WSFS Financial Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Comparisons are primarily with fiscal 2013. WSFS is a Delaware-based community banking and financial services company, with commercial lending funded mainly by customer deposits and additional ATM cash-management and trust and wealth-management businesses.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets, year-end | $4.85 billion | $4.52 billion |
| Total deposits, year-end | $3.65 billion | $3.19 billion |
| Net loans, year-end | $3.16 billion | $2.90 billion |
| Net interest income | $144.5 million | $131.6 million |
| Net income | $53.8 million | $46.9 million |
| Diluted EPS | $5.78 | $5.06 |
| Net interest margin | 3.68% in selected data and average-balance table | 3.56% |
| Noninterest income | $78.3 million | $80.2 million |
| Noninterest expense | $147.8 million | $132.9 million |
- Net income rose 15%; diluted EPS rose 14.2%. Net interest income increased 10%, supported by loan growth, improved balance-sheet mix and the September 2014 First Wyoming acquisition.
- Income before taxes was nearly flat at $71.4 million versus $71.6 million. A one-time $6.7 million tax benefit tied to the reverse-mortgage trust helped lift 2014 net income.
- Noninterest expense increased $14.9 million. Management attributed the increase to acquisitions, hiring and infrastructure investment, compliance staffing, corporate-development costs and other professional fees. Adjusted noninterest expense, a non-GAAP measure, rose 8% to $137.9 million.
- Net cash provided by operating activities was $67.1 million; investing activities used $26.6 million and financing activities used $16.9 million. Cash and cash equivalents increased $23.6 million to $508.0 million. This balance includes $414.2 million of cash in non-owned ATMs, which supports Cash Connect operations and should not be viewed as wholly unrestricted cash.
- Customer deposits grew 15% to $3.46 billion, including $228.8 million acquired with First Wyoming. Core customer deposits, excluding CDs, grew $401.2 million. The loan-to-total-customer-funding ratio was 92%.
- Year-end borrowings included $405.9 million of FHLB advances, $128.2 million of federal funds purchased and repurchase agreements, $67.0 million of trust-preferred borrowings and $55.0 million of senior notes. FHLB advances declined $232.2 million year over year. The senior notes bear 6.25% interest and mature in 2019; FHLB advances had a weighted-average rate of 0.52%.
- WSFS Bank reported a 12.79% Tier 1 risk-based capital ratio, 13.83% total risk-based capital ratio and 10.25% core capital ratio, and was classified as well capitalized under the rules then in effect. The company reported a 9.00% tangible equity-to-assets ratio.
Material changes and asset quality
- First Wyoming was acquired on September 5, 2014 for approximately $64.9 million in cash and stock. The acquisition added $176.0 million of loans and $228.8 million of deposits at fair value and generated $16.4 million of goodwill. Its results are included from the acquisition date.
- Total assets increased 7%; net loans increased 9%. Commercial loans were 84.1% of gross loans, up from 83.6% in 2013, reflecting the company’s continued commercial-lending focus.
- Provision for loan losses fell to $3.6 million from $7.2 million. Net charge-offs declined to $5.4 million from $9.9 million, and nonaccruing loans declined to $24.1 million from $31.0 million.
- Total nonperforming assets nevertheless increased to $52.4 million from $47.8 million, and the NPA-to-assets ratio edged up to 1.08% from 1.06%. The increase principally reflected growth in accruing troubled debt restructurings; total TDRs were $36.2 million versus $27.6 million.
- The allowance for loan losses fell to $39.4 million, or 1.23% of gross loans, from $41.2 million, or 1.40%. Management noted acquired loans were recorded at fair value without an initial allowance; excluding First Wyoming loans, the allowance-to-gross-loans ratio was 1.30%.
- Available-for-sale securities were $740.1 million at fair value. WSFS transferred $124.9 million of municipal securities to held-to-maturity after determining it had the intent and ability to hold them to maturity. The filing reported no other-than-temporary impairment at year-end.
Outlook, commentary and risks
- Management reported 2014 return on average assets of 1.17% and said core ROA reached 1.17% in the fourth quarter. Its stated goal was core ROA of at least 1.20% by the end of 2015. The filing does not provide formal earnings or revenue guidance.
- Management expected continued growth in commercial and relationship-based lending and described anticipated longer-term growth as approximately 80% organic and 20% acquisitions, subject to available opportunities.
- After year-end, WSFS announced a definitive agreement to acquire Alliance Bank, an eight-branch Pennsylvania institution reported to have $421 million in assets, $310 million in loans and $345 million in deposits at December 31, 2014. Completion remained subject to the transaction process and applicable approvals.
- Key risks include the concentration of commercial, commercial-real-estate and construction lending; geographic exposure to Delaware and nearby markets; credit deterioration and collateral values; interest-rate and funding-cost changes; deposit competition and liquidity access; regulatory and compliance costs; acquisition integration; cybersecurity and operational controls; and Cash Connect’s exposure to cash loss or misappropriation.
- Two disclosed legal matters include a bankruptcy trustee claim seeking approximately $5.0 million, with a stated reasonably possible loss range of $0–$5.0 million and summary-judgment motions pending, and a vendor breach-of-contract claim seeking $800,000 plus attorneys’ fees, which the parties agreed to mediate.
- The filing reports effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal control.
Most important facts for investors to verify
- Reconcile the reported net interest margin: the selected financial data and average-balance table show 3.68%, while one MD&A passage states 3.78% for 2014.
- Assess earnings quality by separating the $6.7 million one-time tax benefit and acquisition-related contributions from recurring performance; also review expense growth and management’s non-GAAP adjustments.
- Track TDRs, nonperforming assets, acquired-loan performance and allowance adequacy, particularly as the loan book remains heavily weighted to commercial lending.
- Evaluate liquidity using the composition of reported cash, the growth and durability of customer deposits, funding maturities and reliance on wholesale borrowing; distinguish Cash Connect ATM cash from freely available liquidity.
- Monitor the Alliance acquisition’s approval, terms, integration costs and realized benefits, alongside the First Wyoming integration and related goodwill.
- Follow the outcomes of the disclosed legal claims and any changes to the stated 2015 core-ROA objective or other growth assumptions.