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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
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
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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 checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [_]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]
As of February 28, 2003, there were issued and outstanding 33,001,118
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, 2003 was approximately $587.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Proxy Statement for the 2003 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. The merger with York Financial was
accounted for as a pooling-of-interests. Accordingly, historical financial
information in this report includes restated operations to accommodate the
pooling-of-interests merger.
Waypoint Financial's assets consist primarily of 100% of the outstanding
shares of Waypoint Bank. Waypoint Financial also wholly owns Waypoint Insurance
Group, Waypoint Brokerage Services, Inc. and various other financial services
subsidiaries through which Waypoint Financial provides insurance, brokerage, and
other fee-based services. Waypoint Bank, whose predecessor was founded in 1886,
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.
Market Area
Waypoint Financial conducts its business through fifty-nine offices,
including fifty-one 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 that includes Harford, Washington and
Baltimore Counties. In addition, Waypoint Financial maintains an operations
center, a business center, a support center, eight loan production offices, a
mortgage lending office, two commercial banking offices, and a commissioned
mortgage origination staff that originates residential mortgage loans for
Waypoint Financial primarily in Pennsylvania and Maryland, although loans are
originated in other states within the Mid-Atlantic region. Waypoint Financial's
insurance subsidiary, Waypoint Insurance Group, operates through offices in
York, Harrisburg, and Camp Hill, Pennsylvania.
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,
distribution, 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 and the mutual fund industry.
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
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. 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
------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------- ------------------ ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
Residential mortgage loans:
One-to-four family......... $ 697,505 29.84% $1,025,688 41.27% $1,274,684 48.76% $1,270,978 51.62% $1,129,876 57.04%
Construction............... 23,636 1.01 36,040 1.45 90,712 3.47 103,278 4.19 99,242 5.01
Other...................... - - - - - - 20 - 6,962 0.35
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
721,141 30.85 1,061,728 42.72 1,365,396 52.23 1,374,276 55.81 1,236,080 62.41
Less:
Unearned premiums......... 95 - 159 0.01 210 0.01 296 0.01 471 0.02
Net deferred loan
origination fees......... 3,616 0.15 5,116 0.21 4,491 0.17 4,943 0.20 7,573 0.38
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total residential
mortgage loans........ 717,430 30.69 1,056,453 42.51 1,360,695 52.05 1,369,037 55.60 1,228,036 62.00
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial loans:
Commercial real estate..... 563,138 24.09 484,894 19.51 396,125 15.15 339,165 13.77 225,771 11.40
Commercial business........ 332,253 14.21 272,389 10.96 234,837 8.98 190,839 7.75 103,329 5.22
Construction and site
development............... 23,724 1.01 25,428 1.02 11,840 0.45 14,203 0.58 14,859 0.75
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
919,115 39.32 782,711 31.49 642,802 24.59 544,207 22.10 343,959 17.37
Less:
Net deferred loan
origination fees......... 1,308 0.06 1,171 0.05 923 0.04 934 0.04 643 0.03
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total commercial loans. 917,807 39.26 781,540 31.45 641,879 24.55 543,273 22.06 343,316 17.33
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Consumer and other
loans:
Manufactured housing....... 106,098 4.54 97,243 3.91 90,226 3.45 80,164 3.26 65,455 3.30
Home equity and second
mortgage.................. 360,102 15.40 322,182 12.96 326,024 12.47 231,290 9.39 204,700 10.33
Indirect automobile........ 138,530 5.93 127,258 5.12 117,377 4.49 98,768 4.01 23,937 1.21
Other(1)................... 74,289 3.18 78,075 3.14 55,939 2.14 119,625 4.86 100,181 5.06
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
679,019 29.05 624,758 25.14 589,566 22.55 529,847 21.52 394,273 19.91
Plus:
Dealer reserves(2)........ 25,845 1.11 24,721 0.99 23,476 0.90 20,698 0.84 13,996 0.71
Net deferred loan
origination fees......... (2,489) (0.11) (2,185) (0.09) (1,503) (0.06) (534) (0.02) 1,105 0.06
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total consumer
and other loans....... 702,375 30.05 647,294 26.05 611,539 23.39 550,011 22.34 409,374 20.67
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total net loans before all
allowance for loan losses. 2,337,612 100.00 2,485,287 100.00 2,614,113 100.00 2,462,321 100.00 1,980,726 100.00
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Less:
Allowance for loan losses.. 27,506 23,069 22,586 23,127 19,891
---------- ---------- ---------- ---------- ----------
Loans receivable, net...... $2,310,106 $2,462,218 $2,591,527 $2,439,194 $1,960,835
========== ========== ========== ========== ==========
- ----------
(1) Includes 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, 2002,
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 Three
Over One Through
Within 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 ............................... $ 19,731 $ 25,024 $ 6,842 $ 479,887 $ 511,753 $ 531,484
Construction ..................................... 1,035 - - 22,601 22,601 23,636
--------- --------- ----------- --------- ---------- ----------
Total residential mortgage loans ............ 20,766 25,024 6,842 502,488 534,354 555,120
Commercial loans:
Commercial real estate ........................... 18,736 33,824 23,173 25,500 82,497 101,233
Commercial business .............................. 16,966 22,349 18,411 9,711 50,471 67,437
Construction and site development ................ 200 - - - - 200
--------- --------- ----------- --------- ---------- ----------
Total commercial loans ...................... 35,902 56,173 41,584 35,211 132,968 168,870
Consumer and other loans:
Manufactured housing ............................. 17 268 570 105,243 106,081 106,098
Home equity and second mortgage .................. 10,903 12,375 12,915 169,059 194,349 205,252
Indirect automobile and other .................... 6,519 49,789 107,077 21,811 178,677 185,196
--------- --------- ----------- --------- ---------- ----------
Total consumer and other loans .............. 17,439 62,432 120,562 296,113 479,107 496,546
--------- --------- ----------- --------- ---------- ----------
Total fixed-rate loans ...................... 74,107 143,629 168,988 833,812 1,146,429 1,220,536
Adjustable-Rate Loans:
Residential mortgage loans:
One-to-four family ............................... 86,685 58,138 20,998 200 79,336 166,021
--------- --------- ----------- --------- ---------- ----------
Total residential mortgage loans ............ 86,685 58,138 20,998 200 79,336 166,021
Commercial loans:
Commercial real estate ........................... 229,932 88,105 115,410 28,458 231,973 461,905
Commercial business .............................. 220,035 9,928 20,346 14,507 44,781 264,816
Construction and site development ................ 19,670 313 3,541 - 3,854 23,524
--------- --------- ----------- --------- ---------- ----------
Total commercial loans ...................... 469,637 98,346 139,297 42,965 280,608 750,245
Consumer and other loans:
Home equity and second mortgage .................. 154,850 - - - - 154,850
Other ............................................ 27,338 260 25 - 285 27,623
--------- --------- ----------- --------- ---------- ----------
Total consumer and other loans .............. 182,188 260 25 - 285 182,473
--------- --------- ----------- --------- ---------- ----------
Total adjustable-rate loans ................. 738,510 156,744 160,320 43,165 360,229 1,098,739
--------- --------- ----------- --------- ---------- ----------
Loans receivable, gross ............................. $ 812,617 $ 300,373 $ 329,308 $ 876,977 $1,506,658 $2,319,275
========= ========= =========== ========= ========== ==========
The following table sets forth the dollar amount of all loans maturing or
repricing after December 31, 2003 that have predetermined interest rates and
have floating or adjustable interest rates.
Floating or
Predetermined Rates Adjustable Rates Total
------------------- ------------------- -----------------
(In Thousands)
Residential mortgage loans $ 534,354 $ 79,336 $ 613,690
Commercial loans 132,968 280,608 413,576
Consumer and other loans 479,107 285 479,392
------------------- ------------------- -----------------
Total loans $ 1,146,429 $ 360,229 $1,506,658
=================== =================== =================
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 increased growth in Waypoint Financial's commercial loan portfolio and
payoffs due to historically low interest rates.
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. For the year
ended December 31, 2002, Waypoint Financial sold 99% 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
substantially all of the one-to-four family mortgage loans originated in 2003.
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 2002 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,
2002, residential construction loans amounted to $51.2 million, and the
unadvanced portion of construction loans totaled $27.5 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.
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 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
5
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, 2002, Waypoint Financial's largest commercial real estate loan had
a carrying value of $14.1 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 or the London Interbank Offered Rate (LIBOR).
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 85% of the present value of the net proceeds of
the developed lots, 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, hazard insurance, flood insurance (if
applicable and available) 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, 2002, unadvanced
amounts of home equity lines of credit totaled $167.1 million on commitments of
$320.7 million for an outstaning balance of $153.6 million. The underwriting
standards employed by Waypoint Financial for home equity and second mortgage
loans include a determination of the applicant's credit history, an assessment
of the applicant's ability to meet existing obligations and payments on the
proposed loan and the value of the collateral securing the loan. Home equity
lines of credit have adjustable rates of interest, which are indexed to the
prime rate as reported in The Wall Street Journal. Interest rates on home equity
lines of credit may be adjusted to no more than 18%.
6
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.
Manufactured Housing Loans. During 2002, Waypoint Financial ceased the
origination of manufactured housing loans through third-party service companies
after concluding that this lending method did not meet Waypoint profitability
requirements. Waypoint Finanacial did not incur any losses as a result of
curtailing this lending operation. At December 31, 2002, Waypoint Financial had
in its portfolio manufactured housing loans totaling $106.1 million, or 4.6% of
gross loans.
Prior to the curtailment of this lending operation, each manufactured
housing loan originated was acquired by Waypoint Financial at a premium to its
net asset value. The premium paid to acquire each loan was capitalized and
amortized as a yield adjustment over the term of the loan. One-third of the
premium was advanced to the service company when a contract was purchased. The
remaining two-thirds of the service fee was 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, 2002, Waypoint Financial's deferred premium on
manufactured housing loans totaled $22.3 million and amounts held in reserve
accounts totaled $10.9 million.
Indirect Auto and Other Consumer Loans. Waypoint Financial originates
indirect auto loans through a network of auto dealers, and was actively doing
business with approximately 110 dealers at December 31, 2002. No one dealership
originated more than 10% of the loan balances outstanding in Waypoint
Financial's portfolio at December 31, 2002. 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, 2002, Waypoint Financial's unearned pre-paid interest on indirect
auto loans totaled $3.6 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, 2002,
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 $61.6 million. As of December 31,
2002, Waypoint Financial's largest lending relationship, including the
borrower's related interests, was approximately $24.1 million, and Waypoint
Financial had a total of twenty-five other lending relationships, including the
borrowers' related interests, that exceeded $10.0 million. As of December 31,
2002, 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.
7
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. The Chief Executive Officer, Commercial Banking Manager, Chief
Credit Officer, or the Assistant Commercial Banking Officer must approve any
loan exceeding $1.0 million. All commercial loans in excess of $10.0 million and
up to $20.0 million require the approval of Waypoint Financial's loan committee
and the Chief Executive Officer. All commercial loans in excess of $20.0 million
require the majority approval of the executive committee of the Board of
Directors or the full Board of Directors.
Consumer loans, automobile loans and unsecured personal loans may be
approved by either one or two designated individuals depending on the amount of
the loan.
Loan Originations, Purchases and Sales. Waypoint Financial's mortgage
lending activities are conducted by its salaried and commissioned loan
personnel. Currently, Waypoint Financial uses 27 loan originators who solicit
and originate mortgage loans on behalf of Waypoint Financial. These loan
officers accounted for substantially all of the mortgage loans originated by
Waypoint Financial during 2002. Loan officers are compensated by a commission.
All loans originated by the loan officers are underwritten in conformity with
Waypoint Financial's loan underwriting policies and procedures as well as agency
and investor guidelines. At December 31, 2002, Waypoint Financial serviced
$477.0 million of loans for others. Waypoint Financial did not purchase any
loans during the five-year period ended December 31, 2002.
The following table sets forth Waypoint Financial's gross loan
originations and loans sold for the periods indicated.
For the Years Ended December 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- ---------- ----------
(In Thousands)
Loans originated:
Residential mortgage loans:
One-to-four family ................................ $ 309,722 $ 226,589 $ 144,938 $ 279,040 $ 478,332
Construction ...................................... 80,951 94,723 199,187 336,163 373,226
Other ............................................. - - - 6,100 8,900
---------- --------- --------- ---------- ----------
Total residential mortgage loans ............. 390,673 321,312 344,125 621,303 860,458
Commercial loans:
Commercial real estate ............................ 206,071 168,472 133,822 165,737 113,061
Commercial business ............................... 165,392 151,956 172,219 224,694 157,552
Construction and site development ................. 8,432 28,367 29,150 24,871 22,800
---------- --------- --------- ---------- ----------
Total commercial loans ....................... 379,895 348,795 335,191 415,302 293,413
Consumer and other loans:
Manufactured housing .............................. 22,803 18,028 20,467 26,300 5,400
Home equity and second mortgage ................... 110,293 91,817 112,104 129,239 102,529
Indirect automobile ............................... 78,897 67,165 60,609 91,685 21,279
Other ............................................. 22,848 42,094 38,748 68,875 56,847
---------- --------- --------- ---------- ----------
Total consumer loans ......................... 234,841 219,104 231,928 316,099 186,055
---------- --------- --------- ---------- ----------
Total loans originated ....................... $1,005,409 $ 889,211 $ 911,244 $1,352,704 $1,339,926
========== ========= ========= ========== ==========
Loans securitized and/or sold:
Residential mortgage loans:
One-to-four family ................................ $ 382,861 $ 237,853 $ 251,097 $ 325,158 $ 369,930
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, 2002, Waypoint Financial had loan
commitments and unadvanced loans and lines of credit totaling $638.5 million.
Loan Fees. In addition to interest earned on loans, Waypoint Financial
receives income from fees derived from loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period depending upon the volume and type
of loans made and competitive conditions. On loans originated by third-party
originators, Waypoint Financial may pay a premium to compensate an originator
for loans where the borrower is paying a higher rate on the loan.
8
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, 2002, Waypoint Financial
had approximately $7.4 million of net deferred loan fees. Waypoint Financial
amortized $.1 million of net deferred loan fees during the year ended December
31, 2002.
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, 2002 and 2001, Waypoint Financial had recorded investments
in impaired loans of $10.2 million and $8.2 million, respectively. At December
31, 2002 and 2001, allowance for loan losses had an allocation of $5.4 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,
----------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In Thousands)
Non-accrual residential mortgage loans .................... $ 792 $ 1,345 $ 540 $ 263 $ 4,094
Non-accrual commercial loans .............................. 9,331 6,185 4,552 9,280 2,538
Non-accrual other loans ................................... 126 706 604 727 1,938
-------- -------- -------- -------- --------
Total non-accrual loans (1) .......................... 10,249 8,236 5,696 10,270 8,570
Loans 90 days or more delinquent
And still accruing ...................................... 9,743 14,660 17,481 13,279 9,134
-------- -------- -------- -------- --------
Total non-performing loans ........................... 19,992 22,896 23,177 23,549 17,704
Total foreclosed other assets ........................ 505 666 861 1,149 -
Total foreclosed real estate ......................... 492 804 3,086 3,754 14,088(2)
-------- -------- -------- -------- --------
Total non-performing assets ............................... $ 20,989 $ 24,366 $ 27,124 $ 28,452 $ 31,792
======== ======== ======== ======== ========
Total non-performing loans to total loans (3) ............. 0.86% 0.92% 0.89% 0.96% 0.90%
======== ======== ======== ======== ========
Total non-performing loans and
foreclosed real estate to total assets .................. 0.39% 0.45% 0.57% 0.65% 0.82%
======== ======== ======== ======== ========
- ----------
(1) Waypoint Financial would have recorded additional interest income on
non-accrual loans, had they been current, of $0.4 million, $0.3 million and $0.2
million in 2002, 2001 and 2000, respectively. No interest was included in
interest income in these periods related to these loans.
(2) The amount for 1998 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, 2002, 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 $2.5 million.
9
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. Please see Section II "Critical Accounting
Policies" of Management's Discussion and Analysis of Financial Condition and
Results of Operations for a detailed discussion of Waypoint Financial's
methodology for evaluating the adequacy of the allowance for loan losses.
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,
---------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In Thousands)
Balance at beginning of period ................ $23,069 $22,586 $23,127 $19,891 $17,002
Pooling adjustment to conform
Accounting periods .......................... - - 234 - -
Provision for loan losses ..................... 10,840 6,996 5,070 4,840 6,172
Provision component related to
Unfunded commitments ........................ - - - 617 (503)
Charge-offs:
Residential mortgage loans ............... (853) (739) (1,168) (1,289) (1,837)
Commercial loans ......................... (2,766) (2,770) (2,482) (50) (607)
Consumer and other loans ................. (4,257) (4,545) (2,962) (1,364) (741)
------- ------- ------- ------- -------
Total charge-offs ................... (7,876) (8,054) (6,612) (2,703) (3,185)
Recoveries:
Residential mortgage loans ............... 275 50 161 262 327
Commercial loans ......................... 374 465 24 85 24
Consumer and other loans ................. 824 1,026 582 135 54
------- ------- ------- ------- -------
Total recoveries .................... 1,473 1,541 767 482 405
------- ------- ------- ------- -------
Balance at the end of period .................. $27,506 $23,069 $22,586 $23,127 $19,891
======= ======= ======= ======= =======
Net charge-offs to average loans
Outstanding ................................. 0.27% 0.25% 0.22% 0.10% 0.15%
======= ======= ======= ======= =======
Allowance for loan losses to total loans ...... 1.18% 0.93% 0.86% 0.94% 1.00%
======= ======= ======= ======= =======
Allowance for loan losses to non
performing loans ............................ 137.59% 100.76% 97.45% 98.21% 112.35%
======= ======= ======= ======= =======
10
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,
----------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------- -------------------- ------------------- -------------------- ---------------------
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 .. $ 1,201 4.37% $ 1,867 8.09% $ 2,165 9.59% $ 5,250 22.70% $ 5,665 28.48%
Commercial loans .. 19,235 69.93 15,722 68.15 14,625 64.75 10,949 47.34 7,622 38.32
Consumer and
Other loans ..... 4,424 16.08 4,529 19.64 4,178 18.50 4,112 17.78 3,236 16.27
General ........... 2,646 9.62 951 4.12 1,618 7.16 2,816 12.18 3,368 16.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total ..... $27,506 100.00% $23,069 100.00% $22,586 100.00% $23,127 100.00% $19,891 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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, 2002, 2001, and
2000:
2002 2001 2000
----------- ----------- -----------
Average leveraged investment balance $1,214,668 $1,021,017 $ 794,643
Contribution to net interest margin $ 16,479 $ 11,570 $ 9,159
Net interest margin including leverage 2.57% 2.43% 2.36%
Net interest margin excluding leverage 2.95% 2.77% 2.63%
Efficiency ratio including leverage 53.03% 55.76% 68.98%
Efficiency ratio excluding leverage 59.03% 60.61% 74.91%
11
Investment Portfolio
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. At December 31, 2002, 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.
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 U.S. government and agency instruments, corporate bonds (primarily
investment grade Trust-Preferred issues of major financial institutions rated by
Standard & Poors or Moody's), municipal securities, equity securities and
asset-backed securities.
At December 31, 2002, over 88% of the securities in Waypoint Financial's
investment portfolio were rated "AAA," with the remainder rated "AA", "A", or
non-rated equities. Waypoint Financial's securities and mortgage-backed
securities also 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.
12
The following table sets forth the amortized cost and fair value of
investments, mortgage-backed securities and other interest-earning securities at
the dates indicated.
At December 31,
--------------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------- -------------------------
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
Corporate bonds .......................... - - - - 19,054 18,064
GNMA mortgage-backed securities .......... - - - - 155 163
---------- ---------- ---------- ---------- ---------- ----------
Total securities held-to-maturity ...... $ - $ - $ - $ - $ 22,709 $ 21,740
---------- ---------- ---------- ---------- ---------- ----------
Available for sale:
U.S. Government and agencies ............. $ 337,316 $ 344,769 $ 522,531 $ 525,358 $ 491,998 $ 482,430
Corporate bonds .......................... 78,089 67,216 89,788 82,675 63,609 58,657
Municipal securities ..................... 94,235 98,710 82,734 83,647 69,119 71,461
Equity securities ........................ 234,980 240,733 210,539 216,497 150,891 154,715
Asset-backed securities .................. 43,677 44,844 - - - -
Mortgage-backed securities:
Commercial mortgage-backed securities .... 23,599 24,402 10,002 10,000 - -
Agency PCs & CMOs ........................ 1,054,131 1,060,850 852,239 846,720 475,735 464,148
Private issue CMOs ....................... 905,110 910,588 784,491 787,463 629,795 623,461
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities ....... 1,982,840 1,995,840 1,646,732 1,644,183 1,105,530 1,087,609
---------- ---------- ---------- ---------- ---------- ----------
Total securities available for sale .... $2,771,137 $2,792,112 $2,552,324 $2,552,360 $1,881,147 $1,854,872
---------- ---------- ---------- ---------- ---------- ----------
Other interest-earning securities:
Interest-earning cash .................... $ 38,774 $ 38,774 $ 47,371 $ 47,371 $ 25,434 $ 25,434
---------- ---------- ---------- ---------- ---------- ----------
Total marketable securities and
interest-earning investments .......... $2,809,911 $2,830,886 $2,599,695 $2,599,731 $1,929,290 $1,902,046
========== ========== ========== ========== ========== ==========
13
Investment Portfolio Maturities
The following table sets forth information regarding the scheduled
maturities, carrying values, and average yields for Waypoint Financial's
available-for-sale investment securities at December 31, 2002.
At December 31, 2002
-------------------------------------------------------------------------
After One Through Five After Five Through Ten
One Year or Less Years Years
------------------------ ------------------------ ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
----------- ----------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
U.S. government and agency obligations .... $ 1,009 3.54% $ 57,030 4.43% $ 268,975 5.78%
Corporate bonds ........................... - - 4,988 2.21 2,012 6.76
Municipal securities(2) ................... - - - - 3,116 5.04
Equity(1),(2) ............................. - - - - - -
Asset-backed securities ................... - - 29,027 3.50 14,650 3.64
Mortgage-backed securities(3):
Commercial mortgage-backed .............. - - - - - -
GNMA PC's ............................... 71 8.85 - - - -
Agency CMOs(4) .......................... 38,146 3.32 139,780 3.34 158,148 3.19
Private issue CMOs ...................... 39,989 5.07 127,272 5.55 145,209 4.73
---------- --------- ----------- ---------- ---------- ----------
Total mortgage-backed securities ..... 78,206 4.22 267,052 4.39 303,357 3.93
---------- --------- ----------- ---------- ---------- ----------
Total marketable securities .......... $ 79,215 4.21% $ 358,097 4.29% $ 592,110 4.78%
========== ========= =========== ========== ========== ==========
------------------------------------------------------------
Over Ten Years Total
------------------------ -----------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
----------- ----------- ----------- ---------- ----------
U.S. government and agency obligations .... $ 10,302 5.62% $ 337,316 $ 344,769 5.54%
Corporate bonds ........................... 71,089 2.21 78,089 67,216 2.33
Municipal securities(2) ................... 91,119 5.27 94,235 98,710 5.27
Equity(1),(2) ............................. 234,980 4.26 234,980 240,733 4.26
Asset-backed securities ................... - - 43,677 44,844 3.54
Mortgage-backed securities(3):
Commercial mortgage-backed .............. 23,599 3.98 23,599 24,402 3.98
GNMA PC's ............................... - - 71 78 8.85
Agency CMOs(4) .......................... 717,986 3.67 1,054,060 1,060,772 3.55
Private issue CMOs ...................... 592,640 5.17 905,110 910,588 5.15
---------- ---------- ----------- ---------- ----------
Total mortgage-backed securities ..... 1,334,225 4.34 1,982,840 1,995,840 4.29
---------- ---------- ----------- ---------- ----------
Total marketable securities .......... $1,741,715 4.30% $2,771,137 $2,792,112 4.40%
========== ========== =========== ========== ==========
- ----------
(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) Amortized cost on mortgage-backed securities include scheduled principal
repayments in each period.
(4) Includes Freddie Mac, Fannie Mae and Ginnie Mae CMOs.
Sources of Funds
General. Deposits are the preferred 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, 2002, 2001, and
2000 were $136.7 million, $205.0 million, and $127.9 million, respectively, of
brokered deposits.
Average Balance and Costs of Deposits. The following table sets forth the
average amount, percentage represented by such amount, and weighted average rate
paid on Waypoint Financial's deposits.
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------- --------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Percent Cost Amount Percent Cost Amount Percent Cost
----------- ------- -------- --------- ------- -------- ---------- ------- --------
Savings deposits ......... $ 240,786 9.53% 1.09% $ 217,134 8.66% 2.08% $ 184,404 7.02% 2.52%
Time deposits ............ 1,503,941 59.53 4.15 1,449,583 57.82 5.53 1,643,535 62.59 5.75
Transaction and money
market accounts ....... 781,763 30.94 0.88 840,392 33.52 2.65 798,006 30.39 3.25
---------- ------ ------ ---------- ------- ------ ---------- ------ ------
Total ............ $2,526,490 100.00% 2.85% $2,507,109 100.00% 4.27% $2,625,945 100.00% 4.76%
========== ====== ====== ========== ======= ====== ========== ====== ======
Deposits Flow. The following table summarizes the deposit activity for the
periods indicated.
Year Ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(In Thousands)
Beginning balance ................................................ $ 2,537,269 $ 2,625,720 $ 2,544,598
(Decrease) increase before interest credit ....................... (157,091) (197,637) 24,371
Interest credited ................................................ 73,212 109,186 124,135
----------- ----------- -----------
Net (decrease) increase .......................................... (83,879) (88,451) 148,506
Pooling adjustment to conform accounting years ................... - - (67,384)
----------- ----------- -----------
Ending balance .............................................. $ 2,453,390 $ 2,537,269 $ 2,625,720
=========== =========== ===========
15
During 2002 and 2001, Waypoint Financial maintained disciplined pricing
strategies in managing the deposit portfolio, particularly in money market and
time deposits. While these strategies have resulted in a 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 disciplined 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, 2002.
Amount Due
---------------------------------------------------------------
Less Than 1-2 2-3 After 3
Weighted Average Rate One Year Years Years Years Total
----------- ----------- ----------- ----------- -----------
(In Thousands)
4% or less ............................................. $ 478,886 $ 172,889 $ 16,217 $ 134,514 $ 802,506
4.01-6.00% ............................................. 139,134 74,468 14,449 199,229 427,280
6.01-8.00% ............................................. 94,186 118,747 7,114 3,140 223,187
----------- ----------- ----------- ----------- -----------
Total ............................................. $ 712,206 $ 366,104 $ 37,780 $ 336,883 $ 1,452,973
=========== =========== =========== =========== ===========
Certificates of Deposit of $100,000 and More. The following table presents
information as of December 31, 2002, 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 ..................................... $ 62,602 2.90%
Over three months through six months ..................... 29,482 2.92
Over six months through twelve months .................... 22,615 3.77
Over twelve months ....................................... 71,647 5.08
-------- --------
Total ............................................... $186,346 3.85%
======== ========
- ----------
(1) Excludes brokered certificates of deposit.
Borrowings. In recent years, Waypoint Financial has borrowed from wholesale
sources 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 $2.984 billion at December 31, 2002, with remaining available capacity
totaling $942.3 million.
16
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,
----------------------------------------
2002 2001 2000
---------- ------------ ----------
(In Thousands)
Outstanding at end of period:
FHLB ............................................ $2,041,558 $1,842,170 $1,434,806
Repurchase agreements ........................... 372,897 449,770 189,853
Other ........................................... 25 47 670
---------- ---------- ----------
Total ....................................... $2,414,480 $2,291,987 $1,625,329
========== ========== ==========
Weighted average rate at end of period:
FHLB ............................................ 3.57% 4.11% 6.24%
Repurchase agreements ........................... 2.58 2.62 5.71
Other ........................................... 4.75 9.50 9.77
Total ....................................... 3.41% 3.82% 6.18%
Maximum amount outstanding at any month-end
During the period:
FHLB ............................................ $2,111,289 $1,870,888 $1,434,806
Repurchase agreements ........................... 479,344 499,239 313,000
Other ........................................... 15,025 530 15,663
---------- ---------- ----------
Total ....................................... $2,605,658 $2,370,657 $1,763,469
========== ========== ==========
Average amount outstanding during the period:
FHLB ............................................ $1,828,462 $1,616,444 $1,361,786
Repurchase agreements ........................... 373,266 414,054 204,664
Other ........................................... 1,072 552 5,297
---------- ---------- ----------
Total ................................... $2,202,800 $2,031,050 $1,571,747
========== ========== ==========
Weighted average rate during the period:
FHLB ............................................ 4.06% 5.28% 6.40%
Repurchase agreements ........................... 2.78 4.29 5.68
Other ........................................... 2.86 5.47 8.68
Total ................................... 3.85% 5.08% 6.31%
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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.
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 full service broker/dealer subsidiary that
provides financial services to customers of Waypoint Bank and the general
public.
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.
Waypoint Insurance Group. Waypoint Insurance Group 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.
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.
18
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 its 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 standard. 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 require 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, 2002, 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, 2002, Waypoint Bank was in compliance with its
loans-to-one-borrower limitations.
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Qualified Thrift Lender Test. As a federal savings association, Waypoint
Bank is required to satisfy a qualified thrift lender test whereby it must
maintain at least 65% of its "portfolio assets" in "qualified thrift
investments," which consist primarily of residential mortgages and related
investments, including mortgage-backed and related securities. "Portfolio
assets" generally means total assets less specified liquid assets up to 20% of
total assets, goodwill and other intangible assets, and the value of property
used to conduct business. A savings association that fails the qualified thrift
lender test must either convert to a bank charter or operate under specified
restrictions. Waypoint Bank met the qualified thrift lender test throughout 2002
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 governed by Sections 22(g) and 22(h) of the Federal Reserve Act, by
Regulation O, and also by the Sarbanes-Oxley Act of 2002. Among other things,
these regulations generally require these loans to be made on terms
substantially the same as those offered to unaffiliated individuals and do not
involve more than the normal risk of repayment. However, recent regulations now
permit executive officers and directors to receive the same terms through
benefit or compensation plans that are widely available to other employees, as
long as the director or executive officer is not given preferential treatment
compared to other participating employees. Regulation O also places individual
and aggregate limits on the amount of loans Waypoint Bank may make to these
persons based, in part, on Waypoint Bank's capital position, and requires
approval procedures to be followed. At December 31, 2002, Waypoint Bank was in
compliance with these regulations.
20
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement action against all
"institution-related parties," including stockholders, and attorneys, appraisers
and accountants who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution. Formal enforcement
action may range from the issuance of a capital directive or cease and desist
order to removal of officers and/or directors of the institutions, receivership,
conservatorship or the termination of deposit insurance. Civil penalties cover a
wide range of violations and actions, and range up to $25,000 per day, unless a
finding of reckless disregard is made, in which case penalties may be as high as
$1 million per day. The FDIC also has the authority to recommend to the Director
of the OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take supervisory actions against undercapitalized institutions, the severity of
which depends upon the institution's level of capital. Generally, a savings
institution that has total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has the total risk-based capital
less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Generally, the applicable banking regulator is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date an institution receives
notice that it is "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized." In addition, numerous mandatory supervisory
actions become immediately applicable to the institution, including, but not
limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The OTS could also take any one of a
number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based deposit insurance assessment system. The
FDIC assigns an institution to one of three capital categories, based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, and one of three supervisory subcategories
within each capital group. The three capital categories are well capitalized,
adequately capitalized and undercapitalized. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If this type of action is taken by the FDIC, it could
have an adverse effect on the earnings of Waypoint Bank.
Federal Home Loan Bank System
The Federal Home Loan Bank System (FHLB) provides a central credit facility
primarily for member institutions. Waypoint Bank, as a member of the FHLB of
Pittsburgh, is required to acquire and hold shares of capital stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its borrowings from the FHLB, whichever is greater. As of
December 31, 2002, Waypoint Bank was in compliance with this requirement. The
FHLB's are required to provide funds for the resolution of insolvent thrifts and
to contribute funds for affordable housing programs. These requirements could
reduce the amount of dividends that the FHLB's pay to their members and could
also result in the FHLB's imposing a higher rate of interest on advances to
their members.
21
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At December 31,
2002, Waypoint Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
Holding Company Regulation
Waypoint Financial is a non-diversified unitary savings and loan holding
company, subject to regulation and supervision by the OTS. A non-diversified
unitary savings and loan holding company is a savings and loan holding company
which controls only one subsidiary savings association and which together with
all related activities represented more than 50% of the holding company's
consolidated net worth. In addition, the OTS has enforcement authority over
Waypoint Financial and its non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a risk to the subsidiary savings institution.
Under prior law, a unitary savings and loan holding company was not
generally restricted as to the types of business activities in which it may
engage, provided that its subsidiary savings bank continued to be a qualified
thrift lender. The Gramm-Leach-Bliley Act of 1999, however, restricts unitary
savings and loan holding companies not existing or applied for before May 4,
1999 to activities permissible for financial holding companies under the law or
for multiple savings and loan holding companies. Waypoint Financial does not
qualify to be grandfathered and is limited to the activities permissible for
financial holding companies or for multiple savings and loan holding companies.
A financial holding company may engage in activities that are financial in
nature, incidental to financial activities or complementary to a financial
activity. A multiple savings and loan holding company is generally limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
additional activities authorized by OTS regulation.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with specified
exceptions, more than 5% of a non-subsidiary savings institution, a
non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by Federal law; or acquiring or retaining
control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources, future prospects of Waypoint
Bank and institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act of 1934. In
particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties for
violations of the securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period of time and
are subject to rulemaking by the SEC. Because Waypoint Financial's common stock
is registered with the SEC, it is currently subject to this Act.
Other Laws and Regulations
State usury and credit laws limit the amount of interest and various other
charges collected or contracted by a financial institution on loans. Waypoint
Financial's loans are also subject to federal laws applicable to credit
transactions, such as the
. Federal Truth-In-Lending Act, which governs disclosures of credit
terms to consumer borrowers;
. Home Mortgage Disclosure Act, requiring financial institutuions to
provide information to enable public officials to determine whether
a financial institution is fulfilling its obligations to meet the
housing needs of the community it serves;
22
. Equal Credit Opportunity Act prohibiting discrimination on the basis
of race, creed or other prohibitive factors in extending credit;
. Real Estate Settlement Procedures Act, which requires lenders to
disclose certain information regarding the nature and cost of real
estate settlements, and prohibits certain lending practices, as well
as limits escrow account amounts in real estate transactions;
. Fair Credit Reporting Act governing the manner in which consumer debts
may be collected by collection agencies; and
. Various rules and regulations of various federal agencies charged with
the implementation of such federal laws.
Additionally, Waypoint Financial's operations are subject to additional
federal laws and regulations, including, without limitation:
. Privacy provisions of the Gramm-Leach-Bliley Act and related
regulations, which require us to maintain privacy policies intended to
safeguard customer financial information, to disclose the policies to
our customers and to allow customers to "opt out" of having their
financial service providers disclose their confidential financial
information to non-affiliated third parties, subject to certain
exceptions;
. Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial
records;
. Consumer protection rules for the sale of insurance products by
depository institutions, adopted pursuant to the requirements of the
Gramm-Leach-Bliley Act; and
. Title III of the USA Patriot Act, which requires financial
institutions to take certain actions to help prevent, detect and
prosecute international money laundering and the financing of
terrorism.
Prospective Regulation and Legislation
Regulations that affect Waypoint Bank and Waypoint Financial, on a daily
basis, may be changed at any time, and the interpretation of the relevant law
and regulations may also change because of new interpretations by the
authorities who administer those laws