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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, 2001
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.
(Name of Small Business Issuer in its Charter)
Pennsylvania 25-1872581
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
235 North Second Street,
Harrisburg, Pennsylvania 17101
(Address of Principal Executive Office) (Zip Code)
(717) 236-4041
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
___________________
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [_]
Indicate by 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 February 28, 2002, there were issued and outstanding 37,934,141
shares of the Registrant's Common Stock.
The aggregate value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of the Common Stock as of
February 28, 2002 was approximately $527 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Proxy Statement for the 2001 Annual Meeting of
Stockholders (Part III).
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1
PART I
ITEM 1. Business
General
Waypoint Financial Corp. was organized as part of the October 17, 2000,
mutual-to-stock conversion of Harris Financial, MHC and merger of Harris
Financial, Inc. and York Financial Corp. As part of the conversion and merger,
Waypoint Financial sold 16,850,000 shares of common stock for $10.00 per share
in a subscription and underwritten public offering. In the conversion and
merger, Waypoint Financial succeeded to the operations of Harris Financial and
York Financial, and became the holding company for Harris Savings Bank and York
Federal Savings and Loan Association. On October 30, 2000, Harris Savings 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 commercial services center, various loan production offices, 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 10 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 from other financial services companies,
such as brokerage firms and insurance companies. Waypoint Financial also 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 has
increased as a result of the enactment of the Financial Services Modernization
Act of 1999, which eased restrictions on entry into the financial services
market by insurance companies and securities firms. Moreover, to the extent that
these changes permit banks, securities firms and insurance companies to
affiliate, the financial services industry could experience further
consolidation. This could result in a growing number of larger 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.
2
Loans
Loan Portfolio Analysis. The following table sets forth the composition of
Waypoint Financial's loan portfolio at the dates indicated. Waypoint Financial
had no concentration of loans exceeding 10% of total gross loans other than as
disclosed below.
At December 31
------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ----------------- -------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- --------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
Residential mortgage
loans:
One- to four-family ...... $1,025,688 41.54 % $1,274,684 49.07% $1,270,978 51.91% $1,129,876 57.23% $1,180,541 63.70%
Construction ............. 36,040 1.46 90,712 3.49 103,278 4.22 99,242 5.03 107,984 5.83
Other .................... - - - - 20 0.00 6,962 0.35 1,605 0.09
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total residential
mortgage loans ...... 1,061,728 43.00 1,365,396 52.56 1,374,276 56.13 1,236,080 62.61 1,290,130 69.62
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial loans:
Commercial real estate 484,894 19.64 396,125 15.25 339,165 13.85 225,771 11.44 137,685 7.43
Commercial business ...... 272,389 11.03 234,837 9.04 190,839 7.80 103,329 5.23 37,635 2.03
Construction and site
development ............. 25,428 1.03 11,840 0.46 14,203 0.58 14,859 0.75 12,338 0.67
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total commercial loans 782,711 31.70 642,802 24.75 544,207 22.23 343,959 17.42 187,658 10.13
Consumer and other loans:
Manufactured housing ..... 97,243 3.94 90,226 3.47 80,164 3.27 65,455 3.31 73,310 3.96
Home equity and second
mortgage ................ 322,182 13.05 326,024 12.55 231,290 9.45 204,700 10.37 206,520 11.14
Indirect automobile ...... 127,258 5.15 117,377 4.52 98,768 4.03 23,937 1.21 - -
Other(1) ................. 78,075 3.16 55,939 2.15 119,625 4.89 100,181 5.07 95,524 5.15
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer and
other loans .......... 624,758 25.30 589,566 22.69 529,847 21.64 394,273 19.97 375,354 20.25
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Loans receivable,
gross ................... 2,469,197 100.00 2,597,764 100.00 2,448,330 100.00 1,974,312 100.00 1,853,142 100.00
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Plus:
Dealer reserves(2) ....... 24,721 23,476 20,698 13,996 14,504
Less:
Unearned premiums ........ 159 210 296 471 855
Net deferred loan
origination fees ........ 8,472 6,917 6,411 7,111 7,242
Allowance for loan losses 23,069 22,586 23,127 19,891 17,002
---------- ---------- ---------- ---------- ----------
Loans receivable, net .... 2,462,218 $2,591,527 $2,439,194 $1,960,835 $1,842,547
========== ========== ========== ========== ==========
_____________
(1) Includes credit card loans, education loans and unsecured personal loans.
(2) Includes reserves established for indirect auto and manufactured housing
loan portfolios.
3
Loan Maturity Schedule
The following table sets forth information as of December 31, 2001,
regarding the dollar amount of loans in Waypoint Financial's portfolio based on
their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Adjustable or floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
Over One Over Three
Within Through Through Five Over Total After
One Year Three Years Years Fixed Five Years One Year Total
----------- ------------ ------------ ------------- ------------ -----------
(In Thousands)
Fixed-Rate Loans:
Residential mortgage loans:
One- to four-family .................... $ 28,496 $ 31,710 $ 42,775 $ 616,349 $ 690,834 $ 719,330
Construction ........................... - - - 36,040 36,040 36,040
----------- ------------ ------------ ------------- ------------ -----------
Total residential mortgage loans .. 28,496 31,710 42,775 652,389 726,874 755,370
Commercial loans:
Commercial real estate ................. 1,241 42,210 31,596 34,685 108,491 109,732
Commercial business .................... 17,750 25,023 20,996 13,973 59,992 77,742
Construction and site development ...... 648 - 512 2,319 2,831 3,479
----------- ------------ ------------ ------------- ------------ -----------
Total commercial loans ............ 19,639 67,233 53,104 50,977 171,314 190,953
Consumer and other loans:
Manufactured housing ................... 9 258 388 96,588 97,234 97,243
Home equity and second mortgage ........ 5,758 11,637 17,665 178,990 208,292 214,050
Indirect automobile and other .......... 1,598 44,892 109,344 21,415 175,651 177,249
----------- ------------ ------------ ------------- ------------ -----------
Total consumer and other loans .... 7,365 56,787 127,397 296,993 481,177 488,542
----------- ------------ ------------ ------------- ------------ -----------
Total fixed-rate loans ............ 55,500 155,730 223,276 1,000,359 1,379,365 1,434,865
Adjustable-Rate Loans:
Residential mortgage loans:
One- to four-family .................... 122,118 122,973 55,952 5,315 184,240 306,358
----------- ------------ ------------ ------------- ------------ -----------
Total residential mortgage loans .. 122,118 122,973 55,952 5,315 184,240 306,358
Commercial loans:
Commercial real estate ................. 155,727 78,057 141,189 189 219,435 375,162
Commercial business .................... 158,024 12,734 18,422 5,467 36,623 194,647
Construction and site development ...... 21,949 - - - - 21,949
----------- ------------ ------------ ------------- ------------ -----------
Total commercial loans ............ 335,700 90,791 159,611 5,656 256,058 591,758
Consumer and other loans:
Home equity and second mortgage ........ 108,120 12 - - 12 108,132
Indirect automobile and other .......... 27,569 486 29 - 515 28,084
----------- ------------ ------------ ------------- ------------ -----------
Total consumer and other loans .... 135,689 498 29 - 527 136,216
----------- ------------ ------------ ------------- ------------ -----------
Total adjustable-rate loans ....... 593,507 214,262 215,592 10,971 440,825 1,034,332
----------- ------------ ------------ ------------- ------------ -----------
Loans receivable, gross ................... $ 649,007 $ 369,992 $ 438,868 $ 1,011,330 $ 1,820,190 $ 2,469,197
=========== ============ ============ ============= ============ ===========
The following table sets forth the dollar amount of all loans maturing or
repricing after December 31, 2002 that have predetermined interest rates and
have floating or adjustable interest rates.
Floating or
Predetermined Rates Adjustable Rates Total
--------------------- --------------------- ---------------------
(In Thousands)
Residential mortgage loans .................. $ 726,874 $ 184,240 $ 911,114
Commercial loans ............................ 171,314 256,058 427,372
Consumer and other loans .................... 481,177 527 481,704
--------------------- --------------------- ---------------------
Total loans ............................ $ 1,379,365 $ 440,825 $ 1,820,190
===================== ===================== =====================
4
Residential Mortgage Lending
Mortgage lending historically was Waypoint Financial's primary business. In
recent years, Waypoint Financial has increased its emphasis on its business
banking and consumer lending, and decreased its reliance on traditional one- to
four-family residential real estate lending. Over the last five years, the
percentage of Waypoint Bank's loan portfolio that consists of one- to
four-family residential real estate loans has decreased significantly, due
primarily to the growth of Waypoint Financial's commercial loan portfolio.
One- to Four-Family Real Estate Loans. Waypoint Financial's primary
residential lending activity is the origination of loans secured by one- to
four- family residential real estate located in its primary market area.
Waypoint Financial sells 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, 2001, Waypoint Financial sold 74%
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 2002.
Waypoint Financial also currently offers adjustable-rate mortgage loans
with terms of up to 30 years, with an interest rate based on the one year
Constant Maturity Treasury Bill index. Interest rate adjustments on such loans
are typically limited to a certain amount during any adjustment period and over
the life of the loan. Waypoint Financial originated an insignificant amount of
adjustable-rate loans in 2001 and sold a substantial portion of these loans,
generally on a servicing released basis.
Waypoint Financial underwrites fixed- and adjustable-rate one- to four-
family residential mortgage loans with loan-to-value ratios of up to 95%,
provided that a borrower obtains private mortgage insurance on loans that exceed
80% of the appraised value or sales price, whichever is less, of the secured
property. Waypoint Financial also requires that title insurance, hazard
insurance and, if appropriate, flood insurance be maintained on all properties
securing real estate loans made by Waypoint Financial. A licensed appraiser
appraises all properties securing one- to four-family first mortgage loans.
In an effort to provide financing for low and moderate income buyers,
Waypoint Financial offers Pennsylvania Housing Finance Agency mortgage loans to
qualified individuals. These loans are offered with fixed-rates of interest and
terms of up to 30 years, and must be secured by one- to four-family residential
property that is occupied by the owner. All of these loans are originated using
modified underwriting guidelines, based on rates and terms established by the
Pennsylvania Housing Finance Agency. These loans are generally offered with a
discounted interest rate (approximately 75 to 100 basis points). All
Pennsylvania Housing Finance Agency loans are originated in amounts of up to 95%
of the lower of the property's appraised value or the sale price. Private
mortgage insurance is required on all such loans. All of these loans are sold on
a servicing released basis to the Pennsylvania Housing Finance Agency
immediately after loan closing.
Construction Loans. Waypoint Financial originates construction loans to
individuals to acquire lots and construct personal residences. At December 31,
2001, residential construction loans amounted to $70.7 million, and the
unadvanced portion of construction loans totaled $34.7 million. Waypoint
Financial's residential construction loans generally provide for the payment of
interest only during the construction phase, which is usually six months. At the
end of the construction phase, the loan converts to a permanent mortgage loan.
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.
Commercial Banking
Waypoint Financial's Commercial Banking Group offers commercial financial
products and services to businesses in its primary market area. The Commercial
Banking group originates commercial real estate loans, commercial business
loans, and construction and site development loans.
Commercial Real Estate Loans. Waypoint Financial's commercial real estate
loans are generally secured by owner-occupied properties used for business
purposes such as small office buildings, industrial facilities or retail
facilities primarily located in Waypoint Financial's primary market area.
Commercial real estate loans also include properties that are less than 50%
occupied by the borrower and are owned primarily for the production of rental
income. Although there may be occasional exceptions to the loan policy,
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the lower of cost or appraised value of
the property provided such loans comply with Waypoint Financial's current in
house loans-to-one borrower limit. Waypoint Financial's commercial real estate
loans may be made with terms of up to ten years, amortization not to
5
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 1.25x. Environmental surveys are required for commercial
real estate loans. Generally, commercial real estate loans made to corporations,
partnerships and other business entities require personal guarantees by
principals of the borrower. At December 31, 2001, Waypoint Financial's largest
commercial real estate loan had a carrying value of $13.0 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
generally supported by personal guarantees. However, Waypoint Financial also
makes unsecured commercial loans available to business clients with strong
credit and who are well-known to Waypoint Financial. Unsecured commercial loans
are generally limited to short-term single payment loans or lines of credit used
to provide general corporate liquidity or to provide for seasonal liquidity
needs. These loans generally are offered at floating rates of interest and are
payable on demand or at a stated short-term maturity.
Construction and Site Development Loans. Waypoint Financial also
originates construction and site development loans to developers and builders
primarily to finance the construction of single-family homes and subdivisions,
the construction of commercial development projects, and site development
projects. Loans to finance the construction of single-family homes and
subdivisions are generally offered to experienced builders with whom Waypoint
Financial has an established relationship. Residential development loans are
typically offered with terms of up to 36 months. The maximum loan-to-value limit
applicable to these loans is 80% of the appraised post-construction value or
cost, whichever is less. Construction loan proceeds are disbursed periodically
as construction progresses and as inspection by Waypoint Financial's approved
appraisers warrants.
Waypoint Financial also makes construction loans for commercial
development projects. The projects include multi-family, apartment, industrial,
retail and office buildings. These loans generally have an interest-only phase
during construction, and convert to permanent financing when construction is
completed. Disbursement of funds is at the sole discretion of Waypoint Financial
and is based on the progress of construction. The maximum loan-to-value limit
applicable to these loans is 80% of the appraised post- construction value or
cost, whichever is less.
Waypoint Financial also originates land loans to local contractors and
developers for the purpose of improving the property, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on the
property, are limited to 70% of the lower of the acquisition price or the
appraised value of the land, and 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, 2001, the
unadvanced amounts of home equity lines of credit totaled $144.9 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
6
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 and home equity lines of credit with terms up to 20 years. The
loan-to-value ratios of both fixed- and variable-rate home equity and second
mortgage loans are generally limited to 90% of the appraised value of the real
estate collateral adjusted for any first mortgage loans.
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, indirect conventional home
improvement loans are unsecured for amounts up to $15,000 and are secured by a
second Mortgage or Deed of Trust for amounts greater than $15,000. Conventional
secured home improvement loans have a maximum loan-to-value ratio of 115%. The
maximum loan amount for a secured conventional home improvement loan is $40,000.
In order to determine market value of a subject property, a home value estimate
is obtained through an independent service provider on loan amounts greater than
$15,000.
Waypoint also originates home improvement and consolidation loans that are
referred by approved Waypoint home improvement dealers. These loans are home
equity loans and have maximum loan-to-value ratios of 100%. For home improvement
consolidation loans with loan-to-value's greater than 90%, a second mortgage
property evaluation appraisal is ordered through an independent service
provider.
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 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 generally issued with three draws or checks and
are endorsed over to the contractor as the construction is completed.
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, 2001, 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.
7
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, 2001,
Waypoint Financial's deferred premium on manufactured housing loans totaled
$20.9 million and amounts held in reserve accounts totaled $8.7 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 77 dealers at December 31, 2001. Waypoint Financial
has been in the indirect auto lending business since August 1998. No one
dealership originated more than 10% of the loan balances outstanding in Waypoint
Financial's portfolio at December 31, 2001. In developing its network, Waypoint
Financial has continued to focus on dealers in its primary market area. A
consumer lending sales officer has been dedicated full time to serve dealers in
order to expand on those relationships and to develop potential new dealer
relationships. The growth of the dealer network has been achieved through an
emphasis on quality service and the development of long- term relationships with
the owners and managers of the dealerships. Waypoint Financial does not
currently engage in auto lease financing. Waypoint Financial makes indirect auto
loans to purchase both new and used cars.
In connection with the origination of indirect auto loans, the interest
rate charged to the borrower on the underlying loan is generally one to two
percentage points higher than the "buy rate" or rate earned by Waypoint
Financial. The difference between the two rates is referred to as the "spread."
At loan inception, the dollar value of the spread over the contractual term of
the loan is prepaid by Waypoint Financial to the auto dealer. Such prepaid
amounts are generally subject to rebate to Waypoint Financial in the event the
underlying loan is prepaid in the first three months up to the life of the loan,
depending on the contract, or goes into default resulting in a repossession. The
risk of loss of amounts previously advanced to the dealer primarily depends upon
loan performance but also depends upon the financial condition of the dealer.
Consequently, the dealer's ability to refund any portion of the prepaid
interest, which is unearned, is subject to economic conditions, generally, and
the financial condition of the dealer. Since Waypoint Financial began indirect
auto lending, it has not written off interest spread prepaid to dealers where
the dealer failed to refund any portion of unearned prepaid interest. At
December 31, 2001, Waypoint Financial's unearned pre-paid interest on indirect
auto loans totaled $3.8 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, 2001,
Waypoint Financial's internal limit on loans to a single borrower was $10.0
million, although exceptions are permitted subject to approval requirements set
forth in the loan policy. Waypoint Bank's statutory limit on loans to one
borrower or related group of borrowers was $61.4 million. As of December 31,
2001, Waypoint Financial's largest lending relationship, including the
borrower's related interests, was approximately $20.2 million, and Waypoint
Financial had a total of ten other lending relationships, including the
borrowers' related interests, that exceeded $10.0 million. As of December 31,
2001, 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.
8
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 26 loan
originators who solicit and originate mortgage loans on behalf of Waypoint
Financial. These loan originators accounted for 96% of the mortgage loans
originated by Waypoint Financial during 2001. 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, 2001,
Waypoint Financial serviced $633.1 million of loans for others. Waypoint
Financial did not purchase any loans during the five-year period ended December
31, 2001.
Waypoint Financial operates a correspondent lending program that purchases
loans in ten states. These states include Maryland, Virginia, Delaware, New
Jersey, Pennsylvania, North Carolina, South Carolina, Ohio, Kentucky 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 and loans sold for the periods indicated.
For the Years Ended December 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ----------
(In Thousands)
Loans originated:
Residential mortgage loans:
One- to four-family ....................... $ 226,589 $ 144,938 $ 279,040 $ 478,332 $ 329,110
Construction .............................. 94,723 199,187 336,163 373,226 274,496
Other ..................................... - - 6,100 8,900 6,100
----------- ----------- ----------- ----------- ----------
Total residential mortgage loans ....... 321,312 344,125 621,303 860,458 609,706
Commercial loans:
Commercial real estate .................... 168,472 133,822 165,737 113,061 53,739
Commercial business ....................... 151,956 172,219 224,694 157,552 23,227
Construction and site development ......... 28,367 29,150 24,871 22,800 6,073
----------- ----------- ----------- ----------- ----------
Total commercial loans ................. 348,795 335,191 415,302 293,413 83,039
Consumer and other loans:
Manufactured housing ...................... 18,028 20,467 26,300 5,400 11,900
Home equity and second mortgage ........... 91,817 112,104 129,239 102,529 77,694
Indirect automobile ....................... 67,165 60,609 91,685 21,279 -
Other ..................................... 42,094 38,748 68,875 56,847 43,264
----------- ----------- ----------- ----------- ----------
Total consumer loans ................... 219,104 231,928 316,099 186,055 132,858
----------- ----------- ----------- ----------- ----------
Total loans originated ................. $ 889,211 $ 911,244 $1,352,704 $1,339,926 $ 825,603
=========== =========== =========== =========== ==========
Loans securitized and/or sold:
Residential mortgage loans:
One- to four-family ....................... $ 237,853 $ 251,097 $ 325,158 $ 369,930 $ 260,399
----------- ----------- ----------- ----------- ----------
Total loans sold ....................... $ 237,853 $ 251,097 $ 325,158 $ 369,930 $ 260,399
=========== =========== =========== =========== ==========
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, 2001,
Waypoint Financial had loan commitments and unadvanced loans and lines of credit
totaling $521.7 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.
9
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, 2001, Waypoint Financial
had approximately $8.5 million of net deferred loan fees. Waypoint Financial
amortized $.7 million of net deferred loan fees during the year ended December
31, 2001.
Non-performing Assets, Delinquencies and Impaired Loans. The majority of
the loan payments on first mortgages are due on the first day of each month.
When a borrower fails to make a required loan payment, Waypoint Financial
attempts to cure the deficiency by contacting the borrower and seeking the
payment. A late notice is mailed on the 16th day of the month. In most cases,
deficiencies are cured promptly. If a delinquency continues beyond the 16th day
of the month, the account is referred to an in-house collector. Waypoint
Financial will institute foreclosure or other proceedings after the 90th day of
a delinquency, as necessary, to minimize any potential loss.
Management informs the Board of Directors monthly of the amount of loans
delinquent more than 30 days and all foreclosed and repossessed property that
Waypoint Financial owns. Waypoint Financial ceases accruing interest on mortgage
loans when principal or interest payments are delinquent 90 days or more unless
management determines the loan principal and interest to be fully secured and in
the process of collection. Once the accrual of interest on a loan is
discontinued, all interest previously accrued is reversed against current period
interest income.
Waypoint Financial follows Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118 "Accounting by Creditors for Impairment of a Loan, an amendment to SFAS No.
114." At December 31, 2001 and 2000, Waypoint Financial had recorded investments
in impaired loans of $8.2 million and $5.9 million, respectively. At December
31, 2001 and 2000, 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,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- ------------ ------------ ------------ -------------
(In Thousands)
Non-accrual residential mortgage loans ........... $ 1,345 $ 540 $ 263 $ 4,094 $ 4,982
Non-accrual commercial loans 6,185 4,552 9,280 2,538 562
Non-accrual other loans .......................... 706 604 727 1,938 1,394
--------------- ------------ ------------ ------------ -------------
Total non-accrual loans (1) ................. 8,236 5,696 10,270 8,570 6,938
Loans 90 days or more delinquent
and still accruing ............................. 14,660 17,481 13,279 9,134 15,681
--------------- ------------ ------------ ------------ -------------
Total non-performing loans .................. 22,896 23,177 23,549 17,704 22,619
Total foreclosed other assets ............... 666 861 1,149 - -
Total foreclosed real estate ................ 804 3,086 3,754 14,088(2) 15,688(2)
--------------- ------------ ------------ ------------ -------------
Total non-performing assets ...................... $24,366 $ 27,124 $ 28,452 $ 31,792 $ 38,307
=============== ============ ============ ============ =============
Total non-performing loans to total loans (3) .... 0.92% 0.89% 0.96% 0.90% 1.23%
=============== ============ ============ ============ =============
Total non-performing loans and
foreclosed real estate to total assets ......... 0.45% 0.57% 0.65% 0.82% 1.11%
=============== ============ ============ ============ =============
- ----------
(1) Waypoint Financial would have recorded additional interest income on
non-accrual loans, had they been current, of $0.3 million, $0.2 million and $0.3
million in 2001, 2000 and 1999, 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, 2001, 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 $1.7 million.
10
Real Estate Owned. Real estate acquired by Waypoint Financial as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at the lower of the
carrying value or fair value less estimated costs to sell at the date of
foreclosure. At the time of foreclosure, any excess of carrying value over fair
value is charged to the allowance for loan losses. Holding costs and declines in
fair value result in charges to expense after the property is acquired.
Asset Classification. Banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require their classification.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, it is charged
off in the quarter in which it is so classified, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified
substandard or doubtful can be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"special mention." Waypoint Financial performs an internal analysis of its loan
portfolio and assets to classify such loans and assets similar to the manner in
which such loans and assets are classified by the federal banking regulators. In
addition, Waypoint Financial regularly analyzes the losses inherent in its loan
portfolio and its nonperforming loans in determining the appropriate level of
the allowance for loan losses.
Allowance for Loan Losses. 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 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 accounting
principles generally accepted in the United States, 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.
11
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,
---------------------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
(In Thousands)
Balance at beginning of period .................. $ 22,586 $ 23,127 $ 19,891 $ 17,002 $ 14,735
Pooling adjustment to conform
accounting periods ............................ - 234 - - -
Provision for loan losses ....................... 6,996 5,070 4,840 6,172 4,347
Provision component related to
unfunded commitments .......................... - - 617 (503) (422)
Charge-offs:
Residential mortgage loans ................. (739) (1,168) (1,289) (1,837) (2,061)
Commercial loans ........................... (2,770) (2,482) (50) (607) (68)
Consumer and other loans ................... (4,545) (2,962) (1,364) (741) (97)
-------- -------- -------- -------- --------
Total charge-offs ..................... (8,054) (6,612) (2,703) (3,185) (2,226)
Recoveries:
Residential mortgage loans ................. 50 161 262 327 236
Commercial loans ........................... 465 24 85 24 294
Consumer and other loans ................... 1,026 582 135 54 38
-------- -------- -------- -------- --------
Total recoveries ...................... 1,541 767 482 405 568
-------- -------- -------- -------- --------
Balance at the end of period .................... $ 23,069 $ 22,586 $ 23,127 $ 19,891 $ 17,002
======== ======== ======== ======== ========
Net charge-offs to average loans
outstanding ................................... 0.25 % 0.22 % 0.10 % 0.15 % 0.09 %
======== ======== ======== ======== ========
Allowance for loan losses to net loans .......... 0.93 % 0.87 % 0.95 % 1.01 % 0.92 %
======== ======== ======== ======== ========
Allowance for loan losses to non
performing loans .............................. 100.76 % 97.45 % 98.21 % 112.35 % 75.17 %
======== ======== ======== ======== ========
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,
---------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------- ------------------- -------------------- -------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Total Total Total Total Total
Amount Reserves Amount Reserves Amount Reserves Amount Reserves Amount Reserves
------ -------- ------ ---------- -------- ---------- ------- ---------- ------- --------
(Dollars in Thousands)
Residential
mortgage loans ..... $ 1,867 8.09% $ 2,165 9.59% $ 5,250 22.70% $ 5,665 28.48% $ 4,510 26.53%
Commercial loans ...... 15,722 68.15 14,625 64.75 10,949 47.34 7,622 38.32 3,316 19.50
Consumer and other
Loans .............. 4,529 19.64 4,178 18.50 4,112 17.78 3,236 16.27 3,697 21.74
General ............... 951 4.12 1,618 7.16 2,816 12.18 3,368 16.93 5,479 32.23
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total ......... $23,069 100.00% $22,586 100.00% $23,127 100.00% $19,891 100.00% $17,002 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
12
Investment Activities
The Board of Directors reviews and approves Waypoint Financial's investment
policy on an annual basis. The Chief Executive Officer, Chief Financial Officer
and Chief Investment Officer, as authorized by the Board, implement this policy
based on the established guidelines within the written policy, and other
established guidelines, including those set periodically by the Asset/Liability
Management Committee. Investment decisions are based upon the quality of a
particular investment, its inherent risks, the composition of the balance sheet,
Waypoint Financial's maturity and amortization schedules, market expectations,
liquidity, income and collateral needs, and how the investment fits within
Waypoint Financial's interest rate risk strategy given its interest rate
sensitivity. Waypoint Financial's investment strategies are designed primarily
to manage the interest rate sensitivity of assets and liabilities, to generate a
favorable return without incurring imprudent interest rate and credit risks, to
complement lending activities, to provide liquidity, and to minimize Waypoint
Financial's tax liability.
Waypoint Financial's investment strategies incorporate a leveraged
investment program to increase net income and deploy capital that is not
committed for other uses by Waypoint Financial in the near term. Such
alternative uses of capital include, but are not limited to, loan growth, branch
network expansion, merger and acquisition investments, and stock repurchases.
Waypoint Financial restricts the leveraged investment program in a manner to
generate liquidity should capital be required for these or other alternative
uses. Waypoint Financial's investment leverage program generates net interest
income through the acquisition of securities that meet all policy guidelines and
generally are funded by matched-maturity borrowings.
Following are selected financial highlights related to Waypoint Financial's
leveraged investment program for the years ended December 31, 2001, 2000, and
1999:
2001 2000 1999
------------ ---------- ----------
Average leveraged investment balance $ 1,021,017 $ 794,643 $ 817,150
Contribution to net interest margin $ 11,570 $ 9,159 $ 9,087
Net interest margin including leverage 2.43% 2.36% 2.58%
Net interest margin excluding leverage 2.77% 2.63% 2.95%
Efficiency ratio including leverage 55.76% 68.98% 63.47%
Efficiency ratio excluding leverage 60.61% 74.91% 68.84%
Investment Portfolio
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. At December 31, 2001, all of Waypoint Financial's
securities were classified as "available-for-sale." Between December 31, 2000
and April 1, 2001, Waypoint Financial transferred all of the securities from its
held-to-maturity portfolio to its available-for-sale portfolio. The
held-to-maturity portfolio was recorded at $22.7 million as of December 31,
2000. At the time of transfer, the market value of this portfolio was $22.2
million resulting in an unrecognized loss upon transfer of $0.5 million, which
was recorded as a reduction in other comprehensive income for the first quarter
of 2001.
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, 2001, over 87% 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.
Waypoint Financial invests in a large variety of mortgage-backed
securities, including balloon and fixed-rate certificates. Waypoint Financial
generally purchases short-term or planned amortization class collateralized
mortgage obligations. Waypoint Financial also maintains a significant portfolio
of tax-advantaged instruments. The remainder of the investment portfolio is
invested in
13
corporate bonds, primarily investment grade Trust-Preferred issues of major
financial institutions rated by Standard & Poors or Moody's.
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.
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,
----------------------------------------------------------------------------------
2001 2000 1999
------------------------- --------------------------- --------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Held to maturity:
U.S. Government and agencies .............. $ - $ - $ 3,500 $ 3,513 $ 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 .............. $ 522,531 $ 525,358 $ 491,998 $ 482,430 $ 535,470 $ 504,730
Corporate bonds ........................... 89,788 82,675 63,609 58,657 63,352 59,826
Municipal securities ...................... 82,734 83,647 69,119 71,461 63,980 63,492
Equity securities ......................... 210,539 216,497 150,891 154,715 152,575 154,320
Mortgage-backed securities:
Commercial mortgage-backed securities ..... 10,002 10,000 - - - -
Agency PCs & CMOs ......................... 852,239 846,720 475,735 464,148 398,356 390,326
Private issue CMOs ........................ 784,491 787,463 629,795 623,461 473,170 452,704
----------- ------------ ------------ ------------ ------------ ------------
Total mortgage-backed securities ..... 1,646,732 1,644,183 1,105,530 1,087,609 871,526 843,030
----------- ------------ ------------ ------------ ------------ ------------
Total securities available for sale .. $ 2,552,324 $ 2,552,360 $ 1,881,147 $ 1,854,872 $ 1,686,903 $ 1,625,398
----------- ------------ ------------ ------------ ------------ ------------
Other interest-earning securities:
Interest-earning cash ..................... $ 47,371 $ 47,371 $ 25,434 $ 25,434 $ 37,289 $ 37,289
----------- ------------ ------------ ------------ ------------ ------------
Total marketable securities and
interest-earning investments ...... $ 2,599,695 $ 2,599,731 $ 1,929,290 $ 1,902,046 $ 1,746,881 $ 1,684,792
=========== ============ ============ ============ ============ ============
14
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, 2001.
At December 31, 2001
------------------------------------------------------------------------------
After One Through Five After Five Through Ten
One Year or Less Years Years
------------------------ ------------------------- -------------------------
Amortized Weighted Amortized Weighted Amortized Weighted
Cost Average Yield Cost Average Yield Cost Average Cost
--------- ------------- --------- ------------- ---------- ------------
(Dollars in Thousands)
Available for sale:
U.S. government and agency obligations ....... $ 10,233 5.67 % $ 110,809 5.10% $ 345,060 6.41%
Corporate bonds .............................. - - 4,969 2.93 2,013 6.76
Municipal securities(2) ...................... - - - - 2,857 5.68
Equity(1),(2) ................................ - - - - - -
Mortgage-backed securities(3)(4):
Commercial mortgage-backed ................... - - - - - -
GNMA PC's .................................... 113 8.81 - - - -
GNMA ARM's ................................... 264 4.00 1,308 4.00 2,069 4.00
Agency CMOs(5) ............................... 30,636 3.42 124,609 3.45 162,057 3.51
Private issue CMOs ........................... 20,174 4.65 83,555 4.78 113,583 4.83
--------- ------ --------- ------ ---------- ------
Total mortgage-backed securities ........ 51,187 3.92 209,472 3.98 277,709 3.87
--------- ------ --------- ------ ---------- ------
Total securities available for sale ..... 61,420 4.21 325,250 4.35 627,639 5.28
--------- ------ --------- ------ ---------- ------
Total marketable securities ............. $ 61,420 4.21% $ 325,250 4.35% $ 627,639 5.28%
========= ====== ========= ====== ========== ======
-------------------------
Over Ten Years
-------------------------
Amortized Weighted
Cost Average Yield
---------- -------------
Available for sale:
U.S. government and agency obligations ....... $ 56,429 6.92%
Corporate bonds .............................. 82,806 3.01
Municipal securities(2) ...................... 79,877 5.56
Equity(1),(2) ................................ 210,539 5.94
Mortgage-backed securities(3)(4):
Commercial mortgage-backed ................... 10,002 5.02
GNMA PC's .................................... - -
GNMA ARM's ................................... 16,359 4.00
Agency CMOs(5) ............................... 514,824 3.85
Private issue CMOs ........................... 567,179 4.74
------------ -------
Total mortgage-backed securities ........ 1,108,364 4.27
------------ -------
Total securities available for sale ..... 1,538,015 4.59
------------ -------
Total marketable securities ............. $ 1,538,015 4.59%
============ =======
- ----------
(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, $1.417 billion 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.
15
At December 31, 2001
-----------------------------------------------
Total
-----------------------------------------------
Amortized Market Weighted
Cost Value Average Yield
-------------- -------------- ---------------
Available for sale:
U.S. government and agency obligations ......................... $ 522,531 $ 525,358 6.17%
Corporate bonds ................................................ 89,788 82,675 3.09
Municipal securities(2) ........................................ 82,734 83,647 5.56
Equity(1),(2) .................................................. 210,539 216,497 5.94
Mortgage-backed securities(3)(4):
Commercial mortgage-backed ..................................... 10,002 10,000 5.02
GNMA PC's ...................................................... 113 122 8.81
GNMA ARM's ..................................................... 20,000 20,000 4.00
Agency CMOs(5) ................................................. 832,126 826,598 3.72
Private issue CMOs ............................................. 784,491 787,463 4.78
-------------- -------------- ----------
Total mortgage-backed securities .......................... 1,646,732 1,644,183 4.23
-------------- -------------- ----------
Total securities available for sale ....................... 2,552,324 2,552,360 4.77
-------------- -------------- ----------
Total marketable securities ............................... $ 2,552,324 $ 2,552,360 4.77%
============== ============== ==========
- ----------
(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, $1.417 billion 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.
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 transaction, regular savings, money
market deposits and time deposits, including certificate of deposit accounts and
individual retirement accounts. The maturities of Waypoint Financial's
certificate of deposit accounts range from 7 days to 10 years. In addition,
Waypoint Financial offers a variety of commercial business products to small
businesses operating within its primary market area. Currently, Waypoint
Financial does not generally negotiate interest rates to attract jumbo
certificates, but accepts deposits of $100,000 or more based on posted rates
with certain discretion given to branch managers and the funding desk manager.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit, limits on the number of transactions,
and the interest rate, among other factors. Waypoint Financial regularly
evaluates the internal cost of funds, surveys rates offered by competing
institutions, reviews Waypoint Financial's cash flow requirements for lending,
monitors deposit withdrawal trends and liquidity and changes the rates offered
as appropriate.
While Waypoint Financial does not generally solicit funds outside its
primary market area, it does accept brokered deposits as liquidity demands
require and costs are favorable versus wholesale borrowing alternatives.
Included in Waypoint Financial's time deposits at December 31, 2001, 2000, and
1999 were $205.0 million, $127.9 million, and $77.1 million, respectively, of
brokered deposits.
16
Average Balance and Costs of Deposits. The following table sets forth the
average amount, percentage represented by such amount, and weight average rate
paid on Waypoint Financial's deposits.
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------- -------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Percent Cost Amount Percent Cost Amount Percent Cost
----------- ---------- --------- ----------- -------- --------- ----------- ---------- ---------
Savings Deposit ......... 217,134 8.66% 2.08% $ 184,404 7.02% 2.52% $ 186,197 7.77% 2.21%
Time Deposits ........... 1,449,583 57.82 5.53 1,643,535 62.59 5.75 1,431,720 59.77 5.40
Transaction and money
market accounts ...... 840,392 33.52 2.65 798,006 30.39 3.25 777,511 32.46 3.07
----------- ------- ------- ----------- -------- ------ ----------- ------- -------
Total ........... $ 2,507,109 100.00% 4.27% $ 2,625,945 100.00% 4.76% $ 2,395,428 100.00% 4.40%
=========== ======= ======= =========== ======== ====== =========== ======= =======
Deposits Flow. The following table summarizes the deposit activity for the
periods indicated.
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999
-------------- --------------- --------------
(In Thousands)
Beginning balance .................................................. $ 2,625,720 $ 2,544,598 $ 2,320,632
-------------- --------------- --------------
Increase before interest credit .................................... (197,637) 24,371 82,254
Interest credited .................................................. 109,186 124,135 104,439
Purchased Deposits(1) .............................................. - - 37,273
-------------- --------------- --------------
Net increase ....................................................... (88,451) 148,506 223,966
Pooling Adjustment to conform accounting years ..................... - (67,384) -
-------------- --------------- --------------
Ending balance ................................................ $ 2,537,269 $ 2,625,720 $ 2,544,598
============== =============== ==============
- ----------
(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.
During 2001, Waypoint Financial implemented disciplined pricing strategies
in managing the deposit portfolio, particularly in time deposits. While these
strategies have resulted in a significant decrease in total deposits, most of
the outflow occurred in high-cost product lines. This trend is reflected in the
average balances and costs noted in the preceding discussion. Waypoint Financial
believes such desciplined pricing strategies are critical toward improving
profitability.
Time Deposits by Maturity Schedule. The following table sets forth the amount
and maturities of certificates of deposit at December 31, 2001.
Amount Due
----------------------------------------------------------------
Weighted Average Rate Less Than 1-2 2-3 After 3
- --------------------- One Year Years Years Years Total
----------- ----------- ----------- ----------- ------------
(In Thousands)
4% or less ...................................................... $ 312,557 $ 109,538 $ 31,802 $ 106,723 $ 560,620
4.01-6.00% ...................................................... 133,913 139,080 63,362 81,712 418,067
6.01-8.00% ...................................................... 247,209 92,125 116,527 10,175 466,036
----------- ----------- ----------- ----------- ------------
Total ...................................................... $ 693,679 $ 340,743 $ 211,691 $ 198,610 $ 1,444,723
=========== =========== =========== =========== ============
17
Certificates of Deposit of $100,000 and More. The following table presents
information as of December 31, 2001, 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 ..................... $ 54,019 4.73 %
Over three months through six months ..... 20,567 5.24
Over six months through twelve months .... 22,897 4.72
Over twelve months ....................... 90,161 5.45
-------- -----
Total ............................... $187,644 5.13 %
======== =====
______________
(1) Excludes brokered certificates of deposit.
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 generally reduces net
interest margin due to the higher cost of non-deposit funds as compared to core
deposits. A significant portion of Waypoint Financial's wholesale borrowings are
placed with the Federal Home Loan Bank of Pittsburgh.
The Federal Home Loan Bank functions as a central reserve bank providing
credit for Waypoint Financial and other member financial institutions. As a
member, Waypoint Financial is required to own capital stock in the Federal Home
Loan Bank and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
Federal Home Loan Bank's assessment of the institution's creditworthiness.
Waypoint Financial's maximum borrowing capacity with the Federal Home Loan Bank
totaled $2.718 billion at December 31, 2001, with remaining available capacity
totaling $875.8 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,
---------------------------------------------
2001 2000 1999
----------- ----------- ----------
(In Thousands)
Outstanding at end of period:
FHLB .......................................... $1,842,170 $1,434,806 $ 904,660
Repurchase agreements ......................... 449,770 189,853 568,200
ESOP and other ................................ 47 670 15,530
---------- ---------- ----------
Total ................................. $2,291,987 $1,625,329 $1,488,390
========== ========== ==========
Weighted average rate at end of period:
FHLB .......................................... 4.11 % 6.24 % 5.63 %
Repurchase agreements ......................... 2.62 5.71 6.25
ESOP and other ................................ 9.50 9.77 8.42
Total ................................. 3.82 % 6.18 % 5.90 %
18
Maximum amount outstanding at any month-end During the period:
FHLB ............................................................ $1,870,888 $1,434,806 $1,007,479
Repurchase agreements ........................................... 499,239 313,000 643,324
ESOP and other .................................................. 530 15,663 15,663
---------- ---------- ----------
Total ................................................... $2,370,657 $1,763,469 $1,666,466
========== ========== ==========
Average amount outstanding during the period:
FHLB ............................................................ $1,616,444 $1,361,786 $ 931,636
Repurchase agreements ........................................... 414,054 204,664 500,304
ESOP and other .................................................. 552 5,297 8,170
---------- ---------- ----------
Total ................................................... $2,031,050 $1,571,747 $1,440,110
========== ========== ==========
Weighted average rate during the period:
FHLB ............................................................ 5.28 % 6.40 % 5.40 %
Repurchase agreements ........................................... 4.29 5.68 5.60
ESOP and other .................................................. 5.47 8.68 8.14
Total ................................................... 5.08 % 6.31 % 5.51 %
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 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 90%-owned subsidiary Waypoint Settlement Services, Inc.,
which primarily engages in providing title insurance and settlement services in
real estate transactions to customers of Waypoint Bank and to the general
public.
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, 2001.
19
Waypoint Financial's wholly-owned financial institution subsidiary Waypoint
Bank, in addition to its own banking operations, also conducts business
activities through its direct subsidiaries as follows:
Waypoint Investment Corporation. Waypoint Investment Corporation was
established in 2001 and engages in investment management services for Waypoint
Bank. Waypoint Investment Corporation was created through the merger of Harris
Delaware Corporation (incorporated in 1995) and York Financial Investment
Corporation (incorporated in 1997).
H. S. Service Corporation. H. S. Service Corporation was incorporated in
1974 and operates joint ventures engaged in residential real estate development.
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 through
AVSTAR Mortgage Corporation, its mortgage subsidiary, until 1999 when these
operations were discontinued.
20
REGULATION
Waypoint Bank is examined and supervised extensively by the Office of
Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC).
Under federal regulation, financial institutions are periodically examined to
ensure that they satisfy applicable standards with respect to their capital
adequacy assets, management, earnings, liquidity and sensitivity to market
interest rates. Following completion of 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 its examination in 2001 by
the OTS. Waypoint Bank is also a member of, and owns stock in, the Federal Home
Loan Bank of Pittsburgh, which is one of the twelve regional banks in the
Federal Home Loan Bank System. This regulation and supervision limits the
activities in which Waypoint Bank may engage. Waypoint Bank is also regulated to
a lesser extent by the Board of Governors of the Federal Reserve System,
governing reserves to be maintained against deposits and other matters. The OTS
examines Waypoint Bank and prepares reports for the consideration of its board
of directors on any operating deficiencies. Waypoint Bank's relationship with
its depositors and borrowers is also regulated to a great extent by both federal
and state laws, especially in matters concerning the ownership of savings
accounts and the form and content of Waypoint Bank's mortgage documents. Any
change in this regulation, whether by the FDIC, OTS, or Congress, could have a
material adverse impact on Waypoint Financial and Waypoint Bank and their
operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of federal savings banks are subject to
extensive regulation, including restrictions or requirements with respect to
loans to one borrower, the percentage of non-mortgage loans or investments to
total assets, capital distributions, permissible investments and lending
activities, liquidity, transactions with affiliates and community reinvestment.
In particular, many types of loans, such as commercial real estate, commercial
business and consumer loans, are limited to a specific percentage of capital or
assets. The description of statutory provisions and regulations applicable to
savings associations set forth herein does not purport to be a complete
description of these statutes and regulations and their effect on Waypoint Bank.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and together with the risk-based capital standard, a 4% Tier 1 risk-based
capital 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 OTS capital regulation based on the risks
believed inherent in the type of asset. Core (tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for- sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge. At December 31, 2001, Waypoint Bank
exceeded each of its capital requirements.
Loans to One Borrower. Federal savings associations generally may not make
a loan or extend credit to a single or related group of borrowers in excess of
15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which is defined to include
certain securities and bullion, but generally does not include real estate. As
of December 31, 2001, 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
21
less specified liquid assets up to 20% of total assets, goodwill and other
intangible assets, and the value of property used to conduct business. A savings
association that fails the qualified thrift lender test must either convert to a
bank charter or operate under specified restrictions. Waypoint Bank met the
qualified thrift lender test throughout 2001 as reported in its quarterly Thrift
Financial Reports to the OTS.
Capital Distributions. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock repurchases and other
transactions charged to the capital account of a savings institution. A savings
institution must file an application for OTS approval of a capital distribution
if either (1) the total capital distributions for the applicable calendar year
exceed the sum of the institution's net income for that year to date plus the
institution's retained net income for the preceding two years, (2) the
institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company, as well as certain other institutions, must still file a notice with
the OTS at least 30 days before the board of directors declares a dividend or
approves a capital distribution.
Any additional capital distributions would require prior OTS approval. If
Waypoint Bank's capital falls below its required levels or the OTS notifies it
that it is in need of more than normal supervision, Waypoint Bank's ability to
make capital distributions could be restricted. In addition, the OTS may
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by regulation, if the OTS determines that the
distribution would constitute an unsafe or unsound practice.
Liquidity. The OTS requires Waypoint Bank to maintain sufficient liquidity
to ensure its safe and sound operation. Effective July 18, 2001, the OTS no
longer requires savings institutions to maintain an average daily balance of
liquid assets of at least 4% of its liquidity base.
Community Reinvestment Act and Fair Lending Laws. Federal savings banks
have a responsibility under the Community Reinvestment Act (CRA) and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. An institution's failure to comply with the provisions of the CRA
could, at a minimum, result in regulatory restrictions on its activities, and
failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act
could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. Waypoint Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination.
Transactions with Related Parties. Waypoint Bank's authority to engage in
transactions with related parties or "affiliates" or to make loans to specified
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act. The
term "affiliates" for these purposes generally means any company that controls
or is under common control with an institution, including Waypoint Financial
Corp. and its non-savings institution subsidiaries. Section 23A limits the
aggregate amount of certain "covered" transactions with any individual affiliate
to 10% of the capital and surplus of the savings institution and also limits the
aggregate amount of covered transactions with all affiliates to 20% of the
savings institution's capital and surplus. Covered transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that covered transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
Waypoint Bank's authority to extend credit to executive officers, directors
and 10% stockholders, as well as entities controlled by these persons, is
currently