WSFS Financial Corporation — Q2 2019 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2019; unaudited consolidated results. WSFS provides banking, lending, cash-logistics, wealth-management and trust services, primarily in the Delaware Valley. On March 1, 2019, WSFS acquired Beneficial Bancorp for approximately $1.18 billion in stock and cash. Q2 2019 includes Beneficial’s results for the full quarter; Q2 2018 does not, so year-over-year comparisons are materially affected by the acquisition.
Financial results and position
- Q2 earnings: Net income attributable to WSFS was $36.2 million, versus $28.7 million a year earlier. Diluted EPS was $0.68, versus $0.89, reflecting the substantially larger share count after the merger.
- First-half earnings: Net income attributable to WSFS was $49.2 million, versus $66.1 million; diluted EPS was $1.06, versus $2.05. The filing attributes the decline principally to acquisition-related costs and lower equity-investment gains.
- Revenue and margin: Q2 net interest income was $123.2 million and noninterest income was $42.9 million. Net interest margin was 4.68%, up from 4.10% in Q2 2018. For the first half, net interest income was $206.5 million, noninterest income $84.0 million, and net interest margin 4.52%, versus 4.06%.
- Credit costs: Q2 provision for loan losses was $12.2 million, versus $2.5 million; first-half provision was $19.8 million, versus $6.1 million. First-half net charge-offs were $14.0 million, or 0.38% of average loans on an annualized basis. The allowance was $45.4 million at June 30.
- Expenses: Q2 noninterest expense was $107.8 million, up from $57.8 million; first-half expense was $205.4 million, up from $111.2 million. Corporate-development and restructuring costs related to Beneficial were $15.8 million in Q2 and $46.8 million for the first half.
- Cash flow: For the first half, operating activities provided $92.2 million and investing activities provided $218.9 million; financing activities used $410.1 million. Cash and cash equivalents declined $98.9 million to $521.8 million.
- Balance sheet and funding: Total assets were $12.16 billion, up from $7.25 billion at year-end 2018; net loans were $8.57 billion and deposits $9.59 billion. Total borrowed funds were $415.1 million. Stockholders’ equity was $1.84 billion.
- Capital and liquidity: At June 30, consolidated total capital ratio was 13.55%, CET1 ratio 12.45%, and Tier 1 leverage ratio 11.49%; the Bank also exceeded applicable well-capitalized thresholds. Management said available funding sources and liquid investments should be sufficient for needs over the next 12 months.
Material changes versus comparable periods
- Beneficial’s acquisition drove much of the increase in assets, loans, deposits, interest income and expenses. Excluding acquired loans, WSFS reported a $17.6 million decline in net loans from year-end.
- Q2 net interest income increased $62.2 million year over year, primarily from the acquisition and improved interest-rate positioning. Management attributed the margin increase partly to purchase-accounting accretion and loan payoffs.
- First-half noninterest income rose only $1.5 million despite business-line growth, partly because equity-investment gains were $10.5 million lower than in the prior-year period.
- Nonperforming assets were $55.5 million, compared with $47.7 million at year-end; the ratio to total assets improved to 0.46% from 0.66%, largely due to the larger balance sheet. A $20.2 million C&I relationship moved to nonperforming status in Q2.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management expects to consolidate or divest 30 offices, about 25% of the combined branch network, with most changes planned around the Beneficial conversion and rebranding in Q3 2019. Five New Jersey offices, with approximately $177.9 million of deposits, were sold in Q2 at a 7.37% deposit premium. WSFS also planned to combine its two equipment-leasing operations later in 2019.
- Management planned to continue the authorized share-repurchase program, citing stronger-than-expected post-acquisition capital. The company repurchased 271,340 shares under the program in the first half; 2,865,638 shares remained authorized at June 30. The stated capital-return practice was a minimum of 25% of annual net income through dividends and repurchases.
- CECL adoption was scheduled for January 1, 2020. Implementation work suggested it may materially increase the allowance for credit losses and reduce capital; the ultimate effect depends on portfolio quality, economic conditions and management estimates.
- WSFS had approximately $1.4 billion of loans, $748 million of derivatives and $167 million of debt securities indexed to LIBOR that mature after 2021. The filing identifies transition-related financial, operational, legal, reputational and compliance risks. WSFS also expected to become subject to debit-card interchange fee limits in 2020 after exceeding $10 billion in assets.
- Credit risks include commercial real estate, construction, land-development and C&I exposure. Other stated risks include economic and interest-rate changes, acquisition integration, cybersecurity, regulation and Cash Connect operational controls.
- In a pending Delaware Chancery Court case, Nature’s Healing Trust seeks the $6.3 million face amount of two life-settlement policies, alleging untimely lapse notices; WSFS disputes liability. Trial was scheduled for Q4 2019. WSFS was also pursuing recovery of amounts related to a previously settled Universitas matter.
- Other notable items included a nonrecurring wealth-adviser client-account transfer gain in first-half other income and $4.8 million of first-half unrealized gains on equity investments. The filing reported no goodwill impairment indicators through June 30.
Important facts for investors to verify
- How Beneficial integration costs, branch consolidations and planned operating synergies affect recurring expenses and earnings.
- Whether credit quality and charge-offs stabilize, particularly in C&I, and how acquisition-related loan marks affect reported reserves and future provisions.
- The eventual CECL allowance and regulatory-capital impact, and the company’s ability to sustain its capital-return plans.
- Progress on LIBOR transition and the exposure of indexed loans, derivatives and securities to replacement-rate terms.
- Developments in the Nature’s Healing Trust litigation and WSFS’s recovery efforts related to the Universitas settlement.