WSFS Financial Corporation — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods; balance-sheet comparisons are with December 31, 2015. WSFS is a regional banking and financial-services company operating through WSFS Bank, Cash Connect and Wealth Management. Its lending is funded primarily by customer deposits and borrowings.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $46.4 million | $39.1 million | $91.8 million | $77.9 million |
| Noninterest income | $24.8 million | $22.5 million | $47.9 million | $43.6 million |
| Provision for loan losses | $1.3 million | $3.8 million | $2.0 million | $4.6 million |
| Noninterest expense | $44.0 million | $38.7 million | $87.2 million | $77.6 million |
| Net income | $17.5 million | $12.2 million | $33.2 million | $25.1 million |
| Diluted earnings per share | $0.58 | $0.43 | $1.10 | $0.88 |
| Net interest margin | 3.90% | 3.71% | 3.89% | 3.76% |
Q2 net income rose 43% year over year; six-month net income rose 32%. Management attributed stronger net interest income to loan growth, improved balance-sheet mix and purchase-accounting effects from acquisitions. Fee income growth reflected Cash Connect and Wealth Management. Expense growth reflected staffing and infrastructure for growth, Alliance acquisition costs and higher professional and legal fees.
Financial condition, liquidity and capital
- Total assets were $5.83 billion, up $249.5 million, or 4%, from year-end 2015. Net loans were $3.80 billion, up $72.2 million; available-for-sale securities were $766.5 million, up $45.4 million.
- Cash and cash equivalents increased $142.7 million to $703.9 million. The balance includes $599.1 million of cash in non-owned ATMs associated with Cash Connect.
- Total deposits were $3.99 billion, down $24.4 million. FHLB advances increased $217.3 million to $886.8 million. Borrowed funds totaled $1.17 billion, versus $932.9 million at year-end.
- Stockholders’ equity was $617.2 million. The company issued $100 million of senior unsecured notes in June; reported senior debt at period-end was $152.2 million. The notes carry a 4.50% fixed rate through June 2021, then three-month LIBOR plus 3.30%, and mature in 2026.
- Both the Bank and consolidated company exceeded regulatory “well-capitalized” benchmarks. The Bank’s total capital ratio was 13.05%, common equity Tier 1 was 12.26%, and Tier 1 leverage was 10.48%. The company separately held $137.8 million in cash outside Bank capital.
- Six-month operating cash flow was $51.8 million, compared with $23.1 million in 2015; investing cash use was $107.5 million, versus $194.2 million; financing cash inflow was $198.4 million, versus $196.7 million. Cash increased $142.7 million over the period.
Asset quality and material changes
- Nonperforming assets fell to $31.6 million from $39.9 million at year-end; the ratio to total assets improved to 0.54% from 0.71%. Nonaccrual loans were $14.6 million, or 0.38% of total loans, down from $21.2 million, or 0.56%.
- The allowance for loan losses was $37.7 million, or 0.98% of gross loans, compared with $37.1 million and 0.99% at year-end. Six-month net charge-offs declined to $1.4 million from $3.1 million in 2015. Management cited continued strong credit metrics and removed its model-estimation and complexity-risk reserve during Q2.
- Loan balances grew, particularly commercial and owner-occupied commercial lending; construction loans declined. Customer deposits were slightly lower, while funding shifted toward FHLB advances and newly issued senior debt.
- Q2 available-for-sale securities generated $4.3 million of other comprehensive income, compared with a $6.3 million loss in Q2 2015. At June 30, unrealized losses were $104,000; the company reported no other-than-temporary impairment.
Outlook, unusual items and risks
- Management expected the approximately $101 million Penn Liberty acquisition to close in August 2016, subject to customary closing conditions. Regulatory and shareholder approvals had been obtained. The filing describes expected strategic benefits but provides no quantitative earnings or cost-savings guidance.
- The company early adopted share-based-payment accounting guidance, recognizing a $688,000 tax benefit in Q2 and the first half. This benefited reported effective tax rates, which were 32.7% for Q2 and 34.1% for the first half.
- A proposed $1.45 million settlement of a bankruptcy-related lawsuit was reserved in full at June 30, subject to court approval. Separately, MD&A identifies $950,000 of legal settlement-related costs within higher Q2 professional fees; the filing text does not clearly reconcile these descriptions. A settlement of the Alliance-related shareholder action was approved after quarter-end; insurers were to pay $335,000 of plaintiffs’ legal fees, with no material company impact expected.
- Key stated risks include credit exposure in commercial real estate, construction and commercial lending; rate-driven changes in funding costs, asset yields and securities values; liquidity and regulatory-capital requirements; acquisition completion and integration; Cash Connect operational controls; cybersecurity and systems; and legal, economic and valuation uncertainties. Management cautions that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether Penn Liberty closed as expected and the resulting purchase accounting, integration costs and contribution to earnings.
- The trajectory of FHLB borrowings, overall funding costs, deposits and net interest margin as rates and loan growth change.
- Whether improvement in nonperforming assets and charge-offs is sustained, and whether the allowance remains adequate as the loan portfolio grows.
- The final outcome and accounting for the $1.45 million proposed settlement and the separately described $950,000 legal cost.
- How much of reported cash growth is attributable to Cash Connect ATM balances versus cash available for general liquidity needs.
- The sustainability of earnings growth after the $688,000 tax benefit and the period’s acquisition-related and legal items.