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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2002
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: 0-22399
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WAYPOINT FINANCIAL CORP.
(Name of Small Business Issuer in its Charter)
Pennsylvania 25-1872581
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
235 North Second Street,
Harrisburg, Pennsylvania 17101
(Address of Principal Executive Office) (Zip Code)
(717) 236-4041
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
------------
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [_]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [_]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]
As of February 28, 2003, there were issued and outstanding 33,001,118
shares of the Registrant's Common Stock.
The aggregate value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of the Common Stock as of
February 28, 2003 was approximately $587.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Proxy Statement for the 2003 Annual Meeting of
Stockholders (Part III).
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1
PART I
ITEM 1. Business
General
Waypoint Financial Corp. was organized as part of the October 17, 2000,
mutual-to-stock conversion of Harris Financial, MHC and merger of Harris
Financial, Inc. and York Financial Corp. As part of the conversion and merger,
Waypoint Financial sold 16,850,000 shares of common stock for $10.00 per share
in a subscription and underwritten public offering. In the conversion and
merger, Waypoint Financial succeeded to the operations of Harris Financial and
York Financial, and became the holding company for Harris Savings Bank and York
Federal Savings and Loan Association. The merger with York Financial was
accounted for as a pooling-of-interests. Accordingly, historical financial
information in this report includes restated operations to accommodate the
pooling-of-interests merger.
Waypoint Financial's assets consist primarily of 100% of the outstanding
shares of Waypoint Bank. Waypoint Financial also wholly owns Waypoint Insurance
Group, Waypoint Brokerage Services, Inc. and various other financial services
subsidiaries through which Waypoint Financial provides insurance, brokerage, and
other fee-based services. Waypoint Bank, whose predecessor was founded in 1886,
is primarily engaged in the business of attracting deposits and investing these
deposits into loans secured by residential and commercial real property,
commercial business loans, consumer loans, and investment securities. Waypoint
Bank also offers full-service trust and asset management services and employee
benefit plan services.
Market Area
Waypoint Financial conducts its business through fifty-nine offices,
including fifty-one offices located in the five county south-central region of
Pennsylvania that includes Dauphin, York, Cumberland, Lancaster and Lebanon
Counties, and eight offices in Maryland that includes Harford, Washington and
Baltimore Counties. In addition, Waypoint Financial maintains an operations
center, a business center, a support center, eight loan production offices, a
mortgage lending office, two commercial banking offices, and a commissioned
mortgage origination staff that originates residential mortgage loans for
Waypoint Financial primarily in Pennsylvania and Maryland, although loans are
originated in other states within the Mid-Atlantic region. Waypoint Financial's
insurance subsidiary, Waypoint Insurance Group, operates through offices in
York, Harrisburg, and Camp Hill, Pennsylvania.
The primary market area includes a mixture of rural, suburban and urban
markets, with the Harrisburg Metropolitan Statistical Area being the most
populous and more urban of the markets served by Waypoint Bank. Given the
wide-ranging presence of the branch network, the market area of Waypoint Bank
has a fairly diversified economy, with services, wholesale/retail trade,
distribution, manufacturing, and state and local government constituting the
basis of the economy.
Competition
Waypoint Financial faces intense competition for deposits and loans in its
primary market area. Waypoint Financial's most direct competition for deposits
historically has come from commercial banks and savings banks operating in its
primary market area, credit unions, and from other financial services companies,
such as brokerage firms, and insurance companies and the mutual fund industry.
Waypoint Financial also faces significant competition for investors' funds from
short-term money market securities, corporate securities and government
securities.
Waypoint Financial faces significant competition for loans from savings
banks and commercial banks in its market area, and from other financial service
providers, such as mortgage companies and mortgage brokers. Competition
increased as a result of the enactment of the Financial Services Modernization
Act of 1999, which eased restrictions on entry into the financial services
market by insurance companies and securities firms. Moreover, to the extent that
these changes permit banks, securities firms and insurance companies to
affiliate, the financial services industry could experience further
consolidation. Competition for deposits, for the origination of loans and the
provision of other financial services may limit Waypoint Financial's growth and
adversely impact its profitability in the future.
2
Loans
Loan Portfolio Analysis. The following table sets forth the composition of
Waypoint Financial's loan portfolio at the dates indicated. Waypoint Financial
had no concentration of loans exceeding 10% of total gross loans other than as
disclosed below.
At December 31
------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------- ------------------ ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
Residential mortgage loans:
One-to-four family......... $ 697,505 29.84% $1,025,688 41.27% $1,274,684 48.76% $1,270,978 51.62% $1,129,876 57.04%
Construction............... 23,636 1.01 36,040 1.45 90,712 3.47 103,278 4.19 99,242 5.01
Other...................... - - - - - - 20 - 6,962 0.35
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
721,141 30.85 1,061,728 42.72 1,365,396 52.23 1,374,276 55.81 1,236,080 62.41
Less:
Unearned premiums......... 95 - 159 0.01 210 0.01 296 0.01 471 0.02
Net deferred loan
origination fees......... 3,616 0.15 5,116 0.21 4,491 0.17 4,943 0.20 7,573 0.38
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total residential
mortgage loans........ 717,430 30.69 1,056,453 42.51 1,360,695 52.05 1,369,037 55.60 1,228,036 62.00
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial loans:
Commercial real estate..... 563,138 24.09 484,894 19.51 396,125 15.15 339,165 13.77 225,771 11.40
Commercial business........ 332,253 14.21 272,389 10.96 234,837 8.98 190,839 7.75 103,329 5.22
Construction and site
development............... 23,724 1.01 25,428 1.02 11,840 0.45 14,203 0.58 14,859 0.75
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
919,115 39.32 782,711 31.49 642,802 24.59 544,207 22.10 343,959 17.37
Less:
Net deferred loan
origination fees......... 1,308 0.06 1,171 0.05 923 0.04 934 0.04 643 0.03
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total commercial loans. 917,807 39.26 781,540 31.45 641,879 24.55 543,273 22.06 343,316 17.33
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Consumer and other
loans:
Manufactured housing....... 106,098 4.54 97,243 3.91 90,226 3.45 80,164 3.26 65,455 3.30
Home equity and second
mortgage.................. 360,102 15.40 322,182 12.96 326,024 12.47 231,290 9.39 204,700 10.33
Indirect automobile........ 138,530 5.93 127,258 5.12 117,377 4.49 98,768 4.01 23,937 1.21
Other(1)................... 74,289 3.18 78,075 3.14 55,939 2.14 119,625 4.86 100,181 5.06
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
679,019 29.05 624,758 25.14 589,566 22.55 529,847 21.52 394,273 19.91
Plus:
Dealer reserves(2)........ 25,845 1.11 24,721 0.99 23,476 0.90 20,698 0.84 13,996 0.71
Net deferred loan
origination fees......... (2,489) (0.11) (2,185) (0.09) (1,503) (0.06) (534) (0.02) 1,105 0.06
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer
and other loans....... 702,375 30.05 647,294 26.05 611,539 23.39 550,011 22.34 409,374 20.67
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total net loans before all
allowance for loan losses. 2,337,612 100.00 2,485,287 100.00 2,614,113 100.00 2,462,321 100.00 1,980,726 100.00
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Less:
Allowance for loan losses.. 27,506 23,069 22,586 23,127 19,891
---------- ---------- ---------- ---------- ----------
Loans receivable, net...... $2,310,106 $2,462,218 $2,591,527 $2,439,194 $1,960,835
========== ========== ========== ========== ==========
- ----------
(1) Includes education loans and unsecured personal loans.
(2) Includes reserves established for indirect auto and manufactured housing
loan portfolios.
3
Loan Maturity Schedule
The following table sets forth information as of December 31, 2002,
regarding the dollar amount of loans in Waypoint Financial's portfolio based on
their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Adjustable or floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
Over Three
Over One Through
Within Through Five Over Total After
One Year Three Years Years Fixed Five Years One Year Total
--------- ----------- ----------- ---------- ----------- ----------
(In Thousands)
Fixed-Rate Loans:
Residential mortgage loans:
One-to-four family ............................... $ 19,731 $ 25,024 $ 6,842 $ 479,887 $ 511,753 $ 531,484
Construction ..................................... 1,035 - - 22,601 22,601 23,636
--------- --------- ----------- --------- ---------- ----------
Total residential mortgage loans ............ 20,766 25,024 6,842 502,488 534,354 555,120
Commercial loans:
Commercial real estate ........................... 18,736 33,824 23,173 25,500 82,497 101,233
Commercial business .............................. 16,966 22,349 18,411 9,711 50,471 67,437
Construction and site development ................ 200 - - - - 200
--------- --------- ----------- --------- ---------- ----------
Total commercial loans ...................... 35,902 56,173 41,584 35,211 132,968 168,870
Consumer and other loans:
Manufactured housing ............................. 17 268 570 105,243 106,081 106,098
Home equity and second mortgage .................. 10,903 12,375 12,915 169,059 194,349 205,252
Indirect automobile and other .................... 6,519 49,789 107,077 21,811 178,677 185,196
--------- --------- ----------- --------- ---------- ----------
Total consumer and other loans .............. 17,439 62,432 120,562 296,113 479,107 496,546
--------- --------- ----------- --------- ---------- ----------
Total fixed-rate loans ...................... 74,107 143,629 168,988 833,812 1,146,429 1,220,536
Adjustable-Rate Loans:
Residential mortgage loans:
One-to-four family ............................... 86,685 58,138 20,998 200 79,336 166,021
--------- --------- ----------- --------- ---------- ----------
Total residential mortgage loans ............ 86,685 58,138 20,998 200 79,336 166,021
Commercial loans:
Commercial real estate ........................... 229,932 88,105 115,410 28,458 231,973 461,905
Commercial business .............................. 220,035 9,928 20,346 14,507 44,781 264,816
Construction and site development ................ 19,670 313 3,541 - 3,854 23,524
--------- --------- ----------- --------- ---------- ----------
Total commercial loans ...................... 469,637 98,346 139,297 42,965 280,608 750,245
Consumer and other loans:
Home equity and second mortgage .................. 154,850 - - - - 154,850
Other ............................................ 27,338 260 25 - 285 27,623
--------- --------- ----------- --------- ---------- ----------
Total consumer and other loans .............. 182,188 260 25 - 285 182,473
--------- --------- ----------- --------- ---------- ----------
Total adjustable-rate loans ................. 738,510 156,744 160,320 43,165 360,229 1,098,739
--------- --------- ----------- --------- ---------- ----------
Loans receivable, gross ............................. $ 812,617 $ 300,373 $ 329,308 $ 876,977 $1,506,658 $2,319,275
========= ========= =========== ========= ========== ==========
The following table sets forth the dollar amount of all loans maturing or
repricing after December 31, 2003 that have predetermined interest rates and
have floating or adjustable interest rates.
Floating or
Predetermined Rates Adjustable Rates Total
------------------- ------------------- -----------------
(In Thousands)
Residential mortgage loans $ 534,354 $ 79,336 $ 613,690
Commercial loans 132,968 280,608 413,576
Consumer and other loans 479,107 285 479,392
------------------- ------------------- -----------------
Total loans $ 1,146,429 $ 360,229 $1,506,658
=================== =================== =================
4
Residential Mortgage Lending
Mortgage lending historically was Waypoint Financial's primary business.
In recent years, Waypoint Financial has increased its emphasis on its business
banking and consumer lending, and decreased its reliance on traditional
one-to-four family residential real estate lending. Over the last five years,
the percentage of Waypoint Bank's loan portfolio that consists of one-to-four
family residential real estate loans has decreased significantly, due primarily
to increased growth in Waypoint Financial's commercial loan portfolio and
payoffs due to historically low interest rates.
One-to-Four Family Real Estate Loans. Waypoint Financial's primary
residential lending activity is the origination of loans secured by one-to-four
family residential real estate located in its primary market area. For the year
ended December 31, 2002, Waypoint Financial sold 99% of its one-to-four family
mortgage loan originations. Most one-to-four family loans recently sold by
Waypoint Financial have been sold on a non-recourse basis with the servicing
rights released. Management anticipates that Waypoint Financial will sell
substantially all of the one-to-four family mortgage loans originated in 2003.
Waypoint Financial also currently offers adjustable-rate mortgage loans
with terms of up to 30 years, with an interest rate based on the one year
Constant Maturity Treasury Bill index. Interest rate adjustments on such loans
are typically limited to a certain amount during any adjustment period and over
the life of the loan. Waypoint Financial originated an insignificant amount of
adjustable-rate loans in 2002 and sold a substantial portion of these loans,
generally on a servicing released basis.
Waypoint Financial underwrites fixed and adjustable rate one-to-four
family residential mortgage loans with loan-to-value ratios of up to 95%,
provided that a borrower obtains private mortgage insurance on loans that exceed
80% of the appraised value or sales price, whichever is less, of the secured
property. Waypoint Financial also requires that title insurance, hazard
insurance and, if appropriate, flood insurance be maintained on all properties
securing real estate loans made by Waypoint Financial. A licensed appraiser
appraises all properties securing one-to-four family first mortgage loans.
In an effort to provide financing for low and moderate income buyers,
Waypoint Financial offers Pennsylvania Housing Finance Agency mortgage loans to
qualified individuals. These loans are offered with fixed-rates of interest and
terms of up to 30 years, and must be secured by one-to-four family residential
property that is occupied by the owner. All of these loans are originated using
modified underwriting guidelines, based on rates and terms established by the
Pennsylvania Housing Finance Agency. These loans are generally offered with a
discounted interest rate (approximately 75 to 100 basis points). All
Pennsylvania Housing Finance Agency loans are originated in amounts of up to 95%
of the lower of the property's appraised value or the sale price. Private
mortgage insurance is required on all such loans. All of these loans are sold on
a servicing released basis to the Pennsylvania Housing Finance Agency
immediately after loan closing.
Construction Loans. Waypoint Financial originates construction loans to
individuals to acquire lots and construct personal residences. At December 31,
2002, residential construction loans amounted to $51.2 million, and the
unadvanced portion of construction loans totaled $27.5 million. Waypoint
Financial's residential construction loans generally provide for the payment of
interest only during the construction phase, which is usually six months. At the
end of the construction phase, the loan converts to a permanent mortgage loan.
Before making a commitment to fund a residential construction loan, Waypoint
Financial requires an appraisal of the property by an independent licensed
appraiser. Waypoint Financial also reviews and inspects each property before
disbursement of funds during the term of the construction loan. Loan proceeds
are disbursed after inspection based on the percentage of completion method.
Commercial Banking
Waypoint Financial's Commercial Banking Group offers commercial financial
products and services to businesses in its primary market area. The Commercial
Banking group originates commercial real estate loans, commercial business
loans, and construction and site development loans.
Commercial Real Estate Loans. Waypoint Financial's commercial real estate
loans are generally secured by owner-occupied properties used for business
purposes such as small office buildings, industrial facilities or retail
facilities primarily located in Waypoint Financial's primary market area.
Commercial real estate loans also include properties that are less than 50%
occupied by the borrower and are owned primarily for the production of rental
income. Although there may be occasional exceptions to the loan policy,
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the lower of cost or appraised value of
the property provided such loans comply with Waypoint Financial's current in
house loans-to-one borrower limit. Waypoint Financial's commercial real estate
loans may be made with terms of up to ten years, amortization not to exceed 20
years, and with three to five year fixed interest rates or variable interest
rates tied to market indices. In evaluating a commercial real estate loan
application, Waypoint Financial considers the net operating income of the
borrower's business, the
5
borrower's expertise, credit history and profitability and the value of the
underlying property. In addition, with respect to commercial real estate rental
properties, Waypoint Financial will also consider the term of the lease and the
quality of the tenants. Waypoint Financial has generally required that the
properties securing these real estate loans have debt service coverage ratios
(the ratio of cash flow before debt service to debt service) of at least 1.25x.
Environmental surveys are required for commercial real estate loans. Generally,
commercial real estate loans made to corporations, partnerships and other
business entities require personal guarantees by principals of the borrower. At
December 31, 2002, Waypoint Financial's largest commercial real estate loan had
a carrying value of $14.1 million, was secured by a first mortgage lien, and was
performing according to its original terms.
Commercial Business Loans. Waypoint Financial makes commercial business
loans primarily in its market area to a variety of professionals, sole
proprietorships and small to medium-size businesses. Waypoint Financial offers a
variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. Term loans are generally offered with
initial fixed rates of interest for the first three to five years and with terms
of up to ten years. Business lines of credit have floating rates of interest and
are payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a daily basis and are generally indexed to
Waypoint Financial's prime rate or the London Interbank Offered Rate (LIBOR).
When making commercial business loans, Waypoint Financial considers the
financial statements of the borrower, Waypoint Financial's lending history with
the borrower, the debt service capabilities of the borrower, the projected cash
flows of the business and the value of the collateral. Commercial business loans
are generally secured by a variety of collateral, primarily accounts receivable,
inventory and equipment, and are generally supported by personal guarantees.
However, Waypoint Financial also makes unsecured commercial loans available to
business clients with strong credit and who are well-known to Waypoint
Financial. Unsecured commercial loans are generally limited to short-term single
payment loans or lines of credit used to provide general corporate liquidity or
to provide for seasonal liquidity needs. These loans generally are offered at
floating rates of interest and are payable on demand or at a stated short-term
maturity.
Construction and Site Development Loans. Waypoint Financial also originates
construction and site development loans to developers and builders primarily to
finance the construction of single-family homes and subdivisions, the
construction of commercial development projects, and site development projects.
Loans to finance the construction of single-family homes and subdivisions are
generally offered to experienced builders with whom Waypoint Financial has an
established relationship. Residential development loans are typically offered
with terms of up to 36 months. The maximum loan-to-value limit applicable to
these loans is 80% of the appraised post-construction value or cost, whichever
is less. Construction loan proceeds are disbursed periodically as construction
progresses and as inspection by Waypoint Financial's approved appraisers
warrants.
Waypoint Financial also makes construction loans for commercial development
projects. The projects include multi-family, apartment, industrial, retail and
office buildings. These loans generally have an interest-only phase during
construction, and convert to permanent financing when construction is completed.
Disbursement of funds is at the sole discretion of Waypoint Financial and is
based on the progress of construction. The maximum loan-to-value limit
applicable to these loans is 80% of the appraised post- construction value or
cost, whichever is less.
Waypoint Financial also originates land loans to local contractors and
developers for the purpose of improving the property, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on the
property, are limited to 70% of the lower of the acquisition price or the
appraised value of the land and 85% of the present value of the net proceeds of
the developed lots, and have a term of up to two years with a floating interest
rate based on Waypoint Financial's internal base rate. Waypoint Financial's land
loans are generally secured by property in its primary market area. Waypoint
Financial requires title insurance, hazard insurance, flood insurance (if
applicable and available) and, if applicable, a hazardous waste survey reporting
that the land is free of hazardous or toxic waste.
Consumer and Other Loans
Waypoint Financial offers a variety of consumer and other loans, including
loans secured by manufactured housing, home equity and second mortgage loans
that are secured by owner-occupied one-to-four family residences, indirect home
improvement loans, indirect automobile loans and other loans.
Home Equity and Second Mortgage Loans. Waypoint Bank offers home equity and
second mortgage loans, including fixed-term installment loans, home equity lines
of credit and indirect home improvement loans. At December 31, 2002, unadvanced
amounts of home equity lines of credit totaled $167.1 million on commitments of
$320.7 million for an outstaning balance of $153.6 million. The underwriting
standards employed by Waypoint Financial for home equity and second mortgage
loans include a determination of the applicant's credit history, an assessment
of the applicant's ability to meet existing obligations and payments on the
proposed loan and the value of the collateral securing the loan. Home equity
lines of credit have adjustable rates of interest, which are indexed to the
prime rate as reported in The Wall Street Journal. Interest rates on home equity
lines of credit may be adjusted to no more than 18%.
6
Generally, the maximum loan-to-value ratio on home equity lines of credit,
including the outstanding amount of any first mortgage loan, is 90%. Waypoint
Financial offers fixed- and variable-rate home equity and second mortgage loans
with terms up to 15 years and home equity lines of credit with terms up to 20
years. The loan-to-value ratios of both fixed- and variable-rate home equity
and second mortgage loans are generally limited to 90% of the appraised value
of the real estate collateral adjusted for any first mortgage loans.
Manufactured Housing Loans. During 2002, Waypoint Financial ceased the
origination of manufactured housing loans through third-party service companies
after concluding that this lending method did not meet Waypoint profitability
requirements. Waypoint Finanacial did not incur any losses as a result of
curtailing this lending operation. At December 31, 2002, Waypoint Financial had
in its portfolio manufactured housing loans totaling $106.1 million, or 4.6% of
gross loans.
Prior to the curtailment of this lending operation, each manufactured
housing loan originated was acquired by Waypoint Financial at a premium to its
net asset value. The premium paid to acquire each loan was capitalized and
amortized as a yield adjustment over the term of the loan. One-third of the
premium was advanced to the service company when a contract was purchased. The
remaining two-thirds of the service fee was deposited into non- interest-bearing
reserve accounts which are held on deposit at Waypoint Financial with restricted
access. The amounts held in the reserve accounts are used for potential losses
on a manufactured home loan and to recapture the unearned service fee due from
the service company in the event of a payoff of a loan prior to its scheduled
maturity. A service company's fee is fully earned only when a loan reaches full
maturity. At December 31, 2002, Waypoint Financial's deferred premium on
manufactured housing loans totaled $22.3 million and amounts held in reserve
accounts totaled $10.9 million.
Indirect Auto and Other Consumer Loans. Waypoint Financial originates
indirect auto loans through a network of auto dealers, and was actively doing
business with approximately 110 dealers at December 31, 2002. No one dealership
originated more than 10% of the loan balances outstanding in Waypoint
Financial's portfolio at December 31, 2002. In developing its network, Waypoint
Financial has continued to focus on dealers in its primary market area. A
consumer lending sales officer has been dedicated full time to serve dealers in
order to expand on those relationships and to develop potential new dealer
relationships. The growth of the dealer network has been achieved through an
emphasis on quality service and the development of long- term relationships with
the owners and managers of the dealerships. Waypoint Financial does not
currently engage in auto lease financing. Waypoint Financial makes indirect auto
loans to purchase both new and used cars.
In connection with the origination of indirect auto loans, the interest
rate charged to the borrower on the underlying loan is generally one to two
percentage points higher than the "buy rate" or rate earned by Waypoint
Financial. The difference between the two rates is referred to as the "spread."
At loan inception, the dollar value of the spread over the contractual term of
the loan is prepaid by Waypoint Financial to the auto dealer. Such prepaid
amounts are generally subject to rebate to Waypoint Financial in the event the
underlying loan is prepaid in the first three months up to the life of the loan,
depending on the contract, or goes into default resulting in a repossession. The
risk of loss of amounts previously advanced to the dealer primarily depends upon
loan performance but also depends upon the financial condition of the dealer.
Consequently, the dealer's ability to refund any portion of the prepaid
interest, which is unearned, is subject to economic conditions, generally, and
the financial condition of the dealer. Since Waypoint Financial began indirect
auto lending, it has not written off interest spread prepaid to dealers where
the dealer failed to refund any portion of unearned prepaid interest. At
December 31, 2002, Waypoint Financial's unearned pre-paid interest on indirect
auto loans totaled $3.6 million.
Loans to One Borrower. Waypoint Financial has an internal limitation on the
amount of loans that it will extend to an individual borrower. In addition,
banking regulations establish a maximum amount that may be loaned by Waypoint
Bank to an individual or related group of borrowers. At December 31, 2002,
Waypoint Financial's internal limit on loans to a single borrower was $10.0
million, although exceptions are permitted subject to approval requirements set
forth in the loan policy. Waypoint Bank's statutory limit on loans to one
borrower or related group of borrowers was $61.6 million. As of December 31,
2002, Waypoint Financial's largest lending relationship, including the
borrower's related interests, was approximately $24.1 million, and Waypoint
Financial had a total of twenty-five other lending relationships, including the
borrowers' related interests, that exceeded $10.0 million. As of December 31,
2002, all such loans were performing according to their original contractual
terms.
Loan Approval Procedures and Authority. Waypoint Financial's lending
activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by Waypoint Financial's Board of Directors
and management. The Board of Directors has designated certain individuals of
Waypoint Financial and certain branch managers to consider and approve loans
within their designated authority.
All one-to-four family mortgage loans secured by the borrower's primary
residence and all residential construction and second mortgage loans and home
equity lines of credit may be approved by any two designated individuals.
7
All commercial loans, including commercial real estate loans, multi-family
loans, commercial construction and development loans and commercial business
loans in amounts of up to $10.0 million may be approved by the two designated
individuals. The Chief Executive Officer, Commercial Banking Manager, Chief
Credit Officer, or the Assistant Commercial Banking Officer must approve any
loan exceeding $1.0 million. All commercial loans in excess of $10.0 million and
up to $20.0 million require the approval of Waypoint Financial's loan committee
and the Chief Executive Officer. All commercial loans in excess of $20.0 million
require the majority approval of the executive committee of the Board of
Directors or the full Board of Directors.
Consumer loans, automobile loans and unsecured personal loans may be
approved by either one or two designated individuals depending on the amount of
the loan.
Loan Originations, Purchases and Sales. Waypoint Financial's mortgage
lending activities are conducted by its salaried and commissioned loan
personnel. Currently, Waypoint Financial uses 27 loan originators who solicit
and originate mortgage loans on behalf of Waypoint Financial. These loan
officers accounted for substantially all of the mortgage loans originated by
Waypoint Financial during 2002. Loan officers are compensated by a commission.
All loans originated by the loan officers are underwritten in conformity with
Waypoint Financial's loan underwriting policies and procedures as well as agency
and investor guidelines. At December 31, 2002, Waypoint Financial serviced
$477.0 million of loans for others. Waypoint Financial did not purchase any
loans during the five-year period ended December 31, 2002.
The following table sets forth Waypoint Financial's gross loan
originations and loans sold for the periods indicated.
For the Years Ended December 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- ---------- ----------
(In Thousands)
Loans originated:
Residential mortgage loans:
One-to-four family ................................ $ 309,722 $ 226,589 $ 144,938 $ 279,040 $ 478,332
Construction ...................................... 80,951 94,723 199,187 336,163 373,226
Other ............................................. - - - 6,100 8,900
---------- --------- --------- ---------- ----------
Total residential mortgage loans ............. 390,673 321,312 344,125 621,303 860,458
Commercial loans:
Commercial real estate ............................ 206,071 168,472 133,822 165,737 113,061
Commercial business ............................... 165,392 151,956 172,219 224,694 157,552
Construction and site development ................. 8,432 28,367 29,150 24,871 22,800
---------- --------- --------- ---------- ----------
Total commercial loans ....................... 379,895 348,795 335,191 415,302 293,413
Consumer and other loans:
Manufactured housing .............................. 22,803 18,028 20,467 26,300 5,400
Home equity and second mortgage ................... 110,293 91,817 112,104 129,239 102,529
Indirect automobile ............................... 78,897 67,165 60,609 91,685 21,279
Other ............................................. 22,848 42,094 38,748 68,875 56,847
---------- --------- --------- ---------- ----------
Total consumer loans ......................... 234,841 219,104 231,928 316,099 186,055
---------- --------- --------- ---------- ----------
Total loans originated ....................... $1,005,409 $ 889,211 $ 911,244 $1,352,704 $1,339,926
========== ========= ========= ========== ==========
Loans securitized and/or sold:
Residential mortgage loans:
One-to-four family ................................ $ 382,861 $ 237,853 $ 251,097 $ 325,158 $ 369,930
Loan Commitments. Waypoint Financial issues loan commitments to prospective
borrowers conditioned on the occurrence of certain events. Commitments are made
in writing on specified terms and conditions and are generally honored for up to
60 days from approval. At December 31, 2002, Waypoint Financial had loan
commitments and unadvanced loans and lines of credit totaling $638.5 million.
Loan Fees. In addition to interest earned on loans, Waypoint Financial
receives income from fees derived from loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period depending upon the volume and type
of loans made and competitive conditions. On loans originated by third-party
originators, Waypoint Financial may pay a premium to compensate an originator
for loans where the borrower is paying a higher rate on the loan.
8
Waypoint Financial charges loan origination fees which are calculated as a
percentage of the amount borrowed. As required by applicable accounting
principles, loan origination fees, discount points and certain loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. At December 31, 2002, Waypoint Financial
had approximately $7.4 million of net deferred loan fees. Waypoint Financial
amortized $.1 million of net deferred loan fees during the year ended December
31, 2002.
Non-performing Assets, Delinquencies and Impaired Loans. The majority of
the loan payments on first mortgages are due on the first day of each month.
When a borrower fails to make a required loan payment, Waypoint Financial
attempts to cure the deficiency by contacting the borrower and seeking the
payment. A late notice is mailed on the 16th day of the month. In most cases,
deficiencies are cured promptly. If a delinquency continues beyond the 16th day
of the month, the account is referred to an in-house collector. Waypoint
Financial will institute foreclosure or other proceedings after the 90th day of
a delinquency, as necessary, to minimize any potential loss.
Management informs the Board of Directors monthly of the amount of loans
delinquent more than 30 days and all foreclosed and repossessed property that
Waypoint Financial owns. Waypoint Financial ceases accruing interest on mortgage
loans when principal or interest payments are delinquent 90 days or more unless
management determines the loan principal and interest to be fully secured and in
the process of collection. Once the accrual of interest on a loan is
discontinued, all interest previously accrued is reversed against current period
interest income.
Waypoint Financial follows Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118 "Accounting by Creditors for Impairment of a Loan, an amendment to SFAS No.
114." At December 31, 2002 and 2001, Waypoint Financial had recorded investments
in impaired loans of $10.2 million and $8.2 million, respectively. At December
31, 2002 and 2001, allowance for loan losses had an allocation of $5.4 million
and $1.8 million, respectively, for impaired loans.
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans, accruing loans delinquent 90 days or more, other
non-performing assets and restructured loans at the dates indicated:
At December 31,
----------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In Thousands)
Non-accrual residential mortgage loans .................... $ 792 $ 1,345 $ 540 $ 263 $ 4,094
Non-accrual commercial loans .............................. 9,331 6,185 4,552 9,280 2,538
Non-accrual other loans ................................... 126 706 604 727 1,938
-------- -------- -------- -------- --------
Total non-accrual loans (1) .......................... 10,249 8,236 5,696 10,270 8,570
Loans 90 days or more delinquent
And still accruing ...................................... 9,743 14,660 17,481 13,279 9,134
-------- -------- -------- -------- --------
Total non-performing loans ........................... 19,992 22,896 23,177 23,549 17,704
Total foreclosed other assets ........................ 505 666 861 1,149 -
Total foreclosed real estate ......................... 492 804 3,086 3,754 14,088(2)
-------- -------- -------- -------- --------
Total non-performing assets ............................... $ 20,989 $ 24,366 $ 27,124 $ 28,452 $ 31,792
======== ======== ======== ======== ========
Total non-performing loans to total loans (3) ............. 0.86% 0.92% 0.89% 0.96% 0.90%
======== ======== ======== ======== ========
Total non-performing loans and
foreclosed real estate to total assets .................. 0.39% 0.45% 0.57% 0.65% 0.82%
======== ======== ======== ======== ========
- ----------
(1) Waypoint Financial would have recorded additional interest income on
non-accrual loans, had they been current, of $0.4 million, $0.3 million and $0.2
million in 2002, 2001 and 2000, respectively. No interest was included in
interest income in these periods related to these loans.
(2) The amount for 1998 includes a foreclosed apartment complex with a carrying
value of $6.0 million that was sold in 1999.
(3) Total loans excludes loans held for sale.
As of December 31, 2002, Waypoint Financial's only nonaccruing loan with a
carrying value in excess of $1.0 million was a commercial loan with a carrying
value of $2.5 million.
9
Real Estate Owned. Real estate acquired by Waypoint Financial as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at the lower of the
carrying value or fair value less estimated costs to sell at the date of
foreclosure. At the time of foreclosure, any excess of carrying value over fair
value is charged to the allowance for loan losses. Holding costs and declines in
fair value result in charges to expense after the property is acquired.
Asset Classification. Banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require their classification.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, it is charged
off in the quarter in which it is so classified, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified
substandard or doubtful can be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"special mention." Waypoint Financial performs an internal analysis of its loan
portfolio and assets to classify such loans and assets similar to the manner in
which such loans and assets are classified by the federal banking regulators. In
addition, Waypoint Financial regularly analyzes the losses inherent in its loan
portfolio and its nonperforming loans in determining the appropriate level of
the allowance for loan losses.
Allowance for Loan Losses. Please see Section II "Critical Accounting
Policies" of Management's Discussion and Analysis of Financial Condition and
Results of Operations for a detailed discussion of Waypoint Financial's
methodology for evaluating the adequacy of the allowance for loan losses.
Analysis of the Allowance for Loan Losses. The following table sets forth
information regarding Waypoint Financial's allowance for loan losses and net
charge-offs to average loans outstanding at the dates indicated.
At and for the Fiscal Years Ended December 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In Thousands)
Balance at beginning of period ................ $23,069 $22,586 $23,127 $19,891 $17,002
Pooling adjustment to conform
Accounting periods .......................... - - 234 - -
Provision for loan losses ..................... 10,840 6,996 5,070 4,840 6,172
Provision component related to
Unfunded commitments ........................ - - - 617 (503)
Charge-offs:
Residential mortgage loans ............... (853) (739) (1,168) (1,289) (1,837)
Commercial loans ......................... (2,766) (2,770) (2,482) (50) (607)
Consumer and other loans ................. (4,257) (4,545) (2,962) (1,364) (741)
------- ------- ------- ------- -------
Total charge-offs ................... (7,876) (8,054) (6,612) (2,703) (3,185)
Recoveries:
Residential mortgage loans ............... 275 50 161 262 327
Commercial loans ......................... 374 465 24 85 24
Consumer and other loans ................. 824 1,026 582 135 54
------- ------- ------- ------- -------
Total recoveries .................... 1,473 1,541 767 482 405
------- ------- ------- ------- -------
Balance at the end of period .................. $27,506 $23,069 $22,586 $23,127 $19,891
======= ======= ======= ======= =======
Net charge-offs to average loans
Outstanding ................................. 0.27% 0.25% 0.22% 0.10% 0.15%
======= ======= ======= ======= =======
Allowance for loan losses to total loans ...... 1.18% 0.93% 0.86% 0.94% 1.00%
======= ======= ======= ======= =======
Allowance for loan losses to non
performing loans ............................ 137.59% 100.76% 97.45% 98.21% 112.35%
======= ======= ======= ======= =======
10
Allocation of the Allowance for Loan Losses. The following table sets forth
the breakdown of the allowance for loan losses by loan category at the dates
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance to each category
is not necessarily indicative of future losses and does not restrict the use of
the allowance to absorb losses in any other category.
At December 31,
----------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------- -------------------- ------------------- -------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Total Total Total Total Total
Amount Reserves Amount Reserves Amount Reserves Amount Reserves Amount Reserves
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
Residential
Mortgage loans .. $ 1,201 4.37% $ 1,867 8.09% $ 2,165 9.59% $ 5,250 22.70% $ 5,665 28.48%
Commercial loans .. 19,235 69.93 15,722 68.15 14,625 64.75 10,949 47.34 7,622 38.32
Consumer and
Other loans ..... 4,424 16.08 4,529 19.64 4,178 18.50 4,112 17.78 3,236 16.27
General ........... 2,646 9.62 951 4.12 1,618 7.16 2,816 12.18 3,368 16.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total ..... $27,506 100.00% $23,069 100.00% $22,586 100.00% $23,127 100.00% $19,891 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Investment Activities
The Board of Directors reviews and approves Waypoint Financial's investment
policy on an annual basis. The Chief Executive Officer, Chief Financial Officer
and Chief Investment Officer, as authorized by the Board, implement this policy
based on the established guidelines within the written policy, and other
established guidelines, including those set periodically by the Asset/Liability
Management Committee. Investment decisions are based upon the quality of a
particular investment, its inherent risks, the composition of the balance sheet,
Waypoint Financial's maturity and amortization schedules, market expectations,
liquidity, income and collateral needs, and how the investment fits within
Waypoint Financial's interest rate risk strategy given its interest rate
sensitivity. Waypoint Financial's investment strategies are designed primarily
to manage the interest rate sensitivity of assets and liabilities, to generate a
favorable return without incurring imprudent interest rate and credit risks, to
complement lending activities, to provide liquidity, and to minimize Waypoint
Financial's tax liability.
Waypoint Financial's investment strategies incorporate a leveraged
investment program to increase net income and deploy capital that is not
committed for other uses by Waypoint Financial in the near term. Such
alternative uses of capital include, but are not limited to, loan growth, branch
network expansion, merger and acquisition investments, and stock repurchases.
Waypoint Financial restricts the leveraged investment program in a manner to
generate liquidity should capital be required for these or other alternative
uses. Waypoint Financial's investment leverage program generates net interest
income through the acquisition of securities that meet all policy guidelines and
generally are funded by matched-maturity borrowings.
Following are selected financial highlights related to Waypoint Financial's
leveraged investment program for the years ended December 31, 2002, 2001, and
2000:
2002 2001 2000
----------- ----------- -----------
Average leveraged investment balance $1,214,668 $1,021,017 $ 794,643
Contribution to net interest margin $ 16,479 $ 11,570 $ 9,159
Net interest margin including leverage 2.57% 2.43% 2.36%
Net interest margin excluding leverage 2.95% 2.77% 2.63%
Efficiency ratio including leverage 53.03% 55.76% 68.98%
Efficiency ratio excluding leverage 59.03% 60.61% 74.91%
11
Investment Portfolio
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. At December 31, 2002, all of Waypoint Financial's
securities were classified as "available-for-sale." Between December 31, 2000
and April 1, 2001, Waypoint Financial transferred all of the securities from its
held-to-maturity portfolio to its available-for-sale portfolio. The
held-to-maturity portfolio was recorded at $22.7 million as of December 31,
2000. At the time of transfer, the market value of this portfolio was $22.2
million resulting in an unrecognized loss upon transfer of $0.5 million, which
was recorded as a reduction in other comprehensive income for the first quarter
of 2001.
Waypoint Financial also invests significantly in mortgage-backed
securities, including primarily floating-rate and fixed-rate collateralized
mortgage obligations. A portion of these mortgage-backed securities is directly
insured or guaranteed by Freddie Mac and Fannie Mae. Waypoint Financial also
maintains a substantial investment in "private label" collateralized mortgage
obligations (i.e., non-agency collateralized mortgage obligations).
Private-issue collateralized mortgage obligations carry higher credit risks than
collateralized mortgage obligations insured or guaranteed by agencies of the
U.S. Government. Waypoint Financial invests only in private-issue collateralized
mortgage obligations rated "AA" or better at the time of purchase and management
believes the higher yields associated with these instruments have amply
compensated Waypoint Financial for the incremental increase in risks assumed
relative to investments in U.S. Government-backed collateralized mortgage
obligations.
Waypoint Financial invests in a large variety of mortgage-backed
securities, including balloon and fixed-rate certificates. Waypoint Financial
generally purchases short-term or planned amortization class collateralized
mortgage obligations. Waypoint Financial also maintains a significant portfolio
of tax-advantaged instruments. The remainder of the investment portfolio is
invested in U.S. government and agency instruments, corporate bonds (primarily
investment grade Trust-Preferred issues of major financial institutions rated by
Standard & Poors or Moody's), municipal securities, equity securities and
asset-backed securities.
At December 31, 2002, over 88% of the securities in Waypoint Financial's
investment portfolio were rated "AAA," with the remainder rated "AA", "A", or
non-rated equities. Waypoint Financial's securities and mortgage-backed
securities also carry market risk insofar as increases in market rates of
interest may cause a decrease in their market values. They also carry
pre-payment risk, insofar as they may be called or repaid before maturity in
times of low market interest rates, so that Waypoint Financial may have to
invest the funds at a lower interest rate. The marketable equities securities
portfolio also carries equity-price risk in that, if equity prices decline due
to unfavorable market conditions or other factors, Waypoint Financial's capital
would decrease.
12
The following table sets forth the amortized cost and fair value of
investments, mortgage-backed securities and other interest-earning securities at
the dates indicated.
At December 31,
--------------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Held to maturity:
U.S. Government and agencies ............. $ - $ - $ - $ - $ 3,500 $ 3,513
Corporate bonds .......................... - - - - 19,054 18,064
GNMA mortgage-backed securities .......... - - - - 155 163
---------- ---------- ---------- ---------- ---------- ----------
Total securities held-to-maturity ...... $ - $ - $ - $ - $ 22,709 $ 21,740
---------- ---------- ---------- ---------- ---------- ----------
Available for sale:
U.S. Government and agencies ............. $ 337,316 $ 344,769 $ 522,531 $ 525,358 $ 491,998 $ 482,430
Corporate bonds .......................... 78,089 67,216 89,788 82,675 63,609 58,657
Municipal securities ..................... 94,235 98,710 82,734 83,647 69,119 71,461
Equity securities ........................ 234,980 240,733 210,539 216,497 150,891 154,715
Asset-backed securities .................. 43,677 44,844 - - - -
Mortgage-backed securities:
Commercial mortgage-backed securities .... 23,599 24,402 10,002 10,000 - -
Agency PCs & CMOs ........................ 1,054,131 1,060,850 852,239 846,720 475,735 464,148
Private issue CMOs ....................... 905,110 910,588 784,491 787,463 629,795 623,461
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities ....... 1,982,840 1,995,840 1,646,732 1,644,183 1,105,530 1,087,609
---------- ---------- ---------- ---------- ---------- ----------
Total securities available for sale .... $2,771,137 $2,792,112 $2,552,324 $2,552,360 $1,881,147 $1,854,872
---------- ---------- ---------- ---------- ---------- ----------
Other interest-earning securities:
Interest-earning cash .................... $ 38,774 $ 38,774 $ 47,371 $ 47,371 $ 25,434 $ 25,434
---------- ---------- ---------- ---------- ---------- ----------
Total marketable securities and
interest-earning investments .......... $2,809,911 $2,830,886 $2,599,695 $2,599,731 $1,929,290 $1,902,046
========== ========== ========== ========== ========== ==========
13
Investment Portfolio Maturities
The following table sets forth information regarding the scheduled
maturities, carrying values, and average yields for Waypoint Financial's
available-for-sale investment securities at December 31, 2002.
At December 31, 2002
-------------------------------------------------------------------------
After One Through Five After Five Through Ten
One Year or Less Years Years
------------------------ ------------------------ ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
----------- ----------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
U.S. government and agency obligations .... $ 1,009 3.54% $ 57,030 4.43% $ 268,975 5.78%
Corporate bonds ........................... - - 4,988 2.21 2,012 6.76
Municipal securities(2) ................... - - - - 3,116 5.04
Equity(1),(2) ............................. - - - - - -
Asset-backed securities ................... - - 29,027 3.50 14,650 3.64
Mortgage-backed securities(3):
Commercial mortgage-backed .............. - - - - - -
GNMA PC's ............................... 71 8.85 - - - -
Agency CMOs(4) .......................... 38,146 3.32 139,780 3.34 158,148 3.19
Private issue CMOs ...................... 39,989 5.07 127,272 5.55 145,209 4.73
---------- --------- ----------- ---------- ---------- ----------
Total mortgage-backed securities ..... 78,206 4.22 267,052 4.39 303,357 3.93
---------- --------- ----------- ---------- ---------- ----------
Total marketable securities .......... $ 79,215 4.21% $ 358,097 4.29% $ 592,110 4.78%
========== ========= =========== ========== ========== ==========
------------------------------------------------------------
Over Ten Years Total
------------------------ -----------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
----------- ----------- ----------- ---------- ----------
U.S. government and agency obligations .... $ 10,302 5.62% $ 337,316 $ 344,769 5.54%
Corporate bonds ........................... 71,089 2.21 78,089 67,216 2.33
Municipal securities(2) ................... 91,119 5.27 94,235 98,710 5.27
Equity(1),(2) ............................. 234,980 4.26 234,980 240,733 4.26
Asset-backed securities ................... - - 43,677 44,844 3.54
Mortgage-backed securities(3):
Commercial mortgage-backed .............. 23,599 3.98 23,599 24,402 3.98
GNMA PC's ............................... - - 71 78 8.85
Agency CMOs(4) .......................... 717,986 3.67 1,054,060 1,060,772 3.55
Private issue CMOs ...................... 592,640 5.17 905,110 910,588 5.15
---------- ---------- ----------- ---------- ----------
Total mortgage-backed securities ..... 1,334,225 4.34 1,982,840 1,995,840 4.29
---------- ---------- ----------- ---------- ----------
Total marketable securities .......... $1,741,715 4.30% $2,771,137 $2,792,112 4.40%
========== ========== =========== ========== ==========
- ----------
(1) Includes FHLMC, FNMA and FHLB stocks.
(2) The yield on municipal obligations and certain equity issues have not been
computed on a tax equivalent basis.
(3) Amortized cost on mortgage-backed securities include scheduled principal
repayments in each period.
(4) Includes Freddie Mac, Fannie Mae and Ginnie Mae CMOs.
Sources of Funds
General. Deposits are the preferred source of Waypoint Financial's funds
for lending and other investment purposes. In addition to deposits, Waypoint
Financial obtains funds from the amortization and prepayment of loans and
mortgage-backed securities, the sale or maturity of loans or investment
securities, operations, advances from the Federal Home Loan Bank of Pittsburgh
and other borrowings. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by market interest rates. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources or on a longer term basis for general business purposes.
Waypoint Financial has used wholesale funding sources such as Federal Home Loan
Bank advances to support an investment leveraging strategy for the purpose of
increasing interest income and increasing return on equity.
Deposits. Consumer and commercial deposits are obtained primarily from
Waypoint Financial's primary market area through the offering of a broad
selection of deposit instruments including transaction, regular savings, money
market deposits and time deposits, including certificate of deposit accounts and
individual retirement accounts. The maturities of Waypoint Financial's
certificate of deposit accounts range from 7 days to 10 years. In addition,
Waypoint Financial offers a variety of commercial business products to small
businesses operating within its primary market area. Currently, Waypoint
Financial does not generally negotiate interest rates to attract jumbo
certificates, but accepts deposits of $100,000 or more based on posted rates
with certain discretion given to branch managers and the funding desk manager.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit, limits on the number of transactions,
and the interest rate, among other factors. Waypoint Financial regularly
evaluates the internal cost of funds, surveys rates offered by competing
institutions, reviews Waypoint Financial's cash flow requirements for lending,
monitors deposit withdrawal trends and liquidity and changes the rates offered
as appropriate.
While Waypoint Financial does not generally solicit funds outside its
primary market area, it does accept brokered deposits as liquidity demands
require and costs are favorable versus wholesale borrowing alternatives.
Included in Waypoint Financial's time deposits at December 31, 2002, 2001, and
2000 were $136.7 million, $205.0 million, and $127.9 million, respectively, of
brokered deposits.
Average Balance and Costs of Deposits. The following table sets forth the
average amount, percentage represented by such amount, and weighted average rate
paid on Waypoint Financial's deposits.
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------- --------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Percent Cost Amount Percent Cost Amount Percent Cost
----------- ------- -------- --------- ------- -------- ---------- ------- --------
Savings deposits ......... $ 240,786 9.53% 1.09% $ 217,134 8.66% 2.08% $ 184,404 7.02% 2.52%
Time deposits ............ 1,503,941 59.53 4.15 1,449,583 57.82 5.53 1,643,535 62.59 5.75
Transaction and money
market accounts ....... 781,763 30.94 0.88 840,392 33.52 2.65 798,006 30.39 3.25
---------- ------ ------ ---------- ------- ------ ---------- ------ ------
Total ............ $2,526,490 100.00% 2.85% $2,507,109 100.00% 4.27% $2,625,945 100.00% 4.76%
========== ====== ====== ========== ======= ====== ========== ====== ======
Deposits Flow. The following table summarizes the deposit activity for the
periods indicated.
Year Ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(In Thousands)
Beginning balance ................................................ $ 2,537,269 $ 2,625,720 $ 2,544,598
(Decrease) increase before interest credit ....................... (157,091) (197,637) 24,371
Interest credited ................................................ 73,212 109,186 124,135
----------- ----------- -----------
Net (decrease) increase .......................................... (83,879) (88,451) 148,506
Pooling adjustment to conform accounting years ................... - - (67,384)
----------- ----------- -----------
Ending balance .............................................. $ 2,453,390 $ 2,537,269 $ 2,625,720
=========== =========== ===========
15
During 2002 and 2001, Waypoint Financial maintained disciplined pricing
strategies in managing the deposit portfolio, particularly in money market and
time deposits. While these strategies have resulted in a decrease in total
deposits, most of the outflow occurred in high-cost product lines. This trend is
reflected in the average balances and costs noted in the preceding discussion.
Waypoint Financial believes such disciplined pricing strategies are critical
toward improving profitability.
Time Deposits by Maturity Schedule. The following table sets forth the
amount and maturities of certificates of deposit at December 31, 2002.
Amount Due
---------------------------------------------------------------
Less Than 1-2 2-3 After 3
Weighted Average Rate One Year Years Years Years Total
----------- ----------- ----------- ----------- -----------
(In Thousands)
4% or less ............................................. $ 478,886 $ 172,889 $ 16,217 $ 134,514 $ 802,506
4.01-6.00% ............................................. 139,134 74,468 14,449 199,229 427,280
6.01-8.00% ............................................. 94,186 118,747 7,114 3,140 223,187
----------- ----------- ----------- ----------- -----------
Total ............................................. $ 712,206 $ 366,104 $ 37,780 $ 336,883 $ 1,452,973
=========== =========== =========== =========== ===========
Certificates of Deposit of $100,000 and More. The following table presents
information as of December 31, 2002, regarding Waypoint Financial's certificates
of deposit and other time deposits of $100,000 or more by time remaining until
maturity and weighted average rate.
Weighted
Average
Amount(1) Rate
--------- --------
Three months or less ..................................... $ 62,602 2.90%
Over three months through six months ..................... 29,482 2.92
Over six months through twelve months .................... 22,615 3.77
Over twelve months ....................................... 71,647 5.08
-------- --------
Total ............................................... $186,346 3.85%
======== ========
- ----------
(1) Excludes brokered certificates of deposit.
Borrowings. In recent years, Waypoint Financial has borrowed from wholesale
sources to support an investment leveraging strategy and to supplement funding
provided by customer deposits. The objective of the investment leveraging
strategy is to increase net interest income and return on equity by deploying
excess capital into interest-earning investments. However, this strategy
generally reduces net interest margin due to the higher cost of non-deposit
funds as compared to core deposits. A significant portion of Waypoint
Financial's wholesale borrowings are placed with the Federal Home Loan Bank of
Pittsburgh.
The Federal Home Loan Bank functions as a central reserve bank providing
credit for Waypoint Financial and other member financial institutions. As a
member, Waypoint Financial is required to own capital stock in the Federal Home
Loan Bank and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
Federal Home Loan Bank's assessment of the institution's creditworthiness.
Waypoint Financial's maximum borrowing capacity with the Federal Home Loan Bank
totaled $2.984 billion at December 31, 2002, with remaining available capacity
totaling $942.3 million.
16
Waypoint Financial has entered into sales of securities under agreements to
repurchase with nationally recognized securities dealers. Reverse repurchase
agreements are accounted for as borrowings by Waypoint Financial and are secured
by designated investment securities. The proceeds of these transactions are used
to purchase investments yielding a higher rate than the borrowed funds and to
meet cash flow needs of Waypoint Financial. Waypoint Financial intends to use
these agreements in the future when management believes it is prudent to do so.
The following table sets forth information regarding borrowings by Waypoint
Financial at or for the dates indicated.
At or for Years Ended December 31,
----------------------------------------
2002 2001 2000
---------- ------------ ----------
(In Thousands)
Outstanding at end of period:
FHLB ............................................ $2,041,558 $1,842,170 $1,434,806
Repurchase agreements ........................... 372,897 449,770 189,853
Other ........................................... 25 47 670
---------- ---------- ----------
Total ....................................... $2,414,480 $2,291,987 $1,625,329
========== ========== ==========
Weighted average rate at end of period:
FHLB ............................................ 3.57% 4.11% 6.24%
Repurchase agreements ........................... 2.58 2.62 5.71
Other ........................................... 4.75 9.50 9.77
Total ....................................... 3.41% 3.82% 6.18%
Maximum amount outstanding at any month-end
During the period:
FHLB ............................................ $2,111,289 $1,870,888 $1,434,806
Repurchase agreements ........................... 479,344 499,239 313,000
Other ........................................... 15,025 530 15,663
---------- ---------- ----------
Total ....................................... $2,605,658 $2,370,657 $1,763,469
========== ========== ==========
Average amount outstanding during the period:
FHLB ............................................ $1,828,462 $1,616,444 $1,361,786
Repurchase agreements ........................... 373,266 414,054 204,664
Other ........................................... 1,072 552 5,297
---------- ---------- ----------
Total ................................... $2,202,800 $2,031,050 $1,571,747
========== ========== ==========
Weighted average rate during the period:
FHLB ............................................ 4.06% 5.28% 6.40%
Repurchase agreements ........................... 2.78 4.29 5.68
Other ........................................... 2.86 5.47 8.68
Total ................................... 3.85% 5.08% 6.31%
17
Subsidiary Activities
Waypoint Financial conducts its business activities primarily through its
wholly owned subsidiary Waypoint Bank, and the following wholly-owned
subsidiaries:
Waypoint Financial Investment Corporation. Waypoint Financial Investment
Corporation was incorporated in 2000 and manages certain investments on behalf
of Waypoint Financial.
Waypoint Service Corporation. Waypoint Service Corporation primarily owns
office facilities that it leases to Waypoint Bank and affiliates, and is also
engaged in land acquisition, development, and construction of future branch
locations.
Waypoint Brokerage Services, Inc. Waypoint Brokerage Services, Inc. was
incorporated in 1987 and is a full service broker/dealer subsidiary that
provides financial services to customers of Waypoint Bank and the general
public.
Owen Insurance Inc. Owen Insurance Inc. was acquired by Waypoint Financial
in 2000 and is a full-service insurance agency that provides a variety of
commercial and retail property and casualty insurance services. Owen Insurance
Inc. also provides a wide variety of life and other insurance products to
Waypoint Bank customers and the general public.
Waypoint Insurance Group. Waypoint Insurance Group operates primarily
through its 90%-owned subsidiary Waypoint Settlement Services, Inc., which
primarily engages in providing title insurance and settlement services in real
estate transactions to customers of Waypoint Bank and to the general public.
Waypoint Financial's wholly-owned financial institution subsidiary Waypoint
Bank, in addition to its own banking operations, also conducts business
activities through its direct subsidiaries as follows:
Waypoint Investment Corporation. Waypoint Investment Corporation was
established in 2001 and engages in investment management services for Waypoint
Bank. Waypoint Investment Corporation was created through the merger of Harris
Delaware Corporation (incorporated in 1995) and York Financial Investment
Corporation (incorporated in 1997).
H. S. Service Corporation. H. S. Service Corporation was incorporated in
1974 and operates joint ventures engaged in residential real estate development.
18
REGULATION
Waypoint Bank is examined and supervised extensively by the Office of Thrift
Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). Under
federal regulation, financial institutions are periodically examined to ensure
that they satisfy applicable standards with respect to their capital adequacy
assets, management, earnings, liquidity and sensitivity to market interest
rates. Following completion of its examination, the federal agency critiques the
institution's operations and assigns a rating (this is known as an institution's
CAMELS). Under federal law, an institution may not disclose its CAMELS rating to
the public. However, Waypoint Bank has been advised that it is not the subject
of regulatory concern as a result of its examination in 2001 by the OTS.
Waypoint Bank is also a member of, and owns stock in, the Federal Home Loan Bank
of Pittsburgh, which is one of the twelve regional banks in the Federal Home
Loan Bank System. This regulation and supervision limits the activities in which
Waypoint Bank may engage. Waypoint Bank is also regulated to a lesser extent by
the Board of Governors of the Federal Reserve System, governing reserves to be
maintained against deposits and other matters. The OTS examines Waypoint Bank
and prepares reports for the consideration of its board of directors on any
operating deficiencies. Waypoint Bank's relationship with its depositors and
borrowers is also regulated to a great extent by both federal and state laws,
especially in matters concerning the ownership of savings accounts and the form
and content of Waypoint Bank's mortgage documents. Any change in this
regulation, whether by the FDIC, OTS, or Congress, could have a material adverse
impact on Waypoint Financial and Waypoint Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of federal savings banks are subject to
extensive regulation, including restrictions or requirements with respect to
loans to one borrower, the percentage of non-mortgage loans or investments to
total assets, capital distributions, permissible investments and lending
activities, liquidity, transactions with affiliates and community reinvestment.
In particular, many types of loans, such as commercial real estate, commercial
business and consumer loans, are limited to a specific percentage of capital or
assets. The description of statutory provisions and regulations applicable to
savings associations set forth herein does not purport to be a complete
description of these statutes and regulations and their effect on Waypoint Bank.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and together with the risk-based capital standard, a 4% Tier 1 risk-based
capital standard. In general, institutions must deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
The risk-based capital standards for savings institutions require the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk- weighted
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for- sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge. At December 31, 2002, Waypoint Bank
exceeded each of its capital requirements.
Loans to One Borrower. Federal savings associations generally may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of unimpaired capital and surplus on an unsecured basis. An additional amount
may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is
secured by readily marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate. As of
December 31, 2002, Waypoint Bank was in compliance with its
loans-to-one-borrower limitations.
19
Qualified Thrift Lender Test. As a federal savings association, Waypoint
Bank is required to satisfy a qualified thrift lender test whereby it must
maintain at least 65% of its "portfolio assets" in "qualified thrift
investments," which consist primarily of residential mortgages and related
investments, including mortgage-backed and related securities. "Portfolio
assets" generally means total assets less specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property
used to conduct business. A savings association that fails the qualified thrift
lender test must either convert to a bank charter or operate under specified
restrictions. Waypoint Bank met the qualified thrift lender test throughout 2002
as reported in its quarterly Thrift Financial Reports to the OTS.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution. A savings
institution must file an application for OTS approval of a capital distribution
if either (1) the total capital distributions for the applicable calendar year
exceed the sum of the institution's net income for that year to date plus the
institution's retained net income for the preceding two years, (2) the
institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company, as well as certain other institutions, must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
Any additional capital distributions would require prior OTS approval. If
Waypoint Bank's capital falls below its required levels or the OTS notifies it
that it is in need of more than normal supervision, Waypoint Bank's ability to
make capital distributions could be restricted. In addition, the OTS may
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by regulation, if the OTS determines that the
distribution would constitute an unsafe or unsound practice.
Liquidity. The OTS requires Waypoint Bank to maintain sufficient liquidity
to ensure its safe and sound operation. Effective July 18, 2001, the OTS no
longer requires savings institutions to maintain an average daily balance of
liquid assets of at least 4% of its liquidity base.
Community Reinvestment Act and Fair Lending Laws. Federal savings banks
have a responsibility under the Community Reinvestment Act (CRA) and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. An institution's failure to comply with the provisions of the CRA
could, at a minimum, result in regulatory restrictions on its activities, and
failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. Waypoint Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination.
Transactions with Related Parties. Waypoint Bank's authority to engage in
transactions with related parties or "affiliates" or to make loans to specified
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act. The
term "affiliates" for these purposes generally means any company that controls
or is under common control with an institution, including Waypoint Financial
Corp. and its non-savings institution subsidiaries. Section 23A limits the
aggregate amount of certain "covered" transactions with any individual affiliate
to 10% of the capital and surplus of the savings institution and also limits the
aggregate amount of covered transactions with all affiliates to 20% of the
savings institution's capital and surplus. Covered transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that covered transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
Waypoint Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities controlled by these persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, by
Regulation O, and also by the Sarbanes-Oxley Act of 2002. Among other things,
these regulations generally require these loans to be made on terms
substantially the same as those offered to unaffiliated individuals and do not
involve more than the normal risk of repayment. However, recent regulations now
permit executive officers and directors to receive the same terms through
benefit or compensation plans that are widely available to other employees, as
long as the director or executive officer is not given preferential treatment
compared to other participating employees. Regulation O also places individual
and aggregate limits on the amount of loans Waypoint Bank may make to these
persons based, in part, on Waypoint Bank's capital position, and requires
approval procedures to be followed. At December 31, 2002, Waypoint Bank was in
compliance with these regulations.
20
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement action against all
"institution-related parties," including stockholders, and attorneys, appraisers
and accountants who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution. Formal enforcement
action may range from the issuance of a capital directive or cease and desist
order to removal of officers and/or directors of the institutions, receivership,
conservatorship or the termination of deposit insurance. Civil penalties cover a
wide range of violations and actions, and range up to $25,000 per day, unless a
finding of reckless disregard is made, in which case penalties may be as high as
$1 million per day. The FDIC also has the authority to recommend to the Director
of the OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take supervisory actions against undercapitalized institutions, the severity of
which depends upon the institution's level of capital. Generally, a savings
institution that has total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has the total risk-based capital
less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Generally, the applicable banking regulator is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date an institution receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, numerous mandatory supervisory
actions become immediately applicable to the institution, including, but not
limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The OTS could also take any one of a
number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based deposit insurance assessment system. The
FDIC assigns an institution to one of three capital categories, based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, and one of three supervisory subcategories
within each capital group. The three capital categories are well capitalized,
adequately capitalized and undercapitalized. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If this type of action is taken by the FDIC, it could
have an adverse effect on the earnings of Waypoint Bank.
Federal Home Loan Bank System
The Federal Home Loan Bank System (FHLB) provides a central credit facility
primarily for member institutions. Waypoint Bank, as a member of the FHLB of
Pittsburgh, is required to acquire and hold shares of capital stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its borrowings from the FHLB, whichever is greater. As of
December 31, 2002, Waypoint Bank was in compliance with this requirement. The
FHLB's are required to provide funds for the resolution of insolvent thrifts and
to contribute funds for affordable housing programs. These requirements could
reduce the amount of dividends that the FHLB's pay to their members and could
also result in the FHLB's imposing a higher rate of interest on advances to
their members.
21
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At December 31,
2002, Waypoint Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
Waypoint Financial is a non-diversified unitary savings and loan holding
company, subject to regulation and supervision by the OTS. A non-diversified
unitary savings and loan holding company is a savings and loan holding company
which controls only one subsidiary savings association and which together with
all related activities represented more than 50% of the holding company's
consolidated net worth. In addition, the OTS has enforcement authority over
Waypoint Financial and its non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a risk to the subsidiary savings institution.
Under prior law, a unitary savings and loan holding company was not
generally restricted as to the types of business activities in which it may
engage, provided that its subsidiary savings bank continued to be a qualified
thrift lender. The Gramm-Leach-Bliley Act of 1999, however, restricts unitary
savings and loan holding companies not existing or applied for before May 4,
1999 to activities permissible for financial holding companies under the law or
for multiple savings and loan holding companies. Waypoint Financial does not
qualify to be grandfathered and is limited to the activities permissible for
financial holding companies or for multiple savings and loan holding companies.
A financial holding company may engage in activities that are financial in
nature, incidental to financial activities or complementary to a financial
activity. A multiple savings and loan holding company is generally limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
additional activities authorized by OTS regulation.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with specified
exceptions, more than 5% of a non-subsidiary savings institution, a
non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by Federal law; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources, future prospects of Waypoint
Bank and institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act of 1934. In
particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties for
violations of the securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period of time and
are subject to rulemaking by the SEC. Because Waypoint Financial's common stock
is registered with the SEC, it is currently subject to this Act.
Other Laws and Regulations
State usury and credit laws limit the amount of interest and various other
charges collected or contracted by a financial institution on loans. Waypoint
Financial's loans are also subject to federal laws applicable to credit
transactions, such as the
. Federal Truth-In-Lending Act, which governs disclosures of credit
terms to consumer borrowers;
. Home Mortgage Disclosure Act, requiring financial institutuions to
provide information to enable public officials to determine whether
a financial institution is fulfilling its obligations to meet the
housing needs of the community it serves;
22
. Equal Credit Opportunity Act prohibiting discrimination on the basis
of race, creed or other prohibitive factors in extending credit;
. Real Estate Settlement Procedures Act, which requires lenders to
disclose certain information regarding the nature and cost of real
estate settlements, and prohibits certain lending practices, as well
as limits escrow account amounts in real estate transactions;
. Fair Credit Reporting Act governing the manner in which consumer debts
may be collected by collection agencies; and
. Various rules and regulations of various federal agencies charged with
the implementation of such federal laws.
Additionally, Waypoint Financial's operations are subject to additional
federal laws and regulations, including, without limitation:
. Privacy provisions of the Gramm-Leach-Bliley Act and related
regulations, which require us to maintain privacy policies intended to
safeguard customer financial information, to disclose the policies to
our customers and to allow customers to "opt out" of having their
financial service providers disclose their confidential financial
information to non-affiliated third parties, subject to certain
exceptions;
. Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial
records;
. Consumer protection rules for the sale of insurance products by
depository institutions, adopted pursuant to the requirements of the
Gramm-Leach-Bliley Act; and
. Title III of the USA Patriot Act, which requires financial
institutions to take certain actions to help prevent, detect and
prosecute international money laundering and the financing of
terrorism.
Prospective Regulation and Legislation
Regulations that affect Waypoint Bank and Waypoint Financial, on a daily
basis, may be changed at any time, and the interpretation of the relevant law
and regulations may also change because of new interpretations by the
authorities who administer those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
OTS, the FDIC, the SEC, or the U.S. Congress, could have a material impact on
the business and operations of Waypoint Bank and Waypoint Financial Corp.
Legislation enacted several years ago provided that the Bank Insurance Fund
and the Savings Association Insurance Fund would have merged on January 1, 1999
if there were no savings associations as of that date. Congress did not enact
legislation eliminating the savings association charter by that date and
accordingly, the Bank Insurance Fund and the Savings Association Insurance Fund
have not been merged, and we are unable to predict whether such funds will
eventually be merged and what effect, if any, that may have on our business.
23
TAXATION
Federal Taxation
For federal income tax purposes, Waypoint Financial and its subsidiaries
file a consolidated federal income tax return on a calendar year basis, using
the accrual method of accounting.
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. However, transactions that would require recapture of the
pre-1988 tax bad debt reserve include redemption of Waypoint Bank's stock,
payment of dividends or distributions in excess of earnings and profits, or
failure by the institution to qualify as a bank for federal income tax purposes.
At December 31, 2002, Waypoint Bank had a balance of approximately $35.0 million
of pre-1988 bad debt reserves. A deferred tax liability has not been provided on
this amount as management does not intend to make distributions, redeem stock or
fail certain bank tests that would result in recapture of the reserve.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Waypoint Financial Corp.
accounts for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred-tax liabilities and assets are adjusted to reflect changes in
the tax laws.
Waypoint Financial is subject to the corporate alternative minimum tax to
the extent it exceeds Waypoint Financial's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base are a number of preference items,
including interest on certain tax-exempt bonds issued after August 7, 1986, and
an "adjusted current earnings" computation which is similar to a tax earnings
and profits computation. In addition, for purposes of the alternative minimum
tax, the amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
State Taxation
Waypoint Financial is subject to the Pennsylvania corporate net income tax
and capital stock and franchise tax and, to a lesser extent, certain taxes of
other states The corporate net income tax rate for 2002 is 9.99% and is imposed
on Waypoint Financial's unconsolidated taxable income for federal purposes with
certain adjustments. In general, the capital stock tax is a property tax imposed
at the rate of approximately .724% (for 2002) of a corporation's capital stock
value, which is determined in accordance with a fixed formula based upon average
net income and net worth.
Waypoint Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax
Act, which taxes net earnings, determined in accordance with accounting
principles generally accepted in the United States, with some adjustments, at an
annual rate of 11.5%. The Mutual Thrift Institutions Tax Act exempts Waypoint
Bank from all other taxes imposed by the Commonwealth of Pennsylvania for state
income tax purposes, and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. In
computing net earnings, the Mutual Thrift Institutions Tax Act allows for the
deduction of interest earned on state and federal securities, while disallowing
a percentage of a thrift's interest expense deduction in the proportion of
interest income on those securities to the overall interest income of the
savings bank. Net operating losses, if any, thereafter can be carried forward
three years.
ITEM 2. Properties
Waypoint Financial currently conducts its business through its main office
located in Harrisburg, Pennsylvania and 59 additional full-service offices. The
aggregate net book value of Waypoint Financial's premises and equipment was
$48.8 million at December 31, 2002.
Waypoint Financial's accounting and record keeping activities are
maintained on an in-house data processing system. Waypoint Financial owns data
processing equipment it uses for its internal processing needs. The net book
value of such data processing equipment and related software at December 31,
2002 was $6.6 million. During the fourth quarter of 2002, Waypoint Financial
executed a conversion to a new core banking software and hardware platform.
Expenditures associated with this project included $4.3 million in equipment,
software, and related capitalized costs. Waypoint Financial expects to derive
significant functionality and efficiency improvements as a result of this
implementation.
24
ITEM 3. Legal Proceedings
There are various claims and lawsuits in which Waypoint Financial is
periodically involved incident to Waypoint Financial's business. In the opinion
of management, no material loss is expected from any of such pending claims or
lawsuits.
ITEM 4. Submission of Matters to a Vote of Security Holders
Waypoint Financial had no matters submitted to a vote of security holders
during the year ended December 31, 2002.
25
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Waypoint Financial common stock trades on the NASDAQ National Market under
the symbol "WYPT." As of January 31, 2003, Waypoint Financial had 8,373
stockholders of record. The following table sets forth the high and low sales
price for Waypoint Financial common stock and the cash dividends per share for
the periods indicated.
High Low
Sales Sales Cash Dividend
Year ended December 31, 2002 Price Price Declared per Share
- ---------------------------- ------- -------- --------------------
Quarter ended December 31 .................................................... $18.73 $15.71 $ 0.10
Quarter ended September 30 ................................................... $19.11 $16.20 $ 0.10
Quarter ended June 30 ........................................................ $19.62 $16.49 $ 0.10
Quarter ended March 31 ....................................................... $16.90 $14.28 $ 0.10
Year ended December 31, 2001
- ----------------------------
Quarter ended December 31 .................................................... $15.08 $12.96 $0.085
Quarter ended September 30 ................................................... $14.87 $12.15 $0.085
Quarter ended June 30 ........................................................ $12.60 $10.02 $0.085
Quarter ended March 31 ....................................................... $11.69 $ 9.75 $0.085
Payment of dividends on Waypoint Financial's common stock is subject to
determination and declaration by the Board of Directors and depends upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, Waypoint Financial's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
26
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial
and other data of Waypoint Financial Corp. (Waypoint Financial) and its
subsidiaries for the periods and at the dates indicated. The information is
derived in part from, and should be read together with, the Consolidated
Financial Statements and Notes thereto of Waypoint Financial contained elsewhere
herein.
At December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
Total assets $5,425,013 $5,373,743 $4,758,186 $4,366,920 $3,862,095
Loans receivable, net 2,310,106 2,462,218 2,591,527 2,439,194 1,960,835
Loans held for sale, net 30,328 42,453 18,415 6,061 45,049
Marketable securities 2,792,112 2,552,360 1,877,581 1,648,087 1,601,122
Deposits 2,453,390 2,537,269 2,625,720 2,544,598 2,320,632
Borrowings 2,414,480 2,291,987 1,625,329 1,488,390 1,183,216
Stockholders' equity 456,671 486,215 445,568 279,202 300,380
Year Ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In Thousands)
Selected Operating Data:
Interest Income $281,134 $325,474 $324,558 $284,581 $251,176
Interest expense 157,913 210,129 224,319 184,708 158,976
-------- -------- -------- -------- --------
Net interest income 123,221 115,345 100,239 99,873 92,200
Provision for loan losses 10,840 6,996 5,070 4,840 6,172
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 112,381 108,349 95,169 95,033 86,028
Noninterest income 38,996 29,366 15,528 16,803 25,359
Noninterest expense(6) 86,023 80,691 96,097 74,059 70,138
-------- -------- -------- -------- --------
Income before taxes 65,354 57,024 14,600 37,777 41,249
Provision for income taxes 18,200 17,886 3,905 9,805 12,350
-------- -------- -------- -------- --------
Net income $ 47,154 $ 39,138 $ 10,695 $ 27,972 $ 28,899
======== ======== ======== ======== ========
At or for the Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Selected Operating Ratios and Other Data
Performance Ratios:
Return on average assets (net income divided
by average total assets) 0.90% 0.77% 0.24% 0.67% 0.80%
Return on average equity (net income divided
by average equity) 10.03 8.34 3.76 9.51 9.69
Average net interest rate spread(1) 2.37 2.12 2.18 2.34 2.41
Net interest margin (2) 2.57 2.43 2.36 2.53 2.67
Efficiency Ratio (3) (7) 53.03 55.76 83.01 64.14 60.07
Noninterest expense to average assets (7) 1.64 1.59 2.12 1.77 1.94
Noninterest income to average assets 0.74 0.58 0.34 0.40 0.70
Average interest-earning assets to average
interest bearing liabilities 106.58 107.23 103.56 104.34 106.48
27
At or for the Year Ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
---------- -------- ------ --------- ---------
Asset Quality Ratios:
Non-performing loans to total loans 0.86% 0.92% 0.89% 0.96% 0.90%
Non-performing loans to total assets 0.37 0.43 0.49 0.54 0.46
Non-performing assets as a percentage
of total assets 0.39 0.45 0.57 0.65 0.82
Non-performing loans and real estate owned
to total net loans and real estate owned 0.89 0.99 1.01 1.12 1.61
Allowance for loan losses to total loans 1.18 0.93 0.86 0.94 1.00
Allowance for loan losses to
non-performing loans 137.59 100.76 97.45 98.21 112.35
Equity and Dividend Ratios:
Tangible capital 8.00 8.82 9.86 6.90 6.91
Core capital 8.00 8.82 9.86 6.90 6.91
Risk-based capital 14.28 17.07 16.14 12.20 12.29
Average equity to average assets 8.96 9.28 6.27 7.02 8.24
Period end equity to assets 8.42 9.05 9.36 6.40 7.78
Dividend payout ratio (4) 30.77 32.90 110.71 43.84 42.67
Per Share Data (5):
Basic earnings per share $ 1.33 $ 1.05 $ 0.28 $ 0.73 $ 0.75
Diluted earnings per share 1.30 1.03 0.28 0.72 0.74
Dividends per share (8) 0.40 0.34 0.33 0.34 0.32
Book value per share 13.16 12.42 11.49 7.28 7.40
Other Data:
Number of:
Real estate loans outstanding 8,948 11,525 13,735 14,577 17,024
Loans serviced for others 6,297 8,704 9,695 17,653 33,877
Deposit accounts 260,256 266,491 281,925 291,836 279,532
Full-service offices 59 58 58 62 60
- ----------
(1) Represents the difference between the average tax-effective yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(2) Represents tax-effected net interest income before the provision for loan
losses divided by average interest-earning assets.
(3) Efficiency ratio is non-interest expense divided by the sum of net interest
income before provision for loan losses and non-interest income.
(4) Represents cash dividends per share divided by net income per share.
(5) All per share values have been adjusted to reflect the October 2000 exchange
of 0.7667 shares of Waypoint Financial common stock for each share of Harris
Financial, Inc. common stock and 1.55 shares of Waypoint Financial common stock
for each share of York Financial Corp. common stock.
(6) Noninterest expense for 2000 included merger expenses of $16.2 million
recorded in association with the acquisition by merger of York Financial Corp.
on October 17, 2000.
(7) If noninterest expense for 2000 had been adjusted to remove merger expenses
of $16.2 million (see (6) above), the efficiency ratio would have been 68.98%
and noninterest expense to average assets would have been 1.76%.
(8) Dividends per share are adjusted to exclude the effect of shares held by
Harris Financial, MHC.
28
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide additional information about
Waypoint Financial Corp. (Waypoint Financial), its financial condition and
results of operations. Readers should refer to the consolidated financial
statements and other financial data presented throughout this report to fully
understand the following discussion and analysis.
I. Forward-Looking Statements
In addition to historical information, this report contains forward-looking
statements. The forward-looking statements contained in the following sections
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, interest rate trends, the general economic climate in Waypoint
Financial's market area and the country as a whole, Waypoint Financial's ability
to control costs and expenses, competitive products and pricing, loan
delinquency rates and changes in federal and state regulation. Readers should
not place undue reliance on these forward-looking statements, as they reflect
management's analysis only as of the date of this report. Waypoint Financial has
no obligation to update or revise these forward-looking statements to reflect
events or circumstances that occur after the date of this report. Readers should
carefully review the risk factors described in other documents that Waypoint
Financial files periodically with the Securities and Exchange Commission.
II. Critical Accounting Policies
This section describes Waypoint Financial's critical accounting policies
which involve accounting estimates that: a) require assumptions about highly
uncertain matters, and b) could vary sufficiently to cause a material effect on
Waypoint Financial's financial condition or results of operations.
Allowance for Loan Losses. In originating loans, Waypoint Financial
recognizes that losses will be experienced on loans and that the risk of loss
will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. Waypoint Financial maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent losses, information about specific
borrower situations and estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management in its determination of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes a review
of historical losses, peer group comparisons, industry data and economic
conditions. In addition, the regulatory agencies, as an integral part of their
examination process, periodically review Waypoint Financial's allowance for loan
losses and may require Waypoint Financial to make additional provisions for
estimated losses based upon judgments different from those of management.
In establishing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans. Waypoint Financial segregates the loan
portfolio according to risk characteristics (i.e., mortgage loans, home equity
and consumer). Loss factors are derived using Waypoint Financial's historical
loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Commercial loans are evaluated individually to determine the
required allowance for loan losses and to evaluate for potential impairment of
such loans under SFAS 114.
Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while Waypoint Financial believes it has
established its existing allowance for loan losses in conformity with generally
accepted accounting principles, there can be no assurance that regulators, in
reviewing Waypoint Financial's loan portfolio, will not request Waypoint
Financial to increase its allowance for loan losses. In addition, because future
events affecting borrowers and collateral cannot be predicted with certainty,
there can be no assurance that the existing allowance for loan losses is
adequate or that increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect Waypoint Financial's
financial condition and results of operations.
29
The allowance review methodology is based on information known at the time
of the review. Changes in factors underlying the assessment could have a
material impact on the amount of the allowance that is necessary and the amount
of provision to be charged against earnings. Such changes could impact future
results.
Goodwill. As described in Note 10 in the Notes to Consolidated Financial
Statements, Waypoint Financial has goodwill that is subject to annual impairment
evaluation under SFAS 142. Waypoint Financial applies the market approach under
SFAS 142 for impairment measurement which is highly sensitive to underlying
assumptions. Changes in assumptions and results due to economic conditions,
industry factors and reporting unist performance and cash flow projections could
result in different assessments of the fair values of reporting units and could
result in impairment charges in the future.
III. Financial Review
Waypoint Financial was organized as part of the October 17, 2000,
mutual-to-stock conversion of Harris Financial, MHC and merger of Harris
Financial, Inc. and York Financial Corp. As part of the conversion and merger,
Waypoint Financial completed a stock offering and an acquisition by merger of
York Financial Corp., the parent holding company of York Federal Savings and
Loan Association. As a result of its subscription, community offering, and
public offering, Waypoint Financial sold 16,550,000 shares at $10.00 per share
with net proceeds totaling $155.6 million (including approximately $15.6 million
of proceeds from the sale of shares to Waypoint Financial's employee stock
ownership plan). Waypoint Financial issued 6,191,274 shares to former
stockholders of Harris Financial, Inc. as part of the conversion in accordance
with a ratio of .7667 Waypoint Financial shares to each Harris Financial, Inc.
share. Waypoint Financial also issued 15,666,264 shares to former stockholders
of York Financial to complete its acquisition by merger in accordance with a
ratio of 1.55 shares of Waypoint Financial to each York Financial share. York
Financial held total assets of $1.7 billion as of September 30, 2000. In
addition, Waypoint Financial's underwriters in the public offering exercised
300,000 shares of their overallotment option, resulting in net proceeds of $2.8
million. A total of 38,707,538 shares of common stock were issued in the
conversion, offering, and merger transactions. On October 30, 2000, York Federal
Savings and Loan Association was merged into Waypoint Bank.
Waypoint Financial's assets consist primarily of 100% of the outstanding
shares of Waypoint Bank and various financial services subsidiaries. Waypoint
Bank was originally formed in 1886 as Harris Building and Loan Association, and
is primarily engaged in the business of attracting deposits and investing these
deposits into loans secured by residential and commercial real property,
commercial business loans, consumer loans, and investment securities.
Waypoint Financial's net income depends primarily on its net interest
income, which is the difference between interest income on loans and investments
and interest expense on deposits and borrowings. Net interest income is a
function of Waypoint Financial's interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to interest-earning liabilities.
Because of this reliance on net interest income, Waypoint Financial's net income
is affected by changues in market interest rates and prevailing economic
conditions. The volatility of net interest income due to changes in market
interest rates is often referred to as "interest rate risk". Financial
institutions that accept and manage substantial degrees of interest rate risk
are generally susceptible to larger net interest income fluctuations when
compared to peer institutions that accept less interest rate risk. Accordingly,
managing interest rate risk successfully has a significant impact on Waypoint
Financial's return on equity.
Waypoint Financial also generates non-interest income from fees and
commissions charged on customers' accounts, sales of brokerage and insurance
products, trust and asset management services, and mortgage banking activities
including the seruvicing of loans for others. Noninterest income also includes
gains and losses on sales of securities available for sale, equity in earnings
(losses) of limited partnership interests, and fees and service charges assessed
on loan and deposit transactions. Waypoint Financial's non-interest expenses
primarily consist of employee compensation and benefits, occupancy and equipment
expense, advertising and other operating expenses. Waypoint Financial's results
of operations also are affected by general economic and competitive conditions,
notably changes in market interest rates, government policies and regulations.
IV. Market Risk and Interest Rate Sensitivity Management
Market risk is the risk of loss from adverse changes in market prices and
rates. In an effort to maintain control over such risks, management of Waypoint
Financial focuses its attention on managing the interest rate sensitivity of
assets and liabilities aund controlling the volume of lending, securities,
deposit and borrowing activities. By managing the ratio of interest sensitive
assets to interest sensitive liabilities repricing in the same periods, Waypoint
Financial seeks to control the adverse effect of interest rate fluctuations.
Waypoint Financial's assets and liabilities are not directly exposed to foreign
currency or commodity price risk.
30
Management utilizes an Asset/Liability Committee, which meets at least once
each month, to review Waypoint Financial's interest sensitivity position on an
ongoing basis and prepare strategies regarding the acquisition and allocation of
funds to maximize earnings and maintain the interest rate sensitivity position
at acceptable levels. Waypoint Financial originates for portfolio principally
short and intermediate term and adjustable rate loans and sells most fixed rate
loan originations. Additionally, Waypoint Financial has acquired for its
portfolio investment securities categorized as available for sale. The funding
sources for these portfolio loans and securities are deposits and borrowings
with various maturities. In addition to normal portfolio management activities,
management evaluates and implements strategies to manage interest rate risk
levels, including equity infusions to Waypoint Bank, asset sales, and extension
of maturities of borrowings.
The Asset/Liability Committee monitors Waypoint Financial's interest rate
risk position by utilizing simulation analysis. Net interest income fluctuations
and the net portfolio value ratio are determined in various interest rate
scenarios and monitored against acceptable limitations established by management
and approved by the Board of Directors. Such rate scenarios include "ramped"
rate changes adjusting rates in +/- 100 basis point (bp) increments resulting in
projected changes to net interest income over the next 12 months and immediate
rate shocks resulting in projected net portfolio value ratios as indicated with
the comparison of December 31, 2002 to December 31, 2001 in the following table.
An analysis of hypothetical changes in interest rates as of December 31,
2002 is as follows:
December 31,
--------------------------------------------------------
2002 2001
--------------------------- ---------------------------
Percentage change in
--------------------------------------------------------
Change in
Interest Rates Net Interest Net Portfolio Net Portfolio Net Interest
(In Basis Points) Income (1) Ratio (2) Income (1) Ratio (2)
----------------- ------------ ------------- ------------- ------------
+300 6.95 % 5.29 % 1.73 % 5.61 %
+200 5.22 5.91 0.95 6.58
+100 3.62 6.20 0.71 7.21
0 - 6.30 - 7.77
(100) (3.45) 5.27 (0.96) 7.59
(200) (6.74) 3.72 (2.26) 6.99
- ----------
(1) The percentage change in this column represents an increase (decrease) in
net interest income for 12 months in a stable interest rate environment
versus net interest income for 12 months in the various rate scenarios.
(2) The net portfolio value ratio in this column represents net portfolio value
of Waypoint Financial in various rate scenarios, divided by the present
value of expected net cash flows from existing assets in those same
scenarios. Net portfolio value is defined as the present value of expected
net cash flows from existing assets, minus the present value of expected
net cash flows from existing liabilities, plus or minus the present value
of expected net cash flows from existing off-balance-sheet contracts.
Simulation results are influenced by a number of estimates and assumptions
with regard to embedded options, prepayment behaviors, pricing strategies and
cashflows. Assumptions and estimates used in simulation analysis are inherently
subjective and, as a consequence, results will neither precisely estimate net
interest income or net portfolio value nor precisely measure the impact of
higher or lower interest rates on net interest income or net portfolio value
ratio. The results of these simulations are reported to Waypoint Financial's
Board of Directors on a monthly basis. Management has determined that the level
of interest rate risk is within acceptable limits at December 31, 2002.
Waypoint Financial also uses certain derivative financial instruments from
time to time to manage interest rate risk associated with certain financial
assets and liabilities that Waypoint Financial places in its portfolios in the
ordinary course of business. A detailed discussion of Waypoint Financial's
derivative financial instruments is contained in the Notes to Consolidated
Financial Statements.
31
V. Credit Risk
Waypoint Financial follows a comprehensive loan policy that details credit
underwriting, credit management and loan loss provisioning techniques. The
policies were presented in detail in the "Loans" section of Item 1. With regard
to its marketable securities portfolio, at December 31, 2002, over 88% of the
marketable securities in Waypoint Financial's portfolio were rated "AAA", with
the remainder rated "AA", "A", or non-rated. Waypoint Financial's investment
policies were presented in detail in the "Investment Activities" and "Investment
Portfolio" sections of Item 1.
VI. Concentration Risk - Geographic
Waypoint Financial's primary market area includes the five central
Pennsylvania counties of Dauphin, Cumberland, York, Lancaster, and Lebanon and
the northern Maryland counties of Harford, Washington, and Baltimore. Except for
the manufactured home loan portfolio, substantially all of Waypoint Financial's
loans and deposits are dependent on this primary market area. The southcentral
Pennsylvania and northern Maryland area have enjoyed a strong, well diversified
and stable economy for many years relative to the general economic conditions
experienced in the Northeastern United States and the nation as a whole. During
2002, the United States and the leading industrialized nations of the world
experienced varying degrees of economic disruption. Most service and
manufacturing industries as well as the public sector entered the year in a
state of fiscal weakness and experienced little improvement during 2002. As of
the date of this report, Waypoint Financial's primary market area appears to be
proving resilient to these economic stresses and general economic indicators
appear to be improving. However, should significant economic stress become
evident in this market area, Waypoint Financial's loan and deposit portfolios
and operations could be adversely impacted. As of the current date, Waypoint has
not experienced significant deterioration in its asset quality or demand for
financial services.
VII. Concentration Risk - Major Creditor
Waypoint Financial relies on wholesale borrowings to support a leveraged
investment strategy. As discussed in previous sections of this report, these
strategies have significantly enhanced the Corporation's return to its
shareholders. A significant portion of Waypoint Financial's wholesale borrowings
are placed with the Federal Home Loan Bank of Pittsburgh (the "FHLB"). If
Waypoint Financial's maximum borrowing capacity with the FHLB were to be
encumbered in the future, through statutory restrictions that do not exist at
this time or through other means, Waypoint Financial's leveraged investment
strategies would be impacted to some degree. However, given the quality of
assets pledged as collateral to support wholesale borrowings, management
believes Waypoint Financial would be able to expand its placement of borrowings
with other primary borrowing sources. Management anticipates that such a shift
in borrowing sources would result in, at worst, only modest potential decreases
in net interest income from wholesale leveraging activities. Management is not
aware of any contemplated regulatory actions that indicate Waypoint Financial's
borrowing capacity at the FHLB might become restricted to less than the maximum
capacity.
VIII. Liquidity
The primary purpose of asset/liability management is to maintain adequate
liquidity and a desired balance between interest sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash flow
requirements of customers wanting to withdraw or borrow funds for their personal
or business needs. Interest rate sensitivity management focuses on consistent
growth of net interest income in times of fluctuating interest rates. Management
must coordinate its management of liquidity and interest rate sensitivity
because decisions involving one may influence the other.
Waypoint Financial meets its liquidity needs by either reducing its assets
or increasing its liabilities. Sources of asset liquidity include short-term
investments, securities available for sale, maturing and repaying loans, and
monthly cash flows from mortgage-backed securities. The loan portfolio provides
an additional source of liquidity due to Waypoint Financial's participation in
the secondary mortgage market and resulting ability to sell loans as necessary.
Waypoint Financial also meets its liquidity needs by attracting deposits and
utilizing borrowing arrangements with the FHLB of Pittsburgh and the Federal
Reserve Bank of Philadelphia for short and long- term loans as well as other
short-term borrowings.
Historically, deposits have represented Waypoint Financial's primary
source of funds. Waypoint Financial occasionally uses brokered deposits to
supplement other sources of funds to the extent such deposits are determined to
have more favorable interest cost and risk characteristics at the time of
purchase relative to other sources of funding. During 2002, Waypoint Financial's
deposits decreased $83.9 million. As noted in a previous section, the decrease
in deposits resulted primarily from the implementation of more disciplined
pricing strategies in high-cost product lines such as time deposits. To
supplement deposit-gathering efforts, Waypoint Financial borrows from the FHLB
of Pittsburgh and other sources. At December 31, 2002, Waypoint Financial had
$2,041.6 million
32
in FHLB loans outstanding, an increase of $199.4 million. Borrowings from
repurchase agreements decreased $76.9 million to $372.9 million at December 31,
2002. During 2002, Waypoint Financial was required to purchase additional FHLB
stock totaling $17.7 million due to increased FHLB loans outstanding. For
additional details of FHLB loans and other borrowings, see the Notes to
Consolidated Financial Statements.
During 2002, Waypoint Financial utilized leverage strategies to deploy
available capital. These strategies resulted in expansion of the investment
portfolio through the purchase of available for sale securities. The carrying
value of securities available for sale increased $239.7 million to $2,792.1
million at December 31, 2002 from $2,552.4 million at December 31, 2001. The
increase in carrying value of securities available for sale was funded primarily
by repayments of mortgage loans, which decreased $340.6 million to $721.1
million at December 31, 2002.
Generally, Waypoint Financial's principal use of funds is to originate
commercial and consumer loans. Strong sales and marketing efforts and a
decreasing interest rate environment during 2002 had a favorable effect on
commercial and consumer loan growth. During 2002, commercial loans grew $136.3
million to $917.8 million and consumer loans grew of $55.1 million to $702.4
million. During 2002, Waypoint Financial also acquired $82.9 million of treasury
stock, funding this with excess liquidity and $29.1 million of proceeds from the
issuance of trust preferred securities.
The sources of liquidity previously discussed are deemed by management to
be sufficient to fund outstanding loan commitments and meet other obligations.
See the Notes to Consolidated Financial Statements for information on
commitments and fair value of financial instruments at December 31, 2002.
IX. Capital Resources
The management of capital provides the foundation for future asset and
profitability growth and is a major strategy in the management of Waypoint
Financial. Stockholders' equity at December 31, 2002, totaled $456.7 million
compared to $486.2 million at December 31, 2001, a decrease of $29.5 million.
The decrease in capital resulted primarily from treasury stock purchases of
$82.9 million and cash dividends totaling $13.6 million. These decreases were
offset by net income of $47.2 million, by a reduction in Waypoint Financial's
unrealized losses on available for sale securities, net of tax effect, of $12.7
million, by stock option exercises of $2.3 million, and by earned ESOP and RRP
shares totaling $5.3 million.
Under OTS regulations a savings association must satisfy three minimum
capital requirements: core capital, tangible capital and risk-based capital.
Savings associations must meet all of the standards in order to comply with the
capital requirements. At December 31, 2002, Waypoint Bank exceeded all three
minimum capital requirements. Detailed information on Waypoint Financial's
capital adequacy is included in the Notes to Consolidated Financial Statements.
X. Derivative Financial Instruments
Waypoint Financial uses certain derivative financial instruments
("derivatives") in the normal course of its business to hedge its exposure to
fluctuations in market interest rates. These activities are subject to Waypoint
Financial's Derivative Policy and are monitored by its Asset/Liability
Committee. The Derivative Policy allows for the use of interest rate swaps,
caps, floors, and collars, and certain other option-bearing contracts that are
deemed closely related to Waypoint Financial's business. Prior to entering into
any derivative contract, the derivative instruments are analyzed to ensure that
they meet all relevant risk management and regulatory requirements.
During 2002 and 2001, Waypoint Financial's derivative activities included
the use of callable interest rate swaps, non-callable interest rate swaps,
mortgage loan commitments, and forward loan sale contracts with mortgage loan
investors. See the Notes to Consolidated Financial Statements for a detailed
discussion of Waypoint Financial's accounting policies for derivatives and for
disclosure of the impacts of derivatives on Waypoint Financial's financial
condition and results of operations.
33
XI. Acquisitions
Acquisition by Merger of York Financial Corp. On October 17, 2000, Harris
Financial, MHC, the parent mutual holding company for Harris Financial, Inc. and
owner of 76% of its common stock, completed a mutual-to-stock conversion. As
part of this conversion, Harris Financial, MHC ceased to exist. Immediately
following the conversion, Waypoint Financial became the successor to Harris
Financial, Inc. and Waypoint Bank became the successor to Harris Savings Bank.
As a result of these transactions, Waypoint Bank is the wholly owned subsidiary
of Waypoint Financial and 100% of Waypoint Financial is publicly owned.
As a result of the conversion, offering, and merger transactions, Waypoint
Financial operates as a federally chartered unitary savings and loan holding
company regulated by the OTS. Waypoint Bank operates as a federally chartered
savings bank and is also regulated by the OTS.
The merger of Waypoint Financial and York Financial has been accounted for
under the pooling-of-interests method of accounting and, accordingly, Waypoint
Financial's historical consolidated financial statements have been restated to
include the accounts and results of operations of York Financial. For further
discussion on the merger of Waypoint Financial and York Financial, see the Notes
to Consolidated Financial Statements.
Purchase Acquisition of Owen Insurance Inc. On November 30, 2000, Waypoint
Financial acquired Owen Insurance Inc., a full-service insurance agency that
provides a wide range of property and casualty and life insurance products to
commercial and retail customers of Waypoint Financial and to the general public.
Owen Insurance Inc. was the second largest insurance agency headquartered in
York, Pennsylvania. Waypoint Financial accounted for this acquisition as a
purchase and recorded assets of $1.9 million, liabilities of $1.2 million, and
goodwill of $1.6 million.
Management believes that consolidation of the financial services industry
will continue to present acquisition opportunities in geographical markets and
business market niches within which Waypoint Financial intends to expand and
prosper. These markets may include non-traditional banking products and services
and management believes Waypoint Financial's corporate structure and operating
infrastructure are conducive to successfully integrating such activities.
Results of Operations
XII. Comparison of Results of Operations in 2002 and 2001
Net interest income before provision for loan losses, on a tax-equivalent
basis, was $126.8 million for 2002 as compared to $118.4 million for 2001, which
represents an increase of $8.4 million or 7.1%. The increase in net interest
income was due primarily to a decrease in rates as noted in Table 2. The net
interest margin increased to 2.57% in 2002 from 2.43% in 2001.
34
Table 1 presents the average asset and liability balances, interest rates,
interest income and interest expense for 2002, 2001, and 2000.
Table 1 Average Balance Sheets, Rates and Interest Income and Expense Summary
(All dollar amounts presented in table are in thousands)
For the Years Ended December 31,
-------------------------------------------------------------------------------
2002 2001
Yield/Cost at --------------------------------------- -------------------------------------
December 31, Average Average Average Average
2002 Balance Interest(2) (Yield/Cost) Balance Interest(2) (Yield/Cost)
------------ ---------- ----------- ------------ ------- ---------- ------------
ASSETS
------
Interest-earning assets:
Loans, net (1)(5) 6.50% $2,414,520 $165,929 6.84% $2,593,922 $ 197,507 7.61%
Marketable securities - taxable 4.30 2,471,637 110,039 4.67 2,162,575 123,076 5.69
Marketable securities - tax free 7.45 98,499 7,921 8.04 74,830 6,271 8.38
Other interest-earning assets 1.46 61,615 806 1.71 41,392 1,716 4.15
---- ---------- -------- ---- ---------- --------- ----
Total interest-earning assets 5.41 5,046,271 284,695 5.68 4,872,719 328,570 6.74
---- -------- ---- --------- ----
Noninterest-earning assets 201,847 186,945
---------- ----------
Total Assets $5,248,118 $5,059,664
========== ==========
LIABILITIES AND
---------------
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Savings deposits 0.64 $ 240,786 2,659 1.09 $ 217,134 4,523 2.08
Time deposits 3.90 1,503,941 63,411 4.15 1,449,583 80,094 5.53
NOW and money market deposits 0.61 781,763 6,894 0.88 840,392 22,285 2.65
Escrow and stock subscriptions 0.84 4,426 27 0.61 6,001 30 0.50
Borrowed funds 3.80 2,203,831 84,921 3.85 2,031,050 103,197 5.08
---- ---------- -------- ---- ---------- --------- ----
Total interest-bearing liabilities 3.17 4,734,747 157,912 3.31 4,544,160 210,129 4.62
---- -------- ---- --------- ----
Noninterest-bearing liabilities 43,110 46,016
---------- ----------
Total liabilities 4,777,857 4,590,176
Stockholders' equity 470,261 469,488
---------- ----------
Total liabilities and
stockholders' equity $5,248,118 $5,059,664
========== ==========
Net interest income $126,783 $ 118,441
======== =========
Interest rate spread (3) 2.24% 2.37% 2.12%
==== ==== ====
Net interest-earning assets $ 311,524 $ 328,559
========== ==========
Net interest margin (4) 2.57% 2.43%
==== ====
Ratio of interest-earning assets
To interest-bearing liabilities 1.07x 1.07x
========== ==========
----------------------------------------
2000
----------------------------------------
Average Average
Balance Interest(2) (Yield/Cost)
---------- ----------- ------------
ASSETS
------
Interest-earning assets:
Loans, net (1)(5) $2,608,453 $201,211 7.71%
Marketable securities - taxable 1,651,359 118,911 7.20
Marketable securities - tax free 63,150 5,566 8.81
Other interest-earning assets 34,461 1,466 4.25
---------- -------- ----
Total interest-earning assets 4,357,423 327,154 7.51
-------- ----
Noninterest-earning assets 181,466
----------
Total Assets $4,538,889
==========
LIABILITIES AND
---------------
STOCKHOLDERS' EQUITY
--------------------
Interest-bearing liabilities:
Savings deposits $ 184,404 4,652 2.52
Time deposits 1,643,535 94,449 5.75
NOW and money market deposits 798,006 25,951 3.25
Escrow and stock subscriptions 9,862 88 0.89
Borrowed funds 1,571,747 99,179 6.31
---------- -------- ----
Total interest-bearing liabilities 4,207,554 224,319 5.33
-------- ----
Noninterest-bearing liabilities 46,599
----------
Total liabilities 4,254,153
Stockholders' equity 284,736
----------
Total liabilities and
stockholders' equity $4,538,889
==========
Net interest income $102,835
========
Interest rate spread (3) 2.18%
====
Net interest-earning assets $ 149,869
==========
Net interest margin (4)
Ratio of interest-earning assets 2.36%
====
To interest-bearing liabilities 1.04x
==========
- ----------
(1) Includes net expense (income) recognized on deferred loan fees of $67,000 in
2002, $738,000 in 2001, and $(607,000) in 2000.
(2) Interest income and yields are shown on a tax equivalent basis. The tax
equivalent adjustment to net interest income before provision for loan
losses as reported on the Consolidated Statements of Income was $3,562,000
in 2002, $3,096,000 in 2001, and $2,596,000 in 2000.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the net interest income before the provision for loan losses
divided by average interest-earning assets.
(5) Includes loans on nonaccrual status and loans held for sale.
35
In addition to the absolute level of net interest income, Waypoint
Financial monitors closely the volatility of net interest income and its
sensitivity to key variables. Key variables that impact net interest income are
changes in average account balances (volume), changes in interest rates (rate)
and the mix of interest-earning assets and interest-bearing liabilities.
Historically, a lag has existed between when market interest rates change and
when such changes are reflected in Waypoint Financial's net interest margin. In
recent years, this lag has shortened as customer sophistication and the price
competitiveness of financial service providers have steadily increased. The
average yield on interest-earning assets is influenced by current market rates,
repayments and prepayments, purchases, sales, and the mix of asset maturities.
Similarly, the average cost of interest-bearing liabilities is influenced by
current market rates, redemptions, early withdrawals, purchases, deposit raising
activities, borrowing activity, and the mix of liability maturities.
Table 2 presents an analysis of the changes in tax-equivalent net interest
income attributable to changes in volume and rate. During 2002, essentially all
of Waypoint Financial's $8.4 million increase in tax-equivalent net interest
income was due to a $13.0 million increase due to interest rates. Interest
expense on liabilities decreased $62.3 million during 2002 as the average cost
of funds decrease 131 basis points to 3.31%. Partially offsetting this favorable
impact, tax-equivalent interest income on assets decreased $49.3 million during
2002 as the average yield on assets decreased 106 basis points to 5.68%. While
interest rate markets are the primary determinant in rate changes within the
asset and liability portfolios, Waypoint Financial's disciplined pricing
strategies and portfolio management practices have enhanced the improvement in
net interest income during 2002.
Also as noted in Table 2, changes in volume resulted in a decrease of $4.6
million in tax-equivalent net interest income, which partially offset the
favorable impact of decreased interest rates. Table 1 indicates that although
the average balance of total interest-earning assets increased in 2002, average
loans decreased $179.4 million. Average loans decreased as increases in
commercial and consumer loan balances were exceeded by a decrease in mortgage
loan balances as mortgage loans experienced accelerated refinancing due to
historically low market interest rates. Excess liquidity resulting from the
decrease in total loans was reinvested in marketable securities at significantly
lower yields. In liabilities, Waypoint Financial experienced a $58.6 million
decrease in average transaction and money market accounts, which resulted in the
need to replace this funding source with higher-cost funding from borrowings and
time deposits. Waypoint Financial attributes this decrease in transaction and
money markets primarily to the maintenance of disciplined pricing as key market
competitors offered pricing throughout 2002 at or above wholesale funding levels
to acquire deposit balances.
Table 2 Rate/Volume Analysis of Changes in Net Interest Income
(All dollar amounts presented in table are in 000's)
Year Ended December 31, 2002 Year Ended December 31, 2001
Compared to Compared to
Year Ended December 31, 2001 Year Ended December 31, 2000
Increase (Decrease) Increase (Decrease)
------------------------------------- ------------------------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- -------- --------- -----------
Interest-earning assets:
Loans, net $(13,101) $(18,477) $(31,578) $(1,076) $ (2,628) $ (3,704)
Marketable securities - taxable 16,059 (29,096) (13,037) 32,185 (28,020) 4,165
Marketable securities - tax-free 1,912 (262) 1,650 990 (285) 705
Other interest-earning assets 601 (1,511) (910) 287 (37) 250
-------- -------- -------- ------- -------- --------
Total interest-earning assets 5,471 (49,346) (43,875) 32,386 (30,970) 1,416
-------- -------- -------- ------- -------- --------
Interest-bearing liabilities:
Savings deposits 451 (2,315) (1,864) 748 (877) (129)
Time deposits 2,914 (19,597) (16,683) (10,868) (3,487) (14,355)
NOW and money market deposits (1,458) (13,933) (15,391) 1,322 (4,988) (3,666)
Escrow and stock subscriptions (9) 6 (3) (27) (31) (58)
Borrowed funds 8,194 (26,470) (18,276) 25,600 (21,582) 4,018
-------- -------- -------- ------- -------- --------
Total interest-bearing liabilities 10,092 (62,309) (52,217) 16,775 (30,965) (14,190)
-------- -------- -------- ------- -------- --------
Change in net interest income $ (4,621) $ 12,963 $ 8,342 $15,611 $ (5) $ 15,606
======== ======== ======== ======= ======== ========
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are prorated across rate and volume
variances.
36
Provision for Loan Losses. During 2002, Waypoint Financial recorded
provisions for loan losses totaling $10.8 million, which represented an increase
of $3.8 million or 54.3% from $7.0 million recorded in 2001. In general, this
increase was required to support composition changes within the loan portfolio
and to reflect increased inherent losses in the loan portfolio due to the
challenging economic environment experienced during 2002 in Waypoint Financial's
primary markets and the national and global marketplaces. Detailed financial
information related to the allowance for loan losses was presented in Part I of
this report and Waypoint Financial's methodology for establishing the allowance
for loan losses was presented under the heading Critical Accounting Policies
earlier in this section.
Noninterest Income. Noninterest income increased $9.6 million or 32.8% in
2002 from $29.4 million in 2001. Table 3 presents a summary of the changes in
noninterest income during the years 2002 and 2001.
Table 3 Changes in Noninterest Income
(All dollar amounts presented in table are in thousands)
2002/2001 2001/2000
------------------------------- -------------------------------
2002 Change % 2001 Change % 2000
-------- -------- ------- -------- --------- ------- --------
Service charges on deposits $ 7,608 $ 904 13.5% $ 6,704 $ 183 2.8% $ 6,521
Other service charges, commissions and fees 12,550 1,919 18.1 10,631 3,637 52.0 6,994
Loan servicing, net (1,101) (938) (575.5) (163) (1,355) (113.7) 1,192
Gain (loss) on securities and derivatives 9,098 6,272 221.9 2,826 4,618 (257.7) (1,792)
Gain on sales of loans 4,340 421 10.7 3,919 3,758 2,334.2 161
Bank-owned life insurance 4,691 1,931 70.0 2,760 2,151 353.2 609
Other 1,810 (879) (32.7) 2,689 846 45.9 1,843
-------- -------- ------- -------- --------- ------- --------
Total $ 38,996 $ 9,630 32.8% $ 29,366 $ 13,838 89.1% $ 15,528
======== ======== ======= ======== ========= ======= ========
Service charges on deposits increased $.9 million to $7.6 million in 2002
from $6.7 million in 2001. Service charges on deposits includes primarily
overdraft, non-sufficient funds charges, and monthly service charges. These fees
increased $.5 million during 2002 to $6.4 million primarily on increased
transaction activity. Commercial deposit service fees also increased $.4 million
to $1.2 million in 2002, reflecting Waypoint Financial's expansion of services
to its commercial customers.
Other service charges, commissions, and fees include primarily insurance
fees, brokerage fees, automated teller machine (ATM) and debit card fees,
commercial banking fees, and trust and asset management fees. This income
increased $1.9 million to $12.5 million in 2002 from $10.6 million in 2001.
Insurance fees increased $1.3 million to $3.7 million in 2002 as Waypoint
Financial expanded its insurance product offerings and marketing during 2002.
Brokerage fees decreased slightly to $2.6 million in 2002. ATM and debit card
fees were up $.6 million to $4.0 million reflecting increased customer card
usage in 2002. Commercial credit and non-deposit fees were stable at $1.4
million. Trust and asset management fees were up $.3 million to $1.0 million in
2002 reflecting growth in the trust and asset management portfolio.
Waypoint Financial conducts various mortgage banking activities including
the origination and sale of mortgage loans into the secondary mortgage market
and the servicing of mortgage loans for others. Net gains on the sale of loans
increased $.4 million to $4.3 million in 2002 primarily on increased selling
volume as lowering interest rates prompted increased mortgage loan refinancing
activity. On these mortgage banking sales, Waypoint Financial received the most
favorable pricing on loans sold with the servicing rights released. Executing
mortgage loan sales in this manner does not result in the creation of a
servicing rights asset. Loan servicing income was down $.9 million in 2002 to a
loss of $1.1 million, which reflected the impact of accelerated mortgage loan
prepayments and payoffs during 2002 resulting from lowering market interest
rates for mortgages. The portfolio of loans serviced for others decreased to
$477.0 million at December 31, 2001 from $633.1 million at December 31, 2001.
This trend reduced gross servicing revenue and increased total expense from
servicing rights amortization and valuation adjustments.
Net gains on securities and derivatives increased $6.3 million in 2002 to
$9.1 million. Waypoint Financial benefited from the interest rate environment in
2002 while actively managing its investment portfolio in order to maintain a
prudent interest rate risk profile and improve interest rate spreads. Also
included in this category was a $4.6 million increase in fair value recognized
upon the settlement of derivative instruments not designated as hedges which had
an aggregate notional value of $400.0 million.
37
Income from bank-owned life insurance assets (BOLI) increased $1.9 million
during 2002 to $4.7 million. Waypoint Financial's BOLI income is used to
generate income to supplement the cost of various employee and director benefit
plans. BOLI assets increased to $88.2 million at December 31, 2002 from $83.5
million at December 31, 2001 due entirely to increased aggregate cash surrender
value of the related policies.
Other noninterest income decreased $.9 million in 2002 to $1.8 million.
Waypoint Financial's joint venture equity investments resulted in income of $.2
million in 2002, which represents an improvement of $.7 million over a loss of
$.5 million recorded during 2001. Other income for 2001 also included a one-time
gain of $1.5 million related to the curtailment of a pension plan.
Management believes it is essential to continue its strategic initiatives
toward expanding Waypoint Financial's commercial banking presence and its
financial services activities which include insurance product sales, trust and
asset management, and brokerage activities. These fee-generating activities are
expected to continue enhancing Waypoint Financial's noninterest income and its
profitability in future years.
Noninterest Expense. Table 4 presents a summary of the changes in
noninterest expense for the two year periods ended December 31, 2002.
Table 4 Changes in Noninterest Expense
(All dollar amounts presented in table are in thousands)
2002/2001 2001/2000
------------------------ ---------------------------
2002 Change % 2001 Change % 2000
------- ------ ------ ------- -------- ------ -------
Salaries and benefits $44,832 $2,898 6.9% $41,934 $ 2,870 7.3% $39,064
Equipment expense 7,053 (128) (1.8) 7,181 (113) (1.5) 7,294
Occupancy expense 6,595 106 1.6 6,489 115 1.8 6,374
Advertising and public relations 4,248 1,507 55.0 2,741 (671) (19.7) 3,412
FDIC insurance 442 (53) (10.7) 495 (26) (5.0) 521
(Income) expense from real
Estate operations (361) 41 10.2 (402) (1,649) (132.2) 1,247
Amortization of goodwill - (1,048) (100.0) 1,048 118 12.7 930
Amortization of other intangible assets 1,586 (373) (19.0) 1,959 - - 1,959
Professional fees and outside services 3,107 6 0.2 3,101 (1,715) (35.6) 4,816
Supplies, telephone and postage 4,887 (497) (9.2) 5,384 428 8.6 4,956
Merger expense - - - - (16,239) (100.0) 16,239
Other 13,634 2,873 26.7 10,761 1,476 15.9 9,285
------- ------ ------ ------- -------- ------ -------
Total $86,023 $5,332 6.6% $80,691 $(15,406) (16.0)% $96,097
======= ====== ====== ======= ======== ====== =======
Salaries and benefits expense represents Waypoint Financial's largest
noninterest expense and was up $2.9 million or 6.9% to $44.8 million in 2002.
This increase included a number of increases to salaries and benefits expense
that reflect Waypoint Financial's continued integration of more "pay for
performance" compensation practices and the expansion of activities that
increase fee-based income. Salaries and wages increased $1.2 million to $25.6
million on increased business line staffing and annual merit increases.
Incentive bonuses and commission-based compensation increased $1.0 million to
$6.8 million in 2002. Compensation expense also increased $.2 million due to
stock grants vested under Waypoint Financial's Recognition and Retention Plan
(RRP). The cost of employer payroll taxes and employee benefits increased $.2
million to $7.8 million during 2002. Finally, ESOP expense increased $.3 million
to $2.0 million in 2002 as Waypoint committed the first release of shares under
the Waypoint ESOP. In 2001, employees received ESOP benefits under predecessor
plans that were terminated in 2001.
Equipment expense decreased slightly to $7.1 million in 2002 from $7.2
million in 2001. During the fourth quarter of 2002, Waypoint Financial converted
its core banking computer system to the Fiserv Comprehensive Banking System.
While this new processing system is expected to deliver enhanced functionality
and efficiency, equipment expense is expected to remain stable in 2003 relative
to 2002.
Occupancy expense increased $.1 million to $6.6 million in 2002 as Waypoint
Financial leased several new facilities for branch and loan production
activities.
Advertising and public relations expense increased $1.5 million to $4.2
million in 2002. This increase included an increase of $.8 million in media
advertising for all Waypoint Financial products and services as well as an
increase of $.5 million in marketing costs
38
associated with checking deposit products. Business development expenses also
increased $.2 million as Waypoint Financial continued to promote its offerings
to businesses and clients with high net worth.
FDIC deposit insurance was stable at $.5 million in both 2002 and 2001,
reflecting comparable-sized deposit portfolios and equivalent assessment rates
in each year.
Waypoint Financial recorded net income of $.4 million from real estate
operations in both 2002 and 2001. The gains in both years resulted primarily
from net gains on the sale of residential real estate acquired in foreclosure
(REO) at favorable market prices, which more that offset operating costs of real
estate holdings.
Amortization expense on intangible assets decreased $.4 million to $1.6
million in 2002 due to branch deposit intangibles for certain acquired branches
in Maryland having become fully amortized in September, 2002. Effective January
1, 2002, Waypoint Financial ceased amortizing its goodwill in accordance with
recent accounting standards for intangible assets. During 2001, amortization
expense on goodwill totaled $1.0 million. Detailed information on Waypoint
Financial's accounting for intangible assets is presented in the Notes to
Consolidated Financial Statements.
Expense from professional fees and outside services totaled $3.1 million in
2002 and 2001. This category included a decrease of $.1 million in processing
and outside service costs to $1.8 million in 2002. Remaining expenses in this
category include legal, accounting, consulting, and other professional fees,
which increased slightly to $1.3 million in 2002.
Supplies, telephone and postage expense decreased $.5 million to $4.9
million in 2002. This decrease came primarily in spending on printed forms.
Waypoint Financial's printing expenses were unusually high in 2001 due to heavy
restocking required during the post-merger period.
Other expense increased $2.9 million to $13.6 million in 2002. Other expense
includes customer account servicing expenses, OTS examination fees, director
compensation, charitable contributions, insurance costs, and various
administrative expenses. The largest component of the increase in 2002 resulted
from $1.0 million in one-time expenses associated with the conversion to a new
core banking computer system. The increase in 2002 also included an increase of
$.5 million in Director RRP expense from accelerated vesting due to retirements
and a one-time expense totaling $.5 million for the vesting of advisory
committee stock options. Charitable contributions increased $.4 million, with
substantially all of this increase offset by saving in the provision for income
taxes through offsetting tax credits. Customer account servicing expenses
represent the largest category of other expenses and remained stable at $4.5
million in 2002.
Management believes a continuing emphasis on efficiency is essential to
improving Waypoint Financial's profitability and increasing shareholder returns.
Also, Waypoint Financial's new core banking systems are viewed as an integral
component of this strategy as well as an important tool for enhancing customer
service and Waypoint products.
Income Tax Expense. Income tax expense was $18.2 million in 2002, which
represented an effective tax rate of 27.8% on income before taxes of $65.4
million. Waypoint Financial's effective rate was lower than the expected federal
and state combined statutory rate of approximately 38% in 2002 primarily due to
reductions from tax exempt income on securities and loans (3.2%), dividends
received deduction (2.1%), tax exempt BOLI income (2.5%) and federal tax credits
for qualified investments (1.5%). In 2001, income tax expense was $17.9 million,
which equated to an effective tax rate of 31.4% on income before taxes of $57.0
million. In 2001, the effective rate was higher than in 2002 primarily because
of lower tax exempt BOLI income (1.7%), lower tax credits (.8%), and an addition
in 2001 for non-deductible goodwill amortization of .6%. For a more
comprehensive analysis of income tax expense, see the Notes to Consolidated
Financial Statements.
XII. Comparison of Results of Operations in 2001 and 2000
Net interest income before provision for loan losses, on a tax-equivalent
basis, was $118.4 million for 2001 as compared to $102.8 million for 2000, which
represents an increase of $15.6 million or 15.2%. The increase in net interest
income was due primarily to an increase in average balances as noted in Table 2.
The net interest margin increased to 2.43% in 2001 from 2.36% in 2000.
Table 2 presents an analysis of the changes in tax-equivalent net interest
income attributable to changes in volume and rate. During 2001, essentially all
of Waypoint Financial's $15.6 million increase in tax-equivalent net interest
income was due to volume increases. Table 1 indicates that the average balance
of interest earning assets in 2001 increased $515.3 million from 2000 and the
average balance of interest bearing liabilities increased $336.6 million from
2000. The $178.7 million increase in total average assets
39
over total average liabilities was due in large part to an increase of $155.6
million in Waypoint Financial's assets and stockholders' equity from net
proceeds of its stock offering completed on October 17, 2000, and, to a lesser
extent, retained earnings and other capital additions.
During 2001, Waypoint Financial's average loans decreased $14.5 million or
..6% to $2.594 billion. As noted previously, Waypoint Financial's loans decreased
due to repayments and prepayments of mortgage loans offsetting growth in
commercial and consumer loans. The average balance of securities and other
interest earning assets increased $529.8 million or 30.3% to $2.279 billion and
resulted primarily from leveraged investing activities. The increase in
interest-earning assets was funded by an increase in average borrowings of
$459.3 million or 29.2% to $2.031 billion. The increase in average borrowings
also offset a decrease of $118.8 million or 4.5% in average deposits to $2.507
billion and a decrease of $3.9 million in escrow funds.
During 2001, market interest rates declined dramatically as the Federal
Reserve Bank reduced the Federal Funds Rate (which affects primarily short-term
interest rates) by a cumulative total of 425 basis points. Waypoint Financial's
average interest yield and average cost of funds decreased substantially in this
environment; however, the net interest spread narrowed by 6 basis points to
2.12%. This narrowing of spread occurred primarily because downward movement in
deposit and borrowing rates were offset by decreases in yields on variable-rate
assets and by accelerated prepayments of higher-yield loans and investments.
Waypoint Financial's net interest margin improvement of 7 basis points to 2.43%
resulted primarily from the $178.7 million increase in total average assets over
total average liabilities described earlier, which has the effect of providing
zero-rate funding.
Provision for Loan Losses. During 2001, Waypoint Financial recorded
provisions for loan losses totaling $7.0 million, which represented an increase
of $1.9 million or 37.3% from $5.1 million recorded in 2000. In general, this
increase was required to support composition changes within the loan portfolio
and to reflect the uncertain economic environment experienced during 2001, which
was exacerbated by the terrorist attacks of September 11/th/ and subsequent
related events.
Noninterest Income. Noninterest income increased $13.8 million or 89.1% to
$29.4 million in 2001 from $15.5 million in 2000. Table 3 presents a summary of
the changes in noninterest income during the years 2001 and 2000.
Service charges on deposits increased $.2 million to $6.7 million in 2001
from $6.5 million in 2000. Service charges on deposits includes primarily
overdraft and non-sufficient funds charges which were stable at $5.2 million for
2001 and 2000, reflecting no significant change in customer overdraft behavior
in 2001. Other deposit fees include commercial deposit fees, retail deposit
monthly service charges and miscellaneous deposit fees. The increase in service
charges on deposits was generated primarily in commercial deposit fees, which
increased to $.8 million in 2001 from $.6 million in 2000, reflecting Waypoint
Financial's expansion of commercial services to its customers.
Other service charges, commissions, and fees include primarily brokerage
fees, insurance fees, automated teller machine (ATM) and debit card fees,
commercial banking fees, and trust and asset management fees. This income
increased $3.6 million or 52.0% to $10.6 million in 2001 from $7.0 million in
2000. Brokerage fees increased $.9 million or 50.1% to $2.7 million in 2001 from
$1.8 million in 2000 on very strong annuity and other product sales as customers
sought higher yields than were available from insured deposit accounts.
Insurance fees increased $1.9 million to $2.4 million in 2001 from $.5 million
in 2000. Insurance fees were strong in 2001 and also reflected a full year of
income from Waypoint Financial's wholly-owned insurance subsidiary Owen
Insurance, Inc. which was purchased in November 2000. ATM and debit card fees
were $3.4 million in 2001, up from $3.2 million in 2000 and reflecting no
significant change in customer card usage in 2001. Trust fees were up $.3
million to $.6 million in 2001, reflecting growth in the trust and asset
management portfolio. Commercial credit and non-deposit fees were also up $.2
million to $.5 million reflecting Waypoint Financial's continued expansion of
its commercial banking business.
Waypoint Financial conducts various mortgage banking activities including
the origination and sale of mortgage loans into the secondary mortgage market
and the servicing of mortgage loans for others. Net gains on the sale of loans
increased $3.7 million to $3.9 million in 2001 from $.2 million in 2000. During
2001, lowering interest rates in the mortgage market resulted in improved
selling gains on mortgage loans originated for sale. On these mortgage banking
sales, Waypoint Financial received the most favorable pricing on loans sold with
the servicing rights released. Executing mortgage loan sales in this manner does
not result in the creation of a servicing rights asset. Loan servicing income
was down significantly in 2001 to a loss of $.2 million as compared to income of
$1.2 million in 2000. This reduction in loan servicing primarily reflects the
impact of accelerated mortgage loan prepayments and payoffs during 2001
resulting from lowering market interest rates for mortgages. The portfolio of
loans serviced for others decreased to $633.1 million at December 31, 2001 from
$741.7 million at December 31, 2000. The decrease in loans serviced for others
reduced gross servicing revenue by $.5 million to $2.0 million in 2001. The
accelerated prepayment trend also increased total expense from servicing rights
amortization and valuation adjustments by $.9 million to $2.2 million in 2001.
40
Net gains on securities and derivatives increased to $2.8 million in 2001
from a loss of $1.8 million in 2000. Waypoint Financial actively manages its
investment portfolio in order to maintain a prudent interest rate risk profile
and maintain and/or improve interest rate spreads. During 2000, Waypoint
Financial recorded a $1.8 million valuation loss for other than temporary
impairment of a marketable security. The remainder of security sales in 2000
resulted in no net gain or loss.
BOLI income increased $2.2 million during 2001. Waypoint Financial's
investment in BOLI increased to $83.5 million at December 31, 2001 from $20.9
million at December 31, 2000.
Other noninterest income increased to $2.7 million in 2001 from $1.8 million
in 2000. Waypoint Financial's joint venture equity investments resulted in a
loss of $.2 million in 2001, which represents an improvement of $1.2 million
over a loss of $1.4 million recorded during 2000. Other income for 2001 also
included a one-time gain of $1.5 million related to the curtailment of a pension
plan. During 2000, Waypoint Financial recorded a one-time gain of $1.9 million
for an insurance recovery related to a 1996 fraud loss associated with the
acquisition of First Harrisburg Bancor.
Management believes it is essential to continue its strategic initiatives
toward expanding Waypoint Financial's commercial banking presence and its trust
and asset management, brokerage, and insurance businesses. These fee-based
operations are expected to continue enhancing Waypoint Financial's noninterest
income and its profitability in 2002 and beyond.
Noninterest Expense. Noninterest expense decreased $15.4 million to $80.7
million in 2001 from $96.1 million in 2000, which included $16.2 million of
expense associated with the merger of Waypoint Financial and York Financial
Corp. on October 17, 2000. Noninterest expense was up $.8 million or 1.0% from
$79.9 million of noninterest expenses excluding merger expense in 2000.
Salaries and benefits expense was up $2.8 million to $41.9 million or 7.3%
in 2001 from $39.1 million in 2000. This increase included the effects of salary
and wage savings of $2.6 million from merger efficiencies, net of post-merger
business line staff enhancements, and savings of $1.3 million from increased
deferrals of loan origination costs. This savings was offset by a number of
increases to salaries and benefits expense that reflect Waypoint Financial's
adoption of "pay for performance" compensation practices. Accordingly, incentive
bonuses and commission-based compensation increased $2.2 million to $6.1 million
in 2001. Compensation expense also increased $1.9 million due to stock grants
under Waypoint Financial's RRP. The Waypoint Financial RRP was approved by
shareholders at a special meeting on December 20, 2001. The cost of benefits
increased $1.3 million to $4.7 million in 2001, reflecting market increases in
health insurance and other benefits and the adoption of additional benefit
options to attract and retain high-quality employees. Finally, ESOP expense
increased $1.2 million to $1.7 million in 2001 as Waypoint committed for release
the remaining shares in the former Harris Financial and York Financial ESOPs.
Equipment expense decreased slightly to $7.2 million in 2001 from $7.3
million in 2000. Merger efficiencies were not readily apparent in equipment
expense primarily because Waypoint Financial converted all of its information
technology to in-house processes. Prior to the merger in October 17, 2000, York
Financial relied upon outside service providers for most information technology
services. Such expenses were reflected in "professional fees and outside
services" and are discussed later in this section. Accordingly, Waypoint
Financial was able to maintain its equipment expense level in 2001 while
absorbing a substantial increase in information processing demands.
Occupancy expense increased slightly to $6.5 million in 2001 from $6.4
million in 2000. Waypoint Financial sold certain branch facilities as a result
of the merger. The costs of maintaining these facilities are partially offset by
rental income.
Advertising and public relations expense decreased $.7 million to $2.7
million in 2001 from $3.4 million in 2000. This decrease primarily reflects
merger efficiencies in the acquisition of media advertising.
FDIC deposit insurance was stable at $.5 million in both 2001 and 2000,
reflecting comparable-sized deposit portfolios and assessment rates in each
year.
Waypoint Financial recorded net income of $.4 million from real estate
operations in 2001 as compared to net expense of $1.2 million in 2000. The gain
in 2001 resulted primarily from net gains of $.6 million on the sale of REO at
favorable market prices. During 2000, sales of REO properties occurred in a less
favorable market and generated net losses of $.8 million.
Amortization expense on intangible assets totaled $3.0 million in 2001, up
$.1 million from 2000. This increase resulted from amortization of goodwill from
the November, 2000 purchase of Owen Insurance, Inc. As a result of new
accounting standards related to intangible assets, Waypoint Financial ceased
amortizing goodwill effective January 1, 2002. Detailed information on new
accounting standards and Waypoint Financial's intangible assets is presented in
the Notes to Consolidated Financial Statements.
41
Expense from professional fees and outside services decreased $1.7 million
to $3.1 million in 2001 from $4.8 million in 2000. This decrease resulted
primarily from a $1.6 million decrease in processing and outside service costs
to $1.9 million in 2001, which reflects merger efficiencies gained in
information technology services. As noted previously, Waypoint Financial
integrated all technology services to its in-house operations resulting in
substantial savings in 2001 in outside service costs and technology spending as
a whole. Remaining expenses in this category include legal, accounting,
consulting, and other professional fees, which decreased to $1.2 million in 2001
from $1.3 million in 2000.
Supplies, telephone and postage expense increased $.4 million to $5.4
million in 2001 from $5.0 million in 2000. This increase resulted from an
increase of $.4 million in 2001 spending on printed forms, which reflects
Waypoint Financial's reliance on in-house information technology and
proof-of-deposit systems. All other 2001 spending on supplies, telephone, and
postage remained level with 2000.
Waypoint Financial incurred no merger expenses during 2001. During 2000,
Waypoint Financial recorded $16.2 million of expense associated with the merger
of Harris Financial and York Financial on October 17, 2000. Detailed information
regarding this merger is presented in the Notes to Consolidated Financial
Statements.
Other expense increased $1.5 million to $10.8 million in 2001 from $9.3
million in 2000. Other expense includes customer account servicing expenses, OTS
examination fees, director compensation, charitable contributions, insurance
costs, and various administrative expenses. Customer account servicing expenses
increased $.5 million to $4.1 million from $3.6 million in 2000 on growth in
various portfolios, particularly in commercial and consumer loans. OTS fees
increased $.5 million to $.8 million as all of Waypoint Financial's assets
became subject to the OTS's asset-based examination fee structure. Corporate
stock administration costs also increased $.3 million to $.5 million, which
reflects the increase in Waypoint Financial's shareholder base with the stock
offering and merger completed in October 2000. All other expenses remained
fairly stable in 2001 relative to 2000.
Income Tax Expense. Income tax expense was $17.9 million in 2001, which
represented an effective tax rate of 31.4% on income before taxes of $57.0
million. Waypoint Financial's effective rate was lower than the expected federal
and state combined statutory rate of approximately 38% during 2001 primarily due
to reductions from tax exempt income on securities and loans (2.9%), dividends
received deduction (2.4%), tax exempt BOLI income (1.7%) and federal tax credits
for qualified investments (.8%). In 2000, income tax expense was $3.9 million,
which equated to an effective tax rate of 26.7% on income before taxes of $14.6
million. The effective rate for 2000 reflects a significant impact from merger
expenses on income before taxes and income tax expense.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Waypoint Financial's most significant form of market risk is interest rate
risk. Interest rate risk and interest rate risk management are discussed in Item
7 of this report, which is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements of Waypoint Financial are presented on
the following pages.
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Waypoint Financial Corp:
We have audited the December 31, 2002 consolidated statement of financial
condition of Waypoint Financial Corp. and subsidiaries, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The December 31, 2001 and 2000
consolidated financial statements of Waypoint Financial Corp. and subsidiaries
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements in
their report dated January 16, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the December 31, 2002 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Waypoint Financial Corp. and subsidiaries as of December 31, 2002,
and the consolidated results of their operations and their cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 10 to the consolidated financial statements, the Company
changed its method of accounting for goodwill in 2002.
As discussed above, the December 31, 2001 and 2000 consolidated financial
statements of Waypoint Financial Corp. and subsidiaries were audited by other
auditors who have ceased operations. As described in Note 10, these financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as of January 1, 2002. In
our opinion, the disclosures for 2001 and 2000 in Note 10 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of Waypoint Financial Corp. and
subsidiaries other than with respect to such disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.
/s/ KPMG LLP
Lancaster, Pennsylvania
January 21, 2003
43
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Waypoint Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Waypoint Financial Corporation (a Pennsylvania corporation) and subsidiaries
as of December 31, 2001 and 2000, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of York Financial, Corp., a company acquired during 2000 in
a transaction accounted for as a pooling of interests, as discussed in Note 3 to
the Consolidated Financial Statements. Such statements are included in the
consolidated financial statements of Waypoint Financial Corp. and reflect total
interest income of 38 percent of the related consolidated totals in 1999. These
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts included for York Financial
Corp., is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Waypoint Financial Corp. and subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Lancaster, PA
January 16, 2002
Note: This represents a copy of the auditors report issued by Arthur Andersen
LLP that was included in Waypoint Financial Corp.'s annual report on Form 10-K
for the year ended December 31, 2001 and does not represent a reissuance of the
report. After reasonable efforts, Waypoint Financial Corp. has not been able to
obtain a reissued report from Arthur Andersen LLP. As described in Note 10, the
December 31, 2001 and 2000 consolidated financial statements have been revised
to include transitional disclosures required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangibles, which was adopted
by Waypoint Financial Corp. as of January 1, 2002.
44
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------------------
2002 2001
----------- -----------
(In Thousands)
ASSETS
------
Cash and cash equivalents $ 96,088 $ 116,583
Marketable securities available-for-sale 2,792,112 2,552,360
Loans receivable, net 2,310,106 2,462,218
Loans held for sale, net 30,328 42,453
Loan servicing rights 3,167 4,782
Investment in real estate and other joint ventures 14,811 12,813
Premises and equipment 48,826 43,931
Accrued interest receivable 26,585 28,298
Goodwill 10,302 10,302
Intangible assets 1,676 3,262
Income taxes receivable 72 -
Deferred tax asset, net - 1,516
Other assets 90,940 95,225
----------- -----------
Total assets $ 5,425,013 $ 5,373,743
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 2,453,390 $ 2,537,269
Other borrowings 2,414,480 2,291,987
Escrow 3,348 4,662
Accrued interest payable 10,295 12,620
Postretirement benefit obligation 2,310 2,809
Deferred tax liability 6,106 -
Income taxes payable - 380
Other liabilities 49,311 37,801
----------- -----------
Total liabilities 4,939,240 4,887,528
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding junior subordinated debentures
of Waypoint ("Trust Preferred Securities") 29,102 -
Commitments and Contingencies
Preferred stock, 10,000,000 shares authorized but unissued
Common stock, $ .01 par value, authorized 100,000,000 shares,
40,502,372 shares issued and 34,702,206 outstanding
at December 31, 2002, 40,163,477 shares issued and
39,176,840 shares outstanding at December 31, 2001 404 402
Paid in capital 315,636 312,009
Retained earnings 249,177 215,600
Accumulated other comprehensive income (loss) 11,710 (280)
Employee stock ownership plan (14,460) (15,640)
Recognition and retention plans (6,977) (9,954)
Treasury stock, 5,800,166 shares at December 31, 2002
and 986,637 shares at December 31, 2001 (98,819) (15,922)
----------- -----------
Total stockholders' equity 456,671 486,215
----------- -----------
Total liabilities and stockholders' equity $ 5,425,013 $ 5,373,743
=========== ===========
See accompanying notes to consolidated financial statements
45
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
(In Thousands, except share data)
Interest Income:
Loans $ 165,140 $ 196,640 $ 200,562
Marketable securities and interest-earning cash 115,994 128,834 123,996
--------- --------- ---------
Total interest income 281,134 325,474 324,558
--------- --------- ---------
Interest Expense:
Deposits and escrow 72,991 106,932 125,140
Borrowed funds 84,922 103,197 99,179
--------- --------- ---------
Total interest expense 157,913 210,129 224,319
--------- --------- ---------
Net interest income 123,221 115,345 100,239
Provision for loan losses 10,840 6,996 5,070
--------- --------- ---------
Net interest income after provision for loan losses 112,381 108,349 95,169
--------- --------- ---------
Noninterest Income:
Service charges on deposits 7,608 6,704 6,521
Other service charges, commissions, fees 12,550 10,631 6,994
Loan servicing, net (1,101) (163) 1,192
Gain (loss) on securities and derivatives 9,098 2,826 (1,792)
Gain on sales of loans 4,340 3,919 161
Bank-owned life insurance 4,691 2,760 609
Other 1,810 2,689 1,843
--------- --------- ---------
Total noninterest income 38,996 29,366 15,528
--------- --------- ---------
Noninterest Expense:
Salaries and benefits 44,832 41,934 39,064
Equipment expense 7,053 7,181 7,294
Occupancy expense 6,595 6,489 6,374
Advertising and public relations 4,248 2,741 3,412
FDIC insurance 442 495 521
(Income) expense from real estate operations (361) (402) 1,247
Amortization of goodwill - 1,048 930
Amortization of other intangible assets 1,586 1,959 1,959
Professional fees and outside services 3,107 3,101 4,816
Supplies, telephone and postage 4,887 5,384 4,956
Merger-related expenses - - 16,239
Other 13,634 10,761 9,285
--------- --------- ---------
Total noninterest expense 86,023 80,691 96,097
--------- --------- ---------
Income before income taxes 65,354 57,024 14,600
Income tax expense 18,200 17,886 3,905
--------- --------- ---------
Net income $ 47,154 $ 39,138 $ 10,695
========= ========= =========
Basic earnings per share $ 1.33 $ 1.05 $ 0.28
========= ========= =========
Diluted earnings per share $ 1.30 $ 1.03 $ 0.28
========= ========= =========
See accompanying notes to consolidated financial statements
46
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Employee Recognition
Other Stock and
Common Paid in Retained Comprehensive Ownership Retention Treasury Comprehensive
Stock Capital Earnings Income(loss) Plan Plan (RRP) Stock Total Income
------- ------- -------- ------------- --------- ----------- -------- --------- -------------
(In Thousands)
Balance at January 1, 2000 388 137,392 187,585 (37,866) (826) (456) (7,015) 279,202
Pooling adjustment to conform
accounting periods (3) (548) (2,059) 1,367 (132) 617 (758)
Net income 10,695 10,695 $10,695
Dividends paid at $.33 per share (7,471) (7,471)
Exercised stock options
(62,317 shares) 6 304 310
Unrealized gains on securities,
net of income tax of $10,862 20,172 20,172 20,172
-------
Comprehensive income $30,867
=======
ESOP stock committed for release
(78,795 shares) 171 233 404
Earned portion of RRP Plan 16 29 45
Tax benefit of RRP shares awarded
and exercised options 9 9
Treasury stock purchased (147,250
shares) (1,301) (1,301)
Common stock issued under dividend
reinvestment plan (150,082
shares) 398 1,242 1,640
Stock released as compensation (112) (112)
Stock issuance on conversion (net
of costs of $10,887,000)
(300,000 shares) 157,378 995 (15,640) 142,733
---- -------- -------- --------- -------- -------- -------- --------
Balance at December 31, 2000 391 295,008 189,745 (16,327) (16,365) (427) (6,457) 445,568
Net income 39,138 39,138 $39,138
Dividends paid at $.34 per share (13,283) (13,283)
Exercised stock options (428,868
shares) 2 2,696 2,698
Unrealized gains on securities,
net of income tax of $10,264 16,047 16,047 16,047
-------
Comprehensive income $55,185
=======
ESOP stock committed for release
(135,059 shares) 937 725 1,662
Establish RRP (752,582 shares) 9 12,470 (12,046) 433
Earned portion of RRP 43 2,519 2,562
Tax benefit on exercised options 1,171 1,171
Treasury stock purchased (705,000
shares) (9,561) (9,561)
Dividend reinvestment plan, net (282) 96 (186)
Stock released as compensation (34) (34)
---- -------- -------- --------- -------- -------- -------- --------
Balance at December 31, 2001 402 312,009 215,600 (280) (15,640) (9,954) (15,922) 486,215
Net income 47,154 47,154 $47,154
Dividends paid at $.40 per share (13,577) (13,577)
Exercised stock options (220,933
shares) 2 2,306 2,308
Unrealized gains on securities,
net of income tax of $8,226 12,713 12,713 12,713
ESOP stock committed for release
(117,962 shares) 847 1,180 2,027
Earned portion of RRP 278 2,977 3,255
Accumulated pension benefit
obligation in excess of plan
assets (723) (723) (723)
-------
Comprehensive income $59,144
=======
Tax benefit on exercised options 587 587
Treasury stock purchased
(4,813,529 shares) (82,897) (82,897)
Dividend reinvestment plan, net (391) (391)
---- -------- -------- --------- -------- -------- -------- --------
Balance at December 31, 2002 $404 $315,636 $249,177 $ 11,710 $(14,460) $ (6,977) $(98,819) $456,671
==== ======== ======== ========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements
47
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Cash flows from operating activities:
Net income $ 47,154 $ 39,138 $ 10,695
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 10,840 6,996 5,070
Net depreciation, amortization and accretion 5,620 7,619 5,822
Loans originated for sale (341,706) (230,426) (188,730)
Proceeds from sales of loans originated for sale 387,201 197,739 180,879
Origination of loan servicing rights (1,117) (562) (1,734)
Proceeds from sales of trading securities - - 1,200
Net (gain) loss on sales of interest-earning assets (13,438) (6,745) 1,620
(Gain) loss on the sale of foreclosed real estate (520) (553) 832
Realized loss on trading securities - - 11
(Income) loss from joint ventures (183) 529 1,251
Decrease (increase) in accrued interest receivable 1,713 2,207 (2,751)
(Decrease) increase in accrued interest payable (2,325) (9,305) 10,129
Amortization of intangibles 1,589 3,007 2,889
Earned ESOP shares 2,027 1,662 404
Earned RRP shares 3,255 2,562 54
(Benefit) provision for deferred income taxes (617) (2,905) (3,799)
(Increase) decrease in income taxes receivable (452) 2,715 (713)
Loss (gain) on sale of premises and equipment 106 (331) 98
Other, net 2,380 (682) (18,739)
---------- ---------- ---------
Net cash provided by operating activities 101,527 12,665 4,488
---------- ---------- ---------
Cash flows from investing activities:
Proceeds from maturities, sales, and
principal reductions of marketable securities 3,157,409 1,116,366 405,072
Purchase of marketable securities (3,380,126) (1,724,111) (518,705)
Loans sold - 31,334 71,526
Loan originations less principal payments on loans 135,402 85,572 (331,874)
Loan servicing rights sold - - 6,425
Investments in real estate held for investment and other joint ventures (2,115) (1,421) (3,544)
Proceeds on real estate and premises and equipment 2,641 4,454 8,650
Purchases of premises and equipment, net (7,078) (4,189) (14,540)
Purchase of bank-owned life insurance - (60,000) (5,452)
Acquisition of subsidiary net assets, net
of cash acquired - - (1,165)
---------- ---------- ---------
Net cash used in investing activities (93,867) (551,995) (383,607)
48
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Years Ended December 31,
---------------------------------------------
2002 2001 2000
------------- ------------ ------------
(In Thousands)
Cash flows from financing activities:
Net (decrease) increase in deposits (83,879) (88,451) 148,506
Net increase in other borrowings 122,493 666,658 88,800
Net decrease in escrow (1,314) (1,799) (426)
Net proceeds from issuance of Trust Preferred Securities 29,102 - -
Proceeds from issuance of common stock - - 158,373
Dividend reinvestment plan (391) (282) 398
Cash dividends (13,577) (13,283) (7,471)
Payments to acquire treasury stock (82,897) (9,561) (1,301)
Issuance of treasury stock - 96 1,242
Establish ESOP - - (15,640)
Proceeds from the exercise of stock options 2,308 2,698 310
----------- ----------- -----------
Net cash (used in) provided by financing operations (28,155) 556,076 372,791
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (20,495) 16,746 (6,328)
Pooling Adjustment to conform accounting years - - (4,774)
Cash and cash equivalents at beginning of period 116,583 99,837 110,939
----------- ----------- -----------
Cash and cash equivalents at end of period $ 96,088 $ 116,583 $ 99,837
=========== =========== ===========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 160,238 $ 219,434 $ 215,444
Income taxes 19,269 18,306 7,579
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 1,798 $ 1,545 $ 3,422
Exchange of loans for mortgage-backed securities - 12,698 84,168
Non-cash financing activities
Establish RRP $ - $ 12,046 $ -
Acquisitions:
Fair value of assets acquired $ - $ - $ 1,857
Purchase intangible assets originated - - 1,627
Fair value of liabilities assumed - - 1,224
See accompanying notes to consolidated financial statements
49
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
(All dollar amounts presented in the tables are in thousands,
except share amounts)
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Waypoint Financial Corp.
("Waypoint Financial" or "the Company") and its subsidiaries conform to
accounting principles generally accepted in the United States and to general
practices within the banking industry. The following is a description of the
more significant of those policies.
(a) Basis of Financial Statements
The Consolidated Financial Statements include the accounts of Waypoint
Financial and its wholly owned subsidiaries Waypoint Bank, Waypoint Financial
Investment Corporation, New Service Corporation, Waypoint Service Corporation,
Waypoint Brokerage Services, Inc., Waypoint Insurance Services, Inc., Owen
Insurance Inc., Waypoint Insurance Group, Inc., and Lenders Support Group Inc.
Waypoint Bank is the sole owner of the following subsidiaries: Waypoint
Investment Corporation, H.S. Service Corporation, First Harrisburg Service
Corporation, and C.B.L. Service Corporation. All significant intercompany
transactions and balances are eliminated in consolidation.
Waypoint Bank is primarily engaged in attracting deposits from the general
public and investing deposit funds primarily in commercial loans, residential
real estate loans, consumer loans and marketable securities. Waypoint Bank also
provides commercial services, sells non-deposit investment products, provides
trust and asset management services, and sells insurance products.
Waypoint Financial and Waypoint Bank are subject to the regulations of the
Office of Thrift Supervision ("OTS"), Federal Deposit Insurance Corporation
("FDIC"), the Federal Reserve Bank ("FRB"), the Federal Home Loan Bank ("FHLB"),
and the Securities and Exchange Commission ("SEC") and may undergo periodic
examinations by these regulatory authorities.
(b) Use of Estimates
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, Waypoint Financial defines
cash equivalents as demand deposits with other financial institutions.
(d) Marketable Securities
Marketable securities are classified and accounted for as follows:
. Debt securities that Waypoint Financial has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
. Debt and equity securities not classified as held-to-maturity are
classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a component of comprehensive income.
Premiums and discounts are amortized or accreted on the related securities
using a method that approximates the interest method. Gains or losses upon sale
are determined using the specific identification method.
Federal law requires a member institution of the Federal Home Loan Bank
("FHLB") system to hold stock of its district FHLB according to a predetermined
formula. This stock is recorded at cost and may be pledged to secure FHLB
advances.
50
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(e) Loans Receivable
Loans receivable are stated at unpaid principal balances, adjusted for the
allowance for loan losses, net deferred loan origination fees, unearned
discounts and premiums, and dealer reserves.
Recognition of interest income on loans is accrued and credited to interest
income based upon principal amounts outstanding. Discounts and premiums on
mortgage loans are amortized to income using a method that approximates the
interest method over the remaining period to contractual maturity. Discounts on
consumer loans are recognized over the lives of the loans using methods that
approximate the interest method.
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized as an adjustment to interest income using the
interest method over the contractual life of the loans. Calculation of the
interest method is done on a loan-by-loan basis. The amortization of deferred
fees and costs is discontinued on non-performing loans.
Waypoint Financial accounts for loans in accordance with Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures". Management considers current information and events regarding the
borrowers' ability to repay their obligations and considers a loan to be
impaired when it is probable that Waypoint Financial will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
evaluating whether a loan is impaired, management considers not only the amount
that Waypoint Financial expects to collect but also the timing of collection.
Generally, if a delay in payment is insignificant, a loan is not deemed to be
impaired.
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, at the loan's market price or fair value
of the collateral if the loan is collateral dependent. The majority of loans
deemed to be impaired by management are collateral dependent. Waypoint Financial
evaluates smaller balance, homogeneous loans (e.g., primarily consumer and
residential mortgages) for impairment on a portfolio basis. All other loans are
evaluated individually for impairment.
Interest income on impaired loans is generally recorded as payments are
collected. Interest on impaired loans that are contractually past due ninety
days and over is reserved in accordance with regulatory requirements. Loans are
returned to accrual status when the collectibility of past due principal and
interest is reasonably assured.
The allowance for loan losses represents management's best estimate of
probable losses at the end of the respective reporting periods. An analysis of
the allowance is prepared on a quarterly basis. The allowance required for
commercial loans is developed through an analysis of each loan within the
portfolio for evidence of a loss confirming event. Such events include
delinquencies, loss activity, decreases in cash flow or other adverse economic
or demographic events. Allowances for mortgage and consumer loans are determined
by applying reserve factors to pools of loans with similar risk attributes.
These factors are developed by considering charge-off history, delinquencies and
credit concentrations. Reserve factors are modified as specific events warrant.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and asset mix.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Waypoint Financial's allowance for loan
losses. Such agencies may require Waypoint Financial to recognize additions or
deletions to the allowance based on their judgments of information available to
them at the time of their examination.
(f) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or market, net of deferred fees relating to the
specific loans. Gains and losses on the sale of loans are determined using the
specific identification method.
51
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(g) Loan Servicing
Waypoint Financial follows the provisions of Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities". When capitalizing mortgage
servicing rights, Waypoint Financial allocates the total cost of the mortgage
loans (the recorded investment in the mortgage loans including net deferred fees
or costs and any purchase premium or discount) to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values. Such fair value is primarily based on observable market prices.
Mortgage servicing rights (including purchased mortgage servicing) are amortized
in proportion to, and over the period of, estimated net servicing revenue based
on management's best estimate of remaining loan lives.
Waypoint Financial measures the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their current
fair value. Impairment of servicing rights is recognized through a valuation
allowance. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value. For the purpose
of evaluating and measuring impairment of capitalized mortgage servicing rights,
Waypoint Financial stratifies those rights based on the predominant risk
characteristics of the underlying loans, including loan type (for example,
conventional or government guaranteed and adjustable rate or fixed rate mortgage
loans) and interest rate. Valuation techniques for measuring fair value
incorporate assumptions that market participants use in estimating future
servicing income and expense, including assumptions about prepayment, default
and interest rates.
(h) Real Estate Held for Investment and Foreclosed Real Estate
Effective January 1, 2002, Waypoint Financial adopted the provisions of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 provides guidance for
recognition and measurement of impairment of long-lived assets to be held and
used and assets to be disposed of. SFAS 144 also establishes specific criteria
to determine when a long-lived asset is held for sale.
Real estate properties acquired through loan foreclosure are initially
recorded at the lower of the carrying or fair value less estimated costs to sell
at the date of foreclosure. At the time of foreclosure, the excess, if any, of
the carrying value over the estimated fair value of the property less estimated
costs to sell is charged to the allowance for loan losses. Real estate
properties held for investment are carried at the lower of cost, including cost
of improvements and amenities incurred subsequent to acquisition, or estimated
net realizable value. Costs relating to development and improvement of property
are capitalized, whereas costs relating to holding property are expensed.
Valuations are periodically performed by management on both real estate held for
investment and foreclosed real estate. An allowance for losses is established by
a charge to operations if the carrying value of real estate held for investment
exceeds its estimated net realizable value, or the carrying value of foreclosed
real estate exceeds its estimated fair value.
(i) Premises and Equipment
Buildings, leasehold improvements, furniture, fixtures and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings,
furniture, fixtures and equipment are depreciated using the straight-line method
over the estimated useful lives of the assets. The cost of leasehold
improvements is being amortized using the straight-line method over the lesser
of the estimated useful lives or the terms of the related leases.
(j) Goodwill and Other Intangible Assets
Waypoint Financial's accounting treatment for goodwill is discussed in Note
10. Deposit premiums and identified intangibles resulting from the purchase of
financial service business assets are amortized using the straight-line method
over the estimated benefit period. The amortization periods for these intangible
assets are subject to periodic review for reasonableness by management.
Management also periodically reviews its intangible assets for potential
impairment.
(k) Income Taxes
Waypoint Financial accounts for income taxes using the asset and liability
method. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for temporary differences between the financial
reporting and tax basis of Waypoint Financial's assets and liabilities based on
enacted tax rates expected to be in effect when such amounts are realized or
settled. Waypoint Financial files a consolidated federal income tax return.
52
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(l) Derivative Financial Instruments
Waypoint Financial adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an amendment of FASB Statement No. 133," on
January 1, 2001. SFAS No. 133 requires the transition adjustment, net of the tax
effect, resulting from adopting these Statements to be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change
in accounting principle.
Waypoint Financial does not engage in foreign business operations and,
accordingly, has no derivative instruments associated with such operations.
Waypoint Financial was not required to record a transition adjustment for
derivative contracts that meet the definition of a fair value hedging instrument
due to the immateriality of related amounts. Waypoint Financial also did not
record any net-of-tax transition adjustments in accumulated other comprehensive
income as a result of recognizing derivatives that are designated as cash flow
hedging instruments at fair value due to the immateriality of related amounts.
The Company upon adoption of SFAS 133 reclassified $22.7 million of
held-to-maturity securities as "available-for-sale" so that those securities
would be eligible as hedged items in future hedge transactions. Under the
provisions of SFAS No. 133, such a reclassification does not call into question
the Company's intent to hold current or future debt securities to their
maturity.
Accounting for Derivative Instruments and Hedging Activities
Waypoint Financial recognizes all derivatives on the balance sheet at fair
value. On the date the derivative instrument is entered into, the company
generally designates the derivative as either (1) a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment ("fair value
hedge") or (2) a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability ("cash
flow hedge"). Changes in the fair value of a derivative that is designated as,
and meets all the required criteria for, a fair value hedge, along with the
change in the fair value of the hedged asset or liability that is attributable
to the hedged risk, are recorded in current period earnings. Changes in the fair
value of a derivative that is designated as, and meets all the required criteria
for, a cash flow hedge are recorded in accumulated other comprehensive income
and reclassified into earnings as the underlying hedged item affects earnings.
The portion of the change in fair value of a derivative associated with
hedge ineffectiveness or the component of a derivative instrument excluded from
the assessment of hedge effectiveness is recorded currently in earnings. Also,
changes in the entire fair value of a derivative that is not designated as a
hedge are recorded immediately in earnings. The company formally documents all
relationships between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various hedge
transactions. This process includes relating all derivatives that are designated
as fair value or cash flow hedges to specific assets and liabilities on the
balance sheet or to specific firm commitments or forecasted transactions.
Waypoint Financial periodically purchases financial instruments that
contain "embedded" derivative features. Management believes, based on the
company's assessment, the economic characteristics of the embedded derivative
are clearly and closely related to the economic characteristics of the remaining
component of the financial instrument (the "host contract"). Accordingly, no
embedded derivatives were separated from the host contract and carried at fair
value in the financial statements and are available to be designated in a
hedging transaction.
Waypoint Financial also formally assesses, both at the inception of the
hedge and on an ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged item. If it is
determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly effective hedge, the company will discontinue
hedge accounting prospectively.
There was no material hedge ineffectiveness related to hedges during the
period to be recognized in earnings.
53
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(m) Earnings Per Share
Waypoint Financial follows the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires
earnings per share to be reported as basic earnings per share and diluted
earnings per share. Basic earnings per share is based on the total weighted
average shares outstanding for a given period. Diluted earnings per share is
based on total weighted average shares outstanding, and also assumes the
exercise or conversion of all potentially dilutive instruments currently
outstanding. The computations for basic and diluted earnings per share for the
years ended December 31 are as follows:
2002 2001 2000
------------------------ ------------------------ ------------------------
Amount Amount Amount
per share Shares per share Shares per share Shares
----------- ---------- ----------- ---------- ----------- ----------
Average shares of common stock
outstanding:
Basic $ 1.33 35,356,017 $ 1.05 37,349,442 $ 0.28 38,111,715
Effect of stock options and grants (0.03) 988,182 (0.02) 563,494 - 266,523
------ ---------- ------ ---------- ------ ----------
Diluted $ 1.30 36,344,199 $ 1.03 37,912,936 $ 0.28 38,378,238
====== ========== ====== ========== ====== ==========
The following anti-dilutive options were excluded from the computation of
diluted earnings per share because the exercise prices were greater than the
average market price of the common shares during the period:
Number of
Anti-dilutive Weighted Average Expiration
Year Ended Options Exercise Price Through
------------ ------------- -------------- ----------------
December 31, 2002 79,068 $20.46 January 5, 2009
December 31, 2001 176,206 $18.15 February 15, 2009
December 31, 2000 454,759 $15.61 October 2, 2010
(n) Dividends
Waypoint Bank may not pay dividends on or repurchase any of its common
stock if the effect thereof would reduce net worth below the level of adequate
capitalization as defined by the FDIC and the Office of Thrift Supervision.
(o) Stock-Based Compensation
Waypoint Financial follows the intrinsic value method to account for
compensation expense related to the award of stock options and furnishes the pro
forma disclosures required under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" related to the fair value of
stock options awarded.
The Company accounts for the Option Plans under Accounting Principles Board
Opinion No. 25, and, accordingly, compensation expense generally has not been
recognized in the financial statements of the Company. Had compensation expense
for these plans been recorded in the financial statements of the Company
consistent with the fair value provisions of Statement 123, the Company's net
income and net income per share would have been reduced to the following
pro-forma amounts (in thousands, except per-share data):
2002 2001 2000
------- -------- --------
Net Income
As reported $47,154 $39,138 $10,695
Pro forma $44,799 $37,885 $10,074
Basic earnings per share
As reported $ 1.33 $ 1.05 $ 0.28
Pro forma $ 1.26 $ 1.01 $ 0.26
Diluted earnings per share
As reported $ 1.30 $ 1.03 $ 0.28
Pro forma $ 1.23 $ 1.00 $ 0.26
54
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The effects on pro forma income may not be representative of the effects in
future years because only options granted since 1995 have been reflected.
(p) Advertising
Advertising costs are expensed as incurred and totaled $3,201,000 and
$1,912,000 in 2002 and 2001, respectively.
(q) Comprehensive Income
Waypoint Financial follows Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). This statement prescribes
standards for reporting and display of comprehensive income and its components.
SFAS 130 requires other comprehensive income components such as unrealized gains
or losses on Waypoint Financial's marketable securities and accumulated pension
benefit obligation in excess of plan assets to be included in other
comprehensive income. In accordance with SFAS 130, Waypoint Financial presents
comprehensive income within the consolidated statements of stockholders' equity.
Waypoint Financial recorded reclassification adjustments out of other
comprehensive income totaling ($3,055,000), ($1,837,000), and $1,158,000 in
2002, 2001, and 2000, respectively, for (gains) losses realized on securities
available for sale. These adjustments included tax expense (benefit) of
$1,432,000, $989,000, and ($623,000) in 2002, 2001, and 2000, respectively.
(r) Business Segments
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", prescribes standards for the
way public enterprises report information about operating segments in the
financial statements. Based on the guidance provided by the Statement, Waypoint
Financial does not have more than one operating segment that would require
additional disclosures in accordance with the Statement.
(s) Recently Issued Accounting Guidance
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The provisions of this statement relevant to Waypoint Financial become effective
January 1, 2003, and its adoption is expected to have no impact on Waypoint
Financial's financial condition or results of operations.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146). SFAS 146 redefines the criteria
required for commitment to a plan to exit an activity or dispose of long-lived
assets and requires expense recognition at the time costs are "incurred." SFAS
146 also requires the measurement and recognition of changes in estimated cash
flows associated with covered transactions. SFAS 146 is effective for Waypoint
Financial on January 1, 2003 and its adoption is expected to have no impact on
Waypoint Financial's financial condition or results of operations.
In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions" (SFAS 147). SFAS 147 requires companies that have
acquired certain financial institution businesses cease amortizing all goodwill
previously amortized (SFAS 72 "Goodwill") and subject it to annual impairment
tests. Waypoint Financial does not have any goodwill that meets the requirements
of SFAS 147.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148). SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value-based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Waypoint Financial has not elected
to change to the fair-value method of accounting for stock-based compensation
but has complied with the annual disclosure requirements herein.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and
55
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
measurement provisions of the Interpretation are applicable to guarantees issued
or modified after December 31, 2002 and are not expected to have a material
effect on the Company's financial statements. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For nonpublic enterprises, such as the Company,
with a variable interest in a variable interest entity created before February
1, 2003, the Interpretation is applied to the enterprise no later than the end
of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material effect on
the Company's financial statements. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
(2) Regulatory Structure
Waypoint Financial's primary regulators are the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC").
Waypoint Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Waypoint Financial's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Waypoint Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Waypoint Bank's capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Waypoint Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined by the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). At December 31, 2002 and 2001, Waypoint Bank met all
capital adequacy requirements to which it is subject.
Waypoint Bank's capital amounts and ratios are presented in the following
table:
Well Capitalized
Under Prompt
For Capital Corrective
Adequacy Purposes Action Rules
------------------------- ------------------------
Actual Minimum Required Minimum Required
Waypoint Bank -------------------------- ------------------------- ------------------------
As of December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
----------------------- ---------- --------- ---------- --------- ---------- ---------
Total Capital/Risk Weighted Assets $441,066 13.7% $257,395 8.0% $321,744 10.0%
Tier 1 Capital/Risk Weighted Assets 410,953 12.8 128,697 4.0 193,046 6.0
Tier 1 Capital/Average Assets 410,953 7.8 210,333 4.0 262,916 5.0
As of December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
----------------------- ---------- --------- ---------- --------- ---------- ---------
Total Capital/Risk Weighted Assets $434,847 14.6% $238,377 8.0% $297,971 10.0%
Tier 1 Capital/Risk Weighted Assets 409,125 13.7 119,189 4.0 178,783 6.0
Tier 1 Capital/Average Assets 409,125 8.1 202,703 4.0 253,379 5.0
56
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of Waypoint Bank's regulatory capital to capital using
accounting principles generally accepted in the United States (GAAP) as of
December 31, 2002 follows:
Tier 1
Tangible (Core) Risk-based
Capital Capital Capital
--------- -------- ----------
GAAP capital at Waypoint Financial $456,671 $456,671 $456,671
Capital attributed to affiliates (22,824) (22,824) (22,824)
-------- -------- --------
GAAP capital at Waypoint Bank 433,847 433,847 433,847
Capital adjustments:
Unrealized gains, net of taxes, on securities available for sale (12,457) (12,457) (12,457)
Allowance for loan losses - - 27,506
Certain intangible assets (10,272) (10,272) (10,272)
Disallowed servicing assets (165) (165) (165)
Allowable unrealized gains, net of taxes, on equity securities available for sale - - 2,607
-------- -------- --------
Regulatory capital at Waypoint Bank $410,953 $410,953 $441,066
======== ======== ========
Waypoint Bank may dividend up to amounts allowed by OTS regulation.
(3) Completion of Stock Conversion, Stock Offering, and Acquisition by Merger
On October 17, 2000, Harris Financial, MHC, the parent mutual holding
company for Harris Financial, Inc. and owner of 76% of its common stock,
completed a mutual-to-stock conversion. As part of this conversion, Harris
Financial, MHC ceased to exist. Immediately following the conversion, Waypoint
Financial became the successor to Harris Financial, Inc. and Waypoint Bank
became the successor to Harris Savings Bank. As a result of these transactions,
Waypoint Bank is the wholly owned subsidiary of Waypoint Financial and 100% of
Waypoint Financial is publicly owned.
Also on October 17, 2000, Waypoint Financial completed a stock offering and
an acquisition by merger of York Financial Corp., the parent holding company of
York Federal Savings and Loan Association. As a result of its subscription,
community offering, and public offering, Waypoint Financial sold 16,550,000
shares at $10.00 per share with net proceeds totaling $158,373,000 (including
approximately $15,640,000 of proceeds from the sale of shares to Waypoint Bank's
employee stock ownership plan). Waypoint Financial issued 6,191,274 shares to
former stockholders of Harris Financial, Inc. as part of the conversion in
accordance with a ratio of .7667 Waypoint Financial shares to each Harris
Financial share. Waypoint Financial also issued 15,666,264 shares to former
stockholders of York Financial to complete its acquisition by merger in
accordance with a ratio of 1.55 shares of Waypoint Financial to each York
Financial share. York Financial held total assets of $1.7 billion as of
September 30, 2000.
The merger of Waypoint Financial and York Financial was accounted for under
the pooling-of-interests method of accounting and, accordingly, Waypoint
Financial's historical consolidated financial statements were restated to
include the accounts and results of operations of York Financial.
Prior to the combination, York Financial's fiscal year ended on June 30.
York Financial's financial statements as of and for the fiscal year ended June
30, 2000 were combined with Waypoint Financial's financial statements as of and
for the year ended December 31, 1999.
An adjustment has been made to stockholder's equity in the year ended
December 31, 2000 to eliminate the effect of including York Financial's results
of operations for the six months ended June 30, 2000 in Waypoint Financial's
consolidated financial statements for the years ended December 31, 2000 and
1999. There were no significant intercompany transactions between Waypoint
Financial and York Financial prior to the combination.
57
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2000, Waypoint Financial recorded $16,239,000 of expenses
($12,056,000 after-tax) associated with the merger of Waypoint Financial and
York Financial on October 17, 2000. The major components of merger expense
included: advisory and professional fees of $3,806,000, compensation and benefit
plan integration expenses of $6,655,000, system conversion and account
integration costs of $3,355,000, charges for duplicate facilities of $1,203,000,
and various other expenses totaling $1,220,000. Waypoint Financial recorded
certain merger-related liabilities associated with the merger as follows:
Compensation System
and Benefit Plans Conversion Total
------------------- ------------ -----------
Balance as of December 31, 2000 $ 3,321 $ 135 $ 3,456
Payments during 2001 (1,510) (135) (1,645)
---------- -------- ---------
Balance as of December 31, 2001 1,811 - 1,811
Payments during 2002 (1,079) - (1,079)
---------- -------- ---------
Balance as of December 31, 2002 $ 732 $ - $ 732
========== ======== =========
(4) Restrictions on Cash
Waypoint Financial is required by the Federal Reserve Bank to maintain
certain statutory cash reserves. At December 31, 2002, Waypoint Financial's
reserve requirement was $25,000.
(5) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for available-for-sale securities by major
security type were as follows:
As of December 31, 2002
-------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
------------ ----------- ---------- ------------
U.S. Government and agencies $ 337,316 $ 7,469 $ (16) $ 344,769
Corporate bonds 78,089 78 (10,951) 67,216
Municipal securities 94,235 4,475 - 98,710
FHLB stock 109,807 - - 109,807
Equity securities 125,173 6,260 (507) 130,926
Asset-backed securities 43,677 1,167 - 44,844
Mortgage-backed securities:
Commercial mortgage-backed securities 23,599 803 - 24,402
Agency PC's & CMO's 1,054,131 7,948 (1,229) 1,060,850
Private issue CMO's 905,110 5,976 (498) 910,588
---------- -------- --------- -----------
Total mortgage-backed securities 1,982,840 14,727 (1,727) 1,995,840
---------- -------- --------- -----------
Total securities available for sale $2,771,137 $ 34,176 $ (13,201) $ 2,792,112
========== ======== ========= ===========
58
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2001
--------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
---------- --------- ------------ -----------
U.S. Government and agencies $ 522,531 $ 4,329 $ (1,502) $ 525,358
Corporate bonds 89,788 109 (7,222) 82,675
Municipal securities 82,734 1,962 (1,049) 83,647
FHLB stock 92,147 - - 92,147
Equity securities 118,392 6,110 (152) 124,350
Mortgage-backed securities:
Commercial mortgage-backed securities 10,002 - (2) 10,000
Agency PC's & CMO's 852,239 816 (6,335) 846,720
Private issue CMO's 784,491 6,491 (3,519) 787,463
---------- ------- -------- ----------
Total mortgage-backed securities 1,646,732 7,307 (9,856) 1,644,183
---------- ------- -------- ----------
Total securities available for sale $2,552,324 $19,817 $(19,781) $2,552,360
========== ======= ======== ==========
The following table presents Waypoint Financial's marketable securities as
of December 31, 2002 stratified by contractual maturity as indicated:
Cost Fair Value
----------- ----------
Due in one year or less $ 1,009 $ 1,021
Due after one through five years 91,045 94,220
Due after five through ten years 288,753 294,351
Due after ten years 172,510 165,947
Equity 234,980 240,733
Mortgage-backed securities 1,982,840 1,995,840
---------- ----------
Total securities available for sale $2,771,137 $2,792,112
========== ==========
Marketable securities having a market value of $83,982,000 and $62,260,000
at December 31, 2002 and 2001, respectively, were pledged to secure public
deposits. Marketable securities having a market value of $1,236,257,000 and
$684,259,000 were pledged as collateral for FHLB advances at December 31, 2002
and 2001, respectively.
Activity from the sale of marketable securities and increase in fair value
of derivative instruments is as follows:
2002 2001 2000
---------- ---------- ----------
Proceeds $1,158,152 $ 535,313 $ 360,755
========== ========== =========
Net increase in the fair value
of derivative instruments $ 4,611 $ - $ -
Gross realized gains 5,961 3,670 7,439
Gross realized losses (1,474) (845) (9,231)
---------- ---------- ---------
Net realized gain (loss) $ 9,098 $ 2,826 $ (1,792)
========== ========== =========
59
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2002, Waypoint Financial settled all derivative instruments that were
not designated as hedges. These derivative instruments were acquired in 2002 and
had an aggregate notional amount of $400,000,000. Included in the net realized
loss for 2000 was a valuation adjustment for other than temporary impairment on
a marketable security of $1,842,000.
(6) Loans Receivable
Loans receivable at December 31 are summarized as follows:
2002 2001
---------- ----------
Residential mortgage loans (primarily conventional):
Secured by 1-4 family residences $ 697,505 $1,025,688
Construction (net of undistributed portion of $27,535 in 2002
and $34,676 in 2001)
23,636 36,040
---------- ----------
721,141 1,061,728
Less:
Unearned premium 95 159
Net deferred loan origination fees 3,616 5,116
---------- ----------
Total residential mortgage loans 717,430 1,056,453
---------- ----------
Commercial loans:
Commercial real estate 563,138 484,894
Commercial business 332,253 272,389
Construction and site development (net of undistributed portion
of $15,974 in 2002 and $26,015 in 2001) 23,724 25,428
---------- ----------
919,115 782,711
Less:
Net deferred loan origination fees 1,308 1,171
---------- ----------
Total commercial loans 917,807 781,540
---------- ----------
Consumer and other loans:
Manufactured housing 106,098 97,243
Home equity and second mortgage 360,102 322,182
Indirect automobile 138,530 127,258
Other 74,289 78,075
---------- ----------
679,019 624,758
Plus:
Net deferred loan origination fees (2,489) (2,185)
Dealer reserve 25,845 24,721
---------- ----------
Total consumer and other loans 702,375 647,294
---------- ----------
2,337,612 2,485,287
Less:
Allowance for loan losses 27,506 23,069
---------- ----------
Net loans $2,310,106 $2,462,218
========== ==========
Loans having a carrying value of $995,400,000 were pledged as collateral for
FHLB advances at December 31, 2002.
60
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Activity in the allowance for loan loss is summarized as follows for the
years ended December 31:
2002 2001 2000
---------- ---------- ----------
Balance at the beginning of the year $ 23,069 $ 22,586 $ 23,127
Pooling adjustment to conform accounting periods - - 234
Provision charge to income 10,840 6,996 5,070
Charge-offs and recoveries, net (6,403) (6,513) (5,845)
---------- ---------- ----------
Balance at the end of the year $ 27,506 $ 23,069 $ 22,586
========== ========== ==========
Non-accrual and renegotiated loans for which interest has been reduced
totaled approximately $10,249,000 in 2002, $8,236,000 in 2001, and $5,696,000 in
2000. Interest income accrued but not recognized on these loans amounted to
$375,000 in 2002, $300,000 in 2001, and $210,000 in 2000.
At December 31, 2002 and 2001, Waypoint Financial had $10,249,000 and
$8,236,000, respectively, in impaired loans. The December 31, 2002 and 2001
allowance for loan losses has a reserve of $5,384,000 and $1,849,000,
respectively, for these impaired loans.
Waypoint Financial maintained average balances of $10,762,000, $7,949,000,
and $6,599,000 in impaired loans for the years ending December 31, 2002, 2001,
and 2000, respectively.
(7) Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans totaled $476,990,000, $633,138,000, and $741,740,000 at December 31,
2002, 2001, and 2000, respectively.
Activity associated with mortgage servicing rights is summarized as
follows:
Purchased Originated Total
--------- ---------- ------
Balance at December 31, 2000 $ 225 $ 6,151 $ 6,376
Additions - 562 562
Amortization (113) (1,855) (1,968)
Net change in valuation allowance - (188) (188)
------- ------- -------
Balance at December 31, 2001 112 4,670 4,782
Additions - 1,117 1,117
Amortization (20) (2,247) (2,267)
Net change in valuation allowance - (465) (465)
------- ------- -------
Balance at December 31, 2002 $ 92 $ 3,075 $ 3,167
======= ======= =======
Balances in the valuation allowance for mortgage servicing rights were
$1,158,000 at December 31, 2002 and $693,000 at December 31, 2001.
Custodial investor balances maintained in connection with the foregoing
mortgage servicing rights were approximately $10,831,000 at December 31, 2002
and $17,367,000 at December 31, 2001.
61
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Waypoint Financial establishes the value of its originated mortgage
servicing rights using comparative market prices for mortgage servicing rights
at the time the servicing rights are created. Waypoint Financial used the
following assumptions to measure the fair value of mortgage servicing rights
related to securitizations and recorded gains and losses on securitizations as
follows:
2002 2001 2000
-------------- -------------- --------------
Discount rates 8.0% 8.5% to 10.0% 9.0% to 10.0%
Average prepayment rate 13.7% to 46.2% 9.0% to 41.0% 9.0% to 40.0%
Gain (loss) on securitized loans $ - $276,000 ($11,000)
Waypoint Financial performs a quarterly market value analysis of its
mortgage servicing rights on an individual strata basis. For each strata, if the
calculated market value is less than the carrying value of the servicing rights,
a valuation adjustment is recorded to write down the servicing rights to the
market value. As of December 31, 2002, total mortgage servicing rights reflected
a fair market value of $3,336,000.
At December 31, 2002, Waypoint Financial's valuation of mortgage servicing
rights reflected an average discount rate of 8.0% and an average prepayment rate
of 29.1%. Waypoint Financial also stresses certain modeling assumptions used in
determining the value of its mortgage servicing rights. At December 31, 2002,
the high and low values resulting from stressed assumptions were $3,669,000 and
$3,002,000, respectively.
(8) Investment in Real Estate and Other Joint Ventures
A summary of real estate is as follows:
December 31
----------------------
2002 2001
------- -------
Held for investment (net of accumulated depreciation of $42,000 in 2002
and $30,000 in 2001) $ 949 $ 954
Foreclosed assets held for sale 492 804
------- -------
1,441 1,758
Less: Allowance for real estate losses - -
------- -------
$ 1,441 $ 1,758
======= =======
An analysis of the allowance for real estate losses is as follows:
Year Ended December 31,
-----------------------
2002 2001 2000
----- ------ -------
Balance at beginning of year $ - $ 125 $ 55
Pooling adjustment to conform accounting periods - - (44)
Provision charged to real estate expense - - 338
Less: Real estate losses charged to allowance - (125) (224)
----- ------ -----
Balance at end of year $ - $ - $ 125
===== ====== =====
Waypoint Financial is a partner in an unconsolidated joint venture in
which its ownership percentage is less than 20%. The corporation's investment in
this joint venture is accounted for under the equity method of accounting. At
December 31, 2002 and 2001, the carrying value of this investment was
approximately $6,969,000 and $5,103,000, respectively. Waypoint Financial's
share of the venture's net income (loss) for the years ended December 31, 2002,
2001, and 2000 was $1,266,000, $33,000, and ($1,147,000), respectively.
62
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Waypoint Financial also maintains an interest in a joint venture associated
with reinsurance of credit life and disability and private mortgage insurance
products sold in the course of Waypoint Financial's banking activities. The
carrying value of this investment was $567,000 and $470,000 at December 31, 2002
and 2001, respectively.
Waypoint Financial is a limited partner in several partnerships
(approximate ownership position of 99%) for the purpose of acquiring,
renovating, operating and leasing qualified low-income housing and historic
properties. At December 31, 2002 and 2001, aggregate net equity investment in
these partnerships approximated $5,796,000 and $5,096,000, respectively.
Waypoint Financial's share of the partnerships' net (loss) income of
$(1,128,000), $(486,000), and $66,000 for the years ended December 31, 2002,
2001, and 2000, respectively, is included in operations under the equity method
of accounting. Benefits attributed to these partnerships include low-income
housing and historic tax credits which totaled $980,000, $472,000, and
$1,110,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
A subsidiary of Waypoint Bank operates two unconsolidated joint ventures
engaged in residential real estate development. At December 31, 2002 and 2001,
the combined carrying values of these investments were approximately $35,000 and
$171,000, respectively. The Corporation's share of the ventures' net income for
the years ended December 31, 2002, 2001, and 2000 was $26,000, $81,000, and
$76,000, respectively.
(9) Premises and Equipment
A summary of premises and equipment at December 31 follows:
Estimated
2002 2001 Useful Lives
-------- -------- ----------------
Land and improvements $ 7,822 $ 7,460
Buildings and improvements 30,551 25,814 5-40 years
Leasehold improvements 9,530 9,369 5-25 years
Furniture and equipment 34,892 32,806 3-10 years
Automobiles 577 467 3 years
Software 6,522 5,549 3-5 years
Accumulated depreciation (41,068) (37,534)
-------- --------
$ 48,826 $ 43,931
======== ========
During 2002, Waypoint Financial reclassified real estate assets associated
with an administrative facility previously held for sale to assets used in
operations. The carrying value of this facility was $3,749,000 at December 31,
2002. Waypoint Financial recorded depreciation expense on this facility totaling
$117,000 in 2002, and $39,000 in 2001. Management evaluated the carrying value
of this facility for potential impairment and has deemed it not to be impaired
at December 31, 2002.
Depreciation expense was $5,895,000 in 2002, $6,158,000 in 2001, and
$5,979,000 in 2000.
63
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(10) Goodwill
Waypoint Financial adopted SFAS 142 "Goodwill and Other Intangible Assets"
on January 1, 2002. As required under the non-amortization approach defined in
SFAS 142, Waypoint Financial ceased amortizing goodwill to expense as of January
1, 2002. Following is a comparison of the results of operations as if the
non-amortization approach was applied to all periods presented:
For the years ended
December 31,
-----------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Reported net income $ 47,154 $ 39,138 $ 10,695
Pro forma adjustment to eliminate
amortization of goodwill - 1,048 930
-------------- -------------- --------------
Pro forma net income $ 47,154 $ 40,186 $ 11,625
============== ============== ==============
Reported diluted earnings per share $ 1.30 $ 1.03 $ 0.28
Pro forma adjustment to eliminate
amortization of goodwill - 0.03 0.02
-------------- -------------- --------------
Pro forma diluted earnings per share $ 1.30 $ 1.06 $ 0.30
============== ============== ==============
Waypoint Financial evaluated its goodwill for impairment at the reporting
unit level as prescribed in SFAS 142. Under this evaluation, Waypoint
Financial's goodwill was not impaired as of December 31, 2002 or January 1,
2002.
(11) Other Intangible Assets
Waypoint Financial held one major class of other intangible assets, deposit
intangibles, during the periods presented. The following summarizes other
intangible assets as of December 21, 2002 and 2001:
2002 2001
-------------- ---------------
Acquisition cost of deposit intangibles $ 13,713 $ 13,713
Less: accumulated amortization 12,037 10,451
-------------- ---------------
Carrying value of deposit intangibles $ 1,676 $ 3,262
============== ===============
Weighted-average amortization period 7 years 7 years
of deposit intangible
Waypoint Financial did not acquire any deposit intangible assets or
experience any related impairment losses during the periods presented.
Amortization expense on deposit intangibles is expected to total $478,000,
$478,000, $478,000, $240,000 and $0 for the years 2003, 2004, 2005, 2006, and
2007, respectively.
64
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(12) Deposits
A major component of Waypoint Financial's business is the gathering of
deposit funds from individuals, businesses, governmental bodies, and other
entities. Following is the composition of Waypoint Financial's deposit portfolio
as of December 31, 2002 and 2001:
2002 2001
---------- ----------
Savings $ 250,780 $ 220,344
Time 1,452,973 1,444,723
Transaction 379,211 340,568
Money market 370,426 531,634
---------- ----------
Total deposits $2,453,390 $2,537,269
========== ==========
As of December 31, 2002, deposit balances consisted of the following:
Amount Average Rate
---------- ------------
Deposits maturing in:
2003 $ 712,206 3.58%
2004 366,104 4.61
2005 37,780 4.36
2006 56,621 4.95
2007 143,163 4.76
2008 and beyond 137,099 2.16
Non-maturing deposits 1,000,417 0.62
----------
$2,453,390 2.56
==========
Waypoint Financial pays deposit insurance premiums to the Savings
Association Insurance Fund ("SAIF") of the FDIC. Waypoint Financial's average
deposit insurance premium rate was .018% for 2002, .019% for 2001, and .021% for
2000 of its assessed deposit base. This resulted in total premiums assessed of
$442,000 in 2002, $495,000 in 2001, and $521,000 in 2000.
Waypoint Financial had deposits (excluding brokered deposits) with a
minimum denomination of $100,000 totaling $504,825,000 and $455,471,000 at
December 31, 2002 and 2001, respectively.
Waypoint Financial had brokered certificates of deposit totaling
$136,667,000, at an average rate of 2.01%, at December 31, 2002, and
$204,951,000, at an average rate of 2.64%, at December 31, 2001. The
certificates of deposit have maturities ranging from six months to seven years
and were issued in denominations greater than $100,000 and participated out by
the broker.
65
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(13) Other Borrowings
Borrowed funds at December 31 are summarized as follows:
2002 2001
---------- ----------
FHLB Advances $2,041,558 $1,842,170
Repurchase Agreements 372,897 449,770
Other 25 47
---------- ----------
Total other borrowings $2,414,480 $2,291,987
========== ==========
As of December 31, 2002, FHLB advances consisted of the following:
Amount Average Rate
---------- ------------
FHLB advances maturing in:
2003 $ 570,000 1.937%
2004 300,000 3.295
2005 124,000 5.432
2006 75,000 4.251
2007 245,000 1.453
2008 and beyond 727,558 5.273
----------
$2,041,558 3.565
==========
Waypoint Financial uses a variety of FHLB advance products including
overnight advances, floating-rate advances, fixed-rate advances, and convertible
option advances. Pursuant to collateral agreements with the FHLB, advances are
fully secured by certain debt securities and qualifying first mortgage loans.
Waypoint's maximum borrowing capacity at the FHLB was $2,983,860,000 at December
31, 2002. Unused borrowing capacity totaled $942,302,000 at December 31, 2002
and $875,872,000 at December 31, 2001.
As of December 31, 2002, Waypoint Financial's repurchase agreements
consisted of the following:
Amount Average Rate
---------- ------------
Repurchase agreements maturing in:
2003 $ 227,897 1.744%
2004 20,000 1.410
2005 75,000 3.702
2006 - -
2007 - -
2008 and beyond 50,000 5.210
----------
$ 372,897 2.585
==========
During 2002 and 2001, Waypoint Financial sold repurchase agreements, the
average balance of which was $373,266,000 for 2002 and $414,054,000 for 2001.
The highest month-end balance outstanding was $479,344,000 during 2002 and
$499,239,000 during 2001. The securities underlying the agreements were under
Waypoint Financial's control.
66
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(14) Trust Preferred Securities
On December 19, 2002, Waypoint Capital Trust I and Waypoint Capital Trust
II, Delaware business trust subsidiaries of Waypoint Financial ("the Trusts"),
completed a combined $30,000,000 issuance of variable-rate Trust Preferred
Securities ("the Securities") as part of a larger pooled Trust Preferred
Securities offering. The combined proceeds from the issuance of the Securities
and the purchase by Waypoint Financial of the common securities of the Trusts
were invested by the Trusts in variable-rate subordinated debentures ("the
debentures") of Waypoint Financial in the aggregate principal amount of
$30,900,000. The debentures are the sole assets of the Trusts and eliminate in
consolidation. Considered together, the undertakings under the Trusts, the
related indentures and guarantees, and the redeemable debentures constitute a
full and unconditional guarantee by Waypoint Financial of the Trusts'
obligations under the Securities.
The Securities pay interest at a floating rate equal to 3.35% over three
month LIBOR, with the initial rate set at 4.77%. The Securities are redeemable
at the option of Waypoint Financial after five years and are due January 2033.
Distributions on the Securities are cumulative and will be paid quarterly in
arrears. The Securities are subject to mandatory redemption to the extent of any
early redemption of the debentures and upon maturity of the debentures in
January 2033. The Securities were not registered under the Securities Act of
1933 and, accordingly, the Securities may not be sold in the United States
absent registration of an applicable exemption from registration requirements.
(15) Commitments to Extend Credit
Waypoint Financial issues financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and performance
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet.
At December 31, 2002 and 2001, Waypoint Financial had the following off-
balance sheet commitments:
2002 2001
-------- --------
Commitments:
To extend credit:
Unused open-end consumer lines of credit $179,816 $144,905
Unused open-end commercial lines of credit 313,246 264,491
Funds available on construction loans 43,509 60,691
Loan originations 101,950 77,667
To sell loans 93,568 117,495
Loans sold with recourse 13,271 18,488
Performance standby letters of credit 62,835 34,985
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Waypoint Financial evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
Waypoint Financial upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held includes residential and income
producing commercial properties.
67
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition to commitments to sell loans, Waypoint Financial also has sold
certain mortgage loans under contractual terms that may require Waypoint
Financial to repurchase such loans from the buyer if the borrowers default.
Waypoint Financial has not experienced and does not anticipate experiencing a
material impact to financial condition or results of operations from loans sold
with recourse.
Performance standby letters of credit are conditional commitments issued by
Waypoint Financial to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The terms of the letters of credit vary from 6 months to 36 months
and may have renewal features. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
Waypoint Financial holds collateral supporting those commitments for which
collateral is deemed necessary.
Most of Waypoint Financial's business activity is with customers located
within its defined market area. Waypoint Financial grants commercial,
residential and consumer loans throughout central Pennsylvania and northern
Maryland and occasionally in other Mid-Atlantic states, but sells a majority of
these loans in the secondary market. Since the majority of Waypoint Financial's
loan portfolio is located in central Pennsylvania and northern Maryland, a
substantial portion of Waypoint Financial's debtors' ability to honor their
contracts and increases or decreases in the market value of the real estate
collateralizing such loans may be significantly affected by the level of
economic activity in this area.
(16) Employee Benefits
Waypoint Financial maintains certain benefit plans to attract and retain
high quality employees, including health and life insurance welfare benefit
plans, retirement plans, and other supplemental benefit plans.
As of December 31, 2002, Waypoint Financial provided a defined contribution
plan (401k Plan) that covered substantially all employees of the Company and
provided a matching contribution of 50% of employee contributions up to an
employee contribution of 6% (a maximum matching contribution of 3%). Employees
contributed up to 15% of their covered compensation or the annual tax limit of
$12,000 ($14,000 if age 50 or older). The matching contribution expense related
to the 401k Plan was $597,000 in 2002, $542,000 in 2001, and $192,000 in 2000.
Effective January 1, 2003, the matching contribution was raised to 100% of
employee contributions of up to 3% and 50% of employee contributions above 3%,
up to a maximum match of 4% of employee contributions.
Waypoint Financial has deferred compensation arrangements for certain
current and former directors and executives which generally provide for fixed
payments upon retirement or lump-sum payments upon death. The amounts accrued
under these plans were $2.7 million and $2.4 million at December 31, 2002 and
2001, respectively. These amounts are reflected in other liabilities in the
accompanying consolidated statements of financial condition. Waypoint Financial
recognized associated expense totaling $739,000, $773,000, and $648,000 in 2002,
2001, and 2000, respectively. These obligations are partially funded through
Bank- Owned Life Insurance (BOLI) policies on behalf of participants in the
plans.
Waypoint Financial has invested in various BOLI assets to fund the annual
expense associated with various employee and director benefit plans. The total
cash surrender value of Waypoint Financial's BOLI policies totaled $88.2 million
and $83.5 million at December 31, 2002 and 2001, respectively, and are included
in other assets in the accompanying consolidated statements of financial
condition. Income recognized on the BOLI policies totaled $4,691,000,
$2,760,000, and $609,000 for 2002, 2001, and 2000, respectively, as presented in
the accompanying consolidated statements of income.
68
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Waypoint Financial's financial condition and results of operations also
include the effects of certain defined benefit plans that were curtailed. These
plans include the Harris Pension Plan and the Harris Supplemental Executive
Retirement Plan. The following sets forth the funded status and amounts
recognized for these plans in Waypoint Financial's statement of condition at
December 31, 2002 and 2001:
2002 2001
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $13,719 $ 14,437
Service cost - 415
Interest cost 751 835
Actuarial (gain) loss (873) 122
Curtailment gain - (1,506)
Benefits paid (681) (584)
------------------
Benefit obligation at end of year $12,916 $ 13,719
==================
Change in plan assets:
Fair value of plan assets at beginning of year $12,462 $ 13,436
Employer contributions 84 84
Actual return on plan assets (599) (474)
Benefits paid (681) (584)
------------------
Fair value of plan assets at end of year $11,266 $ 12,462
==================
Funded status $(1,650) $ (1,257)
Unrecognized net actuarial loss 1,309 853
------------------
Accrued benefit cost $ (341) $ (404)
==================
The components of net pension cost for the years ended December 31, 2002,
2001, and 2000 are as follows:
2002 2001 2000
---- ---- ----
Service cost benefits earned $ - $ 415 $ 1,161
Interest cost on projected benefit obligation 766 835 883
Actual (gain) loss on plan assets 599 474 636
Net amortization and deferral of losses (1): (1,344) (1,259) (1,777)
--------------------------
Net pension expense $ 21 $ 465 $ 903
==========================
- --------------
(1) This item comprised of:
Current year's net loss deferred for later
recognition $(1,344) $(1,257) $(1,768)
Amortization of prior service cost - 9 30
Amortization of unrecognized net asset - (13) (38)
Amortization of net loss - 2 (1)
--------------------------
$(1,344) $(1,259) $(1,777)
==========================
Assumptions used to develop the net pension expense were:
2002 2001 2000
---- ---- ----
Discount rate 6.0% 6.0% 6.5%
Expected long-term rate of return on assets 6.0% 6.0% 8.0%
Rate of increase in compensation levels N/A N/A 4.0%
69
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On April 19, 2001, the Harris Pension Plan was amended to freeze benefit
accruals as of May 4, 2001. As of May 4, 2001, the accrued benefits of plan
participants through May 4, 2001 became fully vested, if not already. Waypoint
Financial recorded no prepaid (accrued) pension expense for the Harris Pension
Plan as of December 31, 2002 and 2001. Waypoint Financial recognized net pension
expense on this plan totaling $0, $408,000, and $756,000 in 2002, 2001, and
2000, respectively.
In connection with the amendment to freeze benefits in the Harris Pension
Plan, the Harris Supplemental Executive Retirement Plan was also amended to
freeze benefit accruals as of May 4, 2001. As of this date, the plan
participants' balances were fully vested. Waypoint Financial recorded accrued
pension expense of $341,000 and $404,000 for this plan as of December 31, 2002
and 2001, respectively. Waypoint Financial recognized net pension expense on
this plan totaling $21,000, $57,000, and $147,000 in 2002, 2001, and 2000,
respectively.
Effective November 15, 2000, the York Financial Pension Plan was
terminated. As of the termination date, the plan participants' balances were
fully vested. Following favorable approval of the termination process, Waypoint
Financial distributed all plan assets totaling $8,502,000 to participants during
2001. Waypoint Financial recorded no prepaid or accrued pension balances for the
York Financial Pension Plan as of December 31, 2002 and 2001. Waypoint Financial
did not recognize net pension expense on this plan during 2002, 2001, or 2000.
Waypoint Financial's financial condition and results of operations also
include the effects of the Harris Post-retirement Benefit Plan. This plan
provides certain health care benefits for retired Harris employees that
accumulate 25 years of service and were hired before October 1, 1995. Waypoint
Financial accounts for this plan under the accrual method of accounting as
follows:
2002 2001
-----------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,917 $ 1,782
Service cost 3 64
Interest cost 67 122
Plan change (926) (39)
Actuarial loss due to changes in assumptions 24 33
Benefits paid (54) (45)
-----------------
Benefit obligation at the end of plan year $ 1,031 $ 1,917
=================
Fair value of plan assets at end of year $ - $ -
Funded status (1,031) (1,917)
Unrecognized net (gain) loss (872) (362)
Unrecognized prior service cost (407) (452)
-----------------
Accrued benefit cost $(2,310) $(2,731)
=================
The components of net post-retirement benefit cost for the years ended December
31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
-------------------------
Service cost $ 3 $ 64 $ 64
Interest cost 67 122 113
Amortization of unrecognized prior service cost (54) (27) (25)
Amortization of net gain (21) (17) (21)
-------------------------
Total net periodic post-retirement benefit (gain) cost $ (5) $ 142 $ 131
=========================
During 2002, Waypoint Financial recognized a $361,000 curtailment gain
associated with this plan. The post-retirement benefit obligation was determined
using a discount rate of 6.75% and 7.00% as of December 31, 2002 and 2001,
respectively. The assumed health care cost rate used in measuring the
accumulated post retirement benefit obligation was 5.0% for medical costs and
5.0% per year for dental costs. The health care cost trend assumption has a
significant impact on the amounts reported. For example, a 1.0% increase in the
health care trend rate would increase the accumulated post-retirement benefits
obligation by $117,000 at December 31, 2002 and increase the aggregate of the
service and interest cost components by $8,000 for the year ended December 31,
2002.
70
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(17) Employee Stock Ownership Plans
On October 17, 2000, Waypoint Financial established the Waypoint Financial
Corporation Employee Stock Ownership Plan (the ESOP) for the benefit of its
employees. The ESOP borrowed $15,640,000 from Waypoint Financial and used the
proceeds to purchase 1,564,000 shares of Waypoint Financial common stock. The
initial loan provided for variable interest rate that equaled the national prime
rate and required fifteen equal annual principal installments beginning
September 2002 and ending September 2016. During 2002, in recognition of
historically low fixed interest rates available in the market, Waypoint
Financial determined that it was in the best interests of the ESOP participants
to refinance the ESOP loan. The ESOP loan was refinanced effective September 30,
2002, at a fixed interest rate of 5.80% providing for equal annual payments of
$1,661,853 beginning September 2003 through September 2015, with a final payment
of $1,555,197 on September 30, 2016. The ESOP paid $1,889,000 to settle all
interest due as of September 30, 2002. Based on the interest payment made by the
ESOP in 2002, a proportionate amount of shares originally purchased by the ESOP
was released for allocation to participants' accounts. ESOP shares will continue
to be allocated to participants' accounts in following years based on principal
and interest payments made each year. Actual share allocations to accounts will
be based on each employee's relative portion of Waypoint Financial's total
eligible compensation expense during the year the shares are released for
allocation. ESOP shares allocated to employee accounts vest 20% per year
beginning with completion of two years of service and are fully vested after
completion of six years of service with Waypoint Financial. Employees have
voting rights over the shares allocated to their accounts. Dividends received on
shares are held within the ESOP and can be applied to pay ESOP debt, allocated
to respective participant accounts, or distributed to participants as determined
by Waypoint Financial.
Waypoint Financial accounts for the ESOP under the provisions of the AICPA
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans" (SOP 93-6). Accordingly, the shares pledged as collateral on the ESOP
loan are reported as unearned shares (a reduction in equity) in Waypoint
Financial's consolidated statement of condition. As shares are paid for by the
ESOP and released, Waypoint Financial reports compensation expense equal to the
average market price of the shares during the period and the shares become
outstanding for earnings-per-share computations. Dividends on allocated shares
are recorded as a reduction in retained earnings upon declaration by Waypoint
Financial. Dividends on unallocated shares are recorded as a reduction in debt
service liabilities on the ESOP loan. The first allocation of ESOP shares to
participants was on December 31, 2002 and Waypoint Financial recognized ESOP
expense for this plan totaling $2,027,000 in 2002. Waypoint Financial did not
record any compensation expense for this plan in the years 2001 and 2000.
During 2001, Waypoint Financial took action to commence termination of two
previous employee stock ownership plans known as the Harris ESOP and the York
Financial ESOP. During December, 2001, the plans used existing cash and proceeds
from the sale of 54,400 unearned shares to pay off the remaining principal
balances on outstanding plan loans. This action committed all plan shares
remaining after the debt retirements to be released to participants. Waypoint
Financial completed the allocations to Harris ESOP participant accounts during
2002 and expects to complete the allocations to York Financial ESOP participant
accounts during the year 2003. In accordance with SOP 93-6, Waypoint Financial
recorded compensation expense during 2001 on all remaining shares committed for
release. Compensation expense associated with these plans totaled $1,662,000 in
2001 and $488,000 in 2000. No compensation expense will be recognized on the
Harris ESOP or the York Financial ESOP after December 31, 2001.
Following is a summary of Waypoint Financial's ESOP shares as of December
31, 2002, 2001, and 2000 and compensation expense for the years then ended:
2002 2001 2000
----------- ----------- -----------
Allocated shares in the previous two plans 263,800 1,014,777 888,333
Allocated shares in the Waypoint ESOP 117,962 - -
Earned shares not yet released for allocation - - 44,886
Unearned shares 1,446,038 1,564,000 1,699,059
----------- ----------- -----------
Total shares 1,827,800 2,578,777 2,632,278
=========== =========== ===========
Fair value of unearned shares $25,739,000 $23,585,000 $18,690,000
=========== =========== ===========
Compensation expense $ 2,027,000 $ 1,662,000 $ 488,000
=========== =========== ===========
71
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(18) Stock Award and Option Plans
On December 14, 2001, Waypoint Financial's shareholders approved and
Waypoint Financial adopted the Waypoint Financial Corp. Key Employee/Outside
Director Recognition and Retention Plan (2001 RRP). The 2001 RRP authorized up
to 794,000 shares of Waypoint common stock to be made available for awards of
restricted stock to key officers and employees, non-employee directors, and
advisory committee members of Waypoint Financial and its affiliates. Awards of
restricted stock under the 2001 RRP are subject to forfeiture provisions if the
recipient leaves Waypoint Financial or its affiliates before a specified number
of years. Recipients of restricted stock awards are not required to provide
consideration to Waypoint Financial other than rendering service and have the
right to vote shares and receive dividends. Restricted stock awards under the
2001 RRP generally vest at the rate of 20% per year, with the exception of
advisory committee awards, which fully vested one year after the date of the
initial grant.
On December 20, 2001, restricted stock grants totaling 870,880 shares were
made under the 2001 RRP with 175,776 shares vesting at the date of grant. The
2001 RRP grants included 118,298 shares previously held in suspense in
Waypoint's Recognition and Retention Plan for Officers and Employees and
Recognition Plan for Outside Directors (collectively, 1994 RRPs).
At the date of the RRP grants, the fair value of shares granted were
recorded as unearned compensation in shareholders' equity. As grants are earned,
the unearned compensation is charged to expense. On December 21, 2001, unearned
compensation of $12,046,000 was recorded in shareholders' equity. Waypoint
Financial recorded expense for earned RRP shares totaling $3,255,000 in 2002,
$2,562,000 in 2001, and $29,000 in 2000.
Restricted Unrestricted Shares in Total
Shares Shares Suspense Shares
----------- ------------ ---------- ---------
Unearned on January 1, 2000 2,683 767 116,765 120,215
Plan activity during 2000:
Forfeited (1,533) - 1,533 -
Awarded - - - -
Earned (1,150) (767) - (1,917)
----------- ------------ ---------- ---------
Unearned on December 31, 2000 - - 118,298 118,298
Plan activity during 2001:
Adoption of RRP - - 752,582 752,582
Forfeited - - - -
Awarded 870,880 - (870,880) -
Earned (175,776) (175,776)
----------- ------------ ---------- ---------
Unearned on December 31, 2001 695,104 - - 695,104
Plan activity during 2002:
Forfeited (10,360) - 10,360 -
Awarded 4,300 - (4,300) -
Earned (220,376) (220,376)
----------- ------------ ---------- ---------
Unearned on December 31, 2002 468,668 - 6,060 474,728
=========== ============ ========== =========
On December 20, 2001, Waypoint granted options to advisory committee
members totaling 113,600 shares which fully vested one year after the date of
the grant. Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (Statement 123) requires that expense be recognized
for the fair value of these options. Waypoint Financial recorded $504,000 of
expense during 2002 for advisory committee options, with no corresponding
expense in 2001 or 2000.
The Company maintains stock option plans (Option Plans) under which
incentive and non-incentive options are granted to directors and key personnel.
Options are granted at option prices equal to the fair market value of the
Company's stock on the date of grant and are exercisable within 10 years from
the date of the option grant. Options granted vest over a period between one and
eight years or at the time of certain qualified events. Recipients of options
have no rights with respect to share voting or receipt of dividends on
unexercised option shares. Performance-based options granted under the Option
Plans become exercisable when the Company achieves certain performance
measurement targets in accordance with the terms of the option. If performance
measurement targets are not achieved in accordance with the terms of the option,
the options are forfeited.
72
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents the activity in Waypoint Financial's option
plans during the periods ending December 31:
Option Price
Stock Options per Share
------------- -------------
Balance at January 1, 2000 1,838,666 $ 8.31
Granted 218,116 9.13
Forfeited (108,660) 10.35
Exercised (62,317) 4.83
Pooling adjustment to conform accounting periods 10,227 -
------------
Balance at December 31, 2000 1,896,032 8.72
Granted 1,980,909 14.04
Forfeited (74,262) 12.66
Exercised (428,868) 6.11
------------
Balance at December 31, 2001 3,373,811 11.97
Granted 243,217 16.66
Forfeited (84,653) 12.26
Exercised (220,933) 9.17
------------
Balance at December 31, 2002 3,311,442 $ 12.52
============ =======
Exercisable at December 31, 2002 1,852,803 $ 11.16
============ =======
The following table presents the options outstanding and exercisable at
December 31, 2002:
Options Outstanding Exercisable Stock Options
---------------------------------------------------- -------------------------------
Weighted Average
Range of Total Number Remaining Life Weighted Average Number Weighted Average
Exercise Prices of Shares (Years) Exercise Price of Shares Exercise Price
--------------- ------------ ---------------- ---------------- --------- ----------------
$ 0.00-$ 5.00 6,804 1.07 4.35 6,804 4.35
$ 5.01-$10.00 988,841 4.20 7.57 808,072 7.12
$10.01-$15.00 1,911,521 8.44 14.10 928,072 13.86
$15.01-$20.00 385,108 8.77 16.87 94,111 17.24
$20.01-$30.00 19,168 5.01 26.41 15,334 26.41
--------- ---------
3,311,442 7.16 12.52 1,852,803 11.16
========= =========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
2002 2001 2000
----------- ------------ -----------
Risk-free interest rate 3.1% 4.9% 6.5%
Expected volatility 20.9% 23.9% 38.6%
Expected dividend yield rate 2.5% 2.4% 3.4%
Expected life 8.9 years 9.9 years 8.7 years
Weighted average grant date fair value
of options granted during the year $4.30 $4.13 $3.85
73
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the stock options granted.
(19) Income Taxes
The provision for income taxes in the consolidated statements of income
consists of the following:
Year ended December 31
------------------------------
2002 2001 2000
------- ------- -------
Current:
Federal $16,302 $19,364 $ 7,061
State 2,515 1,427 643
------- ------- -------
18,817 20,791 7,704
Deferred:
Federal (807) (3,038) (3,765)
State 190 133 (34)
------- ------- -------
(617) (2,905) (3,799)
------- ------- -------
Total provision for income taxes $18,200 $17,886 $ 3,905
======= ======= =======
Income tax expense for Waypoint Financial is different than the amounts
computed by applying the statutory federal income tax rate to income before
income taxes because of the following:
Percentage of Income
Before Income Taxes
Year Ended December 31
----------------------
2002 2001 2000
---- ---- ----
Income tax expense at federal statutory rate 35.0% 35.0% 35.0%
Tax exempt income (3.2) (2.9) (9.8)
Dividends received deduction (2.1) (2.4) (7.3)
State taxes, net of federal benefit 2.6 1.6 4.4
Bank-owned life insurance earnings (2.5) (1.7) (0.3)
Amortization 0.0 0.6 2.2
Federal tax credits (1.5) (0.8) (7.6)
Merger costs 0.0 0.0 10.3
Other
(0.5) 2.0 (0.2)
----- ----- -----
Effective tax rate 27.8% 31.4% 26.7%
===== ===== =====
74
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
are as follows:
2002 2001
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 9,720 $ 8,152
Post-retirement benefits expense 934 1,135
Deposit intangible amortization 1,965 1,972
Merger and integration costs 299 676
Deferred loan origination fees 838 1,017
Compensation accrual 3,570 2,279
Other 1,521 1,283
--------- ---------
Total assets 18,847 16,514
--------- ---------
Deferred tax liabilities:
Dealer reserves 8,982 8,583
Depreciation and amortization 2,271 1,906
Joint venture 3,121 1,618
Servicing rights 1,251 1,502
Net unrealized gains on marketable securities available for sale 8,821 803
Other 507 586
--------- ---------
Total liabilities 24,953 14,998
--------- ---------
Net deferred (liabilities) assets $ (6,106) $ 1,516
========= =========
Waypoint Financial has determined that a valuation reserve for deferred tax
assets is not required since it is more likely than not that deferred tax assets
can be realized through carryback to taxable income in prior years or future
reversals of existing taxable temporary differences.
(20) Leases
At December 31, 2002, Waypoint Financial was obligated under non-cancelable
operating leases for office space. Certain leases contain escalation clauses
providing for increased rentals based on increases in the average consumer price
index. Rental expenses for these facilities aggregated $1,774,000 in 2002,
$1,702,000 in 2001, and $1,410,000 in 2000.
The projected minimum rental payments under the terms of the leases at
December 31, 2002, net of projected sub-lease rentals, are as follows:
Years ending December 31, Amount
-------------------------
2003 .............................................. $ 1,756
2004 .............................................. 1,470
2005 .............................................. 1,206
2006 .............................................. 982
2007 .............................................. 880
2008 and thereafter ............................... 5,933
--------
$ 12,227
========
75
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(21) Disclosures about Fair Value of Financial Instruments
The majority of Waypoint Financial's assets and liabilities are considered
financial instruments as defined in SFAS 107. Many of these instruments,
however, lack an available trading market as characterized by a willing buyer
and a willing seller engaging in an exchange transaction. Since it is Waypoint
Financial's general practice not to engage in trading activities, significant
assumptions and estimations were used in calculating present values in
discounted cash flow models. Estimated fair values at December 31, 2002 and 2001
have been determined by using the best available data, as noted below:
Cash and Cash Equivalents. The carrying amounts for short-term instruments
approximate fair value because of the short maturity of, and negligible credit
concerns within those instruments.
Marketable Securities. The fair value of marketable securities has been
valued based on quotations received from an independent pricing service.
Loans and Loans Held for Sale. Fair values are estimated for portfolios of
loans with similar characteristics. Residential mortgages are generally
underwritten to standards substantially in conformity with Federal Home Loan
Mortgage Corporation ("Freddie Mac") standards and have been estimated based on
the discounted value of expected cash flows.
Fair values for all commercial and consumer loans have been calculated by
discounting scheduled cash flows. The discount rate used in these calculations
is the market rate for similar instruments adjusted for noninterest operating
costs, credit risk and assumed prepayment risk.
The fair value of loans held for sale is assumed to equal the amortized
cost of the assets.
Other Financial Assets. Other financial assets have been estimated based on
the discounted value of expected cash flows.
Deposit, Escrow, and Other Borrowings. Under SFAS 107, the fair value of
deposits with no stated maturity, such as demand deposit accounts, NOW accounts,
money market accounts and savings accounts, is equal to the amount payable on
demand. The fair value of time deposits and other borrowings is based on the
discounted value of contractual cash flows and current rates for debt with
similar terms and remaining maturities. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities. The fair
value of escrow, which has no stated maturity, is equal to the amount on
deposit.
Commitments to Extend Credit and Performance Standby Letters of Credit. The
fair value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and present creditworthiness of the counterparties. For
fixed rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
performance standby letters of credit is based upon fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties.
Limitations. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount that could
result from offering for sale at one time Waypoint Financial's entire holdings
or of a particular financial instrument. Because no market exists for a
significant portion of Waypoint Financial's financial instruments, fair value
estimates are based on judgments regarding expected losses, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and the estimates and assumptions that must be made.
76
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The carrying amounts and estimated fair values for Waypoint Financial's
financial assets and liabilities and commitments at December 31, 2002 and 2001
are as follows:
As of December 31,
----------------------------------------------
2002 2001
---------------------- ----------------------
Carrying Carrying
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
Cash and cash equivalents $ 96,088 $ 96,088 $ 116,583 $ 116,583
Marketable securities available-for-sale 2,792,112 2,792,112 2,552,360 2,552,360
Loans receivable, net 2,310,106 2,352,562 2,462,218 2,475,262
Loans held for sale 30,328 30,328 42,453 42,453
Other financial assets 3,167 2,753 4,782 3,050
Demand and NOW accounts 379,211 379,211 340,568 340,568
Money market accounts 370,426 370,426 531,634 531,634
Savings deposits 250,780 250,780 220,344 220,344
Time deposits 1,452,973 1,504,665 1,444,723 1,481,371
---------- ---------- ---------- ----------
Total deposits 2,453,390 2,505,082 2,537,269 2,573,917
---------- ---------- ---------- ----------
Escrow 3,348 3,348 4,662 4,662
Other borrowings 2,414,480 2,570,675 2,291,987 2,355,256
Off-balance sheet financial instruments:
Commitments to extend credit - 2,520 - 1,840
Standby letters of credit - 412 - 247
Derivative instruments designated as fair value hedges - 12,547 - 5,398
(22) Derivative Financial Instruments
Waypoint Financial, in the normal course of its business, uses derivative
financial instruments to economically hedge its exposure to fluctuations in
market interest rates. This exposure includes the impact of changing interest
rates on cash flows from interest-bearing assets and liabilities, as well as the
impact of changing interest rates on the market value of interest-bearing assets
and liabilities.
Waypoint Financial uses callable interest rate swaps (Callable Swaps) that
are matched to fixed rate callable certificates of deposit (Callable CD's). This
hedging relationship was designated as a fair value hedge upon adoption of SFAS
133. Under the terms of the Callable Swaps, Waypoint Financial receives fixed
rate payments and pays variable rate payments based on one-month USD LIBOR. The
fixed interest rate payments received by Waypoint Financial as a result of the
swap is passed on to the holder of the Callable CD's, which effectively converts
the Callable CD's to variable rate. Each Callable Swap is callable by the
counterparty on the same dates that the Callable CD's are callable by Waypoint
Financial. Changes in the fair value of the callable interest rate swaps are
highly effective in offsetting changes in the fair value of the Callable CD's
and as a result, earnings were not impacted by gains or losses on callable
interest rate swaps.
Waypoint Financial also uses interest rate swaps that do not have call
option features ("regular swaps"). The regular swaps are matched to fixed rate
FHLB borrowings and were designated as fair value hedges at the inception of the
instruments. Under the terms of the regular swaps, Waypoint Financial receives
fixed rate payments and pays variable rate payments based on one-month USD
LIBOR. The fixed interest payments received by Waypoint Financial as a result of
the regular swap is passed on to the FHLB, which effectively converts the
borrowings to variable rate. Changes in the fair value of the regular swaps are
highly effective in offsetting changes in the fair value of the FHLB borrowings
and as a result, earnings were not impacted by gains or losses on regular swaps.
77
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes Waypoint Financial's derivative financial
instruments as of December 31, 2002 and December 31, 2001:
Year of
Number Maturity Year of Call Notional Amount Fair Value
---------- --------------- --------------- ----------------- ---------------
As of December 31, 2002:
Callable interest rate swaps 9 2006-2012 2002-2003 $ 110,000,000 $ 1,001,000
Regular interest rate swaps 7 2003-2005 - 300,000,000 12,547,000
Loan commitments, net 279 2003 - 40,252,000 (16,000)
---------------
Total $ 13,532,000
===============
As of December 31, 2001:
Callable interest rate swaps 8 2006-2011 2002 $ 105,000,000 $ (1,203,000)
Regular interest rate swaps 7 2003-2005 - 300,000,000 5,398,000
Loan commitments, net 589 2002 - 69,233,000 (60,000)
---------------
Total $ 4,135,000
===============
See Note (1) for a discussion of accounting standards relevant to
derivative financial instruments.
During 2002, Waypoint Financial settled two interest rate swaps that did
not qualify for hedge accounting treatment. These swaps were acquired during
2002 and had an aggregated notional amount of $400,000,000. Prior to settlement,
Waypoint recognized an aggregate increase in fair value of $4,611,000, which was
reported in net gain on securities and derivatives.
(23) Waypoint Financial Corp. Financial Information (Parent Company Only)
December 31,
---------------------
Condensed Statements of Financial Condition 2002 2001
- ------------------------------------------- -------- --------
(unaudited)
Assets:
Cash $ 13,099 $ 24,144
Marketable securities available for sale 151 3,732
Loans receivable 16,295 16,645
Investment in joint ventures 7,526 5,555
Investment in bank subsidiary 433,847 420,771
Investment in other subsidiaries 8,508 8,068
Income taxes receivable 3,336 5,298
Other assets 6,956 9,061
--------- ---------
Total assets $ 489,718 $ 493,274
========= =========
Liabilities and Stockholders' Equity:
Other borrowings $ 2,310 $ 2,333
Deferred tax liability 1,513 384
Accounts payable and other liabilities 122 4,342
Trust preferred securities 29,102 -
Stockholders' equity 456,671 486,215
--------- ---------
Total liabilities and stockholders' equity $ 489,718 $ 493,274
========= =========
78
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the years ended December 31,
----------------------------------
Condensed Statements of Income 2002 2001 2000
- ------------------------------ -------- -------- --------
(unaudited)
Income:
Dividend income $ 50,918 $ 15,817 $ 5,114
Interest income 1,040 2,497 728
Gain (loss) on sale of securities 495 (28) (2,720)
Income (loss) from joint ventures 1,266 (115) (1,366)
Other income 454 368 1
-------- -------- --------
Total income 54,173 18,539 1,757
Expense:
Interest expense 159 144 1,255
Other expense 1,310 1,232 1,191
Merger expense - - 12,361
-------- -------- --------
Total expense 1,469 1,376 14,807
-------- -------- --------
Net income before equity in undistributed net income of subsidiaries 52,704 17,163 (13,050)
(Distributions above) equity in undistributed net income of subsidiaries (5,830) 21,586 18,730
Income tax benefit (280) (389) (5,015)
-------- -------- --------
Net income $ 47,154 $ 39,138 $ 10,695
======== ======== ========
For the years ended December 31,
----------------------------------
Condensed Statements of Cash Flows 2002 2001 2000
- ---------------------------------- -------- -------- --------
(unaudited)
Cash flows from operating activities:
Net income $ 47,154 $ 39,138 $ 10,695
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Distributions above (equity in) undistributed earnings of subsidiary 5,830 (21,586) (18,730)
Net depreciation, amortization, and accretion (8) (53) (6)
(Gain) loss on sale of investments (495) 28 2,720
Equity (income) losses from joint ventures (1,266) 115 1,366
Increase in loan to subsidiary - (315) (395)
Other, net (228) (19,574) 8,007
-------- -------- --------
Net cash provided by (used in) operating activities 50,987 (2,247) 3,657
-------- -------- --------
Cash flows from investing activities:
Purchase of available-for-sale securities, net (1,670) (3,609) (2,705)
Sale of available-for-sale securities, net 2,274 689 2,872
Maturity of available-for-sale securities, net 3,368 3,334 -
Principal collected on loans 349 965 1,437
Disposal of equipment - - 5
Increase in investment in subsidiaries (230) (574) (80,161)
Investment in joint venture (645) (1,086) (2,346)
-------- -------- --------
Net cash provided by (used in) investing activities 3,446 (281) (80,898)
-------- -------- --------
Cash flows from financing activities:
Net decrease in borrowings (23) (526) (12,803)
Proceeds from issuance of trust preferred securities 29,102 - -
Proceeds from issuance of common stock - - 158,373
Dividend reinvestment plan (391) (282) 398
Stock option plan 2,308 2,698 304
Payments to acquire treasury stock (82,897) (9,561) (1,301)
Issuance of treasury stock - 96 1,242
Dividends paid (13,577) (13,283) (7,471)
Establish ESOP - - (15,640)
-------- -------- --------
Net cash (used in) provided by financing activities (65,478) (20,858) 123,102
-------- -------- -------
Net (decrease) increase in cash (11,045) (23,386) 45,861
Pooling adjustment to conform accounting periods - - (1,563)
Cash at the beginning of the period 24,144 47,530 3,232
-------- -------- --------
Cash at the end of the period $ 13,099 $ 24,144 $ 47,530
======== ======== ========
79
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(24) Commitments and Contingencies
In the ordinary course of business, Waypoint Financial has various
outstanding commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statement. In addition, Waypoint Financial
is a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial condition of Waypoint
Financial.
(25) Consolidated Quarterly Financial Data (Unaudited)
2002
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(unaudited)
Interest income $ 71,783 $ 69,854 $ 69,987 $ 69,510
Interest expense 40,139 39,791 39,459 38,524
-------- -------- -------- --------
Net interest income 31,644 30,063 30,528 30,986
Provision for loan loss 2,085 3,585 3,085 2,085
Noninterest income 7,214 12,745 11,325 7,712
Noninterest expense 20,718 21,287 21,576 22,442
-------- -------- -------- --------
Income before income taxes 16,055 17,936 17,192 14,171
Income taxes 4,558 5,171 4,919 3,552
-------- -------- -------- --------
Net income $ 11,497 $ 12,765 $ 12,273 $ 10,619
======== ======== ======== ========
Basic earnings per share $ 0.31 $ 0.35 $ 0.35 $ 0.32
-------- -------- -------- --------
Diluted earnings per share $ 0.31 $ 0.34 $ 0.34 $ 0.31
======== ======== ======== ========
During 2002, Waypoint Financial recorded a decrease of $1,759,000
($1,091,000 net of tax) in the first quarter and increases of $3,392,000
($2,103,000 net of tax) and $2,978,000 ($1,846,000 net of tax) in the second and
third quarter, respectively, in the fair value of derivatives not designated as
hedges.
2001
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(unaudited)
Interest income $ 85,135 $ 83,997 $ 80,756 $ 75,586
Interest expense 58,077 55,574 51,796 44,682
-------- -------- -------- --------
Net interest income 27,058 28,423 28,960 30,904
Provision for loan loss 1,599 2,099 1,599 1,699
Noninterest income 5,841 7,746 7,595 8,184
Noninterest expense 18,780 19,721 19,153 23,037
-------- -------- -------- --------
Income before income taxes 12,520 14,349 15,803 14,352
Income taxes 3,947 4,382 5,304 4,253
-------- -------- -------- --------
Net income $ 8,573 $ 9,967 $ 10,499 $ 10,099
======== ======== ======== ========
Basic earnings per share $ 0.23 $ 0.27 $ 0.28 $ 0.27
-------- -------- -------- --------
Diluted earnings per share $ 0.23 $ 0.26 $ 0.28 $ 0.27
======== ======== ======== ========
Waypoint Financial recorded RRP expense of $2,562,000 ($1,819,000 net of
tax) and expenses related to ESOP terminations totaling $725,000 ($450,000 net
of tax) during the fourth quarter of 2001.
80
PART III
ITEM 10. Directors and Executive Officers Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The "Proposal -- Election of Directors" section of the Registrant's
definitive proxy statement for its 2003 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
The "Proposal -- Election of Directors" section of the Registrant's Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The "Proposal -- Election of Directors" section of the Registrant's Proxy
Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The "Proposal -- Election of Directors" section of the Registrant's Proxy
Statement is incorporated herein by reference.
ITEM 14. Controls and Procedures
(a) Evalution of Disclosure Controls and Procedures.
Waypoint Financial's Chief Executive Officer and Chief Financial Officer
have concluded that Waypoint Financial's disclosure controls and
procedures (as defined in Rule 13a-14(C) under the Securities Exchange
Act of 1934, as amended), based on their evaluation of these controls
and procedures as of a date within (90) days prior to the filing date of
this form 10-K, are effective.
(b) Changes in Internal Controls.
There have been no significant changes in Waypoint Financial's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation thereof, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
81
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(A) Report of Independent Auditors
(B) Consolidated Statements of Financial Condition
(C) Consolidated Statements of Income
(D) Consolidated Statements of Shareholders Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Reports on Form 8-K
On December 19, 2002, a Current Report on Form 8-K was filed that noted the
following events:
(1) the Company announced the appointment of Randall L. Horst as Class I
Director
(2) the Company announced the issuance of $30 million of Trust Preferred
Securities and the authorization to repurchase an additional 5% of
outstanding common stock.
(c) Exhibits
2.1 Agreement and Plan of Reorganization by and between Harris Financial, MHC,
Harris Financial, Inc., New Harris Financial, Inc., Harris Savings Bank,
York Financial Corp., and York Federal Savings and Loan Association.
(Incorporated by Reference to Exhibit 1 to the Current Report on Form 8-K
of Harris Financial, Inc. (the predecessor of Waypoint Financial Corp.)
filed with the Commission on April 7, 2000 (File No. 0-22399)).
2.2 Plan of Conversion and Reorganization of Harris Financial, MHC.
(Incorporated by reference to Exhibit 2.2 of the Registration Statement
on Form S-1 of Harris Financial, Inc. filed with the Commission on June
23, 2000 (File No.333-40046)).
3.1 Articles of Incorporation of New Harris Financial, Inc. (renamed "Waypoint
Financial Corp.") (Incorporated by reference to Exhibit D attached as
part of Exhibit 2.2 of the Registration Statement on Form S-1 of Harris
Financial, Inc. filed with the Commission on June 23, 2000 (File No.
333-40046)).
3.2 Bylaws of New Harris Financial, Inc. (renamed "Waypoint Financial Corp."
(Incorporated by reference to Exhibit E attached as part of Exhibit 2.2
of the Registration Statement on Form S-1 of Harris Financial, Inc. filed
with the Commission on June 23, 2000 (File No. 333-40046)).
4.1 Form of Common Stock Certificate of New Harris Financial, Inc. (renamed
"Waypoint Financial Corp.") (Incorporated by reference to Exhibit 4.2 of
the Registration Statement on Form S-1 of Harris Financial, Inc. filed
with the Commission on June 23, 2000 (File No. 333-40046)).
10.1 Harris Savings Bank 1994 Stock Option Plan for Outside Directors.
(Incorporated by Reference to Exhibit 4.1 to the Registration Statement
on Form S-8 of Harris Financial, Inc. filed with the Commission on
September 22, 1997 (File No. 333-36087)).
82
10.2 Harris Savings Bank 1994 Incentive Stock Option Plan. (Incorporated by
Reference to Exhibit 4.2 to the Registration Statement on Form S-8 of
Harris Financial, Inc. filed with the Commission on September 22, 1997
(File No. 333-36087)).
10.3 Harris Savings Bank 1996 Incentive Stock Option Plan. (Incorporated by
Reference to Exhibit 4.3 to the Registration Statement on Form S-8 of
Harris Financial, Inc. filed with the Commission on September 22, 1997
(File No. 333-36087)).
10.4 Harris Savings Bank Recognition and Retention Plan for Officers and
Employees. (Incorporated by Reference to Exhibit 10.4 to the
Registration Statement on Form S-4 of Harris Financial, Inc., filed
with the Commission on February 26, 1997, and amended on March 17, 1997
(File No. 333-22415)).
10.5 Harris Savings Bank Recognition and Retention Plan for Outside Directors.
(Incorporated by Reference to Exhibit 10.5 to the Registration
Statement on Form S-4 of Harris Financial, Inc., filed with the
Commission on February 26, 1997, and amended on March 17, 1997 (File
No. 333-22415)).
10.6 Harris Savings Bank Supplemental Executive Retirement Plan. (Incorporated
by Reference to Exhibit 10.8 to the Registration Statement on Form S-4
of Harris Financial, Inc., filed with the Commission on February 26,
1997, and amended on March 17, 1997 (File No. 333-22415)).
10.7 Harris Financial, Inc. 1999 Stock Option Plan for Outside Directors.
(Incorporated by Reference to the Proxy Statement of Harris Financial,
Inc., filed with the Commission on March 18, 1999)).
10.8 Harris Financial, Inc. 1999 Incentive Stock Option Plan Directors.
(Incorporated by Reference to the Proxy Statement of Harris Financial,
Inc., filed with the Commission on March 18, 1999)).
10.9 1984 York Financial Corp. Amended Incentive Stock Option Plan.
(Incorporated by reference to the Registration Statement on Form S-8 of
Waypoint Financial Corp. filed with the Commission on December 19, 2000
(File No. 333-52130)).
10.10 1992 York Financial Corp. Non-Incentive Stock Option Plan for Directors.
(Incorporated by reference to the Registration Statement on Form S-8 of
Waypoint Financial Corp. filed with the Commission on December 19, 2000
(File No. 333-52130)).
10.11 1992 York Financial Corp. Stock Option and Incentive Plan. (Incorporated
by reference to the Registration Statement on Form S-8 of Waypoint
Financial Corp. filed with the Commission on December 19, 2000 (File
No. 333-52130)).
10.12 1995 York Financial Corp. Non-Qualified Stock Option Plan for Directors.
(Incorporated by reference to the Registration Statement on Form S-8 of
Waypoint Financial Corp. filed with the Commission on December 19, 2000
(File No. 333-52130)).
10.13 1997 York Financial Corp. Stock Option and Incentive Plan. (Incorporated
by reference to the 1997 Annual Meeting Proxy Statement of York
Financial Corp. filed with the Commission on September 25, 1997 and
Registration Statement on Form S-8 of York Financial Corp. filed with
the Commission on November 24, 1997 (File No. 333-40887)).
10.14 Supplemental Executive Retirement Plan. (Incorporated by Reference to
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 of
York Financial Corp. filed with the Commission on September 24, 1999
(File No. 000-14995)).
10.15 Revised Employment Agreement of Charles C. Pearson, Jr.(1)
10.16 Form of Employment Agreement with Robert W. Pullo.(1)
10.17 Form of Employment Agreement with James Moss.(1)
10.18 Form of Change-in-Control Agreement with Richard C. Ruben, Andrew S.
Samuel, Jane B. Tompkins and John G. Coulson. (Incorporated by
reference to the Registration Statement on Form S-1 of Harris
Financial, Inc. filed with the Commission on June 23, 2000 (File No.
333-400046).
10.19 Form of Employment Agreement with David E. Zuern.(2)
83
10.20 1984 York Financial Corp Incentive Stock Option Plan, as amended; 1992
York Financial Corp. Stock Option and Incentive Plan, as amended;
1992 York Financial Corp. Non-Incentive Stock Option Plan for
Directors, as amended; 1995 York Financial Corp. Non-Qualified Stock
Option Plan for Directors, as amended; 1997 York Financial Corp.
Stock Option and Incentive Plan; Harris Savings Bank 1994 Incentive
Stock Option Plan; Harris Savings Bank 1994 Stock Option Plan for
Outside Directors; Harris Savings Bank 1996 Incentive Stock Option
Plan; Harris Financial, Inc. 1999 Incentive Stock Option Plan;
Harris Financial, Inc. 1999 Stock Option Plan for Outside Directors.
(Incorporated by reference to Post-Effective Amendment No. 1 and
Post-Effective Amendment No. 2 to the Registration Statement on Form
S-8 of Waypoint Financial Corp. filed with the Commission on April
10, 2001. File No. 333-52130.)
10.21 Waypoint Financial Corp. 2001 Stock Option Plan. (Incorporated by
reference to the Registration Statement on Form S-8 of Waypoint
Financial Corp. filed with the Commission on December 18, 2001. File
No. 333-52130.)
10.22 Waypoint Financial Corp. Key Employee/Outside Director Recognition and
Retention Plan. (Incorporated by reference to the Registration
Statement on Form S-8 of Waypoint Financial Corp. filed with the
Commission on December 18, 2001. File No. 333-52130.)
10.23 The Schedule of Equity Compensation Plan Information of the Registrant's
Proxy Statement for its 2003 Annual Meeting of Stockholders is
incorporated herein by reference.
(1) This document is not attached with this report but is contained in
Waypoint Financial's Report on Form 10-K as filed with the Securities
Exchange Commission on March 28, 2003.
(2) This document is not attached with this report but is contained in
Waypoint Financial's Report on Form 10-K as filed with the Securities
Exchange Commission on April 12, 2001.
21 Subsidiaries of Waypoint Financial Corp.
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
99.1 Certification of the Company's Chief Executive Officer pursuant to 18 U.
S. C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Company's Chief Financial Officer pursuant to 18 U.
S. C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of the Company's Chief Executive Officer pursuant to Rule
13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
99.4 Certification of the Company's Chief Financial Officer pursuant to Rule
13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Waypoint Financial Corp.
Date: March 28, 2003 By: /s/ CHARLES C PEARSON, Jr.
------------------------------------
Charles C. Pearson, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ CHARLES C. PEARSON, Jr. Chief Executive Officer and March 28, 2003
- --------------------------------------------- Chairman (Principal
Charles C. Pearson, Jr. Executive Officer)
/s/ DAVID E. ZUERN President and Chief March 28, 2003
- --------------------------------------------- Operating Officer
David E. Zuern
/s/ JAMES H. MOSS Executive Vice-President and March 28, 2003
- --------------------------------------------- Chief Financial Officer
James H. Moss (Principal Financial and
Accounting Officer)
/s/ ROBERT W. PULLO Vice-Chairman March 28, 2003
- ---------------------------------------------
Robert W. Pullo
/s/ ERNEST P. DAVIS Director March 28, 2003
- ---------------------------------------------
Ernest P. Davis
/s/ CYNTHIA A. DOTZEL Director March 28, 2003
- ---------------------------------------------
Cynthia A. Dotzel
/s/ RANDALL A. GROSS Director March 28, 2003
- ---------------------------------------------
Randall A. Gross
/s/ RANDALL L. HORST Director March 28, 2003
- ---------------------------------------------
Randall L. Horst
/s/ ROBERT A. HOUCK Director March 28, 2003
- ---------------------------------------------
Robert A. Houck
/s/ WILLIAM E. MCCLURE, Jr. Director March 28, 2003
- ---------------------------------------------
William E. McClure, Jr.
/s/ ROBERT E. POOLE Director March 28, 2003
- ---------------------------------------------
Robert E. Poole
/s/ BYRON M. REAM Director March 28, 2003
- ---------------------------------------------
Byron M. Ream
/s/ ROBERT L. SIMPSON Director March 28, 2003
- ---------------------------------------------
Robert L. Simpson
85
Signature Title Date
--------- ----- ----
/s/ WILLIAM A. SIVERLING Director March 28, 2003
- ---------------------------------------------
William A. Siverling
/s/ FRANK R. SOURBEER Director March 28, 2003
- ---------------------------------------------
Frank R. Sourbeer
/s/ DONALD B. SPRINGER Director March 28, 2003
- ---------------------------------------------
Donald B. Springer
86