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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, 1997
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 2-2866913
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
838 Market Street, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of March 13, 1998 was $181,981,202. For purposes of this calculation
only, affiliates are deemed to be directors, executive officers and beneficial
owners of greater than 5% of the outstanding shares.
As of March 13, 1998, there were issued and outstanding 12,464,479 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 23, 1998 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
Item 1. Business .............................................................................. 3
Item 2. Properties ............................................................................ 22
Item 3. Legal Proceedings....................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders..................................... 23
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 24
Item 6. Selected Financial Data................................................................. 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 26
Item 8. Financial Statements and Supplementary Data............................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 84
Part III
Item 10. Directors and Executive Officers of the Registrant..................................... 84
Item 11. Executive Compensation................................................................. 84
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 84
Item 13. Certain Relationships and Related Transactions......................................... 84
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 85
Signatures...................................................................................... 87
PART I
Item 1. Business
GENERAL
WSFS Financial Corporation (Company or 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 acquired in-market. The Corporation's primary market
area is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The Bank provides residential
real estate, commercial real estate, commercial and consumer lending services
and funds these activities primarily with retail deposits and borrowings. The
banking operations of WSFS are presently conducted from 16 retail banking
offices located in the Wilmington and Dover, Delaware areas. Deposits are
insured by the Federal Deposit Insurance Corporation (FDIC).
Additional subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system; and Community Credit Corporation (CCC), which
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 expected to
be sold in the second quarter of 1998. 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 later merged into the Bank in November 1996.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the Office of Thrift Supervision (OTS), the FDIC and the
Federal Reserve Board. This supervision and regulation is intended primarily for
the protection of depositors. See the "Regulation" section 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. 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. During 1992 and 1993, the Company's earnings stabilized as the
economy began to improve and interest rates declined. In 1992, the Company
completed an offering of convertible preferred stock which increased capital by
$11.8 million and was converted to common stock in 1994. 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 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.
3
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 of the sale, 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 core operations. Both amounts represented new
record earnings levels in the Corporation's 164-year history.
Earnings for the years ending December 31, 1997 and 1996 were both
$16.4 million. Net income for each of the years in the five-year period ended
December 31, 1997 included the recognition of tax benefits. Excluding the
one-time net gain on the sale of the Association's deposits, income before taxes
increased $7.3 million from 1995 to 1996 and $3.4 million from 1996 to 1997.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Condensed average balance sheets for each of the last three years and
analyses of net interest income and changes in net interest income due to
changes in volume and rate are presented in "Results of Operations" included in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (MD&A) are incorporated herein by reference.
4
INVESTMENT ACTIVITIES
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,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ---------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
--------- ------- ------ ------- ------ ---------
(Dollars In Thousands)
Held-to-Maturity:
Corporate bonds............................. $12,030 1.0% $15,038 1.1% $16,748 1.4%
U.S. Government and agencies................ 15,000 0.8
State and political subdivisions ........... 1,534 0.1 2,642 0.2 5,542 0.4
Other investments .......................... 88
-------- ------ ------- ----- ------- -----
28,564 1.9 17,680 1.3 22,378 1.8
-------- ------ ------- ----- ------- -----
Available-for-Sale:
U.S. Government and agencies................ 50,091 3.3
State and political subdivisions............ 1,253 0.1 891 0.1
Other investments .......................... 5,503 0.4
-------- ------ ------- ----- ------- -----
50,091 3.3 1,253 0.1 6,394 0.5
-------- ------ ------- ----- ------- -----
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell.............. 25,279 1.7 25,400 1.9 31,500 2.6
Interest-bearing deposits in other banks (1) 28,892 1.9 5,702 0.4 4,568 0.4
-------- ------ ------- ----- ------- -----
54,171 3.6 31,102 2.3 36,068 3.0
-------- ------ ------- ----- ------- -----
$132,826 8.8% $50,035 3.7% $64,840 5.3%
======== ====== ======= ===== ======= =====
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
In 1997, the Bank purchased $105 million in U.S. Government securities,
of which $90 million was classified as available-for-sale. Of these securities,
$40 million were sold in 1997. The reduction of corporate and political
subdivision bonds since 1995 has been primarily due to maturities and calls.
Also, the state and political subdivision bonds classified as available-for-sale
in 1996 were reclassified as held-to-maturity in 1997, as there is no active
market for these securities. In 1996, the Bank purchased and sold $55 million in
U.S. Government securities. Other investments classified as available-for-sale
were sold in the amount of $6 million.
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1997. Substantially all of the related interest and dividends
represent taxable income. Yields on tax-exempt investments are calculated on the
basis of actual yields and not on a tax-equivalent basis, since the effect of
the equivilization is immaterial.
5
At December 31, 1997
---------------------
Amount Yield
------ ------
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
Within one year....................................................... $ 500 6.41%
After one but within five years....................................... 3,934 7.06
After five but within ten years....................................... 3,137 6.92
After ten years....................................................... 4,459 6.94
--------
12,030 6.95
--------
U.S. Government and agencies:
After one but within five years ...................................... 15,000 6.08
--------
State and political subdivisions (1):
Within one year....................................................... 65 5.05
After ten years....................................................... 1,469 7.61
--------
1,534 7.50
--------
Total debt securities, held-to-maturity................................. 28,564 6.53
--------
Available-for-Sale:
U.S. Government and agencies:
Within one year ...................................................... 20,031 5.59
After one but within five years....................................... 30,060 6.11
--------
50,091 5.90
--------
Short-term investments:
Interest-bearing deposits in other banks.............................. 28,892 5.76
Federal funds sold and securities purchased under agreements to resell 25,279 6.15
--------
Total short-term investments............................................ 54,171 5.94
--------
$132,826 6.05%
========
(1) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since the effect would be immaterial.
In addition to the foregoing investment securities, the Company has
maintained an investment portfolio of mortgage-backed securities, which
increased dramatically after 1993 as the Company implemented investment growth
strategies during subsequent years. Purchases of mortgage-backed securities,
specifically collateralized mortgage obligations, in 1997 totalled $79 million,
of which $27 million was classified as available-for-sale and $52 million was
classified as held-to-maturity. The Bank also sold $13 million in GNMA
mortgage-backed securities. Reductions in the other categories, for all years,
were due to principal repayments.
6
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,
-------------------------------------------------------------------------
1997 1996 1995
------------------- ---------------------- -------------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
------------ ------ -------- ----- -------- ------
Held-to-Maturity:
Collateralized mortgage obligations......... $151,982 7.30% $165,516 7.38% $ 72,222 7.72%
GNMA ....................................... 1,299 7.16 1,496 7.16 1,697 7.03
FHLMC....................................... 53,822 6.17 63,223 6.18 73,197 6.22
FNMA........................................ 53,134 6.26 62,754 6.26 72,590 6.30
Other....................................... 12,663 7.50 20,340 8.07 21 13.25
------------ ------ -------- ----- -------- ------
$272,900 6.88% $313,329 6.96% $219,727 6.80%
============ ====== ======== ===== ======== ======
Available-for-Sale:
Collateralized mortgage obligations ........ $ 57,374 7.26% $ 37,482 7.44%
GNMA........................................ 14,441 6.15 $ 17,405 6.44%
------------ ------ -------- ----- -------- ------
$ 57,374 7.26% $ 51,923 7.08% $ 17,405 6.44%
============ ====== ======== ===== ======== ======
CREDIT EXTENSION ACTIVITIES
Traditionally, the majority of a typical thrift institution's loan
portfolio has consisted of first mortgage loans on residential properties.
However, as a result of various legislative and regulatory changes since 1980,
the commercial and consumer lending powers of 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 temporarily discontinued in 1990 and only
originations required by previous funding commitments were made. In 1994, the
Bank began to originate small business and 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.
7
The following table sets forth the composition of the Corporation's
loan/lease portfolio by type of loan/lease at each of the dates indicated. Other
than as disclosed below, the Company had no concentrations of loans/leases
exceeding 10% of total loans/leases at December 31, 1997:
December 31,
------------------------------------------------------------------
1997 1996 1995
--------------- --------------- -----------
Amount Percent Amount Percent Amount Percent
-------- ------ -------- ------ -------- -----
(Dollars in Thousands)
Residential real estate (1)............... $287,349 30.7% $279,060 33.8% $276,926 35.0%
Commercial real estate:...................
Commercial mortgage....................... 238,533 25.5 278,935 33.8 293,979 37.1
Construction.............................. 12,553 1.3 27,056 3.3 29,959 3.8
-------- ------ -------- ------ -------- -----
Total commercial real estate............. 251,086 26.8 305,991 37.1 323,938 40.9
Commercial................................ 94,686 10.1 28,602 3.5 23,894 3.0
Consumer.................................. 159,432 17.0 135,552 16.4 114,265 14.4
Finance leases............................ 60,985 7.4 98,840 12.5
-------- ------ -------- ------ -------- -----
Gross loans............................... 792,553 84.6 810,190 98.2 837,863 105.8
Less:
Unearned income........................... 3,240 0.3 13,102 1.6 21,512 2.7
Allowance for loan losses................. 24,850 2.7 24,241 2.9 24,167 3.1
-------- ------ -------- ------ -------- -----
Net loans................................ 764,463 81.6 772,847 93.7 792,184 100.0
-------- ------ -------- ------ -------- -----
Vehicles under operating leases, net...... 172,115 18.4 52,036 6.3
-------- ------ -------- ------ -------- -----
Net loans and vehicles under operating
leases.................................... $936,578 100.0% $824,883 100.0% $792,184 100.0%
======== ====== ========= ====== ======== =====
RESTUBBED
-------------------------------------------
1994 1993
--------- ----------
Amount Percent Amount Percent
-------- ------ -------- -------
Residential real estate (1)............... $260,442 36.6% $235,213 34.2%
Commercial real estate:...................
Commercial mortgage....................... 259,112 36.6 273,375 39.8
Construction.............................. 25,603 3.6 28,978 4.2
-------- ------ -------- ------
Total commercial real estate............. 284,715 40.2 302,353 44.0
Commercial................................ 25,188 3.5 21,276 3.0
Consumer.................................. 91,182 12.8 93,845 13.7
Finance leases............................ 89,095 12.5 72,941 10.6
-------- ------ -------- ------
Gross loans............................... 750,622 105.6 725,628 105.5
Less:
Unearned income........................... 18,146 2.6 14,523 2.1
Allowance for loan losses................. 21,700 3.0 23,613 3.4
-------- ------ -------- ------
Net loans................................ 710,776 100.0 687,492 100.0
-------- ------ -------- ------
Vehicles under operating leases, net......
-------- ------ -------- ------
Net loans and vehicles under operating
leases.................................... $710,776 100.0% $687,492 100.0%
======== ===== ======== ======
(1) Includes $2,222, $773, $4,401, $257, and $1,965 of residential mortgage
loans held-for-sale at December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
8
The following table sets forth information as of December 31, 1997
regarding the dollar amount of loans and leases maturing in the Company's
portfolios, 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 as well as leases maturing during the indicated periods. Loans
and leases 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)..................... $ 63,056 $176,450 $284,154 $523,660
Construction loans........................ 11,065 1,469 19 12,553
Commercial loans.......................... 20,349 28,923 45,414 94,686
Consumer loans ........................... 56,029 70,647 32,756 159,432
-------- -------- -------- --------
$150,499 $277,489 $362,343 $790,331
======== ======== ======== ========
Rate sensitivity:
Fixed................................... $ 51,771 $130,238 $153,871 $335,880
Adjustable 98,728 147,251 208,472 454,451
------- -------- -------- --------
150,499 277,489 362,343 790,331
-------- -------- -------- --------
Vehicles under operating leases, net 33,228 138,887 172,115
-------- -------- -------- --------
Gross loans and net operating leases $183,727 $416,376 $362,343 $962,446
======== ======== ======== ========
(1) Includes commercial mortgage loans; does not include loans held-for-sale.
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 and lease portfolio is significantly shorter than is reflected in the above
table as a result of prepayments.
Residential Real Estate Lending. WSFS originates residential mortgage
loans with loan-to-value ratios up to 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, 1997, the balance of
all such loans was approximately $17.1 million of which $7.9 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
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, title insurance is required, 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 residential real estate adjustable-rate loans currently
originated have interest rates that adjust every year, with the change in rate
limited to two percentage points 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 risk 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, after the Plan and Directive were lifted, the Bank began to originate
small business commercial and 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 at origination. As a result of subsequent
changes in the real estate market, however, current loan-to-value ratios on
certain loans could 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 independently 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, 1997, $19.6 million was committed for
construction loans, of which $12.6 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 $4.9 million, and their terms range from less than one year to
seven years. The loans generally carry variable interest rates indexed to the
Bank's prime rate or LIBOR 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 entail
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 is 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.
10
Federal law limits the extensions of credit to any one borrower to 15%
of unimpaired capital, 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. A single large extension of credit
by the Bank would be limited by this 15% of capital restriction, except if the
extension of credit would be fully or partially secured by U.S. treasury
securities. 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. In April 1997, the bank originated a
$35.5 million loan to refinance an employee stock ownership plan ("ESOP") loan
of a company. Approximately 80% of the loan is secured by discounted U.S.
treasury securities. The portion of the loan that is secured by U.S. treasury
securities is exempt from the above lending limits. At December 31, 1997, no
borrower had collective outstandings exceeding the above limits.
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 credit products, excluding leases, 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 100%
of the appraised value (net of any senior mortgages) of the residence. This line
of credit is secured by a mortgage on the borrower's property and can be drawn
upon at any time. At December 31, 1997, the Bank had extended a total of $87.1
million in home equity lines of credit, of which $31.1 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 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 first and second 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.
Since 1988, the focus of WSFS Credit Corporation (WCC), formerly Star
States Leasing Corporation, has been to finance leases indirectly. These leases
are secured by motor vehicles and originated through automobile dealerships.
During 1997, WCC originated more than 3,400 leases, which approximated $107.5
million in new assets. At December 31, 1997, the Corporation reclassified
approximately $172 million in leases originated by WCC to operating leases in
accordance with Statement of Financial Accounting Standards No. 13.
Approximately $52 million of leases as of December 31, 1996 have also been
reclassified as operating leases herein.
11
The table below sets forth consumer loans by type, in dollar amounts and
percentages, at the dates indicated.
December 31,
-------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- --------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
Equity secured installment loans $ 78,975 49.6% $ 63,803 47.1% $ 52,793 46.2%
Home equity lines of credit .... 31,110 19.5 33,267 24.5 36,817 32.2
Automobile ..................... 32,959 20.7 26,456 19.5 12,701 11.1
Unsecured lines of credit ...... 9,466 5.9 7,448 5.5 7,017 6.2
Other .......................... 6,922 4.3 4,578 3.4 4,937 4.3
-------- ----- -------- ----- -------- -----
Total consumer loans ........... $159,432 100.0% $135,552 100.0% $114,265 100.0%
======== ====== ======== ====== ======== ======
RESTUBBED
1994 1993
----------------------- ----------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Equity secured installment loans $ 34,088 37.4% $ 24,485 26.1%
Home equity lines of credit .... 40,727 44.7 47,060 50.2
Automobile ..................... 1,951 2.1 2,567 2.7
Unsecured lines of credit ...... 3,683 4.0 4,070 4.3
Other .......................... 10,733 11.8 15,663 16.7
-------- ----- -------- -----
Total consumer loans ........... $ 91,182 100.0% $ 93,845 100.0%
======== ====== ======== ======
12
Loan and Lease 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
practices. The Bank originates fixed-rate 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 1997, WSFS originated $84 million of residential real estate
loans compared to 1996 originations of $71 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 $10 million, $13 million and $14 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Residential real estate
loan sales totaled $26 million in 1997 and $24 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,
consistent with current asset/liability management strategies.
The Bank serviced for others approximately $206 million of residential
loans at December 31, 1997 compared to $196 million at December 31, 1996. The
Company also services residential loans for its portfolio totaling $251 million
and $247 million at December 31, 1997 and 1996.
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 1997, the Bank originated $123 million of
commercial and commercial real estate loans compared to $65 million in 1996.
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 1997, such consumer loan originations aggregated $105 million compared to
$93 million in 1996. Additionally, WSFS Credit Corporation originated
approximately $107.5 million of operating leases in 1997 and $50 million in
1996. See "Consumer Lending" for a further 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, 1997. Loan fees other than those considered adjustments of yield
are reported as loan fee income, a component of other income.
LOAN AND LEASE LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations can be negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its portfolios to identify problem
loans and leases 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, lease 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
At December 31, 1997, WSFS had four wholly owned, first-tier
subsidiaries which were engaged in leasing, consumer finance, insurance
investment products, and securities sales, as well as real estate development.
WSFS is the sole investor in and primary lender to its non-bank subsidiaries. At
December 31, 1997, it had $3.3 million invested in the equity of these companies
and had lent them an additional $228.4 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 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, 1997 and 1996 were $203.5 million and $129.9
million, respectively.
838 Investment Group, Inc. (formerly Star States Financial Services,
Inc.) was formed in 1989. This subsidiary markets various investment and
insurance products, such as single-premium annuities and whole life policies,
and securities to Bank customers primarily through the Bank's branch system.
Community Credit Corporation (CCC), a consumer finance subsidiary, was
formed in June 1994 to provide fixed-rate 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. CCC's total assets at December 31, 1997 and 1996 were $18.4 million
and $12.3 million, respectively.
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 was 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 expected to be sold in the second quarter of 1998.
14
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 it is 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 financial 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 retail deposit growth and various
borrowing sources, including repurchase agreements, federal funds purchased and
advances from the Federal Home Loan Bank (FHLB) of Pittsburgh. Loan repayments
and investment maturities also provide sources of funds. Loan repayments and
investment maturities provide a relatively stable source of funds while certain
deposit flows tend to be more susceptible to market conditions. Borrowings are
used to fund wholesale asset growth, short-term funding of lending activities
when loan demand exceeds projections, or when deposit inflows or outflows are
less than or greater than expected. On a long-term basis, borrowings may be used
to match against specific loans or support business expansion.
Deposits. 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 140,000 total account relationships with approximately 40,500
total households, or 23% of all households in New Castle County, Delaware. The
sixteenth branch is in the state capital, Dover, located in central Delaware's
Kent County, and the seventeenth branch opened March 18, 1998 in Glen Mills,
Pennsylvania.
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 1997
- ---------------- ------------
(In Thousands)
Less than 3 months...................... $34,423
Over 3 months to 6 months............... 7,668
Over 6 months to 12 months.............. 7,711
Over 12 months.......................... 11,861
--------
$61,663
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As a member 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.
15
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 generally 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
individual investors. See Note 10 of the Consolidated Financial Statements for a
further discussion of the Notes.
REGULATION
Regulation of the Company
General. The Company is a registered savings and loan holding company
and is subject to Office of Thrift Supervision (OTS) regulation, examination,
supervision and reporting requirements. As a subsidiary of a holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
other affiliates.
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 (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.
16
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 company involved controls a
savings institution which operated a home or branch office in the state of the
association to be acquired as of March 5, 1987; (ii) the acquirer is authorized
to acquire control of the savings association pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act; or (iii) the
statutes of the state in which the association to be acquired is located
specifically permit institutions to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). The laws of Delaware do not specifically authorize
out-of-state savings associations or their holding companies to acquire
Delaware-chartered savings associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent 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 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. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
Regulation of 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 4% 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
17
supervisory goodwill and, subject to certain limitations, 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 limited amounts of mortgage servicing rights. The
OTS capital rule requires that core and tangible capital be reduced by an amount
equal to a savings institution's debt and equity investments in "nonincludable"
subsidiaries engaged in activities not permissible to national banks, other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies.
Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, increased by certain goodwill amounts
and by a prorated portion of the assets of unconsolidated includable
subsidiaries in which the savings institution holds a minority interest.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the savings institution's minority investments in
unconsolidated includable subsidiaries and, for purposes of the core capital
requirement, qualifying supervisory goodwill. At December 31, 1997, the Bank was
in compliance with both the core and tangible capital requirements.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to-value
ratios not exceeding 80%, fixed-rate multi-family first mortgages not more than
90 days past due with loan-to-value ratios not exceeding 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 standards require savings institutions with more than a
"normal" level of interest rate risk to maintain additional total capital. A
savings institution's interest rate risk is measured in terms of the sensitivity
of its "net portfolio value" to changes in interest rates. A savings association
with more than normal interest rate risk is required to deduct an interest rate
risk component equal to one-half of the excess of its measured interest rate
risk over the normal level from its total capital for purposes of determining
its compliance with the OTS risk-based capital guidelines. At December 31, 1997,
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 Act, loans to an executive officer or director or to a
greater than 10% stockholder of a savings association and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the association's loans to one borrower
limit (generally equal to 15% of the institution's unimpaired capital and
surplus) and all loans to all such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans,
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, loans to directors, executive officers and principal stockholders must
be made on terms substantially the same as offered in comparable transactions to
other persons unless the loan is made pursuant to a compensation or benefit plan
that is widely available to employees and does not discriminate in favor of
insiders. Section 22(h) also prohibits a depository institution from paying the
overdrafts of any of its
18
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 106 of the
BHCA prohibits extensions of credit to executive officers, directors, and
greater than 10% stockholders of a depository institution by any other
institution which has a correspondent banking relationship with the institution,
unless such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and does
not involve more than the normal risk of repayment or present other unfavorable
features.
Dividend Restrictions. 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 regulations. 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, 1997,
the Bank was a Tier 1 Association. 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 may be charged semi-annual premiums by the
FDIC for federal insurance on its insurable deposit accounts up to applicable
regulatory limits. The FDIC may establish an assessment rate for deposit
insurance premiums which protects the insurance fund and considers the fund's
operating expenses, case resolution expenditures, income and effect of the
assessment rate on the earnings and capital of members.
The assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution by the FDIC which
is determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well-capitalized,
adequately-capitalized or undercapitalized -- using the same percentage criteria
as in the prompt corrective action regulations. See "Prompt Corrective Action."
Within each capital group, institutions will be assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund.
Because the BIF achieved its statutory reserve ratio of 1.25% of
insured deposits, the FDIC has eliminated deposit insurance premiums for most
BIF members. The FDIC, however, continues to assess BIF member institutions to
fund interest payments on certain bonds issued by the Financing Corporation
(FICO), an agency of the federal government established to help fund takeovers
of insolvent thrifts. Until December 31, 1999, BIF members will be assessed at
the rate of 1.3 basis points on deposits for FICO payments while SAIF members
will be assessed at the rate of 6.5 basis points on deposits. 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
19
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".
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
CAMELS rating). A "significantly undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a ratio of tangible
equity to total assets of less than 2.0%.
Federal Home Loan Bank System. 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,
1997, of $20.3 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 4%) 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, 1997.
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 $47.8 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement may be to reduce the amount of the institution's
interest-earning assets. As of December 31, 1997, the Bank met its reserve
requirements.
20
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.
As of December 31, 1997, the Company had available net operating loss
(NOL) carryforwards for federal and state tax purposes of approximately $22.9
million and $24.2 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.,
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. The Company is not aware of any pending federal or state
tax adjustments, nor any notice that would materially change the reported amount
of tax due. Furthermore, the 1994 federal tax return audit of a partnership of
which a subsidiary of the Company is a 50% owner was settled in 1997 with no
significant adjustments.
See Note 13 to the Consolidated Financial Statements, incorporated
herein by reference, for further information regarding taxation.
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, conducts business in
several surrounding states and as such, is subject to taxation in these states.
The Company has been notified of the State of New Jersey's intent to audit,
although the scope of the audit has not as yet been defined.
21
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, 1997.
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------- ---------- --------------- ---------
(In Thousands)
WSFS:
Main Office (1) Owned $1,565 $192,503
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 1998 55 53,762
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2001 21 18,975
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 1998 18 72,351
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 1998 24 59,589
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 1998 25 84,702
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2000 13 54,071
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Tri-State Mall Branch* Leased 1998 3 19,073
I-95 & Naamans Road
Claymont, DE 19803
Claymont Branch Owned 75 20,073
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch Leased 1998 24 35,398
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(4) Leased 2007 97 57,704
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 77 62,987
144 N. DuPont Hwy.
New Castle, DE 19720
22
Stanton Leased 2001 257 4,833
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Leased 1998 134 3,676
Inside Genaurdi's at Peoples Plaza
Routes 40 and 896, Newark, DE 19702
Middletown Square Shopping Center Leased 1999 122 11,488
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover (3) Leased 2000 207 15,781
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
WSFS Credit Corporation*
------------------------ --------
30 Blue Hen Drive 280 $766,966
Suite 200 ========
Newark, DE 19713
*Represents locations without ATM.
(1) Includes location of executive offices and approximately $64.4 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and equipment
totalled $9.0 million at December 31, 1997.
(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.
(4) Also includes companies education and development center.
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 15 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, 1997 through the solicitation of
proxies or otherwise.
23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on The Nasdaq Stock
MarketSM under the symbol WSFS. At December 31, 1997, the Corporation had 2,312
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 the covenants of the Senior Notes. For
additional information regarding such restrictions, see Note 10 to the
Consolidated Financial Statements.
The closing market price of the common stock at December 31, 1997 was
$20.
Stock Price Range
-----------------
Low High
--- ----
1997 1st $10 1/8 $12 1/8
2nd 10 5/8 14 1/8
3rd 13 1/2 19 1/4
4th 16 21 7/8
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
-24-
Item 6. Selected Financial Data
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
At December 31,
---------------
Total assets..................................... $1,515,217 $1,357,635 $1,218,826 $1,195,686 $ 994,692
Net loans (1).................................... 764,463 772,847 792,184 710,776 687,492
Vehicles under operating leases, net............. 172,115 52,036
Investment securities (2)........................ 78,655 18,933 28,772 64,144 54,346
Investment in reverse mortgages, net............. 32,109 35,796 35,614 32,172 24,913
Other investments................................ 74,523 47,337 52,128 44,249 110,816
Mortgage-backed securities (2)................... 330,274 365,252 237,132 262,748 43,750
Deposits (4)..................................... 766,966 744,886 724,030 809,707 806,605
Borrowings (3)................................... 615,578 489,819 370,795 295,244 107,864
Senior notes..................................... 29,100 29,100 29,850 32,000 32,000
Stockholders' equity............................. 86,759 75,788 73,546 45,274 38,693
Number of full-service branches (4).............. 16 16 14 16 16
For the Year Ended December 31,
-------------------------------
Interest income.................................. $109,935 $ 101,223 $ 99,936 $ 80,666 $ 72,320
Interest expense................................. 69,817 58,862 58,067 44,652 38,508
Other income (4)................................. 19,616 11,193 22,615 7,210 7,970
Other expenses .................................. 35,236 32,345 37,341 34,483 34,485
Income before taxes ............................. 22,965 19,522 25,740 7,058 4,677
Net income (4)................................... 16,389 16,356 27,008 8,070 6,359
Earnings per share:
Basic .......................................... 1.31 1.18 1.86 .56 .90
Diluted ........................................ 1.29 1.16 1.84 .55 .44
Interest rate spread............................. 3.10% 3.22% 3.14% 3.11% 3.39%
Net interest margin.............................. 3.13 3.56 3.57 3.39 3.64
Return on average equity......................... 20.25 21.19 45.68 19.64 18.12
Return on average assets......................... 1.11 1.28 2.21 .73 .65
Average equity to average assets................. 5.48 6.06 4.84 3.69 3.57
(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 obligation was called in 1996.
(4) During 1995, the WSFS wholly-owned subsidiary, Fidelity Federal, sold the
deposits of four branches resulting in a net pre-tax gain of $14.2 million
and an after-tax gain of $12.4 million. The remaining assets, liabilities
and equity were merged into WSFS. Additionally, during 1995 WSFS opened two
new branches with deposits acquired from other institutions. During 1996,
WSFS opened two more new branches.
-25-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
WSFS Financial Corporation (Company or 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 acquired in-market. The Corporation's primary market
area is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The Bank provides residential
real estate, commercial real estate, commercial and consumer lending services
and funds these activities primarily with retail deposits and borrowings. The
banking operations of WSFS are presently conducted from 16 retail banking
offices located in the Wilmington and Dover, Delaware areas. Deposits are
insured by the Federal Deposit Insurance Corporation (FDIC).
Additional subsidiaries of the Bank include WSFS Credit Corporation
(WCC), which is engaged primarily in indirect motor vehicle leasing; 838
Investment Group, Inc., which markets various insurance products and securities
through the Bank's branch system; and Community Credit Corporation (CCC), which
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 expected to
be sold in the second quarter of 1998. 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 later merged into the Bank in November 1996.
The long-term goal of the Corporation is to maintain its
high-performing financial services company status, 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. 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 these 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 status was largely due to 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. The sale allowed the
Corporation to focus on its primary market area while also enhancing capital.
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
and, as mentioned, $12.4 million was from the sale transaction. Earnings for the
year ended December 31, 1996 and 1997 were $16.4 million. Net income for 1995,
1996 and 1997 included the recognition of tax benefits from prior net operating
losses from WSFS and its subsidiaries. Excluding the one-time net gain on the
sale of the Association's deposits, income before taxes increased $7.3 million
from 1995 to 1996 and $3.4 million from 1996 to 1997.
The following discussion focuses on the major components of the
Company's operations and presents an overview of the significant changes in the
Corporation's results of operations for the past three fiscal years and
financial
-26-
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 both 1997 and
1996 compared with $27.0 million in 1995. Earnings for all three years included
the recognition of tax benefits. Earnings for 1995 were also significantly
impacted by a nonrecurring after tax gain of $12.4 million on the sale of
deposits and certain assets of the Association. Excluding the tax benefits and
the gain on the sale of deposits, net income for 1997 increased $2.5 million
over 1996, and 1996 income increased $1.8 million over 1995.
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 flows. The level of
nonperforming loans can also impact the interest rate spread by reducing the
overall yield on the loan portfolio.
At December 31, 1997, the Corporation reclassified approximately $172
million in leases originated by its vehicle leasing subsidiary to operating
leases in accordance with Statement of Financial Accounting Standards No. 13.
Accordingly, income on these leases, which previously would have been classified
as interest income, has been presented as other income, consistent with the
operating lease treatment. Prior period amounts have also been restated to
conform their presentation. This reclassification did not result in a material
effect on reported net income of any year herein. In 1996, only approximately
50% of leases and their associated income were accounted for as operating
leases.
Net interest income decreased to $40.1 million in 1997 compared with
$42.4 million and $41.9 million in 1996 and 1995, respectively. The decline in
net interest income over the three year period was due to the increase in the
operating lease portfolio, the income from which is treated as fee income, and
the decline in finance leases, the income from which is treated as interest
income. Excluding the effects of reclassification of direct finance leases to
operating leases discussed above, net interest income would have increased to
$50.2 million in 1997 from $45.7 million in 1996.
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.
-27-
Year Ended December 31,
--------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------- ---------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
Interest income:
Real estate loans (1) .................... $ (937) $ (1,110) $ (2,047) $ 2,001 $ (857) $ 1,144
Commercial loans ......................... 2,687 (580) 2,107 218 (381) (163)
Consumer loans ........................... (1,665) 678 (987) (1,393) 179 (1,214)
Loans held-for-sale ...................... (154) 17 (137) 158 (14) 144
Mortgage-backed securities ............... 6,149 234 6,383 2,472 280 2,752
Investment securities .................... 801 (184) 617 (1,170) (29) (1,199)
Other .................................... 836 1,940 2,776 (1,095) 918 (177)
-------- -------- -------- -------- -------- --------
7,717 995 8,712 1,191 96 1,287
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
Money market and interest-bearing demand 87 87 (432) (14) (446)
Savings ................................ 154 386 540 (321) 145 (176)
Time ................................... (278) (87) (365) (1,061) (1,161) (2,222)
FHLB of Pittsburgh advances .............. 4,767 (248) 4,519 2,827 (427) 2,400
Senior notes ............................. (17) (17) (167) (167)
Other borrowed funds ..................... 6,148 43 6,191 1,817 (411) 1,406
-------- -------- -------- -------- -------- --------
10,861 94 10,955 2,663 (1,868) 795
-------- -------- -------- -------- -------- --------
Net change, as reported ...................... $ (3,144) $ 901 $ (2,243) $ (1,472) $ 1,964 $ 492
======== ======== ======== ======== ======== ========
Tax-equivalent effect (2) .................... 425 501 926
-------- ------- -------- -------- -------- --------
Net change, tax-equivalent basis ............. $ (2,719) $ 1,402 $ (1,317) $ (1,472) $ 1,964 $ 492
======== ======== ======== ======== ======== ========
(1) Includes commercial mortgage loans.
(2) The tax-equivalent income adjustment relates primarily to a commercial
loan.
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.
-28-
Year Ended December 31,
-------------------------------------------------------------------------------------
1997 1996
--------------------------------- ----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ---- ------- -------- -------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............... $ 574,596 $ 52,174 9.08% 584,711 $ 54,221 9.27%
Commercial loans (1)................ 58,661 4,781 9.73 26,678 2,674 10.02
Consumer loans...................... 149,855 14,949 9.98 166,733 15,936 9.56
---------- --------- --------- -------
Total loans.................... 783,112 71,904 9.30 778,122 72,831 9.36
Mortgage-backed securities (5).......... 379,315 25,829 6.81 289,158 19,446 6.73
Loans held-for-sale (3)................. 1,698 135 7.95 3,649 272 7.45
Investment securities (5)............... 43,968 2,785 6.33 31,504 2,168 6.88
Other interest-earning assets........... 102,043 9,282 9.10 86,104 6,506 7.56
---------- --------- --------- -------
Total interest-earning assets....... 1,310,136 109,935 8.46 1,188,537 101,223 8.52
--------- -------
Allowance for loan losses............... (24,145) (24,073)
Cash and due from banks................. 17,552 22,911
Vehicles under operating leases, net ... 135,848 44,674
Other noninterest-earning assets........ 36,123 42,347
---------- ---------
Total assets........................ $1,475,514 $1,274,396
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand $ 57,918 1,506 2.60 $ 54,582 1,419 2.60
Savings............................. 162,041 4,617 2.85 156,337 4,077 2.61