WSFS Financial Corporation — 2017 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures are included where relevant. WSFS is a Delaware-based savings and loan holding company, with commercial and retail banking, Cash Connect cash-logistics services, and wealth management. It reported approximately $7.0 billion in assets and $18.6 billion in assets under management and administration.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $345.9 million | $298.8 million |
| Net interest income | $221.3 million | $193.7 million |
| Net income | $50.2 million | $64.1 million |
| Diluted earnings per share | $1.56 | $2.06 |
| Net interest margin | 3.95% | 3.88% |
| Efficiency ratio | 64.91% | 62.52% |
| Operating cash flow | $130.2 million | $80.2 million |
- Growth and balance sheet: Assets rose 3% to $7.0 billion. Net loans increased 7% to $4.8 billion; customer deposits rose 9% to $5.0 billion. Core customer deposits increased 10% ($382.7 million).
- Income and costs: Net interest income grew 14%, supported by loan growth and a full year of Penn Liberty results. Noninterest income increased 19% excluding securities gains, led by wealth management and card/ATM fees. Noninterest expense rose 20% to $226.5 million; adjusted for disclosed unusual and corporate-development items, it increased 16%.
- Cash and liquidity: Cash and cash equivalents ended at $723.9 million, down $98.1 million. Cash flows were $130.2 million from operations, negative $388.8 million from investing, and $160.6 million from financing. The loan-to-customer-funding ratio was 96%.
- Funding and debt: Total deposits were $5.25 billion, including $229.4 million of brokered deposits. FHLB advances were $710.0 million; senior debt was $98.2 million; trust-preferred borrowings were $67.0 million. WSFS redeemed $55.0 million of 6.25% notes due 2019, recording $0.7 million of debt-extinguishment costs.
- Capital: Stockholders’ equity was $724.3 million, up 5%; tangible equity to assets was 7.87%. The Bank’s CET1 ratio was 11.36%, total risk-based capital ratio 12.08%, and leverage ratio 9.73%, all above well-capitalized thresholds. The holding company reported $37.3 million in cash.
Changes, unusual items, and asset quality
- GAAP net income fell 22% from 2016, despite stronger net interest and fee income. GAAP ROA was 0.74%, versus 1.06% in 2016. Management’s non-GAAP core ROA was 1.21%; this measure excluded specified unusual items and should not be viewed as a substitute for GAAP results.
- 2017 results included a $12.0 million Universitas legal-settlement charge, a $14.5 million deferred-tax-asset remeasurement charge following tax reform, an $8.0 million expected tax charge related to the planned 2018 surrender of BOLI policies, a $2.8 million fraud loss, and a $1.5 million WSFS Foundation contribution. The tax-related charges totaled approximately $22.5 million. The Universitas settlement was agreed in February 2018 for claims seeking more than $54 million; WSFS said it would pursue recovery through indemnity and insurance.
- Fourth-quarter 2017 net loss was $9.8 million, or $0.31 per diluted share, compared with net income of $18.1 million in fourth-quarter 2016. The filing attributes the annual earnings decline principally to tax-related charges, the settlement, fraud loss, and higher operating expenses.
- Nonperforming assets rose to $59.0 million from $40.8 million; the ratio to assets increased to 0.84% from 0.60%. Management attributed the increase primarily to two commercial-and-industrial relationships totaling $18.0 million. Net charge-offs were $10.1 million, or 0.22% of gross loans; the allowance was $40.6 million, 0.84% of gross loans.
- Commercial loans were 84% of gross loans. Management identified greater credit risk in commercial real estate, construction and land development, and commercial-and-industrial lending; its loans are concentrated in Delaware and southeastern Pennsylvania.
Outlook, commentary, and risks
- Management expected growth to combine organic expansion and acquisitions, with continued focus on commercial lending, deposits, and fee income from wealth management and Cash Connect. It expected commercial and relationship-based lending growth to continue into 2018 and beyond. The filing provides no specific 2018 earnings or revenue guidance.
- Management cited improving economic conditions as contributing to lower reserve needs and net charge-offs versus 2016, while also noting increased expenses to support growth and acquired businesses. Cash Connect expanded services and smart-safe offerings, but its pretax income declined 13% as investment and funding costs increased.
- Key risks include interest-rate and funding-cost changes, regional economic and real-estate downturns, commercial-loan concentration, deposit competition, regulatory requirements, acquisition integration, litigation, cybersecurity and operational failures. Cash Connect has particular exposure to cash-handling theft or control failures; the filing notes historical incidents and no assurance of full recovery of future losses.
- WSFS said adoption of the expected-credit-loss standard (CECL), planned for 2020, could materially increase its loan-loss allowance and reduce capital, though the effect was not yet quantified. The company reported no material off-balance-sheet arrangements; customer credit commitments totaled $1.3 billion.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of year-end.
Investor verification priorities
- Review the Universitas settlement terms, timing and actual recoveries from insurance or indemnity claims.
- Assess whether the higher nonperforming assets and commercial-credit exposures are stabilizing, and whether the allowance remains adequate.
- Separate recurring earnings from the tax, legal, fraud and other unusual charges; verify the assumptions behind management’s non-GAAP core ROA.
- Monitor deposit growth, deposit pricing, funding mix and the effect of rising rates on net interest margin and liquidity.
- Track ongoing expense growth, Cash Connect profitability, and the eventual capital and allowance effects of CECL.
- Confirm subsequent developments in the planned BOLI surrender and related tax costs.