WSFS FINANCIAL CORP quarterly report, Q3 FY2013

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WSFS Financial Corporation — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise indicated. WSFS is a Delaware-based community banking company with commercial and consumer banking, ATM services, and trust and wealth management businesses.

Financial performance

  • Third-quarter earnings: Net income was $14.2 million, up 42% from $10.0 million a year earlier. Net income allocable to common shareholders was $13.8 million; diluted EPS was $1.54 versus $1.06.
  • Nine-month earnings: Net income was $34.8 million versus $23.8 million. Common earnings were $33.2 million, or $3.72 diluted EPS, compared with $21.7 million, or $2.47.
  • Net interest income and margin: Q3 net interest income was $33.4 million versus $30.9 million; net interest margin was 3.61% versus 3.41%. Nine-month net interest income was $97.0 million versus $95.5 million, and margin was 3.52% versus 3.49%. Management cited deposit and loan pricing, improved balance-sheet mix, and securities-yield improvement; Q3 margin also included $446,000 of one-time net adjustments.
  • Noninterest income: $22.7 million in Q3 versus $19.7 million; $60.4 million for nine months versus $65.5 million. Q3 included a $3.8 million reverse-mortgage consolidation gain. Lower securities gains weighed on the year-to-date comparison ($2.9 million versus $17.8 million).
  • Credit costs and expenses: Provision for loan losses was $2.0 million in Q3 and $5.9 million for nine months, versus $3.8 million and $28.4 million, respectively, in 2012. Noninterest expense was $32.8 million in Q3 and $98.3 million year to date, up 2% in each comparison; Cash Connect’s billing-method change increased both revenue and expense.
  • Cash flow: Operating activities provided $44.7 million in the first nine months, versus $63.3 million. Investing activities used $71.0 million; financing activities provided $27.8 million. Cash and cash equivalents ended at $502.4 million, up $1.6 million from year-end.

Financial condition, credit and capital

  • Total assets were $4.44 billion, up 2% from year-end. Net loans were $2.83 billion, up $106.1 million; reported gross loans were $2.88 billion. Investment securities were $806.9 million, down from $908.0 million.
  • Total deposits were $3.12 billion, down $153.8 million. Customer deposits were $2.95 billion; brokered deposits were $175.6 million. FHLB advances increased to $600.4 million from $376.3 million. Other reported borrowings included $114.0 million in repurchase-related funding, $67.0 million in trust-preferred borrowings, $55.0 million in senior debt, and $38.2 million in other borrowed funds. The reverse-mortgage trust consolidation added $26.3 million of bonds payable.
  • Nonperforming assets were $56.5 million, down from $62.5 million; nonaccruing loans were $38.2 million, or 1.33% of loans, versus 1.73% at year-end. The allowance for loan losses was $41.4 million, or 1.44% of loans, versus $43.9 million and 1.58%. Net charge-offs for nine months were $8.4 million versus $35.9 million.
  • Delinquency warrants attention: management reported total loan delinquency of 1.84%, up from 1.62%, primarily due to a $19.0 million seasonal-business relationship reviewed monthly for accrual status. Loans requiring increased supervision totaled $106.9 million, down from $120.0 million.
  • Stockholders’ equity was $374.0 million, down $47.1 million, reflecting principally the $52.6 million preferred-stock redemption and $29.0 million of other comprehensive loss, partly offset by earnings. WSFS Bank reported capital ratios of 14.30% total risk-based, 13.05% Tier 1 risk-based, and 10.17% core capital, and was classified as well capitalized.
  • Available-for-sale securities had $27.4 million of unrealized losses at September 30, largely attributed to market interest-rate changes; the company reported no third-quarter other-than-temporary impairment. Nine-month other comprehensive loss was $29.0 million.

Material changes, outlook and risks

  • In Q3, WSFS consolidated the SASCO reverse-mortgage securitization trust after obtaining a clean-up call right. It recorded approximately $40.5 million of reverse-mortgage loans, $5.8 million cash, and $38.8 million of debt at fair value, and recognized a $3.8 million gain. The valuation is Level 3 and sensitive to assumptions; management used an 18.7% discount rate and estimated that a 1 percentage-point change would move value by approximately $850,000–$890,000 in the opposite direction.
  • WSFS completed its July 2013 asset purchase of Array Financial Group and Arrow Land Transfer for stated consideration of $8.1 million, including contingent consideration. The acquisition added $4.2 million of goodwill and $2.4 million of intangible assets; results are included from the acquisition date.
  • The company recorded a $6.7 million deferred tax asset related to SASCO consolidation and a full valuation allowance because realization depends on tax restructuring and future taxable income. Management said it is pursuing restructuring; release of the allowance could produce a future tax benefit, but timing and realization are uncertain.
  • No specific earnings or financial guidance is provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results. Risks discussed include credit quality and collateral values, interest-rate and securities-market changes, funding and liquidity, regulation (including Dodd-Frank and capital rules), competition, operational risks, and litigation. New capital rules were scheduled to apply beginning in 2015, with buffers phased in thereafter; the potential effect was not yet fully analyzed.
  • Legal matters include a continuing bankruptcy-trustee complaint concerning an approximately $5.0 million loan repayment and a separate loan-related dispute for which WSFS reported a settlement agreement. The company estimated a $250,000–$5.0 million aggregate range of reasonably possible losses for the proceedings at quarter-end.

Important facts for investors to verify

  1. How much of earnings growth is recurring after excluding the $3.8 million consolidation gain, lower prior-year securities gains, and other one-time adjustments?
  2. Whether the seasonal $19.0 million borrower remains accruing and how total delinquency and criticized loans develop.
  3. Whether deposits stabilize and the higher reliance on FHLB advances and other borrowings affects funding costs and margins.
  4. Whether SASCO valuation assumptions, tax restructuring, and the deferred-tax-asset valuation allowance change materially.
  5. The final acquisition consideration and performance contribution from Array and Arrow, and developments in the disclosed legal matters and regulatory risks.