UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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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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(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
- --------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(302) 792-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 7, 1998:
Common Stock, par value $.01 per share 12,524,879
- -------------------------------------- ------------------------
(Title of Class) (Shares Outstanding)
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements
--------------------
Consolidated Statement of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 (Unaudited)............... 3
Consolidated Statement of Condition as of June 30, 1998
(Unaudited) and December 31, 1997.............................. 4
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited)....................... 5
Notes to the Consolidated Financial Statements for the
Three and Six Months Ended June 30, 1998 and 1997
(Unaudited).................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations...................................... 7
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 17
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PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 18
--------------------------------
Signatures................................................................ 19
-2-
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Six months ended
June 30, June 30,
------------------- -----------------
1998 1997 1998 1997
---- ---- ----- ----
(Unaudited)
Interest income:
Interest and fees on loans............................ $ 17,083 $ 18,378 $ 34,629 $ 35,890
Interest on mortgage-backed securities................ 6,291 6,903 12,175 13,693
Interest and dividends on investment securities....... 664 715 1,730 1,253
Other interest income................................. 2,903 2,012 5,469 3,865
----------- ---------- ---------- -----------
26,941 28,008 54,003 54,701
----------- ---------- ---------- -----------
Interest expense:
Interest on deposits.................................. 8,028 7,861 15,857 15,572
Interest on Federal Home Loan Bank advances........... 5,851 5,713 11,500 10,705
Interest on federal funds purchased and
securities sold under agreement to repurchase....... 2,748 3,215 5,683 6,151
Interest on senior notes.............................. 828 828 1,657 1,657
Interest on other borrowed funds...................... 86 90 164 172
----------- ---------- ---------- -----------
17,541 17,707 34,861 34,257
----------- ---------- ---------- -----------
Net interest income..................................... 9,400 10,301 19,142 20,444
Provision for loan losses............................... 172 364 749 673
----------- ---------- ---------- -----------
Net interest income after provision for loan losses..... 9,228 9,937 18,393 19,771
----------- ---------- ---------- -----------
Other income:
Loan servicing fee income............................. 803 814 1,697 1,584
Rental income on operating leases, net................ 2,887 2,057 5,767 3,824
Service charges on deposit accounts................... 1,348 1,040 2,533 2,141
Securities gains ..................................... 237 2 276 4
Other income....................................... 588 711 1,587 1,268
----------- ---------- ---------- -----------
5,863 4,624 11,860 8,821
----------- ---------- ---------- -----------
Other expenses:
Salaries and other compensation ...................... 3,146 2,999 6,330 6,239
Employee benefits and other personnel expense ........ 905 845 1,964 1,742
Equipment expense .................................... 439 366 867 678
Data processing and operations expenses .............. 1,303 1,239 2,564 2,043
Occupancy expense .................................... 717 679 1,447 1,367
Marketing expense .................................... 275 271 547 549
Professional fees .................................... 438 307 853 669
Net costs of assets acquired through foreclosure ..... 199 418 506 627
Other operating expense .............................. 1,648 1,635 3,166 2,979
----------- ---------- ---------- -----------
9,070 8,759 18,244 16,893
----------- ---------- ---------- -----------
Income before taxes..................................... 6,021 5,802 12,009 11,699
Income tax provision.................................... 1,565 1,633 3,122 3,462
----------- ---------- ---------- -----------
Net income.............................................. $ 4,456 $ 4,169 $ 8,887 $ 8,237
=========== ========== ========== ===========
Earnings per share:
Basic ................................................ $ .36 $ .33 $ .71 $ .66
Diluted .............................................. .35 .33 .70 .65
Other comprehensive income, net of tax:
Net income ........................................... $ 4,456 $ 4,169 $ 8,887 $ 8,237
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period......... 306 24 409 259
Less: reclassification adjustment for gains(losses)
included in net income .............................. 181 467
----------- ---------- ---------- -----------
Comprehensive income ................................... $ 4,581 $ 4,193 $ 8,829 $ 8,496
=========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31,
1998 1997
-------- ------------
(Unaudited)
(Dollars in Thousands)
Assets
Cash and due from banks...................................................... $ 34,667 $ 27,467
Federal funds sold and securities purchased under agreements to resell....... 23,900 25,279
Interest-bearing deposits in other banks..................................... 12,785 28,992
Investment securities held-to-maturity....................................... 21,607 28,564
Investment securities available-for-sale..................................... 20,069 50,091
Mortgage-backed securities held-to-maturity.................................. 296,962 272,900
Mortgage-backed securities available-for-sale................................ 143,211 57,374
Investment in reverse mortgages, net......................................... 31,923 32,109
Loans held for sale.......................................................... 5,373 2,183
Loans, net of allowance for loan losses of $24,671 at June 30, 1998
and $24,850 at December 31, 1997........................................... 727,109 762,280
Vehicles under operating leases, net ........................................ 177,599 172,115
Stock in Federal Home Loan Bank of Pittsburgh, at cost....................... 21,750 20,252
Assets acquired through foreclosure.......................................... 3,417 3,826
Premises and equipment....................................................... 10,220 9,001
Accrued interest and other assets............................................ 21,039 22,784
---------- ---------
Total assets................................................................. $1,551,631 $1,515,217
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits..................................................................... $ 786,211 $ 766,966
Federal funds purchased and securities sold under agreements to repurchase... 175,000 207,699
Federal Home Loan Bank advances.............................................. 435,000 400,000
Senior notes................................................................. 29,100 29,100
Other borrowed funds......................................................... 7,960 7,879
Accrued expenses and other liabilities....................................... 22,903 16,814
---------- ----------
Total liabilities............................................................ 1,456,174 1,428,458
---------- ----------
Commitments and contingencies
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized;
issued and outstanding, none at June 30, 1998 and December 31, 1997........
Common stock $.01 par value, 20,000,000 shares authorized; issued
14,682,688 at June 30, 1998 and 14,622,588 at December 31, 1997............ 147 146
Capital in excess of par .................................................... 57,667 57,469
Retained earnings ........................................................... 57,763 49,252
Accumulated other comprehensive income ...................................... 321 379
Treasury stock at cost, 2,157,809 shares at June 30, 1998 and 2,162,609
shares at December 31, 1997 ............................................... (20,441) (20,487)
---------- ----------
Total stockholders' equity................................................... 95,457 86,759
---------- ----------
Total liabilities and stockholders' equity................................... $1,551,631 $1,515,217
========== ==========
The accompanying notes are an integral part of these financial statements.
-4-
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
--------------------------------
1998 1997
------ -------
(Unaudited)
(Dollars in Thousands)
Operating activities:
Net income ................................................................... $ 8,887 $ 8,237
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses ........................................ 1,275 1,199
Depreciation, accretion and amortization ................................... 316 176
Increase in accrued interest receivable and other assets ................... 980 594
Origination of loans held for sale.......................................... (29,606) (9,498)
Proceeds from loans held for sale........................................... 26,636 9,002
Increase in accrued interest payable and other liabilities.................. 5,989 5,197
Increase in reverse mortgage capitalized interest, net ..................... (2,835)
Other, net ................................................................. 10 (1,303)
---------- --------
Net cash provided by operating activities......................................... 11,652 13,604
---------- --------
Investing activities:
Net (increase) decrease in interest-bearing deposits in other banks .......... 16,207 156
Maturities of investment securities .......................................... 27,018 4,824
Sales of investment securities available-for-sale ............................ 20,059
Sales of mortgage-backed securities available-for-sale ....................... 29,875
Purchases of investment securities held-to-maturity .......................... (10,000) (46)
Purchases of investment securities available-for-sale ........................ (29,956)
Repayments of mortgage-backed securities held-to-maturity .................... 76,404 39,706
Repayments of mortgage-backed securities available-for-sale .................. 16,436 3,511
Purchases of mortgage-backed securities held-to-maturity...................... (100,769) (52,131)
Purchases of mortgage-backed securities available-for-sale.................... (132,042) (17,593)
Repayments of reverse mortgages .............................................. 8,202 9,332
Disbursements for reverse mortgages .......................................... (5,079) (5,343)
Sales of loans................................................................ 11,425 2,905
Purchases of loans ........................................................... (4,411)
Net decrease in loans ........................................................ 25,998 (12,812)
Net increase in operating leases ............................................. (10,002) (79,675)
Net increase in stock of Federal Home Loan Bank of Pittsburgh................. (1,498) (4,629)
Sales of investment in real estate ........................................... 1,034
Sales of assets acquired through foreclosure, net ............................ 6,210 9,166
Premises and equipment, net................................................... (2,002) (1,400)
---------- --------
Net cash used for investing activities............................................ (26,935) (133,985)
---------- --------
Financing activities:
Net increase in demand and savings deposits ................................. 33,175 14,358
Net increase (decrease) in certificates of deposit and time deposits ......... (13,996) (2,677)
Receipts from FHLB borrowings ................................................ 619,000 290,000
Repayments of FHLB borrowings................................................. (584,000) (207,446)
Receipts from reverse repurchase agreements................................... 101,846 334,983
Repayments of reverse repurchase agreements .................................. (134,545) (289,723)
Net increase in federal funds purchased ...................................... 3,000
Dividends declared ........................................................... (376)
Issuance of common stock...................................................... 38
Purchase of treasury stock ................................................... (5,811)
---------- --------
Net cash provided by financing activities......................................... 21,104 136,722
---------- --------
Increase in cash and cash equivalents ........................................ 5,821 16,341
Cash and cash equivalents at beginning of period ............................. 52,746 50,051
---------- --------
Cash and cash equivalents at end of period ................................... $ 58,567 $ 66,392
========== ========
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid for interest during the year ........................................... $ 30,528 $ 28,395
Cash paid (refunded) for income taxes............................................. 1,140 (1,787)
Loans transferred to assets acquired through foreclosure ......................... 4,203 3,578
Net change in unrealized losses on securities available-for-sale, net of tax ..... (58) 259
The accompanying notes are an integral part of these financial statements.
-5-
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
WSFS Financial Corporation (the Corporation) is the parent of Wilmington
Savings Fund Society, FSB (the Bank). The consolidated financial statements for
the three and six months ended June 30, 1998 and 1997 include the accounts of
the parent company, the Bank and its wholly-owned subsidiaries, WSFS Credit
Corporation, 838 Investment Group, Inc., Community Credit Corporation and Star
States Development Company.
The consolidated statement of condition as of June 30, 1998, the
consolidated statement of operations for the three and six months ended June 30,
1998 and 1997 and the consolidated statement of cash flows for the six months
ended June 30, 1998 and 1997 are unaudited and include all adjustments solely of
a normal recurring nature which management believes are necessary for a fair
presentation. All significant intercompany transactions are eliminated in
consolidation. Certain reclassifications have been made to prior periods'
financial statements to conform them to the June 30, 1998 presentation. The
results of operations for the three and six month periods ending June 30, 1998
are not necessarily indicative of the expected results for the full year ending
December 31, 1998. Comprehensive income for the three and six months ended June
30, 1998 and 1997 is comprised entirely of unrealized gains and losses on
investments available-for-sale. The accompanying unaudited financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Corporation's 1997 Annual Report.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which is required to be adopted in both interim and annual financial
statements for periods ending after December 15, 1997. Accordingly, the
Corporation has changed its methodology for computing earnings per share and
restated all prior period amounts. SFAS No. 128 replaced "primary" and "fully"
diluted earnings per share with "basic" and "diluted" earnings per share. Under
the new requirements for calculating earnings per share, the dilutive effective
of stock options will be excluded from the basic earnings per share but included
in the computation of diluted earnings per share.
The following table set forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
For the three months For the six months
ended June 30, ended June 30,
------------------------ -------------------------
1998 1997 1998 1997
---- ---- ----- ----
Numerator:
Net income .................................. $4,456 $4,169 $8,887 $8,237
====== ====== ====== ======
Denominator:
Denominator for basic earnings per share -
Weighted average shares .................. 12,505 12,487 12,484 12,574
Effect of dilutive securities:
Employee stock options .................... 175 184 189 183
-------- -------- -------- --------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise of stock options ......... 12,680 12,671 12,673 12,757
====== ====== ====== ======
Basic earnings per share ...................... $ .36 $ .33 $ .71 $ .66
======= ======= ======== =======
Diluted earnings per share .................... $ .35 $ .33 $ .70 $ .65
======= ======= ======== =======
-6-
WSFS FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
WSFS Financial Corporation (the Corporation) is a savings and loan holding
company headquartered in Wilmington, Delaware. Substantially, all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the Bank or WSFS), the largest thrift institution headquartered in
Delaware and among the four largest financial institutions in the state on the
basis of total deposits acquired in-market. The Corporation's market area is the
Mid-Atlantic region of the United States which is characterized by a diversified
manufacturing and service economy. The banking operations of WSFS are presently
conducted from 18 retail banking offices located in Northern and Central
Delaware, as well as Southeastern Pennsylvania. The Bank provides residential
real estate, commercial real estate, commercial and consumer lending services
and funds these activities primarily by attracting retail deposits. Deposits are
insured by the Federal Deposit Insurance Corporation.
Additional subsidiaries of the Bank include WSFS Credit Corporation (WCC),
which is engaged primarily in indirect motor vehicle leasing and financing; 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system; and Community Credit Corporation (CCC), which
specializes in consumer loans secured by first and second mortgages. An
additional subsidiary, Star States Development Company (SSDC), sold its
remaining parcel of land during the second quarter of 1998 and is currently
inactive.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $36.4 million during the first half of 1998. Asset
growth included an increase of $109.9 million in mortgage-backed securities. The
increase in mortgage-backed securities reflects the purchase of $212.5 million
in collateralized mortgage obligations (CMO) and $30.4 million in GNMA pass
through securities, offset in part by the sale of a $29.0 million CMO and
principal repayments. Asset growth was partially offset by decreases of $37.0
million in investment securities and $35.2 million in net loans. The decline in
investment securities included the sale of $20.0 million in U.S. Treasury notes,
the maturity of $10.0 million in the notes from the Student Loan Marketing
Association and the net reduction of $5.0 million in notes issued by the Federal
Home Loan Bank. The decline in loans included six large commercial real estate
loans totaling $31.2 million that were refinanced at other institutions. This
loan attrition was the result of the Bank's pricing discipline and had the
desired effects of reducing commercial real estate loan concentrations and
improving the overall asset quality of the Company.
Total liabilities increased $27.7 million between December 31, 1997 and
June 30, 1998. During the first six months of 1998 the Corporation added $35.0
million in FHLB advances which were used to replace $32.7 million in reverse
repurchase agreements that matured during the second quarter. In addition,
deposits increased $19.2 million to $786.2 million at June 30, 1998. Interest
credited to deposits totaled $7.6 million for a net deposit growth of $11.6
million.
Capital Resources
Stockholders' equity increased $8.7 million between December 31, 1997 and
June 30, 1998. This increase reflects net income of $8.9 million for the first
six months of 1998 less a dividend distribution of $376,000.
-7-
A table presenting the Bank's consolidated capital position relative to the
minimum regulatory requirements as of June 30, 1998 follows (dollars in
thousands):
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------------------- ------------------------- ---------------------------
Percentage of Percentage of Percentage of
Amount Assets Amount Assets Amount Assets
------ ------------- ------ ------------- ------ --------------
Total Capital
(to Risk-Weighted Assets) ........ $120,689 12.28% $78,627 8.00% $98,283 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 114,004 7.37 61,896 4.00 72,370 5.00
Tangible Capital (to Tangible
Assets) .......................... 113,545 7.34 23,204 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 114,004 11.60 N/A N/A 58,970 6.00
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions such as the Bank must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 4.0% of adjusted total assets and
"total" or "risk-based" capital (a combination of core and "supplementary"
capital) equal to 8.0% 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. At June 30, 1998, the Bank is in
compliance with all regulatory capital requirements and is classified as a "well
capitalized" institution. Management anticipates that the Bank will continue to
be classified as well-capitalized.
Liquidity
The OTS requires institutions, such as the Bank, to maintain a 4.0% minimum
liquidity ratio of cash and qualified assets to net withdrawable deposits and
borrowings due within one year. At June 30, 1998, the Bank's liquidity ratio was
9.5% compared to 10.2% at December 31, 1997. Additionally, the Corporation is
required to maintain a reserve of 100% of the aggregate interest expense for 12
full calendar months on the $29.1 million of senior notes. The interest reserve
requirement on the senior notes at June 30, 1998 was approximately $3.2 million.
-8-
NONPERFORMING ASSETS
The table below sets forth the Corporation's nonperforming assets,
restructured loans and past due loans at the dates indicated. Past due loans are
loans contractually past due 90 days or more as to principal or interest
payments but which remain on accrual status because they are considered well
secured and in the process of collection.
June 30, December 31,
1998 1997
-------- ------------
(Dollars in Thousands)
Nonaccruing loans:
Commercial .............................................. $ 2,390 $ 1,216
Consumer ................................................ 336 194
Commercial mortgages .................................... 3,065 3,919
Residential mortgages ................................... 3,310 3,710
Construction ............................................ 113 38
---------- ----------
Total nonaccruing loans ...................................... 9,214 9,077
Nonperforming investments in real estate ..................... 76 989
Assets acquired through foreclosure .......................... 3,417 3,826
---------- ----------
Total nonperforming assets ................................... $ 12,707 $ 13,892
========== ==========
Restructured loans ........................................... $ 4,740 $ 4,740
========== ==========
Past due loans:
Residential mortgages ................................... $ 117 $ 315
Commercial and commercial mortgages ..................... 2,455 1,909
Consumer ................................................ 177 261
---------- ----------
Total past due loans ......................................... $ 2,749 $ 2,485
========== ==========
Ratios:
Nonaccruing loans/leases to total loans/leases (1) ...... 0.99% 0.95%
Allowance for loan/lease losses to total gross
loans/leases (1)...................................... 2.77 2.69
Nonperforming assets to total assets .................... 0.82 0.92
Loan/lease loss allowance to nonaccruing
loans/leases (2)...................................... 267.64 273.06
Loan/lease and foreclosed asset allowance to total
Nonperforming assets (2)............................... 194.21 178.50
(1) Excludes loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased $1.2 million between June 30, 1998 and
December 31, 1997. This decrease resulted primarily from a $854,000 reduction in
nonaccruing commercial mortgages, a $913,000 reduction in nonperforming
investments in real estate and a $409,000 decline in assets acquired through
foreclosure. This was offset in part by an increase of $1.2 million in
nonaccruing commercial loans. An analysis of the change in the balance of
nonperforming assets is presented as follows:
-9-
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
-------------------- -----------------
(In Thousands)
Beginning balance......................................... $ 13,892 $ 19,277
Additions ........................................... 10,405 20,090
Collections/sales ................................... (9,226) (23,337)
Transfers to accrual/restructured status ............ (1,216) (2,122)
Provisions, charge-offs, other adjustments........... (1,148) (16)
---------- ----------
Ending balance............................................ $ 12,707 $ 13,892
========== ==========
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those which would result from a regulatory examination.
INTEREST-RATE SENSITIVITY
The matching of maturities or repricing periods of interest-sensitive
assets and liabilities to ensure a favorable interest rate spread and mitigate
exposure to fluctuations in interest rates is the Corporation's primary focus
for achieving its asset/liability management strategies. Interest-sensitive
assets of the Corporation include cash flows that relate to the principal of the
operating lease portfolio, because they are interest-rate sensitive. Management
regularly reviews interest-rate sensitivity of the Corporation and adjusts
sensitivity within acceptable tolerance ranges established by management as
needed. At June 30, 1998, interest-sensitive liabilities exceeded
interest-sensitive assets that mature within one year (interest-sensitivity gap)
by $33.9 million. The Corporation's interest-sensitive assets as a percentage of
interest-sensitive liabilities within the one-year window declined to 95.7% at
June 30, 1998 compared to 99.6% at December 31, 1997. Likewise, the one-year
interest-sensitive gap as a percentage of total assets decreased to a negative
2.19% from a negative .18% at December 31, 1997. The decrease is the result of
the Corporation's continuing effort to effectively manage interest rate risk
while providing a favorable interest rate spread.
COMPARISON FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Results of Operations
The Corporation reported net income of $4.5 million, or $.35 per share
(diluted), for the three months ended June 30, 1998, compared to $4.2 million,
or $.33 per share (diluted), for the second quarter of 1997. Net income for the
six months ended June 30, 1998 was $8.9 million, or $.70 per share (diluted),
compared to $8.2 million, or $.65 per share (diluted), for the same period last
year. The improvement in net income reflects growth in net revenues (net
interest income plus other income) which increased $338,000 and $1.7 million
between comparable three and six month periods.
Net Interest Income
The tables on the following two pages, dollars expressed in thousands,
provides information concerning the balances, yields and rates on
interest-earning assets and interest-bearing liabilities during the periods
indicated.
-10-
Three Months Ended June 30,
----------------------------------------------------------------------------------------
1998 1997
--------------------------------------- --------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4).............. $ 503,277 $ 11,521 9.16% $ 588,847 $ 13,452 9.14%
Commercial loans .................. 86,947 1,613 8.75 60,976 1,194 9.67
Consumer loans..................... 159,336 3,882 9.77 148,505 3,694 9.98
------- -------- ---------- ---------
Total loans...................... 749,560 17,016 9.25 798,328 18,340 9.34
Mortgage-backed securities (5).......... 394,756 6,291 6.37 403,109 6,903 6.85
Loans held for sale (3)................. 3,664 67 7.31 1,765 38 8.61
Investment securities (5)............... 41,734 664 6.36 44,311 715 6.45
Other interest-earning assets .......... 133,615 2,903 8.60 98,138 2,012 8.11
---------- -------- ---------- ---------
Total interest-earning assets...... 1,323,329 26,941 8.24 1,345,651 28,008 8.41
-------- ---------
Allowance for loan losses............... (24,900) (23,657)
Cash and due from banks................. 23,183 17,501
Vehicles under operating lease, net..... 173,506 120,357
Other noninterest-earning assets........ 33,368 33,270
---------- ----------
Total assets....................... $1,528,486 $1,493,122
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................... $ 60,757 392 2.59 $ 58,699 381 2.60
Savings............................ 183,717 1,440 3.14 161,854 1,125 2.79
Time............................... 443,792 6,196 5.60 452,738 6,355 5.63
---------- ------- ---------- --------
Total interest-bearing deposits.. 688,266 8,028 4.68 673,291 7,861 4.68
FHLB advances........................... 412,198 5,851 5.69 390,616 5,713 5.87
Senior notes............................ 29,100 828 11.39 29,100 828 11.39
Other borrowed funds.................... 199,870 2,834 5.67 228,229 3,305 5.79
---------- ------- ---------- --------
Total interest-bearing liabilities. 1,329,434 17,541 5.28 1,321,236 17,707 5.36
------- --------
Noninterest-bearing demand deposits..... 83,749 73,475
Other noninterest-bearing liabilities... 20,746 20,015
Stockholders' equity.................... 94,557 78,396
---------- ----------
Total liabilities and stockholders'
equity.......................... $1,528,486 $1,493,122
========== ==========
Excess of interest-earning assets over
interest-bearing liabilities....... $ (6,105) $ 24,415
========== ==========
Net interest and dividend income........ $ 9,400 $ 10,301
========= =========
Interest rate spread.................... 2.96% 3.05%
==== ====
Interest rate margin.................... 2.94% 3.15%
==== ====
Net interest and dividend income to
total average assets............... 2.54% 2.84%
==== ====
(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.
-11-
Six Months Ended June 30,
----------------------------------------------------------------------------------------
1998 1997
--------------------------------------- --------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- --------- ------- ------- -------- --------
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4).............. $ 513,590 $ 23,369 9.10% $ 585,500 $ 26,800 9.15%
Commercial loans .................. 88,063 3,393 9.06 44,883 1,901 9.74
Consumer loans..................... 159,735 7,758 9.79 144,097 7,127 9.97
---------- --------- ---------- ---------
Total loans...................... 761,388 34,520 9.23 774,480 35,828 9.33
Mortgage-backed securities (5).......... 374,630 12,175 6.37 400,617 13,693 6.85
Loans held for sale (3)................. 2,787 109 7.82 1,438 62 8.62
Investment securities (5)............... 54,202 1,730 6.38 40,014 1,253 6.26
Other interest-earning assets .......... 116,158 5,469 9.36 95,569 3,865 8.04
---------- --------- ---------- ---------
Total interest-earning assets...... 1,309,165 54,003 8.34 1,312,118 54,701 8.38
--------- ---------
Allowance for loan losses............... (24,873) (23,665)
Cash and due from banks................. 22,378 17,072
Vehicles under operating lease, net..... 173,487 115,504
Other noninterest-earning assets........ 33,175 35,705
---------- ----------
Total assets....................... $1,513,332 $1,456,734
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................... $ 60,229 773 2.59 $ 57,916 750 2.61
Savings............................ 178,095 2,744 3.11 159,512 2,172 2.75
Time............................... 443,348 12,340 5.61 454,904 12,650 5.61
---------- --------- ---------- ---------
Total interest-bearing deposits 681,672 15,857 4.69 672,332 15,572 4.67
FHLB advances........................... 407,652 11,500 5.69 368,725 10,705 5.85
Senior notes............................ 29,100 1,657 11.39 29,100 1,657 11.39
Other borrowed funds.................... 203,079 5,847 5.76 220,943 6,323 5.72
---------- --------- ---------- ---------
Total interest-bearing liabilities 1,321,503 34,861 5.28 1,291,100 34,257 5.31
--------- ---------
Noninterest-bearing demand deposits..... 80,773 71,157
Other noninterest-bearing liabilities... 18,709 16,998
Stockholders' equity.................... 92,347 77,479
----------- -----------
Total liabilities and stockholders'
equity............................. $1,513,332 $1,456,734
========== ==========
Excess of interest-earning assets over
interest-bearing liabilities....... $ (12,338) $ 21,018
========== ==========
Net interest and dividend income........ $ 19,142 $ 20,444
========= =========
Interest rate spread.................... 3.06% 3.07%
==== ====
Net interest margin..................... 3.02% 3.16%
==== ====
Net interest and dividend income to
total average assets............... 2.61% 2.85%
==== ====
(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.
-12-
Net interest income decreased $901,000 between second quarter of 1998 and
1997 and $1.3 million between the six months ended June 30, 1998 and 1997. This
decrease resulted in large part from the growth in the operating lease portfolio
between comparable periods. Operating lease income, which increased $830,000 and
$1.9 million between the three and six months ended June 30, 1998 and 1997,
respectively, is reported in other income while the cost of funding these assets
is included in interest expense, thereby depressing the net interest margin. In
addition, the net interest margin was adversely affected by competitive market
pricing and the flattening of the yield curve.
Provision for Loan Losses
The following table represents a summary of the changes in the allowance
for loan losses during the periods indicated:
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
------------------------ -----------------
(Dollars in Thousands)
Beginning balance ............................................ $24,850 $24,241
Provision for loan losses .................................... 749 1,533
Reclass to allowance for vehicles under operating lease ...... (259)
Reclass from allowance for ORE losses ........................ 848
Charge-offs:
Residential real estate ................................. 72 193
Commercial real estate (1) .............................. 138 520
Commercial............................................... 289 169
Consumer ............................................... 614 859
-------- --------
Total charge-offs..................................... 1,113 1,741
-------- --------
Recoveries:
Residential real estate ................................. 2
Commercial real estate (1) .............................. 4 95
Commercial .............................................. 94 22
Consumer ............................................... 87 109
-------- --------
Total recoveries ..................................... 185 228
-------- --------
Net charge-offs ...................................... 928 1,513
-------- --------
Ending balance ....................................... $24,671 24,850
======== ========
Net charge-offs to average gross loans outstanding, net
of unearned income (2) .................................. .21% .19%
======== ========
(1) Includes commercial mortgages and construction loans.
(2) Ratio for the six months ended June 30, 1998 is annualized.
-13-
The provision for loan losses decreased $192,000 between the second quarter
of 1998 and 1997 and increased $76,000 between the six months ended June 30,
1997 and 1998. These changes in the provision reflect management's continuing
review of the loan portfolio.
Other Income
Noninterest income increased $1.2 million between the second quarter of
1998 and 1997 and $3.0 million between the six month periods ended June 30, 1998
and 1997. The majority of this increase resulted from the rental income from
operating leases which increased $830,000 and $1.9 million between comparable
three and six month periods. The growth in rental income was attributable to a
38% increase in vehicles under operating leases between June 30, 1998 and 1997.
In addition, service charges on deposits increased $308,000 during the quarter
and $392,000 during the six months ended June 30, 1998. These increases reflect
higher fee income due to the expansion of the Bank's ATM network. Also during
the quarter, the Corporation recognized a $237,000 gain on the sale of a $29.0
million collateralized mortgage obligation. The six months ended June 30, 1998
included a gain of $368,000 on the sale of $10.5 million in residential
mortgages which occurred in the first quarter of 1998. These increases in
earnings were partially offset by a $218,000 loss on the sale of a nonperforming
investment in real estate recognized in the second quarter of 1998.
Other Expenses
Noninterest expenses increased $311,000 between the second quarter of
1998 and 1997. The majority of this increase reflects a $207,000 rise in
salaries and employee benefits, primarily the outcome of higher staffing levels
in 1998 offset in part by a $130,000 decrease in expenses associated with stock
appreciation rights. Additionally, professional fees for the second quarter of
1998 were $131,000 higher than the same period last year. This increase relates
primarily to expenses incurred for researching and developing new business
opportunities. These expense increases were offset in part by the net costs of
assets acquired through foreclosure which decreased $219,000 between comparable
quarters. This decline is attributable to the improvement in the Corporation's
overall asset quality.
For the six months ended June 30, 1998 noninterest expenses increased
$1.4 million over the same period last year. The cost of data processing and
outsourced operations for the six months June 30, 1998 increased $521,000 over
the same period last year. In addition, higher other operating expenses reflects
increases of $313,000 in employee related expenses, $189,000 in equipment
expenses and $184,000 in professional fees. These increases reflect the
Corporation's efforts to invest in its future growth, including an expansion of
retail, the branch network, ATM network, and technology improvements. Employee
related expenses were favorably impacted by a $250,000 decline in expenses
associated with stock appreciation rights.
The comparability between six month periods of certain expense line
items has been affected by the strategic technology alliance entered into on
March 1, 1997, between WSFS and ALLTEL, the company that has been managing the
Corporation's data processing for nine years. This agreement calls for ALLTEL to
employ certain on-site back office personnel as well as manage deposit and loan
operation functions. As a result, certain costs, most of which would have been
previously classified as salaries, are now classified as data processing and
operations expenses.
Management continues to review existing operations as well as other
income opportunities in order to enhance earnings. Accordingly, other income and
expenses may fluctuate during the year.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income
tax return and separate state income tax returns. Income taxes are accounted for
in accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences". The Corporation recorded
a provision for income taxes during the three and six months ended June 30,1998
of $1.6 million and $3.1 million,
-14-
respectively, compared to an income tax provision of $1.6 million and $3.5
million, respectively for the same periods of 1997. The effective tax rate for
the three and six months ended June 30, 1998 was 26%, compared to 28% and 30%,
respectively for the same periods in 1997. This reduction in effective rates
between periods reflects the increased recognition in the financial statements
of certain tax benefits from the acquisition and subsequent merger of a reverse
mortgage lender into the Corporation and increased tax benefits from an ESOP
loan.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly.
ACCOUNTING DEVELOPMENTS
In June 1997 the FASB adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". This statement which supersedes SFAS No.
14, requires public companies to report financial and descriptive information
about their reportable operating segments on both an annual and interim basis.
SFAS No. 131 mandates disclosure of a measure of segment profit/loss, certain
revenue and expense items and segment assets. In addition, the statement
requires reporting information on the entity's products and services, countries
in which the entity earns revenues and holds assets, and major customers. This
statement requires changes in disclosures and would not effect the financial
condition or operating results of the Corporation. This statement becomes
effective for fiscal years beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Post Retirement Benefits." This Statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when FASB Statements No. 87, "Employers' Accounting for
Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," were
issued. This statement requires changes in disclosures and would not affect the
financial condition or operating results of the Corporation. This Statement is
effective for fiscal years beginning after December 15, 1997.
In June 1998 the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of derivatives
depends on the derivative and the resulting designation. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of certain foreign currency
exposures. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier adoption is permitted. The Company has
not yet determined the impact, if any, of this Statement, including its
provisions for the potential reclassifications of investment securities on
operations, financial condition or equity.
YEAR 2000
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999. Banking, by its nature, is a very data processing intensive
industry. These potential shortcomings could result in a system failure or
miscalculations causing disruptions of operation, including among other things,
a temporary inability to process transactions, track important customer
information, provide convenient access to this information, or engage in normal
business operations.
-15-
WSFS has completed an assessment of its core financial and operational
software systems and has found them already in compliance, or the necessary
steps to bring them into compliance have been identified. Our Year 2000 project
plan is in place and is progressing on schedule with the expectation of having
all of our major systems Year 2000 compliant by the end of 1998, with a full
year of intensive testing during 1999. At this time, our Year 2000 Project Plan
is approximately 40% complete.
From a technology perspective, WSFS uses application software systems
and receives technical support from one of the world's largest data processing
providers to financial institutions, for nearly all of its critical customer
applications. This company has extensive resources dedicated at their corporate
level to assure that their financial institution customers are Year 2000
compliant. WSFS has received and is in the process of installing system fixes
for all of its major customer applications including Year 2000 compliant
versions of its software. In addition, WSFS has replaced or upgraded all of its
personal computers to Year 2000 compliant hardware and software. Management has
also evaluated all "imbedded systems" and at this time, foresees no serious Year
2000 problems with those systems.
From a cost perspective, WSFS was already involved in upgrading its
technology infrastructure and therefore, many potential Year 2000 issues were
avoided by the replacement of old systems with new technology. In addition to
these improvements, another $2.1 million has been budgeted for our Year 2000
Project. Approximately half of this amount will be incurred this year, with the
remainder to be allocated to future periods. A large portion of these costs will
be met from existing resources through a reprioritization of the technology
department initiatives with the remainder representing incremental costs.
Systems outside of the direct control of WSFS, such as ATM networks,
credit card processors, and the Fed Wire System, pose a more problematic issue.
A theoretical problem scenario would involve a temporary inability of customers
to access their funds through automated teller machines, point of service
terminals at retailer locations, or other shared networks. For this reason
alone, banks and their governing agencies are closely scrutinizing the progress
of our major industry service providers.
WSFS is currently developing contingencies for various Year 2000
problem scenarios. These contingency plans range from converting off of
third-party providers that we do not feel are adequately prepared for the Year
2000, to the temporary manual processing of certain critical applications if
necessary. It is expected that detailed contingency plans will be in place by
the end of 1998.
Successful and timely completion of the Year 2000 project is based on
management's best estimates, which were derived from numerous assumptions of
future events, which are inherently uncertain, including the availability of
certain resources, third party modification plans and other factors.
FORWARD LOOKING STATEMENTS
Within these financial statements we have included certain "forward
looking statements" concerning the future operations of the Corporation. It is
management's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing the Corporation of the protections of such safe
harbor with respect to all "forward looking statements" contained in our
financial statements. We have used "forward looking statements" to describe the
future plans and strategies including our expectations of the Corporation's
future financial results. Management's ability to predict results or the effect
of future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Delaware, the mid-Atlantic region and the country as a whole, loan
delinquency rates, and changes in federal and state regulation. These factors
should be considered in evaluating the "forward looking statements", and undue
reliance should not be placed on such statements.
-16-
Item 3. Quantitative and Qualitative Disclosures About 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 and deposit taking 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. 13, "Interest Rate Risk Management." This test measures
the impact on the net portfolio value of an immediate, parallel change in
interest rates in 100 basis point increments. Net portfolio value is defined as
the net present value of assets, liabilities, and off-balance sheet contracts.
The chart below represents the estimated impact of immediate changes in interest
rates at the specified levels at June 30, 1998 to the net portfolio value, as
well as the impact to the net interest margin.
Change in Change in Change in
Interest Rate Net Interest Net Portfolio
(Basis Points) Margin (1) Value (2)
-------------- ------------ --------------
+400 7% -23%
+300 5 -18
+200 4 -13
+100 2 -7
-100 -2 7
-200 -4 15
-300 -7 24
-400 -9 34
(1) This column represents the percentage difference between net interest
margin projected for the succeeding 12 months in a stable interest rate
environment and net interest income as projected by the various rate
scenarios.
(2) This column represents the percentage difference between estimated net
portfolio value of the Company in a stable interest rate environment and
the net portfolio value as projected in the various rate scenarios.
The Company's primary objective in managing interest risk is to balance
the adverse impact of changes in interest rates on the Company's net interest
income and capital, with the yield/cost spread in the Company's
asset/liability structure. The Company relies primarily on its asset/liability
structure to manage interest rate risk.
-17-
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) None.
(b) The following was reported under Other Events on Form 8-K, filed
on April 28, 1998.
On April 26, 1998, the registrant announced that it will resume
paying quarterly cash dividends to holders of common stock. The Board
of Directors declared a regular quarterly cash dividend of $.03 per
share of common stock. This dividend is payable on May 20, 1998 to
common stockholders of record on May 6, 1998. No financial statements
were filed.
-18-
SIGNATURES
Pursuant to the requirements 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: August 10, 1998 /s/ MARVIN N. SCHOENHALS
-----------------------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: August 10, 1998 /s/ MARK A. TURNER
------------------------------------------------
Mark A. Turner
Senior Vice President and
Chief Financial Officer
-19-