund's operating expenses,
case resolution expenditures, income and effect of the assessment rate on the
earnings and capital of members.
The assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC which is
determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well-capitalized,
adequately-capitalized or undercapitalized -- 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.
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 CAMELS 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%.
-21-
Federal Home Loan Bank System. WSFS 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, WSFS 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,
2000, 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 to
larger institutions like WSFS for the purpose of providing funds for residential
housing finance.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $42.8 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, 2000 WSFS 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 regulations will become
final, effective in July 2001.
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.
-22-
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.
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.
-23-
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, 2000.
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ---------- --------------- --------
(In Thousands)
-----------------------------------
WSFS:
Main Office (1)(2) Owned $1,253 $286,387
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 2003 101 55,283
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2001 9 23,635
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 2003 12 66,965
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 2003 10 58,744
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 2003 41 87,877
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2005 19 58,420
New Linden Hill & Limestone Roads
Wilmington, DE 19808
University Plaza Shopping Center Branch Leased 2003 19 39,630
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(4) Leased 2007 274 63,270
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 12 67,914
144 N. DuPont Hwy.
New Castle, DE 19720
Stanton Branch Leased 2001 169 8,612
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Branch Leased 2002 188 14,510
Inside Genuardi's at Peoples Plaza
Routes 40 & 896
Newark, DE 19804
Middletown Square Shopping Center Leased 2004 58 14,071
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover Branch Leased 2005 129 13,743
Inside Metro Food Market
Rt 134 & White Oak Road
Dover, DE 19901
-24-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ---------- --------------- --------
(In Thousands)
-----------------------------------
WSFS:
WSFS (continued...):
Pottstown Branch Leased 2001 190 1,628
Inside Genuardi's Family Market
1400 North Charlotte St.
Pottstown, PA 19461
Royersford Branch Leased 2003 199 1,787
Inside Genuardi's Family Markets
Limerick Square
70 Buckwater Rd., Suite 211
Royersford, PA 19468
Glen Eagle Branch Leased 2003 259 4,803
Inside Genaurdi's Family Market
475 Glen Eagle Square
Glen Mills, PA 19342
University of Delaware-Trabant University Center Leased 2003 237 4,095
17 West Main Street
Newark, DE 19716
Brandywine Branch Leased 2004 221 16,506
Inside Genaurdi's Family Market
2522 Foulk Road
Wilmington, DE 19810
Wal-Mart Branch Leased 2004 273 2,004
Route 40 & Wilton Boulevard
New Castle, DE 19720
Chesterbrook Branch Leased 2004 201 2,538
Inside Genaurdi's Family Market
500 Chesterbrook Boulevard
Wayne, PA 19087
Kimberton Branch Leased 2004 217 2,101
Inside Genuardi's Family Market
Maple Lawn Shopping Center
542 Kimberton Road
Phoenixville, PA 19460
King of Prussia Branch Leased 2005 246 3,900
Inside Genuardi's Family Market
310 S. Henderson Road
King of Prussia, PA 19406
Operations Center Owned 1,079 N/A
2400 Philadelphia Pike
Wilmington, DE 19703
Longwood Branch Leased 2005 246 587
830 E. Baltimore Pike
E. Marlborough, PA 19348
Holly Oak Branch Leased 2005 192 19,184
Inside Superfresh
2105 Philadelphia Pike
Claymont, DE 19703
Elkins Park Branch Leased 2005 240 5,528
More Shopping Center
7300 Old York Road
Elkins Park, PA 19027
Hockessin Branch Leased 2015 623 13,885
7450 Lancaster Pike
Wilmington, DE 19707
St. David's Branch Leased 2005 243 743
Inside Genuardi's Supermarket
550 E. Lancaster Ave.
Wayne, PA 19086
-25-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ---------- --------------- --------
(In Thousands)
-----------------------------------
WSFS:
Wilmington National Finance:
Marchwood Shopping Center Leased 2002 2 N/A
4 Marchwood Road
Exton, PA 19341
6265 Southfront Road Leased 2005 - N/A
Livermore, CA
1833 Centre Point Drive Leased 2005 - N/A
Suite 123
Naperville, IL 60566
Suite 350 Leased 2005 24 N/A
2260 Buler Pike
Plymouth Meeting, PA 19462
640 Ten Rod Road Leased 2001 - N/A
North Kingstown, RI
University Plaza-Bellevue Leased 2005 - N/A
262 Chapman Road
Newark, DE
Everbank.com(TM):
St. Louis, Missouri Leased 2002 - 183,241
555 N New Ballas Road
Suite 110
St. Louis, MO 63141
New York Leased 2003 - N/A
11 Oval Drive
Suite 107
Islandia, NY 11749-1476
Vermont Leased 2002 1 N/A
188 South Main Street
P.O. Box 1209
Stowe, VT 05672
Florida (5) Leased 2004 12 N/A
2233 N. Commerce Pkwy.
Suite 1
Weston, FL 33326
WSFS Credit Corporation:
30 Blue Hen Drive Leased 2002 255 N/A
Suite 200
Newark, DE 19713
Friess Land (3) Owned - 2,158 N/A
Wilmington Gateway:
500 Delaware Ave. Owned - 5,974 N/A
Wilmington, DE 19801
----------
$1,121,591
(1) Includes location of executive offices and approximately $147.1 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and
equipment totaled $16.8 million at December 31, 2000.
(3) The total includes building and building depreciation listed under Real
Estate Held for Investment.
(4) Includes the Company's Education and Development Center.
(5) Florida location is pending execution of a sublease by C1FN to an
independent third party at the same rental cost.
-26-
Item 3. Legal Proceedings
There are no material legal proceedings to which the Company or WSFS is a
party or to which any of its property is subject except as discussed in Note 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, 2000 through the solicitation of
proxies or otherwise.
-27-
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, 2000, the Corporation had 1,926
registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly
period within the two most recent fiscal years as well as the quarterly
dividends paid.
The closing market price of the common stock at December 31, 2000 was
$12 7/8.
Stock Price Range Dividends
----------------------------- ---------
Low High
--------- --------
2000 1st $10 11/16 $12 7/8 $ .03
2nd 10 1/4 13 5/16 .04
3rd 9 15/16 11 3/8 .04
4th 10 1/16 12 7/8 .04
-----
$ .15
=====
1999 1st $14 5/8 $17 3/8 $ .03
2nd 13 5/8 16 .03
3rd 13 7/8 15 3/8 .03
4th 11 7/8 15 1/4 .03
-----
$ .12
=====
-28-
Item 6. Selected Financial Data
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Data)
At December 31,
Total assets..................................... $1,739,316 $1,751,037 $1,631,319 $1,510,655 $1,353,519
Net loans (1).................................... 963,491 860,573 739,462 734,716 695,991
Investment securities (2)........................ 29,740 37,473 37,861 78,655 18,933
Investment in reverse mortgages, net............. 33,683 28,103 31,293 32,109 35,796
Other investments................................ 39,318 36,526 51,418 74,523 47,337
Mortgage-backed securities (2)................... 339,718 447,749 459,084 330,274 365,252
Deposits ........................................ 1,121,591 910,090 858,300 766,966 744,886
Borrowings (3)................................... 443,638 672,465 622,409 615,578 489,819
Senior notes..................................... - - - 29,100 29,100
Trust Preferred Borrowings....................... 50,000 50,000 50,000 - -
Stockholders' equity ............................ 97,146 96,153 85,752 86,759 75,788
Number of full-service branches (4).............. 28 24 20 16 16
For the Year Ended December 31,
Interest income.................................. $ 129,677 $ 108,184 $ 105,833 $ 107,265 $ 96,266
Interest expense................................. 65,727 58,856 59,775 60,751 53,135
Other income .................................... 18,101 11,579 11,243 8,785 6,559
Other expenses .................................. 61,428 42,668 34,501 33,883 31,089
Income from continuing operations................ 15,622 18,086 15,388 14,979 15,222
Net income ...................................... 11,019 19,709 16,512 16,389 16,356
Earnings per share:
Basic:
Income from continuing operations............. 1.46 1.60 1.25 1.20 1.09
Net income ................................... 1.03 1.74 1.34 1.31 1.18
Diluted:
Income from continuing operations............. 1.46 1.59 1.23 1.18 1.08
Net income ................................... 1.03 1.73 1.32 1.29 1.16
Interest rate spread............................. 4.76% 3.90% 3.78% 3.78% 3.75%
Net interest margin.............................. 4.57 3.65 3.63 3.71 3.83
Return on average equity (5)..................... 15.95 20.32 16.47 18.51 19.72
Return on average assets (5)..................... 1.04 1.25 1.15 1.14 1.30
Average equity to average assets (5)............. 6.54 6.15 6.96 6.18 6.61
(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) WSFS opened two branches in 1996 and four branches in 1998, 1999 and 2000.
(5) Based on continuing operations.
-29-
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 (WSFS). Founded in 1832, WSFS is one of the oldest financial
institutions in the country. As a federal savings bank which was formerly
chartered as a state mutual savings bank, WSFS enjoys broader investment powers
than most other financial institutions. These grandfathered powers have allowed
WSFS to diversify its revenue sources to a greater extent than most savings
banks. WSFS has served the residents of the Delaware Valley for 169 years. WSFS
is the largest thrift institution headquartered in Delaware and among the four
largest financial institutions in the state on the basis of total deposits
traditionally garnered in-market. The Corporation's primary market area is the
Mid-Atlantic region of the United States which is characterized by a diversified
manufacturing and service economy. 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 WSFS' geographical footprint.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services funding these
activities primarily with retail deposits and borrowings. The banking operations
of WSFS are conducted from 28 retail banking offices located in northern
Delaware and southeastern Pennsylvania. Deposits are insured by the Federal
Deposit Insurance Corporation (FDIC).
Fully owned subsidiaries of WSFS include WSFS Credit Corporation (WCC),
which is engaged primarily in indirect motor vehicle leasing; and 838 Investment
Group, Inc., which markets various insurance products and securities through
WSFS' branch system. An additional subsidiary, Star States Development Company
(SSDC), is currently inactive having sold its final parcel of land in 1998.
On December 21, 2000, the Board of Directors of the Corporation
approved plans to discontinue the operations of WCC, and as a result, the
Company has exited the indirect auto leasing business. WCC, which had 7,300
lease contracts and 2,700 loan contracts at December 31, 2000, no longer accepts
new applications but will continue to service its existing loans and leases.
Management estimates that substantially all loan and lease contracts will mature
by December 2003. As discussed in Note 2 of the Financial Statements, the
results of WCC are presented as discontinued operations, retroactively restated
for all periods presented.
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. As a result of this investment,
C1FN's Internet-only banking structure became part of everbank.com(TM), a
division of WSFS. C1FN assists in managing the operations of everbank.com(TM).
everbank.com(TM) began marketing Internet-only banking to a national clientele
in November of 1999.
WSFS is the single largest shareholder in C1FN, has majority control
through a voting trust and as a result, consolidates the results of C1FN in the
WSFS Financial Statements. For the year ended December 31, 2000 WSFS shared in
42% of the operating results of C1FN. In addition, WSFS holds warrants for the
purchase of 20% additional ownership of C1FN, as well as the option and under
certain circumstances the obligation to invest an additional $5.4 million in the
year 2000, at current offered ownership prices. This option expired on July 5,
2000 with no additional investment being made by WSFS.
On December 29, 2000, C1FN received a $5.0 million investment from a
third party investor with a conditional commitment to invest an additional $12.5
million if and when a separate bank charter is obtained for everbank.com(TM).
This investment effectively reduces WSFS' economic ownership of C1FN at December
31, 2000 from 42% to 29%. Since WSFS retains majority control of C1FN through a
voting trust, the results of C1FN will continue to be consolidated into the
operating results of WSFS until everbank.comTM obtains a separate banking
charter.
Additionally, in November 1999, the Corporation expanded the local
retail home equity lending business of Community Credit Corporation (CCC) which
-30-
began operations in 1994. CCC was renamed Wilmington National Finance, Inc.
(WNF) which expanded its sales to a national level and now aggregates loans
through brokers and sells them to investors. WSFS retained a 51% ownership with
the remainder held by WNF's executives retained to lead the expansion of WNF.
WSFS also has warrants to obtain an additional 15% ownership in WNF. Both C1FN
and WNF are consolidated into the Financial Statements of the Corporation. See
Note 19 of the 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
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.
RESULTS OF OPERATIONS
The Corporation recorded net income of $11.0 million for the year ended
December 31, 2000, compared to $19.7 million and $16.5 million in 1999 and 1998,
respectively. Income from continuing operations was $15.6 million, $18.1 million
and $15.4 million for the years ended December 31, 2000, 1999 and 1998,
respectively
Net Interest Income. Net interest income is the most significant
component of operating income to the Corporation. Net interest income relies
upon the levels of interest-earning assets and interest-bearing liabilities and
the difference or "spread" between the respective yields earned and rates paid.
The interest rate spread is influenced by regulatory, economic and competitive
factors that affect interest rates, loan demand and deposit flows. The level of
nonperforming loans can also impact the interest rate spread by reducing the
overall yield on the loan portfolio.
Net interest income increased 30% to $64.0 million in 2000 compared
with $49.3 million in 1999. Total interest income increased $21.5 million,
between 1999 and 2000, primarily due to an increase in average balances for
loans of $133.7 million over the previous year, offset in part by a $114.5
million decrease in mortgage-backed securities. In addition to this positive
volume variance impact, overall rates were higher in 2000 than in 1999, and
specifically, the average yield on the reverse mortgage portfolio increased to
58.92% from 23.87%, between 2000 and 1999. For further discussion on reverse
mortgages see Note 16 of the Financial Statements.
Total interest expense increased $6.9 million from 1999 and 2000 as a
result of the growth in interest-bearing deposits by an average of $111.6
million, partially offset by a $95.0 million decrease in average borrowings. The
average rates on deposits increased 56 basis points from 4.21% to 4.77%, while
the rates on FHLB and other borrowings increased 57 basis points and 61 basis
points, respectively. The cost of funding discontinued operations resulted in an
overall decrease in total interest expense of $1.4 million between 1999 and
2000, as a result of the declining balance of this business in 2000.
Between 1998 and 1999, interest income increased $2.4 million, while
interest expense decreased $919,000. The primary increase in interest income was
related to the increase in average balances for mortgaged-backed securities of
$69.1 million and an increase in average loan balances of $46.4 million. This
was offset by a decrease in average interest rates in 1999 versus 1998. The
decrease in interest expense was primarily due to a decline in average rates
offset by an increase in average borrowings of $32.6 million. This was partially
offset by a decline in the average rate paid on deposits and borrowings of 42
basis points and 34 basis points respectively, between 1999 and 1998. There was
also a $1.2 million decrease to total interest expense related to the funding of
discontinued operations between 1999 and 1998.
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.
-31-
Year Ended December 31,
-------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------- -------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars In Thousands)
Interest income:
Real estate loans (1).......................... $ 7,173 $ 651 $ 7,824 $ 2,259 $(4,208) $ (1,949)
Commercial loans .............................. 2,378 475 2,853 841 (450) 391
Consumer loans................................. 1,966 238 2,204 1,075 (417) 658
Loans held-for-sale............................ 1,125 93 1,218 59 (33) 26
Mortgage-backed securities..................... (7,619) 2,197 (5,422) 4,356 (552) 3,804
Investment securities ......................... 634 4 638 (679) 5 (674)
Other.......................................... 532 11,646 12,178 (1,799) 1,894 95
------- ------- ------- ------- ------- --------
6,189 15,304 21,493 6,112 (3,761) 2,351
------- ------- ------- ------- ------- --------
Interest expense:
Deposits:
Money market and interest-bearing demand..... 2,818 1,873 4,691 227 (260) (33)
Savings...................................... 1,191 2,102 3,293 1,525 (19) 1,506
Retail time deposits......................... (1,279) 815 (464) (1,979) (2,081) (4,060)
Jumbo certificates of deposit ............... (1,769) 195 (1,574) 878 (165) 713
Brokered certificates of deposit ............ 2,999 804 3,803 2,981 (484) 2,497
FHLB of Pittsburgh advances.................... (4,292) 2,530 (1,762) 2,920 (1,484) 1,436
Senior notes and trust preferred borrowings.... - 513 513 1,461 (1,028) 433
Other borrowed funds........................... (1,146) 900 (246) (2,083) (153) (2,236)
Cost of funding discontinued operations........ - (1,383) (1,383) - (1,175) (1,175)
------- ------- ------- ------- ------- --------
(1,478) 8,349 6,871 5,930 (6,849) (919)
------- ------- ------- ------- ------- --------
Net change, as reported............................ 7,667 6,955 14,622 182 3,088 3,270
------- ------- ------- ------- ------- --------
Tax-equivalent effect (2) ......................... (1) (1) (2) (2) (79) (81)
------- ---------- ------- ------- ------- --------
Net change, tax-equivalent basis................... $ 7,666 $ 6,954 $14,620 $ 180 $ 3,009 $ 3,189
======= ======= ======= ======= ======= ========
(1) Includes commercial mortgage loans.
(2) The tax-equivalent income adjustment relates primarily to a commercial loan.
-32-
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,
-------------------------------------------------------------------------
2000 1999
----------------------------- ----------------------------------
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)....................... $622,932 $ 51,264 8.23% $ 535,623 $ 43,440 8.11%
Commercial loans ........................... 124,742 10,131 8.89 98,440 7,278 8.44
Consumer loans.............................. 165,983 16,273 9.80 145,943 14,069 9.64
---------- -------- ---------- --------
Total loans.............................. 913,657 77,668 8.63 780,006 64,787 8.45
Mortgage-backed securities (5)................ 369,780 25,118 6.79 484,254 30,540 6.31
Loans held-for-sale (3)....................... 16,577 1,477 8.91 3,739 259 6.93
Investment securities (5)..................... 46,703 2,980 6.38 36,792 2,342 6.37
Other interest-earning assets................. 76,358 22,434 29.38 77,705 10,256 13.20
---------- -------- ---------- --------
Total interest-earning assets............... 1,423,075 129,677 9.19 1.382,496 108,184 7.91
---------- -------- ---------- --------
Allowance for loan losses..................... (22,427) (22,705)
Cash and due from banks....................... 55,050 50,640
Other noninterest-earning assets.............. 40,861 35,748
Net assets from discontinued operations 228,544 238,479
---------- ----------
Total assets................................ $1,725,103 $1,684,658
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing demand ... $ 158,849 6,186 3.89% $ 70,400 $ 1,495 2.12%
Savings..................................... 273,675 10,764 3.93 239,034 7,471 3.13
Retail time deposits........................ 275,399 13,687 4.97 301,738 14,151 4.69
Jumbo certificates of deposits ............. 30,671 1,713 5.59 62,532 3,287 5.26
Brokered certificates of deposits........... 160,753 10,541 6.56 114,006 6,738 5.91
---------- -------- ---------- --------
Total interest-bearing deposits.......... 899,347 42,891 4.77 787,710 33,142 4.21
FHLB of Pittsburgh advances................... 397,672 23,459 5.90 473,458 25,221 5.33
Senior notes and trust preferred borrowings... 50,000 4,694 9.23 50,000 4,181 8.36
Other borrowed funds.......................... 137,340 8,580 6.25 156,544 8,826 5.64
Cost of funding discontinued operations....... - (13,897) - (12,514)
---------- -------- ---------- --------
Total interest-bearing liabilities............ 1,484,359 65,727 4.43 1,467,712 58,856 4.01
-------- --------
Noninterest-bearing demand deposits........... 119,928 105,883
Other noninterest-bearing liabilities......... 18,975 20,191
Minority interest............................. 3,912 1,885
Stockholders' equity.......................... 97,929 88,987
---------- ----------
Total liabilities and stockholders' equity.. $1,725,103 $1,684,658
========== ==========
Excess (deficit) of interest-earning assets
over interest-bearing liabilities........... $ (61,284) $ (85,216)
========== ==========
Net interest and dividend income.............. $ 63,950 $ 49,328
======== ========
Interest rate spread.......................... 4.76% 3.90%
===== =====
Interest rate margin.......................... 4.57% 3.65%
===== =====
Net interest and dividend income to
total average assets........................ 3.77% 3.00%
===== =====
[RESTUBBED FOR ABOVE]
-----------------------------------
1998
-------------------------------
Average Yield/
Balance Interest Rate(1)
------- -------- -------
Assets
Interest-earning assets:
Loans(2)(3):
Real estate loans (4)....................... $509,422 $ 45,389 8.91%
Commercial loans ........................... 89,330 6,887 8.96
Consumer loans.............................. 134,888 13,411 9.94
---------- --------
Total loans.............................. 733,640 65,687 9.12
Mortgage-backed securities (5)................ 415,141 26,736 6.44
Loans held-for-sale (3)....................... 2,935 233 7.94
Investment securities (5)..................... 47,430 3,016 6.36
Other interest-earning assets................. 104,485 10,161 9.72
---------- --------
Total interest-earning assets............... 1,303,631 105,833 8.21
--------
Allowance for loan losses..................... (23,621)
Cash and due from banks....................... 29,040
Other noninterest-earning assets.............. 32,273
Net assets from discontinued operations 202,980
----------
Total assets................................ $1,544,303
==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing demand ... $ 60,746 $ 1,528 2.52
Savings..................................... 189,744 5,965 3.14
Retail time deposits........................ 341,257 18,211 5.34
Jumbo certificates of deposits ............. 45,924 2,574 5.60
Brokered certificates of deposits........... 64,302 4,241 6.60
---------- --------
Total interest-bearing deposits.......... 701,973 32,519 4.63
FHLB of Pittsburgh advances................... 419,849 23,785 5.67
Senior notes and trust preferred borrowings... 34,201 3,748 10.96
Other borrowed funds.......................... 193,315 11,062 5.72
Cost of funding discontinued operations....... - (11,339)
---------- --------
Total interest-bearing liabilities............ 1,349,338 59,775 4.43
--------
Noninterest-bearing demand deposits........... 84,631
Other noninterest-bearing liabilities......... 16,918
Minority interest............................. -
Stockholders' equity.......................... 93,416
----------
Total liabilities and stockholders' equity.. $1,544,303
==========
Excess (deficit) of interest-earning assets
over interest-bearing liabilities........... $ (45,707)
==========
Net interest and dividend income.............. $46,058
=======
Interest rate spread.......................... 3.78%
=====
Interest rate margin.......................... 3.63%
=====
Net interest and dividend income to
total average assets........................ 3.06%
=====
(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.
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-34-
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
known and inherent losses.
The Corporation's continued efforts to invest in quality loans and
resolve and collect problem loans, including nonaccrual and restructured loans
favorably impacted the provision. This was evident in 2000 as the provision for
loan losses of $894,000 was a decrease of $110,000 from 1999. The allowance for
loan losses was $21.4 million at December 31, 2000, a 3.6% decrease from the
level reported at December 31, 1999.
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. Other income of $18.1 million in 2000, increased $6.5
million, or 56% during 2000 from 1999. The Corporation's two new not
wholly-owned startup initiatives, C1FN and WNF contributed $5.2 million to the
positive variance, mainly in the form of gains on the sale of loans and other
income. In 1999 the Corporation recorded a $2.0 million loss on the sale of
below-market yielding securities and loans. Credit/debit and ATM income grew
$1.6 million during 2000, due to the continued expansion of WSFS' ATM network
and customer card usage. At December 31, 2000 WSFS derived income from 2,001
ATMs compared to 1,049 at December 31, 1999. In addition, deposit service
charges increased $1.6 million to $7.1 million, a result of the 23.2% growth in
core deposits. Partially offsetting these increases was a $3.8 million increase
in securities losses. These losses were a result of the Corporation's
de-leveraging strategy, in which the Corporation sold below-market yielding
investments to payoff higher cost borrowings.
Other income of $11.6 million in 1999, increased $336,000 during 1999
from 1998. Credit/debit and ATM income grew $1.2 million during 1999, due to the
continued expansion of WSFS' ATM network and customer card usage. At December
31, 1999 WSFS derived income from 1,049 ATMs compared to 757 at December 31,
1998. In addition, deposit service charges increased $1.1 million as a result of
growth in deposits. Partially offsetting these increases was $602,000 in
securities losses and a $1.0 million loss on the sale of loans. These losses
were a result of the Corporation's de-leveraging strategy, in which the
Corporation sold below-market yielding investments to pay off higher cost
borrowings.
Other Expenses. Other expenses of $61.4 million in 2000,
increased $18.8 million or 44% during 2000 from 1999. The Corporation's two new,
not wholly-owned, startup initiatives, C1FN and WNF accounted for $14.2 million
of this increase, mainly in salaries, benefits and other compensation. The
unowned portion of the results of these subsidiaries has been reflected in
minority interest, on an after-tax basis, in the consolidated statement of
operations. Excluding these two startup initiatives expenses increased $5.0
million or 12% during 2000 from 1999. These increases were mainly in salaries,
equipment expense, occupancy expense and other expenses; partially offset by
lower data processing and operations expense, which decreased by $653,000. The
increases were primarily attributable to investments in retail banking offices,
as the Corporation added four new branch offices during the year, and the
expansion of the CashConnect Division (ATM unit). In addition, during the third
quarter of 2000 the Corporation re-assumed all responsibility for loan and
deposit operations that were previously outsourced through ALLTEL, the
Corporation's information technology provider. As a result, approximately sixty
associates that were previously employed by ALLTEL were re-hired by the
Corporation. Expenses previously recorded as data processing and operations are
currently reflected in salaries and benefit expenses.
Other expenses of $42.7 million increased $8.2 million or 24% 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
-35-
improvements in technology. As part of this investment the Corporation added
four new branch offices during the year. In addition, expenses of $2.0 million
from the not wholly-owned C1FN and WNF investments are included in 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.
Income Taxes. The Corporation recorded a $276,000 tax provision for the
year ended December 31, 2000 compared to tax provisions of $1.2 million and $5.5
million for the years ended December 31, 1999 and 1998, respectively. The
provision for income taxes includes federal, state, and local income taxes that
are currently payable and those deferred because of temporary differences
between the financial reporting bases and the tax reporting bases of assets and
liabilities.
The years 2000, 1999, and 1998 include the recording of $2.9 million,
$5.1 million, and $2.7 million, respectively, in tax benefits, resulting from
the merger of a former subsidiary into WSFS. As a consequence of this merger,
certain tax benefits, which were previously offset by a valuation allowance, are
now recognizable based primarily upon the continued profitability of the WSFS
consolidated group.
Approximately $18 million in gross deferred tax assets of the
Corporation at December 31, 2000 is related to built-in losses on reverse
mortgages that are attributable to a former subsidiary, Providential. Management
has continued to assess 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 for income taxes, accordingly. For
additional information regarding the Corporation's tax provision and net
operating loss carryforwards, see Note 12 to the Financial Statements.
FINANCIAL CONDITION
Total assets decreased $11.7 million or .7% during 2000 to $1.739
billion. This decline occurred predominantly in mortgage-backed securities,
partially offset by an increase in loans. The decline in mortgage-backed
securities resulted primarily from a deleveraging strategy in which the
Corporation divested of certain investment securities and residential mortgages
with below-market interest rates, thereby repositioning the balance sheet to
allow room for other strategies. Total liabilities decreased $13.5 million
during the year to $1.636 billion at December 31, 2000. This decrease occurred
primarily in borrowings which declined $228.8 million during the period, as
proceeds from the investment and loan sale were used to repay $164.0 million in
FHLB advances. Partially offsetting this decrease were deposits which increased
$211.5 million. Stockholder's equity increased $1.0 million to $97.1 million at
December 31, 2000. This increase resulted primarily from earnings and the
increase in other comprehensive income, offset in part by the acquisition of
treasury stock and cash dividends paid.
Investments. Between December 31, 2000 and 1999, total investments
increased $639,000. During 2000, investments in reverse mortgages increased
$5.6 million while federal funds sold increased $3.5 million. These increases
were partially offset by a $7.7 million decrease in investment securities.
Mortgage-backed Securities. Investments in mortgage-backed securities
decreased $108.0 million during 2000 to $339.7 million. This decline resulted
primarily from the sale of $225.9 million in mortgage-backed securities, which
was mainly a result of the deleveraging strategy. Also contributing to this
decline were $97.8 million in principal repayments. These decreases were
partially offset by purchases of $210.4 million.
Loans. Net loans, including loans held-for-sale, increased $102.9
million between December 31, 1999 and 2000. This increase was primarily due to a
$48.9 million increase in residential mortgages, a $3.6 million and a $20.4
million increase in commercial and consumer loans, respectively.
-36-
Deposits. Deposits grew $211.5 million during 2000. This growth was
largely attributable to a net inflow of deposits of $186.6 million in 2000 and
interest credited to deposits of $30.2 million in 2000. The table below depicts
the changes in deposits over the last three years:
Year Ended December 31,
------------------------------------
2000 1999 1998
---- ---- ----
(In Millions)
Beginning balance.......................... $ 910.0 $858.3 $767.0
Interest credited.......................... 30.2 25.0 24.4
Deposit inflows, net....................... 181.4 26.8 66.9
-------- ------ ------
Ending balance............................. $1,121.6 $910.1 $858.3
======== ====== ======
Borrowings. Total borrowings decreased $228.8 million between December
31, 2000 and 1999. Advances from the Federal Home Loan Bank decreased $164.0
million and federal funds purchased and securities sold under agreement to
repurchase decreased $74.6 million. The proceeds from the investment and loan
sales as well as deposit inflows were used to repay these balances.
Stockholders' Equity. Stockholders' equity increased $1.0 million to
$97.1 million at December 31, 2000. This increase included $11.0 million in net
income and a $3.5 million in other comprehensive income. This was offset in part
by the acquisition of 1,101,500 shares of treasury stock for $12.7 million and
dividends of $1.6 million declared and paid to stockholders.
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 and the board of directors. Changing the relative proportions of
fixed-rate and adjustable-rate assets and liabilities is one of the primary
strategies utilized by the Corporation to accomplish this objective.
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.
-37-
The repricing and maturities of the Corporation's interest-rate
sensitive assets and interest-rate sensitive liabilities at December 31, 2000
are set forth in the following table:
Less than One to Over
One Year Five Years Five Years Total
---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-rate sensitive assets (1):
Real estate loans (2)................................ $ 202,467 $219,776 $215,509 $ 637,752
Commercial loans..................................... 75,926 21,764 54,197 151,887
Consumer loans....................................... 63,050 60,228 51,991 175,269
Mortgage-backed securities........................... 269,731 45,640 24,347 339,718
Loans held-for-sale.................................. 23,274 - - 23,274
Investment in reverse mortgages...................... 1,469 8,740 23,474 33,683
Investment securities................................ 17,994 4,834 6,912 29,740
Other investments.................................... 39,318 - - 39,318
--------- -------- -------- ----------
693,229 360,982 376,430 1,430,641
--------- -------- -------- ----------
Interest-rate sensitive liabilities:
Money market and interest-bearing
demand deposits .................................. 183,381 - 60,739 244,120
Savings deposits..................................... 63,664 - 225,718 289,382
Retail time deposits................................. 206,104 75,040 1,695 282,839
Jumbo certificates of deposit........................ 18,080 950 - 19,030
Brokered certificates of deposit..................... 138,746 8,346 - 147,092
FHLB advances........................................ 236,000 115,000 - 351,000
Trust preferred borrowings and interest rate cap..... - - 50,000 50,000
Other borrowed funds................................. 67,638 25,000 - 92,638
--------- -------- -------- ----------
913,613 224,336 338,152 1,476,101
--------- --------- -------- ----------
Excess of interest-rate sensitive
assets over interest-rate sensitive liabilities
("interest-rate sensitive gap")...................... $(220,384) $136,646 $ 38,278 $ (45,460)
========= ======== ======== ==========
Interest-rate sensitive assets/interest-rate sensitive
liabilities.......................................... 75.88%
Interest-rate sensitive gap as a percent of total
assets............................................... (12.66%)
(1) Interest-sensitive assets of discontinued operations (WCC) are excluded,
however, funding of $203.6 million for these assets have been included.
(2) 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 WSFS' deposit
accounts, that 35% of money market and 25% of interest-bearing demand deposits
are sensitive to interest rate changes and that 22% of savings deposits are
sensitive to interest rate changes. Accordingly, these interest-sensitive
portions are classified in the less than one-year category with the remainder in
the over five-year category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index.
Deposit rates other than time deposit rates are variable, and changes
in deposit rates are generally subject to local market conditions and
management's discretion and are not indexed to any particular rate.
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-year category reflecting the effective
inability to price upward beyond the capped rate for the balance of the term on
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. Conversly, during a period of falling
rates, a positive gap would result in a decrease in net interest income while a
negative gap would augment net interest income. However, the
interest-sensitivity table does not provide a comprehensive representation of
the impact of interest rate changes on net interest income. Each category of
assets or liabilities will not be affected equally or simultaneously by changes
in the general level of interest rates. Even assets and liabilities, which
contractually reprice within the rate period, may not, in fact, reprice at the
same price or the same time or with the same frequency. It is also important to
consider that the table represents a specific point in time. Variations can
-38-
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 the
estimated cash flows from assets, liabilities, and off-balance sheet contracts.
The table 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, 2000 and 1999, calculated in compliance with Thrift Bulletin No.
13A:
December 31,
--------------------------------------------------------------------------------------
2000 1999
-------------------------------- -------------------------------
Change in Interest % Change in % Change in
Rate Net Interest Net Portfolio Net Interest Net Portfolio
(Basis Points) Margin (1) Value (2) Margin (1) Value (2)
-------------- ---------- ------------- ------------ -------------
+300 6% 6.34% 4% 5.76%
+200 4% 6.50% 3% 6.07%
+100 2% 6.68% 2% 6.40%
0 0% 6.88% 0% 6.88%
-100 -2% 7.21% -2% 7.16%
-200 -3% 7.82% -3% 7.73%
-300 -4% 8.59% -5% 8.41%
(1) This column represents the percentage difference between net interest margin
in a stable interest rate environment and net interest margin as projected
under the various rate environment changes.
(2) This column represents the net portfolio value of the Company in a stable
interest rate environment and the net portfolio value as projected under the
various rate environment changes.
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.
-39-
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.
-40-
The following table sets forth the Corporation's non-performing assets,
restructured loans and past due loans at the dates indicated:
December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans:
Commercial.................................... $ 2,766 $ 2,630 $ 2,182 $ 1,216 $ 550
Consumer...................................... 383 251 312 194 216
Commercial mortgages.......................... 2,272 1,808 2,383 3,919 3,243
Residential mortgages......................... 2,704 2,617 3,068 3,710 3,789
Construction.................................. 210 - - 38 3,529
------- ------- ------- ------- ---------
Total nonaccruing loans............................ 8,335 7,306 7,945 9,077 11,327
Nonperforming investments in real estate........... - - 76 989 1,500
Assets acquired through foreclosure................ 630 853 2,588 3,092 5,809
------- ------- ------- ------- -------
Total nonperforming assets......................... $ 8,965 $ 8,159 $10,609 $13,158 $18,636
======= ======= ======= ======= =======
Restructured loans................................. $ - $ - $ - $ 4,740 $10,967
======= ======= ======= ======= =======
Past due loans:
Residential mortgages......................... $ 449 $ 333 $ 247 $ 315 $ 328
Commercial and commercial mortgages........... 790 504 2,654 1,909 797
Consumer...................................... 199 197 41 82 162
------- ------- ------- ------- -------
Total past due loans............................... $ 1,438 $ 1,034 $ 2,942 $ 2,306 $ 1,287
======= ======= ======= ======= =======
Ratio of nonaccruing loans to total
loans(1)...................................... 0.87% 0.85% 1.05% 1.20% 1.57%
Ratio of allowance for loan losses to gross
loans(1)...................................... 2.22% 2.58% 2.97% 3.16% 3.25%
Ratio of nonperforming assets to total assets...... 0.52% 0.47% 0.65% 0.87% 1.37%
Ratio of loan losses allowance to nonaccruing
loans(2)...................................... 248.81% 294.16% 286.13% 252.24% 208.61%
Ratio of loan losses and foreclosed asset
allowance to total nonperforming assets(2).... 234.01% 266.52% 216.73% 174.08% 131.12%
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
Total nonperforming assets decreased by $2.5 million between 1998 and
1999 and increased $806,000 between 1999 and 2000. The year-over-year increase
reflects the addition in the second quarter 2000 of a $2.6 million commercial
real estate relationship. Management does not expect any significant loss on
this loan. In 2000, $4.3 million in collections of such assets, as well as $1.2
million in transfers to accrual/restructured status contributed to the reduction
in nonperforming assets. Such decreases were offset by the addition of $8.3
million of assets that were not previously classified as nonperforming assets.
-41-
An analysis of the change in the balance of nonperforming assets during
the last three fiscal years is presented below:
Year Ended December 31,
--------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Beginning balance....................................... $ 8,159 $10,609 $13,158
Additions......................................... 8,332 6,912 7,296
Collections ..................................... (4,323) (5,041) (6,653)
Transfers to accrual/restructured status.......... (1,227) (2,937) (1,566)
Transfers to investment in real estate............ - - -
Charge-offs/write-downs........................... (1,976) (1,384) (1,626)
------- ------- -------
Ending balance.......................................... $ 8,965 $ 8,159 $10,609
======= ======= =======
The level of nonaccruing loans to total loans ratio increased from
0.85% in 1999 to 0.87% in 2000. The nonperforming assets to total assets ratio
increased from 0.47% in 1999 to 0.51% in 2000. These increases were primarily
due to the increase in nonaccruing loans and nonperforming loans and
nonperforming assets.
In 2000, an increase of $464,000 in the commercial mortgage category
and an increase of $210,000 in construction loans accounted for the majority of
the increase in total nonperforming assets.
Allowance for Loan Losses. The Corporation maintains allowances for
credit losses and charges losses to these allowances when such losses are
realized. The allowances for losses are maintained at a level which management
considers adequate to provide for known and inherent losses based upon an
evaluation of 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 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 future losses.
-42-
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance.............................. $22,223 $22,732 $24,057 $23,527 $23,667
Provision for loan losses...................... 894 1,004 385 800 1,070
Reclass from allowance for ORE losses.......... - - - 848 -
Balance at acquisition of credit
card portfolio............................. 175 - - - -
Charge-offs:
Residential real estate.................... 133 172 210 193 185
Commercial real estate (1)................. 376 692 608 520 416
Commercial................................. 998 437 648 169 605
Consumer................................... 1,002 720 504 452 153
------- ------- ------- ------- -------
Total charge-offs.............................. 2,509 2,021 1,970 1,334 1,359
------- ------- ------- ------- -------
Recoveries:
Residential real estate.................... 6 - 12 2 15
Commercial real estate (1)................. 252 271 123 95 4
Commercial................................. 70 116 74 22 15
Consumer................................... 312 121 51 97 115
------- ------- ------- ------- -------
Total recoveries............................... 640 508 260 216 149
------- ------- ------- ------- -------
Net charge-offs................................ 1,869 1,513 1,710 1,118 1,210
------- ------- ------- ------- -------
Ending balance................................. $21,423 $22,223 $22,732 $24,057 $23,527
======= ======= ======= ======= =======
Net charge-offs to average gross
loans outstanding, net
of unearned income......................... 0.20% 0.19% 0.23% 0.15% 0.16%
======= ======= ======= ======= =======
(1) Includes commercial mortgage and construction loans.
The provision for loan losses declined modestly by $110,000 between
1999 and 2000. Net charge-offs increased $356,000 between 1999 and 2000. Annual
net charge-offs for the five-year period ranged from .15% of average loans to
.23% of average loans.
-43-
The allowance for losses is allocated by major portfolio type. As these
portfolios have seasoned, they have become a source of historical data in
projecting delinquencies and loss exposure; however, such allocations are not
indicative of where future losses will occur. The allocation of the allowance
for loan losses by portfolio type at the end of each of the last five fiscal
years, and the percentage of outstandings in each category to total gross
outstandings at such dates follow:
December 31,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Residential real estate.......... $ 1,754 43.2% $ 1,389 42.7% $ 229 37.7% $ 524 37.5% $ 326 35.4%
Commercial real estate........... 3,187 22.9 8,240 25.9 10,398 31.0 11,280 33.0 12,697 39.0
Commercial....................... 13,985 15.7 9,983 13.4 11,751 12.8 11,664 12.4 10,068 3.6
Consumer......................... 2,497 18.2 2,611 18.0 354 18.5 589 17.1 436 22.0
------- ------ -------- ------ ---------------- ------- ----- ------- -----
Total loans...................... $21,423 100.0% $22,223 100.0% $22,732 100.0% $24,057 100.0% $23,527 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
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 WSFS were 8.2% and 6.4% at December 31, 2000 and 1999, respectively.
Management monitors liquidity daily and maintains funding sources to
meet unforeseen changes in cash requirements. It is the practice of WSFS 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, 2000 and 1999, WSFS had outstanding FHLB advances of
$351.0 million and $515.0 million, respectively.
The Corporation routinely enters into commitments requiring the future
outlay of funds. Currently WSFS is in the final year of a five-year agreement
with its data processing facilities management company. Under the terms of this
agreement, a minimum payment of approximately $2.5 million for the year 2001 has
been committed. The Corporation has entered into a five-year commitment with
telecommunication companies. Under the terms of this agreement, the average
minimum payment for each of the five years is $1.3 million. The aforementioned
commitments, 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 2000, operating and financing activities provided cash and cash
equivalents of $836,000 and $13.7 million, respectively, while investing
activities used $17.7 million. The cash provided by operating and financing
activities resulted primarily from net income, the sales of investment
securities and mortgage-backed securities, as well as increases in demand and
savings deposits. This cash was used to fund the purchase of mortgage-backed
securities and to fund an increase in loans, as well as to repay borrowings and
purchase treasury stock.
In 1999, financing activities provided $82.5 million of cash and cash
equivalents, while operating and investing activities used $7.2 million and
$92.3 million, respectively. The cash provided by financing activities resulted
primarily from additional FHLB advances and increases in demand and time
deposits. This cash was utilized to fund the purchase of investment securities
and mortgage-backed securities, as well as the repayment of other borrowings,
and to fund the net increase in loan volume. During 1998, the operating and
financing activities provided $17.8 million and $75.7 million of cash and cash
equivalents, respectively, while investing activities used $69.4 million. The
cash provided by operating and financing activities reflect the additional FHLB
advances. 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
the purchase of treasury stock.
-44-
CAPITAL RESOURCES
Federal laws, among other things, require the OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as WSFS to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted" assets and total "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as
well as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well-capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 2000, WSFS is classified as well-capitalized and is in
compliance with all regulatory capital requirements. For additional information
concerning WSFS' regulatory capital compliance see Note 10 to the 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 five separate stock repurchase
programs to reacquire common stock outstanding. 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, 340,000 shares in 1999 and 1.1 million shares in 2000.
At December 31, 2000, the Corporation held 4.6 million shares of its common
stock in the treasury. The Corporation may continue repurchasing shares in 2001.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement supercedes and replaces the
guidance in Statement 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, although it carries over most of Statement 125's
provisions without reconsideration.
The Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001 and for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. This Statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier retroactive application of its
accounting provisions is not permitted. The Company has not yet determined the
impact, if any, of this Statement on the Company's financial condition, equity,
results of operations, or disclosures.
-45-
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, uncertainty of estimates 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.
-46-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A is incorporated herein by reference to page 39 of Item 7 of the
2000 annual report on Form 10K.
ITEM 8. FINANCIAL STATEMENTS AND SUPLIMENTARY DATA
Page
Independent Auditor' Report .........................................48
WSFS Financial Corporation (and Subsidiaries):
Management's Statement on Financial Reporting.....................49
Consolidated Statement of Operations.............................50
Consolidated Statement of Condition...............................52
Consolidated Statement o Changes in Stockholders' Equity..........53
Consolidated Statement of Cash Flows..............................54
Notes to the Consolidated Financial Statements....................56
(b) The following supplementary data is set forth in this
Annual Report on Form 10-K on the following pages:
Quarterly Financial Summary (Unaudited)...........................93
-47-
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,
2000 and 1999, 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, 2000. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated Financial Statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the Financial
Statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated Financial Statements referred to above
present fairly, in all material respects, the financial position of WSFS
Financial Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 20 to the Financial Statements, the Company
adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities"
in 2000.
/s/ KPMG LLP
January 23, 2001, except as to Note 21 which is as of March 16, 2001.
Philadelphia, Pennsylvania
-48-
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 accounting principles generally accepted in the
United States of America 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 effective internal controls 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 controls over financial
reporting presented in conformity with accounting principles generally accepted
in the United States of America. 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 effective internal controls over financial
data, presented in accordance with accounting principles generally accepted in
the United States of America.
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 the Corporation complied, in all material respects,
with the designated laws and regulations related to safety and soundness for the
year ended December 31, 2000.
Marvin N. Schoenhals Mark A. Turner
Chairman, President & Executive Vice President
Chief Executive Officer & Chief Financial Officer
-49-
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
----------------------------------------------
2000 1999 1998
-------- -------------- ---------
(Dollars In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans.................................................... $ 79,145 $ 65,046 $ 65,920
Interest on mortgage-backed securities........................................ 25,118 30,540 26,736
Interest and dividends on investment securities............................... 2,980 2,342 3,016
Interest on investments in reverse mortgages.................................. 19,309 7,372 5,836
Other interest income......................................................... 3,125 2,884 4,325
-------- -------- --------
129,677 108,184 105,833
-------- -------- --------
Interest expense:
Interest on deposits ......................................................... 42,891 33,142 32,519
Interest on Federal Home Loan Bank advances................................... 14,583 16,965 15,890
Interest on federal funds purchased and securities sold under
agreements to repurchase.................................................... 4,801 5,621 8,267
Interest on senior notes and trust preferred borrowings....................... 2,918 2,812 2,914
Interest on other borrowings.................................................. 534 316 185
-------- -------- --------
65,727 58,856 59,775
-------- -------- --------
Net interest income........................................................... 63,950 49,328 46,058
Provision for loan losses..................................................... 894 1,004 385
-------- -------- --------
Net interest income after provision for loan losses........................... 63,056 48,324 45,673
-------- -------- --------
Other income:
Loan servicing fee income .................................................... 2,219 2,075 1,957
Deposit service charges....................................................... 7,050 5,464 4,371
Credit/debit card and ATM income ............................................. 5,544 3,914 2,724
Securities gains (losses) .................................................... (4,368) (602) 305
Gain (loss) on sale of loans.................................................. 3,936 (993) 638
Other income.................................................................. 3,720 1,721 1,248
-------- -------- --------
18,101 11,579 11,243
-------- -------- --------
Other expenses:
Salaries, benefits and other compensation..................................... 29,991 18,950 14,650
Equipment expense............................................................. 4,448 3,133 1,947
Data processing and operations expense........................................ 5,243 5,896 5,179
Occupancy expense............................................................. 4,290 3,422 2,938
Marketing expense............................................................. 2,893 1,570 1,278
Professional fees............................................................. 3,113 2,343 1,564
Other operating expenses...................................................... 11,450 7,354 6,945
-------- -------- --------
61,428 42,668 34,501
-------- -------- --------
Income from continuing operations before minority interest, taxes, loss on
extinguishment of debt and cumulative effect of change in accounting
principle .................................................................. 19,729 17,235 22,415
Less minority interest........................................................ (3,735) (972) -
-------- -------- --------
Income from continuing operations before taxes, loss on extinguishment
of debt and cumulative effect of change in accounting principle............ 23,464 18,207 22,415
Income tax provision.......................................................... 6,586 121 5,566
-------- -------- --------
Income from continuing operations before loss on extinguishment of debt and
cumulative effect of a change in accounting principle ...................... 16,878 18,086 16,849
Loss on extinguishment of debt, net of $787,000 in tax benefit................ - - 1,461
-------- --------- --------
Income from continuing operations before cumulative effect of change in
accounting principle........................................................ 16,878 18,086 15,388
Cumulative effect of change in accounting principle, net of $837,000 in
tax benefit ................................................................ (1,256) - -
-------- -------- --------
Income from continuing operations............................................. 15,622 18,086 15,388
Income (loss) from discontinued operations, net of taxes...................... (2,392) 1,623 1,124
Loss on wind-down of discontinued operations, net of $4.0 million in
tax benefit ................................................................ (2,211) - -
-------- -------- --------
Net income.................................................................... $ 11,019 $ 19,709 $ 16,512
======== ======== ========
-50-
CONSOLIDATED STATEMENT OF OPERATIONS (continued...)
Year Ended December 31,
----------------------------------------------
2000 1999 1998
-------- -------------- ---------
(Dollars In Thousands, Except Per Share Data)
Earnings per share:
Basic:
Income from continuing operations before loss on extinguishment of
debt and cumulative effect of change in accounting
principle............................................................. $ 1.58 $ 1.60 $ 1.37
Loss on extinguishment of debt, net of tax benefit...................... - - (0.12)
-------- -------- --------
Income from continuing operations before cumulative effect of change in
accounting principle................................................ 1.58 1.60 1.25
Cumulative effect of change in accounting principle
net of tax benefit.................................................. (0.12) - -
-------- ----------------- --------
Income from continuing operations...................................... 1.46 1.60 1.25
Income (loss) from discontinued operations, net of taxes............... (0.22) 0.14 0.09
Loss on wind-down of discontinued operations, net of tax benefit....... (0.21) - -
-------- -------- --------
Net income ........................................................ $ 1.03 $ 1.74 $ 1.34
======== ======== ========
Diluted:
Income from continuing operations before loss on extinguishment
of debt and cumulative effect of change in accounting
principle........................................................... $ 1.58 $ 1.59 $ 1.35
Loss on extinguishment of debt, net of tax benefit..................... - - (0.12)
-------- -------- --------
Income from continuing operations before cumulative effect of
change in accounting principle....................................... 1.58 1.59 1.23
Cumulative effect of change in accounting principle
net of tax benefit.................................................. (0.12) - -
-------- -------- --------
Income from continuing operations...................................... 1.46 1.59 1.23
Income (loss) from discontinued operations, net of taxes............... (0.22) 0.14 0.09
Loss on wind-down of discontinued operations, net of tax benefit....... (0.21) - -
-------- -------- --------
Net income ........................................................ $ 1.03 $ 1.73 $ 1.32
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-51-
CONSOLIDATED STATEMENT OF CONDITION
December 31,
--------------------------
2000 1999
---------- ----------
(In thousands)
Assets
Cash and due from banks ........................................................................ $ 87,849 $ 59,166
Federal funds sold and securities purchased under agreements to resell ......................... 3,500 --
Interest-bearing deposits in other banks ....................................................... 7,318 8,026
Investment securities held-to-maturity (market value: 2000-$14,938, 1999-$8,420) ............... 14,746 8,612
Investment securities available-for-sale ....................................................... 14,994 28,861
Mortgage-backed securities held-to-maturity (market value: 2000-$106,604, 1999-$250,079) ....... 107,663 258,825
Mortgage-backed securities available-for-sale .................................................. 232,055 188,924
Investment in reverse mortgages, net ........................................................... 33,683 28,103
Loans held-for-sale ............................................................................ 23,313 24,558
Loans, net of allowance for loan losses of $21,423 at December 31, 2000 and
$22,223 at December 31, 1999 ................................................................. 940,178 836,015
Stock in Federal Home Loan Bank of Pittsburgh, at cost ......................................... 28,500 28,500
Assets acquired through foreclosure ............................................................ 630 853
Premises and equipment ......................................................................... 16,788 14,456
Accrued interest and other assets .............................................................. 28,348 25,375
Net assets of discontinued operations .......................................................... 199,751 240,763
---------- ----------
Total assets ................................................................................... $1,739,316 $1,751,037
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ..................................................................... $ 139,128 $ 119,754
Money market and interest-bearing demand ....................................................... 244,120 79,321
Savings ........................................................................................ 289,382 258,854
Time ........................................................................................... 282,839 278,051
---------- ----------
Total retail deposits ................................................................ 955,469 735,980
Jumbo certificates of deposit .................................................................. 19,030 24,645
Brokered certificates of deposit ............................................................... 147,092 149,465
---------- ----------
Total deposits ...................................................................... 1,121,591 910,090
Federal funds purchased and securities sold under agreements to repurchase ....................... 69,300 143,941
Federal Home Loan Bank advances .................................................................. 351,000 515,000
Trust preferred borrowings ....................................................................... 50,000 50,000
Other borrowed funds ............................................................................. 23,338 13,524
Accrued expenses and other liabilities ........................................................... 21,065 17,223
---------- ----------
Total liabilities ................................................................................ 1,636,294 1,649,778
---------- ----------
Commitments and contingencies
Minority Interest ................................................................................ 5,876 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 14,813,403
at December 31, 2000, and 14,797,513 at December 31, 1999 ...................................... 148 148
Capital in excess of par value ................................................................... 58,985 58,185
Accumulated other comprehensive income (loss) .................................................... 197 (3,265)
Retained earnings ................................................................................ 92,409 83,000
Treasury stock at cost, 4,629,769 shares at December 31, 2000 and 3,528,269
shares at December 31, 1999 .................................................................... (54,593) (41,915)
---------- ----------
Total stockholders' equity ....................................................................... 97,146 96,153
---------- ----------
Total liabilities, minority interest and stockholders' equity .................................... $1,739,316 $1,751,037
========== ==========
The accompanying notes are an integral part of these financial statements:
-52-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLERS' 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, 1998 .............................. $ 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
======= ======= ======= ======== ======== ========
Comprehensive income:
Net income ....................................... -- -- -- 11,019 -- 11,019
Other comprehensive income(1)..................... -- -- 3,462 -- -- 3,462
--------
Total comprehensive income ............................ -- -- -- -- -- 14,481
--------
Cash dividend, $.15 per share ......................... -- -- -- (1,610) -- (1,610)
Exercise of common stock options ...................... -- 103 -- -- -- 103
Treasury stock at cost, 1,101,500(4)
shares .............................................. -- -- -- -- (12,678) (12,678)
Increase in investment in subsidiary .................. -- 697 -- -- -- 697
------- ------- ------- -------- -------- --------
Balance, December 31, 2000 ............................ $ 148 $58,985 $ 197 $ 92,409 $(54,593) $ 97,146
======= ======= ======= ======== ======== ========
(1) Other Comprehensive Income:
2000 1999 1998
------ ------ ------
Net unrealized holding gains (losses) on
securities available-for-sale arising
during the period net of taxes (2000 -
$373,000, 1999 - ($2.1) million,
1998 - $30,000)................................. $ 608 $(3,892) $ 55
Net unrealized holding loss arising during the
period on derivatives used for cash flow
hedge, net of $917,000 tax benefit........... (1,703) - -
Reclassification for losses (gains) included in
income, net of taxes (2000 -( $1.7) million,
1999 - ($211,000), 1998 - $107,000)........... 2,729 391 (198)
------- ------- -------
Total comprehensive income (loss), before
other comprehensive income that resulted
from the cumulative effect of a change
in accounting principle, net of taxes........ 1,634 (3,501) (143)
Net unrealized gain on derivatives used for cash
flow hedging as a result of adopting
SFAS No.133, net of $985,000 tax benefit...... 1,828 - -
------- ------- -------
Total comprehensive income (loss)........ $ 3,462 $(3,501) $ (143)
======= ======= =======
(2) Net of reissuances of 4,800 shares
(3) Net of reissuances of 4,500 shares
(4) Net of reissuances of 5,000 shares
The accompanying notes are an integral part of these financial statements.
-53-
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
------------------------------------------
2000 1999 1998
---- ------ --------
(In Thousands)
Operating activities:
Net income ......................................................................... $ 11,019 $ 19,709 $ 16,512
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Provision for loan, and residual value losses ................................. 894 1,004 385
Depreciation, accretion and amortization ...................................... 2,366 2,724 1,769
Decrease (increase) in accrued interest receivable and other assets ........... (2,725) (3,416) 1,362
Origination of loans held-for-sale ............................................ (189,239) (56,011) (58,398)
Proceeds from sales of loans held-for-sale .................................... 187,104 32,528 58,008
Increase in accrued interest payable and other liabilities .................... 3,706 2,146 2,407
Increase in reverse mortgage capitalized interest, net ........................ (19,111) (7,052) (5,525)
Loss on extinguishment of debt ................................................ -- -- 2,248
Minority interest in net income ............................................... (3,735) (972) --
Other, net .................................................................... 10,557 2,152 (992)
--------- --------- ---------
Net cash provided by (used for) operating activities ............................... 836 (7,188) 17,776
--------- --------- ---------
Investing activities:
Net decrease (increase) of interest-bearing deposits in other banks ........... 708 (508) 21,474
Maturities of investment securities ........................................... 9,155 16,577 41,070
Sales of investment securities available-for-sale ............................. 36,199 20,000 20,059
Sales of mortgage-backed securities available-for-sale ........................ 219,235 -- 29,875
Purchases of investment securities held-to-maturity ........................... (8,952) (2,295) (10,000)
Purchases of investment securities available-for-sale ......................... (27,962) (34,148) (10,000)
Repayments of mortgage-backed securities held-to-maturity ..................... 25,383 108,436 151,661
Repayments of mortgage-backed securities available-for-sale ................... 72,436 67,963 44,344
Purchases of mortgage-backed securities held-to-maturity ...................... -- (101,369) (145,178)
Purchases of mortgage-backed securities available-for-sale .................... (210,376) (69,881) (210,288)
Repayments on reverse mortgages ............................................... 21,904 19,878 16,603
Disbursements for reverse mortgages ........................................... (8,230) (9,456) (10,058)
Sales of loans ................................................................ -- -- 16,781
Purchase of loans ............................................................. (36,829) (74,721) (10,479)
Net increase in loans ......................................................... (69,183) (26,036) (11,648)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ................. -- (5,500) (2,748)
Payments for investment in real estate ........................................ (1,991) -- --
Receipts from investments in real estate ...................................... -- -- 1,252
Sales of assets acquired through foreclosure, net ............................. 1,469 3,259 2,573
Premises and equipment, net ................................................... (5,298) (5,089) (4,696)
--------- --------- ---------
Net cash provided by (used for) investing activities ............................... 17,668 (92,890) (69,403)
--------- --------- ---------
(Continued on next page)
-54-
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
------------------------------------------
2000 1999 1998
---- ------ --------
(In Thousands)
Financing activities:
Net increase in demand and savings deposits ................................... 224,155 67,537 80,739
Net increase (decrease) in time deposits ...................................... (3,733) (11,598) 11,328
Receipts from FHLB borrowings ................................................. 692,500 210,000 884,000
Repayments of FHLB borrowings ................................................. (856,500) (155,000) (824,000)
Receipts from reverse repurchase agreements ................................... 46,588 111,211 259,771
Repayments of reverse repurchase agreements ................................... (116,229) (125,775) (313,965)
Receipts from Federal funds purchased ......................................... (5,000) 5,000 --
Repayments of Federal funds purchased ......................................... (103) -- --
Dividends paid on common stock ................................................ (1,610) (1,366) (1,107)
Issuance of common stock and exercise of employee stock options ............... 103 389 228
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 ................................ (12,678) (4,931) (16,497)
Change in net assets from discontinued operations ............................. 41,012 (19,111) (22,944)
Increase in investment in subsidiary .......................................... -- 101 --
Minority interest ............................................................. 5,174 6,039 --
--------- --------- ---------
Net cash provided by financing activities ..................................... 13,679 82,496 75,629
--------- --------- ---------
Increase (decrease) in cash and cash equivalents .............................. 32,183 (17,582) 24,002
Cash and cash equivalents at beginning of period .............................. 59,166 76,748 52,746
--------- --------- ---------
Cash and cash equivalents at end of period .................................... $ 91,349 $ 59,166 $ 76,748
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year ........................................ $ 79,377 68,231 $ 72,048
Cash paid for income taxes, net ............................................... 1,713 1,041 2,233
Loans transferred to assets acquired through foreclosure ...................... 1,199 1,421 2,138
Net change in unrealized gains (losses) on securities available-
for-sale, net of tax ........................................................ 3,462 (3,501) (143)
Assets transferred from held-to-maturity to available-for-sale
upon adoption of SFAS No.133:
Investment securities ....................................................... 2,000 -- --
Mortgage-backed securities .................................................. 128,981 -- --
The accompanying notes are an integral part of these financial statements.
-55-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company organized under the laws of the State of Delaware. The Corporation's
principal wholly-owned subsidiary, Wilmington Savings Fund Society, FSB (WSFS),
is a federal savings bank organized under the laws of the United States which
conducts operations from 28 retail banking offices located in northern Delaware
and southeastern Pennsylvania.
In preparing the Financial Statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The material estimates that are particularly
susceptible to significant changes in the near term relate to the determination
of the adequacy of the allowances for loan losses and the valuations of the
interest rate cap, other real estate owned, deferred tax assets, investment in
reverse mortgages, reserve for discontinued operations and contingencies.
Basis of Presentation
The consolidated Financial Statements include the accounts of the
parent company, WSFS Capital Trust I, WSFS and its wholly-owned subsidiaries,
838 Investment Group, Inc. and Star States Development Company (SSDC) as well as
not wholly-owned, but majority controlled subsidiaries, Wilmington National
Finance, Inc. (WNF), formerly Community Credit Corporation, and CustomerOne
Financial Network, Inc. (C1FN), see Note 19 for further discussion of non-wholly
owned subsidiaries.
As discussed in Note 2 of the Financial Statements, the results of WSFS
Credit Corporation, the Corporation's wholly owned indirect auto financing and
leasing subsidiary, are presented as discontinued operations, retroactively
restated for all periods presented.
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.
838 Investment Group, Inc. markets various insurance and securities
products to Bank customers through WSFS' 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 remains
inactive.
Certain reclassifications have been made to the prior years' Financial
Statements to conform them to the current year's presentation. All significant
intercompany transactions are eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks, federal funds sold and securities purchased under
agreements to resell. Generally, federal funds are purchased and sold for
periods ranging up to ninety days.
-56-
Debt and Equity Securities
Investments in equity securities that have a readily determinable fair
value and investments in debt securities are classified into three categories
and accounted for as follows:
o Debt securities with the positive intention to hold to maturity are
classified as "held-to-maturity" and reported at amortized cost.
o Debt and equity securities purchased with the intention of selling them
in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in
earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity.
There were no investment and mortgage-backed securities classified as
"trading" during 2000, 1999 and 1998.
Debt and equity securities include mortgage-backed securities,
corporate and municipal bonds, U.S. Government and agency securities and certain
equity securities. Premiums and discounts on debt and equity securities
held-to-maturity and available-for-sale are recognized in interest income using
a level yield method over the period to expected maturity. The fair value of
debt and equity securities are obtained from third party pricing services.
Implicit in the valuation are estimated prepayments based on history and current
market conditions.
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 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.
-57-
Allowances for Loss
The allowances for loan 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 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
and other relevant factors. 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 the results of operations in the period in which they become
known. Identified losses on specific loans, 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. Assets held-for-sale
are carried at the lower of cost or market of the individual assets. Vehicles
that have been returned to the Company upon the expiration of their lease terms
have been included in the net assets of discontinued operations.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the
recorded investment in the loan or fair value less estimated disposal costs.
Costs subsequently incurred to improve the assets are included in the carrying
value provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. Net costs
of assets acquired through foreclosure includes costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life. In
general, computer equipment, furniture and equipment and building renovations
are depreciated over 3, 5 and 10 years, respectively. Accelerated methods are
used in depreciating certain assets for income tax purposes.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are treated as financings, with the
obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements
remain in the asset accounts.
Income Taxes
The provision for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement basis and tax basis of assets and liabilities.
-58-
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
---- ---- ----
(In thousands, except per share data)
Numerator:
Income from continuing operations before loss on extinguishment of debt
and cumulative effect of change in accounting principle................ $16,878 $18,086 $16,849
Loss on extinguishment of debt, net of tax benefit...................... - - (1,461)
------- ------- -------
Income from continuing operations before cumulative effect of
change in accounting principle.......................................... 16,878 18,086 15,388
Cumulative effect of change in accounting principle, net of tax benefit. (1,256) - -
------- ------- -------
Income from continuing operations......................................... 15,622 18,086 15,388
(Loss) income from discontinued operations, net of taxes................ (2,392) 1,623 1,124
Loss on wind-down of discontinued operations, net of tax benefit........ (2,211) - -
------- ------- -------
Net income................................................................ $11,019 $19,709 $16,512
======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares ................................................. 10,652 11,352 12,317
Effect of dilutive securities:
Employee stock options................................................... 14 53 186
------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise......................................................... 10,666 11,405 12,503
======= ======= =======
Earnings per share:
Basic:
Income from continuing operations before loss on extinguishment of debt
and cumulative effect of change in accounting principle................. $ 1.58 $ 1.60 $ 1.37
Loss on extinguishment of debt, net of tax benefit ..................... - - (.12)
------- ------- -------
Income from continuing operations before cumulative effect of
change in accounting principle.......................................... 1.58 1.60 1.25
Cumulative effect of change in accounting principle, net of tax benefit. (.12) - -
------- ------- -------
Income from continuing operations......................................... 1.46 1.60 1.25
(Loss) income from discontinued operations, net of taxes................ (.22) .14 .09
Loss on wind-down of discontinued operations, net of tax benefit (.21) - -
------- ------- -------
Net income................................................................ $ 1.03 $ 1.74 $ 1.34
======= ======= =======
Diluted:
Income from continuing operations before loss on extinguishment and
cumulative effect of change in accounting principle.................... $ 1.58 $ 1.59 $ 1.35
Loss on extinguishment of debt, net of tax benefit ..................... - - (.12)
------- ------- -------
Income from continuing operations before cumulative effect of
change in accounting principle, net of tax benefit...................... 1.58 1.59 1.23
Cumulative effect of change in accounting principle, net of taxes....... (.12) - -
------- ------- -------
Income from continuing operations......................................... 1.46 1.59 $1.23
(Loss) income from discontinued operations, net of taxes................ (.22) .14 .09
Loss on wind-down of discontinued operations, net of tax benefit........ (.21) - -
------- ------- -------
Net income................................................................ $ 1.03 $ 1.73 $ 1.32
======= ======= =======
-59-
2. Discontinued Operations of a Business Segment
On December 21, 2000, the Board of Directors of WSFS Financial
Corporation approved plans to discontinue the operations of WSFS Credit
Corporation (WCC), the Company's indirect auto finance business segment. WCC,
which had 7,300 lease contracts and 2,700 loan contracts at December 31, 2000,
no longer accepts new applications but will continue to service existing loans
and leases until their maturity. Management estimates that substantially all
loan and lease contracts will mature by the end of December 2003.
Accounting for discontinued operations of a business segment requires
that the Company forecast operating results over the wind-down period and
immediately accrue any expected net losses as a one time charge. The historic
results of WCC's operations, the one-time charge, and the future reported
results of WCC are required to be treated as Discontinued Operations of a
Business Segment, and shown in summary form separately from the Company's
results of continuing operations in reported results of the Corporation. Prior
periods are restated, as required by generally accepted accounting principles.
As a result, net operating losses of $2.4 for the year ended December
31, 2000 and net income of $1.6 and $1.1 million for the years ended December
31, 1999 and 1998 respectively, were reclassified from continuing operations to
discontinued operations. In addition, the Corporation recognized a charge of
$2.2 million, net of taxes, for the expected loss over the projected three-year
wind-down period. A $6.2 million pretax reserve has been established to absorb
these expected future losses. This reserve will be reevaluated quarterly with
adjustments, if necessary, recorded as income/losses from discontinued
operations. Accounting for discontinued operations also requires that the net
assets (assets less third party liabilities) be reclassified on the balance
sheet to a single line item, Net assets of discontinued operations.
The following chart depicts the net assets of discontinued operations
at December 31, 2000 and 1999:
At December 31,
----------------------
2000 1999
(In Thousands)
Net loans......................................... $ 27,877 $ 20,612
Vehicles under operating leases, net.............. 175,745 220,209
Interest receivable............................... 148 107
Premises and equipment............................ 131 165
Foreclosed assets................................. 133 208
Other Assets 3,650 2,245
Less:
Reserve for losses of discontinued 6,169
operations.....................................
Other liabilities.............................. 1,764 2,783
-------- --------
Net assets of discontinued operations $199,751 $240,763
======== ========
-60-
The following table depicts the net income (loss) from
discontinued operations for the years ended December 31, 2000, 1999 and 1998:
Year Ended December 31,
----------------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
Interest income........................................................ $ 1,998 $ 1,996 $ 2,399
Allocated interest expense (1)......................................... 13,897 12,514 11,339
-------- -------- --------
Net interest expense................................................... (11,899) (10,518) (8,940)
-------- -------- --------
Provision for loan losses.............................................. - - 695
-------- -------- --------
Net interest income after provision for loan losses.................... (11,899) (10,518) (9,635)
-------- -------- --------
Loan and lease servicing fee income ................................... 723 1,440 1,483
Rental income on operating leases, net................................. 9,214 13,569 11,911
Other income........................................................... 42 46 56
-------- -------- --------
9,979 15,055 13,450
Other operating expenses............................................... 1,987 1,832 1,942
-------- -------- --------
(Loss) income before taxes............................................. (3,907) 2,705 1,873
Income tax provision (benefit) ....................................... (1,515) 1,082 749
-------- -------- --------
(Loss) income from discontinued operations............................. $ (2,392) $ 1,623 $ 1,124
======== ======== ========
(1) Allocated interest expense based on the Company's annual average wholesale
borrowings rate which was 6.28%, 5.65% and 5.12% for the years 2000, 1999 and
1998, respectively.
-61-
3. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
Available-for-sale securities:
December 31, 2000:
U.S. Government and agencies................... $ 1,894 $ - $ 1 $ 1,893
Corporate Bonds................................ 13,104 16 19 13,101
------- ------ ---- -------
$14,998 $ 16 $ 20 $14,994
December 31, 1999:
U.S. Government and agencies................... $28,573 $ - $137 $28,436
Other investments............................. 425 - - 425
------- ------ ---- -------
$28,998 $ - $137 $28,861
======= ==== ==== =======
Held-to-maturity:
December 31, 2000:
Corporate bonds................................ $ 3,885 $ 13 $ 74 $ 3,824
State and political subdivisions............... 10,861 258 5 11,114
------- ---- ---- -------
$14,746 $271 $ 79 $14,938
======= ==== ==== =======
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
======= ==== ==== =======
Securities with book values aggregating $11.5 million at December 31,
2000 were pledged as collateral for WSFS' Treasury Tax and Loan account with the
Federal Reserve Bank and certain municipal deposits which require collateral.
Accrued interest receivable relating to investment securities was $457,000 and
$595,000 at December 31, 2000 and 1999, 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, 2000 were as follows :
Held-to-Maturity Available-for-Sale
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(In Thousands)
Within one year ....................................... $ - $ - $12,953 $12,949
After one year but within five years................... 3,324 3,398 - -
After five but within ten years........................ 5,403 5,515 45 45
After ten years........................................ 6,019 6,025 2,000 2,000
------- ------- ------- -------
$14,746 $14,938 $14,998 $14,994
======= ======= ======= =======
-62-
Proceeds from the sales of investment security available-for-sale
during 2000 were $26.0 million, with gains of $18,000 and losses of $67,000
realized on these sales. There were also proceeds of $10.1 million received in
January 2000 for which a loss of $289,000 was recognized in 1999. In addition,
there was a gain of $40,000 on the sale of common stock received from the
demutualization of insurance companies of which WSFS was a policy holder.
Proceeds from the sale of investments during 1999 and 1998 were $20.0 million
and $20.1 million, respectively. Losses of $9,000 and gains of $30,000 were
realized on these sales in 1999 and 1998, respectively. The cost basis for all
investment security sales was based on the specific identification method. There
were no sales of securities classified as held-to-maturity. With the adoption of
Statement of Financial Accounting Standards (SFAS) No. 133, $2.0 million of
corporate bonds were reclassified from held-to maturity, to available-for-sale.
See Note 20 of the Financial Statements for further discussion of the adoption
of SFAS No. 133.
4. MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In Thousands)
Available-for-sale securities:
December 31, 2000:
Collateralized mortgage obligations ........... $229,882 $617 $ 617 $229,882
FNMA........................................... 1,153 - 12 1,141
FHLMC.......................................... 1,034 - 2 1,032
-------- ---- ------ --------
$232,069 $617 $ 631 $232,055
======== ==== ====== ========
Weighted average yield......................... 7.04%
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%
Held-to-maturity securities:
December 31, 2000:
Collateralized mortgage obligations............ $ 56,091 $103 $ 523 $ 55,671
FNMA........................................... 24,908 - 351 24,557
FHLMC.......................................... 26,664 1 289 26,376
-------- ---- ------ --------
$107,663 $104 $1,163 $106,604
======== ==== ====== ========
Weighted average yield......................... 6.41%
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%
-63-
At December 31, 2000, mortgage-backed securities with book values
aggregating $104.3 million were pledged as collateral for retail customer
repurchase agreements and securities sold under agreements to repurchase.
Accrued interest receivable relating to mortgage-backed securities was $2.0
million and $2.5 million at December 31, 2000 and 1999, respectively. During
2000, as part of a deleveraging strategy, WSFS received proceeds of $180.3
million in collateralized mortgage obligations and $14.7 million in adjustable
rate GNMA securities, all classified as available-for-sale, resulting in net
losses of $6.4 million and gains of $3,000, respectively. The cost basis of all
mortgage-backed security sales is based on the specific identification method.
There were no sales of mortgage-backed securities classified as held to maturity
in 2000. With the adoption of SFAS No. 133, $129.0 million in mortgage-backed
securities were reclassified from held-to-maturity to available-for-sale. In
addition there were proceeds of $24.3 million in January 2000 for the sale of
collateralized mortgage obligations for which a loss of $730,000 was recognized
in 1999. There were no other sales of mortgage-backed securities in 1999. In
1998, WSFS sold $29.6 million in collateralized mortgage obligations, classified
as available-for-sale, resulting in a gain of $235,000. There were no other
sales of mortgage-backed securities, nor transfers between categories of
mortgage-backed securities during 1999 and 1998.
5. LOANS
December 31,
------------------------
2000 1999
--------- ---------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) ................. $ 416,863 $ 368,671
Other .................................... 191,004 206,512
Real estate construction loans................. 37,203 38,273
Commercial loans............................... 156,293 119,875
Consumer loans................................. 175,268 154,857
--------- ---------
976,631 888,188
Less:
Loans in process .............................. 11,723 25,609
Unearned income ............................... 3,307 4,341
Allowance for loan losses ..................... 21,423 22,223
--------- ---------
$ 940,178 $ 836,015
========= =========
The Corporation had impaired loans of approximately $1.3 million at
December 31, 2000 compared to $2.0 million at December 31, 1999. The average
recorded investment in impaired loans was $1.4 million, $1.5 million and $5.4
million during 2000, 1999 and 1998, respectively. The allowance for losses on
impaired loans was $190,000 at December 31, 2000, as compared to $295,000 at
December 31, 1999. There was no interest income recognized on impaired loans.
The total amounts of loans serviced for others were $250.8 million,
$236.4 million and $237.9 million at December 31, 2000, 1999 and 1998,
respectively.
Accrued interest receivable on loans outstanding was $5.9 million, $4.9
million and $4.3 million at December 31, 2000, 1999 and 1998, respectively.
Nonaccruing loans aggregated $8.3 million, $7.4 million and $8.0
million at December 31, 2000, 1999 and 1998, respectively. If interest on all
such loans had been recorded, net interest income would have increased by
$966,000 in 2000, $591,000 in 1999 and $767,000 in 1998.
-64-
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
---------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
Beginning balance .............................................................. $22,223 $22,732 $24,057
Balance at acquisition of credit card portfolio ........................... 175 - -
Provision for loan losses................................................. 894 1,004 385
Loans charged-off ......................................................... (2,509) (2,021) (1,970)
Recoveries................................................................ 640 508 260
------- ------- -------
Ending balance ................................................................. $21,423 $22,223 $22,732
======= ======= =======
6. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31,
------------------------
2000 1999
------ --------
(In Thousands)
Real estate ........................................ $ 903 $ 1,182
Less allowance for losses........................... 273 329
------ --------
$ 630 $ 853
====== ========
A summary of changes in the allowance for foreclosed assets follows:
Year Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- -------
(In Thousands)
Beginning balance.......................... $ 329 $ 390 $ 11
Provision for losses .................... - - (258)
Net (charge-offs) recoveries ............ (56) (61) 126
Transfer from investment in real estate.. - - 511
------- --------- ------
Ending balance ............................ $ 273 $ 329 $ 390
======== ========= ======
-65-
7. PREMISES AND EQUIPMENT
December 31,
--------------------
2000 1999
(In Thousands)
Land .................................................... $ 1,086 $ 720
Buildings ............................................... 6,580 6,773
Leasehold improvements .................................. 9,126 5,503
Furniture and equipment ................................. 18,313 16,673
------- -------
35,105 29,669
Less:
Accumulated depreciation ................................ 18,317 15,213
------- -------
$16,788 $14,456
======= =======
The Corporation occupies certain premises and operates certain
equipment under noncancelable leases with terms ranging from 1 to 25 years.
These leases are accounted for as operating leases. Accordingly, lease costs are
expensed as incurred. Rent expense was $2.2 million in 2000, $1.5 million in
1999, and $1.2 million in 1998. Future minimum payments under these leases at
December 31, 2000 are as follows:
(In thousands)
2001 .......................................................... $ 2,255
2002 .......................................................... 2,146
2003 .......................................................... 1,951
2004 .......................................................... 1,598
2005 .......................................................... 1,103
Thereafter ........................................................ 3,503
-------
Total future minimum lease payments ...................... $12,556
=======
-66-
8. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more which aggregate $49.7 million and $46.0 million at December 31,
2000 and 1999, respectively.
The following is a summary of deposits by category, including a summary
of the remaining time to maturity for time deposits:
December 31,
------------------------------
2000 1999
----------- ---------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ................... $ 139,128 $ 119,754
Money market and interest-bearing demand ..... 244,120 79,321
----------- ---------
Total money market and demand ............. 383,248 199,075
----------- ---------
Savings ......................................... 289,382 258,854
----------- ---------
Retail certificates of deposits by maturity:
Less than one year ........................... 209,035 217,554
One year to two years ........................ 55,532 42,248
Two years to three years ..................... 10,832 8,452
Three years to four years..................... 2,862 5,096
Four years to five years...................... 2,882 1,854
Over five years............................... 1,696 2,847
----------- ---------
Total retail time certificates ............ 282,839 278,051
----------- ---------
Jumbo certificates of deposit by maturity:
Less than one year ........................... 17,722 23,309
One year to two years ........................ 894 908
Two years to three years ..................... 314 324
Three years to four years..................... 100 -
Four years to five years...................... - 104
----------- ---------
Total jumbo time certificates ............. 19,030 24,645
----------- ---------
Brokered certificates of deposit by maturity:
Less than one year ........................... 138,726 99,529
One year to two years ........................ 8,366 49,936
----------- ---------
Total brokered time certificates .......... 147,092 149,465
----------- ---------
Total deposits ................................... $ 1,121,591 $ 910,090
=========== =========
-67-
Interest expense by category follows:
Year Ended December 31,
--------------------------------------
2000 1999 1998
------ -------- --------
(In Thousands)
Money market and interest-bearing demand .............................. $ 6,186 $ 1,495 $ 1,528
Savings ............................................................... 10,764 7,471 5,965
Retail time deposits................................................... 13,687 14,151 18,211
------ -------- --------
Total retail interest expense 30,637 23,117 25,704
------ -------- --------
Jumbo certificates of deposit ......................................... 1,713 3,287 2,574
Brokered certificates of deposit ...................................... 10,541 6,738 4,241
------ -------- --------
Total interest expense on deposits $ 42,891 $ 33,142 $ 32,519
======== ======== ========
-68-
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)
2000
----
FHLB advances............................................ $351,000 6.11% $535,000 $397,672 5.90%
Trust preferred borrowings............................... 50,000 9.52 50,000 50,000 9.23
Federal funds purchased and securities
sold under agreements to repurchase ................... 69,300 6.66 138,941 116,127 6.65
Other borrowed funds .................................... 23,338 4.57 25,155 21,213 4.05
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 borrowed funds .................................... 13,524 4.14 16,103 11,448 4.11
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 4.86% to 7.43% at December 31, 2000 are due as follows:
Weighted
Average
Amount Rate
------ --------
(Dollars in Thousands)
2001......................................... $ 161,000 6.81%
2002......................................... 65,000 4.86
---------
$ 226,000
=========
Also outstanding at December 31, 2000 are four advances, totaling
$125.0 million, with a weighted average rate of 5.87% maturing in 2002 and
beyond, which are convertible on a quarterly basis (at the discretion of the
FHLB) to a variable rate advance based upon the 3-month LIBOR rate, after an
initial fixed term. WSFS has the option to prepay these four advances at
predetermined times or rates. Pursuant to collateral agreements with the FHLB,
advances are secured by qualifying first mortgage loans, collateralized mortgage
obligations, FHLB stock and an interest-bearing demand deposit account with the
FHLB.
As a member of the FHLB of Pittsburgh, WSFS is required to acquire and
hold shares of capital stock in the FHLB of Pittsburgh in an amount at least
equal to 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, 2000, of $28.5 million.
-69-
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 the remaining $29.1 million
in senior notes prior to maturity 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 primarily as
replacement financing for the early retirement of the Corporation's 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,
was to be amortized over the ten-year period as a yield adjustment. On January
1, 2000, the Corporation adopted SFAS No. 133 which changed the accounting
treatment of the cap. See Note 20 of the Financial Statements for a further
discussion. The effective rate of the Trust Preferred securities including
amortization of transactional costs and the change in the time value of the
interest rate cap was 9.52% and 9.06% at December 31, 2000 and 1999,
respectively. The Corporation received $220,000 in payments from the cap in
2000.
Securities Sold Under Agreements to Repurchase
During 2000, WSFS sold securities under agreements to repurchase as a
short-term funding source. At December 31, 2000, securities sold under
agreements to repurchase had fixed rates ranging from 6.59% to 6.76%. The
underlying securities are mortgage-backed securities with book and market values
aggregating $74.1 million and $73.5 million, respectively, at December 31, 2000.
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)
2000
- ----
Over 90 days..................... $ 69,300 6.66% $ 74,070 $ 73,458 $ 405
--------- ------- --------- -------- ------
$ 69,300 6.66% $ 74,070 $ 73,458 $ 405
========= ======= ======== ======== ======
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
======== ======= ======== ======== ======
-70-
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $22.9
million and $13.5 million at December 31, 2000 and 1999, respectively,
consisting of outstanding retail repurchase agreements, contractual arrangements
under which portions of certain securities are sold on an overnight basis to
retail customers under agreements to repurchase. Such borrowings were
collateralized by collateralized mortgage obligations. The average rate on these
borrowings was 4.10% and 4.11% at December 31, 2000 and 1999 respectively. Also
included in other borrowed funds is capital leases totaling $412,000 and $51,000
at December 31, 2000 and 1999, respectively. The average rate on these capital
leases was 16.53% and 14.92% at December 31, 2000 and 1999, respectively.
Cost of funding discontinued operations
A certain amount of WSFS' funding costs were allocated towards the
funding of discontinued operations. See Note 2 of the Financial Statements for
further discussion.
10. STOCKHOLDERS' EQUITY
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions, such as WSFS, must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"Tier 1" capital equal to 4.0% of risk-weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on WSFS'
financial statements. At December 31, 2000 and 1999 WSFS was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
-71-
The following table presents WSFS' consolidated capital position as of
December 31, 2000 and 1999:
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, 2000:
Total Capital (to risk-weighted assets) $151,280 12.72% $95,142 8.00% $118,927 10.00%
Core Capital (to adjusted tangible assets) 144,889 8.31 69,757 4.00 87,197 5.00
Tangible Capital (to tangible assets).. 144,865 8.31 26,159 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets) 144,889 12.18 N/A N/A 71,356 6.00
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) 136,811 7.80 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
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, 2000 and 1999. The Trust
Preferred securities issued in 1998 qualify as Tier 1 capital. WSFS is
prohibited from paying any dividend or making any other capital distribution
if, after making the distribution, WSFS would be undercapitalized within the
meaning of the OTS Prompt Corrective Action regulations. Since 1996, the Board
of Directors has approved five 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, 340,000
shares in 1999, and 1.1 million shares in 2000. At December 31, 2000, the
Corporation held 4.6 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 WSFS, the Corporation has agreed to
cause WSFS' 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 of the Financial Statements. 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 3-month LIBOR. At December 31, 2000, the coupon rate on
these securities was 8.50% with a scheduled maturity of December 1, 2028. The
Corporation purchased an interest rate cap that effectively limits 3-month
LIBOR to 6.00% until 2008. The effective rate of these securities, including
amortization of issuance costs and the cost of the interest rate cap was 9.52%
at December 31, 2000. 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% until 2008. See Note 9 of the Financial Statements for
additional information. The proceeds were used primarily to extinguish the 11%
Senior Notes and for general corporate purposes.
Pursuant to federal laws and regulations, WSFS' ability to engage in
transactions with affiliated corporations is limited, and WSFS generally may
not lend funds to nor guarantee indebtedness of the Corporation.
-72-
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 expenditure of $848,000, $670,000 and
$616,000 for 2000, 1999 and 1998, respectively. All Company contributions are
made in the form of the Corporation's common stock. The plan purchased 105,000,
75,000 and 50,000 shares of common stock of the Corporation during 2000, 1999,
and 1998, respectively.
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.
In December 1998 the Corporation adopted SFAS No. 132, "Employer's
Disclosure About Pensions and Other Post Retirement Benefits" which standardized
the applicable disclosure requirements.
-73-
The following disclosures are in accordance with SFAS No. 132,
"Employer's Disclosure About Pensions and Other Postretirement Benefits":
At or for the Year Ended
---------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year......................................... $ 1,058 $ 1,428 $ 1,350
Service cost.................................................................... 36 43 40
Interest cost................................................................... 74 93 91
Actuarial loss (gain)........................................................... 47 (404) 44
Benefits paid .................................................................. (129) (102) (97)
------- ------- -------
Benefit obligation at end of year......................................... $ 1,086 $ 1,058 $ 1,428
======= ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year.................................. $ - $ - $ -
Employer contributions ......................................................... 129 102 97
Benefits paid .................................................................. (129) (102) (97)
------- ------- -------
Fair value of plan assets at end of year.................................. $ - $ - $ -
======= ======= =======
Funded Status:
Funded status................................................................... $ (1,086) $(1,058) $(1,428)
Unrecognized transition (asset) obligation...................................... 736 797 859
Unrecognized net (gain) loss.................................................... (263) (332) 72
------- ------- -------
Net amount recognized..................................................... $ (613) $ (593) $ (497)
======= ======= =======
Components of net periodic benefit cost:
Service cost.................................................................... $ 36 $ 43 $ 40
Interest cost................................................................... 74 93 91
Amortization of transition (asset) obligation .................................. 61 61 61
Amortization of net (gain) loss ................................................ (21) - -
------- ------- -------
Net periodic benefit cost................................................. $ 150 $ 197 $ 192
======= ======= =======
Sensitivity analysis:
Effect of +1% on service cost plus interest cost................................ $ - $ 2 $ 2
Effect of -1% on service cost plus interest cost................................ - (2)
Effect of +1% on APBO........................................................... 2 1 31
Effect of -1% on APBO........................................................... (1) (1) (35)
Assumptions used to value the Accumulated Postretirement Benefit
Obligation (APBO):
Discount rate............................................................ 7.50% 7.50% 6.75%
Health care cost trend rate.............................................. 7.00% 7.50% 8.00%
The Corporation assumes that the average annual rate of increase for
medical benefits will decrease by one-half of 1% per year and stabilizes 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 2000 this annual premium cap amounted to $1,824 per retiree.
-74-
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,
---------------------------------------
2000 1999 1998
------- -------- -------
(In Thousands)
From Current Operations:
Current income taxes:
Federal taxes .................................................... $ 8,451 $ (214) $ 562
State and local taxes............................................. 541 537 1,295
Deferred income taxes:
Federal taxes .................................................... (2,406) (202) 3,709
State and local taxes ............................................ - - -
------- ------- -------
Subtotal ................................................... $ 6,586 $ 121 $ 5,566
From Discontinued Operations:
Current income taxes:
Federal taxes .................................................... $(3,475) $ 947 $ 655
State and local taxes............................................. 202 135 94
Deferred income taxes:
Federal taxes .................................................... (2,159) - -
State and local taxes ............................................ (41) - -
------- ------- -------
Subtotal ................................................... $(5,473) $ 1,082 $ 749
Current taxes from extraordinary item:
Federal taxes on SFAS no. 133 adoption............................ (837) - -
Federal taxes on debt extinguishment ............................. - - (787)
------- ------- -------
$ 276 $ 1,203 $ 5,528
======= ======= =======
Current federal income taxes include taxes on income that cannot be
offset by net operating loss carryforwards.
Based on the Corporation's history of prior earnings and its
expectations of the future, management believes that operating income and the
reversal pattern of its temporary differences will, more likely than not, be
sufficient to realize a net deferred tax asset of $2.1 million at December 31,
2000. Adjustments to the valuation allowance were made in 2000, 1999, and 1998
as a result of continued operating earnings of the Corporation's consolidated
group and other events.
-75-
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, 2000, 1999 and 1998:
2000 1999 1998
-------- -------- --------
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation.......................................... $(26,502) $(29,344) $(25,205)
Other............................................................. (174) (1,849) (134)
-------- -------- --------
Total deferred tax liabilities......................................... (26,676) (31,193) (25,339)
-------- -------- --------
Deferred tax assets:
Bad debt deductions............................................... 12,151 9,992 9,287
Tax credit carryforwards.......................................... 1,125 2,930 2,259
Net operating loss carryforwards.................................. 7,718 15,284 14,761
Loan fees......................................................... 155 215 283
Provisions for losses on reverse mortgages........................ 12,350 13,069 15,199
Discontinued operations............................................. 2,159 - -
Other............................................................. 1,283 2,165 3,051
Unrealized gains/losses on available-for-sale securities.......... 22 1,758 (127)
Investments in nonwholly-owned subsidiaries....................... 1,958 343 -
-------- -------- --------
Total deferred tax assets.............................................. 38,921 45,756 44,713
-------- -------- --------
Valuation allowance.................................................... (10,147) (14,902) (21,800)
-------- -------- --------
Net deferred tax asset (liability)..................................... $ 2,098 $ (339) $ (2,426)
======== ======== ========
Approximately $18.0 million of the Corporation's deferred tax assets
are related to 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 Internal Revenue Code (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 and certain adjustments in nonwholly-owned subsidiaries. An increase in 2000
for the deferred tax liabilities for investments in nonwholly-owned subsidiaries
for which no deferred tax expense was recognized was $433,000.
-76-
Net operating loss carryforwards of $53.4 million remain at December
31, 2000. The expiration dates and amounts of such carryforwards and credits are
listed below:
NOLs
----------------------------
Federal State
-------- --------
(In Thousands)
2004........................................ $ - $ 4,907
2005........................................ 1,308 10,857
2006........................................ 1,098 -
2007........................................ - 3,723
2008........................................ 6,515 4,745
2009........................................ 6,755 -
2012........................................ - 346
2013........................................ - 112
2014........................................ - 3,205
2018........................................ - 9,818
-------- --------
$ 15,676 $ 37,713
======== ========
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 $15.7 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.
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,
----------------------------
2000 1999 1998
---- ---- ----
Statutory federal income tax rate ............. 35.0% 35.0% 35.0%
State tax net of federal tax benefit........... 21.3 2.2 3.7
Interest income 50% excludable................. (6.7) (3.8) (3.3)
Utilization of loss carryforwards and
valuation allowance adjustments......... (42.1) (28.2) (9.4)
Other.......................................... (5.0) 0.8 -
----- ----- -----
Effective tax rate 2.5% 6.0% 26.09%
-77-
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 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. On April 27, 2000, at the Annual Meeting of
Stockholders', the stockholders approved an amendment to the 1997 Stock Option
Plan to increase the number of shares reserved for issuance under the 1997 Plan
to 1,165,000. At December 31, 2000 there were 357,095 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, within the Option
Plans.
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. There were no SAR's outstanding at December 31, 2000 and
1999.
A summary of the status of the Corporation's Option Plans as of
December 31, 2000, 1999 and 1998, and changes during the years then ending is
presented below:
2000 1999 1998
---------------------------- ---------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ---------------- ---------- ---------------- ------- ----------------
Stock Options:
- -------------
Outstanding at beginning of year 530,055 $ 14.88 333,655 $ 11.55 334,915 $ 7.96
Granted 372,700 12.30 298,225 14.75 96,900 17.47
Exercised (15,890) 6.53 (101,825) 3.59 (73,100) 2.43
Canceled (60,520) 15.09 - - (25,060) 13.07
------- ------- -------
Outstanding at end of year 826,345 $ 13.84 530,055 $ 14.88 333,655 $ 11.55
Exercisable at end of year 156,484 82,830 136,435
Weighted-average fair value
of awards granted $ 4.69 $ 6.15 $ 6.88
SARs:
Outstanding at beginning of year - $ - 97,510 $ 1.65 190,658 $ 1.75
Granted - - - - - -
Exercised - - (97,510) 1.65 (93,148) 1.85
Canceled - - - - - -
------- ------- -------
Outstanding at end of year - - - - 97,510 $ 1.65
Exercisable at end of year - - - - 97,510
-78-
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 6.0% in 2000, 5.6% in
1999, and 4.6% in 1998; expected option life of 6 years for all three years'
awards; and expected stock price volatility of 35% for 2000, 1999 and 1998
awards. Cash dividends of $.16 per share were assumed for 2000, $.12 per share
in 1999 and $.09 per share in 1998.
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 stock 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 $1.3 million in 2000,
$821,000 in 1999 and $349,000 in 1998 related to its Option Plans. As a result,
proforma net income from continuing operations for the Corporation would have
been $14.7 in 2000, $17.5 million in 1999 and $15.1 million in 1998, and
proforma diluted earnings per share would from continuing operations have been
$1.37 in 2000, $1.53 in 1999 and $1.21 in 1998.
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.
The following table summarizes all stock options outstanding and
exercisable for Option Plans as of December 31, 2000, 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:
$ 9.41-$11.29 225,080 $10.56 9.2 years 28,760 $ 9.44
$11.29-$13.17 73,800 11.68 8.8 years 7,380 12.75
$13.17-$15.05 394,725 14.78 8.8 years 54,724 14.73
$15.05-$16.93 3,100 16.08 6.2 years 1,600 15.93
$16.93-$18.81 129,640 17.94 7.1 years 64,020 18.08
------- ----- --------- ------- ------
Total 826,345 $13.84 8.6 years 156,484 $15.04
======= =======
-79-
14. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 2000, the Corporation had commitments to extend credit
of $156.8 million. Consumer lines of credit totaled $66.2 million of which $57.3
million was secured by real estate. Outstanding letters of credit were $2.8
million and outstanding commitments to make or acquire mortgage loans aggregated
$10.1 million of which approximately $5.6 million were at fixed rates ranging
from 6.00% to 8.375%, and approximately $4.5 million were at variable rates
ranging from 5.75% to 8.50%. All mortgage commitments are expected to have
closing dates within a six month period.
Computer Operations
In February 1997, WSFS entered into a five-year contract with ALLTEL,
the company that has been managing data processing operations since 1988. In
2000 the Company reduced the scope of the original agreement with this data
processing management company by (1) assuming the responsibility for the
"back-office" functions of deposit and loan operations and (2) outsourcing the
network operations function to MCI/WorldCom and Intergraph Corporation. The
revised projected amount of future minimum payments contractually due ALLTEL are
as follows:
2001 ..................................... $2,520,000
2002...................................... 420,000
In September 2000, the Company entered into a five-year contract with
MCI/WorldCom and Intergraph Corporation to manage network operations. The
projected amount of future minimum payments contractually due are as follows:
2001 ..................................... $1,249,000
2002...................................... 1,285,000
2003...................................... 1,323,000
2004...................................... 1,362,000
2005...................................... 1,238,000
Legal Proceedings
In the ordinary course of business, the Corporation, WSFS 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.
WSFS, 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 WSFS' 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 WSFS' reverse
mortgage loans.
-80-
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.
The following represents a summary of off-balance sheet financial
instruments at year-end:
December 31,
-----------------------
2000 1999
-------- ------
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments ................... $32,207 $21,931
Commercial mortgage loan commitments ............ 6,425 4,955
Commercial loan commitments ..................... 39,057 30,686
Commercial standby letters of credit ............ 2,829 1,406
Residential mortgage loan commitments ........... 10,104 22,996
Consumer lines of credit ........................ 66,211 65,838
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.
-81-
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 a 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.
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 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 of the
underlying collateral. Estimated cash flows, discounted using a rate
commensurate with current rates and the risk associated with the estimated cash
flows, are utilized if appraisals are not available.
Interest Rate Cap: The fair value is estimated using 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.
-82-
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,
---------------------------------------------------------
2000 1999
------------------------ ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ---------- ------- ------
(In Thousands)
Financial assets:
Cash and short-term investments................. $ 98,667 $ 98,667 $ 67,192 $ 67,192
Investment securities........................... 29,740 29,932 37,473 37,281
Mortgage-backed securities...................... 339,718 338,659 447,749 439,003
Investment in reverse mortgages................. 33,683 36,650 28,103 29,003
Loans, net...................................... 963,491 976,125 860,573 864,903
Interest rate cap............................... 1,997 1,997 2,131 4,944
Financial liabilities:
Deposits........................................ 1,121,591 1,122,754 910,090 910,661
Borrowed funds.................................. 493,638 481,282 722,465 686,288
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows:
December 31,
---------------------
2000 1999
---- ----
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit....................... $ 878 $ 806
Standby letters of credit.......................... 28 14
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.
-83-
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, the value of reverse mortgage assets include significant risk
associated with estimations.
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 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 WSFS. The carrying value of the reverse mortgages
was $17.2 million and $11.4 million at December 31, 2000 and December 31, 1999,
respectively. Of the 526 loans that comprise the 1994 pool at December 31, 2000,
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 $16.5 million and $16.7 million at
December 31, 2000 and December 31, 1999, respectively. Of the 318 loans that
comprise the 1993 Pool at December 31, 2000, 261 loans, or 82%, are located in
Delaware, New Jersey, Pennsylvania and Maryland.
-84-
At December 31, 2000, 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:
- ------------
2001................................. $ 5,166 $ 1,240 $ 6,406
2002................................. 6,335 1,953 8,288
2003................................. 6,454 1,975 8,429
2004................................. 6,477 1,968 8,445
2005................................. 6,449 1,935 8,384
2006-2010............................ 29,956 8,473 38,429
2011-2015............................ 22,658 5,493 28,151
2016-2020............................ 13,635 2,696 16,331
Thereafter........................... 8,914 1,267 10,181
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 2000 are as follows for each pool:
1994 1993
Pool Pool
---- ----
Year ended December 31, 2001...................... 2.00% 1.00%
Year ended December 31, 2002...................... 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
carrying value of reverse mortgages is affected by actual cash flows as well as
estimates of timing of future cash flows and collateral values. Furthermore,
since the 1994 pool was purchased at a significant discount to face value,
changes in collateral value can have a leveraged effect on book value. As such,
the value of the Company's reverse mortgage portfolio can very significantly
from period to period.
The changes in collateral values and actuarial assumptions resulted in
an effective yield of approximately 41.87% at December 31, 2000 on the 1994 Pool
and increased income by $10,215,000 during 2000 over the anticipated effective
yield at January 1, 2000. Included in this increase was a cumulative positive
catch-up adjustment of $7,861,000. The effective yield on the 1993 Pool was
6.62% at December 31, 2000, reflecting a $3,266,000 increase in income over the
anticipated effective yield at January 1, 2000, which includes a cumulative
catch-up adjustment of $2,989,000.
-85-
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, 2000:
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................................ 41.22% 41.57% 6.23% 6.23%
Effect on income of reverse mortgages.......... $(1,364) $ (689) $ (969) $ (969)
The cumulative catch-up adjustments included in the above reductions in
income are $820,000 and $449,000, respectively, at January 1, 2000 for the 1994
Pool. The cumulative catch-up adjustments included in the above reductions in
income are $836,000 and $836,000, respectively, at January 1, 2000 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 three operating
segments in 2000: WSFS, C1FN and WNF. C1FN and WNF are not wholly-owned, but are
majority-controlled subsidiaries that began operating in 1999. As majority
controlled subsidiaries, they are included in consolidated Financial Statements,
including segment reporting.
The operation of WCC, which provided auto loans and leases indirectly
through unrelated auto dealerships within the Mid-Atlantic region, was
discontinued in 2000 and therefore no longer defined as a business segment. The
segment information for 2000, 1999 and 1998 has been restated to reflect this
change. In 1998, excluding the discontinued segment, WCC, the Corporation had
only one segment: Wilmington Savings Fund Society, FSB (WSFS) and thus, no
separate segment information is provided for 1998.
The WSFS segment provides financial products within its geographical
footprint through its branch network to consumer and commercial customers. C1FN
received an additional investment in December 2000, which reduced WSFS'
ownership from 42% to 29%. WSFS retains majority control of C1FN through a
voting trust. C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for "branchless" financial services. WSFS
and C1FN are engaged in joint effort through a division of WSFS,
everbank.com(TM), to provide Internet banking on a national level. WNF, a 51%
owned subsidiary, which began operations in December 1999, is engaged in
sub-prime home equity lending. WNF expanded sales to a national level and now
aggregates loans primarily through brokers and sells them to investors.
Reportable segments are business units that offer different services to
distinct customers. The reportable segments are managed separately because they
operate under different regulations and provide services to distinct customers.
The Corporation evaluates performance based on pre-tax ordinary income and
allocates resources based on these results. Segment information for the years
ended December 31, 2000 and 1999 follow:
-86-
For the year ended December 31, 2000:
WSFS C1FN WNF Total
---- ---- --- -----
(In Thousands)
External customer revenues:
Interest income....................... $ 121,247 $ 7,310 $ 1,120 $ 129,677
Other income ......................... 12,931 796 4,374 18,101
----------- --------- -------- ----------
Total external customer revenues ......... 134,178 8,106 5,494 147,778
----------- --------- -------- ----------
Intersegment revenues:
Interest income....................... - - 72 72
Other income ......................... 327 - - 327
----------- --------- -------- ----------
Total intersegment revenues .............. 327 - 72 399
----------- --------- --------- ----------
Total revenue............................. 134,505 8,106 5,566 148,177
----------- --------- -------- ----------
External customer expenses:
Interest expense...................... 59,476 5,477 774 65,727
Other expenses ....................... 43,838 7,789 7,168 58,795
Other depreciation and
amortization .................... 2,871 469 187 3,527
----------- --------- -------- ----------
Total external customer expenses ......... 106,185 13,735 8,129 128,049
----------- --------- -------- ----------
Intersegment expenses:
Interest expense...................... 72 - - 72
Other expenses ....................... - 327 - 327
----------- --------- -------- ----------
Total intersegment expenses .............. 72 327 - 399
----------- --------- -------- ----------
Total expenses ........................... 106,257 14,062 8,129 128,448
----------- --------- -------- ----------
Income before taxes and minority
interest.............................. $ 28,248 $ (5,956) $ (2,563) $ 19,729
=========== ========= ======== ==========
Provision for income taxes ............... 6,586
Income (loss) from discontinued
operations............................ (2,392)
Loss on wind-down of discontinued
operations............................ (2,211)
Minority interest ........................ (3,735)
Cumulative effect of change in
accounting principle.................. (1,256)
----------
Consolidated net income .................. $ 11,019
==========
Segment assets .......................... $ 1,555,091 $ 192,617 $ 24,682 $1,772,390
Elimination of intersegment receivables.. (33,074)
----------
Consolidated assets ..................... $1,739,316
==========
Capital expenditures...................... $ 4,059 $ 587 $ 847 $ 5,493
-87-
For the year ended December 31, 1999:
WSFS C1FN(1) WNF(2) Total
---- ---- --- -----
(In Thousands)
External customer revenues:
Interest income....................... $ 108,011 $ 173 $ - $ 108,184
Other income ......................... 11,577 2 - 11,579
---------- --------- --------- ----------
Total external customer revenues ......... 119,588 175 - 119,763
---------- --------- --------- ----------
Intersegment revenues:
Interest income....................... - - 7 7
Other income ......................... 40 - - 40
---------- --------- --------- ----------
Total intersegment revenues .............. 40 - 7 47
---------- --------- --------- ----------
Total revenue............................. 119,628 175 7 119,810
---------
External customer expenses:
Interest expense...................... 58,840 16 - 58,856
Other expenses ....................... 39,261 1,687 198 41,146
Other depreciation and
amortization .................... 2,468 58 - 2,526
---------- --------- --------- ----------
Total external customer expenses ......... 100,569 1,761 198 102,528
---------- --------- --------- ----------
Intersegment expenses:
Interest expense...................... 7 - - 7
Other expenses ....................... - 40 - 40
---------- --------- --------- ----------
Total intersegment expenses .............. 7 40 - 47
---------- --------- --------- ----------
Total expenses ........................... 100,576 1,801 198 102,575
---------- --------- --------- ----------
Income before taxes and minority
interest.............................. $ 19,052 $ (1,626) $ (191) $ 17,235
Provision for income taxes ............... 121
Minority interest ........................ (972)
Income from discontinued
operations............................ 1,623
----------
Consolidated net income .................. $ 19,709
==========
Segment assets .......................... $1,740,297 $ 18,091 $ 2,383 $1,760,771
Elimination of intersegment receivables.. (9,734)
----------
Consolidated assets ..................... $1,751,037
==========
Capital expenditures...................... $ 4,274 $ 894 $ 70 $ 5,238
(1) Includes the results of C1FN from September 1, 1999 through
December 31, 1999, the period of WSFS' ownership.
(2) Includes the results of WNF from December 1, 1999, its date of inception.
-88-
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
----------------------------------
2000 1999
--------- ---------
(In Thousands)
Assets:
Cash ...................................................................... $ 2,519 $ 7,185
Investment in the subsidiaries ............................................ 140,116 134,653
Investment in interest rate cap ........................................... 1,997 2,131
Investment in capital trust................................................ 1,547 1,547
Other assets............................................................... 1,449 1,667
---------- ---------
Total assets ................................................................... $ 147,628 $ 147,183
========== =========
Liabilities:
Borrowings................................................................. $ 50,000 $ 50,000
Interest payable................................................................ 409 382
Other liabilities.......................................................... 73 648
---------- ---------
Total liabilities.......................................................... 50,482 51,030
---------- ---------
Stockholders' equity:
Common stock .............................................................. 148 148
Capital in excess of par value ............................................ 58,985 58,185
Comprehensive income....................................................... 197 (3,265)
Retained earnings ......................................................... 92,409 83,000
Treasury stock ............................................................ (54,593) (41,915)
---------- ---------
Total stockholders' equity ................................................ 97,146 96,153
---------- ---------
Total liabilities and stockholders' equity...................................... $ 147,628 $ 147,183
========== =========
Condensed Statement of Operations
Year Ended December 31,
--------------------------------
2000 1999 1998
------ ------ ------
(In Thousands)
Income:
Interest income ........................................................... $ 359 $ 876 $ 850
Other income............................................................... 234 93 91
-------- -------- --------
593 969 941
-------- -------- --------
Expenses:
Interest expense........................................................... 4,787 4,284 3,748
Other operating expenses................................................... (1,408) (1,116) (934)
-------- -------- --------
3,379 3,168 2,814
-------- -------- --------
Loss before equity in undistributed income of WSFS and
extraordinary item............................................................ (2,786) (2,199) (1,873)
Equity in undistributed income of WSFS ......................................... 13,805 21,908 19,846
-------- -------- --------
Income before extraordinary item................................................ 11,019 19,709 17,973
Loss on extinguishment of debt, net of taxes .................................. - - 1,461
-------- -------- --------
Net income ..................................................................... $ 11,019 $ 19,709 $ 16,512
======== ======== ========
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Condensed Statement of Cash Flows
Year Ended December 31,
---------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Operating activities:
Net income ................................................................ $ 11,019 $ 19,709 $ 16,512
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of WSFS .................................... (13,805) (21,908) (19,846)
Amortization .............................................................. 373 286 135
Loss on extinguishment of debt............................................. - - 2,248
(Increase) decrease in other assets........................................ (20) 487 (600)
Decrease (increase) in other liabilities.................................. (547) (706) 98
--------- -------- ---------
Net cash used for operating activities ......................................... (2,980) (2,132) (1,453)
--------- -------- ---------
Investing activities:
Decrease in investment in Bank............................................. 12,374 - 12,000
Investment in interest rate cap ........................................... - - (2,390)
Investment in capital trust ............................................... - - (1,547)
--------- -------- ---------
Net cash provided by investing activities....................................... 12,374 - 8,063
--------- -------- ---------
Financing activities:
Issuance of common stock .................................................. 103 389 228
Proceeds from issuance of trust preferred borrowings, net of costs......... - - 48,624
Extinguishment of senior notes............................................. - - (30,548)
Unrealized gains in intrinsic value of interest rate cap .................. 125 - -
Dividends paid on common stock ............................................ (1,610) (1,366) (1,107)
Treasury stock, net of reissuance ......................................... (12,678) (4,931) (16,497)
--------- -------- ---------
Net cash (used for) provided by financing activities ........................... (14,060) (5,908) 700
--------- -------- ---------
(Decrease) increase in cash .................................................... (4,666) (8,040) 7,310
Cash at beginning of period .................................................... 7,185 15,225 7,915
--------- --------- ---------
Cash at end of period .......................................................... $ 2,519 $ 7,185 $ 15,225
========= ======== =========
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19. INVESTMENTS IN NONWHOLLY-OWNED SUBSIDIARIES
In August 1999, WSFS Financial Corporation invested $5.5
million in CustomerOne Financial Network, Inc (C1FN), a St Louis, Missouri based
corporation formed in 1998 for the express purpose of providing
direct-to-consumer marketing, servicing, Internet development and technology
management for "branchless" financial services. As a result of this investment,
C1FN's Internet-only banking structure became part of everbank.com(TM), a
division of WSFS. C1FN assists WSFS in managing the operations of
everbank.com.(TM) everbank.com(TM) began marketing Internet-only banking to a
national clientele in November of 1999.
WSFS is the single largest shareholder in C1FN, has majority control
through a voting trust and for the year ended December 31, 2000 shared in 42% of
the operating results of C1FN. In addition, WSFS received warrants for the
purchase of 20% additional ownership of C1FN, as well as the option and under
certain circumstances the obligation to invest an additional $5.4 million in the
year 2000, at the original WSFS ownership prices. This option expired on July 5,
2000 with no additional investment being made by WSFS.
On December 29, 2000, C1FN received a $5.0 million investment from a
third party investor, with a conditional commitment to invest an additional
$12.5 million if and when a separate bank charter is obtained for
everbank.com(TM). This investment effectively reduces WSFS' economic ownership
of C1FN at December 31, 2000 from 42% to 29%. Since WSFS retains majority
control of C1FN through a voting trust, the results of C1FN will continue to be
consolidated into the operating results of WSFS until everbank.com(TM) obtains a
separate banking charter. If and when everbank.com(TM) obtains a banking
charter, WSFS will no longer have control. This investment may then be accounted
for under the equity method.
Additionally, in November 1999, the Corporation expanded the local retail home
equity lending business of Community Credit Corporation (CCC) which initially
started operations in 1994. CCC was renamed Wilmington National Finance, Inc.
(WNF) which expanded its sales to a national level and now aggregates loans
primarily through brokers and sells them to investors. WSFS retained a 51%
ownership with the remainder held by WNF's executives retained to lead the
expansion of WNF. WSFS also has warrants to obtain an additional 15% ownership
in WNF.
Both C1FN and WNFI are consolidated into the financial statements of
WSFS Financial Corporation. The portion of equity and operating results
attributable to investors in C1FN and WNF, other than WSFS, are reported as
minority interest.
20. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
On January 1, 2000, the Corporation adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS Nos. 137 and 138. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of derivatives
depends on the derivative and the resulting designation. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of certain foreign currency
exposures. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Corporation has elected earlier adoption as
permitted under this standard.
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The Corporation's only derivative that requires separate accounting
under SFAS 133 is an interest-rate cap with a notional amount of $50 million
which limits 3-month LIBOR to 6% for ten years ending December 1, 2008. The cap
is being used to hedge the cash flows of $50 million in trust preferred floating
rate debt. The cap was recorded at the date of purchase in other assets, at a
cost of $2.4 million. The fair market value (FMV), which at inception is equal
to the cost, is broken into two components: the intrinsic value and the time
value of the option. The cap is marked-to-market quarterly, with changes in the
intrinsic value of the cap, net of tax, included in a separate component of
other comprehensive income and changes in the time value of the option included
directly in interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, will be expensed in the period in which
ineffectiveness is determined. It has been determined that the hedge is highly
effective and can reasonably be expected to remain so. Management is not aware
of any events that would result in the reclassification into earnings of gains
and losses that are currently reported in accumulated other comprehensive income
except for the change in the FMV of the interest rate cap which pertains to the
time value of the hedging instrument. The fair value is estimated using quoted
prices for similar instruments.
The following depicts the change in fair market value of the interest
rate cap:
Carrying Value Changes in Carrying Value
At January 1, Fair Market At December 31,
2000 Value 2000
-------------- ----------- ---------------
(In thousands)
Intrinsic value $ 2,813 $ (2,620) $ 193(1)
Time value 2,131 (327)(2) 1,804
------------ ------------ ---------
$ 4,944 $ (2,947) $ 1,997
============= ============= =========
(1) Included in other comprehensive income, net of taxes.
(2) Included in interest expense on the hedged item (trust preferred
borrowings).
An additional provision of SFAS 133 affords the opportunity to
reclassify investment securities between held-to-maturity, available-for-sale
and trading at the date of adoption. Accordingly, the Corporation reclassified
$131.0 million in investments and mortgage-backed securities from
held-to-maturity to available-for-sale and recorded on unrealized loss of $2.4
million net of tax. Of the $131.0 million transferred, $55.4 million was sold at
a loss of $1.3 million, net of tax, during the quarter of adoption. In
accordance with SFAS No. 133, this loss was included in the statement of
operations as a cumulative effect of a change in accounting principle.
21. Subsequent Event
In the first quarter of 2001, the Company became aware of missing or
misappropriated funds related to an armored car carrier engaged to supply cash
to ATM's operated by customers of Cash Connect, the ATM division of WSFS.
Criminal investigations are ongoing and have resulted in the arrest of certain
armored car carrier employees. The armored car carrier has subsequently declared
bankruptcy.
Management estimates that the related net loss after taxes will be
between $450,000 and $650,000 and will be charged to earnings in the first
quarter of 2001. The Company believes it will reduce any loss by, among other
things, vigorously pursuing restitution from the responsible parties and making
claims in bankruptcy proceedings as well as through various insurance policies.
Management can make no assurance, however, that these efforts will result in any
recovery to the Company.
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QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/00 9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income............ $32,664 $32,302 $30,219 $34,492 28,125 26,729 26,670 26,660
Interest expense........... 17,303 17,251 15,347 15,826 15,502 14,374 14,322 14,658
------- -------- -------- ------ -------- ------- ------- -------
Net interest income ....... 15,361 15,051 14,872 18,666 12,623 12,355 12,348 12,002
Provision for loan losses ..... 222 227 217 228 233 259 249 263
------- -------- -------- ------ -------- ------- ------- -------
Net interest income after
provision for loan losses 15,139 14,824 14,655 18,438 12,390 12,096 12,099 11,739
Other income .............. 5,006 5,982 6,026 1,087 2,211 3,315 3,156 2,897
Other operating expenses... 16,535 16,222 15,271 13,400 12,613 10,558 10,122 9,375
------- -------- -------- ------ -------- ------- ------- -------
Income from operations
before, minority int.,
taxes and accounting
change................... 3,610 4,584 5,410 6,125 1,988 4,853 5,133 5,261
Minority interest net of tax (868) (780) (856) (1,231) (799) (173) - -
------- -------- -------- ------ -------- ------- ------- -------
Income before taxes ....... 4,478 5,364 6,266 7,356 2,787 5,026 5,133 5,261
Income tax provision
(benefit)................ 1,165 1,326 1,999 2,096 (3,462) 1,121 1,188 1,274
------- -------- -------- ------ -------- ------- ------- -------
Income from continued
operations before
accounting change........ 3,313 4,038 4,267 5,260 6,249 3,905 3,945 3,987
Change in accounting
principles, net......... - - - (1,256) - - - -
------- -------- -------- ------ -------- ------- ------- -------
Income from continuing
operations.............. 3,313 4,038 4,267 4,004 6,249 3,905 3,945 3,987
(Loss) income from
Discontinued operations,
net of tax .............. (656) 31 (1,901) 134 (11) 607 623 404
Loss on wind-down of
Discontinued operations. (2,211) - - - - - - -
------- -------- -------- ------ -------- ------- ------- -------
Net income ................ $ 446 $ 4,069 $ 2,366 $ 4,138 $ 6,238 $ 4,512 $ 4,568 $ 4,391
======= ======= ======= ======= ======== ======= ======= =======
Earnings per share:
Basic:
Income from continued
operations before
accounting change ...... $ .32 $ .39 $ .40 $ .47 0.55 0.34 0.35 0.35
Change in accounting
principle, net........... - - - (0.11) - - - -
------- -------- -------- ------ -------- ------- ------- -------
Income from continuing
operations............. 0.32 0.39 0.40 0.36 0.55 0.34 0.35 0.35
(Loss) income from
discontinued operations,
net of tax............... (0.06) - (0.18) 0.01 - 0.06 0.05 0.03
Loss on wind-down of
discontinued operations (0.22) - - - - - - -
------- -------- -------- ------ -------- ------- ------- -------
Net income................. $ 0.04 $ 0.39 $ 0.22 $ 0.37 $ 0.55 $ 0.40 $ 0.40 $ 0.38
======= ======== ======== ======= ======== ======= ======= =======
-93-
QUARTERLY FINANCIAL SUMMARY (Unaudited) (continued...)
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/00 9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Diluted:
Income from continuing
operations before
accounting change ...... $ .32 $ .39 $ .40 $ .47 $ 0.55 $ 0.34 $ 0.35 $ 0.35
Change in accounting
principles, net.......... - - - (0.11) - - - -
------ ------ ------ ------ ------ ------ ------ ------
Income from continuing
operations............. 0.32 0.39 0.40 0.36 0.55 0.34 0.35 0.35
(Loss) Income from
discontinued operations,
net of taxes............. (0.06) - (0.18) 0.01 - 0.06 0.05 0.03
Loss on wind-down of
discontinued operations (0.22) - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------
Net income................. $ 0.04 $ 0.39 $ 0.22 $ 0.37 $ 0.55 $ 0.40 $ 0.40 $ 0.38
====== ====== ====== ====== ====== ====== ====== ======
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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 2001 Annual Meeting of
Stockholders:
Page
----
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 4-8
ITEM 11. EXECUTIVE COMPENSATION 9-15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 2,6,7
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
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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 from Form 8-K/A.
4.5 Trust Preferred Securities Guarantee Agreement, incorporated herein by
reference to the Form 8-K/A filed with the Securities and Exchange
Commission on November 20, 1998.
-96-
4.6 Form of Junior Subordinated Indenture between WSFS Financial
Corporation and Wilmington Trust Company, as trustee, incorporated
herein by reference to Exhibit 4.1 to the Registration Statement.
4.7 Officers' Certificate and Company Order for Floating Rate Junior
Subordinated Debentures due December 1, 2028, incorporated herein by
reference to Exhibit 4.2 to the Form 8-K/A.
4.8 Form of Floating Rate Junior Subordinated Debenture, incorporated
herein by reference to Exhibit 4.5 of the Form 8-K/A.
4.9 First Amendment to the Amended and Restated Trust Agreement of WSFS
Capital Trust I.
10.1 Wilmington Savings Fund Society, Federal Savings Bank 1986 Stock Option
Plan, as amended is incorporated herein by reference to Exhibit 4.1 of
Registrant's Registration Statement on Form S-8 (File No. 33-56108)
filed with the Commission on December 21, 1992.
10.2 WSFS Financial Corporation, 1994 Short Term Management Incentive Plan
Summary Plan Description is incorporated herein by reference to Exhibit
10.7 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
10.3 Wilmington Savings Fund Society, Federal Savings Bank 1997 Stock Option
Plan is incorporated herein by reference to the Registrant's
Registration Statement on Form S-8 (File No. 333-26099) filed with the
Commission on April 29, 1997.
10.4 Attachment A 2000 Stock Option and Temporary Service Agreement among
Wilmington Savings Fund Society, Federal Savings Bank,
WSFS Financial Corporation and Marvin N. Schoenhals on
February 24, 2000.
10.5 Attachment B Severance Policy among Wilmington Savings Fund Society,
Federal Savings Bank and certain Executive Vice
Presidents dated March 13, 2001.
21 Attachment C Subsidiaries of Registrant.
23 Attachment D Consent of KPMG LLP.
Exhibits 10.1 through 10.5 represent management contracts or compensatory plan
arrangements.
(b) No reports on Form 8K were filed during the fourth quarter 2000.
-97-
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 29, 2001 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 29, 2001 BY: /S/ MARVIN N. SCHOENHALS
-----------------------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: March 29, 2001 BY: /S/ CHARLES G. CHELEDEN
-----------------------------------------------
Charles G. Cheleden
Vice Chairman and Director
Date: March 29, 2001 BY: /S/ JOHN F. DOWNEY
-----------------------------------------------
John F. Downey
Director
Date: March 29, 2001 BY: /S/ LINDA C. DRAKE
-----------------------------------------------
Linda C. Drake
Director
Date: March 29, 2001 BY: /S/ DAVID E. HOLLOWELL
-----------------------------------------------
David E. Hollowell
Director
Date: March 29, 2001 BY: /S/ JOSEPH R. JULIAN
-----------------------------------------------
Joseph R. Julian
Director
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Date: March 29, 2001 BY: /S/ THOMAS P. PRESTON
-----------------------------------------------
Thomas P. Preston
Director
Date: March 29, 2001 BY: /S/ CLAIBOURNE D. SMITH
-----------------------------------------------
Claibourne D. Smith
Director
Date: March 29, 2001 BY: /S/ EUGENE W. WEAVER
-----------------------------------------------
Eugene W. Weaver
Director
Date: March 29, 2001 BY: /S/ R. TED WESCHLER
-----------------------------------------------
R. Ted Weschler
Director
Date: March 29, 2001 BY: /S/ DALE E. WOLF
-----------------------------------------------
Dale E. Wolf
Director
Date: March 29, 2001 BY: /S/ MARK A. TURNER
-----------------------------------------------
Mark A. Turner
Executive Vice President and
Chief Financial Officer
Date: March 29, 2001 BY: /S/ ROBERT F. MACK
-----------------------------------------------
Robert F. Mack
Managing Vice President and Controller
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