WSFS Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are against December 31, 2013. Amounts below are in U.S. dollars unless stated otherwise. WSFS is a Delaware-based bank holding company with banking, ATM-services, and wealth-management businesses.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $36.7 million | $33.4 million | $106.3 million | $97.0 million |
| Provision for loan losses | $0.3 million | $2.0 million | $3.0 million | $5.9 million |
| Noninterest income | $20.3 million | $22.7 million | $58.3 million | $60.4 million |
| Noninterest expense | $39.5 million | $32.8 million | $109.2 million | $98.3 million |
| Net income | $11.4 million | $14.2 million | $41.0 million | $34.8 million |
| Diluted EPS | $1.23 | $1.54 | $4.46 | $3.72 |
| Net interest margin | 3.73% | 3.61% | 3.65% | 3.52% |
- At September 30, total assets were $4.78 billion, net loans were $3.14 billion, and available-for-sale securities were $843.3 million.
- Total deposits were $3.50 billion, including $243.2 million of brokered deposits. Federal Home Loan Bank advances were $517.2 million, down $120.9 million from year-end; senior debt was $55.0 million and trust-preferred borrowings were $67.0 million.
- Cash and cash equivalents were $471.3 million, down $13.1 million from year-end. Nine-month operating cash flow was $52.6 million, versus $44.7 million in 2013; investing activities used $34.0 million and financing activities used $31.7 million. The filing does not provide a conventional corporate free-cash-flow measure.
- Stockholders’ equity was $476.3 million. WSFS Bank reported a 14.70% total risk-based capital ratio, 13.65% Tier 1 ratio, and 11.01% core capital ratio; it was categorized as well-capitalized. Tangible common book value per share, a non-GAAP measure, was $44.50 versus $38.68 at year-end.
Material changes and notable items
- Q3 diluted EPS fell 20% year over year. Higher net interest income and a lower loan-loss provision were outweighed by higher expenses and the absence of the prior-year $3.8 million reverse-mortgage consolidation gain. Q3 2014 corporate-development expense included $2.6 million, primarily related to the FNBW merger; legal and fraud-related costs also increased.
- Nine-month net income and diluted EPS increased year over year, with EPS up 20%. Results included a one-time $6.7 million tax benefit in Q1 2014 following the legal call of reverse-mortgage trust bonds. The 2013 comparison included the $3.8 million reverse-mortgage consolidation gain in Q3.
- On September 5, WSFS completed its $64.9 million acquisition of First Wyoming Financial Corporation (FNBW), comprising $32.0 million cash and 452,769 WSFS shares. The acquisition added $176.0 million in loans and $228.8 million in deposits; results are included only from the acquisition date. WSFS recorded preliminary goodwill of $16.5 million and a $3.2 million core-deposit intangible. Nine-month integration costs were $2.9 million.
- Asset quality measures were mixed: nonaccruing loans declined to $26.8 million from $31.0 million at year-end, and nonperforming assets edged down to $47.3 million from $47.8 million. However, total loan delinquency rose to 1.11% from 0.76%, driven largely by a $16.3 million seasonal-industry relationship; management said it was well secured and delinquency excluding it was 0.59%. The allowance was $39.5 million, or 1.24% of gross loans, versus 1.40% at year-end; acquired FNBW loans carried no transferred allowance.
- Unrealized losses on securities declined to $9.6 million from $34.8 million at year-end. Management attributed temporary impairment to market-rate changes and reported no other-than-temporary impairment during the first nine months.
Outlook, risks, and contingencies
- No specific earnings or financial guidance is provided. Management expects the FNBW acquisition to build market share, expand the customer base, and enhance fee income, and believes capital will remain well-capitalized under phased-in Basel III rules.
- Management cited risks including credit deterioration, local economic and real-estate conditions, changing interest rates and funding costs, competition, regulation, liquidity, operational and compliance risks, and execution of growth plans. The filing says actual results may differ from estimates and interim results are not necessarily indicative of full-year results.
- Interest-rate sensitivity modeling showed estimated net interest margin changes of +6% for a 300-basis-point rise, +3% for a 200-basis-point rise, and -1% for a 100-basis-point rise. Declining-rate scenarios of 200 or 300 basis points were not meaningful at prevailing low rates.
- A bankruptcy-trustee lawsuit challenges repayment of an approximately $5.0 million loan. WSFS is defending the case; cross-motions for summary judgment were pending. Management estimated reasonably possible losses from zero to approximately $5.0 million. Litigation costs had exceeded insurance limits.
- Reverse-mortgage asset values depend on assumptions including home-price appreciation, borrower move-out rates, and discount rates. The portfolio’s estimated collateral value was $51.1 million against a $29.4 million carrying amount; management disclosed sensitivity of income and value to changes in these assumptions.
Important facts for investors to verify
- How Q4 and subsequent periods reflect FNBW integration costs, acquired-loan performance, and anticipated acquisition benefits.
- Whether the large seasonal delinquent relationship cures as expected, and whether overall delinquencies, criticized loans, nonaccruals, and credit-loss provisions trend upward or downward.
- Whether deposit growth—particularly brokered deposits—and reductions in FHLB advances support liquidity and funding costs without pressuring margins.
- The sustainability of reported earnings excluding the $6.7 million tax benefit, prior-year reverse-mortgage gain, securities gains, and other unusual costs.
- Developments in the pending lawsuit and any changes to the estimated exposure or insurance coverage.