WSFS Financial Corporation — Q3 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. WSFS is a Delaware Valley-focused bank holding company with commercial and retail banking, Cash Connect ATM and cash services, and wealth management businesses. It reported $6.88 billion in assets and operated 77 offices.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $56.1 million | $49.0 million | $163.5 million | $140.8 million |
| Noninterest income | $32.4 million | $27.6 million | $92.2 million | $76.8 million |
| Provision for loan losses | $2.9 million | $5.8 million | $6.9 million | $7.9 million |
| Noninterest expense | $54.2 million | $51.2 million | $158.4 million | $139.7 million |
| Net income | $20.6 million | $12.7 million | $60.1 million | $46.0 million |
| Diluted earnings per share | $0.64 | $0.41 | $1.86 | $1.50 |
- Q3 net interest margin was 3.95%, versus 3.84% a year earlier; the nine-month margin was 3.93%, versus 3.87%. Q3 efficiency ratio improved to 60.6% from 66.2%.
- At September 30, total assets were $6.88 billion, net loans $4.67 billion, deposits $5.05 billion and stockholders’ equity $740.9 million. Loans grew 5% and deposits 7% from December 31, 2016.
- Cash and cash equivalents were $733.4 million, down from $821.9 million at year-end 2016. Nine-month operating cash flow was $107.8 million; investing cash use was $230.9 million and financing cash provided was $34.5 million.
- Borrowed funds totaled approximately $1.00 billion, including $697.8 million of FHLB advances, $98.1 million of senior debt, and $67.0 million of trust preferred borrowings. WSFS redeemed $55 million of 6.25% senior notes in September and recorded $0.7 million of debt-extinguishment expense.
- Consolidated regulatory capital ratios were 11.43% total capital, 10.73% Tier 1 and 9.62% common equity Tier 1. Management reported the Company and Bank exceeded applicable well-capitalized thresholds. Book value per share was $23.59; tangible book value per share was $17.57.
Changes versus comparable periods
- Q3 net income increased about 62% year over year; nine-month net income increased about 31%. Management attributed earnings growth primarily to loan growth, improved net interest income, and higher fee income.
- Fee growth was led by wealth management and fiduciary income and credit/debit card and ATM income. For Q3, mortgage banking income declined amid lower mortgage volume in a higher-rate environment.
- Higher operating costs partially offset revenue growth. Management attributed expense increases to acquisition-related costs, employee compensation and support for business growth.
- Nonperforming assets rose to $52.4 million from $40.8 million at December 2016; the ratio to assets increased to 0.76% from 0.60%. Nonaccrual loans were $33.5 million versus $22.9 million. The allowance was $40.2 million, or 0.86% of gross loans, versus $39.8 million, or 0.89%.
- Nine-month net charge-offs were $6.5 million, or 0.19% of average loans, compared with $5.9 million, or 0.20%, in 2016.
Outlook, commentary and risks
- Management expected the Q4 2017 efficiency ratio to improve into the high 50% range and targeted a relatively flat full-year 2017 ratio versus 2016. No specific earnings or revenue guidance was provided.
- Management cited loan and deposit growth, pricing discipline, a higher short-term rate environment and acquisition contributions as supporting net interest income. Rising funding costs and lower accretion from certain acquired loans were offsets.
- Management said available liquidity sources were sufficient for funding needs over the next 12 months. The one-year interest-sensitive gap was negative $116.9 million; modeled net interest margin increased 2% under an immediate 100-basis-point rate rise and declined 3% under a 100-basis-point fall.
- Credit exposure is concentrated in commercial and real estate lending. Management linked the increase in nonperforming assets largely to a $9 million commercial and industrial participation downgraded after an energy-sector review; it said the loan remained current and a positive resolution was expected.
- A pending arbitration involving Christiana Trust alleges losses related to misappropriated insurance benefits. The claimant asserted approximately $27 million of alleged loss plus approximately $27 million in costs and interest to date. WSFS said it was vigorously defending the claim and did not expect a material adverse effect, while acknowledging the outcome was uncertain; a decision was anticipated in Q4 2017 or Q1 2018.
- Other disclosed risks include interest-rate and credit risk, regulatory and liquidity requirements, cybersecurity and operational risks, and execution and integration of acquisitions. The filing also notes that the expected-credit-loss accounting standard could materially increase the loan-loss allowance and reduce capital, though the impact had not yet been determined.
Important facts for investors to verify
- Whether the increase in nonperforming assets, particularly the $9 million energy-related commercial exposure, resolves as management anticipates.
- Subsequent credit trends, charge-offs and allowance adequacy as the loan portfolio grows.
- Whether deposit growth remains sufficient to fund loans and limit reliance on wholesale borrowing, and how interest rates affect margin and funding costs.
- The arbitration outcome, related costs and any resulting financial or reputational impact.
- Progress against the Q4 and full-year efficiency-ratio outlook, including ongoing acquisition-related expenses.
- The filing corrected an immaterial 2016 classification error in cash-servicing-fee revenue and other operating expense; the correction did not affect EPS or retained earnings.