WSFS Financial Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 15, 2012. The filing also reports fourth-quarter results. Amounts below are U.S. dollars.
Business context
WSFS is a Delaware-based savings and loan holding company whose principal subsidiary is WSFS Bank. Its core business is commercial lending funded mainly by customer deposits, supplemented by trust and wealth management, ATM services through Cash Connect, and retail banking. It operated 49 banking and trust offices across Delaware, Pennsylvania, Virginia, and Nevada. The December 2010 acquisition of Christiana Bank & Trust contributed to 2011 trust and wealth management growth.
Financial performance and position
| Metric | FY 2011 / Dec. 31, 2011 | FY 2010 / Dec. 31, 2010 |
|---|---|---|
| Net income | $22.7 million | $14.1 million |
| Net income allocable to common shareholders | $19.9 million; diluted EPS $2.28 | $11.3 million; diluted EPS $1.46 |
| Net interest income | $126.0 million | $120.7 million |
| Net interest margin | 3.60% | 3.62% |
| Noninterest income | $63.6 million | $50.1 million |
| Noninterest expense | $127.5 million | $109.3 million |
| Provision for loan losses | $28.0 million | $41.9 million |
| Net cash from operating activities | $76.3 million | $62.0 million |
| Total assets | $4.29 billion | $3.95 billion |
| Gross loans / allowance for loan losses | $2.76 billion / $53.1 million | $2.62 billion / $60.3 million |
| Total deposits | $3.14 billion | $2.81 billion |
| Stockholders’ equity | $392.1 million | $367.8 million |
Common dividends totaled $0.48 per share in 2011. The filing reports return on average assets of 0.56%, return on average equity of 5.96%, an efficiency ratio of 66.85%, and tangible common equity to assets of 7.18%.
Year-end cash and cash equivalents were $468.0 million, including $397.1 million of cash in non-owned ATMs managed by Cash Connect. Net cash used in investing activities was $280.8 million and net cash from financing activities was $295.7 million. The Bank reported $442.4 million of additional FHLB funding capacity. FHLB advances were $538.7 million; other borrowings were $117.9 million; and trust preferred borrowings were $67.0 million. Brokered deposits were $287.8 million.
WSFS Bank reported regulatory Tier 1 capital of 12.18% and total risk-based capital of 13.43%, and was classified as well-capitalized. The company’s 7.18% tangible common equity ratio is a separate measure.
Material changes versus FY 2010
- Net income increased 61%; diluted EPS rose 56%. The lower loan-loss provision was a major contributor, alongside higher fiduciary and investment management income, partly offset by rising operating costs.
- Net interest income grew 4%, while net interest margin slipped 2 basis points. Average loan growth and lower funding costs helped; lower mortgage-backed securities yields offset some benefit.
- Noninterest income rose $13.5 million, including a $7.1 million increase in fiduciary and investment management income, primarily reflecting the acquired Christiana Trust business.
- Noninterest expense increased $18.1 million, reflecting the acquired business, branch expansion and renovation, added commercial relationship managers, and higher loan workout and OREO costs. The efficiency ratio deteriorated to 66.85% from 63.61%.
- Net loans grew about 5%, with commercial and industrial loans up $221.7 million; construction loans declined $34.6 million. Customer deposits increased 11%, driven by core deposits.
- Nonperforming assets declined modestly to $91.7 million from $92.9 million, and their ratio to assets fell to 2.14% from 2.35%. Net charge-offs remained elevated at $35.3 million, or 1.32% of average loans, versus $35.0 million, or 1.39%, in 2010.
- Fourth-quarter 2011 net income was $6.2 million and diluted EPS was $0.63, compared with $2.1 million and $0.16 in fourth-quarter 2010.
Outlook, risks, contingencies and unusual items
- Management said it was nearing the end of a strategic investment phase and would focus in 2012 on optimizing investments, growing earnings, and continuing asset-quality improvement. It expected continued C&I lending growth. Over several years, management anticipated approximately 80% organic growth and 20% acquisition growth, subject to available opportunities. No specific 2012 earnings or revenue guidance was provided.
- Credit remains a significant risk: commercial and commercial real estate loans represented about 81% of gross loans. Nonperforming assets remained high, and $133.7 million of performing loans required increased supervision. Management cautioned that problem-asset balances and related costs could remain volatile.
- A late-2011 loan-rating recalibration moved $67 million of loans from “pass/watch” to criticized or classified, with none placed on nonaccrual; the exercise contributed $2.1 million to the 2011 provision and allowance. The Bank also remained subject to an informal regulatory memorandum of understanding dating from 2009. Management believed it was complying except for completing the further reduction of criticized assets, but noted uncertainty about the new regulators’ assessment.
- Interest-rate movements, mortgage prepayments, real estate collateral values, deposit competition, funding access, and new regulation—including Dodd-Frank implementation—could affect earnings, liquidity, or capital. Management cited expected ongoing compliance costs and noted that the full regulatory impact was uncertain.
- Unusual or noteworthy items included $4.9 million of net securities gains, $2.0 million of bank-owned life insurance income (including $1.2 million described as unanticipated), and $5.9 million of charges related to foreclosed real estate. The filing also describes a 2011 increase in value of the SASCO reverse-mortgage certificates, partly recognized in interest income and partly in other comprehensive income.
- Two matters had no recorded litigation reserve because a loss could not then be reasonably estimated: a bankruptcy trustee’s action concerning a former customer loan and a purported class action challenging overdraft-fee practices. The company said it intended to defend both.
- As a subsequent event, the U.S. Treasury announced on March 14, 2012 plans to sell its $52.6 million of WSFS preferred stock received under the Capital Purchase Plan. The Treasury’s common-stock warrant was not included in the planned sale. CPP terms restricted common-stock repurchases and dividend increases without Treasury approval.
Important facts for investors to verify
- Whether criticized/classified loans, the $133.7 million of loans under heightened monitoring, nonperforming assets, and charge-offs improve—and whether the allowance remains adequate.
- The status and any amended requirements of the Bank’s regulatory memorandum of understanding, particularly the criticized-asset reduction and brokered-deposit restrictions.
- How much of reported cash is operationally required for Cash Connect’s ATM business, and the availability and cost of wholesale funding if loan growth continues.
- Whether acquired trust-management revenue and loan growth can offset rising expenses and preserve margins and earnings as acquisition and branch-related costs continue.
- The eventual outcome and potential financial exposure of the overdraft-fee and bankruptcy-trustee lawsuits, and the implications of Treasury’s preferred-stock sale and continuing warrant.