<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-16668
--------------------------------
WSFS FINANCIAL CORPORATION
Delaware 22-2866913
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 792-6000
--------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of March 14, 1997 was $109,270,617. For purposes of this calculation
only, affiliates are deemed to be directors, executive officers and certain
beneficial owners.
As of March 14, 1997, there were issued and outstanding 12,529,639 shares of
the registrant's common stock.
-------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 24, 1997 are incorporated by reference in Part
III hereof.
<PAGE>
WSFS FINANCIAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
Page
<S> <C> <C>
Item 1. Business .............................................................................. 3
Item 2. Properties ............................................................................ 24
Item 3. Legal Proceedings....................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders..................................... 25
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 26
Item 6. Selected Financial Data................................................................. 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 28
Item 8. Financial Statements and Supplementary Data............................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 82
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... 82
Item 11. Executive Compensation.................................................................. 82
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 82
Item 13. Certain Relationships and Related Transactions.......................................... 82
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 83
Signatures................................................................................................ 85
</TABLE>
-2-
<PAGE>
PART I
Item 1. Business
GENERAL
WSFS Financial Corporation ("Company" or "Corporation") is a thrift
holding company whose principal subsidiary is Wilmington Savings Fund Society,
FSB (the "Bank" or "WSFS") which operates 16 branches in New Castle and Kent
Counties, Delaware. Founded in 1832, the Bank is the largest thrift institution
headquartered in Delaware. Reflecting its long history, the Bank estimates that
it has customer relationships with almost 51,000 households, or 24%, in its
principal market area of New Castle County, Delaware.
The Company has no business operations independent of WSFS and its
subsidiaries. Through WSFS and its subsidiaries, the Company is currently
engaged in a variety of lending services, including residential, consumer and
commercial lending primarily in Delaware. The principal business of the Bank
consist of the solicitation of deposits through its branch networks to provide
funds for lending and investment activities. In connection with its conversion
to a federal savings bank in 1983, the Bank retained its then-authorized powers
as a Delaware-chartered mutual savings bank. Under the Office of Thrift
Supervision ("OTS") regulations, the Bank may exercise any authority it was
allowed to exercise as a mutual savings bank under state laws and regulations at
the time of its conversion to a federal savings bank. In exercising such
"grandfathered" powers, the Bank may continue to comply with applicable state
laws and regulations in effect at the time of its conversion to a federal
charter except as otherwise determined by the OTS. The Bank, however, may not
use its grandfathered powers to engage in activities to a greater degree than
would be allowed under the most liberal construction of either state or federal
law or regulation. The Bank's grandfathered powers could be assumed by any other
institution that acquires the Bank by consolidation or merger. The Bank has
previously used its grandfathered powers to authorize investments above
otherwise applicable limits in subsidiaries engaged in activities such as real
estate and insurance brokerage. The Bank has divested certain of these
subsidiaries in order to focus on the traditional savings bank businesses of
lending to consumers and small businesses in its primary market area.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements. The OTS
periodically examines the Bank for compliance with various regulatory
requirements. The Federal Deposit Insurance Corporation ("FDIC") also has the
authority to conduct special examinations of the Bank as insurer of its
deposits. The Bank is also subject to certain reserve requirements promulgated
by the Federal Reserve Board. This supervision and regulation is intended
primarily for the protection of depositors. See "Regulation" for a further
discussion of certain of these regulatory requirements.
During the 1980's, the Bank pursued an aggressive growth and
diversification strategy acquiring the largest real estate brokerage business in
Delaware, B. Gary Scott, Inc. in 1985, a Maryland automobile fleet leasing
company, Anderson Leasing, Inc. in 1988 and Fidelity Federal Savings and Loan
Association ("Fidelity Federal" or "Association") in 1990. In addition, the Bank
significantly increased its exposure to commercial real estate, both as a lender
and as an equity participant through its real estate development subsidiary. As
a result of operating losses related to deterioration in the Company's loan
portfolios, real estate investments and acquisitions, the Bank failed to meet
certain regulatory capital requirements and the Board of Directors reorganized
management by terminating several executive officers and appointing a new
chairman of the board who was directed to head a search committee for new
management. The Company took a number of steps to address the asset quality and
capital problems that resulted from this previous business strategy.
-3-
<PAGE>
Consistent with these goals, the Company undertook an extensive restructuring
during 1991. This included the sales of loans, investment securities, mortgage
servicing rights, certain real estate, subsidiary operations and the deposit
accounts of eight branches. These nonrecurring sales combined with expense
reduction initiatives resulted in net earnings of $11.3 million in 1991, the
highest in the Company's history at the time. During 1992 and 1993, the
Company's earnings stabilized as the economy began to improve and interest rates
decreased. In 1992, the Company completed an offering of convertible preferred
stock which increased capital by $11.8 million. Such funds were utilized to
recapitalize the Bank. In December 1993, the Company completed a private
placement of $32.0 million in 11% Senior Notes to provide funds for an
additional capital infusion into the Bank. As a result of this capital infusion,
the Bank was in compliance with all currently applicable capital requirements
and it was released from the Capital Directive on December 29, 1993. The Bank's
improved capital position has also allowed the Company to undertake an expansion
of its business activities. During 1994, the Bank formed a new consumer finance
subsidiary specializing in second mortgage lending and acquired Providential
Home Income Plan, Inc. an originator of reverse annuity mortgages. During 1994,
the Corporation reported operating income of $8.1 million, which was at that
time the highest operating earnings in the Corporation's history. Rising
interest rates combined with investment growth strategies contributed
significantly to earnings during 1994.
During 1995, the Corporation's subsidiary, Fidelity Federal, completed
the sale of its deposits and certain real estate of four branches which allowed
the Corporation to further focus on its primary market area and continue to
enhance capital. As a result, the Bank recognized a gain of $12.4 million, net
of taxes and a supplemental contribution to the Corporation's 401(k) Plan. The
Association's remaining operations were merged into the Bank in November 1995.
The Corporation recorded total earnings of $27.0 million in 1995 of which $14.6
million was from operations. Both amounts represented new record earnings levels
in the Corporation's 164-year history.
Earnings for the year end December 31, 1996 were $16.4 million. Net
income for each of the years in the five-year period ended December 31, 1996
included the recognition of tax benefits. Excluding the one-time net gain on the
sale of the Association's deposits, income before taxes increased from $12.2
million in 1995 to $19.5 million in 1996, a $7.3 million or 60% increase.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Condensed average balance sheets for each of the last three years and
analyses of net interest income and changes in net interest income due to
changes in volume and rate are presented in "Results of Operations" included in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MDA"), incorporated herein by reference.
-4-
<PAGE>
INVESTMENT ACTIVITIES
The Bank is able to invest in various securities, including U.S.
Treasury obligations, short-term money market instruments and preferred stock.
The primary purposes of the Company's short-term investment portfolio are to
provide collateral for borrowings and to meet liquidity requirements. Book
values of investment securities and short-term investments by category, stated
in dollar amounts and as a percent of total assets, follow:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1996 1995 1994
------------------ ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars In Thousands)
Held-to-Maturity:
<S> <C> <C> <C> <C> <C> <C>
Corporate bonds ..................................... $15,038 1.1% $16,748 1.4% $19,077 1.6%
U.S. Government and agencies ........................ 10,000 0.9
State and political subdivisions .................... 2,642 0.2 5,542 0.4 6,075 0.5
Other investments ................................... 88
------- --- ------- --- ------- ---
17,680 1.3 22,378 1.8 35,152 3.0
------- --- ------- --- ------- ---
Available-for-Sale:
U.S. Government and agencies ........................ 23,028 1.9
State and political subdivisions .................... 1,253 0.1 891 0.1 761 0.1
Other investments ................................... 5,503 0.4 5,203 0.4
------- --- ------- --- ------- ---
1,253 0.1 6,394 0.5 28,992 2.4
------- --- ------- --- ------- ---
Short-term investments:
Federal funds sold and securities purchased
under agreements to resell ...................... 25,400 1.9 31,500 2.6 23,098 1.9
Interest-bearing deposits in
other banks (1) ................................. 5,702 0.4 4,568 0.4 9,536 0.8
------- --- ------- --- ------- ---
31,102 2.3 36,068 3.0 32,634 2.7
------- --- ------- --- ------- ---
$50,035 3.7% $64,840 5.3% $96,778 8.1%
======= === ======= === ======= ===
</TABLE>
(1) Interest-bearing deposits in other banks does not include deposits with a
maturity greater than one year.
During the 1980's, the Bank began restructuring its balance sheet to
reduce sensitivity to interest-rate fluctuations. Consequently, long-term
investment securities have gradually been reduced. In 1996, the Bank purchased
and sold $55 million in U.S. Government securities, and other investments
classified as available-for-sale were sold in the amount of $6 million. The
reduction of corporate and political subdivision bonds were primarily due to
maturities and calls. In 1995, U.S. Government securities available-for-sale
were sold, and an FHLB step-up bond (held-to-maturity) was called. During 1994,
the same FHLB step-up bond was purchased in the amount of $10 million and U.S.
Government securities were purchased in the amount of $15 million. As in 1996,
the reduction of corporate and state and political subdivision bonds was
primarily the result of maturities and calls.
-5-
<PAGE>
The following table sets forth the terms to maturity and related
weighted average yields of investment securities and short-term investments at
December 31, 1996. Substantially all of the related interest and dividends
represent taxable income. Yields on tax-exempt obligations are calculated on the
basis of actual yields and not on a tax-equivalent basis.
At December 31, 1996
----------------------
Amount Yield
------ -----
(Dollars in Thousands)
Held-to-Maturity:
Corporate bonds:
Within one year.................................... $ 1,750 5.52%
After one but within five years.................... 3,724 6.91
After five but within ten years.................... 4,789 7.21
After ten years.................................... 4,775 6.87
-------
15,038 6.83
-------
State and political subdivisions (1):
Within one year.................................... 2,520 5.00
After one but within five years.................... 65 5.05
After ten years.................................... 57 6.74
-------
2,642 5.04
-------
Total debt securities, held-to-maturity.............. 17,680 6.56
-------
Available-for-Sale:
State and political subdivisions (1):
After ten years.................................... 1,253 7.70
-------
Short-term investments:
Deposits with other banks.......................... 5,702 5.60
Federal funds sold and securities
purchased under agreements to resell............. 25,400 6.00
-------
Total short-term investments......................... 31,102 5.93
-------
$50,035 6.20%
=======
(1) Yields on state and political subdivisions are not calculated on a
tax-equivalent basis since substantially all bonds are taxable.
-6-
<PAGE>
In addition to the foregoing investment securities, the Company has
maintained an investment portfolio of mortgage-backed securities, which
increased dramatically after 1993 as the Company implemented investment growth
strategies during 1996 and 1994. Purchases of mortgage-backed securities in 1996
totalled $175 million, of which $39 million was classified as available-for-sale
and $136 million was classified as held-to-maturity. Reductions in the other
categories, as well as the 1995 and 1994 balances, were due to principal
repayments.
The following table sets forth the book values of mortgage-backed
securities and their related weighted average stated rates at the end of the
last three fiscal years.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
(Dollars in Thousands)
Stated Stated Stated
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- ------- -----
Held-to-Maturity:
<S> <C> <C> <C> <C> <C> <C>
Collateralized mortgage obligations $165,516 7.38% $ 72,222 7.72% $ 78,847 7.82%
GNMA .............................. 1,496 7.16 1,697 7.03 1,895 6.23
FHLMC ............................. 63,223 6.18 73,197 6.22 81,864 6.28
FNMA .............................. 62,754 6.26 72,590 6.30 81,513 6.34
Other ............................. 20,340 8.07 21 13.25 46 13.25
-------- ---- -------- ---- ------- -----
$313,329 6.96% $219,727 6.80% $244,165 6.80%
======== ==== ======== ==== ======= =====
Available-for-Sale:
Collateralized mortgage obligations $ 37,482 7.44% $ % $ %
GNMA .............................. 14,441 6.15 17,405 6.44 18,583 6.41
-------- ---- -------- ---- ------- -----
$ 51,923 7.08% $ 17,405 6.44% $18,583 36.41%
======== ==== ======== ==== ======= =====
</TABLE>
LENDING ACTIVITIES
Traditionally, the majority of a thrift institution's loan portfolio
has consisted of first mortgage loans on residential properties. However, as a
result of various legislative and regulatory changes since 1980, the commercial
and consumer lending powers of the Bank increased substantially. Consequently,
the Bank initiated a diversification strategy in fiscal year 1984 which included
a significant increase in commercial real estate lending. Commercial real estate
lending was discontinued in 1990 and only originations required by previous
funding commitments were made. In 1994, however; the Bank began to originate
small business commercial real estate loans in its primary market area. The
Bank's current lending activity is concentrated on lending to consumers and
small businesses in the Mid-Atlantic Region of the United States area.
-7-
<PAGE>
The following table sets forth the composition of the Corporation's
loan portfolio by type of loan at each of the dates indicated. Other than as
disclosed below, the Company had no concentrations of loans exceeding 10% of
total loans at December 31, 1996:
<TABLE>
<CAPTION>
December 31,
-------- ---------------------------------------------------------------------------- -----
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate (1) $279,060 33.8% $276,926 35.0% $260,442 36.6% $235,213 34.2% $254,936 33.4%
Commercial real estate:
Commercial mortgage 278,935 33.8 293,979 37.1 259,112 36.6 273,375 39.8 288,248 37.7
Construction 27,056 3.3 29,959 3.8 25,603 3.6 28,978 4.2 40,528 5.3
-------- ----- -------- ---- -------- ----- -------- ----- -------- -----
Total commercial real estate 305,991 37.1 323,938 40.9 284,715 40.2 302,353 44.0 328,776 43.0
Commercial 28,602 3.5 23,894 3.0 25,188 3.5 21,276 3.0 33,891 4.4
Consumer 135,552 16.4 114,265 14.4 91,182 12.8 93,845 13.7 123,924 16.2
Lease financings 121,970 14.8 98,840 12.5 89,095 12.5 72,941 10.6 61,750 8.1
-------- ----- -------- ---- -------- ----- -------- ----- -------- -----
Gross loans 871,175 105.6 837,863 105.8 750,622 105.6 725,628 105.5 803,277 105.1
Less:
Unearned income 21,552 2.6 21,512 2.7 18,146 2.6 14,523 2.1 13,215 1.7
Allowance for loan losses 24,740 3.0 24,167 3.1 21,700 3.0 23,613 3.4 26,263 3.4
-------- ----- -------- ---- -------- ----- -------- ----- -------- -----
Net loans $824,883 100.0% $792,184 100.0% $710,776 100.0% $687,492 100.0% $763,799 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
(1) Includes $773, $4,401, $257, $1,965, and $2,994 of residential mortgage
loans held-for-sale at December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
-8-
<PAGE>
The following table sets forth information as of December 31, 1996
regarding the dollar amount of loans maturing in the Company's loan portfolio,
including scheduled repayments of principal, based on contractual terms to
maturity. In addition, the table sets forth the dollar amount of loans maturing
during the indicated periods, based on whether the loan has a fixed- or
adjustable-rate. Loans having no stated maturity or repayment schedule are
reported in the one year or less category.
<TABLE>
<CAPTION>
Less than One to Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Real estate loans (1)..................... $ 83,108 $ 183,036 $ 291,078 $ 557,222
Construction loans........................ 8,554 18,491 11 27,056
Commercial loans.......................... 14,232 12,773 1,597 28,602
Consumer loans............................ 53,883 54,290 27,379 135,552
Lease financings ......................... 27,883 94,087 121,970
----------- ----------- ---------- ----------
$ 187,660 $ 362,677 $ 320,065 $ 870,402
=========== =========== ========== ==========
Rate sensitivity:
Fixed................................... $ 82,880 $ 207,864 $ 106,897 $ 397,641
Adjustable.............................. 104,780 154,813 213,168 472,761
----------- ----------- ---------- ----------
$ 187,660 $ 362,677 $ 320,065 $ 870,402
=========== =========== ========== ==========
</TABLE>
(1) Includes commercial mortgage loans.
The above schedule does not include any prepayment assumptions.
Although prepayments tend to be highly dependent upon the current interest rate
environment, management believes that the actual repricing and maturity of the
loan portfolio is significantly shorter as a result of prepayments than is
reflected in the above table.
Residential Real Estate Lending. WSFS originates residential mortgage
loans with loan-to-value ratios up to 95%; however, the Bank generally requires
private mortgage insurance for up to 30% of the mortgage amount on mortgage
loans whose loan-to-value ratio exceeds 80%. The Bank does not have any
significant concentrations of such insurance with any one insurer. On a limited
basis, the Bank originates loans with loan-to-value ratios exceeding 80% without
a private mortgage insurance requirement. At December 31, 1996, the balance of
all such loans was approximately $15.6 million of which $6.1 million related to
lending intended to satisfy the requirements of the Community Reinvestment Act.
Generally, residential mortgage loans originated or purchased are underwritten
and documented in accordance with standard underwriting criteria published by
FNMA and/or FHLMC to assure maximum eligibility for subsequent sale in the
secondary market; however, unless loans are specifically designated for sale,
the Company holds newly originated loans in portfolio for long-term investment.
Among other things, the institution requires title insurance, insuring the
priority of its lien and fire and extended coverage casualty insurance for the
properties securing the residential loans. All properties securing residential
loans made by the Bank are appraised by independent appraisers selected by the
Bank and subject to review in accordance with Bank standards.
The majority of adjustable-rate loans currently originated have
interest rates that adjust every year, with the change in rate limited to two
percent at any adjustment date. The adjustments are generally based upon a
margin (currently 2.75 percent) over the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity, as published by the Federal Reserve
Board. Generally, the maximum rate on these loans is up to six percent above the
initial interest rate. The Bank generally underwrites adjustable-rate loans
under standards consistent with private mortgage insurance and secondary market
criteria. The Bank does not originate adjustable-rate mortgages with payment
limitations that could produce negative amortization. Consistent with industry
practice in its market area, the Bank has originated adjustable-rate mortgage
loans with initially discounted interest rates. All such loans are underwritten
at the fully-indexed rate.
The retention of adjustable-rate mortgage loans in the Bank's loan
portfolio helps mitigate the Bank's exposure to changes in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of the repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest costs to the borrower. Further, although adjustable-rate
mortgage loans allow the Bank to increase the sensitivity of its asset base to
changes in interest rates, the extent of this interest sensitivity is limited by
the periodic and lifetime interest rate adjustment limitations. Accordingly,
there can be no assurance that yields on the Bank's adjustable-rate mortgages
will adjust sufficiently to compensate for increases in the Bank's cost of funds
during periods of extreme interest rate increases.
-9-
<PAGE>
The original contractual loan payment period for residential loans
originated is normally 10 to 30 years. Because borrowers may refinance or prepay
their loans without penalty, such loans normally remain outstanding for a
substantially shorter period of time. First mortgage loans customarily include
"due-on-sale" clauses on adjustable- and fixed-rate loans, which are provisions
giving the institutions the right to declare a loan immediately due and payable
in the event the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. Due-on-sale clauses are an
important means of adjusting the rate on existing fixed-rate mortgage loans to
current market rates. The Bank enforces due-on-sale clauses through foreclosure
and other legal proceedings to the extent available under applicable laws.
Commercial Real Estate and Commercial Lending. As a federal savings
bank, the Bank is permitted to invest up to 400% of its consolidated capital in
nonresidential real estate loans and up to 20% of its assets in commercial
loans. Prior to 1994, the Bank had been operating under a Capital Plan and was
subject to the terms and conditions of a Capital Directive. Consequently, WSFS
had discontinued the origination of commercial real estate loans other than
renewal of performing loans or funding outstanding commitments. Beginning in
1994, however, the Bank began to originate small business commercial real estate
loans in its primary market area.
WSFS has offered commercial real estate mortgage loans on multi-family
and other commercial real estate. Generally, loan-to-value ratios for such loans
do not exceed 80% of appraised value. Due to softening of the commercial real
estate market in the early 1990's; however, current loan-to-value ratios may
effectively be in excess of 80%.
Prior to the restrictions noted above, the Bank offered
commercial construction loans to developers. These loans were made as
"construction/permanent" loans, which provided for disbursement of loan funds
during construction and automatic conversion to permanent loans upon completion
of construction. Such construction loans were made on a short-term basis,
usually not exceeding two years, with interest rates indexed to the WSFS prime
rate and adjusted periodically as the Bank's prime rate changed. The loan
appraisal process includes the same criteria as required for permanent mortgage
loans as well as completed plans, specifications, comparables and cost
estimates. These items are used, prior to approval of the credit, as a basis to
determine the appraised value of the subject property when completed. Policy
requires that all appraisals are to be reviewed independent of the commercial
lending area. Generally, the loan-to-value ratio for construction loans does not
exceed 80%. The initial interest rate on the permanent portion of the financing
is determined based upon the prevailing market rate at the time of conversion to
the permanent loan. At December 31, 1996, $38.0 million was committed for
construction loans, of which $27.1 million had been disbursed.
The Bank's commercial lending, excluding real estate loans, includes
loans for the purpose of financing equipment acquisitions, expansion, working
capital and other business purposes. These loans generally range in amounts up
to approximately $1.5 million, and their terms range from less than one year to
ten years. The loans generally carry variable interest rates indexed to the
Bank's prime rate at the time of closing. The Bank intends to continue
originating commercial loans to small businesses in its market area.
Commercial, commercial mortgages and construction lending entails
significant risk as compared with residential mortgage lending. These loans
typically involve larger loan balances concentrated in single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the commercial real estate market or in
the economy generally. The majority of the Bank's commercial and commercial real
estate loans are concentrated in Delaware and surrounding areas. Construction
loans involve risks attributable to the fact that loan funds are advanced upon
the security of the project under construction, which, due to various factors,
is of uncertain value prior to the completion of construction. Moreover, because
of the uncertainties inherent in estimating construction costs, delays arising
from labor problems, material shortages and other unpredictable contingencies,
it is relatively difficult to accurately estimate the total loan funds required
to complete a project and or determine the related loan-to-value ratios.
Federal law limits the extensions of credit to any one
borrower to 15% of unimpaired capital surplus, or 25%, if the additional
incremental 10% is secured by readily marketable collateral having a market
value that can be determined by reliable and continually available pricing.
Extensions of credit include outstanding loans as well as contractual
commitments to advance funds, such as standby letters of credit, but do not
include unfunded loan commitments. At December 31, 1996, no borrower had
collective outstandings exceeding the above limits; however, an existing loan
that exceeds these limits does not have to be
-10-
<PAGE>
terminated or divested since the legality of a loan is determined when it is
made and is not affected by subsequent legislative events.
Consumer Lending. Consumer loans (not including certain consumer loans
such as home equity lines of credit and other residential real estate secured
loans) may be made in an amount up to 35% of the Bank's assets. The Company
intends to emphasize consumer lending in the future as a means of enhancing
portfolio yields and capitalizing on existing customer relationships.
The primary consumer loan products, excluding lease financings, of the
Company are equity secured installment loans and home equity lines of credit.
With a home equity line of credit the borrower is granted a line of credit up to
75% of the appraised value (net of any senior mortgages) of the residence. This
line of credit is secured by a mortgage on the borrower's property and can be
drawn upon at any time. At December 31, 1996, the Bank had extended a total of
$86.8 million in home equity lines of credit, of which $33.3 million had been
drawn at the date. Home equity lines of credit offer federal income tax
advantages (in certain circumstances, the interest paid on a home equity loan
remains deductible) and the convenience of their checkbook access and revolving
credit features. Over the past few years; however, home equity lines of credit
have decreased as low interest rates offered on mortgage loans have enabled
consumers to refinance their mortgages and consolidate debt. Although home
equity lines of credit expose the Company to the risk that falling collateral
values may leave it inadequately secured, the Company has not had any
significant adverse experience to date.
The Company also originates leases through its subsidiary, WSFS Credit
Corporation ("WCC"). These leases are secured by motor vehicles and originated
through automobile dealerships. During 1996, WCC originated more than 1,900
leases which approximated $50.0 million in new assets.
-11-
<PAGE>
The table below sets forth consumer loans by type and lease financings
outstanding, in dollar amounts and percentages, at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- -------------- --------------- ----------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity secured installment loans $ 63,803 24.7% $ 52,793 24.8% $ 34,088 18.9% $ 24,485 14.7% $ 46,715 25.1%
Home equity lines of credit.... 33,267 12.9 36,817 17.3 40,727 22.6 47,060 28.2 58,104 31.3
Automobile..................... 26,456 10.3 12,701 6.0 1,951 1.1 2,567 1.5 4,313 2.3
Unsecured lines of credit...... 7,448 2.9 7,017 3.3 3,683 2.0 4,070 2.5 4,409 2.4
Other.......................... 4,578 1.8 4,937 2.3 10,733 6.0 15,663 9.4 10,383 5.6
-------- ------ -------- ------ -------- ----- ------- ------ -------- -----
135,552 52.6 114,265 53.7 91,182 50.6 93,845 56.3 123,924 66.7
Lease financings............... 121,970 47.4 98,840 46.3 89,095 49.4 72,941 43.7 61,750 33.3
-------- ----- -------- ---- -------- ----- -------- ----- -------- ----
Total consumer loans and
lease financings............... $257,522 100.0% $213,105 100.0% $180,277 100.0% $166,786 100.0% $185,674 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
-12-
<PAGE>
Loan Originations, Purchase and Sales. WSFS has traditionally engaged
in lending activities primarily in Delaware and contiguous areas of neighboring
states although, as a federal savings bank, the Bank may originate, purchase and
sell loans throughout the United States. WSFS has also purchased limited amounts
of loans from outside its normal lending area when such purchases are deemed
appropriate and consistent with the Bank's overall policies. The Bank originates
fixed- and adjustable-rate residential real estate loans through banking
offices. In addition, WSFS has established relationships with correspondent
banks, mortgage brokers and real estate developers for loan referrals.
During 1996, WSFS originated $88 million of residential real estate
loans compared to 1995 originations of $87 million. From time to time, the Bank
has purchased whole loans and loan participations in accordance with its ongoing
asset and liability management objectives. Purchases of residential real estate
loans from correspondents and brokers primarily in the northeast region of the
United States totalled $13 million and $14 million for the years ended December
31, 1996 and 1995, respectively. Residential real estate loan sales totaled $38
million for both 1996 and 1995. While the Bank generally intends to hold loans
for the foreseeable future, WSFS, beginning in 1989, has undertaken to sell
newly originated fixed-rate mortgage loans in the secondary market to control
the interest sensitivity of its balance sheet. During the second half of 1993
the Corporation began to hold for investment certain of its fixed-rate mortgage
loans, with terms under 30 years, originated in accordance with current
asset/liability management strategies.
The Bank serviced for others approximately $196 million of residential
loans at December 31, 1996 compared to $229 million at December 31, 1995. The
Company also services residential loans for its portfolio totaling $247 million
and $187 million at December 31, 1996 and 1995.
The Bank originates commercial real estate and commercial loans through
the Bank's commercial lending department. Commercial loans are made for the
purpose of financing equipment acquisitions, expansion, working capital and
other business purposes and also include business loans secured by
nonresidential real estate. During 1996, the Bank originated $50 million of
commercial and commercial real estate loans compared to $91 million in 1995.
These amounts represent gross contract amounts and do not reflect amounts
outstanding on such loans.
The Bank's consumer lending is conducted primarily through the branch
offices and is supported by a consumer credit department credit investigation
unit. WSFS originates a variety of consumer credit products, including home
improvement loans, home equity lines of credit, automobile loans, unsecured
lines of credit and other secured and unsecured personal installment loans.
During 1996, such consumer loan originations aggregated $146 million compared to
$72 million in 1995. See "Consumer Lending" for discussion regarding consumer
loan originations.
All loans to one borrower exceeding $750,000 in aggregate must be
approved by a management loan committee. Minutes of the management loan
committee meetings and individual loans exceeding $3.0 million approved by the
management loan committee are subsequently reviewed by the Executive Committee
and Board of Directors of WSFS, with separate approval needed for all loans to
any borrower who has direct or indirect outstanding commitments in excess of
$3.0 million or for any additional advances or extensions on loans previously
classified by the Bank's regulatory authorities or the Bank's Asset Review
Department. Officers of the Bank have authority to approve smaller loans in
graduated amounts, depending upon their experience and management position.
Fee Income from Lending Activities. The Bank realizes interest and loan
fee income from lending activities, including fees for originating loans and for
servicing loans and loan participations sold. The institution also receive
commitment fees for making commitments to originate construction, residential
and commercial real estate loans. Additionally, loan fees related to existing
loans are received, which include prepayment charges, late charges and
assumption fees.
The Bank offers a range of loan commitments for which fees are charged
depending on lengths of the commitment periods. As part of the loan application,
the borrower also pays the Bank for out-of-pocket costs in reviewing the
application, whether or not the loan is closed. The interest rate charged on the
mortgage loan is normally the prevailing rate at the time the loan application
is approved.
-13-
<PAGE>
Loan fees that are considered adjustments of yield in accordance with
generally accepted accounting principles are reflected in interest income and
represented an immaterial amount of interest income during the three years ended
December 31, 1996. Loan fees other than those considered adjustments of yield
are reported as loan fee income, a component of other income.
LOAN LOSS EXPERIENCE, PROBLEM ASSETS AND DELINQUENCIES
The Company's results of operations can be negatively impacted by
nonperforming assets, which include nonaccruing loans, nonperforming real estate
investments and assets acquired through foreclosure. Nonaccruing loans are those
on which the accrual of interest has ceased. Loans are placed on nonaccrual
status immediately if, in the opinion of management, collection is doubtful, or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued, but not
collected at the date a loan is placed on nonaccrual status, is reversed and
charged against interest income. In addition, the amortization of net deferred
loan fees is suspended when a loan is placed on nonaccrual status. Subsequent
cash receipts are applied either to the outstanding principal balance or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest.
The Company endeavors to manage its loan portfolio to identify problem
loans as promptly as possible and take actions immediately which will minimize
losses. To accomplish this, the Bank's Asset Review Department monitors the
asset quality of the Company's loan and investment in real estate portfolios and
reports such information to the Chief Financial Officer and the Executive
Committee of the Board of Directors.
SUBSIDIARIES
During the 1980's, the Company sought to expand its sources of
noninterest income and its market area primarily through its investments in
subsidiaries. The Company's policy was to exercise the Bank's generally broad
investment authority to invest in subsidiaries which were considered
complementary to its traditional savings bank activities. As a result of the
Bank's failure to comply with minimum regulatory capital requirements in 1990,
it became subject to restrictions on asset growth, lending and capital
distributions, among other things. Consequently, the Company consolidated and/or
divested of certain subsidiary operations, thereby restructuring its balance
sheet and focusing on its core banking businesses.
At December 31, 1996, WSFS had four wholly owned, first-tier
subsidiaries which were engaged in leasing, consumer finance, insurance
brokerage and real estate development. WSFS is the sole investor in and primary
lender to its non-bank subsidiaries. At December 31, 1996, it had $3.3 million
invested in the equity of these companies and had lent them an additional $150.2
million.
WSFS Credit Corporation ("WCC") which commenced operations in 1974,
provides leasing for consumer and business motor vehicles and equipment as well
as consumer loans. Prior to 1988, its business had been concentrated in the
northern Delaware area, but in 1988 it began expanding its motor vehicle leasing
base by originating direct financing leases through automobile dealerships in
Pennsylvania, New Jersey and Maryland as well as Delaware. In 1996 WCC expanded
its market area to parts of western Maryland and West Virginia. WCC underwrites
all leases originated through automobile dealers in accordance with underwriting
criteria generally consistent with those of the Bank and the leasing industry.
WCC's total assets at December 31, 1996 and 1995 were $129.9 million and $96.0
million, respectively.
838 Investment Group, Inc. (formerly Star States Financial Services,
Inc.) was formed in 1989. This subsidiary markets various insurance products,
such as single-premium annuities and whole life policies, and mutual funds to
Bank customers through the Bank's branch system.
Community Credit Corporation (CCC), a consumer finance subsidiary, was
formed in June 1994 to provide fixed- and adjustable-rate consumer loans secured
by first and second mortgages. Loans made by CCC are most often used by the
borrower to consolidate debt, including an existing mortgage, or fund home
improvements. The type of borrower targeted by CCC has a credit history that may
limit their access to credit, given the relatively rigid lending guidelines used
by most financial institutions. The first office of CCC was opened August 1994
in Delaware.
-14
<PAGE>
Star States Development Company was formed in March 1985 with the
objective of engaging in residential real estate projects through either wholly
owned subsidiaries or investments in joint ventures. Star States Development
Company's investments in the projects were in the form of nonrecourse, first
mortgage loans, in return for which Star States Development Company is entitled
to receive repayment of principal and interest, and to share, at an agreed upon
percentage, in the profits of the project. Star States Development Company is
currently inactive with the exception of one remaining parcel of land which is
being marketed for sale.
Providential Home Income Plan, Inc. ("Providential") was a San
Francisco-based reverse mortgage lender. The Bank acquired Providential in
November 1994 for approximately $24.4 million. The acquisition was accounted for
by the purchase method of accounting; accordingly, Providential's results are
included in the Corporation's consolidated statement of operations for the
period in which Providential was owned. The management and operations of
Providential were merged into the Bank in November 1996.
On July 28, 1995, the Corporation's wholly-owned subsidiary, Fidelity
Federal completed the sale of deposits and certain real estate at four of its
branches to another institution. In November 1995, the remaining operations of
Fidelity Federal and its holding company, Star States Pennsylvania, Inc. were
merged into WSFS.
SOURCES OF FUNDS
The Bank funds operations through deposit growth and various borrowing
services, including repurchase agreements, federal funds purchased and advances
from the Federal Home Loan Bank ("FHLB") of Pittsburgh. Loan repayments and
investment maturities also provide sources of funds. Loan repayments and
investment maturities provide a relatively stable source of funds while certain
deposit flows tend to be more susceptible to market conditions. Borrowings are
used either for short-term funding of lending activities when loan demand
exceeds projections or when deposit inflows or outflows are less than or greater
than expected. On a long-term basis, borrowings may be used to match against
specific loans or to ultimately support business expansion.
Deposits. The Bank offers various deposit programs to its customers,
including savings accounts, demand deposits, interest-bearing demand deposits,
money market deposit accounts and certificates of deposits. The Bank also offers
Christmas clubs, Individual Retirement Accounts and Keogh Accounts. In addition,
the Bank accepts negotiable rate certificates with balances in excess of
$100,000 from individuals, businesses and municipalities in Delaware.
The Bank is the second largest independent banking institution
headquartered and operating in Delaware. It primarily attracts deposits through
its system of 16 branches. Fifteen of these branches are located in northern
Delaware's New Castle County, the Bank's primary market. These branches maintain
approximately 145,000 total account relationships with approximately 51,000
total households, or 24% of all households in New Castle County, Delaware. The
sixteenth branch is in the state capital, Dover, located in central Delaware's
Kent County.
One of the most successful deposit related products developed by the
Bank is the WSFS Plan Card, a debit card product. The WSFS Plan Card, initiated
in 1972, allowed customers to charge purchases made within a proprietary network
of merchants. These purchases were then debited to the customers' checking
account and a cash rebate was earned on each purchase. In 1991, the Plan Card
became a VISA(R) Check Card and as a result, WSFS depositors can now use the
Plan Card at all 13 million acceptance locations in the worldwide VISA(R)
network.
-15-
<PAGE>
The following table sets forth the amount of certificates of deposit of
$100,000 or more by time remaining until maturity at the period indicated.
December 31,
Maturity Period 1996
--------------- ------------
(In Thousands)
Less than 3 months...................... $11,400
Over 3 months to 6 months............... 11,275
Over 6 months to 12 months.............. 10,246
Over 12 months.......................... 6,665
-------
$39,586
=======
Borrowings. The Company utilizes several sources of borrowings to fund
operations. As members of the FHLB of Pittsburgh, the Bank is authorized to
apply for advances on the security of their capital stock in the FHLB and
certain of their residential mortgages and other assets (principally securities
which are obligations of or guaranteed by the United States Government) provided
certain standards related to creditworthiness have been met. As a member
institution, the Bank is required to hold capital stock in the FHLB of
Pittsburgh in an amount at least equal to 1% of the aggregate unpaid principal
of their home mortgage loans, home purchase contracts, and similar obligations
at the beginning of each year, or 1/20th of their advances, whichever is
greater.
The Bank also sells securities under agreements to repurchase with
various brokers as an additional source of funding. When entering into these
transactions, the Bank is required to pledge either government securities or
mortgage-backed securities as collateral for the borrowings.
On December 29, 1993, the Company issued $32.0 million in 11% Senior
Notes due December 31, 2005 ("Notes") to certain institutional and accredited
investors in a private placement. See Note 9 of the Consolidated Financial
Statements for a further discussion of the Notes.
REGULATION
Regulation of the Company
General. The Company is a registered as savings and loan holding
company and is subject to OTS regulation, examination, supervision and reporting
requirements. As a subsidiary of a holding company, the Bank is subject to
certain restrictions in its dealings with the Company and other affiliates.
Regulatory Capital Maintenance/Dividend Agreements. As a condition to
obtaining regulatory approval of the acquisition of the Bank, the Company was
required to execute agreements with the predecessor to the OTS with respect to
the receipt of dividends from the Bank and the maintenance of its regulatory
capital. Under the Regulatory Capital Maintenance/Dividend Agreement between the
Company and the predecessors to the OTS, the Company agreed to cause the
regulatory capital of the Bank to be maintained at a level at or above the
Bank's regulatory capital requirement and to infuse sufficient capital to effect
compliance with such requirement during the first quarter after which the Bank
fails to meet its regulatory capital requirement. The Company further agreed
that, without regulatory approval, it would not accept dividends in excess of
50% of the institution's net income for the fiscal year. The Company is
permitted to accept dividends of up to 75% of net income if the Bank's ratio of
regulatory capital to liabilities would equal 7% or more after payment of the
dividend and may accept dividends equal to 100% of net income if such ratio
would be 8% or more after the dividend payment. Dividends permitted under the
agreement may be deferred and paid in a subsequent year provided that no
dividend or repurchase of stock may reduce the Bank's regulatory capital below
its regulatory capital requirement. After notice of default, the Company is
-16-
<PAGE>
prohibited from conveying its ownership of the Bank by gift, sale, exchange or
otherwise without regulatory approval. If a default is not cured within 90 days
and not waived, the predecessor to the OTS was entitled to seek any available
remedy and the Company must pay its attorney fees and other reasonable expenses.
Activities Restrictions. The Company currently operates as a unitary
savings and loan holding company. There generally are no restrictions on the
activities of a unitary holding company. If the Company were to acquire another
thrift and operate it as a separate entity, it would become subject to the
activities restrictions on multiple holding companies. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings association may commence, or continue after a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies;
or (vii) unless the Director of OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities authorized
by the Federal Reserve Board as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the Director of OTS
prior to being engaged in by a multiple savings and loan holding company.
Transactions with Affiliates; Tying Arrangements Transactions between
savings associations and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and limit the aggregate of all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) lend or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association. Savings associations are also subject
to Section 106 of the Bank Holding Company Act of 1956 (the "BHCA") which
prohibits a depository institution from extending credit, offering services, or
fixing or varying the consideration for any extension of credit or service on
the condition that the customer obtain some additional service from the
institution or certain of its affiliates or that the customer not obtain
services from a competitor of the institution, subject to certain limited
exceptions.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof, or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances, a savings and loan holding company is permitted to
acquire, with the approval of the Director of OTS, up to 15% of the voting
shares of an under-capitalized savings association pursuant to a "qualified
stock issuance" without that savings association being deemed controlled by the
holding company. Except with the prior approval of the Director of OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings association, other than a subsidiary savings
association, or of any other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquirer is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
-17-
<PAGE>
The laws of Delaware do not specifically authorize out-of-state savings
associations or their holding companies to acquire Delaware-chartered savings
associations.
The statutory restrictions on the formation of interstate multiple
holding companies would not prevent the Bank from entering into other states by
mergers or branching. OTS regulations permit federal associations to branch in
any state or states of the United States and its territories. Except in
supervisory cases or when interstate branching is otherwise permitted by state
law or other statutory provision, a federal association may not establish an
out-of-state branch unless (i) the federal association qualifies as a "domestic
building and loan association" under ss.7701(a)(19) of the Internal Revenue Code
or as a "qualified thrift lender" under the Home Owners' Loan Act and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association or qualified thrift lender and (ii) such branch would not
result in the formation of a prohibited multi-state multiple savings and loan
holding company. Federal associations generally may not establish new branches
unless the association meets or exceeds minimum regulatory capital requirements.
The OTS will also consider the association's record of compliance with the
Community Reinvestment Act of 1977 in connection with any branch application.
The Bank Holding Company Act of 1956 has been amended to specifically
authorize the Federal Reserve Board to approve an application by a bank holding
company to acquire control of any savings association. Pursuant to rules
promulgated by the Federal Reserve Board, owning, controlling or operating a
savings association is a permissible activity for bank holding companies, if the
savings association engages only in deposit-taking activities and lending and
other activities that are permissible for bank holding companies. In approving
such an application, the Federal Reserve Board may not impose any restriction on
transactions between the savings association and its holding company affiliates
except as required by Sections 23A and 23B of the Federal Reserve Act.
Regulation of the Bank
General. As a federally chartered savings institution, the Bank is
subject to extensive regulation by the OTS. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. The OTS periodically examines the Bank for compliance with
regulatory requirements. The FDIC also has the authority to conduct special
examinations of the Bank as the insurer of deposits. The Bank must file reports
with OTS describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.
Regulatory Capital Requirements. Under OTS capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets. In addition, OTS regulations impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio
of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
institution is rated Composite 1 under the OTS examination rating system). For
purposes of these regulations, Tier 1 capital has the same definition as core
capital.
The OTS capital rule defines core capital as common stockholders'
equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits
and "qualifying supervisory goodwill," less intangible assets other than certain
supervisory goodwill and certain purchased mortgage servicing rights and
purchased credit card relationships. Tangible capital is given the same
definition as core capital but does not include qualifying supervisory goodwill
and is reduced by the amount of all the savings institution's intangible assets
except for certain mortgage servicing rights. The OTS capital rule requires that
core and tangible capital be reduced by an amount equal to a savings
institution's debt and equity investments in "nonincludable" subsidiaries
engaged in activities not permissible to national banks, other than subsidiaries
engaged in activities undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their holding companies.
Adjusted total assets for purposes of the core and tangible capital
requirements are a savings institution's total assets as determined under
generally accepted accounting principles, increased by certain goodwill amounts
and by a prorated portion of
-18-
<PAGE>
the assets of unconsolidated includable subsidiaries in which the savings
institution holds a minority interest. Adjusted total assets are reduced by the
amount of assets that have been deducted from capital, the savings institution's
minority investments in unconsolidated includable subsidiaries and, for purposes
of the core capital requirement, qualifying supervisory goodwill. At December
31, 1996, the Bank is in compliance with both the core and tangible capital
requirements.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. Under the OTS risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given
a 0% risk weight. Mortgage-backed securities that qualify under the Secondary
Mortgage Enhancement Act, including those issued, or fully guaranteed as to
principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family first mortgages not more than 90 days past due with loan-to-value
ratios under 80%, multi-family mortgages (maximum 36 dwelling units) with
loan-to-value ratios under 80% and average annual occupancy rates over 80%, and
certain qualifying loans for the construction of one- to four-family residences
pre-sold to home purchasers are assigned a risk weight of 50%. Consumer loans,
non-qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100% risk-weight.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided the amount of supplementary capital
included does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loan and lease loss allowances. The OTS
risk-based capital requirements require savings institutions with more than a
"normal" level of interest rate risk to maintain additional total capital. A
savings institution's interest rate risk is measured in terms of the sensitivity
of its "net portfolio value" to changes in interest rates. A savings association
with more than normal interest rate risk is required to deduct an interest rate
risk component equal to one-half of the excess of its measured interest rate
risk over the normal level from its total capital for purposes of determining
its compliance with the OTS risk-based capital guidelines. At December 31, 1996,
the Bank was in compliance with the OTS risk-based capital requirements.
Loans to Directors, Officers and 10% Stockholders. Under Section 22(h)
of the Federal Reserve loans to an executive officer or director or to a greater
than 10% stockholder of a savings association and certain affiliated interests
of either, may not exceed, together with all other outstanding loans to such
person and affiliated interests, the association's loans to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus) and
all loans to all such persons may not exceed the institution's unimpaired
capital and unimpaired surplus. Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of a savings association,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the association with any "interested"
director not participating in the voting. The Federal Reserve Board has
prescribed the loan amount (which includes all other outstanding loans to such
person), as to which such prior board of director approval if required, as being
the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further,
the Federal Reserve Board pursuant to Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
unless the loan is made pursuant to a compensation or benefit plan that is
widely available to employees and does not discriminate in favor of insiders.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors. Savings associations are subject
to the requirements and restrictions of Section 22(g) of the Federal Reserve Act
which requires that loans to executive officers of depository institutions not
be made on terms more favorable than those afforded to other borrowers, requires
approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 10G prohibits
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Dividend Restrictions. The Bank is prohibited from paying any dividend
or making any other capital distribution if, after making the distribution, the
Bank would be undercapitalized within the meaning of the OTS prompt corrective
action
-19-
<PAGE>
regulations. Pursuant to the Regulatory Capital Maintenance/Dividend
Agreement, the Company may also be limited in its ability to receive dividends
from the Bank in certain circumstances. OTS regulations impose additional
limitations on the payment of dividends and other capital distributions
(including stock repurchases and cash mergers) by the Bank. Under these
regulations, a savings institution that, immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution, has total
capital (as defined by OTS regulation) that is equal to or greater than the
amount of its fully phased-in capital requirements (a "Tier 1 Association") is
generally permitted, after notice, to make capital distributions during a
calendar year in the amount equal to the greater of: (a) 75% of its net income
for the previous four quarters; or (b) up to 100% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in
risk-based capital ratio requirement at the beginning of the calendar year. A
savings institution with total capital in excess of current minimum capital
ratio requirements but not in excess of the fully phased-in requirements (a
"Tier 2 Association") is permitted, after notice, to make capital distributions
without OTS approval of up to 75% of its net income for the previous four
quarters, less dividends already paid for such period. A savings institution
that fails to meet current minimum capital requirements (a "Tier 3 Association")
is prohibited from making any capital distributions without the prior approval
of the OTS. A Tier 1 Association that has been notified by the OTS that it is in
need of more than normal supervision will be treated as either a Tier 2 or Tier
3 Association. At December 31, 1996, the Bank was a Tier 1 Associations. The OTS
may prohibit any savings institution from making a capital distribution that
would otherwise be permitted by the regulation, if the OTS determines that the
distribution would constitute an unsafe or unsound practice.
Deposit Insurance. The Bank is charged an annual premium by the BIF for
federal insurance on its insurable deposit accounts up to applicable regulatory
limits. The FDIC may establish an assessment rate for deposit insurance premiums
which protects the insurance fund and considers the fund's operating expenses,
case resolution expenditures, income and effect of the assessment rate on the
earnings and capital of members.
The FDIC has established a risk-based assessment system for insured
depository institutions which became effective January 1, 1994. The assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution by the FDIC which is determined by
the institution's capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period using the same percentage criteria
as in the prompt corrective action regulations. See "-- Prompt Corrective
Action." Institutions are assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized. Undercapitalized
institutions consist of institutions that do not qualify as either "well
capitalized" or "adequately capitalized." Within each capital group,
institutions will be assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Because the BIF achieved its statutory reserve ratio of 1.25% of insured
deposits, the FDIC reduced the deposit insurance premium for most BIF members to
the statutory minimum of $1,000 per semi-annual period during 1996. Under the
Deposit Insurance Funds Act of 1996, the statutory minimum assessment was
eliminated. That statute, however, authorized the FDIC to assess BIF member
institutions to fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to help
fund takeovers of insolvent thrifts. Until December 31, 1999, BIF members will
be assessed at the rate of 1.3 basis points for FICO payments while SAIF members
will be assessed at the rate of 6.5 basis points. After December 31, 1999, BIF
and SAIF members will be assessed at the same rate.
Prompt Corrective Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), federal banking regulators are
required to take prompt corrective action if an institution fails to satisfy
certain minimum capital requirements, including a leverage limit, a risk-based
capital requirement, and any other measure deemed appropriate by the federal
banking regulators for measuring the capital adequacy of an insured depository
institution. All institutions, regardless of their capital levels, are
restricted from making any capital distribution or paying any management fees
that would cause the institution to become undercapitalized. An institution that
fails to meet the minimum level for any relevant capital measure (an
"undercapitalized institution") generally is: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. "Significantly
uncapitalized" institutions and their holding companies may become subject to
more severe sanctions including limitations on asset growth, restrictions on
capital distributions by the holding company and possible divestiture
requirements. Institutions generally must be placed in receivership within
specified periods of time after they become "critically undercapitalized".
-20-
<PAGE>
Under the OTS regulations implementing the prompt corrective action
provisions of FDICIA, the OTS measures a savings institution's capital adequacy
on the basis of its total risk-based capital ratio (the ratio of its total
capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of
its core capital to risk-weighted assets) and leverage ratio (the ratio of its
core capital to adjusted total assets). A savings institution that is not
subject to an order or written directive to meet or maintain a specific capital
level is deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0%
or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately
capitalized" savings institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and
(iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 CAMEL rating). An "undercapitalized institution"
is a savings institution that has (i) a total risk-based capital ratio less than
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1
CAMEL rating). A "significantly undercapitalized" institution is defined as a
savings institution that has: (i) a total risk-based capital ratio of less than
6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a ratio of tangible
equity to total assets of less than 2.0%.
Federal Home Loan Bank System. The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of
Pittsburgh, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Pittsburgh in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. WSFS was in compliance with
this requirement with an investment in FHLB of Pittsburgh stock at December 31,
1996, of $16.1 million. The FHLB of Pittsburgh offers advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Pittsburgh. Long term advances may only be made for the
purpose of providing funds for residential housing finance.
Liquidity Requirements. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The Bank was in compliance with applicable liquidity requirements
at December 31, 1996.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of December 31, 1996, the Bank met its reserve
requirements.
-21-
<PAGE>
TAXATION
Federal Income Taxation
The Company and its subsidiaries, as an affiliated group, file a
consolidated corporate income tax return each year for federal income tax
purposes. Among other things, a consolidated return allows the affiliated group
to avoid or defer tax on certain intercompany distributions and transfers and,
under certain circumstances, to reduce the taxable income of one member of the
group using the loss generated by another member.
Thrift institutions such as the Bank are generally subject to the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in the
same general manner as other corporations. Further, in the past, thrift
institutions which satisfied certain conditions, including the asset composition
test under Section 7701(a)(19) of the Code, could determine their bad debt
deduction based upon an annual addition to a bad debt reserve (the "reserve
method") rather than upon the actual amount of worthless debts arising during
the year (the "specific charge-off method"). This reserve method, however, was
repealed for tax years beginning after January 1996. The Bank maintained a bad
debt reserve for tax purposes through 1986 but failed to satisfy the asset
composition test in fiscal year 1987 and therefore could not continue to use the
thrift bad debt reserve method. Moreover, because the Bank at the time had total
assets in excess of $500 million, it could not use the reserve method available
to commercial banks but instead was required to switch to the specific
charge-off method. As a result of the change to the specific charge-off method,
the Bank recaptured into income in 1987 the entire balance of its bad debt
reserve.
For taxable years beginning after December 31, 1986, the Code imposes
an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds, (b) for taxable years beginning after 1989, 75% of the excess
(if any) of (i) 75% of adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses) and (c) depreciation for alternative minimum tax
purposes versus depreciation for regular tax purposes. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum taxes
may be used as credits against regular tax liabilities in future years. In
addition, for taxable years after 1986 and before 1996, corporations, including
thrift institutions, are also subject to an environmental tax equal to 0.12% of
the excess of AMTI for the taxable year (determined without regard to net
operating losses and the deduction for the environmental tax) over $2.0 million.
As of December 31, 1996, the Company had available net operating loss
("NOL") carryforwards for federal and state tax purposes of approximately $18.8
million and $21.4 million, respectively, which may be used to reduce future
income taxes. There are restrictions applicable to approximately $18.8 million
of the NOL carryforwards attributable to Providential Home Income Plan, Inc.
("Providential"), formerly a 100% wholly-owned subsidiary of WSFS. Because
Section 382 of the Code restricts the annual amount of NOL carryforwards
available for use, it could result in the loss of a portion of Providential's
NOL due to expiration.
The Company's federal income tax returns for 1993 and 1994 are
currently under audit. Furthermore, the 1994 federal tax return of a partnership
in which a subsidiary of the Company is a 50% owner is currently under audit. At
present, the Company is not aware of any present or pending federal or state tax
examination adjustments nor any notice that would materially change the reported
amount of tax due.
See Note 12 to the Consolidated Financial Statements, incorporated
herein by reference, for further information regarding taxation.
-22-
<PAGE>
State Income Taxation
As a Delaware corporation, the Company is subject to an annual
franchise tax based on the number of shares of common and preferred stock
authorized under its Certificate of Incorporation. The Bank is also subject to
annual franchise taxes in Delaware based on its pretax net income.
The Bank and its subsidiaries each file separate state tax returns. An
operating subsidiary of the bank, WSFS Credit Corporation, conduct business in
several surrounding states and as such, is subject to taxation in these states.
-23-
<PAGE>
Item 2. Properties
The following table sets forth the location and certain additional
information regarding the Company's offices and other material properties at
December 31, 1996.
<TABLE>
<CAPTION>
Net Book Value
of Property
Owned/ Date Lease or Leasehold
Location Leased Expires Improvements(2) Deposits
- -------- ------ ------- --------------- --------
(In Thousands)
WSFS:
<S> <C> <C> <C> <C>
Main Office (1)* Owned $1,711 $181,118
9th & Market Streets
Wilmington, DE 19899
Union Street Branch* Leased 1998 57 54,099
3rd & Union Streets
Wilmington, DE 19805
Trolley Square Branch* Leased 2001 32 18,529
1711 Delaware Avenue
Wilmington, DE 19806
Fairfax Shopping Center Branch* Leased 1998 22 71,265
2005 Concord Pike
Wilmington, DE 19803
Branmar Plaza Shopping Center Branch* Leased 1998 17 58,566
1812 Marsh Road
Wilmington, DE 19810
Prices Corner Shopping Center Branch* Leased 1998 33 88,113
3202 Kirkwood Highway
Wilmington, DE 19808
Pike Creek Shopping Center Branch* Leased 2000 14 54,029
New Linden Hill & Limestone Roads
Wilmington, DE 19808
Tri-State Mall Branch Leased 1997 4 19,497
I-95 & Naamans Road
Claymont, DE 19803
Claymont Branch Owned 72 23,725
3512 Philadelphia Pike
Claymont, DE 19703
University Plaza Shopping Center Branch* Leased 1998 25 34,373
I-95 & Route 273
Newark, DE 19712
College Square Shopping Center Branch* Leased 2007 88 57,127
Route 273 & Liberty Avenue
Newark, DE 19711
Airport Plaza Shopping Center Branch* Leased 2013 113 59,536
144 N. DuPont Hwy.
New Castle, DE 19720
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Stanton Leased 2001 204 365
Inside ShopRite at First State Plaza
1600 W. Newport Pike
Wilmington, DE 19804
Glasgow Leased 1997 56 159
Inside Genaurdi's at Peoples Plaza
(opening Spring of 1997)
temporarily in Peoples Plaza, Suite 870
Routes 40 and 896, Newark, DE 19702
Middletown Square Shopping Center Leased 1999 145 11,016
Inside Parkers Thriftway
701 N. Broad St.
Middletown, DE 19709
Dover (3) Leased 2000 252 13,369
Inside Metro Food Market
Rt 13 & White Oak Road
Dover, DE 19901
Operations Center Owned 1,072 na
2400 Philadelphia Pike
Wilmington, DE 19703
Community Credit Corporation Leased 1998 10 na
----------------------------
10 Penn Mart Shopping Center
New Castle, DE 19720
$744,886
========
</TABLE>
* Represents locations with ATM.
(1) Includes location of executive offices and approximately $64.2 million in
brokered deposits.
(2) The net book value of all the Company's investment in premises and
equipment totalled $6.0 million at December 31, 1996.
(3) In February 1996, the Bank acquired $10.5 million of deposits from another
financial institution located in Dover, Delaware. These deposits were
transferred to the Bank's branch located inside the Metro Food Market in
Dover.
Item 3. Legal Proceedings
There are no material legal proceedings to which the Company or the
Bank is a party or to which any of its property is subject except as discussed
in Note 14 to the Consolidated Financial Statements.
Item 4. Submissions of Matters To a Vote of Security Holders
No matter was submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1996 through the solicitation of
proxies or otherwise.
-25-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
WSFS Financial Corporation's Common Stock is traded on the NASDAQ
National Market System under the symbol WSFS. At December 31, 1996, the
Corporation had 2,564 registered common stockholders of record. The following
table sets forth the range of high and low sales prices for the Common Stock for
each full quarterly period within the two most recent fiscal years. There have
been no dividends declared or paid on the Common Stock since the first quarter
of 1990. Payment of dividends by the Bank is subject to regulatory restrictions
and the covenants of the Senior Notes. For additional information regarding such
restrictions, see Note 9 to the Consolidated Financial Statements.
The closing market price of the common stock at December 31, 1996 was
$10 3/16.
Stock Price Range
---------------------
Low High
--- ----
1996 1st $7 1/8 $ 9 1/2
2nd 7 1/4 8 1/4
3rd 6 3/4 8 1/2
4th 8 1/4 10 5/8
1995 1st $3 1/2 4 1/4
2nd 4 5 7/8
3rd 5 5/8 8 5/8
4th 7 3/8 10
-26-
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
At December 31,
Total assets..................................... $1,357,635 $1,218,826 $1,195,686 $ 994,692 $1,010,079
Net loans (1).................................... 824,883 792,184 710,776 687,492 763,799
Investment securities (2)........................ 18,933 28,772 64,144 54,346 59,585
Investment in reverse mortgages, net............. 35,796 35,614 32,172 24,913
Other investments................................ 47,337 52,128 44,249 110,816 52,602
Mortgage-backed securities (2)................... 365,252 237,132 262,748 43,750 40,898
Deposits......................................... 744,886 724,030 809,707 806,605 859,147
Borrowings (3)................................... 489,819 370,795 295,244 107,864 110,673
Senior notes..................................... 29,100 29,850 32,000 32,000
Stockholders' equity............................. 75,788 73,546 45,274 38,693 32,267
Number of full-service branches (4).............. 16 14 16 16 16
For the Year Ended December 31,
Interest income.................................. $104,594 $ 99,936 $ 80,666 $ 72,320 $ 85,711
Interest expense................................. 58,862 58,067 44,652 38,508 55,039
Other income .................................... 8,150 22,615 7,210 7,970 8,157
Other expenses .................................. 32,345 37,341 34,483 34,485 33,650
Income before taxes ............................. 19,522 25,740 7,058 4,677 3,820
Net income ...................................... 16,356 27,008 8,070 6,359 4,822
Earnings per share:
Primary ....................................... 1.16 1.84 .55 .88 .89
Fully diluted .................................. 1.16 1.84 .55 .44 .64
Interest rate spread............................. 3.18% 3.14% 3.11% 3.39% 2.88%
Net interest margin.............................. 3.71 3.57 3.39 3.64 3.02
Return on average equity......................... 21.19 45.68 19.64 18.12 23.15
Return on average assets......................... 1.28 2.21 .73 .65 .44
Average equity to average assets................. 6.06 4.84 3.69 3.57 1.92
</TABLE>
(1) Includes loans held-for-sale.
(2) Includes securities available-for-sale.
(3) Borrowings consist of FHLB advances, securities sold under agreement to
repurchase and municipal bond repurchase obligations. The municipal bond
repurchase was called in 1996.
(4) During 1995, WSFS's wholly-owned subsidiary, Fidelity Federal,
sold the deposits of four branches. The remaining assets,
liabilities and equity were merged into WSFS. Additionally, WSFS
opened two new branches with deposits acquired from other
institutions. During 1996, WSFS opened two more new branches.
-27-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
WSFS Financial Corporation (the "Corporation") is a savings and loan
holding company headquartered in Wilmington, Delaware. Substantially, all of the
Corporation's assets are held by its subsidiary, Wilmington Savings Fund
Society, FSB (the "Bank" or "WSFS"), the largest thrift institution
headquartered in Delaware and among the four largest financial institutions in
the state on the basis of total deposits. The Corporation's primary market area
is the Mid-Atlantic region of the United States which is characterized by a
diversified manufacturing and service economy. The banking operations of WSFS
are presently conducted from 16 retail banking offices located in the Wilmington
and Dover, Delaware area. The Bank provides residential real estate, commercial
real estate, commercial and consumer lending services and funds these activities
primarily by attracting retail deposits and borrowings. Deposits are insured by
the Federal Deposit Insurance Corporation.
Additional subsidiaries of the Bank include WSFS Credit Corporation
("WCC"), which is engaged primarily in motor vehicle leasing, and 838 Investment
Group, Inc. which markets various insurance products and mutual funds through
the Bank's branch system. In June 1994, the Bank formed a consumer finance
subsidiary, Community Credit Corporation ("CCC") which opened its first office
in August 1994. CCC specializes in consumer loans secured by first and second
mortgages. An additional subsidiary, Star States Development Company ("SSDC") is
currently inactive with the exception of one remaining parcel of land which is
being marketed for sale. In November 1994, the Bank acquired Providential Home
Income Plan, Inc. ("Providential"), a San Francisco, California-based reverse
mortgage lender. The management and operations of Providential were merged into
the Bank in November 1996.
The long-term goal of the Corporation is to be a high-performing
financial services company focused on its core banking business while developing
unique niche businesses. Beginning in 1994, the Corporation focused its efforts
on developing new businesses and avenues for asset growth which are expected to
yield returns in the future. Toward that end, the Corporation opened the
consumer finance subsidiary, CCC, and acquired Providential. These retail
investments, combined with the growth in the investment portfolios, have
favorably impacted net interest income and earnings since 1994 and are expected
to provide favorable returns on investments in the coming years. Such
investments for the future were possible since the Bank became
"well-capitalized" in the second quarter of 1994. This was largely due to
continued operating earnings and the Corporation's capital infusion of $25.2
million of the proceeds of a $32.0 million debt offering which was completed in
December 1993. In the third quarter of 1995, the Bank recognized a gain of $12.4
million, net of taxes and a supplemental contribution to the Corporation's
401(k) Plan, from the sale of deposits and certain real estate of four branches
of its former bank subsidiary, Fidelity Federal Savings and Loan Association
(the "Association"), located in the northeast section of Philadelphia,
Pennsylvania. This transaction has allowed the Corporation to focus on its
primary market area while enhancing capital.
During the 1980's, the Corporation had pursued a business strategy of
growth and diversification by engaging in such activities as real estate
brokerage, vehicle and equipment leasing and real estate development. This prior
strategy combined with a recession in the U.S. economy resulted in significant
operating and asset quality problems. These problems culminated in a record net
operating loss of $85.5 million in 1990. From 1991 through 1993, the Corporation
had focused on restructuring its operations to achieve compliance with
regulatory capital requirements while reducing nonperforming assets. These
efforts resulted in the Bank achieving full regulatory capital compliance by
completing the previously discussed debt offering as well as twelve consecutive
quarters of earnings. During 1994, earnings continued to improve as the
Corporation recorded record earnings from operations of $8.1 million.
-28-
<PAGE>
The record earnings in 1994 were surpassed in 1995 as the Corporation
recorded earnings of $27.0 million of which $14.6 million was from operations.
Earnings for the year ended December 31, 1996 were $16.4 million. Net income for
1994, 1995 and 1996 included the recognition of tax benefits. Excluding the
one-time net gain on the sale of the Association's deposits, income before taxes
increased from $12.2 million in 1995 to $19.5 million in 1996, a $7.3 million or
60% increase.
The following discussion focuses on the major components of operations
and presents an overview of the significant changes in the Corporation's results
of operations for the past three fiscal years and financial condition during the
past two fiscal years. This discussion should be reviewed in conjunction with
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this Annual Report.
RESULTS OF OPERATIONS
The Corporation recorded net income of $16.4 million in 1996 compared
with $27.0 million and $8.1 million in 1995 and 1994, respectively. Earnings for
1995 were significantly impacted by a nonrecurring after tax gain of $12.4
million on the sale of deposits of the Association. Excluding this gain, net
income for 1996 was $1.8 million higher than 1995 and $8.3 million higher than
1994. This improvement in performance reflects lower operating expenses and
growth in net interest income.
Net Interest Income. Net interest income is the most significant
component of operating income to the Corporation. Net interest income is reliant
upon the levels of interest-earning assets and interest-bearing liabilities and
the difference or "spread" between the respective yields earned and rates paid.
The interest rate spread is influenced by regulatory, economic and competitive
factors that affect interest rates, loan demand and deposit outflows. The level
of nonperforming loans can also impact the interest rate spread by reducing the
yield on the loan portfolio.
Net interest income increased to $45.7 million in 1996 compared with
$41.9 million and $36.0 million in 1995 and 1994, respectively. During these
three years, the growth in interest-earning assets outpaced interest-bearing
liabilities and contributed to the rise in net interest income. Continued growth
in consumer and residential loans as well as the reduction in nonperforming
assets contributed favorably to the growth in net interest income.
Net interest income can be analyzed in terms of the impact of changing
rates and changing volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth certain information regarding
changes in net interest income attributable to changes in the volumes of
interest-earning assets and interest-bearing liabilities and changes in the
rates for the periods indicated. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to: (i) changes in volume (change in volume multiplied by prior
year rate); (ii) changes in rates (change in rate multiplied by prior year
volume); and (iii) net change. Changes due to the combination of rate and volume
changes (changes in volume multiplied by changes in rate) are allocated
proportionately between changes in rate and changes in volume.
-29-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------- -------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Real estate loans (1) .................... $ 2,001 $ (857) $ 1,144 $ 2,970 $ 8,057 $ 11,027
Commercial loans ......................... 218 (381) (163) 123 781 904
Consumer loans ........................... 2,809 (652) 2,157 2,079 539 2,618
Loans held for sale ...................... 158 (14) 144 91 (2) 89
Mortgage-backed securities ............... 2,472 280 2,752 2,714 577 3,291
Investment securities (2) ................ (1,169) (30) (1,199) (240) 511 271
Other .................................... (1,095) 918 (177) 984 86 1,070
-------- -------- -------- -------- -------- --------
5,394 (736) 4,658 8,721 10,549 19,270
-------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
Money market and interest-bearing demand (432) (14) (446) (846) 638 (208)
Savings ................................ (321) 145 (176) (753) 508 (245)
Time ................................... (1,061) (1,161) (2,222) 1,460 5,701 7,161
FHLB of Pittsburgh advances .............. 2,827 (427) 2,400 4,315 (56) 4,259
Senior notes ............................. (167) (167) (146) 10 (136)
Other borrowed funds ..................... 1,817 (411) 1,406 2,264 320 2,584
-------- -------- -------- -------- -------- --------
2,663 (1,868) 795 6,294 7,121 13,415
-------- -------- -------- -------- -------- --------
Net Change ................................... $ 2,731 $ 1,132 $ 3,863 $ 2,427 $ 3,428 $ 5,855
======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes commercial mortgage loans.
(2) No adjustments have been made to restate the yields on tax-exempt
obligations to a tax-equivalent basis. The income differential is not
material.
The $3.9 million increase in net interest income between 1996 and 1995
was attributable to both changes in rate of $1.1 million and changes in volume
of $2.7 million. The changes in volume and rate reflect the various events and
transactions which have occurred between periods. The increase in net interest
income of $5.9 million between 1995 and 1994 was attributable to changes in rate
of $3.4 million and changes in volume of $2.4 million.
The following table, in thousands except yield and rate data, provides
information regarding the balances of and yields and rates on interest-earning
assets and interest-bearing liabilities during the periods indicated.
-30-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- -------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans (1) (2):
Real estate loans (3)............... $ 584,711 $ 54,221 9.27% $ 563,172 $ 53,077 9.42% $ 527,781 $ 42,050 7.97%
Commercial loans.................... 26,678 2,674 10.02 24,687 2,837 11.49 23,276 1,933 8.30
Consumer loans...................... 211,861 19,307 9.11 181,323 17,150 9.46 159,127 14,532 9.13
---------- -------- ---------- -------- ---------- ----------
Total loans.................... 823,250 76,202 9.26 769,182 73,064 9.50 710,184 58,515 8.24
Mortgage-backed securities (4).......... 289,158 19,446 6.73 252,269 16,694 6.62 210,301 13,403 6.37
Loans held for sale (2)................. 3,649 272 7.45 1,539 128 8.32 445 39 8.76
Investment securities (4)............... 31,504 2,168 6.88 48,514 3,367 6.94 52,365 3,096 5.91
Other interest-earning assets........... 86,104 6,506 7.56 101,542 6,683 6.58 87,909 5,613 6.39
---------- -------- ---------- -------- ----------- ---------
Total interest-earning assets....... 1,233,665 104,594 8.48 1,173,046 99,936 8.52 1,061,204 80,666 7.60
-------- --------
Allowance for loan losses............... (24,527) (23,201) (22,077)
Cash and due from banks................. 22,911 25,207 26,794
Other noninterest-earning assets........ 42,347 45,963 46,569
---------- ---------- ----------
Total assets........................ $1,274,396 $1,221,015 $1,112,490
========== ========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-bearing
demand ............................ $ 54,582 1,419 2.60 $ 71,257 1,865 2.62 $ 91,767 2,073 2.26
Savings............................. 156,337 4,077 2.61 168,507 4,253 2.52 200,103 4,498 2.25
Time ............................... 454,654 25,726 5.66 472,941 27,948 5.91 443,401 20,787 4.69
---------- -------- ---------- -------- ---------- ----------
Total interest-bearing deposits 665,573 31,222 4.69 712,705 34,066 4.78 735,271 27,358 3.72
FHLB of Pittsburgh advances............. 307,180 18,079 5.89 259,071 15,679 6.05 187,946 11,420 6.08
Senior notes............................ 29,251 3,332 11.39 30,710 3,499 11.39 32,000 3,635 11.39
Other borrowed funds.................... 108,140 6,229 5.76 77,024 4,823 6.26 40,367 2,239 5.55
---------- -------- ---------- -------- ---------- ----------
Total interest-bearing liabilities.. 1,110,144 58,862 5.30 1,079,510 58,067 5.38 995,584 44,652 4.49
-------- --------
Noninterest-bearing demand deposits..... 66,823 62,880 61,207
Other noninterest-bearing liabilities... 20,224 19,502 14,605
Stockholders' equity.................... 77,205 59,123 41,094
---------- ---------- ----------
Total liabilities and
stockholders' equity .............. $1,274,396 $1,221,015 $1,112,490
========== ========== ==========
Excess of interest-earning assets
over interest-bearing liabilities... $ 123,521 $ 93,536 $ 65,620
========== ========== ==========
Net interest and dividend income........ $ 45,732 $ 41,869 $ 36,014
======== ======== ==========
Interest rate spread.................... 3.18% 3.14% 3.11%
==== ==== ====
Interest rate margin.................... 3.71% 3.57% 3.39%
==== ==== ====
Net interest and dividend income to
total average assets................ 3.59% 3.43% 3.24%
==== ==== ====
</TABLE>
(1) Nonperforming loans are included in average balance computations.
(2) Balances are reflected net of unearned income.
(3) Includes commercial mortgage loans.
(4) Includes securities available for sale.
-31-
<PAGE>
Interest income and expense increased $4.7 million and $795,000,
respectively, between 1996 and 1995. In general, the growth in interest-earning
assets and the continued reduction in the level of nonperforming assets were key
factors contributing favorably to net interest income. The increase in net
interest income year over year was also attributable to the implementation of an
investment growth strategy in the first half of 1996 in which the Bank purchased
$93.9 million in mortgage-backed securities.
Between 1995 and 1994, interest income and expense increased $19.3
million and $13.4 million, respectively. These increases were due in part to the
full year impact of an investment growth strategy which was implemented in 1994
and to acquisition of a $47.5 million portfolio of discounted commercial loans
and commercial mortgages in July 1995.
Provision for Loan Losses. The Corporation considers, among other
things, identifiable and inherent risks in its loan portfolio in periodically
establishing the amount of the provision for loan losses, and the amount of the
allowance for loan losses. Such risks are determined based upon an ongoing
review of the loan portfolio, which includes the identification and assessment
of adverse situations that may affect borrowers' debt servicing ability, an
analysis of overall portfolio quality and prior loan loss experience as well as
an appraisal of current and expected economic trends and conditions.
Accordingly, the allowance for loan losses is maintained at a level which
management deems adequate to provide for potential losses.
The provision for loan losses increased from $1.4 million in 1995 to
$2.0 million in 1996. The increase was due in part to loan growth, as well as
the Corporation's assessment of the portfolio. The provision for loan losses
decreased by $280,000 between 1994 and 1995. The Corporation's continued efforts
to resolve and collect problem loans, including nonaccrual and restructured
loans should favorably impact provision requirements. The allowance for loan
losses was $24.7 million at December 31, 1996, a 2.37% increase from the level
reported at December 31, 1995. The loan loss allowance as a percentage of total
loans was 2.84% in 1996 versus 2.90% in 1995.
During 1997, the Corporation will continue to adjust the provision for
loan losses periodically as necessary to maintain the allowance for loan losses
at what is deemed to be an adequate level, based on the previously discussed
criteria. As the provision is primarily a function of credit quality, changes in
the provision for loan losses are contingent upon the economic conditions of the
Corporation's market area and the economic prospects of borrowers.
Other Income. Other income decreased $14.5 million during 1996 to $8.2
million. This significant decline resulted predominantly from a nonrecurring
pretax gain of $14.2 million recognized on the sale of the Association's
deposits during the third quarter of 1995. In addition, the reduction in other
income was due to the Corporation's recognition of $243,000 of losses on the
disposition of securities in 1996 compared to gains of $265,000 in 1995. This
was offset in part by a $239,000 increase in loan servicing fees between the
same periods.
Other income grew $15.4 million during 1995 to $22.6 million. As
discussed above, other income for 1995 included the $14.2 million gain on the
sale of deposits. In addition, other income was favorably impacted by growth in
loan servicing fees and services charges on deposits which increased $590,000
and $288,000, respectively.
Other Expenses. Other expenses decreased $5.0 million during 1996 to
$32.3 million. Reductions in salaries, the net costs of foreclosed assets, and
federal deposit insurance premiums were the predominant factors contributing to
this favorable performance. Other expenses increased by $2.9 million to $37.3
million between 1994 and 1995. Significant increases occurred in salaries, and
the net costs of assets acquired through foreclosure. Reductions in the deposit
insurance premium partially offset these increases.
-32-
<PAGE>
Salaries decreased $2.0 million during 1996. This decline resulted
primarily from expenses associated with stock appreciation rights, which were
$1.1 million below 1995 levels, as well as lower staffing levels. In 1995,
salaries increased $3.7 million. This rise was primarily attributable to an
increase of $2.6 million in incentive related compensation. Included in such
compensation were higher expenses associated with stock appreciation rights,
resulting from the significant rise in the Corporation's stock price during
1995.
Federal deposit insurance premium decreased $1.1 million between 1996
and 1995, and $1.2 million between 1995 and 1994. Premiums in 1996 represent
only the amount assessed on deposits acquired from SAIF insured institutions.
The decrease between 1995 and 1994 reflects an approximately 80% reduction in
premiums assessed by the FDIC during the second half of 1995. Since the Bank is
currently considered "well-capitalized" by the OTS, FDIC premiums are expected
to remain nominal in 1997.
The net costs of foreclosed assets declined $1.5 million in 1996. This
decrease was largely attributable to a $1.2 million reduction in the provision
for losses on foreclosed assets. Conversely, the $924,000 increase in the net
costs of foreclosed assets between 1995 and 1994 was due almost entirely to a
$927,000 increase in the provision for losses on foreclosed assets.
The Bank entered into a new contract with its data processing
facilities management company in February 1997. Under the terms of the contract,
the management of the Bank's "back office" functions of deposit and loan
operations will be transferred to the data processing facilities management
company. In addition, the Bank will implement new technology initiatives to
expand product and delivery options, enhance customer service and improve
productivity. As a result of this contract, data processing and equipment
expense are expected to increase, offset by reduction in salaries and other
employee related expenses. See Note 14 to the Consolidated Financial Statements
for additional information regarding this contract.
Income Taxes. The Corporation recorded a $3.2 million tax provision for
the year ended December 31, 1996 compared to tax benefits of $1.3 million and
$1.0 million for the years ended December 31, 1995 and 1994, respectively. The
provision (benefit) for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities. The net
tax benefits recorded in 1995 and 1994 were a result of the utilization of the
Corporation's prior net operating loss carryforwards. The year 1996 included a
$3.4 million tax benefit resulting from the merger of Providential into WSFS. As
a result of this merger, certain Providential tax benefits which were previously
offset by a valuation allowance had become recognizable by WSFS, because of the
ability to offset future taxable income of the Corporation with the tax net
operating loss carryforwards of Providential. Previously, these tax net
operating loss carryforwards were not recognized because of limitations imposed
by the Internal Revenue Code of 1986, as amended (the Code), and it was deemed
more likely than not that Providential would not have sufficient future taxable
income to utilize the carryforwards before they expired. Approximately $22
million of the Corporation's deferred tax assets are related to Providential's
writedowns and income on its reverse mortgages. Management has assessed
substantial valuation allowances on these deferred tax assets due to limitations
imposed by the Code and uncertainties, including the timing of when these assets
are realized. As time passes, management will have more information on which to
base the recognition of these assets. As a result, management expects that the
Corporation's effective tax rate for 1997 will be approximately 31%. (It should
be understood that the foregoing is a forward-looking statement that involves
considerable uncertainty. The Company's ability to reduce its 1997 tax rate to
31% is contingent on its ability to recognize the favorable tax attributes
acquired from Providential which are in turn dependent on, among other things,
the Company's future earnings levels and the timing of the realization of the
tax attributes. Accordingly, the Company's actual tax rate for 1997 could differ
materially from 31%).
-33-
<PAGE>
The Corporation analyzes its projections of taxable income on an
ongoing basis and makes adjustments to its provision (benefit) for income taxes
accordingly. For additional information regarding the Corporation's tax
provision and net operating loss carryforwards see Note 12 to the Consolidated
Financial Statements.
FINANCIAL CONDITION
Consolidated assets grew $138.8 million, or 11.4%, during 1996. Asset
growth occurred primarily in mortgage-backed securities and loans offset in part
by reductions in investments and other liquidity. Total liabilities increased
$136.6 million during the year. This increase occurred primarily in securities
sold under agreements to repurchase, deposits and advances from the Federal Home
Loan Bank of Pittsburgh. Stockholders' equity grew $2.2 million to $75.8 million
at December 31, 1996. This increase was attributable to earnings offset in part
by the acquisition of treasury stock.
Mortgage-backed securities. During 1996, mortgage-backed securities
increased by $128.1 million. The increase resulted from the purchase of $154.3
million in high quality collateralized mortgage obligations and $20.3 million in
other mortgage-backed securities. These purchases were offset by principal
repayments.
Investments. Investment securities decreased $9.8 million between
December 31, 1995 and 1996. This decrease resulted primarily from the
disposition of a $6.0 million investment in a fund which invested in
adjustable-rate government securities. In addition, maturities and calls on
corporate and municipal bonds totaled $4.7 million in 1996.
Loans. Net loans grew $36.3 million to $824.1 million at December 31,
1996. This increase was attributable to growth in the Corporation's lease and
consumer loan portfolios of $23.1 million and $21.3 million, respectively.
Partially offsetting these increases was a $15.0 million reduction in commercial
mortgage loans.
Deposits. Deposits increased $20.9 million during 1996 to $744.9
million. This growth was largely attributable to the interest credited to
deposits of $22.9 million and the purchase of $10.4 million in deposits from
another Delaware financial institution. Partially offsetting these increases was
an outflow of $12.4 million in deposits. The table below depicts the changes in
net deposits over the last three years:
Year Ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
(In Millions)
Beginning balance................... $ 724.0 $ 809.7 $ 806.6
Interest credited................... 22.9 24.4 22.9
Deposits (withdrawals), net......... (12.4) 79.1 (19.8)
Deposits acquired (sold), net....... 10.4 (189.2)
-------- ------- -------
Ending balance...................... $ 744.9 $ 724.0 $ 809.7
======= ======= =======
Borrowings. Total borrowings increased $118.3 million during 1996.
Approximately $103.1 million in securities sold under agreements to repurchase
and $15.5 million in FHLB advances were added during the year to fund asset
growth.
Stockholders' Equity. During the year, stockholders' equity increased
$2.2 million to $75.8 million at December 31, 1996. This increase included $16.4
million in net income offset in part by the acquisition of 1.7 million shares of
treasury stock for $14.7 million. At December 31, 1996, the Bank was in
compliance with all regulatory capital requirements and met the regulatory
classification of a "well-capitalized institution." Tangible, core, tier-1
risk-based and risk-based capital to asset ratios were 7.01%, 7.06%, 10.59% and
11.07%, respectively.
-34-
<PAGE>
Asset/Liability Management. The primary asset/liability management goal
of the Corporation is to manage and control its interest rate risk, thereby
reducing its exposure to fluctuations in interest rates, and achieving
sustainable growth in the interest margins over the long term. Other objectives
of asset/liability management include: (1) ensuring adequate liquidity and
funding, (2) maintaining a strong capital base and (3) maximizing net interest
income opportunities.
In general, interest rate risk is mitigated by closely matching the
maturities or repricing periods of interest-sensitive assets and liabilities to
ensure a favorable interest rate spread. Management regularly reviews the
Corporation's interest rate sensitivity, and uses a variety of strategies as
needed to adjust that sensitivity within acceptable tolerance ranges established
by management. Changing the relative proportions of fixed-rate and
adjustable-rate assets and liabilities is one of the primary strategies utilized
by the Corporation to accomplish this objective. The development of the
Corporation's portfolio of adjustable-rate consumer loans in its primary market
area has been one of the tactics utilized.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities and is considered
negative when the amount of interest-rate sensitive liabilities exceeds the
amount of interest-rate sensitive assets. Generally, during a period of rising
interest rates, a positive gap would result in an increase in net interest
income while a negative gap would adversely affect net interest income.
The repricing and maturities of the Corporation's interest-earning
assets and interest-bearing liabilities at December 31, 1996 are set forth in
the following table.
<TABLE>
<CAPTION>
Less than One to Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans (1).................... $ 371,588 $ 112,299 $ 100,391 $ 584,278
Commercial loans......................... 25,290 2,737 575 28,602
Consumer loans........................... 81,453 148,742 27,327 257,522
Mortgage-backed securities............... 139,374 149,418 76,460 365,252
Loans held for sale...................... 773 773
Investment in reverse mortgages.......... 1,654 6,857 27,285 35,796
Investment securities.................... 4,270 3,789 10,874 18,933
Other investments........................ 47,337 47,337
---------- --------- --------- ---------
671,739 423,842 242,912 1,338,493
---------- --------- --------- ---------
Interest-bearing liabilities:
Money market and interest-bearing
demand deposits ...................... 12,166 44,938 57,104
Savings deposits......................... 35,023 121,381 156,404
Time deposits............................ 327,280 124,454 3,193 454,927
FHLB advances............................ 167,699 155,000 322,699
Senior notes............................. 29,100 29,100
Other borrowed funds..................... 77,120 90,000 167,120
---------- ---------- ---------- -----------
619,288 369,454 198,612 1,187,354
---------- ---------- ---------- ---------
Excess of interest-earning
assets over interest-bearing liabilities
("interest-sensitive gap")............... $ 52,451 $ 54,388 $ 44,300 $ 151,139
========== ========== ========== ==========
Interest-sensitive assets/interest-sensitive
liabilities.............................. 108.47%
Interest-sensitive gap as a percent of total
assets................................... 3.86%
</TABLE>
(1) Includes commercial mortgage loans.
-35-
<PAGE>
To provide a more accurate one-year gap position of the Corporation,
certain deposit classifications are based on the interest sensitive attributes
and not on the repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that 30%
of money market and interest-bearing demand deposits are sensitive to interest
rate changes and that 12% of savings deposits are sensitive to interest rate
changes. Accordingly, the interest sensitive portion is classified in the less
than one year category with the remainder in the over five years category.
However, deposit products with interest rates based on a particular index are
classified according to the specific repricing characteristic of the index.
Deposit rates other than time deposit rates are variable, and changes
in deposit rates are generally subject to management's discretion and not
related to any particular index.
The Corporation's positive interest-sensitivity gap indicates that
rising interest rates could favorably impact net interest income and falling
interest rates could negatively impact net interest income. However, the
interest sensitivity table does not provide a comprehensive representation of
the impact of interest rate changes on net interest income. Each category of
assets or liabilities will not be affected equally or simultaneously by changes
in the general level of interest rates. Even assets and liabilities which
contractually reprice within the same period may not, in fact, reprice at the
same price or the same time. It is also important to consider that the table
represents a specific point in time. Variations can occur daily as the Bank
adjusts its interest sensitivity throughout the year. Accordingly, no assurance
can be given that net interest income would benefit from a rise or fall in
interest rates.
NONPERFORMING ASSETS
Nonperforming assets, which include nonaccruing loans, nonperforming
real estate investments and assets acquired through foreclosure can negatively
affect the Corporation's results of operations. 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 the value of the
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 the
ultimate collectibility of principal and interest. Past due loans are loans
contractually past due 90 days or more as to principal or interest payments but
which remain in accrual status because they are considered well secured and in
the process of collection.
-36-
<PAGE>
The following table sets forth the Corporation's nonperforming assets,
restructured loans and past due loans at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Commercial.................................... $ 550 $ 563 $ 1,485 $ 1,595 $ 9,001
Consumer...................................... 224 291 593 674 923
Commercial mortgages.......................... 3,243 2,527 9,886 22,377 16,981
Residential mortgages......................... 3,790 3,568 4,620 4,314 5,887
Construction.................................. 3,529 3,588 3,182 4,638 10,727
--------- --------- ---------- -------- --------
Total nonaccruing loans............................ 11,336 10,537 19,766 33,598 43,519
Nonperforming investments in
real estate................................... 1,500 1,252 2,738 2,901 3,394
Assets acquired through
foreclosure................................... 6,441 11,614 18,936 14,583 28,898
---------- --------- ---------- --------- ---------
Total nonperforming assets......................... $ 19,277 $ 23,403 $ 41,440 $ 51,082 $ 75,811
======== ======== ======== ======== ========
Restructured loans................................. $ 10,967 $ 17,393 $ 13,775 $ 18,020 $ 10,874
======== ======== ======== ======== ========
Past due loans:
Residential mortgages......................... $ 328 $ 111 $ 152 $ 359 $ 518
Commercial and
commercial mortgages........................ 832 789 240 5,590 854
Consumer...................................... 510 143 102 205 376
---------- --------- --------- --------- --------
Total past due loans............................... $ 1,670 $ 1,043 $ 494 $ 6,154 $ 1,748
========= ========= ========= ========= ========
Ratio of nonaccruing loans
to total loans (1)............................ 1.34% 1.30% 2.70% 4.74% 5.53%
Ratio of allowance for loan
losses to total gross loans (1)............... 2.84 2.90 2.89 3.26 3.28
Ratio of nonperforming assets
to total assets............................... 1.42 1.92 3.47 5.14 7.51
Ratio of loan loss allowance
to nonaccruing loans (2)...................... 197.04 201.84 97.79 63.23 60.35
Ratio of loan and foreclosed
asset allowance to total
nonperforming assets (2)...................... 120.22 94.87 51.17 45.51 38.34
</TABLE>
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
-37-
<PAGE>
Total nonperforming assets decreased by $4.1 million between 1996 and
1995 and by $18.0 million between 1995 and 1994. In 1996, collections of such
assets, which were $7.6 million, as well as $7.8 million in transfers to
accrual/restructured status and to investment in real estate contributed to the
reduction in nonperforming assets. Such decreases were offset by the addition of
$11.0 million of assets that were not previously classified as nonperforming
assets. The decrease in the levels of nonperforming assets since 1992 reflects
management's continued efforts to identify and resolve problem assets and, to a
lesser extent, an improved economy.
An analysis of the change in the balance of nonperforming assets during
the last three fiscal years is presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
--------- ------------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance................................................ $ 23,403 $ 41,440 $ 51,082
Additions.................................................. 11,010 8,224 16,732
Collections .............................................. (7,631) (12,247) (17,884)
Transfers to accrual/restructured status................... (2,194)
Transfers to investment in real estate..................... (5,619) (10,424) (3,151)
Charge-offs/write-downs.................................... 308 (3,590) (5,339)
---------- --------- ---------
Ending balance................................................... $ 19,277 $ 23,403 $ 41,440
======== ======== =========
</TABLE>
The most significant reduction in categories between 1996 and 1995 was
in assets acquired through foreclosure which decreased $4.1 million. This
reduction was primarily the result of a $5.6 million property which was
transferred to investment in real estate. The level of nonaccruing loans to
total loans ratio remained somewhat level between periods consistent with level
of both nonaccruing and total loans. The nonperforming assets to total assets
ratio decreased significantly as a result of the reduction in nonperforming
assets, specifically assets acquired through foreclosure.
In 1995, nonaccruing loan reductions of $7.4 million and $1.1 million
in the commercial mortgage and residential mortgage categories, respectively, a
$15 million decrease in nonperforming investments in real estate and a $7.3
million decrease in assets acquired through foreclosure comprised the majority
of the reduction in total nonperforming assets. During the first quarter of
1995, a $4.4 million nonaccruing commercial mortgage loan was returned to
accrual status and a $2.8 million nonaccruing commercial mortgage loan was
transferred to assets acquired through foreclosure after a $744,000 partial
charge-off was recorded to the allowance for loan loss. The property was
subsequently sold during the third quarter of 1995.
-38-
<PAGE>
At December 31, 1996, nonperforming assets with carrying values of $1.0
million or more totalled approximately 51.1% of the Corporation's total
nonperforming assets, as compared to 64.0% at December 31, 1995. The following
table reflects the stratification of such assets by size at December 31, 1996
and 1995.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995
----------------------- ------------------------
No. of Items Balance No. of Items Balance
(Dollars in Thousands)
<C> <C> <C> <C> <C>
$5 million and over..................................... 1 $ 5,100 1 $ 5,950
$1 million - $4.99 million.............................. 3 4,743 4 9,021
$0.5 million - $0.99 million............................ 1 585
Under $500,000.......................................... 175 8,849 150 8,432
--- --------- --- ----------
Total nonperforming assets.......................... 180 $19,277 155 $ 23,403
=== ======= === ========
</TABLE>
The most significant reduction in categories between periods was in the
"$1 million - $4.99 million" category. This reduction was due to the transfer of
an asset acquired through foreclosure.
Allowance for Loan Losses. The Corporation maintains an allowance for
loan losses and charges losses on loans to this allowance when such losses are
considered probable. The allowance for loan losses is maintained at a level
which management considers adequate to provide for potential loan losses based
upon an evaluation of known and inherent risks in the loan portfolio.
Management's evaluation is based upon a continuing review of the loan portfolio
which includes factors such as identification of adverse situations which may
affect the borrower's ability to repay, a review of overall portfolio quality,
prior loan loss experience and an assessment of current and expected economic
conditions. Changes in economic conditions and economic prospects of borrowers
can occur quickly and, as a result, impact the estimates made by management.
Additionally, management evaluates the collectibility of each loan in
the nonperforming portfolio and the fair value of each asset in the assets
acquired through foreclosure category quarterly. The most frequent form of
collateral for loans and foreclosed assets regardless of type are
income-producing properties, business-owned real estate and personal residences.
The value of such collateral is frequently verified through the use of outside
appraisals. Appraisals of collateral, together with the value of guarantees and
the worth of other collateral, are combined to recognize current loan losses,
write-downs of foreclosed assets, and to reserve for potential future losses.
-39-
<PAGE>
The table below represents a summary of changes in the allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance.................................... $24,167 $21,700 $23,613 $26,263 $26,975
Provision for loan losses............................ 2,015 1,403 1,683 2,620 1,359
Balance at acquisition for discounted
commercial mortgages............................. 2,600
Transfer from lease residual reserves ............... 362
Charge-offs:
Residential real estate.......................... 185 154 24 399 124
Commercial real estate (1)....................... 416 814 3,168 3,599 1,799
Commercial....................................... 605 404 1,021 1,689 229
Consumer (2)..................................... 880 826 514 655 910
------- ------- ------- ------- -------
Total charge-offs........................... 2,086 2,198 4,727 6,342 3,062
------- ------- ------- ------- -------
Recoveries:
Residential real estate.......................... 15 1 29 42 49
Commercial real estate (1)....................... 4 293 486 713 554
Commercial....................................... 15 169 322 46 171
Consumer (2)..................................... 248 199 294 271 217
------- ------- ------- ------- -------
Total recoveries............................ 282 662 1,131 1,072 991
------- ------- ------- ------- -------
Net charge-offs...................................... 1,804 1,536 3,596 5,270 2,071
------- ------- ------- ------- -------
Ending balance....................................... $24,740 $24,167 $21,700 $23,613 $26,263
======= ======= ======= ======= =======
Net charge-offs to average gross
loans outstanding, net
of unearned income............................... .22% .20% .51% .71% .25%
======= ======= ======= ======= =======
</TABLE>
(1) Includes commercial mortgage and construction loans.
(2) Includes lease financings.
The provision for loan losses increased $612,000 between 1996 and 1995.
This increase was due in part to loan growth and management's continuing review
of the loan portfolio. A $2.6 million allowance was established on a portfolio
of discounted commercial loans which was purchased in the third quarter of 1995.
The ratio of net charge-offs to average gross loans outstanding (net of unearned
income) was .22% and .20% for the years ending December 31, 1996 and 1995,
respectively.
The higher level of charge-offs in 1994 and 1993 were due to the
deterioration in the credit quality of certain commercial and commercial real
estate loans. During 1994, the most significant charge-off in the commercial
real estate category was a $2.7 million partial charge-off of a nonaccruing
commercial mortgage loan which was subsequently transferred to assets acquired
through foreclosure. The provision for loan losses during 1993 was increased
primarily due to a $9.3 million commercial real estate loan being placed on
nonaccrual in the first quarter of 1993 when the borrower filed bankruptcy.
-40-
<PAGE>
The allowance for loan losses is allocated by major loan portfolio
type. As these portfolios have developed, they have become a source of
historical data in projecting delinquencies and loss exposure; however, such
allocations are not indicative of where future losses may occur. The allocation
of the allowance for loan losses at the end of each of the last five fiscal
years and the percentage of outstanding loans in each category to total gross
outstanding loans at such dates follow:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate.......... $ 326 31.9% $ 409 32.7% $ 506 34.7% $ 439 32.2% $ 774 31.5%
Commercial real estate........... 12,697 35.2 13,663 38.8 14,273 37.9 15,967 41.8 17,052 41.1
Commercial....................... 10,068 3.3 9,180 2.9 5,844 3.4 6,317 2.9 7,475 4.2
Consumer (1)..................... 1,649 29.6 915 25.6 1,077 24.0 890 23.1 962 23.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total........................ $24,740 100.0% $24,167 100.0% $21,700 100.0% $23,613 100.0% $26,263 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
(1) Includes lease financings.
LIQUIDITY
The Corporation itself engages only in limited business operations
independent of the Bank and its subsidiaries and therefore, does not require a
substantial amount of liquid assets. The Corporation is required, however, to
maintain a reserve at December 31, 1996 of 100% of the aggregate interest
expense for 12 full calendar months on $29.1 million of the 11% Senior Notes
issued in December 1993. At December 31, 1996, the Corporation retained
approximately $3.2 million for the purpose of meeting this reserve requirement.
The Corporation's ability to comply with this requirement is dependent upon its
ability to obtain dividends from the Bank. The Corporation's principal asset is
its investment in the capital stock of the Bank and its primary source of
liquidity is dividends from the Bank. Under applicable federal regulations, the
Bank may pay dividends within certain limits and only after notice to the Office
of Thrift Supervision (OTS).
As required by the OTS, institutions under its supervision must
maintain a 5.0% minimum liquidity ratio of cash and qualified assets to net
withdrawable deposits and borrowings due within one year. The liquidity ratios
of the Bank were 8.0% at both December 31, 1996 and 1995, respectively.
Management monitors liquidity daily and maintains funding sources to
meet unforeseen changes in cash requirements. It is the policy of the Bank to
maintain cash and investments slightly above required levels. The Corporation's
primary financing sources are deposits, repayments of loans and investment
securities, sales of loans and borrowings. In addition, the Corporation's
liquidity requirements can be accomplished through the use of its borrowing
capacity from the FHLB of Pittsburgh, the sale of certain securities under
agreement to repurchase and the pledging of certain loans for other lines of
credit. Management believes these sources are sufficient to maintain the
required levels of liquidity.
At December 31, 1996 and 1995, the Bank had outstanding FHLB advances
of $322.7 and $307.2 million, respectively. Additionally in March 1996, the Bank
secured a $48.8 million FHLB revolving line of credit of which none was
outstanding at December 31, 1996. Another available funding source includes a
$15.0 million revolving line of credit with another institution, of which no
balance was outstanding at December 31, 1996.
The Corporation routinely enters into commitments requiring the future
outlay of funds. In February 1997, the Bank entered into a new agreement with
its data processing facilities management company. Under the terms of this
agreement, an average minimum payment of approximately $4.4 million has been
committed for each of the next five years. The above commitment, as well as loan
commitments, are expected to be met through traditional funding sources, such as
deposits, short-term borrowings, advances from the FHLB and principal repayments
on loans.
-41-
<PAGE>
During 1996, operating and financing activities provided cash and cash
equivalents of $17.4 and $124.3 million, respectively, while investing
activities used $154.2 million. The cash provided by financing activities
resulted primarily from additional borrowings from the FHLB and securities sold
under agreement to repurchase. This cash was used to fund the purchase of
mortgage-backed securities, as well as the repayment of other borrowings. Cash
used for investment activities included a net increase in loans, as well as a
net increase in investment securities and mortgage-backed securities.
In 1995, operating and financing activities provided $12.3 million and
$4.0 million of cash and cash equivalents, respectively, while investing
activities used $8.6 million. The funds provided by financing activities reflect
additional FHLB advances and a net increase in certificates of deposit and time
deposits. These funds were utilized to fund the sale of deposits and for the
repayment of other borrowings. During 1994, the financing and operating
activities provided $190.3 million and $8.2 million of cash and cash
equivalents, respectively, while investing activities used $253.4 million. The
funds provided by financing activities reflect the additional FHLB advances and
reverse repurchase agreements resulting from the investment growth strategy
implemented during 1994. These funds, supplemented with existing liquidity, were
used to purchase mortgage-backed securities and were the major component of the
cash and cash equivalents used for investment activities.
CAPITAL RESOURCES
Federal laws among other things, requires OTS to mandate uniformly
applicable capital standards for all savings institutions. These standards
currently require institutions such as the Bank to maintain a "tangible" capital
ratio equal to 1.5% of adjusted total assets, "core" (or "leverage") capital
equal to 4.0% of adjusted total assets, "Tier 1" capital equal to 4.0% of
"risk-weighted"assets and "risk-based" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), as
well as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized and
critically under capitalized. A depository institution's capital tier depends
upon its capital levels in relation to various relevant capital measures, which
include leverage and risk-based capital measures and certain other factors.
Depository institutions that are not classified as well capitalized are subject
to various restrictions regarding capital distributions, payment of management
fees, acceptance of brokered deposits and other operating activities.
At December 31, 1996, the Bank is classified as well-capitalized and is
in compliance with all regulatory capital requirements. Management anticipates
that the Bank will continue to be classified as well-capitalized. For additional
information concerning the Bank's regulatory capital compliance see Note 10 to
the Consolidated Financial Statements.
In March 1996, the Corporation initiated the first of two stock
repurchase plans, approved by the Board of Directors during the year. A total of
725,300 shares, or approximately 5% of the common stock outstanding, were
acquired in open market transactions for $5.7 million. In October, the
Corporation began a second stock repurchase program to acquire up to 10% of the
outstanding common stock through open market repurchases and privately
negotiated transactions. During the fourth quarter of 1996, the Corporation
repurchased 929,900 shares, or 6.7% of common stock outstanding, under the
second plan for approximately $9.0 million. At December 31, 1996, the
Corporation held 1,655,200 shares of common stock in its treasury at a cost of
$14.7 million. Subsequent to year end, the Corporation substantially completed
the second stock repurchase program by acquiring 385,409 of additional shares of
common stock in January for $4.3 million.
-42-
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Corporation's Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration of the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased costs of the Corporation's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Corporation are
monetary. As a result, interest rates have a greater impact on the Corporation's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or the same extent as the price of
goods and services.
ACCOUNTING DEVELOPMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125"). This statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral. The
Corporation will adopt SFAS 125 prospectively, effective January 1, 1997, the
required date of adoption, except for those types of transactions for which the
effective date has been deferred by the issuance of SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125". The impact
of the provisions of SFAS 125, which take effect January 1, 1997, is not
expected to be material to operations, equity and financial condition. The
Corporation has not yet determined the effect that the provisions deferred by
SFAS 127 would have on its operations, equity and financial condition, but
believes present accounting practices fairly depict the financial transactions
and obligations of the Corporation.
-43-
<PAGE>
Item 8. Financial Statements and Supplementary Data
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the following
pages:
Report of Independent Auditors .............................................. 45
WSFS Financial Corporation (and Subsidiaries):
Management's Statement on Financial Reporting............................. 46
Consolidated Statement of Operations ..................................... 47
Consolidated Statement of Condition....................................... 48
Consolidated Statement of Changes in Stockholders' Equity................. 49
Consolidated Statement of Cash Flows...................................... 50
Notes to the Consolidated Financial Statements............................ 52
(b) The following supplementary data is set forth in this Annual Report
on form 10-K on the following pages:
Quarterly Financial Summary................................................. 81
-44-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of WSFS Financial Corporation
We have audited the accompanying consolidated statement of condition of
WSFS Financial Corporation and subsidiaries (the "Corporation") as of December
31, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WSFS
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31,1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
- ----------------------------------------------
January 20, 1997
Philadelphia, Pennsylvania
-45-
<PAGE>
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
To Our Stockholders:
The management of WSFS Financial Corporation (the "Corporation") is
responsible for the preparation, integrity and fair presentation of its
published financial statements. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and, as
such, include amounts that are based on judgments and estimates of management.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can only provide reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the degree of
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with generally accepted accounting
principles. This assessment was based on criteria for effective internal control
over financial reporting described in "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes the Corporation maintained an
effective internal control structure over financial data, presented in
accordance with generally accepted accounting principles.
Management is also responsible for compliance with the federal laws and
regulations concerning dividend restrictions and loans to insiders designated by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation
as safety and soundness laws and regulations.
The Corporation assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that WSFS Financial Corporation complied, in all material
respects, with the designated laws and regulations related to safety and
soundness for the year ended December 31, 1996.
/s/ Marvin N. Schoenhals /s/ R. William Abbott
- -------------------------------- ------------------------------
Marvin N. Schoenhals R. William Abbott
Chairman, President & Executive Vice President
Chief Executive Officer & Chief Financial Officer
-46-
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans .................................. $ 76,474 $ 73,192 $ 58,554
Interest on mortgage-backed securities ...................... 19,446 16,694 13,403
Interest and dividends on investment securities ............. 2,168 3,367 3,096
Other interest income ....................................... 6,506 6,683 5,613
--------- --------- ---------
104,594 99,936 80,666
--------- --------- ---------
Interest expense:
Interest on deposits ........................................ 31,222 34,066 27,358
Interest on Federal Home Loan Bank advances ................. 18,079 15,679 11,420
Interest on senior notes .................................... 3,332 3,499 3,635
Interest on federal funds purchased and securities sold under
agreements to repurchase .................................. 5,869 4,206 1,570
Interest on other borrowed funds ............................ 360 617 669
--------- --------- ---------
58,862 58,067 44,652
--------- --------- ---------
Net interest income ......................................... 45,732 41,869 36,014
Provision for loan losses ................................... 2,015 1,403 1,683
--------- --------- ---------
Net interest income after provision for loan losses ......... 43,717 40,466 34,331
--------- --------- ---------
Other income:
Gain on sale of deposits .................................... 14,247
Loan servicing fee income ................................... 3,255 3,016 2,426
Service charges on deposit accounts ......................... 2,877 2,811 2,523
Securities gains (losses) ................................... (243) 265 175
Other income ................................................ 2,261 2,276 2,086
--------- --------- ---------
8,150 22,615 7,210
--------- --------- ---------
Other expenses:
Salaries .................................................... 13,959 15,921 12,254
Employee benefits and other personnel expenses .............. 3,518 4,380 3,283
Equipment expense ........................................... 1,260 1,298 2,185
Data processing expense ..................................... 2,346 2,269 2,051
Occupancy expense ........................................... 2,493 2,430 2,392
Marketing expense ........................................... 678 1,050 1,470
Professional fees ........................................... 1,614 850 1,352
Federal deposit insurance premium ........................... 75 1,165 2,328
Net costs of assets acquired through foreclosure ............ 1,375 2,871 1,947
Other operating expenses .................................... 5,027 5,107 5,221
--------- --------- ---------
32,345 37,341 34,483
--------- --------- ---------
Income before taxes ......................................... 19,522 25,740 7,058
Income tax provision (benefit) .............................. 3,166 (1,268) (1,012)
--------- --------- ---------
Net income .................................................. $ 16,356 $ 27,008 $ 8,070
========= ========= =========
Earnings per share .......................................... $ 1.16 $ 1.84 $ .55
</TABLE>
The accompanying notes are an integral part of these financial statements.
-47-
<PAGE>
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
(Dollars in thousands)
<S> <C> <C>
Assets
Cash and due from banks........................................................ $ 24,651 $ 31,135
Federal funds sold and securities purchased under agreements to resell......... 25,400 31,500
Interest-bearing deposits in other banks....................................... 5,802 4,768
Investment securities held-to-maturity (market value: 1996 - $17,587
and 1995 - $22,492)........................................................ 17,680 22,378
Investment securities available-for-sale....................................... 1,253 6,394
Mortgage-backed securities held-to-maturity (market value: 1996 - $311,611
and 1995 - $218,476)......................................................... 313,329 219,727
Mortgage-backed securities available-for-sale.................................. 51,923 17,405
Investment in reverse mortgages, net........................................... 35,796 35,614
Loans held-for-sale............................................................ 758 4,345
Loans, net of allowance for loan losses of $24,740 in 1996 and $24,167 in 1995. 824,125 787,839
Stock in Federal Home Loan Bank of Pittsburgh, at cost......................... 16,135 15,860
Assets acquired through foreclosure............................................ 6,441 11,614
Premises and equipment......................................................... 5,966 6,372
Accrued interest and other assets.............................................. 28,376 23,875
---------- ----------
Total assets................................................................... $1,357,635 $1,218,826
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand................................................... $ 76,451 $ 70,242
Money market and interest-bearing demand..................................... 57,104 57,312
Savings...................................................................... 156,404 153,931
Time......................................................................... 454,927 442,545
---------- ----------
Total deposits................................................................. 744,886 724,030
Federal funds purchased and securities sold under agreements to repurchase .... 159,304 56,159
Federal Home Loan Bank advances................................................ 322,699 307,206
Senior notes................................................................... 29,100 29,850
Other borrowed funds........................................................... 7,816 7,430
Accrued expenses and other liabilities......................................... 18,042 20,605
---------- ----------
Total liabilities.............................................................. 1,281,847 1,145,280
---------- ----------
Commitments and contingencies
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; 10%
Convertible Preferred Stock, Series 1,2,000,000 shares authorized; issued
and outstanding, none .......................................................
Common stock $.01 par value, 20,000,000 shares authorized; issued and
outstanding, 14,567,498 at December 31, 1996 and 14,509,298 at December 31, 1995 146 145
Capital in excess of par value................................................. 57,289 57,136
Net unrealized gains (losses) on securities available-for-sale, net of tax..... 166 (242)
Retained earnings ............................................................. 32,863 16,507
Treasury stock at cost, 1,655,200 shares at December 31, 1996 ................. (14,676)
---------- ----------
Total stockholders' equity..................................................... 75,788 73,546
---------- ----------
Total liabilities and stockholders' equity..................................... $1,357,635 $1,218,826
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-48-
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Serial Capital unrealized Total
Preferred Common in excess losses on Retained Treasury stockholders'
stock stock of par value securities earnings stock equity
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ................. $ 14 $ 53 $ 57,197 $ (18,571) $ $ 38,693
Reclassification of preferred stock to
common stock ........................... (14) 92 (79) (1)
Exercise of common stock options ......... 13 13
Net changes in unrealized gains(losses) on
securities available for sale, net of tax (1,501) (1,501)
Net income ............................... 8,070 8,070
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1994 ............... 145 57,131 (1,501) (10,501) 45,274
Exercise of common stock options ......... 5 5
Net changes in unrealized gains(losses) on
securities available for sale, net of tax 1,259 1,259
Net income ............................... 27,008 27,008
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1995 ............... 145 57,136 (242) 16,507 73,546
Exercise of common stock options ......... 1 153 154
Treasury stock purchases ................. (14,676) (14,676)
Net changes in unrealized gains(losses) on
securities available for sale, net of tax 408 408
Net income ............................... 16,356 16,356
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 ............... $ $ 146 $ 57,289 $ 166 $ 32,863 $(14,676) $ 75,788
======== ======== ======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-49-
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
(In Thousands)
Operating activities:
<S> <C> <C> <C>
Net income ...................................................................... $ 16,356 $ 27,008 $ 8,070
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .................................................. 2,015 1,403 1,683
Provision for losses on assets acquired through foreclosure ................ 400 1,570 643
Depreciation, accretion and amortization ................................... (376) (1,304) 1,371
Decrease in accrued interest receivable and other assets ................... (108) (3,718) (6,019)
Origination of loans held for sale ......................................... (27,766) (37,105) (10,818)
Proceeds from sales of loans held for sale ................................. 31,262 33,151 12,512
Increase (decrease) in accrued interest payable and other liabilities ...... (3,204) 5,882 522
Gain on sale of deposits ................................................... (16,553)
Other, net ................................................................. (1,192) 1,928 204
--------- --------- ---------
Net cash provided by operating activities ....................................... 17,387 12,262 8,168
--------- --------- ---------
Investing activities:
Net (increase) decrease of interest-bearing deposits in other banks ........ (1,034) 5,069 16,494
Maturities of investment securities ........................................ 4,595 12,816 4,444
Sales of investment securities available-for-sale .......................... 60,328 63,493 35,413
Purchases of investment securities held-to-maturity ........................ (39,773) (10,049)
Purchases of investment securities available-for-sale ...................... (54,615) (387) (39,858)
Repayments of mortgage-backed securities held-to-maturity .................. 44,382 23,903 37,706
Repayments of mortgage-backed securities available-for-sale ................ 2,123 2,243 1,736
Purchases of mortgage-backed securities held-to-maturity ................... (135,809) (260,105)
Purchases of mortgage-backed securities available-for-sale ................. (38,763)
Repayments on reverse mortgages ............................................ 13,151 12,701 7,180
Disbursements for reverse mortgages ........................................ (11,091) (14,619) (7,300)
Sales of loans ............................................................. 6,456 4,111 747
Purchase of loans .......................................................... (13,351) (54,271) (5,846)
Net increase in loans ...................................................... (34,989) (27,118) (32,727)
Net increase in stock of Federal Home Loan Bank of Pittsburgh .............. (275) (4,546) (5,435)
Sales of investments in real estate ........................................ 505 1,481 1,082
Payments made for investments in real estate ............................... (1,362) (5) (1,090)
Sales of assets acquired through foreclosure, net .......................... 6,263 7,816 10,758
Premises and equipment, net ................................................ (764) (1,053) (1,457)
Purchase of Providential Home Income Plan, Inc., net of cash acquired ...... (2,031)
Other, net ................................................................. (417) (3,065)
--------- --------- ---------
Net cash used for investing activities .......................................... (154,250) (8,556) (253,403)
--------- --------- ---------
</TABLE>
(Continued on next page)
-50-
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Financing activities:
<S> <C> <C> <C>
Net increase (decrease) in demand and savings deposits ............................. 11,518 (13,527) (14,624)
Net increase in certificates of deposit and time deposits .......................... 12,084 122,701 19,381
Sale of deposits, net .............................................................. (180,758)
Repayment of municipal bond repurchase obligations ................................. (2,689) (2,690) (1,122)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase .............................. 103,145 (549) 56,708
Receipts from additional other borrowed funds ...................................... 125,000 150,970 260,000
Repayments of other borrowed funds ................................................. (109,507) (70,047) (130,045)
Issuance of common stock ........................................................... 154 5 13
Extinguishment of senior notes ..................................................... (750) (2,150)
Purchase treasury stock ............................................................ (14,676)
--------- --------- ---------
Net cash provided by financing activities .......................................... 124,279 3,955 190,311
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ........................................ (12,584) 7,661 (54,924)
Cash and cash equivalents at beginning of period ........................................ 62,635 54,974 109,898
--------- --------- ---------
Cash and cash equivalents at end of period .............................................. $ 50,051 $ 62,635 $ 54,974
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest ........................................................................... $ 58,864 $ 53,689 $ 41,969
Income taxes, net .................................................................. 4,820 2,184 745
Loans transferred to assets acquired through foreclosure ........................... 5,885 6,264 12,729
Net change in unrealized gains (losses) on securities available-for-sale, net of tax 408 (1,259) 1,501
Assets acquired through foreclosure transferred to investment in real estate, net .. 4,806
</TABLE>
The accompanying notes are an integral part of these financial statements.
-51-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WSFS Financial Corporation (Corporation) is a thrift holding company
organized under the laws of the State of Delaware. The Corporation's principal
wholly owned subsidiary, Wilmington Savings Fund Society, FSB (Bank), is a
federal savings bank organized under the laws of the United States which
conducts operations from 16 retail banking offices located in the Wilmington and
Dover, Delaware area.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and revenues and expenses. The material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the adequacy of the allowance for possible loan losses and the
valuations of other real estate owned, deferred tax assets, investment in
reverse mortgages and contingencies.
Basis of Presentation
The consolidated financial statements include the accounts of the
parent company, the Bank and its wholly owned subsidiaries, WSFS Credit
Corporation (WCC), 838 Investment Group, Inc., Community Credit Corporation
(CCC) and Star States Development Company (SSDC). Also included in the
consolidated financial statements are the operations of Providential Home Income
Plan, Inc. (Providential), a subsidiary until November 1996 when the management
and operations were merged into WSFS. Providential was a California-based
reverse mortgage lender which was acquired by the Bank in 1994. In addition,
Star States Pennsylvania Corporation (SSPA) and its subsidiary, Fidelity Federal
Savings and Loan Association (Association), a federally-chartered stock savings
and loan association, are included in the consolidated financial statements
until November 1995. This was the result of the sale of the Association's
deposits in July 1995 and the subsequent merger of the Association's remaining
operations into the Bank in November 1995.
WCC is engaged primarily in motor vehicle leasing. The related leases
are accounted for as either direct financing or operating leases. 838 Investment
Group, Inc. markets various insurance and mutual fund products to Bank customers
through the Bank's branch system. CCC is a consumer finance subsidiary
specializing in consumer loans primarily secured by first and second mortgages.
SSDC was originally formed to acquire, develop and market improved and
unimproved real estate either through wholly owned subsidiaries or investments
in joint ventures. SSDC activities are currently inactive with the exception of
one parcel of land which is being marketed for sale. All significant
intercompany transactions are eliminated in consolidation. Certain
reclassifications have been made to the prior years' financial statements to
conform them to the current year's presentation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold and securities purchased under
agreements to resell. Generally, federal funds are purchased and sold for
periods ranging up to ninety days.
Debt and Equity Securities
Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires that
investments in
-52-
<PAGE>
equity securities that have a readily determinable fair value and
investments in debt securities be classified into three categories and accounted
for as follows:
o Debt securities that the enterprise positively intends to hold to
maturity are classified as "held-to-maturity" and reported at
amortized cost.
o Debt and equity securities purchased with the intention of selling
them in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in
earnings.
o Debt and equity securities not classified in either of the above are
classified as "available-for-sale securities" and reported at fair
value, with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of stockholders' equity.
The cumulative effect of this change in accounting principle was
immaterial at adoption. There were no investment or mortgage-backed securities
classified as "trading" during 1996 or 1995.
Debt and equity securities include investment and mortgage-backed
securities, corporate bonds, notes, debentures and certain equity securities.
Premiums and discounts on debt and equity securities held-to-maturity and
available-for-sale are recognized in interest income using a level yield over
the period to expected maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses. The specific
identification method is used to determine realized gains and losses on sales of
investment and mortgage-backed securities. All sales are made without recourse.
Loans
Loans are stated net of deferred fees and costs and unearned discount.
Loan interest income is accrued using various methods which approximate a
constant yield. Loan origination and commitment fees and direct loan origination
costs are deferred and recognized over the life of the related loans using a
level yield method over the period to maturity.
In the first quarter of 1995, the Corporation adopted SFAS No. 114
"Accounting by Creditors for Impairment of a Loan," and its amendment, SFAS No.
118 "Accounting by Creditors for Impairment of a Loan- Income Recognition and
Disclosures," which require that impaired loans be measured based on the present
value of expected future discounted cash flows, the market price of the loan or
the fair value of the underlying collateral if the loan is collateral dependent.
Impaired loans as defined in SFAS No. 114 include loans within the Corporation's
commercial, commercial mortgage and commercial construction portfolios. The
adoption of SFAS No. 114 had no effect on the results of operations or the
financial position of the Corporation since a portion of the allowance for
credit losses was allocated to the allowance for impairment losses.
Nonaccrual Loans
Nonaccrual 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 or recorded as interest income, depending on management's
assessment of ultimate collectibility of principal and interest. Loans are
returned to an accrual status when the borrower's ability to make periodic
principal and interest payments has returned to normal (i.e. - brought current
with respect to principal or interest or restructured) and the
-53-
<PAGE>
paying capacity of the borrower and/or the underlying collateral is deemed
sufficient to cover principal and interest in accordance with the Corporation's
previously established loan-to-value policies.
Allowances for Loss
The allowance for loan losses is maintained at a level which management
considers adequate to provide for potential loan losses based upon an evaluation
of known and inherent risks in the loan portfolio. Management's evaluation is
based upon a continuing review of the loan portfolio which includes factors such
as identification of adverse situations which may affect the borrower's ability
to repay, a review of overall portfolio quality, prior loan loss experience and
an assessment of current and expected economic conditions. Allowances for
estimated losses on investments in real estate and assets acquired through
foreclosure are provided if the carrying value exceeds the fair value less
estimated disposal costs. Consideration is also given to examinations performed
by regulatory authorities.
Changes in economic conditions and economic prospects of borrowers can
occur quickly and, as a result, impact the estimates made by management. These
estimates are continually reviewed and, as adjustments become necessary, are
included in operations in the period which they become known. Identified losses
on specific loans, investments in real estate or assets acquired through
foreclosure are charged against the applicable allowance.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market as
determined on a net aggregate basis.
Assets Acquired Through Foreclosure
Assets acquired through foreclosure are recorded at the lower of the
recorded investment in the loan or fair value less estimated disposal costs.
Costs subsequently incurred to improve the assets are included in the carrying
value provided that the resultant carrying value does not exceed fair value less
estimated disposal costs. Costs relating to holding the assets are charged to
expense in the current period. An allowance for estimated losses is provided
when declines in fair value below the carrying value are identified. Net costs
of assets acquired through foreclosure includes costs of holding and operating
the assets, net gains or losses on sales of the assets and provisions for losses
to reduce such assets to fair value less estimated disposal costs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Costs of major replacements, improvements and additions are
capitalized. Depreciation expense is computed on the straight-line basis over
the estimated useful lives of the assets or, for leasehold improvements, over
the life of the related lease if less than the estimated useful life.
Accelerated methods are used in depreciating certain assets for income tax
purposes.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of securities under agreements to
repurchase. Reverse repurchase agreements are treated as financings with the
obligation to repurchase securities sold reflected as a liability in the
Consolidated Statement of Condition. The securities underlying the agreements
remain in the asset accounts.
-54-
<PAGE>
Income Taxes
The provision or benefit for income taxes includes federal, state and
local income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities.
Earnings per Share
Primary earnings per share is computed by dividing income applicable to
common stockholders by the weighted average number of common stock and common
stock equivalents outstanding during the periods presented. Common stock
equivalents represent the dilutive effect of the assumed exercise of certain
outstanding stock options using the treasury stock method. The weighted average
number of shares used in computing earnings per share were 14,077,617,
14,676,071 and 14,608,579 for the years ended December 31, 1996, 1995 and 1994,
respectively.
2. DISPOSITION OF CERTAIN ASSETS AND LIABILITIES
On July 28, 1995, the Corporation's wholly-owned subsidiary, Fidelity
Federal Savings and Loan Association, completed the sale of deposits and certain
real estate at four of its branches to another institution. Approximately $197.3
million of deposit liabilities were assumed by this institution in exchange for
certain branch related assets, loans and cash. The premium paid of the deposit
base was 8.52%, subject to certain adjustments at closing. The Corporation
reported a gain of approximately $12.4 million, net of taxes and a supplemental
contribution to the Corporation's 401(k) Plan, or $.84 per outstanding share
from this sale. The Corporation funded the $177.6 million cash outflow through
long-term borrowings of $70.0 million and $63.8 million in brokered CD's. This
transaction allowed the Corporation to focus on its primary market area while
enhancing capital.
-55-
<PAGE>
3. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
Available-for-sale securities:
<S> <C> <C> <C>
December 31, 1996:
State and political subdivisions . $ 1,291 $ $ 38 $ 1,253
======= ======= ======= =======
December 31, 1995:
State and political subdivisions $ 757 $ 134 $ $ 891
Other investments .............. 5,786 283 5,503
------- ------- ------- -------
$ 6,543 $ 134 $ 283 $ 6,394
======= ======= ======= =======
Held-to-maturity:
December 31, 1996:
Corporate bonds ................ $15,038 $ 51 $ 148 $14,941
State and political subdivisions 2,642 4 2,646
------- ------- ------- -------
$17,680 $ 55 $ 148 $17,587
======= ======= ======= =======
December 31, 1995:
Corporate bonds ................ $16,748 $ 154 $ 50 $16,852
State and political subdivisions 5,542 54 41 5,555
Other investments .............. 88 3 85
------- ------- ------- -------
$22,378 $ 208 $ 94 $22,492
======= ======= ======= =======
</TABLE>
Securities with book values aggregating $4,870,000 at December 31, 1996
are pledged as collateral for the Bank's treasury, tax and loan account with the
Federal Reserve. Accrued interest receivable relating to investment securities
was $314,000 and $696,000 at December 31, 1996 and 1995, respectively.
Substantially all of the interest and dividends on investment securities
represented taxable income.
The scheduled maturities of securities held-to-maturity and securities
available-for-sale at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------- ------------------
(In Thousands)
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Within one year ....................................... $ 4,270 $ 4,272 $ $
After one year but within five years................... 3,789 3,789
After five but within ten years........................ 4,789 4,788
After ten years........................................ 4,832 4,738 1,291 1,253
-------- -------- ------- -------
$17,680 $17,587 $ 1,291 $ 1,253
======= ======= ======= =======
</TABLE>
-56-
<PAGE>
Proceeds from the sales of investments available-for-sale during 1996
were $60,328,000. Gains of $218,000 and losses of $353,000 were realized on
these sales. There were no sales of securities classified as held-to-maturity
nor transfers between categories of investment securities during 1996 and 1995.
Proceeds from the sale of investments during 1995 and 1994 were
$63,403,000 and $35,497,000, respectively. Gains of $333,000 and $70,000 in 1995
and 1994, respectively, and losses of $87,000 and $42,000 in 1995 and 1994,
respectively, were realized on these sales.
4. MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In Thousands)
Available-for-sale securities:
<S> <C> <C> <C> <C>
December 31, 1996:
Collateralized mortgage obligations ..... $ 37,238 $ 244 $ $ 37,482
GNMA .............................. 14,391 50 14,441
-------- -------- -------- --------
$ 51,629 $ 294 $ $ 51,923
======== ======== ======== ========
Weighted average yield ............... 7.08%
December 31, 1995:
GNMA .............................. $ 17,586 $ $ 181 $ 17,405
======== ======== ======== ========
Weighted average yield .................. 6.44%
Held-to-maturity securities:
December 31, 1996:
Collateralized mortgage obligations $165,516 $ 927 $ 2 $166,441
FNMA .............................. 62,754 1,276 61,478
GNMA .............................. 1,496 41 1,537
FHLMC ............................. 63,223 60 1,470 61,813
Other ............................. 20,340 2 20,342
-------- -------- -------- --------
$313,329 $ 1,030 $ 2,748 $311,611
======== ======== ======== ========
Weighted average yield ............ 6.96%
December 31, 1995:
Collateralized mortgage obligations $ 72,222 $ 1,280 $ 39 $ 73,463
FNMA .............................. 72,590 1,310 71,280
GNMA .............................. 1,697 44 1,741
FHLMC ............................. 73,197 82 1,309 71,970
Other ............................. 21 1 22
-------- -------- -------- --------
$219,727 $ 1,407 $ 2,658 $218,476
======== ======== ======== ========
Weighted average yield .......... 6.75%
</TABLE>
-57-
<PAGE>
At December 31, 1996, mortgage-backed securities with book values
aggregating $170,194,000 were pledged as collateral for retail customer
repurchase agreements and securities sold under agreements to repurchase.
Accrued interest receivable relating to mortgage-backed securities was
$2,149,000 and $1,372,000 at December 31, 1996 and 1995, respectively. There
were no sales of mortgage-backed securities classified as held-to-maturity or
available-for-sale, nor transfers between categories of mortgage-backed
securities during 1996 and 1995.
5. LOANS
December 31,
1996 1995
---------- ---------
(In Thousands)
Real estate mortgage loans:
Residential (1-4 family) ...................... $278,287 $272,525
Other ......................................... 282,748 296,884
Real estate construction loans...................... 32,134 36,486
Commercial loans.................................... 30,369 26,620
Consumer loans .................................... 135,552 114,265
Lease financings.................................... 121,970 98,840
---------- ---------
881,060 845,620
Less:
Loans in process ................................... 10,658 12,158
Unearned income .................................... 21,537 21,456
Allowance for loan losses .......................... 24,740 24,167
--------- ---------
$824,125 $787,839
========= =========
At December 31, 1996, the Corporation has impaired loans totaling
approximately $16.0 million, all of which had a related allowance for
impairment. The average recorded investment in the loans was $16.3 million in
1996. The allowance for losses on impaired loans totalled $2.4 million at
December 31, 1996. A charge-off of $495,000 was recorded in June 1996. The
Corporation recognizes interest income on a cash basis method on impaired loans.
Total interest income recognized on impaired loans totalled $1.3 million for the
year ended December 31, 1996.
The total amounts of loans serviced for others were $196,415,000,
$229,144,000 and $179,562,000 at December 31, 1996, 1995 and 1994, respectively.
Accrued interest receivable on loans outstanding was $4,546,000, $4,965,000 and
$4,318,000 at December 31, 1996, 1995 and 1994, respectively.
Nonaccruing loans aggregated $11,336,000, $10,537,000 and $19,766,000
at December 31, 1996, 1995 and 1994, respectively. If interest on all such loans
had been recorded, net interest income would have increased by $993,000 in 1996,
$735,000 in 1995, $1,191,000 in 1994.
-58-
<PAGE>
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Beginning balance .............................................................. $24,167 $21,700 $23,613
Balance at acquisition for discounted commercial mortgages ................ 2,600
Transfer from lease residual reserve ...................................... 362
Provision for loan losses................................................. 2,015 1,403 1,683
Loans charged-off ......................................................... (2,086) (2,198) (4,727)
Recoveries................................................................ 282 662 1,131
------- ------- -------
Ending balance ................................................................. $24,740 $24,167 $21,700
======= ======= =======
</TABLE>
6. ASSETS ACQUIRED THROUGH FORECLOSURE
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
------- -------
(In Thousands)
<S> <C> <C>
Real estate ........................................................ $ 7,648 $13,802
Other .............................................................. 718 568
------- -------
8,366 14,370
Less:
Allowance for losses................................................ 1,925 2,756
------- -------
$ 6,441 $11,614
======= =======
</TABLE>
A summary of changes in the allowance for losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Beginning balance.................................................. $ 2,756 $ 5,677 $ 5,570
Provision for loan losses ....................................... 400 1,570 643
Net charge-offs ................................................. (231) (4,491) (536)
Transfer to investment in real estate............................ (1,000)
------- ------- -------
Ending balance .................................................... $ 1,925 $ 2,756 $ 5,677
======= ======= =======
</TABLE>
-59-
<PAGE>
7. PREMISES AND EQUIPMENT
December 31,
-------------------
1996 1995
---- ----
(In Thousands)
Land ................................................ $ 720 $ 720
Buildings ........................................... 6,112 6,088
Leasehold improvements .............................. 2,259 2,269
Furniture and equipment ............................. 7,292 7,208
------- -------
16,383 16,285
Less:
Accumulated depreciation ............................ 10,417 9,913
------- --------
$ 5,966 $ 6,372
======= =======
The Corporation occupies certain premises and operates certain equipment
under noncancelable leases with terms ranging from 1 to 18 years. These leases
are accounted for as operating leases. Accordingly, lease costs are expensed as
incurred. Rent expense was $965,000 in 1996, $921,000 in 1995, and $806,000 in
1994. Future minimum payments under these leases at December 31, 1996 are (in
thousands):
1997 ..................................................... $ 908
1998 ..................................................... 785
1999 ..................................................... 536
2000 ..................................................... 513
2001 ..................................................... 413
Thereafter ................................................... 2,882
------
Total minimum lease payments ................................. $6,037
======
-60-
<PAGE>
8. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more which aggregate $39,586,000 and $37,520,000 at December 31,
1996 and 1995, respectively.
The following is a summary of deposits by category including a summary
of the remaining time to maturity for time deposits:
December 31,
--------------------------
1996 1995
-------- --------
(In Thousands)
Money market and demand:
Noninterest-bearing demand ............. $ 76,451 $ 70,242
Money market and interest-bearing demand 57,104 57,312
-------- --------
Total money market and demand ....... 133,555 127,554
-------- --------
Savings .................................... 156,404 153,931
-------- --------
Time certificates by maturity (1):
Less than one year ..................... 300,114 260,826
One year to two years .................. 63,279 81,132
Two years to three years ............... 29,053 36,597
Three years to four years .............. 30,424 32,108
Four years to five years ............... 28,864 28,906
Over five years ........................ 3,193 2,976
-------- --------
Total time certificates ............. 454,927 442,545
-------- --------
Total deposits ............................. $744,886 $724,030
======== ========
(1) Includes $64.2 and $63.8 million of brokered certificates of
deposits at December 31, 1996 and 1995, respectively.
Interest expense by deposit category follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Money market and interest-bearing demand .............................. $ 1,419 $ 1,865 $ 2,074
Savings ............................................................... 4,084 4,261 4,498
Time .................................................................. 25,719 27,940 20,786
-------- -------- --------
$ 31,222 $ 34,066 $ 27,358
======== ======== ========
</TABLE>
-61-
<PAGE>
9. BORROWED FUNDS
<TABLE>
<CAPTION>
Maximum
Amount Weighted
Outstanding Average Average
Weighted at Month Amount Interest
Balance Average End Outstanding Rate
End of Interest During the During the During the
Period Rate Period Period Period
------ ---- ------ ------ ------
(Dollars in Thousands)
1996
<S> <C> <C> <C> <C> <C>
FHLB advances............................................ $322,699 5.85% $322,699 $307,180 5.89%
Senior notes............................................. 29,100 11.39 29,850 29,251 11.39
Municipal bond repurchase obligations.................... 2,666 648 11.57
Federal funds purchased and securities
sold under agreements to repurchase ................... 159,304 5.70 159,304 100,965 5.81
Other collateralized borrowings.......................... 7,816 4.25 9,497 6,527 4.35
1995
FHLB Advances............................................ $307,206 6.03% $317,210 $259,071 6.05%
Senior notes............................................. 29,850 11.39 32,000 30,710 11.39
Municipal bond repurchase obligations.................... 2,658 11.71 4,632 4,180 9.43
Federal funds purchased and securities sold under
agreements to repurchase .............................. 56,159 5.96 87,951 67,383 6.24
Other collateralized borrowings.......................... 4,772 4.40 7,253 5,461 4.08
</TABLE>
Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank (FHLB) of Pittsburgh with
fixed rates ranging from 4.79% to 7.03% at December 31, 1996 are due as follows
(dollars in thousands):
Weighted
Average
Amount Rate
1997 ................................... $ 137,000 6.12%
1998.................................... 80,000 5.40
1999.................................... 65,000 5.70
2001.................................... 10,000 5.82
------------
$ 292,000
============
Also outstanding at December 31, 1996 is a $30,000,000 advance from the
FHLB with a variable rate based on prime rate less 2.05% which matures in 1997.
The Bank also has FHLB advances of $699,000 maturing in 1997, with fixed rates
of 2.25%. These low rate advances are part of the FHLB of Pittsburgh's
Affordable Housing Program.
In March 1996, the Bank secured a $48,807,000 FHLB revolving line of
credit, of which none was outstanding at December 31, 1996. This line expires on
March 25, 1997 and is expected to be renewed at that time. Pursuant to
collateral agreements with the FHLB, advances are secured by qualifying first
mortgage loans, collateralized mortgage obligations, FHLB stock and an
interest-bearing demand deposit account with the FHLB.
-62-
<PAGE>
Senior Notes
In December 1993, the Corporation completed the private placement of
$32.0 million of 11% Senior Notes (the Notes). The net proceeds totalled $30.4
million, after issuance costs of $1.6 million. Issuance costs are being
amortized on a straight line basis over the life of the Notes as a yield
adjustment. Net proceeds equal to two semi-annual interest payments are retained
by the Corporation. The remainder of the net proceeds were invested in the
common stock of the Bank, the Corporation's principal subsidiary. The
Corporation repurchased and canceled $750,000 and $2,150,000 of the bonds
outstanding during 1996 and 1995, respectively.
The Notes mature on December 31, 2005. All outstanding principal will
be due and payable at maturity. There is no sinking fund requiring principal
payments prior to maturity. The Corporation may elect to redeem the Notes, in
whole or in part, at any time on or after December 31, 1998 at 105% of par plus
accrued interest, declining ratably (but not below par) over the remaining term
to maturity. Semi-annual interest payments are due each January 1 and July 1
until maturity.
The covenants of the Notes require the Corporation to maintain
specified amounts of investment grade securities (in an amount equal to two
semi-annual interest payments), restrict the ability of the Corporation to pay
dividends or to make other capital distributions, limits the creation of liens
and guarantees with respect to certain other indebtedness, restricts the
Corporation's ability to dispose of the capital stock of the Bank, and limits
the creation of additional senior debt. The maturity of the Notes may also be
accelerated in the event of a default.
Municipal Bond Repurchase Obligations
In December 1984, the Bank conveyed municipal bonds with a book value
of $28,959,000 to a unit investment trust in exchange for $22,604,000. Holders
of units in the trust had the option of requiring the trust to redeem their
units and the trust had the option of reselling the units or requiring the Bank
to repurchase any or all of the bonds at stated amounts. The price to be paid by
the Bank to repurchase individual bonds increases on each anniversary of the
conveyance and the Bank's obligation to repurchase individual bonds was to cease
one year prior to the final maturity of such bonds. Given the historical
relationships of short- and long-term yields on municipal bonds and the coupon
rates of the bonds conveyed to the trust, it was assumed that the trust would
require the Bank to repurchase the bonds prior to the expiration of the
repurchase obligations. Consequently, the transaction had been accounted for as
a financing arrangement with the bonds included in investment securities at book
value and the proceeds received by the Bank recorded as a liability. This
liability was increased annually to reflect the increase in the amounts the Bank
was obligated to pay to repurchase individual bonds with a corresponding charge
to interest expense ($75,000, $394,000, and $514,000 for the years ended
December 31, 1996, 1995 and 1994, respectively).
During 1996, the Bank's participation in the unit trust was dissolved
and recorded as a sale resulting in the recognition of a $108,000 loss.
Securities Sold Under Agreements to Repurchase
During 1996, the Bank sold securities under agreements to repurchase as
a short-term funding source. At December 31, 1996, securities sold under
agreements to repurchase had fixed rates ranging from 5.45% to 6.12%. The
underlying securities are mortgage-backed securities with book and market values
aggregating $170.2 million and $168.8 million, respectively, at December 31,
1996.
-63-
<PAGE>
Other Collateralized Borrowings
Collateralized borrowings of $7,816,000 and $4,772,000 at December 31,
1996 and 1995, respectively, consisted of outstanding retail repurchase
agreements, contractual arrangements under which portions of certain securities
are sold on an overnight basis to retail customers under agreements to
repurchase. At December 31, 1996 such borrowings were collateralized by
collateralized mortgage obligations. Rates on these borrowings during 1996
ranged from 4.25% to 4.40%.
10. STOCKHOLDERS' EQUITY
Under Office of Thrift Supervision (OTS) capital regulations, savings
institutions, such as the Bank, must maintain "tangible" capital equal to 1.5%
of adjusted total assets, "core" capital equal to 4.0% of adjusted total assets
and "total" or "risk-based" capital (a combination of core and "supplementary"
capital) equal to 8.0% of risk-weighted assets and Tier 1 capital equal to 4.0%
of risk-weighted assets. At December 31, 1996, the Bank was in compliance with
all such requirements and is deemed a "well-capitalized" institution for
regulatory purposes.
A table presenting the Bank's consolidated capital position relative
to the minimum regulatory requirements as of December 31, 1996 follows
(dollars in thousands):
<TABLE>
<CAPTION>
Consolidated Regulatory
Bank Capital Requirement Excess
------------------ ---------------- --------------------
Percent of Percent of Percent of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital.......................... $ 95,057 7.01% $ 10,336 1.50% $ 74,721 5.51%
Core Capital.............................. 95,801 7.06 54,258 4.00 41,543 3.06
Tier 1 Capital............................ 95,801 10.59 36,174 4.00 59,627 6.59
Risk-based Capital........................ 100,122 11.07 72,348 8.00 27,774 3.07
</TABLE>
Treasury Stock
In March 1996, the Corporation initiated the first of two stock repurchase
plans, approved by the Board of Directors during the year. A total of 725,300
shares, or approximately 5% of the common stock outstanding, were acquired in
open market transactions for $5.7 million. In October, the Corporation began a
second stock repurchase program to acquire up to 10% of the outstanding common
stock through open market repurchases and privately negotiated transactions.
During the fourth quarter of 1996, the Corporation repurchased 929,900 shares,
or 6.7% of common stock outstanding, under the second plan for approximately
$9.0 million. At December 31, 1996, the Corporation held 1,655,200 shares of
common stock in its treasury at a cost of $14.7 million. Subsequent to year end,
the Corporation substantially completed the second stock repurchase program by
acquiring 385,409 additional shares of common stock in January 1997 for $4.3
million.
The Holding Company
Although the holding company does not have significant assets or engage in
significant operations separate from the banking subsidiary, the Corporation has
agreed to cause the Bank's required regulatory capital level to be maintained by
infusing sufficient additional capital as necessary. To that end, the
Corporation issued the 11% Senior Notes described in Note 9.
Pursuant to federal laws and regulations, the Bank's ability to engage in
transactions with affiliated corporations is limited and the Bank generally may
not lend funds to nor guarantee indebtedness of the Corporation.
-64-
<PAGE>
11. EMPLOYEE BENEFIT PLANS
Employee 401(k) Savings Plan
Certain subsidiaries of the Corporation maintain a qualified plan in
which employees may participate. The Corporation's contributions to the plan on
behalf of its employees resulted in an expense of $704,000, $1,417,000 and
$480,000 in 1996, 1995 and 1994, respectively. The plan purchased 55,000,
161,000 and 59,000 shares of common stock of the Corporation during 1996, 1995
and 1994, respectively. The significant increase in expense and shares
purchased in 1995 resulted from a special supplemental contribution of $734,000
related to the sale of the Association's deposits.
Postretirement Benefits
The Corporation shares certain costs of providing health and life
insurance benefits to retired employees (and their eligible dependents).
Substantially all employees may become eligible for these benefits if they
reach normal retirement age while working for the Corporation.
The Corporation accounts for it's obligations under the provisions of
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 106 requires that the costs of these benefits be recognized
over an employee's active working career.
Net periodic postretirement benefit costs for the years ended December
31, 1996, 1995 and 1994 included the following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost for benefits during the period..................................... $ 30 $ 62 $ 35
Interest cost on accumulated postretirement benefit obligation.................. 97 108 104
Amortization of unrecognized transition obligation............................. 65 70 78
Actual gain on plan assets...................................................... (2) - (7)
------ ------ -----
Net postretirement benefit cost........................................... $ 190 $ 240 $ 210
====== ====== =====
</TABLE>
The Corporation's unrecorded accumulated postretirement benefit
obligation (APBO) at adoption was $1.4 million. As permitted, this liability
is being amortized through charges to earnings over a 20-year period. The
following summarizes the APBO at each year ended December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees................................................................. $1,032 $1,312
Future retirees.......................................................... 300 279
------- ------
Total obligation......................................................... 1,332 1,591
Market value of plan assets.............................................. - -
Unrecognized net loss.................................................... (42) (162)
Unrecognized transition liability........................................ (981) (1,196)
------- ------
Postretirement benefit liability recognized in the balance sheet...... $ 309 $ 233
======= ======
Assumptions used to value the APBO:
Discount rate......................................................... 7.3% 7.0%
Health care cost trend rate........................................... 9.5% 9.5%
</TABLE>
-65-
<PAGE>
The Corporation assumes that the average annual rate of increase for
medical benefits will decrease by one-half of 1% per year to 5% in the tenth
and all future years. The costs incurred for retirees health care are limited
since certain current and all future retirees are limited to an annual medical
premium cap of $1,664 indexed by the lesser of 4% or the actual increase in
medical premiums paid by the Corporation. During 1996, the benefit for Medicare
Part B Premium reimbursement payments were also included in the cap noted above.
This change decreased the APBO by $150,000. A 1% increase in the annual health
care trend rates would not have a material impact on the APBO or postretirement
benefit expense at or for the years ended December 31, 1996, 1995 and 1994.
12. TAXES ON INCOME
The Corporation and its subsidiaries file a consolidated federal income
tax return and separate state income tax returns. The income tax provision
(benefit)consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
(In Thousands)
Current income taxes:
<S> <C> <C> <C>
Federal taxes .................................................... $ 1,062 $ 514 $ 226
State and local taxes............................................. 846 1,730 816
Deferred income taxes:
Federal taxes .................................................... 1,197 (3,668) (2,056)
State and local taxes ............................................ 61 156 2
------- ------- -------
$ 3,166 $(1,268) $(1,012)
======= ======= =======
</TABLE>
Current federal income taxes include taxes on income which cannot be
offset by net operating loss carryforwards. For 1995 and 1994, this is due to
the limitation on the amount of alternative minimum taxable income that can be
offset by net operating loss carryforwards (NOL's) as provided in the Internal
Revenue Code of 1986, as amended (the Code).
Based on the Corporation's history of prior earnings and its expectations
of the future, management believes that operating income will more likely than
not be sufficient to recognize a net deferred tax asset of $7.9 million and
$9.3 million at December 31, 1996 and 1995, respectively. Adjustments to the
valuation allowance were made in 1996, 1995 and 1994 as a result of continued
operating earnings and the merger of Providential into WSFS.
-66-
<PAGE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
following is a summary of the significant components of the Corporation's
deferred tax assets and liabilities as of December 31, 1996 and December 31,
1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- ------
Deferred tax liabilities:
<S> <C> <C>
Accelerated depreciation.................................. $(7,149) $(1,552)
Other..................................................... (204) (215)
-------- ------
Total deferred tax liabilities................................. (7,353) (1,767)
-------- ------
Deferred tax assets:
Bad debt deductions....................................... 8,398 9,711
Tax credit carryforwards.................................. 1,768 79
Net operating loss carryforwards.......................... 7,656 7,507
Loan fees................................................. 640 1,034
Provisions for losses on reverse mortgages................ 15,606 20,317
Other..................................................... 2,807 3,006
------ -------
Total deferred tax assets...................................... 36,875 41,654
------ -------
Valuation allowance............................................ (21,628) (30,557)
------- -------
Net deferred tax assets........................................ $7,894 $ 9,330
====== =======
</TABLE>
Approximately $22 million of the Corporation's deferred tax assets are
related to Providential's write-downs and income on its portfolio of reverse
mortgages. Management has assessed substantial valuation allowances on these
deferred tax assets due to limitations imposed by the Code and uncertainties,
including the timing of when these assets are realized.
Included in the table above is the effect of certain temporary
differences for which no deferred tax expense or benefit was recognized. Such
items consisted primarily of unrealized gains and losses on certain investments
in debt and equity securities accounted for under SFAS No. 115.
-67-
<PAGE>
Net operating loss carryforwards of $40.3 million remain at December
31, 1996. There are also alternative minimum tax credit carryforwards and
general business credit carryfowards of approximately $1.8 million at December
31, 1996 which can be offset against regular taxes in future years. The
expiration dates and amounts of such carryforwards and credits are listed below
(in thousands):
<TABLE>
<CAPTION>
NOL's
--------------------------- Credit
Federal State Carryforwards
------- ----- -------------
<S> <C> <C>
1998.......................................................... $ $ 928 $ 40
1999.......................................................... 5,215 36
2000.......................................................... 27
2001.......................................................... 51
2002.......................................................... 4,929 83
2003.......................................................... 10,372
2004.......................................................... 968
2005.......................................................... 3,850
2006.......................................................... 1,098
2008.......................................................... 6,157
2009.......................................................... 6,755
Unlimited..................................................... 1,531
------ ------- -------
$18,828 $21,444 $ 1,768
====== ======= =======
</TABLE>
The Corporation's ability to use its NOL's to offset future income is
subject to restrictions enacted in Section 382 of the Code. These restrictions
would limit the Corporation's future use of its NOL's if there are significant
Ownership Changes in or acquisitions of the Corporation's stock (referred to
herein as an "Ownership Change"). The utilization of approximately $18.8
million of net operating loss carryforwards is limited to approximately $1.5
million each year as a result of such "Ownership Changes" in Providential's
stock.
A reconciliation setting forth the differences between the effective
tax rate of the Corporation and the U.S. Federal Statutory tax rate is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ..................... 35.0% 35.0% 34.0%
State tax net of federal tax benefit................... 3.0 4.8 7.6
Amortization of intangibles............................ 1.8
Utilization of loss carryforwards and
valuation allowance adjustments...................... (21.3) (42.3) (61.6)
Tax credits utilized................................... (4.2)
Other.................................................. (.5) 1.8 3.9
----- ----- -----
Effective tax rate .................................. 16.2% (4.9)% (14.3)%
===== ===== =====
</TABLE>
-68-
<PAGE>
13. STOCK OPTION PLANS
During 1996, the Corporation had a stock option plan (1986 Option Plan)
for officers, directors and employees of the Corporation and its subsidiaries.
The 1986 Option Plan was amended and restated effective January 1, 1992 and
expired on November 26, 1996, the tenth anniversary of its effective date. As a
result, no future awards may be granted under the 1986 Option Plan. The Option
Plan provided for the granting of incentive stock options as defined in Section
422 of the Internal Revenue Code as well as nonincentive stock options and
stock appreciation rights (SARs). All options were awarded at not less than the
market price of the Corporation's common stock on the date of grant and expire
no later than the tenth anniversary of the date on which the option was granted.
Options granted under the 1986 Option Plan before 1996 are exercisable one year
from the date of grant. Substantially all options granted under this plan in
1996 are exercisable one year from grant date and vest in 20% per annum
increments.
The 1986 Option Plan also provided for the granting of SARs which
allow an optionee to surrender the SARs in consideration for payment by the
Corporation of an amount equal to the excess of the fair market value of the
common stock over the option price of the SARs. SARs granted are exercisable
one year from the date of grant and vest in 20% per annum increments. Such
payments shall be made in cash; however, no SARs are exercisable unless at the
time of surrender the Corporation has the ability to pay dividends and the Bank
has sufficient capital to exceed its federal regulatory capital requirements.
The SARs expire seven years from the date of grant. The Corporation recorded
salary expense related to such SAR's of $433,000, $1,573,000, and $137,000 in
1996, 1995 and 1994, respectively.
A second stock option plan (1997 Option Plan) was proposed during the
year to replace the expired 1986 Option Plan. The effectiveness of this plan
and any grants made under the plan are subject to shareholder approval at the
April 1997 shareholders' meeting. The terms of the 1997 Option Plan, as
proposed, are substantially the same as the 1986 Option Plan except that the
1997 Option Plan allows for the grant of Phantom Stock Awards and all awards
made under the plan vest in 20% per annum increments. The options generally
become immediately exercisable in the event of a change in control of the
Corporation, generally defined as the acquisition of beneficial ownership of
25% or more of the Corporation's voting securities by any person or group of
persons. The 1997 Option Plan will terminate on the tenth anniversary of its
effective date, after which no awards may be granted. A total of 625,000 awards
may be granted under the 1997 Option Plan. At December 31, 1996 there were
608,600 shares available for future grants under the 1997 Option Plan.
-69-
<PAGE>
A summary of the status of the Corporation's 1986 and 1997 Stock
Option Plans as of December 31, 1994, 1995 and 1996, and changes during the
years then ending is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ------------------------------ -------------------------
Weighted Weighted Weighted
average average average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------- ------------------------------- -------------------------
Stock Options:
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 267,505 $ 2.33 269,705 $ 2.36 253,705 $ 2.22
Granted 106,700 9.50 22,000 3.94
Exercised (58,200) 2.64 (2,200) 2.19 (6,000) 2.19
Canceled
--------- --------- ---------
Outstanding at end of year 316,005 4.72 267,505 2.33 269,705 2.36
Exercisable at end of year 209,305 267,505 247,705
Weighted-average fair value
of awards granted during 1996 $ 3.84
SARs:
Outstanding at beginning of year 329,995 2.00 329,995 2.00 329,995 2.00
Granted
Exercised (51,582) 2.13
Canceled (5,338) 1.65
--------- --------- ---------
Outstanding at end of year 273,075 $ 1.99 329,995 $ 2.00 329,995 $ 2.00
Exercisable at end of year 208,260 192,581 121,998
</TABLE>
The Black-Scholes option-pricing model was used to determine the
grant-date fair-value of options in 1996. Significant assumptions used in the
model included a weighted average risk free rate of return of 6.2%; expected
option life of 6 years; expected stock price volatility of 27% and no future
cash dividends expected.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS 123").
This statement encourages, but does not require, the adoption of fair-value
accounting for stock-based compensation to employees. The Company, as permitted,
has elected not to adopt the fair value accounting provisions of SFAS 123, and
has instead continued to apply APB Opinion 25 and related Interpretations in
accounting for plans and provide the required proforma disclosures of SFAS 123.
Had the grant-date fair-value provisions of SFAS 123 been adopted, the
Corporation would have recognized $30,000 in compensation expense related to
its Option Plans in 1996. As a result, proforma net income of the Corporation
would have been $16,326,000 and proforma earnings per share would have remained
$1.16 in 1996.
The effects on proforma net income and EPS of applying the disclosure
requirement of SFAS 123 in 1996 may not be representative of the future
proforma effects on net income and EPS due to the vesting provisions of the
options and future awards that are available to be granted.
-70-
<PAGE>
The following tables summarizes all stock options and SARs outstanding
and exercisable for both the 1986 and 1997 Stock Option Plans as of December 31,
1996:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise
Grant Year Number Price Contractual Life Number Price
------ ---------- ---------------- ------- -----------
Stock Options:
<C> <C> <C> <C> <C> <C>
1990 Awards 95,350 $ 2.19 3.8 years 95,350 $ 2.19
1991 Awards 106,955 2.27 4.2 years 106,955 2.27
1994 Awards 7,000 3.94 7.8 years 7,000 3.94
1996 Awards 106,700 9.50 9.8 years
------- -------
Total 316,005 $4.72 6.1 years 209,305 $2.29
======= =======
SARs:
1992 Awards 233,075 $1.73 2.8 years 184,260 $1.73
1993 Awards 40,000 3.50 3.3 years 24,000 3.50
---------- ---------
Total 273,075 $1.99 2.9 years 208,260 $1.93
========= ========
</TABLE>
-71-
<PAGE>
14. COMMITMENTS
Lending Operations
At December 31, 1996, outstanding letters of credit were $3,373,460
and outstanding commitments to make or acquire mortgage loans aggregated
$7,409,000, of which approximately $4,200,000 were at fixed rates ranging from
6.00% to 7.50% and approximately $3,209,000 were at variable rates ranging from
4.75% to 8.50%. All mortgage commitments are expected to have closing dates
within a six month period.
Computer Operations
In 1988, the Bank entered into an agreement with a data processing
facilities management company. The Bank's operations were fully converted to
this computer system in November 1989 and SSPA was converted in February 1991.
Certain costs for both conversions were capitalized during the conversion
period. The Bank amortized such costs over the original remaining term of the
agreement. These costs were fully amortized by November 1994. Amortization for
1994 totalled $965,000. In February 1997, the Bank entered into a new five-year
contract expiring in March 2002. Under the terms of the contract, this data
processing facilities management company will manage the on-site "back office"
functions of deposit and loan operations for the Bank. The projected amount of
future minimum payments contractually due, is as follows:
1997............................... $4,515,000
1998 .............................. 4,455,000
1999............................... 4,357,000
2000 .............................. 4,357,000
2001 .............................. 4,357,000
2002............................... 726,000
Legal Proceedings
In the ordinary course of business, the Corporation, Bank and its
subsidiaries are subject to legal actions which involve claims for monetary
relief. Based upon information presently available to management and its
counsel, it is management's opinion that any legal and financial responsibility
arising from such claims will not have a material adverse effect on the
Corporation's results of operations.
In February 1994, a class-action complaint was filed against the
Corporation's former subsidiary, Providential, in the United States District
Court, Northern District of California. The class-action complaint was amended
in April 1994 to add as defendants Providential's President and Executive Vice
President, as well as additional claims. The action was purportedly filed on
behalf of a class of persons who acquired Providential's Lifetime Reverse
Mortgage products and alleges violations of the federal Truth in Lending Act
and Regulation Z promulgated thereunder, fraud and deceit, negligent
misrepresentation, unlawful, unfair or fraudulent business practices and
violations of the Consumers Legal Remedies Act based upon alleged
misrepresentations in connection with the sale of reverse mortgages. It seeks
unspecified compensatory and punitive damages and penalties, an accounting of
all loan portfolios, an injunction barring further alleged violations, interest,
costs, expert witness fees and attorneys' fees.
Providential and the individual defendants have moved to compel
arbitration on an individual basis. In July 1994, the District Court issued an
Order Granting Motion to Compel Arbitration, which also dismissed the case and
held that the Court was without authority to order that arbitration proceed as
a class action. In August 1994, the plaintiffs served a notice of appeal to the
-72-
<PAGE>
United States Court of Appeals for the Ninth Circuit from the Order Granting
Motion to Compel Arbitration. A hearing was held in December 1995 and a
decision is pending.
The Corporation believes that all such actions are without merit and
intends to defend itself vigorously.
Providential's loan documents provide for the arbitration of disputes
that may arise in connection with Lifetime Reverse Mortgages. Providential may
from time-to-time be involved in arbitration or litigation with the borrowers
or with the heirs of borrowers. Some kinds of disputes may delay or impair
Providential's ability to liquidate its collateral promptly after maturity of a
loan. Because reverse mortgages are a relatively new product, there can be no
assurances regarding how courts or arbitrators may apply existing legal
principles to the interpretation and enforcement of the terms and conditions of
Providential's reverse mortgage loans.
Financial Instruments With Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business primarily to meet the financing
needs of its customers. These financial instruments involve, to varying degrees,
elements of credit risk that are not recognized in the Consolidated Statement
of Condition.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of those
instruments. The Corporation generally requires collateral to support such
financial instruments in excess of the contractual amount of those instruments
and essentially uses the same credit policies in making commitments as it does
for on-balance sheet instruments.
The following represents a summary of off-balance sheet financial
instruments at year end:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---- ----
(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
<S> <C> <C>
Construction loan commitments ........................................... $10,929 $10,526
Commercial mortgage loan commitments .................................... 3,840 3,127
Commercial loan commitments ............................................. 13,744 10,290
Commercial standby letters of credit .................................... 3,373 3,968
Residential mortgage loan commitments ................................... 7,409 11,573
Consumer lines of credit ................................................ 62,303 65,342
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being completely drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit
written are conditional commitments issued to guarantee the performance of a
customer to a third party. The Corporation evaluates each customer's
creditworthiness and obtains collateral based on management's credit evaluation
of the counterparty.
-73-
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 119 requires disclosure about derivative financial
instruments and the fair values of financial instruments. The Corporation does
not presently invest in such derivative financial instruments and thus has no
disclosure regarding such investments. The other provisions of SFAS No. 119 and
107 require disclosure of estimated fair values about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. The reported fair values of financial instruments are
based on a variety of factors. In certain cases, fair values represent quoted
market prices for identical or comparable instruments. In other cases, fair
values have been estimated based on assumptions regarding the amount and timing
of estimated future cash flows which are discounted to reflect varying degrees
of risk. Accordingly, the fair values may not represent actual values of the
financial instruments that could have been realized as of year end or that will
be realized in the future.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and short-term investments: For cash and short-term investments,
including due from banks, federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits with other banks, the
carrying amount is a reasonable estimate of fair value.
Investment and mortgage-backed securities: Fair value for investment
securities are based on quoted market prices, where available. If a quoted
market price is not available, fair value is estimated using quoted prices for
similar securities.
Investment in reverse mortgages: The fair value of the Corporation's
investment in reverse mortgages is based on discounted net cash flows. The
discount rate utilized in determining such fair value is based on current rates
of similar instruments with comparable maturities.
Loans: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type: commercial, commercial
mortgages, construction, residential mortgages, consumer and direct financing
leases. The fair value of residential mortgage loans are estimated using quoted
market prices for sales of whole loans with similar characteristics such as
repricing dates, product type and size. For residential loans that reprice
frequently, the carrying amount approximates fair value. The fair value of
direct financing leases is based upon recent market prices of sales of similar
receivables. The fair value of other types of loans for which quoted market
prices are not available is estimated by discounting expected future cash flows
using the current rates at which similar loans would be made to borrowers with
comparable credit ratings and for similar remaining maturities. The fair value
of nonperforming loans is based on recent external appraisals. Estimated cash
flows, discounted using a rate commensurate with the risk associated with the
estimated cash flow, are utilized if appraisals are not available.
Deposit liabilities: The fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, money market and
interest-bearing demand deposits and savings deposits, is equal to the amount
payable on demand. The carrying value of variable rate time deposits and time
deposits that reprice frequently also approximate fair value. The fair value of
the remaining time deposits is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered
for deposits with comparable remaining maturities.
Borrowed funds: Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
-74-
<PAGE>
Off-balance sheet instruments: The fair value of off-balance sheet
instruments, including commitments to extend credit and standby letters of
credit, is estimated using the fees currently charged to enter into similar
agreements with comparable remaining terms and reflect the present
creditworthiness of the counterparties.
The carrying amount and estimated fair value of the Corporation's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1996 1995
----------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- -------
Financial assets:
<S> <C> <C> <C> <C>
Cash and short-term investments................. $ 55,853 $ 55,853 $ 67,403 $ 67,403
Investment securities........................... 18,933 18,840 28,772 28,886
Mortgage-backed securities...................... 365,252 363,534 237,132 235,881
Investment in reverse mortgages................. 35,796 31,856 35,614 31,087
Loans, net...................................... 824,883 823,621 792,184 801,989
Financial liabilities:
Deposits........................................ 744,886 741,846 724,030 721,700
Borrowed funds.................................. 518,919 507,349 400,645 403,013
</TABLE>
The estimated fair value of the Corporation's off-balance sheet
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
Off-balance sheet instruments:
<S> <C> <C>
Commitments to extend credit....................................................... $359 $355
Standby letters of credit.......................................................... 34 40
</TABLE>
-75-
<PAGE>
16. PARENT COMPANY FINANCIAL INFORMATION
Condensed Statement of Financial Condition
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
----------- ----------
(In Thousands)
Assets:
<S> <C> <C>
Cash .............................................................................. $ 6,548 $ 8,299
Investment in the Bank ............................................................ 97,996 95,605
Other assets....................................................................... 1,976 1,167
-------- --------
$106,520 $105,071
======== ========
Liabilities and stockholders' equity:
Senior notes....................................................................... $ 29,100 $ 29,850
Interest payable senior notes...................................................... 1,600 1,642
Other liabilities.................................................................. 32 33
-------- --------
Total liabilities.................................................................. 30,732 31,525
-------- --------
Stockholders' equity:
Common stock ...................................................................... 146 145
Capital in excess of par value .................................................... 57,289 57,136
Unrealized loss on securities available-
for-sale, net of tax............................................................ 166 (242)
Retained earnings ................................................................. 32,863 16,507
Treasury stock .................................................................... (14,676)
-------- --------
Total stockholders' equity ........................................................ 75,788 73,546
-------- --------
$106,520 $105,071
======== ========
</TABLE>
Condensed Statement of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Income:
<S> <C> <C> <C>
Interest .................................................................. $ 659 $ 178 $ 196
Loss on extinguishment of debt............................................. (44) (90)
Loss on sale of investment ............................................... (31) (36)
Other income............................................................... 67
------- ------- ------
682 57 160
------- ------- ------
Expenses:
Interest................................................................... 3,333 3,499 3,635
Other operating expenses................................................... (856) 32 133
------- ------- ------
2,477 3,531 3,768
------- ------ ------
Loss before equity in undistributed income of the Bank.......................... (1,795) (3,474) (3,608)
Equity in undistributed income of the Bank ..................................... 18,151 30,482 11,678
------- -------- ------
Net income ..................................................................... $16,356 $27,008 $8,070
======= ======= -=====
</TABLE>
-76-
<PAGE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Operating activities:
<S> <C> <C> <C>
Net income ................................................................ $ 16,356 $ 27,008 $8,070
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in undistributed income of the Bank ................................ (18,151) (30,482) (11,678)
Amortization .............................................................. 114 132 125
Loss on sale of investments................................................ 31 36
Increase (decrease) in liabilities ........................................ (43) (173) 285
Decrease (increase) in other assets........................................ (923) 113 (22)
--------- ------- --------
Net cash used for operating activities ......................................... (2,647) (3,371) (3,184)
--------- ------- -------
Investing activities:
Decrease in investment in Bank............................................. 16,168 9,340 725
Decrease (increase) in investment securities............................... 3,585 (3,665)
-------- -------- ------
Net cash provided by (used for) investing activities............................ 16,168 12,925 (2,940)
-------- -------- ------
Financing activities:
Issuance of common stock .................................................. 154 5 13
Repurchase of senior notes................................................. (750) (2,150)
Purchase of treasury stock ................................................ (14,676)
-------- -------- -------
Net cash provided by (used for) financing activities ........................... (15,272) (2,145) 13
-------- -------- -------
Increase (decrease) in cash .................................................... (1,751) 7,409 (6,111)
Cash at beginning of period .................................................... 8,299 890 7,001
--------- ------- -------
Cash at end of period .......................................................... $ 6,548 $ 8,299 $ 890
======= ======= =======
</TABLE>
-77-
<PAGE>
17. INVESTMENT IN AND ACQUISITION OF REVERSE MORTGAGES
Reverse mortgage loans are contracts that require the lender to make
monthly advances throughout the borrower's life or until the borrower relocates,
prepays or the home is sold, at which time the loan becomes due and payable.
Since reverse mortgages are nonrecourse obligations, the loan repayments are
generally limited to the sale proceeds of the borrower's residence and the
mortgage balance consists of cash advanced, interest compounded over the life
of the loan and a premium which represents a portion of the shared appreciation
in the home's value, if any, or a percentage of the value of the residence.
The Corporation accounts for its investment in reverse mortgages in
accordance with instructions provided by the staff of the Securities and
Exchange Commission entitled "Accounting for Pools of Uninsured Residential
Reverse Mortgage Contracts" which requires grouping the individual reverse
mortgages into "pools" and recognizing income based on the estimated effective
yield of the pool. In computing the effective yield, the Corporation must
project the cash inflows and outflows of the pool including actuarial
projections of the life expectancy of the individual contract holder and
changes in the collateral values of the residence. At each reporting date, a
new economic forecast is made of the cash inflows and outflows of each pool of
reverse mortgages and the effective yield of each pool is recomputed and income
is adjusted to reflect the revised rate of return.
In November 1994, the Corporation purchased Providential Home Income
Plan, Inc., a California-based reverse mortgage lender, for approximately $24.4
million. Providential's assets at acquisition primarily consisted of cash and
its investment in reverse mortgages (the "1994 Pool"). Providential's available
liquidity was utilized to fund the purchase price. The acquisition was
accounted for by the purchase method of accounting; accordingly, Providential's
results have been included in the Corporation's consolidated statement of
operations since the acquisition date. The carrying value of the reverse
mortgages was $9.9 million and $9.8 million at December 31, 1996 and December
31, 1995, respectively. Of the 840 loans which comprise the 1994 pool at
December 31, 1996, all are located in California. The Corporation acquired
Providential since it has previously purchased other portfolios of reverse
mortgages and believes such investments provide a fair return on investment
while providing income to elderly homeowners.
In 1993, the Corporation acquired a pool of reverse mortgages (the
"1993 Pool") from the FDIC and another lender. The Corporation's investment in
this pool of reverse mortgages totalled $25.9 million and $25.8 million at
December 31, 1996 and December 31, 1995, respectively. Of the 591 loans which
comprise the 1993 Pool at December 31, 1996, 483 loans, or 82%, are located in
Delaware, New Jersey, Pennsylvania and Maryland.
-78-
<PAGE>
At December 31, 1996, the Corporation's actuarial estimate of net cash
flows from each pool of reverse mortgages was as follows:
<TABLE>
<CAPTION>
Inflows (outflows)
-------------------------------------------
1994 Pool 1993 Pool Total
--------- --------- -----
(In Thousands)
Year ending:
<C> <C> <C> <C>
1997........................................................ $1,334 $ 3,543 $ 4,877
1998........................................................ 807 1,871 2,678
1999........................................................ 1,396 2,084 3,480
2000........................................................ 1,847 2,251 4,098
2001........................................................ 2,224 2,346 4,570
2002-2006................................................... 15,904 11,731 27,635
2007-2011................................................... 18,924 9,320 28,244
2012-2016................................................... 16,536 5,602 22,138
Thereafter.................................................. 16,386 3,658 20,044
</TABLE>
The effective yield used to accrue investment income on the
Corporation's investment in reverse mortgages is sensitive to changes in
collateral values and other actuarial and prepayment assumptions. Future
estimated changes in collateral values in 1996 are as follows for each pool:
<TABLE>
<CAPTION>
1994 1993
Pool Pool
---- ----
<S> <C> <C>
Year ended December 31, 1997.................................. 1.00% 1.00%
Year ended December 31, 1998.................................. 2.00 2.00
Thereafter.................................................... 3.00 3.00
</TABLE>
The changes in collateral values and actuarial assumptions resulted in
an effective yield of approximately 21.2% on the 1994 Pool and increased income
by $334,000 during 1996. Included in this increase was a cumulative catch-up
adjustment of $455,000. The effective yield on the 1993 Pool was 6.30% in 1996,
reflecting a $979,000 reduction in income which includes a cumulative catch-up
adjustment of $567,000.
In making these estimates of current and expected collateral values,
the Corporation considers its own experience on reverse mortgages which have
matured, expected rates of future inflation and housing indices published by
the Bureau of Labor Statistics and the Department of Housing and Urban
Development. The projections also incorporate actuarial estimates of contract
terminations using mortality tables published by the Office of the Actuary of
the United States Bureau of Census adjusted for expected prepayments and
relocations.
-79-
<PAGE>
The effect on the yield and income assuming no changes in collateral
values or a 1% annual reduction in the projected future changes of collateral
values is presented below for the year ended December 31, 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
94 Pool 1993 Pool
--------------------------------- ---------------------------------
1% annual 1% annual
reduction reduction
No future in the projected No future in the projected
changes in future changes changes in future changes
collateral in collateral collateral in collateral
values values values values
---------- ------------------ --------- ---------------
<S> <C> <C> <C> <C>
Effective yield ............................... 16.52% 20.30% 3.96% 5.95$
Effect on income of reverse mortgages.......... $(869) $ (169) $ (2,194) $ (345)
</TABLE>
The cumulative catch-up adjustments included in the above decreases in
income are $1,563,000 and $243,000, respectively, at January 1, 1996 for the
1993 Pool. The cumulative catch-up adjustments for the 1994 Pool are $353,000
and $67,000, respectively, at January 1, 1995.
-80-
<PAGE>
QUARTERLY FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
-------- ------- ------- ------- -------- ------- ------- -------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............ $26,334 $26,352 $26,501 $25,407 $26,161 $24,266 $25,712 $23,797
Interest expense........... 14,811 15,055 14,771 14,225 14,493 14,921 14,972 13,681
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ....... 11,523 11,297 11,730 11,182 11,668 9,345 10,740 10,116
Provision for loan losses ..... 730 477 490 318 349 47 653 354
--------- --------- --------- --------- -------------------- -------- ---------
Net interest income after
provision for loan losses 10,793 10,820 11,240 10,864 11,319 9,298 10,087 9,762
Other income .............. 2,330 1,884 2,100 1,836 2,122 16,530 2,045 1,918
Other expenses............. 7,835 8,140 8,241 8,129 8,711 9,818 9,544 9,268
-------- -------- -------- -------- -------- --------- -------- --------
Income before taxes ....... 5,288 4,564 5,099 4,571 4,730 16,010 2,588 2,412
Income tax provision
(benefit) ................ 1,514 (1,668) 1,778 1,542 (1,188) 985 (588) (477)
-------- -------- ------- ------- -------- --------- ------- -------
Net income ................ $3,774 $6,232 $3,321 $3,029 $5,918 $15,025 $3,176 $2,889
====== ====== ====== ====== ====== ======= ====== ======
Earnings per share ........ $ .28 $ .45 $ .24 $ .21 $ .40 $ 1.02 $ .22 $ .20
</TABLE>
-81-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10 through 13 are incorporated by the following references from
the indicated pages of the Proxy Statement for the 1997 Annual Meeting of
Stockholders:
Page
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
4,5,6,7,8
ITEM 11. EXECUTIVE COMPENSATION
9-13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
1,2,5,6
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
14,15
-82-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The financial statements listed on the index set forth in Item 8 of this
Annual Report on Form 10-K are filed as part of this Annual Report.
Financial statement schedules are not required under the related instructions
of the Securities and Exchange Commission or are inapplicable and, therefore,
have been omitted.
(b) The following exhibits are incorporated by reference herein or annexed to
this Annual Report:
Exhibit
Number Description of Document
3.1 Registrant's Certificate of Incorporation, as amended is
incorporated herein by reference to Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
3.2 Bylaws of WSFS Financial Corporation is incorporated herein
by reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form S-1 File No. 33-45762) filed with the
Commission on February 24, 1992.
4 Indenture, dated June 15, 1994, by and between WSFS
Financial Corporation and Wilmington Trust Company, Trustee
for the 11% Senior Notes, Series B, due 2005 is incorporated
herein by reference to Exhibit 4 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
10.1 Employment Agreement between WSFS Financial Corporation and
Wilmington Savings Fund Society, Federal Savings Bank and
Marvin N. Schoenhals is incorporated herein by reference to
Exhibit 10.1 of Registrant's Registration Statement on Form
S-4 (File No. 33-76470) filed with the Commission on March
15, 1994.
10.2 Wilmington Savings Fund Society, Federal Savings Bank 1986
Stock Option Plan, as amended is incorporated herein by
reference to Exhibit 4.1 of Registrant's Registration
Statement on Form S-8 (File No. 33-56108) filed with the
Commission on December 21, 1992.
10.3 Employment Agreement, dated March 24, 1993, by and between
Wilmington Savings Fund Society, Federal Savings Bank and
R. William Abbott is incorporated herein by reference to
Exhibit 10.8 of Registrant's Registration Statement on Form
S-4 (File No. 33-76470) filed with the Commission on March
15, 1994.
-83-
<PAGE>
10.4 WSFS Financial Corporation, 1994 Short Term Management
Incentive Plan Summary Plan Description is incorporated
herein by reference to Exhibit 10.7 of the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1994.
10.5 Exhibit 1 Employment Agreement dated September 20, 1996 by and between
Wilmington Savings Fund Society, Federal Savings Bank and
Thomas E. Stevenson.
10.6 Exhibit 2 Employment Agreement dated November 8, 1996 by and between
Wilmington Savings Fund Society, Federal Savings Bank and
Joseph M. Murphy.
21 Exhibit 3 Subsidiaries of Registrant.
23 Exhibit 4 Consent of KPMG Peat Marwick LLP.
27 Exhibit 5 Financial Data Schedule
(b) The following was reported under Other Events on Form 8-K filed on
November 4, 1996:
On October 28, 1996, the Registrant announced that its Board of
Directors had approved a second stock repurchase program to purchase up to 10%
of the Registrant's outstanding common stock, $.01 par value per share (the
"Common Stock"). Under the new repurchase program, stock repurchases may be
effected through open-market repurchases and privately negotiated transactions.
As previously announced, the Registrant completed a stock repurchase program
during the first half of 1996 in which 5% of the Common Stock was repurchased.
-84-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WSFS FINANCIAL CORPORATION
Date: March 27, 1997 BY: /s/ MARVIN N. SCHOENHALS
-------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 27, 1997 BY: /s/ MARVIN N. SCHOENHALS
-------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: March 27, 1997 BY: /s/ CHARLES G. CHELEDEN
------------------------
Charles G. Cheleden
Vice Chairman and Director
Date: March 27, 1997 BY: /s/ DAVID E. HOLLOWELL
-----------------------
David E. Hollowell
Director
Date: March 27, 1997 BY: /s/ JOSEPH R. JULIAN
---------------------
Joseph R. Julian
Director
Date: March 27, 1997 BY: /s/ RANDALL T. MURRILL, JR .
-----------------------------
Randall T. Murrill, Jr.
Director
Date: March 27, 1997 BY: /s/ THOMAS P. PRESTON
----------------------
Thomas P. Preston
Director
-85-
<PAGE>
Date: March 27, 1997 BY:
-----------------------
Michele M. Rollins
Director
Date: March 27, 1997 BY: /s/ CLAIRBOURNE D. SMITH
------------------------
Claibourne D. Smith
Director
Date: March 27, 1997 BY: /s/ R. TED WESCHLER
------------------------
R. Ted Weschler
Director
Date: March 27, 1997 BY: /s/ DALE E. WOLF
---------------------
Dale E. Wolf
Director
Date: March 27, 1997 BY: /s/ R. WILLIAM ABBOTT
----------------------
R. William Abbott
Executive Vice President and
Chief Financial Officer
Date: March 27, 1997 BY: /s/ MARK A. TURNER
-------------------
Mark A. Turner
Vice President and Controller
-86-
<PAGE>
EXHIBIT 1
EMPLOYMENT AGREEMENT DATED SEPTEMBER 20, 1996 BETWEEN
WILMINGTON SAVINGS FUND SOCIETY,
FEDERAL SAVINGS BANK AND THOMAS E. STEVENSON.
<PAGE>
WSFS bank
YOUR HOME TEAM
September 20, 1996
Mr. Thomas E. Stevenson
308 Old Kennett Road
Centreville, DE 19807
Dear Tom:
We are pleased to confirm our offer and your acceptance of the position of
Executive Vice President, Technology and Operations. Your salary in this
position will be $10,416.67 per month; your anticipated start date is Monday,
October 14, 1996.
Stock Options
You will receive options on ten thousand (10,000) shares of WSFS Financial
Corporation stock, issued at the average of the bid and ask on your date of
hire. These options will be vested over a period of three years (one-third
vested at the end of each service year).
Bonus Program
You have the potential to earn up to a $15,000.00 bonus for 1996, based upon
your performance. Your eligibility for a 1997 bonus will be in accordance with
the Executive Bonus Plan as approved by the WSFS Board of Directors for 1997.
Benefits
You will be eligible for WSFS benefits on the first of the month following
thirty days of service. Approximately three weeks before that eligibility
date, you will receive further details and Lescena Tew, Benefits / Traning
Specialist, will contact you to answer questions and assist you with enrollment
prior to your eligibility date.
Change in Control Protection
In the event of a change in control leading to the elimination of your position
or significant change in your responsibilities, you would be entitled to
salary continuation for a period of eighteen (18) months. (Under other
circumstances, you might be eligible to receive benefits under our regular WSFS
Severance Pay Plan; however, you could not receive benefits under both that
Plan and this Agreement.)
Other
Per your discussion with M.N. Schoenhals, it is understood that Mrs. Stevenson
will resign her current position within 90 days of your date of hire and that
<PAGE>
Stevenson
Page 2
WSFS will provide job placement assistance if desired. We appreciate your and
Mrs. Stevenson's sensitivity to our concerns regarding your respective
employement situations.
On October 14, please plan to arrive at the Human Resources Department at
8:30 a.m. to complete the necessary paperwork. As part of that paperwork, the
Immigration Reform and Control Act of 1986 requires WSFS to verify your
employment eligibility. Therefore, please be prepared to present a driver's
license and a Social Security card (or U.S. birth certificate).
Please call me at (302) 571-7227 if we can be of any further assistance. I
look forward to seeing you on the 14th.
Sincerely,
/s/ Vicki L. Myoda
- ------------------------------
Vicki L. Myoda
Vice President
Human Resources
<PAGE>
EXHIBIT 2
EMPLOYMENT AGREEMENT DATED NOVEMBER 8, 1996 BY AND BETWEEN
WILMINGTON SAVINGS FUND SOCIETY,
FEDERAL SAVINGS BANK AND JOSEPH M. MURPHY
<PAGE>
WSFS bank
Marvin N. Schoenhals
Chairman and President
(302) 571-7294
November 8, 1996
Mr. Joseph M. Murphy
5 Mountain View Drive
West Hartford, Connecticut 06117
Dear Joe:
I am pleased and excited to extend an offer to you to join Wilmington
Savings Fund Society, FSB in the capacity of Executive Vice President
responsible for the Retail Banking function of the Company.
In addition to the normal employment policies and practices governing
Associates of WSFS, the following additional factors are contained in this
offer:
o Salary of $13,333.34 per month for the years 1997 and 1998. Your
salary would be reviewed during the first quarter of 1999 and an
adjustment made, as deemed appropriate, under the Executive
Management Compensation Program as defined by the Personnel and
Compensation Committee of the Board. The goal of our Executive
Compensation Program is to pay base salaries that are approximately
equal to (but generally not above) the average being paid by our
"peer group," coupled with a Bonus Program that provides for
"substantially above average" payouts based upon the performance of
the Bank; and a long term incentive program in the form of stock
options.
o The size of the Executive Bonus Pool, while not guaranteed, is
generally determined by taking 20% of the increase in pretax income
of the company over the preceding year. An individual executive's
share in the pool is determined by their level of responsibility
and individual accomplishments and contributions during the year.
o You would receive a bonus of $20,000 to be paid during March of
1997.This is based upon the understanding that you would be joining
WSFS mid-to-late December, 1996.
o For 1997 and beyond you would be eligible to participate in the
Executive Bonus Program as determined by the Board of Directors.
Based upon the Bank's expected performance in 1997, your 1997 Bonus
(to be paid in March 1998)should be no less than $50,000 and, more
likely, approximately $75,000. These statements as to amounts are
for informational purposes only and can not be construed as a
guarantee that the bonuses will actually be paid. The actual amount
of the bonus is dependent upon the Bank's performance and your
contributions during 1997.
<PAGE>
Mr. Joseph M. Murphy
November 8, 1996
Page two
o You would be issued Options on 16,400 shares of WSFS Financial
Corporation stock at a strike price based upon the average between
the bid and ask price of the stock at the close of business on your
first day of employment with WSFS. The Options would vest 20% per
year over five years with the first 20% vesting on the one year
anniversary of the issuance of the Option. In the event of a
"change of control" of the Bank, the vesting of all previously
granted options would be accelerated. The Board will review the
issuance of additional Options to you annually.
o The Bank will arrange for your present home in West Hartford, to be
purchased by a national relocation service at a "fair market
appraised price." The Bank will assume all costs of this purchase
(assuming the house is not presently listed which would cause a
commission to be paid to a broker upon sale to the relocation
service). In the event that the "fair market value" determined
by the relocation service is unacceptable to you, the Bank would
agree to order two additional independent appraisals of the
property and then average the resulting three appraisals. If that
average was higher than the appraised value determined by the
relocation service, the Bank would agree to pay you the higher
amount for your property. If the average was lower, the house would
be purchased by the relocation service at their appraised value.
The Bank will provide for you a mutually agreeable residence for up
to 60 days of temporary living accommodations here in Wilmington
and any commuting expenses, if required. The Bank will pay the cost
of relocating your household goods from West Hartford to Wilmington
and for up to 60 days of storage, if required.
o If WSFS Financial Corporation is sold and/or merged with another
institution that results in a significant change in your
responsibilities, you will receive the benefit of the acceleration
of the vesting of the Options as described above. In the event that
the value of the acceleration does not equal two times your base
salary at that time, the Bank will make up the difference between
the value of acceleration and the two years salary. If the value of
acceleration of the vesting of the Options is greater than two
times your base salary you will receive that benefit in full.
o If you are released from employment with WSFS for a reason other
than "for cause" you will receive as severance the amount of one
times your base salary at the time of the release; to be paid in
accordance with the Bank's Severance Policy. You will also be
entitled to any other benefits which are provided for in the
Severance Policy at that time.
o The Bank will underwrite your membership in a "luncheon club" and
in a country club to be mutually determined.
<PAGE>
Mr. Joseph M. Murphy
November 8, 1996
Page three
Joe, as you know, this offer is the culmination of a very lengthy
process. It is my belief that you are the right person for this job; that you
will make a signifcant contribution to the organization. I look forward to
working with you to turn WSFS into a consistently high performing financial
services institution.
If the arrangements described above are acceptable to you, please sign
where indicated below and return a copy to me.
Sincerely,
/s/ Marvin N. Schoenhals
---------------------------
Marvin N. Schoenhals
Chairman and President
MNS/bkr
Accepted: /s/ Joseph M. Murphy Date: 11-11-96
------------------------------ --------------------------
<PAGE>
EXHIBIT 3
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
Exhibit 3
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
State or
Percent Other Jurisdiction
Parent Company Subsidiary Owned of Incorporation
- -------------- ---------- ------- ------------------
<S> <C> <C>
WSFS Financial Corporation Wilmington Savings Fund Society 100% United States
Federal Savings Bank
Wilmington Savings Fund Star States Development Company 100 Delaware
Society, Federal 838 Investment Group, Inc. 100 Delaware
Savings Bank WSFS Credit Corporation 100 Delaware
Community Credit Corporation 100 Delaware
</TABLE>
<PAGE>
EXHIBIT 4
CONSENT OF KPMG PEAT MARWICK LLP.
<PAGE>
Consent of Independent Auditors
The Board of Directors
WSFS Financial Corporation:
We consent to incorporation by reference in the Registration Statement (No.
33-56108) on Form S-8 of WSFS Financial Corporation of our report dated
January 20, 1997, relating to the consolidated statement of condition of WSFS
Financial Corporation and subsidiaries as of December 31, 1996, and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, which report appears in the December 31, 1996 annual report
on Form 10-K of WSFS Financial Corporation.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000828944
<NAME> WSFS FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,651
<INT-BEARING-DEPOSITS> 5,802
<FED-FUNDS-SOLD> 25,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,176
<INVESTMENTS-CARRYING> 331,009
<INVESTMENTS-MARKET> 382,374
<LOANS> 805,620
<ALLOWANCE> 24,740
<TOTAL-ASSETS> 1,357,635
<DEPOSITS> 744,886
<SHORT-TERM> 121,157
<LIABILITIES-OTHER> 28,636
<LONG-TERM> 340,124
0
0
<COMMON> 42,759
<OTHER-SE> 33,029
<TOTAL-LIABILITIES-AND-EQUITY> 75,788
<INTEREST-LOAN> 76,474
<INTEREST-INVEST> 21,614
<INTEREST-OTHER> 6,506
<INTEREST-TOTAL> 104,594
<INTEREST-DEPOSIT> 31,222
<INTEREST-EXPENSE> 58,862
<INTEREST-INCOME-NET> 45,732
<LOAN-LOSSES> 2,015
<SECURITIES-GAINS> (243)
<EXPENSE-OTHER> 32,345
<INCOME-PRETAX> 19,522
<INCOME-PRE-EXTRAORDINARY> 19,522
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,356
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 8.48
<LOANS-NON> 11,336
<LOANS-PAST> 1,670
<LOANS-TROUBLED> 10,967
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 24,167
<CHARGE-OFFS> 2,086
<RECOVERIES> 282
<ALLOWANCE-CLOSE> 24,740
<ALLOWANCE-DOMESTIC> 24,740
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
