WSFS Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. WSFS is a regional bank and financial services company with banking, Cash Connect and wealth management businesses. Comparisons below are with Q2 or first-half 2019, as applicable; balance-sheet comparisons are with December 31, 2019. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net interest income | $113.8 | $123.2 | $229.9 | $206.5 |
| Provision for credit losses | $94.8 | $12.2 | $151.4 | $19.8 |
| Noninterest income | $64.4 | $42.9 | $105.2 | $84.0 |
| Noninterest expense | $93.4 | $107.8 | $181.9 | $205.4 |
| Net income (loss) attributable to WSFS | ($7.1) | $36.2 | $3.8 | $49.2 |
| Diluted earnings (loss) per share | ($0.14) | $0.68 | $0.07 | $1.06 |
| Net interest margin | 3.93% | 4.68% | 4.14% | 4.52% |
Q2's loss reflected a sharp increase in credit-loss provisioning and lower net interest income; the $22.1 million realized gain from selling Visa Class B shares partly supported noninterest income. First-half net interest income rose with the full-period contribution of the Beneficial acquisition and PPP lending, but increased credit provisions drove substantially lower earnings. Lower acquisition-related development and restructuring costs helped reduce noninterest expense.
Financial position, liquidity and capital
- Total assets were $13.57 billion, up $1.32 billion from year-end 2019. Gross loans and leases were $9.35 billion; net loans and leases were $9.12 billion. PPP loans totaled $945.1 million at quarter-end.
- Deposits increased to $11.06 billion from $9.59 billion. Cash and cash equivalents rose to $955.8 million from $571.8 million. Management reported an 86% loans-to-customer-deposits ratio and said available funding sources and liquid investments were sufficient for expected needs over the next 12 months.
- Borrowed funds totaled $295.8 million, compared with $489.3 million at year-end: $106.4 million in FHLB advances, $67.0 million in trust preferred borrowings, $98.7 million in senior debt and $23.7 million in other borrowed funds. Federal funds purchased were zero, down from $195.0 million.
- WSFS stockholders' equity was $1.82 billion. The Company's total risk-based capital ratio was 13.95%, Tier 1 ratio 12.70%, CET1 ratio 12.06% and Tier 1 leverage ratio 10.44%; the Bank and Company exceeded regulatory well-capitalized thresholds.
- First-half operating cash flow was $80.4 million, investing cash flow was negative $927.8 million, and financing cash flow was positive $1.23 billion. Cash increased $384.0 million over the period.
Credit quality and material changes
- The allowance for credit losses was $232.2 million, or 2.45% of loans and leases, versus $47.6 million and 0.56% at year-end. The allowance increase reflects both adoption of CECL and pandemic-related provisioning. CECL adoption on January 1 reduced opening retained earnings by $30.4 million.
- Nonaccrual loans were $26.2 million; nonperforming assets were $44.9 million, or 0.33% of total assets, compared with $39.8 million at year-end. The filing attributes the increase mainly to one commercial relationship moving to nonaccrual.
- WSFS modified approximately $2.1 billion of loans and leases for customer relief during Q2. These modifications were generally short-term and are not included in reported nonperforming assets; eligible CARES Act modifications were not reported as TDRs.
- Customer deposits increased substantially, partly reflecting PPP proceeds, government stimulus payments, delayed tax payments and reduced customer spending. WSFS originated nearly $1.0 billion of PPP loans to more than 5,400 customers, which management estimated supported about 100,000 regional jobs.
- Q2 net interest margin fell 75 basis points year over year, reflecting lower rates, reduced purchase-accounting accretion and a higher balance of short-term, lower-yielding liquidity. Deposit costs also declined.
Outlook, risks and unusual items
The filing provides no quantitative earnings or financial guidance. Management said the pandemic's duration, economic recovery and effects on borrowers remain highly uncertain, and warned that prolonged disruption—particularly for small and midsize businesses—could adversely affect results and financial condition. Key risks include further credit deterioration, collateral-value declines, loan-forbearance outcomes, margin pressure, liquidity and deposit changes, and operational, compliance and cyber risks associated with pandemic programs and remote work.
- The $22.1 million Visa share-sale gain was a significant nonrecurring Q2 item. WSFS also recorded a $3.0 million contribution to the WSFS Community Foundation, $1.9 million of Q2 COVID-related costs and $1.8 million of first-half PPP-related costs.
- The Alliance pension-plan termination generated a $1.4 million settlement loss in Q2. The company reported no goodwill impairment after its pandemic-related review.
- WSFS suspended share repurchases pending greater clarity about COVID-19's effects, despite authorizing a new program for up to 7,594,977 shares. It declared a $0.12-per-share dividend payable in August 2020.
- LIBOR transition exposure included approximately $1.7 billion of loans, $901.2 million of customer-guarantee derivatives and $167.0 million of debt securities indexed to LIBOR and maturing after 2021.
- Pending matters include a dispute with Nature's Healing Trust concerning two life-settlement policies with a stated aggregate face value of $6.3 million; WSFS disputes liability. WSFS is also pursuing recovery of additional costs related to the settled Universitas matter. The filing does not provide a clear estimate of potential losses for these matters.
Most important facts for investors to verify
- Whether subsequent credit performance, borrower relief expirations and economic forecasts support the $232.2 million allowance, especially for commercial and hospitality-related exposures.
- PPP loan forgiveness, fee recognition and any resulting repayment or credit risk; PPP loans were $945.1 million at quarter-end.
- Whether deposits and liquidity remain durable as stimulus-related balances change, and whether lower rates continue to compress net interest margin.
- Capital and shareholder-return decisions, including the paused buyback, declared dividend and effects of CECL transition treatment.
- Developments in the LIBOR transition, the identified legal matters and any changes in COVID-related contingencies or operating risks.