UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to _________________________
Commission File Number 0-16668
WSFS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-2866913
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
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(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 November 6, 1998:
Common Stock, par value $.01 per share 11,852,929
- -------------------------------------- -------------------
(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 Nine Months
Ended September 30, 1998 and 1997 (Unaudited)...................................... 3
Consolidated Statement of Condition as of September 30, 1998
(Unaudited) and December 31, 1997.................................................. 4
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited)............................................ 5
Notes to the Consolidated Financial Statements for the Three and Nine
Months Ended September 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
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 Nine months ended
September 30, September 30,
----------------------- ------------------------
1998 1997 1998 1997
---- ---- ----- ----
(Unaudited)
Interest income:
Interest and fees on loans ....................... $16,957 $18,061 $51,586 $53,951
Interest on mortgage-backed securities ........... 7,496 6,357 19,671 20,050
Interest and dividends on investment securities .. 655 710 2,385 1,963
Other interest income ............................ 2,206 2,813 7,675 6,678
------- ------- ------- -------
27,314 27,941 81,317 82,642
------- ------- ------- -------
Interest expense:
Interest on deposits ............................. 8,380 7,950 24,237 23,522
Interest on Federal Home Loan Bank advances ...... 6,175 5,962 17,675 16,667
Interest on federal funds purchased and securities
sold under agreement to repurchase ............. 2,730 3,002 8,413 9,153
Interest on senior notes ......................... 829 829 2,486 2,486
Interest on other borrowed funds ................. 99 98 263 270
------- ------- ------- -------
18,213 17,841 53,074 52,098
------- ------- ------- -------
Net interest income ................................... 9,101 10,100 28,243 30,544
Provision for loan losses ............................. 189 400 938 1,073
------- ------- ------- -------
Net interest income after provision for loan losses ... 8,912 9,700 27,305 29,471
------- ------- ------- -------
Other income:
Loan and lease servicing fee income .............. 899 799 2,596 2,383
Rental income on operating leases, net ........... 2,997 2,400 8,764 6,224
Deposit service charges .......................... 1,104 1,048 3,148 3,176
Credit/debit card and ATM fee income ............. 809 416 2,034 992
Securities gains ................................. 4 94 280 98
Other income ..................................... 588 294 1,439 999
------- ------- ------- -------
6,401 5,051 18,261 13,872
------- ------- ------- -------
Other expenses:
Salaries and other compensation .................. 2,998 3,529 9,328 9,768
Employee benefits and other personnel expense .... 857 832 2,821 2,574
Equipment expense ................................ 527 362 1,394 1,040
Data processing and operations expenses .......... 1,297 1,237 3,861 3,280
Occupancy expense ................................ 779 688 2,226 2,055
Marketing expense ................................ 391 270 938 819
Professional fees ................................ 390 307 1,243 976
Net costs of assets acquired through foreclosure . 4 127 510 754
Other operating expense .......................... 1,842 1,386 5,008 4,365
------- ------- ------- -------
9,085 8,738 27,329 25,631
------- ------- ------- -------
Income before taxes ................................... 6,228 6,013 18,237 17,712
Income tax provision .................................. 1,619 1,733 4,741 5,195
------- ------- ------- -------
Net income ............................................ $ 4,609 $ 4,280 $13,496 $12,517
======= ======= ======= =======
Earnings per share:
Basic ............................................ $ .37 $ .34 $ 1.08 $ 1.00
Diluted .......................................... .37 .34 1.07 .98
Other comprehensive income, net of tax:
Net income ....................................... $ 4,609 $ 4,280 $13,496 $12,517
Net unrealized holding gains on securities
Available-for-sale arising during the period .... 667 73 1,076 332
Less: reclassification adjustment for gains
Included in net income .......................... -- 32 467 32
------- ------- ------- -------
Comprehensive income .................................. $ 5,276 $ 4,321 $14,105 $12,817
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
-3-
- -20-
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
(Dollars in Thousands)
Assets
Cash and due from banks ...................................................... $ 36,485 $ 27,467
Federal funds sold and securities purchased under agreements to resell ....... 33,701 25,279
Interest-bearing deposits in other banks ..................................... 13,044 28,992
Investment securities held-to-maturity ....................................... 10,885 28,564
Investment securities available-for-sale ..................................... 30,369 50,091
Mortgage-backed securities held-to-maturity .................................. 306,525 272,900
Mortgage-backed securities available-for-sale ................................ 152,099 57,374
Investment in reverse mortgages, net ......................................... 30,793 32,109
Loans held for sale .......................................................... 1,560 2,183
Loans, net of allowance for loan losses of $ 23,975 at September 30, 1998
and $24,850 at December 31, 1997 ........................................... 736,139 762,280
Vehicles under operating leases, net ......................................... 185,995 172,115
Stock in Federal Home Loan Bank of Pittsburgh, at cost ....................... 21,750 20,252
Assets acquired through foreclosure .......................................... 3,128 3,826
Premises and equipment ....................................................... 10,965 9,001
Accrued interest and other assets ............................................ 22,254 22,784
----------- -----------
Total assets ................................................................. $ 1,595,692 $ 1,515,217
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ..................................................................... $ 825,141 $ 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 ......................................................... 10,288 7,879
Accrued expenses and other liabilities ....................................... 26,076 16,814
----------- -----------
Total liabilities ............................................................ 1,500,605 1,428,458
----------- -----------
Commitments and contingencies
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued and
outstanding, none at September 30, 1998 and December 31, 1997
Common stock $.01 par value, 20,000,000 shares authorized; issued
14,690,688 at September 30, 1998 and 14,622,588 at December 31, 1997 ..... 147 146
Capital in excess of par ..................................................... 57,685 57,469
Retained earnings ............................................................ 61,996 49,252
Accumulated other comprehensive income ....................................... 988 379
Treasury stock at cost, 2,457,809 shares at September 30, 1998 and 2,162,609
shares at December 31, 1997 .............................................. (25,729) (20,487)
----------- -----------
Total stockholders' equity ................................................... 95,087 86,759
----------- -----------
Total liabilities and stockholders' equity ................................... $ 1,595,692 $ 1,515,217
=========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
(Unaudited)
(Dollars in Thousands)
Operating activities:
Net income .................................................................. $ 13,496 $ 12,517
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan and lease losses ....................................... 1,784 1,859
Depreciation, accretion and amortization .................................. 894 1,086
Increase in accrued interest receivable and other assets .................. (591) 1,531
Origination of loans held for sale ........................................ (42,095) (18,289)
Proceeds from loans held for sale ......................................... 43,107 16,657
Increase in accrued interest payable and other liabilities ................ 9,113 9,526
Increase in reverse mortgage capitalized interest, net .................... (3,982) (3,359)
Other, net ................................................................ (726) 458
--------- ---------
Net cash provided by operating activities ....................................... 21,000 21,986
--------- ---------
Investing activities:
Net (increase) decrease in interest-bearing deposits in other banks ......... 15,948 1,846
Maturities of investment securities ......................................... 37,768 5,020
Sales of investment securities available-for-sale ........................... 20,055 20,070
Sales of mortgage-backed securities available-for-sale ...................... 29,883 13,229
Purchases of investment securities held-to-maturity ......................... (10,000) (46)
Purchases of investment securities available-for-sale ....................... (10,000) (49,922)
Repayments of mortgage-backed securities held-to-maturity ................... 111,117 62,377
Repayments of mortgage-backed securities available-for-sale ................. 28,249 5,075
Purchases of mortgage-backed securities held-to-maturity .................... (145,178) (52,132)
Purchases of mortgage-backed securities available-for-sale .................. (152,042) (17,593)
Repayments of reverse mortgages ............................................. 12,996 14,277
Disbursements for reverse mortgages ......................................... (7,545) (7,950)
Sales of loans .............................................................. 11,255 2,895
Purchases of loans .......................................................... (7,225)
Net decrease (increase) in loans ............................................ 19,060 (7,929)
Net increase in operating leases ............................................ (20,881) (109,702)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ............... (1,498) (5,623)
Sales of investment in real estate .......................................... 1,252
Sales of assets acquired through foreclosure, net ........................... 9,530 11,532
Premises and equipment, net ................................................. (3,192) (2,206)
--------- ---------
Net cash used for investing activities .......................................... (60,448) (116,782)
--------- ---------
Financing activities:
Net increase in demand and savings deposits ................................. 40,216 8,680
Net increase (decrease) in certificates of deposit and time deposits ........ 20,149 (11,938)
Receipts from FHLB borrowings ............................................... 769,000 530,000
Repayments of FHLB borrowings ............................................... (734,000) (417,546)
Receipts from reverse repurchase agreements ................................. 201,846 445,216
Repayments of reverse repurchase agreements ................................. (234,545) (435,827)
Net increase in federal funds purchased ..................................... 2,000
Dividends paid .............................................................. (752)
Issuance of common stock .................................................... 262 122
Purchase of treasury stock .................................................. (5,288) (5,811)
--------- ---------
Net cash provided by financing activities ....................................... 56,888 114,896
--------- ---------
Increase in cash and cash equivalents ....................................... 17,440 20,100
Cash and cash equivalents at beginning of period ............................ 52,746 50,051
--------- ---------
Cash and cash equivalents at end of period .................................. $ 70,186 $ 70,151
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year .......................................... $ 46,603 $ 45,019
Cash paid (refunded) for income taxes ........................................... 1,987 (1,542)
Loans transferred to assets acquired through foreclosure ........................ 6,316 5,812
Net change in unrealized losses on securities available-for-sale, net of tax .... 609 300
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 NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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 September 30, 1998, the
consolidated statement of operations for the three and nine months ended
September 30, 1998 and 1997 and the consolidated statement of cash flows for the
nine months ended September 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 September 30, 1998
presentation. The results of operations for the three and nine month periods
ending September 30, 1998 are not necessarily indicative of the expected results
for the full year ending December 31, 1998. Comprehensive income for the six and
three months ended September 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 nine months
ended September 30, ended September 30,
1998 1997 1998 1997
------- ------- ------- -------
Numerator:
Net income ................................. $ 4,609 $ 4,280 $13,496 $12,517
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
Weighted average shares ................. 12,433 12,437 12,467 12,528
Effect of dilutive securities:
Employee stock options ................... 128 194 168 190
------- ------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise of stock options ........ 12,561 12,631 12,635 12,718
======= ======= ======= =======
Basic earnings per share ..................... $ .37 $ .34 $ 1.08 $ 1.00
======= ======= ======= =======
Diluted earnings per share ................... $ .37 $ .34 $ 1.07 $ .98
======= ======= ======= =======
-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 19 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 through retail deposits and borrowings.
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 $80.5 million during the nine months ended
September 30, 1998. Asset growth included an increase of $128.4 million in
mortgage-backed securities. The increase in mortgage-backed securities reflects
the purchase of $267.0 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 approximately 140.0 million in principal repayments. Asset
growth was partially offset by decreases of $37.4 million in investment
securities and $26.1 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 $15.0 million in notes issued by the Federal Home Loan Bank offset
in part by the purchase of $10.0 million in FNMA notes. 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 risk profile of the
Company.
Total liabilities increased $72.1 million between December 31, 1997 and
September 30, 1998. During this timeframe, deposits increased $58.2 million to
$825.1 million at September 30, 1998. Interest credited to deposits totaled
$12.7 million for a net deposit growth of $45.5 million. In addition, accrued
interest on deposits grew $6.9 million during the nine month period to $8.9
million. Additionally, on November 10, 1998 the Corporation repurchased $6.0
million of its 11% Senior Notes at 104.875% of par with the intention to
extinguish this debt. The remaining $23.1 million in Senior Notes is first
callable by the Corporation on December 31, 1998 at 105% of par.
Capital Resources
Stockholders' equity increased $8.3 million between December 31, 1997
and September 30, 1998. This increase reflects net income of $13.5 million for
the first nine months of 1998 less a dividend distribution of $751,000. Net
unrealized gains on securities increased $609,000 for the first nine months of
1998. These increases were partially offset by the repurchase of 300,000 shares
for $5.2 million. At September 30, 1998, the Corporation held 2.5 million shares
of its treasury stock at a cost of $25.7 million. Subsequent to the end of the
third quarter, the Corporation purchased an additional 380,000 shares at a cost
of $5.2 million.
-7-
A table presenting the Bank's consolidated capital position relative to
the minimum regulatory requirements as of September 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) .... $122,544 12.19% $ 80,425 8.00% $100,531 10.00%
Core Capital (to Adjusted
Tangible Assets) ............. 115,590 7.26 63,667 4.00 79,584 5.00
Tangible Capital (to Tangible
Assets) ...................... 115,179 7.24 23,869 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets) ...................... 115,590 11.50 N/A N/A 60,319 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 September 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 September 30, 1998, the Bank's
liquidity ratio was 10.3% 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 September 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.
September 30, December 31,
1998 1997
------- -------
(Dollars in Thousands)
Nonaccruing loans:
Commercial ....................................... $ 2,101 $ 1,216
Consumer ......................................... 287 194
Commercial mortgages ............................. 2,449 3,919
Residential mortgages ............................ 3,189 3,710
Construction ..................................... 75 38
------- -------
Total nonaccruing loans ............................... 8,101 9,077
Nonperforming investments in real estate .............. 76 989
Assets acquired through foreclosure ................... 3,128 3,826
------- -------
Total nonperforming assets ............................ $11,305 $13,892
======= =======
Restructured loans .................................... $ 3,840 $ 4,740
======= =======
Past due loans:
Residential mortgages ............................ $ 294 $ 315
Commercial and commercial mortgages .............. 2,923 1,909
Consumer ......................................... 241 261
------- -------
Total past due loans .................................. $ 3,458 $ 2,485
======= =======
Ratios:
Nonaccruing loans/leases to total loans/leases (1) 0.86% 0.95%
Allowance for loan/lease losses to total gross
loans/leases (1) .............................. 2.63 2.69
Nonperforming assets to total assets ............. 0.71 0.92
Loan/lease loss allowance to nonaccruing
loans/leases (2) .............................. 297.11 273.06
Loan/lease and foreclosed asset allowance to total
Nonperforming assets (2) ....................... 216.59 178.50
(1) Total loans excludes loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased $2.6 million between September 30, 1998
and December 31, 1997. This decrease resulted primarily from a $1.5 million
reduction in nonaccruing commercial mortgages, a $913,000 reduction in
nonperforming investments in real estate and a $698,000 decline in assets
acquired through foreclosure. This was offset in part by an increase of $885,000
million in nonaccruing commercial loans. Restructured loans also improved
$900,000 to $3.8 million at September 30, 1998. An analysis of the change in the
balance of nonperforming assets is presented on the following page:
-9-
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
--------------------- ------------------
(In Thousands)
Beginning balance ............................. $ 13,892 $ 19,277
Additions ................................ 13,813 20,090
Collections/sales ........................ (13,042) (23,337)
Transfers to accrual/restructured status . (1,437) (2,122)
Transfers to investment in real estate ... -- --
Provisions, charge-offs, other adjustments (1,921) (16)
-------- --------
Ending balance ................................ $ 11,305 $ 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, which 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 September 30, 1998, interest-bearing liabilities exceeded
interest-earning assets that mature within one year (interest-sensitive gap) by
$61.9 million. The Corporation's interest-sensitive assets as a percentage of
interest-sensitive liabilities within the one-year window declined to 92.6% at
September 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 3.88% from a negative .18% at December 31, 1997. The change is the
result of the Corporation's continuing effort to effectively manage interest
rate risk.
COMPARISON FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Results of Operations
The Corporation reported net income of $4.6 million, or $.37 per share
(diluted), for the three months ended September 30, 1998, compared to $4.3
million, or $.34 per share (diluted), for the third quarter of 1997. Net income
for the nine months ended September 30, 1998 was $13.5 million, or $1.07 per
share (diluted), compared to $12.5 million, or $.98 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 $351,000 and
$2.1 million between comparable three and nine 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 September 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)............ $ 504,116 $ 11,200 8.89% $ 578,624 $ 12,773 8.83%
Commercial loans ................ 88,789 1,695 8.85 64,638 1,368 10.18
Consumer loans................... 162,057 3,997 9.79 156,027 3,882 9.87
----------- --------- ---------- ----------
Total loans.................... 754,962 16,892 9.12 799,289 18,023 9.18
Mortgage-backed securities (5)........ 465,335 7,496 6.44 372,684 6,357 6.82
Loans held for sale (3)............... 3,310 65 7.85 2,005 38 7.58
Investment securities (5)............. 41,293 655 6.34 44,066 710 6.44
Other interest-earning assets ........ 95,603 2,206 9.03 103,876 2,813 10.60
----------- --------- ---------- ----------
Total interest-earning assets.... 1,360,503 27,314 8.12 1,321,920 27,941 8.55
--------- ----------
Allowance for loan losses............. (24,491) (23,769)
Cash and due from banks............... 28,047 17,036
Vehicles under operating lease, net... 180,615 141,348
Other noninterest-earning assets...... 33,739 36,633
---------- ----------
Total assets..................... $1,578,413 $1,493,168
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 60,921 393 2.56 $ 57,814 380 2.61
Savings.......................... 197,746 1,631 3.27 163,799 1,196 2.90
Time............................. 452,869 6,356 5.57 446,692 6,374 5.66
----------- --------- ---------- ----------
Total interest-bearing deposits 711,536 8,380 4.67 668,305 7,950 4.72
FHLB advances......................... 435,000 6,175 5.63 406,812 5,962 5.81
Senior notes.......................... 29,100 829 11.39 29,100 829 11.39
Other borrowed funds.................. 198,104 2,829 5.71 211,486 3,100 5.86
----------- --------- ---------- ----------
Total interest-bearing liabilities 1,373,740 18,213 5.30 1,315,703 17,841 5.42
---------- ----------
Noninterest-bearing demand deposits... 86,118 72,726
Other noninterest-bearing liabilities. 21,743 22,576
Stockholders' equity.................. 96,812 82,163
---------- ----------
Total liabilities and stockholders'
equity........................ $1,578,413 $1,493,168
========== ==========
Excess (deficit) of interest-earning assets over
interest-bearing liabilities....... $ (13,237) $ 6,217
=========== ============
Net interest and dividend income...... $ 9,101 $ 10,100
========= ==========
Interest rate spread.................. 2.82% 3.13%
==== ====
Interest rate margin.................. 2.77% 3.15%
==== ====
Net interest and dividend income to
total average assets............. 2.39% 2.79%
==== ====
(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-
Nine Months Ended September 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)............ $ 510,397 $ 34,569 9.03% $ 583,183 $ 39,572 9.05%
Commercial loans ................ 88,308 5,088 8.99 51,540 3,269 9.93
Consumer loans................... 160,518 11,755 9.79 148,117 11,010 9.94
----------- --------- ---------- ----------
Total loans.................... 759,223 51,412 9.19 782,840 53,851 9.28
Mortgage-backed securities (5)........ 405,197 19,671 6.47 391,204 20,050 6.83
Loans held for sale (3)............... 2,963 174 7.83 1,629 100 8.18
Investment securities (5)............. 49,853 2,385 6.38 41,380 1,963 6.33
Other interest-earning assets ........ 109,230 7,675 9.27 98,368 6,678 8.95
----------- --------- ---------- ----------
Total interest-earning assets.... 1,326,466 81,317 8.27 1,315,421 82,642 8.44
-------- ----------
Allowance for loan losses............. (24,744) (23,699)
Cash and due from banks............... 24,288 17,059
Vehicles under operating lease, net... 175,889 124,213
Other noninterest-earning assets...... 33,365 36,018
---------- -----------
Total assets..................... $1,535,264 $1,469,012
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 60,462 1,166 2.58 $ 57,881 1,130 2.61
Savings.......................... 184,718 4,375 3.17 160,957 3,368 2.80
Time............................. 446,556 18,696 5.60 452,137 19,024 5.63
---------- -------- ---------- ----------
Total interest-bearing deposits 691,736 24,237 4.68 670,975 23,522 4.69
FHLB advances......................... 416,868 17,675 5.67 381,560 16,667 5.84
Senior notes.......................... 29,100 2,486 11.39 29,100 2,486 11.39
Other borrowed funds.................. 201,402 8,676 5.74 217,756 9,423 5.77
----------- --------- ---------- ----------
Total interest-bearing liabilities 1,339,106 53,074 5.28 1,299,391 52,098 5.35
--------- ----------
Noninterest-bearing demand deposits... 82,574 71,685
Other noninterest-bearing liabilities. 19,732 18,878
Stockholders' equity.................. 93,852 79,058
------------ ------------
Total liabilities and stockholders'
equity........................... $1,535,264 $1,469,012
========== ==========
Excess (deficit) of interest-earning assets over
interest-bearing liabilities..... $ (12,640) $ 16,030
=========== ============
Net interest and dividend income...... $ 28,243 $ 30,544
========= ==========
Interest rate spread.................. 2.99% 3.09%
==== ====
Net interest margin................... 2.93% 3.16%
==== ====
Net interest and dividend income to
total average assets............. 2.53% 2.83%
==== ====
(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 $999,000 between third quarter of 1998 and
1997 and $2.3 million between the nine months ended September 30, 1998 and 1997.
The net interest margin was adversely affected by the decline in interest rates,
the flattening of the yield curve and the growth in the operating lease
portfolio. Operating lease income, which increased $597,000 million and $2.5
million between the three and nine months ended September 30, 1998 and 1997,
respectively, is reported in other income and not in interest income while the
cost of funding these assets is included in interest expense, thereby depressing
the net interest margin.
Provision for Loan Losses
The following table represents a summary of the changes in the allowance
for loan losses during the periods indicated:
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
-------------------- -----------------
(Dollars in Thousands)
Beginning balance ..................................... $ 24,850 $ 24,241
Provision for loan losses ............................. 938 1,533
Reclass to allowance for lease credit losses .......... (259)
Reclass from allowance for ORE losses ................. 848
Charge-offs:
Residential real estate .......................... 184 193
Commercial real estate (1) ....................... 388 520
Commercial ....................................... 648 169
Consumer ......................................... 858 859
-------- --------
Total charge-offs ............................. 2,078 1,741
-------- --------
Recoveries:
Residential real estate .......................... 6 2
Commercial real estate (1) ....................... 121 95
Commercial ....................................... 20 22
Consumer ......................................... 118 109
-------- --------
Total charge-offs ............................. 265 228
-------- --------
Net charge-offs ....................................... 1,813 1,513
-------- --------
Ending balance ........................................ $ 23,975 $ 24,850
======== ========
Net charge-offs to average gross loans outstanding, net
Of unearned income (2) ........................... .32% .19%
-------- --------
(1) Includes commercial mortgage and construction loans.
(2) Ratio for the nine months ended September 30, 1998 is annualized.
The provision for loan losses decreased $211,000 between the third
quarter of 1998 and 1997 and $135,000 between the nine months ended September
30, 1997 and 1998. These changes in the provision reflect management's
continuing review of the losses expected in the loan portfolio.
-13-
Provision for Lease Losses
The following table represents a summary of the changes in the
allowance for lease credit losses during the periods indicated:
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
-------------------- -----------------
(Dollars in Thousands)
Beginning balance .................... $1,097 $ 499
Provision for lease credit losses .... 422 976
Reclass from allowance for loan losses 259
Charge-offs .......................... 640 791
Recoveries ........................... 163 154
------ ------
Net charge-offs ...................... 477 637
------ ------
Ending balance ....................... $1,042 $1,097
====== ======
Other Income
Noninterest income increased $1.4 million between the third quarter of
1997 and 1998 and $4.4 million between the nine month periods ended September
30, 1998 and 1997. The majority of this increase resulted from the rental income
from operating leases which increased $597,000 and $2.5 million between
comparable three and nine month periods. The growth in rental income was
attributable to a 19% increase in vehicles under operating leases between
September 30, 1997 and 1998. In addition, Credit/debit card and ATM fee income
increased $393,000 during the quarter and $1.0 million during the nine months
ended September 30, 1998. These increases reflect higher fee income due to the
expansion of the Bank's ATM network and increased usage of the Company's debit
card. The bank currently derives fee income from 373 ATMs. In addition, the
other income category increased $294,000 and $440,000 during the three and nine
month periods, respectively. Other income included increases in gains on the
sales of mortgage loans of $83,000 between comparable quarters and $465,000
between comparable nine-month periods. The increases in other income for the
nine months ended September 30, 1998 were partially offset by a loss of $218,000
on the sale of an investment in real estate.
Other Expenses
Noninterest expenses increased $347,000 between the third quarter of
1997 and 1998. The increase in expenses reflect the Company's commitment to
invest in its franchise growth. Since the third quarter of 1997, the Company has
added three branches for a total of 19. Also, owned and operate ATMs increased
from 65 at September 30, 1997 to 111 at September 30, 1998. As a result, other
expense, equipment expenses and marketing increased $456,000, $165,000 and
$121,000, respectively between comparable quarters. These increases were offset
in part by lower employee related expenses which decreased $506,000 between
comparable quarters. This decrease reflects lower expenses associated with stock
appreciation rights which declined $796,000 between the quarters, offset in part
by an increase in staffing levels to support the franchise growth.
For the nine months ended September 30, 1998 noninterest expenses
increased $1.7 million. Consistent with the quarterly results, the rise in
expenses reflects the company's commitment to invest in its franchise growth.
Consequently, other expenses, data processing expenses and equipment expenses
increased $643,000, $581,000 and $354,000, respectively. In addition,
professional fees grew $267,000 between the nine months ended September 30, 1997
and 1998. These increases were offset in part by employee related expenses which
decreased $193,000 between nine periods. Lower employee related expenses reflect
a $1.0 million decline in expenses associated with stock appreciation rights
between the nine months ended September 30, 1997 and 1998, offset in part by an
increase in staffing levels to support the franchise growth.
-14-
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 nine months ended September
30,1998 of $1.6 million and $4.7 million, respectively, compared to an income
tax provision of $1.7 million and $5.2 million, respectively for the same
periods of 1997. The effective tax rates for the three and nine months ended
September 30, 1998 was 26%, compared to 29% for the same periods in 1997. This
reduction in rates reflects the recognition in the financial statements of
certain tax benefits from the acquisition and subsequent merger of a reverse
mortgage lender into the Corporation.
The Internal Revenue Service has recently completed an audit of the
Corporation's 1993 and 1994 Federal income tax returns. The tax adjustment from
the audit was not material and the majority of adjustments are timing in nature.
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
-15-
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.
CONTINGENCIES
On October 5, 1998, the U.S. Supreme Court denied an appeal by a group
of plaintiffs seeking a class action suit. The plaintiffs alleged violations of
the Federal Truth in Lending Act, among other things, in connection with the
sale of reverse mortgages between 1988 and 1994 by Providential Home Income
Plan, Inc., a company purchased by WSFS in November 1994. These plaintiffs may
still make claims against the Company individually, but only through separate
cases in binding arbitration and not as a single class-action case in federal
court.
YEAR 2000
Banking, by its nature, is a very data processing intensive industry.
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. 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.
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 55% 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, including WSFS, 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 for core applications
will be in place by the end of 1998.
-16-
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.
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, deposit taking and wholesale banking 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 interest margin and on net
portfolio value of an immediate and 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 September 30, 1998, calculated in compliance with Thrift
Bulletin No. 13:
Change in Change in Change in
Interest Rate Net Interest Net Portfolio
(Basis Points) Margin (1) Value (2)
-------------- ---------- ---------
+400 4% -31%
+300 3 -24
+200 2 -17
+100 1 -9
-100 -2 9
-200 -3 19
-300 -6 30
-400 -8 43
(1) This column represents the percentage difference between net interest
margin in a stable interest rate environment and net interest margin as
projected in the various rate increments.
(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 increments.
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, while maximizing the yield/cost spread on 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) Report on Form 8-K, dated October 20, contained a press release
announcing earnings for the third quarter of 1998.
-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: November 13, 1998 /s/ MARVIN N. SCHOENHALS
----------------------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: November 13, 1998 /s/ MARK A. TURNER
----------------------------------------------
Mark A. Turner
Senior Vice President and
Chief Financial Officer
-19-