WSFS Financial Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Unless otherwise noted, amounts are in millions of dollars. WSFS is a Delaware-based banking and financial services company, with banking, ATM services, and wealth management businesses.
Financial results and key metrics
| Metric | Q1 2014 | Q1 2013 or prior period |
|---|---|---|
| Total interest and noninterest income | $56.1 | $53.7 |
| Net interest income | $34.0 | $31.6 |
| Net interest margin | 3.57% | 3.46% |
| Provision for loan losses | $2.6 | $2.2 |
| Net income | $16.9 | $9.7 |
| Net income allocable to common shareholders | $16.9 | $9.0 |
| Diluted earnings per share | $1.85 | $1.02 |
| Operating cash flow | $26.2 | $1.5 |
Total assets were $4.546 billion at March 31, up $30.2 million from year-end 2013. Net loans were $2.957 billion, available-for-sale securities were $859.3 million, and cash and cash equivalents were $439.7 million, down $44.7 million from year-end. Investing activities used $77.1 million; financing activities provided $6.2 million.
Total deposits were $3.173 billion, down $13.9 million from year-end. Brokered deposits rose to $247.4 million from $168.7 million, while customer deposits declined. Borrowed funds were $924.3 million at book value, including $654.8 million of FHLB advances, $125.6 million of repurchase-related borrowings, $67.0 million of trust preferred borrowings, and $55.0 million of senior debt. Stockholders’ equity was $408.9 million. WSFS Bank reported a 14.66% total risk-based capital ratio and a 13.47% Tier 1 ratio; the Bank was classified as well-capitalized.
Material changes versus comparable periods
- Net income increased 74% year over year, but included a one-time $6.7 million tax benefit following the January legal call of the reverse-mortgage trust bonds and the resulting ability to recognize deferred tax benefits. Excluding this item, the company reported a 34.7% effective tax rate, versus 35.3% in Q1 2013.
- Net interest income rose 8%; the net interest margin expanded 11 basis points. Management attributed the improvement to higher-yielding loans replacing lower-yielding mortgage-backed securities, reverse-mortgage income, and deposit pricing.
- Noninterest income increased 1.6% overall. Excluding securities gains, it rose 8%, supported by Cash Connect, wealth management, and core banking. Securities gains declined to $0.6 million from $1.6 million.
- Noninterest expense increased 6% to $34.2 million, reflecting business growth, Array and Arrow staffing, and winter-related occupancy costs. Management said severe winter weather affected both revenue growth and expenses.
- Credit indicators weakened versus year-end: nonaccruing loans rose to $40.1 million from $31.0 million; total nonperforming assets increased to $55.4 million from $47.8 million, or 1.22% of assets versus 1.06%. The allowance was $41.3 million, or 1.38% of loans, compared with 1.40% at year-end.
- Accumulated other comprehensive loss narrowed to $12.5 million from $21.3 million at year-end, including $8.8 million of first-quarter other comprehensive income, largely reflecting improved unrealized values on available-for-sale securities.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Management described liquidity sources as sufficient for prudent needs, citing deposits, loan repayments, FHLB borrowing, repurchase agreements, brokered deposits, the Federal Reserve discount window, and liquid securities. Cash and cash equivalents nevertheless declined during the quarter.
- Management identified interest-rate risk, credit losses, economic and real-estate conditions, funding costs, regulatory changes, competition, operational risks, and litigation as factors that could affect results. A modeled 100-basis-point rate increase was estimated to reduce net interest margin by 2%; larger rate scenarios showed different modeled impacts. Down-rate scenarios of 200–300 basis points were deemed not meaningful.
- The pending First Wyoming acquisition was valued at approximately $64 million and was expected to close in Q3 2014, subject to customary conditions, regulatory approvals, and shareholder approval.
- A bankruptcy trustee lawsuit challenges a prior loan repayment of approximately $5.0 million. The company is defending the claim and estimated reasonably possible losses at $0.5 million to $5.0 million. Management reported no material changes to other significant proceedings.
- The reverse-mortgage portfolio’s $36.3 million carrying value depends on modeled cash flows, borrower move-out assumptions, home-price appreciation forecasts, and a 15.55% internal rate of return. Management reported collateral value of $60.5 million, but changes in assumptions could affect reported income and valuation.
Important facts for investors to verify
- How much of the earnings increase is sustainable after excluding the $6.7 million tax benefit, and how will the tax rate evolve?
- Whether the rise in nonaccrual loans and nonperforming assets persists, particularly the two relationships totaling $7.7 million that moved to nonperforming status.
- Whether deposit trends, including greater reliance on brokered deposits and wholesale funding, affect liquidity or funding costs.
- Whether First Wyoming closes on the expected terms and timeline, and what integration or financing effects follow.
- Developments in the $0.5 million–$5.0 million legal-loss range and sensitivity of reverse-mortgage valuations to model assumptions.