WSFS Financial Corporation — Q2 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. WSFS is a Delaware-based banking and financial services holding company, with commercial and retail banking, Cash Connect ATM services, and trust and wealth management businesses.
Financial results and position
Dollar amounts below are in millions except per-share data and ratios.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Interest income | $35.9 | $37.8 | $71.5 | $77.0 |
| Net interest income | $32.1 | $32.1 | $63.6 | $64.6 |
| Provision for loan losses | $1.7 | $16.4 | $3.9 | $24.6 |
| Noninterest income | $19.5 | $29.0 | $37.6 | $45.8 |
| Noninterest expense | $33.2 | $33.0 | $65.5 | $64.0 |
| Net income | $10.9 | $7.3 | $20.6 | $13.8 |
| Diluted EPS | $1.16 | $0.76 | $2.18 | $1.41 |
- Margins and revenue mix: Net interest margin was 3.50% for Q2 and 3.48% for the first half, versus 3.53% and 3.54%, respectively, a year earlier. Lower securities gains drove most of the noninterest-income decline: Q2 gains were $0.9 million versus $13.3 million; first-half gains were $2.6 million versus $15.3 million. Card and ATM, mortgage banking, and wealth-management revenue increased.
- Cash flow: First-half operating cash flow was $31.7 million, down from $47.3 million. Investing activities used $35.9 million, versus providing $61.4 million; financing activities provided $40.9 million, versus using $109.5 million. Cash and cash equivalents ended at $537.5 million, up $36.6 million from year-end 2012.
- Balance sheet and funding: Total assets were $4.41 billion at June 30, up $33.6 million from December 31, 2012. Net loans increased $70.2 million to $2.79 billion. Deposits declined $220.5 million to $3.05 billion, while borrowings increased to $920.8 million from $637.3 million, principally reflecting higher FHLB advances. Stockholders’ equity fell $26.1 million to $394.9 million.
- Capital and liquidity: WSFS Bank reported a 14.29% total risk-based capital ratio, 13.04% Tier 1 risk-based ratio, and 10.01% core capital ratio; the filing says it remained “well-capitalized.” The holding company held $50.4 million in cash. Management cited deposits, borrowings, loan repayments, liquid securities, and other funding channels as liquidity sources.
- Credit quality: Nonperforming assets declined to $59.2 million from $62.5 million at year-end; nonaccrual loans fell to $41.0 million from $47.8 million. Net charge-offs were $6.3 million for the first half, compared with $31.3 million in 2012. The allowance was $41.5 million, or 1.46% of gross loans, versus $43.9 million, or 1.58%, at year-end.
Material changes, outlook, and risks
- Net income growth reflected a sharply lower loan-loss provision and improved performance in several business lines, partly offset by reduced securities gains and slightly lower net interest income. Management attributed lower provision expense to broad improvement in credit quality.
- Available-for-sale securities had $24.7 million of gross unrealized losses at quarter-end, which management attributed to interest-rate changes and classified as temporary. First-half other comprehensive loss was $25.7 million; total comprehensive loss was $5.1 million. Accumulated other comprehensive income moved from positive $12.9 million at year-end to a loss of $12.8 million.
- Management provided no quantified earnings or financial guidance in the supplied filing and cautioned that interim results are not necessarily indicative of full-year results. It identified interest-rate, credit, liquidity, market, regulatory, operational, and litigation risks; it reported no material changes to previously disclosed risk factors.
- Subsequent events and contingencies: On July 31, WSFS Bank completed an $8.0 million asset purchase of Array Financial Group and Arrow Land Transfer, including a $4.0 million five-year earnout tied to earnings targets. A July 15 complaint concerning approximately $18.0 million in loans named the Bank and certain executives; WSFS said it considered the claims without merit and was defending the action. The Bank also reported $374.9 million in notional customer swap transactions for which it provides guarantees to counterparties in specified customer-default circumstances.
- Regulatory capital rules scheduled to apply beginning in 2015 will introduce revised capital requirements and a phase-in of conservation buffers. The filing said the impact was not yet fully analyzed. A court ruling concerning debit interchange fees was stayed pending further proceedings; any industry effect on WSFS was not determinable.
Key investor verification points
- Assess whether the lower loan-loss provision and improved credit indicators are sustainable, including trends in criticized loans, charge-offs, nonperforming assets, and allowance adequacy.
- Track deposit outflows and increased FHLB borrowing, and evaluate the resulting funding mix, costs, and liquidity.
- Separate recurring operating performance from securities gains, and monitor the effect of interest-rate movements on securities values, accumulated other comprehensive income, and net interest margin.
- Review the Array/Arrow purchase economics and earnout terms, and follow developments and potential exposure from the loan-related lawsuit and swap guarantees.
- Monitor capital ratios under the forthcoming regulatory rules and the effects of further changes in rates, regulation, or interchange-fee requirements.