Business context and reporting period
WSFS Financial Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2020. WSFS is a regional banking, wealth management and cash logistics company headquartered in Wilmington, Delaware. It reported $12.3 billion in assets, $21.1 billion in wealth assets under management and administration, and operated 116 offices. Results include a full quarter of Beneficial Bancorp operations, compared with only one month in Q1 2019.
Financial and operating performance
Dollar amounts are in millions unless otherwise noted.
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net interest income | $116.2 | $83.3 |
| Net interest margin | 4.38% | 4.30% |
| Provision for credit losses | $56.6 | $7.7 |
| Noninterest income | $40.8 | $41.1 |
| Noninterest expense | $88.5 | $97.6 |
| Income before taxes | $11.9 | $19.2 |
| Net income attributable to WSFS | $10.9 | $13.0 |
| Diluted earnings per share | $0.21 | $0.33 |
| Operating cash flow | $62.4 | $22.5 |
- Net interest income rose primarily because of the full-quarter Beneficial contribution. Management said higher purchase-accounting accretion helped margin, partly offset by the lower-rate environment.
- Credit-loss provision increased by $49.0 million year over year, chiefly reflecting deterioration in economic forecasts used in CECL modeling amid COVID-19. The allowance was $139.1 million, or 1.60% of loans and leases, versus $47.6 million and 0.56% at December 31, 2019. Nonaccrual loans were $19.3 million; nonperforming assets were $38.1 million, or 0.31% of assets.
- Assets were $12.279 billion versus $12.256 billion at year-end. Loans and leases were $8.551 billion gross; deposits were $9.709 billion versus $9.587 billion. Total borrowed funds were $401.3 million versus $489.3 million.
- Cash and cash equivalents were $505.1 million, down $66.6 million from year-end. Investing activities used $119.6 million and financing activities used $9.5 million. Management said its funding sources and liquid investment portfolio were sufficient for expected needs over the next 12 months.
- WSFS and its bank subsidiary exceeded well-capitalized thresholds: consolidated total capital ratios were 13.87% and 14.53%, respectively; common equity Tier 1 ratios were 12.12% and 13.41%.
Material changes versus comparable periods
- Net income attributable to WSFS and diluted EPS declined from Q1 2019 despite higher net interest income, primarily because of the sharp rise in credit-loss provision.
- Noninterest expense fell $9.1 million year over year, principally because Beneficial-related corporate development and restructuring costs were $29.6 million lower. That benefit was partly offset by higher compensation and operating costs, including a $3.0 million contribution to the WSFS Community Foundation.
- CECL adoption on January 1, 2020 reduced opening retained earnings by $30.4 million. The reported allowance also reflects the quarter’s $56.6 million provision.
- Available-for-sale securities rose to $2.048 billion from $1.945 billion, including favorable market-value changes; accumulated other comprehensive income increased to $70.5 million from $23.5 million.
- Net cash decreased by $66.6 million in Q1 2020, compared with a $27.1 million increase in Q1 2019.
Outlook, risks, contingencies and unusual items
- Management said the duration and economic effects of COVID-19 were highly uncertain and gave no quantified earnings or financial outlook. It warned that prolonged disruption, especially for small and midsize businesses, could materially harm results and financial condition.
- After quarter-end, WSFS reported approvals for 4,732 Paycheck Protection Program applications totaling $971.2 million, and approximately $2.2 billion of loan and lease modifications under customer relief programs. These are post-quarter developments, not Q1 reported originations or modifications.
- COVID-19 risks cited include borrower repayment and collateral deterioration, additional credit-loss reserves, pressure on fee income and liquidity, operational and cyber risks, and effects on capital. The loan portfolio includes substantial commercial real estate, construction and commercial and industrial exposure.
- WSFS repurchased $38.7 million of shares in Q1, completing its prior program. A new authorization covered up to 7,594,977 shares, but repurchases were temporarily suspended. The board approved a $0.12 quarterly dividend, payable May 22, 2020.
- The CARES Act generated a reported $1.8 million tax benefit in Q1, in part from revaluing eligible net operating loss carrybacks. The effective tax rate was 10.9%, versus 32.6% in Q1 2019.
- Legal matters include the company’s effort to recover remaining costs related to the Universitas settlement and a disputed claim by Nature’s Healing Trust seeking the face value of two life-settlement policies. WSFS said it was defending the latter matter; the filing does not provide a clear estimate of potential loss.
Important facts for investors to verify
- How COVID-19 conditions, borrower relief and subsequent loan modifications affect credit quality, charge-offs and future CECL reserves.
- Whether the $971.2 million of approved PPP loans were funded, and the associated economics, guarantees and servicing responsibilities.
- Deposit stability, funding costs and liquidity as customer deposits, brokered deposits and wholesale borrowing needs change.
- Capital and earnings effects of the paused repurchase program, the dividend, and the economic downturn.
- Whether purchase-accounting benefits, Beneficial integration savings and the current net interest margin are sustainable.