WSFS Financial Corporation — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter report. WSFS is a Delaware-based community banking and financial services company, with commercial and consumer banking, Cash Connect ATM services, and trust and wealth management operations.
Financial results and condition
- Profit: Net income was $31.3 million, up 38% from $22.7 million in 2011. Net income available to common shareholders was $28.5 million; diluted EPS was $3.25, up from $2.28.
- Revenue and margins: Net interest income increased 1% to $127.0 million, while net interest margin fell 14 basis points to 3.46%. Noninterest income rose 36% to $86.7 million, including $21.4 million of net securities gains. Excluding securities gains and specified BOLI items, management reported noninterest income growth of 12%.
- Expenses and credit costs: Noninterest expense increased 5% to $133.3 million. Provision for loan losses rose to $32.1 million from $28.0 million; 2012 provision included $14.2 million associated with Asset Strategies. Net charge-offs were $41.2 million, or 1.49% of average loans, versus $35.3 million, or 1.32%, in 2011.
- Balance sheet: Total assets were $4.38 billion, up 2%. Net loans were $2.72 billion, up about 1%; gross loans were $2.77 billion. Commercial loans represented 82% of gross loans.
- Deposits and liquidity: Total deposits were $3.27 billion, including $3.10 billion in customer deposits. Customer deposits grew $256.8 million, or 9%, driven by core deposits. Cash and cash equivalents were $500.9 million; operating cash flow was $103.0 million. Management reported $745.2 million of available FHLB funding capacity and an 87% loan-to-customer-funding ratio.
- Debt: WSFS issued $55 million of unsecured senior notes at 6.25%, due 2019. Year-end borrowings included $376.3 million of FHLB advances, $110 million of federal funds and repurchase agreements, $67.0 million of trust preferred borrowings, and $55 million of senior debt. The company prepaid $125 million of FHLB advances and recorded a $3.7 million penalty.
- Capital: Stockholders’ equity was $421.1 million, up from $392.1 million. Tangible common equity to assets was 7.72%. The Bank’s Tier 1 risk-based capital ratio was 13.04% and total risk-based capital was 14.29%; the Bank was classified as well-capitalized.
Changes versus 2011 and significant items
- Net income and diluted EPS improved substantially, while net interest income grew modestly and net interest margin declined amid low reinvestment yields on mortgage-backed securities and the cost of new senior debt.
- Nonperforming assets fell to $62.5 million from $91.7 million, and the ratio to total assets improved to 1.43% from 2.14%. The reduction reflected, in part, a second-quarter bulk sale of $42.7 million of problem loans, including $22.5 million of nonperforming loans.
- The allowance for loan losses declined to $43.9 million from $53.1 million. Management cited charge-offs, problem-asset sales, improved risk ratings, and lower problem loans. Loans requiring increased supervision remained $120.0 million at year-end.
- WSFS sold $770.0 million of available-for-sale securities, recording $21.4 million in net gains. The filing describes the sales as connected to asset-quality actions, balance-sheet deleveraging, and ongoing portfolio management; gains materially contributed to reported noninterest income.
- Customer deposits increased as brokered deposits and FHLB advances declined. The company began a $125 million mortgage-backed securities deleveraging program in late 2012, completing the remaining portion in the first quarter of 2013.
Outlook, risks and contingencies
- Management expected commercial and small-business lending growth to continue and planned to keep focusing on commercial lending, core deposit growth, and wealth-management and Cash Connect expansion. It described an anticipated longer-term growth mix of approximately 80% organic and 20% acquisitions. No specific earnings or revenue guidance was provided.
- Key risks include credit exposure to commercial real estate, construction, and commercial borrowers; economic and property-market weakness in WSFS’s Mid-Atlantic markets; interest-rate and funding-cost changes; mortgage prepayments and securities valuation; liquidity and regulatory requirements; and operational, cybersecurity, and cash-handling risks at Cash Connect.
- Proposed Basel III capital rules and continuing Dodd-Frank implementation could increase compliance costs or capital requirements. WSFS stated that it believed its capital would satisfy the proposed rules if then in effect, while noting uncertainty about final implementation.
- A bankruptcy trustee’s lawsuit concerning a former customer’s loan remained pending; WSFS had not recorded a reserve because a loss could not be reasonably estimated. The IRS had issued a “No Change Report” on a trust’s 2006 return previously associated with a proposed $14–$18 million adjustment, but Area Director approval remained outstanding.
- Subsequent event: on February 28, 2013, the OCC notified WSFS Bank that its informal Memorandum of Understanding, entered into in December 2009, had been terminated.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of 2012 earnings growth depended on securities gains and other nonrecurring Asset Strategies effects, versus recurring operating performance.
- Whether credit quality continues improving after the problem-loan sale, given $120 million of loans under increased supervision and elevated net charge-offs.
- Whether net interest margin stabilizes as securities are reinvested and the balance-sheet deleveraging program progresses.
- The final effects of Basel III and other regulatory rules on capital, dividends, compliance costs, and growth capacity.
- Resolution of the bankruptcy litigation and final IRS approval of the “No Change Report.”