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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, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-16668
--------------------------------
WSFS FINANCIAL CORPORATION
Delaware 22-2866913
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of March 14, 1997 was $109,270,617. For purposes of this calculation
only, affiliates are deemed to be directors, executive officers and certain
beneficial owners.
As of March 14, 1997, there were issued and outstanding 12,529,639 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 24, 1997 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
Item 1. Business .............................................................................. 3
Item 2. Properties ............................................................................ 24
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 8. Financial Statements and Supplementary Data............................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 82
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... 82
Item 11. Executive Compensation.................................................................. 82
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 82
Item 13. Certain Relationships and Related Transactions.......................................... 82
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 83
Signatures................................................................................................ 85
-2-
PART I
Item 1. Business
GENERAL
WSFS Financial Corporation ("Company" or "Corporation") is a thrift
holding company whose principal subsidiary is Wilmington Savings Fund Society,
FSB (the "Bank" or "WSFS") which operates 16 branches in New Castle and Kent
Counties, Delaware. Founded in 1832, the Bank is the largest thrift institution
headquartered in Delaware. Reflecting its long history, the Bank estimates that
it has customer relationships with almost 51,000 households, or 24%, in its
principal market area of New Castle County, Delaware.
The Company has no business operations independent of WSFS and its
subsidiaries. Through WSFS and its subsidiaries, the Company is currently
engaged in a variety of lending services, including residential, consumer and
commercial lending primarily in Delaware. The principal business of the Bank
consist of the solicitation of deposits through its branch networks to provide
funds for lending and investment activities. In connection with its conversion
to a federal savings bank in 1983, the Bank retained its then-authorized powers
as a Delaware-chartered mutual savings bank. Under the Office of Thrift
Supervision ("OTS") regulations, the Bank may exercise any authority it was
allowed to exercise as a mutual savings bank under state laws and regulations at
the time of its conversion to a federal savings bank. In exercising such
"grandfathered" powers, the Bank may continue to comply with applicable state
laws and regulations in effect at the time of its conversion to a federal
charter except as otherwise determined by the OTS. The Bank, however, may not
use its grandfathered powers to engage in activities to a greater degree than
would be allowed under the most liberal construction of either state or federal
law or regulation. The Bank's grandfathered powers could be assumed by any other
institution that acquires the Bank by consolidation or merger. The Bank has
previously used its grandfathered powers to authorize investments above
otherwise applicable limits in subsidiaries engaged in activities such as real
estate and insurance brokerage. The Bank has divested certain of these
subsidiaries in order to focus on the traditional savings bank businesses of
lending to consumers and small businesses in its primary market area.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements. The OTS
periodically examines the Bank for compliance with various regulatory
requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the
authority to conduct special examinations of the Bank as insurer of its
deposits. The Bank is also subject to certain reserve requirements promulgated
by the Federal Reserve Board. This supervision and regulation is intended
primarily for the protection of depositors. See "Regulation" for a further
discussion of certain of these regulatory requirements.
During the 1980's, the Bank pursued an aggressive growth and
diversification strategy acquiring the largest real estate brokerage business in
Delaware, B. Gary Scott, Inc. in 1985, a Maryland automobile fleet leasing
company, Anderson Leasing, Inc. in 1988 and Fidelity Federal Savings and Loan
Association ("Fidelity Federal" or "Association") in 1990. In addition, the Bank
significantly increased its exposure to commercial real estate, both as a lender
and as an equity participant through its real estate development subsidiary. As
a result of operating losses related to deterioration in the Company's loan
portfolios, real estate investments and acquisitions, the Bank failed to meet
certain regulatory capital requirements and the Board of Directors reorganized
management by terminating several executive officers and appointing a new
chairman of the board who was directed to head a search committee for new
management. The Company took a number of steps to address the asset quality and
capital problems that resulted from this previous business strategy.
-3-
Consistent with these goals, the Company undertook an extensive restructuring
during 1991. This included the sales of loans, investment securities, mortgage
servicing rights, certain real estate, subsidiary operations and the deposit
accounts of eight branches. These nonrecurring sales combined with expense
reduction initiatives resulted in net earnings of $11.3 million in 1991, the
highest in the Company's history at the time. During 1992 and 1993, the
Company's earnings stabilized as the economy began to improve and interest rates
decreased. In 1992, the Company completed an offering of convertible preferred
stock which increased capital by $11.8 million. Such funds were utilized to
recapitalize the Bank. In December 1993, the Company completed a private
placement of $32.0 million in 11% Senior Notes to provide funds for an
additional capital infusion into the Bank. As a result of this capital infusion,
the Bank was in compliance with all currently applicable capital requirements
and it was released from the Capital Directive on December 29, 1993. The Bank's
improved capital position has also allowed the Company to undertake an expansion
of its business activities. During 1994, the Bank formed a new consumer finance
subsidiary specializing in second mortgage lending and acquired Providential
Home Income Plan, Inc. an originator of reverse annuity mortgages. During 1994,
the Corporation reported operating income of $8.1 million, which was at that
time the highest operating earnings in the Corporation's history. Rising
interest rates combined with investment growth strategies contributed
significantly to earnings during 1994.
During 1995, the Corporation's subsidiary, Fidelity Federal, completed
the sale of its deposits and certain real estate of four branches which allowed
the Corporation to further focus on its primary market area and continue to
enhance capital. As a result, the Bank recognized a gain of $12.4 million, net
of taxes and a supplemental contribution to the Corporation's 401(k) Plan. The
Association's remaining operations were merged into the Bank in November 1995.
The Corporation recorded total earnings of $27.0 million in 1995 of which $14.6
million was from operations. Both amounts represented new record earnings levels
in the Corporation's 164-year history.
Earnings for the year end December 31, 1996 were $16.4 million. Net
income for each of the years in the five-year period ended December 31, 1996
included the recognition of tax benefits. Excluding the one-time net gain on the
sale of the Association's deposits, income before taxes increased from $12.2
million in 1995 to $19.5 million in 1996, a $7.3 million or 60% increase.
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 ("MDA"), incorporated herein by reference.
-4-
INVESTMENT ACTIVITIES
The Bank is able to invest in various securities, including U.S.
Treasury obligations, short-term money market instruments and preferred stock.
The primary purposes of the Company's short-term investment portfolio are 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,
---------------------------------------------------------------
1996 1995 1994
------------------ ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars In Thousands)
Held-to-Maturity:
Corporate bonds ..................................... $15,038 1.1% $16,748 1.4% $19,077 1.6%
U.S. Government and agencies ........................ 10,000 0.9
State and political subdivisions .................... 2,642 0.2 5,542 0.4 6,075 0.5
Other investments ................................... 88
------- --- ------- --- ------- ---
17,680 1.3 22,378 1.8 35,152 3.0
------- --- ------- --- ------- ---
Available-for-Sale:
U.S. Government and agencies ........................ 23,028 1.9
State and political subdivisions .................... 1,253 0.1 891 0.1 761 0.1
Other investments ................................... 5,503 0.4 5,203 0.4
------- --- ------- --- ------- ---
1,253 0.1 6,394 0.5 28,992 2.4
------- --- ------- --- ------- ---
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell ...................... 25,400 1.9 31,500 2.6 23,098 1.9
Interest-bearing deposits in
other banks (1) ................................. 5,702 0.4 4,568 0.4 9,536 0.8
------- --- ------- --- ------- ---
31,102 2.3 36,068 3.0 32,634 2.7
------- --- ------- --- ------- ---
$50,035 3.7% $64,840 5.3% $96,778 8.1%
======= === ======= === ======= ===
(1) Interest-bearing deposits in other banks does not include deposits with a
maturity greater than one year.
During the 1980's, the Bank began restructuring its balance sheet to
reduce sensitivity to interest-rate fluctuations. Consequently, long-term
investment securities have gradually been reduced. In 1996, the Bank purchased
and sold $55 million in U.S. Government securities, and other investments
classified as available-for-sale were sold in the amount of $6 million. The
reduction of corporate and political subdivision bonds were primarily due to
maturities and calls. In 1995, U.S. Government securities available-for-sale
were sold, and an FHLB step-up bond (held-to-maturity) was called. During 1994,
the same FHLB step-up bond was purchased in the amount of $10 million and U.S.
Government securities were purchased in the amount of $15 million. As in 1996,
the reduction of corporate and state and political subdivision bonds was
primarily the result of maturities and calls.
-5-
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1996. Substantially all of the related interest and dividends
represent taxable income. Yields on tax-exempt obligations are calculated on the
basis of actual yields and not on a tax-equivalent basis.
At December 31, 1996
----------------------
Amount Yield
------ -----
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
Within one year.................................... $ 1,750 5.52%
After one but within five years.................... 3,724 6.91
After five but within ten years.................... 4,789 7.21
After ten years.................................... 4,775 6.87
-------
15,038 6.83
-------
State and political subdivisions (1):
Within one year.................................... 2,520 5.00
After one but within five years.................... 65 5.05
After ten years.................................... 57 6.74
-------
2,642 5.04
-------
Total debt securities, held-to-maturity.............. 17,680 6.56
-------
Available-for-Sale:
State and political subdivisions (1):
After ten years.................................... 1,253 7.70
-------
Short-term investments:
Deposits with other banks.......................... 5,702 5.60
Federal funds sold and securities
purchased under agreements to resell............. 25,400 6.00
-------
Total short-term investments......................... 31,102 5.93
-------
$50,035 6.20%
=======
(1) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since substantially all bonds are taxable.
-6-
In addition to the foregoing investment securities, the Company has
maintained an investment portfolio of mortgage-backed securities, which
increased dramatically after 1993 as the Company implemented investment growth
strategies during 1996 and 1994. Purchases of mortgage-backed securities in 1996
totalled $175 million, of which $39 million was classified as available-for-sale
and $136 million was classified as held-to-maturity. Reductions in the other
categories, as well as the 1995 and 1994 balances, were due to principal
repayments.
The following table sets forth the book values of mortgage-backed
securities and their related weighted average stated rates at the end of the
last three fiscal years.
December 31,
------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- ------- -----
Held-to-Maturity:
Collateralized mortgage obligations $165,516 7.38% $ 72,222 7.72% $ 78,847 7.82%
GNMA .............................. 1,496 7.16 1,697 7.03 1,895 6.23
FHLMC ............................. 63,223 6.18 73,197 6.22 81,864 6.28
FNMA .............................. 62,754 6.26 72,590 6.30 81,513 6.34
Other ............................. 20,340 8.07 21 13.25 46 13.25
-------- ---- -------- ---- ------- -----
$313,329 6.96% $219,727 6.80% $244,165 6.80%
======== ==== ======== ==== ======= =====
Available-for-Sale:
Collateralized mortgage obligations $ 37,482 7.44% $ % $ %
GNMA .............................. 14,441 6.15 17,405 6.44 18,583 6.41
-------- ---- -------- ---- ------- -----
$ 51,923 7.08% $ 17,405 6.44% $18,583 36.41%
======== ==== ======== ==== ======= =====
LENDING ACTIVITIES
Traditionally, the majority of a thrift institution's loan portfolio
has consisted of first mortgage loans on residential properties. However, as a
result of various legislative and regulatory changes since 1980, the commercial
and consumer lending powers of the Bank increased substantially. Consequently,
the Bank initiated a diversification strategy in fiscal year 1984 which included
a significant increase in commercial real estate lending. Commercial real estate
lending was discontinued in 1990 and only originations required by previous
funding commitments were made. In 1994, however; the Bank began to originate
small business commercial real estate loans in its primary market area. The
Bank's current lending activity is concentrated on lending to consumers and
small businesses in the Mid-Atlantic Region of the United States area.
-7-
The following table sets forth the composition of the Corporation's
loan portfolio by type of loan at each of the dates indicated. Other than as
disclosed below, the Company had no concentrations of loans exceeding 10% of
total loans at December 31, 1996:
December 31,
-------- ---------------------------------------------------------------------------- -----
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Residential real estate (1) $279,060 33.8% $276,926 35.0% $260,442 36.6% $235,213 34.2% $254,936 33.4%
Commercial real estate:
Commercial mortgage 278,935 33.8 293,979 37.1 259,112 36.6 273,375 39.8 288,248 37.7
Construction 27,056 3.3 29,959 3.8 25,603 3.6 28,978 4.2 40,528 5.3
-------- ----- -------- ---- -------- ----- -------- ----- -------- -----
Total commercial real estate 305,991 37.1 323,938 40.9 284,715 40.2 302,353 44.0 328,776 43.0
Commercial 28,602 3.5 23,894 3.0 25,188 3.5 21,276 3.0 33,891 4.4
Consumer 135,552 16.4 114,265 14.4 91,182 12.8 93,845 13.7 123,924 16.2
Lease financings 121,970 14.8 98,840 12.5 89,095 12.5 72,941 10.6 61,750 8.1
-------- ----- -------- ---- -------- ----- -------- ----- -------- -----
Gross loans 871,175 105.6 837,863 105.8 750,622 105.6 725,628 105.5 803,277 105.1
Less:
Unearned income 21,552 2.6 21,512 2.7 18,146 2.6 14,523 2.1 13,215 1.7
Allowance for loan losses 24,740 3.0 24,167 3.1 21,700 3.0 23,613 3.4 26,263 3.4
-------- ----- -------- ---- -------- ----- -------- ----- -------- -----
Net loans $824,883 100.0% $792,184 100.0% $710,776 100.0% $687,492 100.0% $763,799 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
(1) Includes $773, $4,401, $257, $1,965, and $2,994 of residential mortgage
loans held-for-sale at December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
-8-
The following table sets forth information as of December 31, 1996
regarding the dollar amount of loans maturing in the Company's loan portfolio,
including scheduled repayments of principal, based on contractual terms to
maturity. In addition, the table sets forth the dollar amount of loans maturing
during the indicated periods, based on whether the loan has a fixed- or
adjustable-rate. 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)..................... $ 83,108 $ 183,036 $ 291,078 $ 557,222
Construction loans........................ 8,554 18,491 11 27,056
Commercial loans.......................... 14,232 12,773 1,597 28,602
Consumer loans............................ 53,883 54,290 27,379 135,552
Lease financings ......................... 27,883 94,087 121,970
----------- ----------- ---------- ----------
$ 187,660 $ 362,677 $ 320,065 $ 870,402
=========== =========== ========== ==========
Rate sensitivity:
Fixed................................... $ 82,880 $ 207,864 $ 106,897 $ 397,641
Adjustable.............................. 104,780 154,813 213,168 472,761
----------- ----------- ---------- ----------
$ 187,660 $ 362,677 $ 320,065 $ 870,402
=========== =========== ========== ==========
(1) Includes commercial mortgage loans.
The above schedule does not include any prepayment assumptions.
Although prepayments tend to be highly dependent upon the current interest rate
environment, management believes that the actual repricing and maturity of the
loan portfolio is significantly shorter as a result of prepayments than is
reflected in the above table.
Residential Real Estate Lending. WSFS originates residential mortgage
loans with loan-to-value ratios up to 95%; however, the Bank generally requires
private mortgage insurance for up to 30% of the mortgage amount on mortgage
loans whose loan-to-value ratio exceeds 80%. The Bank does not have any
significant concentrations of such insurance with any one insurer. On a limited
basis, the Bank originates loans with loan-to-value ratios exceeding 80% without
a private mortgage insurance requirement. At December 31, 1996, the balance of
all such loans was approximately $15.6 million of which $6.1 million related to
lending intended to satisfy the requirements of the Community Reinvestment Act.
Generally, residential mortgage loans originated or purchased are underwritten
and documented in accordance with standard underwriting criteria published by
FNMA and/or FHLMC to assure maximum eligibility for subsequent sale in the
secondary market; however, unless loans are specifically designated for sale,
the Company holds newly originated loans in portfolio for long-term investment.
Among other things, the institution requires title insurance, insuring the
priority of its lien and fire and extended coverage casualty insurance for the
properties securing the residential loans. All properties securing residential
loans made by the Bank are appraised by independent appraisers selected by the
Bank and subject to review in accordance with Bank standards.
The majority of adjustable-rate loans currently originated have
interest rates that adjust every year, with the change in rate limited to two
percent at any adjustment date. The adjustments are generally based upon a
margin (currently 2.75 percent) over the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity, as published by the Federal Reserve
Board. Generally, the maximum rate on these loans is up to six percent above the
initial interest rate. The Bank generally underwrites adjustable-rate loans
under standards consistent with private mortgage insurance and secondary market
criteria. The Bank does not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization. Consistent with industry
practice in its market area, the Bank has originated adjustable-rate mortgage
loans with initially discounted interest rates. All such loans are underwritten
at the fully-indexed rate.
The retention of adjustable-rate mortgage loans in the Bank's loan
portfolio helps mitigate the Bank's exposure to changes in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of the repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest costs to the borrower. Further, although adjustable-rate
mortgage loans allow the Bank to increase the sensitivity of its asset base to
changes in interest rates, the extent of this interest sensitivity is limited by
the periodic and lifetime interest rate adjustment limitations. Accordingly,
there can be no assurance that yields on the Bank's adjustable-rate mortgages
will adjust sufficiently to compensate for increases in the Bank's cost of funds
during periods of extreme interest rate increases.
-9-
The original contractual loan payment period for residential loans
originated is normally 10 to 30 years. Because borrowers may refinance or prepay
their loans without penalty, such loans normally remain outstanding for a
substantially shorter period of time. First mortgage loans customarily include
"due-on-sale" clauses on adjustable- and fixed-rate loans, which are provisions
giving the institutions the right to declare a loan immediately due and payable
in the event the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. Due-on-sale clauses are an
important means of adjusting the rate on existing fixed-rate mortgage loans to
current market rates. The Bank enforces due-on-sale clauses through foreclosure
and other legal proceedings to the extent available under applicable laws.
Commercial Real Estate and Commercial Lending. As a federal savings
bank, the Bank is permitted to invest up to 400% of its consolidated capital in
nonresidential real estate loans and up to 20% of its assets in commercial
loans. Prior to 1994, the Bank had been operating under a Capital Plan and was
subject to the terms and conditions of a Capital Directive. Consequently, WSFS
had discontinued the origination of commercial real estate loans other than
renewal of performing loans or funding outstanding commitments. Beginning in
1994, however, the Bank began to originate small business commercial real estate
loans in its primary market area.
WSFS has offered commercial real estate mortgage loans on multi-family
and other commercial real estate. Generally, loan-to-value ratios for such loans
do not exceed 80% of appraised value. Due to softening of the commercial real
estate market in the early 1990's; however, current loan-to-value ratios may
effectively be in excess of 80%.
Prior to the restrictions noted above, the Bank offered
commercial construction loans to developers. These loans were made as
"construction/permanent" loans, which provided for disbursement of loan funds
during construction and automatic conversion to permanent loans upon completion
of construction. Such construction loans were made on a short-term basis,
usually not exceeding two years, with interest rates indexed to the WSFS prime
rate and adjusted periodically as the Bank's prime rate changed. The loan
appraisal process includes the same criteria as required for permanent mortgage
loans as well as completed plans, specifications, comparables and cost
estimates. These items are used, prior to approval of the credit, as a basis to
determine the appraised value of the subject property when completed. Policy
requires that all appraisals are to be reviewed independent of the commercial
lending area. Generally, the loan-to-value ratio for construction loans does not
exceed 80%. The initial interest rate on the permanent portion of the financing
is determined based upon the prevailing market rate at the time of conversion to
the permanent loan. At December 31, 1996, $38.0 million was committed for
construction loans, of which $27.1 million had been disbursed.
The Bank's commercial lending, excluding real estate loans, includes
loans for the purpose of financing equipment acquisitions, expansion, working
capital and other business purposes. These loans generally range in amounts up
to approximately $1.5 million, and their terms range from less than one year to
ten years. The loans generally carry variable interest rates indexed to the
Bank's prime rate at the time of closing. The Bank intends to continue
originating commercial loans to small businesses in its market area.
Commercial, commercial mortgages and construction lending entails
significant risk as compared with residential mortgage lending. These loans
typically involve larger loan balances concentrated in single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the commercial real estate market or in
the economy generally. The majority of the Bank's commercial and commercial real
estate loans are concentrated in Delaware and surrounding areas. Construction
loans involve risks attributable to the fact that loan funds are advanced upon
the security of the project under construction, which, due to various factors,
is of uncertain value prior to the completion of construction. Moreover, because
of the uncertainties inherent in estimating construction costs, delays arising
from labor problems, material shortages and other unpredictable contingencies,
it is relatively difficult to accurately estimate the total loan funds required
to complete a project and or determine the related loan-to-value ratios.
Federal law limits the extensions of credit to any one
borrower to 15% of unimpaired capital surplus, or 25%, if the additional
incremental 10% is secured by readily marketable collateral having a market
value that can be determined by reliable and continually available pricing.
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. At December 31, 1996, no borrower had
collective outstandings exceeding the above limits; however, an existing loan
that exceeds these limits does not have to be
-10-
terminated or divested since the legality of a loan is determined when it is
made and is not affected by subsequent legislative events.
Consumer Lending. Consumer loans (not including certain consumer loans
such as home equity lines of credit and other residential real estate secured
loans) may be made in an amount up to 35% of the Bank's assets. The Company
intends to emphasize consumer lending in the future as a means of enhancing
portfolio yields and capitalizing on existing customer relationships.
The primary consumer loan products, excluding lease financings, of the
Company are equity secured installment loans and home equity lines of credit.
With a home equity line of credit the borrower is granted a line of credit up to
75% of the appraised value (net of any senior mortgages) of the residence. This
line of credit is secured by a mortgage on the borrower's property and can be
drawn upon at any time. At December 31, 1996, the Bank had extended a total of
$86.8 million in home equity lines of credit, of which $33.3 million had been
drawn at the date. Home equity lines of credit offer federal income tax
advantages (in certain circumstances, the interest paid on a home equity loan
remains deductible) and the convenience of their checkbook access and revolving
credit features. Over the past few years; however, home equity lines of credit
have decreased as low interest rates offered on mortgage loans have enabled
consumers to refinance their mortgages and consolidate debt. Although home
equity lines of credit expose the Company to the risk that falling collateral
values may leave it inadequately secured, the Company has not had any
significant adverse experience to date.
The Company also originates leases through its subsidiary, WSFS Credit
Corporation ("WCC"). These leases are secured by motor vehicles and originated
through automobile dealerships. During 1996, WCC originated more than 1,900
leases which approximated $50.0 million in new assets.
-11-
The table below sets forth consumer loans by type and lease financings
outstanding, in dollar amounts and percentages, at the dates indicated.
December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- -------------- --------------- ----------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Equity secured installment loans $ 63,803 24.7% $ 52,793 24.8% $ 34,088 18.9% $ 24,485 14.7% $ 46,715 25.1%
Home equity lines of credit.... 33,267 12.9 36,817 17.3 40,727 22.6 47,060 28.2 58,104 31.3
Automobile..................... 26,456 10.3 12,701 6.0 1,951 1.1 2,567 1.5 4,313 2.3
Unsecured lines of credit...... 7,448 2.9 7,017 3.3 3,683 2.0 4,070 2.5 4,409 2.4
Other.......................... 4,578 1.8 4,937 2.3 10,733 6.0 15,663 9.4 10,383 5.6
-------- ------ -------- ------ -------- ----- ------- ------ -------- -----
135,552 52.6 114,265 53.7 91,182 50.6 93,845 56.3 123,924 66.7
Lease financings............... 121,970 47.4 98,840 46.3 89,095 49.4 72,941 43.7 61,750 33.3
-------- ----- -------- ---- -------- ----- -------- ----- -------- ----
Total consumer loans and
lease financings............... $257,522 100.0% $213,105 100.0% $180,277 100.0% $166,786 100.0% $185,674 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
-12-
Loan Originations, Purchase and Sales. WSFS has traditionally engaged
in lending activities primarily in Delaware and contiguous areas of neighboring
states although, as a federal savings bank, the Bank may originate, purchase and
sell loans throughout the United States. WSFS has also purchased limited amounts
of loans from outside its normal lending area when such purchases are deemed
appropriate and consistent with the Bank's overall policies. The Bank originates
fixed- and adjustable-rate residential real estate loans through banking
offices. In addition, WSFS has established relationships with correspondent
banks, mortgage brokers and real estate developers for loan referrals.
During 1996, WSFS originated $88 million of residential real estate
loans compared to 1995 originations of $87 million. From time to time, the Bank
has purchased whole loans and loan participations in accordance with its ongoing
asset and liability management objectives. Purchases of residential real estate
loans from correspondents and brokers primarily in the northeast region of the
United States totalled $13 million and $14 million for the years ended December
31, 1996 and 1995, respectively. Residential real estate loan sales totaled $38
million for both 1996 and 1995. While the Bank generally intends to hold loans
for the foreseeable future, WSFS, beginning in 1989, has undertaken to sell
newly originated fixed-rate mortgage loans in the secondary market to control
the interest sensitivity of its balance sheet. During the second half of 1993
the Corporation began to hold for investment certain of its fixed-rate mortgage
loans, with terms under 30 years, originated in accordance with current
asset/liability management strategies.
The Bank serviced for others approximately $196 million of residential
loans at December 31, 1996 compared to $229 million at December 31, 1995. The
Company also services residential loans for its portfolio totaling $247 million
and $187 million at December 31, 1996 and 1995.
The Bank originates commercial real estate and commercial loans through
the Bank's commercial lending department. Commercial loans are made for the
purpose of financing equipment acquisitions, expansion, working capital and
other business purposes and also include business loans secured by
nonresidential real estate. During 1996, the Bank originated $50 million of
commercial and commercial real estate loans compared to $91 million in 1995.
These amounts represent gross contract amounts and do not reflect amounts
outstanding on such loans.
The Bank's consumer lending is conducted primarily through the branch
offices and is supported by a consumer credit department credit investigation
unit. WSFS originates a variety of consumer credit products, including home
improvement loans, home equity lines of credit, automobile loans, unsecured
lines of credit and other secured and unsecured personal installment loans.
During 1996, such consumer loan originations aggregated $146 million compared to
$72 million in 1995. See "Consumer Lending" for discussion regarding consumer
loan originations.
All loans to one borrower exceeding $750,000 in aggregate must be
approved by a management loan committee. Minutes of the management loan
committee meetings and individual loans exceeding $3.0 million approved by the
management loan committee are subsequently reviewed by the Executive Committee
and Board of Directors of WSFS, with separate approval needed for all loans to
any borrower who has direct or indirect outstanding commitments in excess of
$3.0 million or for any additional advances or extensions on loans previously
classified by the Bank's regulatory authorities or the Bank's Asset Review
Department. Officers of the Bank have authority to approve smaller loans in
graduated amounts, depending upon their experience and management position.
Fee Income from Lending Activities. The Bank realizes interest and loan
fee income from lending activities, including fees for originating loans and for
servicing loans and loan participations sold. The institution also receive
commitment fees for making commitments to originate construction, residential
and commercial real estate loans. Additionally, loan fees related to existing
loans are received, which include prepayment charges, late charges and
assumption fees.
The Bank offers a range of loan commitments for which fees are charged
depending on lengths of the commitment periods. As part of the loan application,
the borrower also pays the Bank for out-of-pocket costs in reviewing the
application, whether or not the loan is closed. The interest rate charged on the
mortgage loan is normally the prevailing rate at the time the loan application
is approved.
-13-
Loan fees that are considered adjustments of yield in accordance with
generally accepted accounting principles are reflected in interest income and
represented an immaterial amount of interest income during the three years ended
December 31, 1996. Loan fees other than those considered adjustments of yield
are reported as loan fee income, a component of other income.
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 loan portfolio to identify problem
loans as promptly as possible and take actions immediately which will minimize
losses. To accomplish this, the Bank's Asset Review Department monitors the
asset quality of the Company's loan and investment in real estate portfolios and
reports such information to the Chief Financial Officer and the Executive
Committee of the Board of Directors.
SUBSIDIARIES
During the 1980's, the Company sought to expand its sources of
noninterest income and its market area primarily through its investments in
subsidiaries. The Company's policy was to exercise the Bank's generally broad
investment authority to invest in subsidiaries which were considered
complementary to its traditional savings bank activities. As a result of the
Bank's failure to comply with minimum regulatory capital requirements in 1990,
it became subject to restrictions on asset growth, lending and capital
distributions, among other things. Consequently, the Company consolidated and/or
divested of certain subsidiary operations, thereby restructuring its balance
sheet and focusing on its core banking businesses.
At December 31, 1996, WSFS had four wholly owned, first-tier
subsidiaries which were engaged in leasing, consumer finance, insurance
brokerage and real estate development. WSFS is the sole investor in and primary
lender to its non-bank subsidiaries. At December 31, 1996, it had $3.3 million
invested in the equity of these companies and had lent them an additional $150.2
million.
WSFS Credit Corporation ("WCC") which commenced operations in 1974,
provides leasing for consumer and business motor vehicles and equipment as well
as consumer loans. Prior to 1988, its business had been concentrated in the
northern Delaware area, but in 1988 it began expanding its motor vehicle leasing
base by originating direct financing leases through automobile dealerships in
Pennsylvania, New Jersey and Maryland as well as Delaware. In 1996 WCC expanded
its market area to parts of western Maryland and West Virginia. WCC underwrites
all leases originated through automobile dealers in accordance with underwriting
criteria generally consistent with those of the Bank and the leasing industry.
WCC's total assets at December 31, 1996 and 1995 were $129.9 million and $96.0
million, respectively.
838 Investment Group, Inc. (formerly Star States Financial Services,
Inc.) was formed in 1989. This subsidiary markets various insurance products,
such as single-premium annuities and whole life policies, and mutual funds to
Bank customers through the Bank's branch system.
Community Credit Corporation (CCC), a consumer finance subsidiary, was
formed in June 1994 to provide fixed- and adjustable-rate consumer loans secured
by first and second mortgages. Loans made by CCC are most often used by the
borrower to consolidate debt, including an existing mortgage, or fund home
improvements. The type of borrower targeted by CCC has a credit history that may
limit their access to credit, given the relatively rigid lending guidelines used
by most financial institutions. The first office of CCC was opened August 1994
in Delaware.
-14
Star States Development Company was formed in March 1985 with the
objective of engaging in residential real estate projects through either wholly
owned subsidiaries or investments in joint ventures. Star States Development
Company's investments in the projects were in the form of nonrecourse, first
mortgage loans, in return for which Star States Development Company is entitled
to receive repayment of principal and interest, and to share, at an agreed upon
percentage, in the profits of the project. Star States Development Company is
currently inactive with the exception of one remaining parcel of land which is
being marketed for sale.
Providential Home Income Plan, Inc. ("Providential") was a San
Francisco-based reverse mortgage lender. The Bank acquired Providential in
November 1994 for approximately $24.4 million. The acquisition was accounted for
by the purchase method of accounting; accordingly, Providential's results are
included in the Corporation's consolidated statement of operations for the
period in which Providential was owned. The management and operations of
Providential were merged into the Bank in November 1996.
On July 28, 1995, the Corporation's wholly-owned subsidiary, Fidelity
Federal completed the sale of deposits and certain real estate at four of its
branches to another institution. In November 1995, the remaining operations of
Fidelity Federal and its holding company, Star States Pennsylvania, Inc. were
merged into WSFS.
SOURCES OF FUNDS
The Bank funds operations through deposit growth and various borrowing
services, 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 either for 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 to ultimately support business expansion.
Deposits. The Bank offers various deposit programs to its customers,
including savings accounts, demand deposits, interest-bearing demand deposits,
money market deposit accounts and certificates of deposits. The Bank also offers
Christmas clubs, Individual Retirement Accounts and Keogh Accounts. In addition,
the Bank accepts negotiable rate certificates with balances in excess of
$100,000 from individuals, businesses and municipalities in Delaware.
The Bank is the second largest independent banking institution
headquartered and operating in Delaware. It primarily attracts deposits through
its system of 16 branches. Fifteen of these branches are located in northern
Delaware's New Castle County, the Bank's primary market. These branches maintain
approximately 145,000 total account relationships with approximately 51,000
total households, or 24% of all households in New Castle County, Delaware. The
sixteenth branch is in the state capital, Dover, located in central Delaware's
Kent County.
One of the most successful deposit related products developed by the
Bank is the WSFS Plan Card, a debit card product. The WSFS Plan Card, initiated
in 1972, allowed customers to charge purchases made within a proprietary network
of merchants. These purchases were then debited to the customers' checking
account and a cash rebate was earned on each purchase. In 1991, the Plan Card
became a VISA(R) Check Card and as a result, WSFS depositors can now use the
Plan Card at all 13 million acceptance locations in the worldwide VISA(R)
network.
-15-
The following table sets forth the amount of certificates of deposit of
$100,000 or more by time remaining until maturity at the period indicated.
December 31,
Maturity Period 1996
--------------- ------------
(In Thousands)
Less than 3 months...................... $11,400
Over 3 months to 6 months............... 11,275
Over 6 months to 12 months.............. 10,246
Over 12 months.......................... 6,665
-------
$39,586
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As members of the FHLB of Pittsburgh, the Bank is authorized to
apply for advances on the security of their capital stock in the FHLB and
certain of their residential mortgages and other assets (principally securities
which are obligations of or guaranteed by the United States Government) provided
certain standards related to creditworthiness have been met. As a member
institution, the Bank is required to hold capital stock in the FHLB of
Pittsburgh in an amount at least equal to 1% of the aggregate unpaid principal
of their home mortgage loans, home purchase contracts, and similar obligations
at the beginning of each year, or 1/20th of their advances, whichever is
greater.
The Bank also sells securities under agreements to repurchase with
various brokers as an additional source of funding. When entering into these
transactions, the Bank is required to pledge either government securities or
mortgage-backed securities as collateral for the borrowings.
On December 29, 1993, the Company issued $32.0 million in 11% Senior
Notes due December 31, 2005 ("Notes") to certain institutional and accredited
investors in a private placement. See Note 9 of the Consolidated Financial
Statements for a further discussion of the Notes.
REGULATION
Regulation of the Company
General. The Company is a registered as savings and loan holding
company and is subject to OTS regulation, examination, supervision and reporting
requirements. As a subsidiary of a holding company, the Bank is subject to
certain restrictions in its dealings with the Company and other affiliates.
Regulatory Capital Maintenance/Dividend Agreements. As a condition to
obtaining regulatory approval of the acquisition of the Bank, the Company was
required to execute agreements with the predecessor to the OTS with respect to
the receipt of dividends from the Bank and the maintenance of its regulatory
capital. Under the Regulatory Capital Maintenance/Dividend Agreement between the
Company and the predecessors to the OTS, the Company agreed to cause the
regulatory capital of the Bank to be maintained at a level at or above the
Bank's regulatory capital requirement and to infuse sufficient capital to effect
compliance with such requirement during the first quarter after which the Bank
fails to meet its regulatory capital requirement. The Company further agreed
that, without regulatory approval, it would not accept dividends in excess of
50% of the institution's net income for the fiscal year. The Company is
permitted to accept dividends of up to 75% of net income if the Bank's ratio of
regulatory capital to liabilities would equal 7% or more after payment of the
dividend and may accept dividends equal to 100% of net income if such ratio
would be 8% or more after the dividend payment. Dividends permitted under the
agreement may be deferred and paid in a subsequent year provided that no
dividend or repurchase of stock may reduce the Bank's regulatory capital below
its regulatory capital requirement. After notice of default, the Company is
-16-
prohibited from conveying its ownership of the Bank by gift, sale, exchange or
otherwise without regulatory approval. If a default is not cured within 90 days
and not waived, the predecessor to the OTS was entitled to seek any available
remedy and the Company must pay its attorney fees and other reasonable expenses.
Activities Restrictions. The Company currently operates as a unitary
savings and loan holding company. There generally are no restrictions on the
activities of a unitary holding company. If the Company were to acquire another
thrift and operate it as a separate entity, it would become subject to the
activities restrictions on multiple holding companies. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings association may commence, or continue after a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies;
or (vii) unless the Director of OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities authorized
by the Federal Reserve Board as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director of OTS
prior to being engaged in by a multiple savings and loan holding company.
Transactions with Affiliates; Tying Arrangements Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and limit the aggregate of all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) lend or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association. Savings associations are also subject
to Section 106 of the Bank Holding Company Act of 1956 (the "BHCA") which
prohibits a depository institution from extending credit, offering services, or
fixing or varying the consideration for any extension of credit or service on
the condition that the customer obtain some additional service from the
institution or certain of its affiliates or that the customer not obtain
services from a competitor of the institution, subject to certain limited
exceptions.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof, or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances, a savings and loan holding company is permitted to
acquire, with the approval of the Director of OTS, up to 15% of the voting
shares of an under-capitalized savings association pursuant to a "qualified
stock issuance" without that savings association being deemed controlled by the
holding company. Except with the prior approval of the Director of OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings association, other than a subsidiary savings
association, or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding 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).
-17-
The laws of Delaware do not specifically authorize out-of-state savings
associations or their holding companies to acquire Delaware-chartered savings
associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent the Bank from entering into other states by
mergers or branching. OTS regulations permit federal associations to branch in
any state or states of the United States and its territories. Except in
supervisory cases or when interstate branching is otherwise permitted by state
law or other statutory provision, a federal association may not establish an
out-of-state branch unless (i) the federal association qualifies as a "domestic
building and loan association" under ss.7701(a)(19) of the Internal Revenue Code
or as a "qualified thrift lender" under the Home Owners' Loan Act and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association or qualified thrift lender and (ii) such branch would not
result in the formation of a prohibited multi-state multiple savings and loan
holding company. 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.
The Bank Holding Company Act of 1956 has been amended to specifically
authorize the Federal Reserve Board to approve an application by a bank holding
company to acquire control of any savings association. Pursuant to rules
promulgated by the Federal Reserve Board, owning, controlling or operating a
savings association is a permissible activity for bank holding companies, if the
savings association engages only in deposit-taking activities and lending and
other activities that are permissible for bank holding companies. In approving
such an application, the Federal Reserve Board may not impose any restriction on
transactions between the savings association and its holding company affiliates
except as required by Sections 23A and 23B of the Federal Reserve Act.
Regulation of the Bank
General. As a federally chartered savings institution, the Bank is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. The OTS periodically examines the Bank for compliance with
regulatory requirements. The FDIC also has the authority to conduct special
examinations of the Bank as the insurer of deposits. The Bank must file reports
with OTS describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets 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 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
and "qualifying supervisory goodwill," less intangible assets other than certain
supervisory goodwill and certain purchased mortgage servicing rights and
purchased credit card relationships. Tangible capital is given the same
definition as core capital but does not include qualifying supervisory goodwill
and is reduced by the amount of all the savings institution's intangible assets
except for certain 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
-18-
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, 1996, the Bank is in compliance with both the core and tangible capital
requirements.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to-value
ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with
loan-to-value ratios under 80% and average annual occupancy rates over 80%, and
certain qualifying loans for the construction of one- to four-family residences
pre-sold to home purchasers are assigned a risk weight of 50%. Consumer loans,
non-qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100% risk-weight.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loan and lease loss allowances. The OTS
risk-based capital requirements 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, 1996,
the Bank was in compliance with the OTS risk-based capital requirements.
Loans to Directors, Officers and 10% Stockholders. Under Section 22(h)
of the Federal Reserve 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,
the Federal Reserve Board pursuant to Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
unless the loan is made pursuant to a compensation or benefit plan that is
widely available to employees and does not discriminate in favor of insiders.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors. Savings associations are subject
to the requirements and restrictions of Section 22(g) of the Federal Reserve Act
which requires that loans to executive officers of depository institutions not
be made on terms more favorable than those afforded to other borrowers, requires
approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 10G 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. The Bank is prohibited from paying any dividend
or making any other capital distribution if, after making the distribution, the
Bank would be undercapitalized within the meaning of the OTS prompt corrective
action
-19-
regulations. Pursuant to the Regulatory Capital Maintenance/Dividend
Agreement, the Company may also be limited in its ability to receive dividends
from the Bank in certain circumstances. OTS regulations impose additional
limitations on the payment of dividends and other capital distributions
(including stock repurchases and cash mergers) by the Bank. Under these
regulations, a savings institution that, immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution, has total
capital (as defined by OTS regulation) that is equal to or greater than the
amount of its fully phased-in capital requirements (a "Tier 1 Association") is
generally permitted, after notice, to make capital distributions during a
calendar year in the amount equal to the greater of: (a) 75% of its net income
for the previous four quarters; or (b) up to 100% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in
risk-based capital ratio requirement at the beginning of the calendar year. A
savings institution with total capital in excess of current minimum capital
ratio requirements but not in excess of the fully phased-in requirements (a
"Tier 2 Association") is permitted, after notice, to make capital distributions
without OTS approval of up to 75% of its net income for the previous four
quarters, less dividends already paid for such period. A savings institution
that fails to meet current minimum capital requirements (a "Tier 3 Association")
is prohibited from making any capital distributions without the prior approval
of the OTS. A Tier 1 Association that has been notified by the OTS that it is in
need of more than normal supervision will be treated as either a Tier 2 or Tier
3 Association. At December 31, 1996, the Bank was a Tier 1 Associations. The OTS
may prohibit any savings institution from making a capital distribution that
would otherwise be permitted by the regulation, if the OTS determines that the
distribution would constitute an unsafe or unsound practice.
Deposit Insurance. The Bank is charged an annual premium by the BIF for
federal insurance on its insurable deposit accounts up to applicable regulatory
limits. The FDIC may establish an assessment rate for deposit insurance premiums
which protects the insurance fund and considers the fund's operating expenses,
case resolution expenditures, income and effect of the assessment rate on the
earnings and capital of members.
The FDIC has established a risk-based assessment system for insured
depository institutions which became effective January 1, 1994. 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. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period using the same percentage criteria
as in the prompt corrective action regulations. See "-- Prompt Corrective
Action." Institutions are assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized. Undercapitalized
institutions consist of institutions that do not qualify as either "well
capitalized" or "adequately capitalized." 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 BIF achieved its statutory reserve ratio of 1.25% of insured
deposits, the FDIC reduced the deposit insurance premium for most BIF members to
the statutory minimum of $1,000 per semi-annual period during 1996. Under the
Deposit Insurance Funds Act of 1996, the statutory minimum assessment was
eliminated. That statute, however, authorized the FDIC to assess BIF member
institutions to fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to help
fund takeovers of insolvent thrifts. Until December 31, 1999, BIF members will
be assessed at the rate of 1.3 basis points for FICO payments while SAIF members
will be assessed at the rate of 6.5 basis points. After December 31, 1999, BIF
and SAIF members will be assessed at the same rate.
Prompt Corrective Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), federal banking regulators are
required to take prompt corrective action if an institution fails to satisfy
certain minimum capital requirements, including a leverage limit, a risk-based
capital requirement, and any other measure deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. An institution that
fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. "Significantly
uncapitalized" 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".
-20-
Under the OTS regulations implementing the prompt corrective action
provisions of FDICIA, the OTS measures a savings institution's capital adequacy
on the basis of its total risk-based capital ratio (the ratio of its total
capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). A savings institution that is not
subject to an order or written directive to meet or maintain a specific capital
level is deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 CAMEL rating). An "undercapitalized institution"
is a savings institution that has (i) a total risk-based capital ratio less than
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1
CAMEL rating). A "significantly undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a ratio of tangible
equity to total assets of less than 2.0%.
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of
Pittsburgh, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Pittsburgh in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. WSFS was in compliance with
this requirement with an investment in FHLB of Pittsburgh stock at December 31,
1996, of $16.1 million. The FHLB of Pittsburgh offers advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Pittsburgh. Long term advances may only be made for the
purpose of providing funds for residential housing finance.
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The Bank was in compliance with applicable liquidity requirements
at December 31, 1996.
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 $49.3 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 is to reduce the amount of the institution's
interest-earning assets. As of December 31, 1996, the Bank met its reserve
requirements.
-21-
TAXATION
Federal Income Taxation
The Company and its subsidiaries, as an affiliated group, file a
consolidated corporate income tax return each year for federal income tax
purposes. Among other things, a consolidated return allows the affiliated group
to avoid or defer tax on certain intercompany distributions and transfers and,
under certain circumstances, to reduce the taxable income of one member of the
group using the loss generated by another member.
Thrift institutions such as the Bank are generally subject to the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in the
same general manner as other corporations. Further, in the past, thrift
institutions which satisfied certain conditions, including the asset composition
test under Section 7701(a)(19) of the Code, could determine their bad debt
deduction based upon an annual addition to a bad debt reserve (the "reserve
method") rather than upon the actual amount of worthless debts arising during
the year (the "specific charge-off method"). This reserve method, however, was
repealed for tax years beginning after January 1996. The Bank maintained a bad
debt reserve for tax purposes through 1986 but failed to satisfy the asset
composition test in fiscal year 1987 and therefore could not continue to use the
thrift bad debt reserve method. Moreover, because the Bank at the time had total
assets in excess of $500 million, it could not use the reserve method available
to commercial banks but instead was required to switch to the specific
charge-off method. As a result of the change to the specific charge-off method,
the Bank recaptured into income in 1987 the entire balance of its bad debt
reserve.
For taxable years beginning after December 31, 1986, the Code imposes
an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds, (b) for taxable years beginning after 1989, 75% of the excess
(if any) of (i) 75% of adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses) and (c) depreciation for alternative minimum tax
purposes versus depreciation for regular tax purposes. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum taxes
may be used as credits against regular tax liabilities in future years. In
addition, for taxable years after 1986 and before 1996, corporations, including
thrift institutions, are also subject to an environmental tax equal to 0.12% of
the excess of AMTI for the taxable year (determined without regard to net
operating losses and the deduction for the environmental tax) over $2.0 million.
As of December 31, 1996, the Company had available net operating loss
("NOL") carryforwards for federal and state tax purposes of approximately $18.8
million and $21.4 million, respectively, which may be used to reduce future
income taxes. There are restrictions applicable to approximately $18.8 million
of the NOL carryforwards attributable to Providential Home Income Plan, Inc.
("Providential"), formerly a 100% wholly-owned subsidiary of WSFS. Because
Section 382 of the Code restricts the annual amount of NOL carryforwards
available for use, it could result in the loss of a portion of Providential's
NOL due to expiration.
The Company's federal income tax returns for 1993 and 1994 are
currently under audit. Furthermore, the 1994 federal tax return of a partnership
in which a subsidiary of the Company is a 50% owner is currently under audit. At
present, the Company is not aware of any present or pending federal or state tax
examination adjustments nor any notice that would materially change the reported
amount of tax due.
See Note 12 to the Consolidated Financial Statements, incorporated
herein by reference, for further information regarding taxation.
-22-
State Income Taxation
As a Delaware corporation, the Company is subject to an annual
franchise tax based on the number of shares of common and preferred stock
authorized under its Certificate of Incorporation. The Bank is also subject to
annual franchise taxes in Delaware based on its pretax net income.
The Bank and its subsidiaries each file separate state tax returns. An
operating subsidiary of the bank, WSFS Credit Corporation, conduct business in
several surrounding states and as such, is subject to taxation in these states.
-23-
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, 1996.
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
WSFS:
Main Office (1)* Owned $1,711 $181,118
9th & Market Streets
Wilmington, DE 19899
Union Street Branch* Leased 1998 57 54,099
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch* Leased 2001 32 18,529
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch* Leased 1998 22 71,265
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch* Leased 1998 17 58,566
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch* Leased 1998 33 88,113
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch* Leased 2000 14 54,029
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Tri-State Mall Branch Leased 1997 4 19,497
I-95 & Naamans Road
Claymont, DE 19803
Claymont Branch Owned 72 23,725
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch* Leased 1998 25 34,373
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch* Leased 2007 88 57,127
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch* Leased 2013 113 59,536
144 N. DuPont Hwy.
New Castle, DE 19720
-24-
Stanton Leased 2001 204 365
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Leased 1997 56 159
Inside Genaurdi's at Peoples Plaza
(opening Spring of 1997)
temporarily in Peoples Plaza, Suite 870
Routes 40 and 896, Newark, DE 19702
Middletown Square Shopping Center Leased 1999 145 11,016
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover (3) Leased 2000 252 13,369
Inside Metro Food Market
Rt 13 & White Oak Road
Dover, DE 19901
Operations Center Owned 1,072 na
2400 Philadelphia Pike
Wilmington, DE 19703
Community Credit Corporation Leased 1998 10 na
----------------------------
10 Penn Mart Shopping Center
New Castle, DE 19720
$744,886
========
* Represents locations with ATM.
(1) Includes location of executive offices and approximately $64.2 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and
equipment totalled $6.0 million at December 31, 1996.
(3) In February 1996, the Bank acquired $10.5 million of deposits from another
financial institution located in Dover, Delaware. These deposits were
transferred to the Bank's branch located inside the Metro Food Market in
Dover.
Item 3. Legal Proceedings
There are no material legal proceedings to which the Company or the
Bank is a party or to which any of its property is subject except as discussed
in Note 14 to the Consolidated Financial Statements.
Item 4. Submissions of Matters To a Vote of Security Holders
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1996 through the solicitation of
proxies or otherwise.
-25-
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
National Market System under the symbol WSFS. At December 31, 1996, the
Corporation had 2,564 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. There have
been no dividends declared or paid on the Common Stock since the first quarter
of 1990. Payment of dividends by the Bank is subject to regulatory restrictions
and the covenants of the Senior Notes. For additional information regarding such
restrictions, see Note 9 to the Consolidated Financial Statements.
The closing market price of the common stock at December 31, 1996 was
$10 3/16.
Stock Price Range
---------------------
Low High
--- ----
1996 1st $7 1/8 $ 9 1/2
2nd 7 1/4 8 1/4
3rd 6 3/4 8 1/2
4th 8 1/4 10 5/8
1995 1st $3 1/2 4 1/4
2nd 4 5 7/8
3rd 5 5/8 8 5/8
4th 7 3/8 10
-26-
Item 6. Selected Financial Data
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Data)
At December 31,
Total assets..................................... $1,357,635 $1,218,826 $1,195,686 $ 994,692 $1,010,079
Net loans (1).................................... 824,883 792,184 710,776 687,492 763,799
Investment securities (2)........................ 18,933 28,772 64,144 54,346 59,585
Investment in reverse mortgages, net............. 35,796 35,614 32,172 24,913
Other investments................................ 47,337 52,128 44,249 110,816 52,602
Mortgage-backed securities (2)................... 365,252 237,132 262,748 43,750 40,898
Deposits......................................... 744,886 724,030 809,707 806,605 859,147
Borrowings (3)................................... 489,819 370,795 295,244 107,864 110,673
Senior notes..................................... 29,100 29,850 32,000 32,000
Stockholders' equity............................. 75,788 73,546 45,274 38,693 32,267
Number of full-service branches (4).............. 16 14 16 16 16
For the Year Ended December 31,
Interest income.................................. $104,594 $ 99,936 $ 80,666 $ 72,320 $ 85,711
Interest expense................................. 58,862 58,067 44,652 38,508 55,039
Other income .................................... 8,150 22,615 7,210 7,970 8,157
Other expenses .................................. 32,345 37,341 34,483 34,485 33,650
Income before taxes ............................. 19,522 25,740 7,058 4,677 3,820
Net income ...................................... 16,356 27,008 8,070 6,359 4,822
Earnings per share:
Primary ....................................... 1.16 1.84 .55 .88 .89
Fully diluted .................................. 1.16 1.84 .55 .44 .64
Interest rate spread............................. 3.18% 3.14% 3.11% 3.39% 2.88%
Net interest margin.............................. 3.71 3.57 3.39 3.64 3.02
Return on average equity......................... 21.19 45.68 19.64 18.12 23.15
Return on average assets......................... 1.28 2.21 .73 .65 .44
Average equity to average assets................. 6.06 4.84 3.69 3.57 1.92
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances, securities sold under agreement to
repurchase and municipal bond repurchase obligations. The municipal bond
repurchase was called in 1996.
(4) During 1995, WSFS's wholly-owned subsidiary, Fidelity Federal,
sold the deposits of four branches. The remaining assets,
liabilities and equity were merged into WSFS. Additionally, WSFS
opened two new branches with deposits acquired from other
institutions. During 1996, WSFS opened two more new branches.
-27-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
WSFS Financial Corporation (the "Corporation") is a savings and loan
holding company headquartered in Wilmington, Delaware. Substantially, all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the "Bank" or "WSFS"), the largest thrift institution
headquartered in Delaware and among the four largest financial institutions in
the state on the basis of total deposits. 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 banking operations of WSFS
are presently conducted from 16 retail banking offices located in the Wilmington
and Dover, Delaware area. The Bank provides residential real estate, commercial
real estate, commercial and consumer lending services and funds these activities
primarily by attracting retail deposits and borrowings. Deposits are insured by
the Federal Deposit Insurance Corporation.
Additional subsidiaries of the Bank include WSFS Credit Corporation
("WCC"), which is engaged primarily in motor vehicle leasing, and 838 Investment
Group, Inc. which markets various insurance products and mutual funds through
the Bank's branch system. In June 1994, the Bank formed a consumer finance
subsidiary, Community Credit Corporation ("CCC") which opened its first office
in August 1994. CCC specializes in consumer loans secured by first and second
mortgages. An additional subsidiary, Star States Development Company ("SSDC") is
currently inactive with the exception of one remaining parcel of land which is
being marketed for sale. In November 1994, the Bank acquired Providential Home
Income Plan, Inc. ("Providential"), a San Francisco, California-based reverse
mortgage lender. The management and operations of Providential were merged into
the Bank in November 1996.
The long-term goal of the Corporation is to be a high-performing
financial services company focused on its core banking business while developing
unique niche businesses. Beginning in 1994, the Corporation focused its efforts
on developing new businesses and avenues for asset growth which are expected to
yield returns in the future. Toward that end, the Corporation opened the
consumer finance subsidiary, CCC, and acquired Providential. These retail
investments, combined with the growth in the investment portfolios, have
favorably impacted net interest income and earnings since 1994 and are expected
to provide favorable returns on investments in the coming years. Such
investments for the future were possible since the Bank became
"well-capitalized" in the second quarter of 1994. This was largely due to
continued operating earnings and the Corporation's capital infusion of $25.2
million of the proceeds of a $32.0 million debt offering which was completed in
December 1993. In the third quarter of 1995, the Bank recognized a gain of $12.4
million, net of taxes and a supplemental contribution to the Corporation's
401(k) Plan, from the sale of deposits and certain real estate of four branches
of its former bank subsidiary, Fidelity Federal Savings and Loan Association
(the "Association"), located in the northeast section of Philadelphia,
Pennsylvania. This transaction has allowed the Corporation to focus on its
primary market area while enhancing capital.
During the 1980's, the Corporation had pursued a business strategy of
growth and diversification by engaging in such activities as real estate
brokerage, vehicle and equipment leasing and real estate development. This prior
strategy combined with a recession in the U.S. economy resulted in significant
operating and asset quality problems. These problems culminated in a record net
operating loss of $85.5 million in 1990. From 1991 through 1993, the Corporation
had focused on restructuring its operations to achieve compliance with
regulatory capital requirements while reducing nonperforming assets. These
efforts resulted in the Bank achieving full regulatory capital compliance by
completing the previously discussed debt offering as well as twelve consecutive
quarters of earnings. During 1994, earnings continued to improve as the
Corporation recorded record earnings from operations of $8.1 million.
-28-
The record earnings in 1994 were surpassed in 1995 as the Corporation
recorded earnings of $27.0 million of which $14.6 million was from operations.
Earnings for the year ended December 31, 1996 were $16.4 million. Net income for
1994, 1995 and 1996 included the recognition of tax benefits. Excluding the
one-time net gain on the sale of the Association's deposits, income before taxes
increased from $12.2 million in 1995 to $19.5 million in 1996, a $7.3 million or
60% increase.
The following discussion focuses on the major components of operations
and presents an overview of the significant changes in the Corporation's results
of operations for the past three fiscal years and financial condition during the
past two fiscal years. This discussion should be reviewed in conjunction with
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this Annual Report.
RESULTS OF OPERATIONS
The Corporation recorded net income of $16.4 million in 1996 compared
with $27.0 million and $8.1 million in 1995 and 1994, respectively. Earnings for
1995 were significantly impacted by a nonrecurring after tax gain of $12.4
million on the sale of deposits of the Association. Excluding this gain, net
income for 1996 was $1.8 million higher than 1995 and $8.3 million higher than
1994. This improvement in performance reflects lower operating expenses and
growth in net interest income.
Net Interest Income. Net interest income is the most significant
component of operating income to the Corporation. Net interest income is reliant
upon the levels of interest-earning assets and interest-bearing liabilities and
the difference or "spread" between the respective yields earned and rates paid.
The interest rate spread is influenced by regulatory, economic and competitive
factors that affect interest rates, loan demand and deposit outflows. The level
of nonperforming loans can also impact the interest rate spread by reducing the
yield on the loan portfolio.
Net interest income increased to $45.7 million in 1996 compared with
$41.9 million and $36.0 million in 1995 and 1994, respectively. During these
three years, the growth in interest-earning assets outpaced interest-bearing
liabilities and contributed to the rise in net interest income. Continued growth
in consumer and residential loans as well as the reduction in nonperforming
assets contributed favorably to the growth in net interest income.
Net interest income can be analyzed in terms of the impact of changing
rates and changing volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth certain information regarding
changes in net interest income attributable to changes in the volumes of
interest-earning assets and interest-bearing liabilities and changes in the
rates for the periods indicated. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to: (i) changes in volume (change in volume multiplied by prior
year rate); (ii) changes in rates (change in rate multiplied by prior year
volume); and (iii) net change. Changes due to the combination of rate and volume
changes (changes in volume multiplied by changes in rate) are allocated
proportionately between changes in rate and changes in volume.
-29-
Year Ended December 31,
-----------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------- -------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In Thousands)
Interest income:
Real estate loans (1) .................... $ 2,001 $ (857) $ 1,144 $ 2,970 $ 8,057 $ 11,027
Commercial loans ......................... 218 (381) (163) 123 781 904
Consumer loans ........................... 2,809 (652) 2,157 2,079 539 2,618
Loans held for sale ...................... 158 (14) 144 91 (2) 89
Mortgage-backed securities ............... 2,472 280 2,752 2,714 577 3,291
Investment securities (2) ................ (1,169) (30) (1,199) (240) 511 271
Other .................................... (1,095) 918 (177) 984 86 1,070
-------- -------- -------- -------- -------- --------
5,394 (736) 4,658 8,721 10,549 19,270
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
Money market and interest-bearing demand (432) (14) (446) (846) 638 (208)
Savings ................................ (321) 145 (176) (753) 508 (245)
Time ................................... (1,061) (1,161) (2,222) 1,460 5,701 7,161
FHLB of Pittsburgh advances .............. 2,827 (427) 2,400 4,315 (56) 4,259
Senior notes ............................. (167) (167) (146) 10 (136)
Other borrowed funds ..................... 1,817 (411) 1,406 2,264 320 2,584
-------- -------- -------- -------- -------- --------
2,663 (1,868) 795 6,294 7,121 13,415
-------- -------- -------- -------- -------- --------
Net Change ................................... $ 2,731 $ 1,132 $ 3,863 $ 2,427 $ 3,428 $ 5,855
======== ======== ======== ======== ======== ========
(1) Includes commercial mortgage loans.
(2) No adjustments have been made to restate the yields on tax-exempt
obligations to a tax-equivalent basis. The income differential is not
material.
The $3.9 million increase in net interest income between 1996 and 1995
was attributable to both changes in rate of $1.1 million and changes in volume
of $2.7 million. The changes in volume and rate reflect the various events and
transactions which have occurred between periods. The increase in net interest
income of $5.9 million between 1995 and 1994 was attributable to changes in rate
of $3.4 million and changes in volume of $2.4 million.
The following table, in thousands except yield and rate data, provides
information regarding the balances of and yields and rates on interest-earning
assets and interest-bearing liabilities during the periods indicated.
-30-
Year Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- -------------------------- ---------------------------
Average Yield/ Average Yie