WSFS Financial Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 1, 2017. This is an annual report, not a quarterly filing. Unaudited fourth-quarter results are noted below.
Business context
WSFS is a Wilmington, Delaware-based savings and loan holding company operating through WSFS Bank, Cash Connect and Wealth Management. Its core business is commercial lending funded mainly by customer deposits, complemented by ATM cash logistics, mortgage banking and fiduciary and investment services. At year-end, the company reported approximately $6.8 billion in assets and $15.7 billion in fiduciary assets.
In 2016, WSFS acquired Penn Liberty Financial, Powdermill Financial Solutions and West Capital Management, expanding its southeastern Pennsylvania banking presence and wealth-management offerings.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Interest income | $216.6 million | $182.6 million |
| Net interest income | $193.7 million | $166.8 million |
| Noninterest income | $102.4 million | $88.3 million |
| Noninterest expense | $186.0 million | $163.5 million |
| Provision for loan losses | $13.0 million | $7.8 million |
| Net income | $64.1 million | $53.5 million |
| Diluted earnings per share | $2.06 | $1.85 |
| Net interest margin | 3.88% | 3.87% |
| Return on average assets | 1.06% | 1.05% |
| Efficiency ratio | 62.18% | 63.52% |
- Management’s non-GAAP core ROA was 1.13%, excluding after-tax corporate development costs and securities gains; GAAP ROA was 1.06%.
- Net cash provided by operating activities was $80.2 million; investing activities used $276.6 million and financing activities provided $457.2 million. Cash and cash equivalents rose $260.7 million to $821.9 million. This includes $698.5 million of cash in non-owned ATMs managed by Cash Connect.
- At December 31, total deposits were $4.74 billion, net loans were $4.42 billion, and reported total assets were $6.77 billion in the consolidated balance sheet. Customer deposits increased 19% during 2016.
- Borrowings included $854.2 million of FHLB advances, $130.0 million of federal funds purchased, $152.1 million of senior debt and $67.0 million of trust-preferred borrowings.
- WSFS Bank’s capital ratios were 11.19% common equity Tier 1, 11.19% Tier 1, 11.93% total risk-based capital and 9.66% Tier 1 leverage; the Bank met well-capitalized thresholds. The holding company had $103.0 million in cash.
- Fourth-quarter 2016 net income was $18.1 million and diluted EPS was $0.56, versus $14.0 million and $0.46 in fourth-quarter 2015.
Material changes versus the prior year
- Net income rose $10.5 million, with growth in net interest income and fee income; diluted EPS increased from $1.85 to $2.06.
- Net interest income increased 16%, primarily from organic lending growth and the contributions of Penn Liberty and the full-year impact of Alliance. Net interest margin edged up one basis point.
- Noninterest income increased 16%, led by card and ATM, wealth-management and mortgage-banking fees. Noninterest expense rose 14% excluding specified non-routine items, reflecting acquisitions, staffing and infrastructure investment.
- Loans grew 19% year over year; commercial loans were 84.9% of gross loans. Customer deposits grew 19%, including acquired balances and core-deposit growth.
- Loan-loss provision increased to $13.0 million from $7.8 million, driven mainly by two isolated credit events. Net charge-offs were $10.3 million, compared with $10.1 million in 2015.
- Nonperforming assets were $40.8 million, or 0.60% of assets, compared with $39.9 million, or 0.71%, in 2015. The allowance was $39.8 million, or 0.89% of gross loans, compared with 0.98% the prior year; acquired loans recorded at fair value affected this ratio.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said its 2017 focus would include optimizing the recent Pennsylvania and Wealth Management acquisitions; it expected future growth to combine organic and acquisition-related growth and anticipated continued emphasis on commercial lending and deposits.
- Corporate development costs were $8.5 million in 2016, primarily related to acquisitions. A $100 million senior unsecured note issuance in June 2016 increased interest expense; the notes carry a 4.50% fixed coupon through June 2021 and then a floating rate.
- The two notable credit events were a $15.4 million substandard C&I relationship, exited with a $4.2 million charge-off, and a private-banking exposure that resulted in a $3.5 million charge-off. Total provision also included other portfolio and acquired-loan factors.
- Interest-rate, credit, liquidity, regulatory, acquisition-integration, cybersecurity and operational risks are emphasized. Commercial real estate, construction and commercial lending represent substantial portfolio exposures. The one-year interest-rate-sensitive gap was negative $298.2 million, or 4.41% of assets.
- Cash Connect’s business carries operational and cash-misappropriation risk; WSFS disclosed prior incidents and cautioned that future losses may not be fully recovered. Wealth Management also faces fiduciary, litigation and reputational risks.
- Management reported no material off-balance-sheet arrangements and did not anticipate a material effect from known legal proceedings. The filing states no subsequent-event disclosures or measurements were required. KPMG gave unqualified opinions on the financial statements and internal controls.
- The filing contains a reported-asset inconsistency: selected financial data states $6.756 billion at December 31, 2016, while the consolidated balance sheet and other disclosures state $6.765 billion. The consolidated balance sheet value is used above; verify against the filed statements.
Important facts for investors to verify
- Reconcile the asset-total discrepancy and confirm final purchase-accounting amounts for the 2016 acquisitions, which were still subject to measurement-period adjustments.
- Assess whether acquisition-related revenue growth and cost savings materialize, and track ongoing expenses, goodwill and integration progress.
- Monitor commercial-credit concentrations, criticized and nonperforming loans, reserve adequacy and whether the two large 2016 charge-offs indicate broader portfolio trends.
- Review funding mix and sensitivity to deposit pricing, FHLB funding costs and interest-rate changes; distinguish operating liquidity from cash held in non-owned ATMs.
- Check subsequent filings for capital, asset-quality and liquidity developments, and for updates to regulatory, litigation, cybersecurity and Cash Connect risks.