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, 2001
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
838 Market Street, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the registrant's common stock as
quoted on the Nasdaq National Marketsm as of March 15, 2002 was $105,270,842.
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 15, 2002, there were issued and outstanding $9,116,542 shares of
the registrant's common stock.
-------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 25, 2002 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
Item 1. Business ................................................................... 3
Item 2. Properties ................................................................. 22
Item 3. Legal Proceedings............................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.......................... 25
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 26
Item 6. Selected Financial Data...................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................... 46
Item 8. Consolidated Financial Statements and Supplementary Data..................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 98
Part III
Item 10. Directors and Executive Officers of the Registrant........................... 98
Item 11. Executive Compensation....................................................... 98
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 98
Item 13. Certain Relationships and Related Transactions............................... 98
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 99
Signatures................................................................... 101
-2-
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 170 years. WSFS
is the largest thrift institution headquartered in Delaware and among the three
or four largest financial institutions in the state on the basis of total
deposits traditionally garnered in-market. The Corporation's primary market area
is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The long-term goal of the
Corporation is to maintain its high-performing financial services company status
by focusing on its core banking business while occasionally developing
profitable niches in highly-synergistic businesses that have a strategic fit.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services. Lending
activities are funded primarily with retail deposit services and borrowings. At
December 31, 2001 there were 27 retail banking offices located in northern
Delaware and southeastern Pennsylvania in which WSFS conducted banking
operations. In January 2002 for strategic reasons, WSFS transferred 5 in-store
branch offices that were outside of its core footprint to another financial
institution. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC).
The Corporation has two consolidated subsidiaries, WSFS and WSFS
Capital Trust I. and no unconsolidated subsidiaries or off-balance sheet
entities. Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), which is engaged primarily in indirect motor vehicle leasing;
and 838 Investment Group, Inc., which markets various third party insurance
products and securities through WSFS' branch system. An additional subsidiary,
Star States Development Company (SSDC), is currently inactive. In addition to
the wholly owned subsidiaries, the Corporation consolidates two non-wholly owned
subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and Wilmington National
Finance, Inc. (WNF). (See the subsidiary discussion later in this section.)
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.
-3-
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,
---------------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
------ --------- ------ ---------- ------ ----------
(Dollars In Thousands)
Held-to-Maturity:
Corporate bonds ............................ $ 1,372 0.1% $ 3,885 0.2% $ 6,855 0.4%
State and political subdivisions ........... 11,024 0.6 10,861 0.6 1,757 0.1
-------- --- -------- --- --------- ---
12,396 0.7 14,746 0.8 8,612 0.5
Available-for-Sale:
U.S. Government and agencies ............... -- -- 1,893 0.1 28,436 1.6
Corporate bonds ............................ 1,798 0.1 13,101 0.8 -- --
Other investments .......................... -- -- -- -- 425 --
-------- --- -------- --- --------- ---
1,798 0.1 14,994 0.9 28,861 1.6
-------- --- -------- --- --------- ---
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell ............. 65,779 3.4 3,500 0.2 -- --
Interest-bearing deposits in other banks (1) 28,360 1.5 7,318 .4 8,026 .5
-------- --- -------- --- --------- ---
94,139 4.9 10,818 0.6 8,026 0.5
-------- --- -------- --- --------- ---
$108,333 5.7% $ 40,558 2.3% $ 45,499 2.6%
======== === ======== === ========= ===
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
WSFS purchased $75 million in U.S. Treasury bills and $306,000 in
corporate bonds in 2001, all of which were classified as available-for-sale. In
addition, there were sales of $644,000 in corporate bonds and $3 million in
corporate bond calls, from which gains of $9,000 and losses of $5,000 were
realized. The remainder of the changes in 2001 resulted from repayments and
maturaties. 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 during
2000 totaling $25 million and a $750,000 corporate call, from which gains of
$18,000 and losses of $67,000, respectively, were realized. There was also a
sale of $10 million in U.S. Government securities in January 2000, for which no
loss was recorded in 2000 as these securities had been marked-to-market in 1999.
In addition, the Company recognized a gain of $40,000 on the sale of common
stock received from the demutualization of insurance companies of which WSFS was
a policyholder. The remainder of the changes during 2000 resulted from
repayments and maturities. 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. Losses of $9,000 were realized on the sales in
1999.
-4-
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 2001. Substantially all of the related interest and dividends
represent taxable income.
At December 31, 2001
--------------------
Amount Yield
------ ------
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
Within one year....................................................... $ 62 6.61%
After one but within five years....................................... 312 6.00
After five but within ten years....................................... 874 6.24
After ten years....................................................... 124 7.52
--------
1,372 6.32
--------
State and political subdivisions (1):
After one but within five years....................................... 2,460 7.28
After five but within ten years....................................... 3,527 7.32
After ten years....................................................... 5,037 6.07
--------
11,024 6.74
--------
Total debt securities, held-to-maturity................................. 12,396 6.69
--------
Available-for-Sale:
Corporate bonds:
After one but within five years...................................... 306 4.46
After five but within ten years....................................... 1,492 9.88
--------
1,798 8.96
--------
Total debt securities, available-for-sale............................... 1,798 8.96
--------
Short-term investments:
Federal funds sold and securities purchased under agreement to resell. 65,779 1.63
Interest-bearing deposits in other banks.............................. 28,360 1.21
--------
Total short-term investments............................................ 94,139 1.50
--------
$108,333 2.22%
========
(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. In 2001,
purchases of mortgage-backed securities, including collateralized mortgage
obligations, totaled $281 million, all classified as available-for-sale. There
were also sales of $4 million of mortgage-backed securities, which resulted in
gains of $78,000. In 2000, purchases of mortgage-backed securities, including
collateralized mortgage obligations, totaled $210 million, all of which were
classified as available-for-sale. There were also sales of $195 million of
mortgage-backed securities, as part of a deleveraging strategy, which resulted
in net losses of $6.5 million. In addition there was a sale of $24 million in
mortgage-backed securities in January 2000 for which a loss of $730,000 was
recognized in 1999. Reductions in the other categories, for all years, were due
to principal repayments.
-5-
The following table sets forth the book value of mortgage-backed
securities and their related weighted average contractual rates at the end of
the last three fiscal years.
December 31,
------------------------------------------------------------------------
2001 2000 1999
------------------- ------------------ --------------------
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Held-to-Maturity:
Collateralized mortgage obligations (1)..... $ 31,889 6.89% $ 56,091 6.75% $191,839 6.65%
FNMA........................................ 18,355 5.57 24,908 6.05 31,065 6.23
FHLMC....................................... 20,041 5.70 26,664 6.04 33,036 6.15
GNMA ....................................... - - - - 852 6.48
Other....................................... - - - - 2,033 5.31
--------- ---- -------- ---- -------- ----
$ 70,285 6.20% $107,663 6.41% $258,825 6.53%
========= ==== ======== ==== ======== ====
Available-for-Sale:
Collateralized mortgage obligations (2)..... $260,784 5.51% $229,882 7.04% $173,544 6.43%
FNMA........................................ 15,276 5.45 1,141 7.25 - -
FHLMC....................................... 15,138 4.84 1,032 7.76 143 6.61
GNMA........................................ 241 6.89 - - 15,237 5.40
-------- ---- -------- ---- -------- ----
$291,439 5.47% $232,055 7.04% $188,924 6.34%
========= ==== ======== ==== ======== ====
(1) Includes $21.3 million in private issues from Residential Funding Mortgage
securities, Inc. with a fair market value of $21.8 million
(2) Includes $25.0 million and $10.0 million in private issues of Residential
Funding Mortgage Securities, Inc. and Countrywide Funding Corp.,
respectively, all stated at their 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.
WSFS' current lending activity is concentrated on lending to consumers and small
businesses in the mid-Atlantic region of the United States.
-6-
The following table sets forth the composition of the Corporation's
loan portfolio by type of loan at the dates indicated. Other than as disclosed
below, the Company had no concentrations of loans exceeding 10% of total loans
at December 31, 2001:
December 31,
------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ----------------- ----------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate (1)....... $487,845 43.7% $440,136 45.7% $393,243 45.7% $291,110 39.4% $287,349 39.1%
Commercial real estate:
Commercial mortgage............... 208,286 18.7% 190,707 19.8% 201,559 23.4% 226,063 30.6% 238,533 32.5%
Construction...................... 48,002 4.3% 30,183 3.1% 21,561 2.5% 11,642 1.5% 12,553 1.7%
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total commercial real estate.... 256,288 23.0% 220,890 22.9% 223,120 25.9% 237,705 32.1% 251,086 34.2%
Commercial........................ 197,790 17.7% 151,887 15.7% 115,931 13.5% 97,524 13.2% 94,686 12.9%
Consumer.......................... 198,366 17.8% 175,268 18.2% 154,857 18.0% 141,238 19.1% 130,069 17.7%
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross loans....................... 1,140,289 102.2% 988,181 102.5% 887,151 103.1% 767,577 103.8% 763,190 103.9%
Less:
Unearned income................... 3,320 0.3% 3,268 0.3% 4,355 0.5% 5,383 0.7% 4,407 0.6%
Allowance for loan losses......... 21,597 1.9% 21,423 2.2% 22,223 2.6% 22,732 3.1% 24,057 3.3%
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans $1,115,372 100.0% $963,490 100.0% $860,573 100.0% $739,462 100.0% $734,726 100.0%
========== ===== ======== ===== ======== ===== ======== ===== ======== =====
(1) Includes $84,691, $23,274, $24,572, $3,103, and $2,222 of residential
mortgage loans held-for-sale at December 31, 2001, 2000, 1999, 1998, and 1997,
respectively.
-7-
The following table sets forth information as of December 31, 2001
regarding the amount of loans maturing in the Company's portfolios, including
scheduled repayments of principal based on contractual terms to maturity. In
addition, the table sets forth the amount of loans maturing during the indicated
periods based on if the loan has a fixed or adjustable rate. Loans having no
stated maturity or repayment schedule are reported in the one year or less
category.
Less than One to Over
One Year Five Years Five Years Total
--------- ---------- ---------- -----
(In Thousands)
Real estate loans (1)..................... $ 48,520 $ 191,199 $ 371,721 $ 611,440
Construction loans........................ 25,519 22,440 43 48,002
Commercial loans.......................... 49,671 68,340 79,779 197,790
Consumer loans ........................... 67,425 67,196 63,745 198,366
----------- ----------- ---------- ----------
$ 191,135 $ 349,175 $ 515,288 $1,055,598
=========== =========== ========== ==========
Rate sensitivity:
Fixed................................... $ 51,568 $ 206,388 $ 251,173 $ 509,129
Adjustable 139,567 142,787 264,115 546,469
----------- ----------- ---------- ----------
191,135 349,175 515,288 1,055,598
----------- ----------- ---------- ----------
Gross loans $ 191,135 $ 349,175 $ 515,288 $1,055,598
=========== =========== ========== ==========
(1) Includes commercial mortgage loans; does not include loans held-for-sale.
The above schedule does not include any prepayment assumptions.
Prepayments tend to be highly dependent upon the interest rate environment.
Management believes that the actual repricing and maturity of the loan portfolio
is significantly shorter than is reflected in the above table as a result of
prepayments.
Residential Real Estate Lending.
WSFS originates residential mortgage loans with loan-to-value ratios up
to 97%. WSFS generally requires private mortgage insurance for up to 30% of the
mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. WSFS
does not have any significant concentrations of such insurance with any one
insurer. On a very limited basis, WSFS originates/purchases loans with
loan-to-value ratios exceeding 80% without a private mortgage insurance
requirement. At December 31, 2001, the balance of all such loans was
approximately $22.3 million. Generally, residential mortgage loans are
underwritten and documented in accordance with standard underwriting criteria
published by Federal Home Loan Mortgage Corporation (FHLMC) to assure maximum
eligibility for subsequent sale in the secondary market. However, unless loans
are specifically designated for sale, the Company holds newly originated loans
in its portfolio for long-term investment. Among other things, title insurance
is required to insure the priority of its lien, and fire and extended coverage
casualty insurance is required for the properties securing the residential
loans. All properties securing residential loans made by WSFS are appraised by
independent appraisers selected by WSFS and subject to review in accordance with
WSFS standards.
The majority of WSFS' residential real estate adjustable-rate loans
have interest rates that adjust yearly, after an initial period. Usually the
change in rate is limited to two percentage points at the adjustment date.
Adjustments are generally based upon a margin (currently 2.75%) over the weekly
average yield on U.S. Treasury securities adjusted to a constant maturity, as
published by the Federal Reserve Board.
Generally, the maximum rate on these loans is up to six percent above
the initial interest rate. WSFS underwrites adjustable-rate loans under
standards consistent with private mortgage insurance and secondary market
criteria. WSFS does not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization. Consistent with industry
practice in its market area, WSFS has typically originated adjustable-rate
mortgage loans with discounted initial interest rates. All such loans are
underwritten at the fully-indexed rate.
-8-
The retention of adjustable-rate mortgage loans in WSFS' loan portfolio
helps mitigate WSFS' risk to changes in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing adjustable-rate mortgage loans. It is possible
that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest costs to the borrower. Further, although adjustable-rate mortgage loans
allow WSFS to increase the sensitivity of its asset base to changes in interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limitations. Accordingly, there can be no
assurance that yields on WSFS' adjustable-rate mortgages will adjust
sufficiently to compensate for increases in WSFS' cost of funds during periods
of extreme interest rate increases.
The original contractual loan payment period for residential loans is
normally 10 to 30 years. Because borrowers may refinance or prepay their loans
without penalty, such loans tend to remain outstanding for a substantially
shorter period of time. First mortgage loans customarily include "due-on-sale"
clauses on adjustable- and fixed-rate loans. This provision gives the
institution the right to declare a loan immediately due and payable in the event
the borrower sells or otherwise disposes of the real property subject to the
mortgage. Due-on-sale clauses are an important means of adjusting the rate on
existing fixed-rate mortgage loans to current market rates. WSFS enforces
due-on-sale clauses through foreclosure and other legal proceedings to the
extent available under applicable laws.
In addition to loans originated for its own portfolio, WSFS originates
nonconforming residential mortgage loans through its non wholly-owned
subsidiary, Wilmington National Finance, Inc. ("WNF"). These loans are resold in
the secondary market on a servicing released, limited recourse basis. They are
originated using the underwriting guidelines of the various investors to which
WNF sells its loans. These 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. They are secured by one-to
four-family residential properties with loan-to-value ratios up to 100% and
contractual terms of 10 to 30 years. With respect to each property securing a
mortgage loan, the underwriting guidelines require among other things, title
insurance, fire and extended coverage casualty insurance, and a full appraisal
by an independent appraiser selected and reviewed by WNF. The majority of
adjustable rate mortgage loans originated by WNF are indexed to the six month
London Interbank Offered Rate (LIBOR) and have rates that adjust every six
months after a initial fixed rate period of 24 to 36 months. Adjustments are
limited to two percent at any adjustment date and six percent over the life of
the loan.
In general, loans are sold without recourse except for the repurchase
arising from standard contract provisions covering violation of representations
and warranties or, under certain investor contracts, a default by the borrower
on the first payment. The Company also has limited recourse exposure under
certain investor contracts in the event a borrower prepays a loan in total
within a specified period after sale, typically one year. The recourse is
limited to a pro rata portion of the premium paid by the investor for that loan,
less any prepayment penalty collectible from the borrower.
Commercial Real Estate, Construction and Commercial Lending.
Federal savings banks are generally permitted to invest up to 400% of
their total regulatory capital in nonresidential real estate loans and up to 20%
of its assets in commercial loans. As a federal savings bank which was formerly
chartered as a Delaware savings bank, WSFS has certain additional lending
authority.
WSFS offers commercial real estate mortgage loans on multi-family
properties and other commercial real estate. Generally, loan-to-value ratios for
these loans do not exceed 80% of appraised value at origination.
-9-
WSFS offers commercial construction loans to developers. In some cases
these loans are made as "construction/permanent" loans, which provides for
disbursement of loan funds during construction and automatic conversion to
mini-permanent loans (1-5 years) upon completion of construction. These
construction loans are made on a short-term basis, usually not exceeding two
years, with interest rates indexed to the WSFS prime rate, in most cases, and
adjusted periodically as WSFS' prime rate changes. The loan appraisal process
includes the same evaluation criteria as required for permanent mortgage loans,
but also takes into consideration completed plans, specifications, comparables
and cost estimates. Prior to approval of the credit, these items are used as a
basis to determine the appraised value of the subject property when completed.
Policy requires that all appraisals be reviewed independently of the commercial
lending area. Generally, the loan-to-value ratios for construction loans do not
exceed 75%. The initial interest rate on the permanent portion of the financing
is determined by the prevailing market rate at the time of conversion to the
permanent loan. At December 31, 2001, $86.9 million was committed for
construction loans, of which $48.6 million had been disbursed.
WSFS' commercial lending, excluding real estate loans, includes loans
for the purpose of financing equipment acquisitions, expansion, working capital
and other business purposes. These loans generally range in amounts up to $5
million, and their terms range from less than one year to seven years. The loans
generally carry variable interest rates indexed to WSFS' prime rate, or LIBOR,
at the time of closing. WSFS intends to continue originating commercial loans to
small businesses in its market area.
Commercial, commercial mortgages and construction lending has a higher
level of risk as compared to residential mortgage lending. These loans typically
involve larger loan balances concentrated in single borrowers or groups of
related borrowers. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related real estate project and may be more subject to adverse conditions
in the commercial real estate market or in the economy generally. The majority
of WSFS' commercial and commercial real estate loans are concentrated in
Delaware and surrounding areas.
Construction loans involve additional risk because loan funds are
advanced as the construction progresses. The valuation of the underlying
collateral can be difficult to quantify prior to the completion of the
construction. This is due to uncertainties inherent in construction such as
changing construction costs, delays arising from labor or material shortages and
other unpredictable contingencies. WSFS attempts to mitigate these risks and
plan for these contingencies through additional analysis and monitoring of its
construction projects.
Federal law limits the extensions of credit to any one borrower to 15%
of unimpaired capital, or 25% if the difference is secured by readily marketable
collateral having a market value that can be determined by reliable and
continually available pricing. Extensions of credit include outstanding loans as
well as contractual commitments to advance funds, such as standby letters of
credit, but do not include unfunded loan commitments. WSFS had a $35.3 million
loan to refinance an employee stock ownership plan ("ESOP") loan of a company.
Approximately 80% of the loan is secured by discounted U.S. treasury securities.
The portion of the loan that is secured by U.S. treasury securities is exempt
from the above lending limits. At December 31, 2001, 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, 2001, WSFS
had equity secured installment loans totaling $125.6 million, which represented
63% of total consumer loans. A home equity line of credit grants borrowers a
line of credit of up to 100% of the appraised value (net of any senior
mortgages) of the residence. This line of credit is secured by a mortgage on the
borrower's property and can be drawn upon at any time during the period of
agreement. At December 31, 2001, WSFS had extended $80.9 million in home equity
lines of credit, of which $24.2 million had been drawn at the date. Home equity
lines of credit potentially offer federal income tax advantages, the convenience
of checkbook access and revolving credit features. Over the past few years,
however, home equity lines of credit have decreased because low interest rates
offered on first and second mortgage loans have enabled consumers to refinance
their mortgages and consolidate their 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.
-10-
The table below sets forth consumer loans by type, in amounts and percentages at
the dates indicated.
December 31,
------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ----------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------ ------- ------ ------- ------ ------- ------ -------
Equity secured installment loans $125,597 63.3% $113,686 64.8% $ 97,491 63.0% $ 87,503 61.9% $ 78,975 60.7%
Home equity lines of credit.... 24,161 12.2% 24,408 13.9% 26,446 17.1% 27,799 19.7% 31,110 23.9%
Automobile..................... 11,737 5.9% 9,762 5.6% 9,800 6.3% 8,307 5.9% 3,596 2.8%
Unsecured lines of credit...... 20,156 10.2% 16,739 9.6% 11,370 7.3% 10,444 7.4% 9,466 7.3%
Other.......................... 16,715 8.4% 10,673 6.1% 9,750 6.3% 7,185 5.1% 6,922 5.3%
-------- ----- -------- ----- -------- ------ -------- ----- -------- -----
Total consumer loans .......... $198,366 100.0% $175,268 100.0% $154,857 100.0% $141,238 100.0% $130,069 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
-11-
Loan Originations, Purchase and Sales.
WSFS has traditionally engaged in lending activities primarily in
Delaware and contiguous areas of neighboring states. As a federal savings bank,
however, WSFS may originate, purchase and sell loans throughout the United
States. WSFS has purchased limited amounts of loans from outside its normal
lending area when such purchases are deemed appropriate and consistent with
WSFS' overall practices. WSFS originates fixed-rate and adjustable-rate
residential real estate loans through its banking offices. In addition, WSFS has
established relationships with correspondent banks and mortgage brokers to
originate loans.
During 2001, the Company originated $693 million of residential real
estate loans, of which $582 million were from WNF. This compares to originations
of $196 million in 2000. From time to time, WSFS has purchased whole loans and
loan participations in accordance with its ongoing asset and liability
management objectives. Purchases of residential real estate loans from
correspondents and brokers primarily in the mid-Atlantic region totaled $25
million for the year ended December 31, 2001, $37 million for 2000 and $75
million for 1999. WSFS also periodically purchases residential mortgages from
WNF with the intention of holding in its portfolio. These purchases totaled
$25.0 million in 2001. Residential real estate loan sales totaled $566 million
in 2001, $145 million in 2000 and $29 million in 1999. While WSFS generally
intends to hold loans for the foreseeable future, WSFS sells newly originated
fixed-rate mortgage loans in the secondary market to control the interest
sensitivity of its balance sheet. The Corporation holds for investment certain
of its fixed-rate mortgage loans, with terms under 30 years, consistent with
current asset/liability management strategies.
At December 31, 2001, WSFS serviced approximately $262 million of
residential loans for other lenders compared to $244 million at December 31,
2000. The Company also services residential loans for its portfolio totaling
$350 million and $372 million at December 31, 2001 and 2000, respectively.
WSFS originates commercial real estate and commercial loans through its
commercial lending division. Commercial loans are made for the purpose of
financing equipment acquisitions, business expansion, working capital and other
business purposes During 2001, WSFS originated $262 million of commercial and
commercial real estate loans compared with $144 million in 2000. These amounts
represent gross contract amounts and do not reflect amounts outstanding on such
loans.
WSFS' consumer lending is conducted primarily through its branch
offices. WSFS originates a variety of consumer credit products including home
improvement loans, home equity lines of credit, automobile loans, credit cards,
unsecured lines of credit and other secured and unsecured personal installment
loans. During 2001, consumer loan originations amounted to $128 million compared
to $106 million in 2000.
All loans to one borrower exceeding $1 million must be approved by a
management loan committee. Minutes of the management loan committee meetings and
individual loans exceeding $3 million approved by the management loan committee
are subsequently reviewed by the Executive Committee and Board of Directors of
WSFS. Separate approval is needed for loans to any borrower who has direct or
indirect outstanding commitments in excess of $3 million or for any advances or
extensions on loans previously classified by banking regulators or WSFS' Risk
Management Department. Officers of WSFS have the authority to approve smaller
loan amounts, depending upon their experience and management position.
Fee Income from Lending Activities.
WSFS earns interest and fee income from lending activities, including
fees for originating loans, for servicing loans and for loan participations
sold. The bank also receives for making commitments to originate construction,
residential and commercial real estate loans. Additionally, the bank collects
fees related to existing loans which include prepayment charges, late charges
and assumption fees.
WSFS charges fees for making loan commitments. Also as part of the loan
application process, the borrower may pay WSFS for out-of-pocket costs to review
the application, whether or not the loan is closed.
-12-
Most loan fees are considered adjustments of yield in accordance with
accounting principles generally accepted in the United States of America and are
reflected in interest income. Those fees represented an immaterial amount of
interest income during the three years ended December 31, 2001. 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, including origination fees, points collected from borrowers and sales
premiums paid by investors, are recognized when loans are sold. Provisions are
made for recourse obligations.
LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations can be negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its portfolios to identify problem
loans as promptly as possible and take actions immediately which will minimize
losses. To accomplish this, WSFS' Risk Management Department monitors the asset
quality of the Company's loan and investment in real estate portfolios and
reports such information to the Credit Policy Committee, the Audit Committee of
the Board of Directors and the Controller's Department.
SUBSIDIARIES
The Corporation has two subsidiaries, Wilmington Savings Fund Society,
FSB (WSFS) and WSFS Capital Trust I. WSFS Capital Trust I was formed in 1998 to
issue Trust Preferred Securities. The Trust invested all of the proceeds from
the sale of the Trust Preferred Securities in Junior Subordinated Debentures of
the Corporation. The Corporation used the proceeds from the Junior Subordinated
Debentures for general corporate purposes, including the redemption of higher
yielding debt.
At December 31, 2001, WSFS had three wholly-owned, first-tier
subsidiaries 838 Investment Group, Inc, SSDC and WCC. In addition to the wholly
owned subsidiaries, the Corporation consolidates two non-wholly owned
subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and WNF. WSFS is the
primary lender to its non-bank subsidiaries. At December 31, 2001, it had $224.1
million invested in the equity of these companies and had an additional $23.0
million in loans outstanding.
838 Investment Group, Inc. was formed in 1989. This subsidiary markets
various third party investment and insurance products, such as single-premium
annuities, whole life policies and securities primarily through WSFS' branch
system.
SSDC 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. SSDC is currently inactive.
WCC is engaged primarily in indirect motor vehicle leasing. On December
21, 2000, the Board approved plans to discontinue the operations of WCC. WCC,
which had 4,600 lease contracts and 1,800 loan contracts at December 31, 2001,
no longer accepts new applications but continues to service existing loans and
leases until their maturity. Management estimates that substantially all loan
and lease contracts will mature by the end of December 2003.
-13-
Accounting for discontinued operations of a business segment requires
that the Company forecast operating results over the wind-down period and accrue
any expected net losses. The historic results of WCC's operations, the accrual
of expected losses to be incurred over the wind-down period, and the future
reported results of WCC are required to be treated as Discontinued Operations of
a Business Segment, and shown in summary form separately from the Company's
results of continuing operations in reported results of the Corporation. Prior
periods are restated, as required by accounting principles generally accepted in
the United States of America.
As a result, net operating losses of $2.4 million for the year ended
December 31, 2000 and net income of $1.6 million for the year ended December 31,
1999 were reclassified from continuing operations to discontinued operations. In
addition in 2000, the Corporation recognized a charge of $2.2 million, net of
$4.0 million in tax benefits related to net operating loss carryforwards, for
the expected loss over the projected three-year wind-down period. A $6.2 million
pretax reserve was established to absorb these expected future losses.
During 2001, used vehicle values continued to deteriorate. This decline
was exacerbated and continues to be affected by, among other things, the
continued incenting of new vehicles by auto manufacturers. As a result,
management's analysis of residual losses as of December 31, 2001 indicated that
additional reserves were needed for the expected losses in the business during
its wind-down. Accordingly, management recorded an additional $3.1 million,
pre-tax, for expected losses over the wind-down period. The balance of reserves
for residual losses represents management's best estimate of losses inherent in
the remaining portfolio. As of December 31, 2001, there were $87 million of
contractual residuals still on lease for which management has estimated $15.5
million in probable losses. The losses have been inherently provided for in
residual reserves and reserves for discontinued operations.
Due to the uncertainty of a number of factors, including residual
values, interest rate volatility and credit quality, this reserve will be
reevaluated quarterly with adjustments, if necessary, recorded as income/loss on
wind-down of 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.
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999 WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. WSFS originally invested $5.5 million, which had a book
value of $2.4 million at December 31, 2001 including approximately $1 million in
goodwill. WSFS currently has a 28% interest in C1FN, with warrants to acquire
additional ownership under certain circumstances, but retains majority control
through a voting trust. Therefore, the results of C1FN are and will continue to
be consolidated into WSFS until Everbank, obtains a separate banking charter or
is otherwise disposed. C1FN paid a management fee to WSFS of $480,000 in 2001
and $327,000 in 2000 which is partially eliminated in consolidation. C1FN had
total assets of $296.1 million at December 31, 2001 and $192.6 million at
December 31, 2000. Net losses after minority interest were $558,000 and $1.5
million for the years ended December 31, 2001 and 2000, respectively.
C1FN/Everbank issues deposits denominated in foreign currencies. At
December 31, 2001, those deposits totaled $60.4 million. Short-term forward
exchange contracts are purchased to provide and effective hedge on the fair
value of deposits from fluctuations that may occur in world currency markets. At
December 31, 2001, the fair value of hedges amounted to a $395,000 liability.
Under the terms of its agreement with WSFS, C1FN has the right to
acquire the deposits and business of Everbank if C1FN obtains its own depository
institution charter. C1FN has submitted an application to the Office of Thrift
Supervision (OTS) for a separate thrift charter for Everbank and is in
discussions with potential strategic partners for the purpose of raising the
capital required to support an independent thrift institution.
In 2002, the Services Agreement between WSFS and C1FN to run the
Everbank division will expire. The impact on WSFS of the expiration of the
arrangement will depend on the outcome of several possible strategies: if C1FN
receives approval from the OTS for a separate charter and raises the required
capital, WSFS' investment in C1FN would likely be preserved or possibly
enhanced; if C1FN is unable to obtain a separate charter, WSFS and C1FN would
likely pursue a sale of the division and preservation or enhancement of WSFS'
interest would depend on sale price; if WSFS and C1FN are unable sell the
division, other possibilities would be considered including the write-off of
WSFS' investment in C1FN. In this last case, other costs may result. The
ultimate strategy and degree of success can not be determined at this time, but
will likely be known by the end of 2002. Management is aggressively pursuing a
separate charter.
-14-
C1FN/Everbank is currently a relatively low margin business. If
C1FN/Everbank is spun-off or sold, the Corporation would likely experience an
improvement in performance ratios such as the efficiency ratio, net interest
margin and the return on average assets and equity, as well as capital ratios.
WNF is a 51% owned subsidiary and began operations in December 1999. In
addition, WSFS holds warrants to purchase an additional 14% ownership. WNF is a
nonconforming mortgage banker generally dealing in higher grade subprime loans.
WNF solicits and originates its loans primarily as a result of referrals through
independent mortgage brokers, although direct-to-consumer originations accounted
for 6.8% and 14.4% of total originations for the years ended December 31, 2001
and 2000, respectively. WNF originates all loans and sells its originations to
investors, typically well known regional banks or national finance companies, on
a whole loan, servicing-released basis for cash premiums only (no
securitizations). Mortgage loans are sold with very limited recourse beyond the
standard representations and warranties.
As of December 31, 2001, WNF's wholesale channel consisted of seven
regional sales offices located throughout the continental United States. These
offices are located in Plymouth Meeting, PA, North Kingston, RI; Charlotte, NC;
Atlanta, GA; Naperville, IL; Livermore, CA and Las Vegas, NV. The offices in
Atlanta, Charlotte and Las Vegas were opened during the second half of 2001.
Management expects an additional office or two may be opened in 2002 depending
on the business climate and the ability to recruit quality, experienced office
managers. The regional offices obtain business by establishing relationships
with, and soliciting mortgage applications from, independent mortgage brokers in
their local markets. These mortgage brokers match their applicants with lenders
(such as WNF) based on the types of products, pricing and the level of service
provided by the lenders. Brokers may be paid for their services by either the
borrower or by the lender, depending on the requirements of the transaction.
WNF has a centralized secondary marketing function which analyzes the
product offerings of the various end investors, consolidates the investors'
underwriting guidelines into the product parameters that WNF offers to its
brokers and ultimately sells WNF's originations to the end investors. Between
the time loans are originated and sold, they are warehoused on WNF's balance
sheet. WSFS provides temporary financing for the loans through a warehouse line
of credit with an adjustable rate based on the One-Month Federal Home Loan Bank
Advance rate + 90 basis points. This line is limited to $135 million and had an
outstanding balance of $75.2 million at December 31, 2001. This line may be
increased to $150 million on a temporary basis. For each of the years ended
December 31, 2001 and 2000, loans remained in the warehouse for an average of 29
days before being sold. The percentage of loans in the warehouse that were 45
days old or greater were 2% at December 31, 2001 and 14% at December 31, 2000.
The following table provides certain WNF production and sales
statistics for the years ended December 31, 2001 and 2000:
2001 2000
---- ----
(Dollars In Thousands)
Origination dollars $595,213 $139,007
Origination units 4,890 1,681
Average mortgage balance $122 $83
Weighted average note rate 8.61% 11.12%
Weighted average CLTV* 84% 84%
Weighted average credit score 644 623
Percentage of second liens 8% 14%
Sales $536,684 $117,131
Sales margin (average) 3.95% 3.77%
* Combined Loan To Value represents the mortgage amount plus any senior liens
(or junior liens if also originated by WNF) divided by the appraised value of
the property.
-15-
WNF's total assets at December 31, 2001 and 2000 were $84.3 million and
$24.7 million, respectively. For the year ended December 31, 2001, WNF added
$2.5 million to the net income of the Corporation compared to a net loss of $1.4
million for the year ended December 31, 2000. At December 31, 2001, WSFS also
held $3.0 million in the preferred stock of WNF.
Results for the year 2001 for WNF were positively influenced by both
organic growth of new business and the very favorable mortgage refinance market.
Management expects as interest rates increase, production may abate, however
this may be offset to an unknown extent by continued build-out of the business
model.
SOURCES OF FUNDS
WSFS funds its operations through retail and wholesale deposit growth
as well as through various borrowing sources, including repurchase agreements,
federal funds purchased and advances from the Federal Home Loan Bank (FHLB) of
Pittsburgh. Loan repayments and investment maturities also provide sources of
funds. Loan repayments and investment maturities provide a relatively stable
source of funds while certain deposit flows tend to be more susceptible to
market conditions. Borrowings are used to fund wholesale asset growth,
short-term funding of lending activities when loan demand exceeds projections,
or when deposit inflows or outflows are less than or greater than expected. On a
long-term basis, borrowings may be used to match against specific loans or
support business expansion.
Deposits. WSFS offers various deposit programs to its customers,
including savings accounts, demand deposits, interest-bearing demand deposits,
money market deposit accounts and certificates of deposits. In addition, WSFS
accepts negotiable rate certificates with balances in excess of $100,000 from
individuals, businesses and municipalities in Delaware.
WSFS is the second largest independent full service banking
institution headquartered and operating in Delaware. It primarily attracts
deposits through its system of branches, which numbered 27 at December 31, 2001.
In January 2002, five of these branches were transferred to another financial
institution. Eighteen branches are located in northern Delaware's New Castle
County, WSFS' primary market. These branches maintain approximately 145,000
total account relationships with approximately 49,800 total households, or 26%
of all households in New Castle County, Delaware. One branch is in the state
capital, Dover, located in central Delaware's Kent County. Three other branches
are located in southeastern Pennsylvania.
Everbank, a division of WSFS, jointly managed with C1FN, garners
deposits nationally through its branchless financial services network. Everbank
offers demand deposits, money market deposits and certificates of deposits as
well as non-dollar denominated deposits. Total deposits at Everbank were $287.4
million at December 31, 2001.
The following table sets forth the amount of certificates of deposit of
$100,000 or more by remaining maturity at the December 31, 2001
December 31,
Maturity Period 2001
- --------------- -------------
(In Thousands)
Less than 3 months...................... $23,631
Over 3 months to 6 months............... 14,759
Over 6 months to 12 months.............. 10,134
Over 12 months.......................... 10,346
-------
$58,870
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As a member of the FHLB of Pittsburgh, WSFS is authorized to apply
for advances on the security of their capital stock in the FHLB and certain of
their residential mortgages and other assets (principally securities which are
obligations of or guaranteed by the United States Government and mortgage-backed
securities), provided certain standards related to creditworthiness have been
met. As a member institution, WSFS is required to hold capital stock in the FHLB
of Pittsburgh in an amount at least equal to 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.
-16-
WSFS also sells securities under agreements to repurchase with various
brokers as an additional source of funding. When entering into these
transactions, WSFS is generally required to pledge either government securities
or mortgage-backed securities as collateral for the borrowings.
In 1998, the Company issued $50.0 million in Trust Preferred securities
due December 11, 2028. See Note 9 of the Consolidated Financial Statements for a
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 Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of OTS prior to being engaged in by
a multiple savings and loan holding company.
Transactions with Affiliates; Tying Arrangements. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls or is under common control with the savings association or
any subsidiary of the savings association that is a bank or savings association
or 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.
-17-
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
(BHCA), as amended by the Gramm-Leach-Bliley Act. Financial holding companies
may engage in activities that the Federal Reserve Board, in consultation with
the Secretary of the Treasury, has determined to be financial in nature or
incidental to a financial activity or complementary to a financial activity
provided that the complementary activity does not pose a risk to safety and
soundness. Financial holding companies that were not previously bank holding
companies may continue to engage in limited non-financial activities for up to
ten years after the effective date of the Gramm-Leach-Bliley Act (with provision
for extension for up to five additional years by the Federal Reserve Board)
provided that the financial holding company is predominantly engaged in
financial activities.
Savings and loan holding companies are prohibited from acquiring,
without prior approval of the Director of OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof, or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Under certain circumstances,
a savings and loan holding company is permitted to acquire, with the approval of
the Director of OTS, up to 15% of the voting shares of an under-capitalized
savings association pursuant to a "qualified stock issuance" without that
savings association being deemed controlled by the holding company. Except with
the prior approval of the Director of OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock, may also acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the company involved controls a
savings institution which operated a home or branch office in the state of the
association to be acquired as of March 5, 1987; (ii) the acquirer is authorized
to acquire control of the savings association pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act; or (iii) the
statutes of the state in which the association to be acquired is located
specifically permit institutions to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The laws of Delaware do not specifically authorize
out-of-state savings associations or their holding companies to acquire
Delaware-chartered savings associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent 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.
-18-
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, purchased
credit card relationships and credit-enhancing interest only strips. Tangible
capital is given the same definition as core capital but does not include
qualifying supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets except for limited amounts of mortgage servicing
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, 2001, WSFS was in
compliance with both the core and tangible capital requirements.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
One- to four-family first mortgages not more than 90 days past due with
loan-to-value ratios not exceeding 80% (or covered by private mortgage insurance
for any amounts in excess of 80%), fixed-rate multi-family first mortgages not
more than 90 days past due with maturities of not less than seven years,
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.
-19-
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, general loan loss
allowances up to 1.25% of risk-weighted assets and up to 45% of unrealized gains
on available-for-sale equity securities with readily determinable fair values.
Total capital is reduced by the amount of the institution's reciprocal holdings
of depository institution capital instruments, all equity investments and that
portion of land and non-residential construction loans in excess of 80%
loan-to-value ratio. 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, 2001, 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 unless payment is made
pursuant to a written, pre-authorized interest-bearing extension of credit plan
that specifies a method of repayment or transfer of funds from another account
at the savings association. 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 BHCA prohibits extensions
of credit to executive officers, directors, and greater than 10% stockholders of
a depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Dividend Restrictions. Savings associations must submit notice to the
OTS prior to making a capital distribution (which includes cash dividends, stock
repurchases and payments to shareholders of another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the association's
common or preferred stock or debt counted as its regulatory capital, or (c) the
association is a subsidiary of a holding company. A savings association must
make application to the OTS to pay a capital distribution if (x) the association
would not be adequately capitalized following the distribution, (y) the
association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
Deposit Insurance. 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.
-20-
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. In the event that the BIF should fail to meet its
statutory reserve ratio, the FDIC would be required to set semi-annual
assessment rates for BIF members that are sufficient to increase the reserve
ratio to 1.25% within one year or in accordance with such other schedule that
the FDIC adopts by regulation to restore the reserve ratio in not more than 15
years. The FDIC continues to assess BIF member institutions to fund interest
payments on certain bonds issued by the Financing Corporation (FICO), an agency
of the federal government established to help fund takeovers of insolvent
thrifts. Until December 31, 1999, BIF members were assessed at approximately
one-fifth the rate at which Savings 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%.
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,
2001, of $28.8 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.
-21-
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 $41.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement may be to reduce the amount of the institution's
interest-earning assets. As of December 31, 2001 WSFS met its reserve
requirements.
-22-
Item 2. Properties
The following table sets forth the location and certain additional
information regarding the Company's offices and other material properties at
December 31, 2001.
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
------------------------------
WSFS:
Main Office (1)(2) Owned $1,117 $169,034
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 2003 110 53,282
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2006 9 23,462
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 2003 10 66,243
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 2003 6 60,064
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 2003 35 91,934
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2005 22 63,401
New Linden Hill & Limestone Roads
Wilmington, DE 19808
University Plaza Shopping Center Branch Leased 2003 14 40,853
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(4) Leased 2007 248 66,193
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 19 68,663
144 N. DuPont Hwy.
New Castle, DE 19720
Stanton Branch Leased 2006 140 9,588
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Branch Leased 2002 158 15,790
Inside Genuardi's at Peoples Plaza
Routes 40 & 896
Newark, DE 19804
Middletown Square Shopping Center Leased 2004 45 14,703
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover Branch Leased 2005 105 15,316
Inside Metro Food Market
Rt 134 & White Oak Road
Dover, DE 19901
Royersford Branch(6) Leased 2003 173 2,107
Inside Genuardi's Family Markets
Limerick Square
70 Buckwater Rd., Suite 211
Royersford, PA 19468
-23-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
------------------------------
WSFS (continued...):
Glen Eagle Branch Leased 2003 228 8,995
Inside Genaurdi's Family Market
475 Glen Eagle Square
Glen Mills, PA 19342
University of Delaware-Trabant University Center Leased 2003 210 5,940
17 West Main Street
Newark, DE 19716
Brandywine Branch Leased 2004 195 16,520
Inside Genaurdi's Family Market
2522 Foulk Road
Wilmington, DE 19810
Wal-Mart Branch Leased 2004 265 2,907
Route 40 & Wilton Boulevard
New Castle, DE 19720
Chesterbrook Branch(6) Leased 2004 179 2,728
Inside Genaurdi's Family Market
500 Chesterbrook Boulevard
Wayne, PA 19087
Kimberton Branch(6) Leased 2004 183 2,679
Inside Genuardi's Family Market
Maple Lawn Shopping Center
542 Kimberton Road
Phoenixville, PA 19460
King of Prussia Branch(6) Leased 2005 221 2,692
Inside Genuardi's Family Market
310 S. Henderson Road
King of Prussia, PA 19406
Operations Center Owned 1,005 N/A
2400 Philadelphia Pike
Wilmington, DE 19703
Longwood Branch Leased 2005 212 2,282
830 E. Baltimore Pike
E. Marlborough, PA 19348
Holly Oak Branch Leased 2005 172 19,458
Inside Superfresh
2105 Philadelphia Pike
Claymont, DE 19703
Elkins Park Branch Leased 2005 221 10,576
More Shopping Center
7300 Old York Road
Elkins Park, PA 19027
Hockessin Branch Leased 2015 589 22,081
7450 Lancaster Pike
Wilmington, DE 19707
St. David's Branch(6) Leased 2005 196 1,177
Inside Genuardi's Supermarket
550 E. Lancaster Ave.
Wayne, PA 19086
Wilmington National Finance:
Marchwood Shopping Center Leased 2004 26 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
-24-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
------------------------------
Wilmington National Finance (continued...):
Suite 350 Leased 2005 - N/A
2260 Buler Pike
Plymouth Meeting, PA 19462
University Plaza-Bellevue Leased 2005 - N/A
262 Chapman Road
Newark, DE
175 Great Neck Road Leased 2003 - N/A
Suite 407
Great Neck, NY
Sunset Ridge Professional Plaza Leased 2004 - N/A
2920 N. Green Parkway
Henderson, NY
One University Plaza Leased 2004 - N/A
8301 JM Keynes Drive
Suite 400
Charlotte, NC
Suite 150 Leased 2004 - N/A
4800 River Green Parkway
Duluth, GA
C1FN
St. Louis, Missouri(5) Leased 2002 - 287,449
555 N New Ballas Road
Suite 110
St. Louis, MO 63141
New York Leased 2003 7 N/A
11 Oval Drive
Suite 107
Islandia, NY 11749-1476
Vermont Leased 2002 - N/A
188 South Main Street
P.O. Box 1209
Stowe, VT 05672
Florida (5) Leased 2004 9 N/A
2233 N. Commerce Pkwy.
Suite 1
Weston, FL 33326
Vermont Leased 2006 2 N/A
56 Old Farm Road
Stowe, VT
St. Louis Leased 2004 23 N/A
1610 Des Peres Road
St. Louis, MO
WSFS Credit Corporation:
30 Blue Hen Drive Leased 2002 219 N/A
Suite 200
Newark, DE 19713
Friess Land (3) Owned - 2,090 N/A
Wilmington Gateway: (3)
500 Delaware Ave. Owned - 5,663 N/A
Wilmington, DE 19801
----------
$1,146,117
==========
(1) Includes location of executive offices and approximately $8.3 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and equipment
totaled $16.4 million at December 31, 2001.
(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) Both locations are sublet by an independent third party at the same rental
cost.
(6) Branches transferred to another financial institution on January 15, 2002.
-25-
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, 2001 through the solicitation of
proxies or otherwise.
-26-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock
MarketSM under the symbol WSFS. At December 31, 2001, the Corporation had 1,937
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, 2001 was
$17.35.
Stock Price Range Dividends
--------------------------- ---------
Low High
--------- -----------
2001 1st $11.88 $13.81 $ .04
2nd 12.38 17.55 .04
3rd 15.25 18.50 .04
4th 15.45 18.25 .04
-----
$ .16
=====
2000 1st $10.69 $12.88 $ .03
2nd 10.25 13.31 .04
3rd 10.94 11.38 .04
4th 10.06 12.88 .04
-----
$ .15
=====
-27-
Item 6. Selected Financial Data
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in Thousands, Except Per Share Data)
At December 31,
Total assets..................................... $1,912,898 $1,739,316 $1,751,037 $1,631,319 $1,510,655
Net loans (1).................................... 1,115,372 963,491 860,573 739,462 734,716
Investment securities (2)........................ 14,194 29,740 37,473 37,861 78,655
Investment in reverse mortgages, net............. 33,939 33,683 28,103 31,293 32,109
Other investments................................ 122,889 39,318 36,526 51,418 74,523
Mortgage-backed securities (2)................... 361,724 339,718 447,749 459,084 330,274
Deposits ........................................ 1,146,117 1,121,591 910,090 858,300 766,966
Borrowings (3)................................... 595,480 443,638 672,465 622,409 615,578
Senior notes..................................... - - - - 29,100
Trust preferred borrowings....................... 50,000 50,000 50,000 50,000 -
Stockholders' equity ............................ 100,003 97,146 96,153 85,752 86,759
Number of full-service branches (4)(5)........... 27 28 24 20 16
For the Year Ended December 31,
Interest income.................................. $ 120,474 $ 129,677 $ 108,184 $ 105,833 $ 107,265
Interest expense................................. 58,184 65,727 58,856 59,775 60,751
Other income .................................... 44,131 18,101 11,579 11,243 8,785
Other expenses .................................. 75,828 61,428 42,668 34,501 33,883
Income from continuing operations................ 19,109 15,622 18,086 15,388 14,979
Net income ...................................... 17,083 11,019 19,709 16,512 16,389
Earnings per share:
Basic:
Income from continuing operations............. $ 1.99 $ 1.46 $ 1.60 $ 1.25 $ 1.20
Net income ................................... 1.78 1.03 1.74 1.34 1.31
Diluted:
Income from continuing operations............. 1.97 1.46 1.59 1.23 1.18
Net income ................................... 1.76 1.03 1.73 1.32 1.29
Interest rate spread............................. 4.11% 4.76% 3.90% 3.78% 3.78%
Net interest margin.............................. 4.11 4.57 3.65 3.63 3.71
Return on average equity (6)..................... 19.03 15.95 20.32 16.47 18.51
Return on average assets (6)..................... 1.16 1.04 1.25 1.15 1.14
Average equity to average assets (6)............. 6.08 6.54 6.15 6.96 6.18
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances and securities sold under agreement to
repurchase.
(4) WSFS closed one branch in 2001. WSFS opened four branches in 1998, 1999 and
2000.
(5) Five branches were transferred to another financial institution in January
2002.
(6) Based on continuing operations.
-28-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (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 170 years. WSFS
is the largest thrift institution headquartered in Delaware and among the three
or four largest financial institutions in the state on the basis of total
deposits traditionally garnered in-market. The Corporation's primary market area
is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The long-term goal of the
Corporation is to maintain its high-performing financial services company status
by focusing on its core banking business while occasionally developing
profitable niches in highly-synergistic businesses that have a strategic fit.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services. Lending
activities are funded primarily with retail deposit services and borrowings. At
December 31, 2001 there were 27 retail banking offices located in northern
Delaware and southeastern Pennsylvania in which WSFS conducted banking
operations. In January 2002, for strategic reasons, WSFS transferred 5 in-store
branch offices that were outside of its core footprint to another financial
institution. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC).
The Corporation has two consolidated subsidiaries, WSFS and WSFS
Capital Trust I. The Corporation has no unconsolidated subsidiaries or
off-balance sheet entities. Fully-owned and consolidated subsidiaries of WSFS
include WSFS Credit Corporation (WCC), which is engaged primarily in indirect
motor vehicle leasing; and 838 Investment Group, Inc., which markets various
third party insurance products and securities through WSFS' branch system. An
additional subsidiary, Star States Development Company (SSDC), is currently
inactive.
On December 21, 2000, the Board of Directors of WSFS Financial
Corporation approved plans to discontinue the operations of WCC. WCC, which had
4,600 lease contracts and 1,800 loan contracts at December 31, 2001, 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 accrue
any expected net losses. The historic results of WCC's operations, the accrual
of expected losses to be incurred over the wind-down period, and the future
reported results of WCC are required to be treated as Discontinued Operations of
a Business Segment, and shown in summary form separately from the Company's
results of continuing operations in reported results of the Corporation. Prior
periods are restated, as required by accounting principles generally accepted in
the United States of America.
As a result, net operating losses of $2.4 million for the year ended
December 31, 2000 and net income of $1.6 million for the year ended December 31,
1999 were reclassified from continuing operations to discontinued operations. In
addition in 2000, the Corporation recognized a charge of $2.2 million, net of
$4.0 million in tax benefits related to net operating loss carryforwards, for
the expected loss over the projected three-year wind-down period. A $6.2 million
pretax reserve was established to absorb these expected future losses.
During 2001, used vehicle values continued to deteriorate. This decline
was exacerbated and continues to be affected by, among other things, the
continued incenting of new vehicles by auto manufacturers. As a result,
management's analysis of residual losses as of December 31, 2001 indicated that
additional reserves were needed for the expected losses in the business during
its wind-down. Accordingly, management recorded an additional $3.1 million,
pre-tax, for expected losses over the wind-down period. The balance of reserves
for residual losses represents management's best estimate of losses inherent in
the remaining portfolio. As of December 31, 2001, there were $87 million of
contractual residuals still on lease for which management has estimated $15.5
million in probable losses. The losses have been inherently provided for in
residual reserves and reserves for discontinued operations.
-29-
Due to the uncertainty of a number of factors, including residual
values, interest rate volatility and credit quality, this reserve will be
reevaluated quarterly with adjustments, if necessary, recorded as income/losses
on wind-down of 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.
In addition to the wholly owned subsidiaries, the Corporation
consolidates two non-wholly owned subsidiaries, CustomerOne Financial Network,
Inc. (C1FN) and Wilmington National Finance, Inc. (WNF).
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999 WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. WSFS originally invested $5.5 million, which had a book
value of $2.4 million at December 31, 2001 including approximately $1 million in
goodwill. WSFS currently has a 28% interest in C1FN, with warrants to acquire
additional ownership under certain circumstances, but retains majority control
through a voting trust. Therefore, the results of C1FN are and will continue to
be consolidated into WSFS until Everbank, obtains a separate banking charter or
is otherwise disposed. C1FN paid a management fee to WSFS of $480,000 in 2001
and $327,000 in 2000 which is partially eliminated in consolidation. C1FN had
total assets of $296.1 million at December 31, 2001 and $192.6 million at
December 31, 2000. Net losses after minority interest were $558,000 and $1.5
million for the years ended December 31, 2001 and 2000, respectively.
C1FN/Everbank issues deposits denominated in foreign currencies. At
December 31, 2001 those deposits totaled $60.4 million. Short-term forward
exchange contracts are purchased to provide an effective hedge on the fair value
of deposits from fluctuations that may occur in world currency markets. At
December 31, 2001, the fair value of the hedges amounted to a $395,000
liability.
Under the terms of its agreement with WSFS, C1FN has the right to
acquire the deposits and business of Everbank if C1FN obtains its own depository
institution charter. C1FN has submitted an application to the Office of Thrift
Supervision (OTS) for a separate thrift charter for Everbank and is in
discussions with potential strategic partners for the purpose of raising the
capital required to support an independent thrift institution.
In 2002, the Services Agreement between WSFS and C1FN to run the
Everbank division will expire. The impact on WSFS of the expiration of the
arrangement will depend on the outcome of several possible strategies: if C1FN
receives approval from the OTS for a separate charter and raises the required
capital, WSFS' investment in C1FN would likely be preserved or possibly
enhanced; if C1FN is unable to obtain a separate charter, WSFS and C1FN would
likely pursue a sale of the division and preservation or enhancement of WSFS'
interest would depend on sale price; if WSFS and C1FN are unable sell the
division, other possibilities would be considered including the write-off of
WSFS' investment in C1FN. In this last case, other costs may result. The
ultimate strategy and degree of success can not be determined at this time, but
will likely be known by the end of 2002. Management is aggressively pursuing a
separate charter.
C1FN/Everbank is currently a relatively low margin business. If
C1FN/Everbank is spun-off or sold, the Corporation would likely experience an
improvement in performance ratios such as the efficiency ratio, net interest
margin and the return on average assets and equity, as well as capital ratios.
WNF is a 51% owned subsidiary and began operations in December 1999. In
addition, WSFS holds warrants to purchase an additional 14% ownership. WNF is a
nonconforming mortgage banker generally dealing in higher grade subprime loans.
WNF solicits and originates its loans primarily as a result of referrals through
independent mortgage brokers, although direct-to-consumer originations accounted
for 6.8% and 14.4% of total originations for the years ended December 31, 2001
and 2000, respectively. WNF originates all loans and sells its originations to
investors, typically well known regional banks or national finance companies, on
a whole loan, servicing-released basis for cash premiums only (no
securitizations). Mortgage loans are sold with very limited recourse beyond the
standard representations and warranties.
As of December 31, 2001, WNF's wholesale channel consisted of seven
regional sales offices located throughout the continental United States. These
offices are located in Plymouth Meeting, PA, North Kingston, RI; Charlotte, NC;
Atlanta, GA; Naperville, IL; Livermore, CA and Las Vegas, NV. The offices in
Atlanta, Charlotte and Las Vegas were opened during the second half of 2001.
-30-
Management expects an additional office or two may be opened in 2002 depending
on the business climate and the ability to recruit quality, experienced office
managers. The regional offices obtain business by establishing relationships
with, and soliciting mortgage applications from, independent mortgage brokers in
their local markets. These mortgage brokers match their applicants with lenders
(such as WNF) based on the types of products, pricing and the level of service
provided by the lenders. Brokers may be paid for their services by either the
borrower or by the lender, depending on the requirements of the transaction.
WNF has a centralized secondary marketing function which analyzes the
product offerings of the various end investors, consolidates the investors'
underwriting guidelines into the product parameters that WNF offers to its
brokers and ultimately sells WNF's originations to the end investors. Between
the time loans are originated and sold, they are warehoused on WNF's balance
sheet. WSFS provides temporary financing for the loans through a warehouse line
of credit with an adjustable rate based on the One-Month Federal Home Loan Bank
Advance rate + 90 basis points. This line is limited to $135 million and had an
outstanding balance of $75.2 million at December 31, 2001. This line may be
increased to $150 million on a temporary basis. For each of the years ended
December 31, 2001 and 2000, loans remained in the warehouse for an average of 29
days before being sold. The percentage of loans in the warehouse that were 45
days old or greater were 2% at December 31, 2001 and 14% at December 31, 2000.
The following table provides certain WNF production and sales
statistics for the years ended December 31, 2001 and 2000:
2001 2000
---- ----
(Dollars In Thousands)
Origination dollars $595,213 $139,007
Origination units 4,890 1,681
Average mortgage balance $122 $83
Weighted average note rate 8.61% 11.12%
Weighted average CLTV* 84% 84%
Weighted average credit score 644 623
Percentage of second liens 8% 14%
Sales $536,684 $117,131
Sales margin (average) 3.95% 3.77%
* Combined Loan To Value represents the mortgage amount plus any senior liens
(or junior liens if also originated by WNF) divided by the appraised value
of the property.
WNF's total assets at December 31, 2001 and 2000 were $84.3 million and
$24.7 million, respectively. For the year ended December 31, 2001, WNF added
$2.5 million to the net income of the Corporation compared to a net loss of $1.4
million for the year ended December 31, 2000. At December 31, 2001, WSFS also
held $3.0 million in the preferred stock of WNF.
Results for the year 2001 for WNF were positively influenced by both
organic growth of new business and the very favorable mortgage refinance market.
Management expects as interest rates increase, production may abate, however
this may be offset to an unknown extent by continued build-out of the business
model.
The following discussion focuses on the major components of the entire
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.
-31-
RESULTS OF OPERATIONS
The Corporation recorded net income of $17.1 million for the year ended
December 31, 2001, compared to $11.0 million and $19.7 million in 2000 and 1999,
respectively. Income from continuing operations was $19.1 million, $15.6 million
and $18.1 million for the years ended December 31, 2001, 2000 and 1999,
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 decreased $1.7 million, or 3%, to $62.3 million in
2001 compared to $64.0 million in 2000. Total interest income decreased $9.2
million between 2000 and 2001, primarily due to a decrease in the average yield
on the reverse mortgage portfolio from 58.92% to 29.54% between 2000 and 2001.
This decline in yield translates to a $10.1 million decrease in net interest
income offset in part by a $903,000 increase in net interest income reflecting
the higher average balance of reverse mortgages in 2001. The long term expected
yield on reverse mortgages at the end of 2001 is expected to be 24.6%, however
as a result of SEC prescribed market-value accounting, yields may vary
significantly from reporting period to reporting period. For further discussion
of reverse mortgages, see the Investment in Reverse Mortgages discussion
included in this Management Discussion and Analysis. In addition to this
decrease, rates were generally lower in 2001 as the target Federal Funds and
similar short term rates decreased as much as 475 basis points during the year.
Total interest expense decreased $7.5 million from 2000 to 2001
primarily due to a decrease in the average yield on deposits of 113 basis points
from 4.77% to 3.64%, and a decrease in the level of other borrowed funds of
$40.l million. These items were partially offset by an increase in the average
balance of interest-bearing deposits of $100.1 million. The decline in interest
expense was also heavily affected by the aforementioned decline in interest
rates in 2001.
Between 1999 and 2000, interest income increased $21.5 million, while
interest expense increased $6.9 million. The increase in interest income was
primarily due to an increase in the average loan balances of $133.7 million
between 1999 and 2000, offset in part by a $114.5 million decrease in
mortgage-backed securities. In addition to this positive volume variance,
overall rates were higher in 2000 than in 1999, and specifically, the average
yield on reverse mortgages increased to 58.92% in 2000 from 23.87% in 1999. The
increase in interest expense was the 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 rates on Federal Home Loan Bank (FHLB)
advances and other borrowings increased 57 basis points and 61 basis points,
respectively.
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.
-32-
Year Ended December 31,
--------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
--------------------------------------------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(Dollars In Thousands)
Interest income:
Real estate loans (1) .................... $ 1,686 $ (2,983) $ (1,297) $ 7,173 $ 651 $ 7,824
Commercial loans ......................... 3,010 (1,276) 1,734 2,378 475 2,853
Consumer loans ........................... 1,824 (1,165) 659 1,966 238 2,204
Loans held-for-sale ...................... 2,359 230 2,589 1,125 93 1,218
Mortgage-backed securities ............... 988 (3,131) (2,143) (7,619) 2,197 (5,422)
Investment securities .................... (1,574) 19 (1,555) 634 4 638
Investment in reverse mortgages .......... 903 (10,057) (9,154) 475 11,462 11,937
Other .................................... 1,475 (1,511) (36) 57 184 241
-------- -------- -------- -------- -------- --------
10,671 (19,874) (9,203) 6,189 15,304 21,493
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
Money market and interest-bearing demand 4,150 (2,165) 1,985 2,818 1,873 4,691
Savings ................................ 1,212 (4,433) (3,221) 1,191 2,102 3,293
Retail time deposits ................... 1,376 (83) 1,293 (1,279) 815 (464)
Jumbo certificates of deposit .......... 65 (244) (179) (1,769) 195 (1,574)
Brokered certificates of deposit ....... (6,669) 282 (6,387) 2,999 804 3,803
FHLB of Pittsburgh advances .............. (67) (1,037) (1,104) (4,292) 2,530 (1,762)
Trust Preferred borrowings ............... -- (1,329) (1,329) -- 513 513
Other borrowed funds ..................... (2,287) (940) (3,227) (1,146) 900 (246)
Cost of funding discontinued operations .. -- 4,626 4,626 -- (1,383) (1,383)
-------- -------- -------- -------- -------- --------
(2,220) (5,323) (7,543) (1,478) 8,349 6,871
-------- -------- -------- -------- -------- --------
Net change, as reported ...................... $ 12,891 $(14,551) $ (1,660) $ 7,667 $ 6,955 $ 14,622
======== ======== ======== ======== ======== ========
(1) Includes commercial mortgage loans.
-33-
The following table provides information regarding the average balances of, and
yields/rates on, interest-earning assets and interest-bearing liabilities during
the periods indicated:
Year Ended December 31,
2001 2000
-----------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate(1)
------- -------- -------- ------- -------- -------
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 643,807 $ 49,967 7.76% $ 622,932 $ 51,264 8.23%
Commercial loans ................... 161,428 11,865 7.94 124,742 10,131 8.89
Consumer loans...................... 185,526 16,932 9.13 165,983 16,273 9.80
---------- -------- ---------- --------
Total loans.................... 990,761 78,764 8.06 913,657 77,668 8.63
Mortgage-backed securities (5)........ 384,821 22,975 5.97 369,780 25,118 6.79
Loans held-for-sale (3)............... 40,116 4,066 10.14 16,577 1,477 8.91
Investment securities (5)............. 22,185 1,425 6.42 46,703 2,980 6.38
Investment in reverse mortgages....... 34,375 10,155 29.54 32,771 19,309 58.92
Other interest-earning assets......... 70,615 3,089 4.37 43,587 3,125 7.17
---------- -------- ---------- --------
Total interest-earning assets..... 1,542,873 120,474 7.88 1,423,075 129,677 9.19
-------- --------
Allowance for loan losses............... (21,615) (22,427)
Cash and due from banks................. 78,085 55,050
Other noninterest-earning assets........ 51,203 40,861
Net assets from discontinued operations 159,989 228,544
---------- ----------
Total assets........................ $1,810,535 $1,725,103
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand........................... $ 295,151 $ 8,171 2.77% $ 158,849 $ 6,186 3.89%
Savings............................. 307,750 7,543 2.45 273,675 10,764 3.93
Retail time deposits................ 303,089 14,980 4.94 275,399 13,687 4.97
Jumbo certificates of deposits ..... 31,862 1,534 4.81 30,671 1,713 5.59
Brokered certificates of deposits... 61,632 4,154 6.74 160,753 10,541 6.56
---------- -------- ---------- --------
Total interest-bearing deposits 999,484 36,382 3.64 899,347 42,891 4.77
FHLB of Pittsburgh advances........... 396,542 22,355 5.64 397,672 23,459 5.90
Trust Preferred borrowings............ 50,000 3,365 6.64 50,000 4,694 9.23
Other borrowed funds.................. 97,266 5,353 5.50 137,340 8,580 6.25
Cost of funding discontinued operations - (9,271) - (13,897)
---------- -------- ---------- --------
Total interest-bearing liabilities...... 1,543,292 58,184 3.77 1,484,359 65,727 4.43
-------- --------
Noninterest-bearing demand deposits..... 141,428 119,928
Other noninterest-bearing liabilities... 20,427 18,975
Minority interest....................... 4,979 3,912
Stockholders' equity.................... 100,409 97,929
---------- ----------
Total liabilities and stockholders'
equity.......................... $1,810,535 $1,725,103
========== ==========
Deficit of interest-earning assets
over interest-bearing liabilities... $ (419) $ (61,284)
====== ==========
Net interest and dividend income........ $ 62,290 $ 63,950
======== ========
Interest rate spread.................... 4.11% 4.76%
===== =====
Interest rate margin.................... 4.11% 4.57%
===== =====
-34-
[RESTUBBED TABLE]
1999
----------------------------------
Average Yield/
Balance Interest Rate (1)
------- -------- --------
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 535,623 $ 43,440 8.11%
Commercial loans ................... 98,440 7,278 8.44
Consumer loans...................... 145,943 14,069 9.64
---------- ---------
Total loans.................... 780,006 64,787 8.45
Mortgage-backed securities (5)........ 484,254 30,540 6.31
Loans held-for-sale (3)............... 3,739 259 6.93
Investment securities (5)............. 36,792 2,342 6.37
Investment in reverse mortgages....... 30,890 7,372 23.87
Other interest-earning assets......... 46,815 2,884 6.16
---------- ---------
Total interest-earning assets..... 1,382,496 108,184 7.91
---------
Allowance for loan losses............... (22,705)
Cash and due from banks................. 50,640
Other noninterest-earning assets........ 35,748
Net assets from discontinued operations 238,479
----------
Total assets........................ $1,684,658
==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand........................... $ 70,400 $ 1,495 2.12%
Savings............................. 239,034 7,471 3.13
Retail time deposits................ 301,738 14,151 4.69
Jumbo certificates of deposits ..... 62,532 3,287 5.26
Brokered certificates of deposits... 114,006 6,738 5.91
---------- ---------
Total interest-bearing deposits. 787,710 33,142 4.21
FHLB of Pittsburgh advances........... 473,458 25,221 5.33
Trust Preferred borrowings............ 50,000 4,181 8.36
Other borrowed funds.................. 156,544 8,826 5.64
Cost of funding discontinued operations - (12,514)
---------- ---------
Total interest-bearing liabilities...... 1,467,712 58,856 4.01
---------
Noninterest-bearing demand deposits..... 105,883
Other noninterest-bearing liabilities... 20,191
Minority interest....................... 1,885
Stockholders' equity.................... 88,987
----------
Total liabilities and stockholders'
equity.......................... $1,684,658
==========
Deficit of interest-earning assets
over interest-bearing liabilities... $ (85,216)
==========
Net interest and dividend income........ $ 49,328
=========
Interest rate spread.................... 3.90%
=====
Interest rate margin.................... 3.65%
=====
(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.
-35-
Provision for Loan Losses. The Corporation records a provision for loan
losses in order to maintain the allowance for loan losses at a level which
management considers its best estimate of known and probable inherent losses.
Management's evaluation is based upon a continuing review of the portfolio and
requires significant management judgment (see the Allowance for Loan Losses
section of the Management Discussion and Analysis of Financial Condition and
Results of Operations contained herein). For the year ended December 31, 2001,
the Corporation recorded a provision for loan losses of $2.2 million. This
increase reflects, among other things, the Company's loan growth, a change in
the mix to higher margin and higher risk loans, a weakening economic
environment in 2001, offset by an overall improvement in credit quality of the
Corporation's loan portfolio. The provision for the years ended December 31,
2000 and 1999 were $894,000 and $1.0 million, respectively.
Other Income. Other income of $44.1 million in 2001, increased
$26.0 million, or 144% from 2000. WNF contributed $16.4 million to the positive
variance, mainly in the form of gains on the sales of loans.. WNF's gains on
sales of mortgages were positively influenced by both organic growth of new
business and the very favorable mortgage refinance market. Credit/debit card and
ATM income grew $1.8 million during 2001, due to the continued expansion of
WSFS' ATM network and customer card usage. At December 31, 2001 WSFS'
CashConnect division (ATM unit) derived income from 2,724 ATMs compared to 2,001
at December 31, 2000. In addition, deposit service charges increased $1.8 to
$8.8 million in 2001 primarily as a result of the 17% growth in retail deposits.
In 2000, other income was negatively affected by a $4.4 million loss on the sale
of securities recorded during 2000. These losses were the result of the
Corporations de-leveraging strategy in which the Corporation sold below-market
yielding investments to extinguish higher costing borrowings.
Other income of $18.1 million in 2000, increased $6.5 million, or 56%
from 1999. WNF contributed $4.0 million to the positive variance, mainly in the
form of gains on the sale of loans. Credit/debit and ATM income grew $1.6
million during 2000, due to the 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 in 2000, a result of the 30% growth in retail deposits.
Partially offsetting these increases was a $3.8 million increase in securities
losses in 2000. The Corporation recorded a $2.0 million loss on the sale of
below-market yielding securities and loans in 1999. These losses were the result
of the Corporation's de-leveraging strategy in which the Corporation sold
below-market yielding investments to extinguish higher costing borrowings.
Other Expenses. Other expenses of $75.8 million in 2001,
increased $14.4 million or 23% from 2000. C1FN and WNF accounted for $11.5
million of this increase mainly in salaries, benefits and other compensation.
Excluding these two subsidiaries expenses increased $2.9 million, or 6% from
2000. These increases were mainly attributable to salaries and other expenses
-36-
which increased $1.9 million and $1.4 million, respectively, partially offset by
lower data processing and operations expense, which decreased by $925,000.
During the third quarter of 2000 the Corporation re-assumed all responsibility
for loan and deposit operations that were previously outsourced through the
Corporation's information technology provider. Expenses previously recorded as
data processing and operations are currently reflected in salaries and benefit
expenses. In addition, the CashConnect division (ATM unit) continued to expand
during 2001. Other expenses for 2001 included a charge of $1.1 million connected
with the exit of six in-store branch offices in southeastern Pennsylvania. All
other things equal, management expects net savings of over $1.0 million annually
related to the exit of these branches.
In addition, in the fourth quarter of 2001 management began a program
to improve customer responsiveness, operational efficiency, and financial
performance. This plan (internally called WSFS' Technology, Organizational and
Process Simplification plan, or TOPS) is designed to clarify corporate strategy,
simplify and better integrate technology solutions and redesign certain back
office processes. Expenses related to the TOPS initiative totaled $433,000 for
2001. These costs consisted primarily of consulting fees and personnel costs.
Management expects the plan will take approximately eighteen months to complete
and involve approximately $3.5 million in one-time implementation expenses.
Related to this program, management expects to achieve a recurring reduction in
annual operating expenses of between $3.0 million and $3.5 million, once fully
phased in by 2003. Successful execution of the TOPS program necessarily involves
operation and execution risk such as costs/benefits varying from expectations or
normal business routines being disrupted.
Other expenses of $61.4 million in 2000, increased $18.8 million or 44%
from 1999. C1FN and WNF accounted for $14.2 million of this increase, mainly in
salaries, benefits and other compensation. Excluding these two startup
initiatives expenses increased $5.0 million in 2000, or 12% from 1999. Increases
in salaries, equipment expense, occupancy expense and other expenses were
partially offset by lower data processing and operations expense. The increases
were primarily attributable to investments in four new retail banking offices
during the year, and the expansion of the CashConnect Division. In addition,
during the third quarter of 2000 the Corporation re-assumed all responsibility
for loan and deposit operations that were previously outsourced through the
Corporation's information technology provider. Expenses previously recorded as
data processing and operations are currently reflected in salaries and benefit
expenses.
Income Taxes. The Corporation recorded an $8.4 million tax provision
for the year ended December 31, 2001 compared to a tax provision of $276,000 and
$1.2 million for the years ended December 31, 2000 and 1999, respectively. The
provision for income taxes includes federal, state, and local income taxes that
are currently payable or deferred because of temporary differences between the
financial reporting bases and the tax reporting bases of assets and liabilities.
Approximately $17 million in gross deferred tax assets of the
Corporation at December 31, 2001 are related to built-in losses and net
operating losses on reverse mortgages attributable to a former subsidiary.
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 when these assets are realized.
The Internal Revenue Service (IRS) is examining the Company's U.S.
income tax returns for the periods ended December 31,1995 through 1999.
Management does not expect the outcome of this examination to have a material
impact on the financial statements of the Corporation.
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 Consolidated Financial
Statements.
FINANCIAL CONDITION
Total assets increased $173.6 million, or 10.0%, during 2001
to $1.9 billion. This increase occurred predominantly in loans and investment
securities. These increases were partially offset by decreases of $85.5 million
in net assets of discontinued operations, the effect of maturities and
repayments of loans and leases at the Corporation's wholly owned indirect
leasing subsidiary, WCC. Total liabilities increased $170.8 million during the
year to $1.8 billion at December 31, 2001. The increase occurred primarily in
retail deposits, which increased $164.4 million. Partially offsetting this
increase was a $138.7 million decline in brokered deposits due to maturities.
During 2001 the Corporation effectively replaced this funding source with
borrowings from the FHLB, which increased $169.0 million.
Investments. Between December 31, 2000 and December 31, 2001, total
investments increased $68.0 million. During that time, federal funds sold and
securities purchased under agreements to resell increased $62.3 million while
interest bearing deposits at other banks increased $21.0 million. This was
partially offset by a $15.5 million decrease in investment securities.
Mortgage-backed Securities. Investments in mortgage-backed securities
increased $22.0 million during 2001 to $361.7 million. This increase resulted
primarily from purchases amounting to $281.0 million. This increase was
partially offset by principal repayments of $257.2 million and sales of $4.1
million.
Loans, net. Net loans, including loans held-for-sale, increased $151.9
million during 2001. This included increases of $45.9 million in commercial
loans, $35.4 million in commercial real estate loans and $23.1 million in
consumer loans. Residential loans, excluding loans held-for-sale, decreased by
$13.7 million. The change reflects management's continued strategy to shift the
mix of loans to higher margin relationships. Loans held-for-sale increased $61.4
million, the result of higher volume at the mortgage banking subsidiary WNF.
-37-
Retail Deposits. Retail deposits grew $164.3 million, or 17%, during
2001 to $1.1 billion at December 31, 2001. Retail deposit growth was driven
primarily by money market, interest demand and noninterest demand accounts
which, in total, increased $116.2 million and included growth of $76.0 million
from the Everbank division. The table below depicts the changes in retail
deposits over the last three years:
Year Ended December 31,
-----------------------------------
2001 2000 1999
---- ---- ----
(In Millions)
Beginning balance........................ $ 961.1 $ 736.0 $ 728.4
Interest credited........................ 30.6 30.2 24.5
Deposit inflows (outflows), net.......... 133.7 194.9 (16.9)
-------- -------- --------
Ending balance........................... $1,125.4 $ 961.1 $ 736.0
======== ======== ========
Borrowings and Brokered Certificates of Deposits. Total borrowings
increased $151.8 million between December 31, 2000 and December 31, 2001.
Advances from the FHLB increased $169.0 million and federal funds purchased and
securities sold under agreements to repurchase decreased $24.3 million. Brokered
deposits declined $138.7 million between December 31, 2000 and December 31,
2001, and were replaced by retail deposit growth and additional FHLB advances.
Stockholders' Equity. Stockholders' equity increased $2.9 million to
$100.0 million at December 31, 2001. This increase included $17.1 million in net
income and a $3.0 million increase in other comprehensive income. This was
offset in part by the acquisition of 1.1 million shares of treasury stock for
$15.7 million and dividends of $1.5 million 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: ensuring adequate liquidity and funding; maintaining a strong capital
base; and 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.
-38-
The repricing and maturities of the Corporation's interest-rate
sensitive assets and interest-rate sensitive liabilities at December 31, 2001
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).............................. $ 235,785 $ 240,504 $ 183,153 $ 659,442
Commercial loans................................... 118,060 27,221 52,507 197,788
Consumer loans..................................... 67,381 67,125 63,861 198,367
Mortgage-backed securities......................... 287,667 54,482 19,575 361,724
Loans held-for-sale................................ 84,692 - - 84,692
Investment in reverse mortgages.................... 2,492 9,417 22,030 33,939
Investment securities.............................. 6,370 2,812 5,012 14,194
Other investments.................................. 122,889 - - 122,889
--------- --------- -------- ----------
925,336 401,561 346,138 1,673,035
--------- --------- -------- ----------
Interest-rate sensitive liabilities:
Money market and interest-bearing
demand deposits ............................... 254,335 - 73,300 327,635
Savings deposits.................................. 68,972 - 244,274 313,246
Retail time deposits.............................. 221,411 79,231 2,417 303,059
Jumbo certificates of deposit..................... 20,202 1,827 - 22,029
Brokered certificates of deposit.................. 8,347 - - 8,347
FHLB advances..................................... 110,000 175,000 110,000 395,000
Trust preferred borrowings and interest rate cap.. 50,000 - - 50,000
Other borrowed funds.............................. 75,480 - - 75,480
--------- --------- -------- ----------
808,747 256,058 429,991 1,494,796
--------- --------- -------- ----------
Excess of interest-rate sensitive
assets over interest-rate sensitive liabilities
("interest-rate sensitive gap").................... $ 116,589 $ 145,503 $(83,853) $ 178,239
========== ========= ======== ==========
Interest-rate sensitive assets/interest-rate
sensitive liabilities.............................. 114.42%
Interest-rate sensitive gap as a percent of total
assets............................................. 6.09%
(1) Interest-sensitive assets of discontinued operations are excluded as well
as the interest-sensitive funding of discontinued operations through FHLB
advances which totaled $125.0 million at December 31, 2001.
(2) Includes commercial mortgage loans and residential mortgage loans.
Generally, during a period of rising interest rates, a positive gap
would result in an increase in net interest income while a negative gap would
adversely affect net interest income. Conversely, during a period of falling
rates, a positive gap would result in a decrease in net interest income while a
negative gap would augment net interest income. However, the
interest-sensitivity table does not provide a comprehensive representation of
the impact of interest rate changes on net interest income. Each category of
assets or liabilities will not be affected equally or simultaneously by changes
in the general level of interest rates. Even assets and liabilities, which
contractually reprice within the rate period may not, in fact, reprice at the
same price or the same time or with the same frequency. It is also important to
consider that the table represents a specific point in time. Variations can
occur as the Company adjusts its interest-sensitivity position throughout the
year.
To provide a more accurate one-year gap position of the Corporation,
certain deposit classifications are based on the interest-rate sensitive
attributes and not on the contractual repricing characteristics of these
deposits. Management estimates, based on historical trends of WSFS' deposit
accounts, that 35% of money market and 25% of interest-bearing demand deposits
are sensitive to interest rate changes and that 22% 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.
-39-
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
the 3-month LIBOR rate (the base rate of the Trust Preferred borrowings) at
6.00%. The Trust Preferred borrowings are classified in the less than one year
category reflecting the ability to adjust upward for the balance of the term of
the interest rate cap. If the three-month LIBOR rate equals or exceeds 6.00%,
the Trust Preferred borrowing takes on a fixed characteristic and therefore is
classified in the window corresponding to the caps maturity.
INVESTMENT IN REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Since reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence, and the
mortgage balance consists of cash advanced, interest compounded over the life of
the loan and a premium which represents a portion of the shared appreciation in
the home's value, if any, or a percentage of the value of the residence.
The Corporation accounts for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages; the effective yield of each pool is recomputed, and income is
adjusted retroactively and prospectively to reflect the revised rate of return.
Accordingly, because of this market-value based accounting the recorded value of
reverse mortgage assets include significant risk associated with estimations,
and income can vary significantly from reporting period to reporting period.
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 $14.6 million and $16.5 million at
December 31, 2001 and December 31, 2000, respectively. Of the 281 loans that
comprise the 1993 Pool at December 31, 2001, 228 loans, or 81%, are located in
Delaware, New Jersey, Pennsylvania and Maryland. Management has made the
assumption that future estimated collateral values are expected to decrease 1%
in 2002 and remain constant thereafter.
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"). The carrying value of the
reverse mortgages was $19.4 million and $17.2 million at December 31, 2001 and
December 31, 2000, respectively. All of the 475 loans that comprise the 1994
pool at December 31, 2001, are located in California. Future estimated
collateral values are expected to decrease 1% in 2002 and increase 1%
thereafter.
At December 31, 2001, the Corporation's net investment in reverse
mortgages totaled $33.9 million. The yield for the year ended December 31, 2001
was 29.54% compared to 58.92% and 23.87% for the years ended December 31, 2000
and 1999, respectively. The yields can vary significantly from period to period
depending on actual and estimated cash flows. Management currently expects the
long term yield to be approximately 25%. Since funding and operating costs
associated with reverse mortgages are relatively small and stable, any change in
reverse mortgage revenue can have a significant affect on the Corporation's
pre-tax income.
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,
-40-
Investment Securities and Derivatives Activities." This test measures the impact
on the net portfolio value of an immediate change in interest rates in 100 basis
point increments. Net portfolio value is defined as the net present value of the
estimated cash flows from assets and liabilities. The table below is the
estimated impact of immediate changes in interest rates on the Company's net
interest margin and net portfolio value at the specified levels at December 31,
2001 and 2000, calculated in compliance with Thrift Bulletin No. 13A:
December 31,
-----------------------------------------------------------------------
2001 2000
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 8% 8.93% 6% 6.34%
+200 4% 8.90% 4% 6.50%
+100 2% 8.82% 2% 6.68%
0 0% 8.75% 0% 6.88%
-100 -3% 8.34% -2% 7.21%
-200 (3) -6% 8.01% -3% 7.82%
-300 (3) -15% 7.82% -4% 8.59%
(1) The percentage difference between net interest margin in a stable interest
rate environment and net interest margin as projected under the various
rate environment changes.
(2) The net portfolio value of the Company in a stable interest rate
environment and the net portfolio value as projected under the various rate
environment changes.
(3) Sensitivity indicated by a decrease of 200 and 300 basis points may not be
particularly meaningful at December 31, 2001 given the historically low
absolute level of interest rates at that time.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while maximizing the yield/cost spread on the
Company's asset/liability structure. The Company relies primarily on its
asset/liability structure to control interest rate risk.
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming
real estate investments and assets acquired through foreclosure can negatively
affect the Corporation's results of operations. Nonaccruing loans are those on
which the accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in the opinion of management, collection is doubtful, or when
principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest. Past due loans are loans
contractually past due 90 days or more as to principal or interest payments but
which remain in accrual status because they are considered well secured and in
the process of collection.
-41-
The following table sets forth the Corporation's non-performing assets,
restructured loans and past due loans at the dates indicated:
December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans:
Commercial.................................... $ 1,330 $ 2,766 $ 2,630 $ 2,182 $ 1,216
Consumer...................................... 306 383 251 312 194
Commercial mortgages.......................... 1,928 2,272 1,808 2,383 3,919
Residential mortgages......................... 3,618 2,704 2,617 3,068 3,710
Construction.................................. 351 210 - - 38
------- ------- ------- ------- --------
Total nonaccruing loans............................ 7,533 8,335 7,306 7,945 9,077
Nonperforming investments in real estate........... - - - 76 989
Assets acquired through foreclosure................ 432 630 853 2,588 3,092
------- ------- ------- ------- --------
Total nonperforming assets......................... $ 7,965 $ 8,965 $ 8,159 $10,609 $ 13,158
======= ======= ======= ======= ========
Restructured loans................................. $ - $ - $ - $ - $ 4,740
======= ======= ======= ======= ========
Past due loans:
Residential mortgages......................... $ 88 $ 449 $ 333 $ 247 $ 315
Commercial and commercial mortgages........... 767 790 504 2,654 1,909
Consumer...................................... 244 199 197 41 82
------- ------- ------- ------- --------
Total past due loans............................... $ 1,099 $ 1,438 $ 1,034 $ 2,942 $ 2,306
======= ======= ======= ======= ========
Ratio of nonaccruing loans to total
loans (1)..................................... 0.72% 0.87% 0.85% 1.05% 1.20%
Ratio of allowance for loan losses to gross
loans(1)...................................... 2.05% 2.22% 2.58% 2.97% 3.16%
Ratio of nonperforming assets to total assets...... 0.42% 0.52% 0.47% 0.65% 0.87%
Ratio of loan loss allowance to nonaccruing
loans (2)..................................... 277.77% 248.81% 294.16% 286.13% 252.24%
Ratio of loan loss and foreclosed asset
allowance to total nonperforming assets (2)... 265.48% 234.01% 266.52% 216.73% 174.08%
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
Total nonperforming assets decreased by $1.0 million between 2000 and
2001 after increasing by $806,000 between 1999 and 2000. The year-over-year
decrease reflects the sale of a $2.3 million commercial real estate property in
the fourth quarter 2001, partially offset by an increase of $914,000 in
residential real estate nonperforming loans in 2001.
-42-
An analysis of the change in the balance of nonperforming assets during
the last three fiscal years is presented below:
Year Ended December 31,
------------------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
Beginning balance............................................. $ 8,965 $ 8,159 $ 10,609
Additions............................................... 7,386 8,332 6,912
Collections ........................................... (5,596) (4,323) (5,041)
Transfers to accrual/restructured status................ (1,542) (1,227) (2,937)
Charge-offs/write-downs................................. (1,248) (1,976) (1,384)
-------- -------- ---------
Ending balance................................................ $ 7,965 $ 8,965 $ 8,159
======== ======== =========
The ratio of nonaccruing loans to total loans decreased from 0.87% in
2000 to 0.72% in 2001. The ratio of nonperforming assets to total assets
decreased from 0.52% in 2000 to 0.42% in 2001. These decreases were primarily
due to the decrease in nonaccruing loans. In 2001, $5.6 million in collections
of such assets, as well as $1.5 million in transfers to accrual status
contributed to the reduction in nonperforming assets. Such decreases were offset
by the addition of $7.4 million of loans that were not previously classified as
nonperforming.
Allowance for Loan Losses. The Corporation maintains allowances for
credit losses and charges losses to these allowances when such losses are
realized. The determination of the allowance for loan losses requires
significant management judgement reflecting management's best estimate of
probable loan losses related to specifically identified loans as well as
probable loan losses in the remaining loan portfolio. Management's evaluation is
based upon a continuing review of these portfolios.
Management establishes the loan loss allowance in accordance with
guidance provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the
allowance consists of several key elements, which include: specific allowances
for identified problem loans; formula allowances for commercial and commercial
real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans, in cases where
management has identified significant conditions or circumstances related to a
specific credit that management believes indicate the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans
are calculated by applying loss factors to outstanding loans in each case based
on the internal risk grade of loans. Changes in risk grades of both performing
and nonperforming loans affect the amount of the formula allowance. Loss factors
by risk grade have a basis in WSFS' historical loss experience for such loans
and may be adjusted for significant factors that, in management's judgment,
affect the collectability of the portfolio as of the evaluation date. (See
discussion on historical loss adjustment factors below.)
Pooled loans are loans that are usually smaller, not-individually-
graded and homogenous in nature, such as consumer installment loans and
residential mortgages. Pooled loan loss allowances are based on historical net
charge-offs for six years which management believes approximates an average
business cycle. The average loss allowance per homogenous pool is based on the
product of average annual historical loss rate and the average estimated
duration of the pool multiplied by the pool balances. These separate risk pools
are then assigned a reserve for losses based upon this historical loss
information, as adjusted for historical loss adjustment factors. Historical loss
adjustment factors are based upon management's evaluation of various current
conditions. The evaluation of the inherent loss with respect to these more
current conditions is subject to a higher degree of uncertainty because they are
not identified with specific credits. The more current conditions, evaluated in
connection with the adjustment factors, include an evaluation of the following:
-43-
o General economic and business conditions affecting WSFS' key
lending areas,
o Credit quality trends (including trends in nonperforming loans
expected to result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan
origination, servicing and risk management processes.
WSFS' loan officers and risk managers meet monthly to discuss and
review these conditions, and also risks associated with individual problem
loans. By assessing the probable estimated losses inherent in the loan portfolio
on a monthly basis, management is able to adjust specific and inherent loss
estimates based upon the availability of more recent information.
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated:
Year Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance.................................... $21,423 $22,223 $22,732 $24,057 $23,527
Provision for loan losses............................ 2,212 894 1,004 385 800
Reclass from allowance for ORE losses................ - - - - 848
Balance at acquisition of credit
card portfolio................................... - 175 - - -
Charge-offs:
Residential real estate.......................... 106 133 172 210 193
Commercial real estate (1)....................... 195 376 692 608 520
Commercial....................................... 1,000 998 437 648 169
Consumer......................................... 1,031 1,002 720 504 452
------- ------- ------- ------ -------
Total charge-offs.................................... 2,332 2,509 2,021 1,970 1,334
------- ------- ------- ------ -------
Recoveries:
Residential real estate.......................... 1 6 - 12 2
Commercial real estate (1)....................... 61 252 271 123 95
Commercial....................................... 100 70 116 74 22
Consumer......................................... 132 312 121 51 97
------- ------- ------- ------ -------
Total recoveries..................................... 294 640 508 260 216
------- ------- ------- ------ -------
Net charge-offs...................................... 2,038 1,869 1,513 1,710 1,118
------- ------- ------- ------ -------
Ending balance....................................... $21,597 $21,423 $22,223 $22,732 $24,057
======= ======= ======= ======= =======
Net charge-offs to average gross
loans outstanding, net
of unearned income............................... 0.20% 0.20% 0.19% 0.23% 0.15%
======= ======= ======= ======= =======
(1) Includes commercial mortgage and construction loans.
For the year ended December 31, 2001, the Corporation provided $2.2
million for loan losses. This increase reflects, among other things, the
Company's loan growth, a change in the mix to higher margin and higher risk
loans, a weakening economic environment in 2001, offset by an overall
improvement in credit quality of the Corporation's loan portfolio.
-44-
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,
---------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Amount(1) Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Residential real estate.......... $ 4,039 38.2% $ 1,754 43.2% $ 1,389 42.7% $ 229 37.7% $ 524 37.5%
Commercial real estate........... 6,927 24.3 3,187 22.9 8,240 25.9 10,398 31.0 11,280 33.0
Commercial....................... 6,963 18.7 13,985 15.7 9,983 13.4 11,751 12.8 11,664 12.4
Consumer......................... 3,668 18.8 2,497 18.2 2,611 18.0 354 18.5 589 17.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total............................ $21,597 100.0% $21,423 100.0% $22,223 100.0% $22,732 100.0% $24,057 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
(1) The implementation of SAB 102 in 2001 led to a significant change in the
allocation methodologies for anticipated loan losses.
LIQUIDITY
In accordance with Thrift Bulletin 77, the OTS requires institutions,
such as WSFS to maintain adequate liquidity to assure safe and sound operation.
WSFS' liquidity ratio of cash and qualified assets to net withdrawable deposits
and borrowings due within one year was 10.8% at December 31, 2001, compared to
6.4% at December 31, 2000. Management monitors liquidity daily and maintains
funding sources to meet unforeseen changes in cash requirements. The
Corporation's primary funding sources are operating earnings, deposits,
repayments of loans and investment securities, sales of loans and borrowings. In
addition, the Corporation's liquidity requirements can be accomplished through
the use of its borrowing capacity from the FHLB of Pittsburgh and other sources,
the sale of certain securities and the pledging of certain loans for other lines
of credit. Management believes these sources are sufficient to maintain the
required and prudent levels of liquidity. At December 31, 2001 and 2000, WSFS
had outstanding FHLB advances of $520.0 million and $351.0 million,
respectively. At December 31, 2001, WSFS had the capacity to borrow up to $774.0
million.
The Corporation routinely enters into commitments requiring the future
outlay of funds. Currently, WSFS is winding down the final year of its agreement
with ALLTEL, the company that has been managing data processing operations since
1998, and will incur a minimum payment of approximately $2.4 million in 2002.
WSFS is currently negotiating a new data processing contract with Metavante
Corporation The Corporation also has four years remaining on a five-year
commitment with telecommunication companies. Under the terms of this agreement,
the average minimum payment for each of the remaining four years is $1.3
million. The aforementioned commitments, as well as loan commitments, are
expected to be met through traditional funding sources, such as operating
earnings, deposits, short-term borrowings, advances from the FHLB and principal
repayments on loans and investments.
During 2001, financing activities provided cash and cash equivalents of
$159.1 million, while operating and investing activities used $52.4 million and
$113.0 million, respectively. The cash provided by financing activities resulted
primarily from additional FHLB advances and an increase in demand and savings
accounts. This cash was used primarily to fund loans and purchase
mortgage-backed securities.
During 2000, operating and investing activities provided cash and cash
equivalents of $836,000 and $17.7 million, respectively, while financing
activities used $27.3 million. The cash provided by operating and investing
activities resulted primarily from the sales of loans held-for-sale and
mortgage-backed securities. This cash was used to fund the purchase of
mortgage-backed securities and to fund an increase in loans, as well as to repay
borrowings and purchase treasury stock. In 1999, financing activities provided
$101.6 million of cash and cash equivalents, while operating and investing
activities used $7.2 million and $92.9 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.
-45-
The Corporation has not used, and has no intention to use, any
significant off-balance sheet financing arrangements for liquidity purposes. The
Corporation's financial instruments with off-balance sheet risk are limited to
obligations to fund loans to customers pursuant to existing commitments and an
interest rate cap which limits the exposure to rising rates on $50 million of
trust preferred floating rate debt. In addition, WSFS has not had, and has no
intention to have, any significant transactions, arrangements or other
relationships with any unconsolidated, limited purpose entities that could
materially affect its liquidity or capital resources. WSFS has not, and does not
intend to, trade in commodity contracts.
CAPITAL RESOURCES
Federal laws, among other things, require the OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as WSFS to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted" assets and total "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as
well as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well-capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 2001, 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 its capital management strategy, the Corporation from time
to time purchases its own shares of common stock to be included as treasury
shares. Since 1996, the Board of Directors has approved six separate stock
repurchase programs to reacquire common stock outstanding. As part of these
programs, the Corporation acquired approximately 1.1 million shares in both 2000
and 2001. At December 31, 2001, the Corporation held 5.7 million shares of its
common stock as treasury shares. The Corporation may continue repurchasing
shares in 2002 depending on capital levels and potential uses of capital.
IMPACT OF INFLATION AND CHANGING PRICES
The Corporation's Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America, which require the measurement of financial position and operating
results in terms of historical dollars without consideration of the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased costs of the Corporation's operations.
Unlike most industrial companies, nearly all the assets and liabilities of the
Corporation are monetary. As a result, interest rates have a greater impact on
the Corporation's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or the
same extent as the price of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Boards (FASB) issued
Statement 141, Business Combinations. Statement 141 addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
16, Business Combinations, and FASB Statement 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. All business combinations in the scope
of Statement 141 are to be accounted for using the purchase method.
The provisions of Statement 141 apply to all business combinations
initiated after June 30, 2001. Statement 141 also applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. There was no impact on earnings,
financial condition, or equity as a result of the adoption of Statement 141.
-46-
In June 2001, the FASB issued Statement 142, Goodwill and Other
Intangible Assets. Statement 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. Statement 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
The provisions of Statement 142 are required to be applied starting with
fiscal years beginning after December 15, 2001, except that goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately to
the nonamortization and amortization provisions of the Statement. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not
previously been issued. Statement 142 is required to be applied at the beginning
of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date. The
Corporation has $1.2 million in negative goodwill that will be recognized in
income in the first quarter of 2002 as a cumulative change in accounting
principle. Amortization of negative goodwill totaled $144,000 and $161,000 for
the years ended December 31, 2001 and 2000, respectively. In addition, the
Corporation has $958,000 in goodwill related to its investment in C1FN, that
will be evaluated in the first half of 2002. Due to the number of possible
outcomes associated with the anticipated exit of this business, the Corporation
cannot yet assess the impairment, if any, that might occur (see General section
of the Management Discussion and Analysis). Amortization of this goodwill
totaled $74,000 for each of the years ended December 31, 2001 and 2000.
In June 2001, the FASB issued Statement 143, Accounting for Asset
Retirement Obligations. Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. Statement 143 is effective for fiscal years beginning
after June 15, 2002. Management has not yet determined the impact, if any, to
earnings, financial condition or equity upon adoption of this statement.
In August 2001, the FASB issued Statement 144, Accounting for
Impairment or Disposal of Long-Lived Assets. Statement 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement 144 supersedes FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. Statement 144 also amends ARB 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. Statement 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. Adoption of
this standard on January 1, 2002 did not have a material impact, to earnings,
financial condition or equity of the company.
FORWARD LOOKING STATEMENTS
Within this annual report and financial statements management has
included certain "forward looking statements" concerning the future operations
of the Corporation. It is management's desire to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward looking statements"
contained in its financial statements and annual report. Management has used
"forward looking statements" to describe the future plans and strategies
including expectations of the Corporation's future financial results.
Management's ability to predict results or the effect of future plans and
strategy is inherently uncertain. Factors that could affect results include
interest rate trends, competition, the general economic climate in Delaware, the
Mid-Atlantic region and the country as a whole, loan delinquency rates,
uncertainty of estimates and changes in federal and state regulation, among
other factors. These factors should be considered in evaluating the "forward
looking statements", and undue reliance should not be placed on such statements.
-47-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A is incorporated herein by reference to page 38 - 39 of Item 7 of
the 2001 annual report on Form 10K.
-48-
ITEM 8. FINANCIAL STATEMENTS
Independent Auditors' 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 of 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)............................................. 96
-49-
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,
2001 and 2000, 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, 2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001 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 21, 2002
Philadelphia, Pennsylvania
-50-
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of WSFS Financial Corporation (the Corporation) is
responsible for establishing and maintaining effective internal control over
financial reporting presented in conformity accounting principles generally
accepted in the United States of America. This internal control contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the Corporation's internal control over financial
reporting presented in conformity with accounting principles generally accepted
in the United States of America as of December 31, 2001. This assessment was
based on criteria for effective internal control over financial reporting
established in "Internal Control-Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes, as of December 31, 2001 the Corporation
maintained effective internal control over financial reporting, presented in
conformity 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, 2001.
/s/ Marvin N. Schoenhals /s/ Mark A. Turner
- ------------------------ ---------------------------
Marvin N. Schoenhals Mark A. Turner
Chairman, President and Chief Operating Officer
Chief Executive Officer and Chief Financial Officer
-51-
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
---------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars In Thousands, Except per Share Data)
Interest income:
Interest and fees on loans.............................................. $ 82,830 $ 79,145 $ 65,046
Interest on mortgage-backed securities.................................. 22,975 25,118 30,540
Interest and dividends on investment securities......................... 1,425 2,980 2,342
Interest on investments in reverse mortgages............................ 10,155 19,309 7,372
Other interest income................................................... 3,089 3,125 2,884
-------- -------- --------
120,474 129,677 108,184
-------- -------- --------
Interest expense:
Interest on deposits ................................................... 35,152 42,891 33,142
Interest on Federal Home Loan Bank advances............................. 15,923 14,583 16,965
Interest on federal funds purchased and securities sold under
agreements to repurchase.............................................. 3,353 4,801 5,621
Interest on trust preferred borrowings.................................. 3,365 2,918 2,812
Interest on other borrowings............................................ 391 534 316
-------- -------- --------
58,184 65,727 58,856
-------- -------- --------
Net interest income..................................................... 62,290 63,950 49,328
Provision for loan losses............................................... 2,212 894 1,004
-------- -------- --------
Net interest income after provision for loan losses..................... 60,078 63,056 48,324
-------- -------- --------
Other income:
Loan servicing fee income .............................................. 3,247 2,219 2,075
Deposit service charges................................................. 8,805 7,050 5,464
Credit/debit card and ATM income ....................................... 7,301 5,544 3,914
Securities gains (losses) .............................................. 82 (4,368) (602)
Gain (loss) on sale of loans............................................ 20,765 3,936 (993)
Other income............................................................ 3,931 3,720 1,721
-------- -------- --------
44,131 18,101 11,579
-------- -------- --------
Other expenses:
Salaries, benefits and other compensation............................... 40,199 29,991 18,950
Equipment expense....................................................... 4,664 4,448 3,133
Data processing and operations expense.................................. 4,760 5,243 5,896
Occupancy expense....................................................... 5,438 4,290 3,422
Marketing expense....................................................... 2,714 2,893 1,570
Professional fees....................................................... 2,949 3,113 2,343
Other operating expenses................................................ 15,104 11,450 7,354
-------- -------- --------
75,828 61,428 42,668
-------- -------- --------
Income from continuing operations before minority interest, taxes and
cumulative effect of change in accounting principle................... 28,381 19,729 17,235
Less minority interest.................................................. (189) (3,735) (972)
-------- -------- --------
Income from continuing operations before taxes and cumulative effect
of change in accounting princip....................................... 28,570 23,464 18,207
Income tax provision.................................................... 9,461 6,586 121
-------- -------- --------
Income from continuing operations before cumulative effect of change
in accounting principle............................................... 19,109 16,878 18,086
Cumulative effect of change in accounting principle, net of $837,000
in tax benefit........................................................ - (1,256)
-------- -------- --------
Income from continuing operations....................................... 19,109 15,622 18,086
(Loss) income from discontinued operations, net of taxes................ - (2,392) 1,623
(Loss) on wind-down of discontinued operations, net of tax benefit of
$1.1 million in 2001 and $4.0 million in 2000......................... (2,026) (2,211) -
-------- -------- --------
Net income.............................................................. $ 17,083 $ 11,019 $ 19,709
======== ======== ========
-52-
CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Year Ended December 31,
------------------------------------------
2001 2000 1999
---------- ---------- ----------
(Dollars In Thousands, Except per Share Data)
Earnings per share:
Basic:
Income from continuing operations before cumulative effect of
change in accounting principle, net of tax benefit................ $ 1.99 $ 1.58 $ 1.60
Cumulative effect of change in accounting principle,
net of tax benefit................................................ - (0.12) -
------- ------- -------
Income from continuing operations.................................... 1.99 1.46 1.60
(Loss) income from discontinued operations, net of taxes............. - (0.22) 0.14
(Loss) on wind-down of discontinued operations, net of tax benefit... (0.21) (0.21) -
------- ------- -------
Net income ...................................................... $ 1.78 $ 1.03 $ 1.74
======= ======= =======
Diluted:
Income from continuing operations before cumulative effect of
change in accounting principle, net of tax benefit................. $ 1.97 $ 1.58 $ 1.59
Cumulative effect of change in accounting principle,
net of tax benefit................................................ - (0.12) -
------- ------- -------
Income from continuing operations.................................... 1.97 1.46 1.59
(Loss) income from discontinued operations, net of taxes............. - (0.22) 0.14
(Loss) on wind-down of discontinued operations, net of tax benefit... (0.21) (0.21) -
------- ------- -------
Net income ................................................... $ 1.76 $ 1.03 $ 1.73
======= ======= =======
The accompanying notes are an integral part of these Financial Statements.
-53-
CONSOLIDATED STATEMENT OF CONDITION
December 31,
------------------------------
2001 2000
------------ ------------
(In Thousands)
Assets
Cash and due from banks.................................................................. $ 104,813 $ 87,849
Federal funds sold and securities purchased under agreements to resell................... 65,779 3,500
Interest-bearing deposits in other banks................................................. 28,360 7,318
Investment securities held-to-maturity (market value: 2001-$12,802, 2000-$14,938)........ 12,396 14,746
Investment securities available-for-sale...................................... 1,798 14,994
Mortgage-backed securities held-to-maturity (market value: 2001-$71,592, 2000-$106,604).. 70,285 107,663
Mortgage-backed securities available-for-sale............................................ 291,439 232,055
Investment in reverse mortgages, net..................................................... 33,939 33,683
Loans held-for-sale...................................................................... 84,741 23,313
Loans, net of allowance for loan losses of $21,597 at December 31, 2001 and
$21,423 at December 31, 2000........................................................... 1,030,631 940,178
Stock in Federal Home Loan Bank of Pittsburgh, at cost................................... 28,750 28,500
Assets acquired through foreclosure...................................................... 432 630
Premises and equipment................................................................... 16,438 16,788
Accrued interest and other assets........................................................ 28,824 28,348
Net assets of discontinued operations.................................................... 114,273 199,751
---------- ----------
Total assets............................................................................. $1,912,898 $1,739,316
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand............................................................. $ 171,801 $ 139,128
Money market and interest-bearing demand .............................................. 327,635 244,120
Savings................................................................................ 313,246 289,382
Time................................................................................... 303,059 282,839
Jumbo certificates of deposit - retail................................................. 9,695 5,611
---------- ----------
Total retail deposits ....................................................... 1,125,436 961,080
Jumbo certificates of deposit.......................................................... 12,334 13,419
Brokered certificates of deposit-other................................................. 8,347 147,092
---------- ----------
Total deposits.............................................................. 1,146,117 1,121,591
Federal funds purchased and securities sold under agreements to repurchase .............. 45,000 69,300
Federal Home Loan Bank advances.......................................................... 520,000 351,000
Trust preferred borrowings............................................................... 50,000 50,000
Other borrowed funds..................................................................... 30,480 23,338
Accrued expenses and other liabilities................................................... 15,497 21,065
---------- ----------
Total liabilities........................................................................ 1,807,094 1,636,294
---------- ----------
Commitments and contingencies
Minority Interest........................................................................ 5,801 5,876
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
14,823,651 at December 31, 2001, and 14,813,403 at December 31, 2000................... 148 148
Capital in excess of par value .......................................................... 59,079 58,985
Accumulated other comprehensive income................................................... 3,146 197
Retained earnings........................................................................ 107,950 92,409
Treasury stock at cost, 5,677,169 shares at December 31, 2001 and 4,629,769
shares at December 31, 2000............................................................ (70,320) (54,593)
---------- ----------
Total stockholders' equity............................................................... 100,003 97,146
---------- ----------
Total liabilities, minority interest and stockholders' equity............................ $1,912,898 $1,739,316
========== ==========
The accompanying notes are an integral part of these Financial Statements.
-54-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital Other Total
Common in Excess Comprehensive Retained Treasury Stockholders'
Stock of Par Value Income (Loss) Earnings Stock Equity
------ ------------ ------------- -------- -------- -------------
(In Thousands)
Balance, January 1, 1999.................... $ 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 (2).. - - - - (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 (3)
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
====== ======== ======= ======== ========= ========
Comprehensive income:
Net income............................... - - - 17,083 - 17,083
Other comprehensive income (1)........... - - 2,949 - - 2,949
--------
Total comprehensive income.................. 20,032
--------
Cash dividend, $.16 per share - - (1,542) - (1,542)
Exercise of common stock options ........... - 94 - - - 94
Treasury stock at cost, 1,047,400 shares(4) - - - - (15,727) (15,727)
------ -------- ------- -------- --------- --------
Balance, December 31, 2001 ................. $ 148 $ 59,079 $ 3,146 $107,950 $(70,320) $100,003
====== ======== ======= ======== ========= ========
(1) Other Comprehensive Income:
2001 2000 1999
------ ------ ------
Net unrealized holding gains (losses) on
securities available-for-sale arising
during the period net of taxes
(2001 - $1.0 million, 2000 - $373,000,
1999 - $(2.1) million).................... $ 2,743 $ 608 $(3,892)
Net unrealized holding gain (losses)
arising during the period on derivatives
used for cash flow hedge, net of
taxes (2001 - $139,000 and
2000 - $(917,000))........................ 257 (1,703) -
Reclassification for (gains) losses
included in income, net of taxes
(2001 - $31,000, 2000 - $(1.7)
million, 1999 - $(211,000))............... (51) 2,729 391
------- ------- -------
Total other comprehensive income (loss),
before other comprehensive income that
resulted from the cumulative effect of
a change in accounting principle,
net of taxes.............................. 2,949 1,634 (3,501)
Net unrealized gain on derivatives used for
cash flow hedging as a result of adopting
SFAS No.133, net of $985,000 tax benefit. - 1,828 -
------- ------- -------
Total other comprehensive income (loss).... $ 2,949 $ 3,462 $(3,501)
======= ======= =======
(2) Net of reissuances of 4,500 shares
(3) Net of reissuances of 5,000 shares
(4) Net of reissuances of 5,000 shares
The accompanying notes are an integral part of these financial statements.
-55-
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-----------------------------------
2001 2000 1999
------ ------- --------
(In Thousands)
Operating activities:
Net income................................................................... $ 17,083 $ 11,019 $ 19,709
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Provision for loan losses............................................... 2,212 894 1,004
Depreciation, accretion and amortization ............................... 4,983 2,366 2,724
Increase in accrued interest receivable and other assets................ (3,176) (2,725) (3,416)
Origination of loans held-for-sale ..................................... (624,481) (189,239) (56,011)
Proceeds from sales of loans held-for-sale.............................. 566,686 187,104 32,528
(Decrease) increase in accrued interest payable and other liabilities... (5,640) 3,706 2,146
Increase in reverse mortgage capitalized interest, net ................. (10,003) (19,111) (7,052)
Minority interest in net income......................................... (189) (3,735) (972)
Other, net ............................................................. 122 10,557 2,152
-------- --------- --------
Net cash (used for) provided by operating activities......................... (52,403) 836 (7,188)
-------- --------- --------
Investing activities:
Net (increase) decrease of interest-bearing deposits in other banks..... (21,042) 708 (508)
Maturities of investment securities .................................... 90,349 9,155 16,577
Sales of investment securities available-for-sale....................... 644 36,199 20,000
Sales of mortgage-backed securities available-for-sale ................. 4,095 219,235 -
Purchases of investment securities held-to-maturity..................... - (8,952) (2,295)
Purchases of investment securities available-for-sale................... (75,246) (27,962) (34,148)
Repayments of mortgage-backed securities held-to-maturity .............. 37,116 25,383 108,436
Repayments of mortgage-backed securities available-for-sale............. 220,076 72,436 67,963
Purchases of mortgage-backed securities held-to-maturity ............... - - (101,369)
Purchases of mortgage-backed securities available-for-sale.............. (280,969) (210,376) (69,881)
Repayments on reverse mortgages......................................... 17,304 21,904 19,878
Disbursements for reverse mortgages..................................... (7,413) (8,230) (9,456)
Purchase of loans ...................................................... (24,512) (36,829) (74,721)
Net increase in loans .................................................. (72,146) (69,183) (26,036)
Net increase in stock of Federal Home Loan Bank of Pittsburgh .......... (250) - (5,500)
Payments for investment in real estate.................................. - (1,991) -
Receipts from investments in real estate................................ 270 - -
Sales of assets acquired through foreclosure, net ...................... 766 1,469 3,259
Premises and equipment, net............................................. (1,992) (5,298) (5,089)
-------- --------- --------
Net cash (used for) provided by investing activities......................... (112,950) 17,668 (92,890)
-------- --------- --------
(Continued on next page)
-56-
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
-----------------------------------
2001 2000 1999
------ ------- --------
(In Thousands)
Financing activities:
Net increase in demand and savings deposits.............................. 147,319 224,155 67,537
Net decrease in time deposits ........................................... (115,715) (3,733) (11,598)
Receipts from FHLB borrowings ........................................... 370,000 692,500 210,000
Repayments of FHLB borrowings ........................................... (201,000) (856,500) (155,000)
Receipts from reverse repurchase agreements.............................. - 46,588 111,211
Repayments of reverse repurchase agreements ............................. (24,300) (116,229) (125,775)
Net (decrease) increase in federal funds purchased....................... - (5,000) 5,000
Net decrease in obligations under capital lease.......................... (125) (103) -
Dividends paid on common stock........................................... (1,542) (1,610) (1,366)
Issuance of common stock and exercise of employee stock options ......... 94 103 389
Purchase of treasury stock, net of re-issuance........................... (15,727) (12,678) (4,931)
Increase in investment in subsidiary..................................... - - 101
Minority interest........................................................ 114 5,174 6,039
--------- --------- ---------
Net cash provided by (used for) financing activities..................... 159,118 (27,333) 101,607
--------- --------- ---------
(Decrease) increase in cash and cash equivalents from continuing
operations (6,235) (8,829) 1,529
Change in net assets from discontinued operations........................ 85,478 41,012 (19,111)
Cash and cash equivalents at beginning of period ........................ 91,349 59,166 76,748
--------- --------- ---------
Cash and cash equivalents at end of period .............................. $ 170,592 $ 91,349 $ 59,166
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year .................................. $ 62,977 $ 79,377 $ 68,231
Cash paid for income taxes, net ......................................... 8,874 1,713 1,041
Loans transferred to assets acquired through foreclosure ................ 648 1,199 1,421
Net change in other comprehensive income................................. 2,949 3,462 (3,501)
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.
-57-
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 at
December 31, 2001 conducted operations from 27 retail banking offices located in
northern Delaware and southeastern Pennsylvania. In January 2002, the
Corporation transferred 5 in-store branches to another financial institution.
In preparing the Financial Statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The material estimates that are particularly
susceptible to significant changes in the near term relate to the allowance for
loan losses and the valuations of the interest rate cap, other real estate
owned, deferred tax assets, investment in reverse mortgages and reserve for
discontinued operations.
Basis of Presentation
The consolidated Financial Statements include the accounts of the
parent company, WSFS Capital Trust I, WSFS and its wholly-owned subsidiaries,
838 Investment Group, Inc. and Star States Development Company (SSDC) as well as
not wholly-owned, but majority controlled and consolidated subsidiaries,
Wilmington National Finance, Inc. (WNF) and CustomerOne Financial Network, Inc.
(C1FN). See Note 19 for further discussion of non-wholly owned but consolidated
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 higher rate debt.
838 Investment Group, Inc. markets various third party 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 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.
-58-
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 2001, 2000 and 1999.
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.
Investment in Reverse Mortgages
The Corporation accounts for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages; the effective yield of each pool is recomputed, and income is
adjusted retroactively and prospectively to reflect the revised rate of return.
Accordingly, because of this market-value based accounting the recorded value of
reverse mortgage assets include significant risk associated with estimations and
income recognition can vary significantly from reporting period to reporting
period.
Loans
Loans are stated net of deferred fees and costs and unearned discounts.
Loan interest income is accrued using various methods which approximate a
constant yield. Loan origination and commitment fees and direct loan origination
costs are deferred and recognized over the life of the related loans using a
level yield method over the period to maturity.
Impaired loans are measured based on the present value of expected
future discounted cash flows, the market price of the loan or the fair value of
the underlying collateral if the loan is collateral dependent. Impaired loans
include loans within the Corporation's commercial, commercial mortgage and
commercial construction portfolios. The Company's policy for recognition of
interest income on impaired loans is the same as for nonaccrual loans discussed
below.
-59-
Nonaccrual Loans
Nonaccrual loans are those on which the accrual of interest has ceased.
Loans are placed on nonaccrual status immediately if, in the opinion of
management, collection is doubtful, or when principal or interest is past due 90
days or more and collateral is insufficient to cover principal and interest.
Interest accrued but not collected at the date a loan is placed on nonaccrual
status is reversed and charged against interest income. In addition, the
amortization of net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Subsequent cash receipts are applied either to the
outstanding principal or recorded as interest income, depending on management's
assessment of ultimate collectibility of principal and interest. Loans are
returned to an accrual status when the borrower's ability to make periodic
principal and interest payments has returned to normal (i.e. - brought current
with respect to principal or interest or restructured) and the paying capacity
of the borrower and/or the underlying collateral is deemed sufficient to cover
principal and interest in accordance with the Corporation's previously
established loan-to-value policies.
Allowances for Losses
The Corporation maintains allowances for credit losses and charges
losses to these allowances when such losses are realized. The determination of
the allowance for loan losses requires significant management judgement
reflecting management's best estimate of probable loan losses related to
specifically identified loans as well as probable loan losses in the remaining
loan portfolio. Management's evaluation is based upon a continuing review of
these portfolios.
Management establishes the loan loss allowance in accordance with
guidance provided in the Securities and Exchange Commission's Staff Accounting
Bulletin 102 (SAB 102). Its methodology for assessing the appropriateness of the
allowance consists of several key elements, which include: specific allowances
for identified problem loans; formula allowances for commercial and commercial
real estate loans; and allowances for pooled homogenous loans.
Specific reserves are established for certain loans, in cases where
management has identified significant conditions or circumstances related to a
specific credit that management believes indicate the probability that a loss
has been incurred.
The formula allowances for commercial and commercial real estate loans
are calculated by applying loss factors to outstanding loans in each case based
on the internal risk grade of loans. Changes in risk grades of both performing
and nonperforming loans affect the amount of the formula allowance. Loss factors
by risk grade have a basis in WSFS' historical loss experience for such loans
and may be adjusted for significant factors that, in management's judgment,
affect the collectability of the portfolio as of the evaluation date. (See
discussion of historical loss adjustment factors below.)
Pooled loans are loans that are usually smaller,
not-individually-graded and homogenous in nature, such as consumer installment
loans and residential mortgages. Pooled loan loss allowances are based on
historical net charge-offs for six years which management believes approximates
an average business cycle. The average loss allowance per homogenous pool is
based on the product of average annual historical loss rate and the average
estimated duration of the pool multiplied by the pool balances. These separate
risk pools are then assigned a reserve for losses based upon this historical
loss information, as adjusted for historical loss adjustment factors. Historical
loss adjustment factors are based upon management's evaluation of various
current conditions. The evaluation of the inherent loss with respect to these
more current conditions is subject to a higher degree of uncertainty because
they are not identified with specific credits. The more current conditions,
evaluated in connection with the adjustment factors, include an evaluation of
the following:
o General economic and business conditions affecting WSFS' key
lending areas,
o Credit quality trends (including trends in nonperforming loans
expected to result from existing conditions),
o Recent loss experience in particular segments of the portfolio,
o Collateral values and loan-to-value ratios,
o Loan volumes and concentrations, including changes in mix,
o Seasoning of the loan portfolio,
-60-
o Specific industry conditions within portfolio segments,
o Bank regulatory examination results, and
o Other factors, including changes in quality of the loan
origination, servicing and risk management processes.
WSFS' loan officers and risk managers meet monthly to discuss and
review these conditions, and also risks associated with individual problem
loans. By assessing the probable estimated losses inherent in the loan portfolio
on a monthly basis, management is able to adjust specific and inherent loss
estimates based upon the availability of more recent information.
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.
Assets Held-for-Sale
Assets held-for-sale include loans held-for-sale and are carried at the
lower of cost or market of the aggregate or in some cases individual assets.
Vehicles that have been returned to the Company upon the expiration of their
lease terms have been included in the net assets of discontinued operations.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the
recorded investment in the loan or fair value less estimated disposal costs.
Costs subsequently incurred to improve the assets are included in the carrying
value provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. Net costs
of assets acquired through foreclosure includes costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life. In
general, computer equipment, furniture and equipment and building renovations
are depreciated over 3, 5 and 10 years, respectively. Accelerated methods are
used in depreciating certain assets for income tax purposes.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are treated as financings, with the
obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements
remain in the asset accounts.
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.
-61-
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
2001 2000 1999
---- ---- ----
(In Thousands, except per share data)
Numerator:
Income from continuing operations before cumulative effect
of change in accounting principle, net of tax benefit.................. $19,109 $16,878 $18,086
Cumulative effect of change in accounting principle, net of tax benefit. - (1,256) -
------- ------- -------
Income from continuing operations......................................... 19,109 15,622 18,086
(Loss) income from discontinued operations, net of taxes................ - (2,392) 1,623
(Loss) on wind-down of discontinued operations, net of tax benefit...... (2,026) (2,211) -
------- ------- -------
Net income................................................................ $17,083 $11,019 $19,709
======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares ................................................. 9,579 10,652 11,352
Effect of dilutive securities:
Employee stock options................................................... 114 14 53
------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise......................................................... 9,693 10,666 11,405
======= ======= =======
Earnings per share:
Basic:
Income from continuing operations before cumulative effect of
change in accounting principle, net of tax benefit...................... 1.99 1.58 1.60
Cumulative effect of change in accounting principle, net of tax benefit. - (.12) -
------- ------- -------
Income from continuing operations......................................... 1.99 1.46 1.60
(Loss) income from discontinued operations, net of taxes................ - (.22) .14
(Loss) on wind-down of discontinued operations, net of tax benefit (.21) (.21) -
------- ------- -------
Net income................................................................ $ 1.78 $ 1.03 $ 1.74
======= ======= =======
Diluted:
Income from continuing operations before cumulative effect of
change in accounting principle, net of tax benefit...................... 1.97 1.58 1.59
Cumulative effect of change in accounting principle, net of tax benefit. - (.12) -
------- ------- -------
Income from continuing operations......................................... 1.97 1.46 1.59
(Loss) income from discontinued operations, net of taxes................ - (.22) .14
(Loss) on wind-down of discontinued operations, net of tax benefit...... (.21) (.21) -
------- ------- -------
Net income................................................................ $ 1.76 $ 1.03 $ 1.73
======= ======= =======
Outstanding common stock equivalents having no dilutive effect............ 146 562 249
-62-
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 WCC. WCC, which had
4,600 lease contracts and 1,800 loan contracts at December 31, 2001, 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 accrue
any expected net losses. The historic results of WCC's operations, the accrual
of expected losses to be incurred over the wind-down period, and the future
reported results of WCC are required to be treated as Discontinued Operations of
a Business Segment, and shown in summary form separately from the Company's
results of continuing operations in reported results of the Corporation. Prior
periods are restated, as required by accounting principles generally accepted in
the United States of America.
As a result, net operating losses of $2.4 million for the year ended
December 31, 2000 and net income of $1.6 million for the year ended December 31,
1999 were reclassified from continuing operations to discontinued operations. In
addition in 2000, the Corporation recognized a charge of $2.2 million, net of
$4.0 million in tax benefits related to net operating loss carryforwards, for
the expected loss over the projected three-year wind-down period. A $6.2 million
pretax reserve was established to absorb these expected future losses.
During 2001, used vehicle values continued to deteriorate. This decline
was exacerbated and continues to be affected by, among other things, the
continued incenting of new vehicles by auto manufacturers. As a result,
management's analysis of residual losses as of December 31, 2001 indicated that
additional reserves were needed for the expected losses in the business during
its wind-down. Accordingly, management recorded an additional $3.1 million,
pre-tax, for expected losses over the wind-down period. The balance of reserves
for residual losses represents management's best estimate of losses inherent to
the remaining portfolio. As of December 31, 2001, there were $87 million of
contractual residuals still on lease for which management has estimated $15.5
million in probable losses. The losses have been inherently provided for in
residual reserves and reserves for discontinued operations.
Due to the uncertainty of a number of factors, including residual
values, interest rate volatility and credit quality, this reserve will be
reevaluated quarterly with adjustments, if necessary, recorded as income/losses
on wind-down of 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, 2001 and 2000:
At December 31,
---------------------------------
2001 2000
(In Thousands)
Vehicles under operating leases, net................ $102,288 $ 175,745
Net loans........................................... 16,131 27,877
Other non-cash assets............................... 3,241 4,062
Less:
Reserve for losses of discontinued operations... 6,365 6,169
Other liabilities............................... 1,022 1,764
-------- --------
Net assets of discontinued operations............... $114,273 $199,751
======== ========
-63-
The following table depicts the net income (loss) from
discontinued operations for the years ended December 31, 2001, 2000 and 1999:
Year Ended December 31,
-------------------------------------
2001 2000 1999
------ ------ ------
(In Thousands)
Interest income......................................................... $ 1,870 $ 1,998 $ 1,996
Allocated interest expense (1)......................................... 9,271 13,897 12,514
------- ------- -------
Net interest expense.................................................... (7,401) (11,899) (10,518)
Provision for loan losses............................................... - - -
------- ------- -------
Net interest income after provision for loan losses..................... (7,401) (11,899) (10,518)
------- ------- -------
Loan and lease servicing fee income .................................... 301 723 1,440
Rental income on operating leases, net................................. 7,730 9,214 13,569
Other income........................................................... 14 42 46
------- ------- -------
8,045 9,979 15,055
Other operating expenses............................................. 2,066 1,987 1,832
(Loss) income before taxes............................................. (1,422) (3,907) 2,705
Charges against the reserve for discontinued operations................ 1,422
Income tax provision (benefit) ....................................... - (1,515) 1,082
------- ------- -------
(Loss) income from discontinued operations............................. $ - $(2,392) $ 1,623
(Loss) on wind down of discontinued operations......................... (2,026) (2,211) -
------- ------- -------
$(2,026) $(4,603) $ 1,623
======= ======= =======
(1) Allocated interest expense was based on the Company's annual average
wholesale borrowings rate which approximated a marginal funding cost of
this business segment and was 5.65%, 6.28% and 5.65% for the years 2001,
2000 and 1999, respectively. Beginning in December 2001, the allocated
interest expenses is based on a direct matched-maturity funding of the net
non-cash assets of discontinued operations.
-64-
3. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------ ----------- ------
(In Thousands)
Available-for-sale securities:
December 31, 2001:
Corporate bonds............................... $ 1,805 $ 1 $ 8 $ 1,798
-------- ------ ------ -------
$ 1,805 $ 1 $ 8 $ 1,798
======== ====== ====== =======
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
======== ====== ====== =======
Held-to-maturity:
December 31, 2001:
Corporate bonds............................... $ 1,372 $ 6 $ 20 $ 1,358
State and political subdivisions.............. 11,024 631 211 11,444
-------- ------ ------ -------
$ 12,396 $ 637 $ 231 $12,802
======== ====== ====== =======
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
======== ====== ====== =======
Securities with book values aggregating $11.5 million at December 31,
2001 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 $211,000 and
$457,000 at December 31, 2001 and 2000, 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, 2001 were as follows :
Held-to-Maturity Available-for-Sale
------------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------- ------------ -------
(In Thousands)
Within one year ....................................... $ 62 $ 64 $ - $ -
After one year but within five years................... 2,772 2,981 305 306
After five but within ten years........................ 4,401 4,709 1,500 1,492
After ten years........................................ 5,161 5,048 - -
-------- -------- ------- -------
$12,396 $12,802 $ 1,805 $ 1,798
======= ======= ======= =======
-65-
Proceeds from the sale of investment securities available-for-sale
during 2001 were $644,000, with no gain or loss. There were also corporate bonds
called by the issuer totaling $2.5 million, with losses of $5,000 and gains of
$9,000 realized on these calls. Proceeds from the sale of investments during
2000 and 1999 were $36.1 million and $20.0 million, respectively. Net losses of
$49,000 and $9,000 were realized on these sales in 2000 and 1999, respectively.
In addition, in 2000 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. The cost basis for all investment security sales was based on the
specific identification method. There were no sales of securities classified as
held-to-maturity. With the adoption of Statement of Financial Accounting
Standards (SFAS) No. 133 in 2000, $2.0 million of corporate bonds were
reclassified from held-to maturity, to available-for-sale.
4. MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
Available-for-sale securities:
December 31, 2001:
Collateralized mortgage obligations ................. $257,618 $ 3,206 $ 40 $ 260,784
FNMA ................................................ 15,173 103 - 15,276
FHLMC................................................ 15,200 - 61 15,139
GNMA................................................. 230 10 - 240
-------- -------- ------- ---------
$288,221 $ 3,319 $ 101 $ 291,439
======== ======== ======= =========
Weighted average yield............................... 5.47%
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%
Held-to-maturity securities:
December 31, 2001:
Collateralized mortgage obligations.................. $ 31,889 $ 831 $ 80 $ 32,640
FNMA................................................. 18,355 254 - 18,609
FHLMC................................................ 20,041 305 3 20,343
-------- -------- ------- ---------
$ 70,285 $ 1,390 $ 83 $ 71,592
======== ======== ======= =========
Weighted average yield............................... 6.20%
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%
-66-
At December 31, 2001, mortgage-backed securities with book values
aggregating $96.1 million were pledged as collateral for retail customer
repurchase agreements, securities sold under agreements to repurchase and FHLB
borrowings. Accrued interest receivable relating to mortgage-backed securities
was $2.1 million and $2.0 million at December 31, 2001 and 2000, respectively.
Proceeds from the sale of mortgage backed securities available for sale were
$4.1 million in 2001, resulting in a gain of $78,000. There were no sales of
mortgage-backed securities classified as held to maturity, nor transfers between
categories of mortgage-backed securities in 2001. 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
2000. 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, nor
transfers between categories of mortgage-backed securities during 2000 and 1999.
5. LOANS
December 31,
------------------------
2001 2000
--------- ----------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) ........................... $ 403,154 $ 416,863
Other .............................................. 208,924 191,004
Real estate construction loans......................... 56,050 37,203
Commercial loans....................................... 197,799 156,293
Consumer loans......................................... 198,366 175,268
---------- ----------
1,064,293 976,631
Less:
Loans in process ...................................... 8,695 11,723
Unearned income ....................................... 3,370 3,307
Allowance for loan losses ............................. 21,597 21,423
---------- ----------
$1,030,631 $ 940,178
========== ==========
The Corporation had impaired loans of approximately $7.5 million at
December 31, 2001 compared to $8.3 million at December 31, 2000. The average
recorded investment in impaired loans was $8.1 million, $7.6 million and $7.7
million during 2001, 2000 and 1999, respectively. The allowance for losses on
impaired loans was $1.1 million at December 31, 2001, as compared to $1.2
million at December 31, 2000. There was no interest income recognized on
impaired loans.
The total amounts of loans serviced for others were $262.2 million,
$250.8 million and $236.4 million at December 31, 2001, 2000 and 1999,
respectively.
Accrued interest receivable on loans outstanding was $5.0 million, $5.9
million and $4.9 million at December 31, 2001, 2000 and 1999, respectively.
Nonaccruing loans aggregated $7.5, $8.3 and $7.4 million at December
31, 2001, 2000 and 1999, respectively. If interest on all such loans had been
recorded in accordance with contractual terms, net interest income would have
increased by $939,000 in 2001, $966,000 in 2000 and $591,000 in 1999.
-67-
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
---------------------------------
2001 2000 1999
-------- ------- --------
(In Thousands)
Beginning balance .............................................................. $21,423 $22,223 $22,732
Balance at acquisition of credit card portfolio ........................... - 175 -
Provision for loan losses.................................................. 2,212 894 1,004
Loans charged-off ......................................................... (2,332) (2,509) (2,021)
Recoveries................................................................. 294 640 508
------- ------- -------
Ending balance ................................................................. $21,597 $21,423 $22,223
======= ======= =======
6. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31,
----------------------
2001 2000
---- ----
(In Thousands)
Real estate ........................................................ $ 685 $ 903
Less allowance for losses........................................... 253 273
------- -------
$ 432 $ 630
======== ========
A summary of changes in the allowance for foreclosed assets follows:
Year Ended December 31,
---------------------------------
2001 2000 1999
-------- ------- --------
(In Thousands)
Beginning balance.............................................................. $ 273 $ 329 $ 390
Net charge-offs ............................................................. 20 56 61
-------- -------- --------
Ending balance ................................................................ $ 253 $ 273 $ 329
======== ======== ========
-68-
7. PREMISES AND EQUIPMENT
December 31,
----------------------
2001 2000
---- ----
(In Thousands)
Land ......................................................... $ 1,086 $ 1,086
Buildings .................................................... 8,342 6,580
Leasehold improvements ....................................... 6,804 7,180
Furniture and equipment ...................................... 21,779 18,313
Renovations-in-process........................................ 549 1,946
-------- -------
38,560 35,105
Less:
Accumulated depreciation ..................................... 22,122 18,317
-------- -------
$16,438 $16,788
======= =======
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 $3.2 million in 2001, $2.2 million in
2000, and $1.5 million in 1999. Future minimum payments under these leases at
December 31, 2001 are as follows:
(In Thousands)
2002 ............................................ $ 2,627
2003 ............................................ 2,387
2004 ............................................ 1,871
2005 ............................................ 1,154
2006 ............................................ 700
Thereafter ....................................... 2,858
-------
Total future minimum lease payments ..... $11,597
=======
-69-
8. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more which aggregated $58.9 million and $49.7 million at December
31, 2001 and 2000, respectively.
The following is a summary of deposits by category, including a summary
of the remaining time to maturity for time deposits:
December 31,
-----------------------------
2001 2000
-------- --------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ........................................ $ 171,801 $ 139,128
Money market and interest-bearing demand .......................... 327,635 244,120
---------- ----------
Total money market and demand .................................. 499,436 383,248
---------- ----------
Savings .............................................................. 313,246 289,382
---------- ----------
Retail certificates of deposits by maturity:
Less than one year ................................................ 222,603 209,035
One year to two years ............................................. 55,310 55,532
Two years to three years .......................................... 16,611 10,832
Three years to four years.......................................... 4,504 2,862
Four years to five years........................................... 2,805 2,882
Over five years.................................................... 1,226 1,696
---------- ----------
Total retail time certificates ................................. 303,059 282,839
---------- ----------
Jumbo certificates of deposit-retail, by maturity:
Less than one year................................................. 9,391 5,253
One year to two years.............................................. 102 358
Two years to three years........................................... - -
Three years to four years.......................................... - -
Four years to five years........................................... 202 -
Over five years.................................................... - -
---------- ----------
Total jumbo certificates of deposit-retail....................... 9,695 5,611
---------- ----------
Sub-Total Retail Deposits.............................................. 1,125,436 961,080
---------- ----------
Jumbo certificates of deposit-other, by maturity:
Less than one year ................................................ 10,709 12,469
One year to two years ............................................. 1,425 536
Two years to three years .......................................... 100 314
Three years to four years.......................................... 100 100
Four years to five years........................................... - -
---------- ----------
Total jumbo time certificates .................................. 12,334 13,419
---------- ----------
Brokered certificates of deposit by maturity:
Less than one year ................................................ 8,347 138,726
One year to two years ............................................. - 8,366
---------- ----------
Total brokered time certificates ............................... 8,347 147,092
---------- ----------
Total deposits ........................................................ $1,146,117 $1,121,591
========== ==========
-70-
Interest expense by category follows:
Year Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
Money market and interest-bearing demand .............................. $ 8,171 $ 6,186 $ 1,495
Savings ............................................................... 7,543 10,764 7,471
Retail time deposits................................................... 14,980 13,687 14,151
Jumbo certificates of deposits-retail.................................. 428 189 -
--------- --------- --------
Total retail interest expense 31,122 30,826 23,117
--------- --------- --------
Jumbo certificates of deposit-other ................................... 1,106 1,524 3,287
Brokered certificates of deposit ...................................... 2,924 10,541 6,738
--------- --------- --------
Total interest expense on deposits $ 35,152 $ 42,891 $ 33,142
========= ========= ========
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)
2001
----
FHLB advances............................................ $520,000 4.58% $520,000 $396,542 5.64%
Trust preferred borrowings............................... 50,000 5.60 50,000 50,000 6.64
Federal funds purchased and securities
sold under agreements to repurchase ................... 45,000 4.87 73,900 69,945 6.46
Other borrowed funds .................................... 30,480 1.40 37,193 27,321 3.06
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
-71-
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 2.09% to 5.37% at December 31, 2001 are due as follows:
Weighted
Average
Amount Rate
------ --------
(Dollars in Thousands)
2002.................................. $ 140,000 3.45%
2003.................................. 120,000 4.42
2004.................................. 90,000 4.78
2005.................................. 15,000 5.01
----------
$ 365,000
==========
Also outstanding at December 31, 2001 are five advances, totaling
$155.0 million, with a weighted average rate of 5.56% 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 five 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, 2001, of $28.8 million.
-72-
Trust Preferred Borrowings
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 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 benefits from reduced long-term financing costs and the flexibility
of additional Bank regulatory capital.
At the same time, the Corporation also entered into an agreement to
limit the interest rate exposure in the trust preferred securities by purchasing
an interest rate cap, which provides a ceiling on 3-month LIBOR of 6.00% for the
first ten years (expires November 2008). This will limit the interest rate
coupon (or cash paid) on the Trust Preferred securities to no more than 8.50%
through the first ten years. The cost of this interest rate cap was $2.4
million, which, prior to the adoption of SFAS 133, was to be amortized 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
accounting rate of the Trust Preferred securities including amortization of
transactional costs and certain changes in value of the cap was 5.60% and 9.52%
at December 31, 2001 and 2000, respectively. The Corporation received payments
from the cap of $92,000 and $220,000 in 2001 and 2000, respectively.
Securities Sold Under Agreements to Repurchase
During 2001, WSFS sold securities under agreements to repurchase as a
short-term funding source. At December 31, 2001, securities sold under
agreements to repurchase had fixed rates ranging from 2.51% to 6.76%. The
underlying securities are mortgage-backed securities with book and market values
aggregating $52.6 million and $53.7 million, respectively, at December 31, 2001.
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)
2001
- ----
Up to 30 days.................... $ 20,000 2.51% $ 20,823 $ 21,235 $ 108
Over 90 days..................... 25,000 6.76 31,786 32,422 176
--------- ----- --------- --------- -------
$ 45,000 4.87% $ 52,609 $ 53,657 $ 284
========= ===== ========= ========= =======
2000
- ----
Over 90 days..................... $ 69,300 6.66% $ 74,070 $ 73,458 $ 405
--------- ----- --------- --------- -------
$ 69,300 6.66% $ 74,070 $ 73,458 $ 405
========= ===== ========= ========= =======
-73-
Other Borrowed Funds
Included in other borrowed funds are collateralized borrowings of $30.2
million and $22.9 million at December 31, 2001 and 2000, 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 rates on
these borrowings were 1.25% and 4.10% at December 31, 2001 and 2000,
respectively. Also included in other borrowed funds are capital leases totaling
$287,000 and $412,000 at December 31, 2001 and 2000, respectively. The average
rates on these capital leases was 16.83% and 16.53% at December 31, 2001 and
2000, 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, 2001 and 2000 WSFS was in compliance with
regulatory capital requirements and was deemed a "well-capitalized" institution.
-74-
The following table presents WSFS' consolidated capital position as of
December 31, 2001 and 2000:
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, 2001:
Total Capital (to risk-weighted assets) ...... $151,356 11.98% $101,074 8.00% $ 126,343 10.00%
Core Capital (to adjusted tangible assets) ... 141,229 7.37 76,680 4.00 95,850 5.00
Tangible Capital (to tangible assets)......... 141,229 7.37 28,755 1.50 N/A N/A
Tier 1 Capital (to risk-weighted assets) ..... 141,229 11.18 N/A N/A 75,806 6.00
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
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 7,580,000 shares of $0.01 par preferred
stock. No preferred stock was outstanding at December 31, 2001 and 2000. 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 six separate stock repurchase programs to reacquire
common shares. As part of these programs, the Corporation acquired approximately
1.1 million shares in both 2000 and 2001. At December 31, 2001, the Corporation
held 5.7 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. 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, 2001, the coupon rate
on these securities was 4.13% 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 5.60%
at December 31, 2001. The effective rate will vary, however, due to fluctuations
in interest rates and the time value of the interest rate cap. See Note 20 for
further discussion of the time value of the interest rate cap. 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. See Notes 9 and 20 of the Financial Statements for additional
information. The proceeds were used primarily to extinguish higher rate debt and
for general corporate purposes.
Pursuant to federal laws and regulations, WSFS' ability to engage in
transactions with affiliated corporations is limited, and WSFS generally may not
lend funds to nor guarantee indebtedness of the Corporation.
-75-
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 $892,000, $848,000, and
$670,000 for 2001, 2000, and 1999, respectively. The plan purchased 91,000,
105,000, and 75,000 shares of common stock of the Corporation during 2001, 2000,
and 1999, respectively.
Various other Company contributions are made in the form of the
Corporation's common stock which employees may transfer to various other
investment opportunities without any significant restrictions.
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. Disclosures are in accordance with
SFAS No.132, "Employer's Disclosure About Pensions and Other Post Retirement
Benefits" which standardized the applicable disclosure requirements.
-76-
The following disclosures are in accordance with SFAS No. 132 (dollars in
thousands):
2001 2000 1999
---- ---- ----
Change in Benefit Obligation:
Benefit obligation at beginning of year......................................... $ 1,086 $ 1,058 $ 1,428
Service Cost.................................................................... 37 36 43
Interest cost................................................................... 78 74 93
Actuarial loss (gain)........................................................... 364 47 (404)
Benefits paid .................................................................. (135) (129) (102)
------- ------- -------
Benefit obligation at end of year............................................... $ 1,430 $ 1,086 $ 1,058
======= ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year.................................. $ - $ - $ -
Employer contributions ......................................................... 135 129 102
Benefits paid .................................................................. (135) (129) (102)
------- ------- -------
Fair value of plan assets at end of year.................................. $ - $ - $ -
======= ======= =======
Funded Status:
Funded status................................................................... $(1,430) $(1,086) $(1,058)
Unrecognized transition obligation.............................................. 675 736 797
Unrecognized net loss (gain) ................................................... 109 (263) (332)
------- ------- -------
Net amount recognized..................................................... $ (646) $ (613) $ (593)
======= ======= =======
2001 2000 1999
---- ---- ----
Components of net periodic benefit cost:
Service cost.................................................................... $ 37 $ 36 $ 43
Interest cost................................................................... 78 74 93
Amortization of transition obligation .......................................... 61 61 61
Amortization of net gain........................................................ (8) (21) -
------- ------- -------
Net periodic benefit cost................................................. $ 168 $ 150 $ 197
======= ======= =======
Sensitivity analysis:
Effect of +1% on service cost plus interest cost................................ $ - $ - $ 2
Effect of -1% on service cost plus interest cost................................ - - -
Effect of +1% on APBO........................................................... 5 2 1
Effect of -1% on APBO........................................................... (2) (1) (1)
2001 2000 1999
---- ---- ----
Assumptions used to value the Accumulated Postretirement Benefit Obligation
(APBO):
Discount rate............................................................ 7.25% 7.50% 7.50%
Health care cost trend rate.............................................. 6.50% 7.00% 7.50%
The Corporation assumes that the average annual rate of increase for
medical benefits will decrease by one-half of 1% per year and stabilizes in the
year 2005, and thereafter, at an average increase of 5% per annum. The costs
incurred for retirees' health care are limited since certain current and all
future retirees are restricted to an annual medical premium cap indexed since
1995 by the lesser of 4% or the actual increase in medical premiums paid by the
Corporation. For 2001 this annual premium cap amounted to $1,823 per retiree.
-77-
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 consists
of the following:
Year Ended December 31,
-------------------------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
From Current Operations:
Current income taxes:
Federal taxes .................................................... $ 5,928 $ 8,451 $ (214)
State and local taxes............................................. 1,039 541 537
Deferred income taxes:
Federal taxes .................................................... 2,494 (2,406) (202)
State and local taxes ............................................ - - -
------- ------- -------
Subtotal ................................................... $ 9,461 $ 6,586 $ 121
From Discontinued Operations:
Current income taxes:
Federal taxes.......................................................... $ 3,734 $(3,475) $ 947
State and local taxes............................................. 174 202 135
Deferred income taxes:
Federal taxes .................................................... (6,307) (2,159) -
State and local taxes ............................................ 1,308 (41) -
------- ------- -------
Subtotal ................................................... $(1,091) $(5,473) $ 1,082
Current taxes from adoption of accounting priciple:
Federal taxes on FAS 133 adoption................................. - (837) -
------- ------- -------
$ 8,370 $ 276 $ 1,203
======= ======= =======
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 $3.9 million at December 31,
2001. Adjustments to the valuation allowance were made in 2001 based on the
realization of certain state net operating loss tax benefits relating to the
discontinuance of the leasing company. The adjustments in 2000 were primarily
the result of the lapsing of uncertainties associated with the Companies ability
to realize certain tax benefits related to the acquisition of Providential.
-78-
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, 2001 and 2000:
2001 2000
---------- ---------- -
(In Thousands)
Deferred tax liabilities:
Accelerated depreciation.......................................... $(27,781) $(31,421)
Other............................................................. (28) (28)
Unrealized Losses on available-for-sale securities................ (654) -
-------- --------
Total deferred tax liabilities......................................... (28,463) (31,449)
-------- --------
Deferred tax assets:
Bad debt deductions............................................... 15,290 13,008
Tax credit carryforwards.......................................... 150 1,125
Net operating loss carryforwards.................................. 6,255 7,718
Loan fees......................................................... 123 152
Provisions for losses on reverse mortgages........................ 11,418 12,488
Discontinued Operations............................................. 2,228 2,159
Other............................................................. 1,502 1,065
Unrealized Gains on available-for-sale securities................. - 22
Investments in non-wholly owned subsidiaries...................... 730 1,958
-------- --------
Total deferred tax assets.............................................. 37,696 39,695
-------- --------
Valuation allowance.................................................... (5,306) (6,148)
-------- --------
Net deferred tax asset (liability)..................................... $ 3,927 $ 2,098
======== ========
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 non-wholly owned subsidiaries.
Approximately $17 million in gross deferred tax assets of the
Corporation at December 31, 2001 are related to built-in losses and net
operating losses on reverse mortgages attributable to a former subsidiary.
Management has assessed substantial valuation allowances on these deferred tax
assets due to limitations imposed by the Internal Revenue Code, and
uncertainties including the timing of when these assets are realized.
The Internal Revenue Service (IRS) is examining the Company's U.S.
income tax returns for the periods ended December 31,1995 through 1999.
Management does not expect the outcome of this examination to have a material
impact on the financial statements of the Corporation.
-79-
Net operating loss carryforwards (NOLs) of $33.3 million remain at
December 31, 2001. The expiration dates and amounts of such carryforwards are
listed below (in thousands):
NOL's
---------------------------
Federal State
------- ----------
2005.................................... $ 425 $ 6,741
2006.................................... 1,098 -
2007.................................... - 1,723
2008.................................... 6,515 4,745
2009.................................... 6,755 -
2014.................................... - 275
2018.................................... - 4,990
------- --------
$14,793 $ 18,474
======= ========
The Corporation's ability to use its federal NOLs to offset future
income is subject to restrictions enacted in Section 382 of the Internal Revenue
Code. These restrictions limit a company's future use of NOLs if there is a
significant ownership change in a company's stock (referred to herein as an
"Ownership Change"). The utilization of approximately $14.8 million of federal
net operating loss carryforwards is limited to approximately $1.3 million each
year as a result of such ownership change in a former subsidiary's stock.
A reconciliation setting forth the differences between the effective
tax rate of the Corporation and the U.S. Federal Statutory tax rate is as
follows:
Year Ended December 31,
---------------------------------------
2001 2000 1999
---- ---- ----
Statutory federal income tax rate ...................... 35.0% 35.0% 35.0%
State tax net of federal tax benefit.................... 5.0 12.8 2.2
Interest income 50% excludable.......................... (2.9) (6.7) (3.8)
Utilization of loss carryforwards and
valuation allowance adjustments..................... (3.3) (33.6) (28.2)
Other................................................... (.9) (5.0) 0.8
----- ------ ------
Effective tax rate ..................................... 32.9% 2.5% 6.0%
===== ====== ======
-80-
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. The number of shares reserved for issuance under
the 1997 Plan is 1,165,000. At December 31, 2001 there were 183,975 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
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 in 1999. There were no
SAR's outstanding at December 31, 2001, 2000 and 1999.
A summary of the status of the Corporation's Option Plans as of
December 31, 2001, 2000 and 1999, and changes during the years then ended is
presented below:
2001 2000 1999
-------------------------- ------------------------ -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------- ---------------
Stock Options:
- -------------
Outstanding at beginning of year 826,345 $ 13.85 530,055 $ 14.88 333,655 $ 11.55
Granted 196,500 16.51 372,700 12.30 298,225 14.75
Exercised (9,360) 9.44 (15,890) 6.53 (101,825) 3.59
Canceled (11,880) 13.41 (60,520) 15.09 - -
---------- -------- ---------
Outstanding at end of year 1,001,605 14.42 826,345 $ 13.84 530,055 $ 14.88
Exercisable at end of year 312,589 14.52 156,484 82,830
Weighted-average fair value
of awards granted $5.73 $ 4.69 $ 6.15
SARs:
- -----
Outstanding at beginning of year - $ - - $ - 97,510 $ 1.65
Granted - - - - - -
Exercised - - - - (97,510) 1.65
Canceled - - - - - -
---------- -------- ---------
Outstanding at end of year - - - - - -
Exercisable at end of year - - - - - -
-81-
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 4.4% in 2001, 6.0% in
2000, and 5.6% in 1999; expected option life of 6 years for all awards; and
expected stock price volatility of 24% in 2001, and 35% for both 2000, and 1999
awards. For the purposes of this option pricing model 1% was used as the
dividend yield. The Black-Scholes and other option pricing models assume that
the options are freely tradable and immediately vested. Since executives options
are not transferable and have long vesting provisions, the value calculated by
the Black-Scholes model may overstate the true economic value of the options.
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 both
2001 and 2000 and $821,000 in 1999 related to its Option Plans. As a result,
proforma net income from continuing operations for the Corporation would have
been $18.3 million in 2001, $14.7 million in 2000, and $17.5 million in 1999.
Proforma diluted earnings per share from continuing operations would have been
$1.88 in 2001, $1.37 in 2000 and $1.53 in 1999.
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, 2001, 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-$11.29 213,220 $10.61 8.3 years 66,980 $10.19
$11.29-$13.17 98,800 12.00 8.2 years 22,140 12.02
$13.17-$15.05 393,645 14.78 7.8 years 133,069 14.76
$15.05-$16.93 15,600 16.45 8.7 years 2,100 16.01
$16.93-$18.81 280,340 17.56 8.2 years 88,300 18.03
--------- ------ --------- ------- ------
Total 1,001,605 $14.42 8.1 years 312,589 $14.52
========= =======
-82-
14. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 2001, the Corporation had commitments to extend credit
of $179.4 million. Consumer lines of credit totaled $65.0 million of which $56.2
million was secured by real estate. Outstanding letters of credit were $4.1
million and outstanding commitments to make or acquire mortgage loans aggregated
$27.0 million of which approximately $17.5 million were at fixed rates ranging
from 6.125% to 8.125%, and approximately $9.5 million were at variable rates
ranging from 4.125% to 6.875%. All mortgage commitments are expected to have
closing dates within a six month period.
Computer Operations
In February 1997, the Bank entered into a five-year contract with
ALLTEL, the Company that has been managing data processing operations since
1988. 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 Intergraph Corporation. In 2001 the Company
extended the contract through October 2002. The revised projected amount of
future minimum payments contractually due is as follows:
2002 $2,397,000
The Company is currently negotiating a contract with Metavante
Corporation to provide data processing and data processing services.
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 is as follows:
2002...................... $1,234,000
2003...................... 1,280,000
2004...................... 1,332,000
2005...................... 1,094,000
Legal Proceedings
In the ordinary course of business, the Corporation, Bank and its
subsidiaries are subject to legal actions which involve claims for monetary
relief. Based upon information presently available to management and its
counsel, it is management's opinion that any legal and financial responsibility
arising from such claims will not have a material adverse effect on the
Corporation's results of operations.
The Bank, as successor to Providential, a reverse mortgage lending
company purchased by WSFS in November 1994, may from time-to-time be involved in
arbitration or litigation with the borrowers or with the heirs of borrowers.
Certain disputes may delay or impair the Bank's ability to liquidate its
collateral promptly after maturity of a reverse mortgage loan. Because reverse
mortgages are a relatively new and uncommon product, there can be no assurances
regarding how the courts or arbitrators may apply existing legal principles to
the interpretation and enforcement of the terms and conditions of the Bank's
reverse mortgage loans.
-83-
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,
--------------------------
2001 2000
-------- -------
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments ........................................... $38,334 $32,207
Commercial mortgage loan commitments .................................... 3,511 6,425
Commercial loan commitments ............................................. 41,554 39,057
Commercial standby letters of credit .................................... 4,052 2,829
Residential mortgage loan commitments ................................... 27,033 10,104
Consumer lines of credit ................................................ 64,963 66,211
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.
-84-
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 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 an original 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 estimated discounted net cash flows.
The discount rate utilized in determining such fair value was 20% for 2001 and
2000.
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 a standard
sophisticated option model and quoted prices for similar instruments.
Short-Term Foreign Exchange Contracts: The Fair value is estimated
using quoted prices for similar currency contracts.
Deposit Liabilities: The fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, money market and
interest-bearing demand deposits and savings deposits, is 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.
-85-
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,
--------------------------------------------------------
2001 2000
------------------------ ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- ------- ------
(In Thousands)
Financial assets:
Cash and short-term investments................. $ 198,952 $ 198,952 $ 98,667 $ 98,667
Investment securities........................... 14,194 14,600 29,740 29,932
Mortgage-backed securities...................... 361,724 363,031 339,718 338,659
Investment in reverse mortgages................. 33,939 37,940 33,683 36,650
Loans, net...................................... 1,115,372 1,133,354 963,491 976,125
Interest rate cap............................... 2,534 2,534 1,997 1,997
Short-term forward foreign exchange contracts... (395) (395) 1,385 1,385
Financial liabilities:
Deposits........................................ 1,146,117 1,148,960 1,121,591 1,122,754
Borrowed funds.................................. 645,480 644,222 493,638 481,282
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows:
December 31,
2001 2000
---- -----
(In Thousands)
Off-balance sheet instruments:
Commitments to extend credit............................... $1,104 $ 878
Standby letters of credit.................................. 41 28
-86-
16. INVESTMENT IN AND ACQUISITION OF REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Since reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence, and the
mortgage balance consists of cash advanced, interest compounded over the life of
the loan and a premium which represents a portion of the shared appreciation in
the home's value, if any, or a percentage of the value of the residence.
The Corporation accounts for its investment in reverse mortgages in
accordance with the instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages; the effective yield of each pool is recomputed, and income is
adjusted retroactively and prospectively to reflect the revised rate of return.
Accordingly, because of this market-value based accounting, the recorded value
of reverse mortgage assets include significant risk associated with estimations,
and income can vary significantly from reporting period to reporting period.
In 1993, the Corporation acquired a pool of reverse mortgages (the
"1993 Pool") from the FDIC and another lender. The Corporation's investment in
the 1993 pool of reverse mortgages totaled $14.6 million and $16.5 million at
December 31, 2001 and December 31, 2000, respectively. Of the 281 loans that
comprise the 1993 Pool at December 31, 2001, 228 loans, or 81%, are located in
Delaware, New Jersey, Pennsylvania and Maryland.
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 1996 the management and operations of
Providential were merged into WSFS. The carrying value of the 1994 pool reverse
mortgages was $19.4 million and $17.2 million at December 31, 2001 and December
31, 2000, respectively. Of the 475 loans that comprise the 1994 pool at December
31, 2001, all are located in California.
-87-
At December 31, 2001, 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:
- ------------
2002.................................................................. $ 8,058 $ 2,682 $ 10,740
2003.................................................................. 6,594 2,042 8,636
2004.................................................................. 6,463 1,980 8,443
2005.................................................................. 6,298 1,901 8,199
2006.................................................................. 6,089 1,808 7,897
2007-2011............................................................. 26,262 7,259 33,521
2012-2016............................................................. 17,731 4,131 21,862
2017-2021............................................................. 9,384 1,786 11,170
Thereafter............................................................ 5,123 707 5,830
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 2001 are as follows for each pool:
1994 1993
Pool Pool
---- ----
Year ended December 31, 2002.................................. -1% -1%
Year ended December 31, 2003.................................. 1% 0%
Thereafter.................................................... 1% 0%
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 carrying value. As such, the
value of the Company's reverse mortgage portfolio can vary significantly from
period to period.
The changes in collateral values and actuarial assumptions resulted in
an effective yield of approximately 43.06% at December 31, 2001 on the 1994 Pool
and increased income by $2.1 million during 2001 over the anticipated effective
yield at January 1, 2001. Included in this increase was a cumulative positive
catch-up adjustment of $1.2 million. The effective yield on the 1993 Pool was
6.83% at December 31, 2001, reflecting a $494,000 increase in income over the
anticipated effective yield at January 1, 2001, which includes a cumulative
catch-up adjustment of $457,000.
Weighted average expected yield implied by the cash flow model for both
pools as of end of the year is 25.0% on $33.9 million in balances at December
31, 2001. Because funding costs and cost to service this portfolio are both
relatively small and stable, any change in reverse mortgage revenue has a
significant effect on pretax income of the Corporation.
-88-
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, 2001):
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................................ 43.01% 42.72% 6.90% 6.47%
Effect on income of reverse mortgages.......... $(281) $ (871) $ 184 $ (886)
The cumulative catch-up adjustments included in the above reductions in
income are $191,000 and $578,000, respectively, at January 1, 2001 for the 1994
Pool. The cumulative catch-up adjustments included in the increase in income for
no future changes in collateral value is $161,000 and the decrease in income for
the 1% annual reduction is $778,000 at January 1, 2001 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 2001: 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 operations of WCC, which provided auto loans
and leases indirectly through unrelated auto dealerships within the Mid-Atlantic
region, was discontinued in 2000 and therefore is no longer defined as a
business segment.
The WSFS segment provides financial products within its geographical
footprint through its branch network to consumer and commercial customers. WSFS
has a 28% interest in C1FN however, 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, 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 mortgage
banking. WNF conducts activity on a national level and 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, 2001, 2000 and 1999 follow:
-89-
For the year ended December 31, 2001:
WSFS C1FN WNF Total
---- ---- --- -------
(In Thousands)
External customer revenues:
Interest income....................... $ 102,298 $ 14,427 $ 3,749 $ 120,474
Other income ......................... 21,215 3,225 19,691 44,131
---------- -------- -------- ----------
Total external customer revenues ......... 123,513 17,652 23,440 164,605
---------- -------- -------- ----------
Intersegment revenues:
Interest income....................... 1,999 - 62 2,061
Other income ......................... (633) - 1,113 480
---------- -------- -------- ----------
Total intersegment revenues .............. 1,366 - 1,175 2,541
---------- -------- -------- ----------
Total revenue............................. 124,879 17,652 24,615 167,146
---------- -------- -------- ----------
External customer expenses:
Interest expense...................... 48,772 9,412 - 58,184
Other expenses ....................... 47,555 10,560 15,902 74,017
Other depreciation and
amortization ....................... 3,234 439 350 4,023
---------- -------- -------- ----------
Total external customer expenses ......... 99,561 20,411 16,252 136,224
---------- -------- -------- ----------
Intersegment expenses:
Interest expense...................... 62 - 1,999 2,061
Other expenses ....................... - 480 - 480
---------- -------- -------- ----------
Total intersegment expenses .............. 62 480 1,999 2,541
---------- -------- -------- ----------
Total expenses ........................... 99,623 20,891 18,251 138,765
---------- -------- -------- ----------
Income before taxes and minority
interest.............................. $ 25,256 $ (3,239) $ 6,364 $ 28,381
========== ========== =======
Provision for income taxes ............... 9,461
Income (loss) from discontinued
operations............................ -
Loss on wind-down of discontinued
operations............................ (2,026)
Minority interest ........................ (189)
Cumulative effect of change in
accounting principle.................. -
----------
Consolidated net income .................. $ 17,083
==========
Segment assets .......................... $1,617,250 $ 296,058 $ 84,271 $1,997,579
Elimination of intersegment receivables.. (84,681)
----------
Consolidated assets ..................... $1,912,898
==========
Segment liabilities ..................... $1,519,179 $ 288,807 $ 79,420 $1,887,406
Elimination of intersegment liabilities.. (80,312)
----------
Consolidated liabilities ................ $1,807,094
==========
Capital expenditures...................... $ 1,534 $ 563 $ 763 $ 2,860
-90-
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
==========
Segment liabilities ..................... $1,454,486 $ 184,124 $ 24,256 $1,662,866
Elimination of intersegment liabilities.. (26,572)
----------
Consolidated liabilities ................ $1,636,294
==========
Capital expenditures...................... $ 4,059 $ 587 $ 847 $ 5,493
-91-
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
===========
Segment liabilities ...................... $1,642,753 $ 9,339 $ 242 $ 1,652,334
Elimination of intersegment liabilities... (2,556)
-----------
Consolidated liabilities ................. $ 1,649,778
===========
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.
-92-
18. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
---------------------------------
2001 2000
--------- --------
(In Thousands)
Assets:
Cash ...................................................................... $ 5,869 $ 2,519
Investment in the subsidiaries ............................................ 139,149 140,116
Investment in interest rate cap ........................................... 2,534 1,997
Investment in capital trust................................................ 1,547 1,547
Other assets............................................................... 1,177 1,449
--------- ---------
Total assets ................................................................... $ 150,276 $ 147,628
========= =========
Liabilities:
Borrowings................................................................. $ 50,000 $ 50,000
Interest payable........................................................... 203 409
Other liabilities.......................................................... 70 73
--------- ---------
Total liabilities.......................................................... 50,273 50,482
--------- ---------
Stockholders' equity:
Common stock .............................................................. 148 148
Capital in excess of par value ............................................ 59,079 58,985
Comprehensive income....................................................... 3,146 197
Retained earnings ......................................................... 107,950 92,409
Treasury stock ............................................................ (70,320) (54,593)
--------- ---------
Total stockholders' equity ................................................ 100,003 97,146
--------- ---------
Total liabilities and stockholders' equity...................................... $ 150,276 $ 147,628
========= =========
Condensed Statement of Operations
Year Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- -------
(In Thousands)
Income:
Interest income ........................................................... $ 362 $ 359 $ 876
Other income............................................................... 187 234 93
-------- -------- --------
549 593 969
-------- -------- --------
Expenses:
Interest expense........................................................... 3,421 4,787 4,284
Other operating expenses................................................... (1,111) (1,408) (1,116)
-------- -------- --------
2,310 3,379 3,168
-------- -------- --------
Loss before equity in undistributed income of WSFS.............................. (1,761) (2,786) (2,199)
Equity in undistributed income of WSFS ......................................... 18,844 13,805 21,908
-------- -------- --------
Net income ..................................................................... $ 17,083 $ 11,019 $ 19,709
======== ======== ========
-93-
Condensed Statement of Cash Flows
Year Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- -------
(In Thousands)
Operating activities:
Net income ................................................................ $ 17,083 $ 11,019 $ 19,709
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of WSFS .................................... (18,844) (13,805) (21,908)
Amortization .............................................................. (93) 373 286
(Increase) decrease in other assets........................................ (169) (20) 487
Decrease in other liabilities.............................................. (209) (547) (706)
-------- -------- --------
Net cash used for operating activities ......................................... (2,232) (2,980) (2,132)
-------- -------- --------
Investing activities:
Decrease in investment in WSFS............................................. 22,500 12,374 -
-------- -------- --------
Net cash provided by investing activities....................................... 22,500 12,374 -
-------- -------- --------
Financing activities:
Issuance of common stock .................................................. 94 103 389
Unrealized gains in intrinsic value of interest rate cap .................. 257 125 -
Dividends paid on common stock ............................................ (1,542) (1,610) (1,366)
Treasury stock, net of reissuance ......................................... (15,727) (12,678) (4,931)
-------- -------- --------
Net cash (used for) financing activities ....................................... (16,918) (14,060) (5,908)
-------- -------- --------
Increase (decrease) in cash .................................................... 3,350 (4,666) (8,040)
Cash at beginning of period .................................................... 2,519 7,185 15,225
-------- -------- --------
Cash at end of period .......................................................... $ 5,869 $ 2,519 $ 7,185
======== ======== ========
19. INVESTMENTS IN NONWHOLLY-OWNED SUBSIDIARIES
The Corporation consolidates two non-wholly owned subsidiaries,
CustomerOne Financial Network, Inc. (C1FN) and Wilmington National Finance, Inc.
(WNF).
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999 WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. WSFS originally invested $5.5 million, which had a book
value of $2.4 million at December 31, 2001 including approximately $1 million in
goodwill. WSFS currently has a 28% interest in C1FN, and warrants to acquire
additional ownership under certain circumstances, but exercises majority control
through a voting trust. Therefore, the results of C1FN are and will continue to
be consolidated into WSFS until Everbank obtains a separate banking charter or
is otherwise disposed. C1FN paid a management fee to WSFS of $480,000 in 2001
and $327,000 in 2000 which is partially eliminated in consolidation. C1FN had
total assets of $296.1 million at December 31, 2001 and $192.6 million at
December 31, 2000. Net losses, after minority interest were $558,000 and $1.5
million for the years ended December 31, 2001 and 2000, respectively.
Under the terms of its agreement with WSFS, C1FN has the right to
acquire the deposits and business of Everbank if C1FN obtains its own depository
institution charter. C1FN has submitted an application to the Office of Thrift
Supervision (OTS) for a separate thrift charter for Everbank and is in
discussions with potential strategic partners for the purpose of raising the
capital required to support an independent thrift institution.
-94-
In 2002, the Services Agreement between WSFS and C1FN to run the
Everbank division will expire. The impact on WSFS of the expiration of the
arrangement will depend on the outcome of several possible strategies: if C1FN
receives approval from the OTS for a separate charter and raises the required
capital, WSFS' investment in C1FN would likely be preserved or possibly
enhanced; if C1FN is unable to obtain a separate charter, WSFS and C1FN would
likely pursue a sale of the division and preservation or enhancement of WSFS'
interest would depend on sale price; if WSFS and C1FN are unable sell the
division, other possibilities would be considered including the write-off of
WSFS' investment in C1FN. In this last case, other costs may result. The
ultimate strategy and degree of success can not be determined at this time, but
will likely be known by the end of 2002. Management is aggressively pursuing a
separate charter.
C1FN/Everbank is currently a relatively low margin business. If
C1FN/Everbank is spun-off or sold, the Corporation would likely experience an
improvement in performance ratios such as the efficiency ratio, net interest
margin and the return on average assets and equity, as well as capital ratios.
WNF is a 51% owned subsidiary and began operations in December 1999. In
addition, WSFS holds warrants to purchase an additional 14% ownership. WNF is a
nonconforming mortgage banker generally dealing in higher grade subprime loans.
WNF solicits and originates its loans primarily as a result of referrals through
independent mortgage brokers, although direct-to-consumer originations accounted
for 6.8% and 14.4% of total originations for the years ended December 31, 2001
and 2000, respectively. WNF originates all loans and sells its originations to
investors, typically well known regional banks or national finance companies, on
a whole loan, servicing-released basis for cash premiums only (no
securitizations). Mortgage loans are sold with very limited recourse beyond the
standard representations and warranties.
As of December 31, 2001, the WNF's wholesale channel consisted of seven
regional sales offices located throughout the continental United States. These
offices are located in Plymouth Meeting, PA, North Kingston, RI, Charlotte, NC,
Atlanta, GA, Naperville, IL, Livermore, CA and Las Vegas, NV. The offices in
Atlanta, Charlotte and Las Vegas were opened during the second half of 2001.
Management expects an additional office or two may be opened in 2002 depending
on the business climate and the ability to recruit quality, experienced office
managers. The regional offices obtain business by establishing relationships
with, and soliciting mortgage applications from, independent mortgage brokers in
their local markets. These mortgage brokers match their applicants with lenders
such as WNF based on the types of products, pricing and the level of service
provided by the lenders. Brokers may be paid for their services by either the
borrower or by the lender, depending on the requirements of the transaction.
WNF has a centralized secondary marketing function which analyzes the
product offerings of the various end investors, consolidates the investors'
underwriting guidelines into the product parameters that WNF offers to its
brokers and ultimately sells WNF's originations to the end investors. Between
the time loans are originated and sold, they are warehoused on WNF's balance
sheet. WSFS provides temporary financing for the loans through a warehouse line
of credit with an adjustable rate based on the One-Month FHLB Advance rate + 90
basis points. This line is limited to $135 million but could increase to $150
million on a temporary basis. At December 31, 2001, $75.2 million was
outstanding on this line. For each of the years ended December 31, 2001 and
2000, loans remained in the warehouse for an average of 29 days before being
sold. The percentage of loans in the warehouse that were 45 days old or greater
were 2% at December 31, 2001 and 14% at December 31, 2000. WNF's total assets at
December 31, 2001 and 2000 were $84.3 million and $24.7 million, respectively.
For the year ended December 31, 2001, WNF added $2.5 million to the net income
of the Corporation compared to a net loss of $1.4 million for the year ended
December 31, 2000. At December 31, 2001, WSFS also held $3.0 million in the
preferred stock of WNF.
-95-
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.
The Corporation's has 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 a
standard sophisticated option model and quoted prices for similar instruments.
Everbank enters into short-term forward exchange contracts to provide
an effective fair value hedge on the foreign currency denominated deposits from
fluctuations that may occur in world currency markets. At December 31, 2001 and
2000, the Company had entered into such contracts with a notional amount of
$60.4 million and $35.5 million, respectively. During the years ended December
31, 2001 and 2000, the expense associated with these hedging contracts was
almost entirely offset by changes in the fair value of the world currency
denominated deposits. There was no material impact on other income.
The following depicts the change in fair market value of the Company's
derivatives:
Carrying Value Carrying Value Carrying Value
at January 1, at December 31, at December 31,
2000 Activity 2000 Activity 2001
-------------- -------- --------------- -------- ---------------
(In Thousands)
Interest rate cap:
Intrinsic Value $ 2,813 $(2,620) $ 193 (1) $ 396 $ 589 (1)
Time Value 2,131 (327) (2) 1,804 141 (2) 1,945
-------- ------- ------- ------- -------
$ 4,944 $(2,947) $ 1,997 $ 537 $ 2,534
======== ======= ======= ======= =======
Foreign Exchange Contracts
Time Value $ - $ 1,385 (3) $ 1,385 $(1,780)(3) $ (395)
======== ======= ======= ======= =======
(1) Included in other comprehensive income, net of taxes.
(2) Included in interest expense on the hedged item (Trust Preferred
borrowings).
(3) Included in other income and offset by corresponding changes in foreign
currency denominated deposits.
-96-
An additional provision of SFAS 133 afforded the opportunity to
reclassify investment securities between held-to-maturity, available-for-sale
and trading at the date of adoption. Accordingly, on January 1, 2000, the
Corporation reclassified $131.0 million in investments and mortgage-backed
securities from held-to-maturity to available-for-sale and recorded an
unrealized loss of $2.4 million net of tax. Of the $131.0 million transferred,
$55.4 million was sold at a loss of $1.3 million, net of tax, during the first
quarter of 2000 (the quarter of adoption). In accordance with SFAS No. 133, this
loss was included in the statement of operations as a cumulative effect of a
change in accounting principle.
-97-
QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/01 9/30/01 6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income............... $28,793 $31,047 $31,016 $29,618 $32,664 $32,302 $30,219 $34,492
Interest expense.............. 12,599 14,997 14,794 15,794 17,303 17,251 15,347 15,826
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .......... 16,194 16,050 16,222 13,824 15,361 15,051 14,872 18,666
Provision for loan losses..... 621 746 452 393 222 227 217 228
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses.. 15,573 15,304 15,770 13,431 15,139 14,824 14,655 18,438
Other income ................. 14,320 11,711 10,050 8,050 5,006 5,982 6,026 1,087
Other operating expenses...... 20,731 18,588 19,702 16,807 16,535 16,222 15,271 13,400
------- ------- ------- ------- ------- ------- ------- -------
Income from operations
before, minority int.,
taxes and accounting
change...................... 9,162 8,427 6,118 4,674 3,610 4,584 5,410 6,125
Minority interest net of tax.. 1,194 117 (753) (747) (868) (780) (856) (1,231)
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes .......... 7,968 8,310 6,871 5,421 4,478 5,364 6,266 7,356
Income tax provision
(benefit)................... 2,788 2,807 2,165 1,701 1,165 1,326 1,999 2,096
------- ------- ------- ------- ------- ------- ------- -------
Income from continued
operations before
accounting change........... 5,180 5,503 4,706 3,720 3,313 4,038 4,267 5,260
Change in accounting
principles, net............ - - - - - - - (1,256)
------- ------- ------- ------- ------- ------- ------- -------
Income from continuing
operations................. 5,180 5,503 4,706 3,720 3,313 4,038 4,267 4,004
(Loss) income from
discontinued operations,
net of tax ................. - - - - (656) 31 (1,901) 134
Loss on wind-down of
discontinued operations.... (2,026) - - - (2,211) - -
------- ------- ------- ------- ------- ------- ------- -------
Net income ................... $ 3,154 $ 5,503 $ 4,706 $ 3,720 $ 446 $ 4,069 $ 2,366 $ 4,138
======= ======= ======= ======== ======= ======= ======= =======
Earnings per share:
Basic:
Income from continued
operations before
accounting change ......... 0.56 0.59 0.48 0.37 $ .32 $ .39 $ .40 $ .47
Change in accounting
principle, net.............. - - - - - - - (0.11)
------- ------- ------- ------- ------- ------- ------- -------
Income from continuing
operations.................. 0.56 0.59 0.48 0.37 0.32 0.39 0.40 0.36
(Loss) income from
discontinued operations,
net of tax.................. - - - - (0.06) - (0.18) 0.01
Loss on wind-down of
discontinued operations..... (0.22) - - - (0.22) - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income.................... $ 0.34 $ 0.59 $ 0.48 $ 0.37 $ 0.04 $ 0.39 $ 0.22 $ 0.37
======= ======= ======= ======== ======= ======= ======= =======
-98-
QUARTERLY FINANCIAL SUMMARY (Unaudited) (continued...)
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/01 9/30/01 6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Income from continuing
operations before
accounting change ......... $ 0.56 $ 0.58 $ 0.48 $ 0.37 $ 0.32 $ 0.39 $ 0.40 $ 0.47
Change in accounting
principles, net............. - - - - - - - (0.11)
------- ------- ------ ------ ------- ------- ------- -------
Income from continuing
operations.................. 0.56 0.58 0.48 0.37 0.32 0.39 0.40 0.36
(Loss) Income from
discontinued operations,
net of taxes................ - - - - (0.06) - (0.18) 0.01
Loss on wind-down of
discontinued operations..... (0.22) - - - (0.22) - - -
------- ------- ------ ------ ------- ------- ------- -------
Net income.................... $ 0.34 $ 0.58 $ 0.48 $ 0.37 $ 0.04 $ 0.39 $ 0.22 $ 0.37
====== ====== ====== ====== ======= ======= ======= =======
-99-
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 2002 Annual Meeting of
Stockholders:
Page
----
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 4-8
ITEM 11. EXECUTIVE COMPENSATION 9-14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 2,6,7
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
-100-
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.
-101-
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 2000 Stock Option and Temporary Severance Agreement among Wilmington Savings Fund Society, Federal Savings
Bank, WSFS Financial Corporation and Marvin N. Schoenhals on February 24, 2000 is incorporated herein by
reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31,
2000
10.5 Attachment A Severance Policy among Wilmington Savings Fund Society, Federal Savings Bank and certain
Executives dated March 13, 2001, as amended.
21 Attachment B Subsidiaries of Registrant.
23 Attachment C 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.
-102-
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 22, 2002 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 22, 2002 BY: /s/MARVIN N. SCHOENHALS
----------------------------------------
Marvin N. Schoenhals
Chairman, President and
Chief Executive Officer
Date: March 22, 2002 BY: /s/CHARLES G. CHELEDEN
----------------------------------------
Charles G. Cheleden
Vice Chairman and Director
Date: March 22, 2002 BY: /s/JOHN F. DOWNEY
----------------------------------------
John F. Downey
Director
Date: March 22, 2002 BY: /s/LINDA C. DRAKE
----------------------------------------
Linda C. Drake
Director
Date: March 22, 2002 BY: /s/DAVID E. HOLLOWELL
----------------------------------------
David E. Hollowell
Director
Date: March 22, 2002 BY: /s/JOSEPH R. JULIAN
----------------------------------------
Joseph R. Julian
Director
-103-
Date: March 22, 2002 BY: /s/THOMAS P. PRESTON
----------------------------------------
Thomas P. Preston
Director
Date: March 22, 2002 BY: /s/CLAIBOURNE D. SMITH
----------------------------------------
Claibourne D. Smith
Director
Date: March 22, 2002 BY: /s/EUGENE W. WEAVER
----------------------------------------
Eugene W. Weaver
Director
Date: March 22, 2002 BY: /s/R. TED WESCHLER
----------------------------------------
R. Ted Weschler
Director
Date: March 22, 2002 BY: /s/DALE E. WOLF
----------------------------------------
Dale E. Wolf
Director
Date: March 22, 2002 BY: /s/MARK A. TURNER
----------------------------------------
Mark A. Turner
Chief Operating Officer and
Chief Financial Officer
Date: March 22, 2002 BY: /s/ROBERT F. MACK
----------------------------------------
Robert F. Mack
Senior Vice President and Controller
-104-
ATTACHMENT A
SEVERANCE POLICY
- --------------------------------------------------------------------------------
Organizational Functional Area: Human Resources
Policy For: Severance Policy, WSFS
Chief Operating Officers(1)
Executive Vice President(1)
Board Approved: February 2002
Last Revision Date: March 2001
Department/Individual Responsible for Executive Vice President,
Maintaining/Updating Policy: Human Resources Director
I. Release Without Cause(2) In the event a Chief Operating Officer ("COO") or an Executive
Vice President ("EVP") (both referred to as "Executive") is
released without cause, an initial six (6) months severance and
professional level outplacement will be provided. If the Executive
has not found new and full time employment on or before six (6)
months after termination, severance pay and outplacement will be
extended for another six (6) months or until the Executive finds
employment, whichever occurs first. In the event the Executive
finds a job within the second six (6) month period, but at a lower
rate of pay than the Executive recived at WSFS, then WSFS shall
make up the difference until the second six (6) month period has
ended. Medical and dental benefits will be offered at the
Associate rate through the severance period.
II. Change of Control If an Executive is released without cause as defined in Attachment
A within one (1) year after the change of control or is offered a
position that is not within thirty-five (35) miles of the
Executive's current work site and at the current WSFS salary and
bonus opportunity:
Executive shall receive twenty-four (24) months base salary
severance offset by the value arising from the acceleration of
stock option vesting3. Note that the value of previously vested
options shall not offset the twenty-four (24) months of severance.
(1) Specifically excluding Presidents or the equivalent of WSFS subsidiaries
(e.g. Cash Connect, Wilmington National Finance, Inc.)
(2) Definition of "cause" is contained in Attachment A.
(3) Under the terms of the WSFS Stock Option Plan, all unvested stock options
become vested upon a change in control.
However, value from the accelerated vesting shall account for no
more than twelve (12) months of the twenty-four (24) months
severance commitment. By way of clarification, irrespective of the
value of the accelerated vesting, Executive would get twelve (12)
months severance pay, plus the value of the accelerated vesting,
even if the value of the accelerated vesting exceeds twelve (12)
months of base pay.
Executive would be eligible for medical and dental benefits at the
Associate rate for the twenty-four (24) month period, however, any
unused flex dollars may not be contributed to the 401(k) Plan, nor
may contributions to the 401(k) Plan occur during the severance
period consistent with the 401(k) Summary Plan Description.
Twelve (12) months of Executive level outplacement will be
offered.
If Executive is offered the same salary and bonus opportunity and
position is within thirty-five (35) miles of WSFS' work location,
but the Executive decides to terminate employment:
Accelerated vesting of stock options and severance pay will equal
at least twelve (12) months base pay. If the value of the
accelerated vesting is less than twelve (12) months of base pay,
then severance pay will be added to the value of the accelerated
options to equal twelve (12) months of base pay. If the value of
the accelerated vesting is greater than or equal to twelve (12)
months of base pay, then no additional severance shall be paid.
Six (6) months of professional level outplacement will be offered
with medical and dental benefits at Associate rate for twelve (12)
months in each case.
III. Receipt of Benefits To receive any of the severance benefits outlined in this policy,
with the exception of accelerated vesting of options, the
Executive must execute a release form acceptable to WSFS.
The severance pay will be paid consistent with WSFS regular pay
schedule.
Attachment A
Severance Policy; WSFS Chief Operating Officer and Executive Vice President
March 2001
(a) Cause. The Company may terminate Executive's employment during the
Employment Period with or without Cause. For purposes of Section I of this
Policy "Cause" shall mean:
(i) the willful and continued failure of Executive to perform
substantially Executive's duties with the Company or one of its affiliates
(other than any such failure resulting from incapacity due to physical or mental
illness) after a written demand for substantial performance is delivered to
Executive by the President or the Board of Directors of the Company which
specifically identifies the manner in which such Chief Executive Officer or the
Board believes that Executive has not substantially performed Executive's
duties, or
(ii) the willful engaging by Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For the purposes of this provision, no act or failure to act, on the part of
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by Executive in bad faith or without reasonable belief that Executive's
action or omission was in the best interests of the Company. The cessation of
employment of Executive shall not be deemed to be for Cause [under paragraph (i)
or (ii) above] unless and until there shall have been delivered to Executive a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board at a meeting of the Board called
and held for such purpose, finding that, in the good faith opinion of the Board,
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail, or
(iii) the consistent failure of Executive to meet reasonable
performance expectations (other than any such failure resulting from incapacity
due to physical or mental illness); provided, however, that termination of
Executive's employment under this subparagraph (iii) shall not be effective
unless at least 90 days prior to such termination Executive shall have received
written notice from the Chief Executive Officer or the Board which specifically
identifies the manner in which the Board or the Chief Executive Officer believes
that Executive has consistently failed to meet reasonable performance
expectations and Executive shall have failed after receipt of such notice to
resume the diligent performance of his duties to the reasonable satisfaction of
the Chief Executive Officer of the Board.