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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-16668
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WSFS FINANCIAL CORPORATION
--------------------------------
Delaware 22-2866913
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
838 Market Street, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the registrant's common stock as
quoted on the Nasdaq National Marketsm as of March 15, 2002 was $105,270,842.
For purposes of this calculation only, affiliates are deemed to be directors,
executive officers and beneficial owners of greater than 5% of the outstanding
shares.
As of March 15, 2002, there were issued and outstanding $9,116,542 shares of
the registrant's common stock.
-------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 25, 2002 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
Item 1. Business ................................................................... 3
Item 2. Properties ................................................................. 22
Item 3. Legal Proceedings............................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.......................... 25
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 26
Item 6. Selected Financial Data...................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................... 46
Item 8. Consolidated Financial Statements and Supplementary Data..................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 98
Part III
Item 10. Directors and Executive Officers of the Registrant........................... 98
Item 11. Executive Compensation....................................................... 98
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 98
Item 13. Certain Relationships and Related Transactions............................... 98
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 99
Signatures................................................................... 101
-2-
PART I
Item 1. Business
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (WSFS). Founded in 1832, WSFS is one of the oldest financial
institutions in the country. As a federal savings bank which was formerly
chartered as a state mutual savings bank, WSFS enjoys broader investment powers
than most other financial institutions. These grandfathered powers have allowed
WSFS to diversify its revenue sources to a greater extent than most savings
banks. WSFS has served the residents of the Delaware Valley for 170 years. WSFS
is the largest thrift institution headquartered in Delaware and among the three
or four largest financial institutions in the state on the basis of total
deposits traditionally garnered in-market. The Corporation's primary market area
is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The long-term goal of the
Corporation is to maintain its high-performing financial services company status
by focusing on its core banking business while occasionally developing
profitable niches in highly-synergistic businesses that have a strategic fit.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services. Lending
activities are funded primarily with retail deposit services and borrowings. At
December 31, 2001 there were 27 retail banking offices located in northern
Delaware and southeastern Pennsylvania in which WSFS conducted banking
operations. In January 2002 for strategic reasons, WSFS transferred 5 in-store
branch offices that were outside of its core footprint to another financial
institution. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC).
The Corporation has two consolidated subsidiaries, WSFS and WSFS
Capital Trust I. and no unconsolidated subsidiaries or off-balance sheet
entities. Fully-owned and consolidated subsidiaries of WSFS include WSFS Credit
Corporation (WCC), which is engaged primarily in indirect motor vehicle leasing;
and 838 Investment Group, Inc., which markets various third party insurance
products and securities through WSFS' branch system. An additional subsidiary,
Star States Development Company (SSDC), is currently inactive. In addition to
the wholly owned subsidiaries, the Corporation consolidates two non-wholly owned
subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and Wilmington National
Finance, Inc. (WNF). (See the subsidiary discussion later in this section.)
The following discussion focuses on the major components of the
Company's operations and presents an overview of the significant changes in the
Corporation's results of operations for the past three fiscal years and
financial condition during the past two fiscal years. This discussion should be
reviewed in conjunction with the Consolidated Financial Statements and Notes
thereto presented elsewhere in this Annual Report.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Condensed average balance sheets for each of the last three years and
analyses of net interest income and changes in net interest income due to
changes in volume and rate are presented in "Results of Operations" included in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) are incorporated herein by reference.
-3-
INVESTMENT ACTIVITIES
The Company's short-term investment portfolio is intended to provide
collateral for borrowings and to meet liquidity requirements. Book values of
investment securities and short-term investments by category, stated in dollar
amounts and as a percent of total assets, follow:
December 31,
---------------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
------ --------- ------ ---------- ------ ----------
(Dollars In Thousands)
Held-to-Maturity:
Corporate bonds ............................ $ 1,372 0.1% $ 3,885 0.2% $ 6,855 0.4%
State and political subdivisions ........... 11,024 0.6 10,861 0.6 1,757 0.1
-------- --- -------- --- --------- ---
12,396 0.7 14,746 0.8 8,612 0.5
Available-for-Sale:
U.S. Government and agencies ............... -- -- 1,893 0.1 28,436 1.6
Corporate bonds ............................ 1,798 0.1 13,101 0.8 -- --
Other investments .......................... -- -- -- -- 425 --
-------- --- -------- --- --------- ---
1,798 0.1 14,994 0.9 28,861 1.6
-------- --- -------- --- --------- ---
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell ............. 65,779 3.4 3,500 0.2 -- --
Interest-bearing deposits in other banks (1) 28,360 1.5 7,318 .4 8,026 .5
-------- --- -------- --- --------- ---
94,139 4.9 10,818 0.6 8,026 0.5
-------- --- -------- --- --------- ---
$108,333 5.7% $ 40,558 2.3% $ 45,499 2.6%
======== === ======== === ========= ===
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
WSFS purchased $75 million in U.S. Treasury bills and $306,000 in
corporate bonds in 2001, all of which were classified as available-for-sale. In
addition, there were sales of $644,000 in corporate bonds and $3 million in
corporate bond calls, from which gains of $9,000 and losses of $5,000 were
realized. The remainder of the changes in 2001 resulted from repayments and
maturaties. In 2000, WSFS purchased $14 million in corporate bonds and $12
million in U.S. Government securities, all of which were classified as
available-for-sale, and $9 million in municipal bonds which were classified as
held-to-maturity. There was also a $2 million corporate bond which was
reclassified from held-to-maturity to available-for-sale in 2000 with the
adoption of SFAS No. 133 (see Note 20 of the Financial Statements for further
discussion). In addition, there were sales of U.S. Government securities during
2000 totaling $25 million and a $750,000 corporate call, from which gains of
$18,000 and losses of $67,000, respectively, were realized. There was also a
sale of $10 million in U.S. Government securities in January 2000, for which no
loss was recorded in 2000 as these securities had been marked-to-market in 1999.
In addition, the Company recognized a gain of $40,000 on the sale of common
stock received from the demutualization of insurance companies of which WSFS was
a policyholder. The remainder of the changes during 2000 resulted from
repayments and maturities. In 1999, WSFS purchased $32 million in U.S.
Government securities, and $2 million in corporate bonds, all classified as
available-for-sale, and $2 million in corporate bonds which were initially
classified as held-to-maturity but reclassified as available for sale in 2000.
In addition, there were sales of $20 million in U.S. Government securities, also
classified as available-for-sale. Losses of $9,000 were realized on the sales in
1999.
-4-
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 2001. Substantially all of the related interest and dividends
represent taxable income.
At December 31, 2001
--------------------
Amount Yield
------ ------
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
Within one year....................................................... $ 62 6.61%
After one but within five years....................................... 312 6.00
After five but within ten years....................................... 874 6.24
After ten years....................................................... 124 7.52
--------
1,372 6.32
--------
State and political subdivisions (1):
After one but within five years....................................... 2,460 7.28
After five but within ten years....................................... 3,527 7.32
After ten years....................................................... 5,037 6.07
--------
11,024 6.74
--------
Total debt securities, held-to-maturity................................. 12,396 6.69
--------
Available-for-Sale:
Corporate bonds:
After one but within five years...................................... 306 4.46
After five but within ten years....................................... 1,492 9.88
--------
1,798 8.96
--------
Total debt securities, available-for-sale............................... 1,798 8.96
--------
Short-term investments:
Federal funds sold and securities purchased under agreement to resell. 65,779 1.63
Interest-bearing deposits in other banks.............................. 28,360 1.21
--------
Total short-term investments............................................ 94,139 1.50
--------
$108,333 2.22%
========
(1) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since the effect would be immaterial.
In addition to the foregoing investment securities, the Company has
maintained an investment portfolio of mortgage-backed securities. In 2001,
purchases of mortgage-backed securities, including collateralized mortgage
obligations, totaled $281 million, all classified as available-for-sale. There
were also sales of $4 million of mortgage-backed securities, which resulted in
gains of $78,000. In 2000, purchases of mortgage-backed securities, including
collateralized mortgage obligations, totaled $210 million, all of which were
classified as available-for-sale. There were also sales of $195 million of
mortgage-backed securities, as part of a deleveraging strategy, which resulted
in net losses of $6.5 million. In addition there was a sale of $24 million in
mortgage-backed securities in January 2000 for which a loss of $730,000 was
recognized in 1999. Reductions in the other categories, for all years, were due
to principal repayments.
-5-
The following table sets forth the book value of mortgage-backed
securities and their related weighted average contractual rates at the end of
the last three fiscal years.
December 31,
------------------------------------------------------------------------
2001 2000 1999
------------------- ------------------ --------------------
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Held-to-Maturity:
Collateralized mortgage obligations (1)..... $ 31,889 6.89% $ 56,091 6.75% $191,839 6.65%
FNMA........................................ 18,355 5.57 24,908 6.05 31,065 6.23
FHLMC....................................... 20,041 5.70 26,664 6.04 33,036 6.15
GNMA ....................................... - - - - 852 6.48
Other....................................... - - - - 2,033 5.31
--------- ---- -------- ---- -------- ----
$ 70,285 6.20% $107,663 6.41% $258,825 6.53%
========= ==== ======== ==== ======== ====
Available-for-Sale:
Collateralized mortgage obligations (2)..... $260,784 5.51% $229,882 7.04% $173,544 6.43%
FNMA........................................ 15,276 5.45 1,141 7.25 - -
FHLMC....................................... 15,138 4.84 1,032 7.76 143 6.61
GNMA........................................ 241 6.89 - - 15,237 5.40
-------- ---- -------- ---- -------- ----
$291,439 5.47% $232,055 7.04% $188,924 6.34%
========= ==== ======== ==== ======== ====
(1) Includes $21.3 million in private issues from Residential Funding Mortgage
securities, Inc. with a fair market value of $21.8 million
(2) Includes $25.0 million and $10.0 million in private issues of Residential
Funding Mortgage Securities, Inc. and Countrywide Funding Corp.,
respectively, all stated at their fair market value.
CREDIT EXTENSION ACTIVITIES
Traditionally, the majority of a typical thrift institution's loan
portfolio has consisted of first mortgage loans on residential properties.
However, as a result of various legislative and regulatory changes since 1980,
the commercial and consumer lending powers of WSFS have increased substantially.
WSFS' current lending activity is concentrated on lending to consumers and small
businesses in the mid-Atlantic region of the United States.
-6-
The following table sets forth the composition of the Corporation's
loan portfolio by type of loan at the dates indicated. Other than as disclosed
below, the Company had no concentrations of loans exceeding 10% of total loans
at December 31, 2001:
December 31,
------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ----------------- ----------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate (1)....... $487,845 43.7% $440,136 45.7% $393,243 45.7% $291,110 39.4% $287,349 39.1%
Commercial real estate:
Commercial mortgage............... 208,286 18.7% 190,707 19.8% 201,559 23.4% 226,063 30.6% 238,533 32.5%
Construction...................... 48,002 4.3% 30,183 3.1% 21,561 2.5% 11,642 1.5% 12,553 1.7%
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total commercial real estate.... 256,288 23.0% 220,890 22.9% 223,120 25.9% 237,705 32.1% 251,086 34.2%
Commercial........................ 197,790 17.7% 151,887 15.7% 115,931 13.5% 97,524 13.2% 94,686 12.9%
Consumer.......................... 198,366 17.8% 175,268 18.2% 154,857 18.0% 141,238 19.1% 130,069 17.7%
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Gross loans....................... 1,140,289 102.2% 988,181 102.5% 887,151 103.1% 767,577 103.8% 763,190 103.9%
Less:
Unearned income................... 3,320 0.3% 3,268 0.3% 4,355 0.5% 5,383 0.7% 4,407 0.6%
Allowance for loan losses......... 21,597 1.9% 21,423 2.2% 22,223 2.6% 22,732 3.1% 24,057 3.3%
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Net loans $1,115,372 100.0% $963,490 100.0% $860,573 100.0% $739,462 100.0% $734,726 100.0%
========== ===== ======== ===== ======== ===== ======== ===== ======== =====
(1) Includes $84,691, $23,274, $24,572, $3,103, and $2,222 of residential
mortgage loans held-for-sale at December 31, 2001, 2000, 1999, 1998, and 1997,
respectively.
-7-
The following table sets forth information as of December 31, 2001
regarding the amount of loans maturing in the Company's portfolios, including
scheduled repayments of principal based on contractual terms to maturity. In
addition, the table sets forth the amount of loans maturing during the indicated
periods based on if the loan has a fixed or adjustable rate. Loans having no
stated maturity or repayment schedule are reported in the one year or less
category.
Less than One to Over
One Year Five Years Five Years Total
--------- ---------- ---------- -----
(In Thousands)
Real estate loans (1)..................... $ 48,520 $ 191,199 $ 371,721 $ 611,440
Construction loans........................ 25,519 22,440 43 48,002
Commercial loans.......................... 49,671 68,340 79,779 197,790
Consumer loans ........................... 67,425 67,196 63,745 198,366
----------- ----------- ---------- ----------
$ 191,135 $ 349,175 $ 515,288 $1,055,598
=========== =========== ========== ==========
Rate sensitivity:
Fixed................................... $ 51,568 $ 206,388 $ 251,173 $ 509,129
Adjustable 139,567 142,787 264,115 546,469
----------- ----------- ---------- ----------
191,135 349,175 515,288 1,055,598
----------- ----------- ---------- ----------
Gross loans $ 191,135 $ 349,175 $ 515,288 $1,055,598
=========== =========== ========== ==========
(1) Includes commercial mortgage loans; does not include loans held-for-sale.
The above schedule does not include any prepayment assumptions.
Prepayments tend to be highly dependent upon the interest rate environment.
Management believes that the actual repricing and maturity of the loan portfolio
is significantly shorter than is reflected in the above table as a result of
prepayments.
Residential Real Estate Lending.
WSFS originates residential mortgage loans with loan-to-value ratios up
to 97%. WSFS generally requires private mortgage insurance for up to 30% of the
mortgage amount for mortgage loans with loan-to-value ratios exceeding 80%. WSFS
does not have any significant concentrations of such insurance with any one
insurer. On a very limited basis, WSFS originates/purchases loans with
loan-to-value ratios exceeding 80% without a private mortgage insurance
requirement. At December 31, 2001, the balance of all such loans was
approximately $22.3 million. Generally, residential mortgage loans are
underwritten and documented in accordance with standard underwriting criteria
published by Federal Home Loan Mortgage Corporation (FHLMC) to assure maximum
eligibility for subsequent sale in the secondary market. However, unless loans
are specifically designated for sale, the Company holds newly originated loans
in its portfolio for long-term investment. Among other things, title insurance
is required to insure the priority of its lien, and fire and extended coverage
casualty insurance is required for the properties securing the residential
loans. All properties securing residential loans made by WSFS are appraised by
independent appraisers selected by WSFS and subject to review in accordance with
WSFS standards.
The majority of WSFS' residential real estate adjustable-rate loans
have interest rates that adjust yearly, after an initial period. Usually the
change in rate is limited to two percentage points at the adjustment date.
Adjustments are generally based upon a margin (currently 2.75%) over the weekly
average yield on U.S. Treasury securities adjusted to a constant maturity, as
published by the Federal Reserve Board.
Generally, the maximum rate on these loans is up to six percent above
the initial interest rate. WSFS underwrites adjustable-rate loans under
standards consistent with private mortgage insurance and secondary market
criteria. WSFS does not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization. Consistent with industry
practice in its market area, WSFS has typically originated adjustable-rate
mortgage loans with discounted initial interest rates. All such loans are
underwritten at the fully-indexed rate.
-8-
The retention of adjustable-rate mortgage loans in WSFS' loan portfolio
helps mitigate WSFS' risk to changes in interest rates. However, there are
unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing adjustable-rate mortgage loans. It is possible
that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest costs to the borrower. Further, although adjustable-rate mortgage loans
allow WSFS to increase the sensitivity of its asset base to changes in interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limitations. Accordingly, there can be no
assurance that yields on WSFS' adjustable-rate mortgages will adjust
sufficiently to compensate for increases in WSFS' cost of funds during periods
of extreme interest rate increases.
The original contractual loan payment period for residential loans is
normally 10 to 30 years. Because borrowers may refinance or prepay their loans
without penalty, such loans tend to remain outstanding for a substantially
shorter period of time. First mortgage loans customarily include "due-on-sale"
clauses on adjustable- and fixed-rate loans. This provision gives the
institution the right to declare a loan immediately due and payable in the event
the borrower sells or otherwise disposes of the real property subject to the
mortgage. Due-on-sale clauses are an important means of adjusting the rate on
existing fixed-rate mortgage loans to current market rates. WSFS enforces
due-on-sale clauses through foreclosure and other legal proceedings to the
extent available under applicable laws.
In addition to loans originated for its own portfolio, WSFS originates
nonconforming residential mortgage loans through its non wholly-owned
subsidiary, Wilmington National Finance, Inc. ("WNF"). These loans are resold in
the secondary market on a servicing released, limited recourse basis. They are
originated using the underwriting guidelines of the various investors to which
WNF sells its loans. These loans are typically sold to investors within 15 to 45
days of origination.
The mortgage loans that WNF originates are fully amortizing, fixed or
adjustable rate, first or second lien mortgage loans. They are secured by one-to
four-family residential properties with loan-to-value ratios up to 100% and
contractual terms of 10 to 30 years. With respect to each property securing a
mortgage loan, the underwriting guidelines require among other things, title
insurance, fire and extended coverage casualty insurance, and a full appraisal
by an independent appraiser selected and reviewed by WNF. The majority of
adjustable rate mortgage loans originated by WNF are indexed to the six month
London Interbank Offered Rate (LIBOR) and have rates that adjust every six
months after a initial fixed rate period of 24 to 36 months. Adjustments are
limited to two percent at any adjustment date and six percent over the life of
the loan.
In general, loans are sold without recourse except for the repurchase
arising from standard contract provisions covering violation of representations
and warranties or, under certain investor contracts, a default by the borrower
on the first payment. The Company also has limited recourse exposure under
certain investor contracts in the event a borrower prepays a loan in total
within a specified period after sale, typically one year. The recourse is
limited to a pro rata portion of the premium paid by the investor for that loan,
less any prepayment penalty collectible from the borrower.
Commercial Real Estate, Construction and Commercial Lending.
Federal savings banks are generally permitted to invest up to 400% of
their total regulatory capital in nonresidential real estate loans and up to 20%
of its assets in commercial loans. As a federal savings bank which was formerly
chartered as a Delaware savings bank, WSFS has certain additional lending
authority.
WSFS offers commercial real estate mortgage loans on multi-family
properties and other commercial real estate. Generally, loan-to-value ratios for
these loans do not exceed 80% of appraised value at origination.
-9-
WSFS offers commercial construction loans to developers. In some cases
these loans are made as "construction/permanent" loans, which provides for
disbursement of loan funds during construction and automatic conversion to
mini-permanent loans (1-5 years) upon completion of construction. These
construction loans are made on a short-term basis, usually not exceeding two
years, with interest rates indexed to the WSFS prime rate, in most cases, and
adjusted periodically as WSFS' prime rate changes. The loan appraisal process
includes the same evaluation criteria as required for permanent mortgage loans,
but also takes into consideration completed plans, specifications, comparables
and cost estimates. Prior to approval of the credit, these items are used as a
basis to determine the appraised value of the subject property when completed.
Policy requires that all appraisals be reviewed independently of the commercial
lending area. Generally, the loan-to-value ratios for construction loans do not
exceed 75%. The initial interest rate on the permanent portion of the financing
is determined by the prevailing market rate at the time of conversion to the
permanent loan. At December 31, 2001, $86.9 million was committed for
construction loans, of which $48.6 million had been disbursed.
WSFS' commercial lending, excluding real estate loans, includes loans
for the purpose of financing equipment acquisitions, expansion, working capital
and other business purposes. These loans generally range in amounts up to $5
million, and their terms range from less than one year to seven years. The loans
generally carry variable interest rates indexed to WSFS' prime rate, or LIBOR,
at the time of closing. WSFS intends to continue originating commercial loans to
small businesses in its market area.
Commercial, commercial mortgages and construction lending has a higher
level of risk as compared to residential mortgage lending. These loans typically
involve larger loan balances concentrated in single borrowers or groups of
related borrowers. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related real estate project and may be more subject to adverse conditions
in the commercial real estate market or in the economy generally. The majority
of WSFS' commercial and commercial real estate loans are concentrated in
Delaware and surrounding areas.
Construction loans involve additional risk because loan funds are
advanced as the construction progresses. The valuation of the underlying
collateral can be difficult to quantify prior to the completion of the
construction. This is due to uncertainties inherent in construction such as
changing construction costs, delays arising from labor or material shortages and
other unpredictable contingencies. WSFS attempts to mitigate these risks and
plan for these contingencies through additional analysis and monitoring of its
construction projects.
Federal law limits the extensions of credit to any one borrower to 15%
of unimpaired capital, or 25% if the difference is secured by readily marketable
collateral having a market value that can be determined by reliable and
continually available pricing. Extensions of credit include outstanding loans as
well as contractual commitments to advance funds, such as standby letters of
credit, but do not include unfunded loan commitments. WSFS had a $35.3 million
loan to refinance an employee stock ownership plan ("ESOP") loan of a company.
Approximately 80% of the loan is secured by discounted U.S. treasury securities.
The portion of the loan that is secured by U.S. treasury securities is exempt
from the above lending limits. At December 31, 2001, no borrower had collective
outstandings exceeding the above limits.
Consumer Lending.
The primary consumer credit products of the Company are equity-secured
installment loans and home equity lines of credit. At December 31, 2001, WSFS
had equity secured installment loans totaling $125.6 million, which represented
63% of total consumer loans. A home equity line of credit grants borrowers a
line of credit of up to 100% of the appraised value (net of any senior
mortgages) of the residence. This line of credit is secured by a mortgage on the
borrower's property and can be drawn upon at any time during the period of
agreement. At December 31, 2001, WSFS had extended $80.9 million in home equity
lines of credit, of which $24.2 million had been drawn at the date. Home equity
lines of credit potentially offer federal income tax advantages, the convenience
of checkbook access and revolving credit features. Over the past few years,
however, home equity lines of credit have decreased because low interest rates
offered on first and second mortgage loans have enabled consumers to refinance
their mortgages and consolidate their debt. Although home equity lines of credit
expose the Company to the risk that falling collateral values may leave it
inadequately secured, the Company has not had any significant adverse experience
to date.
-10-
The table below sets forth consumer loans by type, in amounts and percentages at
the dates indicated.
December 31,
------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ----------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------ ------- ------ ------- ------ ------- ------ -------
Equity secured installment loans $125,597 63.3% $113,686 64.8% $ 97,491 63.0% $ 87,503 61.9% $ 78,975 60.7%
Home equity lines of credit.... 24,161 12.2% 24,408 13.9% 26,446 17.1% 27,799 19.7% 31,110 23.9%
Automobile..................... 11,737 5.9% 9,762 5.6% 9,800 6.3% 8,307 5.9% 3,596 2.8%
Unsecured lines of credit...... 20,156 10.2% 16,739 9.6% 11,370 7.3% 10,444 7.4% 9,466 7.3%
Other.......................... 16,715 8.4% 10,673 6.1% 9,750 6.3% 7,185 5.1% 6,922 5.3%
-------- ----- -------- ----- -------- ------ -------- ----- -------- -----
Total consumer loans .......... $198,366 100.0% $175,268 100.0% $154,857 100.0% $141,238 100.0% $130,069 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
-11-
Loan Originations, Purchase and Sales.
WSFS has traditionally engaged in lending activities primarily in
Delaware and contiguous areas of neighboring states. As a federal savings bank,
however, WSFS may originate, purchase and sell loans throughout the United
States. WSFS has purchased limited amounts of loans from outside its normal
lending area when such purchases are deemed appropriate and consistent with
WSFS' overall practices. WSFS originates fixed-rate and adjustable-rate
residential real estate loans through its banking offices. In addition, WSFS has
established relationships with correspondent banks and mortgage brokers to
originate loans.
During 2001, the Company originated $693 million of residential real
estate loans, of which $582 million were from WNF. This compares to originations
of $196 million in 2000. From time to time, WSFS has purchased whole loans and
loan participations in accordance with its ongoing asset and liability
management objectives. Purchases of residential real estate loans from
correspondents and brokers primarily in the mid-Atlantic region totaled $25
million for the year ended December 31, 2001, $37 million for 2000 and $75
million for 1999. WSFS also periodically purchases residential mortgages from
WNF with the intention of holding in its portfolio. These purchases totaled
$25.0 million in 2001. Residential real estate loan sales totaled $566 million
in 2001, $145 million in 2000 and $29 million in 1999. While WSFS generally
intends to hold loans for the foreseeable future, WSFS sells newly originated
fixed-rate mortgage loans in the secondary market to control the interest
sensitivity of its balance sheet. The Corporation holds for investment certain
of its fixed-rate mortgage loans, with terms under 30 years, consistent with
current asset/liability management strategies.
At December 31, 2001, WSFS serviced approximately $262 million of
residential loans for other lenders compared to $244 million at December 31,
2000. The Company also services residential loans for its portfolio totaling
$350 million and $372 million at December 31, 2001 and 2000, respectively.
WSFS originates commercial real estate and commercial loans through its
commercial lending division. Commercial loans are made for the purpose of
financing equipment acquisitions, business expansion, working capital and other
business purposes During 2001, WSFS originated $262 million of commercial and
commercial real estate loans compared with $144 million in 2000. These amounts
represent gross contract amounts and do not reflect amounts outstanding on such
loans.
WSFS' consumer lending is conducted primarily through its branch
offices. WSFS originates a variety of consumer credit products including home
improvement loans, home equity lines of credit, automobile loans, credit cards,
unsecured lines of credit and other secured and unsecured personal installment
loans. During 2001, consumer loan originations amounted to $128 million compared
to $106 million in 2000.
All loans to one borrower exceeding $1 million must be approved by a
management loan committee. Minutes of the management loan committee meetings and
individual loans exceeding $3 million approved by the management loan committee
are subsequently reviewed by the Executive Committee and Board of Directors of
WSFS. Separate approval is needed for loans to any borrower who has direct or
indirect outstanding commitments in excess of $3 million or for any advances or
extensions on loans previously classified by banking regulators or WSFS' Risk
Management Department. Officers of WSFS have the authority to approve smaller
loan amounts, depending upon their experience and management position.
Fee Income from Lending Activities.
WSFS earns interest and fee income from lending activities, including
fees for originating loans, for servicing loans and for loan participations
sold. The bank also receives for making commitments to originate construction,
residential and commercial real estate loans. Additionally, the bank collects
fees related to existing loans which include prepayment charges, late charges
and assumption fees.
WSFS charges fees for making loan commitments. Also as part of the loan
application process, the borrower may pay WSFS for out-of-pocket costs to review
the application, whether or not the loan is closed.
-12-
Most loan fees are considered adjustments of yield in accordance with
accounting principles generally accepted in the United States of America and are
reflected in interest income. Those fees represented an immaterial amount of
interest income during the three years ended December 31, 2001. Loan fees other
than those considered adjustments of yield are reported as loan fee income, a
component of other income.
All fee income on loans originated by WNF for sale to third party
investors, including origination fees, points collected from borrowers and sales
premiums paid by investors, are recognized when loans are sold. Provisions are
made for recourse obligations.
LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations can be negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its portfolios to identify problem
loans as promptly as possible and take actions immediately which will minimize
losses. To accomplish this, WSFS' Risk Management Department monitors the asset
quality of the Company's loan and investment in real estate portfolios and
reports such information to the Credit Policy Committee, the Audit Committee of
the Board of Directors and the Controller's Department.
SUBSIDIARIES
The Corporation has two subsidiaries, Wilmington Savings Fund Society,
FSB (WSFS) and WSFS Capital Trust I. WSFS Capital Trust I was formed in 1998 to
issue Trust Preferred Securities. The Trust invested all of the proceeds from
the sale of the Trust Preferred Securities in Junior Subordinated Debentures of
the Corporation. The Corporation used the proceeds from the Junior Subordinated
Debentures for general corporate purposes, including the redemption of higher
yielding debt.
At December 31, 2001, WSFS had three wholly-owned, first-tier
subsidiaries 838 Investment Group, Inc, SSDC and WCC. In addition to the wholly
owned subsidiaries, the Corporation consolidates two non-wholly owned
subsidiaries, CustomerOne Financial Network, Inc. (C1FN) and WNF. WSFS is the
primary lender to its non-bank subsidiaries. At December 31, 2001, it had $224.1
million invested in the equity of these companies and had an additional $23.0
million in loans outstanding.
838 Investment Group, Inc. was formed in 1989. This subsidiary markets
various third party investment and insurance products, such as single-premium
annuities, whole life policies and securities primarily through WSFS' branch
system.
SSDC was formed in March 1985 with the objective of engaging in
residential real estate projects through either wholly-owned subsidiaries or
investments in joint ventures. SSDC is currently inactive.
WCC is engaged primarily in indirect motor vehicle leasing. On December
21, 2000, the Board approved plans to discontinue the operations of WCC. WCC,
which had 4,600 lease contracts and 1,800 loan contracts at December 31, 2001,
no longer accepts new applications but continues to service existing loans and
leases until their maturity. Management estimates that substantially all loan
and lease contracts will mature by the end of December 2003.
-13-
Accounting for discontinued operations of a business segment requires
that the Company forecast operating results over the wind-down period and accrue
any expected net losses. The historic results of WCC's operations, the accrual
of expected losses to be incurred over the wind-down period, and the future
reported results of WCC are required to be treated as Discontinued Operations of
a Business Segment, and shown in summary form separately from the Company's
results of continuing operations in reported results of the Corporation. Prior
periods are restated, as required by accounting principles generally accepted in
the United States of America.
As a result, net operating losses of $2.4 million for the year ended
December 31, 2000 and net income of $1.6 million for the year ended December 31,
1999 were reclassified from continuing operations to discontinued operations. In
addition in 2000, the Corporation recognized a charge of $2.2 million, net of
$4.0 million in tax benefits related to net operating loss carryforwards, for
the expected loss over the projected three-year wind-down period. A $6.2 million
pretax reserve was established to absorb these expected future losses.
During 2001, used vehicle values continued to deteriorate. This decline
was exacerbated and continues to be affected by, among other things, the
continued incenting of new vehicles by auto manufacturers. As a result,
management's analysis of residual losses as of December 31, 2001 indicated that
additional reserves were needed for the expected losses in the business during
its wind-down. Accordingly, management recorded an additional $3.1 million,
pre-tax, for expected losses over the wind-down period. The balance of reserves
for residual losses represents management's best estimate of losses inherent in
the remaining portfolio. As of December 31, 2001, there were $87 million of
contractual residuals still on lease for which management has estimated $15.5
million in probable losses. The losses have been inherently provided for in
residual reserves and reserves for discontinued operations.
Due to the uncertainty of a number of factors, including residual
values, interest rate volatility and credit quality, this reserve will be
reevaluated quarterly with adjustments, if necessary, recorded as income/loss on
wind-down of discontinued operations. Accounting for discontinued operations
also requires that the net assets (assets less third party liabilities) be
reclassified on the balance sheet to a single line item, Net assets of
discontinued operations.
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999 WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. WSFS originally invested $5.5 million, which had a book
value of $2.4 million at December 31, 2001 including approximately $1 million in
goodwill. WSFS currently has a 28% interest in C1FN, with warrants to acquire
additional ownership under certain circumstances, but retains majority control
through a voting trust. Therefore, the results of C1FN are and will continue to
be consolidated into WSFS until Everbank, obtains a separate banking charter or
is otherwise disposed. C1FN paid a management fee to WSFS of $480,000 in 2001
and $327,000 in 2000 which is partially eliminated in consolidation. C1FN had
total assets of $296.1 million at December 31, 2001 and $192.6 million at
December 31, 2000. Net losses after minority interest were $558,000 and $1.5
million for the years ended December 31, 2001 and 2000, respectively.
C1FN/Everbank issues deposits denominated in foreign currencies. At
December 31, 2001, those deposits totaled $60.4 million. Short-term forward
exchange contracts are purchased to provide and effective hedge on the fair
value of deposits from fluctuations that may occur in world currency markets. At
December 31, 2001, the fair value of hedges amounted to a $395,000 liability.
Under the terms of its agreement with WSFS, C1FN has the right to
acquire the deposits and business of Everbank if C1FN obtains its own depository
institution charter. C1FN has submitted an application to the Office of Thrift
Supervision (OTS) for a separate thrift charter for Everbank and is in
discussions with potential strategic partners for the purpose of raising the
capital required to support an independent thrift institution.
In 2002, the Services Agreement between WSFS and C1FN to run the
Everbank division will expire. The impact on WSFS of the expiration of the
arrangement will depend on the outcome of several possible strategies: if C1FN
receives approval from the OTS for a separate charter and raises the required
capital, WSFS' investment in C1FN would likely be preserved or possibly
enhanced; if C1FN is unable to obtain a separate charter, WSFS and C1FN would
likely pursue a sale of the division and preservation or enhancement of WSFS'
interest would depend on sale price; if WSFS and C1FN are unable sell the
division, other possibilities would be considered including the write-off of
WSFS' investment in C1FN. In this last case, other costs may result. The
ultimate strategy and degree of success can not be determined at this time, but
will likely be known by the end of 2002. Management is aggressively pursuing a
separate charter.
-14-
C1FN/Everbank is currently a relatively low margin business. If
C1FN/Everbank is spun-off or sold, the Corporation would likely experience an
improvement in performance ratios such as the efficiency ratio, net interest
margin and the return on average assets and equity, as well as capital ratios.
WNF is a 51% owned subsidiary and began operations in December 1999. In
addition, WSFS holds warrants to purchase an additional 14% ownership. WNF is a
nonconforming mortgage banker generally dealing in higher grade subprime loans.
WNF solicits and originates its loans primarily as a result of referrals through
independent mortgage brokers, although direct-to-consumer originations accounted
for 6.8% and 14.4% of total originations for the years ended December 31, 2001
and 2000, respectively. WNF originates all loans and sells its originations to
investors, typically well known regional banks or national finance companies, on
a whole loan, servicing-released basis for cash premiums only (no
securitizations). Mortgage loans are sold with very limited recourse beyond the
standard representations and warranties.
As of December 31, 2001, WNF's wholesale channel consisted of seven
regional sales offices located throughout the continental United States. These
offices are located in Plymouth Meeting, PA, North Kingston, RI; Charlotte, NC;
Atlanta, GA; Naperville, IL; Livermore, CA and Las Vegas, NV. The offices in
Atlanta, Charlotte and Las Vegas were opened during the second half of 2001.
Management expects an additional office or two may be opened in 2002 depending
on the business climate and the ability to recruit quality, experienced office
managers. The regional offices obtain business by establishing relationships
with, and soliciting mortgage applications from, independent mortgage brokers in
their local markets. These mortgage brokers match their applicants with lenders
(such as WNF) based on the types of products, pricing and the level of service
provided by the lenders. Brokers may be paid for their services by either the
borrower or by the lender, depending on the requirements of the transaction.
WNF has a centralized secondary marketing function which analyzes the
product offerings of the various end investors, consolidates the investors'
underwriting guidelines into the product parameters that WNF offers to its
brokers and ultimately sells WNF's originations to the end investors. Between
the time loans are originated and sold, they are warehoused on WNF's balance
sheet. WSFS provides temporary financing for the loans through a warehouse line
of credit with an adjustable rate based on the One-Month Federal Home Loan Bank
Advance rate + 90 basis points. This line is limited to $135 million and had an
outstanding balance of $75.2 million at December 31, 2001. This line may be
increased to $150 million on a temporary basis. For each of the years ended
December 31, 2001 and 2000, loans remained in the warehouse for an average of 29
days before being sold. The percentage of loans in the warehouse that were 45
days old or greater were 2% at December 31, 2001 and 14% at December 31, 2000.
The following table provides certain WNF production and sales
statistics for the years ended December 31, 2001 and 2000:
2001 2000
---- ----
(Dollars In Thousands)
Origination dollars $595,213 $139,007
Origination units 4,890 1,681
Average mortgage balance $122 $83
Weighted average note rate 8.61% 11.12%
Weighted average CLTV* 84% 84%
Weighted average credit score 644 623
Percentage of second liens 8% 14%
Sales $536,684 $117,131
Sales margin (average) 3.95% 3.77%
* Combined Loan To Value represents the mortgage amount plus any senior liens
(or junior liens if also originated by WNF) divided by the appraised value of
the property.
-15-
WNF's total assets at December 31, 2001 and 2000 were $84.3 million and
$24.7 million, respectively. For the year ended December 31, 2001, WNF added
$2.5 million to the net income of the Corporation compared to a net loss of $1.4
million for the year ended December 31, 2000. At December 31, 2001, WSFS also
held $3.0 million in the preferred stock of WNF.
Results for the year 2001 for WNF were positively influenced by both
organic growth of new business and the very favorable mortgage refinance market.
Management expects as interest rates increase, production may abate, however
this may be offset to an unknown extent by continued build-out of the business
model.
SOURCES OF FUNDS
WSFS funds its operations through retail and wholesale deposit growth
as well as through various borrowing sources, including repurchase agreements,
federal funds purchased and advances from the Federal Home Loan Bank (FHLB) of
Pittsburgh. Loan repayments and investment maturities also provide sources of
funds. Loan repayments and investment maturities provide a relatively stable
source of funds while certain deposit flows tend to be more susceptible to
market conditions. Borrowings are used to fund wholesale asset growth,
short-term funding of lending activities when loan demand exceeds projections,
or when deposit inflows or outflows are less than or greater than expected. On a
long-term basis, borrowings may be used to match against specific loans or
support business expansion.
Deposits. WSFS offers various deposit programs to its customers,
including savings accounts, demand deposits, interest-bearing demand deposits,
money market deposit accounts and certificates of deposits. In addition, WSFS
accepts negotiable rate certificates with balances in excess of $100,000 from
individuals, businesses and municipalities in Delaware.
WSFS is the second largest independent full service banking
institution headquartered and operating in Delaware. It primarily attracts
deposits through its system of branches, which numbered 27 at December 31, 2001.
In January 2002, five of these branches were transferred to another financial
institution. Eighteen branches are located in northern Delaware's New Castle
County, WSFS' primary market. These branches maintain approximately 145,000
total account relationships with approximately 49,800 total households, or 26%
of all households in New Castle County, Delaware. One branch is in the state
capital, Dover, located in central Delaware's Kent County. Three other branches
are located in southeastern Pennsylvania.
Everbank, a division of WSFS, jointly managed with C1FN, garners
deposits nationally through its branchless financial services network. Everbank
offers demand deposits, money market deposits and certificates of deposits as
well as non-dollar denominated deposits. Total deposits at Everbank were $287.4
million at December 31, 2001.
The following table sets forth the amount of certificates of deposit of
$100,000 or more by remaining maturity at the December 31, 2001
December 31,
Maturity Period 2001
- --------------- -------------
(In Thousands)
Less than 3 months...................... $23,631
Over 3 months to 6 months............... 14,759
Over 6 months to 12 months.............. 10,134
Over 12 months.......................... 10,346
-------
$58,870
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As a member of the FHLB of Pittsburgh, WSFS is authorized to apply
for advances on the security of their capital stock in the FHLB and certain of
their residential mortgages and other assets (principally securities which are
obligations of or guaranteed by the United States Government and mortgage-backed
securities), provided certain standards related to creditworthiness have been
met. As a member institution, WSFS is required to hold capital stock in the FHLB
of Pittsburgh in an amount at least equal to 1% of the aggregate unpaid
principal of their home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 5% of their outstanding advances,
whichever is greater.
-16-
WSFS also sells securities under agreements to repurchase with various
brokers as an additional source of funding. When entering into these
transactions, WSFS is generally required to pledge either government securities
or mortgage-backed securities as collateral for the borrowings.
In 1998, the Company issued $50.0 million in Trust Preferred securities
due December 11, 2028. See Note 9 of the Consolidated Financial Statements for a
discussion of the Trust Preferred securities.
REGULATION
Regulation of the Company
General. The Company is a registered savings and loan holding company
and is subject to Office of Thrift Supervision (OTS) regulation, examination,
supervision and reporting requirements. As a subsidiary of a holding company,
WSFS is subject to certain restrictions in its dealings with the Company and
other affiliates.
Activities Restrictions. Because the Company became a unitary savings
and loan holding company prior to May 4, 1999, there generally are no
restrictions on its activities. If the Company were to acquire another thrift
and operate it as a separate entity, it would become subject to the activities
restrictions on multiple holding companies. Among other things, no multiple
savings and loan holding company or subsidiary thereof which is not a savings
association may commence, or continue after a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management services
for a subsidiary savings association; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless
the Director of OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of OTS prior to being engaged in by
a multiple savings and loan holding company.
Transactions with Affiliates; Tying Arrangements. Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls or is under common control with the savings association or
any subsidiary of the savings association that is a bank or savings association
or would be deemed a financial subsidiary of a national bank. In a holding
company context, the parent holding company of a savings association (such as
the Company) and any companies which are controlled by such parent holding
company are affiliates of the savings association. Generally, Sections 23A and
23B (i) limit the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, and limit the aggregate
of all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings association may (i) lend or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association. Savings associations are also prohibited from extending credit,
offering services, or fixing or varying the consideration for any extension of
credit or service on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or that the customer
not obtain services from a competitor of the institution, subject to certain
limited exceptions.
-17-
Restrictions on Acquisitions. Unless the acquiror was a unitary savings
and loan holding company on May 4, 1999 (or became a unitary savings and loan
holding company pursuant to an application pending as of that date), no company
may acquire control of the Company unless the company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under the Bank Holding Company Act of 1956
(BHCA), as amended by the Gramm-Leach-Bliley Act. Financial holding companies
may engage in activities that the Federal Reserve Board, in consultation with
the Secretary of the Treasury, has determined to be financial in nature or
incidental to a financial activity or complementary to a financial activity
provided that the complementary activity does not pose a risk to safety and
soundness. Financial holding companies that were not previously bank holding
companies may continue to engage in limited non-financial activities for up to
ten years after the effective date of the Gramm-Leach-Bliley Act (with provision
for extension for up to five additional years by the Federal Reserve Board)
provided that the financial holding company is predominantly engaged in
financial activities.
Savings and loan holding companies are prohibited from acquiring,
without prior approval of the Director of OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof, or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Under certain circumstances,
a savings and loan holding company is permitted to acquire, with the approval of
the Director of OTS, up to 15% of the voting shares of an under-capitalized
savings association pursuant to a "qualified stock issuance" without that
savings association being deemed controlled by the holding company. Except with
the prior approval of the Director of OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock, may also acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the company involved controls a
savings institution which operated a home or branch office in the state of the
association to be acquired as of March 5, 1987; (ii) the acquirer is authorized
to acquire control of the savings association pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act; or (iii) the
statutes of the state in which the association to be acquired is located
specifically permit institutions to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The laws of Delaware do not specifically authorize
out-of-state savings associations or their holding companies to acquire
Delaware-chartered savings associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent WSFS from entering into other states by
mergers or branching. OTS regulations permit federal associations to branch in
any state or states of the United States and its territories. Except in
supervisory cases or when interstate branching is otherwise permitted by state
law or other statutory provision, a federal association may not establish an
out-of-state branch unless the federal association qualifies as a "domestic
building and loan association" under Section 7701(a)(19) of the Internal Revenue
Code or as a "qualified thrift lender" under the Home Owners' Loan Act and the
total assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association or qualified thrift lender. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Regulation of WSFS
General. As a federally chartered savings institution, WSFS is subject
to extensive regulation by the OTS. The lending activities and other investments
of WSFS must comply with various federal regulatory requirements. The OTS
periodically examines WSFS for compliance with regulatory requirements. The FDIC
also has the authority to conduct special examinations of WSFS as the insurer of
deposits. WSFS must file reports with OTS describing its activities and
financial condition. WSFS is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
-18-
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "Tier 1" or "core" capital equal to 4% of adjusted total assets (or 3%
if the institution is rated composite 1 under the OTS examiner rating system),
and "total" capital (a combination of core and "supplementary" capital) equal to
8% of risk-weighted assets. In addition, OTS regulations impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital.
The OTS capital rule defines Tier 1 or core capital as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits of mutual institutions and "qualifying supervisory goodwill," less
intangible assets other than certain supervisory goodwill and, subject to
certain limitations, mortgage and non-mortgage servicing rights, purchased
credit card relationships and credit-enhancing interest only strips. Tangible
capital is given the same definition as core capital but does not include
qualifying supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets except for limited amounts of mortgage servicing
rights. The OTS capital rule requires that core and tangible capital be reduced
by an amount equal to a savings institution's debt and equity investments in
"nonincludable" subsidiaries engaged in activities not permissible to national
banks, other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, increased by certain goodwill amounts
and by a prorated portion of the assets of unconsolidated includable
subsidiaries in which the savings institution holds a minority interest.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the savings institution's minority investments in
unconsolidated includable subsidiaries and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At December 31, 2001, WSFS was in
compliance with both the core and tangible capital requirements.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
One- to four-family first mortgages not more than 90 days past due with
loan-to-value ratios not exceeding 80% (or covered by private mortgage insurance
for any amounts in excess of 80%), fixed-rate multi-family first mortgages not
more than 90 days past due with maturities of not less than seven years,
loan-to-value ratios not exceeding 80% (75% if rate is adjustable), and annual
net operating income equal to not less than 120% of debt service (115% if loan
is adjustable) and certain qualifying loans for the construction of one- to
four-family residences pre-sold to home purchasers are assigned a risk weight of
50%. Consumer loans, non-qualifying residential construction loans and
commercial real estate loans, repossessed assets and assets more than 90 days
past due, as well as all other assets not specifically categorized, are assigned
a risk weight of 100%. The portion of equity investments not deducted from core
or supplementary capital is assigned a 100% risk-weight.
-19-
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments, general loan loss
allowances up to 1.25% of risk-weighted assets and up to 45% of unrealized gains
on available-for-sale equity securities with readily determinable fair values.
Total capital is reduced by the amount of the institution's reciprocal holdings
of depository institution capital instruments, all equity investments and that
portion of land and non-residential construction loans in excess of 80%
loan-to-value ratio. The OTS risk-based capital standards require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. A savings association with more than normal interest rate risk is
required to deduct an interest rate risk component equal to one-half of the
excess of its measured interest rate risk over the normal level from its total
capital for purposes of determining its compliance with the OTS risk-based
capital guidelines. At December 31, 2001, WSFS was in compliance with the OTS
risk-based capital requirements.
Loans to Directors, Officers and 10% Stockholders. Under Section 22(h)
of the Federal Reserve Act, loans to an executive officer or director or to a
greater than 10% stockholder of a savings association and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the association's loans to one borrower
limit (generally equal to 15% of the institution's unimpaired capital and
surplus) and all loans to all such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans,
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, loans to directors, executive officers and principal stockholders must
be made on terms substantially the same as offered in comparable transactions to
other persons unless the loan is made pursuant to a compensation or benefit plan
that is widely available to employees and does not discriminate in favor of
insiders. Section 22(h) also prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors unless payment is made
pursuant to a written, pre-authorized interest-bearing extension of credit plan
that specifies a method of repayment or transfer of funds from another account
at the savings association. Savings associations are subject to the requirements
and restrictions of Section 22(g) of the Federal Reserve Act which requires that
loans to executive officers of depository institutions not be made on terms more
favorable than those afforded to other borrowers, requires approval for such
extensions of credit by the board of directors of the institution, and imposes
reporting requirements for and additional restrictions on the type, amount and
terms of credits to such officers. Section 106 of the BHCA prohibits extensions
of credit to executive officers, directors, and greater than 10% stockholders of
a depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Dividend Restrictions. Savings associations must submit notice to the
OTS prior to making a capital distribution (which includes cash dividends, stock
repurchases and payments to shareholders of another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the association's
common or preferred stock or debt counted as its regulatory capital, or (c) the
association is a subsidiary of a holding company. A savings association must
make application to the OTS to pay a capital distribution if (x) the association
would not be adequately capitalized following the distribution, (y) the
association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
Deposit Insurance. WSFS may be charged semi-annual premiums by the FDIC
for federal insurance on its insurable deposit accounts up to applicable
regulatory limits. The FDIC may establish an assessment rate for deposit
insurance premiums which protects the insurance fund and considers the fund's
operating expenses, case resolution expenditures, income and effect of the
assessment rate on the earnings and capital of members.
-20-
The assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution by the FDIC which
is determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well-capitalized,
adequately-capitalized or undercapitalized -- using the same percentage criteria
as in the prompt corrective action regulations. See "Prompt Corrective Action."
Within each capital group, institutions will be assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund.
Because the Bank Insurance Fund (BIF) achieved its statutory reserve
ratio of 1.25% of insured deposits, the FDIC has eliminated deposit insurance
premiums for most BIF members. In the event that the BIF should fail to meet its
statutory reserve ratio, the FDIC would be required to set semi-annual
assessment rates for BIF members that are sufficient to increase the reserve
ratio to 1.25% within one year or in accordance with such other schedule that
the FDIC adopts by regulation to restore the reserve ratio in not more than 15
years. The FDIC continues to assess BIF member institutions to fund interest
payments on certain bonds issued by the Financing Corporation (FICO), an agency
of the federal government established to help fund takeovers of insolvent
thrifts. Until December 31, 1999, BIF members were assessed at approximately
one-fifth the rate at which Savings Association Insurance Fund (SAIF) members
were assessed. After December 31, 1999, BIF and SAIF members are being assessed
at the same rate.
Prompt Corrective Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), federal banking regulators are
required to take prompt corrective action if an institution fails to satisfy
certain minimum capital requirements, including a leverage limit, a risk-based
capital requirement, and any other measure deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. An institution that
fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. "Significantly
undercapitalized" institutions and their holding companies may become subject to
more severe sanctions including limitations on asset growth, restrictions on
capital distributions by the holding company and possible divestiture
requirements. Institutions generally must be placed in receivership within
specified periods of time after they become "critically undercapitalized".
Under the OTS regulations implementing the prompt corrective action
provisions of FDICIA, the OTS measures a savings institution's capital adequacy
on the basis of its total risk-based capital ratio (the ratio of its total
capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). A savings institution that is not
subject to an order or written directive to meet or maintain a specific capital
level is deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 CAMELS rating). An "undercapitalized institution"
is a savings institution that has (i) a total risk-based capital ratio less than
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1
CAMELS rating). A "significantly undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a ratio of tangible
equity to total assets of less than 2.0%.
Federal Home Loan Bank System. WSFS is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board (FHFB). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of
Pittsburgh, WSFS is required to acquire and hold shares of capital stock in the
FHLB of Pittsburgh in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. WSFS was in compliance with
this requirement with an investment in FHLB of Pittsburgh stock at December 31,
2001, of $28.8 million. The FHLB of Pittsburgh offers advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Pittsburgh. Long term advances may only be made to
larger institutions like WSFS for the purpose of providing funds for residential
housing finance.
-21-
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $41.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement may be to reduce the amount of the institution's
interest-earning assets. As of December 31, 2001 WSFS met its reserve
requirements.
-22-
Item 2. Properties
The following table sets forth the location and certain additional
information regarding the Company's offices and other material properties at
December 31, 2001.
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
------------------------------
WSFS:
Main Office (1)(2) Owned $1,117 $169,034
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 2003 110 53,282
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2006 9 23,462
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 2003 10 66,243
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 2003 6 60,064
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 2003 35 91,934
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2005 22 63,401
New Linden Hill & Limestone Roads
Wilmington, DE 19808
University Plaza Shopping Center Branch Leased 2003 14 40,853
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(4) Leased 2007 248 66,193
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 19 68,663
144 N. DuPont Hwy.
New Castle, DE 19720
Stanton Branch Leased 2006 140 9,588
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Branch Leased 2002 158 15,790
Inside Genuardi's at Peoples Plaza
Routes 40 & 896
Newark, DE 19804
Middletown Square Shopping Center Leased 2004 45 14,703
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover Branch Leased 2005 105 15,316
Inside Metro Food Market
Rt 134 & White Oak Road
Dover, DE 19901
Royersford Branch(6) Leased 2003 173 2,107
Inside Genuardi's Family Markets
Limerick Square
70 Buckwater Rd., Suite 211
Royersford, PA 19468
-23-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
------------------------------
WSFS (continued...):
Glen Eagle Branch Leased 2003 228 8,995
Inside Genaurdi's Family Market
475 Glen Eagle Square
Glen Mills, PA 19342
University of Delaware-Trabant University Center Leased 2003 210 5,940
17 West Main Street
Newark, DE 19716
Brandywine Branch Leased 2004 195 16,520
Inside Genaurdi's Family Market
2522 Foulk Road
Wilmington, DE 19810
Wal-Mart Branch Leased 2004 265 2,907
Route 40 & Wilton Boulevard
New Castle, DE 19720
Chesterbrook Branch(6) Leased 2004 179 2,728
Inside Genaurdi's Family Market
500 Chesterbrook Boulevard
Wayne, PA 19087
Kimberton Branch(6) Leased 2004 183 2,679
Inside Genuardi's Family Market
Maple Lawn Shopping Center
542 Kimberton Road
Phoenixville, PA 19460
King of Prussia Branch(6) Leased 2005 221 2,692
Inside Genuardi's Family Market
310 S. Henderson Road
King of Prussia, PA 19406
Operations Center Owned 1,005 N/A
2400 Philadelphia Pike
Wilmington, DE 19703
Longwood Branch Leased 2005 212 2,282
830 E. Baltimore Pike
E. Marlborough, PA 19348
Holly Oak Branch Leased 2005 172 19,458
Inside Superfresh
2105 Philadelphia Pike
Claymont, DE 19703
Elkins Park Branch Leased 2005 221 10,576
More Shopping Center
7300 Old York Road
Elkins Park, PA 19027
Hockessin Branch Leased 2015 589 22,081
7450 Lancaster Pike
Wilmington, DE 19707
St. David's Branch(6) Leased 2005 196 1,177
Inside Genuardi's Supermarket
550 E. Lancaster Ave.
Wayne, PA 19086
Wilmington National Finance:
Marchwood Shopping Center Leased 2004 26 N/A
4 Marchwood Road
Exton, PA 19341
6265 Southfront Road Leased 2005 - N/A
Livermore, CA
1833 Centre Point Drive Leased 2005 - N/A
Suite 123
Naperville, IL 60566
-24-
Net Book Value
Of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
------------------------------
Wilmington National Finance (continued...):
Suite 350 Leased 2005 - N/A
2260 Buler Pike
Plymouth Meeting, PA 19462
University Plaza-Bellevue Leased 2005 - N/A
262 Chapman Road
Newark, DE
175 Great Neck Road Leased 2003 - N/A
Suite 407
Great Neck, NY
Sunset Ridge Professional Plaza Leased 2004 - N/A
2920 N. Green Parkway
Henderson, NY
One University Plaza Leased 2004 - N/A
8301 JM Keynes Drive
Suite 400
Charlotte, NC
Suite 150 Leased 2004 - N/A
4800 River Green Parkway
Duluth, GA
C1FN
St. Louis, Missouri(5) Leased 2002 - 287,449
555 N New Ballas Road
Suite 110
St. Louis, MO 63141
New York Leased 2003 7 N/A
11 Oval Drive
Suite 107
Islandia, NY 11749-1476
Vermont Leased 2002 - N/A
188 South Main Street
P.O. Box 1209
Stowe, VT 05672
Florida (5) Leased 2004 9 N/A
2233 N. Commerce Pkwy.
Suite 1
Weston, FL 33326
Vermont Leased 2006 2 N/A
56 Old Farm Road
Stowe, VT
St. Louis Leased 2004 23 N/A
1610 Des Peres Road
St. Louis, MO
WSFS Credit Corporation:
30 Blue Hen Drive Leased 2002 219 N/A
Suite 200
Newark, DE 19713
Friess Land (3) Owned - 2,090 N/A
Wilmington Gateway: (3)
500 Delaware Ave. Owned - 5,663 N/A
Wilmington, DE 19801
----------
$1,146,117
==========
(1) Includes location of executive offices and approximately $8.3 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and equipment
totaled $16.4 million at December 31, 2001.
(3) The total includes building and building depreciation listed under Real
Estate Held for Investment.
(4) Includes the Company's Education and Development Center.
(5) Both locations are sublet by an independent third party at the same rental
cost.
(6) Branches transferred to another financial institution on January 15, 2002.
-25-
Item 3. Legal Proceedings
There are no material legal proceedings to which the Company or WSFS is
a party or to which any of its property is subject except as discussed in Note
14 to the Consolidated Financial Statements.
Item 4. Submissions of Matters To a Vote of Security Holders
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 2001 through the solicitation of
proxies or otherwise.
-26-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock
MarketSM under the symbol WSFS. At December 31, 2001, the Corporation had 1,937
registered common stockholders of record. The following table sets forth the
range of high and low sales prices for the Common Stock for each full quarterly
period within the two most recent fiscal years as well as the quarterly
dividends paid.
The closing market price of the common stock at December 31, 2001 was
$17.35.
Stock Price Range Dividends
--------------------------- ---------
Low High
--------- -----------
2001 1st $11.88 $13.81 $ .04
2nd 12.38 17.55 .04
3rd 15.25 18.50 .04
4th 15.45 18.25 .04
-----
$ .16
=====
2000 1st $10.69 $12.88 $ .03
2nd 10.25 13.31 .04
3rd 10.94 11.38 .04
4th 10.06 12.88 .04
-----
$ .15
=====
-27-
Item 6. Selected Financial Data
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in Thousands, Except Per Share Data)
At December 31,
Total assets..................................... $1,912,898 $1,739,316 $1,751,037 $1,631,319 $1,510,655
Net loans (1).................................... 1,115,372 963,491 860,573 739,462 734,716
Investment securities (2)........................ 14,194 29,740 37,473 37,861 78,655
Investment in reverse mortgages, net............. 33,939 33,683 28,103 31,293 32,109
Other investments................................ 122,889 39,318 36,526 51,418 74,523
Mortgage-backed securities (2)................... 361,724 339,718 447,749 459,084 330,274
Deposits ........................................ 1,146,117 1,121,591 910,090 858,300 766,966
Borrowings (3)................................... 595,480 443,638 672,465 622,409 615,578
Senior notes..................................... - - - - 29,100
Trust preferred borrowings....................... 50,000 50,000 50,000 50,000 -
Stockholders' equity ............................ 100,003 97,146 96,153 85,752 86,759
Number of full-service branches (4)(5)........... 27 28 24 20 16
For the Year Ended December 31,
Interest income.................................. $ 120,474 $ 129,677 $ 108,184 $ 105,833 $ 107,265
Interest expense................................. 58,184 65,727 58,856 59,775 60,751
Other income .................................... 44,131 18,101 11,579 11,243 8,785
Other expenses .................................. 75,828 61,428 42,668 34,501 33,883
Income from continuing operations................ 19,109 15,622 18,086 15,388 14,979
Net income ...................................... 17,083 11,019 19,709 16,512 16,389
Earnings per share:
Basic:
Income from continuing operations............. $ 1.99 $ 1.46 $ 1.60 $ 1.25 $ 1.20
Net income ................................... 1.78 1.03 1.74 1.34 1.31
Diluted:
Income from continuing operations............. 1.97 1.46 1.59 1.23 1.18
Net income ................................... 1.76 1.03 1.73 1.32 1.29
Interest rate spread............................. 4.11% 4.76% 3.90% 3.78% 3.78%
Net interest margin.............................. 4.11 4.57 3.65 3.63 3.71
Return on average equity (6)..................... 19.03 15.95 20.32 16.47 18.51
Return on average assets (6)..................... 1.16 1.04 1.25 1.15 1.14
Average equity to average assets (6)............. 6.08 6.54 6.15 6.96 6.18
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances and securities sold under agreement to
repurchase.
(4) WSFS closed one branch in 2001. WSFS opened four branches in 1998, 1999 and
2000.
(5) Five branches were transferred to another financial institution in January
2002.
(6) Based on continuing operations.
-28-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
WSFS Financial Corporation (Company or Corporation) is a thrift holding
company headquartered in Wilmington, Delaware. Substantially all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (WSFS). Founded in 1832, WSFS is one of the oldest financial
institutions in the country. As a federal savings bank which was formerly
chartered as a state mutual savings bank, WSFS enjoys broader investment powers
than most other financial institutions. These grandfathered powers have allowed
WSFS to diversify its revenue sources to a greater extent than most savings
banks. WSFS has served the residents of the Delaware Valley for 170 years. WSFS
is the largest thrift institution headquartered in Delaware and among the three
or four largest financial institutions in the state on the basis of total
deposits traditionally garnered in-market. The Corporation's primary market area
is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The long-term goal of the
Corporation is to maintain its high-performing financial services company status
by focusing on its core banking business while occasionally developing
profitable niches in highly-synergistic businesses that have a strategic fit.
WSFS provides residential and commercial real estate, commercial and
consumer lending services, as well as cash management services. Lending
activities are funded primarily with retail deposit services and borrowings. At
December 31, 2001 there were 27 retail banking offices located in northern
Delaware and southeastern Pennsylvania in which WSFS conducted banking
operations. In January 2002, for strategic reasons, WSFS transferred 5 in-store
branch offices that were outside of its core footprint to another financial
institution. Deposits are insured to their legal maximum by the Federal Deposit
Insurance Corporation (FDIC).
The Corporation has two consolidated subsidiaries, WSFS and WSFS
Capital Trust I. The Corporation has no unconsolidated subsidiaries or
off-balance sheet entities. Fully-owned and consolidated subsidiaries of WSFS
include WSFS Credit Corporation (WCC), which is engaged primarily in indirect
motor vehicle leasing; and 838 Investment Group, Inc., which markets various
third party insurance products and securities through WSFS' branch system. An
additional subsidiary, Star States Development Company (SSDC), is currently
inactive.
On December 21, 2000, the Board of Directors of WSFS Financial
Corporation approved plans to discontinue the operations of WCC. WCC, which had
4,600 lease contracts and 1,800 loan contracts at December 31, 2001, no longer
accepts new applications but will continue to service existing loans and leases
until their maturity. Management estimates that substantially all loan and lease
contracts will mature by the end of December 2003.
Accounting for discontinued operations of a business segment requires
that the Company forecast operating results over the wind-down period and accrue
any expected net losses. The historic results of WCC's operations, the accrual
of expected losses to be incurred over the wind-down period, and the future
reported results of WCC are required to be treated as Discontinued Operations of
a Business Segment, and shown in summary form separately from the Company's
results of continuing operations in reported results of the Corporation. Prior
periods are restated, as required by accounting principles generally accepted in
the United States of America.
As a result, net operating losses of $2.4 million for the year ended
December 31, 2000 and net income of $1.6 million for the year ended December 31,
1999 were reclassified from continuing operations to discontinued operations. In
addition in 2000, the Corporation recognized a charge of $2.2 million, net of
$4.0 million in tax benefits related to net operating loss carryforwards, for
the expected loss over the projected three-year wind-down period. A $6.2 million
pretax reserve was established to absorb these expected future losses.
During 2001, used vehicle values continued to deteriorate. This decline
was exacerbated and continues to be affected by, among other things, the
continued incenting of new vehicles by auto manufacturers. As a result,
management's analysis of residual losses as of December 31, 2001 indicated that
additional reserves were needed for the expected losses in the business during
its wind-down. Accordingly, management recorded an additional $3.1 million,
pre-tax, for expected losses over the wind-down period. The balance of reserves
for residual losses represents management's best estimate of losses inherent in
the remaining portfolio. As of December 31, 2001, there were $87 million of
contractual residuals still on lease for which management has estimated $15.5
million in probable losses. The losses have been inherently provided for in
residual reserves and reserves for discontinued operations.
-29-
Due to the uncertainty of a number of factors, including residual
values, interest rate volatility and credit quality, this reserve will be
reevaluated quarterly with adjustments, if necessary, recorded as income/losses
on wind-down of discontinued operations. Accounting for discontinued operations
also requires that the net assets (assets less third party liabilities) be
reclassified on the balance sheet to a single line item, Net assets of
discontinued operations.
In addition to the wholly owned subsidiaries, the Corporation
consolidates two non-wholly owned subsidiaries, CustomerOne Financial Network,
Inc. (C1FN) and Wilmington National Finance, Inc. (WNF).
C1FN provides direct-to-customer marketing, servicing and Internet
development and technology management for branchless financial services. Since
the fourth quarter of 1999 WSFS and C1FN have been engaged in a joint effort
through a division of WSFS, Everbank, to provide branchless financial services
on a national level. WSFS originally invested $5.5 million, which had a book
value of $2.4 million at December 31, 2001 including approximately $1 million in
goodwill. WSFS currently has a 28% interest in C1FN, with warrants to acquire
additional ownership under certain circumstances, but retains majority control
through a voting trust. Therefore, the results of C1FN are and will continue to
be consolidated into WSFS until Everbank, obtains a separate banking charter or
is otherwise disposed. C1FN paid a management fee to WSFS of $480,000 in 2001
and $327,000 in 2000 which is partially eliminated in consolidation. C1FN had
total assets of $296.1 million at December 31, 2001 and $192.6 million at
December 31, 2000. Net losses after minority interest were $558,000 and $1.5
million for the years ended December 31, 2001 and 2000, respectively.
C1FN/Everbank issues deposits denominated in foreign currencies. At
December 31, 2001 those deposits totaled $60.4 million. Short-term forward
exchange contracts are purchased to provide an effective hedge on the fair value
of deposits from fluctuations that may occur in world currency markets. At
December 31, 2001, the fair value of the hedges amounted to a $395,000
liability.
Under the terms of its agreement with WSFS, C1FN has the right to
acquire the deposits and business of Everbank if C1FN obtains its own depository
institution charter. C1FN ha