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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number: 0-22399
WAYPOINT FINANCIAL CORP.
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(Name of Small Business Issuer in its Charter)
Pennsylvania 25-1872581
- ------------------------------------------------------------------ ---------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
235 North Second Street, Harrisburg, Pennsylvania 17101
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(Address of Principal Executive Office) (Zip Code)
(717) 236-4041
(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
------------------------------------------
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES x NO
---------- ------------
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. [ ]
As of March 30, 2001, there were issued and outstanding 38,951,431
shares of the Registrant's Common Stock.
The aggregate value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of the Common Stock
as of March 30, 2001, was approximately $360 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of the Proxy Statement for the 2001 Annual Meeting of Stockholders
(Part III).
PART I
------
ITEM 1. Business
- ------ --------
General
Waypoint Financial Corp. was organized as part of the October 17,
2000, mutual-to-stock conversion of Harris Financial, MHC and merger of Harris
Financial, Inc. and York Financial Corp. As part of the conversion and merger,
Waypoint Financial sold 16,850,000 shares of common stock for $10.00 per share
in a subscription and underwritten public offering. In the conversion and
merger, Waypoint Financial succeeded to the operations of Harris Financial and
York Financial, and became the holding company for Harris Savings Bank and York
Federal Savings and Loan Association. On October 30, 2000, Harris Saving Bank
and York Federal Savings and Loan Association merged to form Waypoint Bank. The
merger with York Financial was accounted for as a pooling-of-interests.
Accordingly, historical financial information in this report includes restated
operations to accomodate the pooling-of-interests merger.
Waypoint Financial's assets consist primarily of 100% of the
outstanding shares of Waypoint Bank, and various financial services company
subsidiaries through which Waypoint Financial provides brokerage, insurance,
advisory, and other fee-based services. Waypoint Bank is primarily engaged in
the business of attracting deposits and investing these deposits into loans
secured by residential and commercial real property, commercial business loans,
consumer loans, and investment securities. Waypoint Bank also offers
full-service trust and asset management services and employee benefit plan
services. Waypoint Bank's predecessor was originally formed in 1886.
Market Area
Waypoint Bank conducts its business through 58 offices, including 50
offices located in the five county south-central region of Pennsylvania that
includes Dauphin, York, Cumberland, Lancaster and Lebanon Counties, and eight
offices in Maryland. In addition, Waypoint Bank maintains an operations center,
a business center, a support center, five loan production offices, a mortgage
lending office, a business banking office, and a commissioned mortgage
origination staff as well as mortgage correspondent relationships that originate
residential mortgage loans for Waypoint Bank primarily in Pennsylvania, Maryland
and Virginia, although loans are originated in 11 states within the Mid-Atlantic
region.
The primary market area includes a mixture of rural, suburban and
urban markets, with the Harrisburg Metropolitan Statistical Area being the most
populous and more urban of the markets served by Waypoint Bank. Given the
wide-ranging presence of the branch network, the market area of Waypoint Bank
has a fairly diversified economy, with services, wholesale/retail trade,
manufacturing, and state and local government constituting the basis of the
economy.
Competition
Waypoint Financial faces intense competition for deposits and loans
in its primary market area. Waypoint Financial's most direct competition for
deposits historically has come from commercial banks and savings banks operating
in its primary market area, credit unions, and, to a lesser but increasing
extent, from other financial services companies, such as brokerage firms and
insurance companies. While these entities continue to provide a source of
competition for deposits, Waypoint Financial increasingly faces significant
competition for deposits from the mutual fund industry as the public continues
to invest relatively more savings in securities than in insured deposits.
Waypoint Financial also faces significant competition for investors' funds from
short-term money market securities, corporate securities and government
securities.
Waypoint Financial faces significant competition for loans from
savings banks and commercial banks in its market area, and from other financial
service providers, such as mortgage companies and mortgage brokers. Competition
is likely to increase as a result of the recent enactment of the Financial
Services Modernization Act of 1999, which eases restrictions on entry into the
financial services market by insurance companies and securities firms. Moreover,
to the extent that these changes permit banks, securities firms and insurance
companies to affiliate, the financial services industry could experience further
consolidation. This could result in a growing number of larger
2
financial institutions competing in Waypoint Financial's primary market area
that offer a wider variety of financial services than Waypoint Financial
currently offer. Competition for deposits, for the origination of loans and the
provision of other financial services may limit Waypoint Financial's growth and
adversely impact its profitability in the future.
3
Loan Portfolio Analysis. The following table sets forth the
composition of Waypoint Financial's loan portfolio at the dates indicated.
Waypoint Financial had no concentration of loans exceeding 10% of total gross
loans other than as disclosed below.
At December 31,
- ---------------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------- ---------------------------
Amount Percent Amount Percent
- ------------------------------------------------------ ------------ ------------ ------------
Residential mortgage loans:
One- to four-family.................. $ 1,274,684 49.07% $ 1,270,978 51.91%
Construction......................... 90,712 3.49 103,278 4.22
Other................................ - 0.00 20 0.00
--------------- -------- ------------ --------
Total residential mortgage loans..... 1,365,396 52.56 1,374,276 56.13
--------------- -------- ------------ --------
Commercial loans:
Commercial real estate............... 396,125 15.25 339,165 13.85
Commercial business.................. 234,837 9.04 190,839 7.80
Construction and site development.... 11,840 0.46 14,203 0.58
--------------- -------- ------------- --------
Total commercial loans............... 642,802 24.75 544,207 22.23
--------------- -------- ------------- --------
Consumer and other loans:
Manufactured housing................. 90,226 3.47 80,164 3.27
Home equity and second mortgage...... 326,024 12.55 231,290 9.45
Indirect automobile.................. 117,377 4.52 98,768 4.03
Other (1)............................ 55,939 2.15 119,625 4.89
--------------- -------- ------------- --------
Total consumer and other loans....... 589,566 22.69 529,847 21.64
--------------- -------- ------------- --------
Loans receivable, gross.............. 2,597,764 100.00 2,448,330 100.00
--------------- -------- ------------- --------
Plus:
Dealer reserves (2).................. 23,476 20,698
Less:
Unearned premiums.................... 210 296
Net deferred loans origination fees.. 6,917 6,411
Allowance for loan losses............ 22,586 23,127
--------------- -------------
Loans receivable, net................ $ 2,591,527 $ 2,439,194
=============== =============
At December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------- --------------------------- --------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Residential mortgage loans:
One- to four-family.................. $ 1,129,876 57.23% $1,180,541 63.70% $1,286,320 70.30%
Construction......................... 99,242 5.03 107,984 5.83 69,295 3.79
Other................................ 6,962 0.35 1,605 0.09 21,777 1.19
------------- -------- ------------- -------- ------------- --------
Total residential mortgage loans..... 1,236,080 62.61 1,290,130 69.62 1,377,392 75.28
------------- -------- ------------- -------- ------------- --------
Commercial loans:
Commercial real estate............... 225,771 11.44 137,685 7.43 87,378 4.78
Commercial business.................. 103,329 5.23 37,635 2.03 496 0.03
Construction and site development.... 14,859 0.75 12,338 0.67 4,994 0.27
------------- -------- ------------- -------- ------------- --------
Total commercial loans............... 343,959 17.42 187,658 10.13 92,868 5.08
------------- -------- ------------- -------- ------------- --------
Consumer and other loans:
Manufactured housing................. 65,455 3.31 73,310 3.96 68,043 3.71
Home equity and second mortgage...... 204,700 10.37 206,520 11.14 207,291 11.33
Indirect automobile.................. 23,929 1.21 - - - -
Other (1)............................ 100,181 5.07 95,524 5.15 84,083 4.60
------------- -------- ------------- -------- ------------- --------
Total consumer and other loans....... 394,273 19.97 375,354 20.25 359,417 19.64
------------- -------- ------------- -------- ------------- --------
Loans receivable, gross.............. 1,974,312 100.00 1,853,142 100.00 1,829,677 100.00
------------- -------- ------------- -------- ------------- --------
Plus:
Dealer reserves (2).................. 13,996 14,504 13,880
Less:
Unearned premiums.................... 471 855 (327)
Net deferred loans origination fees.. 7,111 7,242 7,392
Allowance for loan losses............ 19,891 17,002 14,735
------------- ------------- -------------
Loans receivable, net................ $ 1,960,835 $ 1,842,547 $ 1,821,757
============= ============= =============
- ------------------------------------
(1) Includes credit card loans, education loans and unsecured personal loans.
(2) Includes reserves established for indirect auto and manufactured housing
loan portfolios.
4
Loan Maturity Schedule
The following table sets forth information as of December 31, 2000,
regarding the dollar amount of loans in Waypoint Financial's portfolio based on
their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Adjustable and floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
Over Over Three
One Through Total
Within Through Five Over After
One Year Three Years Years Fixed Five Years One Year Total
----------- ----------- ---------- -------- -------- -----
(In Thousands)
Fixed-Rate Loans:
Residential mortgage loans:
One- to four-family............... $ 2,217 $ 49,134 $ 72,915 $ 707,754 $ 829,803 $ 832,020
Construction...................... - - - 90,712 90,712 90,712
Other............................. - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Total residential mortgage
loans.......................... 2,217 49,134 72,915 798,466 920,515 922,732
Commercial loans:
Commercial real estate............ 8,834 25,244 53,757 29,694 108,695 117,529
Commercial business............... 18,080 18,384 26,705 29,713 74,802 92,882
Construction and site development. 1,346 - 100 943 1,043 2,389
------------ ------------ ------------ ------------ ------------ ------------
Total commercial loans.......... 28,260 43,628 80,562 60,350 184,540 212,800
Consumer and other loans:...........
Manufactured housing.............. 11 112 603 89,500 90,215 90,226
Home equity and second mortgage... 1,330 12,207 26,434 187,768 226,409 227,739
Indirect automobile and other..... 964 23,845 104,170 18,149 146,164 147,128
------------ ------------ ------------ ------------ ------------ ------------
Total consumer and other loans... 2,305 36,164 131,207 295,417 462,788 465,093
------------ ------------ ------------ ------------ ------------ ------------
Total fixed-rate loans........... 32,782 128,926 284,684 1,154,233 1,567,843 1,600,625
Adjustable-Rate Loans:
Residential mortgage loans:
One-to four-family................ 143,494 104,658 149,230 45,282 299,170 442,664
------------ ------------ ------------ ------ ------------ ------------
Total residential mortgage
loans.......................... 143,494 104,658 149,230 45,282 299,170 442,664
Commercial loans:
Commercial real estate............ 88,364 71,074 91,937 27,221 190,232 278,596
Commercial business............... 120,899 8,564 10,421 2,071 21,056 141,955
Construction and site development. 9,451 - - - - 9,451
------------ ------------ ------------ ------------ ------------ ------------
Total commercial loans........... 218,714 79,638 102,358 29,292 211,288 430,002
Consumer and other loans:
Home equity and second mortgage... 98,285 - - - - 98,285
Indirect automobile and other..... 19,290 1,349 75 5,474 6,898 26,188
------------ ------------ ------------ ------------ ------------ ------------
Total consumer and other loans... 117,575 1,349 75 5,474 6,898 124,473
------------ ------------ ------------ ------------ ------------ ------------
Total adjustable-rate Loans...... 479,783 185,645 251,663 80,048 517,356 997,139
------------ ------------ ------------ ------------ ------------ ------------
Loans receivable, gross............. $ 512,565 $ 314,571 $ 536,347 $ 1,234,281 $ 2,085,199 $ 2,597,764
============ ============ ============ ============ ============ ============
5
The following table sets forth the dollar amount of all loans maturing or
repricing after December 31, 2001 that have predetermined interest rates and
have floating or adjustable interest rates.
Floating or
Predetermined Rates Adjustable Rates Total
------------------------------ ------------------------------ ----------------------------
(In Thousands)
Residential mortgage loans.... $ 920,515 $ 299,170 $ 1,219,685
Business banking loans........ 184,540 211,288 395,828
Consumer and other loans...... 462,788 6,898 469,686
------------------ ---------------- ------------------
Total loans................ $ 1,567,843 $ 517,356 $ 2,085,199
================== ================ ==================
Residential Mortgage Lending
Mortgage lending traditionally has been Waypoint Financial's primary
business. In recent years, Waypoint Financial has increased its emphasis on its
business banking and consumer lending, and decreased its reliance on traditional
one- to four-family residential real estate lending. Although the total amount
of one- to four-family residential real estate loans has remained relatively
stable over the last five years, the percentage of Waypoint Bank's loan
portfolio that consists of one- to four-family residential real estate loans has
decreased, due primarily to the growth of Waypoint Financial's business loan
portfolio.
One- to Four-Family Real Estate Loans. Historically, Waypoint Financial's
primary lending activity was the origination of loans secured by one- to
four-family residential real estate located in its primary market area. More
recently, Waypoint Financial has sold into the secondary mortgage market a
substantial portion of the conforming one- to four-family residential real
estate loans that it originates. For the year ended December 31, 2000, Waypoint
Financial sold 73% of its one- to four-family mortgage loan originations. Most
one- to four-family loans recently sold by Waypoint Financial have been sold on
a non-recourse basis with the servicing rights released. Management anticipates
that Waypoint Financial will sell a majority of the one-to four-family mortgage
loans originated in 2001.
Waypoint Financial also currently offers adjustable-rate mortgage loans
with terms of up to 30 years, with an interest rate based on the one year
Constant Maturity Treasury Bill index. Interest rate adjustments on such loans
are typically limited to a certain amount during any adjustment period and over
the life of the loan. Waypoint Financial sold a substantial portion of its
adjustable-rate mortgage loans originated in 2000, generally on a servicing
released basis.
Waypoint Financial underwrites fixed- and adjustable-rate one- to
four-family residential mortgage loans with loan-to-value ratios of up to 95%,
provided that a borrower obtains private mortgage insurance on loans that exceed
80% of the appraised value or sales price, whichever is less, of the secured
property. Waypoint Financial also requires that title insurance, hazard
insurance and, if appropriate, flood insurance be maintained on all properties
securing real estate loans made by Waypoint Financial. A licensed appraiser
appraises all properties securing one- to four-family first mortgage loans.
In an effort to provide financing for low and moderate income buyers,
Waypoint Financial offers Pennsylvania Housing Finance Agency mortgage loans to
qualified individuals. These loans are offered with fixed-rates of interest and
terms of up to 30 years, and must be secured by one- to four-family residential
property that is occupied by the owner. All of these loans are originated using
modified underwriting guidelines, based on rates and terms established by the
Pennsylvania Housing Finance Agency. These loans are generally offered with a
discounted interest rate (approximately 75 to 100 basis points). All
Pennsylvania Housing Finance Agency loans are originated in amounts of up to 95%
of the lower of the property's appraised value or the sale price. Private
mortgage insurance is required on all such loans. All of these loans are sold on
a servicing released basis to the Pennsylvania Housing Finance Agency
immediately after loan closing.
Construction Loans. Waypoint Financial originates construction loans to
individuals to acquire lots and construct personal residences. At December 31,
2000, residential construction loans amounted to $157.8 million, and the
unadvanced portion of construction loans totaled $67.1 million. Waypoint
Financial's residential construction loans generally provide for the payment of
interest only during the construction phase, which is usually six months. At
6
the end of the construction phase, the loan converts to a permanent mortgage
loan. In some cases, Waypoint Financial buys a hedge for the six-month
construction period and then sells into the secondary market the permanent
mortgage loan into which the construction loan converts. Before making a
commitment to fund a residential construction loan, Waypoint Financial requires
an appraisal of the property by an independent licensed appraiser. Waypoint
Financial also reviews and inspects each property before disbursement of funds
during the term of the construction loan. Loan proceeds are disbursed after
inspection based on the percentage of completion method.
Business Banking
Waypoint Financial's Business Banking Group offers commercial financial
products and services to businesses in its primary market area. The Business
Banking group originates commercial real estate loans, commercial business
loans, and construction and site development loans.
Commercial Real Estate Loans. Waypoint Financial's commercial real estate
loans are generally secured by owner-occupied properties used for business
purposes such as small office buildings, industrial facilities or retail
facilities primarily located in Waypoint Financial's primary market area.
Commercial real estate loans also include properties that are less than 50%
occupied by the borrower and are owned primarily for the production of rental
income. Although there may be occasional exceptions to the loan policy,
commercial real estate underwriting policies provide that such real estate loans
may be made in amounts of up to 80% of the lower of cost or appraised value of
the property provided such loans comply with Waypoint Financial's current in
house loans-to-one borrower limit. Waypoint Financial's commercial real estate
loans may be made with terms of up to ten years, amortization not to exceed 20
years, and with three to five year fixed interest rates or variable interest
rates tied to market indices. In evaluating a commercial real estate loan
application, Waypoint Financial considers the net operating income of the
borrower's business, the borrower's expertise, credit history and profitability
and the value of the underlying property. In addition, with respect to
commercial real estate rental properties, Waypoint Financial will also consider
the term of the lease and the quality of the tenants. Waypoint Financial has
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of cash flow before debt service to debt
service) of at least 1.20x. Environmental surveys are required for commercial
real estate loans. Generally, commercial real estate loans made to corporations,
partnerships and other business entities require personal guarantees by
principals of the borrower. At December 31, 2000, Waypoint Financial's largest
commercial real estate loan had a carrying value of $8.7 million, was secured by
a first mortgage lien, and was performing according to its original terms.
Commercial Business Loans. Waypoint Financial makes commercial business
loans primarily in its market area to a variety of professionals, sole
proprietorships and small- to medium-size businesses. Waypoint Financial offers
a variety of commercial lending products, including term loans for fixed assets
and working capital, revolving lines of credit, letters of credit, and Small
Business Administration guaranteed loans. Term loans are generally offered with
initial fixed rates of interest for the first three to five years and with terms
of up to ten years. Business lines of credit have floating rates of interest and
are payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a daily basis and are generally indexed to
Waypoint Financial's prime rate. When making commercial business loans, Waypoint
Financial considers the financial statements of the borrower, Waypoint
Financial's lending history with the borrower, the debt service capabilities of
the borrower, the projected cash flows of the business and the value of the
collateral. Commercial business loans are generally secured by a variety of
collateral, primarily accounts receivable, inventory and equipment, and are
supported by personal guarantees. However, Waypoint Financial also makes
unsecured commercial loans available to business clients with strong credit and
who are well-known to Waypoint Financial. Unsecured commercial loans are
generally limited to short-term single payment loans or lines of credit used to
provide general corporate liquidity or to provide for seasonal liquidity needs.
These loans generally are offered at floating rates of interest and are payable
on demand or at a stated short-term maturity.
Construction and Site Development Loans. Waypoint Financial also originates
construction and site development loans to developers and builders primarily to
finance the construction of single-family homes and subdivisions, the
construction of commercial development projects, and site development projects.
Loans to finance
7
the construction of single-family homes and subdivisions are generally offered
to experienced builders with whom Waypoint Financial has an established
relationship. Residential development loans are typically offered with terms of
up to 36 months. The maximum loan-to-value limit applicable to these loans is
80% of the appraised post-construction value or cost, whichever is less.
Construction loan proceeds are disbursed periodically as construction progresses
and as inspection by Waypoint Financial's approved appraisers warrants.
Waypoint Financial also makes construction loans for commercial development
projects. The projects include multi-family, apartment, industrial, retail and
office buildings. These loans generally have an interest-only phase during
construction, and convert to permanent financing when construction is completed.
Disbursement of funds is at the sole discretion of Waypoint Financial and is
based on the progress of construction. The maximum loan-to-value limit
applicable to these loans is 75% of the appraised post-construction value or
cost, whichever is less.
Waypoint Financial also originates land loans to local contractors and
developers for the purpose of improving the property, or for the purpose of
holding or developing the land for sale. Such loans are secured by a lien on the
property, are limited to 70% of the lower of the acquisition price or the
appraised value of the land, and have a term of up to two years with a floating
interest rate based on Waypoint Financial's internal base rate. Waypoint
Financial's land loans are generally secured by property in its primary market
area. Waypoint Financial requires title insurance and, if applicable, a
hazardous waste survey reporting that the land is free of hazardous or toxic
waste.
Consumer and Other Loans
Waypoint Financial offers a variety of consumer and other loans, including
loans secured by manufactured housing, home equity and second mortgage loans
that are secured by owner-occupied one- to four-family residences, indirect home
improvement loans, indirect automobile loans and other loans.
Home Equity and Second Mortgage Loans. Waypoint Bank offers home equity and
second mortgage loans, including fixed-term installment loans, home equity lines
of credit and indirect home improvement loans. At December 31, 2000, the
unadvanced amounts of home equity lines of credit totaled $139.4 million. The
underwriting standards employed by Waypoint Financial for home equity and second
mortgage loans include a determination of the applicant's credit history, an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. Home
equity lines of credit have adjustable rates of interest, which are indexed to
the prime rate as reported in The Wall Street Journal. Interest rates on home
equity lines of credit may be adjusted to no more than 18%. Generally, the
maximum loan-to-value ratio on home equity lines of credit, including the
outstanding amount of any first mortgage loan, is 90%. Waypoint Financial offers
fixed- and variable-rate home equity and second mortgage loans with terms up to
15 years. The loan-to-value ratios of both fixed- and variable-rate home equity
and second mortgage loans are generally limited to 90% of the appraised value of
the real estate collateral adjusted for any first mortgage loans.
Indirect home improvement loans are installment sales contracts and
installment loan agreements originated by home improvement contractors and
assigned to Waypoint Financial. These contractors are approved by Waypoint
Financial based on a review assessing their financial condition, industry
reputation and trade references. Indirect home improvement loans are either
unsecured or secured by deeds of trust or mortgages, which generally are
subordinate to other mortgages on the same residential properties. Waypoint
Financial originates Federal Housing Authority Title I insured dealer loans and
conventional non-insured home improvement loans. Each indirect home improvement
loan is acquired by Waypoint Financial only after a review in accordance with
its established underwriting procedures. Generally, loans for amounts greater
than $40,000 require appraisals performed by licensed appraisers to determine
the value of the related mortgaged properties. Waypoint Financial's guidelines
are intended only to provide a basis for lending decisions, and exceptions to
such guidelines may, within certain limits, be made based upon the credit
judgment of the lending officer. Waypoint Financial conducts quality audits to
ensure compliance with its established policies and procedures. Prior to funding
an indirect home improvement loan, Waypoint Financial requires the borrower to
sign a certificate of completion that indicates that the project has been
completed to the borrower's satisfaction. Waypoint Financial then contacts each
borrower by phone in order to review the terms and conditions of the loan and to
reconfirm that all work was completed according to the terms of the contractor's
agreement with the borrower. Following receipt of the certificate of completion
and telephone validation, Waypoint
8
Financial funds the loan. Funds are disbursed to the related home improvement
contractor by cashier's check. For certain large indirect home improvement
loans, Waypoint Financial may offer staged funding in which portions of the
contract amount are payable as the work is completed. Checks for staged funding
are issued to both the contractor and the customer.
Waypoint Financial offers borrowers the option to extend the contractual
period between the funding date for an indirect home improvement loan and the
first scheduled due date to between 45 and 180 days depending on the type of
loan. Interest will accrue on the original principal balance of such indirect
home improvement loan during the deferral period regardless of its length. The
indirect home improvement loan will be considered current unless the borrower
fails to make the first scheduled payment on its contractual due date. Scheduled
payments will commence on the first contractual due date of the indirect home
improvement loan and continue each month thereafter.
Manufactured Housing Loans. Waypoint Financial originates manufactured
housing loans through service companies that act as agent in brokering such
loans. Each service company must be approved by Waypoint Financial after
consideration of the service company's reputation, past experience, financial
resources, and its ability to service loans throughout the geographic areas in
which it originates such loans. Each service company is subject to an annual
review by Waypoint Financial, including a review of annually updated financial
statements and supporting documentation. At December 31, 2000, Waypoint
Financial had in its portfolio manufactured housing loans originated by three
service companies, but was doing origination business with one service company.
All manufactured housing loans are initially underwritten by the service
company based on guidelines specified by Waypoint Financial. However, before a
commitment is made, it is also separately underwritten by Waypoint Financial
personnel. The loans are secured by the manufactured home for which the loan
funds are advanced. Waypoint Financial will accept, as additional collateral, a
perfected first lien against land that an applicant owns, free and clear of all
liens, where the manufactured home will be located. The maximum loan amount
currently is $90,000. The minimum down payment is 5% in cash or trade, based on
the sales price plus tax. If an applicant owns a tract of land free and clear,
Waypoint Financial will accept a first lien position on the land in lieu of the
down payment provided that 75% of the appraised value of the land is equal to or
more than the 5% minimum down payment required. The maximum term for
manufactured housing loans ranges from 180 months to 300 months, depending upon
the amounts financed and the size of the unit.
Each manufactured housing loan originated is acquired by Waypoint Financial
at a premium to its net asset value. The premium paid to acquire the loan is
capitalized and amortized as a yield adjustment over the term of the loan.
One-third of the premium is advanced to the service company when a contract is
purchased. The remaining two-thirds of the service fee is deposited into
non-interest-bearing reserve accounts which are held on deposit at Waypoint
Financial with restricted access. The amounts held in the reserve accounts are
used for potential losses on a manufactured home loan and to recapture the
unearned service fee due from the service company in the event of a payoff of a
loan prior to its scheduled maturity. A service company's fee is fully-earned
only when a loan reaches full maturity. At December 31, 2000, Waypoint
Financial's deferred premium on manufactured housing loans totaled $19.6 million
and amounts held in reserve accounts totaled $8.9 million.
Indirect Auto and Other Consumer Loans. Waypoint Financial originates
indirect auto loans through a network of auto dealers, and was actively doing
business with approximately 60 dealers at December 31, 2000. Waypoint Financial
has been in the indirect auto lending business since August 1998. No one
dealership originated more than 15% of the loan balances outstanding in Waypoint
Financial's portfolio at December 31, 2000. In developing its network, Waypoint
Financial has continued to focus on dealers in its primary market area. A
consumer lending sales officer has been dedicated full time to serve dealers in
order to expand on those relationships and to develop potential new dealer
relationships. The growth of the dealer network has been achieved through an
emphasis on quality service and the development of long-term relationships with
the owners and managers of the dealerships. Waypoint Financial does not
currently engage in auto lease financing. Waypoint Financial makes indirect auto
loans to purchase both new and used cars.
9
In connection with the origination of indirect auto loans, the interest
rate charged to the borrower on the underlying loan is generally one to two
percentage points higher than the "buy rate" or rate earned by Waypoint
Financial. The difference between the two rates is referred to as the "spread."
At loan inception, the dollar value of the spread over the contractual term of
the loan is prepaid by Waypoint Financial to the auto dealer. Such prepaid
amounts are generally subject to rebate to Waypoint Financial in the event the
underlying loan is prepaid in the first three months up to the life of the loan,
depending on the contract, or goes into default resulting in a repossession. The
risk of loss of amounts previously advanced to the dealer primarily depends upon
loan performance but also depends upon the financial condition of the dealer.
Consequently, the dealer's ability to refund any portion of the prepaid
interest, which is unearned, is subject to economic conditions, generally, and
the financial condition of the dealer. Since Waypoint Financial began indirect
auto lending, it has not written off interest spread prepaid to dealers where
the dealer failed to refund any portion of unearned prepaid interest. At
December 31, 2000, Waypoint Financial's unearned pre-paid interest on indirect
auto loans totaled $3.9 million.
Loans to One Borrower. Waypoint Financial has an internal limitation on the
amount of loans that it will extend to an individual borrower. In addition,
banking regulations establish a maximum amount that may be loaned by Waypoint
Bank to an individual or related group of borrowers. At December 31, 2000,
Waypoint Financial's internal limit on loans to a single borrower was $10.0
million, although exceptions are permitted subject to approval requirements set
forth in the loan policy. Waypoint Bank's statutory limit on loans to one
borrower or related group of borrowers was $57.3 million. As of December 31,
2000, Waypoint Financial's largest lending relationship, including the
borrower's related interests, was approximately $24.1 million, and Waypoint
Financial had a total of four lending relationships, including the borrowers'
related interests, that exceeded $10.0 million. As of December 31, 2000, all
such loans were performing according to their original contractual terms.
Loan Approval Procedures and Authority. Waypoint Financial's lending
activities follow written, non-discriminatory, underwriting standards and loan
origination procedures established by Waypoint Financial's Board of Directors
and management. The Board of Directors has designated certain individuals of
Waypoint Financial and certain branch managers to consider and approve loans
within their designated authority.
All one- to four-family mortgage loans secured by the borrower's primary
residence and all residential construction and second mortgage loans and home
equity lines of credit may be approved by any two designated individuals.
All commercial loans, including commercial real estate loans, multi-family
loans, commercial construction and development loans and commercial business
loans in amounts of up to $10.0 million may be approved by the two designated
individuals, one of who must be Waypoint Financial's Chief Credit Officer. All
commercial loans in excess of $10.0 million and up to $15.0 million require the
approval of Waypoint Financial's loan committee and the Chief Executive Officer.
All commercial loans in excess of $15.0 million require the approval of the
executive committee of the Board of Directors or the full Board of Directors.
Consumer loans, automobile loans and unsecured personal loans may be
approved by either one or two designated individuals depending on the amount of
the loan.
Loan Originations, Purchases and Sales. Waypoint Financial's mortgage
lending activities are conducted by its salaried and commissioned loan personnel
and approved correspondent lenders. Currently, Waypoint Financial uses 25 loan
originators who solicit and originate mortgage loans on behalf of Waypoint
Financial. These loan originators accounted for 57% of the mortgage loans
originated by Waypoint Financial during 2000. Loan originators are compensated
by a commission. All loans originated by the loan originators are underwritten
in conformity with Waypoint Financial's loan underwriting policies and
procedures as well as agency and investor guidelines. At December 31, 2000,
Waypoint Financial serviced $741.7 million of loans for others. From time to
time, Waypoint Financial will purchase loans or participation interests in
loans, although only $8.5 million of loans have been purchased since December
31, 1995.
10
Waypoint Financial operates a correspondent lending program that purchases
loans in nine states and the District of Columbia. These states include,
Maryland, Virginia, Delaware, New Jersey, Pennsylvania, North Carolina, South
Carolina, Ohio and West Virginia. The correspondent originators process the
mortgage loan applications in accordance with Waypoint Financial specifications.
Waypoint Financial personnel underwrite and close all approved loans in
accordance with Waypoint Financial, agency and investor guidelines.
The following table sets forth Waypoint Financial's gross loan
originations, loans purchased and loans sold for the periods indicated.
For the Years Ended
December 31,
-------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ------------- -------------- --------------- ---------------
(In Thousands)
Loans originated:
Residential mortgage loans:
One- to four-family................ $ 144,938 $ 279,040 $ 478,332 $ 329,110 $ 351,901
Construction....................... 199,187 336,163 373,226 274,496 153,575
Other.............................. - 6,100 8,900 6,100 6,000
--------------- --------------- --------------- --------------- ---------------
Total residential mortgage loans. 344,125 621,303 860,458 609,706 511,476
Commercial loans:
Commercial real estate............. 133,822 165,737 113,061 53,739 98,876
Commercial business................ 172,219 224,694 157,552 23,227 19,386
Construction and site development.. 29,150 24,871 22,800 6,073 7,998
--------------- --------------- --------------- --------------- ---------------
Total commercial loans........... 335,191 415,302 293,413 83,039 126,260
Consumer and other loans:
Manufactured housing............... 20,467 26,300 5,400 11,900 37,700
Home equity and second mortgage.... 112,104 129,239 102,529 77,694 109,475
Indirect automobile and other...... 99,357 160,560 78,126 43,264 42,021
--------------- --------------- --------------- --------------- ---------------
Total consumer loans............. 231,928 316,099 186,055 132,858 189,196
--------------- --------------- --------------- --------------- ---------------
Total loans originated........... $ 911,244 $ 1,352,704 $ 1,339,926 $ 825,603 $ 826,932
=============== =============== =============== =============== ===============
Loans purchased:
Residential mortgage loans:
One-to four-family................. $ - $ - $ - $ - $ 8,500
--------------- --------------- --------------- --------------- ---------------
Total loans purchased............ $ - $ - $ - $ - $ 8,500
=============== =============== =============== =============== ===============
Loans securitized and/or sold:
Residential mortgage loans:
One- to four-family................ $ 251,097 $ 325,158 $ 369,930 $ 260,399 $ 310,422
--------------- --------------- --------------- --------------- ---------------
Total loans sold................. $ 251,097 $ 325,158 $ 369,930 $ 260,399 $ 310,422
=============== =============== =============== =============== ===============
Loan Commitments. Waypoint Financial issues loan commitments to prospective
borrowers conditioned on the occurrence of certain events. Commitments are made
in writing on specified terms and conditions and are generally honored for up to
60 days from approval. At December 31, 2000, Waypoint Financial had loan
commitments and unadvanced loans and lines of credit totaling $486.5 million.
Loan Fees. In addition to interest earned on loans, Waypoint Financial
receives income from fees derived from loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period depending upon the volume and type
of loans made and competitive conditions. On loans originated by third-party
originators, Waypoint Financial may pay a premium to compensate an originator
for loans where the borrower is paying a higher rate on the loan.
Waypoint Financial charges loan origination fees which are calculated as a
percentage of the amount borrowed. As required by applicable accounting
principles, loan origination fees, discount points and certain loan origination
costs are deferred and recognized over the contractual remaining lives of the
related loans on a level yield basis. At December 31, 2000, Waypoint Financial
had approximately $6.9 million of net deferred loan fees. Waypoint Financial
amortized $.6 million of net deferred loan fees during the year ended December
31, 2000.
11
Non-performing Assets, Delinquencies and Impaired Loans. All loan payments
on first mortgages are due on the first day of each month. When a borrower fails
to make a required loan payment, Waypoint Financial attempts to cure the
deficiency by contacting the borrower and seeking the payment. A late notice is
mailed on the 16th day of the month. In most cases, deficiencies are cured
promptly. If a delinquency continues beyond the 16th day of the month, the
account is referred to an in-house collector. Waypoint Financial will institute
foreclosure or other proceedings after the 90th day of a delinquency, as
necessary, to minimize any potential loss.
Management informs the Board of Directors monthly of the amount of loans
delinquent more than 30 days and all foreclosed and repossessed property that
Waypoint Financial owns. Waypoint Financial ceases accruing interest on mortgage
loans when principal or interest payments are delinquent 90 days or more unless
management determines the loan principal and interest to be fully secured and in
the process of collection. Once the accrual of interest on a loan is
discontinued, all interest previously accrued is reversed against current period
interest income.
On January 1, 1995, Waypoint Financial adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan, an amendment to SFAS No. 114." At December 31, 2000 and 1999, Waypoint
Financial had recorded investments in impaired loans of $5.9 million and $9.5
million, respectively. At December 31, 2000 and 1999, allowance for loan losses
had a reserve of $1.8 million and $1.8 million, respectively, for impaired
loans.
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans, accruing loans delinquent 90 days or more, other
non-performing assets and restructured loans at the dates indicated:
At December 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- -------------- ------------ -------------
(In Thousands)
Non-accrual mortgage loans...................... $ 5,092 $ 9,543 $ 6,632 $ 5,544 $ 5,777
Non-accrual other loans......................... 604 727 1,938 1,394 798
------------ ------------ ------------ ------------ ------------
Total non-accrual loans (1)................ 5,696 10,270 8,570 6,938 6,575
Loans 90 days or more delinquent and still
accruing.................................. 17,481 13,279 9,134 15,681 13,437
------------ ------------ ------------ ------------ ------------
Total non-performing loans................. 23,177 23,549 17,704 22,619 20,012
Total foreclosed other assets.............. 861 1,149 - - -
Total foreclosed real estate (2)........... 3,086 3,754 14,088 15,688 17,264
------------ ------------ ------------ ------------ ------------
Total non-performing assets..................... $ 27,124 $ 28,452 $ 31,792 $ 38,307 $ 37,276
============ ============ ============ ============ ============
Total non-performing loans to total loans (3)... 0.89% 0.96% 0.90% 1.23% 1.10%
=========== =========== =========== =========== ===========
Total non-performing loans and foreclosed real
estate to total loans......................... 0.57% 0.65% 0.82% 1.11% 1.27%
=========== =========== =========== =========== ===========
(1) Waypoint Financial would have recorded additional interest income on
non-accrual loans , had they been current, of $0.2 million, $0.3 million
and $0.4 million in 2000, 1999 and 1998, respectively. No interest was
included in interest income in these periods related to these loans.
(2) This amount includes a foreclosed apartment complex with a carrying value
of $6.0 million that was sold in 1999.
(3) Total loans excludes loans held for sale.
As of December 31, 2000, Waypoint Financial's only nonaccruing loan with a
carrying value in excess of $1.0 million was a commercial loan with a carrying
value of $1.9 million.
Real Estate Owned. Real estate acquired by Waypoint Financial as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at the lower of the
carrying value or fair value less estimated costs to sell at the date of
foreclosure. At the time of foreclosure, any
12
excess of carrying value over fair value is charged to the allowance for loan
losses. Holding costs and declines in fair value result in charges to expense
after the property is acquired.
Asset Classification. Banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such
regulations, federal and state examiners have authority to identify problem
assets during examinations and, if appropriate, require their classification.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, it is charged
off in the quarter in which it is so classified, the insured institution
establishes specific allowances for loan losses for the full amount of the
portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified
substandard or doubtful can be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Assets that do not currently
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess weaknesses are designated
"special mention." Waypoint Financial performs an internal analysis of its loan
portfolio and assets to classify such loans and assets similar to the manner in
which such loans and assets are classified by the federal banking regulators. In
addition, Waypoint Financial regularly analyzes the losses inherent in its loan
portfolio and its nonperforming loans in determining the appropriate level of
the allowance for loan losses.
Allowance for Loan Losses. In originating loans, Waypoint Financial
recognizes that losses will be experienced on loans and that the risk of loss
will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security for
the loan. Waypoint Financial maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance for loan losses represents
management's estimate of probable losses based on information available as of
the date of the financial statements. The allowance for loan losses is based on
management's evaluation of the collectibility of the loan portfolio, including
past loan loss experience, known and inherent losses, information about specific
borrower situations and estimated collateral values, and economic conditions.
The loan portfolio and other credit exposures are regularly reviewed by
management to evaluate the adequacy of the allowance for loan losses. The
methodology for assessing the appropriateness of the allowance includes
comparison to actual losses, industry data and economic conditions. In addition,
the regulatory agencies, as an integral part of their examination process,
periodically review Waypoint Financial's allowance for loan losses and may
require Waypoint Financial to make additional provisions for estimated losses
based upon judgments different from those of management.
In assessing the allowance for loan losses, loss factors are applied to
various pools of outstanding loans. Waypoint Financial segregates the loan
portfolio according to risk characteristics (i.e., mortgage loans, home equity,
commercial and consumer). Loss factors are derived using Waypoint Financial's
historical loss experience and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date.
In addition, management assesses the allowance using factors that cannot be
associated with specific credit or loan categories. These factors include
management's subjective evaluation of local and national economic and business
conditions, portfolio concentration and changes in the character and size of the
loan portfolio. The allowance methodology reflects management's objective that
the overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected credit losses.
Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be
13
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations. Furthermore, while Waypoint Financial
believes it has established its existing allowance for loan losses in conformity
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing Waypoint Financial's loan portfolio, will not request
Waypoint Financial to increase its allowance for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material
increase in the allowance for loan losses may adversely affect Waypoint
Financial's financial condition and results of operations.
Analysis of the Allowance for Loan Losses. The following table sets forth
information regarding Waypoint Financial's allowance for loan losses and net
charge-offs to average loans outstanding at the dates indicated.
At and For the Fiscal Years
Ended December 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ------------ --------------- ------------ ------------
(Dollars in Thousands)
Balance at beginning of period................... $ 23,127 $ 19,891 $17,002 $14,735 $ 12,723
Pooling adjustment to conform accounting periods. 234 - - - 1,074
Provision for loan losses........................ 5,070 4,840 6,172 4,347 4,381
Provision component related to
unfunded commitments........................... - 617 (503) (422) -
Charge-offs:
Commercial loans............................... (2,482) (50) (607) (68) (1,820)
Residential mortgage loans..................... (1,168) (1,289) (1,837) (2,061) (1,988)
Consumer and other loans....................... (2,962) (1,364) (741) (97) (402)
------------- ------------- ------------- ------------- -------------
Total charge-offs.............................. (6,612) (2,703) (3,185) (2,226) (4,210)
Recoveries:
Commercial loans............................... 24 85 24 294 516
Residential mortgage loans..................... 161 262 327 236 229
Consumer and other loans....................... 582 135 54 38 22
------------ ------------ ------------ ------------ ------------
Total recoveries............................... 767 482 405 568 767
------------ ------------ ------------ ------------ ------------
Balance at the end of period..................... $ 22,586 $ 23,127 $ 19,891 $ 17,002 $ 14,735
============ ============ ============ ============ ============
Net charge-offs to average loans outstanding..... 0.22% 0.10% 0.15% 0.09% 0.19%
============ ============ ============ ============ ============
Allowance for loan losses to net loans........... 0.87% 0.95% 1.01% 0.92% 0.81%
============ ============ ============ ============ ============
Allowance for loan losses to non performing
loans............................................ 97.45% 98.21% 112.35% 75.17% 73.63%
============ ============ ============ ============ ============
14
Allocation of the Allowance for Loan Losses. The following table sets forth
the breakdown of the allowance for loan losses by loan category at the dates
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance to each category
is not necessarily indicative of future losses and does not restrict the use of
the allowance to absorb losses in any other category.
At December 31,
---------------------------- ---------------------------- ----------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------------ -------------- ------------ ------------- ------------- -------------
(Dollars in Thousands)
Residential mortgage loans........ $ 2,165 52.56% $ 5,250 56.13% $ 5,665 62.61%
Commercial loans.................. 14,625 24.74 10,949 22.23 7,622 17.42
Consumer and other loans.......... 4,178 22.70 4,112 21.64 3,236 19.97
Unallocated....................... 1,618 - 2,816 - 3,368 -
------------ ------- ------------ ------- ------------ -------
Total.......................... $ 22,586 100.00% $ 23,127 100.00% $ 19,891 100.00%
============ ======= ============ ======= ============ =======
At December 31,
------------------------------------------------------------------------
1997 1996
--------------------------------- ------------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ -------------
(Dollars in Thousands)
Residential mortgage loans............................ $ 4,510 69.62% $ 5,262 75.28%
Commercial loans...................................... 3,316 10.13 3,495 5.08
Consumer and other loans.............................. 3,697 20.25 2,294 19.64
Unallocated........................................... 5,479 - 3,684 -
----------- ------ ---------- ------
Total.............................................. $ 17,002 100.00% $ 14,735 100.00%
=========== ====== ========== ======
15
Investment Activities
The Board of Directors reviews and approves Waypoint Financial's investment
policy on an annual basis. The Chief Executive Officer, Chief Financial Officer
and Chief Investment Officer, as authorized by the Board, implement this policy
based on the established guidelines within the written policy, and other
established guidelines, including those set periodically by the Asset/Liability
Management Committee. Investment decisions are based upon the quality of a
particular investment, its inherent risks, the composition of the balance sheet,
Waypoint Financial's maturity and amortization schedules, market expectations,
liquidity, income and collateral needs, and how the investment fits within
Waypoint Financial's interest rate risk strategy given its interest rate
sensitivity.
Waypoint Financial's investment policy is designed primarily to manage the
interest rate sensitivity of its assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement its
lending activities and to provide and maintain liquidity while minimizing
Waypoint Financial's tax liability. Waypoint Financial also uses a leveraged
investment strategy for the purpose of enhancing returns to stockholders.
Pursuant to this strategy, during periods of relatively weak loan demand in its
market area, Waypoint Financial has increased the size of its investment
portfolio and has relied heavily on wholesale borrowing to support such
investments.
Investment Portfolio
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. At December 31, 2000, 99% of Waypoint Financial's
securities were classified as "available-for-sale." Between December 31, 2000
and April 1, 2001, Waypoint Financial transferred all of the securities from its
held-to-maturity portfolio to its available-for-sale portfolio. The held-to-
maturity portfolio was recorded at $22.7 million as of December 31, 2000. At the
time of transfer, the market value of this portfolio was $22.2 million resulting
in an unrecognized loss upon transfer of $0.5 million, which will be recorded as
a reduction in other comprehensive income for the first quarter of 2001.
In an effort to maintain the credit quality of the investment portfolio,
Waypoint Financial maintains a significant portion of the investment portfolio
in U.S. Government and agency obligations. At December 31, 2000, over 90% of the
securities in Waypoint Financial's investment portfolio were rated "AAA," with
the remainder rated "AA" or "A."
Waypoint Financial also invests significantly in mortgage-backed
securities, including primarily floating-rate and fixed-rate collateralized
mortgage obligations. A portion of these mortgage-backed securities is directly
insured or guaranteed by Freddie Mac and Fannie Mae. Waypoint Financial also
maintains a substantial investment in "private label" collateralized mortgage
obligations (i.e., non-agency collateralized mortgage obligations). Private-
issue collateralized mortgage obligations carry higher credit risks than
collateralized mortgage obligations insured or guaranteed by agencies of the
U.S. Government. Waypoint Financial invests only in private-issue collateralized
mortgage obligations rated "AA" or better at the time of purchase and management
believes the higher yields associated with these instruments have amply
compensated Waypoint Financial for the incremental increase in risks assumed
relative to investments in U.S. Government-backed collateralized mortgage
obligations. At December 31, 2000, Waypoint Financial did not own any investment
or mortgage-backed securities of a single issuer, other than U. S. Government
and agency securities, which had an aggregate book value in excess of 10% of its
capital.
Waypoint Financial invests in a large variety of mortgage-backed
securities, including balloon and fixed-rate certificates. Waypoint Financial
generally purchases short-term or planned amortization class collateralized
mortgage obligations. Waypoint Financial also maintains a significant portfolio
of tax-advantaged instruments. The remainder
16
of the investment portfolio is invested in corporate bonds, primarily investment
grade Trust-Preferred issues of major financial institutions rated by Standard &
Poors or Moody's.
Waypoint Financial's investment policy permits it to be a party to
financial instruments with off-balance sheet risk in the normal course of
business in order to manage interest rate risk. The investment policy authorizes
Waypoint Financial to be involved in and purchase various types of derivative
transactions and products, including interest rate swap, cap and floor
agreements. Waypoint Financial also occasionally uses total return swap
agreements to hedge against the decline in the market value of a specifically
identified pool of fixed-rate construction loans that are to be sold upon their
conversion to long-term mortgage loans. In addition, Waypoint Financial
occasionally uses callable interest rate swaps matched against callable
certificates of deposit.
All of Waypoint Financial's securities and mortgage-backed
securities carry market risk insofar as increases in market rates of interest
may cause a decrease in their market values. They also carry pre-payment risk,
insofar as they may be called or repaid before maturity in times of low market
interest rates, so that Waypoint Financial may have to invest the funds at a
lower interest rate. The marketable equities securities portfolio also carries
equity-price risk in that, if equity prices decline due to unfavorable market
conditions or other factors, Waypoint Financial's capital would decrease.
17
The following table sets forth the amortized cost and fair value of
investments mortgage-backed and other interest-earning securities at the dates
indicated.
At December 31,
------------------------------------------------------------------
2000 1999
-------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ---------------- ----------------
(Dollars in Thousands)
Held to maturity:
U.S. Government and agencies............ $ 3,500 $ 3,513 $ 3,500 $ 3,421
Corporate bonds........................ 19,054 18,064 19,018 18,506
GNMA mortgage-backed
securities......................... 155 163 171 178
------------- --------------- --------------- ---------------
Total securities held-to-maturity... $ 22,709 $ 21,740 $ 22,689 $ 22,105
============= =============== =============== ===============
Available for sale:
U.S. Government and agencies........... $ 491,998 $ 482,430 $ 535,470 $ 504,730
Corporate bonds........................ 63,609 58,657 63,352 59,826
Municipal securities................... 69,119 71,461 63,980 63,492
Equity securities...................... 150,891 154,715 152,575 154,320
Asset-backed securities................ - - - -
Mortgage-backed securities:
Agency PCs & CMOs...................... 475,735 464,148 398,356 390,326
Private issue CMOs..................... 629,795 623,461 473,170 452,704
------------- --------------- --------------- ---------------
Total mortgage-backed securities.... 1,105,530 1,087,609 871,526 843,030
------------- --------------- --------------- ---------------
Total securities available for sale. $ 1,881,147 $ 1,854,872 $ 1,686,903 $ 1,625,398
============= =============== =============== ===============
Other interest-earning securities:
FHLB daily investment.................. $ 25,434 $ 25,434 $ 37,289 $ 37,289
------------- --------------- --------------- ---------------
Total marketable securities and
interest-earning investments...... $ 1,929,290 $ 1,902,046 $ 1,746,881 $ 1,684,792
============= =============== =============== ===============
At December 31,
1998
--------------------------------
Amortized Fair
Cost Value
---------------- ---------------
(Dollars in Thousands)
Held to maturity:
U.S. Government and agencies............ $ 3,498 $ 3,484
Corporate bonds........................ 18,903 18,920
GNMA mortgage-backed
securities......................... 217 231
--------------- ------------
Total securities held-to-maturity... $ 22,618 $ 22,635
=============== ============
Available for sale:
U.S. Government and agencies........... $ 462,997 $ 461,052
Corporate bonds........................ 148,731 142,240
Municipal securities................... 113,557 119,233
Equity securities...................... 160,754 170,655
Asset-backed securities................ 15,146 15,661
Mortgage-backed securities:
Agency PCs & CMOs...................... 315,038 315,015
Private issue CMOs..................... 355,199 354,648
--------------- ------------
Total mortgage-backed securities.... 670,237 669,663
--------------- ------------
Total securities available for sale. 1,571,422 1,578,504
=============== ============
Other interest-earning securities:
FHLB daily investment.................. 22,646 22,646
--------------- ------------
Total marketable securities and
interest-earning investments...... $ 1,616,686 $ 1,623,785
=============== ============
18
Investment Portfolio Maturities
The following table sets forth information regarding the scheduled
maturities, carrying values, and average yields for Waypoint Financial's
investment securities at December 31, 2000.
At December 31,2000
---------------------------------------------------------
One Year After One Through
or Less Five Years
--------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
------------ ------------ ------------ ------------
Held to maturity:
U.S. government and
agency obligations....................... $ - - $ 3,500 6.75%
Corporate bonds............................... - - 4,907 7.52
Mortgage-backed securities (3)(4):
GNMA PCs..................................... 133 8.77% 22 8.86
----------- ---- ------------ ----
Total mortgage-backed securities.............. 133 8.77 22 8.86
----------- ---- ------------ ----
Total securities held to maturity............. 133 8.77 8,429 7.20
----------- ---- ------------ ----
Available for sale:
U.S. government and
agency obligations....................... 1,620 6.33 111,952 6.09
Corporate bonds............................... - 0.00 - 0.00
Municipal securities (2)........................ - 0.00 - 0.00
Equity (1), (2)................................. - 0.00 - 0.00
Mortgage-backed securities (3)(4):
Agency CMOs (5)............................. 9,886 7.58 47,149 7.58
Private issue CMOs......................... 11,414 7.41 54,114 7.41
----------- ---- ------------ ----
Total mortgage-backed securities.............. 21,300 7.49 101,263 7.49
----------- ---- ------------ ----
Total securities available for sale........... 22,920 7.41 213,215 6.75
----------- ---- ------------ ----
Total marketable securities..................... $ 23,053 7.42% $ 221,644 6.77%
=========== ==== ============ ====
At December 31, 2000
---------------------------------------------------------
After Five Through
Ten Years Over Ten Years
--------------------------- ---------------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
------------ ------------ ------------ ------------
(Dollars in Thousands)
Held to maturity:
U.S. government and
agency obligations....................... $ - - $ -
0.00%
Corporate bonds............................... - - 14,147 7.52%
Mortgage-backed securities (3)(4):
GNMA PCs..................................... - - - 0.00
------------ ---- ----------- ----
Total mortgage-backed securities.............. - - - 0.00
------------ ---- ----------- ----
Total securities held to maturity............. - - 14,147 7.52
------------ ---- ----------- ----
Available for sale:
U.S. government and
agency obligations....................... 298,478 6.44 79,948 7.28
Corporate bonds............................... - 0.00 63,609 7.44
Municipal securities (2)........................ 995 5.40 68,124 5.69
Equity (1), (2)................................. - 0.00 150,891 6.46
Mortgage-backed securities (3)(4):
Agency CMOs (5)............................. 57,601 7.61 361,100 7.60
Private issue CMOs......................... 81,932 7.43 482,334 7.37
------------ ---- ----------- ----
Total mortgage-backed securities.............. 139,533 7.50 843,434 7.47
------------ ---- ----------- ----
Total securities available for sale........... 439,006 6.77 1,206,006 7.23
------------ ---- ----------- ----
Total marketable securities..................... $ 439,006 6.77% $ 1,220,153 7.23%
============ ==== =========== ====
At December 31, 2000
------------------------------------------
Total
------------------------------------------
Weighted
Amortized Market Average
Cost Value Yield
------------ --------- ---------------
Held to maturity:
U.S. government and
agency obligations....................... $ 3,500 $ 3,513 6.75%
Corporate bonds............................... 19,054 18,064 7.52
Mortgage-backed securities (3)(4):
GNMA PCs..................................... 155 163 8.79
--------------- ------------- ----
Total mortgage-backed securities.............. 155 163 8.79
--------------- ------------- ----
Total securities held to maturity............. 22,709 21,740 7.41
--------------- ------------- ----
Available for sale:
U.S. government and
agency obligations....................... 491,998 482,430 6.49
Corporate bonds............................... 63,609 58,657 7.44
Municipal securities (2)........................ 69,119 71,461 5.68
Equity (1), (2)................................. 150,891 154,715 6.46
Mortgage-backed securities (3)(4):
FNMA PCs................................... 9 9 3.07
Agency CMOs (5)............................. 475,726 464,139 7.60
Private issue CMOs......................... 629,795 623,461 7.39
--------------- ------------- ----
Total mortgage-backed securities.............. 1,105,530 1,087,609 7.48
--------------- ------------- ----
Total securities available for sale........... 1,881,147 1,854,872 7.07
--------------- ------------- ----
Total marketable securities..................... $ 1,903,856 $ 1,876,612 7.08%
=============== ============= ====
- ------------------
(1) Includes FHLMC, FNMA and FHLB stocks.
(2) The yield on municipal obligations and certain equity issues have not been
computed on a tax equivalent basis.
(3) Based on current prepayment trends, $945.1 million of mortgage-backed
securities are anticipated to prepay or reprice within three years.
(4) Amortized cost on mortgage-backed securities include scheduled principal
repayments in each period.
(5) Includes Freddie Mac, Fannie Mae and Ginnie Mae CMOs.
19
Sources of Funds
General. Deposits are the primary source of Waypoint Financial's funds for
lending and other investment purposes. In addition to deposits, Waypoint
Financial obtains funds from the amortization and prepayment of loans and
mortgage-backed securities, the sale or maturity of loans or investment
securities, operations, advances from the Federal Home Loan Bank of Pittsburgh
and other borrowings. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by market interest rates. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources or on a longer term basis for general business purposes.
Waypoint Financial has used wholesale funding sources such as Federal Home Loan
Bank advances to support an investment leveraging strategy for the purpose of
increasing interest income and increasing return on equity.
Deposits. Consumer and commercial deposits are obtained primarily from
Waypoint Financial's primary market area through the offering of a broad
selection of deposit instruments including checking, regular savings, money
market deposits and time deposits, including certificate of deposit accounts and
individual retirement accounts. The maturities of Waypoint Financial's
certificate of deposit accounts ranges from 30 days to 10 years. In addition,
Waypoint Financial offers a variety of commercial business products to small
businesses operating within its primary market area. Currently Waypoint
Financial does not generally negotiate interest rates to attract jumbo
certificates, but accepts deposits of $100,000 or more based on posted rates
with certain discretion given to branch managers and the funding desk manager.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit, limits on the number of transactions,
and the interest rate, among other factors. Waypoint Financial regularly
evaluates the internal cost of funds, surveys rates offered by competing
institutions, reviews Waypoint Financial's cash flow requirements for lending,
monitors deposit withdrawal trends and liquidity and changes the rates offered
as appropriate.
While Waypoint Financial does not generally solicit funds outside its
primary market area, it does accept brokered deposits as liquidity demands
require and costs are favorable versus wholesale borrowing alternatives.
Included in Waypoint Financial's time deposits at December 31, 2000, 1999, and
1998 were $127.9 million, $77.1 million, and $50.0 million, respectively, of
brokered deposits.
Average Balance and Costs of Deposits. The following table sets forth the
amount, percentage represented by such amount, and weight average rate paid on
Waypoint Financial's deposits.
For the Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Percent Cost Amount Percent Cost Amount Percent Cost
--------- -------- -------- ---------- --------- --------- ---------- --------- ---------
Savings Deposit $184,404 7.02% 2.52% $186,197 7.77% 2.21% $ 206,446 9.27% 2.30%
Time Deposits 1,643,535 62.59 5.75 1,431,720 59.77 5.40 1,339,026 60.16 5.51
NOW and money market accounts 798,006 30.39 3.25 777,511 32.46 3.00 680,376 30.57 3.22
---------- ------- ----- ---------- ------- ----- ---------- ------- -----
Total $2,625,945 100.00% 4.76% $2,395,428 100.00% 4.37% $2,225,848 100.00% 4.51%
========== ======= ==== ========== ======= ==== ========== ======= ====
20
Deposits Flow. The following table summarizes the deposit activity for the
periods indicated.
Year Ended December 31,
--------------- --------------- ---------------
2000 1999 1998
--------------- --------------- ---------------
(In Thousands)
Beginning balance........................................ $ 2,544,598 $ 2,320,632 $ 2,212,015
--------------- --------------- ---------------
Increase before interest credit.......................... 24,371 82,254 9,488
Interest credited........................................ 124,135 104,439 99,129
Purchased Deposits (1)....................................... - 37,273 -
--------------- --------------- ---------------
Net increase............................................. 148,506 223,966 108,617
Pooling Adjustment to conform
accounting years...................................... (67,384) - -
---------------- --------------- ---------------
Ending balance........................................ $ 2,625,720 $ 2,544,598 $ 2,320,632
=============== =============== ===============
(1) During 1999, Waypoint Financial acquired a branch in Lebanon County
Pennsylvania. A deposit premium intangible totaling $3.3 million was recorded on
this purchase.
Time Deposits by Maturity Schedule. The following table sets forth
the amount and maturities of certificates of deposit at December 31, 2000.
Amount Due
------------------------------------------------------------------------------------
Less Than 1-2 2-3 After 3
Weighted Average Rate One Year Years Years Years Total
--------------------------------- ----------------- -------------- ----------------- ---------------- ----------------
(In Thousands)
4% or less........................... $ 7,596 $ 34 $ 28 $ - $ 7,658
4.01 - 6.00%......................... 426,431 71,296 49,887 24,691 572,305
6.01 - 8.00%......................... 500,350 265,263 124,787 163,813 1,054,213
--------------- ------------- ---------------- --------------- ---------------
Total.............................. $ 934,377 $ 336,593 $ 174,702 $ 188,504 $ 1,634,176
=============== ============= ================ =============== ===============
Certificates of Deposit of $100,000 and More. The following table presents
information as of December 31, 2000, regarding Waypoint Financial's certificates
of deposit and other time deposits of $100,000 or more by time remaining until
maturity and weighted average rate.
Weighted
Average
Amount (1) Rate
--------------- ---------
Three months or less.................... $ 63,154 6.05%
Over three months through six months.... 33,729 6.45
Over six months through twelve months... 59,873 6.14
Over twelve months...................... 84,716 6.53
--------------- ---------
Total................................. $ 241,472 6.30%
=============== =========
- ------------------
(1) Excludes brokered certificates of deposits.
Borrowings. In recent years, Waypoint Financial has borrowed from wholesale
sources including primarily the Federal Home Loan Bank system to support an
investment leveraging strategy and to supplement funding provided by customer
deposits. The objective of the investment leveraging strategy is to increase net
interest income and return on equity by deploying excess capital into interest-
earning investments. However, this strategy reduces net interest margins due to
the higher cost of non-deposit funds as compared to core deposits. A significant
portion of Waypoint Financial's wholesale borrowings are placed with the Federal
Home Loan Bank of Pittsburgh.
21
The Federal Home Loan Bank functions as a central reserve bank providing
credit for Waypoint Financial and other member financial institutions. As a
member, Waypoint Financial is required to own capital stock in the Federal Home
Loan Bank and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
Federal Home Loan Bank's assessment of the institution's creditworthiness.
Waypoint Financial's maximum borrowing capacity with the Federal Home Loan Bank
totaled $2.069 billion at December 31, 2000, with remaining available capacity
totaling $634.2 million.
Waypoint Financial has entered into sales of securities under agreements to
repurchase with nationally-recognized securities dealers. Reverse repurchase
agreements are accounted for as borrowings by Waypoint Financial and are secured
by designated investment securities. The proceeds of these transactions are used
to purchase investments yielding a higher rate than the borrowed funds and to
meet cash flow needs of Waypoint Financial. Waypoint Financial intends to use
these agreements in the future when management believes it is prudent to do so.
The following table sets forth information regarding borrowings by Waypoint
Financial at or for the dates indicated.
At or for Years Ended December 31,
----------------------------------------------------------
2000 1999 1998
-------------- ---------------- -----------------
(In Thousands)
Outstanding at end of period:
FHLB ................................................. $1,434,806 $ 904,660 $ 772,592
Repurchase agreements ................................ 189,853 568,200 409,961
ESOP and other........................................ 670 15,530 663
---------- ---------- ----------
Total ............................................. $1,625,329 $1,488,390 $1,183,216
========== ========== ==========
Weighted average rate at end of period:
FHLB ................................................. 6.24% 5.63% 5.32%
Repurchase agreements ................................ 5.71 6.25 5.35
ESOP and other........................................ 9.77 8.42 8.50
Total ............................................. 6.18% 5.90% 5.33%
Maximum amount outstanding at any
month-end
During the period:
FHLB ................................................. $1,434,806 $1,007,479 $ 746,543
Repurchase agreements ................................ 313,000 643,324 444,412
ESOP and other........................................ 15,663 15,663 794
---------- ---------- ----------
Total ............................................. $1,763,469 $1,666,466 $1,191,749
========== ========== ==========
Average amount outstanding during the period:
FHLB ................................................. $1,361,786 $ 931,636 $ 670,630
Repurchase agreements ................................ 204,664 500,304 361,888
ESOP and other........................................ 5,297 8,170 1,177
---------- ---------- ----------
Total ............................................. $1,571,747 $1,440,110 $1,033,695
========== ========== ==========
Weighted average rate during the period:
FHLB ................................................. 6.40% 5.40% 5.40%
Repurchase agreements ................................ 5.68 5.60 5.77
ESOP and other........................................ 8.68 8.14 8.14
Total ............................................. 6.31% 5.51% 5.68%
22
Subsidiary Activities
Waypoint Financial conducts its business activities primarily through its
wholly owned subsidiary Waypoint Bank, and the following wholly-owned
subsidiaries:
Waypoint Financial Investment Corporation. Waypoint Financial Investment
Corporation was incorporated in 2000 and manages certain investments on behalf
of Waypoint Financial.
New Service Corporation. New Service Corporation primarily engages in land
acquisition, development, and construction projects.
Waypoint Service Corporation. Waypoint Service Corporation primarily owns
office facilities that it leases to Waypoint Bank and affiliates, and is also
engaged in land acquisition, development, and construction of future branch
locations.
Waypoint Brokerage Services, Inc. Waypoint Brokerage Services, Inc. was
incorporated in 1987 and is a discount securities brokerage subsidiary that
provides financial services to customers of Waypoint Bank and the general
public.
Waypoint Insurance Services, Inc. Waypoint Insurance Services Inc. was
incorporated in 1992 and is primarily engaged in providing credit life and
health insurance products to certain Waypoint Bank loan customers, employee
group benefit plans, as well as providing a wide variety of life insurance
products to the retail market.
Owen Insurance Inc. Owen Insurance Inc. was acquired by Waypoint Financial
in 2000 and is a full-service insurance agency that provides a variety of
commercial and retail property and casualty insurance services. Owen Insurance
Inc. also provides a wide variety of life and other insurance products to
Waypoint Bank customers and the general public.
Advanced Real Estate Associates. Advanced Real Estate Associates operates
primarily through its wholly-owned subsidiary Y. F. Settlement Services, Inc.,
which primarily engages in providing settlement services in real estate
transactions to customers of Waypoint Bank and to the general public.
Lenders Support Group Inc. Lenders Support Group Inc. is inactive and its
operations were discontinued in 1998 and its net worth was negligible as of
December 31, 2000.
Waypoint Financial's wholly-owned financial institution subsidiary Waypoint
Bank, in addition to its own banking operations, also conducts business
activities through its direct subsidiaries as follows:
Harris Delaware Corporation. Harris Delaware Corporation was incorporated
in 1995 and manages certain investments in marketable securities on behalf of
Waypoint Bank.
York Financial Investment Corporation. York Financial Investment
Corporation was incorporated in 1997 and engages in investment management
services for Waypoint Bank.
H. S. Service Corporation. H. S. Service Corporation was incorporated in
1974 and operates joint ventures engaged in residential real estate development.
First Harrisburg Service Corporation. First Harrisburg Service Corporation
was incorporated in 1972 and is mainly involved with title, life, annuity and
other insurance activities. It also serves as the holding company for Second
Harrisburg Service Corporation, an inactive real estate company.
The two remaining subsidiaries, C.B.L. Service Corporation and
AVSTAR Mortgage Corporation currently are inactive and have negligible assets
and liabilities. Waypoint Bank had originated VA/FHA and sub-prime loans
23
through AVSTAR Mortgage Corporation, its mortgage subsidiary, until 1999 when
these operations were discontinued.
REGULATION
Waypoint Bank is examined and supervised extensively by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation. Under federal
regulation, financial institutions are periodically examined to ensure that they
satisfy applicable standards with respect to their capital adequacy assets,
management, earnings, liquidity and sensitivity to market interest rates.
Following completion of their examination, the federal agency critiques the
institution's operations and assigns a rating (this is known as an institution's
CAMELS). Under federal law, an institution may not disclose its CAMELS rating to
the public. However, Waypoint Bank has been advised that it is not the subject
of regulatory concern as a result of examinations by the Office of Thrift
Supervision or the Federal Deposit Insurance Corporation of Waypoint Bank's
predecessors Harris Savings Bank and York Federal Savings and Loan Association.
Waypoint Bank is also a member of, and owns stock in, the Federal Home Loan Bank
of Pittsburgh, which is one of the twelve regional banks in the Federal Home
Loan Bank System. This regulation and supervision limits the activities in which
Waypoint Bank may engage. Waypoint Bank is also regulated to a lesser extent by
the Board of Governors of the Federal Reserve System, governing reserves to be
maintained against deposits and other matters. The Office of Thrift Supervision
examines Waypoint Bank and prepares reports for the consideration of its board
of directors on any operating deficiencies. Waypoint Bank's relationship with
its depositors and borrowers is also regulated to a great extent by both federal
and state laws, especially in matters concerning the ownership of savings
accounts and the form and content of Waypoint Bank's mortgage documents. Any
change in this regulation, whether by the Federal Deposit Insurance Corporation,
Office of Thrift Supervision, or Congress, could have a material adverse impact
on Waypoint Financial and Waypoint Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of federal savings banks are
subject to extensive regulation, including restrictions or requirements with
respect to loans to one borrower, the percentage of non-mortgage loans or
investments to total assets, capital distributions, permissible investments and
lending activities, liquidity, transactions with affiliates and community
reinvestment. In particular, many types of loans, such as commercial real
estate, commercial business and consumer loans, are limited to a specific
percentage of capital or assets. The description of statutory provisions and
regulations applicable to savings associations set forth herein does not purport
to be a complete description of these statutes and regulations and their effect
on Waypoint Bank.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings institutio