WSFS Financial Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. WSFS is a regional banking and financial-services company operating through WSFS Bank, Cash Connect, and Wealth Management. Amounts below are in millions except per-share data and ratios.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total interest and noninterest income | $82.2 | $66.5 | $231.7 | $196.0 |
| Net interest income | $49.0 | $41.0 | $140.8 | $118.9 |
| Provision for loan losses | $5.8 | $1.5 | $7.9 | $6.0 |
| Noninterest income | $26.8 | $21.7 | $74.8 | $65.2 |
| Noninterest expense | $50.5 | $38.7 | $137.7 | $116.3 |
| Net income | $12.7 | $14.4 | $46.0 | $39.5 |
| Diluted EPS | $0.41 | $0.51 | $1.50 | $1.39 |
| Net interest margin | 3.84% | 3.79% | 3.87% | 3.77% |
- Q3 net income fell 12% year over year as higher revenue was more than offset by expenses and credit costs. Nine-month net income rose 16%.
- At September 30, total assets were $6.63 billion, up 19% from year-end; net loans were $4.35 billion, up 17%. Total deposits were $4.73 billion, up 18%, largely reflecting the Penn Liberty acquisition.
- Cash and cash equivalents were $813.4 million versus $561.2 million at year-end. This includes $694.0 million of cash in non-owned ATMs associated with Cash Connect.
- Stockholders’ equity was $692.0 million. The Bank’s total capital ratio was 11.88%, and the Company’s was 11.42%; both exceeded the filing’s well-capitalized benchmarks. Tangible common book value per share was $16.57, versus $16.30 at year-end.
- Borrowed funds totaled $1.145 billion, including $817.2 million of FHLB advances, $151.9 million of senior debt, $81.0 million of federal funds/repurchase agreements, $67.0 million of trust preferred borrowings, and $27.6 million of other borrowed funds.
- For the first nine months, operating cash flow was $55.2 million, investing cash outflow was $136.4 million, and financing cash inflow was $333.4 million. Financing inflows included deposits, net FHLB borrowings, and the senior-note issuance.
Changes, acquisitions, and notable items
- WSFS completed the Penn Liberty acquisition on August 12, 2016. Preliminary purchase accounting included $65.2 million of goodwill; acquired loans were recorded at estimated fair value. The company reported $5.7 million of Penn Liberty integration expenses in Q3.
- WSFS acquired Powdermill Financial Solutions’ assets on August 1 to expand wealth management. It acquired West Capital Management’s assets on October 17, after quarter-end.
- Q3 net interest income increased $8.0 million year over year, supported by organic and acquisition-related loan growth. Noninterest income rose $5.1 million, including growth in card/ATM, mortgage-banking, and wealth-management income.
- Q3 noninterest expense increased $11.8 million year over year, including higher corporate-development costs, acquisition-related operating costs, compensation, and infrastructure spending.
- During Q3, WSFS resolved its largest problem loan, recording a $4.2 million charge-off and $3.0 million of incremental loan-loss provision. Q3 total provision was $5.8 million.
- WSFS issued $100 million of senior unsecured fixed-to-floating notes in June 2016, due 2026. The notes carry a 4.50% fixed coupon through June 15, 2021, then three-month LIBOR plus 3.30% to maturity.
- Nine-month net charge-offs were $5.9 million, or 0.20% of average loans annualized, versus $9.0 million, or 0.36%, in 2015. Nonperforming assets were $40.6 million, 0.61% of assets, versus $39.9 million and 0.71% at year-end.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management described acquisition integration, organic growth, and fee-income diversification as strategic priorities; it cautioned that interim results are not necessarily indicative of full-year results.
- Key stated risks include credit exposure from commercial real estate, construction, and commercial and industrial lending; changes in interest rates, funding costs, and securities values; loan losses; liquidity and capital requirements; acquisition integration and customer retention; operational and cybersecurity failures; and legal, regulatory, and compliance risks.
- Management said liquidity sources—including deposits, loan repayments, FHLB borrowing, repurchase agreements, discount-window access, brokered deposits, and liquid securities—were sufficient for prudent needs. Cash balances increased substantially, partly due to Cash Connect growth.
- Interest-rate sensitivity analysis showed estimated net interest margin increasing 4% under an immediate +300 basis-point scenario and decreasing 1% under -100 basis points; scenarios of -200 and -300 basis points were deemed not meaningful. These are modeled estimates, not guidance.
- The Goldstein litigation settlement was approved and the case dismissed. Management did not expect other known proceedings to have a material financial-statement effect. WSFS also disclosed guarantees related to customer interest-rate swaps: 130 transactions with $498.6 million aggregate initial notional at quarter-end; no reserves were recorded.
- Management reported no material change in previously disclosed risk factors, no material change in internal control over financial reporting, and effective disclosure controls.
Important facts for investors to verify
- How much of Q3’s earnings and loan growth came from Penn Liberty and other acquired businesses versus organic growth, and whether integration expenses and expected benefits develop as anticipated.
- Whether the elevated Q3 provision and the $4.2 million charge-off signal additional deterioration in commercial credits; review criticized loans, nonaccruals, delinquencies, and allowance coverage.
- The sustainability of margin improvement as deposit and borrowing costs rise, including the effect of the 2026 senior notes and interest-rate changes.
- The composition and practical liquidity of reported cash, particularly the large Cash Connect balance held in non-owned ATMs, and the company’s reliance on FHLB and other wholesale funding.
- The effect of acquisition-related goodwill and intangible assets on tangible book value, and the risk of future impairment or integration shortfalls.
- The potential exposure under swap guarantees and any developments in wealth-management-related disputes or other contingencies.