WSFS FINANCIAL CORP quarterly report, Q2 FY2014

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WSFS Financial Corporation — Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. WSFS is a Delaware-based banking and financial services company operating through WSFS Bank, Cash Connect, and Trust and Wealth Management.

Financial performance

  • Second quarter: Net income was $12.7 million, up 17% from $10.9 million; diluted EPS was $1.39 versus $1.16. Net interest income increased 11% to $35.5 million. Noninterest income was $19.6 million, compared with $19.5 million, while noninterest expense rose 7% to $35.5 million.
  • First half: Net income was $29.6 million versus $20.6 million; diluted EPS was $3.24 versus $2.18. Net interest income increased 9% to $69.5 million, and noninterest income increased 1% to $38.0 million. Noninterest expense rose 6% to $69.7 million.
  • Margins and credit costs: Tax-equivalent net interest margin was 3.64% for Q2, up from 3.50%; first-half margin was 3.61% versus 3.48%. Q2 loan-loss provision was $50,000 versus $1.68 million; first-half provision was $2.68 million versus $3.91 million. First-half net charge-offs were $2.5 million, down from $6.3 million.
  • One-time tax item: First-half results included a $6.7 million tax benefit after WSFS completed the legal call of its reverse-mortgage trust bonds and removed a valuation allowance. The first-half effective tax rate was 15.6%; excluding this benefit, management reported 34.8%.

Financial position, liquidity and capital

  • At June 30, 2014, total assets were $4.61 billion, up 2.2% from year-end 2013. Net loans were $2.99 billion, up about $88 million; loans held for sale were $35.2 million. Available-for-sale securities were $841.7 million.
  • Cash and cash equivalents were $475.2 million, down $9.2 million from year-end. The balance includes cash held in non-owned ATMs; assess its liquidity accordingly. First-half operating cash flow was $27.5 million, compared with $31.7 million in 2013.
  • Total deposits were $3.15 billion, down $33.6 million from year-end, while customer deposits declined $65.3 million and brokered deposits increased $31.7 million. Management attributed the overall deposit movement partly to purposeful declines in time and temporary trust deposits; excluding temporary trust deposits, it said deposits increased $81.4 million.
  • FHLB advances were $758.4 million, up $120.3 million from year-end. Other reported borrowings included $86.0 million of federal funds/repo financing, $67.0 million of trust preferred borrowings, $55.0 million of senior debt and $18.5 million of other borrowed funds. Reverse-mortgage trust bonds were fully repaid.
  • Stockholders’ equity was $432.0 million, up $48.9 million, reflecting earnings and a $18.3 million after-tax increase in available-for-sale securities’ value, partly offset by dividends. WSFS Bank’s total risk-based capital ratio was 14.68%; its core capital ratio was 10.82%. The Bank was classified as well-capitalized.

Material changes and credit quality

  • Loan growth and the consolidation of reverse-mortgage assets contributed to higher net interest income; management also cited improved balance-sheet mix and deposit pricing. Growth in fee businesses, especially Cash Connect and Trust and Wealth Management, helped noninterest revenue.
  • Nonperforming assets increased to $50.3 million from $47.8 million at year-end, and nonaccrual loans increased to $34.1 million from $31.0 million. Nonperforming assets were 1.09% of total assets. Management said $10.6 million of collections and $3.9 million of charge-offs/write-downs offset additions during the first half.
  • The allowance for loan losses was $41.4 million, or 1.36% of total loans, versus $41.2 million and 1.40% at year-end. Troubled debt restructurings totaled $26.2 million, including $14.4 million on nonaccrual status.
  • Accumulated other comprehensive loss narrowed to $3.0 million from $21.3 million at year-end, primarily reflecting improved unrealized values of available-for-sale securities. Unrealized losses on securities fell to $8.7 million from $34.8 million; the filing reported no other-than-temporary impairment in the first half.

Outlook, risks and unusual items

  • The filing gives no specific earnings or financial guidance. WSFS said results for the interim periods are not necessarily indicative of full-year results.
  • First Wyoming Financial Corporation’s acquisition, valued at approximately $64 million in cash and stock, had received required approvals and was expected to close in September 2014. The Array and Arrow mortgage/title businesses acquired in 2013 continued to contribute to results and expenses.
  • Management cited interest-rate and funding-cost sensitivity, borrower repayment and collateral risks, regulatory changes, competition, operational and liquidity risks, and potential litigation costs. Cash Connect also faces operational exposure to theft, accounting error and fraud relating to ATM cash services.
  • A pending bankruptcy-related complaint seeks recovery of approximately $5.0 million. WSFS is defending the matter; management estimated a reasonably possible loss range of $0 to $5.0 million. Litigation costs had exceeded insurance limits.
  • Management reported a near-neutral one-year interest-sensitive gap. Its scenario analysis showed net interest margin decreasing 2% under an immediate 100-basis-point increase, while increasing 1% under a 200-basis-point increase; results for rate declines of 200–300 basis points were not meaningful.

Most important facts for investors to verify

  • How much of first-half earnings growth is sustainable after excluding the $6.7 million reverse-mortgage tax benefit?
  • Whether loan growth, deposit mix and higher FHLB borrowing can be maintained without pressuring funding costs or net interest margin.
  • Trends in nonaccrual loans, nonperforming assets, criticized commercial loans, TDRs and allowance adequacy as the portfolio grows.
  • The final cost, integration and expected contribution of the First Wyoming acquisition, and the ongoing performance of Array and Arrow.
  • Potential outcome and uninsured cost of the pending legal matter, alongside the sensitivity of reverse-mortgage asset values to housing assumptions and model inputs.