WSFS Financial Corporation — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed March 1, 2021. The filing also reports fourth-quarter results. WSFS is a Delaware-based savings and loan holding company operating primarily in Delaware and the Greater Philadelphia region, through banking, Cash Connect and wealth-management businesses.
Business context and financial performance
At year-end, WSFS had $14.3 billion in assets, a $9.0 billion loan and lease portfolio, $11.9 billion in deposits, and $24.2 billion in assets under management and administration. Its three reporting segments are WSFS Bank, Cash Connect and Wealth Management.
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net interest income | $466.0 million | $444.9 million | Up 5% |
| Net interest margin | 3.96% | 4.44% | Down 48 basis points |
| Noninterest income | $201.0 million | $188.1 million | Up 7% |
| Noninterest expense | $368.8 million | $413.1 million | Down $44.3 million, chiefly lower Beneficial acquisition and restructuring costs |
| Provision for credit losses | $153.2 million | $25.6 million | Up $127.6 million, largely reflecting COVID-19 forecasts and CECL |
| Net income attributable to WSFS | $114.8 million | $148.8 million | Down 23%; diluted EPS $2.27 versus $3.00 |
| Return on average assets | 0.87% | 1.30% | Core ROA, a non-GAAP measure, was 0.74% |
Fourth-quarter 2020 net income attributable to WSFS was $59.8 million, or $1.20 per diluted share, compared with $45.7 million, or $0.88, in fourth-quarter 2019. The fourth quarter included a $0.9 million recovery of credit-loss provision.
Balance sheet, credit, liquidity and capital
- Total assets rose 17% to $14.3 billion. Deposits increased 24% to $11.86 billion, contributing to a substantial liquidity build; cash, cash equivalents and restricted cash reached $1.65 billion, versus $571.8 million a year earlier.
- Net loans and leases increased 4% to $8.80 billion. Year-end PPP loans were $751.2 million; WSFS originated nearly $1.0 billion of first-round PPP loans during 2020.
- The allowance for credit losses was $228.8 million, or 2.51% of gross loans and leases, versus $47.6 million and 0.56% in 2019. Net charge-offs were $7.8 million, or 0.09% of average loans, compared with $17.5 million, or 0.22%, in 2019.
- Nonperforming assets rose to $60.5 million from $39.8 million; the NPA-to-assets ratio increased to 0.42% from 0.32%. Nonaccrual loans increased to $41.9 million, including a $15.1 million commercial real-estate investor loan moved to nonaccrual in Q4.
- COVID-related loan modifications fell from $2.02 billion at June 30 to $114.8 million at December 31, less than 2% of the loan and lease portfolio. Eligible modifications generally were not reported as troubled debt restructurings.
- Operating cash flow was $15.1 million, down from $89.9 million in 2019. Investing activities used $874.9 million, while financing activities provided $1.94 billion, principally reflecting deposit growth and the new debt issuance, offset in part by share repurchases and repayments of borrowings.
- WSFS Bank’s year-end CET1, total risk-based capital and Tier 1 leverage ratios were 12.50%, 13.76% and 9.74%, respectively; each exceeded well-capitalized benchmarks. The holding company’s CET1 ratio was 11.87%. Tangible common equity to tangible assets was 8.96%, a non-GAAP measure.
- Borrowings included $67.0 million in trust-preferred securities and $246.6 million in senior debt. FHLB advances fell to $6.6 million from $112.7 million, and year-end federal funds purchased were zero. The company issued $150 million of senior notes in December; proceeds were $147.8 million net of costs.
Material changes and unusual items
- WSFS adopted CECL on January 1, 2020. Adoption reduced opening retained earnings by $30.4 million and increased the allowance; pandemic-related economic deterioration drove substantial additional provision expense.
- Lower deposit funding costs and PPP interest income helped net interest income, but falling asset yields and balance-sheet mix reduced margin. PPP loans generated $21.7 million of interest income and incurred $3.3 million in related costs in 2020.
- Mortgage banking income increased with refinancing volume. Card and ATM income declined, in part after WSFS became subject to Durbin Amendment interchange limits in July 2020. The company also recorded $9.1 million of securities gains and a $22.1 million realized gain from selling Visa Class B shares.
- WSFS repurchased 3.95 million shares for $155.1 million in 2020, including 2.95 million shares for $116.3 million in Q4. It paid $24.4 million in common dividends. Year-end stockholders’ equity was $1.79 billion, down from $1.85 billion.
- The filing reports $4.9 million of COVID-related costs, a $3.0 million Community Foundation contribution, and a $2.3 million loss on early extinguishment of FHLB debt. Goodwill was not impaired in 2020.
Outlook, risks and contingencies
Management provided no quantified 2021 earnings or revenue guidance. It expects to continue relationship-based commercial lending and growth in small-business leasing, residential mortgage, small-business and SBA portfolios. WSFS plans to invest $17.5 million in its Delivery Transformation initiative in 2021 and said it expects growth to combine organic expansion and potential acquisitions. PPP 2.0 participation began in January 2021 through third-party processing and servicing; those loans are not expected to be originated on WSFS’s balance sheet, though related customer deposits may affect 2021 results.
Key uncertainties include the duration and economic effects of COVID-19, borrower repayment capacity after relief programs and deferrals, future credit-loss estimates, commercial real-estate and C&I exposures, interest rates and net interest margin, deposit and liquidity conditions, PPP compliance and litigation risks, cybersecurity and third-party service providers, regulatory requirements, and the transition away from LIBOR. WSFS disclosed approximately $1.8 billion of loans and $1.0 billion of derivatives indexed to LIBOR and maturing after 2021. It also reported $2.35 billion of commitments to extend credit; these contractual amounts do not necessarily represent expected funding needs.
A pending Delaware Court of Chancery action alleges WSFS Bank failed to give timely notice of possible lapse of two life-settlement policies with an aggregate face value of $6.3 million. WSFS disputes the allegations and is defending the matter. The filing also describes ongoing efforts to recover costs related to a previously settled Universitas dispute. Management reported no material changes to other significant proceedings. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; the allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- How subsequent borrower performance, expirations of relief and updated economic forecasts affect provision expense, the allowance and nonperforming assets.
- How quickly PPP loans are forgiven or repaid, the associated fee and interest recognition, and any compliance, fraud or litigation exposure.
- Whether deposit growth and elevated cash balances persist, and how excess liquidity and asset yields affect net interest margin.
- Execution, costs and expected returns from the $17.5 million 2021 Delivery Transformation investment and other growth initiatives.
- Capital and shareholder-return capacity after the 2020 repurchases, dividend payments and $150 million senior-note issuance, including debt repricing and LIBOR transition terms.
- Developments in the identified legal matters and whether any additional loss or liability becomes probable and estimable.