WSFS Financial Corporation — Q1 2013 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2013, WSFS operated a regional banking business, Cash Connect ATM services, and Trust and Wealth Management. The filing is unaudited; dollar figures below are in millions unless noted.
Financial performance and condition
- Earnings: Net income was $9.7 million, up 51% from $6.4 million; net income available to common shareholders was $9.0 million. Diluted EPS rose to $1.02 from $0.66.
- Revenue and margin: Net interest income was $31.6 million, down 3% year over year; noninterest income was $18.1 million, up 8%. Together, these produced $49.7 million of net interest and noninterest income, versus $49.3 million. Net interest margin declined 11 basis points to 3.46%.
- Credit costs: Provision for loan losses fell to $2.2 million from $8.2 million. Net charge-offs were $3.2 million, or 0.46% of average gross loans on an annualized basis, versus $5.5 million and 0.80% a year earlier.
- Expenses and taxes: Noninterest expense increased 4% to $32.4 million, including higher compensation and the Cash Connect billing presentation change. The effective tax rate was 35.3%, compared with 35.9%.
- Cash flow: Operating cash flow was $1.5 million, down from $18.6 million. Cash and cash equivalents increased $29.7 million during the quarter to $530.6 million; investing activities provided $46.9 million and financing activities used $18.6 million.
- Balance sheet and funding: Total assets were $4.35 billion, down $20.5 million from year-end 2012. Net loans were $2.74 billion. Deposits totaled $3.19 billion, down $86.4 million, while borrowed funds were $706.2 million, up $68.9 million. Stockholders’ equity was $424.3 million.
- Capital and liquidity: The Bank reported a 14.52% total risk-based capital ratio, 13.27% Tier 1 risk-based ratio, and 10.12% core capital ratio; it stated that it remained well-capitalized. The parent company held $61 million in cash. Reported cash equivalents include cash in non-owned ATMs, so the filing’s aggregate cash figure should not be assumed to be fully available for general corporate use.
Material changes versus comparable periods
- Earnings growth primarily reflected the sharply lower loan-loss provision and higher noninterest income, partly offset by lower net interest income and higher expenses.
- Interest income declined to $35.6 million from $39.2 million, while interest expense fell to $4.0 million from $6.7 million. Management attributed margin pressure to low MBS yields and interest expense on $55 million of senior notes issued in 2012.
- Wealth Management revenue increased 23%; Cash Connect revenue increased 8%, according to management. Management cited continued credit-quality improvement, including lower delinquencies and fewer problem loans relative to capital.
- Available-for-sale securities declined $78.2 million, consistent with the company’s deleveraging strategy. The portfolio’s net-of-tax unrealized loss contributed to a $5.8 million other comprehensive loss; total comprehensive income was $3.9 million, versus $5.5 million in Q1 2012.
- Customer deposits fell during the quarter, primarily from temporary trust account outflows, intentional reduction of higher-cost time deposits, and seasonal public-fund balances. FHLB advances increased $79.0 million.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or revenue guidance was provided. Management said deleveraging, prepaying higher-rate FHLB borrowings, reducing higher-cost CDs, and stabilizing investment yields were expected to support net interest margin in 2013.
- Management warned that results depend on economic conditions, borrower credit performance, property values, interest rates, deposit and funding costs, securities markets, regulation, competition, and operational and legal risks. It noted that actual economic conditions could be worse than assumptions used in estimates.
- Nonperforming assets were $63.0 million, or 1.45% of assets, versus $62.5 million and 1.43% at year-end. Nonaccrual loans were $45.7 million; assets acquired through foreclosure rose to $6.5 million. Troubled debt restructurings totaled $22.8 million, including $10.8 million accruing.
- Management reported no other-than-temporary impairment of investment securities in Q1. Available-for-sale securities had $2.6 million of gross unrealized losses; management attributed these primarily to market interest-rate changes and said it did not intend, and was not likely required, to sell the affected securities before recovery.
- On April 9, 2013, WSFS requested regulatory approval to redeem $52.625 million of Series A preferred stock issued under TARP. Separately, stockholders approved executive stock-option awards on April 25, with associated compensation cost to be recognized over time.
- The company disclosed guarantees related to customer interest-rate swaps: 97 transactions with $367.6 million aggregate notional at quarter-end. It reported no material change in significant legal proceedings and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether improved credit trends and the lower provision are sustainable, particularly given nonperforming assets’ slight increase and continued OREO transfers.
- Whether margin improvement initiatives can offset low asset yields and the cost of senior debt and other funding.
- The liquidity and availability of reported cash, including the substantial balance held in non-owned ATMs, and the effect of deposit declines and increased FHLB advances.
- Progress and regulatory approval concerning the proposed preferred-stock redemption, including its effects on capital, dividends, and funding.
- Exposure to fair-value estimates for Level 3 securities, impaired loans, and reverse mortgages, as well as interest-rate and prepayment risks in the securities portfolio.