WSFS Financial Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions except per-share data. WSFS is a community banking and financial services company operating through WSFS Bank, Cash Connect and Wealth Management.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $39.1 | $35.5 | $77.9 | $69.5 |
| Provision for loan losses | $3.8 | $0.1 | $4.6 | $2.7 |
| Noninterest income | $22.5 | $19.6 | $43.6 | $38.0 |
| Noninterest expense | $38.7 | $35.2 | $77.6 | $69.1 |
| Income before taxes | $19.1 | $19.8 | $39.3 | $35.7 |
| Net income | $12.2 | $12.7 | $25.1 | $29.6 |
| Diluted EPS | $0.43 | $0.46 | $0.88 | $1.08 |
| Net interest margin | 3.71% | 3.64% | 3.76% | 3.61% |
Q2 net income fell about 4% year over year, as higher loan-loss provision and operating costs offset growth in net interest income and fees. Six-month net income fell about 15%, but the comparison includes a $6.7 million tax benefit in Q1 2014; excluding that item, the filing says 2015 six-month net income increased from $22.9 million to $25.1 million. Six-month diluted EPS was $0.88 versus $0.84 on that adjusted comparison.
Fee growth reflected Wealth Management, Cash Connect and mortgage banking. Q2 fee income increased 14%; six-month fee income increased 15%. Six-month noninterest expense rose 12%, including acquisition and growth-related costs, $475,000 of early termination costs and $408,000 related to ATM fraud. The filing reports no material goodwill or intangible impairment indicators.
Financial position, cash flow and liquidity
- At June 30, 2015, assets were $5.08 billion, up 5% from December 31, 2014. Net loans were $3.30 billion, up $138.8 million; total deposits were $3.53 billion, down $122.8 million.
- FHLB advances increased to $740.7 million from $405.9 million. Total borrowed funds were $1.00 billion, versus $667.8 million at year-end. Stockholders' equity was $500.4 million.
- Cash and cash equivalents were $533.7 million, up $25.7 million from year-end. For the first six months, operating cash flow was $22.4 million, investing cash outflow $194.2 million and financing cash flow $197.4 million.
- Management cited seasonal withdrawal of temporary trust-related deposits as a principal reason for the deposit decline and said available liquidity sources were sufficient. The filing does not provide a consolidated-company liquidity ratio.
- WSFS Bank reported total risk-based capital of 13.58%, Tier 1 risk-based capital of 12.59% and Tier 1 leverage capital of 10.67%; each exceeded the stated well-capitalized benchmarks. Tangible common book value per share was $15.88, up from $15.30 at year-end.
Material changes and credit quality
- Loans grew 6% from year-end, led by commercial mortgages and construction lending. Nonperforming assets declined to $46.2 million from $52.4 million, and the NPA-to-assets ratio fell to 0.91% from 1.08%. Nonaccruing loans, however, increased to $27.7 million from $24.1 million.
- The allowance for loan losses was $40.8 million, or 1.22% of gross loans, versus $39.4 million, or 1.23%, at year-end. Six-month net charge-offs were $3.1 million, or 0.19% of average loans, compared with $2.5 million, or 0.17%, a year earlier.
- A $9.1 million substandard commercial-and-industrial relationship moved from accruing TDR to nonaccrual in Q2. It drove a $1.9 million net charge-off and a $3.6 million incremental allowance increase. The company also lengthened its historical loss look-back period, increasing the allowance by $1.7 million; other methodology changes partly offset that increase.
- Accumulated other comprehensive income fell to $1.2 million from $3.5 million at year-end, primarily reflecting an unfavorable change in unrealized available-for-sale securities gains and losses.
Outlook, risks and contingencies
- WSFS expected to complete its acquisition of Alliance Bancorp of Pennsylvania in Q4 2015, subject to regulatory approval and customary closing conditions. Alliance shareholders approved the transaction; four merger-related shareholder actions were consolidated, with a proposed settlement subject to court approval.
- No specific earnings or financial guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results.
- Management identified risks including credit deterioration, commercial real estate and C&I concentrations, interest-rate and funding-cost changes, securities valuation, regulatory capital and liquidity requirements, acquisition execution, operational and cybersecurity risks, and Cash Connect controls.
- A separate legal matter involving a former customer’s bankruptcy trustee sought recovery of approximately $5.0 million; management estimated reasonably possible losses from zero to $5.0 million. Summary judgment motions were pending. The filing states litigation costs had exceeded insurance limits.
- The company repurchased 455,402 shares in Q2 for $11.8 million at an average $25.81 per share. At quarter-end, 569,818 shares remained authorized for repurchase under the program.
Most important facts for investors to verify
- Whether the large C&I relationship causes further charge-offs, reserve increases or additional deterioration in nonperforming loans.
- Whether Alliance receives regulatory and court approvals and closes on the expected timetable, and the related integration costs.
- Whether deposit trends stabilize and increased reliance on FHLB advances remains manageable and cost-effective.
- Whether fee and loan growth can offset higher expenses and credit costs; compare reported earnings with the prior-year tax benefit appropriately.
- How securities marks, interest-rate sensitivity and legal contingencies develop; confirm capital and liquidity remain above required levels.