Back to GetFilings.com
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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______ to________
Commission file number 0-16668
--------------------------------
WSFS FINANCIAL CORPORATION
--------------------------------
Delaware 22-2866913
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of March 17, 1999 was $125,931,485. 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 17, 1999, there were issued and outstanding 11,439,288 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 22, 1999 are incorporated by reference in Part
III hereof.
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
Part I
Page
----
Item 1. Business .............................................................................. 3
Item 2. Properties ............................................................................ 21
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................................................................ 86
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... 86
Item 11. Executive Compensation.................................................................. 86
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 86
Item 13. Certain Relationships and Related Transactions.......................................... 86
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 87
Signatures.............................................................................. 90
PART I
Item 1. Business
- -----------------
GENERAL
WSFS Financial Corporation (Company or Corporation) is a savings and
loan holding company headquartered in Wilmington, Delaware. The Corporation has
two subsidiaries, Wilmington Savings Fund Society, FSB (WSFS or Bank) and WSFS
Capital Trust I. WSFS Capital Trust I was formed in 1998 to sell Trust Preferred
Securities. The Trust invested all of the proceeds from the sale of the Trust
Preferred Securities in Junior Subordinated Debentures of the Corporation. The
Corporation used the proceeds from the Junior Subordinated Debentures for
general corporate purposes, including the redemption of its 11% Senior Notes due
2005 on December 31, 1998.
Substantially, all of the Corporation's assets are held by its
subsidiary, 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 20 retail banking offices located in
Northern Delaware and Southeastern Pennsylvania. Deposits are insured by the
Federal Deposit Insurance Corporation (FDIC).
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 having sold its
final parcel of land in 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 merged into
the Bank in November 1996.
The long-term goal of the Corporation is maintaining its
high-performing financial services company status, focusing on its core banking
business while taking advantage of its intrastructure to develop unique niche
businesses.
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.
Net income for the period ended December 31, 1998 was $16.5 million
compared to $16.4 million for both 1997 and 1996. Net income for the last three
years included the recognition of tax benefits. Income before extraordinary
items and taxes increased $1.3 million between 1998 and 1997; and $3.4 million
between 1997 and 1996.
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.
INVESTMENT ACTIVITIES
The Company's short-term investment portfolio is intended to provide
collateral for borrowings and to meet liquidity requirements. Book values of
investment securities and short-term investments by category, stated in dollar
amounts and as a percent of total assets, follow:
December 31,
----------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- -----------------------
Percent Percent Percent
of of of
Amount Assets Amount Assets Amount Assets
------- ------ ------ ------- ------ -------
(Dollars In Thousands)
Held-to-Maturity:
- -----------------
Corporate bonds............................. $ 6,059 0.4% $12,030 1.0% $15,038 1.1%
U.S. Government and agencies................ 15,000 0.8
State and political subdivisions ........... 1,583 0.1 1,534 0.1 2,642 0.2
------- ------- ------- ------- ------- -------
7,642 0.5 28,564 1.9 17,680 1.3
------- ------- ------- ------- ------- -------
Available-for-Sale:
- -------------------
U.S. Government and agencies................ $30,219 1.9 50,091 3.3
State and political subdivisions............ 1,253 0.1
------- ------- ------- ------- ------- -------
$30,219 1.9 50,091 3.3 1,253 0.1
------- ------- ------- ------- ------- -------
Short-term investments:
- -----------------------
Federal funds sold and securities purchased
under agreements to resell.............. $20,900 1.3 25,279 1.7 25,400 1.9
Interest-bearing deposits in other banks(1). 7,518 0.4 28,892 1.9 5,702 0.4
------- ------- ------- ------- ------- -------
28,418 1.7 54,171 3.6 31,102 2.3
------- ------- ------- ------- ------- -------
66,279 4.1% $132,826 8.8% $50,035 3.7%
======= ======= ======== ======= ======= =======
(1) Interest-bearing deposits in other banks do not include deposits with a
maturity greater than one year.
In 1998, the Bank purchased $20 million in U.S. Government securities,
of which $10 million was classified as available-for-sale. In addition, there
were sales and calls of U.S. Government securities totaling $20 million and $25
million, respectively. The reduction of corporate and political subdivision
bonds since 1996 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 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 was sold in 1997.
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1998. 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.
At December 31, 1998
--------------------
Amount Yield
------ -----
(Dollars in Thousands)
Held-to-Maturity:
-----------------
Corporate bonds:
Within one year....................................................... $ 200 5.45%
After one but within five years....................................... 2,533 6.93
After five but within ten years....................................... 2,136 6.26
After ten years....................................................... 1,190 7.30
--------
6,059 6.72
--------
State and political subdivisions (1):
After ten years....................................................... 1,583 7.61
--------
Total debt securities, held-to-maturity................................. 7,642 6.90
--------
Available-for-Sale:
-------------------
U.S. Government and agencies:
After one but within five years....................................... 30,219 6.12
--------
Short-term investments:
-----------------------
Interest-bearing deposits in other banks.............................. 7,518 4.78
Federal funds sold and securities purchased under agreements to resell 20,900 5.57
-------
Total short-term investments............................................ 28,418 5.36
-------
$66,279 5.88%
=======
(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,
including collateralized mortgage obligations, in 1998 totaled $355 million, of
which $210 million was classified as available-for-sale and $145 million was
classified as held-to-maturity. The Bank also sold $30 million in collateralized
mortgage obligations. Reductions in the other categories, for all years, were
due to principal repayments.
The following table sets forth the book values of mortgage-backed
securities and their related weighted average stated rates at the end of the
last three fiscal years.
December 31,
---------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- --------------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
------- ---- ------ ---- ------ ----
Held-to-Maturity:
- -----------------
Collateralized mortgage obligations......... $175,619 6.78% $151,982 7.30% $165,516 7.38%
GNMA ....................................... 1,044 6.93 1,299 7.16 1,496 7.16
FHLMC....................................... 42,337 6.16 55,822 6.17 63,223 6.18
FNMA........................................ 40,881 6.26 53,134 6.26 62,754 6.26
Other....................................... 5,977 7.36 12,663 7.50 20,340 8.07
-------- ---- -------- ---- -------- ----
$265,858 6.61% $274,900 6.88% $313,329 6.96%
======== ==== ======== ==== ======== ======
Available-for-Sale:
- -------------------
Collateralized mortgage obligations ........ $168,997 6.54% $ 57,374 7.26% $ 37,482 7.44%
GNMA........................................ 24,229 6.11 14,441 6.15
-------- ---- -------- ---- -------- ----
$193,226 6.49% $ 57,374 7.26% $ 51,923 7.08%
======== ==== ======== ==== ========= ====
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 have 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.
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, 1998 :
December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ------------------ ---------------- ----------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Residential real estate(1) $291,110 30.2% $287,349 30.7% $279,060 33.8% $276,926 35.0% $260,442 36.6%
Commercial real estate:
Commercial mortgage ........... 226,063 23.5 238,533 25.5 278,935 33.8 293,979 37.1 259,112 36.6
Construction .................. 11,642 1.2 12,553 1.3 27,056 3.3 29,959 3.8 25,603 3.6
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Total commercial real estate . 237,705 24.7 251,086 26.8 305,991 37.1 323,938 40.9 284,715 40.2
Commercial .................... 97,524 10.1 94,686 10.1 28,602 3.5 23,894 3.0 25,188 3.5
Consumer ...................... 165,660 17.2 159,432 17.0 135,552 16.4 114,265 14.4 91,182 12.8
Finance leases................. 60,985 7.4 98,840 12.5 89,095 12.5
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Gross loans ................... 791,999 82.2 792,553 84.6 810,190 98.2 837,863 105.8 750,622 105.6
Less:
Unearned income 4,642 0.5 3,240 0.3 13,102 1.6 21,512 2.7 18,146 2.6
Allowance for loan losses ..... 23,689 2.5 24,850 2.7 24,241 2.9 24,167 3.1 21,700 3.0
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Net loans ..................... 763,668 79.2 764,463 81.6 772,847 93.7 792,184 100.0 710,776 100.0
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Vehicles under operating leases,
net........................... 199,967 20.8 172,115 18.4 52,036 6.3
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Net loans and vehicles under
operating leases ............. $963,635 100.0% 936,578 100.0% $824,883 100.0% $792,184 100.0% $710,776 100.0%
======== ===== ======= ===== ======== ===== ======== ===== ======== =====
(1) Includes $3,103, $2,222, $773, $4,401, and $257 of residential mortgage loans held-for-sale at December 31, 1998,
1997, 1996, 1995 and 1994, respectively.
The following table sets forth information as of December 31, 1998
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)..................... $ 42,401 $ 183,659 $ 288,010 $514,070
Construction loans........................ 9,589 1,857 196 11,642
Commercial loans.......................... 25,802 25,591 46,131 97,524
Consumer loans ........................... 62,675 67,766 35,219 165,660
----------- ----------- ----------- ----------
$ 140,467 $ 278,873 $ 369,556 $ 788,896
=========== =========== =========== ==========
Rate sensitivity:
Fixed................................... $ 53,539 $ 159,693 $ 182,276 $ 395,508
Adjustable 86,928 119,180 187,280 393,388
----------- ----------- ---------- ----------
140,467 278,873 369,556 788,896
----------- ----------- ---------- ----------
Vehicles under operating leases, net 43,017 156,950 0 199,967
----------- ----------- ---------- ---------
Gross loans and net operating leases $ 183,484 $ 435,823 $ 369,556 $ 988,863
=========== =========== ========== ==========
(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 very
limited basis, the Bank originates loans with loan-to-value ratios exceeding 80%
without a private mortgage insurance requirement. At December 31, 1998, the
balance of all such loans was approximately $16.6 million of which $8.9 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.
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. 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, 1998, $29.2 million was committed for
construction loans, of which $11.5 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 $5.0 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.
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, 1998, 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, 1998, the Bank had extended a total of $85.8
million in home equity lines of credit, of which $27.8 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 can be deductible)
and the convenience of checkbook access as well as 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 1998, WCC originated more than 2,032 leases, which approximated $76.9
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. At December 31, 1999, WCC had $200.0
million in vehicles under operating leases.
The table below sets forth consumer loans by type, in dollar amounts and
percentages, at the dates indicated.
December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Equity secured installment loans $87,503 52.8% $78,975 49.6% $ 63,803 47.1%
Home equity lines of credit.... 27,799 16.8% 31,110 19.5 33,267 24.5
Automobile..................... 32,729 19.8% 32,959 20.7 26,456 19.5
Unsecured lines of credit...... 10,444 6.3% 9,466 5.9 7,448 5.5
Other.......................... 7,185 4.3% 6,922 4.3 4,578 3.4
---------- ------ ----------- ------ ----------- ------
Total consumer loans .......... $165,660 100.0% $159,432 100.0% $135,552 100.0%
======== ===== ======== ===== ======== =====
(Restubbed Table)
-------------------------------------------------
1995 1994
-------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------
Equity secured installment loans $ 52,793 46.2% $ 34,088 37.4%
Home equity lines of credit.... 36,817 32.2 40,727 44.7
Automobile..................... 12,701 11.1 1,951 2.1
Unsecured lines of credit...... 7,017 6.2 3,683 4.0
Other.......................... 4,937 4.3 10,733 11.8
------------ ------- ---------- ------
Total consumer loans .......... $114,265 100.0% $ 91,182 100.0%
======== ===== ======== =====
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 1998, WSFS originated $129 million of residential real estate
loans compared to 1997 originations of $84 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 totaled $10 million for years ended December 31, 1998 and 1997;
and $13 million during 1996, respectively. Residential real estate loan sales
totaled $75 million in 1998, $26 million in 1997 and $24 million in 1996. 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 $237 million of residential
loans at December 31, 1998 compared to $207 million at December 31, 1997. The
Company also services residential loans for its portfolio totaling $255 million
and $251 million at December 31, 1998 and 1997.
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 1998, the Bank originated $124 million of
commercial and commercial real estate loans compared to $123 million in 1997.
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 1998, such consumer loan originations aggregated $92 million
compared to $105 million in 1997. Additionally, WSFS Credit Corporation
originated approximately $78 million of operating leases in 1998 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.
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, 1998. 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 Credit Policy Committee and the
Audit Committee of the Board of Directors.
SUBSIDIARIES
The Corporation has two subsidiaries, Wilmington Savings Fund Society,
FSB (WSFS or Bank) and WSFS Capital Trust I. WSFS Capital Trust I was formed in
1998 to sell Trust Preferred Securities. The Trust invested all of the proceeds
from the sale of the Trust Preferred Securities in Junior Subordinated
Debentures of the Corporation. The Corporation used the proceeds from the Junior
Subordinated Debentures for general corporate purposes, including the redemption
of its 11% Senior Notes due 2005 on December 31, 1998.
At December 31, 1998, 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, 1998, it had $3.3 million invested in the equity of these companies
and had lent them an additional $253.3 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, 1998 and 1997 were $226.3 million and $203.5
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, 1998 and 1997 were $22.1 million
and $19.0 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. In 1998,
Star States Development Company sold its remaining parcel of land and is
currently inactive.
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.
SOURCES OF FUNDS
The Bank funds operations through retail and wholesale deposit growth
as well as through various borrowing sources, including repurchase agreements,
federal funds purchased and advances from the Federal Home Loan Bank (FHLB) of
Pittsburgh. Loan repayments and investment maturities also provide sources of
funds. Loan repayments and investment maturities provide a relatively stable
source of funds while certain deposit flows tend to be more susceptible to
market conditions. Borrowings are used to fund wholesale asset growth,
short-term funding of lending activities when loan demand exceeds projections,
or when deposit inflows or outflows are less than or greater than expected. On a
long-term basis, borrowings may be used to match against specific loans or
support business expansion.
Deposits. 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 20 branches. Sixteen of these branches are located in northern
Delaware's New Castle County, the Bank's primary market. These branches maintain
approximately 135,000 total account relationships with approximately 42,400
total households, or 25% of all households in New Castle County, Delaware. The
seventeenth branch is in the state capital, Dover, located in central Delaware's
Kent County. The three remaining branches are located in Southern 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 1998
--------------- --------------
(In Thousands)
Less than 3 months...................... $39,972
Over 3 months to 6 months............... 21,401
Over 6 months to 12 months.............. 20,467
Over 12 months.......................... 8,448
---------
$90,288
=========
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 5% of their outstanding advances, whichever is
greater.
The Bank also sells securities under agreements to repurchase with
various brokers as an additional source of funding. When entering into these
transactions, the Bank is generally required to pledge either government
securities or mortgage-backed securities as collateral for the borrowings.
In 1998, the Company issued $50.0 million in trust preferred securities
due December 11, 2028, part of which was used to pay down the $29.1 million in
11% Senior Notes. See Note 9 of the Consolidated Financial Statements for a
further discussion of the Notes.
REGULATION
Regulation of the Company
General. The Company is a registered 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
prohibited from extending credit, offering services, or fixing or varying the
consideration for any extension of credit or service on the condition that the
customer obtain some additional service from the institution or certain of its
affiliates or that the customer not obtain services from a competitor of the
institution, subject to certain limited exceptions.
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, "Tier 1" or "core" capital equal to 4% of adjusted total assets (or 3%
if the institution is rated composite 1 under the OTS examiner rating system),
and "total" capital (a combination of core and "supplementary" capital) equal to
8% of risk-weighted assets. In addition, OTS regulations impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital.
The OTS capital rule defines Tier 1 or core capital as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits of mutual institutions and "qualifying supervisory goodwill," less
intangible assets other than certain supervisory goodwill and, subject to
certain limitations, mortgage and non-mortgage servicing rights 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, 1998, 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% (75% if rate is
adjustable, and annual net operating income equal to not less than 120% of debt
service (115% if loan is adjustable) and certain qualifying loans for the
construction of one- to four-family residences pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer loans, non-qualifying residential
construction loans and commercial real estate loans, repossessed assets and
assets more than 90 days past due, as well as all other assets not specifically
categorized, are assigned a risk weight of 100%. The portion of equity
investments not deducted from core or supplementary capital is assigned a 100%
risk-weight.
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, 1998,
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 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 Bank Holding Company Act (BHCA) prohibits
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Dividend Restrictions. Savings associations must submit notice to the
OTS prior to making a capital distribution (which includes cash dividends, stock
repurchases and payments to shareholders of another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the association's
common or preferred stock or debt counted as its regulatory capital, or (c) the
association is a subsidiary of a holding company. A savings association must
make application to the OTS to pay a capital distribution if (x) the association
would not be adequately capitalized following the distribution, (y) the
association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.
Deposit Insurance. 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 Bank Insurance Fund (BIF) achieved its statutory reserve
ratio of 1.25% of insured deposits, the FDIC has eliminated deposit insurance
premiums for most BIF members. 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
Savings Association Insurance Fund (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 their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. An institution that
fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. "Significantly
undercapitalized" institutions and their holding companies may become subject to
more severe sanctions including limitations on asset growth, restrictions on
capital distributions by the holding company and possible divestiture
requirements. Institutions generally must be placed in receivership within
specified periods of time after they become "critically undercapitalized".
Under the OTS regulations implementing the prompt corrective action
provisions of FDICIA, the OTS measures a savings institution's capital adequacy
on the basis of its total risk-based capital ratio (the ratio of its total
capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). A savings institution that is not
subject to an order or written directive to meet or maintain a specific capital
level is deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 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,
1998, of $23.0 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, 1998.
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 $46.5 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, 1998, the Bank met its reserve
requirements.
TAXATION
Federal Income Taxes
The Corporation and its subsidiaries file a consolidated federal income
tax return and separate state income tax returns. Income taxes are accounted for
in accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences". 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, 1998, the Company had available net operating loss
(NOL) carryforwards for federal and state tax purposes of approximately $31.1
million and $66.5 million, respectively, which can be used to reduce future
income taxes. There are annual restrictions on approximately $16.6 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 being utilized, a portion of
the Providential NOL carryforwards could expire before being fully utilized.
The Corporation has recently completed an audit of its 1993 and 1994
Federal income tax returns. As a result of this audit a $106,000 tax liability
was determined, however, the Corporation has deemed these adjustments as not
being significant. Because of their timing nature, substantially all of these
adjustments will reverse within the coming year.
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision for income taxes
accordingly. See Note 12 to the Consolidated Financial Statements, incorporated
herein by reference, for further information on recorded taxes.
State Income Taxation
As a Delaware corporation, the Company is subject to an annual
franchise tax which is based on the number of shares of common and preferred
stock authorized by its Board of Directors. The Bank is also subject to
Delaware's annual franchise tax which is based upon its financial pretax net
income.
The Bank and its subsidiaries each file separate 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 those states.
A tax clearance certificate has been issued to WSFS Credit Corporation
on the recent completion of an audit by the State of New Jersey, where no
additional tax was assessed. Also, no exceptions were noted during the recently
completed Motor Vehicle Sales Finance examination conducted by the office of the
Delaware State Bank Commissioner.
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, 1998.
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
WSFS:
Main Office (1)(2) Owned $1,537 $242,021
9th & Market Streets
Wilmington, DE 19899
Union Street Branch Leased 2003 43 58,198
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch Leased 2001 14 20,115
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch Leased 2003 15 78,159
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch Leased 2003 21 64,116
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch Leased 2003 17 88,094
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch Leased 2000 30 58,752
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Tri-State Mall Branch Leased 1999 6 18,520
I-95 & Naamans Road
Claymont, DE 19803
Claymont Branch Owned 87 20,076
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch Leased 2003 30 38,150
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch(3) Leased 2007 336 60,658
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch Leased 2013 33 63,853
144 N. DuPont Hwy.
New Castle, DE 19720
-21-
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
Stanton Leased 2001 228 7,152
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Leased 2003 247 6,646
Inside Genaurdi's at Peoples Plaza
Routes 40 and 896, Newark, DE 19702
Middletown Square Shopping Center Leased 1999 99 13,104
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover (4) Leased 2000 180 17,459
Inside Metro Food Market
Rt 13 & White Oak Road
Dover, DE 19901
Pottstown Leased 2003 975 12
Inside Genaurdi's Family Market
1400 North Charlotte St.
Pottstown, PA 19461
Royersford Leased 2003 231 28
Inside Genuardi's Family Markets
Limerick Square
70 Buckwater Rd., Suite 211
Royersford, PA 19468
Glen Mills Leased 2003 121 544
Inside Genaurdi's Family Market
475 Glen Eagle Square
Glen Mills, PA 19342
University of Delaware-Trabant University Center Leased 2003 209 1,680
17 West Main Street
Newark, DE 19716
Operations Center Owned 1,152 N/A
2400 Philadelphia Pike
Wilmington, DE 19703
Community Credit Corporation Leased 1999 4 N/A
- ----------------------------
10 Penn Mart Shopping Center
New Castle, DE 19720
WSFS Credit Corporation
- -----------------------
30 Blue Hen Drive Leased 2002 311
Suite 200
Newark, DE 19713
--------
$858,300
========
(1) Includes location of executive offices and approximately $65.5 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and equipment
totaled $12.0 million at December 31, 1998.
(3) Includes the Company's Education and Development Center.
(4) 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.
-22-
Item 3. Legal Proceedings
- -------------------------
There are no material legal proceedings to which the Company or the
Bank is a party or to which any of its property is subject except as discussed
in Note 14 to the Consolidated Financial Statements.
Item 4. Submissions of Matters To a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1998 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
Market(SM) under the symbol WSFS. At December 31, 1998, the Corporation had
2,307 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. The Corporation paid
dividends of $.09 per share in 1998. Prior to 1998, there were no dividends
declared or paid on the Common Stock since the first quarter of 1990.
The closing market price of the common stock at December 31, 1998 was
$16 7/8.
Stock Price Range
-------------------------
Low High
-------------------------
1998 1st $17 5/8 $22
2nd 20 1/4 24 1/8
3rd 15 3/8 21 7/8
4th 12 3/8 18 1/2
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
-24-
Item 6. Selected Financial Data
- --------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Data)
At December 31,
- ---------------
Total assets..................................... $1,635,710 $1,515,217 $1,357,635 $1,218,826 $1,195,686
Net loans (1).................................... 763,668 764,463 772,847 792,184 710,776
Vehicles under operating leases, net............. 199,967 172,115 52,036
Investment securities (2)........................ 37,861 78,655 18,933 28,772 64,144
Investment in reverse mortgages, net............. 31,293 32,109 35,796 35,614 32,172
Other investments................................ 51,418 74,523 47,337 52,128 44,249
Mortgage-backed securities (2)................... 459,084 330,274 365,252 237,132 262,748
Deposits ........................................ 858,300 766,966 744,886 724,030 809,707
Borrowings (3)................................... 622,409 615,578 489,819 370,795 295,244
Senior notes..................................... 29,100 29,100 29,850 32,000
Trust Preferred Borrowings....................... 50,000
Stockholders' equity ............................ 85,752 86,759 75,788 73,546 45,274
Number of full-service branches (4).............. 20 16 16 14 16
For the Year Ended December 31,
- -------------------------------
Interest income.................................. $108,232 $109,935 $ 101,223 $ 99,936 $ 80,666
Interest expense................................. 71,114 69,817 58,862 58,067 44,652
Other income .................................... 24.693 19,616 11,193 22,615 7,210
Other expenses .................................. 36,443 35,236 32,345 37,341 34,483
Income before taxes and extraordinary item ...... 24,288 22,965 19,522 25,740 7,058
Income before extraordinary item................. 17,973 16,389 16,356 27,008 8,070
Loss on extinguishment of debt, net of $787,000
tax credits ................................... 1,461 0 0
Net income ...................................... 16,512 16,389 16,356 27,008 8,070
Earnings per share:
Basic:
Income before extraordinary item.............. 1.46 1.31 1.18 1.86 .56
Loss on extinguishment of debt ............... (0.12)
Net income ................................... 1.34
Diluted:
Income before extraordinary item.............. 1.44 1.29 1.16 1.84 .55
Loss on extinguishment of debt ............... (0.12)
Net income ................................... 1.32
Interest rate spread............................. 2.96% 3.10% 3.22% 3.14% 3.11%
Net interest margin.............................. 2.88 3.13 3.56 3.57 3.39
Return on average equity......................... 19.24 20.25 21.19 45.68 19.64
Return on average assets......................... 1.16 1.11 1.28 2.21 .73
Average equity to average assets................. 6.03 5.48 6.06 4.84 3.69
(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,
and 1998, WSFS opened two and four new branches, respectively.
-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. The Corporation has
two subsidiaries, Wilmington Savings Fund Society, FSB and WSFS Capital Trust I.
WSFS Capital Trust I was formed in 1998 to sell Trust Preferred Securities. The
Trust invested all of the proceeds from the sale of the Trust Preferred
Securities in Junior Subordinated Debentures of the Corporation. The Corporation
used the proceeds from the Junior Subordinated Debentures for general corporate
purposes, including the redemption of its 11% Senior Notes due 2005 on December
31, 1998.
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 20 retail banking offices located in Northern
Delaware and Southeastern Pennsylvania. Deposits are insured by the Federal
Deposit Insurance Corporation (FDIC).
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 having sold its
final parcel of land in 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 merged into
the Bank in November 1996.
The long-term goal of the Corporation is maintaining its
high-performing financial services company status, focusing on its core banking
business while taking advantage of its intrastructure to develop unique niche
businesses.
The following discussion focuses on the major components of the
Company's operations and presents an overview of the significant changes in the
Corporation's results of operations for the past three fiscal years and
financial condition during the past two fiscal years. This discussion should be
reviewed in conjunction with the Consolidated Financial Statements and Notes
thereto presented elsewhere in this Annual Report.
RESULTS OF OPERATIONS
The Corporation recorded net income of $16.5 million for the year
ending December 31, 1998, compared to $16.4 million for both 1997 and 1996.
Earnings for 1998 were impacted by an extraordinary charge of $1.5 million, net
of tax, on the early extinguishment of $29.1 million in 11% senior notes. Income
before the extraordinary item increased $1.6 million or 10% over 1997.
Net Interest Income. Net interest income is the most significant
component of operating income to the Corporation. Net interest income is
dependent 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.
-26-
Net interest income decreased to $37.1 million in 1998 compared with
$40.1 million and $42.4 million in 1997 and 1996, respectively. Total interest
income decreased $1.7 million, between 1998 and 1997 primarily due to a decline
in average loan balances and a declining interest rate environment. Average loan
balances which were $22.4 million lower than the previous year due to the
commercial real estate loan portfolio in the first half of 1998, were more than
offset by the growth in mortgage-backed securities of $35.8 million. However,
the average yield on mortgaged-backed securities of 6.44% was 267 basis points
below the average yield on total loans of 9.11%. In addition, the declining
interest rate environment of 1998 resulted in the repricing of both
interest-earning assets and interest-bearing liabilities, however, the assets
generally repriced more rapidly resulting in a 23 basis point reduction in
yields, but only a 7 basis point reduction in average rates paid on
interest-bearing liabilities.
Total interest expense increased $1.3 million, between 1998 and 1997
mainly as a result of the growth in interest-bearing deposits by an average of
$32.5 million. This was partially offset by a 7 basis point drop as the average
rate paid on deposits declined to 4.63% from 4.70% due to the overall decline in
interest rates during 1998. The increased interest expense associated with an
increase of $15.2 million in average borrowed funds in 1998 over the previous
year was essentially offset by the decline in rates paid for those funds
relative to 1997. Although the Company reduced long-term borrowing rates by
issuing $50 million in lower-cost trust preferred securities as replacement
financing for its 11% Senior Notes, the timing of the transaction had minimal
impact in 1998. Finally, net lease volume increased by an average of $44.0
million during 1998 resulting in increased interest expense to fund the growth,
however, as previously noted, the incremental income is classified as other
income and not interest income.
Between 1997 and 1996, interest income and expense increased $8.7
million and $11.0 million, respectively. The primary increase in interest income
was related to the growth in mortgage-backed securities of $90.2 million.
Subsequent increases in average borrowings of $187.7 million over the same
period contributed to the increase in interest expense.
-27-
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.
Year Ended December 31,
----------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars In Thousands)
Interest income:
Real estate loans (1).......................... $(5,824) $ (961) $(6,785) $ (937) $(1,110) $(2,047)
Commercial loans .............................. 2,543 (437) 2,106 2,687 (580) 2,107
Consumer loans................................. 1,195 (334) 861 (1,665) 678 (987)
Loans held-for-sale............................ 98 - 98 (154) 17 (137)
Mortgage-backed securities..................... 2,357 (1,450) 907 6,149 234 6,383
Investment securities ......................... 218 13 231 801 (184) 617
Other.......................................... (95) 974 879 836 1,940 2,776
------- ------- ------- -------- ------- -------
492 (2,195) (1,703) 7,717 995 8,712
------- ------- ------- -------- ------- -------
Interest expense:
Deposits:
Money market and interest-bearing demand..... 70 (48) 22 87 - 87
Savings...................................... 845 503 1,348 154 386 540
Time......................................... 110 (445) (335) (278) (87) (365)
FHLB of Pittsburgh advances.................... 1,747 (560) 1,187 4,767 (248) 4,519
Senior notes .................................. 562 (129) 433 (17) - (17)
Other borrowed funds........................... (1,191) (167) (1,358) 6,148 43 6,191
------- ------- ------- -------- ------- -------
2,143 (846) 1,297 10,861 94 10,955
------- ------- ------- -------- ------- -------
Net change, as reported............................ (1,651) (1,349) (3,000) (3,144) 901 (2,243)
------- ------- ------- -------- ------- -------
Tax-equivalent effect(2) .......................... 329 (31) 298 425 501 926
------- ------- ------- -------- ------- -------
Net change, tax-equivalent basis................... $(1,322) $(1,380) $(2,702) $(2,719) $ 1,402 $(1,317)
======= ======= ======= ======== ======= =======
(1) Includes commercial mortgage loans.
(2) The tax-equivalent income adjustment relates primarily to a commercial loan.
-28-
The following table, in thousands except yield and rate data, provides
information regarding the averages balances of and yields and rates on
interest-earning assets and interest-bearing liabilities during the periods
indicated.
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
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)............... $509,422 $ 45,389 8.91% $ 574,596 $ 52,174 9.08%
Commercial loans ................... 89,330 6,887 9.08 58,661 4,781 9.73
Consumer loans...................... 161,969 15,810 9.76 149,855 14,949 9.98
---------- -------- ---------- ---------
Total loans.................... 760,721 68,086 9.11 783,112 71,904 9.30
Mortgage-backed securities (5).......... 415,141 26,736 6.44 379,315 25,829 6.81
Loans held-for-sale (3)................. 2,935 233 7.94 1,698 135 7.95
Investment securities (5)............... 47,430 3,016 6.36 43,968 2,785 6.33
Other interest-earning assets........... 104,485 10,161 9.72 102,043 9,282 9.10
---------- -------- ---------- ---------
Total interest-earning assets....... 1,330,712 108,232 8.23 1,310,136 109,935 8.46
-------- ---------
Allowance for loan losses............... (24,541) (24,145)
Cash and due from banks................. 29,040 17,552
Vehicles under operating leases, net ... 179,844 135,848
Other noninterest-earning assets........ 33,576 36,123