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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to __________
Commission file number 0-16668
--------------------------------
WSFS FINANCIAL CORPORATION
--------------------------------
Delaware 22-2866913
- ------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
838 Market Street, Wilmington, Delaware 19899
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of March 15, 1996 was $67,170,429. For purposes of this calculation
only, affiliates are deemed to be directors, executive officers and certain
beneficial owners.
As of March 15, 1996, there were issued and outstanding 14,386,598 shares of
the registrant's common stock.
----------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 25, 1996 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
-----
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 28
Item 3. Legal Proceedings.............................................................. 29
Item 4. Submission of Matters to a Vote of Security Holders............................ 29
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................................... 30
Item 6. Selected Financial Data........................................................ 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 32
Item 8. Financial Statements and Supplementary Data.................................... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 90
Part III
Item 10. Directors and Executive Officers of the Registrant............................. 90
Item 11. Executive Compensation......................................................... 90
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 90
Item 13. Certain Relationships and Related Transactions................................. 90
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 91
Signatures................................................................................... 93
-2-
PART I
Item 1. Business
GENERAL
WSFS Financial Corporation ("Company" or "Corporation") is a thrift
holding company whose principal subsidiary is Wilmington Savings Fund Society,
FSB (the "Bank" or "WSFS") which operates 14 branches in the Wilmington and
Dover, Delaware area. Founded in 1832, the Bank is the largest thrift
institution headquartered in Delaware. Reflecting its long history, the Bank
estimates that it has customer relationships with almost 51,000 households, or
24%, in its principal market area of New Castle County, Delaware.
The Company has no business operations independent of WSFS and its
subsidiaries. Through WSFS and its subsidiaries, the Company is currently
engaged in a variety of lending services, including residential, consumer and
commercial lending primarily in Delaware. The principal business of the Bank
consist of the solicitation of deposits through its branch networks to provide
funds for lending and investment activities. In connection with its conversion
to a federal savings bank in 1983, the Bank retained its then-authorized powers
as a Delaware-chartered mutual savings bank. Under the Office of Thrift
Supervision ("OTS") regulations, the Bank may exercise any authority it was
allowed to exercise as a mutual savings bank under state laws and regulations at
the time of its conversion to a federal savings bank. In exercising such
"grandfathered" powers, the Bank may continue to comply with applicable state
laws and regulations in effect at the time of its conversion to a federal
charter except as otherwise determined by the OTS. The Bank, however, may not
use its grandfathered powers to engage in activities to a greater degree than
would be allowed under the most liberal construction of either state or federal
law or regulation. The Bank's grandfathered powers could be assumed by any other
institution that acquires the Bank by consolidation or merger. The Bank has
previously used its grandfathered powers to authorize investments above
otherwise applicable limits in subsidiaries engaged in activities such as real
estate and insurance brokerage. The Bank has divested certain of these
subsidiaries in order to focus on the traditional savings bank businesses of
lending to consumers and small businesses in its primary market area.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements. The OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations of
the Bank as insurer of its deposits. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of depositors. See
"Regulation" for a further discussion of certain of these regulatory
requirements.
During the 1980's, the Bank pursued an aggressive growth and
diversification strategy acquiring the largest real estate brokerage business in
Delaware, B. Gary Scott, Inc. in 1985, a Maryland automobile fleet leasing
company, Anderson Leasing, Inc. in 1988 and Fidelity Federal Savings and Loan
Association ("Fidelity Federal" or "Association") in 1990. In addition, the Bank
significantly increased its exposure to commercial real estate, both as a lender
and as an equity participant through its real estate development subsidiary. As
a result of operating losses related to deterioration in the Company's loan
portfolios, real estate investments and acquisitions, the Bank failed to meet
certain regulatory capital requirements and the Board of Directors reorganized
management by terminating several executive officers and appointing a new
chairman of the board who was directed to head a search committee for new
management. The Company took a number of steps to address the asset quality and
capital problems that resulted from this previous business strategy.
-3-
Consistent with these goals, the Company undertook an extensive
restructuring during 1991. This included the sales of loans, investment
securities, mortgage servicing rights, certain real estate, subsidiary
operations and the deposit accounts of eight branches. These sales combined with
expense reduction initiatives resulted in net earnings of $11.3 million in 1991,
the highest in the Company's history at the time. During 1992 and 1993, the
Company's earnings stabilized as the economy began to improve and interest rates
decreased. In 1992, the Company completed an offering of convertible preferred
stock which increased capital by $11.8 million. Such funds were utilized to
recapitalize the Bank. In December 1993, the Company completed a private
placement of $32.0 million in 11% Senior Notes to provide funds for an
additional capital infusion into the Bank. As a result of this capital infusion,
the Bank was in compliance with all currently applicable capital requirements
and it was released from the Capital Directive on December 29, 1993. The Bank's
improved capital position has also allowed the Company to undertake an expansion
of its business activities. During 1994, the Bank formed a new consumer finance
subsidiary specializing in second mortgage lending and acquired Providential
Home Income Plan, Inc. an originator of reverse annuity mortgages. During 1994,
the Corporation reported operating income of $8.1 million, which was at that
time the highest operating earnings in the Corporation's history. Rising
interest rates combined with investment growth strategies contributed
significantly to earnings during 1994.
During 1995, the Corporation's subsidiary, Fidelity Federal, completed
the sale of its deposits and certain real estate of four branches which allowed
the Corporation to further focus on its primary market area and continue to
enhance capital. As a result, the Bank recognized a gain of $12.4 million, net
of taxes and a supplemental contribution to the Corporation's 401(k) Plan. The
Association's remaining operations were merged into the Bank in November 1995.
The Corporation recorded total earnings of $27.0 million in 1995 of which $14.6
million was from operations. Both amounts represent new record earnings levels
in the Corporation's 164-year history.
These continued improvements in income from operations are the results
of earnings and operational strategies the Corporation has undertaken over the
last several years. For these reasons, as well as the significant changes and
ongoing consolidation in the financial services industry, the Corporation's
Board of Directors selected a financial advisor to assist the Board in
considering strategic alternatives, including a possible sale of the
Corporation. On March 4, 1996, the Board of Directors announced its intention to
operate the Corporation as an independent financial institution.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Condensed average balance sheets for each of the last three years and
analyses of net interest income and changes in net interest income due to
changes in volume and rate are presented in "Results of Operations" included in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MDA"), incorporated herein by reference.
-4-
INVESTMENT ACTIVITIES
The Bank is able to invest in various securities, including U.S.
Treasury obligations and securities of various government agencies, municipal
and state obligations, corporate debt obligations, short-term money market
instruments and preferred stock. The primary purposes of the Company's
short-term investment portfolio are to provide collateral for borrowings and to
meet liquidity requirements. Book values of investment securities and short-term
investments by category, stated in dollar amounts and as a percent of total
assets, follow:
December 31,
-----------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ -------- ------- ------- ------ -------
(Dollars In Thousands)
Held-to-Maturity:
- -----------------
Corporate bonds......................... $ 16,748 1.4% $ 19,077 1.6% $ 23,054 2.3%
U.S. Government and agencies............ 10,000 0.9
State and political subdivisions........ 5,542 0.4 6,075 0.5 11,175 1.1
Other investments....................... 88 5,216 0.5
-------- ---- -------- --- -------- ---
22,378 1.8 35,152 3.0 39,445 3.9
-------- ---- -------- --- -------- ---
Available-for-Sale:
- -------------------
U.S. Government and agencies............ 23,028 1.9 14,901 1.5
State and Political subdivisions........ 891 0.1 761 0.1
Other investments....................... 5,503 0.4 5,203 0.4
-------- --- -------- --- ------ ---
6,394 0.5 28,992 2.4 14,901 1.5
-------- --- -------- --- ------ ---
Short-term investments:
- -----------------------
Federal funds sold and
securities purchased
under agreements to resell.......... 31,500 2.6 23,098 1.9 78,599 7.9
Interest-bearing deposits in
other banks (1)..................... 4,568 0.4 9,536 0.8 25,836 2.6
-------- --- -------- --- -------- ---
36,068 3.0 32,634 2.7 104,435 10.5
-------- --- -------- --- -------- ----
$ 64,840 5.3% $ 96,778 8.1% $158,781 15.9%
======== === ======== === ======== ====
(1) Interest-bearing deposits in other banks does not include deposits with a
maturity greater than one year.
During the 1980's, the Bank began restructuring its balance sheet to
reduce sensitivity to interest-rate fluctuations. Consequently, long-term
investment securities have gradually been reduced. In 1995, U.S. Government
securities available-for-sale were sold, and an FHLB step-up bond
(held-to-maturity) was called. The reduction of corporate and state and
political subdivision bonds were due to maturities and calls. In 1994, an FHLB
step-up bond was purchased in the amount of $10 million and U.S. Government
securities were purchased in the amount of $15 million. During 1993, the
corporate and municipal bond portfolios were reduced primarily as a result of
early redemptions or calls. Certain of the proceeds were reinvested into
treasury securities and also into a fund which invests in adjustable rate
mortgage-backed securities issued by governmental agencies.
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1995. Substantially all of the related interest and dividends
represent taxable income. Yields on tax-exempt obligations are calculated on the
basis of actual yields and not on a tax-equivalent basis.
-5-
At December 31, 1995
---------------------
Amount Yield
------ -----
(Dollars in Thousands)
Held-to-Maturity:
-----------------
Corporate bonds:
Within one year....................................................... $ 200 5.75%
After one but within five years....................................... 3,471 5.93
After five but within ten years....................................... 6,224 7.27
After ten years....................................................... 6,853 7.20
--------
16,748 6.94
--------
State and political subdivisions (1):
Within one year....................................................... 805 4.87
After one but within five years....................................... 4,688 4.97
After ten years....................................................... 49 6.75
--------
5,542 4.97
--------
Other................................................................... 88 6.55
--------
Total debt securities, held-to-maturity................................. 22,378 6.45
--------
Available-for-Sale:
-------------------
U.S. Government and agencies:
Within one year....................................................... 5,503 4.96
--------
State and political subdivisions (1):
After ten years....................................................... 891 5.35
--------
Total debt securities, available-for-sale............................... 6,394 5.01
--------
Short-term investments:
-----------------------
Deposits with other banks............................................. 4,568 5.65
Federal funds sold and securities
purchased under agreements to resell................................ 31,500 5.30
--------
36,068 5.34
--------
$ 64,840 6.23%
========
(1) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since substantially all bonds are taxable and
pledged to a municipal bond unit trust.
In addition to the foregoing investment securities, the Company has
maintained an investment portfolio of mortgage-backed securities. The portfolio
of CMO's decreased dramatically during 1993 as a result of the high rate of
prepayments of the underlying mortgages. Certain of these proceeds were utilized
to purchase approximately $22.1 million of GNMA mortgage-backed securities with
adjustable rates. These securities were classified as held-for-sale at December
31, 1993 and subsequently reclassified to available-for-sale in 1994 in
accordance with SFAS No. 115. During 1995, the reduction in the mortgage-backed
securities was due to principal repayments.
-6-
The following table sets forth the book values of mortgage-backed
securities and their related weighted average stated rates at the end of the
last three fiscal years.
December 31,
---------------------------------------------------------------------
1995 1994 1993
--------------------- ------------------- -----------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Held-to-Maturity:
- -----------------
Collateralized mortgage obligations........... $72,222 7.72% $ 78,847 7.82% $ 19,370 6.53%
GNMA.......................................... 1,718 7.11 1,941 6.40 2,276 6.74
FHLMC......................................... 73,197 6.22 81,864 6.28 536 5.01
FNMA.......................................... 72,590 6.30 81,513 6.34
-------- ---- -------- ---- -------- ----
.............................................. $219,727 6.75% $244,165 6.80% $ 22,182 6.52%
======== ==== ======== ==== ======== ====
Available-for-Sale:
- -------------------
GNMA.......................................... $ 17,405 6.44% $ 18,583 6.41% $ 21,568 4.68%
======== ==== ======== ==== ======== ====
LENDING ACTIVITIES
Traditionally, the majority of a thrift institution's loan portfolio
has consisted of first mortgage loans on residential properties. However, as a
result of various legislative and regulatory changes since 1980, the commercial
and consumer lending powers of the Bank increased substantially. Consequently,
the Bank initiated a diversification strategy in fiscal year 1984 which included
a significant increase in commercial real estate lending. Commercial real estate
lending was discontinued in 1990 and only originations required by previous
funding commitments were made. In 1994, however; the Bank began to originate
small business commercial real estate loans in its primary market area. The
Bank's current lending activity is concentrated on lending to consumers and
small businesses in the Mid-Atlantic Region of the United States, which has
traditionally been the Bank's principal market area.
-7-
The following table sets forth the composition of the Corporation's loan
portfolio by type of loan at each of the dates indicated. Other than as
disclosed below, the Company had no concentrations of loans exceeding 10% of
total loans at December 31, 1995:
December 31,
-----------------------------------------------------------
1995 1994
------------------------ ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Residential real estate (1).................. $276,926 35.0% $260,442 36.6%
Commercial real estate:
Commercial mortgage........................ 293,979 37.1 259,112 36.6
Construction............................... 29,959 3.8 25,603 3.6
--------- ----- -------- -----
Total commercial real estate............. 323,938 40.9 284,715 40.2
Commercial.................................. 23,894 3.0 25,188 3.5
Consumer.................................... 114,265 14.4 91,182 12.8
Lease financings............................ 98,840 12.5 89,095 12.5
--------- ------ -------- -----
Gross loans................................ 837,863 105.8 750,622 105.6
Less:
Unearned income............................ 21,512 2.7 18,146 2.6
Allowance for loan losses.................. 24,167 3.1 21,700 3.0
--------- ----- --------- -----
Net loans................................ $792,184 100.0% $710,776 100.0%
======== ===== ======== =====
December 31,
----------------------------------------------------------------------------
1993 1992 1991
------------------------ -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate (1).................. $235,213 34.2% $254,936 33.4% $257,109 31.0%
Commercial real estate:
Commercial mortgage........................ 273,375 39.8 288,248 37.7 298,820 36.1
Construction............................... 28,978 4.2 40,528 5.3 56,915 6.9
-------- ----- --------- ----- --------- -----
Total commercial real estate............. 302,353 44.0 328,776 43.0 355,735 43.0
Commercial.................................. 21,276 3.0 33,891 4.4 41,487 5.0
Consumer.................................... 93,845 13.7 123,924 16.2 155,958 18.8
Lease financings............................ 72,941 10.6 61,750 8.1 58,516 7.1
-------- ----- --------- ----- --------- -----
Gross loans................................ 725,628 105.5 803,277 105.1 868,805 104.9
Less:
Unearned income............................ 14,523 2.1 13,215 1.7 13,239 1.6
Allowance for loan losses.................. 23,613 3.4 26,263 3.4 26,975 3.3
--------- ------ --------- ----- --------- -----
Net loans................................ $687,492 100.0% $763,799 100.0% $828,591 100.0%
======== ===== ======== ===== ======== =====
(1) Includes $4,401, $257, $1,965, $2,994 and $4,046 of residential mortgage
loans held-for-sale at December 31, 1995, 1994, 1993, 1992 and 1991,
respectively.
-8-
The following table sets forth information as of December 31, 1995
regarding the dollar amount of loans maturing in the Company's loan portfolio,
including scheduled repayments of principal, based on contractual terms to
maturity. In addition, the table sets forth the dollar amount of loans maturing
during the indicated periods, based on whether the loan has a fixed- or
adjustable-rate. Loans having no stated maturity or repayment schedule are
reported in the one year or less category.
Less than One to Over
One Year Five Years Five Years Total
---------- ------------ ---------- ---------
(In Thousands)
Real estate loans (1)..................... $ 60,165 $205,512 $300,827 $566,504
Construction loans........................ 21,395 7,622 942 29,959
Commercial loans.......................... 10,217 10,708 2,969 23,894
Consumer loans............................ 55,081 36,336 22,848 114,265
Lease financings.......................... 21,998 76,842 -- 98,840
-------- -------- -------- --------
$168,856 $337,020 $327,586 $833,462
======== ======== ======== ========
Rate sensitivity:
Fixed................................... $ 51,158 $189,730 $ 88,229 $329,117
Adjustable.............................. 117,698 147,290 239,357 504,345
-------- -------- -------- --------
$168,856 $337,020 $327,586 $833,462
======== ======== ======== ========
(1) Includes commercial mortgage loans.
The above schedule does not include any prepayment assumptions.
Although prepayments tend to be highly dependent upon the current interest rate
environment, management believes that the actual repricing and maturity of the
loan portfolio is significantly shorter as a result of prepayments than is
reflected in the above table.
Residential Real Estate Lending. WSFS originates residential mortgage
loans with loan-to-value ratios up to 95%; however, the Bank generally requires
private mortgage insurance for up to 25% of the mortgage amount on mortgage
loans whose loan-to-value ratio exceeds 80%. The Bank does not have any
significant concentrations of such insurance with any one insurer. On a limited
basis, the Bank originates loans with loan-to-value ratios exceeding 80%without
a private mortgage insurance requirement. At December 31, 1995, the balance of
all such loans was approximately $15.0 million of which $4.8 million related to
lending intended to satisfy the requirements of the Community Reinvestment Act.
Generally, residential mortgage loans originated or purchased are underwritten
and documented in accordance with standard underwriting criteria published by
FNMA and/or FHLMC to assure maximum eligibility for subsequent sale in the
secondary market; however, unless loans are specifically designated for sale,
the Company holds newly originated loans in portfolio for long-term investment.
Among other things, the institution requires title insurance, insuring the
priority of its lien and fire and extended coverage casualty insurance for the
properties securing the residential loans. All properties securing residential
loans made by the Bank are appraised by independent appraisers selected by the
Bank and subject to review in accordance with Bank standards.
The majority of adjustable-rate loans currently originated have
interest rates that adjust every year, with the change in rate limited to two
percent at any adjustment date. The adjustments are generally based upon a
margin (currently 2.75 percent) over the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity, as published by the Federal Reserve
Board. Generally, the maximum rate on these loans is up to six percent above the
initial interest rate. The Bank generally underwrites adjustable-rate loans
under standards consistent with private mortgage insurance and secondary market
criteria. The Bank does not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization.
-9-
Consistent with industry practice in its market area, the Bank has originated
adjustable-rate mortgage loans with initially discounted interest rates that
generally adjust to the fully indexed rate at the first adjustment period. All
such loans are underwritten at the fully-indexed rate.
The retention of adjustable-rate mortgage loans in the Bank's loan
portfolio helps mitigate the Bank's exposure to changes in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of the repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest costs to the borrower. Further, although adjustable-rate
mortgage loans allow the Bank to increase the sensitivity of its asset base to
changes in interest rates, the extent of this interest sensitivity is limited by
the periodic and lifetime interest rate adjustment limitations. Accordingly,
there can be no assurance that yields on the Bank's adjustable-rate mortgages
will adjust sufficiently to compensate for increases in the Bank's cost of funds
during periods of extreme interest rate increases.
The original contractual loan payment period for residential loans
originated is normally 10 to 30 years. Because borrowers may refinance or prepay
their loans without penalty, such loans normally remain outstanding for a
substantially shorter period of time. First mortgage loans customarily include
"due-on-sale" clauses on adjustable- and fixed-rate loans, which are provisions
giving the institutions the right to declare a loan immediately due and payable
in the event the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. Due-on-sale clauses are an
important means of adjusting the rate on existing fixed-rate mortgage loans to
current market rates. The Bank enforces due-on-sale clauses through foreclosure
and other legal proceedings to the extent available under applicable laws.
Commercial Real Estate and Commercial Lending. As a federal savings
bank, the Bank is permitted to invest up to 400% of its consolidated capital in
nonresidential real estate loans and up to 10% of its assets in commercial
loans. Prior to 1994, the Bank had been operating under a Capital Plan and was
subject to the terms and conditions of a Capital Directive. Consequently, WSFS
had discontinued the origination of commercial real estate loans other than
renewal of performing loans or funding outstanding commitments. Beginning in
1994, however,the Bank began to originate small business commercial real estate
loans in its primary market area.
WSFS has offered commercial real estate mortgage loans on multi-family
and other commercial real estate. Generally, loan-to-value ratios for such loans
do not exceed 80% of appraised value. Due to softening of the commercial real
estate market in the early 1990's; however, current loan-to-value ratios may
effectively be in excess of 80%.
Prior to the restrictions noted above, the Bank offered commercial
construction loans to developers. These loans were made as
"construction/permanent" loans, which provided for disbursement of loan funds
during construction and automatic conversion to permanent loans upon completion
of construction. Such construction loans were made on a short-term basis,
usually not exceeding two years, with interest rates indexed to the WSFS prime
rate and adjusted periodically as the Bank's prime rate changed. The loan
appraisal process includes the same criteria as required for permanent mortgage
loans as well as completed plans, specifications, comparables and cost
estimates. These items are used, prior to approval of the credit, as a basis to
determine the appraised value of the subject property when completed. Policy
requires that all appraisals are to be reviewed independent of the commercial
lending area. Generally, the loan-to-value ratio for construction loans does
-10-
not exceed 80%. The initial interest rate on the permanent portion of the
financing is determined based upon the prevailing market rate at the time of
conversion to the permanent loan. At December 31, 1995, $35.3 million was
committed for construction loans, of which $24.8 million had been disbursed.
The Bank's commercial lending, excluding real estate loans, includes
loans for the purpose of financing equipment acquisitions, expansion, working
capital and other business purposes. These loans generally range in amounts up
to approximately $1.5 million, and their terms range from less than one year to
ten years. The loans generally carry variable interest rates indexed to the
Bank's prime rate at the time of closing. The Bank intends to continue
originating commercial loans to small businesses in its primary market area.
Commercial, commercial mortgages and construction lending entails
significant risk as compared with residential mortgage lending. These loans
typically involve larger loan balances concentrated in single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the commercial real estate market or in
the economy generally. The majority of the Bank's commercial and commercial real
estate loans are concentrated in Delaware and surrounding areas. Construction
loans involve risks attributable to the fact that loan funds are advanced upon
the security of the project under construction, which, due to various factors,
is of uncertain value prior to the completion of construction. Moreover, because
of the uncertainties inherent in estimating construction costs, delays arising
from labor problems, material shortages and other unpredictable contingencies,
it is relatively difficult to accurately estimate the total loan funds required
to complete a project and or determine the related loan-to-value ratios.
Federal law limits the extensions of credit to any one borrower to 15%
of unimpaired capital, or 25%, if the additional incremental 10% is secured by
readily marketable collateral having a market value that can be determined by
reliable and continually available pricing. One large extension of credit by the
Bank is limited by this 15% of capital restriction. Extensions of credit include
outstanding loans as well as contractual commitments to advance funds, such as
standby letters of credit, but do not include unfunded loan commitments. At
December 31, 1995, no borrower had collective outstandings exceeding the above
limits; however, an existing loan that exceed these limits does not have to be
terminated or divested since the legality of a loan is determined when it is
made and is not affected by subsequent legislative events.
Consumer Lending. Consumer loans (not including certain consumer loans
such as home equity lines of credit and other residential real estate secured
loans) may be made in an amount up to 35% of the Bank's assets. The Company
intends to emphasize consumer lending in the future as a means of enhancing
portfolio yields and capitalizing on existing customer relationships.
-11-
The table below sets forth consumer loans by type and lease financings
outstanding, in dollar amounts and percentages, at the dates indicated.
December 31,
----------------------------------------------------------
1995 1994
------------------------- ------------------------
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Equity secured installment loans........ $52,793 24.8% $34,088 18.9%
Home equity lines of credit............. 36,817 17.3 40,727 22.6
Automobile.............................. 12,701 6.0 1,951 1.1
Unsecured lines of credit............... 7,017 3.3 3,683 2.0
Other................................... 4,937 2.3 10,733 6.0
-------- ----- -------- -----
114,265 53.7 91,182 50.6
Lease financings ....................... 98,840 46.3 89,095 49.4
-------- ----- -------- -----
Total consumer loans and
lease financings...................... $213,105 100.0% $180,277 100.0%
======== ===== ======== =====
December 31,
-------------------------------------------------------------------------------
1993 1992 1991
----------------------- -------------------- ------------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Equity secured installment loans........ $24,485 14.7% $46,715 25.1% $56,312 26.3%
Home equity lines of credit............. 47,060 28.2 58,104 31.3 71,009 33.1
Automobile.............................. 2,567 1.5 4,313 2.3 6,636 3.1
Unsecured lines of credit............... 4,070 2.5 4,409 2.4 5,014 2.3
Other................................... 15,663 9.4 10,383 5.6 16,987 7.9
-------- ----- -------- ----- -------- -----
93,845 56.3 123,924 66.7 155,958 72.7
Lease financings ....................... 72,941 43.7 61,750 33.3 58,516 27.3
-------- ----- -------- ----- -------- -----
Total consumer loans and
lease financings...................... $166,786 100.0% $185,674 100.0% $214,474 100.0%
======== ===== ======== ===== ======== =====
-12-
The primary consumer loan products of the Company are equity secured
installment loans and home equity lines of credit. With a home equity line of
credit the borrower is granted a line of credit up to 75% of the appraised value
(net of any senior mortgages) of the residence. This line of credit is secured
by a mortgage on the borrower's property and can be drawn upon at any time. At
December 31, 1995, the Bank had extended a total of $93.1 million in home equity
lines of credit, of which $36.8 million had been drawn at that date. Home equity
lines of credit offer federal income tax advantages (in certain circumstances,
the interest paid on a home equity loan remains deductible) and the convenience
of their checkbook access and revolving credit features. Over the past few
years, however, home equity lines of credit have decreased as low interest rates
offered on mortgage loans have enabled consumers to refinance their mortgages
and consolidate debt. Although home equity lines of credit expose the Company to
the risk that falling collateral values may leave it inadequately secured, the
Company has not had any adverse experience to date.
Beginning in 1988, the focus of WSFS Credit Corporation ("WCC"),
formerly Star States Leasing Corporation, has been to originate finance type
leases. These leases are secured by motor vehicles and originated through
automobile dealerships. During 1995, WCC originated more than 1,400 leases which
approximated $33.6 million in new assets. Such leases have been a growing
component of the consumer loan portfolio.
Loan Originations, Purchase and Sales. WSFS has traditionally engaged
in lending activities primarily in Delaware and contiguous areas of neighboring
states although, as a federal savings bank, the Bank may originate, purchase and
sell loans throughout the United States. WSFS has also purchased limited amounts
of loans from outside its normal lending area when such purchases are deemed
appropriate and consistent with the Bank's overall policies. The Bank originates
fixed- and adjustable-rate residential real estate loans through banking
offices. In addition, WSFS has established relationships with correspondent
banks, mortgage brokers and real estate developers for loan referrals.
During 1995, WSFS originated $87 million of residential real estate
loans compared to 1994 originations of $68 million. From time to time, the Bank
has purchased whole loans and loan participations in accordance with its ongoing
asset and liability management objectives. Purchases of residential real estate
loans from correspondents and brokers primarily in the northeast region of the
United States totalled $14 million and $6 million while residential real estate
loan sales totaled $38 million and $13 million for the years ended December 31,
1995 and 1994, respectively. While the Bank generally intends to hold loans for
the foreseeable future, WSFS, beginning in 1989, has undertaken to sell newly
originated fixed-rate mortgage loans in the secondary market to control the
interest sensitivity of its balance sheet. During the second half of 1993 the
Corporation began to hold for investment certain of its fixed-rate mortgage
loans, with terms under 30 years, originated in accordance with current
asset/liability management strategies.
The Bank serviced for others approximately $229 million of residential
loans at December 31, 1995 compared to $180 million at December 31, 1994. The
Company also services residential loans for its portfolio totalling $187 million
and $246 million at December 31, 1995 and 1994.
The Bank originates commercial real estate and commercial loans through
the Bank's commercial lending department. Commercial loans are made for the
purpose of financing equipment acquisitions, expansion, working capital and
other business purposes and also include business loans secured by
nonresidential real estate. During 1995, the Bank originated $91 million of
commercial and commercial real estate loans compared to $50 million in 1994.
These amounts represent gross contract amounts and do not reflect amounts
outstanding on such loans. Also during 1995, the Bank purchased a $47.5 million
portfolio of discounted commercial loans and commercial mortgages.
-13-
The Bank's consumer lending is conducted primarily through the branch
offices and is supported by a consumer credit department credit investigation
unit. WSFS originates a variety of consumer credit products, including home
improvement loans, home equity lines of credit, automobile loans, unsecured
lines of credit and other secured and unsecured personal installment loans.
During 1995, such consumer loan originations aggregated $72 million compared to
$55 million in 1994. See "Consumer Lending" for discussion regarding consumer
loan originations.
All loans to one borrower exceeding $500,000 in aggregate must be
approved by a management loan committee. Minutes of the management loan
committee meetings and individual loans exceeding $1.0 million approved by the
management loan committee are subsequently reviewed by the Executive Committee
and Board of Directors of WSFS, with separate approval needed for all loans to
any borrower who has direct or indirect outstanding commitments in excess of
$1.5 million or for any additional advances or extensions on loans previously
classified by the Bank's regulatory authorities or the Bank's Asset Review
Department. Officers of the Bank have authority to approve smaller loans in
graduated amounts, depending upon their experience and management position.
Fee Income from Lending Activities. The Bank realizes interest and loan
fee income from lending activities, including fees for originating loans and for
servicing loans and loan participations sold. The institutions also receive
commitment fees for making commitments to originate construction, residential
and commercial real estate loans. Additionally, each entity receives loan fees
related to existing loans, which include prepayment charges, late charges and
assumption fees.
The Bank offers a range of loan commitments for which fees are charged
depending on lengths of the commitment periods. As part of the loan application,
the borrower also pays the Bank for out-of-pocket costs in reviewing the
application, whether or not the loan is closed. The interest rate charged on the
mortgage loan is normally the prevailing rate at the time the loan application
is approved.
Loan fees that are considered adjustments of yield in accordance with
generally accepted accounting principles are reflected in interest income and
represented an immaterial amount of interest income during the three years ended
December 31, 1995. Loan fees other than those considered adjustments of yield
are reported as loan fee income, a component of other income.
LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations are negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its loan portfolio to identify problem
loans as promptly as possible and take actions immediately which will minimize
losses. To accomplish this, the Bank's Asset Review Department monitors the
asset quality of the Company's loan and investment in real estate portfolios and
reports such information to the Chief Financial Officer and the Executive
Committee of the Board of Directors.
-14-
SUBSIDIARIES
During the 1980's, the Company sought to expand its sources of
noninterest income and its market area primarily through its investments in
subsidiaries. The Company's policy was to exercise the Bank's generally broad
investment authority to invest in subsidiaries which were considered
complementary to its traditional savings bank activities. As a result of the
Bank's failure to comply with minimum regulatory capital requirements in 1990,
it became subject to restrictions on asset growth, lending and capital
distributions, among other things. Consequently, the Company consolidated and/or
divested of certain subsidiary operations, thereby restructuring its balance
sheet and focusing on its core banking businesses.
At December 31, 1995, WSFS had five wholly owned, first-tier
subsidiaries which were engaged in leasing, real estate development, reverse
mortgages, consumer finance and insurance brokerage. WSFS is the sole investor
in and primary lender to its non-bank subsidiaries. At December 31, 1995, it had
$9.0 million invested in the equity of these companies and had lent them an
additional $115.1 million.
WSFS Credit Corporation, formerly Star States Leasing Corporation,
which commenced operations in 1974, provides leasing for consumer and business
motor vehicles and equipment as well as consumer loans. Prior to 1988, its
business had been concentrated in the northern Delaware area, but in 1988 it
began expanding its motor vehicle leasing base by originating direct financing
leases through automobile dealerships in Pennsylvania, New Jersey and Maryland
as well as Delaware. WSFS Credit Corporation underwrites all leases originated
through automobile dealers in accordance with underwriting criteria generally
consistent with those of the Bank and the leasing industry. WSFS Credit
Corporation's total assets at December 31, 1995 and 1994 were $96.0 million and
$76.7 million, respectively.
Star States Development Company was formed in March 1985 with the
objective of engaging in residential real estate projects through either wholly
owned subsidiaries or investments in joint ventures. Star States Development
Company's investments in the projects are in the form of nonrecourse, first
mortgage loans, in return for which Star States Development Company is entitled
to receive repayment of principal and interest, and to share, at an agreed upon
percentage, in the profits of the project. The activities of Star States
Development Company are currently limited to the phase down of its existing real
estate investments and projects.
838 Investment Group, Inc. (formerly Star States Financial Services,
Inc.) was formed in 1989. This subsidiary markets various insurance products,
such as single-premium annuities and whole life policies, and mutual funds to
Bank customers through the Bank's branch system.
Community Credit Corporation (CCC), a consumer finance subsidiary, was
formed in June 1994 to provide fixed- and adjustable-rate consumer loans secured
by first and second mortgages. Loans made by CCC are most often used by the
borrower to consolidate debt, including an existing mortgage, or fund home
improvements. The type of borrower targeted by CCC has a credit history that may
limit their access to credit, given the relatively rigid lending guidelines used
by most financial institutions. The first office of CCC was opened August 1994
in Delaware.
Providential Home Income Plan, Inc. (Providential) is a San
Francisco-based reverse mortgage lender. The Bank acquired Providential in
November 1994 for approximately $24.4 million. The acquisition was accounted for
by the purchase method of accounting; accordingly, Providential's results are
included in the Corporation's consolidated statement of operations for the
period in which Providential was owned. See Note 17 of the Consolidated
Financial Statements for a further discussion of reverse mortgages.
-15-
On July 28, 1995, the Corporation's wholly-owned subsidiary, Fidelity
Federal completed the sale of deposits and certain real estate at four of its
branches to Commonwealth Savings Bank. In November, the remaining operations of
Fidelity Federal and its holding company, Star States Pennsylvania, Inc. were
merged into WSFS.
SOURCES OF FUNDS
The Bank funds operations through deposit growth and various borrowing
services, including repurchase agreements, federal funds purchased and advances
from the Federal Home Loan Bank ("FHLB") of Pittsburgh. Loan repayments and
investment maturities also provide sources of funds. Loan repayments and
investment maturities provide a relatively stable source of funds while certain
deposit flows tend to be more susceptible to market conditions. Borrowings are
used either for short-term funding of lending activities when loan demand
exceeds projections or when deposit inflows or outflows are less than or greater
than expected. On a long-term basis, borrowings may be used to match against
specific loans or to ultimately support business expansion.
Deposits. The Bank offers various deposit programs to its customers,
including passbook and statement savings accounts, demand deposits,
interest-bearing demand deposits, money market deposit accounts and certificates
of deposits. The Bank also offers Christmas clubs, Individual Retirement
Accounts and Keogh Accounts. In addition, the Bank accepts negotiable rate
certificates with balances in excess of $100,000 from individuals, businesses
and municipalities in Delaware.
The Bank is the second largest independent banking institution
headquartered and operating in Delaware. It primarily attracts deposits through
its system of 14 branches. Thirteen of these branches are located in northern
Delaware's New Castle County, the Bank's primary market. These maintain
approximately 147,000 total account relationships with approximately 51,000
total households, or 24% of all households in New Castle County, Delaware. The
fourteenth and newest branch is in the state capital, Dover, located in central
Delaware's Kent County.
One of the most successful deposit related products developed by the
Bank is the WSFS Plan Card, a debit card product. The Plan Card, initiated in
1972, allowed customers to charge purchases made within a proprietary network of
merchants. These purchases were then debited to the customers' checking account
and a cash rebate was earned on each purchase. In 1991, the Plan Card became a
VISA(R) Check Card and as a result, WSFS depositors can now use the Plan Card at
all 12 million acceptance locations in the worldwide VISA(R) network.
The following table sets forth the amount of certificates of deposit of
$100,000 or more by time remaining until maturity at the period indicated.
December 31,
1995
Maturity Period ---------------
- --------------- (In Thousands)
Less than 3 months......................... $ 14,186
Over 3 months to 6 months.................. 9,046
Over 6 months to 12 months................. 4,178
Over 12 months............................. 10,110
--------
$ 37,520
========
-16-
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As members of the FHLB of Pittsburgh, the Bank is authorized to
apply for advances on the security of their capital stock in the FHLB and
certain of their residential mortgages and other assets (principally securities
which are obligations of or guaranteed by the United States Government) provided
certain standards related to creditworthiness have been met. As a member
institution, the Bank is required to hold capital stock in the FHLB of
Pittsburgh in an amount at least equal to 1% of the aggregate unpaid principal
of their home mortgage loans, home purchase contracts, and similar obligations
at the beginning of each year, or 1/20th of their advances, whichever is
greater.
On December 29, 1993, the Company issued $32.0 million in 11% Senior
Notes due December 31, 2005 ("Notes") to certain institutional and accredited
investors in a private placement. See Note 9 of the Consolidated Financial
Statements for a further discussion of the Notes.
In December 1984, WSFS conveyed municipal bonds with a book value of
$29.0 million to a unit investment trust in exchange for $22.6 million. At
December 31, 1995, the outstanding amount on this borrowing was $2.7 million.
See Note 9 to the Consolidated Financial Statements for a further discussion of
this borrowing.
The Bank also has access to the federal funds market through member
banks of the Federal Reserve. Federal funds are excess reserves (reserves at the
federal reserve bank in excess of legal requirements) of member banks. Federal
funds are purchased through correspondent banks which act as intermediaries.
These transactions are of a short-term nature, generally overnight. The Bank
purchases federal funds as needed to meet liquidity requirements. In addition,
in December 1993, the Bank secured open end lines of credit with three different
brokerage firms, of which none was outstanding at December 31, 1995. Advances on
these open end lines of credit can be secured by investments, mortgages or
mortgage related securities. There were no federal funds purchased outstanding
at December 31, 1995, 1994 or 1993. Federal funds were not purchased during
1995, 1994 and 1993.
The Company also periodically sells reverse repurchase agreements,
which represent indebtedness of the Company arising from the sale of U.S.
Treasury and other government agency securities or mortgage-backed securities to
commercial banks and securities firms that the Company is obligated to
repurchase at specified prices and dates. For regulatory and financial reporting
purposes, repurchase agreements are classified as borrowings which are
collateralized by the security sold. These agreements have also been used as
short-term funding sources to maintain adequate liquidity levels. At December
31, 1995, $56.2 million of these borrowings were outstanding with a weighted
average rate of 5.97%. $16.2 million matures in 80 days and $40 million mature
in 3 years. The average outstanding during the year was $67.4 million with a
weighted average interest rate of 6.24%. The maximum outstanding at any
month-end during 1995 was $87.0 million. At December 31, 1994, $56.7 million of
these borrowings were outstanding with a weighted average interest rate of 6.35%
and maturities of 180 days or less. The average outstanding during 1994 was
$29.4 million with a weighted average interest rate of 5.33%. The maximum
outstanding at any month-end during 1994 was $80.1 million. The Corporation did
not utilize this type of borrowing in 1993.
-17-
EMPLOYEES
At December 31, 1995, the Company and its subsidiaries had 350
full-time equivalent employees, none of whom were represented by a collective
bargaining group. Management considers its relations with employees to be
satisfactory. The Company currently maintains a comprehensive employee benefit
program providing, among other benefits, a 401(k) plan, hospitalization and
major medical and dental insurance, paid sick leave, long-term disability
insurance and life insurance.
COMPETITION
The Bank is subject to intense competition in attracting and retaining
deposits and in lending funds from commercial banks and, to a lesser extent,
other savings banks, savings and loan associations and credit unions. The Bank
also competes with other providers of financial services, such as money market
and mutual funds, brokerage firms, investment companies, credit companies and
insurance companies. The Bank competes for deposits and loans by focusing on
customer service and offering a variety of products with competitive interest
rates and fees.
REGULATION
Regulation of the Company
General. The Company is a registered as savings and loan
holding company and is subject to OTS regulation, examination, supervision and
reporting requirements. As a subsidiary of a holding company, the Bank is
subject to certain restrictions in its dealings with the Company and other
affiliates.
Regulatory Capital Maintenance/Dividend Agreements. As a condition to
obtaining regulatory approval of their acquisitions of the Bank and Fidelity
Federal, respectively, the Company and the Bank were required to execute
agreements with the predecessor to the OTS with respect to the receipt of
dividends from the Bank respectively, and, in the case of the Bank, the
maintenance of its regulatory capital. Under the Regulatory Capital
Maintenance/Dividend Agreement between the Company and the predecessors to the
OTS, the Company agreed to cause the regulatory capital of the Bank to be
maintained at a level at or above the Bank's regulatory capital requirement and
to infuse sufficient capital to effect compliance with such requirement during
the first quarter after which the Bank fails to meet its regulatory capital
requirement. The Company further agreed that, without regulatory approval, it
would not accept dividends in excess of 50% of the institution's net income for
the fiscal year. The Company is permitted to accept dividends of up to 75% of
net income if the Bank's ratio of regulatory capital to liabilities would equal
7% or more after payment of the dividend and may accept dividends equal to 100%
of net income if such ratio would be 8% or more after the dividend payment.
Dividends permitted under the agreement may be deferred and paid in a subsequent
year provided that no dividend or repurchase of stock may reduce the Bank's
regulatory capital below its regulatory capital requirement. After notice of
default, the Company is prohibited from conveying its ownership of the Bank by
gift, sale, exchange or otherwise without regulatory approval. If a default is
not cured within 90 days and not waived, the predecessor to the OTS was entitled
to seek any available remedy and the Company must pay its attorney fees and
other reasonable expenses.
-18-
The Company had previously been given notice that it was in default
with respect to the Regulatory Capital Maintenance/Dividend Agreement. However,
no further action has been taken by the OTS and all such defaults were cured as
of December 31, 1993 when the Bank came into compliance with all minimum
regulatory capital requirements of the OTS. Because such defaults have been
cured, the Company does not anticipate that the OTS will seek any remedies under
the Regulatory Capital/Maintenance Dividend Agreement.
Activities Restrictions. The Board of Directors of the Company has
operated the Company as a multiple savings and loan holding company subject to
certain activity limitations. Among other things, no multiple savings and loan
holding company or subsidiary thereof which is not a savings association may
commence, or continue after a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than: (i) furnishing or performing management services for a subsidiary
savings association; (ii) conducting an insurance agency or escrow business;
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings institution; (iv) holding or managing properties used or
occupied by a subsidiary savings institution; (v) acting as trustee under deeds
of trust; (vi) those activities authorized by regulation as of March 5, 1987 to
be engaged in by multiple holding companies; or (vii) unless the Director of OTS
by regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of OTS prior to being engaged in by
a multiple savings and loan holding company. Upon the merger of Fidelity Federal
into the Bank in November 1995, the Corporation became a unitary savings and
loan holding company.
Transactions with Affiliates. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings association.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and limit the aggregate of all such transactions with all affiliates to
an amount equal to 20% of such capital stock and surplus and (ii) require that
all such transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to a non-affili-
ate. The term "covered transaction" includes the making of loans, purchase of
assets, issuance of a guarantee and similar types of transactions. In addition
to the restrictions imposed by Sections 23A and 23B, no savings association may
(i) lend or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), as amended by FIRREA
and FDICIA, loans to an executive officer or director or to a greater than 10%
stockholder of a savings association and certain affiliated interests of either,
may not exceed, together with all other outstanding loans to such person and
affiliated interests, the association's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus) and all loans
to such persons may not exceed the institution's unimpaired capital and
unimpaired surplus. Section 22(h) also prohibits loans, above amounts
-19-
prescribed by the appropriate federal banking agency, to directors, executive
officers and greater than 10% stockholders of a savings association, and their
respective affiliates, unless such loan is approved in advance by a majority of
the board of directors of the association with any "interested" director not
participating in the voting. The Federal Reserve Board has prescribed the loan
amount (which includes all other outstanding loans to such person), as to which
such prior board of director approval if required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, the Federal
Reserve Board pursuant to Section 22(h) requires that loans to directors,
executive officers and principal stockholders be made on terms substantially the
same as offered in comparable transactions to other persons. Section 22(h) also
prohibits a depository institution from paying the overdrafts of any of its
executive officers or directors.
Savings associations are subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act on loans to executive officers and
the restrictions of 12 U.S.C. ss. 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof, or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances, a savings and loan holding company is permitted to
acquire, with the approval of the Director of OTS, up to 15% of the voting
shares of an under-capitalized savings association pursuant to a "qualified
stock issuance" without that savings association being deemed controlled by the
holding company. Except with the prior approval of the Director of OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings association, other than a subsidiary savings
association, or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
-20-
OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a "domestic building and loan
association" under ss.7701(a)(19) of the Internal Revenue Code and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association and (ii) such branch would not result in the formation of a
prohibited multi-state multiple savings and loan holding company. Federal
associations generally may not establish new branches unless the association
meets or exceeds minimum regulatory capital requirements. The OTS will also
consider the association's record of compliance with the Community Reinvestment
Act of 1977 in connection with any branch application.
The Bank Holding Company Act of 1956 has been amended to specifically
authorize the Federal Reserve Board to approve an application by a bank holding
company to acquire control of any savings association. Pursuant to rules
promulgated by the Federal Reserve Board, owning, controlling or operating a
savings association is a permissible activity for bank holding companies, if the
savings association engages only in deposit-taking activities and lending and
other activities that are permissible for bank holding companies. In approving
such an application, the Federal Reserve Board may not impose any restriction on
transactions between the savings association and its holding company affiliates
except as required by Sections 23A and 23B of the Federal Reserve Act.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a BIF member
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
Regulation of the Bank
General. As a federally chartered savings institution, the Bank is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Bank and the Association must comply with various federal
regulatory requirements. The OTS periodically examines the Bank for compliance
with regulatory requirements. The FDIC also has the authority to conduct special
examinations of the Bank as the insurer of deposits. The Bank must file reports
with OTS describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. In addition, the OTS has recently adopted regulations which impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
-21-
has the same definition as core capital. The OTS capital rule defines core
capital as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill," less intangible assets other than certain qualifying supervisory
goodwill and certain purchased mortgage servicing rights. Tangible capital is
given the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets except for certain purchased mortgage servicing
rights. The OTS capital rule requires that core and tangible capital be reduced
by an amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks, other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies ("nonincludable subsidiaries"). As of December 31, 1995, the
Bank had no investments in or extensions of credit to nonincludable
subsidiaries.
Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, increased by certain goodwill amounts
and by a prorated portion of the assets of subsidiaries in which the savings
institution holds a minority interest and which are not engaged in activities
for which the capital rules require the savings institution to net its debt and
equity investments in such subsidiaries against capital. Adjusted total assets
are reduced by the amount of assets that have been deducted from capital, the
portion of savings institution's investments in subsidiaries that must be netted
against capital under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At December 31, 1995, the Bank's
adjusted total assets for purposes of both the core and tangible capital
requirements were $1,217.8 million.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loan and lease loss allowances.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to-value
ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with
loan-to-value ratios under 80% and average annual occupancy rates over 80%, and
certain qualifying loans for the construction of one- to four-family residences
pre-sold to home purchasers are assigned a risk weight of 50%. Consumer loans,
non-qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets. The Bank was in
compliance with all such standards as of December 31, 1995.
-22-
The OTS has recently adopted an amendment to its risk-based capital
requirements that will require savings institutions with more than a "normal"
level of interest rate risk to maintain additional total capital. A savings
institution's interest rate risk will be measured in terms of the sensitivity of
its "net portfolio value" to changes in interest rates. The OTS notified the
Bank in 1995 that this proposal has been delayed indefinitely. The Bank has
determined that, on the basis of current financial data, it would not be deemed
to have more than normal level of interest rate risk under the proposed rule and
believes that it will not be required to increase its total capital as a result
of the rule.
Dividend Restrictions. OTS regulations impose additional limitations on
the payment of dividends and other capital distributions (including stock
repurchases and cash mergers) by the Bank. Under these regulations, a savings
institution that, immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is generally permitted, after
notice, to make capital distributions during a calendar year in the amount equal
to the greater of: (a) 75% of its net income for the previous four quarters; or
(b) up to 100% of its net income to date during the calendar year plus an amount
that would reduce by one-half the amount by which its ratio of total capital to
assets exceeded its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital ratio requirements but not in excess of the
fully phased-in requirements (a "Tier 2 Association") is permitted, after
notice, to make capital distributions without OTS approval of up to 75% of its
net income for the previous four quarters, less dividends already paid for such
period. A savings institution that fails to meet current minimum capital
requirements (a "Tier 3 Association") is prohibited from making any capital
distributions without the prior approval of the OTS. A Tier 1 Association that
has been notified by the OTS that it is in need of more than normal supervision
will be treated as either a Tier 2 or Tier 3 Association. At December 31, 1994,
the Bank and the Association were Tier 1 Associations. Despite the above
authority, the OTS may prohibit any savings institution from making a capital
distribution that would otherwise be permitted by the regulation, if the OTS
determines that the distribution would constitute an unsafe or unsound practice.
In response to the Company's request, by letter dated December 3, 1993,
the Regional Director of the Northeast Region of the OTS approved the payment of
dividends by the Bank in support of the Company's obligations under the Notes,
so long as, with respect to each such dividend (i) the Bank would not be
"undercapitalized" under the prompt corrective action provisions of the FDI Act
and would meet its minimum regulatory capital requirements after payment of such
dividend, (ii) dividends are limited to an amount which, when taken together
with other capital distributions, does not exceed the lesser of net income
earned in the most recent four fiscal quarters or net income earned to date
during the calendar year plus the amount that would reduce by one-half its
surplus capital ratio at the beginning of the calendar year, (iii) continued
progress is made by the Bank in the disposition and reduction of classified
assets, and (iv) at least thirty days prior notice (and such other notices as
may be required by law or regulation) of the declaration of such dividend is
provided to the OTS. This letter also notes that the approval contained therein
does not constrain the OTS in the future from taking any appropriate action,
including, without limitation, restricting future dividend payments based upon
safety and soundness concerns.
Deposit Insurance. The Bank is charged an annual premium by the BIF for
federal insurance on its respective insurable deposit accounts up to applicable
regulatory limits. The FDIC may establish an assessment rate for deposit
insurance premiums which protects the insurance fund and considers the fund's
operating expenses, case resolution expenditures, income and effect of the
assessment rate on the earnings and capital of members.
-23-
The FDIC has established a risk-based assessment system for insured
depository institutions which became effective January 1, 1994. The assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution by the FDIC which is determined by
the institution's capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period using the same percentage criteria
as in the prompt corrective action regulations. See "-- Prompt Corrective
Action." Institutions are assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized. Undercapitalized
institutions consist of institutions that do not qualify as either "well
capitalized" or "adequately capitalized." Within each capital group,
institutions will be assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A consists of financially sound institutions with only a few
minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
Current law prohibits the BIF and SAIF insurance premiums from being lowered
until their respective reserve ratios equal 1.25%. Furthermore, current law
prohibits SAIF members from converting to BIF membership, and vice versa, until
the SAIF has achieved its designated reserve ratio of 1.25%. In 1995, the FDIC
reduced insurance premiums for members of BIF, resulting in members of the SAIF
paying premiums that are substantially higher than those charged to members of
BIF. The FDIC stated that a premium differential might reduce earnings and
impair the ability to raise funds in the capital markets for members of SAIF. It
cannot be determined when or how long such increased premiums would continue.
The effect of such a reduction should be favorable to WSFS because its deposits
are insured by BIF. In 1995, Congress began discussing various proposals
designed to alleviate the insurance premium disparity between BIF and SAIF.
Included in these proposals is a one-time charge for SAIF deposits which would
bring the SAIF reserve levels to the levels at BIF. The effect of this
legislation, if any, has not been determined, however, since WSFS is BIF insured
it is not expected to result in any material affect on results of operations.
Prompt Corrective Action. Federal banking regulators are required to
take prompt corrective action if an institution fails to satisfy certain minimum
capital requirements, including a leverage limit, a risk-based capital
requirement, and any other measure deemed appropriate by the federal banking
regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. An institution that
fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses.
The OTS adopted regulations, effective December 19, 1992, implementing
the prompt corrective action provisions of FDICIA. Under the regulations, the
OTS measures a savings institution's capital adequacy on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). A savings institution that is not subject to an order or
written directive to meet or maintain a specific capital level is deemed "well
capitalized" if it also has: (i) a total risk- based capital ratio of 10% or
greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a
leverage ratio of 5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
-24-
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
composite 1 CAMEL rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of tangible equity to total
assets of less than 2.0%.
Proposed Standards for Safety and Soundness. Each federal banking
agency is required to establish non-capital safety and soundness standards for
institutions under its authority. The federal banking agencies, including the
OTS, have established standards covering internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, asset
growth and compensation, fees, and benefits, and have proposed standards for
asset quality and earnings sufficiency. An institution which fails to meet any
of these standards, would be required to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions.
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of
Pittsburgh, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Pittsburgh in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. WSFS was in compliance with
this requirement with an investment in FHLB of Pittsburgh stock at December 31,
1995, of $15.9 million. The FHLB of Pittsburgh offers advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Pittsburgh. Long term advances may only be made for the
purpose of providing funds for residential housing finance. At December 31,
1995, the Bank had advances outstanding from the FHLB of $307.2 million.
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The Bank was in compliance with applicable liquidity requirements
at December 31, 1995.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $54.0 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of December 31, 1995, the Bank met its reserve
requirements.
-25-
TAXATION
Federal Income Taxation
The Company and its subsidiaries, as an affiliated group, file a
consolidated corporate income tax return each year for federal income tax
purposes. Among other things, a consolidated return allows the affiliated group
to avoid or defer tax on certain intercompany distributions and transfers and,
under certain circumstances, to reduce the taxable income of one member of the
group using the loss generated by another member.
Thrift institutions such as the Bank are generally subject to the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in the
same general manner as other corporations. Further, thrift institutions which
satisfy certain conditions, including the asset composition test under Section
7701(a)(19) of the Code, may determine their bad debt deduction based upon an
annual addition to a bad debt reserve (the "reserve method") rather than upon
the actual amount of worthless debts arising during the year (the "specific
charge-off method"). The Bank maintained a bad debt reserve for tax purposes
through 1986 but failed to satisfy the asset composition test in fiscal year
1987 and therefore could not continue to use the thrift bad debt reserve method.
Moreover, because the Bank at the time had total assets in excess of $500
million, it could not use the reserve method available to commercial banks but
instead was required to switch to the specific charge-off method. As a result of
the change to the specific charge-off method, the Bank recaptured into income in
1987 the entire balance of its bad debt reserve.
For taxable years beginning after December 31, 1986, the Code imposes
an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) 75% of adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more than
90% of AMTI. Certain payments of alternative minimum taxes may be used as
credits against regular tax liabilities in future years. In addition, for
taxable years after 1986 and before 1996, corporations, including thrift
institutions, are also subject to an environmental tax equal to 0.12% of the
excess of AMTI for the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2.0 million.
As of December 31, 1995, the Company had available net operating loss
("NOL") carryforwards for federal and state tax purposes of approximately $17.1
million and $7.8 million, respectively, which may be used to reduce future
income taxes. There are restrictions applicable to approximately $17.1 million
of the NOL carryforwards attributable to Providential Home Income Plan, Inc., a
100% wholly owned subsidiary of WSFS which may only be used to offset future
taxable income generated on a separate return limitation year ("SRLY") basis.
These SRLY losses are additionally limited to two separate changes in control of
Providential. Because the restrictions imposed under Section 382 of the Code
restrict the annual amount of NOL carryforwards available for use, it could
result in the loss of a substantial portion of Providential's NOL due to
expiration.
-26-
The Company's federal income tax returns have not been audited. At
present, the Company is not aware of any present or pending federal or state tax
examinations nor any notice that would materially change the reported amount of
tax due.
See Note 12 to the Consolidated Financial Statements, incorporated
herein by reference, for further information regarding taxation.
State Income Taxation
As a Delaware corporation, the Company is subject to an annual
franchise tax based on the number of shares of common and preferred stock
authorized under its Certificate of Incorporation. The Bank and its subsidiaries
each file separate state tax returns. The Bank is also subject to annual
franchise taxes in Delaware based on its pretax net income.
-27-
Item 2. Properties
The following table sets forth the location and certain additional
information regarding the Company's offices and other material properties at
December 31, 1995.
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------- ---------- --------------- --------
(In Thousands)
WSFS(3):
- ----
Main Office (1)* Owned $ 1,963 $174,559
9th & Market Streets
Wilmington, DE 19899
Union Street Branch* Leased 1998 68 52,926
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch* Leased 1998 49 19,865
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch* Leased 1998 29 71,379
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch* Leased 1998 20 59,155
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch* Leased 1998 40 89,093
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch* Leased 2000 16 51,345
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Tri-State Mall Branch Leased 1996 5 19,054
I-95 & Naamans Road
Claymont, DE 19803
Claymont Branch Owned 73 24,337
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch* Leased 1998 17 34,847
I-95 & Route 273
Newark, DE 19720
College Square Shopping Center Branch* Leased 2007 132 57,345
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch* Leased 2013 157 59,656
Route 13
New Castle, DE 19720
Middletown Square Shopping Center Leased 2015 168 10,295
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19720
Dover Leased 2000 108 174
Inside Metro Food Market
Rt 13 & White Oak Road
Dover, DE 19901
Operations Center Owned 1,160 na
2400 Philadelphia Pike
Wilmington, DE 19703
-28-
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------- ---------- --------------- --------
(In Thousands)
WSFS(3):
- ----
Community Credit Corporation Leased 1996 13 na
- ----------------------------
10 Penn Mart Shopping Center
New Castle, DE 19720
Providential Home Income Plan, Inc. Leased 1997 0 na
- -----------------------------------
475 Sansome Street
Suite 540
San Francisco, CA 94111 ---------
Total at the Bank $724,030
========
* Represents ATM locations.
(1) Includes location of executive offices and approximately $63.8 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and
equipment totalled $6.4 million at December 31, 1995.
(3) In March 1995, the Bank acquired $8.1 million of deposits of a branch in
Middletown, DE from another savings institution.
(4) On July 28, 1995, the Bank sold/transferred the deposits at four
Fidelity Federal branches to Commonwealth Savings Bank of Valley Forge,
Pennsylvania.
(5) In February 1996, the Bank acquired $10.5 million of deposits from
another financial institution located in Dover, Delaware. These
deposits were transferred to the Bank's branch located inside the Metro
Food Market in Dover.
Item 3. Legal Proceedings
There are no material legal proceedings to which the Company or the
Bank is a party or to which any of its property is subject except as discussed
in Note 14 to the Consolidated Financial Statements for the year ended December
31, 1995.
Item 4. Submissions of Matters To a Vote of Security Holders
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1995 through the solicitation of
proxies or otherwise.
-29-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on the NASDAQ
National Market System under the symbol WSFS. At December 31, 1995, the
Corporation had 2,733 common stockholders of record. The following table sets
forth the range of high and low sales prices for the Common Stock for each full
quarterly period within the two most recent fiscal years. There have been no
dividends declared or paid on the Common Stock since the first quarter of 1990.
Payment of dividends by the Bank is subject to regulatory restrictions and the
covenants of the Senior Notes. For additional information regarding such
restrictions, see Note 9 to the Consolidated Financial Statements.
The closing market price of the common stock at December 31, 1995 was
$9.
Stock Price Range
---------------------------------
Low High
--- ----
1995 1st $ 3 1/2 $ 4 1/4
2nd 4 5 7/8
3rd 5 5/8 8 5/8
4th 7 3/8 10
1994 1st $ 3 1/4 $ 4 3/8
2nd 3 1/4 4 1/8
3rd 3 3/8 4 1/8
4th 3 3/8 4 1/8
-30-
Item 6. Selected Financial Data
1995 1994 1993 1992 1991
-------- -------- -------- ------- -------
(Dollars in Thousands, except per share data)
At December 31,
- ---------------
Total assets.................................... $1,218,826 $1,195,686 $ 994,692 $1,010,079 $1,146,533
Net loans (1)................................... 792,184 710,776 687,492 763,799 828,591
Investment securities (2)....................... 28,772 64,144 54,346 59,585 105,686
Investment in reverse mortgages, net............ 35,614 32,172 24,913
Securities purchased under agreements
to resell...................................... 7,098 45,599
Mortgage-backed securities (2).................. 237,132 262,748 43,750 40,898 12,152
Deposits........................................ 724,030 809,707 806,605 859,147 987,373
Borrowings (3).................................. 370,795 295,244 107,864 110,673 128,329
Senior Notes.................................... 29,850 32,000 32,000
Stockholders' equity............................ 73,546 45,274 38,693 32,267 15,572
Number of full-service branches (4)............. 14 16 16 16 18
For the Year Ended December 31,
- -------------------------------
Interest income................................. $ 99,936 $ 80,666 $ 72,320 $ 85,711 $ 117,241
Interest expense................................ 58,067 44,652 38,508 55,039 86,166
Income before extraordinary item................ 27,008 8,070 6,359 4,822 7,185
Net income ..................................... 27,008 8,070 6,359 4,822 11,255
Earnings per share
Primary:
Income before extraordinary item............. 1.84 .55 .88 .89 1.49
Net income .................................. 1.84 .55 .88 .89 2.33
Fully diluted:
Income before extraordinary item............. 1.84 .55 .44 .64 1.49
Net income .................................. 1.84 .55 .44 .64 2.33
Interest rate spread............................ 3.14% 3.11% 3.39% 2.88% 2.45%
Net interest margin............................. 3.57 3.39 3.64 3.02 2.50
Return on average equity........................ 45.68 19.64 18.12 23.15 127.25
Return on average assets........................ 2.21 .73 .65 .44 .84
Average equity to average assets................ 4.84 3.69 3.57 1.92 .66
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances, securities sold under agreements to
repurchase and municipal bond repurchase obligations.
(4) During 1992, WSFS and Fidelity Federal each closed and consolidated the
operations of one branch into other branches. During 1995, WSFS's
wholly-owned subsidiary, Fidelity Federal, sold the deposits of four
branches. The remaining assets, liabilities and equity were merged into
WSFS. Additionally, WSFS opened a new branch and acquired a branch from
another institution in 1995.
-31-
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
WSFS Financial Corporation (the "Corporation") is a savings and loan
holding company headquartered in Wilmington, Delaware. Substantially, all of
the Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the "Bank" or "WSFS"), the largest thrift institution
headquartered in Delaware and among the five largest financial institutions in
the state on the basis of total deposits. The Corporation's market area is the
Mid-Atlantic region of the United States which is characterized by a diversified
manufacturing and service economy. The banking operations of WSFS are presently
conducted from 14 retail banking offices located in the Wilmington and Dover,
Delaware area. The Bank provides residential real estate, commercial real
estate, commercial and consumer lending services and funds these activities
primarily by attracting retail deposits and borrowings. Deposits are insured by
the Federal Deposit Insurance Corporation.
Additional subsidiaries of the Bank include WSFS Credit Corporation
("WCC"), which is engaged primarily in motor vehicle leasing, and 838 Investment
Group, Inc. (formerly Star States Financial Services, Inc.) which markets
various insurance products and mutual funds through the Bank's branch system. In
June 1994, the Bank formed a consumer finance subsidiary, Community Credit
Corporation ("CCC") which opened its first office in August 1994. CCC
specializes in consumer loans secured by first and second mortgages. In November
1994, the Bank acquired Providential Home Income Plan, Inc. ("Providential"), a
San Francisco, California-based reverse mortgage lender. An additional
subsidiary, Star States Development Company, is currently phasing down its real
estate investments and developments.
The long-term goal of the Corporation is to be a high-performing financial
services company focused on its core savings bank business while developing
unique niches in retail asset generation. Beginning in 1994, the Corporation
focused its efforts on developing new businesses and avenues for asset growth
which are expected to yield returns in the future. Toward that end, the
Corporation opened the consumer finance subsidiary, CCC, and acquired
Providential. These retail investments, combined with the growth in the
investment portfolios, have favorably impacted net interest income and earnings
since 1994 and are expected to provide favorable returns on investments in the
coming years. Such investments for the future were possible since the Bank
became "well-capitalized" in the second quarter of 1994. This was largely due to
continued operating earnings and the Corporation's capital infusion of $25.2
million of the proceeds of a $32.0 million debt offering which was completed in
December 1993. In the third quarter of 1995, the Bank recognized a gain of $12.4
million, net of taxes and a supplemental contribution to the Corporation's
401(k) Plan, from the sale of deposits and certain real estate of four branches
of its former bank subsidiary, Fidelity Federal Savings and Loan Association
(the "Association"), located in the northeast section of Philadelphia,
Pennsylvania. This transaction has allowed the Corporation to focus on its
primary market area while enhancing capital.
During the 1980's, the Corporation had pursued a business strategy of
growth and diversification by engaging in such activities as real estate
brokerage, vehicle and equipment leasing and real estate development. This prior
strategy combined with a recession in the U.S. economy resulted in significant
operating and asset quality problems. These problems culminated in a record net
operating loss of $85.5 million in 1990. From 1991 through 1993, the Corporation
had focused on restructuring its operations to achieve compliance with
regulatory capital requirements while reducing nonperforming assets. These
efforts resulted in the Bank achieving full regulatory capital compliance by
-32-
completing the previously discussed debt offering as well as twelve consecutive
quarters of earnings. During 1994, earnings continued to improve as the
Corporation recorded record earnings from operations of $8.1 million.
During 1995, the Corporation has reported higher earnings and continued
reductions in nonperforming assets. These operating improvements are the result
of earnings and operational strategies the Corporation has undertaken over the
last several years. For these reasons, as well as the significant changes and
ongoing consolidation in the financial services industry, the Corporation's
Board of Directors selected a financial advisor to assist the Board in
considering strategic alternatives, including a possible sale of the
Corporation. On March 4, 1996, the Board of Directors announced its intention to
operate the Corporation as an independent financial institution.
The following discussion focuses on the major components of operations and
presents an overview of the significant changes in the Corporation's results of
operations for the past three fiscal years and financial condition during the
past two fiscal years. This discussion should be reviewed in conjunction with
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this Annual Report.
RESULTS OF OPERATIONS
The Corporation recorded earnings of $27.0 million in 1995 of which $14.6
million was from operations. Both amounts represent new record earning levels in
the Corporation's 164-year history. Earnings for 1994 and 1993 were $8.1 million
and $6.4 million, respectively. The growth in net interest income during the
three years ended December 31, 1995 was a significant factor contributing to the
Corporation's improved earnings performance. Earnings for 1995 were also
significantly impacted by the sale of the Association's deposits in the third
quarter of 1995 which resulted in a gain of $12.4 million after taxes and a
supplemental contribution to the Corporation's 401(k) Plan. In addition,
reductions in nonperforming assets have favorably impacted earnings since 1993.
Net Interest Income. Net interest income is the most significant component
of operating income to the Corporation. Net interest income is reliant upon the
levels of interest-earning assets and interest-bearing liabilities and the
difference or "spread" between the respective yields earned and rates paid. The
interest rate spread is influenced by regulatory, economic and competitive
factors that affect interest rates, loan demand and deposit outflows. The level
of nonperforming loans can also impact the interest rate spread by reducing the
yield on the loan portfolio.
Net interest income increased to $41.9 million in 1995 compared with $36.0
million and $33.8 million in 1994 and 1993, respectively. During these three
years, the growth in interest-earning assets outpaced interest-bearing
liabilities and contributed to the rise in net interest income. The
implementation of an investment growth strategy in 1994, the acquisition of a
$47.5 million portfolio of discounted commercial loans and commercial mortgages
in July 1995 and the reduction in nonperforming assets, also contributed to the
growth in net interest income.
Net interest income can be analyzed in terms of the impact of changing
rates and changing volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth certain information regarding
changes in net interest income attributable to changes in the volumes of
interest-earning assets and interest-bearing liabilities and changes in the
rates for the periods indicated. For each category of interest-earning assets
-33-
and interest-bearing liabilities, information is provided on changes
attributable to: (i) changes in volume (change in volume multiplied by prior
year rate); (ii) changes in rates (change in rate multiplied by prior year
volume); and (iii) net change. Changes due to the combination of rate and volume
changes (changes in volume multiplied by changes in rate) are allocated
proportionately between changes in rate and changes in volume.
Year Ended December 31,
-----------------------------------------------------------------------
1995 vs. 1994 1994 vs. 1993
-------------------- ------------------
Volume Rate Net Volume Rate Net
-------- ----- --- ------ ---- ---
(In Thousands)
Interest income:
Real estate loans (1)............. $ 2,970 $ 8,057 $11,027 $ (1,560) $ 163 $ (1,397)
Commercial loans................. 123 781 904 (508) (276) (784)
Consumer loans................... 2,079 539 2,618 (695) (454) (1,149)
Loans held for sale.............. 91 (2) 89 (210) 20 (190)
Mortgage-backed securities....... 2,714 577 3,291 10,917 153 11,070
Investment securities (2)........ (240) 511 271 (618) (618)
Investment in reverse mortgages... 697 (1,096) (399) 1,241 (137) 1,104
Other............................. 287 1,182 1,469 (200) 510 310
-------- ------- ------- -------- --------- ---------
8,721 10,549 19,270 8,367 (21) 8,346
-------- ------- ------- -------- --------- ---------
Interest expense:
Deposits:
Money market and interest-
bearing demand............. (846) 638 (208) (20) (214) (234)
Savings....................... (753) 508 (245) (41) (721) (762)
Time.......................... 1,460 5,701 7,161 (1,371) 324 (1,047)
FHLB of Pittsburgh advances...... 4,315 (56) 4,259 6,006 (2,631) 3,375
Senior notes ................... (146) 10 (136) 3,606 3,606
Other borrowed funds............ 2,264 320 2,584 1,595 (389) 1,206
-------- ------- ------- -------- --------- --------
6,294 7,121 13,415 9,775 (3,631) 6,144
-------- ------- ------- -------- --------- --------
Net Change...................... $ 2,427 $ 3,428 $ 5,855 $ (1,408) $ 3,610 $ 2,202
======== ======= ======== ======== ======== ========
(1) Includes commercial mortgage loans.
(2) No adjustments have been made to restate the yields on tax-exempt
obligations to a tax-equivalent basis. The income differential is not
material.
The $5.9 million increase in net interest income between 1995 and 1994 was
attributable to both changes in rate of $3.4 million and changes in volume of
$2.4 million. The changes in volume and rate reflect the various events and
transactions which have occurred between periods. The increase in net interest
income of $2.2 million between 1994 and 1993 was primarily attributable to
changes in rate of $3.6 million offset in part by changes in volume of $1.4
million. This rate related increase was due to FHLB advances, of which $85.0
million matured in 1994 and were replaced by advances with rates that were
approximately 2% lower than the previous rate.
The following table, in thousands except yield and rate data, provides
information regarding the balances of and yields and rates on interest-earning
assets and interest-bearing liabilities during the end of the periods indicated
and at December 31, 1995. Rates at December 31, 1995 do not reflect yield
adjustments, such as premiums and discounts, which are not considered material.
-34-
Year Ended December 31,
--------------------------------------------------------------
1995 1994
---------------------------- -----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (1) (2):
Real estate loans (3)............. $ 563,172 $ 53,077 9.42% $ 527,781 $ 42,050 7.97%
Commercial loans.................. 24,687 2,837 11.49 23,276 1,933 8.30
Consumer loans.................... 181,323 17,150 9.46 159,127 14,532 9.13
----------- --------- ----------- ---------
Total loans...................... 769,182 73,064 9.50 710,184 58,515 8.24
Mortgage-backed securities (4)........ 252,269 16,694 6.62 210,301 13,403 6.37
Loans held for sale................... 1,539 128 8.32 445 39 8.76
Investment securities (4)............. 48,514 3,367 6.94 52,365 3,096 5.91
Investment in reverse mortgages....... 34,705 2,492 7.18 27,021 2,891 10.70
Other interest-earning assets......... 66,837 4,191 6.27 60,888 2,722 4.47
----------- --------- ----------- ---------
Total interest-earning assets..... 1,173,046 99,936 8.52 1,061,204 80,666 7.60
--------- ---------
Allowance for loan losses............. (23,201) (22,077)
Cash and due from banks............... 25,207 26,794
Other noninterest-earning assets...... 45,963 46,569
----------- ----------
Total assets...................... $1,221,015 $1,112,490
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing $ 71,257 1,865 2.62 $ 91,767 2,073 2.26
demand
Savings........................... 168,507 4,253 2.52 200,103 4,498 2.25
Time.............................. 472,941 27,948 5.91 443,401 20,787 4.69
----------- --------- ----------- ---------
Total interest-bearing deposits. 712,705 34,066 4.78 735,271 27,358 3.72
FHLB of Pittsburgh advances........... 259,071 15,679 6.05 187,946 11,420 6.08
Senior notes.......................... 30,710 3,499 11.39 32,000 3,635 11.36
Other borrowed funds.................. 77,024 4,823 6.26 40,367 2,239 5.55
----------- --------- ----------- ---------
Total interest-bearing liabilities. 1,079,510 58,067 5.38 995,584 44,652 4.49
--------- ---------
Noninterest-bearing demand deposits... 62,880 61,207
Other noninterest-bearing liabilities. 19,502 14,605
Stockholders' equity.................. 59,123 41,094
----------- -----------
Total liabilities and stockholders'
equity $1,221,015 $1,112,490
========== ===========
Excess of interest-earning assets
over interest-bearing liabilities. $ 93,536 $ 65,620
========== ==========
Net interest and dividend income...... $ 41,869 $ 36,014
========== =========
Interest rate spread.................. 3.14% 3.11%
==== ====
Net interest margin................... 3.57% 3.39%
==== ====
Net interest and dividend income to
total average assets.............. 3.43% 3.24%
==== ====
Year Ended December 31, At December 31,
----------------------------- -------------------
1993 1995
----------------------------- -------------------
Average Yield/
Balance Interest Rate Balance Rate
------- -------- ---- ------- ----
Assets
Interest-earning assets:
Loans (1) (2):
Real estate loans (3)............. $ 547,271 $ 43,447 7.94% $ 588,450 8.55%
Commercial loans.................. 29,148 2,717 9.32 23,823 10.01
Consumer loans.................... 166,716 15,681 9.41 199,733 9.26
---------- --------- ----------
Total loans...................... 743,135 61,845 8.32 812,006 8.51
Mortgage-backed securities (4)........ 38,914 2,333 6.00 237,132 6.91
Loans held for sale................... 2,862 229 8.00 4,345 7.69
Investment securities (4)............. 62,817 3,714 5.91 28,772 6.21
Investment in reverse mortgages....... 15,502 1,787 11.53 35,614 11.56
Other interest-earning assets......... 66,067 2,412 3.65 52,128 5.91
---------- --------- ----------
Total interest-earning assets..... 929,297 72,320 7.78 1,169,997 8.27
---------
Allowance for loan losses............. (24,582) (24,167)
Cash and due from banks............... 26,797 31,135
Other noninterest-earning assets...... 51,215 41,861
---------- ----------
Total assets...................... $ 982,727 $1,218,826
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing $ 92,580 2,307 2.49 $ 57,312 2.73
demand
Savings........................... 201,677 5,260 2.61 153,931 2.47
Time.............................. 472,432 21,834 4.62 442,545 5.70
---------- --------- ----------
Total interest-bearing deposits. 766,689 29,401 3.83 653,788 4.66
FHLB of Pittsburgh advances........... 96,541 8,045 8.33 307,206 6.03
Senior notes.......................... 263 29 11.00 29,850 11.39
Other borrowed funds.................. 13,061 1,033 7.91 63,589 6.08
---------- --------- ----------
Total interest-bearing liabilities. 876,554 38,508 4.39 1,054,433 5.32
---------
Noninterest-bearing demand deposits... 57,143 70,242
Other noninterest-bearing liabilities. 13,936 20,605
Stockholders' equity.................. 35,094 73,546
---------- ----------
Total liabilities and stockholders'
equity $ 982,727 $1,218,826
========== ==========
Excess of interest-earning assets
over interest-bearing liabilities. $ 52,743
==========
Net interest and dividend income...... $ 33,812
==========
Interest rate spread.................. 3.39%
====
Net interest margin................... 3.64%
====
Net interest and dividend income to
total average assets.............. 3.44%
====
(1) Nonperforming loans are included in average balance computations.
(2) Balances are reflected net of unearned income.
(3) Includes commercial mortgage loans.
(4) Includes securities available for sale.
-35-
Interest income and expense increased $19.3 million and $13.4 million,
respectively, between 1995 and 1994. In general, the interest rate environment
between periods, growth in interest-earning assets and the continued reduction
in the level of nonperforming assets were key factors contributing favorably to
net interest income. The increase in net interest income year over year was also
attributable to the full year impact of the investment growth strategy which was
implemented in phases throughout the first three quarters of 1994. In addition,
the Bank's acquisition of a $47.5 million portfolio of discounted commercial
loans and commercial mortgages in July 1995 contributed favorably to net
interest income. The weighted average yield on this acquired portfolio is
approximately 18%.
The above favorable items were partially offset by the Association's deposit
sale and an adjustment to the yield on the Corporation's investment in reverse
mortgages which occurred in the third quarter of 1995. The unfavorable impact of
the deposit sale was the result of the higher level of liquidity maintained
prior to the consummation of the transaction. In addition, net interest income
was unfavorably impacted as lower costing retail deposits were replaced with
higher rate borrowings. A $1.7 million reduction in interest income on the
Corporation's investment in reverse mortgages was the result of reductions in
the yield reflecting changes in the underlying assumptions regarding current and
future real estate values.
Between 1994 and 1993, interest income and expense increased $8.3 million
and $6.1 million, respectively. These increases were due in part to the
implementation of the investment growth strategy during 1994 and the issuance of
the 11% Senior Notes in December 1993.
Prevailing economic conditions greatly influence net interest income and the
levels of interest-earning assets and interest-bearing liabilities. Management
anticipates a moderate decline in interest rates in the early part of 1996 as
economic growth stabilizes. The projected interest rate environment in
conjunction with current asset/liability management strategies are anticipated
to favorably impact net interest income.
Provision for Loan Losses. The Corporation considers, among other
things, identifiable and inherent risks in its loan portfolio in periodically
establishing the amount of the provision for loan losses, and the amount of the
allowance for loan losses. Such risks are determined based upon an ongoing
review of the loan portfolio, which includes the identification and assessment
of adverse situations that may affect borrowers' debt servicing ability, an
analysis of overall portfolio quality and prior loan loss experience as well as
an appraisal of current and expected economic trends and conditions.
Accordingly, the allowance for loan losses is maintained at a level which
management deems adequate to provide for potential losses.
The provision for loan losses decreased from $1.7 million in 1994 to $1.4
million in 1995. The $2.6 million provision in 1993 was due to the effects of
certain nonaccruing loans including the addition of one nonperforming asset
totalling $9.3 million. The Corporation's continued efforts to resolve and
collect problem loans, including nonaccrual and restructured loans, during 1995
resulted in the lowest level of nonaccruing loans since 1988.
The allowance for loan losses was $24.2 million at December 31, 1995, an
11.4% increase from the level reported at December 31, 1994. The loan loss
allowance as a percentage of total loans remained level at 2.90% versus 2.89% in
1995 and 1994, respectively. During the third quarter of 1995, a $2.6 million
allowance was established on a commercial/commercial real estate portfolio
purchased at discounted prices.
-36-
During 1996, the Corporation will continue to adjust the provision for
loan losses periodically as necessary to maintain the allowance for loan losses
at what is deemed to be an adequate level, based on the previously discussed
criteria. As the provision is primarily a function of credit quality, changes in
the provision for loan losses are contingent upon the economic conditions of the
Corporation's market area and the economic prospects of borrowers.
Other Income. Other income grew $15.4 million during 1995 to $22.6
million. This significant increase resulted predominantly from a pretax gain of
$14.2 million on the sale of the Association's deposits during the third quarter
of 1995. Other income for 1995 was also favorably impacted by growth in loan
servicing fees and services charges on deposits which increased $590,000 and
$288,000, respectively.
Other income declined $760,000 between 1994 and 1993 to $7.2 million. The
most significant factor contributing to this decline was gains on the sales of
mortgage loans which were $675,000 lower in 1994. This decline was attributable
to the slowdown of loan originations in 1994 as compared to 1993 when a strong
refinance market existed. Conversely, an increase in leasing activity during
1994 contributed to a rise in loan servicing fees of $485,000.
Other Expenses. Other expenses increased $2.9 million during 1995 to $37.3
million. Significant increases occurred in salaries, employee benefits and the
net costs of assets acquired through foreclosure. These increases were partially
offset by reductions in the deposit insurance premium, equipment and marketing
expenses as well as professional fees.
Salaries increased $3.7 million during 1995. The rise in salaries is
primarily attributable to an increase of $2.6 million in incentive related
compensation. Included in such compensation were higher expenses associated with
stock appreciation rights, resulting from the significant rise in the
Corporation's stock price during 1995. Employee benefits, which increased $1.1
million during 1995, included a supplemental contribution of $734,000 to the
employee 401(k) Plan related to the sale of the Association's deposits. During
1994, salary levels were $1.7 million higher than 1993. This increase was due to
higher staffing levels and an incentive plan which was implemented in 1994.
Staffing increases in 1994 resulted from the Corporation's investments in new
businesses such as CCC and Providential. The increase of $290,000 in employee
benefits during 1994 corresponds to the rise in salaries. Salaries and benefits
are expected to remain somewhat level in 1996.
Equipment expenses decreased $887,000 in 1995 and $64,000 in 1994. The
decrease between 1995 and 1994 reflect computer conversion costs which were
fully amortized by the end of 1994. Equipment expenses are expected to remain
level through 1996.
Marketing expenses decreased $420,000 between 1995 and 1994. These cost
reductions reflect savings from the Association's deposit sale as well as
management efforts to control costs. The increase in marketing expenses between
1994 and 1993 were attributable to management's efforts to promote its retail
banking operations. Marketing expenses are expected to decline in 1996.
Professional fees were reduced $502,000 during 1995 and $491,000 in 1994.
These decreases are primarily the result of a steady reduction in nonperforming
assets over the past several years. As the level of professional fees are
partially reliant upon the level of problem assets, future changes in these
expenses are dependent upon the level of such assets.
-37-
Federal deposit insurance premiums decreased $1.2 million in 1995 and
$197,000 in 1994. The decrease in 1995 reflects an approximately 80% reduction
in such premiums assessed by the FDIC. The decrease in 1994 reflects lower
deposit levels between 1994 and 1993. Since the Bank is currently considered
well-capitalized by the OTS, FDIC premiums are expected to be nominal in 1996.
The net costs of foreclosed assets increased $924,000 between 1995 and
1994. This increase was due entirely to the increase in the provision for losses
on foreclosed assets which increased $927,000 in 1995. Conversely, the provision
for losses on foreclosed assets, which declined $2.0 million between 1994 and
1993 was the primary factor contributing to the $1.4 million reduction in the
net costs of foreclosed assets during 1994. Due to the reduction of
nonperforming assets in 1995, related expenses are expected to decline in 1996.
Income Taxes. The Corporation recorded a $1.3 million tax benefit for the
year ended December 31, 1995 compared to tax benefits of $1.0 million and $1.7
million for the years ended December 31, 1994 and 1993, respectively. The
provision (benefit) for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision (benefit) for income taxes
accordingly. Management expects that it will be fully taxable in 1996 as a
result of fully utilizing its operating loss and tax credit carryforwards in
fiscal year 1995. For additional information regarding the Corporation's tax
provision and net operating loss carryforwards see Note 12 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
Consolidated assets grew $23.1 million, or 2%, during the year. Asset
growth was primarily in commercial mortgage loans and was offset in part by
reductions in investments and mortgage-backed securities. Total liabilities
decreased $5.1 million during 1995. This decrease occurred primarily in deposits
almost entirely offset by advances from the Federal Home Loan Bank of
Pittsburgh. Stockholders' equity grew $28.3 million to $73.5 million at December
31, 1995.
Mortgage-backed securities. During 1995, mortgage-backed securities
decreased by $25.6 million. This decrease was due to principal repayments. No
purchase transactions occurred during the year.
Investments. Federal funds sold and securities purchased under agreement
to resell increased $8.4 million and interest-bearing deposits in other banks
decreased $5.1 million. Investment securities decreased $35.4 million primarily
as a result of the net sales of $23.7 million of U.S. government securities, the
call of a $10.0 million FHLB step-up note and the maturities and calls on
municipal and corporate bonds of $350,000 and $2.3 million, respectively.
Loans. Net loans grew $77.3 million to $787.8 million at December 31,
1995. This increase is primarily due to the acquisition of a $47.5 million
portfolio of discounted commercial loans and commercial mortgages. Growth of
$23.1 million in consumer loans, $12.3 million in residential mortgages and $9.7
million in leases also contributed to this increase.
-38-
Deposits. Deposits decreased $85.7 million during 1995. This decrease is
largely attributable to the July 1995 sale of the Association's $197.3 million
in deposits. Offsetting this decrease was the addition of $63.8 million in
brokered certificates of deposits and $8.1 million in deposits from a branch
acquisition in the first quarter of 1995. Also, interest credited to deposits
totalled $24.4 million for a net increase in retail banking deposits of $14.1
million. The table below depicts the changes in net deposits over the last three
years:
Year Ended December 31,
-----------------------------------------
1995 1994 1993
-------- ------ -------
(In Millions)
Beginning balance........................................ $ 809.7 $ 806.6 $ 859.1
Interest credited...................................... 24.4 22.9 24.5
Deposits (withdrawals), net............................ 79.1 (19.8) (77.0)
Deposits acquired (sold), net.......................... (189.2)
-------- ------- -------
Ending balance........................................... $ 724.0 $ 809.7 $ 806.6
======= ======= =======
Borrowings. Total borrowings increased $73.4 million during 1995.
Approximately $80.9 million of FHLB advances were added to fund the sale of the
Association's deposits as discussed previously.
Stockholders' Equity. During 1995, stockholders' equity increased $28.3
million to $73.5 million. Included in this increase was net income of $27.0
million and a $1.3 million reduction in net unrealized losses on securities
available-for-sale, net of tax. At December 31, 1995, the Bank was in compliance
with all regulatory capital requirements and met the regulatory classification
of a "well-capitalized institution." Tangible, core, tier-1 risk-based and
risk-based capital to assets ratios were 7.85%, 7.85%, 11.14% and 12.29%,
respectively.
Asset/Liability Management. The primary asset/liability management goal of
the Corporation is to manage and control its interest rate risk, thereby
reducing its exposure to fluctuations in interest rates, and achieving
sustainable growth in the interest margins over the long term. Other objectives
of asset/ liability management include: (1) ensuring adequate liquidity and
funding, (2) maintaining a strong capital base and (3) maximizing net interest
income opportunities.
In general, interest rate risk is mitigated by closely matching the
maturities or repricing periods of interest-sensitive assets and liabilities to
ensure a favorable interest rate spread. Management regularly reviews the
Corporation's interest rate sensitivity, and uses a variety of strategies as
needed to adjust that sensitivity within acceptable tolerance ranges established
by management. Changing the relative proportions of fixed-rate and
adjustable-rate assets and liabilities is one of the primary strategies utilized
by the Corporation to accomplish this objective. The development of the
Corporation's portfolio of adjustable-rate consumer loans in its primary market
area as well as the continued reduction of nonperforming assets have been two of
the key tactics used in conjunction with this strategy since 1991. With the
improvement in the ratio of interest-sensitive assets which mature or reprice
within one year to interest-sensitive liabilities with similar maturities
(interest-sensitivity gap) since 1991, the Corporation began to hold for
investment certain of its originated fixed-rate mortgage loans with terms less
than 30 years. All other fixed-rate residential mortgage loans originated by the
Corporation continue to be sold.
-39-
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities and is considered
negative when the amount of interest-rate sensitive liabilities exceeds the
amount of interest-rate sensitive assets. Generally, during a period of rising
interests rates, a positive gap would result in an increase in net interest
income while a negative gap would adversely affect net interest income.
The repricing and maturities of the Corporation's interest-earning assets
and interest-bearing liabilities at December 31, 1995 are set forth in the
following table.
Less than One to Over
One Year Five Years Five Years Total
---------- ----------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Real estate loans (1).................... $ 369,780 $ 138,011 $ 88,672 $ 596,463
Commercial loans......................... 21,027 1,736 1,131 23,894
Consumer loans........................... 72,640 117,920 22,545 213,105
Mortgage-backed securities............... 41,401 96,807 98,924 237,132
Loans held for sale...................... 4,402 4,402
Investment in reverse mortgages.......... 2,255 11,643 21,716 35,614
Investment securities.................... 6,336 8,849 13,587 28,772
Other investments........................ 52,128 52,128
---------- ----------- ----------- ----------
569,969 374,966 246,575 1,191,510
--------- --------- ----------- ----------
Interest-bearing liabilities:
Money market and interest-bearing
demand deposits....................... 15,275 42,037 57,312
Savings deposits......................... 34,727 119,204 153,931
Time deposits............................ 317,167 122,403 2,975 442,545
FHLB advances............................ 83,969 213,237 10,000 307,206
Senior notes............................. 29,850 29,850
Other borrowed funds..................... 21,974 41,615 63,589
----------- ----------- ------------ ----------
473,112 377,255 204,066 1,054,433
---------- ---------- ---------- ---------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
("interest-sensitive gap")............... $ 96,857 $ (2,289) $ 42,509 $ 137,077
========== ========== ========== ==========
Interest-sensitive assets/interest-sensitive
liabilities............................... 120.47%
Interest-sensitive gap as a percent of total
assets.................................... 7.95%
(1) Includes commercial mortgage loans.
To provide a more accurate one-year gap position of the Corporation,
certain deposit classifications are based on the interest sensitive attributes
and not on the repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that 30%
of money market and interest-bearing demand deposits are sensitive to interest
rate changes and that 12% of savings deposits are sensitive to interest rate
-40-
changes. However, deposit products with interest rates based on a particular
index are classified according to the specific repricing characteristic of the
index. Accordingly, the interest sensitive portion is classified in the less
than one year category with the remainder in the over five years category.
Deposit rates other than time deposit rates are variable, and changes in
deposit rates are generally subject to management's discretion and not related
to any particular index.
The Corporation's positive interest-sensitivity gap indicates that rising
interest rates could favorably impact net interest income and falling interest
rates could negatively impact net interest income. However, the interest
sensitivity table does not provide a comprehensive representation of the impact
of interest rate changes on net interest income. Each category of assets or
liabilities will not be affected equally or simultaneously by changes in the
general level of interest rates. Even assets and liabilities which contractually
reprice within the same period may not, in fact, reprice at the same price or
the same time. It is also important to consider that the table represents a
specific point in time. Variations can occur daily as the Bank adjusts its
interest sensitivity throughout the year.
NONPERFORMING ASSETS
The Corporation's results of operations have been negatively affected by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued,
but not collected at the date a loan is placed on nonaccrual status, is reversed
and charged against interest income. In addition, the amortization of net
deferred loan fees is suspended when a loan is placed on nonaccrual status.
Subsequent cash receipts are applied either to the outstanding principal balance
or recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest.
-41-
The following table sets forth the Corporation's nonperforming assets,
restructured loans and past due loans at the dates indicated. Past due loans are
loans contractually past due 90 days or more as to principal or interest
payments but which remain in accrual status because they are considered well
secured and in the process of collection.
December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans:
Commercial..................... $ 563 $ 1,485 $ 1,595 $ 9,001 $ 2,846
Consumer....................... 291 593 674 923 715
Commercial mortgages........... 2,527 9,886 22,377 16,981 22,086
Residential mortgages.......... 3,568 4,620 4,314 5,887 7,239
Construction................... 3,588 3,182 4,638 10,727 13,606
-------- -------- ---------- --------- --------
Total nonaccruing loans............ 10,537 19,766 33,598 43,519 46,492
Nonperforming investments in
real estate.................... 1,252 2,738 2,901 3,394 3,394
Assets acquired through
foreclosure.................... 11,614 18,936 14,583 28,898 37,979
-------- -------- ---------- --------- --------
Total nonperforming assets......... $ 23,403 $ 41,440 $ 51,082 $ 75,811 $ 87,865
======== ======== ======== ======== ========
Restructured loans................. $ 17,393 $ 13,775 $ 18,020 $ 10,874 $ 1,846
======== ======== ======== ======== ========
Past due loans:
Residential mortgages.......... $ 111 $ 152 $ 359 $ 518 $ 1,030
Commercial and
commercial mortgages......... 789 240 5,590 854 3,865
Consumer....................... 143 102 205 376 254
-------- -------- ---------- --------- --------
Total past due loans............... $ 1,043 $ 494 $ 6,154 $ 1,748 $ 5,149
======== ======== ======== ========= ========
Ratio of nonaccruing loans
to total loans (1)............. 1.30% 2.70% 4.74% 5.53% 5.46%
Ratio of allowance for loan
losses to total gross
loans (1)...................... 2.90 2.89 3.26 3.28 3.12
Ratio of nonperforming assets
to total assets................ 1.92 3.47 5.14 7.51 7.66
Ratio of loan loss allowance
to nonaccruing loans (2)....... 201.84 97.79 63.23 60.35 58.02
Ratio of loan and foreclosed
asset allowance to total
nonperforming assets (2)....... 94.87 51.17 45.51 38.34 32.29
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
-42-
Total nonperforming assets decreased by $18.0 million between 1995 and
1994 and by $9.6 million between 1994 and 1993. In 1995, collections of such
assets were $12.2 million and $3.6 million in charge-offs and write-downs were
recorded. Such decreases were offset by the addition of $8.2 million of assets
that were not previously classified as nonperforming assets. The decrease in the
levels of nonperforming assets since 1991 reflects management's efforts to
identify and resolve problem assets and, to a lesser extent, an improving
economy.
An analysis of the change in the balance of nonperforming assets during
the last three fiscal years is presented below.
Year Ended December 31,
----------------------------------------
1995 1994 1993
------- ------ ------
(In Thousands)
Beginning balance..................................... $ 41,440 $ 51,082 $ 75,811
Additions......................................... 8,224 16,732 28,880
Collections....................................... (12,247) (17,884) (31,133)
Transfers to accrual/restructured status.......... (10,424) (3,151) (14,877)
Charge-offs/write-downs........................... (3,590) (5,339) (7,599)
--------- --------- ---------
Ending balance........................................ $ 23,403 $ 41,440 $ 51,082
======== ========= =========
In 1995, nonaccruing loan reductions of $7.4 million and $1.1 million in the
commercial mortgage and residential mortgage categories, respectively, a $1.5
million decrease in nonperforming investments in real estate and a $7.3 million
decrease in assets acquired through foreclosure comprised the majority of the
reduction in total nonperforming assets. During the first quarter, a $4.4
million nonaccruing commercial mortgage loan was returned to accrual status and
a $2.8 million nonaccruing commercial mortgage loan was transferred to assets
acquired through foreclosure after a $744,000 partial charge-off was recorded to
the allowance for loan losses. This property was subsequently sold during the
third quarter of 1995. The decrease in residential mortgages was the result of
$1.9 million of loans returning to accrual status and the transfer of other
loans to assets acquired through foreclosure. As of December 31,1995, the
Corporation has significantly reduced the level of assets acquired through
foreclosure through sales and collections of properties which totalled $11.8
million, offset in part by additions of $6.7 million. The reduction in the
nonaccruing loans to total loans ratio was due to the reductions noted above as
well as charge-offs and collection activity. Consequently, the nonperforming
assets to total assets ratio also decreased significantly.
A $13.8 million reduction in nonaccruing loans was the most notable factor
contributing to the reduction in nonperforming assets between 1994 and 1993.
This decrease was primarily due to the reclassification of several loans to
assets acquired through foreclosure. The most significant loan was a $9.3
million commercial mortgage loan secured by a health care facility and
unimproved land located in Delaware which was transferred after a $2.7 million
charge-off to the allowance for loan losses. Other nonaccruing commercial loan
activity for the year ended December 31, 1994 includes three loans totalling
$3.8 million which were transferred to assets acquired through foreclosure. One
property for $1.1 million was sold subsequent to its transfer. In addition, a
$1.4 million nonaccruing construction loan was reclassified as accruing in
August 1994.
-43-
Assets acquired through foreclosure increased $4.4 million between December
31, 1994 and 1993. This was primarily due to four properties transferred from
nonaccruing commercial mortgage loans, which totalled $9.6 million after
charge-offs. A $2.8 million commercial mortgage was also transferred from
restructured loans in December 1994. In addition, the Corporation foreclosed on
a restaurant facility located in Delaware during the first quarter of 1994 which
resulted in an increase of $2.1 million. The sale of two foreclosed office
buildings totalling approximately $2.0 million were two of the more significant
transactions offsetting the above increases. Sales of other commercial
properties and to a lesser extent residential and consumer collection activity
also offset these increases.
At December 31, 1995, nonperforming assets with carrying values of $1.0
million or more totalled approximately 64.0% of the Corporation's total
nonperforming assets, as compared to 70.9% at December 31, 1994. The following
table reflects the stratification of such assets by size at December 31, 1995
and 1994.
December 31,
---------------------------------------------------
1995 1994
----------------------- -----------------------
No. of Items Balance No. of Items Balance
------------ ------- ------------ -------
(Dollars in Thousands)
$5 million and over................................... 1 $ 5,950 1 $ 6,700
$1 million - $4.99 million............................ 4 9,021 10 22,695
$0.5 million - $0.99 million.......................... 2 1,437
Under $500,000........................................ 150 8,432 198 10,608
--- ------- --- --------
Total nonperforming assets........................ 155 $23,403 211 $ 41,440
=== ======= === ========
The reductions in the "$1 million - $4.99 million" and "$0.5 million -
$0.99 million" categories were due exclusively to the $4.4 million commercial
mortgage returned to accrual status and sale of foreclosed assets previously
discussed.
The timely identification of problem loans is a key element in the
Corporation's management of its loan portfolios. Timely identification enables
the Corporation to take appropriate action and, accordingly, minimize losses. A
loan review system, which was established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios, facilitates the
identification of problem loans. In general, this system utilizes the guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those which would result from a regulatory examination.
Allowance for Loan Losses. The Corporation maintains an allowance for
loan losses and charges losses on loans to this allowance when such losses are
considered probable. The allowance for loan losses is maintained at a level
which management considers adequate to provide for potential loan losses based
upon an evaluation of known and inherent risks in the loan portfolio.
Management's evaluation is based upon a continuing review of the loan portfolio
which includes factors such as identification of adverse situations which may
affect the borrower's ability to repay, a review of overall portfolio quality,
prior loan loss experience and an assessment of current and expected economic
conditions. Changes in economic conditions and economic prospects of borrowers
can occur quickly and, as a result, impact the estimates made by management.
-44-
Additionally, management evaluates the collectibility of each loan in the
nonperforming portfolio and the fair value of each asset in the assets acquired
through foreclosure category quarterly. The most frequent form of collateral for
loans and foreclosed assets regardless of type are income-producing properties,
business-owned real estate and personal residences. The value of such collateral
is frequently verified through the use of outside appraisals. Appraisals of
collateral, together with the value of guarantees and the worth of other
collateral, are combined to recognize current loan losses, write-downs of
foreclosed assets, and to reserve for potential future losses.
The table below represents a summary of changes in the allowance for loan
losses during the periods indicated.
Year Ended December 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance....................... $21,700 $23,613 $26,263 $26,975 $33,121
Allowance established on purchased
loan portfolios...................... 2,600
Provision for loan losses............... 1,403 1,683 2,620 1,359 1,996
Transfer to allowance for foreclosed
assets............................... (2,000)
Charge-offs:
Residential real estate.............. 154 24 399 124 442
Commercial real estate (1)........... 814 3,168 3,599 1,799 2,118
Commercial........................... 404 1,021 1,689 229 1,247
Consumer (2)......................... 826 514 655 910 3,321
--------- -------- --------- -------- --------
Total charge-offs................. 2,198 4,727 6,342 3,062 7,128
-------- ------- -------- -------- --------
Recoveries:
Residential real estate.............. 1 29 42 49 357
Commercial real estate (1)........... 293 486 713 554 90
Commercial........................... 169 322 46 171 309
Consumer (2)......................... 199 294 271 217 230
--------- -------- --------- -------- --------
Total recoveries.................. 662 1,131 1,072 991 986
--------- -------- -------- -------- --------
Net charge-offs......................... 1,536 3,596 5,270 2,071 6,142
-------- -------- -------- -------- --------
Ending balance.......................... $24,167 $21,700 $23,613 $26,263 $26,975
======= ======= ======= ======= =======
Net charge-offs to average gross
loans outstanding, net
of unearned income.................... .20% .51% .71% .25% .78%
========= ======== ======== ======== =======
(1) Includes commercial mortgage and construction loans.
(2) Includes lease financings.
-45-
The provision for loan losses decreased $280,000 between 1995 and 1994. The
reduction is due in part to the decrease in nonperforming loans and management's
continuing review of the loan portfolio. During the third quarter of 1995, a
$2.6 million allowance was established on a commercial loan and commercial real
estate portfolio purchased at discounted prices. The ratio of net charge-offs to
average gross loans outstanding (net of unearned income) was .20% and .51% for
the years ending December 31, 1995 and 1994, respectively. This decrease
reflects the reduction in net charge-offs between the periods.
Charge-offs in 1994 and 1993 were due to the deterioration in the credit
quality of certain commercial and commercial real estate loans. During 1994, the
most significant charge-off in the commercial real estate category was a $2.7
million partial charge-off of a nonaccruing commercial mortgage loan which was
subsequently transferred to assets acquired through foreclosure. The high levels
of charge-offs in 1991 were due to a variety of factors including the
deterioration of the regional commercial real estate market and recessionary
conditions. The provision for loan losses during 1993 was increased primarily
due to a $9.3 million commercial real estate loan being placed on nonaccrual in
the first quarter of 1993 when the borrower filed bankruptcy. The decline in
charge-offs during 1992 versus 1991 is in large part attributable to reduced
charge-offs of commercial real estate loans (including construction loans). The
1991 consumer loan charge-offs is the result of a charge-off of a consumer loan
portfolio that was subsequently sold.
The allowance for loan losses is allocated by major loan portfolio type. As
these portfolios have developed, they have become a source of historical data in
projecting delinquencies and loss exposure. The allocation of the allowance for
loan losses at the end of each of the last five fiscal years and the percentage
of outstanding loans in each category to total gross outstanding loans at such
dates follow:
December 31,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Residential real estate.... $ 409 32.7% $ 506 34.7% $ 439 32.2% $ 774 31.5% $ 829 29.3%
Commercial real estate..... 13,663 38.8 14,273 37.9 15,967 41.8 17,052 41.1 17,244 41.1
Commercial................. 9,180 2.9 5,844 3.4 6,317 2.9 7,475 4.2 7,529 4.8
Consumer (1)............... 915 25.6 1,077 24.0 890 23.1 962 23.2 1,373 24.8
-------- ------ -------- ----- -------- ------ -------- ----- ------- -----
Total................... $24,167 100.0% $21,700 100.0% $23,613 100.0% $26,263 100.0% $26,975 100.0%
======= ===== ======= ===== ========= ====== ======== ===== ======= =====
(1) Includes lease financings.
LIQUIDITY
The Corporation itself engages only in limited business operations
independent of the Bank and its subsidiaries and therefore, does not require a
substantial amount of liquid assets. The Corporation is required, however, to
maintain a reserve at December 31, 1995 of 100% of the aggregate interest
expense for 12 full calendar months on $29.9 million of the 11% Senior Notes
issued in December 1993. The Corporation's principal asset is its investment in
the capital stock of the Bank and its primary source of liquidity is dividends
from the Bank. Under applicable federal regulations, the Bank may pay dividends
within certain limits and only after notice to the Office of Thrift Supervision
(OTS). See Note 10 to the Consolidated Financial Statements for a further
discussion of dividend restrictions.
-46-
Under the Indenture for the 11% Senior Notes, the Corporation was required
to maintain a reserve at December 31, 1995 of 100% of the aggregate interest
expense for 12 full calendar months on $29.9 million of the Senior Notes, issued
in December 1993. At December 31, 1995, the Corporation retained approximately
$3.3 million for the purpose of meeting this reserve requirement. The
Corporation's ability to comply with this requirement is dependent upon its
ability to obtain dividends from the Bank.
As required by the OTS, institutions under its supervision must maintain a
5.0% minimum liquidity ratio of cash and qualified assets to net withdrawable
deposits and borrowings due within one year. The liquidity ratios of the Bank
were 8.0% and 6.2% at December 31, 1995 and 1994, respectively.
Management monitors liquidity daily and maintains funding sources to meet
unforeseen changes in cash requirements. It is the policy of the Bank to
maintain cash and investments slightly above required levels. The Corporation's
primary financing sources are deposits, repayments of loans and investment
securities, sales of loans and borrowings. In addition, the Corporation's
liquidity requirements can be accomplished through the use of its borrowing
capacity from the FHLB of Pittsburgh, the sale of certain securities under
agreement to repurchase and the pledging of certain loans for other lines of
credit. Management believes these sources are sufficient to maintain the
required levels of liquidity.
At December 31, 1995 and 1994, the Bank had outstanding FHLB advances of
$307.2 and $226.3 million, respectively. Additionally in December 1994, the Bank
secured a $97.8 million FHLB revolving line of credit of which none was
outstanding at December 31, 1995. Other available funding sources included open
ended secured lines of credit with three different brokerage firms and a $40.0
million revolving line of credit with two lending institutions. No balances were
outstanding on any of these credit facilities at December 31, 1995.
The Corporation routinely enters into commitments requiring the future
outlay of funds. The Bank entered into an agreement in 1989, which was amended
in 1993 and extended until December 31, 1997, whereby a facilities management
company provides on-site data processing services. Under the terms of this
agreement, average minimum payments of approximately $2.4 million have been
committed for each of the next two years. The above commitments, as well as loan
commitments, are expected to be met through traditional funding sources, such as
deposits, short-term borrowings, advances from the FHLB and principal repayments
on loans.
During 1995, operating and financing activities provided cash and cash
equivalents of $12.3 and $4.0 million, respectively, while investing activities
used $8.6 million. The cash provided by financing activities resulted primarily
from additional borrowings from the FHLB and the net increase in certificates of
deposit and time deposits. This cash was used to fund the sale of deposits as
well as the repayment of other borrowings. Cash used for investment activities
included a net increase in loans, offset in part by a net decrease in investment
securities. In 1994, financing and operating activities provided $190.3 and $8.2
million of cash and cash equivalents, respectively, while investing activities
used $253.4 million. The funds provided by financing activities reflect the
additional FHLB advances and reverse repurchase agreements resulting from the
investment growth strategy implemented during 1994. These funds, supplemented
with existing liquidity, were utilized to purchase mortgage-backed securities
and were the major component of the cash and cash equivalents used for
investment activities. During 1993, the primary source of cash and cash
equivalents was investment activities. The funds provided by investment
activities resulted primarily from the net reduction in the loan portfolio and
maturities, sales and dispositions of investment securities. These cash flows
were primarily used to fund deposit outflows and to a lesser extent repay
-47-
borrowings. The Corporation derived $76.0 million from investing activities in
1993, while financing activities resulted in a use of cash of $25.2 million.
CAPITAL RESOURCES
Federal laws among other things, requires OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as the Bank to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted"assets and "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
Regulations have been issued by the OTS which incorporate an interest rate
risk (IRR) component into the risk-based capital calculation. Implementation of
this regulation, however, has been postponed until further notice. The IRR
component is based on the lowest calculated interest rate capital component for
the preceding three quarters. The institution's actual measured IRR is expressed
as the change that occurs in its net portfolio value as a result of a
hypothetical 200 basis point increase or decrease in interest rates, subject to
an established floor. An institution will be required to maintain one-half of
the difference between its measured IRR and 2.0%, multiplied by the present
value of its assets. Based on the current composition of the Bank's portfolio at
December 31, 1995, management believes no additional capital would be required.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as well
as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 1995, the Bank is classified as well-capitalized and is in
compliance with all regulatory capital requirements. Management anticipates that
the Bank will continue to be classified as well-capitalized. For additional
information concerning the Bank's regulatory capital compliance see Note 10 to
the Consolidated Financial Statements.
On March 4, 1996, the Corporation's Board of Directors announced the
authorization of a 5% stock buyback program. No shares had been purchased by the
Corporation prior to this date.
IMPACT OF INFLATION AND CHANGING PRICES
The Corporation's Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased costs of the Corporation's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Corporation are
monetary. As a result, interest rates have a greater impact on the
-48-
Corporation's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
CHANGE IN INDEPENDENT AUDITORS
During 1994, the Corporation engaged KPMG Peat Marwick LLP as its
independent auditors beginning with the fiscal year ended December 31, 1994.
Prior to 1994, the Corporation's independent auditors were Price Waterhouse LLP.
There were no disagreements with Price Waterhouse LLP on any matter of
accounting practices, financial statements disclosure or auditing scope or
procedures at the time of their dismissal.
ACCOUNTING DEVELOPMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122, "Accounting for Mortgage Servicing Rights." This standard requires an
entity to recognize a separate asset for the right to service mortgage loans for
others regardless of how such servicing rights were acquired. Additionally, an
entity such as the Bank will be required to assess the fair value of these
assets at each reporting date to determine impairment. The Corporation does not
presently have servicing rights recorded as assets and management does not
expect the adoption of SFAS No. 122 to have a material impact on its operations
or financial position.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting standards for
stock-based employee compensation plans. In general, this statement requires a
fair value based method of accounting for stock-based awards or similar equity
instruments and encourages all entities to adopt this method of accounting for
all employee stock compensation plans. Entities may elect to continue accounting
for stock-based compensation under prior accounting literature at their
discretion, but must make proforma disclosures if the accounting standards of
SFAS No. 123 are not adopted. The accounting requirements of SFAS No. 123 are
effective for transactions entered into during 1996. The disclosure requirements
of SFAS No. 123 are effective for financial statements for fiscal year 1996.
Management has not completed an analysis of the effects, if any, this standard
would have on its results of operations or financial condition.
On October 24, 1995, the FASB issued an exposure draft entitled,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This proposed standard would require transfers to be recorded
as sales if the transferor surrenders control over financial assets and certain
conditions are met including if the transfer is not assuredly temporary.
Management has not determined the effect this standard would have on its
operations or financial condition, but believes present accounting practices
fairly depict the financial transactions and obligations of the Corporation.
-49-
Item 8. Financial Statements and Supplementary Data
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:
Report of Independent Auditors ........................................................... 51
WSFS Financial Corporation (and Subsidiaries):
Management's Statement on Financial Reporting......................................... 52
Consolidated Statement of Operations ................................................. 53
Consolidated Statement of Conditions.................................................. 54
Consolidated Statement of Changes in Stockholders' Equity............................. 55
Consolidated Statement of Cash Flows.................................................. 56
Notes to the Consolidated Financial Statements........................................ 58
(b) The following supplementary data is set forth in this Annual Report
on form 10-K on the following pages:
Quarterly Financial Summary.............................................................. 89
-50-
LOGO of KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of WSFS Financial Corporation
We have audited the accompanying consolidated statement of condition of WSFS
Financial Corporation and subsidiaries (the "Corporation") as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The accompanying consolidated financial
statements of WSFS Financial Corporation for the period ended December 31, 1993
were audited by other auditors whose report thereon, dated January 21, 1994,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. 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 1995 and 1994 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
WSFS Financial Corporation and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 115," Accounting for Certain Investments in Debt and Equity
Securities" in 1994.
/s/ KPMG Peat Marwick LLP
January 22, 1996
Philadelphia, Pennsylvania
-51-
To the Board of Directors and Stockholders of
WSFS Financial Corporation
Report of Independent Accountants
In our opinion, the consolidated statements of income, of cash flows and of
changes in stockholders' equity for the year ended December 31, 1993 present
fairly, in all material respects, the results of operations and cash flows of
WSFS Financial Corporation and its subsidiaries for the year ended December 31,
1993, in conformity with generally accepted accounting principles. 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. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of WSFS
Financial Corporation for any period subsequent to December 31, 1993.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Washington, D.C.
January 21, 1994
-51a-
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of WSFS Financial Corporation (the "Corporation") is
responsible for the preparation, integrity and fair presentation of its
published financial statements. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and, as
such, include amounts that are based on judgements and estimates of management.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can only provide reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the degree of
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with generally accepted accounting
principles. This assessment was based on criteria for effective internal control
over financial reporting described in "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes the Corporation maintained an
effective internal control structure over financial data, presented in
accordance with generally accepted accounting principles.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation
as safety and soundness laws and regulations.
The Corporation assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that WSFS Financial Corporation complied, in all material
respects, with the designated laws and regulations related to safety and
soundness for the year ended December 31, 1995.
/s/ Marvin N. Schoenhals /s/ R. William Abbott
- ------------------------ ------------------------
Marvin N. Schoenhals R. William Abbott
Chairman, President & Executive Vice President
Chief Executive Officer & Chief Financial Officer
-52-
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
-----------------------------------------
1995 1994 1993
---------- --------- ------
(In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans............................................. $ 73,192 $ 58,554 $ 62,074
Interest on mortgage-backed securities.................................. 16,694 13,403 2,333
Interest and dividends on investment securities......................... 3,367 3,096 3,714
Other interest income................................................... 6,683 5,613 4,199
---------- -------- --------
99,936 80,666 72,320
---------- -------- --------
Interest expense:
Interest on deposits................................................... 34,066 27,358 29,401
Interest on Federal Home Loan Bank advances............................ 15,679 11,420 8,045
Interest on senior notes............................................... 3,499 3,635 29
Interest on federal funds purchased and securities sold under
agreements to repurchase............................................. 4,206 1,570
Interest on other borrowed funds....................................... 617 669 1,033
----------- ----------- ----------
58,067 44,652 38,508
---------- ---------- ---------
Net interest income..................................................... 41,869 36,014 33,812
Provision for loan losses............................................... 1,403 1,683 2,620
----------- ---------- ----------
Net interest income after provision for loan losses..................... 40,466 34,331 31,192
---------- --------- ---------
Other income:
Gain on sale of deposits................................................ 14,247
Loan servicing fee income............................................... 3,016 2,426 1,941
Service charges on deposit accounts.................................... 2,811 2,523 2,650
Securities gains....................................................... 265 175 298
Other income........................................................... 2,276 2,086 3,081
----------- --------- ----------
22,615 7,210 7,970
----------- --------- ----------
Other expenses:
Salaries............................................................... 15,921 12,254 10,545
Employee benefits and other personnel expenses......................... 4,380 3,283 2,993
Equipment expense...................................................... 1,298 2,185 2,249
Data processing expense................................................ 2,269 2,051 1,947
Occupancy expense...................................................... 2,430 2,392 2,763
Marketing expense...................................................... 1,050 1,470 862
Professional fees...................................................... 850 1,352 1,843
Federal deposit insurance premium...................................... 1,165 2,328 2,525
Net costs of assets acquired through foreclosure....................... 2,871 1,947 3,380
Other operating expenses............................................... 5,107 5,221 5,378
----------- --------- ----------
37,341 34,483 34,485
---------- --------- ---------
Income before taxes.................................................... 25,740 7,058 4,677
Income tax benefit..................................................... (1,268) (1,012) (1,682)
----------- --------- ---------
Net income............................................................. $ 27,008 $ 8,070 $ 6,359
========== ========== =========
Earnings per share:
Primary.............................................................. $ 1.84 $ .55 $ .88
Fully diluted........................................................ 1.84 .55 .44
The accompanying notes are an integral part of these financial statements.
-53-
CONSOLIDATED STATEMENT OF CONDITION
December 31,
------------------------------------
1995 1994
--------- ---------
(Dollars in Thousands)
Assets
Cash and due from banks........................................................ $ 31,135 $ 31,876
Federal funds sold and securities purchased under agreements to resell......... 31,500 23,098
Interest-bearing deposits in other banks....................................... 4,768 9,837
Investment securities held-to-maturity (market value: 1995 - $22,492
and 1994 - $33,037).......................................................... 22,378 35,152
Investment securities available-for-sale....................................... 6,394 28,992
Mortgage-backed securities held-to-maturity (market value: 1995 - $218,476
and 1994 - $226,068)......................................................... 219,727 244,165
Mortgage-backed securities available-for-sale.................................. 17,405 18,583
Investment in reverse mortgages, net........................................... 35,614 32,172
Loans held-for-sale............................................................ 4,345 253
Loans, net of allowance for loan losses of $24,167 in 1995 and $21,700 in 1994. 787,839 710,523
Stock in Federal Home Loan Bank of Pittsburgh, at cost......................... 15,860 11,314
Assets acquired through foreclosure............................................ 11,614 18,936
Premises and equipment......................................................... 6,372 8,440
Accrued interest and other assets.............................................. 23,875 22,345
----------- -----------
Total assets................................................................... $1,218,826 $1,195,686
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand................................................... $ 70,242 $ 69,432
Money market and interest-bearing demand..................................... 57,312 88,992
Savings...................................................................... 153,931 190,862
Time......................................................................... 442,545 460,421
----------- -----------
Total deposits................................................................. 724,030 809,707
Securities sold under agreements to repurchase................................. 56,159 56,708
Federal Home Loan Bank advances................................................ 307,206 226,284
Senior notes................................................................... 29,850 32,000
Other borrowed funds........................................................... 7,430 12,252
Accrued expenses and other liabilities......................................... 20,605 13,461
----------- -----------
Total liabilities.............................................................. 1,145,280 1,150,412
---------- ----------
Commitments and contingencies
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; 10%
Convertible Preferred Stock, Series 1, 2,000,000 shares authorized; issued
and outstanding, none at December 31, 1995 and 1994..........................
Common stock $.01 par value, 20,000,000 shares authorized; issued and
outstanding, 14,509,298 at December 31, 1995 and
14,507,098 at December 31, 1994.............................................. 145 145
Capital in excess of par value................................................. 57,136 57,131
Net unrealized losses on securities available-for-sale, net of tax............. (242) (1,501)
Retained earnings.............................................................. 16,507 (10,501)
------------ -----------
Total stockholders' equity..................................................... 73,546 45,274
------------ ----------
Total liabilities and stockholders' equity..................................... $1,218,826 $1,195,686
========== ==========
The accompanying notes are an integral part of these financial statements.
-54-
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Net
Serial Capital unrealized Total
Preferred Common in excess losses on Retained stockholders'
stock stock of par value securities earnings equity
------------ --------- ----------- ----------- ---------- -------------
(In Thousands)
Balance, January 1, 1993..................... $ 15 $ 50 $ 56,012 $ $ (23,810) $ 32,267
Imputed dividends on preferred stock......... 1,120 (1,120)
Conversion from preferred to common
stock..................................... (1) 3 (2)
Exercise of common stock options............. 67 67
Net income................................... 6,359 6,359
------------ --------- --------- ----------- ---------- ---------
Balance, December 31, 1993................... 14 53 57,197 (18,571) 38,693
Reclassification of preferred stock to
common stock.............................. (14) 92 (79) (1)
Exercise of common stock options............. 13 13
Net changes in unrealized losses on
securities available-for-
sale, net of tax.......................... (1,501) (1,501)
Net income................................... 8,070 8,070
------------ --------- --------- ----------- ---------- ---------
Balance, December 31, 1994................... 145 57,131 (1,501) (10,501) 45,274
Exercise of common stock options............. 5 5
Net changes in unrealized losses on
securities available-for-sale,
net of tax................................ 1,259 1,259
Net income................................... 27,008 27,008
------------ --------- --------- ----------- ---------- ---------
Balance, December 31, 1995...................$ $ 145 $ 57,136 $ (242) $ 16,507 $ 73,546
============ ========= ========= =========== ========== =========
The accompanying notes are an integral part of these financial statements.
-55-
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
1995 1994 1993
--------- ------ ------
(In Thousands)
Operating activities:
Net income.................................................................. $ 27,008 $ 8,070 $ 6,359
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses.............................................. 1,403 1,683 2,620
Provision for losses on assets acquired through foreclosure............ 1,570 643 2,617
Depreciation, accretion and amortization ............................. (1,304) 1,371 979
Decrease in accrued interest receivable and other assets............... (3,718) (6,019) (3,640)
Origination of loans held for sale .................................... (37,105) (10,818) (70,495)
Proceeds from sales of loans held for sale............................. 33,151 12,512 71,552
Increase in accrued interest payable and other liabilities............. 5,882 522 1,040
Gain on sale of deposits............................................... (16,553)
Gain on sales of loans ................................................ (67) (105) (780)
Other, net ............................................................ 1,995 309 643
--------- --------- ---------
Net cash provided by operating activities....................................... 12,262 8,168 10,895
--------- -------- --------
Investing activities:
Net decrease of interest-bearing deposits in other banks .................... 5,069 16,494 3,649
Maturities of investment securities ......................................... 12,816 4,444 30,746
Sales of investment securities held-to-maturity.............................. 29,679
Sales of investment securities available-for-sale............................ 63,493 35,413
Purchases of investment securities held-to-maturity.......................... (39,773) (10,049) (39,736)
Purchases of investment securities available-for-sale........................ (387) (39,858) (14,770)
Repayments of mortgage-backed securities held-to-maturity.................... 23,903 37,706 19,199
Repayments of mortgage-backed securities available-for-sale.................. 2,243 1,736 418
Purchases of mortgage-backed securities held-to-maturity .................... (260,105)
Purchases of mortgage-backed securities available-for-sale................... (22,133)
Repayments on reverse mortgages.............................................. 12,701 7,180 1,752
Disbursements for reverse mortgages.......................................... (14,619) (7,300) (4,051)
Purchases of reverse mortgages............................................... (7,898)
Sales of loans............................................................... 4,111 747 5,079
Purchase of loans ........................................................... (54,271) (5,846) (7,280)
Net decrease (increase) in loans ............................................ (27,118) (32,727) 63,019
Net decrease (increase) in stock of Federal Home Loan Bank of Pittsburgh .... (4,546) (5,435) 3,723
Sales of investments in real estate ......................................... 1,481 1,082 3,767
Payments made for investments in real estate ................................ (5) (1,090) (1,305)
Sales of assets acquired through foreclosure, net ........................... 7,816 10,758 12,808
Premises and equipment, net ................................................. (1,053) (1,457) (785)
Purchase of Providential Corporation, Inc., net of cash acquired............. (2,031)
Other, net................................................................... (417) (3,065) 152
----------- --------- --------
Net cash provided by (used for) investing activities............................ (8,556) (253,403) 76,033
---------- --------- --------
(Continued on next page)
-56-
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
---------------------------------------------
1995 1994 1993
---------- -------- -------
(In Thousands)
Financing activities:
Net increase (decrease) in demand and savings deposits ...................... (13,527) (14,624) 6,213
Net increase (decrease) in certificates of deposit and time deposits ........ 122,701 19,381 (57,225)
Sale of deposits, net ....................................................... (180,758)
Repayment of municipal bond repurchase obligations .......................... (2,690) (1,122) (4,595)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase ........................ (549) 56,708
Receipts from additional other borrowed funds ............................... 150,970 260,000 5,000
Repayments of other borrowed funds .......................................... (70,047) (130,045) (5,044)
Issuance of common stock .................................................... 5 13 67
Issuance (extinguishment) of Senior Notes ................................... (2,150) 30,430
--------- --------- ---------
Net cash provided by (used for) financing activities ........................... 3,955 190,311 (25,154)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ............................... 7,661 (54,924) 61,774
Cash and cash equivalents at beginning of period ............................... 54,974 109,898 48,124
--------- --------- ---------
Cash and cash equivalents at end of period ..................................... $ 62,635 $ 54,974 $ 109,898
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest .................................................................. $ 53,689 $ 41,969 $ 38,504
Income taxes, net ......................................................... 2,184 745 505
Loans transferred to assets acquired through foreclosure .................... 6,264 12,729 1,868
Loans transferred to investment in reverse mortgages ........................ 13,539
Net change in unrealized losses on securities available-for-sale, net of tax (1,259) 1,501
The accompanying notes are an integral part of these financial statements.
-57-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation (Corporation) is a thrift holding company
organized under the laws of the State of Delaware. The Corporation's principal
wholly owned subsidiary, Wilmington Savings Fund Society, FSB (Bank), is a
federal savings bank organized under the laws of the United States which
conducts operations from 14 retail banking offices located in the Wilmington and
Dover, Delaware area.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and revenues and expenses. The material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the adequacy of the allowance for possible loan losses and the
valuations of other real estate owned, deferred tax assets, investment in
reverse mortgages and contingencies.
Basis of Presentation
The consolidated financial statements include the accounts of the parent
company, the Bank and its wholly owned subsidiaries, WSFS Credit Corporation
(WCC), 838 Investment Group, Inc. (formerly Star States Financial Services,
Inc.), Star States Development Company (SSDC), Community Credit Corporation
(CCC) and Providential Home Income Plan, Inc. (Providential). Providential was
acquired by the Bank in November 1994. Also included in the consolidated
financial statements are the operations of Star States Pennsylvania Corporation
(SSPA) and its subsidiary, Fidelity Federal Savings and Loan Association
(Association), a federally-chartered stock savings and loan association, until
November 1995. This was the result of the sale of the Association's deposits in
July 1995 and the subsequent merger of the Association's remaining operations
into the Bank in November 1995.
WCC is engaged in motor vehicle leasing. The related leases are accounted
for as either direct financing or operating leases. 838 Investment Group, Inc.
markets various insurance and mutual fund products to Bank customers through the
Bank's branch system. SSDC was originally formed to acquire, develop and market
improved and unimproved real estate either through wholly owned subsidiaries or
investments in joint ventures. SSDC activities are presently limited to phasing
down its existing real estate investments and developments. CCC is a consumer
finance subsidiary specializing in consumer loans secured by first and second
mortgages. Providential is a California-based reverse mortgage lender which
offered a variety of reverse mortgage products to elderly homeowners. All
significant intercompany transactions are eliminated in consolidation. Certain
reclassifications have been made to the prior years' financial statements to
conform them to the current year's presentation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold and securities purchased under
agreements to resell. Generally, federal funds are purchased and sold for
periods ranging up to ninety days.
-58-
Debt and Equity Securities
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." This statement requires that investments in equity
securities that have a readily determinable fair value and investments in debt
securities be classified into three categories and accounted for as follows:
o Debt securities that the enterprise positively intends to hold to
maturity are classified as "held-to-maturity" and reported at
amortized cost.
o Debt and equity securities purchased with the intention of selling them
in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in
earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair value,
with unrealized gains and losses excluded from earnings and reported, net
of tax, as a separate component of stockholders' equity.
The cumulative effect of this change in accounting principle was
immaterial at adoption. There were no investment or mortgage-backed securities
classified as "trading" during 1994 or 1995.
Debt and equity securities include investment and mortgage-backed
securities, corporate bonds, notes, debentures and certain equity securities.
Premiums and discounts on debt and equity securities held-to-maturity and
available-for-sale are recognized in interest income using a level yield over
the period to expected maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses. The specific
identification method is used to determine realized gains and losses on sales of
investment and mortgage-backed securities. All sales are made without recourse.
Prior to 1994, investment and mortgage-backed securities held for
investment were carried at cost, adjusted for amortization of premium and
accretion of discount, because the Corporation had the ability and management
had the intent to hold such securities to maturity. The amortization of premium
and accretion of discount were computed using a level yield method and the
amortization of premiums and the accretion of discounts were periodically
adjusted to reflect increases and decreases in the expected life of the
underlying security, such as changes in prepayment rates. Equity securities that
were nonmarketable or that had mandatory sinking funds were carried at cost
unless, in the opinion of management, such securities had been permanently
impaired. The specific identification method was used to determine realized
gains and losses on sales of investment securities. All sales were made without
recourse. Investment and mortgage-backed securities to be held for indefinite
periods of time, including investment and mortgage-backed securities that
management intended to use as part of its asset/liability strategy, or that may
have been sold in response to changes in interest rates, changes in prepayment
risk, the need to increase regulatory capital or other similar factors, were
classified as held-for-sale and were carried at the lower of the cost or market
value. Gains and losses on securities held-for-sale, including market value
adjustments, were included in gains on sales of investments or mortgage-backed
securities.
-59-
Loans
Loans are stated net of deferred fees and costs and unearned discount.
Loan interest income is accrued using various methods which approximate a
constant yield. Loan origination and commitment fees and direct loan origination
costs are deferred and recognized over the life of the related loans using a
level yield method over the period to maturity.
In the first quarter of 1995, the Corporation adopted SFAS No. 114
"Accounting by Creditors for Impairment of a Loan," and its amendment, SFAS No.
118 "Accounting by Creditors for Impairment of a Loan- Income Recognition and
Disclosures," which require that impaired loans be measured based on the present
value of expected future discounted cash flows, the market price of the loan or
the fair value of the underlying collateral if the loan is collateral dependent.
Impaired loans as defined in SFAS No. 114 include loans within the Corporation's
commercial, commercial mortgage and commercial construction portfolios. The
adoption of SFAS No. 114 had no effect on the results of operations or the
financial position of the Corporation since a portion of the allowance for
credit losses was allocated to the allowance for impairment losses.
Nonaccrual Loans
Nonaccrual loans are those on which the accrual of interest has ceased.
Loans are placed on nonaccrual status immediately if, in the opinion of
management, collection is doubtful, or when principal or interest is past due 90
days or more and collateral is insufficient to cover principal and interest.
Interest accrued, but not collected at the date a loan is placed on nonaccrual
status, is reversed and charged against interest income. In addition, the
amortization of net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Subsequent cash receipts are applied either to the
outstanding principal or recorded as interest income, depending on management's
assessment of ultimate collectibility of principal and interest. Loans are
returned to an accrual status when the borrower's ability to make periodic
principal and interest payments has returned to normal (i.e. - brought current
with respect to principal or interest or restructured) and the paying capacity
of the borrower and/or the underlying collateral is deemed sufficient to cover
principal and interest in accordance with the Corporation's previously
established loan-to-value policies.
Allowances for Loss
The allowance for loan losses is maintained at a level which management
considers adequate to provide for potential loan losses based upon an evaluation
of known and inherent risks in the loan portfolio. Management's evaluation is
based upon a continuing review of the loan portfolio which includes factors such
as identification of adverse situations which may affect the borrower's ability
to repay, a review of overall portfolio quality, prior loan loss experience and
an assessment of current and expected economic conditions. Allowances for
estimated losses on investments in real estate and assets acquired through
foreclosure are provided if the carrying value exceeds the fair value less
estimated disposal costs. Consideration is also given to examinations performed
by regulatory authorities.
-60-
Changes in economic conditions and economic prospects of borrowers can
occur quickly and, as a result, impact the estimates made by management. These
estimates are continually reviewed and, as adjustments become necessary, are
included in operations in the period which they become known. Identified losses
on specific loans, investments in real estate or assets acquired through
foreclosure are charged against the applicable allowance. Provisions for
estimated losses are based on management's estimate of net realizable value or
fair value of the underlying collateral, as applicable.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market as
determined on a net aggregate basis.
Assets Under Lease to Others
Assets under lease to others are stated at cost less accumulated
depreciation. Depreciation expense is computed on a straight-line basis over the
terms of the related leases. Accelerated methods are used in depreciating
certain assets for income tax purposes.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the
recorded investment in the loan or fair value less estimated disposal costs.
Costs subsequently incurred to improve the assets are included in the carrying
value provided that the resultant carrying value does not exceed fair value.
Costs relating to holding the assets are charged to expense in the current
period. An allowance for estimated losses is provided when declines in fair
value below the carrying value are identified. Net costs of assets acquired
through foreclosure includes costs of holding and operating the assets, net
gains or losses on sales of the assets and provisions for losses to reduce such
assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life.
Accelerated methods are used in depreciating certain assets for income tax
purposes.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are treated as financings with the
obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements
remain in the asset accounts.
-61-
Income Taxes
The provision or benefit for income taxes includes federal, state and local
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities.
Earnings per Share
Primary earnings per share is computed by dividing income applicable to
common stockholders by the weighted average number of common stock and common
stock equivalents outstanding during the periods presented. For the year ended
December 31, 1993, income applicable to common stockholders is net income less
imputed preferred stock dividends of $1,120,000. No such dividends were accrued
in 1995 or 1994 due to the reclassification of the 10% Convertible Preferred
Stock Series 1 (Preferred Stock). Common stock equivalents represent the
dilative effect of the assumed exercise of certain outstanding stock options
using the treasury stock method. Fully diluted earnings per share computations
assume the conversion of the Preferred Stock during the period that such stock
was outstanding and that no Preferred Stock dividends were paid.
The weighted average number of shares used in computing earnings per share
were as follows:
1995 1994 1993
---------- ---------- ----------
Primary................... 14,676,071 14,608,579 5,944,577
Fully diluted............. 14,676,071 14,608,579 14,613,261
As a result of the reclassification of the Preferred Stock in June 1994, an
additional 648,706 shares of Common Stock were issued in the form of a stock
dividend and the weighted average number of shares used to determine primary and
fully diluted earnings per share have been restated for prior years. Under the
original terms of the Preferred Stock, each share could be converted at the
option of the holder into six shares of Common Stock. An additional .47 shares
of Common Stock was issued to each Preferred Stockholder at the time of the
Preferred Stock reclassification. The additional .47 shares were intended to be
equal to the present value of the accrued dividends on the Preferred Stock prior
to the first redemption date.
2. DISPOSITION OF CERTAIN ASSETS AND LIABILITIES
On July 28, 1995, the Corporation's wholly-owned subsidiary, Fidelity
Federal Savings and Loan Association, completed the sale of deposits and certain
real estate at four of its branches to Commonwealth Savings Bank. Commonwealth
assumed approximately $197.3 million of deposit liabilities in exchange for
certain branch related assets, loans and cash. The premium paid of the deposit
base was 8.52%, subject to certain adjustments at closing. The Corporation
reported a gain of approximately $12.4 million, net of taxes and a supplemental
contribution to the Corporation's 401(k) Plan, or $.84 per outstanding share
from this sale. The Corporation funded the $177.6 million cash outflow through
long-term borrowings of $70.0 million and $63.8 million in brokered CD's. This
transaction allowed the Corporation to focus on its primary market area while
enhancing capital.
-62-
3. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ---------- --------
(In Thousands)
Available-for-sale securities:
December 31, 1995:
State and political subdivisions................. $ 757 $ 134 $ $ 891
Other investments................................ 5,786 283 5,503
-------- ---------- -------- --------
$ 6,543 $ 134 $ 283 $ 6,394
======= ======== ======= =======
December 31, 1994:
U.S. Government and agencies..................... $23,363 $ $ 335 $23,028
State and political subdivisions................. 757 6 2 761
Other investments................................ 5,398 195 5,203
------- ---------- -------- --------
$29,518 $ 6 $ 532 $28,992
======= ========= ======= =======
Held-to-maturity:
December 31, 1995:
Corporate bonds................................... $16,748 $ 154 $ 50 $16,852
State and political subdivisions.................. 5,542 54 41 5,555
Other investments................................. 88 3 85
--------- ---------- --------- ---------
$22,378 $ 208 $ 94 $22,492
======= ======== ======== =======
December 31, 1994:
U.S. Government and Agencies..................... $10,000 $ $ 692 $ 9,308
Corporate bonds................................... 19,077 31 1,415 17,693
State and political subdivisions.................. 6,075 1 40 6,036
-------- --------- --------- --------
$35,152 $ 32 $ 2,147 $33,037
======= ======== ======= =======
Securities with book values aggregating $18,716,000 at December 31, 1995
are pledged as collateral for municipal bond repurchase obligations and other
borrowings (See Note 9). Accrued interest receivable relating to investment
securities was $696,000 and $1,221,000 at December 31, 1995 and 1994,
respectively. Substantially all of the interest and dividends on investment
securities represented taxable income.
-63-
The scheduled maturities of securities held-to-maturity and securities
available-for-sale at December 31, 1995 were as follows:
Held-to-Maturity Available-for-Sale
--------------------- ---------------------
(In Thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- ---------- -------
Within one year...................................... $ 1,093 $ 1,093 $ 5,786 $ 5,503
After one year but within five years................. 8,159 8,209
After five but within ten years...................... 6,224 6,276
After ten years...................................... 6,902 6,914 757 891
-------- -------- -------- --------
$22,378 $22,492 $ 6,543 $ 6,394
======= ======= ======= =======
Proceeds from the sales of investments available-for-sale during 1995 were
$63,493,000. Gains of $333,000 and losses of $87,000 were realized on these
sales. There were no sales of securities classified as held-to-maturity nor
transfers between categories of investment securities during 1995.
Proceeds from the sales of investments during 1994 and 1993 were
$35,497,000 and $32,350,000, respectively. Gains of $70,000 and $32,000 in 1994
and 1993, respectively, and losses of $42,000 in 1994 were realized on these
sales.
-64-
4. MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ---------
(In Thousands)
Available-for-sale securities:
December 31, 1995:
GNMA........................................ $17,586 $ $ 181 $17,405
======= ========= ======= =======
Weighted average yield........................... 6.44%
December 31, 1994:
GNMA............................................. $19,920 $ $ 1,337 $18,583
======= ========= ======= =======
Weighted average yield......................... 6.41%
Held-to-maturity securities:
December 31, 1995:
Collateralized mortgage obligations.............. $ 72,222 $ 1,280 $ 39 $ 73,463
FNMA............................................. 72,590 1,310 71,280
GNMA............................................. 1,718 45 1,763
FHLMC............................................ 73,197 82 1,309 71,970
--------- ---------- --------- ---------
$219,727 $ 1,407 $ 2,658 $218,476
======== ======== ======== ========
Weighted average yield......................... 6.75%
December 31, 1994:
Collateralized mortgage obligations............... $ 78,847 $ $ 3,207 $ 75,640
FNMA.............................................. 81,513 7,305 74,208
GNMA.............................................. 1,941 2 39 1,904
FHLMC............................................. 81,864 7,548 74,316
--------- --------- --------- ---------
$244,165 $ 2 $ 18,099 $226,068
======== ======== ======== ========
Weighted average yield......................... 6.80%
At December 31, 1995, mortgage-backed securities with book values
aggregating $103,307,000 were pledged as collateral for retail customer
repurchase agreements and securities sold under agreements to repurchase.
Accrued interest receivable relating to mortgage-backed securities was
$1,372,000 and $1,508,000 at December 31, 1995 and 1994, respectively. There
were no sales of mortgage-backed securities classified as held-to-maturity or
available-for-sale, nor transfers between categories of mortgage-backed
securities during 1995 and 1994.
-65-
5. LOANS
December 31,
----------------------------------
1995 1994
--------- ---------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) ...................... $272,525 $260,185
Other ......................................... 296,884 262,226
Real estate construction loans................... 36,486 34,382
Commercial loans................................. 26,620 35,001
Consumer loans ................................. 114,265 91,182
Lease financings................................. 98,840 89,095
--------- ---------
845,620 772,071
Less:
Loans in process ................................ 12,158 21,706
Unearned income ................................. 21,456 18,142
Allowance for loan losses ....................... 24,167 21,700
--------- ---------
$787,839 $710,523
========= ========
At December 31, 1995, the Corporation has impaired loans totalling
approximately $16.6 million, all of which had a related allowance for
impairment. The average recorded investment in these loans was $16.5 million in
1995. The allowance for losses on impaired loans totalled $2.9 million at
December 31, 1995. There were no charge-offs or recoveries of impaired loans
during 1995. The Corporation recognizes interest income on a cash basis method
on impaired loans. Total interest income recognized on impaired loans totalled
$1.3 million for the year ended December 31, 1995.
The total amounts of loans serviced for others were $229,144,000,
$179,562,000 and $190,555,000 at December 31, 1995, 1994 and 1993, respectively.
Accrued interest receivable on loans outstanding was $4,965,000, $4,318,000 and
$3,702,000 at December 31, 1995, 1994 and 1993, respectively.
Nonaccruing loans aggregated $10,537,000, $19,766,000 and $33,598,000 at
December 31, 1995, 1994 and 1993, respectively. If interest on all such loans
had been recorded, net interest income would have increased by $735,000 in 1995,
$1,191,000 in 1994 and $2,277,000 in 1993.
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
----------------------------------
1995 1994 1993
------ ---- ----
(In Thousands)
Beginning balance .......................................... $21,700 $23,613 $26,263
Allowance on purchased loan portfolios.................... 2,600
Provision for loan losses................................. 1,403 1,683 2,620
Loans charged-off ........................................ (2,198) (4,727) (6,342)
Recoveries................................................ 662 1,131 1,072
-------- ------- -------
Ending balance ............................................. $24,167 $21,700 $23,613
======= ======= =======
-66-
6. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31,
----------------------------
1995 1994
--------- ---------
(In Thousands)
Real estate ........................................................ $13,802 $24,229
Other .............................................................. 568 384
--------- ---------
14,370 24,613
Less:
Allowance for losses................................................. 2,756 5,677
-------- --------
$11,614 $18,936
======= =======
A summary of changes in the allowance for losses follows:
Year Ended December 31,
-----------------------------------
1995 1994 1993
------ ---- ----
(In Thousands)
Beginning balance........................................... $ 5,677 $ 5,570 $ 3,267
Provision for losses ..................................... 1,570 643 2,617
Net charge-offs .......................................... (4,491) (536) (314)
-------- ------- --------
Ending balance ............................................. $ 2,756 $ 5,677 $ 5,570
======= ======= =======
7. PREMISES AND EQUIPMENT
December 31,
-------------------------------
1995 1994
---- ----
(In Thousands)
Land ........................................................ $ 720 $ 1,337
Buildings ................................................... 6,088 8,814
Leasehold improvements ...................................... 2,269 2,088
Furniture and equipment ..................................... 7,208 11,589
-------- -------
16,285 23,828
Less:
Accumulated depreciation .................................... 9,913 15,388
-------- -------
$ 6,372 $ 8,440
======= =======
The Corporation occupies certain premises and operates certain equipment
under noncancelable leases with terms ranging from 1 to 19 years. These leases
-67-
are accounted for as operating leases. Accordingly, lease costs are expensed as
incurred. Rent expense was $921,000 in 1995, $806,000 in 1994 and $1,282,000 in
1993. Future minimum payments under these leases at December 31, 1995 are:
1996 ............................ $1,100,538
1997 ............................ 905,080
1998 ............................ 741,525
1999............................. 513,440
2000............................. 496,480
Thereafter ...................... 2,979,082
----------
Total minimum lease payments .... $6,736,145
==========
8. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000
or more which aggregate $37,520,000 and $42,031,000 at December 31, 1995 and
1994, respectively.
The following is a summary of deposits by category including a summary of
the remaining time to maturity for time deposits:
December 31,
-----------------------------
1995 1994
--------- ---------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ...................... $ 70,242 $ 69,432
Money market and interest-bearing demand ........ 57,312 88,992
---------- ----------
Total money market and demand ................ 127,554 158,424
---------- ---------
Savings ............................................ 153,931 190,862
---------- ---------
Time certificates by maturity (1):
Less than one year ............................... 260,826 286,054
One year to two years ........................... 81,132 118,467
Two years to three years ........................ 36,597 26,970
Three years to four years........................ 32,108 16,491
Four years to five years......................... 28,906 10,441
Over five years.................................. 2,976 1,998
----------- ----------
Total time certificates ...................... 442,545 460,421
---------- ----------
Total deposits ..................................... $ 724,030 $ 809,707
========== ==========
(1) Includes $63.8 million of brokered certificates of deposits.
-68-
Interest expense by deposit category follows:
Year Ended December 31,
--------------------------------------------
1995 1994 1993
-------- ------- -----
(In Thousands)
Money market and interest-bearing demand ................ $ 1,865 $ 2,074 $ 2,307
Savings ................................................. 4,261 4,498 5,263
Time .................................................... 27,940 20,786 21,831
--------- -------- --------
$ 34,066 $ 27,358 $ 29,401
======== ======== ========
9. BORROWED FUNDS
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
---------- --------- ---------- ----------- -----------
(Dollars in Thousands)
1995
----
FHLB advances............................... $307,206 6.03% $317,210 $259,071 6.05%
Senior Notes................................ 29,850 11.39 32,000 30,710 11.39
Municipal bond repurchase obligations....... 2,658 11.71 4,632 4,180 9.43
Securities sold under agreements to
repurchase.............................. 56,159 5.96 87,951 67,383 6.24
Other collateralized borrowings............. 4,772 4.40 7,253 5,461 4.08
1994
----
FHLB advances............................... $226,284 5.66% $226,284 $187,946 6.08
Senior Notes................................ 32,000 11.36 32,000 32,000 11.36
Municipal bond repurchase obligations....... 5,206 9.00 6,161 5,488 9.37
Securities sold under agreements to
repurchase................................ 56,708 6.35 80,083 29,364 5.33
Other collateralized borrowings............. 7,046 4.00 7,559 5,389 2.88
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with fixed
rates ranging from 4.49% to 8.40% at December 31, 1995 are due as follows
(dollars in thousands):
Weighted
Average
Amount Rate
-------- -------
1996 .................... $ 83,969 5.93%
1997..................... 112,000 6.22
1998..................... 30,000 5.19
1999..................... 40,000 5.97
2001..................... 10,000 5.82
----------
$ 275,969 5.97
=========
-69-
Also outstanding at December 31, 1995 is a $30,000,000 advance from the
FHLB with a variable rate based on prime rate less 2.05% which matures in 1997.
The Bank also has FHLB advances of $511,000 and $726,000 maturing in 1996 and
1997, respectively, with fixed rates of 2.25%. These low rate advances are part
of the FHLB of Pittsburgh's Affordable Housing Program.
In January 1995, the Bank and Association secured a $97,800,000 and
$24,442,000 FHLB revolving line of credit, of which none was outstanding at
December 31, 1995. These lines expired January 3, 1996 and were replaced by a
line of credit in the amount of $120,771,000, which expires January 2, 1997.
Pursuant to collateral agreements with the FHLB, advances are secured by
qualifying first mortgage loans, collateralized mortgage obligations, FHLB stock
and interest-bearing demand deposit accounts with the FHLB.
Senior Notes
In December 1993, the Corporation completed the private placement of
$32.0 million of 11% Senior Notes (the Notes). The net proceeds totalled $30.4
million, after issuance costs of $1.6 million. Issuance costs are being
amortized on a straight line basis over the life of the Notes as a yield
adjustment. Net proceeds equal to two semi-annual interest payments are retained
by the Corporation. The remainder of the net proceeds were invested in the
common stock of the Bank, the Corporation's principal subsidiary. During 1995,
the Corporation repurchased and cancelled $2.2 million of the bonds outstanding.
The Notes mature on December 31, 2005. All outstanding principal will be
due and payable at maturity. There is no sinking fund requiring principal
payments prior to maturity. The Corporation may elect to redeem the Notes, in
whole or in part, at any time on or after December 31, 1998 at 105% of par plus
accrued interest, declining ratably (but not below par) over the remaining term
to maturity. Semi-annual interest payments are due each January 1 and July 1
until maturity.
The covenants of the Notes require the Corporation to maintain specified
amounts of investment grade securities (in an amount equal to two semi-annual
interest payments), restrict the ability of the Corporation to pay dividends or
to make other capital distributions, limits the creation of liens and guarantees
with respect to certain other indebtedness, restricts the Corporation's ability
to dispose of the capital stock of the Bank, and limits the creation of
additional senior debt. The maturity of the Notes may also be accelerated in the
event of a default.
Municipal Bond Repurchase Obligations
In December 1984, the Bank conveyed municipal bonds with a book value of
$28,959,000 to a unit investment trust in exchange for $22,604,000. Holders of
units in the trust have the option of requiring the trust to redeem their units
and the trust has the option of reselling the units or requiring the Bank to
repurchase any or all of the bonds at stated amounts. The price to be paid by
the Bank to repurchase individual bonds increases on each anniversary of the
conveyance and the Bank's obligation to repurchase individual bonds ceases one
year prior to the final maturity of such bonds. The Bank's maximum obligation
for the repurchase of bonds over the next two years is as follows: 1996 -
$1,671,000 and 1997 - $395,000.
-70-
Given the historical relationships of short- and long-term yields on
municipal bonds and the coupon rates of the bonds conveyed to the trust, it can
be reasonably expected that the trust will require the Bank to repurchase the
bonds prior to the expiration of the repurchase obligations. Consequently, this
transaction has been accounted for as a financing arrangement with the bonds
included in investment securities at book value and the proceeds received by the
Bank recorded as a liability. This liability is increased annually to reflect
the increase in the amounts the Bank is obligated to pay to repurchase
individual bonds with a corresponding charge to interest expense ($394,000,
$514,000 and $939,000 for the years ended December 31, 1995, 1994 and 1993,
respectively). Interest earned on the bonds is included in interest income and
an equal amount is recorded as interest expense, since the unit trust is
entitled to the income on the bonds prior to any exercise of the option to
require the Bank to repurchase the bonds. The effective annual interest rate on
this financing arrangement, comprising the foregone interest on the municipal
bonds and the increase in the Bank's repurchase obligation, approximates 9.4%.
If, at anytime, it is no longer probable that the repurchase option will be
exercised by the trust, this transaction will be recorded as a sale resulting in
the recognition of a loss equal to the excess of the book value of the bonds
over the related liability for the repurchase obligation.
Securities Sold Under Agreements to Repurchase
During 1995, the Bank sold securities under agreements to repurchase as a
short-term funding source. At December 31, 1995, securities sold under
agreements to repurchase had fixed rates of 5.58% and 6.12%. The underlying
securities are mortgage-backed securities with book and market values
aggregating $50.4 million and $50.7 million, respectively, at December 31, 1995.
Other Collateralized Borrowings
Collateralized borrowings of $4,772,000 and $7,046,000 at December 31, 1995
and 1994, respectively, consisted of outstanding retail repurchase agreements,
contractual arrangements under which portions of certain securities are sold on
an overnight basis to retail customers under agreements to repurchase. At
December 31, 1995, such borrowings were collateralized by a collateralized
mortgage obligation and a mortgage-backed security. Rates on these borrowings
during 1995 ranged from 4.00% to 4.40%. In 1994, the Bank secured open ended
lines of credit with three different brokerage firms, of which none was
outstanding at December 31, 1995. Advances on these open ended lines of credit
can be secured by investment, mortgage or mortgage related securities.
10. STOCKHOLDERS' EQUITY
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions, such as the Bank, must maintain "tangible" capital equal to 1.5%
of adjusted total assets, "core" capital equal to 4.0% of adjusted total assets
and "total" or "risk-based" capital (a combination of core and "supplementary"
capital) equal to 8.0% of risk-weighted assets and Tier 1 capital equal to 4.0%
of risk-weighted assets. At December 31, 1995, the Bank was in compliance with
all such requirements and is deemed a "well-capitalized" institution for
regulatory purposes.
-71-
A table presenting the Bank's consolidated capital position relative to the
minimum regulatory requirements as of December 31, 1995 follows (dollars in
thousands):
Consolidated Regulatory
Bank Capital Requirement Excess
-------------------- ------------------- ---------------------
Percent of Percent of Percent of
Amount Assets Amount Assets Amount Assets
------ -------- --------- ----------- -------- ----------
Tangible Capital.......................... $ 95,643 7.85% $ 18,270 1.50% $ 77,373 6.35%
Core Capital.............................. 95,643 7.85 48,719 4.00 46,924 3.85
Tier 1 Capital............................ 95,643 11.14 34,353 4.00 61,290 7.14
Risk-based Capital........................ 105,552 12.29 68,706 8.00 36,846 4.29
Preferred Stock
In September 1992, the Corporation issued 1,491,413 shares of 10%
Convertible Preferred Stock, Series 1, at a subscription price of $9.00 per
share. The net proceeds totalled $11.8 million, after issuance costs of $1.6
million. The proceeds of the issuance were used to recapitalize the Bank, the
Corporation's principal subsidiary. Dividends were to accrue and become payable
at the stated rate of $.90 per share per annum, payable quarterly in arrears in
cash, after March 31, 1994.
At the Annual Meeting of Stockholders held in June 1994, an amendment to
the Certificate of Incorporation was approved whereby each share of issued and
outstanding 10% Convertible Preferred Stock was reclassified into 6.47 shares of
Common Stock. By its original terms, each share of Preferred Stock could be
converted at the option of the holder into six shares of Common Stock. The
additional .47 shares of Common Stock into which the Preferred Stock was
converted as a result of the reclassification was intended to be approximately
equal to the present value of the accrued dividends on the Preferred Stock prior
to the first redemption date. Such a reclassification was undertaken to simplify
the Corporation's capital structure, to reduce the overall ratio of earnings to
fixed charges and preferred stock dividends and to avoid an increase in the
interest rate the Corporation would have been required to pay on its Senior
Notes.
The Holding Company
Although the holding company does not have significant assets or engage in
significant operations separate from the banking subsidiary, the Corporation has
agreed to cause the Bank's required regulatory capital level to be maintained by
infusing sufficient additional capital as necessary. To that end, the
Corporation issued the 11% Senior Notes described in Note 9.
Pursuant to federal laws and regulations, the Bank's ability to engage in
transactions with affiliated corporations is limited and the Bank generally may
not lend funds to nor guarantee indebtedness of the Corporation.
-72-
The Bank is also limited in its declaration and payment of dividends to the
Corporation. Dividends from the Bank, and investment income earned thereon by
the Corporation, are the only source of funds from which the Corporation
currently can pay dividends to its stockholders or interest on the Senior Notes.
OTS regulations impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash mergers)
by the Bank. Under these regulations, an institution that immediately prior to,
and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital that is equal to or greater than the amount of
its fully phased-in capital requirements is generally permitted to make a
capital distribution after notice. Capital distributions are limited to the
greater of: (a) 75% of its net income for the previous four quarters; or (b) up
to 100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its ratio of total capital to
assets exceeded its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year.
11. EMPLOYEE BENEFIT PLANS
Employee 401(k) Savings Plan
Certain subsidiaries of the Corporation maintain a qualified plan in which
employees may participate. The Corporation's contributions to the plan on behalf
of its employees resulted in an expense of $1,417,000, $480,000 and $325,000 in
1995, 1994 and 1993, respectively. The plan purchased 161,000, 59,000 and 67,000
shares of common stock of the Corporation during 1995, 1994 and 1993,
respectively. The significant increase in expense and shares purchased resulted
from a special supplemental contribution of $734,000 in the third quarter of
1995 related to the sale of the Association's deposits.
Postretirement Benefits
The Corporation shares certain costs of providing health and life
insurance benefits to retired employees (and their eligible dependents).
Substantially all employees may become eligible for these benefits if they reach
normal retirement age while working for the Corporation.
The Corporation adopted the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective January
1, 1993. SFAS No. 106 requires that the costs of these benefits be recognized
over an employee's active working career.
-73-
Net periodic postretirement benefit costs for the years ended December 31,
1995, 1994 and 1993 included the following components (in thousands):
1995 1994 1993
Service cost for benefits during the period..................................... $ 62 $ 35 $ 31
Interest cost on accumulated postretirement benefit obligation.................. 108 104 107
Amortization of unrecognized transition obligation............................. 70 78 50
Actual (gain) loss on plan assets............................................... (7) 20
------- ------- ------
Net postretirement benefit cost.............................................. $ 240 $ 210 $ 208
===== ===== =====
The Corporation's unrecorded accumulated postretirement benefit obligation
(APBO) at adoption was $1.4 million. As permitted, this liability is being
amortized through charges to earnings over a 20-year period. The following
summarizes the APBO at each year ended December 31 (dollars in thousands):
1995 1994
-------- -------
Accumulated Postretirement Benefit Obligation:
Retirees.................................................................. $1,312 $1,162
Future retirees........................................................... 279 250
------- ------
Total obligation.......................................................... 1,591 1,412
Market value of plan assets.................................................
Unrecognized net gain (loss)................................................ (162) (12)
Unrecognized transition liability........................................... (1,196) (1,267)
------ ------
Postretirement benefit liability recognized in the balance sheet.......... $ 233 $ 133
====== ======
Assumptions used to value the APBO:
Discount rate.............................................................. 7.0% 8.0%
Health care cost trend rate................................................ 9.5% 13.0%
The Corporation assumes that the average annual rate of increase for
medical benefits will decrease by one-half of 1% per year to 5% in the tenth and
all future years. The costs incurred for retirees health care are limited since
future retirees are limited to an annual medical premium cap of $1,500 indexed
by the lesser of 4% or the actual increase in medical premiums paid by the
Corporation. A 1% increase in the annual health care trend rates would not have
a material impact on the APBO or postretirement benefit expense at or for the
years ended December 31, 1995, 1994 and 1993.
-74-
12. TAXES ON INCOME
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. The income tax provision (benefit)
consists of the following:
Year Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
Current income taxes:
Federal taxes ..................................... $ 514 $ 226 $ 202
State and local taxes ............................. 1,730 816 284
Deferred income taxes:
Federal taxes ..................................... (3,668) (2,056) (2,221)
State and local taxes ............................. 156 2 53
-------- ---------- ---------
$(1,268) (1,012) (1,682)
======= ======= ========
Current federal income taxes represent taxes on income which cannot be
offset by net operating loss carryforwards. This is due to the limitation on the
amount of alternative minimum taxable income that can be offset by net operating
loss carryforwards (NOL's) as provided in the Internal Revenue Code of 1986, as
amended (the Code).
Based on the Corporation's history of prior operating earnings and its
expectations of the future, management believes that operating income will more
likely than not be sufficient to recognize a net deferred tax asset of $9.3
million and $5.9 million at December 31, 1995 and 1994, respectively.
Adjustments to the valuation allowance were made in 1995 and 1994 and the fourth
quarter of 1993 as a result of continued operating earnings, the issuance of the
Corporation's 11% Senior Notes in December 1993 and subsequent recapitalization
of WSFS.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following is a
summary of the significant components of the Corporation's deferred tax assets
and liabilities as of December 31, 1995 and December 31, 1994 (in thousands):
-75-
1995 1994
-------- ------
Deferred tax liabilities:
Accelerated depreciation............................................. $ (1,552) $ (1,773)
Other............................................................... (215) (338)
Origination costs................................................... (633)
----------- ---------
Total deferred tax liabilities......................................... (1,767) (2,744)
--------- ---------
Deferred tax assets:
Bad debt deductions................................................. 9,711 9,929
Tax credit carryforwards............................................ 79 1,375
Net operating loss carryforwards.................................... 7,507 8,108
Loan fees........................................................... 1,034 1,895
Provisions for losses on reverse mortgages.......................... 20,317 18,929
Other............................................................... 3,006 1,570
---------- ---------
Total deferred tax assets.............................................. 41,654 41,806
--------- --------
Valuation allowance.................................................... (30,557) (33,138)
-------- --------
Net deferred tax assets................................................ $ 9,330 $ 5,924
======== ========
Approximately $28.0 million of the Corporation's deferred tax assets are
related to Providential's write-downs and income on its portfolio of reverse
mortgages. Management has assessed substantial valuation allowances on
Providential's deferred tax assets due to limitations and uncertainties
surrounding Providential's ability to generate future earnings sufficient to
recognize a tax benefit.
Included in the table above is the effect of certain temporary differences
for which no deferred tax expense or benefit was recognized. Such items
consisted primarily of unrealized losses on certain investments in debt and
equity securities accounted for under SFAS No. 115.
Net operating loss carryforwards of $24.9 million remain at December 31,
1995. There are also alternative minimum tax credit carryforwards of
approximately $79,000 at December 31, 1995 which can be offset against regular
taxes in future years. The expiration dates and amounts of such carryforwards
and credits are listed below (in thousands):
NOL's
-------------------------- Credit
Federal State Carryforwards
---------- -------- -------------
1998.............................................. $ $ 928
1999.............................................. 5,215
2004.............................................. 213
2005.............................................. 3,850
2006.............................................. 1,098
2007.............................................. 1,659
2008.............................................. 5,203
2009.............................................. 6,755
Unlimited......................................... 79
------- ------- ---------
$17,119 $ 7,802 $ 79
======= ======= =========
-76-
The Corporation's ability to use its NOL's to offset future income is
subject to restrictions enacted in Section 382 of the Code. These restrictions
would limit the Corporation's future use of its NOL's if there are significant
Ownership Changes in or acquisitions of the Corporation's stock (referred to
herein as an "Ownership Change"). The utilization of approximately $17.1 million
of net operating loss carryforwards is limited to approximately $1.5 million
each year as a result of such "Ownership Changes" in Providential's stock. Such
NOL's also can only be utilized to offset Providential's future taxable income.
A reconciliation setting forth the differences between the effective tax
rate of the Corporation and the U.S. Federal Statutory tax rate is as follows:
Year Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
Statutory federal income tax rate ....................... 35.0% 34.0% 34.0%
State tax net of federal tax benefit..................... 4.8 7.6 4.8
Amortization of intangibles............................... 1.8 2.8
Utilization of loss carryforwards and
valuation allowance adjustments......................... (42.3) (61.6) (78.4)
Tax credits utilized...................................... (4.2)
Other..................................................... 1.8 3.9 .8
----- ------ ------
Effective tax rate .................................... (4.9)% (14.3)% (36.0)%
===== ===== ======
13. STOCK OPTION PLAN
The Corporation has a stock option plan (Option Plan) for officers,
directors and employees of the Corporation and its subsidiaries. The Option Plan
was amended and restated effective January 1, 1992. The Option Plan provides for
the granting of incentive stock options as defined in Section 422 of the
Internal Revenue Code as well as nonincentive stock options and stock
appreciation rights (SARs). All options are awarded at not less than the market
price of the Corporation's common stock on the date of grant. Such options are
exercisable one year from the date of grant and expire no later than the tenth
anniversary of the date on which the option was granted.
The Option Plan also provides for the granting of SARs which allow an
optionee to surrender the SARs in consideration for payment by the Corporation
of an amount equal to the excess of the fair market value of the common stock
over the option price of the SARs. SARs granted are exercisable one year from
the date of grant and vest in 20% per annum increments. Such payments shall be
made in cash; however, no SARs are exercisable unless at the time of surrender
the Corporation has the ability to pay dividends and the Bank has sufficient
capital to exceed its federal regulatory capital requirements. The SARs expire
seven years from the date of grant. The Corporation recorded salary expense
related to such SAR's of $1,573,000, $137,000 and $298,000 in 1995, 1994 and
1993, respectively.
The number of shares for which options or SARs may be granted cannot exceed
1,000,000 shares of the Corporation's common stock. The Option Plan shall
terminate on the tenth anniversary of its original effective date, November 26,
1986, after which no awards may be granted.
-77-
Transactions involving the Option Plan are summarized as follows:
Option Price
Option Shares Shares Per Share
- ------------- -------- ---------
Outstanding at January 1, 1993 ........................... 290,055 $ 2.1875 - 10.375
Exercised................................................. (31,350) 2.1875
Cancelled................................................. (5,000) 9.1875 - 10.375
----------
Outstanding at December 31, 1993.......................... 253,705 2.1875 - 2.9375
Exercised................................................. (6,000) 2.1875
Granted................................................... 22,000 3.9375
--------
Outstanding at December 31, 1994.......................... 269,705 2.1875 - 3.9375
Exercised................................................. (2,200) 2.1875
----------
Outstanding at December 31, 1995 of which
all are exercisable at
December 31, 1995....................................... 267,505 2.1875 - 3.9375
----------
Stock Appreciation Rights
- --------------------------
Outstanding SARs at January 1, 1993....................... 291,900 $ 1.65 - 2.15
Granted................................................... 50,000 3.50 - 4.125
Cancelled................................................. (11,905) 1.65
---------
Outstanding SARs at December 31, 1995, 1994 and
1993 of which 192,581 are exercisable at
December 31, 1995....................................... 329,995 1.65 - 4.125
---------
Total awards outstanding at December 31, 1995............. 597,500
=========
At December 31, 1995, there were 347,150 shares available for future
grants under the Option Plan.
14. COMMITMENTS
Lending Operations
At December 31, 1995, outstanding letters of credit were $3,968,000 and
outstanding commitments to make or acquire mortgage loans aggregated
$11,573,000, of which approximately $7,627,000 were at fixed rates ranging from
6.00% to 7.50% and approximately $3,946,000 were at variable rates ranging from
4.50% to 8.50%. All mortgage commitments are expected to have closing dates
within a six month period.
-78-
Computer Operations
In 1988, the Bank entered into an agreement with a data processing
facilities management company. The Bank's operations were fully converted to
this computer system in November 1989 and SSPA was converted in February 1991.
Certain costs for both conversions were capitalized during the conversion
period. The Bank amortized such costs over the original remaining term of the
agreement. These costs were fully amortized by November 1994. Amortization for
1994 and 1993 totalled $965,000 and $975,000, respectively. This agreement was
subsequently amended, and the term of the agreement was extended to December
1997.
The projected amount of future minimum payments due under the terms of the
amended agreement at December 31, 1995, is as follows:
1996............... $2,318,000
1997............... 2,389,000
-----------
$4,707,000
===========
Legal Proceedings
In the ordinary course of business, the Corporation, Bank and its
subsidiaries are subject to legal actions which involve claims for monetary
relief. Based upon information presently available to management and its
counsel, it is management's opinion that any legal and financial responsibility
arising from such claims will not have a material adverse effect on the
Corporation's results of operations.
In February 1994, a class-action complaint was filed against the
Corporation's subsidiary, Providential, in the United States District Court,
Northern District of California. The class-action complaint was amended in April
1994 to add as defendants Providential's President and Executive Vice President,
as well as additional claims. The action was purportedly filed on behalf of a
class of persons who acquired Providential's Lifetime Reverse Mortgage products
and alleges violations of the federal Truth in Lending Act and Regulation Z
promulgated thereunder, fraud and deceit, negligent misrepresentation, unlawful,
unfair or fraudulent business practices and violations of the Consumers Legal
Remedies Act based upon alleged misrepresentations in connection with the sale
of reverse mortgages. It seeks unspecified compensatory and punitive damages and
penalties, an accounting of all loan portfolios, an injunction barring further
alleged violations, interest, costs, expert witness fees and attorneys' fees.
Providential and the individual defendants have moved to compel arbitration
on an individual basis. In July 1994, the District Court issued an Order
Granting Motion to Compel Arbitration, which also dismissed the case and held
that the Court was without authority to order that arbitration proceed as a
class action. In August 1994, the plaintiffs served a notice of appeal to the
United States Court of Appeals for the Ninth Circuit from the Order Granting
Motion to Compel Arbitration. A hearing was held in December 1995 and a decision
is pending.
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The Corporation believes that all such actions are without merit and
intends to defend itself vigorously.
Providential's loan documents provide for the arbitration of disputes that
may arise in connection with Lifetime Reverse Mortgages. Providential may from
time-to-time be involved in arbitration or litigation with the borrowers or with
the heirs of borrowers. Some kinds of disputes may delay or impair
Providential's ability to liquidate its collateral promptly after maturity of a
loan. Because reverse mortgages are a relatively new product, there can be no
assurances regarding how courts or arbitrators may apply existing legal
principles to the interpretation and enforcement of the terms and conditions of
Providential's reverse mortgage loans.
Financial Instruments With Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business primarily to meet the financing needs of
its customers. These financial instruments involve, to varying degrees, elements
of credit risk that are not recognized in the Consolidated Statement of
Financial Condition.
Exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit written is represented by the contractual amount of those instruments.
The Corporation generally requires collateral to support such financial
instruments in excess of the contractual amount of those instruments and
essentially uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
The following represents a summary of off-balance sheet financial
instruments at year end:
December 31,
---------------------
1995 1994
---- ----
(In Thousands)
Financial instruments whose contract amounts represent
potential credit risk:
Construction loan commitments ............................ $10,526 $10,509
Commercial mortgage loan commitments ..................... 3,127 3,375
Commercial loan commitments .............................. 10,290 7,365
Commercial standby letters of credit ..................... 3,968 2,725
Residential mortgage loan commitments .................... 11,573 8,142
Consumer lines of credit ................................. 65,342 77,841
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit
written are conditional commitments issued to guarantee the performance of a
customer to a third party. The Corporation evaluates each customer's
creditworthiness and obtains collateral based on management's credit evaluation
of the counterparty.
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Concentrations of Credit Risk
The Corporation considers its primary market area for lending and savings
activities to be the Mid-Atlantic region of the United States. The Corporation
estimates that approximately 93% of its loan portfolio is based in Delaware and
its three contiguous states: New Jersey, Pennsylvania and Maryland. The
remainder is distributed throughout the United States. Although the Corporation
has a diversified loan portfolio, a substantial factor in its debtors' ability
to honor their contractual obligation is the economic stability of the region.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
In October 1994, the FASB issued SFAS No. 119 which requires disclosure
about derivative financial instruments and the fair values of financial
instruments. The Corporation does not presently invest in such derivative
financial instruments and thus has no disclosure regarding such investments. The
other provisions of SFAS No. 119 and 107 require disclosure of estimated fair
values about financial instruments, whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. The reported fair
values of financial instruments are based on a variety of factors. In certain
cases, fair values represent quoted market prices for identical or comparable
instruments. In other cases, fair values have been estimated based on
assumptions regarding the amount and timing of estimated future cash flows which
are discounted to reflect varying degrees of risk. Accordingly, the fair values
may not represent actual values of the financial instruments that could have
been realized as of year end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and short-term investments: For cash and short-term investments,
including due from banks, federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits with other banks, the
carrying amount is a reasonable estimate of fair value.
Investment and mortgage-backed securities: Fair value for investment
securities are based on quoted market prices, where available. If a quoted
market price is not available, fair value is estimated using quoted prices for
similar securities.
Investment in reverse mortgages: The fair value of the Corporation's
investment in reverse mortgages is based on discounted net cash flows. The
discount rate utilized in determining such fair value is based on current rates
of similar instruments with comparable maturities.
Loans: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type: commercial, commercial
mortgages, construction, residential mortgages, consumer and direct financing
leases. The fair value of residential mortgage loans are estimated using quoted
market prices for sales of whole loans with similar characteristics such as
repricing dates, product type and size. For residential loans that reprice
frequently, the carrying amount approximates fair value.
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The fair value of direct financing leases is based upon recent market prices of
sales of similar receivables. The fair value of other types of loans for which
quoted market prices are not available is estimated by discounting expected
future cash flows using the current rates at which similar loans would be made
to borrowers with comparable credit ratings and for similar remaining
maturities. The fair value of nonperforming loans is based on recent external
appraisals. Estimated cash flows, discounted using a rate commensurate with the
risk associated with the estimated cash flow are utilized if appraisals are not
available.
Deposit liabilities: SFAS No. 107 defines the fair value of deposits with
no stated maturity, such as noninterest-bearing demand deposits, money market
and interest-bearing demand deposits and savings deposits, to be equal to the
amount payable on demand as of December 31, 1995 and 1994. The carrying value of
variable rate time deposits and time deposits that reprice frequently also
approximate fair value at December 31, 1995 and 1994. The fair value of the
remaining time deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits with comparable remaining maturities.
Borrowed funds: Rates currently available to the Corporation for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
Off-balance sheet instruments: The fair value of off-balance sheet
instruments, including commitments to extend credit and standby letters of
credit, is estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflect the present
creditworthiness of the counterparties.
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The carrying amount and estimated fair value of the Corporation's
financial instruments are as follows (in thousands):
December 31,
-------------------------------------------------------------
1995 1994
-------- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial assets:
Cash and short-term investments................... $ 67,403 $ 67,403 $ 64,811 $ 64,811
Investment securities............................. 28,772 28,886 64,144 62,029
Mortgage-backed securities........................ 237,132 235,881 262,748 244,651
Investment in reverse mortgages................... 35,614 31,087 32,172 36,159
Loans, net........................................ 792,184 801,989 710,776 712,058
Financial liabilities:
Deposits.......................................... 724,030 721,700 809,707 807,980
Borrowed funds.................................... 400,645 403,013 327,244 311,899
The estimated fair value of the Corporation's off-balance sheet financial
instruments are as follows (in thousands):
December 31,
----------------------
1995 1994
---- ------
Off-balance sheet instruments:
Commitments to extend credit............ $355 $294
Standby letters of credit............... 40 27
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16. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
------------------------------
1995 1994
------ ------
(In Thousands)
Assets:
Cash ....................................................... $ 8,299 $ 890
Investment in the Bank ..................................... 95,605 73,296
Investment securities....................................... 3,536
Other assets................................................ 1,167 1,400
--------- ---------
$105,071 $ 79,122
======== ========
Liabilities and stockholders' equity:
Senior notes............................................... $ 29,850 $ 32,000
Interest payable senior notes.............................. 1,642 1,760
Other liabilities.......................................... 33 88
---------- ----------
Total liabilities.......................................... 31,525 33,848
---------- ---------
Stockholders' equity:
Common stock .............................................. 145 145
Capital in excess of par value ............................ 57,136 57,131
Unrealized loss on securities available-
for-sale, net of tax..................................... (242) (1,501)
Retained earnings ......................................... 16,507 (10,501)
--------- ---------
Total stockholders' equity ................................ 73,546 45,274
--------- ---------
$105,071 $ 79,122
======== ========
Condensed Statement of Operations
Year Ended December 31,
-------------------------------------
1995 1994 1993
---------- ---------- ---------
(In Thousands)
Income:
Interest .................................................. $ 178 $ 196 $ 6
Loss on extinguishment of debt............................. (90)
Loss on sale of investment................................. (31) (36)
-------- --------- ----------
57 160 6
-------- --------- ----------
Expenses:
Interest................................................... 3,499 3,635 29
Other operating expenses................................... 32 133 143
-------- --------- ----------
3,531 3,768 172
-------- --------- ----------
Loss before equity in undistributed income of the Bank........... (3,474) (3,608) (166)
Equity in undistributed income of the Bank ...................... 30,482 11,678 6,525
-------- --------- ----------
Net income ...................................................... $ 27,008 $ 8,070 $ 6,359
======== ========= ==========
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Condensed Statement of Cash Flows
Year Ended December 31,
-----------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
Operating activities:
Net income ............................................. $ 27,008 $ 8,070 $ 6,359
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of the Bank ............ (30,482) (11,678) (6,525)
Amortization .......................................... 132 125 41
Loss on sale of investments............................ 31 36
Increase (decrease) in liabilities .................... (173) 285 1,602
Decrease (increase) in other assets.................... 113 (22)
--------- --------- ---------
Net cash provided by (used for) operating activities ......... (3,371) (3,184) 1,477
--------- --------- ---------
Investing activities:
Decrease (increase) in investment in Bank............... 9,340 725 (25,150)
Decrease (increase) in investment securities............ 3,585 (3,665)
--------- --------- ---------
Net cash provided by (used for) investing activities.......... 12,925 (2,940) (25,150)
--------- --------- ---------
Financing activities:
Issuance of common stock ............................... 5 13 67
Repurchase of senior notes.............................. (2,150)
Issuance of senior notes................................ 30,430
--------- --------- ---------
Net cash provided by (used for) financing activities ......... (2,145) 13 30,497
--------- --------- ---------
Increase (decrease) in cash .................................. 7,409 (6,111) 6,824
Cash at beginning of period .................................. 890 7,001 177
--------- --------- ---------
Cash at end of period ........................................ $ 8,299 $ 890 $ 7,001
========= ========= ========
17. INVESTMENT IN AND ACQUISITION OF REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Since reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence and the
mortgage balance consists of cash advanced, interest compounded over the life of
the loan and a premium which represents a portion of the shared appreciation in
the home's value, if any, or a percentage of the value of the residence.
The Corporation accounts for its investment in reverse mortgages in
accordance with instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
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projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages and the effective yield of each pool is recomputed and income
is adjusted to reflect the revised rate of return.
In November 1994, the Corporation purchased Providential Home Income Plan,
Inc., a California-based reverse mortgage lender, for approximately $24.4
million. The acquisition was accounted for by the purchase method of accounting;
accordingly, Providential's results are included in the Corporation's
consolidated statement of operations for the period in which they were owned.
Providential's assets at acquisition primarily consisted of cash and its
investment in reverse mortgages (the "1994 Pool"). The carrying value of the
reverse mortgages at December 31, 1995 was $9.8 million. Providential's
available liquidity was utilized to fund the purchase price. Prior to its
acquisition, Providential had been an originator of approximately 1,250 reverse
mortgages all of which were located in California. Due to continued declines in
the values of California real estate and other operating difficulties,
Providential ceased originating such mortgages in the first quarter of 1994 and
actively sought a merger partner.
The Corporation acquired Providential since it has previously purchased
other portfolios of reverse mortgages and believes such investments provide a
fair return on investment while providing income to elderly homeowners.
In 1993, the Corporation acquired a pool of reverse mortgages (the
"1993 Pool") from the FDIC and another lender. The Corporation's investment in
this pool of reverse mortgages totalled $25.8 million at December 31, 1995. Of
the 657 loans which comprise the 1993 Pool, 544 loans, or 83%, are located in
Delaware, New Jersey, Pennsylvania and Maryland.
At December 31, 1995, the Corporation's actuarial estimate of net cash
flows from each pool of reverse mortgages was as follows:
Inflows (outflows)
------------------------------------------
1994 Pool 1993 Pool Total
--------- --------- ------
(In Thousands)
Year ending:
1996................................................. $(2,124) $ 3,883 $ 1,759
1997................................................. 338 2,378 2,716
1998................................................. 1,031 2,597 3,628
1999................................................. 1,726 2,739 4,465
2000................................................. 2,230 2,813 5,043
2001-2005............................................ 16,182 13,311 29,493
2006-2010............................................ 19,596 9,781 29,377
2011-2015............................................ 18,312 5,516 23,828
Thereafter........................................... 20,621 3,402 24,023
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The effective yield used to accrue investment income on the Corporation's
investment in reverse mortgages is sensitive to changes in collateralized values
and other actuarial and prepayment assumptions. Future estimated changes in
collateral values were revised in 1995 as follows for each pool:
1994 1993
Pool Pool
----- ----
Year ended December 31, 1996................... 0.00% 2.00%
Year ended December 31, 1997................... 1.00 1.00
Year ended December 31, 1998................... 2.00 2.00
Thereafter..................................... 3.00 3.00
These changes in estimates resulted in an effective yield of approximately
21.5% on the 1994 Pool and reduced income by $273,000 in the year ended December
31, 1995. Included in this reduction in income was a cumulative catch-up
adjustment of $24,000. The effective yield on the 1993 Pool was 7.2% in 1995 and
reflects a reduction in income of $1.7 million, which includes a cumulative
catch-up adjustment of $1.3 million.
At December 31, 1994, the Corporation's estimates of future changes in
collateral values were as follows:
1994 1993
Pool Pool
---- ----
Year ended December 31, 1995................... 0.00% 2.00%
Year ended December 31, 1996................... 1.00 3.00
Thereafter..................................... 2.00 4.00
-87-
In making these estimates of current and expected collateral values, the
Corporation considers its own experience on reverse mortgages which have
matured, expected rates of future inflation and housing indices published by the
Bureau of Labor Statistics and the Department of Housing and Urban Development.
The projections also incorporate actuarial estimates of contract terminations
using mortality tables published by the Office of the Actuary of the United
States Bureau of Census adjusted for expected prepayments and relocations. The
effect on the yield and income assuming no changes in collateral values or a 1%
annual reduction in the projected future changes of collateral values is
presented below for the year ended December 31, 1995 (dollars in thousands):
1994 Pool 1993 Pool
-------------------------------- ------------------------------------
1% annual 1% annual
reduction reduction
No future in the projected No future in the projected
changes in future changes changes in future changes
collateral in collateral collateral in collateral
values values values values
------------ ---------------- ------------ -----------------
Effective yield.............................. 15.63% 19.37% 4.96% 6.42%
Effect on income of reverse mortgages........ $(435) $(168) (1,598) $ (555)
The cumulative catchup adjustments included in the above decreases in net
income are $948,000 and $327,000 at January 1, 1995 for the 1993 Pool,
respectively. The cumulative catchup adjustments for the 1994 Pool are $31,000
and $12,000, respectively, at January 1, 1995.
-88-
QUARTERLY FINANCIAL SUMMARY
Three Months Ended
--------------------------------------------------------------------------------------------------
12/31/95 9/30/95 6/30/95 3/31/95 12/31/94 9/30/94 6/30/94 3/31/94
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income $26,161 $24,266 $25,712 $23,797 $22,591 $20,925 $ 19,212 $17,938
Interest Expense 14,493 14,921 14,972 13,681 12,739 11,290 10,655 9,968
------- ------- ------- ------- ------- ------- -------- -------
Net interest income 11,668 9,345 10,740 10,116 9,852 9,635 8,557 7,970
Provision for loan losses 349 47 653 354 335 471 373 504
------- ------- ------- ------- ------- ------- -------- -------
Net interest income after
provision for loan losses 11,319 9,298 10,087 9,762 9,517 9,164 8,184 7,466
Other income 2,122 16,530 2,045 1,918 1,864 1,764 1,677 1,905
Other expenses 8,711 9,818 9,544 9,268 9,187 8,676 8,366 8,254
------- ------- ------- ------- ------- ------- -------- -------
Income before taxes on 4,730 16,010 2,588 2,412 2,194 2,252 1,495 1,117
Income tax provision (1,188) 985 (588) (477) (729) (100) (107) (76)
------- ------- ------- ------- ------- ------- -------- -------
Net income $ 5,918 $15,025 $ 3,176 $ 2,889 $ 2,923 $ 2,352 $ 1,602 $ 1,193
======= ======= ======= ======= ======= ======= ======== =======
Earnings per share $ .40 $ 1.02 $ .22 $ .20 $ .20 $ .16 $ .11 $ .08
-89-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
This information is incorporated herein by reference from "Change in
Independent Auditors" included in MDA.
PART III
Items 10 through 13 are incorporated by the following references from the
indicated pages of the Proxy Statement for the 1996 Annual Meeting of
Stockholders:
Page
-------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
4,5,8,9
ITEM 11. EXECUTIVE COMPENSATION
8,10-13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
2,3,6,7
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
9
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) The financial statements listed on the index set forth in Item 8 of this
Annual Report on Form 10-K are filed as part of this Annual Report.
Financial statement schedules are not required under the related instructions
of the Securities and Exchange Commission or are inapplicable and, therefore,
have been omitted.
(a)(2) The following exhibits are incorporated by reference herein or annexed
to this Annual Report:
Exhibit
Number
- ------- Description of Document
3.1 Registrant's Certificate of Incorporation, as amended, is incorporated herein
by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994.
3.2 Bylaws of WSFS Financial Corporation is incorporated herein by reference to
Exhibit 3.2 of the Registrant's Registration Statement on Form S-1 (File No.
33-45762) filed with the Commission on February 24, 1992.
4 Indenture, dated June 15, 1994, by and between WSFS Financial Corporation
and Wilmington Trust Company, Trustee for the 11% Senior Notes, Series
B, due 2005 is incorporated herein by reference to Exhibit 4 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
10.1 Employment Agreement between WSFS Financial Corporation and
Wilmington Savings Fund Society, Federal Savings Bank and Marvin N.
Schoenhals is incorporated herein by reference to Exhibit 10.1 of Registrant's
Registration Statement on Form S-4 (File No. 33-76470) filed with the
Commission on March 15, 1994.
10.2 Amended Employment Agreement between Wilmington Savings Fund
Society, Federal Savings Bank and Gordon M. Dyott is incorporated herein
by reference to Exhibit 10.4 of Registrant's Registration Statement on Form
S-1 (File No. 33-45762) filed with the Commission on February 24, 1992.
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Exhibit
Number
- ------- Description of Document
10.3 Wilmington Savings Fund Society, Federal Savings Bank 1986 Stock Option
Plan, as amended is incorporated herein by reference to Exhibit 4.1 of
Registrant's Registration Statement on Form S-8 (File No. 33-56108) filed
with the Commission on December 21, 1992.
10.4 Employment Agreement, dated March 24, 1993, by and between Wilmington
Savings Fund Society, Federal Savings Bank and R. William Abbott is
incorporated herein by reference to Exhibit 10.8 of Registrant's Registration
Statement on Form S-4 (File No. 33-76470) filed with the Commission on
March 15, 1994.
10.5 WSFS Financial Corporation, 1994 Short Term Management Incentive Plan
Summary Plan Description is incorporated herein by reference to Exhibit
10.7 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
21 Exhibit 1 Subsidiaries of Registrant.
22 Exhibit 2 Proxy Statement for 1995 Annual Meeting of Stockholders.
23.2 Exhibit 3 Consent of Price Waterhouse LLP.
23.3 Exhibit 4 Consent of KPMG Peat Marwick LLP.
27 Exhibit 5 Financial Data Schedules.
(b) No current reports on Form 8-K were filed during the fourth quarter of
1995.
-92-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: March 28, 1996 BY: /s/ MARVIN N. SCHOENHALS
---------------------------
Marvin N. Schoenhals
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 28, 1996 BY: /s/ MARVIN N. SCHOENHALS
------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive
Officer
Date: March 28, 1996 BY: /s/ CHARLES G. CHELEDEN
--------------------------------
Charles G. Cheleden
Vice Chairman and Director
Date: March 28, 1996 BY: /s/ JOSEPH R. JULIAN
--------------------------------
Joseph R. Julian
Director
Date: March 28, 1996 BY: /s/ RANDALL T. MURRILL, JR.
--------------------------------
Randall T. Murrill, Jr.
Director
Date: March 28, 1996 BY: /s/ THOMAS P. PRESTON
--------------------------------
Thomas P. Preston
Director
-93-
Date: March 28, 1996 BY: /s/ MICHELE M. ROLLINS
--------------------------------
Michele M. Rollins
Director
Date: March 28, 1996 BY: /s/ CLAIBOURNE D. SMITH
--------------------------------
Claibourne D. Smith
Director
Date: March 28, 1996 BY: /s/ R. TED WESCHLER
--------------------------------
R. Ted Weschler
Director
Date: March 28, 1996 BY: /s/ DALE E. WOLF
--------------------------------
Dale E. Wolf
Director
Date: March 28, 1996 BY: /s/ R. WILLIAM ABBOTT
--------------------------------
R. William Abbott
Executive Vice President and
Chief Financial Officer
Date: March 28, 1996 BY: /s/ JERRY D. HOLBROOK
--------------------------------
Jerry D. Holbrook
Senior Vice President and Controller
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