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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number: 0-22399
WAYPOINT FINANCIAL CORP.
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(Name of Small Business Issuer in its Charter)
Pennsylvania 25-1872581
- ------------------------------------------------------------------ ---------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
235 North Second Street, Harrisburg, Pennsylvania 17101
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(Address of Principal Executive Office) (Zip Code)
(717) 236-4041
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
------------------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES x NO
---------- ------------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. [ ]
As of March 30, 2001, there were issued and outstanding 38,951,431
shares of the Registrant's Common Stock.
The aggregate value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of the Common Stock
as of March 30, 2001, was approximately $360 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Proxy Statement for the 2001 Annual Meeting of Stockholders
(Part III).
PART I
------
ITEM 1. Business
- ------ --------
General
Waypoint Financial Corp. was organized as part of the October 17,
2000, mutual-to-stock conversion of Harris Financial, MHC and merger of Harris
Financial, Inc. and York Financial Corp. As part of the conversion and merger,
Waypoint Financial sold 16,850,000 shares of common stock for $10.00 per share
in a subscription and underwritten public offering. In the conversion and
merger, Waypoint Financial succeeded to the operations of Harris Financial and
York Financial, and became the holding company for Harris Savings Bank and York
Federal Savings and Loan Association. On October 30, 2000, Harris Saving Bank
and York Federal Savings and Loan Association merged to form Waypoint Bank. The
merger with York Financial was accounted for as a pooling-of-interests.
Accordingly, historical financial information in this report includes restated
operations to accomodate the pooling-of-interests merger.
Waypoint Financial's assets consist primarily of 100% of the
outstanding shares of Waypoint Bank, and various financial services company
subsidiaries through which Waypoint Financial provides brokerage, insurance,
advisory, and other fee-based services. Waypoint Bank is primarily engaged in
the business of attracting deposits and investing these deposits into loans
secured by residential and commercial real property, commercial business loans,
consumer loans, and investment securities. Waypoint Bank also offers
full-service trust and asset management services and employee benefit plan
services. Waypoint Bank's predecessor was originally formed in 1886.
Market Area
Waypoint Bank conducts its business through 58 offices, including 50
offices located in the five county south-central region of Pennsylvania that
includes Dauphin, York, Cumberland, Lancaster and Lebanon Counties, and eight
offices in Maryland. In addition, Waypoint Bank maintains an operations center,
a business center, a support center, five loan production offices, a mortgage
lending office, a business banking office, and a commissioned mortgage
origination staff as well as mortgage correspondent relationships that originate
residential mortgage loans for Waypoint Bank primarily in Pennsylvania, Maryland
and Virginia, although loans are originated in 11 states within the Mid-Atlantic
region.
The primary market area includes a mixture of rural, suburban and
urban markets, with the Harrisburg Metropolitan Statistical Area being the most
populous and more urban of the markets served by Waypoint Bank. Given the
wide-ranging presence of the branch network, the market area of Waypoint Bank
has a fairly diversified economy, with services, wholesale/retail trade,
manufacturing, and state and local government constituting the basis of the
economy.
Competition
Waypoint Financial faces intense competition for deposits and loans
in its primary market area. Waypoint Financial's most direct competition for
deposits historically has come from commercial banks and savings banks operating
in its primary market area, credit unions, and, to a lesser but increasing
extent, from other financial services companies, such as brokerage firms and
insurance companies. While these entities continue to provide a source of
competition for deposits, Waypoint Financial increasingly faces significant
competition for deposits from the mutual fund industry as the public continues
to invest relatively more savings in securities than in insured deposits.
Waypoint Financial also faces significant competition for investors' funds from
short-term money market securities, corporate securities and government
securities.
Waypoint Financial faces significant competition for loans from
savings banks and commercial banks in its market area, and from other financial
service providers, such as mortgage companies and mortgage brokers. Competition
is likely to increase as a result of the recent enactment of the Financial
Services Modernization Act of 1999, which eases restrictions on entry into the
financial services market by insurance companies and securities firms. Moreover,
to the extent that these changes permit banks, securities firms and insurance
companies to affiliate, the financial services industry could experience further
consolidation. This could result in a growing number of larger
2
financial institutions competing in Waypoint Financial's primary market area
that offer a wider variety of financial services than Waypoint Financial
currently offer. Competition for deposits, for the origination of loans and the
provision of other financial services may limit Waypoint Financial's growth and
adversely impact its profitability in the future.
3
Loan Portfolio Analysis. The following table sets forth the
composition of Waypoint Financial's loan portfolio at the dates indicated.
Waypoint Financial had no concentration of loans exceeding 10% of total gross
loans other than as disclosed below.
At December 31,
- ---------------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------- ---------------------------
Amount Percent Amount Percent
- ------------------------------------------------------ ------------ ------------ ------------
Residential mortgage loans:
One- to four-family.................. $ 1,274,684 49.07% $ 1,270,978 51.91%
Construction......................... 90,712 3.49 103,278 4.22
Other................................ - 0.00 20 0.00
--------------- -------- ------------ --------
Total residential mortgage loans..... 1,365,396 52.56 1,374,276 56.13
--------------- -------- ------------ --------
Commercial loans:
Commercial real estate............... 396,125 15.25 339,165 13.85
Commercial business.................. 234,837 9.04 190,839 7.80
Construction and site development.... 11,840 0.46 14,203 0.58
--------------- -------- ------------- --------
Total commercial loans............... 642,802 24.75 544,207 22.23
--------------- -------- ------------- --------
Consumer and other loans:
Manufactured housing................. 90,226 3.47 80,164 3.27
Home equity and second mortgage...... 326,024 12.55 231,290 9.45
Indirect automobile.................. 117,377 4.52 98,768 4.03
Other (1)............................ 55,939 2.15 119,625 4.89
--------------- -------- ------------- --------
Total consumer and other loans....... 589,566 22.69 529,847 21.64
--------------- -------- ------------- --------
Loans receivable, gross.............. 2,597,764 100.00 2,448,330 100.00
--------------- -------- ------------- --------
Plus:
Dealer reserves (2).................. 23,476 20,698
Less:
Unearned premiums.................... 210 296
Net deferred loans origination fees.. 6,917 6,411
Allowance for loan losses............ 22,586 23,127
--------------- -------------
Loans receivable, net................ $ 2,591,527 $ 2,439,194
=============== =============
At December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------- --------------------------- --------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Residential mortgage loans:
One- to four-family.................. $ 1,129,876 57.23% $1,180,541 63.70% $1,286,320 70.30%
Construction......................... 99,242 5.03 107,984 5.83 69,295 3.79
Other................................ 6,962 0.35 1,605 0.09 21,777 1.19
------------- -------- ------------- -------- ------------- --------
Total residential mortgage loans..... 1,236,080 62.61 1,290,130 69.62 1,377,392 75.28
------------- -------- ------------- -------- ------------- --------
Commercial loans:
Commercial real estate............... 225,771 11.44 137,685 7.43 87,378 4.78
Commercial business.................. 103,329 5.23 37,635 2.03 496 0.03
Construction and site development.... 14,859 0.75 12,338 0.67 4,994 0.27
------------- -------- ------------- -------- ------------- --------
Total commercial loans............... 343,959 17.42 187,658 10.13 92,868 5.08
------------- -------- ------------- -------- ------------- --------
Consumer and other loans:
Manufactured housing................. 65,455 3.31 73,310 3.96 68,043 3.71
Home equity and second mortgage...... 204,700 10.37 206,520 11.14 207,291 11.33
Indirect automobile.................. 23,929 1.21 - - - -
Other (1)............................ 100,181 5.07 95,524 5.15 84,083 4.60
------------- -------- ------------- -------- ------------- --------
Total consumer and other loans....... 394,273 19.97 375,354 20.25 359,417 19.64
------------- -------- ------------- -------- ------------- --------
Loans receivable, gross.............. 1,974,312 100.00 1,853,142 100.00 1,829,677 100.00
------------- -------- ------------- -------- ------------- --------
Plus:
Dealer reserves (2).................. 13,996 14,504 13,880
Less:
Unearned premiums.................... 471 855 (327)
Net deferred loans origination fees.. 7,111 7,242 7,392
Allowance for loan losses............ 19,891 17,002 14,735
------------- ------------- -------------
Loans receivable, net................ $ 1,960,835 $ 1,842,547 $ 1,821,757
============= ============= =============
- ------------------------------------
(1) Includes credit card loans, education loans and unsecured personal loans.
(2) Includes reserves established for indirect auto and manufactured housing
loan portfolios.
4
Loan Maturity Schedule
The following table sets forth information as of December 31, 2000,
regarding the dollar amount of loans in Waypoint Financial's portfolio based on
their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Adjustable and floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
Over Over Three
One Through Total
Within Through Five Over After
One Year Three Years Years Fixed Five Years One Year Total
----------- ----------- ---------- -------- -------- -----
(In Thousands)
Fixed-Rate Loans:
Residential mortgage loans:
One- to four-family............... $ 2,217 $ 49,134 $ 72,915 $ 707,754 $ 829,803 $ 832,020
Construction...................... - - - 90,712 90,712 90,712
Other............................. - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Total residential mortgage
loans.......................... 2,217 49,134 72,915 798,466 920,515 922,732
Commercial loans:
Commercial real estate............ 8,834 25,244 53,757 29,694 108,695 117,529
Commercial business............... 18,080 18,384 26,705 29,713 74,802 92,882
Construction and site development. 1,346 - 100 943 1,043 2,389
------------ ------------ ------------ ------------ ------------ ------------
Total commercial loans.......... 28,260 43,628 80,562 60,350 184,540 212,800
Consumer and other loans:...........
Manufactured housing.............. 11 112 603 89,500 90,215 90,226
Home equity and second mortgage... 1,330 12,207 26,434 187,768 226,409 227,739
Indirect automobile and other..... 964 23,845 104,170 18,149 146,164 147,128
------------ ------------ ------------ ------------ ------------ ------------
Total consumer and other loans... 2,305 36,164 131,207 295,417 462,788 465,093
------------ ------------ ------------ ------------ ------------ ------------
Total fixed-rate loans........... 32,782 128,926 284,684 1,154,233 1,567,843 1,600,625
Adjustable-Rate Loans:
Residential mortgage loans:
One-to four-family................ 143,494 104,658 149,230 45,282 299,170 442,664
------------ ------------ ------------ ------ ------------ ------------
Total residential mortgage
loans.......................... 143,494 104,658 149,230 45,282 299,170 442,664
Commercial loans:
Commercial real estate............ 88,364 71,074 91,937 27,221 190,232 278,596
Commercial business............... 120,899 8,564 10,421 2,071 21,056 141,955
Construction and site development. 9,451 - - - - 9,451
------------ ------------ ------------ ------------ ------------ ------------
Total commercial loans........... 218,714 79,638 102,358 29,292 211,288 430,002
Consumer and other loans:
Home equity and second mortgage... 98,285 - - - - 98,285
Indirect automobile and other..... 19,290 1,349 75 5,474 6,898 26,188
------------ ------------ ------------ ------------ ------------ ------------
Total consumer and other loans... 117,575 1,349 75 5,474 6,898 124,473
------------ ------------ ------------ ------------ ------------ ------------
Total adjustable-rate Loans...... 479,783 185,645 251,663 80,048 517,356 997,139
------------ ------------ ------------ ------------ ------------ ------------
Loans receivable, gross............. $ 512,565 $ 314,571 $ 536,347 $ 1,234,281 $ 2,085,199 $ 2,597,764
============ ============ ============ ============ ============ ============
5
The following table sets forth the dollar amount of all loans maturing or
repricing after December 31, 2001 that have predetermined interest rates and
have floating or adjustable interest rates.
Floating or
Predetermined Rates Adjustable Rates Total
------------------------------ ------------------------------ ----------------------------
(In Thousands)
Residential mortgage loans.... $ 920,515 $ 299,170 $ 1,219,685
Business banking loans........ 184,540 211,288 395,828
Consumer and other loans...... 462,788 6,898 469,686
------------------ ---------------- ------------------
Total loans................ $ 1,567,843 $ 517,356 $ 2,085,199
================== ================ ==================
Residential Mortgage Lending
Mortgage lending traditionally has been Waypoint Financial's primary
business. In recent years, Waypoint Financial has increased its emphasis on its
business banking and consumer lending, and decreased its reliance on traditional
one- to four-family residential real estate lending. Although the total amount
of one- to four-family residential real estate loans has remained relatively
stable over the last five years, the percentage of Waypoint Bank's loan
portfolio that consists of one- to four-family residential real estate loans has
decreased, due primarily to the growth of Waypoint Financial's business loan
portfolio.
One- to Four-Family Real Estate Loans. Historically, Waypoint Financial's
primary lending activity was the origination of loans secured by one- to
four-family residential real estate located in its primary market area. More
recently, Waypoint Financial has sold into the secondary mortgage market a
substantial portion of the conforming one- to four-family residential real
estate loans that it originates. For the year ended December 31, 2000, Waypoint
Financial sold 73% of its one- to four-family mortgage loan originations. Most
one- to four-family loans recently sold by Waypoint Financial have been sold on
a non-recourse basis with the servicing rights released. Management anticipates
that Waypoint Financial will sell a majority of the one-to four-family mortgage
loans originated in 2001.
Waypoint Financial also currently offers adjustable-rate mortgage loans
with terms of up to 30 years, with an interest rate based on the one year
Constant Maturity Treasury Bill index. Interest rate adjustments on such loans
are typically limited to a certain amount during any adjustment period and over
the life of the loan. Waypoint Financial sold a substantial portion of its
adjustable-rate mortgage loans originated in 2000, generally on a servicing
released basis.
Waypoint Financial underwrites fixed- and adjustable-rate one- to
four-family residential mortgage loans with loan-to-value ratios of up to 95%,
provided that a borrower obtains private mortgage insurance on loans that exceed
80% of the appraised value or sales price, whichever is less, of the secured
property. Waypoint Financial also requires that title insurance, hazard
insurance and, if appropriate, flood insurance be maintained on all properties
securing real estate loans made by Waypoint Financial. A licensed appraiser
appraises all properties securing one- to four-family first mortgage loans.
In an effort to provide financing for low and moderate income buyers,
Waypoint Financial offers Pennsylvania Housing Finance Agency mortgage loans to
qualified individuals. These loans are offered with fixed-rates of interest and
terms of up to 30 years, and must be secured by one- to four-family residential
property that is occupied by the owner. All of these loans are originated using
modified underwriting guidelines, based on rates and terms established by the
Pennsylvania Housing Finance Agency. These loans are generally offered with a
discounted interest rate (approximately 75 to 100 basis points). All
Pennsylvania Housing Finance Agency loans are originated in amounts of up to 95%
of the lower of the property's appraised value or the sale price. Private
mortgage insurance is required on all such loans. All of these loans are sold on
a servicing released basis to the Pennsylvania Housing Finance Agency
immediately after loan closing.
Construction Loans. Waypoint Financial originates construction loans to
individuals to acquire lots and construct personal residences. At December 31,
2000, residential construction loans amounted to $157.8 million, and the
unadvanced portion of construction loans totaled $67.1 million. Waypoint
Financial's residential construction loans generally provide for the payment of
interest only during the construction phase, which is usually six months. At
6
the end of the construction phase, the loan converts to a permanent mortgage
loan. In some cases, Waypoint Financial buys a hedge for the six-month
construction period and then sells into the secondary market the permanent
mortgage loan into which the construction loan converts. Before making a
commitment to fund a residential construction loan, Waypoint Financial requires
an appraisal of the property by an independent licensed appraiser. Waypoint
Financial also reviews and inspects each property before disbursement of funds
during the term of the construction loan. Loan proceeds are disbursed after
inspection based on the percentage of completion method.
Business Banking
Waypoint Financial's Business Banking Group offers commercial financial
products and services to businesses in its primary market area. The Business
Banking group originates commercial real estate loans, commercial business
loans, and construction and site development loans.
Commercial Real Estate Loans. Waypoint Financial's commercial real estate
loans are generally secured by owner-occupied properties used for business
purposes such as small office buildings, industrial facilities or retail
facilities primarily located in Waypoint Financial's primary market area.
Commercial real estate loans also include properties that are less than 50%
occupied by the borrower and are owned primarily for the production of rental
income. Although there may be occasional exceptions to the loan policy,
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the lower of cost or appraised value of
the property provided such loans comply with Waypoint Financial's current in
house loans-to-one borrower limit. Waypoint Financial's commercial real estate
loans may be made with terms of up to ten years, amortization not to exceed 20
years, and with three to five year fixed interest rates or variable interest
rates tied to market indices. In evaluating a commercial real estate loan
application, Waypoint Financial considers the net operating income of the
borrower's business, the borrower's expertise, credit history and profitability
and the value of the underlying property. In addition, with respect to
commercial real estate rental properties, Waypoint Financial will also consider
the term of the lease and the quality of the tenants. Waypoint Financial has
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of cash flow before debt service to debt
service) of at least 1.20x. Environmental surveys are required for commercial
real estate loans. Generally, commercial real estate loans made to corporations,
partnerships and other business entities require personal guarantees by
principals of the borrower. At December 31, 2000, Waypoint Financial's largest
commercial real estate loan had a carrying value of $8.7 million, was secured by
a first mortgage lien, and was performing according to its original terms.
Commercial Business Loans. Waypoint Financial makes commercial business
loans primarily in its market area to a variety of professionals, sole
proprietorships and small- to medium-size businesses. Waypoint Financial offers
a variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. Term loans are generally offered with
initial fixed rates of interest for the first three to five years and with terms
of up to ten years. Business lines of credit have floating rates of interest and
are payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a daily basis and are generally indexed to
Waypoint Financial's prime rate. When making commercial business loans, Waypoint
Financial considers the financial statements of the borrower, Waypoint
Financial's lending history with the borrower, the debt service capabilities of
the borrower, the projected cash flows of the business and the value of the
collateral. Commercial business loans are generally secured by a variety of
collateral, primarily accounts receivable, inventory and equipment, and are
supported by personal guarantees. However, Waypoint Financial also makes
unsecured commercial loans available to business clients with strong credit and
who are well-known to Waypoint Financial. Unsecured commercial loans are
generally limited to short-term single payment loans or lines of credit used to
provide general corporate liquidity or to provide for seasonal liquidity needs.
These loans generally are offered at floating rates of interest and are payable
on demand or at a stated short-term maturity.
Construction and Site Development Loans. Waypoint Financial also originates
construction and site development loans to developers and builders primarily to
finance the construction of single-family homes and subdivisions, the
construction of commercial development projects, and site development projects.
Loans to finance
7
the construction of single-family homes and subdivisions are generally offered
to experienced builders with whom Waypoint Financial has an established
relationship. Residential development loans are typically offered with terms of
up to 36 months. The maximum loan-to-value limit applicable to these loans is
80% of the appraised post-construction value or cost, whichever is less.
Construction loan proceeds are disbursed periodically as construction progresses
and as inspection by Waypoint Financial's approved appraisers warrants.
Waypoint Financial also makes construction loans for commercial development
projects. The projects include multi-family, apartment, industrial, retail and
office buildings. These loans generally have an interest-only phase during
construction, and convert to permanent financing when construction is completed.
Disbursement of funds is at the sole discretion of Waypoint Financial and is
based on the progress of construction. The maximum loan-to-value limit
applicable to these loans is 75% of the appraised post-construction value or
cost, whichever is less.
Waypoint Financial also originates land loans to local contractors and
developers for the purpose of improving the property, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on the
property, are limited to 70% of the lower of the acquisition price or the
appraised value of the land, and have a term of up to two years with a floating
interest rate based on Waypoint Financial's internal base rate. Waypoint
Financial's land loans are generally secured by property in its primary market
area. Waypoint Financial requires title insurance and, if applicable, a
hazardous waste survey reporting that the land is free of hazardous or toxic
waste.
Consumer and Other Loans
Waypoint Financial offers a variety of consumer and other loans, including
loans secured by manufactured housing, home equity and second mortgage loans
that are secured by owner-occupied one- to four-family residences, indirect home
improvement loans, indirect automobile loans and other loans.
Home Equity and Second Mortgage Loans. Waypoint Bank offers home equity and
second mortgage loans, including fixed-term installment loans, home equity lines
of credit and indirect home improvement loans. At December 31, 2000, the
unadvanced amounts of home equity lines of credit totaled $139.4 million. The
underwriting standards employed by Waypoint Financial for home equity and second
mortgage loans include a determination of the applicant's credit history, an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. Home
equity lines of credit have adjustable rates of interest, which are indexed to
the prime rate as reported in The Wall Street Journal. Interest rates on home
equity lines of credit may be adjusted to no more than 18%. Generally, the
maximum loan-to-value ratio on home equity lines of credit, including the
outstanding amount of any first mortgage loan, is 90%. Waypoint Financial offers
fixed- and variable-rate home equity and second mortgage loans with terms up to
15 years. The loan-to-value ratios of both fixed- and variable-rate home equity
and second mortgage loans are generally limited to 90% of the appraised value of
the real estate collateral adjusted for any first mortgage loans.
Indirect home improvement loans are installment sales contracts and
installment loan agreements originated by home improvement contractors and
assigned to Waypoint Financial. These contractors are approved by Waypoint
Financial based on a review assessing their financial condition, industry
reputation and trade references. Indirect home improvement loans are either
unsecured or secured by deeds of trust or mortgages, which generally are
subordinate to other mortgages on the same residential properties. Waypoint
Financial originates Federal Housing Authority Title I insured dealer loans and
conventional non-insured home improvement loans. Each indirect home improvement
loan is acquired by Waypoint Financial only after a review in accordance with
its established underwriting procedures. Generally, loans for amounts greater
than $40,000 require appraisals performed by licensed appraisers to determine
the value of the related mortgaged properties. Waypoint Financial's guidelines
are intended only to provide a basis for lending decisions, and exceptions to
such guidelines may, within certain limits, be made based upon the credit
judgment of the lending officer. Waypoint Financial conducts quality audits to
ensure compliance with its established policies and procedures. Prior to funding
an indirect home improvement loan, Waypoint Financial requires the borrower to
sign a certificate of completion that indicates that the project has been
completed to the borrower's satisfaction. Waypoint Financial then contacts each
borrower by phone in order to review the terms and conditions of the loan and to
reconfirm that all work was completed according to the terms of the contractor's
agreement with the borrower. Following receipt of the certificate of completion
and telephone validation, Waypoint
8
Financial funds the loan. Funds are disbursed to the related home improvement
contractor by cashier's check. For certain large indirect home improvement
loans, Waypoint Financial may offer staged funding in which portions of the
contract amount are payable as the work is completed. Checks for staged funding
are issued to both the contractor and the customer.
Waypoint Financial offers borrowers the option to extend the contractual
period between the funding date for an indirect home improvement loan and the
first scheduled due date to between 45 and 180 days depending on the type of
loan. Interest will accrue on the original principal balance of such indirect
home improvement loan during the deferral period regardless of its length. The
indirect home improvement loan will be considered current unless the borrower
fails to make the first scheduled payment on its contractual due date. Scheduled
payments will commence on the first contractual due date of the indirect home
improvement loan and continue each month thereafter.
Manufactured Housing Loans. Waypoint Financial originates manufactured
housing loans through service companies that act as agent in brokering such
loans. Each service company must be approved by Waypoint Financial after
consideration of the service company's reputation, past experience, financial
resources, and its ability to service loans throughout the geographic areas in
which it originates such loans. Each service company is subject to an annual
review by Waypoint Financial, including a review of annually updated financial
statements and supporting documentation. At December 31, 2000, Waypoint
Financial had in its portfolio manufactured housing loans originated by three
service companies, but was doing origination business with one service company.
All manufactured housing loans are initially underwritten by the service
company based on guidelines specified by Waypoint Financial. However, before a
commitment is made, it is also separately underwritten by Waypoint Financial
personnel. The loans are secured by the manufactured home for which the loan
funds are advanced. Waypoint Financial will accept, as additional collateral, a
perfected first lien against land that an applicant owns, free and clear of all
liens, where the manufactured home will be located. The maximum loan amount
currently is $90,000. The minimum down payment is 5% in cash or trade, based on
the sales price plus tax. If an applicant owns a tract of land free and clear,
Waypoint Financial will accept a first lien position on the land in lieu of the
down payment provided that 75% of the appraised value of the land is equal to or
more than the 5% minimum down payment required. The maximum term for
manufactured housing loans ranges from 180 months to 300 months, depending upon
the amounts financed and the size of the unit.
Each manufactured housing loan originated is acquired by Waypoint Financial
at a premium to its net asset value. The premium paid to acquire the loan is
capitalized and amortized as a yield adjustment over the term of the loan.
One-third of the premium is advanced to the service company when a contract is
purchased. The remaining two-thirds of the service fee is deposited into
non-interest-bearing reserve accounts which are held on deposit at Waypoint
Financial with restricted access. The amounts held in the reserve accounts are
used for potential losses on a manufactured home loan and to recapture the
unearned service fee due from the service company in the event of a payoff of a
loan prior to its scheduled maturity. A service company's fee is fully-earned
only when a loan reaches full maturity. At December 31, 2000, Waypoint
Financial's deferred premium on manufactured housing loans totaled $19.6 million
and amounts held in reserve accounts totaled $8.9 million.
Indirect Auto and Other Consumer Loans. Waypoint Financial originates
indirect auto loans through a network of auto dealers, and was actively doing
business with approximately 60 dealers at December 31, 2000. Waypoint Financial
has been in the indirect auto lending business since August 1998. No one
dealership originated more than 15% of the loan balances outstanding in Waypoint
Financial's portfolio at December 31, 2000. In developing its network, Waypoint
Financial has continued to focus on dealers in its primary market area. A
consumer lending sales officer has been dedicated full time to serve dealers in
order to expand on those relationships and to develop potential new dealer
relationships. The growth of the dealer network has been achieved through an
emphasis on quality service and the development of long-term relationships with
the owners and managers of the dealerships. Waypoint Financial does not
currently engage in auto lease financing. Waypoint Financial makes indirect auto
loans to purchase both new and used cars.
9
In connection with the origination of indirect auto loans, the interest
rate charged to the borrower on the underlying loan is generally one to two
percentage points higher than the "buy rate" or rate earned by Waypoint
Financial. The difference between the two rates is referred to as the "spread."
At loan inception, the dollar value of the spread over the contractual term of
the loan is prepaid by Waypoint Financial to the auto dealer. Such prepaid
amounts are generally subject to rebate to Waypoint Financial in the event the
underlying loan is prepaid in the first three months up to the life of the loan,
depending on the contract, or goes into default resulting in a repossession. The
risk of loss of amounts previously advanced to the dealer primarily depends upon
loan performance but also depends upon the financial condition of the dealer.
Consequently, the dealer's ability to refund any portion of the prepaid
interest, which is unearned, is subject to economic conditions, generally, and
the financial condition of the dealer. Since Waypoint Financial began indirect
auto lending, it has not written off interest spread prepaid to dealers where
the dealer failed to refund any portion of unearned prepaid interest. At
December 31, 2000, Waypoint Financial's unearned pre-paid interest on indirect
auto loans totaled $3.9 million.
Loans to One Borrower. Waypoint Financial has an internal limitation on the
amount of loans that it will extend to an individual borrower. In addition,
banking regulations establish a maximum amount that may be loaned by Waypoint
Bank to an individual or related group of borrowers. At December 31, 2000,
Waypoint Financial's internal limit on loans to a single borrower was $10.0
million, although exceptions are permitted subject to approval requirements set
forth in the loan policy. Waypoint Bank's statutory limit on loans to one
borrower or related group of borrowers was $57.3 million. As of December 31,
2000, Waypoint Financial's largest lending relationship, including the
borrower's related interests, was approximately $24.1 million, and Waypoint
Financial had a total of four lending relationships, including the borrowers'
related interests, that exceeded $10.0 million. As of December 31, 2000, all
such loans were performing according to their original contractual terms.
Loan Approval Procedures and Authority. Waypoint Financial's lending
activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by Waypoint Financial's Board of Directors
and management. The Board of Directors has designated certain individuals of
Waypoint Financial and certain branch managers to consider and approve loans
within their designated authority.
All one- to four-family mortgage loans secured by the borrower's primary
residence and all residential construction and second mortgage loans and home
equity lines of credit may be approved by any two designated individuals.
All commercial loans, including commercial real estate loans, multi-family
loans, commercial construction and development loans and commercial business
loans in amounts of up to $10.0 million may be approved by the two designated
individuals, one of who must be Waypoint Financial's Chief Credit Officer. All
commercial loans in excess of $10.0 million and up to $15.0 million require the
approval of Waypoint Financial's loan committee and the Chief Executive Officer.
All commercial loans in excess of $15.0 million require the approval of the
executive committee of the Board of Directors or the full Board of Directors.
Consumer loans, automobile loans and unsecured personal loans may be
approved by either one or two designated individuals depending on the amount of
the loan.
Loan Originations, Purchases and Sales. Waypoint Financial's mortgage
lending activities are conducted by its salaried and commissioned loan personnel
and approved correspondent lenders. Currently, Waypoint Financial uses 25 loan
originators who solicit and originate mortgage loans on behalf of Waypoint
Financial. These loan originators accounted for 57% of the mortgage loans
originated by Waypoint Financial during 2000. Loan originators are compensated
by a commission. All loans originated by the loan originators are underwritten
in conformity with Waypoint Financial's loan underwriting policies and
procedures as well as agency and investor guidelines. At December 31, 2000,
Waypoint Financial serviced $741.7 million of loans for others. From time to
time, Waypoint Financial will purchase loans or participation interests in
loans, although only $8.5 million of loans have been purchased since December
31, 1995.
10
Waypoint Financial operates a correspondent lending program that purchases
loans in nine states and the District of Columbia. These states include,
Maryland, Virginia, Delaware, New Jersey, Pennsylvania, North Carolina, South
Carolina, Ohio and West Virginia. The correspondent originators process the
mortgage loan applications in accordance with Waypoint Financial specifications.
Waypoint Financial personnel underwrite and close all approved loans in
accordance with Waypoint Financial, agency and investor guidelines.
The following table sets forth Waypoint Financial's gross loan
originations, loans purchased and loans sold for the periods indicated.
For the Years Ended
December 31,
-------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ------------- -------------- --------------- ---------------
(In Thousands)
Loans originated:
Residential mortgage loans:
One- to four-family................ $ 144,938 $ 279,040 $ 478,332 $ 329,110 $ 351,901
Construction....................... 199,187 336,163 373,226 274,496 153,575
Other.............................. - 6,100 8,900 6,100 6,000
--------------- --------------- --------------- --------------- ---------------
Total residential mortgage loans. 344,125 621,303 860,458 609,706 511,476
Commercial loans:
Commercial real estate............. 133,822 165,737 113,061 53,739 98,876
Commercial business................ 172,219 224,694 157,552 23,227 19,386
Construction and site development.. 29,150 24,871 22,800 6,073 7,998
--------------- --------------- --------------- --------------- ---------------
Total commercial loans........... 335,191 415,302 293,413 83,039 126,260
Consumer and other loans:
Manufactured housing............... 20,467 26,300 5,400 11,900 37,700
Home equity and second mortgage.... 112,104 129,239 102,529 77,694 109,475
Indirect automobile and other...... 99,357 160,560 78,126 43,264 42,021
--------------- --------------- --------------- --------------- ---------------
Total consumer loans............. 231,928 316,099 186,055 132,858 189,196
--------------- --------------- --------------- --------------- ---------------
Total loans originated........... $ 911,244 $ 1,352,704 $ 1,339,926 $ 825,603 $ 826,932
=============== =============== =============== =============== ===============
Loans purchased:
Residential mortgage loans:
One-to four-family................. $ - $ - $ - $ - $ 8,500
--------------- --------------- --------------- --------------- ---------------
Total loans purchased............ $ - $ - $ - $ - $ 8,500
=============== =============== =============== =============== ===============
Loans securitized and/or sold:
Residential mortgage loans:
One- to four-family................ $ 251,097 $ 325,158 $ 369,930 $ 260,399 $ 310,422
--------------- --------------- --------------- --------------- ---------------
Total loans sold................. $ 251,097 $ 325,158 $ 369,930 $ 260,399 $ 310,422
=============== =============== =============== =============== ===============
Loan Commitments. Waypoint Financial issues loan commitments to prospective
borrowers conditioned on the occurrence of certain events. Commitments are made
in writing on specified terms and conditions and are generally honored for up to
60 days from approval. At December 31, 2000, Waypoint Financial had loan
commitments and unadvanced loans and lines of credit totaling $486.5 million.
Loan Fees. In addition to interest earned on loans, Waypoint Financial
receives income from fees derived from loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period depending upon the volume and type
of loans made and competitive conditions. On loans originated by third-party
originators, Waypoint Financial may pay a premium to compensate an originator
for loans where the borrower is paying a higher rate on the loan.
Waypoint Financial charges loan origination fees which are calculated as a
percentage of the amount borrowed. As required by applicable accounting
principles, loan origination fees, discount points and certain loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. At December 31, 2000, Waypoint Financial
had approximately $6.9 million of net deferred loan fees. Waypoint Financial
amortized $.6 million of net deferred loan fees during the year ended December
31, 2000.
11
Non-performing Assets, Delinquencies and Impaired Loans. All loan payments
on first mortgages are due on the first day of each month. When a borrower fails
to make a required loan payment, Waypoint Financial attempts to cure the
deficiency by contacting the borrower and seeking the payment. A late notice is
mailed on the 16th day of the month. In most cases, deficiencies are cured
promptly. If a delinquency continues beyond the 16th day of the month, the
account is referred to an in-house collector. Waypoint Financial will institute
foreclosure or other proceedings after the 90th day of a delinquency, as
necessary, to minimize any potential loss.
Management informs the Board of Directors monthly of the amount of loans
delinquent more than 30 days and all foreclosed and repossessed property that
Waypoint Financial owns. Waypoint Financial ceases accruing interest on mortgage
loans when principal or interest payments are delinquent 90 days or more unless
management determines the loan principal and interest to be fully secured and in
the process of collection. Once the accrual of interest on a loan is
discontinued, all interest previously accrued is reversed against current period
interest income.
On January 1, 1995, Waypoint Financial adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan, an amendment to SFAS No. 114." At December 31, 2000 and 1999, Waypoint
Financial had recorded investments in impaired loans of $5.9 million and $9.5
million, respectively. At December 31, 2000 and 1999, allowance for loan losses
had a reserve of $1.8 million and $1.8 million, respectively, for impaired
loans.
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans, accruing loans delinquent 90 days or more, other
non-performing assets and restructured loans at the dates indicated:
At December 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- -------------- ------------ -------------
(In Thousands)
Non-accrual mortgage loans...................... $ 5,092 $ 9,543 $ 6,632 $ 5,544 $ 5,777
Non-accrual other loans......................... 604 727 1,938 1,394 798
------------ ------------ ------------ ------------ ------------
Total non-accrual loans (1)................ 5,696 10,270 8,570 6,938 6,575
Loans 90 days or more delinquent and still
accruing.................................. 17,481 13,279 9,134 15,681 13,437
------------ ------------ ------------ ------------ ------------
Total non-performing loans................. 23,177 23,549 17,704 22,619 20,012
Total foreclosed other assets.............. 861 1,149 - - -
Total foreclosed real estate (2)........... 3,086 3,754 14,088 15,688 17,264
------------ ------------ ------------ ------------ ------------
Total non-performing assets..................... $ 27,124 $ 28,452 $ 31,792 $ 38,307 $ 37,276
============ ============ ============ ============ ============
Total non-performing loans to total loans (3)... 0.89% 0.96% 0.90% 1.23% 1.10%
=========== =========== =========== =========== ===========
Total non-performing loans and foreclosed real
estate to total loans......................... 0.57% 0.65% 0.82% 1.11% 1.27%
=========== =========== =========== =========== ===========
(1) Waypoint Financial would have recorded additional interest income on
non-accrual loans , had they been current, of $0.2 million, $0.3 million
and $0.4 million in 2000, 1999 and 1998, respectively. No interest was
included in interest income in these periods related to these loans.
(2) This amount includes a foreclosed apartment complex with a carrying value
of $6.0 million that was sold in 1999.
(3) Total loans excludes loans held for sale.
As of December 31, 2000, Waypoint Financial's only nonaccruing loan with a
carrying value in excess of $1.0 million was a commercial loan with a carrying
value of $1.9 million.
Real Estate Owned. Real estate acquired by Waypoint Financial as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at the lower of the
carrying value or fair value less estimated costs to sell at the date of
foreclosure. At the time of foreclosure, any
12
excess of carrying value over fair value is charged to the allowance for loan
losses. Holding costs and declines in fair value result in charges to expense
after the property is acquired.
Asset Classification. Banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require their classification.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, it is charged
off in the quarter in which it is so classified, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified
substandard or doubtful can be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"special mention." Waypoint Financial performs an internal analysis of its loan
portfolio and assets to classify such loans and assets similar to the manner in
which such loans and assets are classified by the federal banking regulators. In
addition, Waypoint Financial regularly analyzes the losses inherent in its loan
portfolio and its nonperforming loans in determining the appropriate level of
the allowance for loan losses.
Allowance for Loan Losses. In originating loans, Waypoint Financial
recognizes that losses will be experienced on loans and that the risk of loss
will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. Waypoint Financial maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent losses, information about specific
borrower situations and estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, industry data and economic conditions. In addition,
the regulatory agencies, as an integral part of their examination process,
periodically review Waypoint Financial's allowance for loan losses and may
require Waypoint Financial to make additional provisions for estimated losses
based upon judgments different from those of management.
In assessing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans. Waypoint Financial segregates the loan
portfolio according to risk characteristics (i.e., mortgage loans, home equity,
commercial and consumer). Loss factors are derived using Waypoint Financial's
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
In addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management's subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of the
loan portfolio. The allowance methodology reflects management's objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be
13
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations. Furthermore, while Waypoint Financial
believes it has established its existing allowance for loan losses in conformity
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing Waypoint Financial's loan portfolio, will not request
Waypoint Financial to increase its allowance for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect Waypoint
Financial's financial condition and results of operations.
Analysis of the Allowance for Loan Losses. The following table sets forth
information regarding Waypoint Financial's allowance for loan losses and net
charge-offs to average loans outstanding at the dates indicated.
At and For the Fiscal Years
Ended December 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ------------ --------------- ------------ ------------
(Dollars in Thousands)
Balance at beginning of period................... $ 23,127 $ 19,891 $17,002 $14,735 $ 12,723
Pooling adjustment to conform accounting periods. 234 - - - 1,074
Provision for loan losses........................ 5,070 4,840 6,172 4,347 4,381
Provision component related to
unfunded commitments........................... - 617 (503) (422) -
Charge-offs:
Commercial loans............................... (2,482) (50) (607) (68) (1,820)
Residential mortgage loans..................... (1,168) (1,289) (1,837) (2,061) (1,988)
Consumer and other loans....................... (2,962) (1,364) (741) (97) (402)
------------- ------------- ------------- ------------- -------------
Total charge-offs.............................. (6,612) (2,703) (3,185) (2,226) (4,210)
Recoveries:
Commercial loans............................... 24 85 24 294 516
Residential mortgage loans..................... 161 262 327 236 229
Consumer and other loans....................... 582 135 54 38 22
------------ ------------ ------------ ------------ ------------
Total recoveries............................... 767 482 405 568 767
------------ ------------ ------------ ------------ ------------
Balance at the end of period..................... $ 22,586 $ 23,127 $ 19,891 $ 17,002 $ 14,735
============ ============ ============ ============ ============
Net charge-offs to average loans outstanding..... 0.22% 0.10% 0.15% 0.09% 0.19%
============ ============ ============ ============ ============
Allowance for loan losses to net loans........... 0.87% 0.95% 1.01% 0.92% 0.81%
============ ============ ============ ============ ============
Allowance for loan losses to non performing
loans............................................ 97.45% 98.21% 112.35% 75.17% 73.63%
============ ============ ============ ============ ============
14
Allocation of the Allowance for Loan Losses. The following table sets forth
the breakdown of the allowance for loan losses by loan category at the dates
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance to each category
is not necessarily indicative of future losses and does not restrict the use of
the allowance to absorb losses in any other category.
At December 31,
---------------------------- ---------------------------- ----------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------------ -------------- ------------ ------------- ------------- -------------
(Dollars in Thousands)
Residential mortgage loans........ $ 2,165 52.56% $ 5,250 56.13% $ 5,665 62.61%
Commercial loans.................. 14,625 24.74 10,949 22.23 7,622 17.42
Consumer and other loans.......... 4,178 22.70 4,112 21.64 3,236 19.97
Unallocated....................... 1,618 - 2,816 - 3,368 -
------------ ------- ------------ ------- ------------ -------
Total.......................... $ 22,586 100.00% $ 23,127 100.00% $ 19,891 100.00%
============ ======= ============ ======= ============ =======
At December 31,
------------------------------------------------------------------------
1997 1996
--------------------------------- ------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ -------------
(Dollars in Thousands)
Residential mortgage loans............................ $ 4,510 69.62% $ 5,262 75.28%
Commercial loans...................................... 3,316 10.13 3,495 5.08
Consumer and other loans.............................. 3,697 20.25 2,294 19.64
Unallocated........................................... 5,479 - 3,684 -
----------- ------ ---------- ------
Total.............................................. $ 17,002 100.00% $ 14,735 100.00%
=========== ====== ========== ======
15
Investment Activities
The Board of Directors reviews and approves Waypoint Financial's investment
policy on an annual basis. The Chief Executive Officer, Chief Financial Officer
and Chief Investment Officer, as authorized by the Board, implement this policy
based on the established guidelines within the written policy, and other
established guidelines, including those set periodically by the Asset/Liability
Management Committee. Investment decisions are based upon the quality of a
particular investment, its inherent risks, the composition of the balance sheet,
Waypoint Financial's maturity and amortization schedules, market expectations,
liquidity, income and collateral needs, and how the investment fits within
Waypoint Financial's interest rate risk strategy given its interest rate
sensitivity.
Waypoint Financial's investment policy is designed primarily to manage the
interest rate sensitivity of its assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement its
lending activities and to provide and maintain liquidity while minimizing
Waypoint Financial's tax liability. Waypoint Financial also uses a leveraged
investment strategy for the purpose of enhancing returns to stockholders.
Pursuant to this strategy, during periods of relatively weak loan demand in its
market area, Waypoint Financial has increased the size of its investment
portfolio and has relied heavily on wholesale borrowing to support such
investments.
Investment Portfolio
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. At December 31, 2000, 99% of Waypoint Financial's
securities were classified as "available-for-sale." Between December 31, 2000
and April 1, 2001, Waypoint Financial transferred all of the securities from its
held-to-maturity portfolio to its available-for-sale portfolio. The held-to-
maturity portfolio was recorded at $22.7 million as of December 31, 2000. At the
time of transfer, the market value of this portfolio was $22.2 million resulting
in an unrecognized loss upon transfer of $0.5 million, which will be recorded as
a reduction in other comprehensive income for the first quarter of 2001.
In an effort to maintain the credit quality of the investment portfolio,
Waypoint Financial maintains a significant portion of the investment portfolio
in U.S. Government and agency obligations. At December 31, 2000, over 90% of the
securities in Waypoint Financial's investment portfolio were rated "AAA," with
the remainder rated "AA" or "A."
Waypoint Financial also invests significantly in mortgage-backed
securities, including primarily floating-rate and fixed-rate collateralized
mortgage obligations. A portion of these mortgage-backed securities is directly
insured or guaranteed by Freddie Mac and Fannie Mae. Waypoint Financial also
maintains a substantial investment in "private label" collateralized mortgage
obligations (i.e., non-agency collateralized mortgage obligations). Private-
issue collateralized mortgage obligations carry higher credit risks than
collateralized mortgage obligations insured or guaranteed by agencies of the
U.S. Government. Waypoint Financial invests only in private-issue collateralized
mortgage obligations rated "AA" or better at the time of purchase and management
believes the higher yields associated with these instruments have amply
compensated Waypoint Financial for the incremental increase in risks assumed
relative to investments in U.S. Government-backed collateralized mortgage
obligations. At December 31, 2000, Waypoint Financial did not own any investment
or mortgage-backed securities of a single issuer, other than U. S. Government
and agency securities, which had an aggregate book value in excess of 10% of its
capital.
Waypoint Financial invests in a large variety of mortgage-backed
securities, including balloon and fixed-rate certificates. Waypoint Financial
generally purchases short-term or planned amortization class collateralized
mortgage obligations. Waypoint Financial also maintains a significant portfolio
of tax-advantaged instruments. The remainder
16
of the investment portfolio is invested in corporate bonds, primarily investment
grade Trust-Preferred issues of major financial institutions rated by Standard &
Poors or Moody's.
Waypoint Financial's investment policy permits it to be a party to
financial instruments with off-balance sheet risk in the normal course of
business in order to manage interest rate risk. The investment policy authorizes
Waypoint Financial to be involved in and purchase various types of derivative
transactions and products, including interest rate swap, cap and floor
agreements. Waypoint Financial also occasionally uses total return swap
agreements to hedge against the decline in the market value of a specifically
identified pool of fixed-rate construction loans that are to be sold upon their
conversion to long-term mortgage loans. In addition, Waypoint Financial
occasionally uses callable interest rate swaps matched against callable
certificates of deposit.
All of Waypoint Financial's securities and mortgage-backed
securities carry market risk insofar as increases in market rates of interest
may cause a decrease in their market values. They also carry pre-payment risk,
insofar as they may be called or repaid before maturity in times of low market
interest rates, so that Waypoint Financial may have to invest the funds at a
lower interest rate. The marketable equities securities portfolio also carries
equity-price risk in that, if equity prices decline due to unfavorable market
conditions or other factors, Waypoint Financial's capital would decrease.
17
The following table sets forth the amortized cost and fair value of
investments mortgage-backed and other interest-earning securities at the dates
indicated.
At December 31,
------------------------------------------------------------------
2000 1999
-------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
Held to maturity:
U.S. Government and agencies............ $ 3,500 $ 3,513 $ 3,500 $ 3,421
Corporate bonds........................ 19,054 18,064 19,018 18,506
GNMA mortgage-backed
securities......................... 155 163 171 178
------------- --------------- --------------- ---------------
Total securities held-to-maturity... $ 22,709 $ 21,740 $ 22,689 $ 22,105
============= =============== =============== ===============
Available for sale:
U.S. Government and agencies........... $ 491,998 $ 482,430 $ 535,470 $ 504,730
Corporate bonds........................ 63,609 58,657 63,352 59,826
Municipal securities................... 69,119 71,461 63,980 63,492
Equity securities...................... 150,891 154,715 152,575 154,320
Asset-backed securities................ - - - -
Mortgage-backed securities:
Agency PCs & CMOs...................... 475,735 464,148 398,356 390,326
Private issue CMOs..................... 629,795 623,461 473,170 452,704
------------- --------------- --------------- ---------------
Total mortgage-backed securities.... 1,105,530 1,087,609 871,526 843,030
------------- --------------- --------------- ---------------
Total securities available for sale. $ 1,881,147 $ 1,854,872 $ 1,686,903 $ 1,625,398
============= =============== =============== ===============
Other interest-earning securities:
FHLB daily investment.................. $ 25,434 $ 25,434 $ 37,289 $ 37,289
------------- --------------- --------------- ---------------
Total marketable securities and
interest-earning investments...... $ 1,929,290 $ 1,902,046 $ 1,746,881 $ 1,684,792
============= =============== =============== ===============
At December 31,
1998
--------------------------------
Amortized Fair
Cost Value
---------------- ---------------
(Dollars in Thousands)
Held to maturity:
U.S. Government and agencies............ $ 3,498 $ 3,484
Corporate bonds........................ 18,903 18,920
GNMA mortgage-backed
securities......................... 217 231
--------------- ------------
Total securities held-to-maturity... $ 22,618 $ 22,635
=============== ============
Available for sale:
U.S. Government and agencies........... $ 462,997 $ 461,052
Corporate bonds........................ 148,731 142,240
Municipal securities................... 113,557 119,233
Equity securities...................... 160,754 170,655
Asset-backed securities................ 15,146 15,661
Mortgage-backed securities:
Agency PCs & CMOs...................... 315,038 315,015
Private issue CMOs..................... 355,199 354,648
--------------- ------------
Total mortgage-backed securities.... 670,237 669,663
--------------- ------------
Total securities available for sale. 1,571,422 1,578,504
=============== ============
Other interest-earning securities:
FHLB daily investment.................. 22,646 22,646
--------------- ------------
Total marketable securities and
interest-earning investments...... $ 1,616,686 $ 1,623,785
=============== ============
18
Investment Portfolio Maturities
The following table sets forth information regarding the scheduled
maturities, carrying values, and average yields for Waypoint Financial's
investment securities at December 31, 2000.
At December 31,2000
---------------------------------------------------------
One Year After One Through
or Less Five Years
--------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
------------ ------------ ------------ ------------
Held to maturity:
U.S. government and
agency obligations....................... $ - - $ 3,500 6.75%
Corporate bonds............................... - - 4,907 7.52
Mortgage-backed securities (3)(4):
GNMA PCs..................................... 133 8.77% 22 8.86
----------- ---- ------------ ----
Total mortgage-backed securities.............. 133 8.77 22 8.86
----------- ---- ------------ ----
Total securities held to maturity............. 133 8.77 8,429 7.20
----------- ---- ------------ ----
Available for sale:
U.S. government and
agency obligations....................... 1,620 6.33 111,952 6.09
Corporate bonds............................... - 0.00 - 0.00
Municipal securities (2)........................ - 0.00 - 0.00
Equity (1), (2)................................. - 0.00 - 0.00
Mortgage-backed securities (3)(4):
Agency CMOs (5)............................. 9,886 7.58 47,149 7.58
Private issue CMOs......................... 11,414 7.41 54,114 7.41
----------- ---- ------------ ----
Total mortgage-backed securities.............. 21,300 7.49 101,263 7.49
----------- ---- ------------ ----
Total securities available for sale........... 22,920 7.41 213,215 6.75
----------- ---- ------------ ----
Total marketable securities..................... $ 23,053 7.42% $ 221,644 6.77%
=========== ==== ============ ====
At December 31, 2000
---------------------------------------------------------
After Five Through
Ten Years Over Ten Years
--------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
------------ ------------ ------------ ------------
(Dollars in Thousands)
Held to maturity:
U.S. government and
agency obligations....................... $ - - $ -
0.00%
Corporate bonds............................... - - 14,147 7.52%
Mortgage-backed securities (3)(4):
GNMA PCs..................................... - - - 0.00
------------ ---- ----------- ----
Total mortgage-backed securities.............. - - - 0.00
------------ ---- ----------- ----
Total securities held to maturity............. - - 14,147 7.52
------------ ---- ----------- ----
Available for sale:
U.S. government and
agency obligations....................... 298,478 6.44 79,948 7.28
Corporate bonds............................... - 0.00 63,609 7.44
Municipal securities (2)........................ 995 5.40 68,124 5.69
Equity (1), (2)................................. - 0.00 150,891 6.46
Mortgage-backed securities (3)(4):
Agency CMOs (5)............................. 57,601 7.61 361,100 7.60
Private issue CMOs......................... 81,932 7.43 482,334 7.37
------------ ---- ----------- ----
Total mortgage-backed securities.............. 139,533 7.50 843,434 7.47
------------ ---- ----------- ----
Total securities available for sale........... 439,006 6.77 1,206,006 7.23
------------ ---- ----------- ----
Total marketable securities..................... $ 439,006 6.77% $ 1,220,153 7.23%
============ ==== =========== ====
At December 31, 2000
------------------------------------------
Total
------------------------------------------
Weighted
Amortized Market Average
Cost Value Yield
------------ --------- ---------------
Held to maturity:
U.S. government and
agency obligations....................... $ 3,500 $ 3,513 6.75%
Corporate bonds............................... 19,054 18,064 7.52
Mortgage-backed securities (3)(4):
GNMA PCs..................................... 155 163 8.79
--------------- ------------- ----
Total mortgage-backed securities.............. 155 163 8.79
--------------- ------------- ----
Total securities held to maturity............. 22,709 21,740 7.41
--------------- ------------- ----
Available for sale:
U.S. government and
agency obligations....................... 491,998 482,430 6.49
Corporate bonds............................... 63,609 58,657 7.44
Municipal securities (2)........................ 69,119 71,461 5.68
Equity (1), (2)................................. 150,891 154,715 6.46
Mortgage-backed securities (3)(4):
FNMA PCs................................... 9 9 3.07
Agency CMOs (5)............................. 475,726 464,139 7.60
Private issue CMOs......................... 629,795 623,461 7.39
--------------- ------------- ----
Total mortgage-backed securities.............. 1,105,530 1,087,609 7.48
--------------- ------------- ----
Total securities available for sale........... 1,881,147 1,854,872 7.07
--------------- ------------- ----
Total marketable securities..................... $ 1,903,856 $ 1,876,612 7.08%
=============== ============= ====
- ------------------
(1) Includes FHLMC, FNMA and FHLB stocks.
(2) The yield on municipal obligations and certain equity issues have not been
computed on a tax equivalent basis.
(3) Based on current prepayment trends, $945.1 million of mortgage-backed
securities are anticipated to prepay or reprice within three years.
(4) Amortized cost on mortgage-backed securities include scheduled principal
repayments in each period.
(5) Includes Freddie Mac, Fannie Mae and Ginnie Mae CMOs.
19
Sources of Funds
General. Deposits are the primary source of Waypoint Financial's funds for
lending and other investment purposes. In addition to deposits, Waypoint
Financial obtains funds from the amortization and prepayment of loans and
mortgage-backed securities, the sale or maturity of loans or investment
securities, operations, advances from the Federal Home Loan Bank of Pittsburgh
and other borrowings. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by market interest rates. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources or on a longer term basis for general business purposes.
Waypoint Financial has used wholesale funding sources such as Federal Home Loan
Bank advances to support an investment leveraging strategy for the purpose of
increasing interest income and increasing return on equity.
Deposits. Consumer and commercial deposits are obtained primarily from
Waypoint Financial's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits and time deposits, including certificate of deposit accounts and
individual retirement accounts. The maturities of Waypoint Financial's
certificate of deposit accounts ranges from 30 days to 10 years. In addition,
Waypoint Financial offers a variety of commercial business products to small
businesses operating within its primary market area. Currently Waypoint
Financial does not generally negotiate interest rates to attract jumbo
certificates, but accepts deposits of $100,000 or more based on posted rates
with certain discretion given to branch managers and the funding desk manager.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit, limits on the number of transactions,
and the interest rate, among other factors. Waypoint Financial regularly
evaluates the internal cost of funds, surveys rates offered by competing
institutions, reviews Waypoint Financial's cash flow requirements for lending,
monitors deposit withdrawal trends and liquidity and changes the rates offered
as appropriate.
While Waypoint Financial does not generally solicit funds outside its
primary market area, it does accept brokered deposits as liquidity demands
require and costs are favorable versus wholesale borrowing alternatives.
Included in Waypoint Financial's time deposits at December 31, 2000, 1999, and
1998 were $127.9 million, $77.1 million, and $50.0 million, respectively, of
brokered deposits.
Average Balance and Costs of Deposits. The following table sets forth the
amount, percentage represented by such amount, and weight average rate paid on
Waypoint Financial's deposits.
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Percent Cost Amount Percent Cost Amount Percent Cost
--------- -------- -------- ---------- --------- --------- ---------- --------- ---------
Savings Deposit $184,404 7.02% 2.52% $186,197 7.77% 2.21% $ 206,446 9.27% 2.30%
Time Deposits 1,643,535 62.59 5.75 1,431,720 59.77 5.40 1,339,026 60.16 5.51
NOW and money market accounts 798,006 30.39 3.25 777,511 32.46 3.00 680,376 30.57 3.22
---------- ------- ----- ---------- ------- ----- ---------- ------- -----
Total $2,625,945 100.00% 4.76% $2,395,428 100.00% 4.37% $2,225,848 100.00% 4.51%
========== ======= ==== ========== ======= ==== ========== ======= ====
20
Deposits Flow. The following table summarizes the deposit activity for the
periods indicated.
Year Ended December 31,
--------------- --------------- ---------------
2000 1999 1998
--------------- --------------- ---------------
(In Thousands)
Beginning balance........................................ $ 2,544,598 $ 2,320,632 $ 2,212,015
--------------- --------------- ---------------
Increase before interest credit.......................... 24,371 82,254 9,488
Interest credited........................................ 124,135 104,439 99,129
Purchased Deposits (1)....................................... - 37,273 -
--------------- --------------- ---------------
Net increase............................................. 148,506 223,966 108,617
Pooling Adjustment to conform
accounting years...................................... (67,384) - -
---------------- --------------- ---------------
Ending balance........................................ $ 2,625,720 $ 2,544,598 $ 2,320,632
=============== =============== ===============
(1) During 1999, Waypoint Financial acquired a branch in Lebanon County
Pennsylvania. A deposit premium intangible totaling $3.3 million was recorded on
this purchase.
Time Deposits by Maturity Schedule. The following table sets forth
the amount and maturities of certificates of deposit at December 31, 2000.
Amount Due
------------------------------------------------------------------------------------
Less Than 1-2 2-3 After 3
Weighted Average Rate One Year Years Years Years Total
--------------------------------- ----------------- -------------- ----------------- ---------------- ----------------
(In Thousands)
4% or less........................... $ 7,596 $ 34 $ 28 $ - $ 7,658
4.01 - 6.00%......................... 426,431 71,296 49,887 24,691 572,305
6.01 - 8.00%......................... 500,350 265,263 124,787 163,813 1,054,213
--------------- ------------- ---------------- --------------- ---------------
Total.............................. $ 934,377 $ 336,593 $ 174,702 $ 188,504 $ 1,634,176
=============== ============= ================ =============== ===============
Certificates of Deposit of $100,000 and More. The following table presents
information as of December 31, 2000, regarding Waypoint Financial's certificates
of deposit and other time deposits of $100,000 or more by time remaining until
maturity and weighted average rate.
Weighted
Average
Amount (1) Rate
--------------- ---------
Three months or less.................... $ 63,154 6.05%
Over three months through six months.... 33,729 6.45
Over six months through twelve months... 59,873 6.14
Over twelve months...................... 84,716 6.53
--------------- ---------
Total................................. $ 241,472 6.30%
=============== =========
- ------------------
(1) Excludes brokered certificates of deposits.
Borrowings. In recent years, Waypoint Financial has borrowed from wholesale
sources including primarily the Federal Home Loan Bank system to support an
investment leveraging strategy and to supplement funding provided by customer
deposits. The objective of the investment leveraging strategy is to increase net
interest income and return on equity by deploying excess capital into interest-
earning investments. However, this strategy reduces net interest margins due to
the higher cost of non-deposit funds as compared to core deposits. A significant
portion of Waypoint Financial's wholesale borrowings are placed with the Federal
Home Loan Bank of Pittsburgh.
21
The Federal Home Loan Bank functions as a central reserve bank providing
credit for Waypoint Financial and other member financial institutions. As a
member, Waypoint Financial is required to own capital stock in the Federal Home
Loan Bank and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
Federal Home Loan Bank's assessment of the institution's creditworthiness.
Waypoint Financial's maximum borrowing capacity with the Federal Home Loan Bank
totaled $2.069 billion at December 31, 2000, with remaining available capacity
totaling $634.2 million.
Waypoint Financial has entered into sales of securities under agreements to
repurchase with nationally-recognized securities dealers. Reverse repurchase
agreements are accounted for as borrowings by Waypoint Financial and are secured
by designated investment securities. The proceeds of these transactions are used
to purchase investments yielding a higher rate than the borrowed funds and to
meet cash flow needs of Waypoint Financial. Waypoint Financial intends to use
these agreements in the future when management believes it is prudent to do so.
The following table sets forth information regarding borrowings by Waypoint
Financial at or for the dates indicated.
At or for Years Ended December 31,
----------------------------------------------------------
2000 1999 1998
-------------- ---------------- -----------------
(In Thousands)
Outstanding at end of period:
FHLB ................................................. $1,434,806 $ 904,660 $ 772,592
Repurchase agreements ................................ 189,853 568,200 409,961
ESOP and other........................................ 670 15,530 663
---------- ---------- ----------
Total ............................................. $1,625,329 $1,488,390 $1,183,216
========== ========== ==========
Weighted average rate at end of period:
FHLB ................................................. 6.24% 5.63% 5.32%
Repurchase agreements ................................ 5.71 6.25 5.35
ESOP and other........................................ 9.77 8.42 8.50
Total ............................................. 6.18% 5.90% 5.33%
Maximum amount outstanding at any
month-end
During the period:
FHLB ................................................. $1,434,806 $1,007,479 $ 746,543
Repurchase agreements ................................ 313,000 643,324 444,412
ESOP and other........................................ 15,663 15,663 794
---------- ---------- ----------
Total ............................................. $1,763,469 $1,666,466 $1,191,749
========== ========== ==========
Average amount outstanding during the period:
FHLB ................................................. $1,361,786 $ 931,636 $ 670,630
Repurchase agreements ................................ 204,664 500,304 361,888
ESOP and other........................................ 5,297 8,170 1,177
---------- ---------- ----------
Total ............................................. $1,571,747 $1,440,110 $1,033,695
========== ========== ==========
Weighted average rate during the period:
FHLB ................................................. 6.40% 5.40% 5.40%
Repurchase agreements ................................ 5.68 5.60 5.77
ESOP and other........................................ 8.68 8.14 8.14
Total ............................................. 6.31% 5.51% 5.68%
22
Subsidiary Activities
Waypoint Financial conducts its business activities primarily through its
wholly owned subsidiary Waypoint Bank, and the following wholly-owned
subsidiaries:
Waypoint Financial Investment Corporation. Waypoint Financial Investment
Corporation was incorporated in 2000 and manages certain investments on behalf
of Waypoint Financial.
New Service Corporation. New Service Corporation primarily engages in land
acquisition, development, and construction projects.
Waypoint Service Corporation. Waypoint Service Corporation primarily owns
office facilities that it leases to Waypoint Bank and affiliates, and is also
engaged in land acquisition, development, and construction of future branch
locations.
Waypoint Brokerage Services, Inc. Waypoint Brokerage Services, Inc. was
incorporated in 1987 and is a discount securities brokerage subsidiary that
provides financial services to customers of Waypoint Bank and the general
public.
Waypoint Insurance Services, Inc. Waypoint Insurance Services Inc. was
incorporated in 1992 and is primarily engaged in providing credit life and
health insurance products to certain Waypoint Bank loan customers, employee
group benefit plans, as well as providing a wide variety of life insurance
products to the retail market.
Owen Insurance Inc. Owen Insurance Inc. was acquired by Waypoint Financial
in 2000 and is a full-service insurance agency that provides a variety of
commercial and retail property and casualty insurance services. Owen Insurance
Inc. also provides a wide variety of life and other insurance products to
Waypoint Bank customers and the general public.
Advanced Real Estate Associates. Advanced Real Estate Associates operates
primarily through its wholly-owned subsidiary Y. F. Settlement Services, Inc.,
which primarily engages in providing settlement services in real estate
transactions to customers of Waypoint Bank and to the general public.
Lenders Support Group Inc. Lenders Support Group Inc. is inactive and its
operations were discontinued in 1998 and its net worth was negligible as of
December 31, 2000.
Waypoint Financial's wholly-owned financial institution subsidiary Waypoint
Bank, in addition to its own banking operations, also conducts business
activities through its direct subsidiaries as follows:
Harris Delaware Corporation. Harris Delaware Corporation was incorporated
in 1995 and manages certain investments in marketable securities on behalf of
Waypoint Bank.
York Financial Investment Corporation. York Financial Investment
Corporation was incorporated in 1997 and engages in investment management
services for Waypoint Bank.
H. S. Service Corporation. H. S. Service Corporation was incorporated in
1974 and operates joint ventures engaged in residential real estate development.
First Harrisburg Service Corporation. First Harrisburg Service Corporation
was incorporated in 1972 and is mainly involved with title, life, annuity and
other insurance activities. It also serves as the holding company for Second
Harrisburg Service Corporation, an inactive real estate company.
The two remaining subsidiaries, C.B.L. Service Corporation and
AVSTAR Mortgage Corporation currently are inactive and have negligible assets
and liabilities. Waypoint Bank had originated VA/FHA and sub-prime loans
23
through AVSTAR Mortgage Corporation, its mortgage subsidiary, until 1999 when
these operations were discontinued.
REGULATION
Waypoint Bank is examined and supervised extensively by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation. Under federal
regulation, financial institutions are periodically examined to ensure that they
satisfy applicable standards with respect to their capital adequacy assets,
management, earnings, liquidity and sensitivity to market interest rates.
Following completion of their examination, the federal agency critiques the
institution's operations and assigns a rating (this is known as an institution's
CAMELS). Under federal law, an institution may not disclose its CAMELS rating to
the public. However, Waypoint Bank has been advised that it is not the subject
of regulatory concern as a result of examinations by the Office of Thrift
Supervision or the Federal Deposit Insurance Corporation of Waypoint Bank's
predecessors Harris Savings Bank and York Federal Savings and Loan Association.
Waypoint Bank is also a member of, and owns stock in, the Federal Home Loan Bank
of Pittsburgh, which is one of the twelve regional banks in the Federal Home
Loan Bank System. This regulation and supervision limits the activities in which
Waypoint Bank may engage. Waypoint Bank is also regulated to a lesser extent by
the Board of Governors of the Federal Reserve System, governing reserves to be
maintained against deposits and other matters. The Office of Thrift Supervision
examines Waypoint Bank and prepares reports for the consideration of its board
of directors on any operating deficiencies. Waypoint Bank's relationship with
its depositors and borrowers is also regulated to a great extent by both federal
and state laws, especially in matters concerning the ownership of savings
accounts and the form and content of Waypoint Bank's mortgage documents. Any
change in this regulation, whether by the Federal Deposit Insurance Corporation,
Office of Thrift Supervision, or Congress, could have a material adverse impact
on Waypoint Financial and Waypoint Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of federal savings banks are
subject to extensive regulation, including restrictions or requirements with
respect to loans to one borrower, the percentage of non-mortgage loans or
investments to total assets, capital distributions, permissible investments and
lending activities, liquidity, transactions with affiliates and community
reinvestment. In particular, many types of loans, such as commercial real
estate, commercial business and consumer loans, are limited to a specific
percentage of capital or assets. The description of statutory provisions and
regulations applicable to savings associations set forth herein does not purport
to be a complete description of these statutes and regulations and their effect
on Waypoint Bank.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutions to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest rating on the CAMELS financial
institution rating system),and together with the risk-based capital standard, a
4% Tier 1 risk-based capital standards. In general, institutions must deduct
investments in and loans to subsidiaries engaged in activities as principal that
are not permissible for a national bank.
The risk-based capital standards for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weighted
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core (tier
1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45%
24
of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the Office of Thrift Supervision has
deferred implementation of the interest rate risk capital charge. At December
31, 2000, Waypoint Bank met each of its capital requirements.
Loans to One Borrower. Federal savings associations generally may not make
a loan or extend credit to a single or related group of borrowers in excess of
15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which is defined to include
certain securities and bullion, but generally does not include real estate. As
of December 31, 2000, Waypoint Bank was in compliance with its
loans-to-one-borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Waypoint
Bank is required to satisfy a qualified thrift lender test whereby it must
maintain at least 65% of its "portfolio assets" in "qualified thrift
investments," which consist primarily of residential mortgages and related
investments, including mortgage-backed and related securities. "Portfolio
assets" generally means total assets less specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property
used to conduct business. A savings association that fails the qualified thrift
lender test must either convert to a bank charter or operate under specified
restrictions. As of December 31, 2000, Waypoint Bank met the qualified thrift
lender test.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution. A savings
institution must file an application for OTS approval of a capital distribution
if either (1) the total capital distributions for the applicable calendar year
exceed the sum of the institution's net income for that year to date plus the
institution's retained net income for the preceding two years, (2) the
institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company, as well as certain other institutions, must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
Any additional capital distributions would require prior OTS approval. If
Waypoint Bank's capital falls below its required levels or the Office of Thrift
Supervision notifies it that it is in need of more than normal supervision,
Waypoint Bank's ability to make capital distributions could be restricted. In
addition, the Office of Thrift Supervision may prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by
regulation, if the Office of Thrift Supervision determines that the distribution
would constitute an unsafe or unsound practice.
Liquidity. Waypoint Bank is required to maintain an average daily balance
of specified liquid assets equal to a quarterly average of not less than a
specified percentage of its net withdrawable deposit accounts plus borrowings
payable in one year or less. The current requirement is 4%. Waypoint Bank's
average liquidity ratio for the quarter ended December 31, 2000 exceeded the
applicable requirements.
Community Reinvestment Act and Fair Lending Laws. Federal savings banks
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities, and failure to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice. Waypoint Bank
received a
25
satisfactory Community Reinvestment Act rating under the current Community
Reinvestment Act regulations in its most recent federal examination.
Transactions with Related Parties. Waypoint Bank's authority to engage in
transactions with related parties or "affiliates" or to make loans to specified
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act. The
term "affiliates" for these purposes generally means any company that controls
or is under common control with an institution, including Waypoint Financial
Corp. and its non-savings institution subsidiaries. Section 23A limits the
aggregate amount of certain "covered" transactions with any individual affiliate
to 10% of the capital and surplus of the savings institution and also limits the
aggregate amount of covered transactions with all affiliates to 20% of the
savings institution's capital and surplus. Covered transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that covered transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
Waypoint Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities controlled by these persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
also by Regulation O. Among other things, these regulations generally require
these loans to be made on terms substantially the same as those offered to
unaffiliated individuals and do not involve more than the normal risk of
repayment. However, recent regulations now permit executive officers and
directors to receive the same terms through benefit or compensation plans that
are widely available to other employees, as long as the director or executive
officer is not given preferential treatment compared to other participating
employees. Regulation O also places individual and aggregate limits on the
amount of loans Waypoint Bank may make to these persons based, in part, on
Waypoint Bank's capital position, and requires approval procedures to be
followed. At December 31, 2000, Waypoint Bank was in compliance with these
regulations.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take such
action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
26
Prompt Corrective Regulatory Action
Under the Office of Thrift Supervision Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's level of capital. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has the total risk-based capital less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Generally, the
applicable Banking regulator is required to appoint a receiver or conservator
for an institution that is "critically undercapitalized." The regulation also
provides that a capital restoration plan must be filed with the Office of Thrift
Supervision within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The Office of Thrift Supervision could also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
Insurance of Deposit Accounts
The Federal Deposit Insurance Corporation has adopted a risk-based deposit
insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories, based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, and one of three supervisory subcategories within each
capital group. The three capital categories are well capitalized, adequately
capitalized and undercapitalized. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on the earnings of Waypoint Bank.
Federal Home Loan Bank System
The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. Waypoint Bank, as a member of the Federal
Home Loan Bank of Pittsburgh, is required to acquire and hold shares of capital
stock in that Federal Home Loan Bank in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its borrowings from the
Federal Home Loan Bank, whichever is greater. As of December 31, 2000, Waypoint
Bank was in compliance with this requirement. The Federal Home Loan Banks are
required to provide funds for the resolution of insolvent thrifts and to
contribute funds for affordable housing programs. These requirements could
reduce the amount of dividends that the Federal Home Loan Banks pay to their
members and could also result in the Federal Home Loan Banks imposing a higher
rate of interest on advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At December 31,
2000, Waypoint Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.
27
Holding Company Regulation
Waypoint Financial is a non-diversified unitary savings and loan holding
company, subject to regulation and supervision by the Office of Thrift
Supervision. A non-diversified unitary savings and loan holding company is a
savings and loan holding company which controls only one subsidiary savings
association and which together with all related activities represented more than
50% of the holding company's consolidated net worth. In addition, the Office of
Thrift Supervision has enforcement authority over Waypoint Financial and its
non-savings institution subsidiaries. Among other things, this authority permits
the Office of Thrift Supervision to restrict or prohibit activities that are
determined to be a risk to the subsidiary savings institution.
Under prior law, a unitary savings and loan holding company was not
generally restricted as to the types of business activities in which it may
engage, provided that its subsidiary savings bank continued to be a qualified
thrift lender. The Gramm-Leach-Bliley Act of 1999, however, restricts unitary
savings and loan holding companies not existing or applied for before May 4,
1999 to activities permissible for financial holding companies under the law or
for multiple savings and loan holding companies. Waypoint Financial will not
qualify to be grandfathered and will be limited to the activities permissible
for financial holding companies or for multiple savings and loan holding
companies. A financial holding company may engage in activities that are
financial in nature, incidental to financial activities or complementary to a
financial activity. A multiple savings and loan holding company is generally
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain additional activities authorized by
Office of Thrift Supervision regulation.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with specified exceptions, more than 5% of a non-subsidiary savings institution,
a non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by Federal law; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision must consider the financial and managerial resources, future
prospects of Waypoint Bank and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
Prospective Regulation and Legislation
Regulations that affect Waypoint Bank and Waypoint Financial, on a daily
basis, may be changed at any time, and the interpretation of the relevant law
and regulations may also change because of new interpretations by the
authorities who administer those laws and regulations. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Office of Thrift Supervision, the Federal Deposit Insurance Corporation or the
U.S. Congress, could have a material impact of the business and operations of
Waypoint Bank and Waypoint Financial Corp.
Legislation enacted several years ago provided that the Bank Insurance Fund
and the Savings Association Insurance Fund would have merged on January 1, 1999
if there were no savings associations as of that date. Congress did not enact
legislation eliminating the savings association charter by that date and
accordingly, the Bank Insurance Fund and the Savings Association Insurance Fund
have not been merged, and we are unable to predict whether such funds will
eventually be merged and what effect, if any, that may have on our business.
TAXATION
Federal Taxation
For federal income tax purposes, Waypoint Financial and its subsidiaries
file a consolidated federal income tax return on a calendar year basis, using
the accrual method of accounting.
28
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or be merged into a commercial bank
without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. However, transactions that would require recapture of the
pre-1988 tax bad debt reserve include redemption of Waypoint Bank's stock,
payment of dividends or distributions in excess of earnings and profits, or
failure by the institution to qualify as a bank for federal income tax purposes.
At December 31, 2000, Waypoint Bank had a balance of approximately $43.7
million of pre-1988 bad debt reserves. A deferred tax liability has not been
provided on this amount as management does not intend to make distributions,
redeem stock or fail certain bank tests that would result in recapture of the
reserve.
Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. Waypoint Financial Corp.
accounts for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred-tax liabilities and assets are adjusted to reflect changes in
the tax laws.
Waypoint Financial is subject to the corporate alternative minimum tax to
the extent it exceeds Waypoint Financial's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base are a number of preference items,
including interest on certain tax-exempt bonds issued after August 7, 1986, and
an "adjusted current earnings" computation which is similar to a tax earnings
and profits computation. In addition, for purposes of the alternative minimum
tax, the amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
State Taxation
Waypoint Financial is subject to the Pennsylvania corporate net income tax
and capital stock and franchise tax. The corporate net income tax rate for 2000
is 9.99% and is imposed on Waypoint Financial's unconsolidated taxable income
for federal purposes with certain adjustments. In general, the capital stock tax
is a property tax imposed at the rate of approximately .9% of a corporation's
capital stock value, which is determined in accordance with a fixed formula
based upon average net income and net worth.
Waypoint Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax
Act, which taxes net earnings, determined in accordance with generally accepted
accounting principles, with some adjustments, at an annual rate of 11.5%. The
Mutual Thrift Institutions Tax Act exempts Waypoint Bank from all other taxes
imposed by the Commonwealth of Pennsylvania for state income tax purposes, and
from all local taxation imposed by political subdivisions, except taxes on real
estate and real estate transfers. In computing net earnings, the Mutual Thrift
Institutions Tax Act allows for the deduction of interest earned on state and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the savings bank. Net operating losses, if any,
thereafter can be carried forward three years.
ITEM 2. Properties
Waypoint Financial currently conducts its business through its main office
located in Harrisburg, Pennsylvania and 58 additional full-service offices. The
aggregate net book value of Waypoint Financial's premises and equipment was
$49.8 million at December 31, 2000.
Waypoint Financial's accounting and record keeping activities are
maintained on an in-house data processing system. Waypoint Financial owns data
processing equipment it uses for its internal processing needs. The net book
value of such data processing equipment and related software at December 31,
2000 was $4.8 million.
ITEM 3. Legal Proceedings
29
There are various claims and lawsuits in which Waypoint Financial is
periodically involved incident to Waypoint Financial's business. In the opinion
of management, no material loss is expected from any of such pending claims or
lawsuits.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
Waypoint Financial common stock trades on the Nasdaq National Market under
the symbol "WYPT." As of March 16, 2001, Waypoint Financial had 8,423
stockholders of record. The following table sets forth the high and low sales
price for Waypoint Financial common stock and, prior to October 17, 2000, Harris
Financial common stock, and the cash dividends per share for the periods
indicated. The information has been adjusted to reflect the October 17, 2000
exchange of .7667 shares of Waypoint Financial for each share of Harris
Financial, in Harris Financial, MHC's mutual-to-stock conversion, and has been
obtained from monthly statistical summaries provided by the Nasdaq Stock Market.
See Note 3 of the Notes to Consolidated Financial Statements for more discussion
of Waypoint Financial's stock conversion, stock offering, and acquisition by
merger of York Financial.
High Low
Sales Sales Cash Dividend
Year ended December 31, 2000 Price Price Declared per share
- ---------------------------- ----- ----- ------------------
Quarter ended December 31 $ 11.00 $ 8.97 $ .0908
Quarter ended September 30 $ 10.60 $ 7.99 $ .0743
Quarter ended June 30 $ 9.37 $ 7.83 $ .0747
Quarter ended March 31 $ 10.35 $ 7.83 $ .0742
Year ended December 31, 1999
- ----------------------------
Quarter ended December 31 $ 14.51 $ 9.05 $ .0865
Quarter ended September 30 $ 16.47 $ 11.74 $ .0791
Quarter ended June 30 $ 16.63 $ 13.04 $ .0785
Quarter ended March 31 $ 19.56 $ 15.65 $ .0800
Payment of dividends on Waypoint Financial's common stock is subject to
determination and declaration by the Board of Directors and depends upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, Waypoint Financial's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
ITEM 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical
financial and other data of Waypoint Financial Corp. (Waypoint Financial) and
its subsidiaries for the periods and at the dates indicated. The information is
derived in part from, and should be read together with, the Consolidated
Financial Statements and Notes thereto of Waypoint Financial contained elsewhere
herein.
At December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
Total assets $4,758,186 $4,366,920 $3,862,095 $3,436,749 $2,930,515
Loans receivable, net 2,591,527 2,439,194 1,960,835 1,842,547 1,821,757
Loans held for sale, net 18,415 6,061 45,049 32,420 13,935
Marketable securities 1,877,581 1,648,087 1,601,122 1,260,894 912,618
Deposits 2,625,720 2,544,598 2,320,632 2,212,015 2,166,529
Borrowings 1,625,329 1,488,390 1,183,216 881,839 466,867
Stockholders' equity 445,568 279,202 300,380 288,259 252,835
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Selected Operating Data:
Interest Income $ 324,558 $ 284,581 $ 251,176 $ 229,633 $ 195,629
Interest expense 224,319 184,708 158,976 144,929 119,114
--------------------------------------------------------------------
Net interest income 100,239 99,873 92,200 84,704 76,515
Provision for loan losses 5,070 4,840 6,172 4,347 4,381
--------------------------------------------------------------------
Net interest income after provision
for loan losses 95,169 95,033 86,028 80,357 72,134
Noninterest income 15,528 16,803 25,359 24,711 12,692
Noninterest expense(1)(2)(8) 96,097 74,059 70,138 63,171 73,350
--------------------------------------------------------------------
Income before taxes 14,600 37,777 41,249 41,897 11,476
Provision for income taxes 3,905 9,805 12,350 14,111 3,358
--------------------------------------------------------------------
Net income $ 10,695 $ 27,972 $ 28,899 $ 27,786 $ 8,118
====================================================================
At or for the Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Selected Operating Ratios and Other Data
Performance Ratios:
Return on average assets (net income divided
by average total assets) 0.24% 0.67% 0.80% 0.87% 0.30%
Return on average equity ( net income divided
by average equity) 3.76 9.51 9.69 10.34 3.30
Average net interest rate spread(3) 2.18 2.34 2.41 2.57 2.69
Net interest margin (4) 2.36 2.53 2.67 2.89 3.04
Efficiency Ratio(5) (9) 68.98 64.14 60.07 57.74 68.44
Noninterest expense to average assets (9) 1.76 1.77 1.94 1.99 2.27
Noninterest income to average assets 0.34 0.40 0.70 0.78 0.47
Average interest-earning assets to average
interest bearing liabilities 103.56 104.34 106.48 106.55 107.71
Asset Quality Ratios:
Non-performing loans to total loans 0.89% 0.97% 0.90% 1.23% 1.10%
Non-performing loans to total assets 0.49 0.54 0.46 0.66 0.68
Non-performing assets as a percentage
of total assets 0.57 0.65 0.82 1.11 1.27
Non-performing loans and real estate owned
to total net loans and real estate owned 1.01 1.12 1.61 2.06 2.03
Allowance for loan losses to net loans 0.87 0.95 1.01 0.92 0.81
Allowance for loan losses to
non-performing loans 97.45 98.21 112.35 75.17 73.63
Equity and Dividend Ratios:
Tangible capital 9.86% 6.90% 6.91% 7.56% 7.96%
Core capital 9.86 6.90 6.91 7.56 7.96
Risk-based capital 16.14 12.20 12.29 13.46 13.44
Average equity to average assets 6.27 7.02 8.24 8.45 9.15
Period end equity to assets 9.36 6.40 7.78 8.39 8.63
Dividend payout ratio(6) 110.71 43.84 42.67 39.73 127.27
Per Share Data (7):
Basic earnings per share $ 0.28 $ 0.73 $ 0.75 $ 0.73 $ 0.22
Diluted earnings per share 0.28 0.72 0.74 0.71 0.21
Dividends per share (10) 0.31 0.32 0.32 0.29 0.28
Book value per share 11.49 7.28 7.40 7.24 6.90
Other Data:
Number of:
Real estate loans outstanding 13,735 14,577 17,024 18,420 19,715
Loans serviced for others 9,695 17,653 33,877 22,072 18,768
Deposit accounts 281,925 291,836 279,532 272,640 262,104
Full-service offices 58 62 60 56 54
(1) Noninterest expense for 1996 includes a one-time special assessment of
$12.3 million to recapitalize the Savings Association Insurance Fund of the
FDIC. In 1996, a one-time special assessment was made on all depository
institutions with deposits insured by the Savings Association Insurance
Fund of the FDIC.
(2) Noninterest expense for 1996 includes a $4.3 million charge for a fraud
loss incurred in connection with the acquisition of First Harrisburg
Bancorp, Inc.
(3) Represents the difference between the average tax-effective yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Represents annualized tax-effected net interest income before the provision
for loan losses divided by average interest-earning assets.
(5) Efficiency ratio is non-interest expense divided by the sum of net interest
income before provision for loan losses and non-interest income.
(6) Represents cash dividends per share divided by net income per share.
(7) All per share values have been adjusted to reflect the October 2000
exchange of 0.7667 shares of Waypoint Financial common stock for each share
of Harris Financial, Inc. common stock and 1.55 shares of Waypoint
Financial common stock for each share of York Financial Corp. common stock.
(8) Noninterest expense for 2000 included merger expenses of $16.2 million
recorded in association with the acquisition by merger of York Financial
Corp. on October 17, 2000.
(9) For calculation of this ratio, noninterest expense for 2000 has been
adjusted to remove merger expenses of $16.2 million (see (8) above). Also,
noninterest expense for 1996 has been adjusted to remove a one-time SAIF
assessment of $12.3 million (see (1) above).
(10) Dividends per share are adjusted to exclude the effect of shares held by
Harris Financial, MHC.
_______________
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this discussion is to provide additional information
about Waypoint Financial Corp. (Waypoint Financial), its financial condition and
results of operations. Readers should refer to the consolidated financial
statements and other financial data presented throughout this report to fully
understand the following discussion and analysis.
I. Forward-Looking Statements
In addition to historical information, this report contains forward-
looking statements. The forward-looking statements contained in the following
sections are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, interest rate trends, the general economic climate in
Waypoint Financial's market area and the country as a whole, Waypoint
Financial's ability to control costs and expenses, competitive products and
pricing, loan delinquency rates and changes in federal and state regulation.
Readers should not place undue reliance on these forward-looking statements, as
they reflect management's analysis only as of the date of this report. Waypoint
Financial has no obligation to update or revise these forward-looking statements
to reflect events or circumstances that occur after the date of this report.
Readers should carefully review the risk factors described in other documents
that Waypoint Financial files periodically with the Securities and Exchange
Commission.
II. Financial Review
Waypoint Financial was organized as part of the October 17, 2000,
mutual-to-stock conversion of Harris Financial, MHC and merger of Harris
Financial, Inc. and York Financial Corp. As part of the conversion and merger,
Waypoint Financial completed a stock offering and an acquisition by merger of
York Financial Corp., the parent holding company of York Federal Savings and
Loan Association. As a result of its subscription, community offering, and
public offering, Waypoint Financial sold 16,550,000 shares at $10.00 per share
with net proceeds totaling $155.6 million (including approximately $15.6 million
of proceeds from the sale of shares to Waypoint Financial's employee stock
ownership plan). Waypoint Financial issued 6,191,274 shares to former
stockholders of Harris Financial, Inc. as part of the conversion in accordance
with a ratio of .7667 Waypoint Financial shares to each Harris Financial, Inc.
share. Waypoint Financial also issued 15,666,264 shares to former stockholders
of York Financial to complete its acquisition by merger in accordance with a
ratio of 1.55 shares of Waypoint Financial to each York Financial share. York
Financial held total assets of $1.7 billion as of September 30, 2000. In
addition, Waypoint Financial's underwriters in the public offering exercised
300,000 shares of their overallotment option, resulting in net proceeds of $2.8
million. A total of 38,707,538 shares of common stock were issued in the
conversion, offering, and merger transactions. On October 30, 2000, York Federal
Savings and Loan Association was merged into Waypoint Bank.
Waypoint Financial's assets consist primarily of 100% of the
outstanding shares of Waypoint Bank and various financial services subsidiaries.
Waypoint Bank was originally formed in 1886 as Harris Building and Loan
Association, and is primarily engaged in the business of attracting deposits and
investing these deposits into loans secured by residential and commercial real
property, commercial business loans, consumer loans, and investment securities.
Waypoint Financial conducts its business through fifty-eight offices,
including fifty offices located in the five county south-central region of
Pennsylvania that includes Dauphin, York, Cumberland, Lancaster and Lebanon
Counties, and eight offices in Maryland. In addition, Waypoint Financial
maintains an operations center, a business center, a support center, five loan
production offices, a mortgage lending office, a business banking office, and a
commissioned mortgage origination staff as well as mortgage correspondent
relationships that originate residential mortgage loans for Waypoint Financial
primarily in Pennsylvania, Maryland and Virginia, although loans are originated
in 11 states within the Mid-Atlantic region. Waypoint Financial's wholly-owned
insurance agency Owen Insurance Inc. operates its main office in York,
Pennsylvania and a second office in Camp Hill, Pennsylvania.
Waypoint Financial's net income depends primarily on its net interest
income, which is the difference between interest income on loans and investments
and interest expense on deposits and borrowings. Net interest income is a
function of Waypoint Financial's interest rate spread, which is the difference
between the average yield earned on interest-earning assets and the average rate
paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to interest-earning liabilities.
Because of this reliance on net interest income, Waypoint
32
Financial's net income is affected by changes in market interest rates and
prevailing economic conditions. The volatility of net interest income due to
changes in market interest rates is often referred to as "interest rate risk".
Financial institutions that accept and manage substantial degrees of interest
rate risk are generally susceptible to larger net interest income fluctuations
when compared to peer institutions that accept less interest rate risk.
Accordingly, managing interest rate risk successfully has a significant impact
on Waypoint Financial's return on equity.
Waypoint Financial also generates non-interest income from fees and
commissions charged on customers' accounts, sales of brokerage and insurance
products, trust and asset management services, and mortgage banking activities
including the servicing of loans for others. Noninterest income also includes
gains and losses on sales of securities available for sale, gains and losses on
sales of real estate, equity in (losses) earnings of limited partnership
interests, and fees and service charges assessed on loan and deposit
transactions. Waypoint Financial's non-interest expenses primarily consist of
employee compensation and benefits, occupancy and equipment expense, advertising
and other operating expenses. Waypoint Financial's results of operations also
are affected by general economic and competitive conditions, notably changes in
market interest rates, government policies and regulations.
III. Market Risk and Interest Rate Sensitivity Management
Market risk is the risk of loss from adverse changes in market prices
and rates. In an effort to maintain control over such risks, management of
Waypoint Financial focuses its attention on managing the interest rate
sensitivity of assets and liabilities and controlling the volume of lending,
securities, deposit and borrowing activities. By managing the ratio of interest
sensitive assets to interest sensitive liabilities repricing in the same
periods, Waypoint Financial seeks to control the adverse effect of interest rate
fluctuations. Waypoint Financial's assets and liabilities are not directly
exposed to foreign currency or commodity price risk.
Management utilizes an Asset/Liability Committee, which meets at least
once each month, to review Waypoint Financial's interest sensitivity position on
an ongoing basis and prepare strategies regarding the acquisition and allocation
of funds to maximize earnings and maintain the interest rate sensitivity
position at acceptable levels. Waypoint Financial originates for portfolio
principally short and intermediate term and adjustable rate loans and sells most
fixed rate loan originations. Additionally, Waypoint Financial has acquired for
its portfolio investment securities categorized as available for sale. The
funding sources for these portfolio loans and securities are deposits and
borrowings with various maturities. In addition to normal portfolio management
activities, management evaluates and implements strategies to manage interest
rate risk levels, including equity infusions to Waypoint Financial, asset sales,
and extension of maturities of borrowings.
The Asset/Liability Committee monitors Waypoint Financial's interest
rate risk position by utilizing simulation analysis. Net interest income
fluctuations and the net portfolio value ratio are determined in various
interest rate scenarios and monitored against acceptable limitations established
by management and approved by the Board of Directors. Such rate scenarios
include immediate rate shocks adjusting rates in +/- 100 basis point (bp)
increments resulting in projected changes to net interest income over the next
12 months and projected net portfolio value ratios as indicated with the
comparison of December 31, 2000 to December 31, 1999 in the following table.
An analysis of hypothetical changes in interest rates as of December
31, 2000 is as follows:
Percentage change in
--------------------
Change in interest
rates Net interest Net portfolio
(In basis points) income (1) ratio (2)
-------------------------- ------------- ----------------
+300 (3.30)% 4.09%
+200 0.59 6.44
+100 0.29 7.83
0 - 8.66
(100) 0.84 9.01
(200) (2.03) 8.42
________________________
(1) The percentage change in this column represents an increase (decrease)
in net interest income for 12 months in a stable interest rate
environment versus net interest income for 12 months in the various
rate scenarios.
33
(2) The net portfolio value ratio in this column represents net portfolio
value of Waypoint Financial in various rate scenarios, divided by the
present value of expected net cash flows from existing assets in those
same scenarios. Net portfolio value is defined as the present value of
expected net cash flows from existing assets, minus the present value
of expected net cash flows from existing liabilities, plus or minus the
present value of expected net cash flows from existing off-balance-
sheet contracts.
Simulation results are influenced by a number of estimates and
assumptions with regard to embedded options, prepayment behaviors, pricing
strategies and cashflows. Net interest income variability in various rate shock
scenarios is due to portfolio lending and investment leverage strategies which
were funded with convertible borrowings and overnight borrowings resulting in
inherently higher interest rate risk than had this asset growth been funded by
deposits. Net portfolio value had less variability due to strategies evaluated
and implemented to manage risks over the long term. Assumptions and estimates
used in simulation analysis are inherently subjective and, as a consequence,
results will neither precisely estimate net interest income or net portfolio
value nor precisely measure the impact of higher or lower interest rates on net
interest income or net portfolio value ratio. The results of these simulations
are reported to Waypoint Financial's Board of Directors on a monthly basis.
Management has determined that the level of interest rate risk is within
acceptable limits at December 31, 2000.
Waypoint Financial also uses certain derivative financial instruments
from time to time to manage interest rate risk associated with certain financial
assets and liabilities that Waypoint Financial places in its portfolios in the
ordinary course of business. A detailed discussion of Waypoint Financial's
derivative financial instruments is contained in the Notes to Consolidated
Financial Statements.
IV. Credit Risk
Due to strong underwriting standards and credit and collections
management as well as a historically strong economy in its market area, Waypoint
Financial's experience in credit losses has been favorable. Waypoint Financial
follows a comprehensive loan policy that details credit underwriting, credit
management and loan loss provisioning techniques. With regard to its marketable
securities portfolio, at December 31, 2000, over 90% of the marketable
securities in Waypoint Financial's portfolio were rated "AAA", with the
remainder rated "AA" or "A". At December 31, 1999, over 87% of the marketable
securities in Waypoint Financial's portfolio were rated "AAA", with the
remainder rated "AA" or "A".
V. Concentration Risk - Geographic
Waypoint Financial's primary market area includes the five central
Pennsylvania counties of Dauphin, Cumberland, York, Lancaster, and Lebanon and
the northern Maryland counties of Harford and Washington. Except for the
manufactured home loan portfolio, virtually all of Waypoint Financial's loans
and deposits are dependent on this primary market area. The southcentral
Pennsylvania and northern Maryland area have enjoyed a strong, well diversified
and stable economy for many years relative to the general economic conditions
experienced in the Northeastern United States and the nation as a whole.
Currently, Waypoint Financial's primary market area does not appear to be
exhibiting signs of economic deterioration. Should such economic stress become
evident, however, Waypoint Financial's loan and deposit portfolios and
operations could be adversely impacted.
VI. Concentration Risk - Major Creditor
Waypoint Financial relies on wholesale borrowings to support a
leveraged investment strategy. As discussed in previous sections of this report,
these strategies have significantly enhanced the Corporation's return to its
shareholders. A significant portion of Waypoint Financial's wholesale borrowings
are placed with the Federal Home Loan Bank of Pittsburgh (the "FHLB"). If
Waypoint Financial's maximum borrowing capacity with the FHLB were to be
encumbered in the future, through statutory restrictions that do not exist at
this time or through other means, Waypoint Financial's leveraged investment
strategies would be impacted to some degree. However, given the quality of
assets pledged as collateral to support wholesale borrowings, management
believes Waypoint Financial would be able to expand its placement of borrowings
with other primary borrowing sources. Management anticipates that such a shift
in borrowing sources would result in, at worst, only modest potential decreases
in net interest income from wholesale leveraging activities. Management is not
aware of any contemplated regulatory actions that indicate Waypoint Financial's
borrowing capacity at the FHLB might become restricted to less than the maximum
capacity.
34
VII. Liquidity
The primary purpose of asset/liability management is to maintain
adequate liquidity and a desired balance between interest sensitive assets and
liabilities. Liquidity management focuses on the ability to meet the cash flow
requirements of customers wanting to withdraw or borrow funds for their personal
or business needs. Interest rate sensitivity management focuses on consistent
growth of net interest income in times of fluctuating interest rates. Management
must coordinate its management of liquidity and interest rate sensitivity
because decisions involving one may influence the other.
Waypoint Financial meets its liquidity needs by either reducing its
assets or increasing its liabilities. Sources of asset liquidity include short-
term investments, securities available for sale, maturing and repaying loans,
and monthly cash flows from mortgage-backed securities. The loan portfolio
provides an additional source of liquidity due to Waypoint Financial's
participation in the secondary mortgage market and resulting ability to sell
loans as necessary. Waypoint Financial also meets its liquidity needs by
attracting deposits and utilizing borrowing arrangements with the FHLB of
Pittsburgh and the Federal Reserve Bank of Philadelphia for short and long-term
loans as well as other short-term borrowings.
Deposits represent Waypoint Financial's primary source of funds.
Waypoint Financial occasionally uses brokered deposits to supplement other
sources of funds to the extent such deposits are determined to have more
favorable interest cost and risk characteristics at the time of purchase
relative to other sources of funding. During 2000, Waypoint Financial's deposits
increased $81.1 million. The deposit growth resulted primarily from aggressive
pricing of certificate and money market accounts to retain existing customers
and attract new customers. At December 31, 2000, Waypoint Financial also had
brokered deposits of $127.9 million outstanding at an average interest rate of
6.73% as compared to $77.1 million outstanding at December 31, 1999 at an
average interest rate of 5.94%. To supplement deposit-gathering efforts,
Waypoint Financial borrows from the FHLB of Pittsburgh. At December 31, 2000,
Waypoint Financial had $1,434.8 million in FHLB loans outstanding at a weighted
average interest rate of 6.24%, an increase of $530.1 million from $904.7
million on December 31, 1999. A substantial portion of this increase in FHLB
borrowings was used to refinance other borrowings from repurchase agreements.
Waypoint Financial was required to purchase additional FHLB stock totaling $26.5
million due to increased FHLB loans outstanding. Other borrowings from
repurchase agreements decreased to $189.9 million at December 31, 2000 from
$568.2 million at December 31, 1999. For additional details of FHLB loans and
other borrowings, see the Notes to Consolidated Financial Statements.
Amortization and prepayments of loans and proceeds from loan and
securities sales represent a substantial source of funds to Waypoint Financial.
These sources amounted to $1,238.0 million, $1,550.2 million and $2,534.6
million in 2000, 1999 and 1998, respectively.
Generally, Waypoint Financial's principal use of funds is to originate
mortgage and other loans. In addition, during fiscal 2000, Waypoint Financial
utilized leverage strategies to deploy available capital. These strategies
resulted in expansion of the investment portfolio through the purchase of
available for sale securities as well as an increase in loan balances. The
carrying value of securities available for sale increased $229.5 million to
$1,854.9 million in at December 31, 2000 from $1,625.4 million at December 31,
1999. The increase in carrying value of securities available for sale included
an increase of $244.6 million in mortgage-backed securities, of which $170.8
million came in high investment-grade private issued securities.
Loan demand resulted in total originations of $911.2 million in 2000.
Loan originations were obtained through various channels including the retail
branch system, commissioned mortgage origination staff, electronic-banking
channels, mortgage correspondent relationships, and Business Banking
relationship managers. A relatively high-rate interest rate environment during
most of the fiscal year had an unfavorable effect on the volume of originations.
A significant component of loan origination volume was intermediate term
mortgage products, primarily, five/one adjustable rate loans (fixed rate for the
first five years with annual adjustments thereafter) as well as an increase in
the commercial loan portfolio. During 2000, the loan portfolio increased by
$152.3 million, to $2,591.5 million at December 31, 2000. Under current
regulations, Waypoint Bank is required to maintain liquid assets at 4.0% or
more of its net withdrawable deposits plus short-term borrowings. The Office of
Thrift Supervision measures liquidity at the financial institution level. At
December 31, 2000, Waypoint Bank's regulatory liquidity ratio was 17.0%.
35
The sources of liquidity previously discussed are deemed by management
to be sufficient to fund outstanding loan commitments and meet other
obligations. See the Notes to Consolidated Financial Statements for information
on commitments and fair value of financial instruments at December 31, 2000.
VIII. Capital Resources
The management of capital provides the foundation for future asset and
profitability growth and is a major strategy in the management of Waypoint
Financial. Stockholders' equity at December 31, 2000, totaled $445.6 million
compared to $279.2 million at December 31, 1999, an increase of $166.4 million.
The increase included net proceeds of $158.4 million from Waypoint Financial's
sale of 16,850,000 shares in a stock offering that was completed on October 17,
2000. Stockholders' Equity also was increased by a reduction in Waypoint
Financial's unrealized losses on available for sale securities, net of tax
effect, of $20.2 million, by net income of $10.7 million, by common stock issued
under dividend reinvestment plans of $1.6 million, and by various other net
increases totaling $1.7 million. Offsetting these increases were $15.6 million
deployed to establish a leveraged employee stock ownership plan, cash dividends
of $7.5 million, treasury stock purchases of $1.3 million, and a net adjustment
of $.8 million to conform accounting periods associated with the pooling-of-
interests combination. For more information on Waypoint Financial's pooling-of-
interests combination, see the Notes to Consolidated Financial Statements.
Under OTS regulations a savings association must satisfy three minimum
capital requirements: core capital, tangible capital and risk-based capital.
Savings associations must meet all of the standards in order to comply with the
capital requirements. At December 31, 2000, Waypoint Bank met all three minimum
capital requirements.
IX. Acquisitions
Acquisition by Merger of York Financial Corp. On October 17, 2000,
Harris Financial, MHC, the parent mutual holding company for Harris Financial,
Inc. and owner of 76% of its common stock, completed a mutual-to-stock
conversion. As part of this conversion, Harris Financial, MHC ceased to exist.
Immediately following the conversion, Waypoint Financial became the successor to
Harris Financial, Inc. and Waypoint Bank became the successor to Harris Savings
Bank. As a result of these transactions, Waypoint Bank is the wholly owned
subsidiary of Waypoint Financial and 100% of Waypoint Financial is publicly
owned.
Also on October 17, 2000, Waypoint Financial completed a stock offering
and an acquisition by merger of York Financial, the parent holding company of
York Federal Savings and Loan Association. As a result of its subscription,
community offering, and public offering, Waypoint Financial sold 16,550,000
shares at $10.00 per share with net proceeds totaling $155.6 million (including
approximately $15.6 million of proceeds from the sale of shares to Waypoint
Financial's employee stock ownership plan). Waypoint Financial issued 6,191,274
shares to former stockholders of Harris Financial, Inc. as part of the
conversion in accordance with a ratio of .7667 Waypoint Financial shares to each
Harris Financial, Inc. share. Waypoint Financial also issued 15,666,264 shares
to former stockholders of York Financial to complete its acquisition by merger
in accordance with a ratio of 1.55 shares of Waypoint Financial to each York
Financial share. York Financial held total assets of $1.7 billion as of
September 30, 2000. In addition, Waypoint Financial's underwriters in the public
offering exercised 300,000 shares of their overallotment option, resulting in
proceeds of $2.8 million. On October 30, 2000, York Federal Savings and Loan
Association was merged into Waypoint Bank.
As a result of the conversion, offering, and merger transactions,
Waypoint Financial survives as a federally chartered unitary savings and
loan holding company regulated by the OTS. Waypoint Bank survives as a federally
chartered savings bank and is also regulated by the OTS.
The merger of Waypoint Financial and York Financial has been accounted
for under the pooling-of-interests method of accounting and, accordingly,
Waypoint Financial's historical consolidated financial statements have been
restated to include the accounts and results of operations of York Financial.
For further discussion on the merger of Waypoint Financial and York Financial,
see the Notes to Consolidated Financial Statements.
Purchase Acquisition of Owen Insurance Inc. On November 30, 2000,
Waypoint Financial acquired Owen Insurance Inc., a full-service insurance agency
that provides a wide range of property and casualty and life insurance products
to commercial
36
and retail customers of Waypoint Financial and to the general public. Owen
Insurance Inc. was the second largest insurance agency headquartered in York,
Pennsylvania. This acquisition was accounted for under purchase accounting and
did not have a material impact on Waypoint Financial's financial condition or
results of operation.
Branch Purchase Acquisition. During 1999, Waypoint Financial acquired
a branch in Lebanon County, Pennsylvania. Waypoint Financial accounted for this
transaction as a purchase, with $3.3 million of deposit premium intangibles
recorded on $37.3 million of deposit balances acquired.
Acquisition of Equity Interest. During 1999, Waypoint Financial
acquired an equity interest in WFG Capital Advisors, a locally-based business
advisory firm. Through this endeavor, Waypoint Financial offers its commercial
customers extensive advisory services for business expansion, business purchases
and business sales.
Management considers an aggressive acquisition strategy to be a crucial
strategic objective. Management believes that consolidation of the financial
services industry will continue to present acquisition opportunities in
geographical markets and business market niches within which Waypoint Financial
intends to expand and prosper. These markets may include non-traditional banking
products and services and management believes Waypoint Financial's corporate
structure and operating infrastructure are conducive to successfully integrating
such activities.
37
Results of Operations
X. Comparison of Results of Operations in 2000 and 1999
Net interest income before provision for loan losses, on a tax-
equivalent basis, for 2000 was $102.8 million, as compared to $103.3 million for
1999, which represents a decrease of $.5 million or 0.5% from 1999. The
decrease in net interest income was primarily due to an increase in average
balances in loans and securities, which was offset by decreasing interest rate
spreads. The net interest margin for 2000 decreased to 2.36% from 2.58% in 1999.
Table 1 presents the average asset and liability balances, interest rates,
interest income and interest expense for 2000, 1999, and 1998.
Table 1 Average Balance Sheets, Rates and Interest Income and Expense Summary
(All dollar amounts presented in table are in thousands)
For the Years Ended December 31,
------------------------------------------------------------------
2000
------------------------------------------------------------------
Yield/cost at Average
December 31, Average (Yield/ Average
2000 Balance Interest (2) Cost) Balance
--------------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Loans, net (1) (5) 7.83% $ 2,608,453 $ 201,211 7.71% $ 2,332,577
Marketable securities - taxable 7.15 1,651,359 118,911 7.20 1,540,540
Marketable securities - tax free 8.74 63,150 5,566 8.81 99,096
Other interest-earning assets 5.21 34,461 1,466 4.25 35,146
--------------------------------------------------------------------------------------
Total interest-earning assets 7.56 4,357,423 327,154 7.51 4,007,359
---------------- --------------------------------
Noninterest-earning assets 181,466 178,874
----------------- ------------------
Total Assets $ 4,538,889 $ 4,186,233
================= ==================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits 2.99 $ 184,404 4,652 2.52 $ 186,197
Time deposits 6.02 1,643,535 94,449 5.75 1,431,720
NOW and money market deposits 3.86 798,006 25,951 3.25 777,511
Escrow and stock subscriptions 0.52 9,862 88 0.89 5,034
Borrowed funds 6.22 1,571,747 99,179 6.31 1,440,110
---------------------------------------------------------------------
Total interest-bearing liabilities 5.54 4,207,554 224,319 5.33 3,840,572
--------------------------------
Noninterest-bearing liabilities 46,599 51,638
----------------- ------------------
Total liabilities 4,254,153 3,892,210
Stockholders' equity 284,736 294,023
----------------- ------------------
Total liabilities and
stockholders' equity $ 4,538,889 $ 4,186,233
================= ==================
Net interest income $ 102,835
=================
Interest rate spread (3) 1.86% 2.18%
================ ===============
Net interest-earning assets $ 149,869 $ 166,787
================= ==================
Net interest margin (4) 2.36%
===============
Ratio of interest-earning assets
to interest-bearing liabilities 1.04 1.04
================= ==================
For the Years Ended December 31,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
Average Average
(Yield/ Average (Yield/
Interest (2) Cost) Balance Interest (2) Cost)
--------------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Loans, net (1) (5) $ 178,942 7.67% $ 1,865,106 $ 151,406 8.12%
Marketable securities - taxable 99,100 6.43 1,320,367 85,254 6.46
Marketable securities - tax free 8,300 8.38 113,106 9,588 8.48
Other interest-earning assets 1,648 4.69 157,989 8,438 5.34
--------------------------------------------------------------------------------------
Total interest-earning assets 287,990 7.20 3,456,568 254,686 7.37
-------------------------------- ---------------------------------
Noninterest-earning assets 163,474
-------------------
Total Assets $ 3,620,042
===================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits 4,109 2.21 $ 206,446 4,748 2.30
Time deposits 77,305 5.40 1,339,026 73,846 5.51
NOW and money market deposits 23,902 3.07 680,376 21,935 3.22
Escrow and stock subscriptions 90 1.79 8,997 90 1.00
Borrowed funds 79,302 5.51 1,033,695 58,357 5.65
--------------------------------------------------------------------------------------
Total interest-bearing liabilities 184,708 4.81 3,268,540 158,976 4.86
-------------------------------- ---------------------------------
Noninterest-bearing liabilities 53,326
-------------------
Total liabilities 3,321,866
Stockholders' equity 298,176
-------------------
Total liabilities and
stockholders' equity $ 3,620,042
===================
Net interest income $ 103,282 $ 95,710
================ ================
Interest rate spread (3) 2.39% 2.51%
================ =================
Net interest-earning assets $ 188,028
===================
Net interest margin (4) 2.58% 2.77%
================ =================
Ratio of interest-earning assets
to interest-bearing liabilities 1.06
===================
(1) Includes income recognized on deferred loan fees of $607,000 in 2000,
$1,353,000 in 1999, and $2,405,000 in 1998.
(2) Interest income and yields are shown on a tax equivalent basis. The tax
equivalent adjustment to net interest income before provision for loan
losses as reported on the Consolidated Statements of Income was $2,596,000
in 2000, $3,409,000 in 1999, and $3,510,000 in 1998.
(3) Represents the difference between the average yield on interest-earning
assets and the average cost on interest-bearing liabilities.
(4) Represents the annualized net interest income before the provision for loan
losses divided by average interest-earning assets.
(5) Includes loans on nonaccrual status and loans held for sale.
In addition to absolute levels of net interest income, the volatility
of net interest income or its sensitivity to key variables is of significant
concern to financial institutions. The key variables that determine the
volatility of net interest income are changes in average account balances
(volume), changes in interest rates (rate) and the mix of interest-earning
assets and interest-bearing liabilities. A lag exists between the time changes
occur in market interest rates and when such changes are reflected in the
performance of Waypoint Financial's interest-earning asset and interest-bearing
liability portfolios. The average yield on average interest-earning assets is
influenced by the rate of repayments and prepayments, purchases and sales, and
the mix of asset maturities as well as current market rates.
38
Similarly, the average cost of average interest-bearing liabilities is
influenced by redemptions, early withdrawals, deposit purchases, deposit raising
activities, borrowed funds activity and the mix of liability maturities as well
as current market rates.
Table 2 presents an analysis of the changes in tax-equivalent net
interest income attributable to changes in the volume and rate components of net
interest income. During 2000, there was an increase in net interest income of
$5.4 million due to changes in volume and a decrease of $5.8 million due to
changes in rates. Table 1 indicates that the average balance of total interest
earning assets in 2000 increased $350.1 million from 1999 and the average
balance of total interest-bearing liabilities increased $367.0 million from
1999.
Table 2 Rate/Volume Analysis of Changes in Net Interest Income (All dollar
amounts presented in table are in 000's)
Year Ended December 31, 2000 Year Ended December 31, 1999
Compared to Compared to
Year Ended December 31, 1999 Year Ended December 31, 1998
Increase (Decrease) Increase (Decrease)
------------------------------------------- ----------------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------------- ----------------------------------------------
Interest-earning assets:
Loans, net $21,372 $ 897 $22,269 $35,739 $ (8,203) $27,536
Marketable securities - taxable 7,435 12,376 19,811 13,712 134 13,846
Marketable securities - taxfree (3,142) 408 (2,734) (1,176) (112) (1,288)
Other interest-earning assets (31) (151) (182) (6,173) (617) (6,790)
------------------------------------------- ----------------------------------------------
Total interest-earning assets 25,634 13,530 39,164 42,102 (8,798) 33,304
------------------------------------------- ----------------------------------------------
Interest-bearing
liabilities:
Savings deposits (39) 582 543 (479) (160) (639)
Time deposits 11,921 5,223 17,144 4,988 (1,529) 3,459
NOW and money market deposits 635 1,414 2,049 2,903 (936) 1,967
Escrow and stock subscriptions 58 (60) (2) (51) 51 -
Borrowed funds 7,679 12,198 19,877 23,094 (2,149) 20,945
------------------------------------------- ----------------------------------------------
Total interest-bearing liabilities 20,254 19,357 39,611 30,455 (4,723) 25,732
------------------------------------------- ----------------------------------------------
Net change in interest income $ 5,380 $(5,827) (447) $11,647 $ (4,075) $ 7,572
=========================================== ==============================================
Note: Changes in interest income and interest expense arising from the
combination of rate and volume variances are prorated across rate and volume
variances.
During 2000, Waypoint Financial's average loans increased $275.9
million or 11.8% to $2.608 billion. The average balance of securities and other
interest-earning assets increased $74.2 million or 4.4% over the prior year and
results primarily from Waypoint's leveraged investing activities. The increase
in interest-earning assets was funded by an increase in average deposits of
$235.3 million or 9.8% and an increase in average borrowings of $131.7 million
or 9.1%. Waypoint Financial's total average interest-bearing liabilities
increased $367.0 million in 2000 to $4.208 billion from $3.841 billion in 1999.
A primary factor affecting the interest income was the increase in volume of
interest-earning assets and an increase in the yield on interest-earning assets
of 31 basis points to 7.51%. Offsetting the increase in asset yields, the
average rate on interest-bearing liabilities increased to 5.33% from 4.81% in
the prior year. This higher average rate on liabilities was primarily the result
of the increase in cost of funds for borrowings and time deposits related to
increased market rates of interest and repricing of short-term maturities of
such liabilities. The net effect caused the interest rate spread for 2000 to
decrease to 2.18% from 2.39% in 1999.
Provision for Loan Losses. In 2000, additions were made to the
allowance for loan losses including provisions of $5.1 million and a pooling
adjustment to conform accounting periods totaling $.2 million. Offsetting these
additions were charge-offs, net of recoveries of $.8 million, totaling $5.8
million. This activity resulted in an allowance for loan losses of $22.6
million, or .87% of the loan portfolio at December 31, 2000. This compared to
an allowance of $23.1 million, or .95% of net loans, at December 31, 1999.
Waypoint Financial establishes provisions for loan losses, which are
charged to operations, in order to maintain the allowance for loan losses at a
level that is deemed appropriate to absorb charge-offs of loans deemed
uncollectible. In determining the appropriate level of the allowance of loan
losses, management considers past loss experience, evaluations of real estate
collateral, economic conditions, volume and type of lending and the levels of
nonperforming and other classified loans. The amount of the
39
allowance is based on estimates and the ultimate losses may vary from such
estimates. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Waypoint Financial's allowance
for loan losses. Such agencies may require Waypoint Financial to recognize
additional provisions for loan losses based on their judgment about information
available to them at the time of their examination. Management of Waypoint
Financial assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses in order to maintain the adequacy of the allowance.
Noninterest Income. Noninterest income decreased $1.3 million or 7.6%
to $15.5 million in 2000 from $16.8 million in 1999. Table 3 presents a summary
of the changes in noninterest income during the years 2000 and 1999.
Table 3 Changes in Noninterest Income (All dollar amounts presented in table are
in 000's)
2000/1999 1999/1998
2000 Change % 1999 Change % 1998
---------------------------------------------------------------------------
Service charges on deposits $ 9,760 $ 873 9.8% $ 8,887 $ 2,387 36.7% $ 6,500
Other service charges, commissions and
fees 3,755 568 17.8 3,187 792 33.1 2,395
Net servicing income 1,192 (389) (24.6) 1,581 467 41.9 1,114
(Loss) gain on securites, net (1,792) (3,760) (191.1) 1,968 (3,724) (65.4) 5,692
Gain (loss) on sale of loans, net 161 (516) (76.2) 677 (6,308) (90.3) 6,985
Other 2,452 1,949 387.5 503 (2,170) (81.2) 2,673
---------------------------------------------------------------------------
Total $15,528 $ (1,275) (7.6)% $16,803 $ (8,556) (33.7)% $25,359
===========================================================================
Service charges on deposits increased $.9 million or 9.8% to $9.8
million in 2000 from $8.9 million in 1999. This increase resulted primarily from
an increased number of checking, savings, and money market deposit accounts and
from service fee rate increases implemented in the latter part of 1999. Waypoint
also experienced a significant increase in revenue from its automated teller
machine ("ATM") network as activity increased with the increase in account
volume and due to ATM network expansion completed during 1999 and 1998. Waypoint
Financial's analysis has indicated that a ramp-up period of generally one to two
years is required for new ATMs to reach profitable revenue levels.
Other service charges, commissions and fees include primarily
commercial banking fees, trust and asset management fees, brokerage fees, and
insurance fees. This income increased $.6 million or 17.8% to $3.8 million in
2000 from $3.2 million in 1999. This increase resulted primarily from
significant expansion of Waypoint Financial's commercial loan and deposit
portfolios and other commercial service activities. Also, fee-generating
activities have been enhanced by Waypoint Financial's licensing and training of
retail banking representatives to provide financial services through the branch
network.
Mortgage banking income, which includes net servicing income and gains
on the sale of mortgage loans, decreased $.9 million or 39.1% to $1.4 million in
2000 as compared to $2.3 million in 1999. The primary cause of this decrease was
a $.5 million reduction in gains on the sale of loans from $.7 million in 1999
to $.2 million in 2000. Also, net servicing income decreased $.4 million to $1.2
million in 2000 as compared to $1.6 million in 1999.
Net servicing income is generated through servicing fees collected on
loans serviced for others, which totaled $1.2 million for 2000, as compared to
$1.6 million for 1999. During 2000, Waypoint Financial's loan servicing income
was negatively impacted by servicing volume and by a $.3 million valuation
adjustment charged to expense in the fourth quarter of 2000 due to a reduction
in the market valuation of loan servicing rights. During the fourth quarter of
2000, a rapid change in market interest rate trends from a rising to a falling
rate environment greatly increased estimated loan prepayment speeds, which has
the effect of reducing forecasted net servicing income and thereby negatively
impacts the valuation of servicing rights. The portfolio of loans serviced for
others decreased to $741.7 million at December 31, 2000 from $1,361.3 million at
December 31, 1999. The related loan servicing rights asset also decreased in
2000 to $6.4 million at December 31, 2000 from $12.7 million at December 31,
1999. During the first quarter of 2000, Waypoint Financial sold substantially
all of its purchased mortgage servicing rights, which had a carrying value of
$4.2 million at the time of sale, and recorded an immaterial gain. Waypoint
Financial continues to invest in originated mortgage servicing rights generated
from its mortgage banking operations. For additional information on loan
servicing fees and loans serviced for others, refer to the Notes to the
Consolidated Financial Statements.
Waypoint Financial recorded a net loss of $1.8 million on sales of
marketable securities during 2000 as compared to a net gain of $2.0 million on
such activity in 1999. Management attributes the net loss on sales of
marketable securities during 2000 primarily to a $1.8 million valuation
adjustment for other than temporary impairment of a marketable security. Also,
Waypoint Financial restructured the marketable securities portfolio during 2000
to improve its Waypoint Financial's interest rate risk profile. During 2000,
Waypoint Financial sold marketable securities with carrying values totaling
$361.3 million, with realized gains and losses netting to breakeven.
40
Other noninterest income increased $2.0 million to $2.5 million in 2000
from $.5 million in 1999. Noninterest income for 1999 was substantially reduced
by Waypoint Financial's partnership interests in various joint ventures. During
1999, joint venture activities resulted in a net loss of $1.5 million. During
2000, joint venture activities resulted in a net loss of $1.2 million.
In recognition of the margin compression experienced by the banking and
thrift industries over the past several years, management has accelerated
Waypoint Financial's operational conversion to a full-service financial
institution to increase the contribution of noninterest income to corporate
profits. During 2000, Waypoint Financial continued to expand its commercial
banking services and advisory services. Waypoint Financial also provides trust
and asset mangement services, brokerage services, insurance and other financial
services. Also, pursuant to Waypoint Financial's strategy to increase
noninterest income, on November 30, 2000, Waypoint Financial consummated the
acquisition of Owen Insurance Inc., which prior to the acquisition was the
second largest insurance brokerage headquartered in York County, Pennsylvania.
Management believes this strategic focus is essential to improving
Waypoint Financial's long-term return to its shareholders and it is committed to
success in this endeavor. Management's goal is to continue to increase
contributions of noninterest income in 2001 and beyond with ongoing expansion of
fee-based financial services in addition to enhancing fee-generating
opportunities with Waypoint Bank's commercial and retail banking customers.
Noninterest Expense. Table 4 presents a summary of the changes in noninterest
expense for the two year periods ended December 31, 2000.
Table 4 Changes in Noninterest Expense (All dollar amounts presented in table
are in thousands)
2000/1999 1999/1998
--------------------------------------------------------------------------------------
2000 Change % 1999 Change % 1998
--------------------------------------------------------------------------------------
Salaries and benefits $ 39,064 $ 1,385 3.7% $ 37,679 $ 1,203 3.3% $ 36,476
Equipment expense 7,294 1,352 22.8 5,942 733 14.1 5,209
Occupancy expense 6,374 1,276 25.0 5,098 193 3.9 4,905
Advertising and public relations 3,412 (97) (2.8) 3,509 305 9.5 3,204
FDIC insurance 521 (639) (55.1) 1,160 (182) (13.6) 1,342
Director fees 1,240 59 5.0 1,181 239 25.4 942
Expense (income) from real
estate operations 1,247 3,872 (147.5) (2,625) (1,344) 104.9 (1,281)
Amortization of intangibles 2,889 248 9.4 2,641 153 6.1 2,488
Consulting and other fees 4,816 (1,826) (27.5) 6,642 1,440 27.7 5,202
Supplies, telephone and postage 4,956 (331) (6.3) 5,287 585 12.4 4,702
Merger expense 16,239 16,239 - - - - -
Other 8,045 500 6.6 7,545 596 8.6 6,949
--------------------------------------------------------------------------------------
Total $ 96,097 $ 22,038 29.8% $ 74,059 $ 3,921 5.6% $ 70,138
======================================================================================
Noninterest expense increased $22.0 million or 29.8% to $96.1 million
in 2000 from $74.1 million in 1999. This increase included $16.2 million of
expense associated with the merger of Waypoint Financial and York Financial
Corp. on October 17, 2000. Also, in 1999, Waypoint Financial recorded a gain of
$2.6 million on the sale of an apartment complex originally acquired in
foreclosure. This gain was recorded as a reduction in expense from real estate
operations and reduced noninterest expense in 1999 by $2.6 million. Excluding
the merger expense of $16.2 million, Waypoint Financial's noninterest expense
from operations totaled $79.9 million for 2000, which compares to operating
noninterest expense for 1999, excluding the $2.6 million gain, of $76.7 million.
The resulting increase in operating noninterest expense in 2000 was $3.2
million, or 4.2%.
Salaries and benefits expense totaled $39.1 million in 2000, which
represents an increase of $1.4 million or 3.7% from $37.7 million in 1999. This
increase is attributed primarily to normal merit raises incurred with ongoing
salary and benefit administration.
Equipment and occupancy expenses combined increased $2.6 million or
23.8% to $13.7 million in 2000 from $11.0 million in 1999. A substantial portion
of this increase resulted from the acquisition of Waypoint Financial's new
operations center that was opened in June 2000. Also, duplicate administrative
facilities previously used by Harris Financial and York Financial prior to the
merger were not disposed of as of December 31, 2000, which required Waypoint
Financial to continue to incur fixed operating expenses on the buildings. One
administrative center was sold during January 2001, at a nominal loss excluding
previous valuation adjustments and two other administrative centers are
currently being marketed for sale. A total of $1.2 million of estimated market
valuation adjustments associated with these duplicate facilities were recorded
in merger expenses during the fourth quarter of 2000.
41
Advertising and public relations totaled $3.4 million in 2000, which
was essentially unchanged from $3.5 million recorded in 1999.
Deposit insurance decreased substantially with the lowering of
effective premiums paid by institutions such as Waypoint Financial that were in
the lowest risk category assigned by the Federal Deposit Insurance Corporation
("FDIC"). In 2000, Waypoint Financial incurred $.5 million in deposit insurance
expense, which was down $.6 million or 55.1% from $1.2 million in 1999. Waypoint
Financial's average deposit insurance premium rate was .021% for 2000 as
compared to .054% for 1999.
Expense from real estate operations was $1.2 million in 2000, an
increase of $3.8 million from income of $2.6 million in 1999. During 1999,
Waypoint sold an apartment complex acquired in foreclosure in a prior period,
resulting in a gain on sale of $2.6 million. Also, during 2000, Waypoint sold at
net losses a substantial amount of real estate acquired in foreclosure.
Amortization of intangibles totaled $2.9 million in 2000, up $.2
million or 9.4% from $2.7 million in 1999, primarily as a result of increased
amortization of deposit intangibles from the acquisition of a Lebanon branch in
June 1999.
Consulting and other fees decreased $1.8 million or 27.5% to $4.8
million in 2000 from $6.6 million in 1999. During 1999, Waypoint Financial paid
substantial consulting and advisory fees pursuant to merger and acquisition
activity that was not associated with the merger of Harris Financial and York
Financial. These fees were recorded as operating expense as the underlying
merger and acquisition activity did not result in an acquisition.
Supplies, telephone, and postage expense totaled $5.0 million, which
represented a decrease of $.3 million or 6.3% from $5.3 million in 1999. Other
noninterest expense increased $.5 million or 6.6% to $8.0 million in 2000 from
$7.5 million in 1999, primarily as a result of increased write-offs to expense
for uncollectible customer transaction amounts.
Waypoint Financial recorded $16.2 million of expenses associated with
the merger of Waypoint Financial and York Financial on October 17, 2000. The
major components of merger expense included: advisory and professional fees of
$3.8 million, compensation and benefit plan integration expenses of $6.7
million, system conversion and account integration costs of $3.4 million,
charges for duplicate facilities of $1.2 million, and various other expenses
totaling $1.1 million. Management anticipates that noninterest expense savings
associated with the merger will start being realized in the first quarter of
2001.
Income Tax Expense. Income tax expense was $3.9 million in 2000, which
represented an effective tax rate of 26.7% on income before taxes of $14.6
million. In 1999, income tax expense was $9.8 million, which represented an
effective tax rate of 26.0% on income before taxes of $37.8 million. For a more
comprehensive analysis on income tax expense, see the Notes to Consolidated
Financial Statements.
XI. Comparison of Results of Operations in 1999 and 1998
Net interest income before provision for loan losses, on a tax-
equivalent basis, was $103.3 million in 1999, as compared to $95.7 million
in 1998, which represents an increase of $7.6 million or 7.9%. The increase in
net interest income was primarily due to an increase in average balances in
loans and securities, which was partially offset by lowering interest rate
spreads. The net interest margin for 1999 decreased to 2.58% from 2.77% in 1998.
During 1999, there was an increase in net interest income of $11.6
million due to changes in volume and a decrease of $5.6 million due to changes
in rates. The average balance of total interest earning assets in 1999 increased
$550.8 million from 1998 and the average balance of total interest-bearing
liabilities increased $572.0 million from 1998.
During 1999, Waypoint Financial's average loans increased $467.5
million or 25.1% to $2.3 billion. The average balance of securities and other
interest-earning assets increased $83.3 million over the prior year and resulted
primarily from Waypoint's leveraged investing activities. The increase in
interest-earning assets was funded by an increase in average deposits of $165.6
million or 7.4% and an increase in average borrowings of $406.4 million or
39.3%. The primary factor affecting the increase in interest income was the
increased volume of interest-earning assets. Offsetting this, downward repricing
in the asset portfolio resulted in the yield on interest-earning assets
decreasing 17 basis points to 7.20%. The average rate on interest-bearing
liabilities decreased to 4.81% from 4.86% in the prior year. This lower average
rate on liabilities was primarily the result of the decrease in cost of funds
for borrowings and time deposits related to decreased market rates and repricing
of short-term maturities of such liabilities. The net effect caused the interest
rate spread for 1999 to decrease to 2.39% from 2.51% in 1998.
Provision for Loan Losses. In 1999, additions were made to the
allowance for loan losses including provisions of $4.8 million and a transfer of
reserves for unfunded commitments totaling $.6 million. Offsetting these
additions were charge-offs, net of recoveries of $.5 million, totaling $2.2
million. This activity resulted in an allowance for loan losses of $23.1
million, or .95% of net loans at December 31, 1999.
42
In 1998, additions were made to the allowance for loan losses from
provisions of $6.2 million. Offsetting these provisions were charge-offs, net of
recoveries of $.4 million, totaling $2.8 million. This activity resulted in an
allowance for loan losses of $19.9 million, or 1.01% of net loans at December
31, 1998.
Noninterest Income. Noninterest income was $16.8 million in 1999, which
represents a decrease of $8.6 million or 33.7% from noninterest income of $25.4
million recorded in 1999. The primary components of this decrease were a $3.7
million decrease in gains on the sale of securities and a $6.3 million decrease
in gains on the sale of loans. These and other changes in noninterest income
during 1999 are discussed below.
Service charges on deposits increased $2.4 million or 36.7% to $8.9
million in 1999 from $6.5 million in 1998. This increase resulted primarily from
an increased number of checking accounts associated with the continuation of
Waypoint Financial's "high performance checking" program. The major thrust of
this program is the delivery of high-quality, profitable checking deposit
products to a large share of Waypoint Financial's market. Waypoint Financial
also experienced a significant increase in its revenue from automated teller
machine ("ATM") network as activity increased with the increase in account
volume and due to ATM network expansion completed during 1999 and 1998.
Other service charges, commissions and fees includes primarily
commercial banking fees, trust and asset management fees, brokerage fees, and
insurance fees. This income increased $.8 million or 33.1% to $3.2 million in
1999 from $2.4 million in 1998. This increase resulted primarily from
significant expansion of Waypoint Financial's commercial loan and deposit
portfolios and other commercial service activities.
Mortgage banking income, which includes net servicing income and gains
on the sale of mortgage loans, decreased $5.8 million or 71.6% to $2.3 million
in 1999 as compared to $8.1 million in 1998. The primary cause of this decrease
was a decrease of $6.3 million in gains on mortgage loan sales, which resulted
primarily from significant changes in market interest rates for mortgage loans.
The mortgage rate environment in 1998 was primarily characterized by decreasing
rates, which resulted in mortgage refinancing activity significantly above
historical norms. This environment created opportunities to generate gains on
mortgage loan sales totaling $7.0 million in 1998 versus $.7 million of gains on
mortgage loan sales in 1999. A significant portion of 1999 was characterized by
rising mortgage interest rates and diminished loan selling opportunities.
Net servicing income totaled $1.6 million for 1999, which represented
an increase of $.5 million or 41.9 % from $1.1 million for 1998. During 1999,
Waypoint Financial's loan servicing income benefited from an increasing interest
rate environment, which had the effect of decreasing loan prepayment speeds,
thereby increasing servicing fee income and decreasing amortization expense on
loan servicing rights. Offsetting the favorable impact from the rate
environment, the portfolio of loans serviced for others decreased to $1,361.3
million at December 31, 1999 from $1,601.4 million at December 31, 1998. For
additional information on loan servicing fees and loans serviced for others,
refer to the Notes to the Consolidated Financial Statements.
Waypoint Financial recorded a net gain of $2.0 million on sales of
marketable securities during 1999, which was a decrease of $3.7 million or 65.4%
from $5.7 million in 1998. A substantial portion of Waypoint Financial's
marketable securities porfolio consisted of mortgage-backed securities in 1999
and 1998. Accordingly, the market interest rate trends described earlier in
relation to mortgage loan sales in 1998 were also conducive to increasing gains
on sales of mortgage-backed securities in 1998. Also similar to mortgage loan
sales in 1999, as mortgage interest rates increased, gains on the sale of
mortgage-backed securities were diminished.
Other noninterest income decreased $2.2 million or 81.2% to $.5 million
in 1999 from $2.7 million in 1998. This decrease came primarily from Waypoint
Financial's partnership interests in various joint ventures. During 1999, joint
venture activities resulted in a net loss of $1.5 million, which represents a
decrease of $2.7 million from net gains on joint venture activities of $1.2
million in 1998.
Noninterest Expense. Noninterest expense increased $3.9 million or 5.6%
to $74.1 million in 1999 from $70.1 million in 1998. The various components of
noninterest expense are discussed in the following paragraphs.
Salaries and benefits expense totaled $37.7 million in 1999, which
represents an increase of $1.2 million or 3.3% from $36.5 million in 1998. This
increase is attributed primarily to normal merit raises incurred with ongoing
salary and benefit administration.
Equipment and occupancy expenses combined increased $.9 million or 8.9%
to $11.0 million in 1999 from $10.1 million in 1998. A substantial portion of
this increase resulted from increased branch investments and additional
depreciation on proof of deposit, imaging, and enhanced network technology
acquired late in 1998. The branch investments were made to increase branch
network penetration in selected areas of Waypoint Financial's market. The
information technology investments represented an extension of investments begun
in 1997 to overhaul the company's information systems to support full-service
commercial banking activities.
43
Advertising and public relations totaled $3.5 million in 1999, which
represented an increase of $.3 million or 9.5% from $3.2 million in 1998. This
increase came largely from increased media spending to enhance the market
presence of Waypoint Financial's predecessor companies.
Deposit insurance decreased with the lowering of effective premiums
paid by institutions such as Waypoint Financial that were in the lowest risk
category assigned by the FDIC. In 1999, Waypoint incurred $1.1 million in
deposit insurance expense, which was down $.2 million or 13.6% from $1.3 million
in 1999. Waypoint Financial's average deposit insurance premium rate was.054%
for 1999 as compared to .060% for 1998.
Real estate operations generated income of $2.6 million in 1999, an
increase of $1.3 million from income of $1.3 million in 1998. During 1999,
Waypoint sold an apartment complex acquired in foreclosure in a prior period,
resulting in a gain on sale of $2.6 million. Real estate operations include both
operating expenses and income from rental real estate in addition to gains and
losses on the sales of real estate acquired for investment or acquired in
foreclosure. During 1998, Waypoint recorded an unusually high amount of net
gains on the sale of real estate acquired in mortgage loan foreclosures in
comparison to historical norms.
Amortization of intangibles totaled $2.6 million in 1999, a modest
increase from $2.5 million in 1998, with this increase coming from amortization
of deposit intangibles associated with a Lebanon County branch purchased in June
1999.
Consulting and other fees increased $1.4 million or 27.7% to $6.6
million in 1999 from $5.2 million in 1998. As noted previously, Waypoint
Financial paid substantial consulting and advisory fees during 1999 pursuant to
merger and acquisition activity and financial services expansion. These fees
were recorded as operating expense as the underlying merger and acquisition
activity did not result in an acquisition.
Supplies, telephone, and postage expense totaled $5.3 million, which
represented an increase of $.6 million or 12.4% from $4.7 million in 1998. These
expenses increased with the expansion of sales and marketing activities
associated with Waypoint Financial's commercial and retail banking franchises
and the expansion of financial service activities.
Other noninterest expense increased $.6 million or 8.6% to $7.5 million
in 1999 from $6.9 million in 1998. Similar to other general operating expenses,
other expense increased primarily as a result of the expansion of Waypoint
Financial's banking and financial service activities.
Income Tax Expense. Income tax expense was $9.8 million in 1999, which
represented an effective tax rate of 26.0% on income before taxes of $37.8
million. In 1998, income tax expense was $12.3 million, which represented an
effective tax rate of 29.9% on income before taxes of $41.2 million. For a more
comprehensive analysis on income tax expense, see the Notes to Consolidated
Financial Statements.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
Waypoint Financial's most significant form of market risk is interest rate
risk. Interest rate risk and interest rate risk management is discussed in Item
7 of this report, which is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
- ------ ------------------------------------------
The consolidated financial statements of Waypoint Financial are presented
on the following pages.
(remainder of page intentionally left blank)
44
Management Report
Financial Statements
Waypoint Financial Corp. (Waypoint Financial) is responsible for the
preparation, integrity and fair presentation of its published financial
statements as of December 31, 2000, and the year then ended. The financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States, and as such, include amounts, some of which are
based on judgements and estimates of management.
Internal Control Structure Over Financial Reporting
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting presented in conformity with
accounting principles generally accepted in the United States and the Office of
Thrift Supervision instructions for Thrift Financial Reports. The structure
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any internal
control structure, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective internal
control structure can provide only reasonable assurance with respect to
financial statement presentation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Waypoint Financial's internal control structure
over financial reporting presented in conformity with accounting principles
generally accepted in the United States and Thrift Financial Report instructions
as of December 31, 2000. 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 that, as of
December 31, 2000, Waypoint Financial maintained an effective internal control
structure over financial reporting presented in conformity with accounting
principles generally accepted in the United States and Thrift Financial report
instructions.
Compliance With Laws and Regulations
Management is also responsible for compliance with the federal and
state laws and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders designated by the FDIC as safety and
soundness laws and regulations.
Management assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that Waypoint Financial complied, in all significant
respects, with the designated laws and regulations relating to safety and
soundness for the year ended December 31, 2000.
/s/ CHARLES C. PEARSON, JR.
______________________________________________________
Charles C. Pearson, Jr., Co-Chairman of the
Board and Chief Executive Officer
/s/ JAMES H. MOSS
______________________________________________________
James H. Moss, Chief Financial Officer
/s/ JOSEPH S. ARTHUR
______________________________________________________
Joseph S. Arthur, Controller
45
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Waypoint Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Waypoint Financial Corporation (a Pennsylvania corporation) and subsidiaries
as of December 31, 2000 and 1999, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of York Financial Corp., a company acquired during 2000 in
a transaction accounted for as a pooling of interests, as discussed in Note 3
to the Consolidated Financial Statements. Such statements are included in the
consolidated financial statements of Waypoint Financial Corp. and reflect total
assets of 38 percent of the related consolidated total in 1999 and total
interest income of 38 percent and 35 percent of the related consolidated totals
in 1999 and 1998, respectively. These statements were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to amounts included for York Financial Corp., is based solely upon the reports
of other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Waypoint Financial Corp. and subsidiaries as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
Lancaster, Pa.
February 3, 2001
46
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31,
------------------------
2000 1999
------------ -----------
(In thousands)
Assets
- ------
Cash and cash equivalents $ 99,837 $ 110,939
Marketable securities held-to-maturity 22,709 22,689
Marketable securities available-for-sale 1,854,872 1,625,398
Loans receivable, net 2,591,527 2,439,194
Loans held for sale, net 18,415 6,061
Loan servicing rights 6,376 12,738
Investment in real estate and other joint ventures 14,276 13,723
Premises and equipment 49,824 45,080
Accrued interest receivable 30,505 28,642
Intangible assets 16,356 17,619
Income taxes receivable 2,335 1,086
Deferred tax asset, net 7,914 19,413
Other assets 43,240 24,338
------------ -----------
Total assets $ 4,758,186 $ 4,366,920
============ ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits $ 2,625,720 $ 2,544,598
Other borrowings 1,625,329 1,488,390
Escrow 6,461 8,813
Accrued interest payable 21,927 11,825
Postretirement benefit obligation 2,712 3,806
Other liabilities 30,469 30,286
----------- -----------
Total liabilities 4,312,618 4,087,718
----------- -----------
Commitments and Contingencies
Preferred stock, 10,000,000 shares authorized but
unissued Common stock, $ .01 par value, authorized
100,000,000 shares, 39,018,962 shares issued and
38,737,325 outstanding at December 31, 2000, 38,729,151
shares issued and 38,314,825 shares outstanding at
December 31,1999 391 388
Paid in capital 295,008 137,392
Retained earnings 189,745 187,585
Accumulated other comprehensive income (16,327) (37,866)
Employee stock ownership plan (16,365) (826)
Recognition and retention plans (427) (456)
Treasury stock, 281,637 shares at December 31, 2000
and 414,326 shares at December 31, 1999 (6,457) (7,015)
----------- -----------
Total stockholders' equity 445,568 279,202
----------- -----------
Total liabilities and stockholders' equity $ 4,758,186 $ 4,366,920
=========== ===========
See accompanying notes to consolidated financial statements.
47
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
-------------------------------------------------
2000 1999 1998
--------- --------- ---------
(In thousands, except share data)
Interest Income:
Loans receivable:
Residential mortgage loans $ 101,797 $ 104,206 $ 100,247
Commercial loans 50,295 34,085 18,698
Consumer and other loans 48,470 40,147 32,307
Taxable investments 54,243 48,263 43,164
Taxfree investments 3,619 5,395 6,232
Dividends on investments 9,499 9,313 9,666
Mortgage-backed securities 56,447 43,066 40,778
Money market investments 188 106 84
--------- --------- ---------
Total interest income 324,558 284,581 251,176
--------- --------- ---------
Interest Expense:
Deposits 125,052 105,316 100,529
Borrowed funds 99,179 79,302 58,357
Escrow 88 90 90
--------- --------- ---------
Total interest expense 224,319 184,708 158,976
--------- --------- ---------
Net interest income 100,239 99,873 92,200
Provision for loan losses 5,070 4,840 6,172
--------- --------- ---------
Net interest income after provision for loan losses 95,169 95,033 86,028
--------- --------- ---------
Noninterest Income:
Service charges on deposits 9,760 8,887 6,500
Other service charges, commissions, fees 3,755 3,187 2,395
Loan servicing income, net 1,192 1,581 1,114
(Loss) gain on securities (1,792) 1,968 5,692
Gain on sales of loans 161 677 6,985
Other 2,452 503 2,673
--------- --------- ---------
Total noninterest income 15,528 16,803 25,359
--------- --------- ---------
Noninterest Expense:
Salaries and benefits 39,064 37,679 36,476
Equipment expense 7,294 5,942 5,209
Occupancy expense 6,374 5,098 4,905
Advertising and public relations 3,412 3,509 3,204
FDIC insurance 521 1,160 1,342
Director fees 1,240 1,181 942
Expense (income) from real estate operations 1,247 (2,625) (1,281)
Amortization of intangibles 2,889 2,641 2,488
Consulting and other fees 4,816 6,642 5,202
Supplies, telephone and postage 4,956 5,287 4,702
Merger-related expenses 16,239 - -
Other 8,045 7,545 6,949
--------- --------- ---------
Total noninterest expense 96,097 74,059 70,138
--------- --------- ---------
Income before income taxes 14,600 37,777 41,249
Income tax expense 3,905 9,805 12,350
--------- --------- ---------
Net Income $ 10,695 $ 27,972 $ 28,899
========= ========= =========
Basic earnings per share $ 0.28 $ 0.73 $ 0.75
========= ========= =========
Diluted earnings per share $ 0.28 $ 0.72 $ 0.74
========= ========= =========
See accompanying notes to consolidated financial statements.
48
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Accumulated Employee Recognition
Comprehensive Stock and Compre-
Common Paid in Retained Income Ownership Retention Treasury hensive
Stock Capital Earnings (Loss) Plan Plan(RRP) Stock Total Income
----------------------------------------------------------------------------------------------
(In thousands)
Balance at January 1, 1998 $ 370 $ 118,800 $159,929 $ 11,050 $ (1,324) $(566) $ - $ 288,259
Net income 28,899 28,899 $ 28,899
Dividends paid at $.32 per share (6,782) (6,782)
Exercised stock options 6 2,556 2,562
Unrealized losses on securities (6,882) (6,882) (6,882)
--------
Comprehensive income $ 22,017
========
ESOP stock committed for release 702 266 968
Earned portion of RRP 306 110 416
Tax benefit of RRP shares
awarded and exercised options 1,060 1,060
Treasury stock purchased
(313,810 shares) (5,970) (5,970)
Common stock dividends 7 8,607 (8,632) (18)
Retirement of common stock (5) (4,392) (4,397)
Common stock issued under
dividend reinvestment plan 2 2,263 2,265
-----------------------------------------------------------------------------------
Balance at December 31, 1998 380 129,902 173,414 4,168 (1,058) (456) (5,970) 300,380
Net income 27,972 27,972 $ 27,972
Dividends paid at $.34 per share (7,002) (7,002)
Exercised stock options 1 397 398
Unrealized losses on securities (42,034) (42,034) (42,034)
--------
Comprehensive income $(14,062)
========
ESOP stock committed for release 307 232 539
Tax benefit exercised options 156 156
Treasury stock purchased
(177,918 shares) (1,729) (1,729)
Common stock dividends 7 6,777 (6,799) (15)
Retirement of common stock (2) (1,664) (1,666)
Common stock issued under
dividend reinvestment plan 2 1,517 684 2,203
-------------------------------------------------------------------------------------
Balance at December 31, 1999 388 137,392 187,585 (37,866) (826) (456) (7,015) 279,202
Pooling adjustment to conform
accounting periods (3) (548) (2,059) 1,367 (132) 617 (758)
Net income 10,695 10,695 $ 10,695
Dividends paid at $.33 per share (7,471) (7,471)
Exercised stock options 6 304 310
Unrealized gains(losses) on securities 20,172 20,172 20,172
--------
Comprehensive income $ 30,867
========
ESOP stock committed for release 171 233 404
Earned portion of RRP 16 29 45
Tax benefit of RRP shares
awarded and exercised options 9 9
Treasury stock purchased
(147,250 shares) (1,301) (1,301)
Common stock issued under
dividend reinvestment plan 398 1,242 1,640
Stock issued for compensation (112) (112)
Stock issuance on conversion
(net of costs of $10,887,000) 157,378 995 (15,640) 142,733
-----------------------------------------------------------------------------------
Balance at December 31, 2000 $ 391 $295,008 $ 189,745 $ (16,327) $(16,365) $ (427) $(6,457) $445,568
===================================================================================
See accompanying notes to consolidated financial statements.
49
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
---------------------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net income $ 10,695 $ 27,972 $ 28,899
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 5,070 4,840 6,172
Net depreciation, amortization and accretion 5,822 6,771 9,673
Loans originated for sale (192,668) (76,282) (325,266)
Proceeds from sales of loans originated for sale 180,879 73,798 132,093
Origination of loan servicing rights (1,734) (2,444) (3,862)
Proceeds from sales of trading Securities 1,200 31,327 175,963
Net loss (gain) on sales of interest-earning assets 1,620 (2,224) (10,398)
Loss (gain) on the sale of foreclosed real estate 832 (2,594) 357
Realized loss (gain) on trading securities 11 (421) (2,240)
Loss (income) from joint ventures 1,251 1,496 (1,428)
Increase in accrued interest receivable (2,751) (4,538) (2,478)
Increase in accrued interest payable 10,129 3,914 3,037
Amortization of intangibles 2,889 2,640 2,487
Earned ESOP shares 404 470 907
Earned RRP shares 54 - 416
(Provision) benefit for deferred income taxes (3,799) 3,035 2,536
(Increase) decrease in income taxes receivable (713) 2,557 3,255
Other, net (20,155) 18,495 (29,117)
--------- --------- ---------
Net cash (used in) provided by operating activities (964) 88,812 (8,994)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturities, sales, and principal reductions of
marketable securities 405,072 644,205 1,079,518
Purchase of marketable securities (518,705) (669,815) (1,353,884)
Loans sold 71,526 137,374 1,669
Loan originations less principal payments on loans (331,874) (689,242) (194,522)
Loan servicing rights sold 6,425 2,119 -
Investments in real estate held for investment and other joint ventures (3,544) (3,930) (1,347)
Proceeds from payments on real estate and premises and equipment 8,650 18,841 8,711
Purchases of premises and equipment, net (14,540) (7,665) (8,285)
Branch purchase - 22,054 -
Acquisition of subsidiary net assets, net of cash acquired (1,165) - -
--------- --------- ---------
Net cash used in investing activities (378,155) (546,059) (468,140)
========= ========= =========
50
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
Years Ended December 31,
2000 1999 1998
--------- --------- ---------
(in thousands)
Cash flows from financing activities:
Net increase in deposits $ 148,506 $ 186,693 $ 108,616
Net increase in other borrowings 88,800 305,174 301,377
Net decrease in escrow (426) (4,395) (646)
Proceeds from issuance of common stock 158,373 - -
Dividend reinvestment plan 398 1,519 2,265
Cash dividends (7,471) (7,017) (6,800)
Repurchase and retirement of stock - (1,666) (4,397)
Payments to acquire treasury stock (1,301) (1,729) (5,970)
Issuance of treasury stock 1,242 684 -
Establish ESOP (15,640) - -
Proceeds from the exercise of stock options 310 411 2,188
--------- --------- ---------
Net cash provided by financing operations 372,791 479,674 396,633
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (6,328) 22,427 (80,501)
Pooling Adjustment to conform accounting years (4,774) - -
Cash and cash equivalents at beginning of period 110,939 88,512 169,013
--------- --------- ---------
Cash and cash equivalents at end of period $ 99,837 $ 110,939 $ 88,512
========= ========= =========
Supplemental disclosures:
Cash paid during the years for:
Interest on deposits, advances and other borrowings
(includes interest credited to deposit accounts) $ 215,444 $ 180,770 $ 155,881
Income taxes 7,579 3,657 6,396
Non-cash investing activities:
Transfers from loans to foreclosed real estate $ 3,422 $ 3,905 $ 6,500
Exchange of loans for mortgage-backed securities 84,168 114,206 241,282
Exercise of stock options - - 374
Transfers from investment in joint ventures - - 2,205
Acquisitions:
Fair value of assets acquired $ 1,857 $ 11,870 $ -
Purchase intangible assets originated 1,627 3,349 -
Fair value of liabilities assumed 1,224 37,273 -
See accompanying notes to consolidated financial statements.
51
WAYPOINT FINANCIAL CORP. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(All dollar amounts presented in the tables are in thousands, except share
amounts)
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Waypoint Financial Corp. ("Waypoint
Financial" or "the Company") and its subsidiaries conform to generally accepted
accounting principles and to general practices within the banking industry. The
following is a description of the more significant of those policies.
(a) Basis of Financial Statements
The Consolidated Financial Statements include the accounts of Waypoint Financial
and its wholly owned subsidiaries Waypoint Bank, Waypoint Financial Investment
Corporation, New Service Corporation, Waypoint Service Corporation, Waypoint
Brokerage Services, Inc., Waypoint Insurance Services, Inc., Owen Insurance
Inc., Advanced Real Estate Associates, and Lenders Support Group Inc. Waypoint
Bank is the sole owner of the following subsidiaries: Harris Delaware
Corporation, York Financial Investment Corporation, H.S. Service Corporation,
First Harrisburg Service Corporation, and C.B.L. Service Corporation. All
significant intercompany transactions and balances are eliminated in
consolidation.
Waypoint Bank is primarily engaged in attracting deposits from the general
public and investing deposit funds primarily in commercial loans, residential
real estate loans, consumer loans and marketable securities. Waypoint Bank also
provides commercial services, sells non-deposit investment products, provides
trust and asset management services, and sells insurance products.
Waypoint Financial and Waypoint Bank are subject to the regulations of the
Office of Thrift Supervision ("OTS"), Federal Deposit Insurance Corporation
("FDIC"), the Federal Reserve Bank ("FRB"), the Federal Home Loan Bank ("FHLB"),
and the Securities Exchange Commission ("SEC") and may undergo periodic
examinations by these regulatory authorities.
(b) Use of Estimates
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan losses
and foreclosed real estate, management obtains independent appraisals for
significant properties.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, Waypoint Financial defines cash
equivalents as demand deposits with other financial institutions.
(d) Marketable Securities
Marketable securities are classified and accounted for as follows:
. Debt securities that Waypoint Financial has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
. Debt and equity securities not classified as held-to-maturity are
classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a component of comprehensive income.
Premiums and discounts are amortized or accreted on the related securities using
a method that approximates the interest method. Gains or losses upon sale are
determined using the specific identification method.
Federal law requires a member institution of the Federal Home Loan Bank ("FHLB")
system to hold stock of its district FHLB according to a predetermined formula.
This stock is recorded at cost and may be pledged to secure FHLB advances.
52
(e) Loans Receivable
Loans receivable are stated at unpaid principal balances, adjusted for the
allowance for loan losses, net deferred loan origination fees, unearned
discounts and premiums, and dealer reserves.
Recognition of interest income on loans is accrued and credited to interest
income based upon principal amounts outstanding. Discounts and premiums on
mortgage loans are amortized to income using a method that approximates the
interest method over the remaining period to contractual maturity. Discounts on
consumer loans are recognized over the lives of the loans using methods that
approximate the interest method.
Loan fees and certain direct loan origination costs are deferred and the net fee
or cost is recognized as an adjustment to interest income using the interest
method over the contractual life of the loans. Calculation of the interest
method is done on a loan-by-loan basis. The amortization of deferred fees and
costs is discontinued on non-performing loans.
Waypoint Financial accounts for loans in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
as amended by Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures".
Management considers current information and events regarding the borrowers'
ability to repay their obligations and considers a loan to be impaired when it
is probable that Waypoint Financial will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In evaluating whether
a loan is impaired, management considers not only the amount that Waypoint
Financial expects to collect but also the timing of collection. Generally, if a
delay in payment is insignificant (e.g., less than 30 days), a loan is not
deemed to be impaired.
When a loan is considered to be impaired, the amount of impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, at the loan's market price or fair value of
the collateral if the loan is collateral dependent. The majority of loans deemed
to be impaired by management are collateral dependent. Waypoint Financial
evaluates smaller balance, homogeneous loans (e.g., primarily consumer and
residential mortgages) for impairment on a portfolio basis. All other loans are
evaluated individually for impairment.
Interest income on impaired loans is generally recorded as payments are
collected. Interest on impaired loans that are contractually past due ninety
days and over is reserved in accordance with regulatory requirements. Loans are
returned to accrual status when the collectibility of past due principal and
interest is reasonably assured.
The allowance for loan losses represents management's best estimate of probable
losses at the end of the respective reporting periods. An analysis of the
reserve is prepared on a quarterly basis. The reserve required for commercial
loans is developed through an analysis of each loan within the portfolio for
evidence of a loss confirming event. Such events include delinquencies, loss
activity, decreases in cash flow or other adverse economic or demographic
events. Reserves for mortgage and consumer loans are determined by applying
reserve factors to pools of loans with similar risk attributes. These factors
are developed by considering charge-off history, delinquencies and credit
concentrations. Reserve factors are modified as specific events warrant.
Management believes that the allowance for losses on loans is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions and asset mix.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Waypoint Financial's allowance for
losses on loans. Such agencies may require Waypoint Financial to recognize
additions or deletions to the allowance based on their judgments of information
available to them at the time of their examination.
(f) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or market, net of deferred fees relating to the
specific loans. Gains and losses on the sale of loans are determined using the
specific identification method.
(g) Loan Servicing
Waypoint Financial follows the provisions of Statement of Financial Accounting
Standards No. 125, " Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities". When capitalizing mortgage servicing rights,
Waypoint Financial allocates the total cost of the mortgage loans (the recorded
investment in the mortgage loans including net deferred fees or costs and any
purchase premium or discount) to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
Such fair value is primarily based on observable market prices. Mortgage
servicing rights (including purchased mortgage servicing) are amortized in
proportion to, and over the period of, estimated net servicing revenue based on
management's best estimate of remaining loan lives.
53
Waypoint Financial measures the impairment of servicing rights based on the
difference between the carrying amount of the servicing rights and their current
fair value. Impairment of servicing rights is recognized through a valuation
allowance. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value. For the purpose
of evaluating and measuring impairment of capitalized mortgage servicing rights,
Waypoint Financial stratifies those rights based on the predominant risk
characteristics of the underlying loans, including loan type (for example,
conventional or government guaranteed and adjustable rate or fixed rate mortgage
loans) and interest rate. Valuation techniques for measuring fair value
incorporate assumptions that market participants use in estimating future
servicing income and expense, including assumptions about prepayment, default
and interest rates.
(h) Real Estate Held for Investment and Foreclosed Real Estate
Waypoint Financial follows the provisions of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). SFAS 121 provides guidance for recognition
and measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill related to both assets to be held and used and assets
to be disposed of. Real estate properties acquired through loan foreclosure are
initially recorded at the lower of the carrying or fair value less estimated
costs to sell at the date of foreclosure. At the time of foreclosure, the
excess, if any, of the carrying value over the estimated fair value of the
property less estimated costs to sell is charged to the allowance for loan
losses. Real estate properties held for investment are carried at the lower of
cost, including cost of improvements and amenities incurred subsequent to
acquisition, or estimated net realizable value. Costs relating to development
and improvement of property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management on both real estate held for
investment and foreclosed real estate. An allowance for losses is established by
a charge to operations if the carrying value of real estate held for investment
exceeds its estimated net realizable value, or the carrying value of foreclosed
real estate exceeds its estimated fair value.
(i) Premises and Equipment
Buildings, leasehold improvements, furniture, fixtures and equipment are carried
at cost, less accumulated depreciation and amortization. Buildings, furniture,
fixtures and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. The cost of leasehold improvements is
being amortized using the straight-line method over the lesser of the estimated
useful lives or the terms of the related leases.
(j) Intangible Assets
Deposit premiums are amortized using the straight-line method over the estimated
benefit period. The amortization period for deposit premiums is subject to
periodic review for reasonableness by management.
(k) Goodwill
Goodwill results when, under the purchase method of accounting for acquisitions,
the amount paid for the acquired entity is greater than the fair value of the
net assets acquired. Waypoint Financial amortizes goodwill using the straight-
line method over the estimated useful life of the assets acquired. The
amortization period for goodwill is subject to periodic review by management.
Waypoint Financial reviews the carrying value of intangible assets and goodwill
for impairment whenever events and circumstances indicate that the carrying
amount may not be recoverable.
(l) Income Taxes
Waypoint Financial accounts for income taxes using the liability method. The
objective of the liability method is to establish deferred tax assets and
liabilities for temporary differences between the financial reporting and tax
basis of Waypoint Financial's assets and liabilities based on enacted tax rates
expected to be in effect when such amounts are realized or settled. Waypoint
Financial files a consolidated federal income tax return.
(m) Derivative Financial Instruments
Waypoint Financial utilizes derivative financial instruments to hedge its
exposure to fluctuations in market interest rates. This exposure includes the
impact of interest rates on cash flows from interest-bearing assets and
liabilities, as well as the impact of interest rates on the market value of
certain loans held-for-sale. The Bank does not utilize derivative financial
instruments for trading purposes.
To qualify for hedge accounting, the contracts must meet defined correlation and
effectiveness criteria, be designated as hedges and result in cash flows and
financial statement effects that substantially offset those of the position
being hedged. Amounts receivable or payable under derivative financial
instrument contracts, when recognized, are reported on the consolidated balance
sheet. Gains and losses related to the fair value of the hedge contracts are
recorded as an adjustment to the value of the hedged item. The gains and losses
on the hedge contracts are recognized in the income statement upon sale of the
hedged item.
In relation to interest rate swaps, the differentials to be received or paid are
recognized in income over the life of the contract as an adjustment to interest
expense.
(n) Earnings Per Share
54
Waypoint Financial follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires earnings
per share to be reported as basic earnings per share and diluted earnings per
share. Basic earnings per share is based on the total weighted average shares
outstanding for a given period. Diluted earnings per share is based on total
weighted average shares outstanding, and also assumes the exercise or conversion
of all potentially dilutive instruments currently outstanding. The computations
for basic and diluted earnings per share for the years ended December 31 are as
follows:
2000 1999 1998
----------------------------------------------------
Average shares of common stock outstanding:
Basic 38,111,715 38,236,594 38,546,511
Effect of stock options 266,523 380,389 673,672
---------- ---------- ----------
Diluted 38,378,238 38,616,983 39,220,183
========== ========== ==========
The following anti-dilutive options were excluded from the computation of
diluted earnings per share because the exercise prices were greater than the
average market price of the common shares during the period:
# of dilutive Weighted Average Expiration
Year Ended options Exercise Price through
------------------------------------------------------------------------------------------
December 31, 2000 454,759 $15.61 October 2, 2010
December 31, 1999 273,117 $26.41 October 9, 2009
December 31, 1998 285,387 $34.56 March 17, 2009
(o) Dividends
Waypoint Bank may not pay dividends on or repurchase any of its common stock if
the effect thereof would reduce net worth below the level of adequate
capitalization as defined by the FDIC and the Office of Thrift Supervision
(OTS).
(p) Stock-Based Compensation
Waypoint Financial follows the intrinsic value method to account for
compensation expense related to the award of stock options and to furnish the
pro forma disclosures required under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-based Compensation".
(q) Comprehensive Income
On January 1, 1998, Waypoint Financial adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This statement
established standards for reporting and display of comprehensive income and its
components. SFAS 130 requires unrealized gains or losses on Waypoint Financial's
marketable securities to be included in other comprehensive income. In
accordance with SFAS 130, Waypoint Financial presents comprehensive income
within the consolidated statements of stockholders' equity.
Waypoint Financial recorded reclassification adjustments in net income of
$1,158,000, $547,000, and ($1,145,000) in 2000, 1999, and 1998, respectively,
for losses (gains) realized on securities available for sale. These adjustments
included tax expense (benefit) of ($623,000), ($371,000), and $709,000 in 2000,
1999, and 1998, respectively.
(r) Business Segments
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", was effective January 1, 1998. This
Statement establishes standards for the way public enterprises report
information about operating segments in the financial statements. Based on the
guidance provided by the Statement, Waypoint Financial does not have more than
one operating segment that would require additional disclosures in accordance
with the Statement.
(s) Recently Issued Accounting Guidance
In June,1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (Statement 133). This statement expanded the previous
definition of derivatives to include certain additional transactions. Entities
are required to record derivatives at their fair values and recognize any
changes in fair value in current period earnings, unless specific hedge criteria
are met. Statement 133, as amended by Statement 137 and 138, is effective for
years beginning after June 15, 2000. Waypoint Financial adopted Statement 133 on
January 1, 2001 and there was no material impact on its financial condition,
comprehensive income or net income
(2) Regulatory Structure
Waypoint Financial's primary regulators are the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC").
55
Waypoint Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on Waypoint
Financial's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Waypoint Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. Waypoint Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Waypoint Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined by the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). At December 31, 2000, Waypoint Bank met all capital
adequacy requirements to which it is subject.
Waypoint Bank's actual capital amounts and ratios are presented in the following
table:
Well Capitalized
Under Prompt Corrective
For Capital Action
Actual Adequacy Purposes Rules
----------------------------------------------------------------------------------
Waypoint Bank Minimum Required Minimum Required
As of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital/Risk Weighted Assets $407,016 13.9% $233,551 8.0% $291,939 10.0%
Tier 1 Capital/Risk Weighted Assets 382,599 13.1% 116,776 4.0% 175,163 6.0%
Tier 1 Capital/Average Assets 382,599 7.9% 193,393 4.0% 241,741 5.0%
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital/Risk Weighted Assets $321,898 12.3% $209,598 8.0% $261,998 10.0%
Tier 1 Capital/Risk Weighted Assets 297,832 11.4% 104,799 4.0% 157,199 6.0%
Tier 1 Capital/Average Assets 297,832 6.9% 172,961 4.0% 216,201 5.0%
A reconciliation (unaudited) of Waypoint Bank's regulatory capital to capital
using accounting principles generally accepted in the United States (GAAP) as of
December 31, 2000 follows:
Tangible Capital Core Capital Risk-based Capital
GAAP capital at Waypoint Financial $ 445,568 $ 445,568 $ 445,568
Capital attributed to affiliates (66,723) (66,723) (66,723)
-------------------------------------------------------
GAAP capital at Waypoint Bank 378,845 378,845 378,845
Capital adjustments:
Unrealized losses, net of taxes, on securities available for sale 18,493 18,493 18,493
Allowance for loan losses - - 22,586
Certain Intangible assets (14,739) (14,739) (14,739)
Allowable unrealized gains, net of taxes, on equity securities
available for sale - - 1,831
-------------------------------------------------------
Regulatory capital at Waypoint Bank $ 382,599 $ 382,599 $ 407,016
=======================================================
56
Waypoint Bank may dividend up to amounts allowed by OTS regulation.
(3) Completion of Stock Conversion, Stock Offering, and Acquisition by Merger
On October 17, 2000, Harris Financial, MHC, the parent mutual holding company
for Harris Financial, Inc. and owner of 76% of its common stock, completed a
mutual-to-stock conversion. As part of this conversion, Harris Financial, MHC
ceased to exist. Immediately following the conversion, Waypoint Financial
became the successor to Harris Financial, Inc. and Waypoint Bank became the
successor to Harris Savings Bank. As a result of these transactions, Waypoint
Bank is the wholly owned subsidiary of Waypoint Financial and 100% of
Waypoint Financial is publicly owned.
Also on October 17, 2000, Waypoint Financial completed a stock offering and an
acquisition by merger of York Financial Corp., the parent holding company of
York Federal Savings and Loan Association. As a result of its subscription,
community offering, and public offering, Waypoint Financial sold 16,550,000
shares at $10.00 per share with net proceeds totaling $155.6 million (including
approximately $15.6 million of proceeds from the sale of shares to Waypoint
Bank's employee stock ownership plan). Waypoint Financial issued 6,191,274
shares to former stockholders of Harris Financial, Inc. as part of the
conversion in accordance with a ratio of .7667 Waypoint Financial shares to each
Harris Financial share. Waypoint Financial also issued 15,666,264 shares to
former stockholders of York Financial to complete its acquisition by merger in
accordance with a ratio of 1.55 shares of Waypoint Financial to each York
Financial share. York Financial held total assets of $1.7 billion as of
September 30, 2000. In addition, Waypoint Financial's underwriters in the public
offering exercised 300,000 shares of their overallotment option, resulting in
net proceeds of $2.8 million. On October 30, 2000, York Federal Savings and Loan
Association was merged into Waypoint Bank.
As a result of conversion, offering, and merger transactions, Waypoint
Financial survives as a federally chartered unitary savings and loan
holding company regulated by the OTS. Waypoint Bank survives as a federally
chartered savings bank and is also regulated by the OTS.
The merger of Waypoint Financial and York Financial has been accounted for under
the pooling-of-interests method of accounting and, accordingly, Waypoint
Financial's historical consolidated financial statements have been restated to
include the accounts and results of operations of York Financial.
The results of operations previously reported by the separate entities and the
combined amounts presented in the accompanying consolidated financial statements
are presented below:
Nine Months Ended Year Ended Year Ended
September 30, 2000 December 31, 1999 December 31, 1998
(unaudited)
Net interest income (in thousands)
Harris Financial $ 46,909 $ 61,438 $ 56,862
York Financial 26,639 38,435 35,338
--------------------------------------------------------------
Combined $ 73,548 $ 99,873 $ 92,200
==============================================================
Net income (in thousands)
Harris Financial $ 13,644 $ 18,683 $ 19,229
York Financial 6,695 9,289 9,670
--------------------------------------------------------------
Combined $ 20,339 $ 27,972 $ 28,899
==============================================================
Prior to the combination, York Financial's fiscal year ended on June 30. York
Financial's financial statements as of and for the fiscal years ended June 30,
2000 and June 30, 1999 were combined with Waypoint Financial's financial
statements as of and for the year ended December 31, 1999 and December 31, 1998,
respectively.
An adjustment has been made to stockholder's equity in the year ended December
31, 2000 to eliminate the effect of including York Financial's results of
operations for the six months ended June 30, 2000 in Waypoint Financial's
consolidated financial statements for the years ended December 31, 2000 and
1999. There were no significant intercompany transactions between Waypoint
Financial and York Financial prior to the combination.
57
Waypoint Financial recorded $16,239,000 of expenses ($12,056,000 after-tax)
associated with the merger of Waypoint Financial and York Financial on October
17, 2000. The major components of merger expense included: advisory and
professional fees of $3,806,000, compensation and benefit plan integration
expenses of $6,655,000, system conversion and account integration costs of
$3,355,000, charges for duplicate facilities of $1,203,000, and various other
expenses totaling $1,220,000. At December 31, 2000, Waypoint Financial's reserve
for merger expenses, which consisted primarily of employee severance and benefit
plan liabilities, totaled $3,456,000 and is expected to be paid in 2001.
The following table presents selected (unaudited) financial information for York
Financial Corp. for the six months ended June 30, 2000:
For the Six Months
Ended
June 30, 2000
------------------------
Selected Operating Data:
Interest income 57,958
Interest expense 38,884
Provision for loan losses 510
------------------------
Net interest income after provision for loan losses 18,564
------------------------
Noninterest income 3,221
Noninterest expense 16,399
Provision for income taxes 719
------------------------
Net income 4,667
========================
Selected shareholders' equity data:
Shareholders' equity at December 31, 1999 109,120
Net income 4,667
Cash dividends paid (2,608)
Net change in unrealized losses on securities available for sale (1,367)
Activity associated with stock option and ESOP plans 258
Stock dividends --
Activity associated with treasury stock (1,301)
Dividend reinvestment plan 1,109
------------------------
Shareholders' equity at June 30, 2000 109,878
========================
Selected cash flow data:
Net income 4,667
Net adjustments to reconcile net income to net cash provided
by operating activities (14,151)
------------------------
Net cash provided by operations (9,484)
Net cash flows from investing activities (2,345)
Net cash flows from financing activities 16,603
------------------------
Net change in cash and cash equivalents 4,774
Cash and cash equivalents at December 31, 1999 32,552
------------------------
Cash and cash equivalents at June 30, 2000 37,326
========================
(4) Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for held-to-maturity and available-for-sale securities by
major security type were as follows:
58
As of December 31, 2000
-----------------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-----------------------------------------------------------------------
Held to Maturity:
U.S. Government and agencies $ 3,500 $ 13 $ - $ 3,513
Corporate bonds 19,054 - (990) 18,064
GNMA Mortgage-backed securities 155 8 - 163
-----------------------------------------------------------------------
Total securities held to maturity $ 22,709 $ 21 $ (990) $ 21,740
=======================================================================
Available for sale:
U.S. Government and agencies $ 491,998 $ 506 $ (10,074) $ 482,430
Corporate bonds 63,609 - (4,952) 58,657
Municipal securities 69,119 2,622 (280) 71,461
FHLB stock 76,540 - - 76,540
Equity securities 74,351 4,871 (1,047) 78,175
Mortgage-backed securities:
Agency PC's & CMO's 475,735 685 (12,272) 464,148
Private issue CMO's 629,795 1,450 (7,784) 623,461
-----------------------------------------------------------------------
Total mortgage-backed securities 1,105,530 2,135 (20,056) 1,087,609
-----------------------------------------------------------------------
Total securities available for sale $ 1,881,147 $ 10,134 $ (36,409) $ 1,854,872
=======================================================================
As of December 31, 1999
-----------------------------------------------------------------------
Held to Maturity:
U.S. Government and agencies $ 3,500 $ - $ (79) $ 3,421
Corporate bonds 19,018 58 (570) 18,506
GNMA Mortgage-backed securities 171 7 - 178
-----------------------------------------------------------------------
Total securities held to maturity $ 22,689 $ 65 $ (649) $ 22,105
=======================================================================
Available for sale:
U.S. Government and agencies $ 535,470 15 (30,755) $ 504,730
Corporate bonds 63,352 - (3,526) 59,826
Municipal securities 63,980 958 (1,446) 63,492
FHLB stock 66,690 - - 66,690
Equity securities 85,885 5,741 (3,996) 87,630
Mortgage-backed securities:
Agency PC's & CMO's 398,356 1,101 (9,131) 390,326
Private issue CMO's 473,170 1,043 (21,509) 452,704
-----------------------------------------------------------------------
Total mortgage-backed securities 871,526 2,144 (30,640) 843,030
-----------------------------------------------------------------------
Total securities available for sale $ 1,686,903 $ 8,858 $ (70,363) $ 1,625,398
=======================================================================
The following table presents Waypoint Financial's marketable securities as of
December 31, 2000 stratified by maturity as indicated:
59
Amortized Fair
Cost Value
---------------------------
Held to Maturity:
Due in one year or less $ - $ -
Due after one through five years 8,407 8,251
Due after five through ten years - -
Due after ten years 14,147 13,326
Mortgage-backed securities 155 163
---------------------------
Total securities held to maturity $ 22,709 $ 21,740
===========================
Available for sale:
Due in one year or less $ 1,620 $ 1,621
Due after one through five years 111,952 111,971
Due after five through ten years 299,473 294,720
Due after ten years 211,681 204,236
Equity 150,891 154,715
Mortgage-backed securities 1,105,530 1,087,609
---------------------------
Total securities available for sale $ 1,881,147 $ 1,854,872
===========================
Marketable securities having a market value of $40,883,000 and $42,675,000 at
December 31, 2000 and 1999, respectively, were pledged to secure public
deposits. Marketable securities having a market value of $508,902,000 and
$622,862,000 were pledged as collateral for FHLB advances at December 31, 2000
and 1999, respectively.
Activity from the sale of marketable securities is as follows:
2000 1999 1998
----------------------------------------------
Proceeds $ 360,755 $ 478,270 $ 708,160
==============================================
Gross realized gains $ 7,439 $ 5,156 $ 6,213
Gross realized losses (9,231) (3,188) (521)
----------------------------------------------
Net realized (Loss) gain $ (1,792) $ 1,968 $ 5,692
==============================================
Included in the net realized loss for 2000 was a valuation adjustment for other
than temporary impairment on a marketable security of $1,842,000.
(5) Loans Receivable
Loans receivable at December 31 are summarized as follows:
60
2000 1999
----------------- --------------
Residential mortgage loans (principally conventional):
Secured by 1-4 family residences $ 1,274,684 $ 1,270,998
Construction (net of undistributed
portion of $67,073 in 2000 and
$94,137 in 1999) 90,712 103,279
----------------- --------------
1,365,396 1,374,277
Less:
Unearned premium 210 296
Net deferred loan origination fees 4,491 4,944
----------------- --------------
Total residential mortgage loans 1,360,695 1,369,037
----------------- --------------
Commercial loans:
Commercial 642,802 544,206
Less:
Net deferred loan origination fees 923 933
----------------- --------------
Total commercial loans 641,879 543,273
----------------- --------------
Consumer and other loans:
Manufactured housing 90,226 80,164
Home equity and second mortgage 326,024 231,290
Indirect automobile 117,377 98,768
Other 55,939 119,625
----------------- --------------
589,566 529,847
Plus:
Net deferred loan origination fees (1,503) (534)
Dealer reserve 23,476 20,698
----------------- --------------
Total consumer and other loans 611,539 550,011
----------------- --------------
Less:
Allowance for loan losses 22,586 23,127
----------------- --------------
Net loans $ 2,591,527 $ 2,439,194
================= ==============
Loans having a carrying value of $1,388,531,000 were pledged as collateral for
FHLB advances at December 31, 2000.
Activity in the allowance for loan loss is summarized as follows for the years
ended December 31:
2000 1999 1998
--------------------------------------------
Balance at the beginning of the year $ 23,127 $ 19,891 $ 17,002
Pooling adjustment to conform accounting periods 234 - -
Provision charge to income 5,070 4,840 6,172
Less: Portion of provision related
to unfunded commitments - 617 (503)
Charge-offs and recoveries, net (5,845) (2,221) (2,780)
--------------------------------------------
Balance at the end of the year $ 22,586 $ 23,127 $ 19,891
============================================
Non-accrual and renegotiated loans for which interest has been reduced totaled
approximately $5,696,000 in 2000, $10,270,000 in 1999, and $8,570,000 in 1998.
Interest income foregone on these loans amounted to $210,000 in 2000, $352,000
in 1999, and $366,000 in 1998.
At December 31, 2000 and 1999, Waypoint Financial had $5,852,000 and $9,517,000,
respectively, in impaired loans. The December 31, 2000 and 1999 allowance for
loan losses has a reserve of $1,788,000 and $1,768,000, respectively, for these
impaired loans.
61
(6) Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans totaled $741,740,000, $1,361,300,000, and $1,601,359,000 at December
31, 2000, 1999, and 1998, respectively.
Activity associated with mortgage servicing rights is summarized as follows:
Purchased Originated Total
--------------------------------------------------
Balance at December 31, 1998 $ 7,963 $ 7,444 $ 15,407
Additions - 2,444 2,444
Sales (2,119) - (2,119)
Amortization (1,505) (1,273) (2,778)
Net change in valuation allowance (1) (215) (216)
--------------------------------------------------
Balance at December 31, 1999 4,338 8,400 12,738
Additions - 1,734 1,734
Sales (4,246) (2,179) (6,425)
Amortization (66) (1,134) (1,200)
Net change in valuation allowance 200 (499) (299)
Pooling adjustment to conform accounting years (1) (171) (172)
--------------------------------------------------
Balance at December 31, 2000 $ 225 $ 6,151 $ 6,376
==================================================
Custodial escrow balances maintained in connection with the foregoing mortgage
servicing rights were approximately $10,536,000 at December 31, 2000, and
$10,704,000 at December 31, 1999.
Waypoint Financial establishes the value of its originated mortgage servicing
rights using comparative market prices for mortgage servicing rights at the time
the servicing rights are created. Waypoint Financial used the following
assumptions to measure the fair value of mortgage servicing rights related to
securitizations and recorded losses and gains on securitizations as follows:
2000 1990 1998
--------------------------------------------------------
Discount rates 9.0% to 10.0% 9.0% to 10.0% 8.5% to 9.5%
Average prepayment rate 9.0% to 14.0% 9.0% to 14.0% 12.0% to 17.0%
(Loss) gain on securitized loans $ (11,000) $ 421,000 $ 2,240,000
Waypoint Financial performs a market value analysis of its mortgage servicing
rights on a quarterly basis. If the calculated market value is less than the
carrying value of the servicing rights, a valuation adjustment is recorded to
write down the servicing rights to the market value. As of December 31, 2000,
the mortgage servicing rights reflected a fair market value of $7,355,000.
At December 31, 2000, Waypoint Financial's valuation of mortgage servicing
rights reflected an average discount rate of 9.5% and an average prepayment
rate of 13.7%. Waypoint Financial also stresses certain modeling assumptions
used in determining the value of its mortgage servicing rights. At December 31,
2000, the high and low values resulting from stressed assumptions were
$8,263,000 and $6,761,000, respectively.
During the first quarter of 2000, Waypoint Financial sold substantially all of
its purchased mortgage servicing rights and recorded a net gain of $.1 million.
(7) Investment in Real Estate and Other Joint Ventures
A summary of real estate is as follows:
December 31
2000 1999
----------------------------
Held for investment (net of accumulated depreciation
of $1,000 in 2000 and $310,000 in 1999) $ 1,344 $ 788
Foreclosed assets held for sale 3,211 3,809
---------- --------
4,555 4,597
Less: Allowance for real estate losses 125 55
---------- --------
$ 4,430 $ 4,542
========== ========
An analysis of the allowance for real estate losses is as follows:
Year Ended December 31,
2000 1999 1998
----------------------------------------
Balance at beginning of year $ 55 $ 45 $ 116
Pooling adjustment to conform accounting periods (44) - -
Provision charged real estate expense 338 250 250
Less: Real estate losses charged to allowance (224) (240) (321)
------ ------ ---------
Balance at end of year $ 125 $ 55 $ 45
====== ====== =========
Waypoint Financial is a partner in an unconsolidated joint venture in which its
ownership percentage is less than 20%. The corporation's investment in this
joint venture is accounted for under the equity method of accounting. At
December 31, 2000 and 1999, the carrying value of this investment was
approximately $3,984,000 and $3,633,000, respectively. Waypoint Financial's
share of the venture's net (loss) income for the years ended December 31, 2000,
1999 and 1998 was ($1,147,000), ($956,000) and $1,433,000, respectively.
Waypoint Financial also maintains a minority interest in a joint venture
associated with reinsurance of property and casualty insurance products sold in
the course of Waypoint Financial's banking activities. The carrying value of
this investment was $413,000 and $0 at December 31, 2000 and 1999 respectively.
A subsidiary of Waypoint Financial is a partner in an unconsolidated joint
venture in which its ownership percentage is greater than 20%. The purpose of
the venture is to acquire and develop real property for ultimate resale or for
management of the resulting income-producing property. At December 31, 2000 and
1999, the carrying value of this investment were approximately $24,000 and
$117,000, respectively. The Corporation's share of the venture's net income for
the years ended December 31, 2000, 1999, and 1998 was $22,000, $39,000 and
$21,000, respectively.
Waypoint Financial is a limited partner in several partnerships (approximate
ownership position of 99%) for the purpose of acquiring, renovating, operating
and leasing qualified low-income housing and historic properties. At December
31, 2000 and 1999, aggregate net equity investment in these partnerships
approximated $5,541,000 and $5,775,000, respectively. Waypoint Financial's share
of the partnerships' net income (loss) of $66,000, ($514,000) and ($213,000) for
the years ended December 31, 2000, 1999 and 1998, respectively, is included in
operations under the equity method of accounting. Benefits attributed to these
partnerships include low-income housing and historic tax credits.
A subsidiary of Waypoint Bank operates two unconsolidated joint ventures engaged
in residential real estate development. At December 31, 2000 and 1999, the
combined carrying values of these investments were approximately ($142,000) and
($565,000) respectively. The Corporation's share of the ventures' net incomes
for the years ended December 31, 2000, 1999 and 1998 was $76,000, $46,000 and
$167,000, respectively.
(8) Premises and Equipment
A summary of premises and equipment at December 31 follows:
Estimated
2000 1999 Useful Lives
---------------------------------------------
Land and improvements $ 7,790 $ 8,322
Buildings and improvements 31,294 28,866 5-40 years
Leasehold improvements 8,831 5,759 5-25 years
Furniture and equipment 31,812 27,804 3-10 years
Automobiles 292 214 3 years
Software 4,842 4,919 3-5 years
Accumulated depreciation (35,037) (30,804)
------------------------------
$ 49,824 $ 45,080
==============================
Depreciation expense was $5,979,000 in 2000, $5,186,000 in 1999, and $4,445,000
in 1998.
(9) Intangible Assets
Total amortization expense recorded on intangible assets was $2,889,000 in 2000,
$2,641,000 in 1999, and $2,488,000 in 1998. Intangible assets at December 31,
2000 were recorded at $16,356,000, net of accumulated amortization of
$12,882,000.
62
Effective November 30, 2000, Waypoint Financial acquired Owen Insurance, Inc., a
full-service insurance agency based in York, Pennsylvania. The acquisition was
accounted for as a purchase and resulted in a premium of $1,627,000, which is
being amortized over a fifteen year period using the straight-line method.
Amortization expense totaled $9,000 for 2000.
Effective June 25, 1999, Waypoint Financial acquired a branch in Lebanon County,
Pennsylvania from another regional bank. The acquisition included the purchase
of $37,273,000 in deposits, $11,400,000 in loans, and cash and other assets
totaling $700,000. The acquisition was accounted for as a purchase and resulted
in a core deposit intangible of $3,300,000, which is being amortized over a
seven year period using the straight-line method.
(10) Deposits
Waypoint Financial pays deposit insurance premiums to the Savings Association
Insurance Fund ("SAIF") of the FDIC. Waypoint Financial's average deposit
insurance premium rate was .021% for 2000, .054% for 1999, and .060% for 1998 of
its assessed deposit base. This resulted in total premiums assessed of $521,000
in 2000, $1,160,000 in 1999, and $1,342,000 in 1998.
Waypoint Financial had deposits (excluding brokered deposits) with a minimum
denomination of $100,000 totaling $363,216,000 and $212,775,000 at December 31,
2000 and 1999, respectively.
Waypoint Financial had brokered certificates of deposit totaling $127,887,000,
at an average rate of 6.73%, at December 31, 2000 and $77,111,000, at an average
rate of 5.94%, at December 31, 1999. The certificates of deposit have maturities
ranging from six months to seven years and were issued in denominations greater
than $100,000 and participated out by the broker.
(11) Other Borrowings
Borrowed funds at December 31 are summarized as follows:
2000 1999
-------------------------------
FHLB Advances $ 1,434,806 $ 904,660
Repurchase Agreements 189,853 568,200
ESOP & Other 670 15,530
------------ -----------
Total Other borrowings $ 1,625,329 $ 1,488,390
===============================
As of December 31, 2000, FHLB advances consisted of the following:
FHLB advances maturing in: Amount Average Rate
- ---------------------------------- -----------------------------------
2001 $ 500,000 6.651
2002 50,000 6.570
2003 100,000 6.585
2004 150,000 6.723
2005 200,000 6.408
2006 and beyond 434,806 5.403
-----------------
$ 1,434,806 6.239
=================
Waypoint Financial uses a variety of FHLB advance products including overnight
advances, floating-rate advances, fixed-rate advances, and convertible option
advances. Pursuant to collateral agreements with the FHLB, advances are fully
secured by certain debt securities and qualifying first mortgage loans. There
were available lines of credit totaling $633.2 million at December 31, 2000 and
$1,059.5 million at December 31, 1999. Waypoint's maximum borrowing capacity at
the FHLB was $2,069.0 million at December 31, 2000.
As of December 31, 2000, Waypoint Financial's repurchase agreements consisted of
the following:
Repurchase agreements maturing in: Amount Average Rate
- ------------------------------------------------------------- ------------
2001 $ 66,478 5.665
2002 - -
2003 23,375 5.590
2004 - -
2005 50,000 6.340
2006 and beyond 50,000 5.210
----------
$ 189,853 5.714
==========
63
During 2000 and 1999, Waypoint Financial sold repurchase agreements, the average
balance of which was $204.7 million for 2000 and $500.3 million for 1999. The
highest month-end balance outstanding was $313.0 million during 2000 and $643.3
million during 1999. The securities underlying the agreements were under
Waypoint Financial's control.
(12) Restrictions
Waypoint Financial is required by the Federal Reserve Bank to maintain certain
statutory cash reserves. At December 31, 2000, Waypoint Financial's reserve
requirement was $25,000.
(13) Commitments To Extend Credit
Waypoint Financial issues financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and performance
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet.
At December 31, 2000 and 1999, Waypoint Financial had the following off-balance
sheet commitments:
2000 1999
-------------------------------------
Commitments:
To extend credit:
Unused open-end consumer lines of credit $ 139,417 $ 124,430
Unused open-end commercial lines of credit 220,683 126,339
Funds available on construction loans 67,073 94,137
Loan originations and purchases 59,372 47,584
To sell loans 22,544 7,633
Loans sold with recourse 32,050 37,039
Performance standby letters of credit 21,840 10,591
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Waypoint Financial evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by Waypoint
Financial upon extension of credit, is based on management's credit evaluation
of the customer. Collateral held includes residential and income producing
commercial properties.
In addition to commitments to sell loans, Waypoint Financial also has sold
certain mortgage loans under contractual terms that may require Waypoint
Financial to repurchase such loans from the buyer if the borrowers default.
Waypoint Financial has not experienced and does not anticipate experiencing a
material impact to financial condition or results of operations from loans sold
with recourse.
Performance standby letters of credit are conditional commitments issued by
Waypoint Financial to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. The terms of the letters of credit vary from 6 months to 36 months
and may have renewal features. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
Waypoint Financial holds collateral supporting those commitments for which
collateral is deemed necessary.
Most of Waypoint Financial's business activity is with customers located within
its defined market area. Waypoint Financial grants commercial, residential and
consumer loans throughout central Pennsylvania and northern Maryland. Waypoint
Financial also originates mortgage loans in nine Eastern states other than
Pennsylvania through a correspondent lending program, but sells a majority of
these loans in the secondary market. Since the majority of Waypoint Financial's
loan portfolio is located in central Pennsylvania and northern Maryland, a
substantial portion of Waypoint Financial's debtors' ability to honor their
contracts and increases or decreases in the market value of the real estate
collateralizing such loans may be significantly affected by the level of
economic activity in this area.
64
(14) Employee Benefits
Waypoint Financial maintains qualified non-contributory defined benefit pension
plans covering substantially all of the eligible former Harris employees hired
prior to January 1, 1999 (the Harris Pension Plan) and all of the eligible
former York Financial employees prior to the merger date (the York Financial
Pension Plan).
Benefits for the participants in the Harris Pension Plan continue to accrue
based on years of service and the employee's average monthly pay using the five
highest years of employment. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future. Waypoint Financial's policy is to make the minimum contribution,
as calculated by the Plans' actuary. The following sets forth the plan's funded
status and amounts recognized in Waypoint Financial's statement of financial
condition at December 31, 2000 and 1999:
2000 1999
-----------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 13,145 $ 11,791
Service Cost 1,085 963
Interest Cost 843 759
Actuarial loss 53 86
Curtailment gain (754) -
Benefits paid (501) (454)
--------------- ---------
Benefit obligation at the end of plan year 13,871 13,145
=============== =========
Change in plan assets:
Fair value of plan assets at beginning of year 14,573 13,180
Actual return on plan assets (636) 1,847
Benefits paid (501) (454)
--------------- ---------
Fair value of plan assets at end of year 13,436 14,573
=============== =========
Funded status (435) 1,428
Unrecognized net actuarial loss (350) (2,187)
Unrecognized net prior service cost 122 150
Unrecognized net asset (307) (346)
--------------- ---------
Accrued benefit cost $ (970) $ (955)
=============== =========
The components of net pension expense for the years ended December 31, 2000,
1999, and 1998 are as follows:
2000 1999 1998
-----------------------------------------------
Service cost benefits earned during the period $ 1,085 $ 963 $ 714
Interest cost on projected benefit obligation 843 759 721
Actual loss (gain) on plan assets 636 (1,847) (1,405)
Net amortization and deferral of gains (1) (1,808) 783 385
-----------------------------------------------
Net pension expense $ 756 $ 658 $ 415
===============================================
(1) This item is comprised of:
Current year's net asset (loss) gain deferred for later recognition $(1,768) $ 809 $ 446
Amortization of prior service cost 14 15 15
Amortization of unrecognized net asset (38) (38) (38)
Amortization of net gain (16) (3) (38)
-----------------------------------------------
$(1,808) $ 783 $ 385
===============================================
Assumptions used to develop the net pension expense were:
65
2000 1999 1998
------------------ ----------------- ---------------
Discount Rate 6.5% 6.5% 6.5%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
Rate of increase in compensation levels 4.0% 4.0% 4.0%
The assets of the Harris Pension Plan consist primarily of U.S. Government
securities, corporate bonds, and equity securities.
Waypoint Financial also provides supplemental retirement benefits for certain
executives formerly of Harris Financial. The following sets forth the amounts
recognized in Waypoint Financial's statement of financial condition as of
December 31, 2000 and 1999:
2000 1999
------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 678 $ 491
Service Cost 76 26
Interest Cost 40 16
Actuarial loss - 145
Benefit payments (60) -
Actuarial loss due to changes in assumptions (168) -
------------------------------
Benefit obligation at the end of plan year 566 678
------------------------------
Fair value of plan assets at end of year - -
Funded status (566) (678)
Unrecognized net loss 101 285
Unrecognized prior service cost 110 125
------------------------------
Accrued benefit cost $ (355) $ (268)
==============================
The components of net pension cost for the supplemental retirement benefits for
executives for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
-----------------------------------------
Service cost $ 76 $ 26 $ 22
Interest cost 40 16 24
Amortization of unrecognized prior service cost 16 16 16
Amortization of net loss 15 7 -
------------------------------------------
Total net periodic post-retirement benefit cost $ 147 $ 65 $ 62
==========================================
The accumulated benefit obligation for the supplemental retirement benefits for
executives was determined using a discount rate of 6.5%.
Effective November 15, 2000, the York Financial Pension Plan was terminated and
participants' benefit accruals ceased as of October 15, 2000. As of the
termination date, the plan participants' balances were fully vested. As of
December 31, 2000, Waypoint Financial is in the process of winding down the
Plan. Management expects to complete this process in 2001. The following
schedules set forth the plan's funded status as of June 30, 2000 and represents
amounts recognized in Waypoint Financial's statement of financial condition at
December 31, 1999.
66
December 31, 1999
-----------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,436
Service Cost 391
Interest Cost 495
Benefits paid (218)
Changes in assumptions (601)
Experience loss 259
-------------------
Benefit obligation at the end of year 6,762
-------------------
Change in plan assets:
Fair value of plan assets at beginning of year 7,330
Actual return on plan assets 1,004
Benefits paid (252)
-------------------
Fair value of plan assets at end of year 8,082
-------------------
Funded status 1,320
Unrecognized net actuarial loss (197)
Unrecognized net prior service cost 127
Unrecognized net asset (708)
-------------------
Prepaid Pension Expense $ 542
===================
During September, 2000, all plan assets, except some of the Company's shares,
were liquidated and placed in a money market fund in anticipation of the Plan's
termination. As of December 31, 2000, the value of the money market fund was
$7,570,000. Prior to liquidation, other plan assets included debt and equity
funds. The Plan held 89,500 and 88,610 of the Company's shares, with a fair
value of $985,000 and $700,000 as of December 31, 2000 and 1999 respectively.
The Plan's obligation as of December 31, 2000 was $8,235,000. The Company had
$242,000 of net pension expense in conjunction with this plan during 2000. Also
during 2000, Waypoint Financial charged to merger expense $542,000 to recognize
the accrued benefit cost which was accelerated upon termination of the Plan.
The components of net pension expense included in the consolidated statements of
income for the years ended December 31, 1999, and 1998 are as follows:
1999 1998
--------------------------
Service cost benefits earned during the period $ 425 $ 441
Interest cost on projected benefit obligation 495 435
Actual return on plan assets (1,004) (547)
Net amortization and deferral of gains (1) 326 (102)
---------------------------
Net pension expense $ 242 $ 227
===========================
(1) This item is comprised of:
Current year's net asset (loss) gain deferred for later recognition $ 353 $ (75)
Amortization of prior service cost 22 22
Amortization of unrecognized net asset (49) (49)
Amortization of net loss - -
---------------------------
$ 326 $ (102)
===========================
Assumptions used to develop the net pension expense were:
1999 1998
----------------- -----------------
Discount Rate 8.0% 7.5%
67
Expected long-term rate of return on assets 9.0% 9.0%
Rate of increase in compensation levels 4.5% 4.5%
Waypoint Financial also has a defined contribution plan covering substantially
all employees. Waypoint Financial provides a matching contribution of 25% of
employee contributions to a maximum of 6% of employee compensation (a maximum
matching contribution of 1.5%). Expense related to the defined contribution plan
was $192,000 in 2000, $150,000 in 1999, and $123,000 in 1998. During 1999,
Waypoint Financial amended its defined contribution plan to provide a matching
contribution of 50% of employee contributions to a maximum of 6% of employee
compensation (a maximum matching contribution of 3%) for only employees hired
after January 1, 1999.
Waypoint Financial also provides certain health care benefits for retired
Harris' employees that accumulate 25 years of service and were hired before
October 1, 1995. Waypoint Financial accounts for these post-retirement benefits
under the accrual method of accounting.
2000 1999
------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 1,689 $ 2,553
Service Cost 64 61
Interest Cost 113 99
Plan change (53) (51)
Actuarial loss (gain) due to changes in assumptions 4 (941)
Benefits Paid (35) (32)
--------------------------------
Benefit obligation at the end of plan year 1,782 1,689
--------------------------------
Fair value of plan assets at end of year - -
Funded status (1,782) (1,689)
Unrecognized net (gain) loss (502) (528)
Unrecognized prior service cost (350) (321)
--------------------------------
Accrued benefit cost $ (2,634) $ (2,538)
================================
The components of net post-retirement benefit cost for the years ended December
31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
--------------------------------------------------
Service cost $ 64 $ 61 $ 81
Interest cost 113 99 127
Amortization of unrecognized prior service cost (25) (20) -
Amortization of net gain (21) (22) (20)
--------------------------------------------------
Total net periodic post-retirement benefit cost $ 131 $ 118 $ 188
==================================================
The post-retirement benefit obligation was determined using a discount rate of
7.0%. The assumed health care cost rate used in measuring the accumulated post
retirement benefit obligation was 5.0% for medical costs and 5.0% per year for
dental costs. The health care cost trend assumption has a significant impact on
the amounts reported. For example, a 1.0% increase in the health care trend rate
would increase the accumulated post-retirement benefits obligation by
approximately $379,000 at December 31, 2000 and increase the aggregate of the
service and interest cost components by $43,000 for the year ended December 31,
2000.
The Company provides Supplemental Executive Retirement Plans (SERPS) to certain
of its executives. These plans are unfunded, nonqualified deferred compensation
plans. The SERPS are funded through life insurance policies, which are designed
to offset annual expense associated with the individual agreements. The cash
surrender value of the policies was $15.6 million and $9.8 million in 2000 and
1999, respectively, and is included in other assets in the accompanying
consolidated balance sheets. Total income recognized on the insurance policies
for the year ended December 31, 2000 and 1999, amounted to $609,000 and
$439,000, respectively. For the year ended December 31, 2000 and 1999, salaries
and employee benefits expense included $266,000 and $165,000, respectively, in
connection with the SERP.
The Company has deferred compensation arrangements for certain current and
former directors and executives which generally provide for fixed payments upon
retirement or lump-sum payments upon death. The amounts accrued under these
plans were $2.2 million and $2.3 million at December 31, 2000 and 1999,
respectively. These amounts are reflected in other liabilities in the
accompanying consolidated statements of financial condition. The total expense
recorded by Company was $382,000, $327,000 and $191,000 in 2000, 1999 and 1998,
respectively. The Company funds a portion of these obligations through the
establishment of insurance assets on behalf of the executives participating in
the plans. The insurance assets are reflected as other assets in the
accompanying consolidated balance sheets.
68
(15) Employee Stock Ownership Plans
Waypoint Financial maintains two leveraged employee stock option plans covering
substantially all of the eligible employees of the Company. In addition, on
October 17, 2000 the Company created the Waypoint Financial Corporation Employee
Stock Ownership Plan, and loaned $15,640,000 for the purchase of 1,564,000
shares of the Company's stock. The Company makes annual contributions to each of
the Plans. For one plan, the annual contribution is equal to the debt service
less dividends received on the unearned shares. For the second plan, dividends
on unearned shares are used to purchase additional shares held for collateral
on the related debt. Each plan's shares were initially pledged as collateral for
its debt to the Company and unrelated third parties. The Plan's debt to
unrelated third parties was $530,000 as of December 31, 2000 and 1999,
respectively. The fair value of 89,517 shares of Waypoint Financial stock
pledged as collateral on debt with third parties was $985,000 and $707,000 as of
December 31, 2000 and 1999, respectively. As the debt is repaid by the plans,
shares including shares purchased with dividends are released from collateral
and become eligible to be allocated to employee accounts. Actual share
allocations to employee accounts are based on each employee's relative portion
of Waypoint Financial's total eligible compensation recorded during the year
shares are earned. The Company accounts for each ESOP under the provisions of
the AICPA Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" (SOP 93-6). Accordingly, the shares pledged as collateral on
the plans' borrowings are reported as unearned shares on Waypoint Financial's
statement of condition. As shares are earned, Waypoint Financial reports
compensation expense equal to the current market price of the shares and the
shares become outstanding for earnings-per-share (EPS) computations. Dividends
on allocated shares are recorded as a reduction of retained earnings. Dividends
on unallocated shares are recorded as a reduction of accrued interest.
In conjunction with the merger with York Financial, certain employees were
involuntarily terminated causing one of the plans to undergo a partial
termination. As a result, those employees' allocations became fully vested.
The ESOP shares and the related compensation expense as of December 31, 2000,
1999, and 1998 were as follows:
2000 1999 1998
----------- ----------- ------------
Allocated Shares 888,333 809,538 714,697
-------------------------------------------------
Earned shares not yet released for allocation 44,886 44,886 42,938
-------------------------------------------------
Unearned shares 1,699,059 157,830 192,879
-------------------------------------------------
Total Shares in the Plan 2,632,278 1,012,254 950,514
=========== =========== ============
Fair value of unearned shares $18,690,000 $ 1,375,000 $ 2,580,000
=========== =========== ============
Compensation expense $ 488,000 $ 591,000 $ 1,054,000
=========== =========== ============
(16) Stock Award and Option Plans
Waypoint Financial's stock award plans include the Recognition and Retention
Plan for Officers and Employees and the Recognition and Retention Plan for
Outside Directors (the RRPs). The RRPs provide for the granting of restricted
stock awards to key employees and unrestricted stock awards to outside
directors. Restricted stock awards will only vest if Waypoint Financial achieves
certain financial goals over one-year performance periods. Recipients of
restricted and unrestricted stock awards are not required to provide
consideration to Waypoint Financial other than rendering service and have the
right to vote the shares and receive dividends. The following table summarizes
the activity in Waypoint Financial's RRPs during 2000, 1999, and 1998:
69
Unrestricted Shares in
Restricted Shares Shares Suspense Total Shares
------------------------------------------------------------------------
Unearned on
January 1, 1998: 14,836 3,067 129,668 147,571
Plan activity during 1998:
Forfeited - - - -
Awarded 3,450 - (3,450) -
Earned (8,568) (1,150) - (9,718)
- ------------------------------------------------------------------------------------------------------------------------
Unearned on
December 31, 1998: 9,718 1,917 126,218 137,853
Plan activity during 1999:
Forfeited - - - -
Awarded 9,453 - (9,453) -
Earned (16,488) (1,150) - (17,638)
- ------------------------------------------------------------------------------------------------------------------------
Unearned on
December 31, 1999: 2,683 767 116,765 120,215
Plan activity during 2000:
Forfeited (1,533) - 1,533 -
Awarded - - - -
Earned (1,150) (767) - (1,917)
- ------------------------------------------------------------------------------------------------------------------------
Unearned on
December 31, 2000: - - 118,298 118,298
========================================================================================================================
At the time of inception of the RRPs, the cost of the plan shares was recorded
as unearned compensation in shareholders' equity. As granted shares are earned,
compensation is charged to expense at market value (restricted shares) or at
cost (unrestricted shares), unearned compensation is reduced at share cost
($4.34 per share), thereby increasing stockholders' equity, and paid in capital
is increased by the appreciated portion of the restricted shares' market value.
Waypoint Financial recorded compensation expense for earned RRP shares totaling
$ 27,000 in 2000, $173,000 in 1999, and $173,000 in 1998.
The Company maintains stock option plans (Option Plans) under which incentive
and non-incentive options are granted to directors and key personnel. Options
are granted at option prices equal to the fair market value of the Company's
stock on the date of grant and are exercisable within 10 years from the date of
the option grant. Options granted vest over a period between one and eight years
or at the time of certain qualified events. Recipients of options have no rights
with respect to share voting or receipt of dividends on unexercised option
shares. Performance-based options granted under the Option Plans become
exercisable when the Company achieves certain performance measurement targets in
accordance with the terms of the option. If performance measurement targets are
not achieved in accordance with the terms of the option, the options are
forfeited.
The following table presents the activity in Waypoint Financial's option plans
during the periods ending December 31:
70
Stock Options Weighted Average
Option Price per Share
---------------- ----------------------
Balance at January 1, 1998 2,120,347 $ 5.83
Granted 123,876 16.06
Forfeited (11,668) 10.96
Exercised (640,914) 4.00
----------------
Balance at December 31, 1998 1,591,641 7.34
Granted 425,306 12.57
Forfeited (82,365) 16.19
Exercised (95,916) 4.14
----------------
Balance at December 31, 1999 1,838,666 8.31
Granted 218,116 9.13
Forfeited (108,660) 10.35
Exercised (62,317) 4.83
Pooling adjustment to conform accounting periods 10,227 -
---------------- ----------------------
Balance at December 31, 2000 1,896,032 $ 8.72
================ ======================
Exercisable at December 31, 2000 1,623,761 $ 7.56
================ ======================
The following table presents the options outstanding and exercisable at December
31, 2000:
Options Outstanding Exercisable Stock Options
- ----------------------------------------------------------------------------------------------------------------------------
Weighted Average
Total Number of Remaining Life Weighted Average Number of Weighted average
Range of Exercise Prices Shares (Years) Exercise Price Shares exercise price
- ----------------------------------------------------------------------------------------------------------------------------
$ 0.00 - $ 5.00 130,033 0.65 $ 2.72 130,033 $ 2.72
$ 5.01 - $10.00 1,364,206 5.36 7.08 1,227,809 6.88
$10.01 - $15.00 203,927 7.33 11.48 203,927 11.48
$15.01 - $20.00 178,698 7.83 17.07 54,325 17.06
$20.01 - $30.00 19,168 7.01 26.41 7,667 26.41
------------ -----------
1,896,032 5.50 8.39 1,623,761 7.56
============ ===========
The Company accounts for the Option Plans under Accounting Principles Board
Opinion No. 25, and, accordingly, no compensation expense has been recognized in
the financial statements of the Company. Had compensation cost for these plans
been recorded in the financial statements of the Company consistent with the
fair value provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (Statement 123), the Company's net
income and net income per share would have been reduced to the following pro-
forma amounts (in thousands, except per-share data):
71
2000 1999 1998
-------------------------------------------
Net Income (in thousands)
As reported $ 10,695 $ 27,972 $ 28,899
Pro forma $ 10,074 $ 27,054 $ 28,521
Basic earnings per share
As reported $ 0.28 $ 0.73 $ 0.75
Pro forma $ 0.26 $ 0.71 $ 0.74
Diluted earnings per share
As reported $ 0.28 $ 0.72 $ 0.74
Pro forma $ 0.26 $ 0.70 $ 0.73
Weighted average grant date fair value of options granted
during the year $ 3.85 $ 4.64 $ 4.11
The effects of applying SFAS No. 123 may not be representative of the effects on
reported net income in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2000 1999 1998
Risk-free interest rate 6.5% 6.1% 5.7%
Expected volatility 38.6% 25.3% 25.4%
Expected dividend yield rate 3.4% 3.8% 3.5%
Expected life 8.7 years 4.2 years 4.1 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of the stock options granted.
(17) Income Taxes
The provision for income taxes in the consolidated statements of income consists
of the following:
Year ended December 31
2000 1999 1998
--------------------------------------
(In thousands)
Current:
Federal $ 7,061 $ 5,077 $ 8,455
State 643 1,693 1,359
--------------------------------------
7,704 6,770 9,814
Deferred:
Federal (3,765) 2,918 2,068
State (34) 117 468
--------------------------------------
(3,799) 3,035 2,536
--------------------------------------
Total provision for income taxes $ 3,905 $ 9,805 $12,350
======================================
72
Income tax expense for Waypoint Financial is different than the amounts computed
by applying the statutory federal income tax rate to income before income taxes
because of the following:
Percentage of Income Before Income Taxes
Year Ended December 31
------------------------------------------
2000 1999 1998
------------------------------------------
Income tax expense at Federal Statutory Rate 35.0% 35.0% 35.0%
Tax Exempt Income (9.8) (6.1) (5.6)
Dividends Received Deduction (7.3) (3.2) (4.1)
State Taxes, Net of Federal Benefit 4.4 3.2 2.9
Federal Tax Credits (7.6) (3.9) (0.5)
Merger Costs 10.3 0.0 0.0
Other 1.7 1.0 2.2
------------------------------------------
Effective Tax Rate 26.7% 26.0% 29.9%
==========================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are as
follows:
2000 1999
----------------------------------
(In thousands)
Deferred tax assets:
Allowance for loan losses $ 7,925 $ 8,199
Post-retirement benefits expense 1,126 1,035
Deposit intangible amortization 1,583 1,218
Federal tax credits - 1,354
Merger and integration costs 1,586 -
Net unrealized losses on marketable
securities available for sale 8,055 19,051
Other 1,065 3,850
----------------------------------
Total assets 21,340 34,707
----------------------------------
Deferred tax liabilities:
Deferred loan costs and dealer reserves 8,029 7,721
Depreciation and amortization 1,451 1,546
Joint venture 1,056 2,110
Servicing rights 1,918 2,468
Other 972 1,449
----------------------------------
Total liabilities 13,426 15,294
----------------------------------
Net deferred assets $ 7,914 $ 19,413
==================================
Waypoint Financial has determined that a valuation reserve for the net
deferred tax asset is not required since it is more likely than not that the net
deferred tax asset can be realized through carryback to taxable income in prior
years, future reversals of existing taxable temporary differences, or reductions
of future taxes.
(18) Leases
At December 31, 2000, Waypoint Financial was obligated under non-cancelable
operating leases for office space. Certain leases contain escalation clauses
providing for increased rentals based on increases in the average consumer price
index. Rental expenses for these facilities aggregated $1,410,000 in 2000,
$1,190,000 in 1999, and $1,084,000 in 1998.
73
The projected minimum rental payments under the terms of the leases at December
31, 2000, net of projected sub-lease rentals, are as follows:
Years ending
December 31, Amount
- ------------------------- ----------
2001 $ 1,346
2002 1,275
2003 1,082
2004 915
2005 719
2006 and thereafter 3,111
----------
$ 8,449
==========
(19) Disclosures about Fair Value of Financial Instruments
The majority of Waypoint Financial's assets and liabilities are considered
financial instruments as defined in SFAS 107. Many of these instruments,
however, lack an available trading market as characterized by a willing buyer
and a willing seller engaging in an exchange transaction. Since it is Waypoint
Financial's general practice not to engage in trading activities, significant
assumptions and estimations were used in calculating present values in
discounted cash flow models. Estimated fair values at December 31, 2000 and 1999
have been determined by using the best available data, as generally provided in
Waypoint Financial's regulatory reports with an estimation methodology suitable
for each category of financial instrument, as noted below.
Cash and Cash Equivalents. The carrying amounts for short-term instruments
approximate fair value because of the short maturity of, and negligible credit
concerns within those instruments.
Marketable Securities. The fair value of marketable securities has been valued
based on quotations received from an independent pricing service.
Loans and Loans Held For Sale. Fair values are estimated for portfolios of loans
with similar characteristics. Residential mortgages make up a substantial
percentage of Waypoint Financial's loan portfolio. These residential mortgages,
which are generally underwritten to standards substantially in conformity with
Federal Home Loan Mortgage Corporation ("Freddie Mac") standards, have been
estimated based on the discounted value of expected cash flows.
Fair values for all commercial and other loans have been calculated by
discounting scheduled cash flows. The discount rate used in these calculations
is the market rate for similar instruments adjusted for noninterest operating
costs, credit risk and assumed prepayment risk.
The fair value of loans held for sale is assumed to equal the amortized cost of
the assets.
Other Financial Assets. Other financial assets have been estimated based on the
discounted value of expected cash flows.
Deposit, Escrow, and Other Borrowings. Under SFAS 107, the fair value of
deposits with no stated maturity, such as demand deposit accounts, NOW accounts,
money market accounts and savings accounts, is equal to the amount payable on
demand. The fair value of time deposits and other borrowings is based on the
discounted value of contractual cash flows and current rates for debt with
similar terms and remaining maturities. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities. The fair
value of escrow, which has no stated maturity, is equal to the amount on
deposit.
Commitments to Extend Credit and Performance Standby Letters of Credit. The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and present creditworthiness of the counterparties. For
fixed rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
performance standby letters of credit is based upon fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties.
74
Limitations. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time Waypoint Financial's entire holdings or of a
particular financial instrument. Because no market exists for a significant
portion of Waypoint Financial's financial instruments, fair value estimates are
based on judgments regarding expected losses, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. Management is
concerned that reasonable comparability between financial institutions may not
be likely due to the wide range of permitted valuation techniques and the
estimates and assumptions that must be made.
The carrying amounts and estimated fair values for Waypoint Financial's
financial assets and liabilities and commitments at December 31, 2000 and 1999
are as follows:
As of December 31,
------------------------------------------------------------------
2000 1999
------------------------------- ------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------------------------------------------------------
Cash and cash equivalents $ 99,837 $ 99,837 $110,939 $110,939
Marketable securities held-to-maturity 22,709 21,740 22,689 22,105
Marketable securities available-for-sale 1,881,147 1,854,872 1,686,903 1,625,398
Loans receivable:
Mortgage 1,365,396 1,369,694 1,374,277 1,367,435
Commercial 642,802 644,806 544,206 507,250
Consumer 589,566 590,434 529,847 529,270
------------------------------------------------------------------
Total Gross Loans 2,597,764 2,604,934 2,448,330 2,403,955
------------------------------------------------------------------
Loans held for sale 18,415 18,415 6,061 6,061
Other Financial Assets 6,376 7,355 12,720 16,693
Demand and Now accounts 298,591 298,591 297,006 297,006
Money market accounts 470,482 470,482 502,142 502,142
Savings deposits 222,471 222,471 178,916 178,916
Time deposits 1,634,176 1,655,609 1,566,534 1,572,169
------------------------------------------------------------------
Total Deposits 2,625,720 2,647,153 2,544,598 2,550,233
------------------------------------------------------------------
Escrow 6,461 6,461 8,813 8,813
Other borrowings 1,625,329 1,648,371 1,488,390 1,462,997
Off-balance sheet financial instruments:
Commitments to extend credit - 1,107 - 1,230
Standby letters of credit - 125 - -
(20) Derivative Financial Instruments
As of December 31, 2000, Waypoint Financial was a party to three total return
swaps. The swaps are intended to hedge market value fluctuations in Waypoint
Financial's retail construction loan portfolio that are caused by changes in
market levels of interest rates. The swaps have contract durations of six to
eight months and consist of two components:
. Waypoint Financial exchanges fixed rate interest payments on a
designated mortgage backed security (MBS) pool for a floating rate
interest payment indexed to the London Interbank Offered Rate (LIBOR)
less a spread. The settlement is made on a monthly basis between
Waypoint Financial and the counter-party.
. A lump sum payment which reflects the change in market value of the
designated MBS pool from the inception of the swap contract to the end
of the swap contract. This payment is made at the final date of the
contract between Waypoint Financial and the counter-party. Waypoint
Financial receives a payment if the market value of the underlying MBS
pool declines. Conversely, Waypoint Financial must pay the counter-
party if the value of the MBS pool increases.
The total return swaps are designed to hedge against the decline in the market
value of a specifically identified pool of fixed rate construction loans that
are to be sold upon their conversion to long term mortgage loans. Waypoint
Financial has determined that there is a high degree of correlation between the
changes in the market value of the underlying MBS pool and the fair market value
of
75
the hedged loans. Accordingly, Waypoint Financial has recorded the change in
market value of the contract on the balance sheet, with an offsetting entry to
the carrying value of the hedged loans. Management has estimated the market
value of the contract by determining the change in the fair market value of the
underlying MBS pool. Management believes this amount is approximately equal to
the fair market value of the contract. The ultimate gain or loss incurred by
Waypoint Financial as a result of the changes in the market value of the
contract will be recognized upon the sale of the construction loans.
As of December 31, 2000, Waypoint Financial had entered into five callable
interest rate swaps which are matched to callable certificates of deposits. The
fixed interest rate received by Waypoint Financial as a result of the swap is
passed on to the holder of the certificate of deposit. Each callable interest
rate swap has the same call date as the callable certificate of deposit to which
it is matched.
The following table summarizes Waypoint Financial's derivative financial
instruments as of December 31, 2000:
Year of Maturity Year of Call Notional Amount Fair Value
---------------- ------------ --------------- ----------
Callable interest rate swaps 2003 - 2009 2000 - 2001 $ 68,000,000 $ (225)
Total return swaps 2000 - 15,000,000 (630)
--------------
Total (855)
==============
See Note (1) for a discussion of new accounting standards relevant to derivative
financial instruments.
(21) Waypoint Financial Corp. Financial Information (Parent Company Only)
December 31,
--------------------------------
Condensed Statements of Financial Condition 2000 1999
- ------------------------------------------- --------------------------------
(unaudited)
Assets:
Cash $ 47,530 $ 3,232
Marketable securities available for sale 3,790 4,469
Loans receivable 17,295 1,369
Investment in joint ventures 4,351 3,807
Investment in bank subsidiary 378,843 279,498
Investment in other subsidiaries 6,750 4,481
Other assets 6,199 1,390
------------------------------------
Total assets $ 464,758 $ 298,246
====================================
Liabilities and Stockholders' Equity:
Accounts payable and other liabilities $ 16,861 $ 2,724
Other borrowings 2,329 16,320
Stockholders' equity 445,568 279,202
------------------------------------
Total liabilities and stockholders' equity $ 464,758 $ 298,246
====================================
76
For the years ended
December 31,
---------------------------------------------
Condensed Statements of Income 2000 1999 1998
- ------------------------------ ---------------------------------------------
(unaudited)
Income:
Dividend income $ 3,604 $ 3,141 $ 5,608
Interest income 728 557 881
Loss on sale of securities (2,720) - (6)
Gain on sale of real estate - - 589
(Loss) gain from joint ventures (1,366) (1,083) 1,433
Other income 1 13 9
---------------------------------------------
Total income 247 2,628 8,514
Expense:
Interest expense 1,255 647 -
Merger expense 12,361 - -
Other expense 1,191 1,510 1,323
---------------------------------------------
Total expense 14,807 2,157 1,323
---------------------------------------------
Net (loss) income before equity in undistributed
net income of subsidiaries (14,560) 470 7,191
Equity in undistributed net income of subsidiaries 20,240 26,692 22,450
Income tax benefit (5,015) (810) 742
---------------------------------------------
Net income $ 10,695 $ 27,972 $ 28,899
=============================================
77
For the years ended
December 31,
-------------------------------------------------
Condensed Statements of Cash Flows 2000 1999 1998
- ------------------------------------ -------------------------------------------------
(unaudited)
Cash flows from operating activities:
Net income $ 10,695 $ 27,972 $ 28,899
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed earnings of susidiary (20,240) (26,692) (22,450)
Net depreciation, amortization, and accretion (6) 92 165
Loss on sale of investments 2,720 - 6
Equity losses from joint venture 1,366 (829) 938
Increase in loan to subsidiary (395) - -
Other, net 8,537 2,734 (684)
-------------------------------------------------
Net cash (used in) provided by operating activities: 2,677 3,277 6,874
-------------------------------------------------
Cash flows from investing activities:
Purchase of available-for-sale securities, net (2,705) (345) (781)
Sale of available-for-sale securities, net 2,872 - 6,571
Principal collected on loans 1,437 1,442 155
Disposal of equipment 5 5 4
Increase in investment in subsidiaries (80,161) (18,046) (8)
Dissolution of subsidiary - - 4
Investment in joint venture (2,346) (1,089) (415)
-------------------------------------------------
Net cash (used in) provided by investing activities (80,898) (18,033) 5,530
-------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in borrowings (13,333) 15,789 -
Proceeds from issuance of common stock 158,373 - -
Dividend reinvestment plan 398 1,519 2,265
Stock option plan 304 411 2,188
Retirement of common stock - (1,666) (4,397)
Payments to acquire treasury stock (1,301) (1,729) (5,970)
Issuance of treasury stock 1,242 684 -
Dividends paid (7,471) (7,017) (6,800)
Dividends received 1,510 3,085 1,870
Establish ESOP (15,640) - -
-------------------------------------------------
Net cash provided by (used in) financing activities 124,082 11,076 (10,844)
-------------------------------------------------
Net increase (decrease) in cash 45,861 (3,680) 1,560
Pooling adjustment to conform accounting periods (1,563) - -
Cash at the beginning of the period 3,232 6,912 5,352
-------------------------------------------------
Cash at the end of the period $ 47,530 $ 3,232 $ 6,912
=================================================
78
(22) Consolidated Quarterly Financial Data
2000
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
(unaudited)
Interest income $ 75,892 $ 79,437 $ 83,792 $ 85,437
Interest expense 50,862 54,350 59,126 59,981
------------------------------------------------------------
Net interest income 25,030 25,087 24,666 25,456
Provision for loan loss 1,235 941 1,207 1,687
Noninterest income 4,565 4,750 7,171 (958)
Noninterest expense 20,156 19,912 20,233 35,796
------------------------------------------------------------
Income (loss) before income taxes 8,204 8,984 10,397 (12,985)
Income taxes 1,858 2,004 3,383 (3,340)
------------------------------------------------------------
Net income (loss) $ 6,346 $ 6,980 $ 7,014 $ (9,645)
============================================================
Basic earnings (loss) per share $ 0.17 $ 0.18 $ 0.19 $ (0.26)
------------------------------------------------------------
Diluted earnings (loss) per share $ 0.17 $ 0.18 $ 0.19 $ (0.26)
============================================================
Waypoint Financial recorded merger expenses of $16,239,000 ($12,056,000 net of
tax) during the fourth quarter of 2000.
For the 1999 quarters noted in the table below, Waypoint Financial combined the
results of operations for Harris Financial and York Financial for the quarters
ending as noted below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Harris Financial March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
York Financial September 30, 1999 December 31, 1999 March 31, 2000 June 30, 2000
1999
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------
(unaudited)
Interest income $ 65,880 $ 70,050 $ 73,957 $ 74,694
Interest expense 41,324 44,923 48,565 49,896
------------------------------------------------------------
Net interest income 24,556 25,127 25,392 24,798
Provision for loan loss 1,395 1,345 1,195 905
Noninterest income 5,503 4,853 4,051 2,396
Noninterest expense 19,010 18,868 19,943 16,238
------------------------------------------------------------
Income before income taxes 9,654 9,767 8,305 10,051
Income taxes 2,392 2,737 1,849 2,827
------------------------------------------------------------
Net income $ 7,262 $ 7,030 $ 6,456 $ 7,224
============================================================
Basic earnings per share $ 0.19 $ 0.18 $ 0.16 $ 0.20
------------------------------------------------------------
Diluted earnings per share $ 0.18 $ 0.18 $ 0.16 $ 0.20
============================================================
(23) Commitments and Contingencies
In the ordinary course of business, Waypoint Financial has various
outstanding commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statement. In addition, Waypoint Financial
is a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consideration with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial condition of Waypoint
Financial.
79
PART III
ITEM 10. Directors and Executive Officers Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
The "Proposal I -- Election of Directors" section of the Registrant's
definitive proxy statement for its 2001 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
The "Proposal I -- Election of Directors" section of the Registrant's Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The "Proposal I -- Election of Directors" section of the Registrant's Proxy
Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The "Proposal I--Election of Directors" section of the Registrant's Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 13. Exhibits, List, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-K are as follows:
(A) Report of Independent Auditors
(B) Consolidated Statements of Financial Condition
(C) Consolidated Statements of Income
(D) Consolidated Statements of Shareholders Equity
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
80
(b) Reports on Form 8-K
The Company has not filed a Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 2000.
(c) Exhibits
2.1 Agreement and Plan of Reorganization by and between Harris
Financial, MHC, Harris Financial, Inc. New Harris Financial, Inc. Harris Savings
Bank and York Financial Corp. and York Federal Savings and Loan Association.
(Incorporated by Reference to Exhibit 1 to the Current Report on Form 8-K of
Harris Financial, Inc. (the predecessor of Waypoint Financial Corp.) filed with
the Commission on April 7, 2000 (File No. 0-22399)).
2.2 Plan of Conversion and Reorganization of Harris Financial, MHC.
(Incorporated by reference to Exhibit 2.2 of the Registration Statement on Form
S-1 of Harris Financial, Inc. filed with the Commission on June 23, 2000 (File
No.333-40046)).
3.1 Articles of Incorporation of New Harris Financial, Inc. (renamed
"Waypoint Financial Corp.") (Incorporated by reference to Exhibit D attached as
part of Exhibit 2.2 of the Registration Statement on Form S-1 of Harris
Financial, Inc. filed with the Commission on June 23, 2000 (File No.333-40046)).
3.2 Bylaws of New Harris Financial, Inc. (renamed "Waypoint Financial
Corp.") (Incorporated by reference to Exhibit E attached as part of Exhibit 2.2
of the Registration Statement on Form S-1 of Harris Financial, Inc. filed with
the Commission on June 23, 2000 (File No.333-40046)).
4.1 Form of Common Stock Certificate of New Harris Financial, Inc.
(renamed "Waypoint Financial Corp.") (Incorporated by reference to Exhibit 4.2
of the Registration Statement on Form S-1 of Harris Financial, Inc. filed with
the Commission on June 23, 2000 (File No.333-40046)).
10.1 Harris Savings Bank 1994 Stock Option Plan for Outside Directors.
(Incorporated by Reference to Exhibit 4.1 to the Registration Statement on Form
S-8 of Harris Financial, Inc. filed with the Commission on September 22, 1997
(File No. 333-36087)).
10.2 Harris Savings Bank 1994 Incentive Stock Option Plan. (Incorporated
by Reference to Exhibit 4.2 to the Registration Statement on Form S-8 of Harris
Financial, Inc. filed with the Commission on September 22, 1997 (File No. 333-
36087)).
10.3 Harris Savings Bank 1996 Incentive Stock Option Plan. (Incorporated
by Reference to Exhibit 4.3 to the Registration Statement on Form S-8 of Harris
Financial, Inc. filed with the Commission on September 22, 1997 (File No. 333-
36087)).
10.4 Harris Savings Bank Recognition and Retention Plan for Officers and
Employees. (Incorporated by Reference to Exhibit 10.4 to the Registration
Statement on Form S-4 of Harris Financial, Inc., filed with the Commission on
February 26, 1997, and amended on March 17, 1997 (File No. 333-22415)).
10.5 Harris Savings Bank Recognition and Retention Plan for Outside
Directors. (Incorporated by Reference to Exhibit 10.5 to the Registration
Statement on Form S-4 of Harris Financial, Inc., filed with the Commission on
February 26, 1997, and amended on March 17, 1997 (File No. 333-22415)).
10.6 Harris Savings Bank Supplemental Executive Retirement Plan.
(Incorporated by Reference to Exhibit 10.8 to the Registration Statement on Form
S-4 of Harris Financial, Inc., filed with the Commission on February 26, 1997,
and amended on March 17, 1997 (File No. 333-22415)).
10.7 Harris Financial, Inc. 1999 Stock Option Plan for Outside Directors.
(Incorporated by Reference to the Proxy Statement of Harris Financial, Inc.,
filed with the Commission on March 18, 1999)).
81
10.8 Harris Financial, Inc. 1999 Incentive Stock Option Plan Directors.
(Incorporated by Reference to the Proxy Statement of Harris Financial, Inc.,
filed with the Commission on March 18, 1999)).
10.9 1984 York Financial Corp. Amended Incentive Stock Option Plan.
(Incorporated by reference to the Registration Statement on Form S-8 of Waypoint
Financial Corp. filed with the Commission on December 19, 2000 (File No.
333-52130)).
10.10 1992 York Financial Corp. Non-Incentive Stock Option Plan for
Directors. (Incorporated by reference to the Registration Statement on Form S-8
of Waypoint Financial Corp. filed with the Commission on December 19, 2000 (File
No. 333-52130)).
10.11 1992 York Financial Corp. Stock Option and Incentive Plan.
(Incorporated by reference to the Registration Statement on Form S-8 of Waypoint
Financial Corp. filed with the Commission on December 19, 2000 (File No.
333-52130)).
10.12 1995 York Financial Corp. Non-Qualified Stock Option Plan for
Directors. (Incorporated by reference to the Registration Statement on Form S-8
of Waypoint Financial Corp. filed with the Commission on December 19, 2000 (File
No. 333-52130)).
10.13 1997 York Financial Corp. Stock Option and Incentive Plan.
(Incorporated by reference to the 1997 Annual Meeting Proxy Statement of York
Financial Corp. filed with the Commission on September 25, 1997 and to
Registration Statement on Form S-8 of York Financial Corp. filed with the
Commission on November 24, 1997 (File No. 333-40887)).
10.14 Supplemental Executive Retirement Plan. (Incorporated by Reference
to Annual Report on Form 10-K for the fiscal year ended June 30, 1999 of York
Financial Corp. filed with the Commission on September 24, 1999 (File No. 000-
14995)).
10.15 Revised Employment Agreement of Charles C. Pearson, Jr.
10.16 Form of Employment Agreement with Robert W. Pullo.
10.17 Form of Employment Agreement with James Moss.
10.18 Form of Change-in-Control Agreement with Richard C. Ruben, Andrew S.
Samuel, Jane B. Tompkins and John G. Coulson. (Incorporated by reference to the
Registration Statement on Form S-1 of Harris Financial, Inc. filed with the
Commission on June 23, 2000 (File No. 333-400046).
10.19 Retirement Agreement and General Release of James L. Durrell.
10.20 Retirement Agreement and General Release of John W. Atkinson with
Addendum.
10.21 Form of Employment Agreement with David E. Zuern.
21 Subsidiaries of Waypoint Financial, Corp.
Subsidiary of Waypoint Financial State of Organization
------------------------------------------- ------------------------------
Waypoint Bank United States
Waypoint Financial Investment Corporation. Delaware
New Service Corporation. Pennsylvania
Waypoint Service Corporation Pennsylvania
Waypoint Brokerage Services, Inc. Pennsylvania
Waypoint Insurance Services, Inc. Pennsylvania
Owen Insurance Inc. Pennsylvania
Advanced Real Estate Associates. Pennsylvania
82
Lenders Support Group Inc. Pennsylvania
Subsidiary of Waypoint Bank State of Organization
---------------------------------------- ---------------------------------
Harris Delaware Corporation Delaware
York Financial Investment Corporation. Delaware
H. S. Service Corporation. Pennsylvania
First Harrisburg Service Corporation. Pennsylvania
C.B.L. Service Corporation Pennsylvania
AVSTAR Mortgage Corporation Pennsylvania
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
99 Report of Ernst & Young LLP Dated July 19, 2000
83
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Waypoint Financial Corp.
Date: April 12, 2001 By: /s/ Charles C. Pearson, Jr.
-----------------------------------------------
Charles C. Pearson, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Charles C. Pearson, Jr. By: /s/ James H. Moss
-------------------------------------------- -----------------------------------------------
Charles C. Pearson, Jr. James H. Moss
Chief Executive Officer and Executive Vice President and
Co-Chairman (Principal Executive Officer) Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: April 12, 2001 Date: April 12, 2001
By: /s/ Robert W. Pullo By: /s/ Ernest P. Davis
------------------------ -----------------------------------------------
Robert W. Pullo Ernest P. Davis
Co-Chairman Director
Date: April 12, 2001 Date: April 12, 2001
By: /s/ Jimmie C. George By: /s/ Randall A. Gross
------------------------ -----------------------------------------------
Jimmie C. George Randall A. Gross
Director Director
Date: April 12, 2001 Date: April 12, 2001
By: /s/ Robert A. Houck By: /s/ Bruce S. Isaacman
------------------------ -----------------------------------------------
Robert A. Houck Bruce S. Isaacman
Director Director
Date: April 12, 2001 Date: April 12, 2001
84
By: /s/ William E. McClure, Jr. By: /s/ Robert E. Poole
-------------------------------------------- --------------------------------------
William E. McClure, Jr. Robert E. Poole
Co-Chairman Director
Date: April 12, 2001 Date: April 12, 2001
By: /s/ Byron M. Ream By: /s/ Robert L. Simpson
------------------------ -----------------------------------------------
Byron M. Ream Robert L. Simpson
Director Director
Date: April 12, 2001 Date: April 12, 2001
By: /s/. William A. Siverling By: /s/ Frank R. Sourbeer
-------------------------------------------- --------------------------------------
William A. Siverling Frank R. Sourbeer
Director Director
Date: April 12, 2001 Date: April 12, 2001
By: /s/ Donald B. Springer By: /s/ Thomas W. Wolf
------------------------ -----------------------------------------------
Donald B. Springer Thomas W. Wolf
Co-Chairman Director
Date: April 12, 2001 Date: April 12, 2001
By: /s/ David E. Zuern
------------------------
David E. Zuern
Director
Date: April 12, 2001
85