WSFS FINANCIAL CORP annual report, FY2015

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WSFS Financial Corporation — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. WSFS is a Delaware-based bank holding company with commercial banking, Cash Connect ATM services, and Wealth Management businesses.

Financial performance and condition

  • Assets and loans: Total assets rose 15% to $5.59 billion. Net loans were $3.73 billion, up 18%; commercial loans represented 84.6% of gross loans. Alliance contributed $291.1 million of net loans, with $281.3 million of organic loan growth.
  • Deposits and liquidity: Total deposits increased 10% to $4.02 billion, including $3.86 billion in customer deposits. Core customer deposits grew 11%, or $311.5 million. Cash and cash equivalents were $561.2 million, including $477.9 million of cash managed in non-owned ATMs. The loan-to-total-customer-funding ratio was 97%. The filing does not provide a single conventional liquidity ratio.
  • Earnings: Net interest income rose 15% to $166.8 million; net interest margin increased to 3.87% from 3.68%. Noninterest income increased to $88.3 million from $78.3 million. Noninterest expense grew to $163.5 million from $146.6 million. Net income was $53.5 million, down slightly from $53.8 million; diluted EPS was $1.85 versus $1.93. Return on average assets was 1.05%, compared with 1.17%.
  • Cash flow: Operating activities provided $73.3 million, versus $67.1 million in 2014. Investing activities used $275.8 million, mainly reflecting $285.7 million of net loan growth. Financing activities provided $255.7 million; cash and cash equivalents increased $53.1 million to $561.2 million.
  • Credit quality: Nonperforming assets fell to $39.9 million from $52.4 million, or 0.71% of assets versus 1.08%. The allowance for loan losses was $37.1 million, or 0.98% of gross loans, down from $39.4 million and 1.23%. Net charge-offs rose to $10.1 million from $5.4 million, largely due to a $5.7 million charge-off tied to one commercial-and-industrial relationship.
  • Capital and debt: Stockholders’ equity was $580.5 million; tangible equity to assets was 8.84%. WSFS Bank’s common equity Tier 1 ratio was 12.31%, total capital ratio 13.11%, and leverage ratio 10.88%; the Bank reported capital above well-capitalized thresholds. Period-end borrowings totaled approximately $934.2 million, including $669.5 million of FHLB advances, $67.0 million of trust-preferred borrowings and $55.0 million of senior notes due 2019.

Material changes and notable items

  • WSFS completed its Alliance acquisition on October 9, 2015, for approximately $97.9 million in cash and stock. The acquisition added $36.4 million of goodwill and $2.6 million of core deposit intangibles; reported results include Alliance from the acquisition date.
  • Net income was roughly flat year over year despite higher net interest income. Results were affected by higher loan-loss provision and operating costs, while 2014 included a one-time $6.7 million tax benefit from the reverse-mortgage trust and lower corporate-development expenses.
  • Provision for loan losses increased to $7.8 million from $3.6 million. Reported noninterest expenses included $7.6 million of corporate-development costs and $651,000 of debt-extinguishment costs; management also cited ongoing acquisition-related infrastructure and staffing costs.
  • Stockholders received $0.21 per share in dividends during 2015. WSFS repurchased 1,152,233 shares during the year; the Board authorized repurchases of up to 1,492,661 shares, with 1,400,565 remaining at year-end.

Outlook, risks and contingencies

  • Management expected loan growth to continue in 2016, emphasizing commercial and relationship-based lending. Its stated growth mix over the next several years was approximately 80% organic and 20% acquisitions, subject to available opportunities.
  • The 2013–2015 strategic-plan goal of at least 1.20% core and sustainable ROA was exceeded in the fourth quarter of 2015, when management reported 1.24% on a non-GAAP basis. This is not a formal 2016 earnings forecast.
  • A definitive agreement to acquire Penn Liberty was signed November 23, 2015. The approximately $101 million transaction was expected to close in early third-quarter 2016, subject to shareholder and regulatory approvals and other conditions; completion and integration remained uncertain.
  • Principal risks include the concentration in commercial, commercial real estate and construction lending; local economic and property-market weakness; interest-rate and funding-cost changes; deposit competition; acquisition execution and integration; regulatory/compliance costs; Cash Connect operational and cash-control risks; cybersecurity; and goodwill impairment.
  • One commercial relationship accounted for $17.5 million of loans more than 90 days past due at year-end; the company reported it was brought current in early January 2016. Loans requiring increased supervision totaled $79.9 million, up from $67.4 million.
  • A bankruptcy-related lawsuit had a reasonably possible loss range estimated at $0 to $5.0 million; litigation costs had exceeded insurance limits. A proposed settlement of shareholder litigation related to the Alliance merger was subject to court approval. Management did not expect other disclosed proceedings to have a material financial-statement effect.
  • The 2015 financial statements received an unqualified audit opinion, and management and KPMG reported effective internal control over financial reporting as of year-end.

Investor verification priorities

  1. Confirm whether Penn Liberty closed as planned, the final purchase accounting, integration costs and realized benefits.
  2. Track commercial credit concentrations, the large past-due relationship, criticized loans, charge-offs and allowance adequacy; reconcile the filing’s differing problem-loan ratios (17.7% in one discussion versus 24.1% in another).
  3. Assess deposit growth and funding mix alongside rising FHLB advances and the true availability of reported cash, much of which supports Cash Connect ATM operations.
  4. Separate recurring earnings from acquisition costs, the prior-year tax benefit, securities gains and other non-routine items; monitor expense growth and margins.
  5. Review the status and potential cost of the bankruptcy litigation, Alliance-related shareholder settlement, and the $959.6 million of credit commitments and other contingent exposures.