-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CP3Eg6XekK1cK4vnoYd5hWVjBlCIbEHVvvEUW6+JM6dxeIlWXnpHz1/I9dbuW2i+ RsEeR8QFBjLpPHEu+9TeDA== 0000950116-99-001556.txt : 19990816 0000950116-99-001556.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950116-99-001556 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WSFS FINANCIAL CORP CENTRAL INDEX KEY: 0000828944 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222866913 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16668 FILM NUMBER: 99689005 BUSINESS ADDRESS: STREET 1: 838 MARKET ST CITY: WILMINGTON STATE: DE ZIP: 19899 BUSINESS PHONE: 3027926000 MAIL ADDRESS: STREET 1: 838 MARKET STREET CITY: WILMINGTON STATE: DE ZIP: 19899 FORMER COMPANY: FORMER CONFORMED NAME: STAR STATES CORP DATE OF NAME CHANGE: 19920703 10-Q 1 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) WSFS FINANCIAL CORPORATION FORM 10-Q INDEX PART I. Financial Information
Page ---- 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
-2- WSFS FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended Six months ended June 30, June 30, --------------------------- --------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (Unaudited) 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 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. -3- WSFS FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CONDITION
June 30, December 31, 1999 1998 ----------- ----------- (Unaudited) (Dollars in Thousands) 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 =========== ===========
The accompanying notes are an integral part of these financial statements. -4- WSFS FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, ------------------------------- 1999 1998 --------- --------- (Unaudited) (Dollars in thousands) 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)
The accompanying notes are an integral part of these financial statements. -5- 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).
For the three months For the six months ended June 30, ended June 30, ------------------------ ------------------------ 1999 1998 1999 1998 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 ======= ======= ======= =======
-6- 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- A table presenting the Bank's consolidated capital position relative to the minimum regulatory requirements as of June 30, 1999 (dollars in thousands):
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 ------ ------ ------ ------ ------ ------ 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
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- 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.
June 30, December 31, 1999 1998 ------- ------- 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
(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- 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-
Three 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): 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% ===== ====
(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-
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): 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% ==== ====
(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- 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-
Six Months Ended Six Months June 30, 1999 June 30, 1998 ------------------- ------------- (Dollars in Thousands) 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% ======= =======
(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:
Six Months Ended Six Months Ended June 30, 1999 June 30, 1998 ----------------- ---------------- (Dollars in Thousands) 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 ====== ======
-14- 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- 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:
For the three months ended June 30, -------------------------------------------------------------------------- 1999 1998 ----------------------------------- --------------------------------- Bank WCC Total Bank WCC Total --------- -------- --------- --------- -------- --------- 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 ========== ==========
-16-
For the six months ended June 30, -------------------------------------------------------------------------- 1999 1998 ----------------------------------- --------------------------------- Bank WCC Total Bank WCC Total --------- ---------- --------- --------- ---------- -------- External customer revenues: 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
(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- 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- 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- 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:
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) -------------- ---------- ---------- ----------- --------- +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
(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- Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) None. 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 EX-27 2 FINANCIAL DATA SCHEDULE
9 0000828944 WSFS FINANCIAL CORPORATION 1,000 6-MOS DEC-31-1999 JUN-30-1999 56,541 3,926 18,840 0 237,404 273,086 0 793,192 23,551 1,680,015 917,906 145,829 29,289 500,000 0 0 16,906 70,085 1,680,015 32,465 16,954 4,935 54,354 16,444 35,124 19,230 512 1 20,392 12,107 12,107 0 0 8,959 0.79 0.78 7.82 8,217 2,446 0 0 23,689 801 151 23,551 23,551 0 0
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