WSFS Financial Corporation — 2015 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Balance-sheet comparisons are against December 31, 2014. Unless stated otherwise, dollar amounts below are in millions.
Business context and reporting period
WSFS is a Delaware-based bank holding company operating through WSFS Bank, Cash Connect and Wealth Management. Its core business is commercial lending funded primarily by customer and retail deposits. It served customers through 55 offices in Delaware, Pennsylvania, Virginia and Nevada. The filing is unaudited.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $41.0 | $36.7 | $118.9 | $106.3 |
| Provision for loan losses | $1.5 | $0.3 | $6.0 | $3.0 |
| Noninterest income | $21.7 | $20.3 | $65.2 | $58.3 |
| Noninterest expense | $38.7 | $39.2 | $116.3 | $108.3 |
| Income before taxes | $22.5 | $17.6 | $61.8 | $53.3 |
| Net income | $14.4 | $11.4 | $39.5 | $41.0 |
| Diluted earnings per share | $0.51 | $0.41 | $1.39 | $1.49 |
| Net interest margin | 3.79% | 3.70% | 3.77% | 3.65% |
Q3 net income increased 26% year over year. For the first nine months, reported net income fell 4%; excluding a $6.7 million one-time tax benefit recorded in Q1 2014, management said net income increased $5.2 million year over year.
- Balance sheet: Total assets were $5.07 billion, up 4% from year-end 2014. Net loans were $3.32 billion, up $167.4 million; total investment securities were about $894.8 million.
- Deposits and borrowings: Total deposits were $3.64 billion, down $4.6 million from year-end; customer deposits fell $41.3 million as higher-rate certificates ran off. FHLB advances rose $237.1 million to $643.0 million. Other reported borrowings included $67.0 million of trust preferred borrowings and $55.0 million of senior debt.
- Cash flow: For the nine months, operating activities provided $57.4 million, investing activities used $203.4 million and financing activities provided $167.0 million. Cash and cash equivalents ended at $529.0 million, up $21.0 million.
- Credit: The allowance for loan losses was $36.4 million, or 1.08% of gross loans, versus $39.4 million, or 1.23%, at year-end. Nine-month net charge-offs were $9.0 million (0.36% annualized), versus $4.8 million (0.21%) in the prior-year period. Nonperforming assets were $40.8 million, or 0.81% of assets, down from $52.4 million, or 1.08%, at year-end.
- Capital: WSFS Bank reported total risk-based capital of 13.80%, Tier 1 capital of 12.91% and common equity Tier 1 capital of 12.91%, all above disclosed well-capitalized benchmarks. Tangible common book value per share was $16.40, compared with $15.30 at year-end.
Material changes versus comparable periods
- Q3 net interest income rose $4.3 million and noninterest income rose $1.4 million year over year; noninterest expense declined $0.5 million, partly because prior-year corporate development costs were higher. The loan-loss provision increased $1.1 million.
- For nine months, net interest income increased $12.6 million and noninterest income increased $6.9 million, while noninterest expense rose $8.0 million and the loan-loss provision rose $3.0 million. Growth in loans, Wealth Management, mortgage banking and Cash Connect contributed to revenue growth; compensation and other growth-related costs contributed to higher expenses.
- The higher provision and charge-offs included a $9.1 million C&I relationship moved to nonaccrual in Q2 2015, with a $5.7 million net charge-off during the nine-month period. The company also lengthened the historical loss look-back period used in its allowance model, increasing the allowance by $1.3 million.
- Assets and loans expanded while customer deposits declined; management cited increased FHLB borrowing and the runoff of higher-rate CDs as part of funding and margin management.
Outlook, management commentary, risks and unusual items
- No specific financial guidance or quantified forecast is provided. Management described growth in lending and fee businesses, improved balance-sheet mix and ongoing attention to operating leverage and efficiency. It cautioned that interim results are not necessarily indicative of full-year results.
- On October 9, 2015, after quarter-end, WSFS completed its acquisition of Alliance Bancorp. The transaction was valued at $97.9 million, consisting of $26.6 million cash and 2,459,223 WSFS shares; Alliance had approximately $415 million in assets and $340 million in deposits at June 30. Purchase accounting estimates remained preliminary.
- On October 29, the board approved a new repurchase program of up to 5% of outstanding common shares and a 20% increase in the quarterly dividend to $0.06 per share. The prior 5% repurchase program was completed in September; $28.3 million of treasury stock was purchased in the first nine months.
- Interest-rate sensitivity, loan concentration and credit losses, funding and liquidity, regulatory capital requirements, acquisition integration, Cash Connect operational risks, cybersecurity and valuation assumptions are identified risks. At September 30, management reported a $180.1 million positive one-year interest-sensitive gap; modeled net interest margin sensitivity ranged from a 1% decline under a 100-basis-point rate decrease to a 7% increase under a 300-basis-point increase.
- Reverse mortgage assets were $24.5 million, with $47.1 million of estimated realizable collateral value. Their modeled value is sensitive to home-price appreciation and discount-rate assumptions; the filing quantifies material changes in income and net present value under alternative assumptions.
- A pending bankruptcy-trustee case seeks recovery of approximately $5.0 million; management estimated a reasonably possible loss range of $0–$5.0 million. Separate Alliance merger litigation was subject to a proposed settlement requiring court approval; the filing gives no assurance it would be finalized or approved.
- Available-for-sale securities had $1.8 million of unrealized losses, attributed principally to market interest-rate changes; management reported no other-than-temporary impairment. The 2014 nine-month comparison includes the unusual $6.7 million tax benefit related to the reverse-mortgage trust tax structure.
Most important facts for investors to verify
- Whether loan performance, especially the cited C&I relationship, supports the allowance and whether elevated charge-offs persist.
- How Alliance integration, purchase accounting, funding and expected contribution affect results after the October closing.
- Whether deposit trends and increased FHLB advances remain sustainable and how they affect funding costs and net interest margin.
- Whether fee-income growth and expense control continue as the company expands, including the cost and execution of the new buyback and higher dividend.
- Developments in the disclosed litigation and sensitivity of reverse mortgage valuations and investment securities to market assumptions.