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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, 1997
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 2-2866913
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
838 Market Street, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of March 13, 1998 was $181,981,202. For purposes of this calculation
only, affiliates are deemed to be directors, executive officers and beneficial
owners of greater than 5% of the outstanding shares.
As of March 13, 1998, there were issued and outstanding 12,464,479 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 23, 1998 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
Item 1. Business .............................................................................. 3
Item 2. Properties ............................................................................ 22
Item 3. Legal Proceedings....................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders..................................... 23
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 24
Item 6. Selected Financial Data................................................................. 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 26
Item 8. Financial Statements and Supplementary Data............................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 84
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 84
Item 11. Executive Compensation................................................................. 84
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 84
Item 13. Certain Relationships and Related Transactions......................................... 84
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 85
Signatures...................................................................................... 87
PART I
Item 1. Business
GENERAL
WSFS Financial Corporation (Company or Corporation) is a savings and
loan holding company headquartered in Wilmington, Delaware. Substantially, all
of the Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the Bank or WSFS), the largest thrift institution headquartered in
Delaware and among the four largest financial institutions in the state on the
basis of total deposits acquired in-market. The Corporation's primary market
area is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The Bank provides residential
real estate, commercial real estate, commercial and consumer lending services
and funds these activities primarily with retail deposits and borrowings. The
banking operations of WSFS are presently conducted from 16 retail banking
offices located in the Wilmington and Dover, Delaware areas. Deposits are
insured by the Federal Deposit Insurance Corporation (FDIC).
Additional subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system; and Community Credit Corporation (CCC), which
specializes in consumer loans secured by first and second mortgages. An
additional subsidiary, Star States Development Company (SSDC), is currently
inactive with the exception of one remaining parcel of land which is expected to
be sold in the second quarter of 1998. In November 1994, the Bank acquired
Providential Home Income Plan, Inc. (Providential), a San Francisco,
California-based reverse mortgage lender. The management and operations of
Providential were later merged into the Bank in November 1996.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the Office of Thrift Supervision (OTS), the FDIC and the
Federal Reserve Board. This supervision and regulation is intended primarily for
the protection of depositors. See the "Regulation" section 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. 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. During 1992 and 1993, the Company's earnings stabilized as the
economy began to improve and interest rates declined. In 1992, the Company
completed an offering of convertible preferred stock which increased capital by
$11.8 million and was converted to common stock in 1994. 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 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.
3
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 of the sale, 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 core operations. Both amounts represented new
record earnings levels in the Corporation's 164-year history.
Earnings for the years ending December 31, 1997 and 1996 were both
$16.4 million. Net income for each of the years in the five-year period ended
December 31, 1997 included the recognition of tax benefits. Excluding the
one-time net gain on the sale of the Association's deposits, income before taxes
increased $7.3 million from 1995 to 1996 and $3.4 million from 1996 to 1997.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Condensed average balance sheets for each of the last three years and
analyses of net interest income and changes in net interest income due to
changes in volume and rate are presented in "Results of Operations" included in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) are incorporated herein by reference.
4
INVESTMENT ACTIVITIES
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,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ---------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
--------- ------- ------ ------- ------ ---------
(Dollars In Thousands)
Held-to-Maturity:
Corporate bonds............................. $12,030 1.0% $15,038 1.1% $16,748 1.4%
U.S. Government and agencies................ 15,000 0.8
State and political subdivisions ........... 1,534 0.1 2,642 0.2 5,542 0.4
Other investments .......................... 88
-------- ------ ------- ----- ------- -----
28,564 1.9 17,680 1.3 22,378 1.8
-------- ------ ------- ----- ------- -----
Available-for-Sale:
U.S. Government and agencies................ 50,091 3.3
State and political subdivisions............ 1,253 0.1 891 0.1
Other investments .......................... 5,503 0.4
-------- ------ ------- ----- ------- -----
50,091 3.3 1,253 0.1 6,394 0.5
-------- ------ ------- ----- ------- -----
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell.............. 25,279 1.7 25,400 1.9 31,500 2.6
Interest-bearing deposits in other banks (1) 28,892 1.9 5,702 0.4 4,568 0.4
-------- ------ ------- ----- ------- -----
54,171 3.6 31,102 2.3 36,068 3.0
-------- ------ ------- ----- ------- -----
$132,826 8.8% $50,035 3.7% $64,840 5.3%
======== ====== ======= ===== ======= =====
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
In 1997, the Bank purchased $105 million in U.S. Government securities,
of which $90 million was classified as available-for-sale. Of these securities,
$40 million were sold in 1997. The reduction of corporate and political
subdivision bonds since 1995 has been primarily due to maturities and calls.
Also, the state and political subdivision bonds classified as available-for-sale
in 1996 were reclassified as held-to-maturity in 1997, as there is no active
market for these securities. In 1996, the Bank purchased and sold $55 million in
U.S. Government securities. Other investments classified as available-for-sale
were sold in the amount of $6 million.
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1997. Substantially all of the related interest and dividends
represent taxable income. Yields on tax-exempt investments are calculated on the
basis of actual yields and not on a tax-equivalent basis, since the effect of
the equivilization is immaterial.
5
At December 31, 1997
---------------------
Amount Yield
------ ------
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
Within one year....................................................... $ 500 6.41%
After one but within five years....................................... 3,934 7.06
After five but within ten years....................................... 3,137 6.92
After ten years....................................................... 4,459 6.94
--------
12,030 6.95
--------
U.S. Government and agencies:
After one but within five years ...................................... 15,000 6.08
--------
State and political subdivisions (1):
Within one year....................................................... 65 5.05
After ten years....................................................... 1,469 7.61
--------
1,534 7.50
--------
Total debt securities, held-to-maturity................................. 28,564 6.53
--------
Available-for-Sale:
U.S. Government and agencies:
Within one year ...................................................... 20,031 5.59
After one but within five years....................................... 30,060 6.11
--------
50,091 5.90
--------
Short-term investments:
Interest-bearing deposits in other banks.............................. 28,892 5.76
Federal funds sold and securities purchased under agreements to resell 25,279 6.15
--------
Total short-term investments............................................ 54,171 5.94
--------
$132,826 6.05%
========
(1) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since the effect would be immaterial.
In addition to the foregoing investment securities, the Company has
maintained an investment portfolio of mortgage-backed securities, which
increased dramatically after 1993 as the Company implemented investment growth
strategies during subsequent years. Purchases of mortgage-backed securities,
specifically collateralized mortgage obligations, in 1997 totalled $79 million,
of which $27 million was classified as available-for-sale and $52 million was
classified as held-to-maturity. The Bank also sold $13 million in GNMA
mortgage-backed securities. Reductions in the other categories, for all years,
were 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,
-------------------------------------------------------------------------
1997 1996 1995
------------------- ---------------------- -------------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
------------ ------ -------- ----- -------- ------
Held-to-Maturity:
Collateralized mortgage obligations......... $151,982 7.30% $165,516 7.38% $ 72,222 7.72%
GNMA ....................................... 1,299 7.16 1,496 7.16 1,697 7.03
FHLMC....................................... 53,822 6.17 63,223 6.18 73,197 6.22
FNMA........................................ 53,134 6.26 62,754 6.26 72,590 6.30
Other....................................... 12,663 7.50 20,340 8.07 21 13.25
------------ ------ -------- ----- -------- ------
$272,900 6.88% $313,329 6.96% $219,727 6.80%
============ ====== ======== ===== ======== ======
Available-for-Sale:
Collateralized mortgage obligations ........ $ 57,374 7.26% $ 37,482 7.44%
GNMA........................................ 14,441 6.15 $ 17,405 6.44%
------------ ------ -------- ----- -------- ------
$ 57,374 7.26% $ 51,923 7.08% $ 17,405 6.44%
============ ====== ======== ===== ======== ======
CREDIT EXTENSION ACTIVITIES
Traditionally, the majority of a typical thrift institution's loan
portfolio has consisted of first mortgage loans on residential properties.
However, as a result of various legislative and regulatory changes since 1980,
the commercial and consumer lending powers of 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 temporarily discontinued in 1990 and only
originations required by previous funding commitments were made. In 1994, the
Bank began to originate small business and 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.
7
The following table sets forth the composition of the Corporation's
loan/lease portfolio by type of loan/lease at each of the dates indicated. Other
than as disclosed below, the Company had no concentrations of loans/leases
exceeding 10% of total loans/leases at December 31, 1997:
December 31,
------------------------------------------------------------------
1997 1996 1995
--------------- --------------- -----------
Amount Percent Amount Percent Amount Percent
-------- ------ -------- ------ -------- -----
(Dollars in Thousands)
Residential real estate (1)............... $287,349 30.7% $279,060 33.8% $276,926 35.0%
Commercial real estate:...................
Commercial mortgage....................... 238,533 25.5 278,935 33.8 293,979 37.1
Construction.............................. 12,553 1.3 27,056 3.3 29,959 3.8
-------- ------ -------- ------ -------- -----
Total commercial real estate............. 251,086 26.8 305,991 37.1 323,938 40.9
Commercial................................ 94,686 10.1 28,602 3.5 23,894 3.0
Consumer.................................. 159,432 17.0 135,552 16.4 114,265 14.4
Finance leases............................ 60,985 7.4 98,840 12.5
-------- ------ -------- ------ -------- -----
Gross loans............................... 792,553 84.6 810,190 98.2 837,863 105.8
Less:
Unearned income........................... 3,240 0.3 13,102 1.6 21,512 2.7
Allowance for loan losses................. 24,850 2.7 24,241 2.9 24,167 3.1
-------- ------ -------- ------ -------- -----
Net loans................................ 764,463 81.6 772,847 93.7 792,184 100.0
-------- ------ -------- ------ -------- -----
Vehicles under operating leases, net...... 172,115 18.4 52,036 6.3
-------- ------ -------- ------ -------- -----
Net loans and vehicles under operating
leases.................................... $936,578 100.0% $824,883 100.0% $792,184 100.0%
======== ====== ========= ====== ======== =====
RESTUBBED
-------------------------------------------
1994 1993
--------- ----------
Amount Percent Amount Percent
-------- ------ -------- -------
Residential real estate (1)............... $260,442 36.6% $235,213 34.2%
Commercial real estate:...................
Commercial mortgage....................... 259,112 36.6 273,375 39.8
Construction.............................. 25,603 3.6 28,978 4.2
-------- ------ -------- ------
Total commercial real estate............. 284,715 40.2 302,353 44.0
Commercial................................ 25,188 3.5 21,276 3.0
Consumer.................................. 91,182 12.8 93,845 13.7
Finance leases............................ 89,095 12.5 72,941 10.6
-------- ------ -------- ------
Gross loans............................... 750,622 105.6 725,628 105.5
Less:
Unearned income........................... 18,146 2.6 14,523 2.1
Allowance for loan losses................. 21,700 3.0 23,613 3.4
-------- ------ -------- ------
Net loans................................ 710,776 100.0 687,492 100.0
-------- ------ -------- ------
Vehicles under operating leases, net......
-------- ------ -------- ------
Net loans and vehicles under operating
leases.................................... $710,776 100.0% $687,492 100.0%
======== ===== ======== ======
(1) Includes $2,222, $773, $4,401, $257, and $1,965 of residential mortgage
loans held-for-sale at December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
8
The following table sets forth information as of December 31, 1997
regarding the dollar amount of loans and leases maturing in the Company's
portfolios, 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 as well as leases maturing during the indicated periods. Loans
and leases 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)..................... $ 63,056 $176,450 $284,154 $523,660
Construction loans........................ 11,065 1,469 19 12,553
Commercial loans.......................... 20,349 28,923 45,414 94,686
Consumer loans ........................... 56,029 70,647 32,756 159,432
-------- -------- -------- --------
$150,499 $277,489 $362,343 $790,331
======== ======== ======== ========
Rate sensitivity:
Fixed................................... $ 51,771 $130,238 $153,871 $335,880
Adjustable 98,728 147,251 208,472 454,451
------- -------- -------- --------
150,499 277,489 362,343 790,331
-------- -------- -------- --------
Vehicles under operating leases, net 33,228 138,887 172,115
-------- -------- -------- --------
Gross loans and net operating leases $183,727 $416,376 $362,343 $962,446
======== ======== ======== ========
(1) Includes commercial mortgage loans; does not include loans held-for-sale.
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 and lease portfolio is significantly shorter than is reflected in the above
table as a result of prepayments.
Residential Real Estate Lending. WSFS originates residential mortgage
loans with loan-to-value ratios up to 95%; however, the Bank generally requires
private mortgage insurance for up to 30% 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, 1997, the balance of
all such loans was approximately $17.1 million of which $7.9 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
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, title insurance is required, 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 residential real estate adjustable-rate loans currently
originated have interest rates that adjust every year, with the change in rate
limited to two percentage points 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.
Consistent with industry practice in its market area, the Bank has originated
adjustable-rate mortgage loans with initially discounted interest rates. 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 risk 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.
9
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 20% 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, after the Plan and Directive were lifted, the Bank began to originate
small business commercial and 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 at origination. As a result of subsequent
changes in the real estate market, however, current loan-to-value ratios on
certain loans could 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 independently of the commercial
lending area. Generally, the loan-to-value ratio for construction loans does 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, 1997, $19.6 million was committed for
construction loans, of which $12.6 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 $4.9 million, and their terms range from less than one year to
seven years. The loans generally carry variable interest rates indexed to the
Bank's prime rate or LIBOR at the time of closing. The Bank intends to continue
originating commercial loans to small businesses in its market area.
Commercial, commercial mortgages and construction lending entail
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 is 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.
10
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. A single large extension of credit
by the Bank would be limited by this 15% of capital restriction, except if the
extension of credit would be fully or partially secured by U.S. treasury
securities. 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. In April 1997, the bank originated a
$35.5 million loan to refinance an employee stock ownership plan ("ESOP") loan
of a company. Approximately 80% of the loan is secured by discounted U.S.
treasury securities. The portion of the loan that is secured by U.S. treasury
securities is exempt from the above lending limits. At December 31, 1997, no
borrower had collective outstandings exceeding the above limits.
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.
The primary consumer credit products, excluding leases, 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 100%
of the appraised value (net of any senior mortgages) of the residence. This line
of credit is secured by a mortgage on the borrower's property and can be drawn
upon at any time. At December 31, 1997, the Bank had extended a total of $87.1
million in home equity lines of credit, of which $31.1 million had been drawn at
the 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 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 first and second 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
significant adverse experience to date.
Since 1988, the focus of WSFS Credit Corporation (WCC), formerly Star
States Leasing Corporation, has been to finance leases indirectly. These leases
are secured by motor vehicles and originated through automobile dealerships.
During 1997, WCC originated more than 3,400 leases, which approximated $107.5
million in new assets. At December 31, 1997, the Corporation reclassified
approximately $172 million in leases originated by WCC to operating leases in
accordance with Statement of Financial Accounting Standards No. 13.
Approximately $52 million of leases as of December 31, 1996 have also been
reclassified as operating leases herein.
11
The table below sets forth consumer loans by type, in dollar amounts and
percentages, at the dates indicated.
December 31,
-------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- --------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
Equity secured installment loans $ 78,975 49.6% $ 63,803 47.1% $ 52,793 46.2%
Home equity lines of credit .... 31,110 19.5 33,267 24.5 36,817 32.2
Automobile ..................... 32,959 20.7 26,456 19.5 12,701 11.1
Unsecured lines of credit ...... 9,466 5.9 7,448 5.5 7,017 6.2
Other .......................... 6,922 4.3 4,578 3.4 4,937 4.3
-------- ----- -------- ----- -------- -----
Total consumer loans ........... $159,432 100.0% $135,552 100.0% $114,265 100.0%
======== ====== ======== ====== ======== ======
RESTUBBED
1994 1993
----------------------- ----------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Equity secured installment loans $ 34,088 37.4% $ 24,485 26.1%
Home equity lines of credit .... 40,727 44.7 47,060 50.2
Automobile ..................... 1,951 2.1 2,567 2.7
Unsecured lines of credit ...... 3,683 4.0 4,070 4.3
Other .......................... 10,733 11.8 15,663 16.7
-------- ----- -------- -----
Total consumer loans ........... $ 91,182 100.0% $ 93,845 100.0%
======== ====== ======== ======
12
Loan and Lease 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
practices. The Bank originates fixed-rate 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 1997, WSFS originated $84 million of residential real estate
loans compared to 1996 originations of $71 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 $10 million, $13 million and $14 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Residential real estate
loan sales totaled $26 million in 1997 and $24 million for both 1996 and 1995.
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,
consistent with current asset/liability management strategies.
The Bank serviced for others approximately $206 million of residential
loans at December 31, 1997 compared to $196 million at December 31, 1996. The
Company also services residential loans for its portfolio totaling $251 million
and $247 million at December 31, 1997 and 1996.
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 1997, the Bank originated $123 million of
commercial and commercial real estate loans compared to $65 million in 1996.
These amounts represent gross contract amounts and do not reflect amounts
outstanding on such loans.
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 1997, such consumer loan originations aggregated $105 million compared to
$93 million in 1996. Additionally, WSFS Credit Corporation originated
approximately $107.5 million of operating leases in 1997 and $50 million in
1996. See "Consumer Lending" for a further discussion regarding consumer loan
originations.
All loans to one borrower exceeding $750,000 in aggregate must be
approved by a management loan committee. Minutes of the management loan
committee meetings and individual loans exceeding $3.0 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
$3.0 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 institution also receive
commitment fees for making commitments to originate construction, residential
and commercial real estate loans. Additionally, loan fees related to existing
loans are received, 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.
13
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, 1997. Loan fees other than those considered adjustments of yield
are reported as loan fee income, a component of other income.
LOAN AND LEASE LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations can be negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its portfolios to identify problem
loans and leases 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, lease and investment in real estate
portfolios and reports such information to the Chief Financial Officer and the
Executive Committee of the Board of Directors.
SUBSIDIARIES
At December 31, 1997, WSFS had four wholly owned, first-tier
subsidiaries which were engaged in leasing, consumer finance, insurance
investment products, and securities sales, as well as real estate development.
WSFS is the sole investor in and primary lender to its non-bank subsidiaries. At
December 31, 1997, it had $3.3 million invested in the equity of these companies
and had lent them an additional $228.4 million.
WSFS Credit Corporation (WCC) 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 leases through automobile dealerships in Pennsylvania, New
Jersey and Maryland as well as Delaware. In 1996 WCC expanded its market area to
parts of western Maryland and West Virginia. WCC underwrites all leases
originated through automobile dealers in accordance with underwriting criteria
generally consistent with those of the Bank and the leasing industry. WCC's
total assets at December 31, 1997 and 1996 were $203.5 million and $129.9
million, respectively.
838 Investment Group, Inc. (formerly Star States Financial Services,
Inc.) was formed in 1989. This subsidiary markets various investment and
insurance products, such as single-premium annuities and whole life policies,
and securities to Bank customers primarily through the Bank's branch system.
Community Credit Corporation (CCC), a consumer finance subsidiary, was
formed in June 1994 to provide fixed-rate 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. CCC's total assets at December 31, 1997 and 1996 were $18.4 million
and $12.3 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 were in the form of
nonrecourse, first mortgage loans, in return for which Star States Development
Company was entitled to receive repayment of principal and interest, and to
share, at an agreed upon percentage, in the profits of the project. Star States
Development Company is currently inactive with the exception of one remaining
parcel of land which is expected to be sold in the second quarter of 1998.
14
Providential Home Income Plan, Inc. (Providential) was 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 it is owned. The management and operations of Providential were
merged into the Bank in November 1996.
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 another financial institution. In November 1995, 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 retail deposit growth and various
borrowing sources, including repurchase agreements, federal funds purchased and
advances from the Federal Home Loan Bank (FHLB) of Pittsburgh. Loan repayments
and investment maturities also provide sources of funds. Loan repayments and
investment maturities provide a relatively stable source of funds while certain
deposit flows tend to be more susceptible to market conditions. Borrowings are
used to fund wholesale asset growth, short-term funding of lending activities
when loan demand exceeds projections, or when deposit inflows or outflows are
less than or greater than expected. On a long-term basis, borrowings may be used
to match against specific loans or support business expansion.
Deposits. The Bank offers various deposit programs to its customers,
including 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 16 branches. Fifteen of these branches are located in northern
Delaware's New Castle County, the Bank's primary market. These branches maintain
approximately 140,000 total account relationships with approximately 40,500
total households, or 23% of all households in New Castle County, Delaware. The
sixteenth branch is in the state capital, Dover, located in central Delaware's
Kent County, and the seventeenth branch opened March 18, 1998 in Glen Mills,
Pennsylvania.
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,
Maturity Period 1997
- ---------------- ------------
(In Thousands)
Less than 3 months...................... $34,423
Over 3 months to 6 months............... 7,668
Over 6 months to 12 months.............. 7,711
Over 12 months.......................... 11,861
--------
$61,663
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As a member 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.
15
The Bank also sells securities under agreements to repurchase with
various brokers as an additional source of funding. When entering into these
transactions, the Bank is generally required to pledge either government
securities or mortgage-backed securities as collateral for the borrowings.
On December 29, 1993, the Company issued $32.0 million in 11% Senior
Notes due December 31, 2005 (Notes) to certain institutional and accredited
individual investors. See Note 10 of the Consolidated Financial Statements for a
further discussion of the Notes.
REGULATION
Regulation of the Company
General. The Company is a registered savings and loan holding company
and is subject to Office of Thrift Supervision (OTS) regulation, examination,
supervision and reporting requirements. As a subsidiary of a holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
other affiliates.
Activities Restrictions. The Company currently operates as a unitary
savings and loan holding company. There generally are no restrictions on the
activities of a unitary holding company. If the Company were to acquire another
thrift and operate it as a separate entity, it would become subject to the
activities restrictions on multiple holding companies. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings association may commence, or continue after a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies;
or (vii) unless the Director of OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities authorized
by the Federal Reserve Board as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director of OTS
prior to being engaged in by a multiple savings and loan holding company.
Transactions with Affiliates; Tying Arrangements Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, 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-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) lend or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association. Savings associations are also subject
to Section 106 of the Bank Holding Company Act of 1956 (BHCA) which prohibits a
depository institution from extending credit, offering services, or fixing or
varying the consideration for any extension of credit or service on the
condition that the customer obtain some additional service from the institution
or certain of its affiliates or that the customer not obtain services from a
competitor of the institution, subject to certain limited exceptions.
16
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 company involved controls a
savings institution which operated a home or branch office in the state of the
association to be acquired as of March 5, 1987; (ii) the acquirer is authorized
to acquire control of the savings association pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act; or (iii) the
statutes of the state in which the association to be acquired is located
specifically permit institutions to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The laws of Delaware do not specifically authorize
out-of-state savings associations or their holding companies to acquire
Delaware-chartered savings associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent the Bank from entering into other states by
mergers or branching. OTS regulations permit federal associations to branch in
any state or states of the United States and its territories. Except in
supervisory cases or when interstate branching is otherwise permitted by state
law or other statutory provision, a federal association may not establish an
out-of-state branch unless the federal association qualifies as a "domestic
building and loan association" under ss.7701(a)(19) of the Internal Revenue Code
or as a "qualified thrift lender" under the Home Owners' Loan Act and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association or qualified thrift lender. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Regulation of 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 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 4% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. In addition, OTS regulations impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio
of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
institution is rated Composite 1 under the OTS examination rating system). For
purposes of these regulations, Tier 1 capital has the same definition as core
capital.
The OTS capital rule defines 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
17
supervisory goodwill and, subject to certain limitations, mortgage servicing
rights and purchased credit card relationships. Tangible capital is given the
same definition as core capital but does not include qualifying supervisory
goodwill and is reduced by the amount of all the savings institution's
intangible assets except for limited amounts of mortgage servicing rights. The
OTS capital rule requires that core and tangible capital be reduced by an amount
equal to a savings institution's debt and equity investments in "nonincludable"
subsidiaries engaged in activities not permissible to national banks, other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies.
Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, increased by certain goodwill amounts
and by a prorated portion of the assets of unconsolidated includable
subsidiaries in which the savings institution holds a minority interest.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the savings institution's minority investments in
unconsolidated includable subsidiaries and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At December 31, 1997, the Bank was
in compliance with both the core and tangible capital requirements.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to-value
ratios not exceeding 80%, fixed-rate multi-family first mortgages not more than
90 days past due with loan-to-value ratios not exceeding 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.
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 OTS
risk-based capital standards require savings institutions with more than a
"normal" level of interest rate risk to maintain additional total capital. A
savings institution's interest rate risk is measured in terms of the sensitivity
of its "net portfolio value" to changes in interest rates. A savings association
with more than normal interest rate risk is required to deduct an interest rate
risk component equal to one-half of the excess of its measured interest rate
risk over the normal level from its total capital for purposes of determining
its compliance with the OTS risk-based capital guidelines. At December 31, 1997,
the Bank was in compliance with the OTS risk-based capital requirements.
Loans to Directors, Officers and 10% Stockholders. Under Section 22(h)
of the Federal Reserve Act, loans to an executive officer or director or to a
greater than 10% stockholder of a savings association and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the association's loans to one borrower
limit (generally equal to 15% of the institution's unimpaired capital and
surplus) and all loans to all such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans,
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, loans to directors, executive officers and principal stockholders must
be made on terms substantially the same as offered in comparable transactions to
other persons unless the loan is made pursuant to a compensation or benefit plan
that is widely available to employees and does not discriminate in favor of
insiders. Section 22(h) also prohibits a depository institution from paying the
overdrafts of any of its
18
executive officers or directors. Savings associations are subject to the
requirements and restrictions of Section 22(g) of the Federal Reserve Act which
requires that loans to executive officers of depository institutions not be made
on terms more favorable than those afforded to other borrowers, requires
approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 106 of the
BHCA prohibits extensions of credit to executive officers, directors, and
greater than 10% stockholders of a depository institution by any other
institution which has a correspondent banking relationship with the institution,
unless such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and does
not involve more than the normal risk of repayment or present other unfavorable
features.
Dividend Restrictions. The Bank is prohibited from paying any dividend
or making any other capital distribution if, after making the distribution, the
Bank would be undercapitalized within the meaning of the OTS prompt corrective
action regulations. 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, 1997,
the Bank was a Tier 1 Association. 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.
Deposit Insurance. The Bank may be charged semi-annual premiums by the
FDIC for federal insurance on its insurable deposit accounts up to applicable
regulatory limits. The FDIC may establish an assessment rate for deposit
insurance premiums which protects the insurance fund and considers the fund's
operating expenses, case resolution expenditures, income and effect of the
assessment rate on the earnings and capital of members.
The assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution by the FDIC which
is determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well-capitalized,
adequately-capitalized or undercapitalized -- using the same percentage criteria
as in the prompt corrective action regulations. See "Prompt Corrective Action."
Within each capital group, institutions will be assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund.
Because the BIF achieved its statutory reserve ratio of 1.25% of
insured deposits, the FDIC has eliminated deposit insurance premiums for most
BIF members. The FDIC, however, continues to assess BIF member institutions to
fund interest payments on certain bonds issued by the Financing Corporation
(FICO), an agency of the federal government established to help fund takeovers
of insolvent thrifts. Until December 31, 1999, BIF members will be assessed at
the rate of 1.3 basis points on deposits for FICO payments while SAIF members
will be assessed at the rate of 6.5 basis points on deposits. After December 31,
1999, BIF and SAIF members will be assessed at the same rate.
Prompt Corrective Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), federal banking regulators are
required to take prompt corrective action if an institution fails to satisfy
certain minimum capital requirements, including a leverage limit, a risk-based
capital requirement, and any other measure deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of
19
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to become
undercapitalized. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") generally is: (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses.
"Significantly uncapitalized" institutions and their holding companies may
become subject to more severe sanctions including limitations on asset growth,
restrictions on capital distributions by the holding company and possible
divestiture requirements. Institutions generally must be placed in receivership
within specified periods of time after they become "critically
undercapitalized".
Under the OTS regulations implementing the prompt corrective action
provisions of FDICIA, the OTS measures a savings institution's capital adequacy
on the basis of its total risk-based capital ratio (the ratio of its total
capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). A savings institution that is not
subject to an order or written directive to meet or maintain a specific capital
level is deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 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
CAMELS rating). A "significantly undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a ratio of tangible
equity to total assets of less than 2.0%.
Federal Home Loan Bank System. 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,
1997, of $20.3 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.
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 4%) 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, 1997.
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 $47.8 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement may be to reduce the amount of the institution's
interest-earning assets. As of December 31, 1997, the Bank met its reserve
requirements.
20
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.
As of December 31, 1997, the Company had available net operating loss
(NOL) carryforwards for federal and state tax purposes of approximately $22.9
million and $24.2 million, respectively, which may be used to reduce future
income taxes. There are restrictions applicable to approximately $18.8 million
of the NOL carryforwards attributable to Providential Home Income Plan, Inc.,
formerly a 100% wholly-owned subsidiary of WSFS. Because Section 382 of the Code
restricts the annual amount of NOL carryforwards available for use, it could
result in the loss of a portion of Providential's NOL due to expiration.
The Company's federal income tax returns for 1993 and 1994 are
currently under audit. The Company is not aware of any pending federal or state
tax adjustments, nor any notice that would materially change the reported amount
of tax due. Furthermore, the 1994 federal tax return audit of a partnership of
which a subsidiary of the Company is a 50% owner was settled in 1997 with no
significant adjustments.
See Note 13 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 is also subject to
annual franchise taxes in Delaware based on its pretax net income.
The Bank and its subsidiaries each file separate state tax returns. An
operating subsidiary of the bank, WSFS Credit Corporation, conducts business in
several surrounding states and as such, is subject to taxation in these states.
The Company has been notified of the State of New Jersey's intent to audit,
although the scope of the audit has not as yet been defined.
21
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, 1997.
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------- ---------- --------------- ---------
(In Thousands)
WSFS:
Main Office (1) Owned $1,565 $192,503
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 1998 55 53,762
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2001 21 18,975
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 1998 18 72,351
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 1998 24 59,589
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 1998 25 84,702
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2000 13 54,071
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Tri-State Mall Branch* Leased 1998 3 19,073
I-95 & Naamans Road
Claymont, DE 19803
Claymont Branch Owned 75 20,073
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch Leased 1998 24 35,398
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(4) Leased 2007 97 57,704
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 77 62,987
144 N. DuPont Hwy.
New Castle, DE 19720
22
Stanton Leased 2001 257 4,833
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Leased 1998 134 3,676
Inside Genaurdi's at Peoples Plaza
Routes 40 and 896, Newark, DE 19702
Middletown Square Shopping Center Leased 1999 122 11,488
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover (3) Leased 2000 207 15,781
Inside Metro Food Market
Rt 13 & White Oak Road
Dover, DE 19901
Operations Center Owned 1,072 na
2400 Philadelphia Pike
Wilmington, DE 19703
Community Credit Corporation* Leased 1998 10 na
-----------------------------
10 Penn Mart Shopping Center
New Castle, DE 19720
WSFS Credit Corporation*
------------------------ --------
30 Blue Hen Drive 280 $766,966
Suite 200 ========
Newark, DE 19713
*Represents locations without ATM.
(1) Includes location of executive offices and approximately $64.4 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and equipment
totalled $9.0 million at December 31, 1997.
(3) 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.
(4) Also includes companies education and development center.
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 15 to the Consolidated Financial Statements.
Item 4. Submissions of Matters To a Vote of Security Holders
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1997 through the solicitation of
proxies or otherwise.
23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock
MarketSM under the symbol WSFS. At December 31, 1997, the Corporation had 2,312
registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly
period within the two most recent fiscal years. 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 the covenants of the Senior Notes. For
additional information regarding such restrictions, see Note 10 to the
Consolidated Financial Statements.
The closing market price of the common stock at December 31, 1997 was
$20.
Stock Price Range
-----------------
Low High
--- ----
1997 1st $10 1/8 $12 1/8
2nd 10 5/8 14 1/8
3rd 13 1/2 19 1/4
4th 16 21 7/8
1996 1st $ 7 1/8 $ 9 1/2
2nd 7 1/4 8 1/4
3rd 6 3/4 8 1/2
4th 8 1/4 10 5/8
-24-
Item 6. Selected Financial Data
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
At December 31,
---------------
Total assets..................................... $1,515,217 $1,357,635 $1,218,826 $1,195,686 $ 994,692
Net loans (1).................................... 764,463 772,847 792,184 710,776 687,492
Vehicles under operating leases, net............. 172,115 52,036
Investment securities (2)........................ 78,655 18,933 28,772 64,144 54,346
Investment in reverse mortgages, net............. 32,109 35,796 35,614 32,172 24,913
Other investments................................ 74,523 47,337 52,128 44,249 110,816
Mortgage-backed securities (2)................... 330,274 365,252 237,132 262,748 43,750
Deposits (4)..................................... 766,966 744,886 724,030 809,707 806,605
Borrowings (3)................................... 615,578 489,819 370,795 295,244 107,864
Senior notes..................................... 29,100 29,100 29,850 32,000 32,000
Stockholders' equity............................. 86,759 75,788 73,546 45,274 38,693
Number of full-service branches (4).............. 16 16 14 16 16
For the Year Ended December 31,
-------------------------------
Interest income.................................. $109,935 $ 101,223 $ 99,936 $ 80,666 $ 72,320
Interest expense................................. 69,817 58,862 58,067 44,652 38,508
Other income (4)................................. 19,616 11,193 22,615 7,210 7,970
Other expenses .................................. 35,236 32,345 37,341 34,483 34,485
Income before taxes ............................. 22,965 19,522 25,740 7,058 4,677
Net income (4)................................... 16,389 16,356 27,008 8,070 6,359
Earnings per share:
Basic .......................................... 1.31 1.18 1.86 .56 .90
Diluted ........................................ 1.29 1.16 1.84 .55 .44
Interest rate spread............................. 3.10% 3.22% 3.14% 3.11% 3.39%
Net interest margin.............................. 3.13 3.56 3.57 3.39 3.64
Return on average equity......................... 20.25 21.19 45.68 19.64 18.12
Return on average assets......................... 1.11 1.28 2.21 .73 .65
Average equity to average assets................. 5.48 6.06 4.84 3.69 3.57
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances, securities sold under agreement to
repurchase and municipal bond repurchase obligations. The municipal bond
repurchase obligation was called in 1996.
(4) During 1995, the WSFS wholly-owned subsidiary, Fidelity Federal, sold the
deposits of four branches resulting in a net pre-tax gain of $14.2 million
and an after-tax gain of $12.4 million. The remaining assets, liabilities
and equity were merged into WSFS. Additionally, during 1995 WSFS opened two
new branches with deposits acquired from other institutions. During 1996,
WSFS opened two more new branches.
-25-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
WSFS Financial Corporation (Company or Corporation) is a savings and
loan holding company headquartered in Wilmington, Delaware. Substantially, all
of the Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the Bank or WSFS), the largest thrift institution headquartered in
Delaware and among the four largest financial institutions in the state on the
basis of total deposits acquired in-market. The Corporation's primary market
area is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The Bank provides residential
real estate, commercial real estate, commercial and consumer lending services
and funds these activities primarily with retail deposits and borrowings. The
banking operations of WSFS are presently conducted from 16 retail banking
offices located in the Wilmington and Dover, Delaware areas. Deposits are
insured by the Federal Deposit Insurance Corporation (FDIC).
Additional subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system; and Community Credit Corporation (CCC), which
specializes in consumer loans secured by first and second mortgages. An
additional subsidiary, Star States Development Company (SSDC), is currently
inactive with the exception of one remaining parcel of land which is expected to
be sold in the second quarter of 1998. In November 1994, the Bank acquired
Providential Home Income Plan, Inc. (Providential), a San Francisco,
California-based reverse mortgage lender. The management and operations of
Providential were later merged into the Bank in November 1996.
The long-term goal of the Corporation is to maintain its
high-performing financial services company status, focused on its core banking
business while developing unique niche businesses. Beginning in 1994, the
Corporation focused its efforts on developing new businesses and avenues for
asset growth. 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 these 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 status was largely due to 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. The sale allowed the
Corporation to focus on its primary market area while also enhancing capital.
Record earnings in 1994 were surpassed in 1995 as the Corporation
recorded earnings of $27.0 million, of which $14.6 million was from operations
and, as mentioned, $12.4 million was from the sale transaction. Earnings for the
year ended December 31, 1996 and 1997 were $16.4 million. Net income for 1995,
1996 and 1997 included the recognition of tax benefits from prior net operating
losses from WSFS and its subsidiaries. Excluding the one-time net gain on the
sale of the Association's deposits, income before taxes increased $7.3 million
from 1995 to 1996 and $3.4 million from 1996 to 1997.
The following discussion focuses on the major components of the
Company's operations and presents an overview of the significant changes in the
Corporation's results of operations for the past three fiscal years and
financial
-26-
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 net income of $16.4 million in both 1997 and
1996 compared with $27.0 million in 1995. Earnings for all three years included
the recognition of tax benefits. Earnings for 1995 were also significantly
impacted by a nonrecurring after tax gain of $12.4 million on the sale of
deposits and certain assets of the Association. Excluding the tax benefits and
the gain on the sale of deposits, net income for 1997 increased $2.5 million
over 1996, and 1996 income increased $1.8 million over 1995.
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 flows. The level of
nonperforming loans can also impact the interest rate spread by reducing the
overall yield on the loan portfolio.
At December 31, 1997, the Corporation reclassified approximately $172
million in leases originated by its vehicle leasing subsidiary to operating
leases in accordance with Statement of Financial Accounting Standards No. 13.
Accordingly, income on these leases, which previously would have been classified
as interest income, has been presented as other income, consistent with the
operating lease treatment. Prior period amounts have also been restated to
conform their presentation. This reclassification did not result in a material
effect on reported net income of any year herein. In 1996, only approximately
50% of leases and their associated income were accounted for as operating
leases.
Net interest income decreased to $40.1 million in 1997 compared with
$42.4 million and $41.9 million in 1996 and 1995, respectively. The decline in
net interest income over the three year period was due to the increase in the
operating lease portfolio, the income from which is treated as fee income, and
the decline in finance leases, the income from which is treated as interest
income. Excluding the effects of reclassification of direct finance leases to
operating leases discussed above, net interest income would have increased to
$50.2 million in 1997 from $45.7 million in 1996.
The following table sets forth certain information regarding changes in
net interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in the rates for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in
volume (change in volume multiplied by prior year rate); (ii) changes in rates
(change in rate multiplied by prior year volume); and (iii) net change. Changes
due to the combination of rate and volume changes (changes in volume multiplied
by changes in rate) are allocated proportionately between changes in rate and
changes in volume.
-27-
Year Ended December 31,
--------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------- ---------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
Interest income:
Real estate loans (1) .................... $ (937) $ (1,110) $ (2,047) $ 2,001 $ (857) $ 1,144
Commercial loans ......................... 2,687 (580) 2,107 218 (381) (163)
Consumer loans ........................... (1,665) 678 (987) (1,393) 179 (1,214)
Loans held-for-sale ...................... (154) 17 (137) 158 (14) 144
Mortgage-backed securities ............... 6,149 234 6,383 2,472 280 2,752
Investment securities .................... 801 (184) 617 (1,170) (29) (1,199)
Other .................................... 836 1,940 2,776 (1,095) 918 (177)
-------- -------- -------- -------- -------- --------
7,717 995 8,712 1,191 96 1,287
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
Money market and interest-bearing demand 87 87 (432) (14) (446)
Savings ................................ 154 386 540 (321) 145 (176)
Time ................................... (278) (87) (365) (1,061) (1,161) (2,222)
FHLB of Pittsburgh advances .............. 4,767 (248) 4,519 2,827 (427) 2,400
Senior notes ............................. (17) (17) (167) (167)
Other borrowed funds ..................... 6,148 43 6,191 1,817 (411) 1,406
-------- -------- -------- -------- -------- --------
10,861 94 10,955 2,663 (1,868) 795
-------- -------- -------- -------- -------- --------
Net change, as reported ...................... $ (3,144) $ 901 $ (2,243) $ (1,472) $ 1,964 $ 492
======== ======== ======== ======== ======== ========
Tax-equivalent effect (2) .................... 425 501 926
-------- ------- -------- -------- -------- --------
Net change, tax-equivalent basis ............. $ (2,719) $ 1,402 $ (1,317) $ (1,472) $ 1,964 $ 492
======== ======== ======== ======== ======== ========
(1) Includes commercial mortgage loans.
(2) The tax-equivalent income adjustment relates primarily to a commercial
loan.
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 periods indicated.
-28-
Year Ended December 31,
-------------------------------------------------------------------------------------
1997 1996
--------------------------------- ----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ---- ------- -------- -------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 574,596 $ 52,174 9.08% 584,711 $ 54,221 9.27%
Commercial loans (1)................ 58,661 4,781 9.73 26,678 2,674 10.02
Consumer loans...................... 149,855 14,949 9.98 166,733 15,936 9.56
---------- --------- --------- -------
Total loans.................... 783,112 71,904 9.30 778,122 72,831 9.36
Mortgage-backed securities (5).......... 379,315 25,829 6.81 289,158 19,446 6.73
Loans held-for-sale (3)................. 1,698 135 7.95 3,649 272 7.45
Investment securities (5)............... 43,968 2,785 6.33 31,504 2,168 6.88
Other interest-earning assets........... 102,043 9,282 9.10 86,104 6,506 7.56
---------- --------- --------- -------
Total interest-earning assets....... 1,310,136 109,935 8.46 1,188,537 101,223 8.52
--------- -------
Allowance for loan losses............... (24,145) (24,073)
Cash and due from banks................. 17,552 22,911
Vehicles under operating leases, net ... 135,848 44,674
Other noninterest-earning assets........ 36,123 42,347
---------- ---------
Total assets........................ $1,475,514 $1,274,396
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand $ 57,918 1,506 2.60 $ 54,582 1,419 2.60
Savings............................. 162,041 4,617 2.85 156,337 4,077 2.61
Time ............................... 449,555 25,361 5.64 454,654 25,726 5.66
---------- --------- --------- -------
Total interest-bearing deposits 669,514 31,484 4.70 665,573 31,222 4.69
FHLB of Pittsburgh advances............. 388,866 22,598 5.81 307,180 18,079 5.89
Senior notes............................ 29,100 3,315 11.39 29,251 3,332 11.39
Other borrowed funds.................... 214,310 12,420 5.80 108,140 6,229 5.76
---------- --------- --------- -------
Total interest-bearing liabilities.. 1,301,790 69,817 5.36 1,110,144 58,862 5.30
---------- --------- -------
Noninterest-bearing demand deposits..... 71,950 66,823
Other noninterest-bearing liabilities... 20,850 20,224
Stockholders' equity.................... 80,924 77,205
----------- -----------
Total liabilities and stockholders'
equity $1,475,514 $1,274,396
========== ==========
Excess of interest-earning assets
over interest-bearing liabilities... $ 8,346 $ 78,393
=========== ==========
Net interest and dividend income........ $ 40,118 $ 42,361
========== ==========
Interest rate spread.................... 3.10% 3.22%
==== ====
Interest rate margin.................... 3.13% 3.56%
==== ====
Net interest and dividend income to
total average assets................ 2.78% 3.32%
==== ====
RESTUBBED TABLE
Year Ended December 31,
---------------------------------------
1995
-------------------------------------
Average Yield/
Balance Interest Rate(1)
------- -------- -------
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)...............$ 563,172 $ 53,077 9.42%
Commercial loans (1)................ 24,687 2,837 11.49
Consumer loans...................... 181,323 17,150 9.46
-------- --------
Total loans.................... 769,182 73,064 9.50
Mortgage-backed securities (5).......... 252,269 16,694 6.62
Loans held-for-sale (3)................. 1,539 128 8.32
Investment securities (5)............... 48,514 3,367 6.94
Other interest-earning assets........... 101,542 6,683 6.58
-------- --------
Total interest-earning assets....... 1,173,046 99,936 8.52
--------
Allowance for loan losses............... (23,201)
Cash and due from banks................. 25,207
Vehicles under operating leases, net ...
Other noninterest-earning assets........ 45,963
----------
Total assets........................$1,221,015
==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand $ 71,257 1,865 2.62
Savings............................. 168,507 4,253 2.52
Time ............................... 472,941 27,948 5.91
-------- --------
Total interest-bearing deposits 712,705 34,066 4.78
FHLB of Pittsburgh advances............. 259,071 15,679 6.05
Senior notes............................ 30,710 3,499 11.39
Other borrowed funds.................... 77,024 4,823 6.26
-------- --------
Total interest-bearing liabilities.. 1,079,510 58,067 5.38
--------
Noninterest-bearing demand deposits..... 62,880
Other noninterest-bearing liabilities... 19,502
Stockholders' equity.................... 59,123
----------
Total liabilities and stockholders'
equity $1,221,015
==========
Excess of interest-earning assets
over interest-bearing liabilities...$ 93,536
==========
Net interest and dividend income........ $ 41,869
========
Interest rate spread.................... 3.14%
====
Interest rate margin.................... 3.57%
====
Net interest and dividend income to
total average assets................ 3.43%
====
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes commercial mortgage loans.
(5) Includes securities available-for-sale.
-29-
Interest income and expense, on a tax-equivilized basis, increased $8.7
million and $11.0 million, respectively, between 1996 and 1997. The Bank's
acquisition of $69.8 million in mortgage-backed securities in the first quarter
of 1997 and $45 million in other investment securities purchased during 1997
contributed favorably to net interest income. The growth in the operating lease
portfolio (and the decline in the financing lease portfolio) as well as
additional wholesale investment activities contributed to the decrease in the
interest rate spread and margin between 1996 and 1997.
Between 1995 and 1996 interest income and expense increased $1.3
million and $795,000, respectively. These increases were due in part to the
impact of an investment growth strategy which was implemented in 1996.
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 1996 to
$1.5 million in 1997. The Corporation's continued efforts to resolve and collect
problem loans, including nonaccrual and restructured loans have and should
continue to favorably impact provision requirements. The allowance for loan
losses was $24.9 million at December 31, 1997, a 2.51% increase from the level
reported at December 31, 1996. The loan loss allowance as a percentage of total
loans was 3.14% in 1997 versus 2.99% in 1996.
During 1998, 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 increased $8.4 million during 1997 to $19.6
million. This increase was largely attributable to growth in the Corporation's
operating lease portfolio during 1997. As a result, the net rental income from
operating leases increased $6.0 million during the year. In addition, the
Corporation modified its deposit fee schedule at the beginning of the year,
resulting in a $1.7 million increase in service charges on deposits.
Between 1995 and 1996, other income decreased $11.4 million to $11.2
million. This significant decline is the result of a nonrecurring pretax gain of
$14.2 million recognized on the sale of a former subsidiary's deposits and
certain assets during the third quarter of 1995. This decrease was partially
offset by net rental income from operating leases which grew $3.0 million during
the year.
Other Expenses. Other expenses increased $2.9 million during 1997 to
$35.2 million. The primary reason for the increase was expenses associated with
stock appreciation rights (SARs) which increased $2.1 million during the year.
SARs are similar to stock options, but, unlike stock options, accounting for
SARs requires an increase in operating expenses as the stock price increases
above the exercise price. The SAR expense in 1997 resulted from a 96% rise in
the stock price during 1997.
The comparability between periods of certain expense line items has
been affected by the strategic technology alliance entered into on March 1,
1997, between WSFS and ALLTEL, the company which has been managing WSFS data
processing for eight years. Under the new five year agreement, ALLTEL will also
employ certain on-site back office
-30-
personnel as well as manage deposit and loan operation functions. As a result,
certain costs, most of which previously would have been classified as salaries,
are now classified as outsourced operations.
Other expenses decreased $5.0 million between 1995 and 1996 to $32.3
million. The majority of this decrease occurred in salaries which declined $2.0
million during 1996. This decline resulted from SAR expenses, which were $1.1
million below 1995 levels, as well as from lower staffing levels. Also, the net
costs of foreclosed assets declined $1.5 million between 1995 and 1996. This
decrease was largely attributable to a $1.2 million reduction in the provision
for losses on foreclosed assets as a result of improved asset quality. In
addition, FDIC premiums decreased $1.1 million between 1995 and 1996. Premiums
in 1997 and 1996 represent only the amount assessed on deposits acquired from
SAIF insured institutions.
Income Taxes. The Corporation recorded a $6.6 million tax provision for
the year ended December 31, 1997 compared to a tax provision of $3.2 million for
the year ended December 31, 1996 and a tax benefit of $1.3 million for the year
ended December 31, 1995. 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 net tax benefit recorded in 1995 was a result of
the utilization of the Corporation's prior net operating loss carryforwards. The
years 1997 and 1996 included $1.8 million and $3.4 million in tax benefits,
respectively, resulting from the merger of a former subsidiary into WSFS. As a
result of this merger, certain tax benefits, which were previously offset by a
valuation allowance, are now recognizable based upon the continued profitability
of the WSFS consolidated group.
Approximately $22 million of the Corporation's deferred tax assets at
December 31, 1997 are related to write-downs and income on reverse mortgages
attributable to a former subsidiary, Providential. Management has continued to
assess substantial valuation allowances on these deferred tax assets due to
limitations imposed by the Code and uncertainties, including the timing of when
these assets are realized. As historical data accumulate, management will have
more information on which to base the possible recognition of these assets.
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision (benefit) for income taxes
accordingly. For additional information regarding the Corporation's tax
provision and net operating loss carryforwards, see Note 13 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
Consolidated assets grew $157.6 million, or 11.6%, during 1997. Asset
growth occurred primarily in vehicles under operating lease, investments and
other liquidity, offset in part by reductions in mortgage-backed securities.
Total liabilities increased $146.6 million during the year to fund this
activity. This increase occurred primarily in advances from the Federal Home
Loan Bank of Pittsburgh and securities sold under agreements to repurchase.
Stockholders' equity grew $11.0 million to $86.8 million at December 31, 1997.
This increase was attributable to earnings, offset in part by the acquisition of
treasury stock.
Investments. Investment securities grew $59.7 million between December
31, 1996 and 1997. This increase resulted primarily from increases of $35.0
million in notes of the Federal Home Loan Bank, $20 million in U.S. Treasury
notes, and $10.0 million in notes from the Student Loan Marketing Association
(SLMA).
Mortgage-backed Securities. During 1997, mortgage-backed securities
decreased by $35.0 million. The majority of this decline resulted from $100.2
million in principal repayments during the year. In addition, the Corporation
-31-
sold a $13.2 million investment in GNMA adjustable-rate mortgage-backed
securities. These decreases were offset in part by the purchase of $78.8 million
in Collateralized Mortgage Obligations.
Loans. Net loans declined $9.8 million to $762.3 million at December
31, 1997. Direct finance leases, which are shown under the heading of loans,
decreased $61.0 million between December 31, 1996 and 1997. These leases were
replaced by the origination of operating leases during 1997 which are shown
separately on the balance sheet. In addition, commercial real estate loans
decreased $54.9 million. These declines were partially offset by growth in
commercial and consumer loans of $66.1 million and $23.9 million, respectively.
Vehicles Under Operating Leases. Vehicles under operating leases grew
$120.1 million to $172.1 million at December 31, 1997, primarily as a result of
originations in 1997.
Deposits. Deposits increased $22.1 million during 1997 to $767.0
million. This growth was largely attributable to the interest credited to
deposits of $23.7 million. Partially offsetting this increase was an outflow of
$1.6 million in deposits. The table below depicts the changes in net deposits
over the last three years:
Year Ended December 31,
-------------------------------------------
1997 1996 1995
-------- --------- ---------
(In Millions)
Beginning balance...................................................... $ 744.9 $ 724.0 $ 809.7
Interest credited...................................................... 23.7 22.9 24.4
Deposit inflows (outflows), net........................................ (1.6) (12.4) 79.1
Deposit acquired (sold), net........................................... 10.4 (189.2)
------- --------- --------
Ending balance......................................................... $ 767.0 $ 744.9 $ 724.0
======= ======= =======
Borrowings. Total borrowings increased $125.8 million during 1997.
Approximately $77.3 million in FHLB advances and $48.4 million in securities
sold under agreements to repurchase were added during the year to fund asset
growth.
Stockholders' Equity. During the year, stockholders' equity increased
$11.0 million to $86.8 million at December 31, 1997. This increase included
$16.4 million in net income offset in part by the acquisition of 507,409 shares
of treasury stock for $5.8 million. At December 31, 1997, 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 total risk-based capital ratios were 6.89%, 6.93%, 10.45% and
11.05%, 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 net interest
income 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
-32-
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 has been one of the
tactics utilized.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
The repricing and maturities of the Corporation's interest-rate
sensitive assets and interest-rate sensitive liabilities at December 31, 1997
are set forth in the following table.
Less than One to Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in Thousands)
Interest-rate sensitive assets:
Real estate loans (1).................... $ 343,885 $ 84,410 $ 107,918 $ 536,213
Commercial loans......................... 43,947 11,146 39,593 94,686
Consumer loans (2)....................... 94,986 234,062 32,752 361,800
Mortgage-backed securities............... 136,610 126,670 66,994 330,274
Loans held-for-sale...................... 2,222 2,222
Investment in reverse mortgages.......... 1,683 5,833 24,593 32,109
Investment securities.................... 50,656 18,933 9,066 78,655
Other investments........................ 74,523 74,523
------- ------- ------- ---------
748,512 481,054 280,916 1,510,482
------- ------- ------- ---------
Interest-rate sensitive liabilities:
Money market and interest-bearing
demand deposits ...................... 12,786 48,667 61,453
Savings deposits......................... 36,449 131,835 168,284
Time deposits............................ 321,366 126,664 3,690 451,720
FHLB advances............................ 275,000 125,000 400,000
Senior notes............................. 29,100 29,100
Other borrowed funds..................... 105,578 110,000 215,578
------- ------- ------- ---------
751,179 361,664 213,292 1,326,135
------- ------- ------- ---------
Excess of interest-rate sensitive
assets over interest-rate sensitive liabilities
("interest-rate sensitive gap").......... $ (2,667) $ 119,390 $ 67,624 $ 184,347
=========== ========= ========== ==========
Interest-rate sensitive assets/interest-rate sensitive
liabilities.............................. 99.64%
Interest-rate sensitive gap as a percent of total
assets................................... (0.18)%
(1) Includes commercial mortgage loans.
(2) Includes principal related cash flows of the operating lease portfolio,
which are interest-rate sensitive.
To provide a more accurate one-year gap position of the Corporation,
certain deposit classifications are based on the interest-rate sensitive
attributes and not on the contractual repricing characteristics of these
deposits. Management estimates, based on historical trends of 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 changes. Accordingly, these interest-sensitive
portions are classified in the less than one year category with the remainder in
the over five years category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index.
-33-
Deposit rates other than time deposit rates are variable, and changes
in deposit rates are typically subject to local market conditions and
management's discretion and are not indexed to any particular rate.
Generally, during a period of rising interest rates, a positive gap
would result in an increase in net interest income while a negative gap would
adversely affect net interest income. 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 or
with the same frequency. It is also important to consider that the table
represents a specific point in time. Variations can occur as the Company adjusts
its interest-sensitivity position throughout the year.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest
rates. A sudden and substantial change in interest rates may adversely impact
the Company's earnings to the extent that the yields on interest-sensitive
assets and interest-sensitive liabilities do not change at the same speed, to
the same extent, or on the same basis. The Company monitors the impact of
changes in interest rates between assets and liabilities as shown in the
Company's Maturity and Rate Sensitivity Analysis under the Asset/Liability
Management caption. Another measure, required to be performed by OTS-regulated
institutions, is the test specified by OTS Thrift Bulletin No. 13, "Interest
Rate Risk Management." This test measures the impact on net interest income and
on net portfolio value of an immediate change in interest rates in 100 basis
point increments. Net portfolio value is defined as the net present value of
assets, liabilities, and off-balance sheet contracts. The chart below is the
estimated impacts of immediate changes in interest rates at the specified levels
at December 31, 1997, calculated in compliance with Thrift Bulletin No. 13:
Change in Change in Change in
Interest Rate Net Interest Net Portfolio
(Basis Points) Income (1) Value (2)
-------------- ---------- ---------
+400 4% -28%
+300 3 -22
+200 2 -15
+100 1 - 8
-100 -1 9
-200 -3 19
-300 -5 29
-400 -7 41
(1) This column represents the percentage difference between net interest income
for the succeeding 12 months in a stable interest rate environment and net
interest income as projected by the various rate scenarios.
(2) This column represents the percentage difference between net portfolio value
of the Company in a stable interest rate environment and the net portfolio value
as projected in the various rate scenarios.
-34-
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset/liability
structure to obtain the maximum yield/cost spread on that structure. The Company
relies primarily on its asset/liability structure to control interest rate risk.
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective
and, therefore, has focused its efforts on increasing the Company's yield/cost
spread through wholesale and retail opportunities.
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming
real estate investments and assets acquired through foreclosure can negatively
affect the Corporation's results of operations. Nonaccruing loans are those on
which the accrual of interest has ceased. Loans are placed on nonaccrual status
immediately if, in the opinion of management, collection is doubtful, or when
principal or interest is past due 90 days or more and the value of the
collateral is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
ultimate collectibility of principal and interest. Past due loans are loans
contractually past due 90 days or more as to principal or interest payments but
which remain in accrual status because they are considered well secured and in
the process of collection.
-35-
The following table sets forth the Corporation's nonperforming assets,
restructured loans and past due loans and leases at the dates indicated.
December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans/nonperforming leases:
Commercial.................................... $ 1,216 $ 550 $ 563 $ 1,485 $ 1,595
Consumer...................................... 194 224 291 593 674
Commercial mortgages.......................... 3,919 3,243 2,527 9,886 22,377
Residential mortgages......................... 3,710 3,790 3,568 4,620 4,314
Construction.................................. 38 3,529 3,588 3,182 4,638
----------- --------- ---------- --------- ---------
Total nonaccruing loans/nonperforming leases....... 9,077 11,336 10,537 19,766 33,598
Nonperforming investments in
real estate................................... 989 1,500 1,252 2,738 2,901
Assets acquired through
foreclosure................................... 3,826 6,441 11,614 18,936 14,583
----------- --------- ---------- --------- ---------
Total nonperforming assets......................... $ 13,892 $ 19,277 $ 23,403 $ 41,440 $ 51,082
========= ======== ======== ======== ========
Restructured loans................................. $ 4,740 $ 10,967 $ 17,393 $ 13,775 $ 18,020
========== ======== ======== ======== ========
Past due loans/leases:
Residential mortgages......................... $ 315 $ 328 $ 111 $ 152 359
Commercial and
commercial mortgages........................ 1,909 832 789 240 5,590
Consumer...................................... 261 510 143 102 205
----------- --------- ---------- --------- ---------
Total past due loans/leases........................ $ 2,485 $ 1,670 $ 1,043 $ 494 $ 6,154
========== ========= ========= ========= =========
Ratio of nonaccruing loans/nonperforming leases
to total loans/leases (1)..................... .95% 1.34% 1.30% 2.70% 4.74%
Ratio of allowance for loan/lease
losses to total gross loans/leases (1)........ 2.61 2.84 2.90 2.89 3.26
Ratio of nonperforming assets
to total assets............................... .92 1.42 1.92 3.47 5.14
Ratio of loan/lease loss allowance
to nonaccruing loans/leases (2)............... 273.06 197.04 201.84 97.79 63.23
Ratio of loan/lease and foreclosed
asset allowance to total
nonperforming assets (2)...................... 178.50 120.22 94.87 51.17 45.51
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
-36-
Total nonperforming assets decreased by $5.4 million between 1996 and
1997 and by $4.1 million between 1995 and 1996. In 1997, $23.3 million in
collections of such assets, as well as $2.1 million in transfers to
accrual/restructured status contributed to the reduction in nonperforming
assets. Such decreases were offset by the addition of $20.1 million of assets
that were not previously classified as nonperforming assets. The decrease in the
levels of nonperforming assets since 1993 reflects management's continued
efforts to identify and resolve problem assets, and the effects of an improved
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,
----------------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)
Beginning balance................................................ $ 19,277 $ 23,403 $ 41,440
Additions.................................................. 20,090 11,010 8,224
Collections .............................................. (23,337) (7,631) (12,247)
Transfers to accrual/restructured status................... (2,122) (2,194) (10,424)
Transfers to investment in real estate..................... (5,619)
Charge-offs/write-downs.................................... (16) 308 (3,590)
--------- --------- ---------
Ending balance................................................... $ 13,892 $ 19,277 $ 23,403
========= ======== =========
The level of nonaccruing loans and the nonperforming leases to total
loans/leases ratio decreased from 1.34% in 1996 to .95% in 1997. The
nonperforming assets to total assets ratio decreased from 1.42% in 1996 to .92%
in 1997. The significant reduction in nonaccruing loans and nonperforming assets
and, to a lesser extent, the increase in total loans/leases and assets, resulted
in the improved ratios.
In 1997, nonaccruing loan reductions of $3.5 million in the
construction loan category and a $2.6 million decrease in assets acquired
through foreclosure accounted for the majority of the decrease in total
nonperforming assets. During the second quarter of 1997, a $5.1 million asset
acquired through foreclosure was sold. During the second and third quarters of
1997, a $6.2 million loan was transferred to nonaccruing status and subsequently
transferred to assets acquired through foreclosure and then sold. No gain or
loss was recorded on either sale.
Allowance for Loan/Lease Losses. The Corporation maintains allowances
for losses and charges losses to these allowances when such losses are
considered probable. The allowances for losses are maintained at a level which
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the portfolios. Management's
evaluation is based upon a continuing review of the portfolios, which include
factors such as identification of adverse situations that may affect the
borrower's ability to repay, a review of overall portfolio quality, prior loss
experience and an assessment of current and expected economic conditions.
Changes in economic conditions and economic prospects of debtors can occur
quickly, and as a result, impact the estimates made by management.
Additionally, each quarter, management evaluates the collectibility of
each loan and lease in the nonperforming portfolio and the fair value of each
asset in the assets acquired through foreclosure category. The most frequent
forms of collateral for loans and foreclosed assets 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 losses, write-downs of
foreclosed assets, and to reserve for potential future losses.
37
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated.
Year Ended December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance................................. $24,241 $24,167 $21,700 $23,613 $26,263
Provision for loan losses......................... 1,533 1,687 1,403 1,683 2,620
Balance at acquisition for discounted
commercial mortgages............................. 2,600
Reclass to allowance for vehicles under operating lease (259)
Reclass from allowance for ORE losses............. 848
Charge-offs:
Residential real estate.......................... 193 185 154 24 399
Commercial real estate (1)....................... 520 416 814 3,168 3,599
Commercial....................................... 169 605 404 1,021 1,689
Consumer (2)..................................... 859 607 826 514 655
------ ------ ------ ------ ------
Total charge-offs........................... 1,741 1,813 2,198 4,727 6,342
------ ------ ------ ------ ------
Recoveries:
Residential real estate.......................... 2 15 1 29 42
Commercial real estate (1)....................... 95 4 293 486 713
Commercial....................................... 22 15 169 322 46
Consumer (2)..................................... 109 166 199 294 271
------ ------ ------ ------ ------
Total recoveries............................ 228 200 662 1,131 1,072
------ ------ ------ ------ ------
Net charge-offs................................... 1,513 1,613 1,536 3,596 5,270
------ ------ ------ ------ ------
Ending balance.................................... $24,850 $24,241 $24,167 $21,700 $23,613
====== ====== ====== ====== ======
Net charge-offs to average gross
loans outstanding, net
of unearned income............................... .19% .21% .20% .51% .71%
=== === === === ====
(1) Includes commercial mortgage and construction loans.
(2) Includes finance-type leases.
The table below represents a summary of changes in the allowance for
operating lease losses during the periods indicated (dollars in thousands).
Year Ended December 31,
-----------------------
1997 1996(1)
------ --------
Beginning balance.................................... $ 499
Provision for losses on vehicles under operating leases 976 $ 328
Reclass to allowance for lease losses to vehicles under
operating lease ................................. 259
Transfer from lease residual reserve................. 362
Charge-offs.......................................... 791 273
Recoveries........................................... 154 82
------- ------
Net charge-offs...................................... 637 191
------- ------
Ending balance....................................... $ 1,097 $ 499
======= ======
(1) Operating type lease activity began in 1996.
38
The provision for loan losses decreased $154,000 between 1996 and 1997.
This decrease was due primarily to the decrease in loans and a general
improvement in the credit quality of the loan portfolio. The provision for
losses on vehicles under operating leases increased $648,000 between 1996 and
1997. This increase reflects the growth in operating leases and the increase in
net charge-offs.
The higher level of loan charge-offs in 1994 and 1993 was 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 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. Net
charge-offs have declined substantially since 1993 and have stabilized for the
three years ended December 31, 1997.
The allowance for losses is allocated by major portfolio type. As these
portfolios have developed, they have become a source of historical data in
projecting delinquencies and loss exposure; however, such allocations are not
indicative of where future losses may occur. The allocation of the allowance for
loan and lease losses by portfolio type at the end of each of the last five
fiscal years, and the percentage of outstandings in each category to total gross
outstandings, at such dates follow:
December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Residential real estate..... $ 525 36.0% $ 326 34.4% $ 409 32.7% $ 506 34.7% $ 439 32.2%
Commercial real estate...... 11,280 31.8 12,697 37.8 13,663 38.8 14,273 37.9 15,967 41.8
Commercial.................. 11,663 12.0 10,068 3.5 9,180 2.9 5,844 3.4 6,317 2.9
Consumer (1)................ 1,382 20.2 1,150 24.3 915 25.6 1,077 24.0 890 23.1
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total loans............... $24,850 100.0% $24,241 100.0% $24,167 100.0% $21,700 100.0% $23,613 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Operating leases............ $ 1,097 100.0% $ 499 100.0%
======= ===== ======= =====
(1) Includes finance-type leases.
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, 1997 of 100% of the aggregate interest
expense for 12 full calendar months on $29.1 million of the 11% Senior Notes
issued in December 1993. At December 31, 1997, the Corporation retained
approximately $3.2 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. 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).
As required by the OTS, institutions under its supervision must
maintain a 4.0% 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 10.2% and 8.0% at December 31, 1997 and 1996, 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 at least 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
and the pledging of certain loans for other lines of credit. Management believes
these sources are sufficient to maintain the required and prudent levels of
liquidity.
39
At December 31, 1997 and 1996, the Bank had outstanding FHLB advances
of $400.0 and $322.7 million, respectively. Another available short-term funding
source is a $10.0 million revolving line of credit with another institution, of
which no balance was outstanding at December 31, 1997.
The Corporation routinely enters into commitments requiring the future
outlay of funds. Effective March 1, 1997, the Bank entered into a new agreement
with its data processing facilities management company. Under the terms of this
agreement, an average minimum payment of approximately $4.4 million has been
committed for each of the next four years. The above commitment, 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 1997, operating and financing activities provided cash and cash
equivalents of $15.7 and $141.9 million, respectively, while investing
activities used $155.0 million. The cash provided by financing activities
resulted primarily from additional borrowings from the FHLB and securities sold
under agreements to repurchase. This cash was used to fund the purchase of
investment securities and mortgage-backed securities, as well as the repayment
of other borrowings, and a net increase in assets leased to others.
In 1996, operating and financing activities provided $17.4 million and
$124.3 million of cash and cash equivalents, respectively, while investing
activities used $154.2 million. The funds provided by financing activities
reflect additional FHLB advances and securities sold under agreements to
repurchase. These funds were utilized to fund the purchase of mortgage-backed
securities and for the repayment of other borrowings. During 1995, the financing
and operating activities provided $4.0 million and $12.3 million of cash and
cash equivalents, respectively, while investing activities used $8.6 million.
The funds provided by financing activities reflect the additional FHLB advances
and a net increase in certificates of deposit and time deposits. These funds
were used to fund the sale of deposits and for the repayment of other
borrowings.
CAPITAL RESOURCES
Federal laws, among other things, require the OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as 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 total "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as
well as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well-capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 1997, 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 11 to
the Consolidated Financial Statements.
In March 1996, the Corporation initiated the first of three stock
repurchase plans approved by the Board of Directors. In the second and third
quarters of 1996, 725,300 shares, or approximately 5% of the common stock
outstanding, were acquired in open market transactions for $5.7 million. In
October of 1996, the Corporation began a second stock repurchase program to
acquire up to 10% of the outstanding common stock through open market
repurchases and privately negotiated transactions. During the fourth quarter of
1996, the Corporation repurchased 929,900 shares, or 6.7% of common stock
outstanding for approximately $9.0 million. At December 31, 1996, the
Corporation held 1,655,200 shares of common stock in its treasury at a cost of
$14.7 million. In 1997, the Corporation substantially completed the second stock
repurchase program by acquiring 385,409 additional shares of common stock in
January 1997 for $4.3 million. During the second quarter of 1997, the
Corporation started a third stock repurchase plan to acquire up to 10% of common
stock outstanding. Under this third plan, the Corporation has purchased 122,000
shares at a cost of $1.5 million. At December 31, 1997, the Corporation held
2,162,609 shares of its treasury stock at a cost of $20.5 million. Subsequent to
December 31, 1997, the Corporation reissued 4,500 shares of treasury stock as
part of 1998 compensation for the Board of Directors.
40
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 Corporation's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or the same extent as the price of
goods and services.
ACCOUNTING DEVELOPMENTS
In March 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share"
(EPS). This statement, which supersedes APB Opinion No. 15, simplifies the
standards for computing EPS and makes them comparable to international
standards. SFAS No. 128 replaces the "primary" and "fully diluted" earnings per
share with "basic" and "diluted" earnings per share. Basic EPS is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock, or resulted in the issuance of
common stock that then shared in the earnings of the company. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. SFAS No.
128 is effective for financial statements issued for the periods ending December
31, 1997, and retroactive restatement of prior period results is required.
Accordingly, all EPS information contained in this Annual Report has been
restated to comply with this new standard.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure". SFAS No. 129, which is applicable to all
companies, consolidates the existing guidance in the authoritative literature on
an entity's capital structure. SFAS No. 129 requires disclosures that include
the liquidation preferences of preferred stock, information about the pertinent
rights and privileges of the outstanding equity securities, and the redemption
amounts of capital stock that are redeemable at fixed or determinable prices on
fixed or determinable dates. This statement is effective for financial
statements for periods ending after December 15, 1997. Since the Company
currently has a simple capital structure, this statement has had little effect
on disclosure requirements for the Corporation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". According to the statement, all items of "comprehensive income" are to
be reported in a "financial statement that is displayed with the same prominence
as other financial statements". Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Along with net income, examples
of comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on available-for-sale securities, changes in
the market value of a futures contract that qualifies as a hedge of an asset
reported at fair value, and minimum pension liability adjustments. Currently,
the comprehensive income of the Corporation would consist primarily of net
income and unrealized holding gains and losses on available-for-sale securities.
This statement becomes effective for fiscal years beginning after December 15,
1997.
41
In June 1997, the FASB adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". This statement, which
supersedes SFAS No. 14, requires public companies to report financial and
descriptive information about their reportable operating segments on both an
annual and interim basis. SFAS No. 131 mandates disclosure of a measure of
segment profit/loss, certain revenue and expense items and segment assets. In
addition, the statement requires reporting information on the entity's products
and services, countries in which the entity earns revenues and holds assets, and
major customers. This statement requires changes in disclosures only and would
not affect the financial condition or operating results of the Corporation. This
statement becomes effective for fiscal years beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Post Retirement Benefits." This Statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when "FASB Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions," were
issued. This statement requires changes in disclosures and would not affect the
financial condition or operating results of the Corporation. This Statement is
effective for fiscal years beginning after December 15, 1997.
YEAR 2000 ISSUES
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically, the year 2000 is represented as the year 1900.
Correctly identifying the year 2000 as a leap year may also be an issue. These
misidentifications could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, track important customer account information, provide
convenient access to this information, or engage in normal business operations.
The Company has completed an assessment of its core financial and
operational software systems and has found them already in compliance, or the
necessary steps to bring them into compliance have been identified. These tasks
are scheduled for completion by December 1998. The assessment of other less
critical software systems and various types of equipment is continuing and
should be completed in March 1998. The Company expects to bring all systems into
compliance well before the inevitable transition to year 2000 could cause a
disruption in business activities supported by them. The Company has initiated
formal communication with its significant suppliers, business partners and
customers. This communication is intended to determine the extent to which the
Company is vulnerable to those third parties' failure to correct their own Year
2000 issues. Procedures have been put in place to monitor third parties' efforts
directed toward correcting Year 2000 issues. Steps have been defined to help
mitigate the effects of a third party's failure to address Year 2000 issues
adequately.
The Company has not identified any exposure to contingencies related to
the Year 2000 issue but will continue to evaluate for potential exposure. The
Company will use both internal and external resources to complete tasks and
perform testing necessary to address Year 2000 issues. While addressing and
correcting Year 2000 issues will require substantial effort, a large portion of
the costs related to this issue will be met from existing resources through a
reprioritization of the technology department initiatives with the remainder
representing incremental costs which are not expected to be material. The
Company plans to complete the Year 2000 corrections to its core financial and
operational software systems by December 31, 1998 with a full year of
integration testing scheduled for 1999. Completion of the Year 2000 project is
based on management's best estimates, which were derived using numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors.
42
FORWARD LOOKING STATEMENTS
In our Annual Report, we have included certain "forward looking
statements" concerning the future operations of the Corporation. It is
management's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing the Corporation of the protections of such safe
harbor with respect to all "forward looking statements" contained in our Annual
Report. We have used "forward looking statements" to describe the future plans
and strategies including our expectations of the Corporation's future financial
results. Management's ability to predict results or the effect of future plans
and strategy is inherently uncertain. Factors that could affect results include
interest rate trends, competition, the general economic climate in Delaware, the
mid-Atlantic region and the country as a whole, loan delinquency rates, and
changes in federal and state regulation. These factors should be considered in
evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
43
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:
Independent Auditors' Report ................................................45
WSFS Financial Corporation (and Subsidiaries):
Management's Statement on Financial Reporting.............................46
Consolidated Statement of Operations .....................................47
Consolidated Statement of Condition.......................................48
Consolidated Statement of Changes in Stockholders' Equity.................49
Consolidated Statement of Cash Flows......................................50
Notes to the Consolidated Financial Statements............................52
(b) The following supplementary data is set forth in this Annual Report
on Form 10-K on the following page:
Quarterly Financial Summary (unaudited)...................................83
-44-
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,
1997 and 1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WSFS
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31,1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
January 20, 1998
Philadelphia, Pennsylvania
-45-
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 judgments 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, 1997.
Marvin N. Schoenhals R. William Abbott
Chairman, President & Executive Vice President
Chief Executive Officer & Chief Financial Officer
-46-
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
-------------------------------------
1997 1996 1995
------ ------ ------
(In Thousands, Except Per Share Data)
INTEREST INCOME:
Interest and fees on loans.............................................. $ 72,039 $ 73,103 $73,192
Interest on mortgage-backed securities.................................. 25,829 19,446 16,694
Interest and dividends on investment securities......................... 2,785 2,168 3,367
Other interest income................................................... 9,282 6,506 6,683
-------- -------- -------
109,935 101,223 99,936
-------- -------- -------
INTEREST EXPENSE:
Interest on deposits .................................................. 31,484 31,222 34,066
Interest on Federal Home Loan Bank advances............................ 22,598 18,079 15,679
Interest on federal funds purchased and securities sold under
agreements to repurchase............................................. 12,040 5,869 4,206
Interest on senior notes............................................... 3,315 3,332 3,499
Interest on other borrowings........................................... 380 360 617
-------- -------- -------
69,817 58,862 58,067
-------- -------- -------
Net interest income..................................................... 40,118 42,361 41,869
Provision for loan losses............................................... 1,533 1,687 1,403
-------- -------- -------
Net interest income after provision for loan losses..................... 38,585 40,674 40,466
-------- -------- -------
OTHER INCOME:
Gain on sale of deposits................................................ 14,247
Loan servicing fee income............................................... 3,165 3,255 3,016
Net rental income from operating leases................................ 9,089 3,043
Service charges on deposit accounts.................................... 4,579 2,877 2,811
Securities gains (losses).............................................. 165 (243) 265
Other income........................................................... 2,618 2,261 2,276
-------- -------- -------
19,616 11,193 22,615
-------- -------- -------
OTHER EXPENSE:
Salaries and other compensation........................................ 13,700 13,959 15,921
Employee benefits and other personnel expenses......................... 3,373 3,518 4,380
Equipment expense...................................................... 1,452 1,260 1,298
Data processing expense................................................ 2,362 2,346 2,269
Occupancy expense...................................................... 2,793 2,493 2,430
Marketing expense...................................................... 1,212 678 1,050
Professional fees...................................................... 1,374 1,614 850
Net costs of assets acquired through foreclosure....................... 1,056 1,375 2,871
Outsourced operations.................................................. 2,155
Other operating expenses............................................... 5,759 5,102 6,272
-------- -------- -------
35,236 32,345 37,341
-------- -------- -------
Income before taxes.................................................... 22,965 19,522 25,740
Income tax provision (benefit)........................................ 6,576 3,166 (1,268)
-------- -------- -------
Net income............................................................. $16,389 $ 16,356 $27,008
======== ======== =======
Earnings per share:
Basic ............................................................... $ 1.31 $ 1.18 $ 1.86
Diluted ............................................................. 1.29 1.16 1.84
The accompanying notes are an integral part of these financial statements.
-47-
CONSOLIDATED STATEMENT OF CONDITION
December 31,
------------------------------
1997 1996
---------- -----------
(Dollars in thousands)
ASSETS
Cash and due from banks....................................................... $ 27,467 $ 24,651
Federal funds sold and securities purchased under agreements to resell........ 25,279 25,400
Interest-bearing deposits in other banks...................................... 28,992 5,802
Investment securities held-to-maturity (market value: 1997-$28,905, 1996-$17,587) 28,564 17,680
Investment securities available-for-sale...................................... 50,091 1,253
Mortgage-backed securities held-to-maturity (market value: 1997-$273,320, 1996-$311,611) 272,900 313,329
Mortgage-backed securities available-for-sale................................. 57,374 51,923
Investment in reverse mortgages, net.......................................... 32,109 35,796
Loans held-for-sale........................................................... 2,183 758
Loans, net of allowance for loan losses of $24,850 at December 31, 1997 and
$24,241 at December 31, 1996................................................ 762,280 772,089
Vehicles under operating leases, net of allowance for lease losses of $1,097
at December 31, 1997 and $499 at December 31, 1996......................... 172,115 52,036
Stock in Federal Home Loan Bank of Pittsburgh, at cost......................... 20,252 16,135
Assets acquired through foreclosure........................................... 3,826 6,441
Premises and equipment........................................................ 9,001 5,966
Accrued interest and other assets............................................. 22,784 28,376
---------- ----------
TOTAL ASSETS.................................................................. $1,515,217 $1,357,635
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand..................................................... $ 85,509 $ 76,451
Money market and interest-bearing demand ...................................... 61,453 57,104
Savings........................................................................ 168,284 156,404
Time........................................................................... 451,720 454,927
---------- ----------
Total deposits ................................................................. 766,966 744,886
Federal funds purchased and securities sold under agreements to repurchase ..... 207,699 159,304
Federal Home Loan Bank advances................................................. 400,000 322,699
Senior notes.................................................................... 29,100 29,100
Other borrowed funds............................................................ 7,879 7,816
Accrued expenses and other liabilities.......................................... 16,814 18,042
---------- ----------
Total liabilities............................................................... 1,428,458 1,281,847
---------- ----------
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 ........................................................
Common stock $.01 par value, 20,000,000 shares authorized; issued 14,622,588
at December 31, 1997, and 14,567,498 at December 31, 1996..................... 146 146
Capital in excess of par ....................................................... 57,469 57,289
Net unrealized gains on securities available-for-sale, net of tax............... 379 166
Retained earnings............................................................... 49,252 32,863
Treasury stock at cost, 2,162,609 shares at December 31, 1997 and 1,655,200
shares at December 31, 1996................................................. (20,487) (14,676)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY...................................................... 86,759 75,788
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $1,515,217 $1,357,635
========== ==========
The accompanying notes are an integral part of these financial statements.
-48-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Net
Capital unrealized Total
Common in excess gains (losses) Retained Treasury stockholders'
stock of par value on securities earnings stock equity
------ ------------ ------------- -------- -------- ------------
(In Thousands)
Balance, January 1, 1995 ........................ $145 $57,131 $(1,501) $(10,501) $45,274
Exercise of common stock options ................ 5 5
Net changes in unrealized gains (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
Exercise of common stock options ................ 1 153 154
Treasury stock at cost, 1,655,200 shares......... $(14,676) (14,676)
Net changes in unrealized gains (losses) on
securities available-for-sale, net of tax....... 408 408
Net income....................................... 16,356 16,356
---- ------- ---- ------- -------- -------
Balance, December 31, 1996 ...................... 146 57,289 166 32,863 (14,676) 75,788
EXERCISE OF COMMON STOCK OPTIONS ................ 180 180
TREASURY STOCK AT COST, 507,409 SHARES (5,811) (5,811)
NET CHANGES IN UNREALIZED GAINS (LOSSES) ON
SECURITIES AVAILABLE-FOR-SALE, NET OF TAX...... 213 213
NET INCOME ...................................... 16,389 16,389
---- ------- ---- ------- -------- -------
BALANCE, DECEMBER 31, 1997 ...................... $146 $57,469 $379 $49,252 $(20,487) $86,759
==== ======= ==== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-------------------------------------------
1997 1996 1995
---------- -------- --------
(In Thousands)
OPERATING ACTIVITIES:
Net income......................................................................... $ 16,389 $ 16,356 $27,008
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses .......................................... 2,509 2,015 1,403
Provision for losses on assets acquired through foreclosure................... 400 1,570
Depreciation, accretion and amortization ..................................... (861) (376) (1,304)
Decrease (increase) in accrued interest receivable and other assets 4,703 (108) (3,718)
Origination of loans held-for-sale ........................................... (27,605) (27,766) (37,105)
Proceeds from sales of loans held-for-sale.................................... 26,509 31,262 33,151
Increase (decrease) in accrued interest payable and other liabilities......... (1,908) (3,204) 5,882
Gain on sale of deposits...................................................... (16,553)
Increase in reverse mortgage capitalized interest, net ....................... (4,372) (2,158) (1,468)
Other, net ................................................................... 372 966 3,396
---------- -------- -------
Net cash provided by operating activities.......................................... 15,736 17,387 12,262
---------- -------- -------
INVESTING ACTIVITIES:
Net (increase) decrease of interest-bearing deposits in other banks .......... (23,190) (1,034) 5,069
Maturities of investment securities .......................................... 5,528 4,595 12,816
Sales of investment securities available-for-sale............................. 40,030 60,328 63,493
Purchases of investment securities held-to-maturity........................... (15,046) (39,773)
Purchases of investment securities available-for-sale......................... (89,956) (54,615) (387)
Sales of mortgage-backed securities available-for-sale ....................... 13,295
Repayments of mortgage-backed securities held-to-maturity..................... 92,029 44,382 23,903
Repayments of mortgage-backed securities available-for-sale................... 8,205 2,123 2,243
Purchases of mortgage-backed securities held-to-maturity ..................... (52,131) (135,809)
Purchases of mortgage-backed securities available-for-sale.................... (26,651) (38,763)
Repayments on reverse mortgages............................................... 19,023 13,151 12,701
Disbursements for reverse mortgages........................................... (10,546) (11,091) (14,619)
Sales of loans................................................................ 7,556 6,456 4,111
Purchase of loans ............................................................ (11,030) (13,351) (54,271)
Net decrease (increase) in loans ............................................ 8,422 17,047 (27,118)
Net increase in operating leases.............................................. (125,863) (52,036)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ................ (4,117) (275) (4,546)
Disbursement for real estate held for investment in real estate............... 505 1,481
Receipts from investments in real estate .................................... (1,362) (5)
Sales of assets acquired through foreclosure, net ............................ 13,819 6,263 7,816
Premises and equipment, net ................................................. (4,325) (764) (1,053)
Other, net .................................................................. (2) (417)
---------- -------- -------
Net cash used for investing activities............................................. (154,950) (154,250) (8,556)
---------- -------- -------
(Continued on next page)
-50-
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits................... 25,350 11,518 (13,527)
Net increase (decrease) in certificates of deposit and time deposits .... (3,506) 12,084 122,701
Sale of deposits, net.................................................... (180,758)
Repayment of municipal bond repurchase obligations....................... (2,689) (2,690)
Receipts from FHLB borrowings ........................................... 765,000 125,000 150,970
Repayments of FHLB borrowings ........................................... (687,699) (109,507) (70,047)
Receipts from reverse repurchase agreements.............................. 543,157 285,940 194,289
Repayments of reverse repurchase agreements ............................. (494,762) (182,795) (194,838)
Issuance of common stock ................................................ 180 154 5
Extinguishment of senior notes .......................................... (750) (2,150)
Purchase treasury stock.................................................. (5,811) (14,676)
--------- --------- ---------
Net cash provided by financing activities................................ 141,909 124,279 3,955
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ............................. 2,695 (12,584) 7,661
Cash and cash equivalents at beginning of period ............................. 50,051 62,635 54,974
--------- --------- ---------
Cash and cash equivalents at end of period ................................... $ 52,746 $ 50,051 $ 62,635
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid in interest during the year ................................... $ 68,611 $ 58,864 $ 53,689
Cash paid (refund) in income taxes, net ................................. (538) 4,820 2,184
Loans transferred to assets acquired through foreclosure ................ 9,655 5,885 6,264
Net change in unrealized gains (losses) on securities
available-for-sale, net of tax ......................................... 213 408 (1,259)
Assets acquired through foreclosure transferred to investment in
real estate, net ....................................................... 4,806
The accompanying notes are an integral part of these financial statements.
-51-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company organized under the laws of the State of Delaware. The Corporation's
principal wholly-owned subsidiary, Wilmington Savings Fund Society, FSB (WSFS or
Bank), is a federal savings bank organized under the laws of the United States
which conducts operations from 16 retail banking offices located in the
Wilmington and Dover, Delaware areas.
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 allowances for loan and lease 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., Community Credit Corporation
(CCC) and Star States Development Company (SSDC). Also included in the
consolidated financial statements are the operations of Providential Home Income
Plan, Inc. (Providential), a separate subsidiary until November 1996 when the
management and operations were merged into WSFS. Providential was a
California-based reverse mortgage lender which was acquired by the Bank in 1994.
In addition, Star States Pennsylvania Corporation (SSPA) and its subsidiary,
Fidelity Federal Savings and Loan Association (Association), a
federally-chartered stock savings and loan association, are included in the
consolidated financial statements until November 1995. Their subsequent
exclusion is the result of the sale of the Association's deposits and certain
other assets in July 1995 and the merger of the Association's remaining
operations into the Bank in November 1995.
WCC is engaged primarily in indirect motor vehicle leasing. The related
leases are accounted for as operating leases or direct financing leases. 838
Investment Group, Inc. markets various insurance and securities products to Bank
customers through the Bank's branch system. CCC is a consumer finance subsidiary
specializing in consumer loans primarily secured by first and second mortgages.
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 is currently inactive with the exception of one parcel
of land which is being marketed for sale. 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, federal funds sold and securities purchased under
agreements to resell. Generally, federal funds are purchased and sold for
periods ranging up to ninety days.
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Debt and Equity Securities
Investments in equity securities that have a readily determinable fair
value and investments in debt securities are classified into three categories
and accounted for as follows:
o Debt securities 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.
There were no investment and mortgage-backed securities classified as
"trading" during 1997 and 1996.
Debt and equity securities include mortgage-backed securities,
corporate and municipal bonds, U.S. Government and agency securities and certain
equity securities. Premiums and discounts on debt and equity securities
held-to-maturity and available-for-sale are recognized in interest income using
a level yield method over the period to expected maturity.
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.
Loans
Loans are stated net of deferred fees and costs and unearned discounts.
Loan interest income is accrued using various methods which approximate a
constant yield. Loan origination and commitment fees and direct loan origination
costs are deferred and recognized over the life of the related loans using a
level yield method over the period to maturity.
Impaired loans are measured based on the present value of expected
future discounted cash flows, the market price of the loan or the fair value of
the underlying collateral if the loan is collateral dependent. Impaired loans
include loans within the Corporation's commercial, commercial mortgage and
commercial construction portfolios. The Company's policy for recognition of
interest income on impaired loans is the same as for nonaccrual loans discussed
below.
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.
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Allowances for Loss
The allowances for loan and lease losses are maintained at a level
which management considers adequate to provide for potential losses based upon
an evaluation of known and inherent risks in the loan and lease portfolios.
Management's evaluation is based upon a continuing review of each portfolio
which includes factors such as identification of adverse situations that 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.
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, they
are included in operations in the period in which they become known. Identified
losses on specific loans, investments in real estate or assets acquired through
foreclosure are charged against the applicable allowance.
Loans Held-for-Sale
Loans held-for-sale are carried at the lower of cost or market.
Vehicles Under Operating Leases
Vehicles under operating leases are stated at cost less accumulated
depreciation and estimated credit losses. Depreciation expense is computed on a
straight-line basis over the life of the lease, excluding estimated residual
value. 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 less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. "Net costs
of assets acquired through foreclosure" includes costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life.
Accelerated methods are used in depreciating certain assets for income tax
purposes.
-54-
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are treated as financings, with the
obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements
remain in the asset accounts.
Income Taxes
The provision 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
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which is required to be adopted in both interim and annual financial
statements for periods ending after December 15, 1997. Accordingly, the
Corporation has changed its methodology for computing earnings per share and
restated all prior period amounts. SFAS 128 replaced "primary" and "fully"
diluted earnings per share with "basic" and "diluted" earnings per share. Under
the new requirements for calculating earnings per share, the dilutive effect of
stock options will be excluded from basic earnings per share but included in the
computation of diluted earnings per share.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
1997 1996 1995
---- ---- ----
Numerator:
Net income .................................. $16,389 $16,356 $27,008
======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares ................... 12,508 13,910 14,508
Effect of dilutive securities:
Employee stock options..................... 196 168 168
--------- --------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise........................... 12,704 14,078 14,676
======== ======== ========
Basic earnings per share....................... $ 1.31 $ 1.18 $ 1.86
========= ========= =========
Diluted earnings per share..................... $ 1.29 $ 1.16 $ 1.84
========= ========= =========
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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 another institution. Approximately $197.3
million of deposit liabilities were assumed by this institution in exchange for
certain branch related assets, loans and cash. The premium paid on the deposit
base was 8.5%, and other post-closing adjustments. 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 share from this sale.
The Corporation partially 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.
3. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
Available-for-sale securities:
December 31, 1997:
U.S. Government and agencies.................. $ 50,029 $ 62 $50,091
======== ======== ======== =======
December 31, 1996:
State and political subdivisions.............. $ 1,291 $ 38 $ 1,253
======== ======== ======== =======
Held-to-maturity:
December 31, 1997:
Corporate bonds................................ $ 12,030 $ 96 $ 40 $12,086
U.S. Government and agencies .................. 15,000 5 15,005
State and political subdivisions............... 1,534 360 80 1,814
---------- ------- ------- -------
$ 28,564 $ 461 $ 120 $28,905
========== ======== ======== =======
December 31, 1996:
Corporate bonds................................ $15,038 $ 51 $ 148 $14,941
State and political subdivisions................ 2,642 4 2,646
--------- --------- ------- -------
$17,680 $ 55 $ 148 $17,587
======= ======= ======= =======
Securities with book values aggregating $45,934,000 at December 31,
1997 are pledged as collateral for securities sold under agreements to
repurchase and the Bank's treasury, tax and loan account with the Federal
Reserve. Accrued interest receivable relating to investment securities was
$1,123,000 and $314,000 at December 31, 1997 and 1996, respectively.
Substantially all of the interest and dividends on investment securities
represented taxable income.
-56-
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 1997 were as follows:
Held-to-Maturity Available-for-Sale
------------------------ --------------------
(In Thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
Within one year ....................................... $ 565 $ 566 $20,029 $20,031
After one year but within five years................... 18,934 18,962 30,000 30,060
After five but within ten years........................ 3,137 3,127
After ten years........................................ 5,928 6,250
------- -------- ------- -------
$28,564 $28,905 $50,029 $50,091
======= ======= ======= =======
Proceeds from the sales of investments available-for-sale during 1997
were $40,030,000. Gains of $91,000 were realized on these sales. During 1997,
the $1.3 million in state and political subdivision bonds, previously classified
as available-for-sale, were reclassified as held-to-maturity due to the lack of
an active market in these securities and the difficulty in obtaining timely
market valuations for these securities. There were no sales of securities
classified as held-to-maturity nor other transfers between categories of
investment securities during 1997, 1996 and 1995.
Proceeds from the sale of investments during 1996 and 1995 were
$60,328,000 and $63,493,000, respectively. Gains of $218,000 and $333,000 in
1996 and 1995, respectively, and losses of $353,000 and $87,000 in 1996 and
1995, respectively, were realized on these sales.
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4. MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ---------- ---------
(In Thousands)
Available-for-sale securities:
December 31, 1997:
Collateralized mortgage obligations .......... $56,852 $ 719 $ 197 $ 57,374
======= ======== ========== =========
Weighted average yield......................... 7.26%
December 31, 1996:
Collateralized mortgage obligations ........... $37,238 $ 244 $ 37,482
GNMA................................................. 14,391 50 14,441
------- ------- ---------- ---------
$51,629 $ 294 $ 51,923
======= ======= ========== =========
Weighted average yield......................... 7.08%
Held-to-maturity securities:
December 31, 1997:
Collateralized mortgage obligations............ $151,982 $1,518 $ 11 $ 153,489
FNMA........................................... 53,134 593 52,541
GNMA........................................... 1,299 37 1,336
FHLMC ......................................... 53,822 32 604 53,250
Other.......................................... 12,663 41 12,704
-------- ------- ----------- ----------
$272,900 $1,628 $ 1,208 $273,320
======== ====== =========== ==========
Weighted average yield......................... 6.88%
December 31, 1996:
Collateralized mortgage obligations............ $165,516 $ 927 $ 2 $166,441
FNMA........................................... 62,754 1,276 61,478
GNMA........................................... 1,496 41 1,537
FHLMC.......................................... 63,223 60 1,470 61,813
Other......................................... 20,340 2 20,342
--------- ------ ----------- --------
$313,329 $1,030 $ 2,748 $311,611
======== ====== ============ ========
Weighted average yield......................... 6.96%
At December 31, 1997, mortgage-backed securities with book values
aggregating $309,754,000 were pledged as collateral for retail customer
repurchase agreements, Federal Home Loan Bank Advances and securities sold under
agreements to repurchase. Accrued interest receivable relating to
mortgage-backed securities was $1,957,000 and $2,149,000 at December 31, 1997
and 1996, respectively. In 1997, the Bank sold $12,711,000 in adjustable-rate
GNMA securities, classified as available-for-sale, resulting in a gain of
$64,000. There were no sales of mortgage-backed securities in 1996 and 1995, nor
transfers between categories of mortgage-backed securities during 1997, 1996 and
1995.
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5. LOANS
December 31,
---------------------
1997 1996
-------- --------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) ........ $285,127 $278,287
Other ........................... 243,408 282,748
Real estate construction loans........ 17,269 32,134
Commercial loans...................... 97,268 30,369
Consumer loans ...................... 159,432 135,552
Finance leases (see Note 6)........... 60,985
-------- --------
802,504 820,075
Less:
Loans in process ..................... 12,173 10,658
Unearned income ...................... 3,201 13,087
Allowance for loan losses ............ 24,850 24,241
--------- ---------
$762,280 $772,089
The Corporation had impaired loans totaling approximately $5.9 million
and $16.0 million at December 31, 1997 and 1996, respectively. The average
recorded investment in these loans was $8.6 million, $16.3 million and $16.5
million for 1997, 1996 and 1995, respectively. At December 31, 1997, the
allowance for losses on impaired loans totalled $1.2 million as compared to $2.4
million at December 31, 1996. The Corporation recognizes interest income on a
cash basis method on impaired loans. Total interest income recognized on
impaired loans totalled $652,000 for the year ended December 31, 1997 and $1.3
million for the years ending December 31, 1996 and 1995.
The total amounts of loans serviced for others were $207,828,000,
$196,415,000 and $229,144,000 at December 31, 1997, 1996 and 1995, respectively.
Accrued interest receivable on loans outstanding was $5,080,000, $4,546,000 and
$4,965,000 at December 31, 1997, 1996 and 1995, respectively.
Nonaccruing loans aggregated $9,077,000, $11,336,000 and $10,537,000 at
December 31, 1997, 1996 and 1995, respectively. If interest on all such loans
had been recorded, net interest income would have increased by $922,000 in 1997,
$993,000 in 1996 and $735,000 in 1995.
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A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
-------------------------------
1997 1996 1995
------ ------- -------
(In Thousands)
Beginning balance .............................................................. $24,241 $24,167 $21,700
Balance at acquisition for discounted commercial mortgages ................ 2,600
Transfer to allowance for vehicles under operating leases.................. (259)
Transfer from assets acquired through foreclosure reserve ................. 848
Provision for loan losses................................................. 1,533 1,687 1,403
Loans charged-off ......................................................... (1,741) (1,813) (2,198)
Recoveries................................................................ 228 200 662
------- ------- -------
Ending balance ................................................................. $24,850 $24,241 $24,167
6. VEHICLES UNDER OPERATING LEASES
The Corporation leases motor vehicles through its indirect auto leasing
subsidiary, WSFS Credit Corporation. Vehicles are leased through a network of
auto dealerships in Delaware, Pennsylvania, New Jersey, West Virginia, and
Maryland. At December 31, 1997, substantially all leased assets were accounted
for using the operating lease method. At December 31, 1996, approximately 50% of
the leased assets were accounted for under the operating lease method and the
remaining leased assets were accounted for using the direct finance lease
accounting method.
Year Ended December 31,
1997 1996
---- ----
(In Thousands)
Motor vehicles under operating lease, gross................. $186,304 $ 53,378
-------- --------
Less:
Allowance for lease losses.................................. (1,097) (499)
Accumulated depreciation.................................... (13,092) (843)
-------- --------
$172,115 $ 52,036
======== ========
Motor vehicles held-for-sale or lease (net)................. $ 602 $ 280
======== ========
Minimum future rentals under operating leases at December 31, 1997 are
as follows (in thousands):
1998 ................................................. $35,874
1999.................................................. 29,934
2000 ................................................. 18,723
2001.................................................. 6,383
2002.................................................. 300
Thereafter............................................ -------
Total............................................... $91,214
=======
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7. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31,
-------------------------
1997 1996
------- -------
(In Thousands)
Real estate ..................... $ 3,103 $ 7,648
Other ........................... 734 718
------- -------
3,837 8,366
Less:
Allowance for losses............. 11 1,925
------- -------
$ 3,826 $ 6,441
======= =======
A summary of changes in the allowance for losses follows:
Year Ended December 31,
------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
Beginning balance.......................... $ 1,925 $ 2,756 $ 5,677
Provision for loan losses ............... 400 1,570
Net charge-offs ......................... (555) (231) (4,491)
Transfer to investment in real estate.... (511) (1,000)
Transfer to allowance for loan losses.... (848)
------- ------- -------
Ending balance ............................ $ 11 $ 1,925 $ 2,756
======= ======= =======
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8. PREMISES AND EQUIPMENT
December 31,
---------------------------
1997 1996
---- ----
(In Thousands)
Land ...................................... $ 720 $ 720
Buildings ................................. 6,279 6,112
Leasehold improvements .................... 2,933 2,259
Furniture and equipment ................... 10,795 7,292
-------- -------
20,727 16,383
Less:
Accumulated depreciation .................. 11,726 10,417
-------- -------
$ 9,001 $ 5,966
======== =======
The Corporation occupies certain premises and operates certain
equipment under noncancelable leases with terms ranging from 1 to 25 years.
These leases are accounted for as operating leases. Accordingly, lease costs are
expensed as incurred. Rent expense was $1,032,000 in 1997, $965,000 in 1996, and
$921,000 in 1995. Future minimum payments under these leases at December 31,
1997 are (in thousands):
1998 ............................................. $1,015
1999 ............................................. 818
2000 ............................................. 791
2001 ............................................. 637
Thereafter ........................................... 3,546
------
Total future minimum lease payments .................. $6,807
======
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9. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more which aggregate $61,663,000 and $39,586,000 at December 31,
1997 and 1996, respectively.
The following is a summary of deposits by category, including a summary
of the remaining time to maturity for time deposits:
December 31,
----------------------------
1997 1996
--------- --------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ........................... $ 85,509 $ 76,451
Money market and interest-bearing demand ............. 61,453 57,104
--------- ---------
Total money market and demand ..................... 146,962 133,555
--------- ---------
Savings ................................................. 168,284 156,404
--------- ---------
Time certificates by maturity (1):
Less than one year ................................... 268,624 300,114
One year to two years ................................ 88,992 63,279
Two years to three years ............................. 30,981 29,053
Three years to four years............................. 32,355 30,424
Four years to five years.............................. 27,078 28,864
Over five years....................................... 3,690 3,193
---------- ---------
Total time certificates ........................... 451,720 454,927
---------- ---------
Total deposits ........................................... $ 766,966 $ 744,886
========= =========
(1) Includes $64.4 and $64.2 million of brokered certificates of deposit at
December 31, 1997 and 1996, respectively.
Interest expense by deposit category follows:
Year Ended December 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
Money market and interest-bearing demand ................ $ 1,506 $ 1,419 $ 1,865
Savings ................................................. 4,623 4,084 4,261
Time .................................................... 25,355 25,719 27,940
-------- -------- --------
$ 31,484 $ 31,222 $ 34,066
======== ======== ========
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10. 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)
1997
----
FHLB Advances............................................ $400,000 5.65% $435,152 $388,866 5.81%
Senior notes............................................. 29,100 11.39 29,100 29,100 11.39
Federal funds purchased and securities sold under
agreements to repurchase .............................. 207,699 5.83 238,000 205,565 5.86
Other collateralized borrowings.......................... 7,879 4.25 11,877 8,745 4.25
1996
----
FHLB advances............................................ $322,699 5.85% $322,699 $307,180 5.89%
Senior notes............................................. 29,100 11.39 29,850 29,251 11.39
Municipal bond repurchase obligations.................... 2,666 648 11.57
Federal funds purchased and securities
sold under agreements to repurchase ................... 159,304 5.70 159,304 100,965 5.81
Other collateralized borrowings.......................... 7,816 4.25 9,497 6,527 4.35
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 5.15% to 7.03% at December 31, 1997 are due as follows
(dollars in thousands):
Weighted
Average
Amount Rate
------ --------
1998 ............................... $ 115,000 5.49%
1999................................ 90,000 5.78
2000................................ 25,000 6.60
2001................................ 10,000 5.82
2002................................ 40,000 5.55
----------
$ 280,000
==========
Also outstanding at December 31, 1997 are advances of $40,000,000 and
$30,000,000, maturing in 2000 and 2002, respectively, which reprice quarterly
based upon the 3-month LIBOR rate, and a $50,000,000 advance, maturing in 2002,
which is convertible at six month intervals (at the discretion of the FHLB) to
the 3-month LIBOR rate plus 0.03%. The Bank has the option to prepay these
advances at predetermined times or rates.
In March 1996, the Bank secured a $48,807,000 FHLB revolving line of
credit which expired on March 25, 1997 and was not renewed. Pursuant to
collateral agreements with the FHLB, advances are secured by qualifying first
mortgage loans, collateralized mortgage obligations, FHLB stock and an
interest-bearing demand deposit account with the FHLB.
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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, 1997, of $20.0 million.
Senior Notes
In December 1993, the Corporation issued $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 were retained by the Corporation. The remainder of
the net proceeds were invested in the common stock of the Bank, the
Corporation's principal subsidiary. The Corporation repurchased and canceled
$750,000 and $2,150,000 of the bonds outstanding during 1996 and 1995,
respectively.
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, limit the creation of liens
and guarantees with respect to certain other indebtedness, restrict the
Corporation's ability to dispose of the capital stock of the Bank, and limit 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 had the option of requiring the trust to redeem their
units, and the trust had 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 was to
cease one year prior to the final maturity of such bonds. 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 was assumed that the trust would
require the Bank to repurchase the bonds prior to the expiration of the
repurchase obligations. Consequently, the transaction had 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 was increased annually to reflect the increase in the amounts the Bank
was obligated to pay to repurchase individual bonds with a corresponding charge
to interest expense ($75,000 and $394,000 for the years ended December 31, 1996
and 1995, respectively).
During 1996, the Bank's participation in the unit trust was dissolved
and recorded as a sale resulting in the recognition of a $108,000 loss.
-65-
Securities Sold Under Agreements to Repurchase
During 1997, the Bank sold securities under agreements to repurchase as
a short-term funding source. At December 31, 1997, securities sold under
agreements to repurchase had fixed rates ranging from 5.59% to 6.12%. The
underlying securities are mortgage-backed securities and U.S. Government and
agency securities with book and market values aggregating $216.4 million and
$216.1 million, respectively, at December 31, 1997. Securities sold under
agreements to repurchase with the corresponding carrying and market values of
the underlying securities are due as follows:
Collateral
--------------------------------------------
Carrying Market Accrued
Borrowing Rate Value Value Interest
--------- ----- -------- -------- --------
1997
----
Up to 30 days.................... $ 20,356 5.65 $ 20,031 $ 20,031 $ 444
30 to 90 days.................... 37,343 5.84 35,888 36,507 208
Over 90 days..................... 150,000 5.86 160,452 159,549 1,073
-------- ----- -------- -------- -------
$207,699 5.83 $216,371 $216,087 $ 1,725
======== ===== ======== ======== =======
1996
----
30 to 90 days.................... 69,304 5.54 72,553 73,239 444
Over 90 days..................... 90,000 5.83 91,759 89,626 501
-------- ----- -------- -------- -------
$159,304 5.70 $164,312 $162,865 $ 945
======== ===== ======== ======== =======
Other Collateralized Borrowings
Collateralized borrowings of $7,879,000 and $7,816,000 at December 31,
1997 and 1996, 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, 1997 such borrowings were collateralized by
collateralized mortgage obligations. The rate on these borrowings during 1997
averaged 4.25%.
11. 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,
"Tier 1" capital equal to 4.0% of risk-weighted assets and "total" or
"risk-based" capital (a combination of core and "supplementary" capital) equal
to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. At December 31, 1997, and 1996 the Bank was in
compliance with all such requirements and is deemed a "well-capitalized"
institution for regulatory purposes. There are no conditions or events since
that notification that management believes have changed the institution's
category.
-66-
A table presenting the Bank's consolidated capital position as of
December 31, 1997, and 1996 follows (dollars in thousands):
To Be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------------- ------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)......... $110,851 11.05% $ 80,230 8.00% $100,288 10.00%
Core Capital (to Adjusted Tangible Assets)...... 104,833 6.93 60,538 4.00 75,672 5.00
Tangible Capital (to Tangible Assets)........... 104,279 6.89 22,693 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted Assets)........ 104,833 10.45 N/A N/A 60,173 6.00
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets)......... $100,122 11.07% $ 72,348 8.00% $ 90,435 10.00%
Core Capital (to Adjusted Tangible Assets)...... 95,801 7.06 54,258 4.00 67,823 5.00
Tangible Capital (to Tangible Assets)........... 95,057 7.01 10,336 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted Assets)........ 95,801 10.59 N/A N/A 54,261 6.00
The Corporation has a simple capital structure with one class of $ .01
par common stock outstanding, each share having equal voting rights. In
addition, the Corporation has authorized 7,500,000 shares of $ .01 par preferred
stock, and 2,000,000 shares of 10% convertible preferred stock, series 1. No
preferred stock was outstanding at December 31, 1997 and 1996. The Bank is
prohibited from paying any dividend or making any other capital distribution if,
after making the distribution, the Bank would be undercapitalized within the
meaning of the OTS Prompt Corrective Action regulations. Dividends are also
limited by the covenants of the senior notes.
Treasury Stock
In March 1996, the Corporation initiated the first of three stock
repurchase plans, approved by the Board of Directors. Under the first plan,
725,300 shares, or approximately 5% of the common stock outstanding, were
acquired in open market transactions for $5.7 million. In October 1996, the
Corporation began a second stock repurchase program to acquire up to 10% of the
outstanding common stock through open market repurchases and privately
negotiated transactions. During the fourth quarter of 1996, the Corporation
repurchased 929,900 shares, or 6.7% of common stock outstanding for
approximately $9.0 million. At December 31, 1996, the Corporation held 1,655,200
shares of common stock in its treasury at a cost of $14.7 million. In 1997, the
Corporation substantially completed the second stock repurchase program by
acquiring 385,409 additional shares of common stock in January 1997 for $4.3
million. During the second quarter of 1997, the Corporation initiated the third
stock repurchase plan to acquire up to 10% of common stock outstanding. Under
this third plan, the Corporation has purchased 122,000 shares at a cost of $1.5
million. At December 31, 1997, the Corporation held 2,162,609 shares of its
treasury stock at a cost of $20.5 million. Subsequent to year-end, the
Corporation reissued 4,500 shares of treasury stock as part of a compensation
plan for the Board of Directors.
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 10.
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.
-67-
12. EMPLOYEE BENEFIT PLANS
Employee 401(k) Savings Plan
Certain subsidiaries of the Corporation maintain a qualified plan in
which employees may participate. Participants in the plan may elect to direct a
portion of their wages into investment accounts which include professionally
managed mutual and money market funds and the Corporation's common stock. The
principal and earnings thereon are tax deferred until withdrawn, generally. The
Company matches a portion of the employees' contributions and also periodically
makes discretionary contributions, based on Company performance, into the plan
for the benefit of employees. The Corporation's contributions to the plan on
behalf of its employees resulted in an expense of $564,000, $704,000 and
$1,417,000 in 1997, 1996 and 1995, respectively. The plan purchased 33,000,
55,000 and 161,000 shares of common stock of the Corporation during 1997, 1996
and 1995, respectively. The comparatively large expense and shares purchased in
1995 resulted from a special contribution of $734,000 to the plan for the
benefit of employees related to the sale of a former subsidiary's deposits.
All Company contributions are made in the form of the Corporation's
common stock.
Postretirement Benefits
The Corporation shares certain costs of providing health and life
insurance benefits to retired employees (and their eligible dependents).
Substantially all employees may become eligible for these benefits if they reach
normal retirement age while working for the Corporation.
The Corporation accounts for its obligations under the provisions of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 106 requires that the costs of these benefits be recognized
over an employee's active working career.
Net periodic postretirement benefit costs for the years ended December
31, 1997, 1996 and 1995 included the following components (in thousands):
1997 1996 1995
---- ---- ----
Service cost for benefits during the period................................. $ 36 $ 30 $ 62
Interest cost on accumulated postretirement benefit obligation.............. 93 97 108
Amortization of unrecognized transition obligation.......................... 61 63 70
---- ---- -----
Net postretirement benefit cost............................................ $190 $190 $ 240
==== ==== =====
68
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):
1997 1996
----- ----
Accumulated Postretirement Benefit Obligation:
Retirees................................................................. $ 984 $1,032
Future retirees.......................................................... 366 300
------ ------
Total obligation......................................................... 1,350 1,332
Market value of plan assets.............................................. - -
Unrecognized net loss.................................................... (28) (42)
Unrecognized transition liability........................................ (920) (981)
------- -------
Postretirement benefit liability recognized in the balance sheet...... $ 402 $ 309
======= ======
Assumptions used to value the APBO:
Discount rate......................................................... 7.0% 7.3%
Health care cost trend rate........................................... 9.0% 9.5%
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 ninth and
all future years. The costs incurred for retirees' health care are limited since
certain current and all future retirees are restricted to an annual medical
premium cap of $1,500 indexed from 1995 by the lesser of 4% or the actual
increase in medical premiums paid by the Corporation. Beginning in 1996, the
benefit for Medicare Part B Premium reimbursement payments was also included in
the cap noted above. This change decreased the APBO by $150,000 in 1996. 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, 1997, 1996 and 1995.
13. 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,
--------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Current income taxes:
Federal taxes ....................... $ (931) $ 1,062 $ 514
State and local taxes................ 1,208 846 1,730
Deferred income taxes:
Federal taxes ....................... 6,175 1,197 (3,668)
State and local taxes ............... 124 61 156
------- ------- -------
$ 6,576 $ 3,166 $(1,268)
======= ======= =======
Current federal income taxes include taxes on income which cannot be
offset by net operating loss carryforwards. For 1995 this was due to the
limitation on the amount of alternative minimum taxable income that could be
offset by net operating loss carryforwards (NOL's) as provided in the Internal
Revenue Code of 1986, as amended (the Code).
69
Based on the Corporation's history of prior 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 $1.5
million and $7.9 million at December 31, 1997 and 1996, respectively.
Adjustments to the valuation allowance were made in 1997, 1996, and 1995 as a
result of continued operating earnings of the WSFS consolidated group.
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, 1997 and December 31, 1996 (in
thousands):
1997 1996
-------- ---------
Deferred tax liabilities:
Accelerated depreciation......................... $(17,672) $(7,149)
Other............................................ (235) (204)
--------- ---------
Total deferred tax liabilities........................ (17,907) (7,353)
--------- ---------
Deferred tax assets:
Bad debt deductions.............................. 8,822 8,398
Tax credit carryforwards......................... 2,102 1,768
Net operating loss carryforwards................. 9,841 7,656
Loan fees........................................ 598 640
Provisions for losses on reverse mortgages....... 15,779 15,606
Other............................................ 3,580 2,807
-------- ---------
Total deferred tax assets............................. 40,722 36,875
-------- ---------
Valuation allowance................................... (21,335) (21,628)
--------- ---------
Net deferred tax assets............................... $ 1,480 $ 7,894
======== =========
Approximately $22 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 these
deferred tax assets due to limitations imposed by the Code and uncertainties,
including the timing of when these assets are realized.
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 gains and losses on certain investments
in debt and equity securities accounted for under SFAS No. 115.
70
Net operating loss carryforwards of $47.2 million remain at December
31, 1997. There are also alternative minimum tax credit carryforwards and
general business credit carryforwards of approximately $2.1 million at December
31, 1997 which can be used to 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.......................... $ 728
1999.......................... 5,215
2000.......................... $ 31
2001..........................
2002.......................... 4,929
2003.......................... 9,443
2004.......................... $ 968 3,950
2005.......................... 3,850
2006.......................... 1,098
2008.......................... 6,157
2009.......................... 6,755
2017.......................... 4,067
Unlimited..................... 2,071
------- ------- -------
$22,895 $24,265 $ 2,102
======= ======= =======
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 $18.8 million
of net operating loss carryforwards is limited to approximately $1.5 million
each year as a result of such "Ownership Changes" in a former subsidiary's
stock.
A reconciliation setting forth the differences between the effective
tax rate of the Corporation and the U.S. Federal Statutory tax rate is as
follows:
Year Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
Statutory federal income tax rate ... 35.0% 35.0% 35.0%
State tax net of federal tax benefit 3.8 3.0 4.8
Interest income 50% excludable ...... (2.6)
Utilization of loss carryforwards and
valuation allowance adjustments ... (7.6) (21.3) (42.3)
Tax credits utilized ................ (4.2)
Other ............................... (.5) 1.8
---- ---- ----
Effective tax rate ................ 28.6% 16.2% (4.9)%
==== ==== ====
71
14. STOCK OPTION PLANS
The Corporation has stock options and stock appreciation rights (SARs)
outstanding under two stock option plans (collectively, Option Plans) for
officers, directors and employees of the Corporation and its subsidiaries. The
1986 Stock Option Plan (1986 Plan) expired on November 26, 1996, the tenth
anniversary of its effective date. As a result, no future awards may be granted
under the 1986 Plan. The 1997 Stock Option Plan (1997 Plan) was approved by
shareholders in April 1997 to replace the expired 1986 Plan. The 1997 Plan will
terminate on the tenth anniversary of its effective date, after which no awards
may be granted. A total of 625,000 awards may be granted under the 1997 Plan. At
December 31, 1997 there were 529,900 shares available for future grants under
the 1997 Plan.
The Option Plans provide for the granting of incentive stock options as
defined in Section 422 of the Internal Revenue Service Code as well as
nonincentive stock options (collectively, stock options), Phantom Stock Awards
and stock appreciation rights. All awards are to be granted at not less than the
market price of the Corporation's common stock on the date of the grant and
expire no later than ten years from the grant date. All stock options granted
prior to October 1996 are exercisable one year from the date of grant. All stock
options granted after October 1996 are exercisable one year from grant date and
vest in 20% per annum increments. All awards generally become immediately
exercisable in the event of a change in control, as defined, of the Corporation.
SARs allow an optionee to surrender the award in consideration for
payment by the Corporation of an amount equal to the excess of the fair market
value of the common stock over the option price of the SARs. 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 expense related to such SARs of $2,529,000,
$433,000 and $1,573,000 in 1997, 1996 and 1995, respectively.
72
A summary of the status of the Corporation's Stock Option Plans as of
December 31, 1997, 1996 and 1995, and changes during the years then ending is
presented below:
1997 1996 1995
---------------------------- ------------------------ --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of year 316,005 $ 4.72 267,505 $ 2.33 269,705 $ 2.36
Granted ........................ 78,700 17.75 106,700 9.50
Exercised ...................... (55,090) 3.27 (58,200) 2.64 (2,200) 2.19
Canceled ....................... (4,700) 9.44
------- ------- -------
Outstanding at end of year ..... 334,915 $ 7.96 316,005 $ 4.72 267,505 $ 2.33
Exercisable at end of year ..... 180,695 209,305 267,505
Weighted-average fair value
of awards granted ............. $ 6.93 $ 3.84
SARs:
Outstanding at beginning of year 273,075 $ 1.99 329,995 $ 2.00 329,995 $ 2.00
Granted
Exercised ...................... (82,417) 2.54 (51,582) 2.13
Canceled ....................... (5,338) 1.65
------- ------- -------
Outstanding at end of year ..... 190,658 $ 1.75 273,075 $ 1.99 329,995 $ 2.00
Exercisable at end of year ..... 182,658 208,260 192,581
The Black-Scholes option pricing model was used to determine the
grant-date fair-value of options. Significant assumptions used in the model
included a weighted average risk-free rate of return of 6.1% in 1997 and 6.2% in
1996; expected option life of 6 years for both the 1997 and 1996 awards; and
expected stock price volatility of 25% for 1997 awards and 27% for 1996 awards.
No future cash dividends are assumed in either pricing model.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123). This
statement encourages, but does not require, the adoption of fair-value
accounting for stock-based compensation to employees. The Company, as permitted,
has elected not to adopt the fair value accounting provisions of SFAS 123, and
has instead continued to apply APB Opinion 25 and related Interpretations in
accounting for the plans and to provide the required proforma disclosures of
SFAS 123. Had the grant-date fair-value provisions of SFAS 123 been adopted, the
Corporation would have recognized $250,000 in 1997 and $30,000 in 1996 of
compensation expense related to its Option Plans. As a result, proforma net
income of the Corporation would have been $16,139,000 in 1997 and $16,326,000 in
1996, and proforma diluted earnings per share would have been $1.27 in 1997 and
$1.16 in 1996.
73
The effects on proforma net income and diluted earnings per share of
applying the disclosure requirement of justify SFAS 123 in past years may not be
representative of the future proforma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.
The following table summarizes all stock options and SARs outstanding
and exercisable for both the 1986 and 1997 Stock Option Plans as of December 31,
1997, segmented by range of exercise prices:
Outstanding Exercisable
------------------------------------------------------ ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Remaining Exercise
Number Price Contractual Life Number Price
------ --------- ---------------- ------ ----------
Stock Options:
$1.88-$3.76 155,455 $2.25 3.0 years 155,455 $2.25
$3.77-$5.64 7,000 3.94 6.9 years 7,000 3.94
$7.94 2,000 7.94 8.6 years 2,000 7.94
$9.44-$10.00 91,760 9.54 8.9 years 16,240 9.55
$12.75 12,300 12.75 9.4 years
$17.54-$18.81 66,400 18.67 9.7 years
---------- ---------
Total 334,915 $7.96 6.3 years 180,695 $3.03
========== =========
SARs:
$0.00-$1.88 175,380 $1.65 1.9 years 175,380 $1.65
$1.89-$3.76 15,278 2.86 2.1 years 7,278 2.15
---------- ---------
Total 190,658 $1.75 1.9 years 182,658 $1.67
========== =========
74
15. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 1997, outstanding letters of credit were $3,026,410 and
outstanding commitments to make or acquire mortgage loans aggregated $9,605,000,
of which approximately $8,215,000 were at fixed rates ranging from 5.75% to
7.75%, and approximately $1,390,000 were at variable rates ranging from 4.75% to
7.88%. All mortgage commitments are expected to have closing dates within a six
month period.
Computer Operations
In February 1997, the Bank entered into a five-year contract with
ALLTEL, the Company that has been managing data processing operations since
1988, expiring in March 2002. Under the terms of the new contract, this data
processing facilities management company will manage the on-site "back office"
functions of deposit and loan operations for the Bank. The projected amount of
future minimum payments contractually due is as follows:
1998 ............................................... $ 4,748,000
1999................................................ 4,659,000
2000 ............................................... 4,457,000
2001 ............................................... 4,457,000
2002................................................ 743,000
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 former 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. It 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, and
payment of interest, costs, expert witness fees and attorneys' fees.
Providential and the individual defendants 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 filed an appeal with the United
States Court of Appeals for the Ninth Circuit. On August 20, 1997, the Ninth
Circuit issued a ruling dismissing plaintiffs' appeal for lack of jurisdiction.
On February 25, 1998, the Ninth Circuit issued an order denying plaintiffs'
petition for rehearing and suggestions for rehearing en banc.
75
The Corporation believes that all such claims and actions are without
merit and intends to defend itself vigorously.
Additionally, Providential's loan documents provide for the arbitration
of disputes that may arise in connection with Lifetime Reverse Mortgages. The
Bank, as successor to 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 the Bank'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 the Bank'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
Condition.
Exposure to loss for commitments to extend credit and standby letters
of credit written is represented by the contractual amount of those instruments.
The Corporation generally requires collateral to support such financial
instruments in excess of the contractual amount of those instruments and
essentially uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
The following represents a summary of off-balance sheet financial
instruments at year-end:
December 31,
-------------------
1997 1996
----- -----
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments ........................ $ 7,064 $10,929
Commercial mortgage loan commitments ................. 5,376 3,840
Commercial loan commitments .......................... 17,512 13,744
Commercial standby letters of credit ................. 3,026 3,373
Residential mortgage loan commitments ................ 9,605 7,409
Consumer lines of credit ............................. 64,085 62,303
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.
76
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a
variety of factors. In certain cases, fair values represent quoted market prices
for identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions regarding the amount and timing of estimated
future cash flows which are discounted to reflect current market rates and
varying degrees of risk. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year-end
or that will be realized in the future. The Corporation does not presently hold
derivative financial instruments and thus has no disclosure regarding such
investments.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and short-term investments: For cash and short-term investments,
including due from banks, federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits with other banks, the
carrying amount is a reasonable estimate of fair value.
Investment and mortgage-backed securities: Fair value for investment
securities is based on quoted market prices, where available. If a quoted market
price is not available, fair value is estimated using quoted prices for similar
securities.
Investment in reverse mortgages: The fair value of the Corporation's
investment in reverse mortgages is based on 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 is estimated using quoted
market prices for sales of whole loans with similar characteristics such as
repricing dates, product type and size. For residential loans that reprice
frequently, the carrying amount approximates fair value. The fair value of
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 current rates and the risk
associated with the estimated cash flow, are utilized if appraisals are not
available.
Deposit liabilities: The fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, money market and
interest-bearing demand deposits and savings deposits, is equal to the amount
payable on demand. The carrying value of variable rate time deposits and time
deposits that reprice frequently also approximates fair value. The fair value of
the remaining time deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits with comparable remaining maturities.
Borrowed funds: Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
Off-balance sheet instruments: The fair value of off-balance sheet
instruments, including commitments to extend credit and standby letters of
credit, is estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflects the present
creditworthiness of the counterparties.
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The carrying amount and estimated fair value of the Corporation's
financial instruments are as follows (in thousands):
December 31,
--------------------------------------------------------
1997 1996
--------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- --------- -----
Financial assets:
Cash and short-term investments................. $ 81,738 $ 81,738 $ 55,853 $ 55,853
Investment securities........................... 78,655 78,996 18,933 18,840
Mortgage-backed securities...................... 330,274 330,694 365,252 363,534
Investment in reverse mortgages................. 32,109 30,505 35,796 31,856
Loans, net...................................... 764,463 782,298 772,847 771,585
Financial liabilities:
Deposits........................................ 766,966 767,723 744,886 741,846
Borrowed funds.................................. 644,678 639,570 518,919 507,349
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows (in thousands):
December 31,
-------------------------
1997 1996
------ ------
Off-balance sheet instruments:
Commitments to extend credit....................................................... $1,342 $359
Standby letters of credit.......................................................... 30 34
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
projections of the life expectancy of the individual contract holder and changes
in the collateral values of the residence. At each reporting date, a new
economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages; the effective yield of each pool is recomputed, and income is
adjusted retroactively and prospectively to reflect the revised rate of return.
In November 1994, the Corporation purchased Providential Home Income
Plan, Inc., a California-based reverse mortgage lender, for approximately $24.4
million. Providential's assets at acquisition primarily consisted of cash and
its
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investment in reverse mortgages (the "1994 Pool"). Providential's available
liquidity was utilized to fund most of the purchase price. The acquisition was
accounted for by the purchase method of accounting; accordingly, Providential's
results have been included in the Corporation's consolidated statement of
operations since the acquisition date. In November 1996 the management and
operations of Providential were merged into the Bank. The carrying value of the
reverse mortgages was $9.7 million and $9.9 million at December 31, 1997 and
December 31, 1996, respectively. Of the 758 loans which comprise the 1994 pool
at December 31, 1997, all are located in California.
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 $22.4 million and $25.9 million at
December 31, 1997 and December 31, 1996, respectively. Of the 494 loans which
comprise the 1993 Pool at December 31, 1997, 404 loans, or 82%, are located in
Delaware, New Jersey, Pennsylvania and Maryland.
At December 31, 1997, the Corporation's actuarial estimate of net cash
flows from each pool of reverse mortgages was as follows:
Net Inflows (Outflows)
-------------------------------------------
1994 Pool 1993 Pool Total
--------- --------- -----
(In Thousands)
Year ending:
- ------------
1998........................................................ $1,853 $ 2,708 $ 4,561
1999........................................................ 1,844 1,870 3,714
2000........................................................ 2,288 2,026 4,314
2001........................................................ 2,634 2,123 4,757
2002........................................................ 2,985 2,176 5,161
2003-2007................................................... 18,517 10,510 29,027
2008-2012................................................... 19,842 7,906 27,748
2013-2017................................................... 15,946 4,489 20,435
Thereafter.................................................. 14,148 2,662 16,810
The effective yield used to accrue investment income on the
Corporation's investment in reverse mortgages is sensitive to changes in
collateral values and other actuarial and prepayment assumptions. Future
estimated changes in collateral values in 1997 are as follows for each pool:
1994 1993
Pool Pool
---- ----
Year ended December 31, 1998............................. 2.00% 2.00%
Year ended December 31, 1999............................. 3.00 3.00
Thereafter............................................... 3.00 3.00
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In making these estimates of current and expected collateral values,
the Corporation considers its own experience with 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 changes in collateral values and actuarial assumptions resulted in
an effective yield of approximately 26.65% on the 1994 Pool and increased income
by $1,993,000 during 1997 over the anticipated effective yield at January 1,
1997. Included in this increase was a cumulative catch-up adjustment of
$1,199,000. The effective yield on the 1993 Pool was 6.41% in 1997, reflecting a
$109,000 increase in income over the anticipated effective yield at January 1,
1997 which includes a cumulative catch-up adjustment of $104,000.
The effect on the yield and income assuming no changes in collateral
values or a 1% annual reduction in the aforementioned projected future changes
of collateral values is presented below for the year ended December 31, 1997
(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................................ 21.56% 24.88% 5.32% 5.62%
Effect on income of reverse mortgages.......... $(1,775) $ (632) $ (1,351) $ (986)
The cumulative catch-up adjustments included in the above decreases in
income are $972,000 and $341,000, respectively, at January 1, 1997 for the 1994
Pool. The cumulative catch-up adjustments included in the above decreases in
income are $1,043,000 and $760,000, respectively, at January 1, 1997 for the
1993 Pool.
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18. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
---------------------------
1997 1996
------ ------
(In Thousands)
Assets:
Cash .............................................................................. $ 7,915 $ 6,548
Investment in the Bank ............................................................ 108,440 97,996
Other assets....................................................................... 1,141 1,976
----------- ----------
$ 117,496 $ 106,520
=========== ==========
Liabilities and stockholders' equity:
Senior notes....................................................................... $ 29,100 $ 29,100
Interest payable senior notes...................................................... 1,601 1,600
Other liabilities.................................................................. 36 32
----------- ----------
Total liabilities.................................................................. 30,737 30,732
----------- ----------
Stockholders' equity:
Common stock ...................................................................... 146 146
Capital in excess of par value .................................................... 57,469 57,289
Unrealized gains on securities available-for-sale, net of tax...................... 379 166
Retained earnings ................................................................. 49,252 32,863
Treasury stock .................................................................... (20,487) (14,676)
----------- ----------
Total stockholders' equity ........................................................ 86,759 75,788
----------- ----------
$117,496 $ 106,520
=========== ==========
Condensed Statement of Operations
Year Ended December 31,
-----------------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
Income:
Interest .................................................................. $ 524 $ 659 $ 178
Loss on extinguishment of debt............................................. (44) (90)
Loss on sale of investment ............................................... (31)
Other income............................................................... 62 67
--------- --------- -------
586 682 57
--------- --------- -------
Expenses:
Interest................................................................... 3,201 3,333 3,499
Other operating expenses................................................... (801) (856) 32
--------- --------- -------
2,400 2,477 3,531
--------- --------- -------
Loss before equity in undistributed income of the Bank.......................... (1,814) (1,795) (3,474)
Equity in undistributed income of the Bank ..................................... 18,203 18,151 30,482
--------- --------- -------
Net income ..................................................................... $ 16,389 $ 16,356 $27,008
========= ========= =======
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Condensed Statement of Cash Flows
Year Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Operating activities:
Net income ................................................................ $ 16,389 $ 16,356 $27,008
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of the Bank ................................ (18,203) (18,151) (30,482)
Amortization .............................................................. 115 114 132
Loss on sale of investments................................................ 31
Increase (decrease) in liabilities ........................................ 4 (43) (173)
Decrease (increase) in other assets........................................ 721 (923) 113
---------- --------- -------
Net cash used for operating activities ......................................... (974) (2,647) (3,371)
---------- --------- -------
Investing activities:
Decrease in investment in Bank............................................. 7,972 16,168 9,340
Decrease in investment securities.......................................... 3,585
---------- --------- -------
Net cash provided by investing activities....................................... 7,972 16,168 12,925
---------- --------- -------
Financing activities:
Issuance of common stock .................................................. 180 154 5
Repurchase of senior notes................................................. (750) (2,150)
Purchase of treasury stock ................................................ (5,811) (14,676)
---------- --------- -------
Net cash used for financing activities ......................................... (5,631) (15,272) (2,145)
---------- --------- -------
Increase (decrease) in cash .................................................... 1,367 (1,751) 7,409
Cash at beginning of period .................................................... 6,548 8,299 890
---------- --------- -------
Cash at end of period .......................................................... $ 7,915 $ 6,548 $ 8,299
========== ========= =======
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QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income............ $27,292 $27,942 $28,008 $26,693 $24,657 $25,216 $25,942 $25,408
Interest expense........... 17,719 17,841 17,707 16,550 14,811 15,055 14,771 14,225
------- ------- ------- ------- ------- ------- ------- -------
Net interest income (1) ... 9,573 10,101 10,301 10,143 9,846 10,161 11,171 11,183
Provision for loan losses ..... 460 400 364 309 514 404 450 319
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 9,113 9,701 9,937 9,834 9,332 9,757 10,721 10,864
Other income (1)........... 5,745 5,050 4,624 4,197 3,791 2,947 2,619 1,836
Other expenses............. 9,605 8,738 8,759 8,134 7,835 8,140 8,241 8,129
------- ------- ------- ------- ------- ------- ------- -------
Income before taxes ....... 5,253 6,013 5,802 5,897 5,288 4,564 5,099 4,571
Income tax provision (benefit) 1,381 1,733 1,633 1,829 1,514 (1,668) 1,778 1,542
------- ------- ------- ------- ------- ------- ------- -------
Net income ................ $3,872 $4,280 $4,169 $4,068 $3,774 $ 6,232 $3,321 $3,029
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted
earnings per share ...... $ .31 $ .34 $ .33 $ .32 $ .28 $ .45 $ .24 $ .21
(1) At December 31, 1997, the Corporation reclassified approximately $172
million in leases originated by its vehicle leasing subsidiary to operating
leases in accordance with Statement of Financial Accounting Standards No.
13. Accordingly, income on leases, previously classified as interest
income, has been presented as other income, consistent with the operating
lease treatment. Prior period amounts have also been restated to conform
their presentation. In 1996, only approximately 50% of leases and their
associated income were accounted for as operating leases.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10 through 13 are incorporated by the following references from the
indicated pages of the Proxy Statement for the 1998 Annual Meeting of
Stockholders:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 4-8
ITEM 11. EXECUTIVE COMPENSATION 10-17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 2,5,6
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements listed on the index set forth in Item 8 of this
Annual Report on Form 10-K are filed as part of this Annual Report.
Financial statement schedules are not required under the related instructions
of the Securities and Exchange Commission or are inapplicable and, therefore,
have been omitted.
(b) 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 Form10-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 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.
10.3 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.
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10.4 WSFS Financial Corporation, 1994 Short Term Management Incentive Plan
Summary Plan Description is incorporated herein by reference to
Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.5 Employment Agreement dated September 20, 1996 by and between
Wilmington Savings Fund Society, Federal Savings Bank and Thomas E.
Stevenson is incorporated herein by reference to Exhibit 10.5 of the
Annual Report on Form 10-K for the year ended December 31, 1996
10.6 Employment Agreement dated November 8, 1996 by and between Wilmington
Savings fund Society, Federal Savings Bank and Joseph M. Murphy is
incorporated herein by reference to Exhibit 10.6 of the Annual Report
on Form 10-K for the year ended December 31, 1996.
10.7 Wilmington Savings Fund Society, Federal Savings Bank 1997 Stock
Option Plan is incorporated herein by reference to the Registrant's
Registration Statement on Form S-8 (File No. 333-26099) filed with the
Commission on April 29, 1997.
10.8 Attachment A Employment Agreement dated May 6, 1997 by and between
Wilmington Savings Fund Society, Federal Savings Bank
and Karl L. Johnston.
10.9 Attachment B Amendment and Extension to the Employment Agreement
between WSFS Financial Corporation and Wilmington Savings
Fund Society, Federal Savings Bank and Marvin N.
Schoenhals dated April 24, 1997.
21 Attachment C Subsidiaries of Registrant.
23 Attachment D Consent of KPMG Peat Marwick LLP.
27 Attachment E Financial Data Schedule
(b) No current reports on Form 8-K were filed during the fourth quarter of 1997.
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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 26, 1998 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 26, 1998 BY: /s/ MARVIN N. SCHOENHALS
-------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive
Officer
Date: March 26, 1998 BY: /s/ CHARLES G. CHELEDEN
------------------------
Charles G. Cheleden
Vice Chairman and Director
Date: March 26, 1998 BY: /s/ DAVID E. HOLLOWELL
-----------------------
David E. Hollowell
Director
Date: March 26, 1998 BY: /s/ JOSEPH R. JULIAN
---------------------
Joseph R. Julian
Director
Date: March 26, 1998 BY: /s/ THOMAS P. PRESTON
----------------------
Thomas P. Preston
Director
Date: March 26, 1998 BY:
----------------------
Michele M. Rollins
Director
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Date: March 26, 1998 BY: /s/ CLAIBOURNE D. SMITH
------------------------
Claibourne D. Smith
Director
Date: March 26, 1998 BY: /s/ R. TED WESCHLER
--------------------
R. Ted Weschler
Director
Date: March 26, 1998 BY: /s/ DALE E. WOLF
-----------------
Dale E. Wolf
Director
Date: March 26, 1998 BY: /s/ R. WILLIAM ABBOTT
----------------------
R. William Abbott
Executive Vice President and
Chief Financial Officer
Date: March 26, 1998 BY: /s/ MARK A. TURNER
-------------------
Mark A. Turner
Senior Vice President and Controller
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