<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
----------------------------------------
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
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-2866913
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
838 Market Street, Wilmington, Delaware 19899
- --------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(302) 792-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 12 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of August 6, 1999:
Common Stock, par value $.01 per share 11,319,244
- -------------------------------------- --------------------
(Title of Class) (Shares Outstanding)
<PAGE>
WSFS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 1999 and 1998 (Unaudited)........................................... 3
Consolidated Statement of Condition as of June 30, 1999
(Unaudited) and December 31, 1998.................................................. 4
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 (Unaudited)................................................. 5
Notes to the Consolidated Financial Statements for the Three and Six
Months Ended June 30, 1999 and 1998 (Unaudited).................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................... 21
Signatures ................................................................................... 22
</TABLE>
-2-
<PAGE>
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ........................ $ 16,138 $ 17,083 $ 32,465 $ 34,629
Interest on mortgage-backed securities ............ 7,791 6,291 15,803 12,175
Interest and dividends on investment securities ... 573 664 1,151 1,730
Other interest income ............................. 2,663 2,903 4,935 5,469
-------- -------- -------- --------
27,165 26,941 54,354 54,003
-------- -------- -------- --------
Interest expense:
Interest on deposits .............................. 8,406 8,028 16,444 15,857
Interest on Federal Home Loan Bank advances ....... 5,961 5,851 12,460 11,500
Interest on federal funds purchased and securities
sold under agreement to repurchase .............. 1,933 2,748 4,045 5,683
Interest on senior notes and trust preferred
borrowings ..................................... 1,003 828 1,990 1,657
Interest on other borrowed funds .................. 91 86 185 164
-------- -------- -------- --------
17,394 17,541 35,124 34,861
-------- -------- -------- --------
Net interest income .................................... 9,771 9,400 19,230 19,142
Provision for loan losses .............................. 249 172 512 749
-------- -------- -------- --------
Net interest income after provision for loan losses .... 9,522 9,228 18,718 18,393
-------- -------- -------- --------
Other income:
Loan and lease servicing fees ..................... 903 803 1,736 1,697
Rental income on operating leases, net ............ 3,603 2,887 6,975 5,767
Deposit service charges ........................... 1,271 1,060 2,482 2,044
Credit/debit card and ATM income .................. 972 687 1,651 1,225
Securities gains .................................. -- 237 1 276
Other income ...................................... 461 189 936 851
-------- -------- -------- --------
7,210 5,863 13,781 11,860
-------- -------- -------- --------
Other expenses:
Salaries, benefits and other compensation ......... 4,837 4,051 9,419 8,294
Equipment expense ................................. 784 439 1,494 867
Data processing and operations expenses ........... 1,420 1,303 2,755 2,564
Occupancy expense ................................. 840 717 1,629 1,447
Marketing expense ................................. 375 275 708 547
Professional fees ................................. 379 438 732 853
Net costs of assets acquired through foreclosure .. 119 199 144 506
Other operating expense ........................... 1,805 1,648 3,511 3,166
-------- -------- -------- --------
10,559 9,070 20,392 18,244
-------- -------- -------- --------
Income before taxes .................................... 6,173 6,021 12,107 12,009
Income tax provision ................................... 1,605 1,565 3,148 3,122
-------- -------- -------- --------
Net income ............................................. $ 4,568 $ 4,456 $ 8,959 $ 8,887
======== ======== ======== ========
Earnings per share:
Basic ............................................. $ .40 $ .36 $ .79 $ .71
Diluted ........................................... .40 .35 .78 .70
Other comprehensive income, net of tax:
Net income ........................................ $ 4,568 $ 4,456 $ 8,959 $ 8,887
Net unrealized holding gains (losses) on securities
available-for-sale arising during the period ...... (2,574) 279 (3,084) 121
Less: reclassification adjustment for gains
included in net income .......................... -- 154 1 179
-------- -------- -------- --------
Comprehensive income ................................... $ 1,994 $ 4,581 $ 5,874 $ 8,829
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(Unaudited)
(Dollars in Thousands)
<S> <C> <C>
Assets
Cash and due from banks ...................................................... $ 56,541 $ 55,848
Federal funds sold and securities purchased under agreements to resell ....... 18,840 20,900
Interest-bearing deposits in other banks ..................................... 3,926 7,518
Investment securities held-to-maturity ....................................... 6,549 7,642
Investment securities available-for-sale ..................................... 29,856 30,219
Mortgage-backed securities held-to-maturity .................................. 266,537 265,858
Mortgage-backed securities available-for-sale ................................ 207,548 193,226
Investment in reverse mortgages, net ......................................... 31,799 31,293
Loans held-for-sale .......................................................... 4,899 3,084
Loans, net of allowance for loan losses of $23,551 at June 30, 1999
and $23,689 at December 31, 1998 ........................................... 764,742 760,584
Vehicles under operating leases, net ......................................... 223,925 199,967
Stock in Federal Home Loan Bank of Pittsburgh, at cost ....................... 26,250 23,000
Assets acquired through foreclosure .......................................... 1,692 2,993
Premises and equipment ....................................................... 13,135 11,919
Accrued interest and other assets ............................................ 23,776 21,659
----------- -----------
Total assets ................................................................. $ 1,680,015 $ 1,635,710
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand ............................................... $ 114,613 $ 108,418
Money market and interest-bearing demand ................................. 75,777 68,208
Savings .................................................................. 244,293 218,334
Time ..................................................................... 296,385 333,419
----------- -----------
Total retail deposits .................................................. 731,068 728,379
Jumbo certificates of deposit ............................................ 72,343 65,453
Brokered certificates of deposit ......................................... 114,495 64,468
----------- -----------
Total deposits ......................................................... 917,906 858,300
Federal funds purchased and securities sold under agreements to repurchase ... 135,000 153,505
Federal Home Loan Bank advances .............................................. 450,000 460,000
Senior notes and trust preferred borrowings .................................. 50,000 50,000
Other borrowed funds ......................................................... 10,829 8,904
Accrued expenses and other liabilities ....................................... 29,289 19,249
----------- -----------
Total liabilities ............................................................ 1,593,024 1,549,958
----------- -----------
Commitments and contingencies
Stockholders' Equity:
Serial preferred stock $.01 par value, 7,500,000 shares authorized; none
issued and outstanding ................................................... -- --
Common stock $.01 par value, 20,000,000 shares authorized; issued
14,796,513 at June 30, 1999 and 14,695,688 at December 31, 1998 .......... 148 147
Capital in excess of par ..................................................... 58,073 57,696
Accumulated other comprehensive income ....................................... (2,847) 236
Retained earnings ............................................................ 72,932 64,657
Treasury stock at cost, 3,478,269 shares at June 30, 1999 and 3,192,769 shares
at December 31, 1998 ..................................................... (41,315) (36,984)
----------- -----------
Total stockholders' equity ................................................... 86,991 85,752
----------- -----------
Total liabilities and stockholders' equity ................................... $ 1,680,015 $ 1,635,710
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
WSFS FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1999 1998
--------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Operating activities:
Net income ..................................................................... $ 8,959 $ 8,887
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan, lease and residual value losses .......................... 1,520 1,275
Depreciation, accretion and amortization ..................................... 1,606 316
Decrease (increase) in accrued interest receivable and other assets .......... (547) 980
Origination of loans held-for-sale ........................................... (21,654) (29,606)
Proceeds from sales of loans held-for-sale ................................... 19,821 26,636
Increase in accrued interest payable and other liabilities ................... 9,930 5,989
Increase in reverse mortgage capitalized interest, net ....................... (3,293) (2,835)
Other, net ................................................................... 139 10
--------- ---------
Net cash provided by operating activities ......................................... 16,481 11,652
--------- ---------
Investing activities:
Net decrease in interest-bearing deposits in other banks ....................... 3,592 16,207
Maturities of investment securities ............................................ 1,203 27,018
Sales of investment securities available-for-sale .............................. -- 20,059
Sales of mortgage backed securities available-for-sale ......................... -- 29,875
Purchases of investment securities held-to-maturity ............................ (295) (10,000)
Repayments of mortgage-backed securities held-to-maturity ...................... 74,314 76,404
Repayments of mortgage-backed securities available-for-sale .................... 39,907 16,436
Purchases of mortgage-backed securities held-to-maturity ....................... (74,786) (100,769)
Purchases of mortgage-backed securities available-for-sale ..................... (58,862) (132,042)
Repayments of reverse mortgages ................................................ 7,420 8,202
Disbursements for reverse mortgages ............................................ (4,543) (5,079)
Sales of loans ................................................................. -- 11,425
Purchase of loans .............................................................. (7,959) (4,411)
Net decrease in loans .......................................................... 2,431 25,998
Net increase in operating leases ............................................... (30,961 (10,002)
Net increase in stock of Federal Home Loan Bank of Pittsburgh .................. (3,250) (1,498)
Sales of investment in real estate ............................................. -- 1,034
Sales of assets acquired through foreclosure, net .............................. 8,218 6,210
Premises and equipment, net .................................................... (2,405) (2,002)
--------- ---------
Net cash used for investing activities ............................................. (45,976) (26,935)
--------- ---------
Financing activities:
Net increase in demand and savings deposits .................................... 41,648 33,175
Net increase (decrease) in time deposits ....................................... 19,697 (13,996)
Receipts from FHLB borrowings .................................................. 65,000 619,000
Repayments of FHLB borrowings .................................................. (75,000) (584,000)
Receipts from reverse repurchase agreements .................................... 17,270 101,846
Repayments of reverse repurchase agreements .................................... (35,775) (134,545)
Dividends paid on common stock ................................................. (684) (376)
Issuance of common stock ....................................................... 355 --
Purchase of treasury stock ..................................................... (4,383) --
--------- ---------
Net cash provided by financing activities .......................................... 28,128 21,104
--------- ---------
Increase (decrease) in cash and cash equivalents ................................... (1,367) 5,821
Cash and cash equivalents at beginning of period ................................... 76,748 52,746
--------- ---------
Cash and cash equivalents at end of period ......................................... $ 75,381 $ 58,567
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest during the year ............................................. $ 30,930 $ 30,528
Cash paid for income taxes ......................................................... 741 1,140
Loans and leases transferred to assets acquired through foreclosure ................ 5,539 4,203
Net change in unrealized gains (losses) on securities available-for-sale, net of tax (3,083) (58)
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
WSFS Financial Corporation (the Corporation) is a thrift holding company
headquartered in the state of Delaware. The Corporation has two wholly-owned
subsidiaries, Wilmington Savings Fund Society, FSB, (the Bank or WSFS) a thrift
conducting business in the Mid-Atlantic region and WSFS Capital Trust I, a
company formed to issue Trust preferred securities to be invested in junior
subordinated debt of the Corporation. The consolidated financial statements
include the accounts of the parent company, WSFS Capital Trust I, the Bank and
its wholly-owned subsidiaries, WSFS Credit Corporation (WCC), Community Credit
Corporation (CCC), 838 Investment Group, Inc. and Star States Development
Company, (SSDC).
The consolidated statement of condition as of June 30, 1999, the
consolidated statement of operations for the three and six months ended June 30,
1999 and 1998 and the consolidated statement of cash flows for the six months
ended June 30, 1999 and 1998 are unaudited and include all adjustments solely of
a normal recurring nature which management believes are necessary for a fair
presentation. All significant intercompany transactions are eliminated in
consolidation. Certain reclassifications have been made to prior period's
financial statements to conform them to the June 30, 1999 presentation. The
results of operations for the three and six month periods ending June 30, 1999
are not necessarily indicative of the expected results for the full year ending
December 31, 1999. The accompanying unaudited financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Corporation's 1998 Annual Report.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data).
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------------ ------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income ................................. $ 4,568 $ 4,456 $ 8,959 $ 8,887
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares ................. 11,305 12,505 11,385 12,484
Effect of dilutive securities:
Employee stock options ................... 59 175 80 189
------- ------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed exercise of stock options ........ 11,364 12,680 11,465 12,673
======= ======= ======= =======
Basic earnings per share ..................... $ .40 $ .36 $ .79 $ .71
======= ======= ======= =======
Diluted earnings per share ................... $ .40 $ .35 $ .78 $ .70
======= ======= ======= =======
</TABLE>
-6-
<PAGE>
WSFS FINANCIAL CORPORATION
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 long-term goal of the Corporation is to be
a high-performing, customer-centered financial services company focused on its
core, banking business in Delaware, while developing unique, profitable niches
in complementary businesses which may operate outside the Bank's geographical
footprint.
Founded in 1832, WSFS is one of the oldest financial institutions in the
country. It has operated under the same name and charter serving the residents
of Delaware for over 167 years. WSFS is the largest thrift institution
headquartered in Delaware and is the fourth largest financial institution in the
state on the basis of deposits traditionally garnered in-market. The
Corporation's market area is the Mid-Atlantic region of the United States,
characterized by a diversified manufacturing and service economy.
The Bank provides cash management services as well as residential real
estate, and commercial and consumer lending services, funding these credit
activities by attracting retail deposits and borrowings. Deposits are insured by
the Federal Deposit Insurance Corporation. WSFS also has the largest off-premise
ATM network in the state of Delaware.
Other operating subsidiaries of the Bank include WSFS Credit Corporation,
engaged primarily in motor vehicle leasing; 838 Investment Group, Inc., which
markets insurance products and securities; and Community Credit Corporation, a
consumer finance company specializing in consumer loans secured by first and
second mortgages.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Financial Condition
Total assets increased $44.3 million during the first half of 1999. Asset
growth included increases of $24.0 million in vehicles under operating leases
and $15.0 million in mortgage-backed securities. This increase in
mortgage-backed securities reflect the purchase of $133.6 million in
collaterized mortgage obligations, offset in part by principal payments. Loans
increased by $4.2 million despite the large commercial loan prepayments of $23.9
million that occurred during the first quarter of 1999.
Total liabilities increased $43.1 million between December 31, 1998 and June
30, 1999. During the first six months of 1999, total deposits grew by $59.6
million, the result of the influx of jumbo certificates of deposit and the
acquisition of $50.0 million in brokered deposits. Interest credited to deposits
totaled $9.3 million for a net deposit growth of $50.3 million.
Capital Resources
Stockholders' equity increased $1.2 million between December 31, 1998 and
June 30, 1999. This increase reflects net income of $9.0 million for the first
six months of 1999 partially offset by a $3.1 million increase in net unrealized
holding losses on securities available-for-sale for the six month period. In
addition, treasury stock increased $4.3 million as a result of the purchase of
290,000 treasury shares, less the re-issuance of 4,500 shares of treasury stock
to the Board of Directors as part of their annual retainer. At June 30, 1999,
the Corporation held in its treasury 3,478,269 shares of its common stock at a
cost of $41.3 million.
-7-
<PAGE>
A table presenting the Bank's consolidated capital position relative to the
minimum regulatory requirements as of June 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
To be Well-Capitalized
Consolidated For Capital Under Prompt Corrective
Bank Capital Adequacy Purposes Action Provisions
------------------------ -------------------------- ------------------------
Percentage of Percentage of Percentage of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) ........ $133,515 12.51% $85,357 8.00% $106,696 10.00%
Core Capital (to Adjusted
Tangible Assets).................. 125,862 7.49 67,234 4.00 84,043 5.00
Tangible Capital (to Tangible
Assets) .......................... 125,594 7.47 25,209 1.50 N/A N/A
Tier 1 Capital (to Risk-Weighted
Assets)........................... 125,862 11.80 N/A N/A 64,017 6.00
</TABLE>
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. 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. At June 30, 1999, the Bank is in
compliance with all regulatory capital requirements and is classified as a "well
capitalized" institution. Management anticipates that the Bank will continue to
be classified as well-capitalized.
Liquidity
The OTS requires institutions, such as the Bank, to maintain a 4.0% minimum
liquidity ratio of cash and qualified assets to net withdrawable deposits and
borrowings due within one year. At June 30, 1999, the Bank's liquidity ratio was
6.6% compared to 10.6% at December 31, 1998. 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 at least 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 and the pledging of certain loans for other lines of credit.
Management believes these sources are sufficient to maintain the required and
prudent levels of liquidity.
-8-
<PAGE>
NONPERFORMING ASSETS
The following table sets forth the Corporation's nonperforming assets,
restructured loans and past due loans at the dates indicated. Past due loans are
loans contractually past due 90 days or more as to principal or interest
payments but which remain on accrual status because they are considered well
secured and in the process of collection.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- -------
<S> <C> <C>
Nonaccruing loans:
Commercial ....................................... $ 2,281 $ 2,182
Consumer ......................................... 392 381
Commercial mortgages ............................. 2,632 2,383
Residential mortgages ............................ 2,912 3,068
Construction ..................................... -- --
------- -------
Total nonaccruing loans ............................... 8,217 8,014
Nonperforming investments in real estate .............. 76 76
Assets acquired through foreclosure ................... 1,692 2,993
------- -------
Total nonperforming assets ............................ $ 9,985 $11,083
======= =======
Restructured loans .................................... $ -- $ --
======= =======
Past due loans:
Residential mortgages ............................ $ 181 $ 247
Commercial and commercial mortgages .............. 2,116 2,654
Consumer ......................................... 149 86
------- -------
Total past due loans .................................. $ 2,446 $ 2,987
======= =======
Ratios:
Nonperforming loans/leases to total
loans/leases (1) .............................. 0.81% .81%
Allowance for loan/lease losses to total gross
Loans/leases (1) .............................. 2.43 2.49
Nonperforming assets to total assets ............. .59 .68
Loan loss/lease loss allowance to nonaccruing
loans/leases (2) .............................. 291.89 307.97
Loan/lease and foreclosed asset allowance to total
Nonperforming assets (2) ....................... 242.77 225.05
</TABLE>
(1) Total loans exclude loans held for sale.
(2) The applicable allowance represents general valuation allowances only.
Nonperforming assets decreased $1.1 million between June 30, 1999 and
December 31,1998. This decrease resulted primarily from a $1.3 million decline
in assets acquired through foreclosure of which, $1.3 million was related to a
commercial property. This was offset in part by an increase of $203,000 in
nonaccruing loans particularly commercial mortgages and commercial loans. An
analysis of the change in the balance of nonperforming assets is presented on
the following page.
-9-
<PAGE>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
-------------- -----------------
(In Thousands)
Beginning balance ............................. $ 11,083 $ 13,892
Additions ................................ 9,286 18,809
Collections/sales ........................ (9,212) (17,029)
Transfers to accrual/restructured status . (841) (2,880)
Transfers to investment in real estate ... -- --
Provisions, charge-offs, other adjustments (331) (1,709)
-------- --------
Ending balance ................................ $ 9,985 $ 11,083
======== ========
The timely identification of problem loans is a key element in the
Corporation's strategy to manage its loan portfolios. Timely identification
enables the Corporation to take appropriate action and, accordingly, minimize
losses. An asset review system established to monitor the asset quality of the
Corporation's loans and investments in real estate portfolios facilitates the
identification of problem assets. In general, this system utilizes guidelines
established by federal regulation; however, there can be no assurance that the
levels or the categories of problem loans and assets established by the Bank are
the same as those which would result from a regulatory examination.
INTEREST RATE SENSITIVITY
The matching of maturities or repricing periods of interest-sensitive
assets and liabilities to ensure a favorable interest rate spread and mitigate
exposure to fluctuations in interest rates is the Corporation's primary focus
for achieving its asset/liability management strategies. Interest rate-sensitive
assets of the Corporation include cash flows that relate to the principal of the
operating lease portfolio, which are interest-rate sensitive. The trust
preferred borrowing is classified in the less than one-year category reflecting
the variable rate feature of the instrument. An interest rate cap was purchased
in 1998 in order to limit its interest rate risk exposure. Management regularly
reviews interest-rate sensitivity of the Corporation and adjusts sensitivity
within acceptable tolerance ranges established by management as needed. At June
30, 1999, interest-bearing liabilities exceeded interest-earning assets that
mature within one year (interest-sensitivity gap) by $43.9 million. The
Corporation's interest-sensitive assets as a percentage of interest-sensitive
liabilities within the one-year window decreased to 94.8% at June 30, 1999
compared to 97.6% at December 31, 1998. Likewise, the one-year
interest-sensitive gap as a percentage of total assets decreased to a negative
2.61% from a negative 1.21% at December 31, 1998. The decrease is the result of
the Corporation's continuing effort to effectively manage interest rate risk.
COMPARISON FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Results of Operations
The Corporation reported net income of $4.6 million, or $.40 per share
(diluted), for the three months ended June 30, 1999, compared to $4.5 million,
or $.35 per share (diluted), for the second quarter of 1998. Net income for the
six months ended June 30, 1999 was $9.0 million, or $.78 per share (diluted),
compared to $8.9 million, or $.70 per share (diluted), for the same period last
year. The improvement in net income reflects growth in net revenues (net
interest income plus other income) which increased $1.7 million and $2.0 million
between comparable three and six month periods.
Net Interest Income
The table on the following page, dollars expressed in thousands, provides
information concerning the balances, yields and rates on interest-earning assets
and interest-bearing liabilities during the periods indicated.
-10-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans (2) (3):
Real estate loans (4)............ $ 515,497 $10,398 8.07% $ 503,277 $11,521 9.16%
Commercial loans ................ 94,900 1,742 8.45 86,947 1,613 8.75
Consumer loans................... 166,155 3,949 9.53 159,336 3,882 9.77
---------- ------- ---------- -------
Total loans.................... 776,552 16,089 8.43 749,560 17,016 9.25
Mortgage-backed securities (5)........ 498,032 7,791 6.26 394,756 6,291 6.37
Loans held for sale (3)............... 2,626 49 7.46 3,664 67 7.31
Investment securities (5)............. 36,630 573 6.26 41,734 664 6.36
Other interest-earning assets ........ 87,580 2,663 12.03 133,615 2,903 8.60
---------- ------- ---------- -------
Total interest-earning assets.... 1,401,420 27,165 7.83 1,323,329 26,941 8.24
------- -------
Allowance for loan losses............. (23,551) (24,900)
Cash and due from banks............... 42,049 23,183
Vehicles under operating lease, net... 217,442 173,506
Other noninterest-earning assets...... 35,934 33,368
---------- ----------
Total assets..................... $1,673,294 $1,528,486
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 71,711 377 2.11 $ 60,757 392 2.59
Savings.......................... 236,334 1,756 2.98 183,717 1,440 3.14
Retail time deposits ............ 303,342 3,499 4.63 344,599 4,636 5.40
Jumbo certificates of deposits .. 74,715 965 5.18 35,148 504 5.75
Brokered certificates of deposit. 124,450 1,809 5.83 64,045 1,056 6.61
---------- ------- ---------- -------
Total interest-bearing deposits 810,552 8,406 4.16 688,266 8,028 4.68
FHLB of Pittsburgh advances........... 453,571 5,961 5.27 412,198 5,851 5.69
Senior notes and trust preferred borrowings 50,000 1,003 8.02 29,100 828 11.39
Other borrowed funds.................. 144,007 2,024 5.62 199,870 2,834 5.67
---------- ------- ---------- -------
Total interest-bearing liabilities 1,458,130 17,394 4.77 1,329,434 17,541 5.28
----- -------
Noninterest-bearing demand deposits... 106,600 83,749
Other noninterest-bearing liabilities. 20,888 20,746
Stockholders' equity.................. 87,676 94,557
---------- ----------
Total liabilities and stockholders'
equity........................ $1,673,294 $1,528,486
========== ==========
Deficit of interest-earning assets over
interest-bearing liabilities..... $ (56,710) $ (6,105)
========== ==========
Net interest and dividend income...... $ 9,771 $ 9,400
======= =======
Interest rate spread.................. 3.06% 2.96%
===== ====
Net interest rmargin.................. 2.87% 2.94%
===== ====
Net interest and dividend income to
total average assets............. 2.40% 2,54%
===== ====
</TABLE>
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes commercial mortgage loans.
(5) Includes securities available-for-sale.
-11-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- -------
Assets
Interest-earning assets:
Loans (2) (3):
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans (4)............ $ 519,291 $21,109 8.13% 513,590 $23,369 9.10%
Commercial loans ................ 94,140 3,406 8.39 88,063 3,393 9.06
Consumer loans................... 165,777 7,863 9.56 159,735 7,758 9.79
---------- ------- ---------- -------
Total loans.................... 779,208 32,378 8.46 761,388 34,520 9.23
Mortgage-backed securities (5)........ 502,329 15,803 6.29 374,630 12,175 6.50
Loans held for sale (3)............... 2,395 87 7.27 2,787 109 7.82
Investment securities (5)............. 36,856 1,151 6.25 54,202 1,730 6.38
Other interest-earning assets ........ 84,100 4,935 11.67 116,158 5,469 9.36
---------- ------- ---------- -------
Total interest-earning assets.... 1,404,888 54,354 7.82 1,309,165 54,003 8.34
------- -------
Allowance for loan losses............. (23,599) (24,873)
Cash and due from banks............... 46,642 22,378
Vehicles under operating lease, net... 212,010 173,487
Other noninterest-earning assets...... 36,284 33,175
---------- ----------
Total assets..................... $1,676,225 $1,513,332
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Money market and interest-
bearing demand................. $ 69,182 742 2.16 $ 60,229 773 2.59
Savings.......................... 227,951 3,367 2.98 178,095 2,744 3.11
Retail time deposits............. 315,019 7,415 4.75 344,875 9,250 5.41
Jumbo certificates of deposit.... 76,271 1,980 5.24 34,260 973 5.73
Brokered certificates of deposit. 98,071 2,940 6.05 64,213 2,117 6.65
---------- ------- ---------- -------
Total interest-bearing deposits 786,494 16,444 4.22 681,672 15,857 4.69
FHLB of Pittsburgh advances........... 475,912 12,460 5.28 407,652 11,500 5.69
Senior notes and trust preferred borrowings 50,000 1,990 7.96 29,100 1,657 11.39
Other borrowed funds.................. 151,957 4,230 5.57 203,079 5,847 5.76
---------- ------- ---------- -------
Total interest-bearing liabilities 1,464,363 35,124 4.80 1,321,503 34,861 5.28
------- -------
Noninterest-bearing demand deposits... 104,030 80,773
Other noninterest-bearing liabilities. 20,171 18,709
Stockholders' equity.................. 87,661 92,347
---------- ----------
Total liabilities and stockholders'
equity........................... $1,676,225 $1,513,332
========== ==========
Deficit of interest-earning assets over
interest-bearing liabilities..... $ (59,475) $ (12,338)
========== ==========
Net interest and dividend income...... $19,230 $19,142
======= =======
Interest rate spread.................. 3.02% 3.06%
==== ====
Net interest margin................... 2.82% 3.02%
==== ====
Net interest and dividend income to
total average assets............. 2.36% 2.61%
==== ====
</TABLE>
(1) Weighted average yields have been computed on a tax-equivalent basis.
(2) Nonperforming loans are included in average balance computations.
(3) Balances are reflected net of unearned income.
(4) Includes commercial mortgage loans.
(5) Includes securities available-for-sale.
-12-
<PAGE>
Net interest income increased $371,000 between the three months ended June
30, 1999 and 1998. The net interest margin, however, declined 7 basis points
between comparable quarters primarily due to the $43.9 million growth in the
average operating lease portfolio. which while significantly enhancing our fee
income has expectedly depressed the margin as the funding costs flow through
interest expense. Total interest income increased $224,000 between 1999 and 1998
primarily due to an increase in mortgage-backed securities and loans offset in
part by the decline in interest rates. The average investment in mortgage-backed
securities increased $103.3 million between quarters while loans increased $27.0
million over the same period. Yields, however, on loans and mortgage-backed
securities declined 82 and 11 basis points, respectively over the same period, a
reflection of the lower interest rate environment. Total interest expense
declined $147,000 between the three months ended June 30, 1999 and 1998. The
decrease is attributed to the decline in interest rates between the second
quarter of 1998 and 1999. The cost of interest-bearing deposits was reduced by
52 basis points between the three months ended June 30, 1999 and 1998, the
results of the favorable repricing. The cost of borrowings, including trust
preferred, declined 38 basis points over the same period.
Net interest income increased $88,000 between the six months ended June 30,
1999 and 1998. Consistent with the quarterly results, the net interest margin
decreased 20 basis points, due to the growth in the leasing portfolio. Total
interest income increased $351,000, between 1999 and 1998. Similar to the
quarter, this increase reflects a higher level of mortgage-backed securities and
loans offset in part by the decline in interest rates. The average investment in
mortgage-backed increased $127.7 million, while loans increased $17.8 million.
The yield on mortgage-backed securities declined from 6.50% to 6.29% over the
same period, while the yield on loans decreased from 9.23% to 8.46%. Total
interest expense increased $263,000, between the six months ended June 30, 1999
and 1998. The increase is attributed to growth in interest-bearing liabilities
partially offset by the decline in interest rates. Average interest-bearing
deposits increased $104.8 million while borrowings increased by $38.0 million.
The cost of interest-bearing deposits was reduced by 47 basis points to 4.22%
from 4.69% between the six months ended June 30, 1998 and 1998. The cost of
borrowings, including trust preferred, declined 43 basis points over the same
period.
Allowance for Loan/Lease Losses:
The Corporation maintains allowances for credit losses and charges losses
to these allowances when such losses are considered probably. The allowances for
losses are maintained at a level which management considers adequate to provide
for losses based upon an evaluation of known and inherent risks in the
portfolios. Management's evaluation is based upon a continuing review of the
portfolios.
The table on the following page represents a summary of the changes in the
allowance for loan losses during the periods indicated:
-13-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months
June 30, 1999 June 30, 1998
------------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Beginning balance ..................................... $23,689 $24,850
Provision for loan losses ............................. 512 749
Charge-offs:
Residential real estate .......................... 97 72
Commercial real estate (1) ....................... 196 138
Commercial ....................................... 8 289
Consumer ......................................... 500 614
------- -------
Total recoveries .............................. 801 1,113
------- -------
Recoveries:
Residential real estate .......................... -- --
Commercial real estate (1) ....................... 48 4
Commercial ....................................... 9 94
Consumer (2) ..................................... 94 87
------- -------
Total charge-offs ............................. 151 185
------- -------
Net charge-offs ....................................... 650 928
------- -------
Ending balance ........................................ $23,551 $24,671
======= =======
Net charge-offs to average gross loans outstanding, net
of unearned income (3) ........................... .17% .24%
======= =======
</TABLE>
(1) Includes commercial mortgages and construction loans.
(2) Includes finance-type leases.
(3) Ratio is annualized.
The following table represents a summary of the changes in the allowance
for lease credit losses during the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
----------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Beginning balance ..................................... $ 992 $1,097
Provision for losses on vehicles under operating leases 432 286
Charge-offs ........................................... 321 485
Recoveries ............................................ 131 106
------ ------
Net charge-offs ....................................... 190 379
------ ------
Ending balance ........................................ $1,234 $1,004
====== ======
</TABLE>
-14-
<PAGE>
Other Income
Noninterest income increased $1.3 million between the three months ended
June 30, 1998 and 1999. This increase resulted primarily from net rental income
on operating leases, which increased $716,000 between the comparable quarters.
The growth in rental income was attributable to a 26% increase in vehicles under
operating leases between June 30, 1998 and 1999. In addition, credit/debit and
ATM fee income increased $285,000 during the quarter ended June 30, 1999 in
comparison to the quarter ended June 30, 1998, due to the expansion of the
Bank's ATM network and increased usage of the Company's debit card. Deposit
service charges increased $211,000 between the second quarter of 1999 and 1998
primarily due to increased fees along with the addition of six new branches. In
addition, during the second quarter of 1998, the Corporation recorded a $218,000
loss on the sale of a nonperforming investment in real estate. Partially
offsetting these increases was a decrease in securities gains. During the second
quarter of 1998 the Company recognized a $237,000 gain on the sale of a $29.0
million collateralized mortgage obligation. No gains were recorded during the
second quarter of 1999.
Noninterest income increased $1.9 million between the six months ended June
30, 1998 and 1999. This increase resulted primarily from net rental income on
operating leases, which increased $1.2 million between comparable quarters.
Deposit service charges increased $438,000 while credit/debit card and ATM fee
income increased $426,000 during the same period. Partially offsetting these
increases was a decline in securities gains of $275,000.
Other Expenses
Noninterest expenses increased $1.5 million between the quarters ending
June 30, 1998 and 1999. Higher salary, equipment, data processing and occupancy
expenses accounted for the planned increase and were primarily associated with
six new retail banking offices, expansion of the fee generating ATM network and
investments in technology for enhanced customer service capabilities.
Noninterest expenses increased $2.1 million between the six months ended
June 30, 1998 and 1999. Consistent with the quarterly results, higher salary,
equipment, data processing and occupancy expenses accounted for the planned
increase and were primarily associated with six new retail banking offices,
expansion of the fee generating ATM network and investments in technology for
enhanced customer service capabilities. Partially offsetting these increases was
a $362,000 decline in net costs of assets acquired through foreclosure, the
result of the decline in problem assets.
Income Taxes
The Corporation and its subsidiaries file a consolidated federal income tax
return and separate state income tax returns. Income taxes are accounted for in
accordance with SFAS No. 109, which requires the recording of deferred income
taxes for tax consequences of "temporary differences". The Corporation recorded
a provision for income taxes during the three and six months ended June 30, 1999
of $1.6 million and $3.1 million, respectively, compared to an income tax
provision of $1.6 million and $3.1 million, for the comparable periods of 1998.
The effective tax rates for the three and six months ended June 30, 1999 were
26% compared to 26%, which is essentially the same as comparable periods in
1998. These effective rates reflect the recognition in the financial statements
of certain tax benefits from a previous acquisition of a reverse mortgage lender
into the Corporation; and from a fifty-percent interest income exclusion on an
ESOP loan.
The Corporation analyzes its projections of taxable income on an ongoing
basis and makes adjustments to its provision for income taxes accordingly.
-15-
<PAGE>
SEGMENT INFORMATION
Under the definition of SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information, the Corporation has two operating segments:
Wilmington Savings Fund Society, FSB (Bank) and WSFS Credit Corporation (WCC).
The Bank segment provides financial products through its branch network to
consumer and commercial customers. The WCC segment provides loans and leases
inderectly through unrelated auto dealerships primarily in the Mid-Atlantic
region.
Reportable segments are business units that offer different services to
distinct customers. The reportable segments are managed separately because they
operate under different regulations and provide services to distinct customers.
The Corporation evaluates performance based on pre-tax ordinary income and
allocates resources based on these results. Segment information for the three
and six months ended June 30, 1999 and 1998 follow:
<TABLE>
<CAPTION>
For the three months ended June 30,
--------------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
Bank WCC Total Bank WCC Total
--------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
External customer revenues:
Interest income.............................. $ 26,670 $ 495 $ 27,165 $ 26,343 $ 598 $ 26,941
Other income ................................ 3,155 4,055(1) 7,210 2,626 3,237 (1) 5,863
--------- -------- --------- --------- -------- ---------
Total external customer revenues ................ 29,825 4,550 34,375 28,969 3,835 32,804
--------- -------- --------- --------- -------- ---------
Intersegment revenues:
Interest income.............................. 34(2) - 34 2,747(2) - 2,747
Other income ................................ 23 1 24 25 1 26
--------- -------- --------- --------- -------- ---------
Total intersegment revenues ..................... 57 1 58 2 ,772 1 2,773
--------- -------- --------- --------- -------- ---------
Total revenue.................................... 29,882 4,551 34,433 31,741 3,836 35,577
--------- -------- --------- --------- -------- ---------
External customer expenses:
Interest expense ............................ 17,394 - 17,394 17,541 - 17,541
Other expenses............................... 9,807 376 10,183 8,207 410 8,617
Other depreciation and amortization.......... 606 19 625 606 19 625
--------- -------- --------- --------- -------- ---------
Total external customer expenses ................ 27,807 395 28,202 26,354 429 26,783
--------- -------- --------- --------- -------- ---------
Intersegment expense:
Interest expense............................. - 34(2) 34 - 2,747(2) 2,747
Other expenses............................... 1 23 24 1 25 26
--------- -------- --------- --------- -------- ---------
Total intersegment expenses ..................... 1 57 58 1 2,772 2,773
--------- -------- --------- --------- -------- ---------
Total expenses .................................. 27,808 452 28,260 26,355 3,201 29,556
--------- -------- --------- --------- -------- ---------
Income before taxes.............................. 2,074 4,099 6,173 5,386 635 6,021
--------- ---------
Provision for income taxes ...................... 1,605 1,565
--------- ---------
Consolidated net income ......................... $ 4,568 $ 4,456
========== ==========
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
Bank WCC Total Bank WCC Total
--------- ---------- --------- --------- ---------- --------
External customer revenues:
<S> <C> <C> <C> <C> <C> <C>
Interest income.............................. $ 53,330 $ 1,024 $ 54,354 $ 52,773 $ 1,230 $ 54,003
Other income ................................ 6,053 7,728(1) 13,781 5,401 6,459(1) 11,860
--------- ---------- --------- --------- ---------- --------
Total external customer revenues ................ 59,383 8,752 68,135 58,174 7,689 65,863
--------- ---------- --------- --------- ---------- --------
Intersegment revenues:
Interest income.............................. 3,008(2) - 3,008 5,574(2) - 5,574
Other income ................................ 45 3 48 42 4 46
--------- ---------- --------- --------- ---------- --------
Total intersegment revenues ..................... 3,053 3 3,056 5,616 4 5,620
--------- ---------- --------- --------- ---------- --------
Total revenue.................................... 62,436 8,755 71,191 63,790 7,693 71,483
--------- ---------- --------- --------- ---------- --------
External customer expenses:
Interest expense ............................ 35,124 - 35,124 34,861 - 34,861
Other expenses............................... 18,864 854 19,718 17,303 883 18,186
Other depreciation and amortization.......... 1,146 40 1,186 767 40 807
--------- ---------- --------- --------- ---------- --------
Total external customer expenses ................ 55,134 894 56,028 52,931 923 53,854
--------- ---------- --------- --------- ---------- --------
Intersegment expense:
Interest expense............................. - 3,008(2) 3,008 - 5,574(2) 5,574
Other expenses............................... 3 45 48 4 42 46
--------- ---------- --------- --------- ---------- --------
Total intersegment expenses ..................... 3 3,053 3,056 4 5,616 5,620
--------- ---------- --------- --------- ---------- --------
Total expenses .................................. 55,137 3,947 59,084 52,935 6,539 59,474
--------- ---------- --------- --------- ---------- --------
Income before taxes.............................. 7,299 4,808 12,107 10,855 1,154 12,009
--------- --------
Provision for income taxes ...................... 3,148 3,122
--------- --------
Consolidated net income ......................... $ 8,959 $ 8,887
========= ========
At June 30,
---------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Bank WCC Total Bank WCC Total
Segment assets.....................................$1,662,650 $246,640 $1,909,290 $1,539,699 $204,838 $1,744,537
Elimination intersegment receivables............... (229,275) (192,906)
---------- --------
Consolidated assets................................ $1,680,015 $1,551,631
========== ==========
Capital expenditures...............................$ 2,530 $ 35 $ 2,565 $ 1,996 $ 11 $ 2,007
</TABLE>
(1) Operating lease income net of depreciation and loss provision.
(2) Inter-segment interest based on the Corporations weighted average wholesale
borrowing costs which was 5.57% and 5.95% for the three months ended June
30, 1999 and 1998, respectively and 5.56% and 5.99% for the six months
ended June 30, 1999 and 1998, respectively.
-17-
<PAGE>
ACCOUNTING DEVELOPMENTS
In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of derivatives
depends on the derivative and resulting designation. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of certain foreign currency
exposures. This Statement was to become effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company has not yet determined
the impact, if any, of this Statement, including its provisions for the
potential reclassifications of investment securities, on operations, financial
condition or equity. In July 1999, FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of effective date of
SFAS No. 133". SFAS No. 137 delays the effective date of SFAS No. 133 to fiscal
years beginning after June 30, 2000.
YEAR 2000
Banking, by its nature, is a very data processing intensive industry.
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use a date after
December 31, 1999. These potential shortcomings could result in a system failure
or miscalculations causing disruptions of operation, including among other
things, a temporary inability to process transactions, calculate interest
payments, track important customer information, provide convenient access to
this information, or engage in normal business operations.
WSFS is subject to the regulation and supervision of various banking
regulators, whose oversight includes providing specific timetables, programs and
guidance regarding Year 2000 issues. Regulatory examination of the WSFS' Year
2000 programs are conducted periodically and reports are submitted by the Bank
to the banking regulators and the Board of Directors on a periodic basis.
From a technology perspective, WSFS uses application software systems
and receives technical support from one of the world's largest data processing
providers to financial institutions, for nearly all of its critical customer
accounting applications. This company has extensive resources dedicated at their
corporate level to assist their financial institution customers, including WSFS,
in the effort to become Year 2000 compliant.
WSFS has completed an assessment of its core financial and operational
software systems and has found them already in compliance, or has developed a
plan that is directed toward bringing non-complaint systems into compliance. Its
Year 2000 Project Plan is in place and is progressing on schedule.
WSFS has completed the renovation, testing and re-installation of 100%
of its internally maintained Mission Critical Systems including those systems
that comprise the books and records of the bank. Its renovation effort is
substantially complete for both Significant Impact and Low Impact Systems as
well with 96% of the renovation work effort for all systems complete as of June
30, 1999. WSFS has taken a proactive approach in working with several financial
industry service providers, such as ATM networks and card processors, to help
increase the probability that WSFS customers will have uninterrupted service
into the Year 2000.
Plans have been developed and are being implemented to address and
track compliance in other areas of the organization. The infrastructure plan
addresses physical facilities, for example: building security systems, fire
alarm systems, heating and air conditioning and business equipment, for example:
fax machines, copiers, vaults, ATMs, postage machines and forms.
Systems outside of the direct control of WSFS, such as ATM networks,
credit card processors, and the Fed Wire System, pose a more problematic issue.
A theoretical problem scenario could involve a temporary inability of customers
to access their funds through automated teller machines, point of service
terminals at retailer locations, or other shared networks. For this reason
alone, banks and their governing agencies are closely scrutinizing the progress
of our major
-18-
<PAGE>
industry service providers.
WSFS plans include a review of the Year 2000 efforts of our suppliers,
vendors and other business relationships to encourage the timely resolution of
product or service compliance issues. WSFS has completed a review of the Year
2000 risks in its customer base and plans to continue to evaluate these risks.
WSFS has developed contingencies for various Year 2000 problem
scenarios. These contingency plans range from converting from third-party
providers that we do not feel are adequately prepared for the Year 2000, to the
temporary manual processing of certain critical applications, if necessary. A
detailed remediation contingency plan for core applications was in place in
early 1998 and a business resumption contingency plan for the core business
functions supported by these applications was completed in the second quarter of
1999. Contingency plan testing is underway and is scheduled to be complete in
the third quarter of 1999.
From a cost perspective, WSFS was already involved in upgrading its
technology infrastructure and therefore, many potential Year 2000 issues were
avoided by the replacement of old systems with new technology. As of June 30,
1999, WSFS has incurred expenses of $2.9 million related to the Year 2000 issue.
WSFS anticipates spending an additional $370,000 in future periods. A large
portion of costs associated with Year 2000 issues will be met from existing
resources through a reprioritization of the technology department initiatives
with the remainder representing incremental costs.
WSFS believes the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues do not represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition. However, if compliance
is not achieved in a timely manner by WSFS or any of its significant related
third-parties, be it a supplier of services or customer, the Year 2000 issue
could possibly have a material effect on the Company's results of operations and
financial position.
Successful and timely completion of the Year 2000 project is based on
management's best estimates, which were derived from numerous assumptions of
future events, which are inherently uncertain, including the availability of
certain resources, third party modification plans, and other factors. Many of
the factors that would guarantee Year 2000 success are beyond the control of
WSFS. These factors include availability of vendor compliant products, interface
system partner compliance, government activity and client readiness. Because of
the interconnectedness of the Year 2000 situation, WSFS cannot realistically
offer any certifications, representations or guarantees. Nevertheless, WSFS has
devoted substantial resources to the problem and describes its plan in this
corporate statement. WSFS' Year 2000 initiative is an ongoing process. The
information available in this document may be periodically updated and is
subject to change without notice. This statement about WSFS' Year 2000 readiness
is intended to supercede every statement that has been made previously regarding
Year 2000 readiness issues.
FORWARD LOOKING STATEMENTS
Within this discussion and analysis we have included certain "forward
looking statements" concerning the future operations of the Corporation. It is
management's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing the Corporation of the protections of such safe
harbor with respect to all "forward looking statements" contained in our
financial statements. We have used "forward looking statements" to describe the
future plans and strategies including our expectations of the Corporation's
future financial results. Management's ability to predict results or the effect
of future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, competition, the general economic climate
in Delaware, mid-Atlantic region and the country as a whole, loan delinquency
rates, Year 2000 issues, and changes in federal and state regulation. These
factors should be considered in evaluating the "forward looking statements", and
undue reliance should not be placed on such statements.
-19-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing and funding activities. To that end,
management actively monitors and manages its interest rate risk exposure. One
measure, required to be performed by OTS-regulated institutions, is the test
specified by OTS Thrift Bulletin No. 13A, "Management of Interest Rate Risk,
Investment Securities and Derivative Activities." This test measures the impact
on net portfolio value of an immediate change in interest rates in 100 basis
point increments. Net portfolio value is defined as the net present value of
assets, liabilities, and off-balance sheet contracts. The chart below is the
estimated impact of immediate changes in interest rates on net interest margin
and net portfolio value at the specified levels at June 30, 1999 and 1998,
calculated in compliance with Thrift Bulletin No. 13A:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
1999 1998(1)
-------------------------------- -------------------------------
Change in Interest % Change in % Change in % Change in % Change in
Rate Net Interest Net Portfolio Net Portfolio Net Portfolio
(Basis Points) Margin (2) Value (3) Margin (2) Value (3)
-------------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
+300 1% -25% 3% -28%
+200 1 -17 2 -20
+100 1 -9 1 -10
-100 -1 9 -1 11
-200 -2 20 -3 23
-300 -3 32 -5 36
</TABLE>
(1) June 30, 1998 has been restated to reflect the interest-sensitive nature of
the operating lease portfolio
(2) This column represents the percentage difference between net interest margin
in a stable interest rate environment and net interest margin as projected in
the various rate increments.
(3) This column represents the percentage difference between net portfolio value
of the Company in a stable interest rate environment and the net portfolio value
as projected in the various rate increments.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while maximizing the yield/cost spread on the
Company's asset/liability structure. The Company relies primarily on its
asset/liability structure to control interest rate risk.
-20-
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None.
<PAGE>
SIGNATURES
Pursuant to the requirements 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: August 12, 1999 /s/ MARVIN N. SCHOENHALS
-----------------------------------------------
Marvin N. Schoenhals
Chairman, President and Chief Executive Officer
Date: August 12, 1999 /s/ MARK A. TURNER
-----------------------------------------------
Mark A. Turner
Executive Vice President and
Chief Financial Officer
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<NAME> WSFS FINANCIAL CORPORATION
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