WSFS Financial Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. WSFS is a Delaware Valley-based bank holding company with banking, Cash Connect and wealth management businesses. The prior-year comparison includes results before the August 2016 Penn Liberty and wealth-management acquisitions, so growth reflects both expansion and acquisition contributions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $54.3 million | $46.4 million | $107.4 million | $91.8 million |
| Noninterest income | $31.7 million | $25.5 million | $59.8 million | $49.2 million |
| Net income | $20.6 million | $17.5 million | $39.5 million | $33.2 million |
| Diluted EPS | $0.64 | $0.58 | $1.22 | $1.10 |
| Provision for loan losses | $1.8 million | $1.3 million | $4.0 million | $2.0 million |
- Q2 net interest margin was 3.93%, up from 3.90%; the tax-equivalent net interest spread was 3.79%, versus 3.82%. Six-month net interest margin was 3.91%, versus 3.89%.
- Q2 efficiency ratio improved to 60.8% from 61.5% in Q2 2016 and 62.9% in Q1 2017.
- For the six months, operating cash flow was $59.9 million; investing activities used $117.6 million and financing activities used $18.9 million. Cash and cash equivalents fell $76.6 million to $745.3 million.
Financial condition, credit and capital
- At June 30, total assets were $6.82 billion, up 1% from year-end 2016. Net loans were $4.58 billion, up $135.3 million (3%); deposits were $4.83 billion, up $95.6 million (2%). Stockholders’ equity was $722.6 million.
- Borrowed funds totaled $1.16 billion, including $823.7 million of FHLB advances, $152.3 million of senior debt, $67.0 million of trust preferred borrowings and $65.0 million of federal funds/repo borrowings. The company expected to call its $55 million, 6.25% senior notes during Q3 2017.
- Company capital ratios were 11.34% total capital, 10.63% Tier 1 and 9.50% common equity Tier 1; the Bank’s ratios were 12.14%, 11.42% and 11.42%, respectively. Both exceeded applicable well-capitalized thresholds. Book value per share was $22.99 and tangible book value per share was $16.94.
- Nonperforming assets rose to $58.6 million from $40.8 million at year-end; the NPA-to-assets ratio increased to 0.86% from 0.60%. Nonaccrual loans were $38.4 million, compared with $22.9 million. The increase was attributed chiefly to a $9.7 million C&I participation downgraded after an energy-sector review and several other C&I relationships. Management said the $9.7 million relationship was current on payments and expected a positive resolution.
- The allowance for loan losses was $40.0 million, 0.87% of gross loans, versus 0.89% at year-end. Six-month net charge-offs were $3.8 million, or 0.17% of average loans annualized, compared with $1.4 million and 0.07% in the prior-year period. Total TDRs increased to $28.8 million from $22.8 million.
Changes, outlook and risks
- Q2 net income rose about 18% year over year. Management attributed revenue growth to loan growth, Penn Liberty, stronger investment-management and fiduciary income, and higher card/ATM revenue. Expenses also increased: Q2 noninterest expense rose 18%, mainly from acquisition-related operating costs and additional staffing.
- Management expected continued efficiency-ratio improvement, trending toward the high 50% range in Q4, and targeted a roughly flat full-year 2017 ratio versus 2016. No specific earnings or revenue guidance was provided.
- Management said liquidity sources—including deposits, operating cash, FHLB borrowing, repurchase agreements, the discount window and liquid investments—were expected to meet needs for the next 12 months. Interest-rate sensitivity modeling showed a 2% increase in net interest margin under an immediate +100 basis-point scenario and a 3% decrease under −100 basis points.
- A material legal contingency is the Universitas arbitration concerning alleged mishandling of insurance-trust proceeds before WSFS acquired Christiana Trust. Universitas asserted an alleged loss of approximately $27 million plus about $26 million in costs and interest; the two policies had $30 million face value. WSFS said it was vigorously defending the matter and did not expect a material adverse effect, while acknowledging uncertainty. The evidentiary hearing began in July 2017, with a decision expected in Q4 2017 or Q1 2018.
- Other risks include commercial real estate and C&I credit exposure, interest-rate and funding-cost changes, regulation, acquisition integration, Cash Connect operational/cash-security risks, cybersecurity and wealth-management litigation or reputational risks. Management’s preliminary assessment was that the expected-credit-loss accounting standard could materially increase the loan-loss allowance.
- The filing corrected an immaterial 2016 classification error between other income and other operating expense; the correction did not affect EPS or retained earnings. Six-month 2017 results also included a $0.9 million gain on SBA loan sales (Q2 included $0.8 million).
Important facts for investors to verify
- Track whether the rise in nonaccrual loans and NPAs persists, particularly the identified C&I credits, and whether charge-offs remain elevated.
- Verify execution of the planned Q3 2017 call of the $55 million senior notes and the resulting funding costs and net interest margin effects.
- Assess whether deposit growth, liquidity and capital remain adequate as loans grow and share repurchases continue; 71,000 shares were repurchased in Q2 at an average $45.18, with 821,194 shares remaining under authorization.
- Monitor the Universitas arbitration outcome and any change in the company’s assessment of potential exposure.
- Check progress toward the stated Q4 efficiency-ratio and full-year efficiency targets, considering acquisition and staffing costs.