WSFS Financial Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. The filing also reports unaudited fourth-quarter results. WSFS is a Delaware-based banking and financial-services company operating primarily in Delaware, southeastern Pennsylvania and southern New Jersey, with banking, Cash Connect and Wealth Management businesses.
Financial performance and position
| Metric | FY2019 / Dec. 31, 2019 | FY2018 / Dec. 31, 2018 |
|---|---|---|
| Net income attributable to WSFS | $148.8 million | $134.7 million |
| Diluted earnings per share | $3.00 | $4.19 |
| Net interest income | $444.9 million | $246.5 million |
| Net interest margin | 4.44% | 4.09% |
| Noninterest income | $188.1 million | $162.5 million |
| Noninterest expense | $413.1 million | $225.0 million |
| Total assets | $12.26 billion | $7.25 billion |
| Net loans and leases | $8.42 billion | $4.86 billion |
| Total deposits | $9.59 billion | $5.64 billion |
- Net income rose about 10%, while diluted EPS declined; the weighted-average diluted share count increased substantially following the Beneficial acquisition.
- Net interest income increased 81%, reflecting Beneficial’s contribution, purchased-loan accounting accretion, loan growth and balance-sheet management. Average earning-asset yield was 5.19%; average interest-bearing liability cost was 1.04%.
- Reported return on average assets was 1.30%; management’s non-GAAP core ROA was 1.61%. Tangible common equity to tangible assets was 10.97% (non-GAAP).
- Provision for loan and lease losses was $25.6 million, up from $13.2 million. Net charge-offs were $17.5 million, or 0.22% of average loans, versus $14.2 million, or 0.29%, in 2018.
- Nonperforming assets fell to $39.8 million from $47.7 million; nonperforming assets were 0.32% of total assets, versus 0.66%. The allowance was $47.6 million, or 0.56% of gross loans and leases.
- Operating cash flow was $89.9 million; investing activities provided $293.8 million and financing activities used $432.7 million. Cash and cash equivalents decreased $49.0 million to $571.8 million.
- Bank regulatory capital ratios remained above well-capitalized thresholds: CET1 13.52%, Tier 1 13.52%, total risk-based capital 14.01%, and leverage 11.72%. The parent held $71.4 million in cash.
- Year-end borrowing balances included $112.7 million of FHLB advances, $195.0 million of federal funds purchased, $67.0 million of trust preferred borrowings and $98.6 million of senior debt. These figures exclude deposits.
Material changes and unusual items
- WSFS acquired Beneficial Bancorp on March 1, 2019, for reported consideration of approximately $1.18 billion. The acquisition added $3.7 billion of loans at acquisition-date fair value, $4.1 billion of deposits, and $306.8 million of goodwill. Results include Beneficial only from the acquisition date, limiting direct year-over-year comparability.
- Assets increased 69%; loans and deposits grew substantially, primarily due to the acquisition. Excluding acquired deposits and loans, management reported continued organic growth.
- Reported noninterest expense rose by $188.1 million. It included $55.7 million of corporate-development costs and $16.1 million of restructuring costs, primarily related to Beneficial. Adjusted noninterest expense, a company-defined non-GAAP measure, increased 50% to $341.8 million.
- Noninterest income included $26.2 million of unrealized gains on equity investments, principally Visa Class B shares and Spring EQ, compared with $20.7 million in 2018; FY2018 also included a $3.8 million realized Visa-share gain. Management’s adjusted noninterest income was $161.6 million versus $138.0 million.
- Provision expense increased primarily due to significant credit events in two legacy WSFS commercial-and-industrial relationships; $11.6 million was charged off on those relationships in the second quarter.
- WSFS sold five former Beneficial branches in New Jersey and completed systems integration and rebranding in the third quarter. It planned to consolidate or divest 30 offices in the combined network.
- For Q4 2019, WSFS reported net income attributable to the company of $45.7 million, diluted EPS of $0.88 and net interest income of $117.6 million. Q4 2018 comparables were $29.7 million, $0.93 and $64.7 million, respectively.
Outlook, risks and contingencies
- Management described continued organic and acquisition-related growth as its strategy, including commercial lending, leasing, deposits, Wealth Management, Cash Connect and delivery-technology investments. The filing does not provide specific 2020 earnings or revenue guidance.
- Management expected CECL adoption on January 1, 2020 to increase the allowance for credit losses by approximately $30–$40 million and reduce opening retained earnings, net of tax, by approximately $24–$32 million; estimates were still being finalized. WSFS planned to phase in the regulatory-capital impact through 2023.
- Following growth above $10 billion in assets, WSFS expected additional regulatory obligations, including CFPB supervision beginning in Q1 2020 and debit-card interchange-fee restrictions beginning July 1, 2020.
- LIBOR-linked exposures maturing after 2021 included approximately $1.5 billion of loans, $957.3 million of derivatives and $167.0 million of debt securities. The transition to an alternative benchmark presents operational, market and basis-risk uncertainty.
- Key risks include credit exposure to commercial real estate, construction and commercial-and-industrial lending; local economic and real-estate conditions; interest-rate and funding-cost changes; acquisition integration and remaining merger costs; cybersecurity and third-party service-provider risks; and Cash Connect cash-control and fraud risks.
- A Delaware trust-related lawsuit alleges failure to provide timely notice regarding two life-settlement policies with $6.3 million aggregate face value. WSFS disputes liability; trial was scheduled for 2020. The filing also describes efforts to recover amounts related to a previously settled Universitas matter.
- A fourth-quarter branch fire caused $1.1 million of operating costs; WSFS was pursuing insurance recovery. The filing reports no material off-balance-sheet arrangements, although customer credit commitments totaled $2.10 billion.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included the loan-loss allowance and Beneficial merger purchase accounting.
Important facts for investors to verify
- How much of earnings and net interest margin depends on Beneficial-related purchase-accounting accretion, and how those effects run off.
- Progress toward merger cost savings, remaining integration expenses, and branch-optimization outcomes.
- CECL’s actual opening allowance and capital impact compared with management’s estimates.
- Credit trends in the two charged-off C&I relationships and the wider commercial, construction and CRE portfolios.
- Whether organic loan and deposit growth can continue while controlling deposit costs and maintaining liquidity.
- Valuation and potential earnings volatility from Visa, Spring EQ and other equity investments, alongside recurring fee-income growth.
- LIBOR transition readiness, regulatory costs associated with crossing the $10 billion threshold, and the outcome of pending legal matters.