WSFS Financial Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are to December 31, 2017. WSFS is a Delaware Valley-focused banking and financial-services holding company with banking, Cash Connect and wealth-management segments. At quarter-end, it reported $7.0 billion in assets and 77 offices.
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable period / December 31, 2017 |
|---|---|---|
| Net income | $37.4 million; diluted EPS $1.16 | $18.9 million; diluted EPS $0.59 |
| Net interest income | $57.7 million | $53.1 million in Q1 2017 |
| Net interest margin | 4.01% | 3.90% in Q1 2017 |
| Noninterest income | $47.5 million | $28.1 million in Q1 2017 |
| Noninterest expense | $53.4 million | $51.5 million in Q1 2017 |
| Provision for loan losses | $3.7 million | $2.2 million in Q1 2017 |
| Cash and cash equivalents | $711.1 million | $723.9 million |
| Net loans | $4.81 billion | $4.78 billion |
| Total deposits | $5.20 billion | $5.25 billion |
| Total stockholders’ equity | $746.3 million | $724.3 million |
Cash flow from operating activities was $62.5 million, investing activities used $20.8 million, and financing activities used $54.5 million. The quarter-end allowance for loan losses was $40.8 million, or 0.84% of gross loans. Annualized net charge-offs were 0.29% of average loans, versus 0.19% in Q1 2017. Nonaccrual loans were $34.1 million; nonperforming assets were $56.9 million, or 0.81% of total assets.
WSFS and its bank subsidiary exceeded applicable “well-capitalized” thresholds: consolidated total capital ratios were 11.89% and 12.42%, respectively; common equity Tier 1 ratios were 10.05% and 11.69%. Tangible book value per share was $17.75, compared with $17.06 at year-end 2017.
Material changes versus the prior comparable period
- Net income nearly doubled year over year. Net interest income rose 9%, with loan growth, higher mortgage-backed securities income, and lower senior-debt interest expense partly offset by higher deposit and FHLB funding costs.
- Noninterest income increased 69%, largely because a $15.3 million unrealized gain on Visa Class B shares was recognized under newly adopted equity-investment accounting. This item materially boosts reported earnings and is not presented as recurring operating performance.
- Noninterest expense rose 4%; higher employee and operating costs were partly offset by a $1.7 million fraud-loss recovery.
- The effective tax rate fell to 22.4% from 31.2%, principally reflecting the federal corporate tax-rate reduction effective in 2018.
- Compared with year-end, deposits declined $45.1 million, including seasonal reductions in public-funding balances; FHLB advances fell $122.8 million while federal funds purchased rose $97.0 million. Net loans increased $29.4 million.
- Available-for-sale securities had $26.1 million of gross unrealized losses at quarter-end, primarily attributed by management to market interest-rate changes; the company reported no other-than-temporary impairment.
Outlook, commentary, risks and unusual items
Management said available liquidity sources—including operating cash, deposits, loan repayments, FHLB borrowing, repurchase agreements, discount-window access, brokered deposits and liquid securities—were sufficient for expected needs over the next 12 months. No specific earnings or revenue guidance was provided. Management noted that rising rates could increase funding costs and affect margins; its modeled net interest margin change was +2% under a 100-basis-point rise and -5% under a 100-basis-point decline.
Credit risk is material given commercial real estate, construction and commercial-and-industrial loan exposures. The quarter’s provision increase reflected a large nonperforming commercial relationship and related charge-off; nonperforming assets declined mainly after a $2.5 million partial charge-off on one large commercial-and-industrial relationship. Other disclosed risks include liquidity and interest-rate sensitivity, regulatory and capital requirements, cybersecurity and operational controls, acquisition integration, and litigation involving trust services.
WSFS paid $12.0 million in February 2018 to settle Universitas Education claims concerning services provided before its acquisition of Christiana Trust. The company said it would pursue recovery through indemnification and insurance; the ultimate recovery is uncertain. The company also surrendered BOLI policies, receiving $96.4 million in cash, and redeployed proceeds partly into mortgage-backed securities. Adoption of the expected-credit-loss standard (CECL) was preliminarily expected to potentially increase the loan-loss allowance and reduce capital; the extent was not yet determined. Adoption was planned for January 1, 2020.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring banking and fee growth versus the $15.3 million Visa valuation gain and the $1.7 million fraud-loss recovery.
- Whether loan-credit trends, especially the large commercial relationship, lead to further charge-offs, provisions or changes in nonperforming assets.
- How deposit pricing and wholesale-funding reliance affect net interest margin as rates change.
- Whether WSFS recovers the Universitas settlement payment and related costs, and what additional legal or insurance exposure remains.
- The potential CECL impact on reserves and regulatory capital, which management had not yet quantified.
- The filing reports BOLI of $5.7 million at March 31, 2018, versus $103.0 million at year-end, alongside the disclosed policy surrender; verify the accounting and remaining balance detail in the financial statements.