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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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______ to________
Commission file number 0-16668
--------------------------------
WSFS FINANCIAL CORPORATION
--------------------------------
Delaware 22-2866913
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 17, 1999 was $125,931,485. 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 17, 1999, there were issued and outstanding 11,439,288 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 22, 1999 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
----
Item 1. Business .............................................................................. 3
Item 2. Properties ............................................................................ 21
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................................................................ 86
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... 86
Item 11. Executive Compensation.................................................................. 86
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 86
Item 13. Certain Relationships and Related Transactions.......................................... 86
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 87
Signatures.............................................................................. 90
PART I
Item 1. Business
- -----------------
GENERAL
WSFS Financial Corporation (Company or Corporation) is a savings and
loan holding company headquartered in Wilmington, Delaware. The Corporation has
two subsidiaries, Wilmington Savings Fund Society, FSB (WSFS or Bank) and WSFS
Capital Trust I. WSFS Capital Trust I was formed in 1998 to sell Trust Preferred
Securities. The Trust invested all of the proceeds from the sale of the Trust
Preferred Securities in Junior Subordinated Debentures of the Corporation. The
Corporation used the proceeds from the Junior Subordinated Debentures for
general corporate purposes, including the redemption of its 11% Senior Notes due
2005 on December 31, 1998.
Substantially, all of the Corporation's assets are held by its
subsidiary, 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 20 retail banking offices located in
Northern Delaware and Southeastern Pennsylvania. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC).
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 having sold its
final parcel of land in 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 merged into
the Bank in November 1996.
The long-term goal of the Corporation is maintaining its
high-performing financial services company status, focusing on its core banking
business while taking advantage of its intrastructure to develop unique niche
businesses.
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.
Net income for the period ended December 31, 1998 was $16.5 million
compared to $16.4 million for both 1997 and 1996. Net income for the last three
years included the recognition of tax benefits. Income before extraordinary
items and taxes increased $1.3 million between 1998 and 1997; and $3.4 million
between 1997 and 1996.
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.
INVESTMENT ACTIVITIES
The Company's short-term investment portfolio is intended 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,
----------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- -----------------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
------- ------ ------ ------- ------ -------
(Dollars In Thousands)
Held-to-Maturity:
- -----------------
Corporate bonds............................. $ 6,059 0.4% $12,030 1.0% $15,038 1.1%
U.S. Government and agencies................ 15,000 0.8
State and political subdivisions ........... 1,583 0.1 1,534 0.1 2,642 0.2
------- ------- ------- ------- ------- -------
7,642 0.5 28,564 1.9 17,680 1.3
------- ------- ------- ------- ------- -------
Available-for-Sale:
- -------------------
U.S. Government and agencies................ $30,219 1.9 50,091 3.3
State and political subdivisions............ 1,253 0.1
------- ------- ------- ------- ------- -------
$30,219 1.9 50,091 3.3 1,253 0.1
------- ------- ------- ------- ------- -------
Short-term investments:
- -----------------------
Federal funds sold and securities purchased
under agreements to resell.............. $20,900 1.3 25,279 1.7 25,400 1.9
Interest-bearing deposits in other banks(1). 7,518 0.4 28,892 1.9 5,702 0.4
------- ------- ------- ------- ------- -------
28,418 1.7 54,171 3.6 31,102 2.3
------- ------- ------- ------- ------- -------
66,279 4.1% $132,826 8.8% $50,035 3.7%
======= ======= ======== ======= ======= =======
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
In 1998, the Bank purchased $20 million in U.S. Government securities,
of which $10 million was classified as available-for-sale. In addition, there
were sales and calls of U.S. Government securities totaling $20 million and $25
million, respectively. The reduction of corporate and political subdivision
bonds since 1996 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 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 was sold in 1997.
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1998. 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.
At December 31, 1998
--------------------
Amount Yield
------ -----
(Dollars in Thousands)
Held-to-Maturity:
-----------------
Corporate bonds:
Within one year....................................................... $ 200 5.45%
After one but within five years....................................... 2,533 6.93
After five but within ten years....................................... 2,136 6.26
After ten years....................................................... 1,190 7.30
--------
6,059 6.72
--------
State and political subdivisions (1):
After ten years....................................................... 1,583 7.61
--------
Total debt securities, held-to-maturity................................. 7,642 6.90
--------
Available-for-Sale:
-------------------
U.S. Government and agencies:
After one but within five years....................................... 30,219 6.12
--------
Short-term investments:
-----------------------
Interest-bearing deposits in other banks.............................. 7,518 4.78
Federal funds sold and securities purchased under agreements to resell 20,900 5.57
-------
Total short-term investments............................................ 28,418 5.36
-------
$66,279 5.88%
=======
(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,
including collateralized mortgage obligations, in 1998 totaled $355 million, of
which $210 million was classified as available-for-sale and $145 million was
classified as held-to-maturity. The Bank also sold $30 million in collateralized
mortgage obligations. Reductions in the other categories, for all years, were
due to principal repayments.
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,
---------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- --------------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
------- ---- ------ ---- ------ ----
Held-to-Maturity:
- -----------------
Collateralized mortgage obligations......... $175,619 6.78% $151,982 7.30% $165,516 7.38%
GNMA ....................................... 1,044 6.93 1,299 7.16 1,496 7.16
FHLMC....................................... 42,337 6.16 55,822 6.17 63,223 6.18
FNMA........................................ 40,881 6.26 53,134 6.26 62,754 6.26
Other....................................... 5,977 7.36 12,663 7.50 20,340 8.07
-------- ---- -------- ---- -------- ----
$265,858 6.61% $274,900 6.88% $313,329 6.96%
======== ==== ======== ==== ======== ======
Available-for-Sale:
- -------------------
Collateralized mortgage obligations ........ $168,997 6.54% $ 57,374 7.26% $ 37,482 7.44%
GNMA........................................ 24,229 6.11 14,441 6.15
-------- ---- -------- ---- -------- ----
$193,226 6.49% $ 57,374 7.26% $ 51,923 7.08%
======== ==== ======== ==== ========= ====
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 have 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.
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, 1998 :
December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ------------------ ---------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate(1) $291,110 30.2% $287,349 30.7% $279,060 33.8% $276,926 35.0% $260,442 36.6%
Commercial real estate:
Commercial mortgage ........... 226,063 23.5 238,533 25.5 278,935 33.8 293,979 37.1 259,112 36.6
Construction .................. 11,642 1.2 12,553 1.3 27,056 3.3 29,959 3.8 25,603 3.6
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Total commercial real estate . 237,705 24.7 251,086 26.8 305,991 37.1 323,938 40.9 284,715 40.2
Commercial .................... 97,524 10.1 94,686 10.1 28,602 3.5 23,894 3.0 25,188 3.5
Consumer ...................... 165,660 17.2 159,432 17.0 135,552 16.4 114,265 14.4 91,182 12.8
Finance leases................. 60,985 7.4 98,840 12.5 89,095 12.5
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Gross loans ................... 791,999 82.2 792,553 84.6 810,190 98.2 837,863 105.8 750,622 105.6
Less:
Unearned income 4,642 0.5 3,240 0.3 13,102 1.6 21,512 2.7 18,146 2.6
Allowance for loan losses ..... 23,689 2.5 24,850 2.7 24,241 2.9 24,167 3.1 21,700 3.0
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Net loans ..................... 763,668 79.2 764,463 81.6 772,847 93.7 792,184 100.0 710,776 100.0
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Vehicles under operating leases,
net........................... 199,967 20.8 172,115 18.4 52,036 6.3
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Net loans and vehicles under
operating leases ............. $963,635 100.0% 936,578 100.0% $824,883 100.0% $792,184 100.0% $710,776 100.0%
======== ===== ======= ===== ======== ===== ======== ===== ======== =====
(1) Includes $3,103, $2,222, $773, $4,401, and $257 of residential mortgage loans held-for-sale at December 31, 1998,
1997, 1996, 1995 and 1994, respectively.
The following table sets forth information as of December 31, 1998
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)..................... $ 42,401 $ 183,659 $ 288,010 $514,070
Construction loans........................ 9,589 1,857 196 11,642
Commercial loans.......................... 25,802 25,591 46,131 97,524
Consumer loans ........................... 62,675 67,766 35,219 165,660
----------- ----------- ----------- ----------
$ 140,467 $ 278,873 $ 369,556 $ 788,896
=========== =========== =========== ==========
Rate sensitivity:
Fixed................................... $ 53,539 $ 159,693 $ 182,276 $ 395,508
Adjustable 86,928 119,180 187,280 393,388
----------- ----------- ---------- ----------
140,467 278,873 369,556 788,896
----------- ----------- ---------- ----------
Vehicles under operating leases, net 43,017 156,950 0 199,967
----------- ----------- ---------- ---------
Gross loans and net operating leases $ 183,484 $ 435,823 $ 369,556 $ 988,863
=========== =========== ========== ==========
(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 very
limited basis, the Bank originates loans with loan-to-value ratios exceeding 80%
without a private mortgage insurance requirement. At December 31, 1998, the
balance of all such loans was approximately $16.6 million of which $8.9 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.
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. 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, 1998, $29.2 million was committed for
construction loans, of which $11.5 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 $5.0 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.
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, 1998, 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, 1998, the Bank had extended a total of $85.8
million in home equity lines of credit, of which $27.8 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 can be deductible)
and the convenience of checkbook access as well as 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 1998, WCC originated more than 2,032 leases, which approximated $76.9
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. At December 31, 1999, WCC had $200.0
million in vehicles under operating leases.
The table below sets forth consumer loans by type, in dollar amounts and
percentages, at the dates indicated.
December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Equity secured installment loans $87,503 52.8% $78,975 49.6% $ 63,803 47.1%
Home equity lines of credit.... 27,799 16.8% 31,110 19.5 33,267 24.5
Automobile..................... 32,729 19.8% 32,959 20.7 26,456 19.5
Unsecured lines of credit...... 10,444 6.3% 9,466 5.9 7,448 5.5
Other.......................... 7,185 4.3% 6,922 4.3 4,578 3.4
---------- ------ ----------- ------ ----------- ------
Total consumer loans .......... $165,660 100.0% $159,432 100.0% $135,552 100.0%
======== ===== ======== ===== ======== =====
(Restubbed Table)
-------------------------------------------------
1995 1994
-------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------
Equity secured installment loans $ 52,793 46.2% $ 34,088 37.4%
Home equity lines of credit.... 36,817 32.2 40,727 44.7
Automobile..................... 12,701 11.1 1,951 2.1
Unsecured lines of credit...... 7,017 6.2 3,683 4.0
Other.......................... 4,937 4.3 10,733 11.8
------------ ------- ---------- ------
Total consumer loans .......... $114,265 100.0% $ 91,182 100.0%
======== ===== ======== =====
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 1998, WSFS originated $129 million of residential real estate
loans compared to 1997 originations of $84 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 totaled $10 million for years ended December 31, 1998 and 1997;
and $13 million during 1996, respectively. Residential real estate loan sales
totaled $75 million in 1998, $26 million in 1997 and $24 million in 1996. 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 $237 million of residential
loans at December 31, 1998 compared to $207 million at December 31, 1997. The
Company also services residential loans for its portfolio totaling $255 million
and $251 million at December 31, 1998 and 1997.
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 1998, the Bank originated $124 million of
commercial and commercial real estate loans compared to $123 million in 1997.
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 1998, such consumer loan originations aggregated $92 million
compared to $105 million in 1997. Additionally, WSFS Credit Corporation
originated approximately $78 million of operating leases in 1998 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.
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, 1998. 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 Credit Policy Committee and the
Audit Committee of the Board of Directors.
SUBSIDIARIES
The Corporation has two subsidiaries, Wilmington Savings Fund Society,
FSB (WSFS or Bank) and WSFS Capital Trust I. WSFS Capital Trust I was formed in
1998 to sell Trust Preferred Securities. The Trust invested all of the proceeds
from the sale of the Trust Preferred Securities in Junior Subordinated
Debentures of the Corporation. The Corporation used the proceeds from the Junior
Subordinated Debentures for general corporate purposes, including the redemption
of its 11% Senior Notes due 2005 on December 31, 1998.
At December 31, 1998, 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, 1998, it had $3.3 million invested in the equity of these companies
and had lent them an additional $253.3 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, 1998 and 1997 were $226.3 million and $203.5
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, 1998 and 1997 were $22.1 million
and $19.0 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. In 1998,
Star States Development Company sold its remaining parcel of land and is
currently inactive.
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.
SOURCES OF FUNDS
The Bank funds operations through retail and wholesale deposit growth
as well as through 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 20 branches. Sixteen of these branches are located in northern
Delaware's New Castle County, the Bank's primary market. These branches maintain
approximately 135,000 total account relationships with approximately 42,400
total households, or 25% of all households in New Castle County, Delaware. The
seventeenth branch is in the state capital, Dover, located in central Delaware's
Kent County. The three remaining branches are located in Southern 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 1998
--------------- --------------
(In Thousands)
Less than 3 months...................... $39,972
Over 3 months to 6 months............... 21,401
Over 6 months to 12 months.............. 20,467
Over 12 months.......................... 8,448
---------
$90,288
=========
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 5% of their outstanding advances, whichever is
greater.
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.
In 1998, the Company issued $50.0 million in trust preferred securities
due December 11, 2028, part of which was used to pay down the $29.1 million in
11% Senior Notes. See Note 9 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
prohibited 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.
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, "Tier 1" or "core" capital equal to 4% of adjusted total assets (or 3%
if the institution is rated composite 1 under the OTS examiner rating system),
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 Tier 1 or 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 of mutual institutions and "qualifying supervisory goodwill," less
intangible assets other than certain supervisory goodwill and, subject to
certain limitations, mortgage and non-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, 1998, 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% (75% if rate is
adjustable, and annual net operating income equal to not less than 120% of debt
service (115% if loan is adjustable) 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, 1998,
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 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 Bank Holding Company Act (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. Savings associations must submit notice to the
OTS prior to making a capital distribution (which includes cash dividends, stock
repurchases and payments to shareholders of another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the association's
common or preferred stock or debt counted as its regulatory capital, or (c) the
association is a subsidiary of a holding company. A savings association must
make application to the OTS to pay a capital distribution if (x) the association
would not be adequately capitalized following the distribution, (y) the
association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
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 Bank Insurance Fund (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
Savings Association Insurance Fund (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 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
undercapitalized" 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,
1998, of $23.0 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, 1998.
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 $46.5 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, 1998, the Bank met its reserve
requirements.
TAXATION
Federal Income Taxes
The Corporation and its subsidiaries file a consolidated federal income
tax return and separate state income tax returns. Income taxes are accounted for
in accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences". 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, 1998, the Company had available net operating loss
(NOL) carryforwards for federal and state tax purposes of approximately $31.1
million and $66.5 million, respectively, which can be used to reduce future
income taxes. There are annual restrictions on approximately $16.6 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 being utilized, a portion of
the Providential NOL carryforwards could expire before being fully utilized.
The Corporation has recently completed an audit of its 1993 and 1994
Federal income tax returns. As a result of this audit a $106,000 tax liability
was determined, however, the Corporation has deemed these adjustments as not
being significant. Because of their timing nature, substantially all of these
adjustments will reverse within the coming year.
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision for income taxes
accordingly. See Note 12 to the Consolidated Financial Statements, incorporated
herein by reference, for further information on recorded taxes.
State Income Taxation
As a Delaware corporation, the Company is subject to an annual
franchise tax which is based on the number of shares of common and preferred
stock authorized by its Board of Directors. The Bank is also subject to
Delaware's annual franchise tax which is based upon its financial pretax net
income.
The Bank and its subsidiaries each file separate 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 those states.
A tax clearance certificate has been issued to WSFS Credit Corporation
on the recent completion of an audit by the State of New Jersey, where no
additional tax was assessed. Also, no exceptions were noted during the recently
completed Motor Vehicle Sales Finance examination conducted by the office of the
Delaware State Bank Commissioner.
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, 1998.
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
WSFS:
Main Office (1)(2) Owned $1,537 $242,021
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 2003 43 58,198
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2001 14 20,115
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 2003 15 78,159
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 2003 21 64,116
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 2003 17 88,094
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2000 30 58,752
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Tri-State Mall Branch Leased 1999 6 18,520
I-95 & Naamans Road
Claymont, DE 19803
Claymont Branch Owned 87 20,076
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch Leased 2003 30 38,150
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(3) Leased 2007 336 60,658
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 33 63,853
144 N. DuPont Hwy.
New Castle, DE 19720
-21-
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
Stanton Leased 2001 228 7,152
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Leased 2003 247 6,646
Inside Genaurdi's at Peoples Plaza
Routes 40 and 896, Newark, DE 19702
Middletown Square Shopping Center Leased 1999 99 13,104
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover (4) Leased 2000 180 17,459
Inside Metro Food Market
Rt 13 & White Oak Road
Dover, DE 19901
Pottstown Leased 2003 975 12
Inside Genaurdi's Family Market
1400 North Charlotte St.
Pottstown, PA 19461
Royersford Leased 2003 231 28
Inside Genuardi's Family Markets
Limerick Square
70 Buckwater Rd., Suite 211
Royersford, PA 19468
Glen Mills Leased 2003 121 544
Inside Genaurdi's Family Market
475 Glen Eagle Square
Glen Mills, PA 19342
University of Delaware-Trabant University Center Leased 2003 209 1,680
17 West Main Street
Newark, DE 19716
Operations Center Owned 1,152 N/A
2400 Philadelphia Pike
Wilmington, DE 19703
Community Credit Corporation Leased 1999 4 N/A
- ----------------------------
10 Penn Mart Shopping Center
New Castle, DE 19720
WSFS Credit Corporation
- -----------------------
30 Blue Hen Drive Leased 2002 311
Suite 200
Newark, DE 19713
--------
$858,300
========
(1) Includes location of executive offices and approximately $65.5 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and equipment
totaled $12.0 million at December 31, 1998.
(3) Includes the Company's Education and Development Center.
(4) 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.
-22-
Item 3. Legal Proceedings
- -------------------------
There are no material legal proceedings to which the Company or the
Bank is a party or to which any of its property is subject except as discussed
in Note 14 to the Consolidated Financial Statements.
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, 1998 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
Market(SM) under the symbol WSFS. At December 31, 1998, the Corporation had
2,307 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. The Corporation paid
dividends of $.09 per share in 1998. Prior to 1998, there were no dividends
declared or paid on the Common Stock since the first quarter of 1990.
The closing market price of the common stock at December 31, 1998 was
$16 7/8.
Stock Price Range
-------------------------
Low High
-------------------------
1998 1st $17 5/8 $22
2nd 20 1/4 24 1/8
3rd 15 3/8 21 7/8
4th 12 3/8 18 1/2
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
-24-
Item 6. Selected Financial Data
- --------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
At December 31,
- ---------------
Total assets..................................... $1,635,710 $1,515,217 $1,357,635 $1,218,826 $1,195,686
Net loans (1).................................... 763,668 764,463 772,847 792,184 710,776
Vehicles under operating leases, net............. 199,967 172,115 52,036
Investment securities (2)........................ 37,861 78,655 18,933 28,772 64,144
Investment in reverse mortgages, net............. 31,293 32,109 35,796 35,614 32,172
Other investments................................ 51,418 74,523 47,337 52,128 44,249
Mortgage-backed securities (2)................... 459,084 330,274 365,252 237,132 262,748
Deposits ........................................ 858,300 766,966 744,886 724,030 809,707
Borrowings (3)................................... 622,409 615,578 489,819 370,795 295,244
Senior notes..................................... 29,100 29,100 29,850 32,000
Trust Preferred Borrowings....................... 50,000
Stockholders' equity ............................ 85,752 86,759 75,788 73,546 45,274
Number of full-service branches (4).............. 20 16 16 14 16
For the Year Ended December 31,
- -------------------------------
Interest income.................................. $108,232 $109,935 $ 101,223 $ 99,936 $ 80,666
Interest expense................................. 71,114 69,817 58,862 58,067 44,652
Other income .................................... 24.693 19,616 11,193 22,615 7,210
Other expenses .................................. 36,443 35,236 32,345 37,341 34,483
Income before taxes and extraordinary item ...... 24,288 22,965 19,522 25,740 7,058
Income before extraordinary item................. 17,973 16,389 16,356 27,008 8,070
Loss on extinguishment of debt, net of $787,000
tax credits ................................... 1,461 0 0
Net income ...................................... 16,512 16,389 16,356 27,008 8,070
Earnings per share:
Basic:
Income before extraordinary item.............. 1.46 1.31 1.18 1.86 .56
Loss on extinguishment of debt ............... (0.12)
Net income ................................... 1.34
Diluted:
Income before extraordinary item.............. 1.44 1.29 1.16 1.84 .55
Loss on extinguishment of debt ............... (0.12)
Net income ................................... 1.32
Interest rate spread............................. 2.96% 3.10% 3.22% 3.14% 3.11%
Net interest margin.............................. 2.88 3.13 3.56 3.57 3.39
Return on average equity......................... 19.24 20.25 21.19 45.68 19.64
Return on average assets......................... 1.16 1.11 1.28 2.21 .73
Average equity to average assets................. 6.03 5.48 6.06 4.84 3.69
(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,
and 1998, WSFS opened two and four new branches, respectively.
-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. The Corporation has
two subsidiaries, Wilmington Savings Fund Society, FSB and WSFS Capital Trust I.
WSFS Capital Trust I was formed in 1998 to sell Trust Preferred Securities. The
Trust invested all of the proceeds from the sale of the Trust Preferred
Securities in Junior Subordinated Debentures of the Corporation. The Corporation
used the proceeds from the Junior Subordinated Debentures for general corporate
purposes, including the redemption of its 11% Senior Notes due 2005 on December
31, 1998.
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 20 retail banking offices located in Northern
Delaware and Southeastern Pennsylvania. Deposits are insured by the Federal
Deposit Insurance Corporation (FDIC).
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 having sold its
final parcel of land in 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 merged into
the Bank in November 1996.
The long-term goal of the Corporation is maintaining its
high-performing financial services company status, focusing on its core banking
business while taking advantage of its intrastructure to develop unique niche
businesses.
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 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 $16.5 million for the year
ending December 31, 1998, compared to $16.4 million for both 1997 and 1996.
Earnings for 1998 were impacted by an extraordinary charge of $1.5 million, net
of tax, on the early extinguishment of $29.1 million in 11% senior notes. Income
before the extraordinary item increased $1.6 million or 10% over 1997.
Net Interest Income. Net interest income is the most significant
component of operating income to the Corporation. Net interest income is
dependent 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.
-26-
Net interest income decreased to $37.1 million in 1998 compared with
$40.1 million and $42.4 million in 1997 and 1996, respectively. Total interest
income decreased $1.7 million, between 1998 and 1997 primarily due to a decline
in average loan balances and a declining interest rate environment. Average loan
balances which were $22.4 million lower than the previous year due to the
commercial real estate loan portfolio in the first half of 1998, were more than
offset by the growth in mortgage-backed securities of $35.8 million. However,
the average yield on mortgaged-backed securities of 6.44% was 267 basis points
below the average yield on total loans of 9.11%. In addition, the declining
interest rate environment of 1998 resulted in the repricing of both
interest-earning assets and interest-bearing liabilities, however, the assets
generally repriced more rapidly resulting in a 23 basis point reduction in
yields, but only a 7 basis point reduction in average rates paid on
interest-bearing liabilities.
Total interest expense increased $1.3 million, between 1998 and 1997
mainly as a result of the growth in interest-bearing deposits by an average of
$32.5 million. This was partially offset by a 7 basis point drop as the average
rate paid on deposits declined to 4.63% from 4.70% due to the overall decline in
interest rates during 1998. The increased interest expense associated with an
increase of $15.2 million in average borrowed funds in 1998 over the previous
year was essentially offset by the decline in rates paid for those funds
relative to 1997. Although the Company reduced long-term borrowing rates by
issuing $50 million in lower-cost trust preferred securities as replacement
financing for its 11% Senior Notes, the timing of the transaction had minimal
impact in 1998. Finally, net lease volume increased by an average of $44.0
million during 1998 resulting in increased interest expense to fund the growth,
however, as previously noted, the incremental income is classified as other
income and not interest income.
Between 1997 and 1996, interest income and expense increased $8.7
million and $11.0 million, respectively. The primary increase in interest income
was related to the growth in mortgage-backed securities of $90.2 million.
Subsequent increases in average borrowings of $187.7 million over the same
period contributed to the increase in interest expense.
-27-
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.
Year Ended December 31,
----------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars In Thousands)
Interest income:
Real estate loans (1).......................... $(5,824) $ (961) $(6,785) $ (937) $(1,110) $(2,047)
Commercial loans .............................. 2,543 (437) 2,106 2,687 (580) 2,107
Consumer loans................................. 1,195 (334) 861 (1,665) 678 (987)
Loans held-for-sale............................ 98 - 98 (154) 17 (137)
Mortgage-backed securities..................... 2,357 (1,450) 907 6,149 234 6,383
Investment securities ......................... 218 13 231 801 (184) 617
Other.......................................... (95) 974 879 836 1,940 2,776
------- ------- ------- -------- ------- -------
492 (2,195) (1,703) 7,717 995 8,712
------- ------- ------- -------- ------- -------
Interest expense:
Deposits:
Money market and interest-bearing demand..... 70 (48) 22 87 - 87
Savings...................................... 845 503 1,348 154 386 540
Time......................................... 110 (445) (335) (278) (87) (365)
FHLB of Pittsburgh advances.................... 1,747 (560) 1,187 4,767 (248) 4,519
Senior notes .................................. 562 (129) 433 (17) - (17)
Other borrowed funds........................... (1,191) (167) (1,358) 6,148 43 6,191
------- ------- ------- -------- ------- -------
2,143 (846) 1,297 10,861 94 10,955
------- ------- ------- -------- ------- -------
Net change, as reported............................ (1,651) (1,349) (3,000) (3,144) 901 (2,243)
------- ------- ------- -------- ------- -------
Tax-equivalent effect(2) .......................... 329 (31) 298 425 501 926
------- ------- ------- -------- ------- -------
Net change, tax-equivalent basis................... $(1,322) $(1,380) $(2,702) $(2,719) $ 1,402 $(1,317)
======= ======= ======= ======== ======= =======
(1) Includes commercial mortgage loans.
(2) The tax-equivalent income adjustment relates primarily to a commercial loan.
-28-
The following table, in thousands except yield and rate data, provides
information regarding the averages balances of and yields and rates on
interest-earning assets and interest-bearing liabilities during the periods
indicated.
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
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)............... $509,422 $ 45,389 8.91% $ 574,596 $ 52,174 9.08%
Commercial loans ................... 89,330 6,887 9.08 58,661 4,781 9.73
Consumer loans...................... 161,969 15,810 9.76 149,855 14,949 9.98
---------- -------- ---------- ---------
Total loans.................... 760,721 68,086 9.11 783,112 71,904 9.30
Mortgage-backed securities (5).......... 415,141 26,736 6.44 379,315 25,829 6.81
Loans held-for-sale (3)................. 2,935 233 7.94 1,698 135 7.95
Investment securities (5)............... 47,430 3,016 6.36 43,968 2,785 6.33
Other interest-earning assets........... 104,485 10,161 9.72 102,043 9,282 9.10
---------- -------- ---------- ---------
Total interest-earning assets....... 1,330,712 108,232 8.23 1,310,136 109,935 8.46
-------- ---------
Allowance for loan losses............... (24,541) (24,145)
Cash and due from banks................. 29,040 17,552
Vehicles under operating leases, net ... 179,844 135,848
Other noninterest-earning assets........ 33,576 36,123
---------- ----------
Total assets........................ $1,548,631 $1,475,514
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand ......................... $ 60,746 $ 1,528 2.52% $ 57,918 $ 1,506 2.60%
Savings............................. 189,744 5,965 3.14 162,041 4,617 2.85
Time ............................... 451,483 25,026 5.54 449,555 25,361 5.64
---------- -------- ---------- ---------
Total interest-bearing deposits 701,973 32,519 4.63 669,514 31,484 4.70
FHLB of Philadelphia advances........... 419,849 23,785 5.67 388,866 22,598 5.81
Senior notes and trust preferred........ 34,201 3,748 10.96 29,100 3,315 11.39
Other borrowed funds.................... 193,315 11,062 5.72 214,310 12,420 5.80
---------- -------- ---------- ---------
Total interest-bearing liabilities.. 1,349,338 71,114 5.27 1,301,790 69,817 5.36
-------- ---------
Noninterest-bearing demand deposits..... 84,631 71,950
Other noninterest-bearing liabilities... 21,246 20,850
Stockholders' equity.................... 93,416 80,924
---------- ----------
Total liabilities and
stockholders' equity ............ $1,548,631 $1,475,514
========== ==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities......................... $ (18,626) $ 8,346
=========== ==========
Net interest and dividend income........ $ 37,118 $ 40,118
======== =========
Interest rate spread.................... 2.96% 3.10%
===== ====
Interest rate margin.................... 2.88% 3.13%
===== ====
Net interest and dividend income to
total average assets................ 2.48% 2.78%
===== ====
(RESTUBBED TABLE)
Year Ended December 31,
-----------------------------------
1996
-----------------------------------
Average Yield/
Balance Interest Rate(1)
------- -------- -------
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 584,711 $ 54,221 9.27%
Commercial loans ................... 26,678 2,674 10.02
Consumer loans...................... 166,733 15,936 9.56
---------- ---------
Total loans.................... 778,122 72,831 9.36
Mortgage-backed securities (5).......... 289,158 19,446 6.73
Loans held-for-sale (3)................. 3,649 272 7.45
Investment securities (5)............... 31,504 2,168 6.88
Other interest-earning assets........... 86,104 6,506 7.56
---------- ---------
Total interest-earning assets....... 1,188,537 101,223 8.52
---------
Allowance for loan losses............... (24,073)
Cash and due from banks................. 22,911
Vehicles under operating leases, net ... 44,674
Other noninterest-earning assets........ 42,347
----------
Total assets........................ $1,274,396
==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand ......................... $ 54,582 $ 1,419 2.60%
Savings............................. 156,337 4,077 2.61
Time ............................... 454,654 25,726 5.66
---------- ---------
Total interest-bearing deposits 665,573 31,222 4.69
FHLB of Philadelphia advances........... 307,180 18,079 5.89
Senior notes and trust preferred........ 29,251 3,332 11.39
Other borrowed funds.................... 108,140 6,229 5.76
---------- ---------
Total interest-bearing liabilities.. 1,110,144 58,862 5.30
---------
Noninterest-bearing demand deposits..... 66,823
Other noninterest-bearing liabilities... 20,224
Stockholders' equity.................... 77,205
----------
Total liabilities and
stockholders' equity ............ $1,274,396
==========
Excess (deficit) of interest-earning
assets over interest-bearing
liabilities......................... $ 78,393
==========
Net interest and dividend income........ $ 42,361
========
Interest rate spread.................... 3.22%
====
Interest rate margin.................... 3.56%
====
Net interest and dividend income to
total average assets................ 3.32%
====
(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-
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 $1.5 million in 1997 to
$1.0 million in 1998. The Corporation's continued efforts to resolve and collect
problem loans, including nonaccrual and restructured loans have and may continue
to favorably impact provision requirements. The allowance for loan losses was
$23.7 million at December 31, 1998, a 4.67% decrease from the level reported at
December 31, 1997. The loan loss allowance as a percentage of total loans was
3.00% in 1998 versus 3.14% in 1997.
During 1999, the Corporation will continue to adjust the provision for
loan losses periodically as necessary to maintain the allowance 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 $5.1 million during 1998 to $24.7
million. Other income included increases of $2.8 million in operating lease
revenue and $1.2 million in debit/credit card and ATM income. These increases
resulted from a 16% growth in the average operating lease portfolio, and the
expansion of the Bank's ATM network.
Other income increased $8.4 million between 1997 and 1996. Consistent
with 1998 results, this increase was largely attributable to growth in the
Corporation's average 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 $1.4 million increase in service charges on
deposits.
Other Expenses. Other expenses increased $1.2 million during 1998 to
$36.4 million. Expense rose primarily due to increases in salaries excluding
stock appreciation rights (SARs), equipment, data processing and operating
expenses, occupancy and other operating expenses. These increases were
associated with the continued investment in new retail banking offices, our ATM
network and technological enhancements. As part of this investment the
Corporation added four new branch offices and 36 new owned-and-operated ATMs as
well as established a large number of relationships with independent service
organizations to provide funding for ATMs nationwide. These increases in
expenses were offset in part by expenses associated SARs, which declined $2.8
million during the year. SARs are similar to stock options, but, unlike stock
options, accounting for SARs requires a change in operating expenses as the
stock price changes above the exercise price. This decline largely reflects the
lower stock price at December 31, 1998 as compared to December 31, 1997. In
addition, other expenses were favorably affected by lower costs associated with
foreclosed assets. This decrease was attributable to an improvement in the level
of nonperforming assets during the year.
Other expenses increased $2.9 million during 1997 to $35.2 million. The
primary reason for the increase was expenses associated with SARs which
increased $2.1 million during the year. 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 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 data processing and
operations expenses.
Income Taxes. The Corporation recorded a $5.5 million tax provision for
the year ended December 31, 1998 compared to a tax provision of $6.6 million and
$3.2 million for the year ended December 31, 1997 and 1996, respectively. The
-30-
year 1998 includes a $6.3 million tax provision on continuing operations and a
$787,000 tax benefit from the extraordinary loss on the extinguishment of debt.
The provision for income taxes includes federal, state, and local income taxes
that are currently payable and those currently deferred because of temporary
differences between the financial reporting bases and the tax reporting bases of
assets and liabilities. The years 1998, 1997, and 1996 include $2.7 million,
$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 $21 million in gross deferred tax assets of the
Corporation at December 31, 1998 is 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 Internal Revenue Code and
uncertainties, including the timing of settlement on these assets for their
realization. As historical data accumulates, management obtains more information
on which to base the potential recognition of these assets.
The Corporation analyzes its projection of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes, accordingly. For
additional information regarding the Corporation's tax provision and net
operating loss carryforwards, see Note 12 to the Consolidated Financial
Statements.
FINANCIAL CONDITION
Total assets grew $120.5 million or 8.0% during 1998 to $1.6 billion.
This growth occurred predominantly in mortgage-backed securities and vehicles
under operating leases, partially offset by a decline in investment securities.
Total liabilities grew $121.5 million during the year to $1.5 billion at
December 31, 1998. This increase occurred primarily in deposits and borrowings.
Stockholders' equity decreased $1.0 million to $85.8 million at December 31,
1998. This decrease resulted primarily from the purchase of treasury stock
offset by retained earnings for the year.
Investments. Between December 31, 1997 and 1998, investment securities
decreased $40.8 million. This decline included the sale from the
available-for-sale category of $20.0 million in US Treasury notes, $10.0
million in notes issued by the Student Loan Marketing Association and the net
reduction of $15.0 million in Federal Home Loan Bank notes. These declines were
offset in part by the purchase of $10.0 million in FNMA notes. Other interest
earning assets increased $4.5 million during the year, as a result of an
increase in liquidity.
Mortgage-backed Securities. Investments in mortgage-backed securities
grew $128.8 million during 1998. This increase reflected the purchase of $325.2
million in collateralized mortgage obligations (CMOs) and $30.4 million in GNMA
pass through securities, offset in part by principal repayments of approximately
$197.8 million and the sale of $29.9 million in CMOs available-for-sale.
Loans. Net loans, including loans held for sale, decreased $795,000
between December 31, 1997 and 1998. During the year, six large commercial real
estate loans totaling $31.2 million were refinanced at other institutions. This
attrition resulted from the Bank's pricing discipline and had the desired
effects of reducing commercial real estate loan concentrations and improving the
overall risk profile of the company.
Vehicles Under Operating Leases. Vehicles under operating leases grew
$27.9 million during 1998. This increase resulted primarily from originations
during the year.
-31-
Deposits. Deposits grew $91.3 million during 1998 to $858.3 million.
This growth was largely attributable to a net inflow of deposits of $66.9
million in 1998 and interest credited to deposits of $24.4 million in 1998. The
table below depicts the changes in deposits over the last three years.
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(In Millions)
Beginning balance...................................................... $ 767.0 $ 744.9 $ 724.0
Interest credited...................................................... 24.4 23.7 22.9
Deposit inflows (outflows), net........................................ 66.9 (1.6) (12.4)
Deposit acquired, net.................................................. - - 10.4
------- ------- -------
Ending balance......................................................... $ 858.3 $ 767.0 $ 744.9
======= ======= =======
Borrowings. Total borrowings increased $27.7 million between December
31, 1997 and 1998. Approximately $60.0 million in borrowings from the Federal
Home Loan Bank were added during the year. Additionally, in November, the
corporation issued $50.0 million in trust preferred securities due December 1,
2028. The securities were issued with a floating rate of 250 basis points over
3-month LIBOR and reprice quarterly. The current rate of the trust preferred
securities is 7.75%. Coincident with this transaction, to hedge against uses in
interest rates the Corporation purchased an interest rate cap which creates an
effective ceiling of 6.0% on 3-month LIBOR for 10 years. These securities were
issued by a newly formed subsidiary of the Corporation, WSFS Capital Trust I, a
Delaware statutory trust which invested the proceeds in junior subordinated
debentures issued by the Corporation. A portion of the proceeds were used to
extinguish $29.1 million in 11% senior notes.
Stockholders' Equity. Stockholders' equity decreased $1.0 million to
$85.8 million at December 31, 1998. During 1998, the Corporation purchased
1,030,160 treasury shares at a cost of $16.5 million. Additionally, the
Corporation declared and paid $1.1 million in dividends to stockholders. These
decreases in stockholders' equity were partially offset by $16.5 million in net
income for the year.
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 liabilities is one of the primary strategies utilized
by the Corporation to accomplish this objective.
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.
-32-
The repricing and maturities of the Corporation's interest-rate
sensitive assets and interest-rate sensitive liabilities at December 31, 1998
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)............................... $ 261,455 $ 131,340 $ 132,918 $ 525,713
Commercial loans.................................... 49,715 8,888 38,921 97,524
Consumer loans and leases........................... 62,839 67,603 35,218 165,660
Vehicles under operating leases..................... 51,031 186,191 - 237,222
Mortgage-backed securities.......................... 283,718 128,747 46,619 459,084
Loans held-for-sale................................. 3,103 - - 3,103
Investment in reverse mortgages..................... 1,457 6,882 22,954 31,293
Investment securities............................... 30,419 2,533 4,909 37,861
Other investments................................... 51,418 - - 51,418
--------- --------- --------- ----------
795,155 532,184 281,539 1,608,878
--------- --------- --------- ----------
Interest-rate sensitive liabilities:
Money market and interest-bearing
demand deposits ................................. 14,047 - 54,161 68,208
Savings deposits.................................... 49,463 - 168,871 218,334
Time deposits....................................... 359,070 101,084 3,186 463,340
FHLB advances....................................... 315,000 145,000 - 460,000
Senior notes........................................ 50,000 - - 50,000
Other borrowed funds................................ 27,409 135,000 - 162,409
--------- --------- --------- ----------
814,989 381,084 226,218 1,422,291
--------- --------- --------- ----------
Excess of interest-rate sensitive
assets over interest-rate sensitive
liabilities ("interest-rate sensitive gap")......... $ (19,834) $ 151,100 $ 55,321 $ 186,587
========= ========= ========= ==========
Interest-rate sensitive assets/interest-rate
sensitive liabilities............................... 97.57%
Interest-rate sensitive gap as a percent of
total assets........................................ (1.21)%
(1) Includes commercial mortgage loans.
To provide a more accurate one-year gap position of the Corporation,
certain deposit classifications are based on the interest-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.
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.
In November 1998, the corporation purchased an interest rate cap in
order to limit its exposure on $50.00 million of variable rate trust preferred
securities issued in November 1998. This derivative instrument caps 3-month
LIBOR (the base rate of the trust preferred) at 6.00%. The trust preferred is
classified in the less than one-year category reflecting the variable rate
feature of the instrument. The trust preferred will remain in the less than
one-year category unless the interest rate cap goes into effect at which time
the trust preferred will be transferred to the appropriate maturity category.
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
-33-
interest rates. Even assets and liabilities which contractually reprice within
the rate 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, investing and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13A "Management of Interest Rate Risk,
Investment Securities and Derivatives Activities." This test measures the impact
on the 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 impact of immediate changes in interest rates on net interest margin
and net portfolio value at the specified levels at December 31, 1998 and 1997,
calculated in compliance with Thrift Bulletin No. 13A:
December 31,
----------------------------------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Change in Interest % Change in % Change in % Change in % Change in
Rate Net Interest Net Portfolio Net Portfolio Net Portfolio
(Basis Points) Margin (1) Value (2) Value (2) Value (2)
-------------- ---------- ------------- ------------- -------------
+300 3% -27% 3% -22%
+200 2 -19 2 -15
+100 1 -10 1 - 8
-100 -1 10 -1 9
-200 -3 21 -3 19
-300 -5 33 -5 29
(1) This column represents the percentage difference between net interest margin
in a stable interest rate environment and net interest margin as projected
in the various rate increments.
(2) This column represents the percentage difference between net portfolio value
of the Company in a stable interest rate environment and the net portfolio
value as projected in the various rate increments.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while maximizing they yield/cost spread on the
Company's asset/liability structure. The Company relies primarily on its
asset/liability structure to control interest rate risk.
-34-
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 non-performing assets,
restructured loans and past due loans and leases at the dates indicated.
December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Nonaccruing loans/nonperforming leases:
Commercial.................................... $ 2,182 $ 1,216 $ 550 $ 563 $ 1,485
Consumer...................................... 381 194 224 291 593
Commercial mortgages.......................... 2,383 3,919 3,243 2,527 9,886
Residential mortgages......................... 3,068 3,710 3,790 3,568 4,620
Construction.................................. - 38 3,529 3,588 3,182
-------- --------- --------- --------- ---------
Total nonaccruing loans/nonperforming leases....... 8,014 9,077 11,336 10,537 19,766
Nonperforming investments in real estate........... 76 989 1,500 1,252 2,738
Assets acquired through foreclosure................ 2,993 3,826 6,441 11,614 18,936
-------- --------- --------- --------- ---------
Total nonperforming assets......................... $ 11,083 $ 13,892 $ 19,277 $ 23,403 $ 41,440
======== ========= ======== ======== ========
Restructured loans................................. $ - $ 4,740 $ 10,967 $ 17,393 $ 13,775
======== ========= ======== ======== ========
Past due loans/leases:
Residential mortgages......................... $ 247 $ 315 $ 328 $ 111 $ 152
Commercial and commercial mortgages........... 2,654 1,909 832 789 240
Consumer...................................... 86 261 510 143 102
-------- --------- --------- --------- ---------
Total past due loans............................... $ 2,987 $ 2,485 $ 1,670 $ 1,043 $ 494
======== ========= ======== ======== ========
Ratio of nonaccruing loans/lease to total
loans/leases (1).............................. 0.81% .95% 1.34% 1.30% 2.70%
Ratio of allowance for loan/lease losses to gross
loans/leases(1)............................... 2.49 2.61 2.84 2.90 2.89
Ratio of nonperforming assets to total assets...... 0.68 .92 1.42 1.92 3.47
Ratio of loan loss/lease allowance to nonaccruing
loans/leases (2).............................. 307.97 273.06 197.04 201.84 97.79
Ratio of loan/loss lease and foreclosed asset
allowance to total nonperforming assets (2)... 225.05 178.50 120.22 94.87 51.17
(1) Total loans exclude loans held-for-sale.
(2) The applicable allowance represents general valuation allowances only.
Total nonperforming assets decreased by $2.8 million between 1997 and
1998 and by $5.4 million between 1996 and 1997. In 1998, $17.0 million in
collections of such assets, $1.7 million in charge-offs/writedowns, and $2.9
million in transfers to accrual/restructured status contributed to the reduction
in nonperforming assets. Such decreases were offset by the addition of $18.8
million of assets that were not previously classified as nonperforming assets.
The decrease in the levels of nonperforming assets reflect management's
continued efforts to identify and resolve problem assets, and the effects of the
current economic environment.
-36-
An analysis of the change in the balance of nonperforming assets during
the last three fiscal years is presented below.
Year Ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Beginning balance................................................ $ 13,892 $ 19,277 $ 23,403
Additions.................................................. 18,809 20,090 11,010
Collections .............................................. (17,029) (23,337) (7,631)
Transfers to accrual/restructured status................... (2,880) (2,122) (2,194)
Transfers to investment in real estate..................... - - (5,619)
Charge-offs/write-downs.................................... (1,709) (16) 308
--------- --------- --------
Ending balance................................................... $ 11,083 $ 13,892 $ 19,277
========= ========= ========
The level of nonaccruing loans and the nonperforming leases to total
loans/leases ratio decreased from .95% in 1997 to .81% in 1998. The
nonperforming assets to total assets ratio decreased from .92% in 1997 to .68%
in 1998. The continued 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 1998, nonaccruing loan reductions of $1.5 million in the commercial
mortgage category and a $900 thousand decrease in nonperforming investments in
real estate accounted for the majority of the decrease in total nonperforming
assets.
Allowance for Loan/Lease Losses. The Corporation maintains allowances
for credit 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,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Beginning balance.................................... $24,850 $24,241 $24,167 $21,700 $23,613
Provision for loan losses............................ 1,080 1,533 1,687 1,403 1,683
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.......................... 210 193 185 154 24
Commercial real estate (1)....................... 608 520 416 814 3,168
Commercial....................................... 648 169 605 404 1,021
Consumer (2)..................................... 1,153 859 607 826 514
------- ------- ------- ------- -------
Total charge-offs................................ 2,619 1,741 1,813 2,198 4,727
------- ------- ------- ------- -------
Recoveries:
Residential real estate.......................... 12 2 15 1 29
Commercial real estate (1)....................... 123 95 4 293 486
Commercial....................................... 74 22 15 169 322
Consumer (2)..................................... 169 109 166 199 294
------- ------- ------- ------- -------
Total recoveries..................................... 378 228 200 662 1,131
------- ------- ------- ------- -------
Net charge-offs...................................... 2,241 1,513 1,613 1,536 3,596
------- ------- ------- ------- -------
Ending balance....................................... $23,689 $24,850 $24,241 $24,167 $21,700
======= ======= ======= ======= =======
Net charge-offs to average gross
loans outstanding, net
of unearned income............................... .29% .19% .21% .20% .51%
(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).
1998 1997 1996(1)
---- ---- ----
Beginning balance.................................... $1,097 $ 499 $ -
Provision for losses on vehicles under operating
leases ............................................ 547 976 328
Reclass from allowance for loan losses .............. - 259 -
Transfer from residual reserve ...................... - - 362
Charge-offs.......................................... 909 791 273
Recoveries........................................... 257 154 82
------- ------- -------
Net charge-offs...................................... 652 637 191
------- ------- -------
Ending balance....................................... $ 992 $ 1,097 $ 499
======= ======= ======
(1) Operating-lease activity began in 1996.
-38-
The provision for loan losses decreased $452,000 between 1997 and 1998.
This decrease reflects a general improvement in the quality of the loan
portfolio. The provision for losses on vehicles under operating leases decreased
$428,000 between 1997 and 1998. This decrease brings the allowance in line with
acceptable levels.
Net charge-offs increased $729,000 between 1997 and 1998. The most
substantial charge-offs occurring in 1998 included a $314,000 charge-off of a
commercial real estate loan secured by an office building facility and a
$216,000 charge-off of a commercial loan secured by both real estate and
business assets. Net charge-offs remained relatively stable between 1995 and
1997. The high level of charge-offs in 1994 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 allowance for credit losses is allocated by major portfolio type.
As these portfolios have matured, 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,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Residential real estate.......... $ 229 36.5% $ 525 36.0% $ 326 34.4% $ 409 32.7% $ 506 34.7%
Commercial real estate........... 10,398 30.1 11,280 31.8 12,697 37.8 13,663 38.8 14,273 37.9
Commercial....................... 11,751 12.4 11,663 12.0 10,068 3.5 9,180 2.9 5,844 3.4
Consumer (1)..................... 1,311 21.0 1,382 20.2 1,150 24.3 915 25.6 1,077 24.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans...................... $23.689 100.0% $24,850 100.0% $24,241 100.0% $24,167 100.0% $21,700 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Operating leases................. $ 992 100.0% $ 1,097 100.0% $ 499 100.0%
======= ===== ======= ===== ======= =====
(1) Includes finance-type leases.
s
LIQUIDITY
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 10.6% and 10.2% at December 31, 1998 and 1997, 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. At December 31, 1998 and 1997, the Bank had outstanding FHLB advances
of $460.0 and $400.0 million, respectively.
The Corporation routinely enters into commitments requiring the future
outlay of funds. Effective March 1, 1997, the Bank entered into a new 5-year
agreement with its data processing facilities management company. Under the
terms of this agreement, an average minimum payment of approximately $4.7
million in 1999 and $4.5 million for 2000 and 2001 has been committed. The
aforementioned 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 and investments.
During 1998, operating and financing activities provided cash and cash
equivalents of $20.8 and $98.6 million, respectively, while investing activities
used $95.3 million. The cash provided by financing activities resulted primarily
from additional borrowings from the FHLB, increases in demand and time deposits,
and the issuance of trust preferred securities. 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 vehicles under operating
leases.
In 1997, operating and financing activities provided $15.7 million and
$141.9 million of cash and cash equivalents, respectively, while investing
activities used $155.0 million. The funds provided by financing activities
reflect additional FHLB advances and securities sold under agreements to
repurchase. This cash was utilized 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. During 1996, the 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 the additional FHLB advances and
securities sold under agreement to repurchase. This cash was used to fund the
purchase of mortgage-backed securities 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.
-40-
At December 31, 1998, the Bank is classified as well-capitalized and is in
compliance with all regulatory capital requirements. Management anticipates that
the Bank will continue to be classified as well-capitalized. For additional
information concerning the Bank's regulatory capital compliance see Note 10 to
the Consolidated Financial Statements.
As part of capital management, the corporation from time to time purchases
its own shares of common stock to be included in its treasury. Since 1996, the
Board of Directors has approved four separate stock repurchase programs to
reacquire 10%, 5%, 10% and 10% of the common stock outstanding. As part of these
programs, the Corporation acquired 1.6 million shares in 1996, 507,000 shares in
1997 and 1.1 million shares in 1998. At December 31, 1998, the Corporation held
3.2 million shares of its common stock in the treasury. The Corporation may
continue repurchasing shares in 1999.
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 June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of derivatives
depends on the derivative and the resulting designation. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of certain foreign currency
exposures. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier adoption is permitted. The Company has
not yet determined the impact, if any, of this Statement, including its
provisions for the potential reclassifications of investment securities, on
operations, financial condition or equity.
YEAR 2000
Banking, by its nature, is a very data processing intensive industry. Year
2000 issues result from the inability of many computer programs or computerized
equipment to accurately calculate, store or use a date after December 31, 1999.
These potential shortcomings could result in a system failure or miscalculations
causing disruptions of operation, including among other things, a temporary
inability to process transactions, calculate interest payments, track important
customer information, provide convenient access to this information, or engage
in normal business operations.
WSFS is subject to the regulation and supervision of various banking
regulators, whose oversight includes providing specific timetables, programs and
guidance regarding Year 2000 issues. Regulatory examination of the
-41-
WSFS' Year 2000 programs are conducted periodically and reports are submitted by
the Bank to the banking regulators and the Board of Directors on a periodic
basis.
WSFS has completed an assessment of its core financial and operational
software systems and has found them already in compliance, or has developed a
plan that is directed toward bringing non-complaint systems into compliance. Our
Year 2000 Project Plan is in place and is progressing on schedule with all of
our major systems Year 2000 compliant by the end of 1998. A full year of
intensive testing scheduled during 1999. As of January 31, 1999 all of our
internally maintained mission-critical systems have been renovated, tested, and
all but one installed in production, and 85% of our significant impact systems
have also been renovated and testing is well underway. We have also taken a
proactive approach in working with several financial services industry
providers, such as ATM networks and card processors, to help increase the
probability that WSFS customers will have uninterrupted service into the Year
2000.
From a technology perspective, WSFS uses application software systems and
receives technical support from one of the world's largest data processing
providers to financial institutions, for nearly all of its critical customer
accounting applications. This company has extensive resources dedicated at their
corporate level to assist their financial institution customers, including WSFS,
in the effort to become Year 2000 compliant. WSFS has installed system fixes for
all of its major customer applications including Year 2000 compliant versions of
its software. In addition, WSFS has replaced or upgraded all of its personal
computers and tested this hardware for Year 2000 compliance.
Plans have been developed and are being implemented to address and track
compliance in other areas of the organization. The infrastructure plan addresses
physical facilities, for example: building security systems, fire alarm systems,
heating and air conditioning and business equipment, for example: fax machines,
copiers, vaults, ATMs, postage machines and forms.
Systems outside of the direct control of WSFS, such as ATM networks, credit
card processors, and the Fed Wire System, pose a more problematic issue. A
theoretical problem scenario could involve a temporary inability of customers to
access their funds through automated teller machines, point of service terminals
at retailer locations, or other shared networks. For this reason alone, banks
and their governing agencies are closely scrutinizing the progress of our major
industry service providers.
WSFS plans include a review of the Year 2000 efforts of our suppliers,
vendors and other business relationships to encourage the timely resolution of
product or service compliance issues.
WSFS is currently developing contingencies for various Year 2000 problem
scenarios. These contingency plans range from converting from third-party
providers that we do not feel are adequately prepared for the Year 2000, to the
temporary manual processing of certain critical applications, if necessary.
Detailed remediation contingency plans for core applications were in place by
the end of 1998.
From a cost perspective, WSFS was already involved in upgrading its
technology infrastructure and therefore, many potential Year 2000 issues were
avoided by the replacement of old systems with new technology. As of December
31, 1998, WSFS has incurred expenses of $2.2 million related to the Year 2000
issue. WSFS anticipates spending an additional $1.0 million in future periods. A
large portion of costs associated with Year 2000 issues will be met from
existing resources through a reprioritization of the technology department
initiatives with the remainder representing incremental costs.
WSFS believes the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues do not represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial
-42-
condition. However, if compliance is not achieved in a timely manner by WSFS or
any of its significant related third-parties, be it a supplier of services or
customer, the Year 2000 issue could possibly have a material effect on the
Company's results of operations and financial position.
Successful and timely completion of the Year 2000 project is based on
management's best estimates, which were derived from numerous assumptions of
future events, which are inherently uncertain, including the availability of
certain resources, third party modification plans, and other factors. Many of
the factors that would guarantee Year 2000 success are beyond the control of
WSFS. These factors include availability of vendor compliant products, interface
system partner compliance, government activity and client readiness. Because of
the interconnectedness of the Year 2000 situation, WSFS cannot realistically
offer any certifications, representations or guarantees. Nevertheless, WSFS has
devoted substantial resources to the problem and describes its plan in this
corporate statement. WSFS' Year 2000 initiative is an ongoing process. The
information available in this document may be periodically updated and is
subject to change without notice. This statement about WSFS' Year 2000 readiness
is intended to supercede every statement that has been made previously Year 2000
readiness issues.
FORWARD LOOKING STATEMENTS
Within this annual report and financial statements we have included certain
"forward looking statements" concerning the future operations of the
Corporation. It is management's desire to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing the Corporation of the
protections of such safe harbor with respect to all "forward looking statements"
contained in our financial statements and 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, among others. 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)................................. 85
-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,
1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31,1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
- ------------
January 20, 1999
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, 1998.
/s/ MARVIN N. SCHOENHALS /s/ MARK A. TURNER
- ------------------------ -------------------------
Marvin N. Schoenhals Mark A. Turner
Chairman, President & Senior Vice President
Chief Executive Officer & Chief Financial Officer
-46-
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
--------- -------- ---------
(Dollars In Thousands, Except Per Share Data)
Interest income:
Interest and fees on loans.............................................. $ 68,319 $ 72,039 $ 73,103
Interest on mortgage-backed securities.................................. 26,736 25,829 19,446
Interest and dividends on investment securities......................... 3,016 2,785 2,168
Other interest income................................................... 10,161 9,282 6,506
--------- --------- ---------
108,232 109,935 101,223
--------- --------- ---------
Interest expense:
Interest on deposits .................................................. 32,519 31,484 31,222
Interest on Federal Home Loan Bank advances............................ 23,785 22,598 18,079
Interest on federal funds purchased and securities sold under
agreements to repurchase............................................. 10,686 12,040 5,869
Interest on senior notes and trust preferred borrowings................ 3,748 3,315 3,332
Interest on other borrowings........................................... 376 380 360
--------- ---------- ---------
71,114 69,817 58,862
--------- --------- ---------
Net interest income..................................................... 37,118 40,118 42,361
Provision for loan losses............................................... 1,080 1,533 1,687
--------- --------- ---------
Net interest income after provision for loan losses..................... 36,038 38,585 40,674
--------- --------- ---------
Other income:
Loan and lease servicing fee income .................................... 3,440 3,165 3,255
Rental income on operating leases, net................................. 11,911 9,089 3,043
Deposit service charges................................................ 4,371 4,248 2,877
Credit/debit card and ATM income ...................................... 2,724 1,531 1,125
Securities gains (losses) ............................................. 305 165 (243)
Other income........................................................... 1,942 1,418 1,136
---------- --------- ---------
24,693 19,616 11,193
---------- --------- ---------
Other expense:
Salaries and other compensation........................................ 11,911 13,700 13,959
Employee benefits and other personnel expenses......................... 3,847 3,373 3,518
Equipment expense...................................................... 2,093 1,452 1,260
Data processing and operations expense................................. 5,179 4,540 2,346
Occupancy expense...................................................... 3,000 2,793 2,493
Marketing expense...................................................... 1,288 1,212 678
Professional fees...................................................... 1,581 1,374 1,614
Net costs of assets acquired through foreclosure....................... 737 1,056 1,375
Other operating expenses............................................... 6,807 5,736 5,102
---------- --------- ---------
36,443 35,236 32,345
---------- --------- ---------
Income before taxes and extraordinary item............................. 24,288 22,965 19,522
Income tax provision .................................................. 6,315 6,576 3,166
---------- -------- ---------
Income before extraordinary item....................................... 17,973 16,389 16,356
Loss on extinguishment of debt, net of $787,000 in income tax.......... 1,461 -- --
---------- --------- ---------
Net income ............................................................ $ 16,512 $ 16,389 $ 16,356
========== ========= =========
Earnings per share:
Basic:
Income before extraordinary item ................................. $ 1.46 $ 1.31 $ 1.18
Loss on extinguishment of debt.................................... (0.12) -- --
---------- --------- ---------
Net income ................................................... $ 1.34 $ 1.31 $ 1.18
========== ========= =========
Diluted:
Income before extraordinary item ................................. $ 1.44 $ 1.29 $ 1.16
Loss on extinguishment of debt.................................... (0.12) -- --
----------- --------- ---------
Net income ................................................... $ 1.32 $ 1.29 $ 1.16
========== ========= =========
The accompanying notes are an integral part of these financial statements.
-47-
CONSOLIDATED STATEMENT OF CONDITION
December 31,
-----------------------------
1998 1997
---------- -----------
(In thousands)
Assets
Cash and due from banks......................................................... $ 55,848 $ 27,467
Federal funds sold and securities purchased under agreements to resell.......... 20,900 25,279
Interest-bearing deposits in other banks........................................ 7,518 28,992
Investment securities held-to-maturity (market value: 1998-$8,050,
1997-$28,905) ................................................................ 7,642 28,564
Investment securities available-for-sale........................................ 30,219 50,091
Mortgage-backed securities held-to-maturity (market value: 1998-$266,797,
1997-$273,320) .............................................................. 265,858 272,900
Mortgage-backed securities available-for-sale................................... 193,226 57,374
Investment in reverse mortgages, net............................................ 31,293 32,109
Loans held-for-sale............................................................. 3,084 2,183
Loans, net of allowance for loan losses of $23,689 at December 31, 1998 and
$24,850 at December 31, 1997.................................................. 760,584 762,280
Vehicles under operating leases, net of allowance for lease losses of $992 at
December 31, 1998 and $1,097 at December 31, 1997............................. 199,967 172,115
Stock in Federal Home Loan Bank of Pittsburgh, at cost.......................... 23,000 20,252
Assets acquired through foreclosure............................................. 2,993 3,826
Premises and equipment.......................................................... 11,919 9,001
Accrued interest and other assets............................................... 21,659 22,784
---------- ----------
Total assets.................................................................... $1,635,710 $1,515,217
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand.................................................... $ 108,418 $ 85,509
Money market and interest-bearing demand ..................................... 68,208 61,453
Savings....................................................................... 218,334 168,284
Time.......................................................................... 463,340 451,720
========== ==========
Total deposits ................................................................. 858,300 766,966
Federal funds purchased and securities sold under agreements to repurchase .... 153,505 207,699
Federal Home Loan Bank advances................................................ 460,000 400,000
Senior notes and trust preferred borrowings.................................... 50,000 29,100
Other borrowed funds........................................................... 8,904 7,879
Accrued expenses and other liabilities......................................... 19,249 16,814
========== ==========
Total liabilities.............................................................. 1,549,958 1,428,458
========== ==========
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; none
issued and outstanding, ........................ ............................ -- --
Common stock $.01 par value, 20,000,000 shares authorized; issued 14,695,688
at December 31, 1998, and 14,622,588 at December 31, 1997.................... 147 146
Capital in excess of par ...................................................... 57,696 57,469
Accumulated other comprehensive income......................................... 236 379
Retained earnings.............................................................. 64,657 49,252
Treasury stock at cost, 3,192,769 shares at December 31, 1998 and 2,162,609
shares at December 31, 1997.................................................. (36,984) (20,487)
========== ==========
Total stockholders' equity..................................................... 85,752 86,759
========== ==========
Total liabilities and stockholders' equity..................................... $1,635,710 $1,515,217
========== ==========
The accompanying notes are an integral part of these financial statements.
-48-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Capital Other Total
Common in excess comprehensive Retained Treasury stockholders'
stock of par value income earnings stock equity
------ ------------ ------------- -------- -------- ------------
(In Thousands)
Balance, January 1, 1996 .................. $ 145 $57,136 $ (242) $16,507 $ -- $73,546
Comprehensive income:
Net income............................ -- -- -- 16,356 -- 16,356
Other comprehensive income............ -- -- 408 -- -- 408
-------
Total comprehensive income (1)............. -- -- -- -- -- 16,764
-------
Exercise of common stock options .......... 1 153 -- -- -- 154
Treasury Stock at cost, 1,655,200 shares... -- -- -- -- (14,676) (14,676)
------- ------- ------- ------- ------- -------
Balance, December 31, 1996 ................ 146 57,289 166 32,863 (14,676) 75,788
Comprehensive income:
Net income............................ -- -- -- 16,389 -- 16,389
Other comprehensive income (1)........ -- -- 213 -- -- 213
-------
Total comprehensive income................. -- -- -- -- -- 16,602
-------
Exercise of common stock options .......... -- 180 -- -- -- 180
Treasury Stock at cost, 507,409 shares..... -- -- -- -- (5,811) (5,811)
------- ------- ------- ------- ------- -------
Balance, December 31, 1997 ................ 146 57,469 379 49,252 (20,487) 86,759
Comprehensive income:
Net income............................ -- -- -- 16,512 -- 16,512
Other comprehensive income (1) -- -- (143) -- -- (143)
-------
Total comprehensive income................. -- -- -- -- -- 16,369
-------
Cash Dividend, $.03 per share.............. -- -- -- (1,107) -- (1,107)
Exercise of common stock options .......... 1 227 -- -- -- 228
Treasury Stock at cost, 1,030,160 shares(2) -- -- -- -- (16,497) (16,497)
------- ------- ------- ------- ------- -------
Balance, December 31, 1998 ................ $ 147 $57,696 $ 236 $64,657 $(36,984) $85,752
------- ------- ------- ------- ------- -------
(1) Other Comprehensive Income:
1998 1997 1996
------ ------ ------
Net unrealized holding gains on securities
available-for-sale arising during the period ....... $ 162 $ 378 $ 165
Less: reclassification adjustment for gains (losses)
included in income ................................. 305 165 (243)
------ ----- -----
Other comprehensive income (loss)....................... $(143) $ 213 $ 408
--==== ===== =====
(2) Net of reissuances of 4,800 shares
The accompanying notes are an integral part of these financial statements.
-49-
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1998 1997 1996
------- -------- --------
(In Thousands)
Operating activities:
Net income................................................................. $ 16,512 $ 16,389 $ 16,356
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan, lease and residual value losses ..................... 2,313 2,509 2,015
Provision for losses on assets acquired through foreclosure.............. -- -- 400
Depreciation, accretion and amortization ................................ 2,875 (861) (376)
Decrease (increase) in accrued interest receivable and other assets...... 1,496 4,703 (108)
Origination of loans held-for-sale ...................................... (58,398) (27,605) (27,766)
Proceeds from sales of loans held-for-sale............................... 58,008 26,509 31,262
Increase (decrease) in accrued interest payable and other liabilities.... 2,236 (1,908) (3,204)
Increase in reverse mortgage capitalized interest, net .................. (5,525) (4,372) (2,158)
Loss on extinguishment of debt........................................... 2,248 -- --
Other, net .............................................................. (994) 372 966
-------- -------- --------
Net cash provided by operating activities.................................. 20,771 15,736 17,387
-------- -------- --------
Investing activities:
Net (increase) decrease of interest-bearing deposits in other banks...... 21,474 (23,190) (1,034)
Maturities of investment securities ..................................... 41,070 5,528 4,595
Sales of investment securities available-for-sale........................ 20,059 40,030 60,328
Purchases of investment securities held-to-maturity...................... (10,000) (15,046) --
Purchases of investment securities available-for-sale.................... (10,000) (89,956) (54,615)
Sales of mortgage-backed securities available-for-sale .................. 29,875 13,295 --
Repayments of mortgage-backed securities available-for-sale.............. 44,344 8,205 2,123
Repayments of mortgage-backed securities held-to-maturity ............... 151,661 92,029 44,382
Purchases of mortgage-backed securities held-to-maturity ................ (145,178) (52,131) (135,809)
Purchases of mortgage-backed securities available-for-sale............... (210,288) (26,651) (38,763)
Repayments on reverse mortgages.......................................... 16,603 19,023 13,151
Disbursements for reverse mortgages...................................... (10,058) (10,546) (11,091)
Sales of loans........................................................... 16,781 7,556 6,456
Purchase of loans ....................................................... (10,479) (11,030) (13,351)
Net decrease (increase) in loans ........................................ (8,007) 8,422 17,047
Net increase in operating leases......................................... (39,979) (125,863) (52,036)
Net increase in stock of Federal Home Loan Bank of Pittsburgh ........... (2,748) (4,117) (275)
Disbursement for real estate held for investment......................... -- -- 505
Receipts (purchases) from investments in real estate ................... 1,252 -- (1,362)
Sales of assets acquired through foreclosure, net ....................... 12,996 13,819 6,263
Premises and equipment, net ............................................. (4,720) (4,325) (764)
Other, net............................................................... -- (2) --
-------- -------- --------
Net cash used for investing activities..................................... (95,342) (154,950) (154,250)
-------- -------- --------
(Continued on next page)
-50-
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended December 31,
----------------------------------------
1998 1997 1996
------- -------- --------
(In Thousands)
Financing activities:
Net increase in demand and savings deposits.............................. 80,739 25,350 11,518
Net increase (decrease) in time deposits ................................ 11,328 (3,506) 12,084
Repayment of municipal bond repurchase obligations....................... -- -- (2,689)
Receipts from FHLB borrowings ........................................... 884,000 765,000 125,000
Repayments of FHLB borrowings ........................................... (824,000) (687,699) (109,507)
Receipts from reverse repurchase agreements.............................. 259,771 543,157 285,940
Repayments of reverse repurchase agreements ............................. (313,965) (494,762) (182,795)
Dividends paid on common stock........................................... (1,107) -- --
Issuance of common stock ................................................ 228 180 154
Extinguishment of senior notes .......................................... (30,548) -- (750)
Proceeds from issuance of trust preferred borrowings, net of costs....... 48,624 -- --
Purchase treasury stock, net of reissuance............................... (16,497) (5,811) (14,676)
-------- -------- --------
Net cash provided by financing activities................................ 98,573 141,909 124,279
-------- -------- --------
Increase (decrease) in cash and cash equivalents ........................ 24,002 2,695 (12,584)
Cash and cash equivalents at beginning of period ........................ 52,746 50,051 62,635
-------- -------- --------
Cash and cash equivalents at end of period .............................. $ 76,748 $ 52,746 $ 50,051
-------- -------- --------
Supplemental Disclosure of Cash Flow Information:
Cash paid in interest during the year ................................... $ 72,048 $ 68,611 $ 58,864
Cash paid (refund) in income taxes, net ................................. 2,233 (538) 4,820
Loans transferred to assets acquired through foreclosure ................ 9,704 9,655 5,885
Net change in unrealized gains (losses) on securities
available-for-sale, net of tax ........................................ (143) 213 408
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 20 retail banking offices located in Northern
Delaware and Southeastern Pennsylvania.
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, WSFS Capital Trust I, 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.
WSFS Capital Trust I was formed in 1998 to sell Trust Preferred
Securities. The Trust invested all of the proceeds from the sale of the Trust
Preferred Securities in Junior Subordinated Debentures of the Corporation. The
Corporation used the proceeds from the Junior Subordinated Debentures for
general corporate purposes, including the redemption of its 11% Senior Notes due
2005 on December 31, 1998.
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 sold its remaining parcel of land in 1998 and is
currently inactive. 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.
-52-
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 1998, 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.
-53-
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.
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.
-54-
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
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
1998 1997 1996
---- ---- ----
Numerator:
Income before extraordinary item ......... $17,973 $16,389 $16,356
Loss on extinguishment of debt ........... 1,461 - -
------- ------- -------
Net Income..................................... $16,512 $16,389 $16,356
======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares ................... 12,317 12,508 13,910
Effect of dilutive securities:
Employee stock options..................... 186 196 168
------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise........................... 12,503 12,704 14,078
======= ======= =======
Earnings per share:
Basic:
Income before extraordinary item ....... $ 1.46 $ 1.31 $ 1.18
Loss on extinguishment of debt.......... (0.12) - -
------- ------- -------
Net income .................................... $ 1.34 $ 1.31 $ 1.18
======= ======= =======
Diluted:
Income before extraordinary item........ $ 1.44 $ 1.29 $ 1.16
Loss on extinguishment of debt.......... (0.12) - -
------- ------- -------
Net income .................................... $ 1.32 $ 1.29 $ 1.16
======= ======= =======
-55-
2. INVESTMENT SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ----------- -------
(In Thousands)
Available-for-sale securities:
December 31, 1998:
U.S. Government and agencies......................... $ 30,000 $ 219 $ - $30,219
======= ======= ========= =======
December 31, 1997:
U.S. Government and agencies......................... $ 50,029 $ 62 $ - $50,091
======= ======== ========= =======
Held-to-maturity:
December 31, 1998:
Corporate bonds...................................... $ 6,059 $ 55 $ 12 $ 6,102
State and political subdivisions..................... 1,583 365 - 1,948
-------- -------- --------- -------
$ 7,642 $ 420 $ 12 $ 8,050
======== ======== ========= =======
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
======== ======== ========= =======
Securities with book values aggregating $24,175,000 at December 31,
1998 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
$609,000 and $1,123,000 at December 31, 1998 and 1997, respectively.
Substantially, all of the interest and dividends on investment securities
represented taxable income.
The scheduled maturities of investment securities held-to-maturity and
securities available-for-sale at December 31, 1998 were as follows (in
thousands):
Held-to-Maturity Available-for-Sale
---------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Within one year .............................................. $ 200 $ 200 $ - $ -
After one year but within five years.......................... 2,533 2,542 30,000 30,219
After five but within ten years............................... 2,136 2,144 - -
After ten years............................................... 2,773 3,164 - -
------- -------- ------- -------
$ 7,642 $ 8,050 $30,000 $30,219
======= ======= ======= =======
Proceeds from the sales of investments available-for-sale during 1998
were $20.1 million. Gains of $30,000 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 1998, 1997 and 1996.
-56-
Proceeds from the sale of investments during 1997 and 1996 were $40.0
and $60.3 million, respectively. Gains of $91,000 and $218,000 in 1997 and 1996,
respectively, and a loss of $353,000 in 1996, were realized on these sales.
3. MORTGAGE-BACKED SECURITIES
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- -----
(In Thousands)
Available-for-sale securities:
December 31, 1998:
Collateralized mortgage obligations ........... $168,637 $ 583 $ 223 $ 168,997
GNMA........................................... 24,444 - 215 24,229
-------- -------- ------- ---------
$193,081 $ 583 $ 438 $ 193,226
======== ======== ======= =========
Weighted average yield......................... 6.49%
December 31, 1997:
Collateralized mortgage obligations............ $56,852 $ 719 $ 197 $ 57,374
======= ======== ======= =========
Weighted average yield......................... 7.26%
Held-to-maturity securities:
December 31, 1998:
Collateralized mortgage obligations............ $175,619 $ 1,497 $ 149 $176,967
FNMA........................................... 40,881 - 258 40,623
GNMA........................................... 1,044 26 - 1,070
FHLMC.......................................... 42,337 29 36 42,330
Other......................................... 5,977 - 170 5,807
-------- -------- ------- ---------
$265,858 $ 1,552 $ 613 $266,797
======== ======== ======= =========
Weighted average yield......................... 6.61%
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%
At December 31, 1998, mortgage-backed securities with book values
aggregating $399.8 million 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 $2.6 and $2.0 million at
-57-
December 31, 1998 and 1997, respectively. In 1998, the Bank sold $29.6 million
in collateralized mortgage obligations, classified as available-for-sale,
resulting in a gain of $235,000. In 1997, the Bank sold $12.7 million 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,
nor transfers between categories of mortgage-backed securities during 1998, 1997
and 1996.
4. LOANS
December 31,
------------
1998 1997
---- ----
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) .............. $288,007 $285,127
Other ................................. 227,624 243,408
Real estate construction loans.............. 24,534 17,269
Commercial loans............................ 100,526 97,268
Consumer loans.............................. 165,660 159,432
-------- --------
806,351 802,504
Less:
Loans in process ........................... 17,455 12,173
Unearned income ............................ 4,623 3,201
Allowance for loan losses .................. 23,689 24,850
-------- --------
$760,584 $762,280
======== ========
The Corporation had impaired loans at December 31, 1998 of $874,000
compared to approximately $6.9 million at December 31, 1997. The average
recorded investment in impaired loans was $5.4 million, $8.6 million and $16.3
million during 1998, 1997 and 1996, respectively. The allowance for losses on
impaired loans was $131,000 at December 31, 1998, as compared to $1.2 million at
December 31, 1997. The Corporation recognizes interest income on a cash basis
method on impaired loans. Total interest income recognized on impaired loans
totaled $465,000 for the year ended December 31, 1998 and $652,000 and $1.3
million for the years ended December 31, 1997 and 1996, respectively.
The total amounts of loans serviced for others were $237.9, $207.8 and
$196.4 million at December 31, 1998, 1997 and 1996, respectively.
Accrued interest receivable on loans outstanding was $4.4, $5.1 and
$4.5 million at December 31, 1998, 1997 and 1996, respectively.
Nonaccruing loans aggregated $8.0, $9.1 and $11.3 million at December
31, 1998, 1997 and 1996, respectively. If interest on all such loans had been
recorded, net interest income would have increased by $767,000 in 1998, $922,000
in 1997 and $993,000 in 1996.
-58-
A summary of changes in the allowance for loan losses follows:
Year Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Beginning balance .............................................................. $24,850 $24,241 $24,167
Transfer to allowance for vehicles under operating leases.................. - (259) -
Transfer from assets acquired through foreclosure reserve ................. - 848 -
Provision for loan losses................................................. 1,080 1,533 1,687
Loans charged-off ......................................................... (2,619) (1,741) (1,813)
Recoveries................................................................ 378 228 200
------- ------- -------
Ending balance ................................................................. $23,689 $24,850 $24,241
======= ======= =======
5. 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 primarily in Delaware, Pennsylvania, New Jersey, and Maryland.
At December 31, 1998 and 1997, substantially all leased assets were accounted
for using the operating lease method.
Year Ended December 31,
------------------------
1998 1997
---- ----
(In Thousands)
Motor vehicles under operating lease, gross................................ $233,866 $186,304
-------- --------
Less:
Allowance for lease credit losses.......................................... (992) (1,097)
Accumulated depreciation................................................... (32,907) (13,092)
--------- ---------
$199,967 $172,115
======== ========
Motor vehicles held-for-sale or lease (net)................................ $ 939 $ 602
======== ========
Minimum future rentals under operating leases at December 31, 1998 are as
follows (in thousands):
1999.................................. $40,145
2000 ................................. 29,692
2001.................................. 15,788
2002.................................. 3,795
2003.................................. 425
--------
Total............................. $89,845
========
-59-
A summary of changes in the allowance for lease credit losses follows:
Year Ended December 31,
----------------------------
1998 1997 1996(1)
---- ---- -----
Beginning balance.................................................... $1,097 $ 499 $ -
Provision for losses on vehicles under operating leases ............. 547 976 328
Reclass from allowance loan losses .................................. - 259 -
Transfer from lease residual reserve ................................ - - 362
Net charge-offs...................................................... (652) (637) (191)
------ ------- ------
Ending balance....................................................... $ 992 $ 1,097 $ 499
====== ======= ======
(1) Operating type lease activity began in 1996.
6. ASSETS ACQUIRED THROUGH FORECLOSURE
December 31,
-------------------------
1998 1997
---- ----
(In Thousands)
Real estate ................................. $ 2,978 $ 3,103
Other ....................................... 405 734
------- -------
3,383 3,837
Less:
Allowance for losses......................... 390 11
------- -------
$ 2,993 $ 3,826
======= =======
A summary of changes in the allowance for losses follows:
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- -----
(In Thousands)
Beginning balance.................................................. $ 11 $ 1,925 $ 2,756
Provision for losses ............................................ (258) - 400
Net (charge-offs) recoveries .................................... 126 (555) (231)
Transfer to/from investment in real estate....................... 511 (511) (1,000)
Transfer to allowance for loan losses............................ - (848) -
------ ------- -------
Ending balance .................................................... $ 390 $ 11 $ 1,925
===== ======= =======
-60-
7. PREMISES AND EQUIPMENT
December 31,
-------------------------
1998 1997
---- ----
(In Thousands)
Land ......................................... $ 720 $ 720
Buildings .................................... 6,598 6,279
Leasehold improvements ....................... 4,088 2,933
Furniture and equipment ...................... 13,854 10,795
------ -------
25,260 20,727
Less:
Accumulated depreciation ..................... 13,341 11,726
------ -------
$11,919 $ 9,001
======= =======
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 $1,207,000 in 1998, $1,032,000 in 1997, and $965,000
in 1996. Future minimum payments under these leases at December 31, 1998 are (in
thousands):
1999 .............................................. $1,334
2000 .............................................. 1,210
2001 .............................................. 1,080
2002 .............................................. 969
Thereafter ........................................ 2,700
------
Total future minimum lease payments ...... $7,293
======
-61-
8. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more which aggregate $90,287,516 and $61,663,000 at December 31,
1998 and 1997, respectively.
The following is a summary of deposits by category, including a summary
of the remaining time to maturity for time deposits:
December 31,
----------------------
1998 1997
---- ----
(In Thousands)
Money market and demand:
Noninterest-bearing demand.................. $ 108,418 $ 85,509
Money market and interest-bearing demand ... 68,208 61,453
--------- --------
Total money market and demand .......... 176,626 146,962
--------- --------
Savings ...................................... 218,334 168,284
--------- --------
Time certificates by maturity (1):
Less than one year ........................ 337,808 283,624
One year to two years ..................... 85,926 113,938
Two years to three years .................. 27,276 40,848
Three years to four years.................. 5,091 7,409
Four years to five years................... 4,053 2,211
Over five years............................ 3,186 3,690
--------- --------
Total time certificates ................ 463,340 451,720
--------- --------
Total deposits ................................ $ 858,300 $766,966
========= ========
(1) Includes $64.5 and $64.4 million of brokered certificates of deposit at
December 31, 1998 and 1997, respectively.
Interest expense by category follows:
Year Ended December 31,
------------------------------
1998 1997 1996
---- ---- -----
Money market and interest-bearing demand .............................. $ 1,528 $ 1,506 $ 1,419
Savings ............................................................... 5,971 4,623 4,084
Time .................................................................. 25,020 25,355 25,719
------- -------- --------
$32,519 $ 31,484 $ 31,222
======= ======== ========
-62-
9. BORROWED FUNDS
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
------- -------- ---------- ------------- -----------
(Dollars in Thousands)
1998
----
FHLB advances............................................ $460,000 5.32% $460,000 $419,849 5.67%
Senior notes and trust preferred borrowings.............. 50,000 8.32 73,100 34,201 10.96
Federal funds purchased and securities
sold under agreements to repurchase ................... 153,505 5.60 210,000 184,310 5.80
Other borrowings ........................................ 8,904 4.10 11,160 9,005 4.18
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 borrowings ........................................ 7,879 4.25 11,877 8,745 4.25
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 4.62% to 6.60% at December 31, 1998 are due as follows
(dollars in thousands):
Weighted
Average
Amount Rate
------ ---------
1999............................... $105,000 5.07%
2000............................... 85,000 5.42
2001............................... 10,000 5.82
--------
$200,000
========
Also outstanding at December 31, 1998 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. The Bank also has four additional advances,
totaling $150,000,000 which are convertible on a quarterly basis (at the
discretion of the FHLB) to variable rate advances based upon the 3-month LIBOR
rate, after an initial fixed term, and a $40,000 advance which is fixed at
5.55%, unless 3-month LIBOR is greater than 6.50%, in which case, the advance
becomes variable on a quarterly basis at 3-month LIBOR plus 3 basis points. The
Bank has the option to prepay these advances at predetermined times or rates.
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.
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 5%
of its advances (borrowings) from
-63-
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, 1998,
of $23.0 million.
Senior Notes and Trust Preferred Borrowings
In December 1993, the Corporation issued $32.0 million of 11% Senior
Notes (the Notes). The Corporation repurchased and extinguished $750,000 and
$2.2 million of the notes outstanding during 1996 and 1995, respectively. In
1998, the Corporation repurchased and extinguished $29.1 million in senior notes
recording an extraordinary loss on extinguishment of debt of $1.5 million, net
of $787,000 in tax benefit.
On November 20, 1998, the Corporation issued $50.0 million of trust
preferred securities, due at December 1, 2028, pursuant to a shelf registration
under the Securities Act of 1933 under which the Corporation may sell, from time
to time, up to $75.0 million in aggregate purchase price of trust preferred
securities. These securities were issued at a floating rate of 250 basis points
over 3-month LIBOR, repricing quarterly. The maturity date on these securities
may be shortened to a date not earlier than December 1, 2003 if certain
conditions are met.
The trust preferred securities were issued by a specially formed
subsidiary of the Corporation, a Delaware statutory trust, which invested the
proceeds in junior subordinated debentures to be issued by the Corporation. The
net proceeds from the sale of trust preferred securities were used as
replacement financing for the early retirement of the Corporation's 11% Senior
Notes, due 2005. The Corporation expects to benefit from significantly reduced
long-term financing costs and the flexibility of additional Bank regulatory
capital.
The Corporation also entered into an agreement to limit the interest
rate exposure in the trust preferred securities by purchasing an interest rate
cap, which provides a ceiling on 3-month LIBOR of 6.00% for the first ten years.
This will limit the interest rate exposure on the trust preferred securities to
no more than 8.50% through the first ten years. The cost of this interest rate
cap was $2.4 million, which will be amortized over the ten-year period as a
yield adjustment.
Securities Sold Under Agreements to Repurchase
During 1998, the Bank sold securities under agreements to repurchase as
a short-term funding source. At December 31, 1998, securities sold under
agreements to repurchase had fixed rates ranging from 5.10% to 6.05%. The
underlying securities are mortgage-backed securities and U.S. Government and
agency securities with book and market
-64-
values aggregating $162.8 million and $162.7 million, respectively, at December
31, 1998. Securities sold under agreements to repurchase with the corresponding
carrying and market values of the underlying securities are due as follows
(dollars in thousands):
Collateral
-------------------------------------------
Carrying Market Accrued
Borrowing Rate Value Value Interest
--------- ---- -------- ------ --------
1998
- ----
30 to 90 days.................... $ 18,505 5.10% $ 21,453 $ 21,318 $ 122
Over 90 days..................... 135,000 5.66 141,338 141,382 954
--------- ------- ---------- ---------- --------
$153,505 5.60% $162,791 $162,700 $ 1,076
======== ======= ======== ======== =======
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
======== ======= ======== ======== ======
Other Collateralized Borrowings
Collateralized borrowings of $8.9 and $7.9 million at December 31, 1998
and 1997, 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, 1998 such borrowings were collateralized by collateralized mortgage
obligations. The average rate on these borrowings during 1998 was 4.18%.
10. STOCKHOLDERS' EQUITY
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions, such as the Bank, must maintain "tangible" capital equal to 1.5%
of adjusted total assets, "core" capital equal to 4.0% of adjusted total assets,
"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, 1998, and 1997 the Bank was in
compliance with regulatory capital requirements and was deemed a
"well-capitalized" institution. Management anticipates that the Bank will
continue to be classified as well-capitalized.
-65-
A table presenting the Bank's consolidated capital position as of
December 31, 1998 and 1997 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, 1998:
Total Capital (to Risk-Weighted Assets)...... $123,430 11.87% $ 83,164 8.00% $103,955 10.00%
Core Capital (to Adjusted Tangible Assets)... 115,907 7.09 65,378 4.00 81,722 5.00
Tangible Capital (to Tangible Assets)........ 115,544 7.07 24,511 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted Assets)..... 115,907 11.15 N/A N/A 62,373 6.00
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
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 $0.01 par preferred stock,
and 2,000,000 shares of 10% convertible preferred stock, series 1. No preferred
stock was outstanding at December 31, 1998 and 1997. The trust preferred
securities issued in 1998 qualify for tier 1 capital. 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. Since 1996, the Board of
Directors has approved four separate stock repurchase programs to reacquire 10%,
5%, 10% and 10% of the common shares outstanding. As part of these programs, the
Corporation acquired 1.6 million shares in 1996, 507,000 shares in 1997 and 1.1
million in 1998. At December 31, 1998, the Corporation held 3.2 million shares
of its common stock in the treasury.
The Holding Company
Although the holding company does not have significant assets or engage
in significant operations separate from the banking subsidiary, the Corporation
has agreed to cause the Bank's required regulatory capital level to be
maintained by infusing sufficient additional capital as necessary. To that end,
the Corporation issued the 11% Senior Notes described in Note 9. These notes
were called in December, 1998. In November the Corporation issued $50 million of
Trust Preferred Securities at a variable interest rate of 250 basis points over
the three-month LIBOR. At December 31, 1998, the rate on these securities was
7.75% with a scheduled maturity of December 1, 2028. These securities were
issued by WSFS Financial Corporation's recently formed corporation subsidiary,
WSFS Capital Trust I, and the proceeds from the issue were invested in Junior
Subordinate Debentures issued by WSFS Financial Corporation. These securities
are treated as borrowings with the interest included in interest expense on the
consolidated statement of operations. The Corporation purchased an interest rate
cap that effectively limits 3-month LIBOR to 6.00% See Note 9 for additional
information. The proceeds were used to extinguish the 11% senior notes and for
general corporate purposes.
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.
-66-
11. 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 $616,000, $564,000, and
$704,000 in 1998, 1997 and 1996, respectively. The plan purchased 50,000, 33,000
and 55,000 shares of common stock of the Corporation during 1998, 1997 and 1996,
respectively.
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.
In December 1998, the Corporation adopted SFAS No.132, "Employer's
Disclosure About Pensions and Other Post Retirement Benefits" which standardized
the applicable disclosure requirements.
The following disclosures are in accordance with SFAS No. 132 (dollars in
thousands):
1998 1997
---- ----
Change in Benefit Obligation:
Benefit obligation at beginning of year......................................... $ 1,350 $ 1,332
Service Cost.................................................................... 40 36
Interest cost................................................................... 91 93
Actuarial loss (gain)........................................................... 44 (14)
Benefits paid .................................................................. (97) (97)
------- -------
Benefit obligation at end of year......................................... $ 1,428 $ 1,350
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year.................................. $ - $ -
Employer contributions ......................................................... 97 97
Benefits paid .................................................................. (97) (97)
------- -------
Fair value of plan assets at end of year.................................. $ - $ -
Funded Status:
Funded status................................................................... $(1,428) $(1,350)
Unrecognized transition (asset) obligation...................................... 859 920
Unrecognized net (gain) loss.................................................... 72 28
------- -------
Net amount recognized..................................................... $ (497) $ (402)
======= =======
-67-
1998 1997 1996
---- ---- ----
Components of net periodic benefit cost:
Service cost.................................................................... $ 40 $ 36 $ 30
Interest cost................................................................... 91 93 97
Amortization of transition (asset) obligation .................................. 61 61 61
Amortization of net (gain) loss ................................................ - - 2
---- ---- ----
Net periodic benefit cost................................................. $192 $190 $190
==== ==== ====
Sensitivity analysis:
Effect of +1% on service cost plus interest cost................................ $ 2 $ 3 $ 3
Effect of -1% on service cost plus interest cost................................ (2) (3) (3)
Effect of +1% on APBO........................................................... 31 30 32
Effect of -1% on APBO........................................................... (35) (36) (38)
1998 1997 1996
---- ---- ----
Assumptions used to value the Accumulated Postretirement Benefit Obligation
(APBO):
Discount rate............................................................ 6.75% 7.00% 7.25%
Health care cost trend rate.............................................. 8.00% 8.50% 9.00%
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.
12. TAXES ON INCOME
The Corporation and its subsidiaries file a consolidated federal income
tax return and separate state income tax returns. The income tax provision
(benefit) consists of the following:
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Current income taxes from operations:
Federal taxes .................................................... $1,217 $ (931) $1,062
State and local taxes............................................. 1,389 1,208 846
Deferred income taxes:
Federal taxes .................................................... 3,709 6,175 1,197
State and local taxes ............................................ - 124 61
------ ------ ------
Subtotal ................................................... $6,315 $6,576 $3,166
Current taxes from extraordinary item:
Federal taxes on debt extinguishment ............................. (787) - -
------ ------ ------
$5,528 $6,576 $3,166
====== ====== ======
Current federal income taxes include taxes on income which cannot be
offset by net operating loss carryforwards.
-68-
Based on the Corporation's history of prior earnings and its
expectations of the future, management believes that operating income and the
reversal pattern of its temporary differences will, more likely than not, be
sufficient to settle a net deferred tax liability of $2.4 million as of December
31, 1998 and recover a net deferred tax asset of $1.5 million at December 31,
1997. Adjustments to the valuation allowance were made in 1998, 1997, and 1996
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, 1998 and December 31, 1997 (in
thousands):
1998 1997
-------- --------
Deferred tax liabilities:
Accelerated depreciation................................................... $(25,205) $(17,672)
Other...................................................................... (134) (235)
-------- --------
Total deferred tax liabilities.................................................. (25,339) (17,907)
-------- --------
Deferred tax assets:
Bad debt deductions........................................................ 9,287 8,822
Tax credit carryforwards................................................... 2,259 2,102
Net operating loss carryforwards........................................... 14,761 9,841
Loan fees.................................................................. 283 598
Provisions for losses on reverse mortgages................................. 15,199 15,779
Other...................................................................... 2,924 3,580
------- --------
Total deferred tax assets....................................................... 44,713 40,722
------- --------
Valuation allowance............................................................. (21,800) (21,335)
-------- --------
Net deferred tax asset (liability).............................................. $ (2,426) $ 1,480
======== ========
Approximately $21 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 preceding 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.
-69-
Net operating loss carryforwards of $97.5 million remain at December
31, 1998. There are also alternative minimum tax credit carryforwards and
general business credit carryforwards of approximately $2.3 million at December
31, 1998 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
------- ----- -------------
1999......................... $ - $ 7,302 $ -
2000......................... - 4,405 -
2001......................... - - -
2002......................... - 4,929 -
2003......................... - 9,443 -
2004......................... 968 21,301 -
2005......................... 3,850 18,743 -
2006......................... 1,098 - -
2008......................... 6,157 - -
2009......................... 6,755 - -
2012......................... - 34 31
2013......................... - 306 -
2017......................... 2,757 - -
2018......................... 9,480 - -
Unlimited.................... - - 2,229
------- ------- -------
$31,065 $66,463 $ 2,260
======= ======= =======
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 $16.6 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,
-----------------------------------
1998 1997 1996
---- ---- ----
Statutory federal income tax rate ............... 35.0% 35.0% 35.0%
State tax net of federal tax benefit............. 3.7 3.8 3.0
Interest income 50% excludable................... (3.3) (2.6) -
Utilization of loss carryforwards and
valuation allowance adjustments........... (9.4) (7.6) (21.3)
Other............................................ - - (0.5)
---- ---- ----
Effective tax rate .......................... 26.0% 28.6% 16.2%
==== ==== ====
-70-
13. 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, 1998 there were 433,000 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 a credit related to SARs of $261,000 in 1998 and
expenses of $2.5 million and $433,000 in 1997, and 1996, respectively.
-71-
A summary of the status of the Corporation's Stock Option Plans as of
December 31, 1998, 1997 and 1996, and changes during the years then ending is
presented below:
1998 1997 1996
------------------------ ------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Stock Options:
Outstanding at beginning of year 334,915 $ 7.96 316,005 $ 4.72 267,505 $ 2.33
Granted 96,900 17.47 78,700 17.75 106,700 9.50
Exercised (73,100) 2.43 (55,090) 3.27 (58,200) 2.64
Canceled (25,060) 13.07 (4,700) 9.44 - -
-------- -------- --------
Outstanding at end of year 333,655 $11.55 334,915 $ 7.96 316,005 $ 4.72
Exercisable at end of year 136,435 180,695 209,305
Weighted-average fair value
of awards granted $ 6.88 $ 6.93 $3.84
SARs:
Outstanding at beginning of year 190,658 $ 1.75 273,075 $ 1.99 329,995 $ 2.00
Granted - - - - - -
Exercised (93,148) 1.85 (82,417) 2.54 (51,582) 2.13
Canceled - - - - (5,338) 1.65
-------- -------- --------
Outstanding at end of year 97,510 $ 1.65 190,658 $ 1.75 273,075 $ 1.99
Exercisable at end of year 97,510 182,658 208,260
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 4.6% in 1998, 6.1% in
1997 and 6.2% in 1996; expected option life of 6 years for all three year's
awards; and expected stock price volatility of 35% for 1998 awards, 25% for 1997
awards and 27% for 1996 awards. Cash dividends of $.12 per share were assumed
for 1998 awards.
SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123)
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 $349,000 in 1998, $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 $16.2 million in 1998, $16.2 million
in 1997 and $16.3 million in 1996, and proforma diluted earnings per share would
have been $1.29 in 1998, $1.27 in 1997 and $1.16 in 1996.
The effects on proforma net income and diluted earnings per share of
applying the disclosure requirement of 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.
-72-
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,
1998, 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 88,555 $2.29 2.0 years 88,555 $2.29
$3.77-$5.64 2,000 3.94 5.9 years 2,000 3.94
$7.25-$9.41 2,000 7.94 7.6 years 2,000 7.94
$9.40-$11.29 75,200 9.56 7.9 years 30,080 9.56
$11.29-$13.17 12,300 12.75 8.4 years 2,460 12.75
$15.05-$16.93 2,500 16.25 9.7 years
$16.93-$18.81 151,100 17.93 9.5 years 11,340 18.65
-------- ----- --------- ------- -----
Total 333,655 $11.55 7.0 years 136,435 $5.55
======= =======
SARs:
$1.65 97,510 $1.65 .9 years 97,510 $1.65
14. COMMITMENTS AND CONTINGENCIES
Lending Operations
At December 31, 1998, the Corporation had commitments to extend credit
of $128.0 million. Consumer lines of credit totaled $66.2 million of which $58.0
million was secured by real estate. Outstanding letters of credit were $3.6
million and outstanding commitments to make or acquire rescheduled mortgage
loans aggregated $23.1 million of which approximately $20.8 million were at
fixed rates ranging from 5.63% to 7.50%, and approximately $2.3 million were at
variable rates ranging from 4.50% to 8.00%. All mortgage commitments are
expected to have closing dates within a six month period.
-73-
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:
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 in 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, a company purchased by WSFS in
November 1994, 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.
On October 5, 1998, the U.S. Supreme Court denied hearing an appeal by
the plaintiffs seeking a class action suit. These plaintiffs may still make
claims against the Company individually, but only through separate cases in
binding arbitration and not as a single class-action case in federal court. The
Corporation believes that all such claims and actions are without merit and
intends to defend itself vigorously.
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.
-74-
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,
-----------------------
1998 1997
---- ----
(In Thousands)
Financial instruments with contract amounts which
represent potential credit risk:
Construction loan commitments .......................................... $17,689 $ 7,064
Commercial mortgage loan commitments ................................... 1,772 5,376
Commercial loan commitments ............................................ 15,636 17,512
Commercial standby letters of credit ................................... 3,597 3,026
Residential mortgage loan commitments .................................. 23,145 9,605
Consumer lines of credit ............................................... 66,208 64,085
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.
15. 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. In November 1998, the corporation
purchased an interest rate cap in order to limit its exposure on $50.0 million
of variable trust preferred securities issued in November 1998. The cap has a
notional amount of $50.0 million and a term of 10 years. This derivative
instrument caps 3-month LIBOR (the base rate of the trust preferred) at 6.00%
for 10 years, thus limiting the Company's exposure to rising interest rates on
the Trust Preferred Offering.
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:
-75-
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 flows, are utilized if appraisals are not
available.
Interest rate cap: The fair value is estimated using quoted prices for
similar instruments.
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.
-76-
The carrying amount and estimated fair value of the Corporation's
financial instruments are as follows (in thousands):
December 31,
--------------------------------------------------------
1998 1997
----------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and short-term investments................. $ 84,266 $ 84,266 $ 81,738 $ 81,738
Investment securities........................... 37,861 38,269 78,655 78,996
Mortgage-backed securities...................... 459,084 460,023 330,274 330,694
Investment in reverse mortgages................. 31,293 31,493 32,109 30,505
Loans, net...................................... 763,668 783,344 764,463 782,298
Interest rate cap............................... 2,370 2,196 - -
Financial liabilities:
Deposits........................................ 858,300 860,272 766,966 767,723
Borrowed funds.................................. 672,409 662,953 644,678 639,570
The estimated fair value of the Corporation's off-balance sheet financial
instruments is as follows (in thousands):
December 31,
--------------------
1998 1997
---- ----
Off-balance sheet instruments:
Commitments to extend credit....................................................... $ 582 $1,342
Standby letters of credit.......................................................... 36 30
16. 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 investment in reverse mortgages (the "1994 Pool"). Providential's available
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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 $10.8 million and $9.7 million at December 31, 1998 and
December 31, 1997, respectively. All 674 loans, which comprise the 1994 pool at
December 31, 1998, 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 totaled $20.5 million and $22.4 million at
December 31, 1998 and December 31, 1997, respectively. Of the 430 loans which
comprise the 1993 Pool at December 31, 1998, 355 loans, or 83%, are located in
Delaware, New Jersey, Pennsylvania and Maryland.
At December 31, 1998, 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:
- ------------
1999........................................................ $ 3,318 $ 1,804 $ 4,942
2000........................................................ 2,062 2,229 4,291
2001........................................................ 2,338 2,296 4,634
2002........................................................ 2,682 2,344 5,026
2003........................................................ 3,000 2,353 5,353
2004-2008................................................... 17,816 10,851 28,667
2009-2013................................................... 18,166 7,654 25,820
2014-2018................................................... 13,650 4,102 17,752
Thereafter.................................................. 10,954 2,226 13,180
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 1998 are as follows for each pool:
1994 1993
Pool Pool
---- ----
Year ended December 31, 1999.................................. 1.00% 1.00%
Year ended December 31, 2000.................................. 2.00 2.00
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 28.4% on the 1994 Pool and increased income
by $1,088,000 during 1998 over the anticipated effective yield at January 1,
1998. Included in this increase was a cumulative catch-up adjustment of
$807,000. The effective yield on the 1993 Pool was 6.93% in 1998, reflecting an
$826,000 increase in income over the anticipated effective yield at January 1,
1998 which includes a cumulative catch-up adjustment of $653,000.
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, 1998
(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................................ 25.70% 27.19% 5.26% 6.27%
Effect on income of reverse mortgages.......... $(1,442) $ (653) $ (2,544) $ (1,028)
The cumulative catch-up adjustments included in the above decreases in
income are $924,000 and $415,000, respectively, at January 1, 1998 for the 1994
Pool. The cumulative catch-up adjustments included in the above decreases in
income are $2,076,000 and $834,000, respectively, at January 1, 1998 for the
1993 Pool.
17. SEGMENT INFORMATION
In December 1998, the Corporation 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, geographic areas in which the entity earns revenues and holds
assets, and major customers.
Under the definition of SFAS No. 131, the Corporation has two operating
segments: Wilmington Savings Fund Society, FSB (Bank) and WSFS Credit
Corporation, (WCC). The Bank segment provides financial products through its
branch network to consumer and commercial customers. The WSFS Credit Corporation
segment provides auto loans and leases indirectly through unrelated auto
dealerships within the Mid-Atlantic region.
-80-
WSFS's reportable segments are business units that offer different
services to distinct customers. The reportable segments are managed separately
because they operate under different regulations and provide services to
distinct customers.
The Corporation evaluates performance based on pre-tax ordinary income
and allocates resources based on these results. Segment information for the
years ended December 31, 1998, 1997, and 1996 follow (in thousands):
For the year ended December 31, 1998 (in thousands):
Bank WCC Total
---- --- -----
External customer revenues:
Interest income.................................................... $ 105,833 $ 2,399 $ 108,232
Other income ...................................................... 11,243 13,450(1) 24,693
---------- ---------- ----------
Total external customer revenues ...................................... 117,076 15,849 132,925
---------- ---------- ----------
Intersegment revenues:
Interest income.................................................... 11,339(2) - 11,339
Other income ...................................................... 20 7 27
---------- ---------- ----------
Total intersegment revenues ........................................... 11,359 7 11,366
---------- ---------- ----------
Total revenue.......................................................... 128,435 15,856 144,291
------- ----------- -------
External customer expenses:
Interest expense .................................................. 71,114 - 71,114
Other expenses..................................................... 33,118 2,556 35,674
Other depreciation and amortization................................ 1,768 81 1,849
---------- ---------- ----------
Total external customer expenses ...................................... 106,000 2,637 108,637
---------- ---------- ----------
Intersegment expense:
Interest expense................................................... - 11,339(2) 11,339
Other expenses..................................................... 7 20 27
---------- ---------- ----------
Total intersegment expenses ........................................... 7 11,359 11,366
---------- ---------- ----------
Total expenses ........................................................ 106,007 13,996 120,003
---------- ---------- ----------
Income before taxes and extraordinary item............................. 22,428 1,860 24,288
Provision for income taxes ............................................ 6,315
Loss on extinquishment of debt, net
of tax .............................................................. 1,461
----------
Consolidated net income ............................................... $ 16,512
==========
Segment assets......................................................... 1,622,848 226,305 $1,849,153
Elimination intersegment receivables................................... (213,443)
----------
Consolidated assets.................................................... $1,635,710
==========
Capital expenditures................................................... $ 4,744 $ 24 $ 4,768
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For the year ended December 31, 1997 (in thousands):
Bank WCC Total
---- --- -----
External customer revenues:
Interest income.................................................... $ 107,265 $ 2,670 $ 109,935
Other income ...................................................... 8,788 10,828(1) 19,616
---------- ---------- ----------
Total external customer revenues ...................................... 116,053 13,498 129,551
Intersegment revenues:
Interest income.................................................... 9,066(2) - 9,066
Other income ..................................................... 20 9 29
---------- ---------- ----------
Total intersegment revenues ........................................... 9,086 9 9,095
---------- ---------- ----------
Total revenue.......................................................... 125,139 13,507 138,646
---------- ---------- ----------
External customer expenses:
Interest expense .................................................. 69,817 - 69,817
Other expenses.................................................... 33,349 1,978 35,327
Other depreciation and amortization ............................... 1,335 107 1,442
---------- ---------- ----------
Total external customer expenses ...................................... 104,501 2,085 106,586
---------- ---------- ----------
Intersegment expenses:
Interest expense................................................... - 9,066(2) 9,066
Other expenses .................................................... 9 20 29
---------- ---------- ----------
Total intersegment expenses ........................................... 9 9,086 9,095
---------- ---------- ----------
Total expenses......................................................... 104,510 11,171 115,681
---------- ---------- ----------
Income before taxes and extraordinary item ............................ 20,629 2,336 22,965
Provision for income taxes ............................................ 6,576
Loss on extinquishment of debt, net
of tax .............................................................. -
----------
Consolidated net income ............................................... $ 16,389
==========
Segment assets......................................................... 1,502,732 203,522 $1,706,254
Elimination intersegment receivables................................... (191,037)
----------
Consolidated assets.................................................... $1,515,217
==========
Capital expenditures................................................... $ 4,424 $ 23 $ 4,447
(continued on next page)
-81-
For the year ended December 31, 1996 (in thousands):
External customer revenues:
Interest income.................................................... $ 96,266 $ 4,957 $ 101,223
Other income ...................................................... 6,558 4,635(1) 11,193
---------- ---------- ----------
Total external customer revenues ...................................... 102,824 9,592 112,416
---------- ---------- ----------
Intersegment revenues:
Interest income.................................................... 5,727(2) - 5,727
Other income ...................................................... 22 - 22
...................................................................... ---------- ---------- ----------
Total intersegment revenues ........................................... 5,749 - 5,749
---------- ---------- ----------
Total revenue.......................................................... 108,573 9,592 118,165
---------- ---------- ----------
External customer expenses:
Interest expense................................................... 58,862 - 58,862
Other expenses .................................................... 30,983 1,783 32,766
Other depreciation and amortization ............................... 1,198 68 1,266
---------- ---------- ----------
Total external customer expenses ...................................... 91,043 1,851 92,894
---------- ---------- ----------
Intersegment expenses:
Interest expense................................................... - 5,727(2) 5,727
Other expenses .................................................... - 22 22
---------- ---------- ----------
Total intersegment expenses ........................................... - 5,749 5,749
---------- ---------- ----------
Total expenses ........................................................ 91,043 7,600 98,643
---------- ---------- ----------
Income before taxes and extraordinary item ............................ 17,530 1,992 19,522
Provision for income taxes ............................................ 3,166
Loss on extinquishment of debt, net
of tax .............................................................. -
----------
Consolidated net income ............................................... $ 16,356
==========
Segment assets ........................................................ 1,346,224 129,915 $1,476,139
Elimination intersegment receivables .................................. (118,504)
----------
Consolidated assets ................................................... $1,357,635
==========
Capital expenditures................................................... $ 819 $ 15 $ 834
(1) Operating lease income net of depreciation and loss provisions.
(2) Intersegment interest based on the Corporation's weighted average wholesale
borrowing cost which was 5.96%, 6.06%, and 6.22% for the years ended
December 31, 1998, 1997 and 1996, respectively.
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18. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
December 31,
---------------------
1998 1997
---- ----
(In Thousands)
Assets:
Cash .............................................................................. $ 15,225 $ 7,915
Investment in the Bank ............................................................ 116,144 108,440
Investment in Interest Rate Cap ................................................... 2,370 -
Investment in Capital Trust........................................................ 1,547 -
Other assets....................................................................... 2,201 1,141
-------- --------
$137,487 $117,496
======== ========
Liabilities and stockholders' equity:
Borrowings......................................................................... $ 50,000 $ 29,100
Interest payable........................................................................ 495 1,601
Other liabilities.................................................................. 1,240 36
-------- --------
Total liabilities.................................................................. 51,735 30,737
-------- --------
Stockholders' equity:
Common stock ...................................................................... 147 146
Capital in excess of par value .................................................... 57,696 57,469
Comprehensive income............................................................... 236 379
Retained earnings ................................................................. 64,657 49,252
Treasury stock .................................................................... (36,984) (20,487)
-------- --------
Total stockholders' equity ........................................................ 85,752 86,759
-------- --------
$137,487 $117,496
======== ========
Condensed Statement of Operations
Year Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Income:
Interest income ........................................................... $ 850 $ 524 $ 659
Other income............................................................... 91 62 23
------- ------- -------
941 586 682
------- ------- -------
Expenses:
Interest expense........................................................... 3,748 3,201 3,333
Other operating expenses................................................... (934) (801) (856)
------- ------- -------
2,814 2,400 2,477
------- ------- -------
Loss before equity in undistributed income of the Bank and extraordinary item... (1,873) (1,814) (1,795)
Equity in undistributed income of the Bank ..................................... 19,846 18,203 18,151
------- ------- -------
Income before extraordinary item................................................ 17,973 16,389 16,356
Loss on extinguishment of debt, net of taxes ................................... 1,461 - -
------- ------- -------
Net income ..................................................................... $16,512 $16,389 $ 16,356
======= ======= ========
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Condensed Statement of Cash Flows
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Operating activities:
Net income ................................................................ $ 16,512 $ 16,389 $ 16,356
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of the Bank ................................ (19,846) (18,203) (18,151)
Amortization .............................................................. 135 115 114
Loss on extinguishment of debt............................................. 2,248 - -
Increase (decrease) in liabilities ........................................ 98 4 (43)
Decrease (increase) in other assets........................................ (600) 721 (923)
------- ------- -------
Net cash used for operating activities ......................................... (1,453) (974) (2,647)
------- ------- -------
Investing activities:
Decrease in investment in Bank............................................. 12,000 7,972 16,168
Investment in Interest Rate Cap ........................................... (2,390) - -
Investment in Capital Trust ............................................... (1,547) - -
------- ------- -------
Net cash provided by investing activities....................................... 8,063 7,972 16,168
------- ------- -------
Financing activities:
Issuance of common stock .................................................. 228 180 154
Proceeds from issuance of Trust Preferred Securities, net of costs......... 48,624 - -
Extinguishment of senior notes............................................. (30,548) - (750)
Dividends paid on common stock ............................................ (1,107) - -
Treasury stock, net ....................................................... (16,497) (5,811) (14,676)
------- ------- -------
Net cash provided by (used for) financing activities ........................... 700 (5,631) (15,272)
------- ------- -------
Increase (decrease) in cash .................................................... 7,310 1,367 (1,751)
Cash at beginning of period .................................................... 7,915 6,548 8,299
------- ------- -------
Cash at end of period .......................................................... $15,225 $ 7,915 $ 6,548
======= ======= =======
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QUARTERLY FINANCIAL SUMMARY (Unaudited)
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
Interest income............ $ 26,915 $ 27,314 $ 26,941 $27,062 $27,292 $27,942 $28,008 $26,693
Interest expense........... 18,040 18,213 17,541 17,320 17,719 17,841 17,707 16,550
-------- -------- -------- ------- ------- ------- ------- -------
Net interest income ....... 8,875 9,101 9,400 9,742 9,573 10,101 10,301 10,143
Provision for loan losses ..... 142 189 172 577 460 400 364 309
-------- -------- -------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 8,733 8,912 9,228 9,165 9,113 9,701 9,937 9,834
Other income .............. 6,432 6,401 5,863 5,997 5,745 5,050 4,624 4,197
Other expenses............. 9,114 9,085 9,070 9,174 9,605 8,738 8,759 8,134
-------- -------- -------- ------- ------- ------- ------- -------
Income before taxes ....... 6,051 6,228 6,021 5,988 5,253 6,013 5,802 5,897
Income tax provision ...... 1,574 1,619 1,565 1,557 1,381 1,733 1,633 1,829
-------- -------- -------- ------- ------- ------- ------- -------
Income before extraordinary
item.................... 4,477 4,609 4,456 4,431 3,872 4,280 4,169 4,068
Loss on extinguishment of
debt, net of tax........ 1,461 - - - - - - -
-------- -------- -------- ------- ------- ------- ------- -------
Net income ................ $ 3,016 $ 4,609 $ 4,456 $ 4,431 $ 3,872 $ 4,280 $ 4,169 $ 4,068
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic:
Income before extraordinary
item ................... $ .37 $ .37 $ .36 $ .36 $ .31 $ .34 $ .33 $ .32
Loss on extinguishment of
debt.................... (.12) - - - - - - -
------- -------- -------- ------- -------- ------- ------- -------
Net income............... $ .25 $ .37 $ .36 $ .36 $ .31 $ .34 $ .33 $ .32
======= ======== ======== ======= ======== ======= ======= =======
Diluted:
Income before extraordinary
item ................... $ .37 $ .37 $ .35 $ .35 $ .31 $ .34 $ .33 $ .32
Loss on extinguishment of
debt.................... (.12) - - - - - - -
------- -------- -------- ------- ------- ------- ------- -------
Net income............... $ .25 $ .37 $ .35 $ .35 $ .31 $ .34 $ .33 $ .32
======= ======== ======== ======= ======= ======= ======= =======
-85-
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 1999 Annual Meeting of
Stockholders:
Page
----
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 4-9
- ------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION 10-17
- --------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 2,6,7,18
- ---------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
- --------------------------------------------------------
-86-
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.
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 are 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.
4.1 Amended and Restated Trust Agreement of WSFS Capital I, incorporated
herein by reference from Form 8-K/A filed with the Securities and Exchange
Commission on November 20, 1998.
4.2 Officers Certificate and Company Order for Floating Rate Junior
Subordinated Debentures due December 1, 2028, incorporated
herein by reference from Form 8-K/A filed with the Securities and Exchange
Commission on November 20, 1998.
4.3 Trust Preferred Securities Guarantee Agreement, incorporated herein by
reference from Form 8-K/A filed with the Securities and Exchange
Commission on November 20, 1998.
4.4 Form of Trust Preferred Security (included in Exhibit 4.1), incorporated
herein by reference from Form 8-K/A, filed with the Securities and Exchange
Commission on November 20, 1998.
4.5 Form of Floating Rate Junior Subordinated Debentures due December 1,
2028, incorporated herein by reference from Form 8-K/A filed with the
Securities and Exchange Commission on November 20, 1998.
-87-
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 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.
10.4 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
10.5 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.
10.6 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.
10.7 Employment Agreement dated May 6, 1997 by and between Wilmington Savings Fund
Society, Federal Savings Bank and Karl L. Johnston is incorporated herein by
reference to exhibit 10.8 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.8 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 is incorporated herein by reference to exhibit
10.9 of the Registrant's Annual Report of Form 10K for the year ended December
1997.
21 Attachment A Subsidiaries of Registrant.
23 Attachment B Consent of KPMG LLP.
27 Attachment C Financial Data Schedule
-88-
(b) The following reports on Form 8K were filed during the fourth quarter 1998:
November 5, 1998, the registrant filed a Form 8-K reporting under Item
5, Other Events, the press release announcing third quarter earnings.
November 20, 1999, the registrant filed a Form 8-K and 8-K/A reporting
information under the following items:
Under Item 5. The Registrant reported that on November 20,
1998, the Registrant's wholly-owned subsidiary, WSFS Capital Trust
I issued $50,000,000 aggregate liquidation amount of Floating Rate
Cumulative Trust Preferred Securities at a public offering price
of $1,000 per Trust Preferred Security.
Under Item 7. the Registrant included the following exhibits:
Underwriting Agreement dated November 17, 1998, between
Sandler O'Neill & Partners, L.P. and WSFS Financial Corporation
and Wilmington Savings Fund Society, Federal Savings Bank Amended
and Restated Trust Agreement of WSFS Capital I
Officers Certificate and Company Order for Floating Rate
Junior Subordinated Debentures due December 1, 2028
Trust Preferred Securities Guarantee Agreement
Form of Trust Preferred Security
Form of Floating Rate Junior Subordinated Debentures due
December 1, 2028
-89-
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 25, 1999 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 25, 1999 BY: /s/ MARVIN N. SCHOENHALS
---------------------------------
Marvin N. Schoenhals
Chairman, President and
Chief Executive Officer
Date: March 25, 1999 BY: /s/ CHARLES G. CHELEDEN
---------------------------------
Charles G. Cheleden
Vice Chairman and Director
Date: March 25, 1999 BY: /s/ DAVID E. HOLLOWELL
---------------------------------
David E. Hollowell
Director
Date: March 25, 1999 BY: /s/ JOSEPH R. JULIAN
---------------------------------
Joseph R. Julian
Director
Date: March 25, 1999 BY: /s/ THOMAS P. PRESTON
---------------------------------
Thomas P. Preston
Director
Date: March 25, 1999 BY: /s/ JOHN F. DOWNEY
---------------------------------
John F. Downey
Director
Date: March 25, 1999 BY: /s/ CLAIBOURNE D. SMITH
----------------------------------
Claibourne D. Smith
Director
-90-
Date: March 25, 1999 BY: /s/ R. TED WESCHLER
---------------------------------
R. Ted Weschler
Director
Date: March 25, 1999 BY: /s/ DALE E. WOLF
----------------------------------
Dale E. Wolf
Director
Date: March 25, 1999 BY: /s/ EUGENE W. WEAVER
----------------------------------
Eugene W. Weaver
Director
Date: March 25, 1999 BY: /s/ MARK A. TURNER
----------------------------------
Mark A. Turner
Senior Vice President and
Chief Financial Officer
Date: March 25, 1999 BY: /s/ ROBERT A. KUEHL
-----------------------------------
Robert A. Kuehl
Managing Vice President and Controller
-91-
ATTACHMENT A
SUBSIDIARIES OF REGISTRANT
-92-