WSFS Financial Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are primarily with 2012. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars.
Business context
WSFS is a Delaware-based community banking and financial services company. Its principal business is commercial lending funded primarily by customer deposits; it also operates Cash Connect, trust and wealth management, and mortgage and title businesses. At year-end it reported $4.52 billion in assets, a $2.43 billion commercial loan portfolio, and 52 offices.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue, net interest income plus noninterest income | $211.7 million | $213.7 million |
| Net interest income | $131.6 million | $127.0 million |
| Net interest margin | 3.56% | 3.46% |
| Net income | $46.9 million | $31.3 million |
| Income allocable to common shareholders | $45.2 million | $28.5 million |
| Diluted EPS | $5.06 | $3.25 |
| Noninterest income | $80.2 million | $86.7 million |
| Noninterest expense | $132.9 million | $133.3 million |
| Provision for loan losses | $7.2 million | $32.1 million |
| Cash from operating activities | $57.4 million | $103.0 million |
- Profitability: Net income rose 50%; diluted EPS increased 56%. Return on average assets was 1.07%, versus 0.73%, and return on average equity was 11.60%, versus 7.66%.
- Loans and credit: Gross loans grew 6% to $2.95 billion; net loans were $2.90 billion, excluding loans held for sale. Commercial loans were 83.6% of gross loans. Nonperforming assets fell to $47.8 million from $62.5 million, and were 1.06% of assets versus 1.43%. The allowance for loan losses was $41.2 million, or 1.40% of gross loans; net charge-offs were $9.9 million, or 0.33% of average loans.
- Liquidity and funding: Cash and cash equivalents were $484.4 million. Total deposits declined 3% to $3.19 billion, while core customer deposits grew $67 million, or 3%. FHLB advances increased $261.8 million to $638.1 million; total borrowings were $759.8 million, with an additional $67.0 million in trust preferred borrowings and $55.0 million in senior notes. The loan-to-customer-funding ratio was 98%.
- Capital: Stockholders’ equity was $383.1 million, down from $421.1 million. The Bank reported Tier 1 risk-based capital of 13.16%, total risk-based capital of 14.36%, and a 10.35% core capital-to-adjusted-assets ratio; it was classified as well-capitalized. WSFS redeemed its $52.6 million preferred stock in 2013. Tangible common equity to assets was 7.69%.
- Cash flow: Investing activities used $172.5 million, principally reflecting $207.0 million of net loan growth. Financing activities provided $98.6 million; cash and cash equivalents declined $16.5 million during the year.
Material changes versus 2012
- Net interest income increased 4%, supported by loan growth, improved balance-sheet mix, and lower funding costs; net interest margin rose 10 basis points.
- The provision for loan losses fell $24.9 million as credit metrics improved. Net charge-offs declined from $41.2 million to $9.9 million.
- Reported noninterest income decreased $6.5 million, chiefly because securities gains declined to $3.5 million from $21.4 million. Excluding specified unusual items, management reported adjusted noninterest income growth of 8%.
- Reported expenses were nearly flat. Lower loan workout, OREO, and FDIC costs were substantially offset by higher compensation and equipment costs.
- Available-for-sale securities declined to $817.1 million from $900.9 million. A $34.2 million after-tax decline in other comprehensive income, primarily from lower unrealized securities gains, contributed to reduced equity.
- Customer deposits fell $86.1 million, mainly from reductions in time and jumbo CDs, while core deposit relationships increased. Higher FHLB advances funded balance-sheet growth.
Outlook, commentary, risks and unusual items
- Management described 2013 as an early stage of a “harvesting” phase after substantial investment in prior years, emphasizing continued commercial lending and deposit growth, fee businesses, and expense discipline. It set no specific earnings or revenue guidance in the provided filing text.
- WSFS completed the Array Financial Group and Arrow Land Transfer acquisition in July 2013 for approximately $8.0 million, including contingent consideration. Management expected the acquisition to contribute to mortgage banking growth.
- The proposed First Wyoming Financial Corporation merger was valued at approximately $64 million and was expected to close in the third quarter of 2014, subject to shareholder and regulatory approvals and other conditions. Management anticipated first-year earnings accretion; completion and benefits were not assured.
- A reverse-mortgage securitization consolidation produced a $3.8 million pretax gain and added related assets and liabilities to the balance sheet. The trust bonds were legally called in January 2014. The resulting tax-structure change led to a $6.6 million tax benefit recorded in January 2014, which management estimated would add approximately $0.74 to first-quarter 2014 diluted EPS and tangible book value per share.
- Principal risks include concentrated commercial real estate, construction, and commercial lending; local economic and property-market weakness; interest-rate and securities valuation changes; deposit and wholesale-funding pressures; regulatory costs and Basel III implementation; Cash Connect operational or fraud losses; cybersecurity and systems risk; and acquisition integration and execution.
- A bankruptcy trustee’s lawsuit concerning repayment of a former customer’s loan seeks recovery of approximately $5.0 million. WSFS was defending the matter and estimated reasonably possible losses of $250,000 to $5.0 million. Management said other routine proceedings were not expected to materially affect the financial statements.
- At year-end, WSFS disclosed a negative one-year interest-sensitive gap of approximately $148 million. It also reported $113.2 million of performing loans requiring increased supervision. The filing cautions that interest-rate models and reverse-mortgage valuations depend on significant assumptions.
Most important facts for investors to verify
- Whether credit improvement continues and whether the lower 2013 loan-loss provision and charge-offs prove sustainable; review commercial-loan concentrations, criticized credits, and the $113.2 million under increased supervision.
- Whether core deposit growth can offset further CD outflows, and how increased FHLB borrowing affects funding costs, liquidity, and the 98% loan-to-customer-funding ratio.
- How net interest income responds to rate changes, given the negative one-year gap and the sensitivity of securities and loan yields.
- Whether recurring fee growth and operating leverage support earnings after excluding securities gains, the reverse-mortgage gain, and Cash Connect billing-presentation effects.
- Completion, purchase accounting, integration, and realized benefits of the First Wyoming merger; also confirm the reported 2014 tax benefit and per-share impact in subsequent results.
- Potential outcome of the bankruptcy trustee litigation and exposure from off-balance-sheet credit commitments, which totaled $653.3 million at year-end.