WSFS Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. WSFS is a Delaware-based bank holding company operating WSFS Bank, Cash Connect and Wealth Management. It reported $5.7 billion in assets and served customers through 63 offices.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net interest income | $45.4 million | $38.8 million | Up 17% |
| Net interest margin | 3.87% | 3.82% | Up 5 basis points |
| Noninterest income | $23.1 million | $21.1 million | Up 9% |
| Provision for loan losses | $0.8 million | $0.8 million | Broadly unchanged |
| Noninterest expense | $43.2 million | $38.9 million | Up 11% |
| Income before taxes | $24.4 million | $20.2 million | Up 21% |
| Net income | $15.8 million | $12.9 million | Up 22% |
| Diluted EPS | $0.52 | $0.45 | Up 16% |
| Operating cash flow | $17.7 million | $(6.5) million | Improved |
Net interest income plus noninterest income, the principal reported revenue components, totaled $68.4 million versus $59.9 million a year earlier. Q1 2015 included an $808,000 one-time FHLB dividend, equivalent to about 8 basis points of net interest margin.
Financial position, liquidity and credit
- At March 31, total assets were $5.685 billion, up $100.4 million (2%) from year-end 2015. Net loans were $3.758 billion, up $28.7 million; total deposits were $4.069 billion, up $52.2 million.
- Cash and cash equivalents were $590.0 million, up $28.8 million. Investing activities used $69.2 million; financing activities provided $80.3 million.
- Borrowings included $707.8 million of FHLB advances, $127.5 million of federal funds and repurchase agreements, $67.0 million of trust preferred borrowings, and $53.8 million of senior debt. FHLB advances rose $38.3 million from year-end.
- Stockholders’ equity was $597.6 million. WSFS Bank’s total risk-based capital ratio was 12.96%, Tier 1 and common equity Tier 1 ratios were each 12.16%, and Tier 1 leverage ratio was 10.50%; the Bank exceeded regulatory “well-capitalized” benchmarks. The Company separately held $36.9 million in cash for general capital purposes.
- Asset quality improved: nonperforming assets were $37.7 million, or 0.66% of assets, versus $39.9 million and 0.71% at year-end. Nonaccrual loans were $19.8 million; the allowance was $37.6 million, or 0.99% of gross loans. Quarterly net charge-offs were $313,000, or 0.03% of average loans.
- Book value per share rose to $20.24 from $19.50 at year-end; tangible book value per share rose to $17.04 from $16.30.
Material changes and management commentary
- Management attributed higher earnings to organic and acquisition-related growth, an improved balance-sheet mix, and positive purchase-accounting effects. Loan growth, particularly commercial and industrial lending, supported net interest income.
- Fee income benefited from Cash Connect and Wealth Management growth, higher card/ATM and deposit service-charge income, and $355,000 of SBA loan-sale gains.
- Higher expenses reflected growth-related compensation, a $931,000 increase in professional fees, and $1.8 million of additional operating costs associated with the Alliance acquisition.
- The October 2015 Alliance acquisition was included in results. The pending Penn Liberty acquisition, valued at approximately $101 million, had required approvals and was expected to close in August 2016, subject to customary conditions.
- WSFS repurchased 301,871 shares under its announced buyback program at an average price of $29.75, with 1,098,694 shares remaining under the authorization. The repurchase table separately reports 324,723 total shares purchased, including employee tax-withholding shares.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include interest-rate and funding-cost changes, commercial real estate and other lending concentrations, credit losses, liquidity and capital requirements, regulatory changes, acquisition integration and completion, cybersecurity and operational controls, and economic conditions in WSFS’s markets.
- The Penn Liberty transaction remained pending. The Universal Marketing bankruptcy-related case had a reasonably possible loss range of approximately $0 to $5.0 million; the Bank was defending the remaining claim. Costs had exceeded insurance limits. The Alliance shareholder-litigation settlement remained subject to court approval. Management said other identified legal matters were not expected to have a material effect.
- Reverse mortgage valuation depends on estimates including move-out rates, house-price appreciation and discount yields. The filing disclosed sensitivity of quarterly income and portfolio value to changes in those assumptions.
- Investment securities had unrealized losses, which the Company attributed to market interest-rate changes; it reported no other-than-temporary impairment and no intent or expected requirement to sell before recovery.
Investor verification points
- Track whether loan and deposit growth can sustain net interest income and margin as funding costs change.
- Assess expense growth, Alliance integration, and the timing, terms and realized benefits of the proposed Penn Liberty acquisition.
- Review credit trends, especially commercial exposures, nonperforming assets, TDRs, allowance adequacy and charge-offs.
- Confirm liquidity and funding mix, including increasing brokered deposits and FHLB advances, and monitor regulatory capital after growth and buybacks.
- Follow the $0–$5.0 million litigation exposure and the resolution of the Alliance shareholder case.
- Reconcile the share-repurchase disclosures: 301,871 program shares versus 324,723 total purchases including employee tax-withholding shares.