Business context and reporting period
WSFS Financial Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019. WSFS provides banking, lending, wealth management, trust, and cash-logistics services. On March 1, 2019, it acquired Beneficial Bancorp for approximately $1.2 billion; Beneficial’s results are included from that date. The acquisition materially changes the scale and comparability of year-over-year results.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $120.8 million | $63.1 million | $327.4 million | $181.8 million |
| Noninterest income | $62.3 million | $41.9 million | $146.3 million | $124.4 million |
| Provision for loan losses | $4.1 million | $3.7 million | $24.0 million | $9.9 million |
| Noninterest expense | $109.6 million | $52.5 million | $315.0 million | $163.7 million |
| Net income attributable to WSFS | $53.9 million | $38.9 million | $103.1 million | $105.0 million |
| Diluted earnings per share | $1.02 | $1.20 | $2.12 | $3.26 |
| Net interest margin, tax-equivalent | 4.38% | 4.11% | 4.47% | 4.07% |
- Q3 net interest margin improved 27 basis points year over year; management attributed the increase in part to acquisition-related purchase-accounting accretion. The filing estimates approximately 40 basis points of Q3 benefit from that accretion.
- At September 30, total assets were $12.3 billion, net loans and leases were $8.5 billion, deposits were $9.5 billion, and stockholders’ equity was $1.9 billion. Reported assets increased $5.0 billion from December 31, 2018, primarily reflecting Beneficial.
- Cash and cash equivalents were $580.3 million, down from $620.8 million at year-end. Nine-month operating cash flow was $75.0 million, investing cash flow was $260.6 million, and financing cash flow was negative $376.1 million.
- Borrowed funds totaled approximately $554.8 million, including $365.7 million of FHLB advances, $98.6 million of senior debt, and $67.0 million of trust preferred borrowings.
- Regulatory capital ratios remained above well-capitalized thresholds: WSFS consolidated total capital 13.72%, Tier 1 capital 13.24%, CET1 12.59%, and Tier 1 leverage 11.34%. Management reported $130.9 million of parent-company cash outside the Bank.
- Book value per share was $35.41 and tangible book value per share, a non-GAAP measure, was $24.50 at quarter-end.
Material changes versus the prior comparable period
- Q3 net income attributable to WSFS rose to $53.9 million from $38.9 million, while nine-month net income declined to $103.1 million from $105.0 million. The nine-month comparison reflects acquisition and integration costs, higher credit provision, and changing share counts.
- Q3 noninterest income included $21.3 million of unrealized gains on equity investments, compared with $3.2 million in Q3 2018; nine-month unrealized gains were $26.2 million versus $18.6 million. These gains are valuation-sensitive and not equivalent to recurring operating fees.
- Noninterest expense increased substantially, including $10.5 million of corporate development expense and $8.4 million of restructuring expense in Q3. For the first nine months, management cited $61.4 million of net corporate development and restructuring costs related to Beneficial, alongside higher staffing and operating costs.
- Beneficial added significant loan and deposit balances. Excluding acquired loans, WSFS said loans increased $167.6 million from year-end; deposits excluding acquired customer funding increased $524.2 million.
- Nine-month net charge-offs were $15.8 million, or 0.27% of average loans annualized, versus $8.7 million, or 0.24%, in 2018. The allowance was $47.7 million; its ratio to gross loans was 0.56%, or 1.00% excluding purchased loans.
- Nonperforming assets increased to $56.2 million from $47.7 million at year-end, including higher nonaccruing loans. The nonperforming-assets-to-total-assets ratio fell to 0.46% from 0.66%, primarily because the combined balance sheet was larger.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management stated available funding sources were expected to meet funding needs and maintain prudent liquidity over the next twelve months.
- WSFS planned to adopt CECL on January 1, 2020. Implementation work indicated adoption may materially increase the allowance for credit losses and reduce capital, but the amount remained uncertain and depended on portfolio quality, economic conditions, and estimates.
- Key disclosed exposures include commercial real estate, construction and commercial-and-industrial lending; interest-rate and funding-cost changes; acquisition integration and realization of expected benefits; operational and cybersecurity risks; and regulatory, liquidity, and market risks. The one-year interest-sensitive gap was negative $347 million, or negative 3.38% of assets.
- A Delaware Chancery Court case brought by Nature’s Healing Trust concerning two life-settlement policies was scheduled for trial in Q1 2020. WSFS disputes liability; the filing does not state a clear estimate of potential loss.
- WSFS reported no reserves for guarantees on customer interest-rate swaps. At quarter-end, 147 swaps were in a paying position to counterparties, with an aggregate liability of $34.7 million to third parties. This is a contingent exposure, not a reported loss.
- Other unusual items include the Q3 completion of Beneficial systems integration and rebranding, branch-network optimization, and the merger of the two leasing operations. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of earnings and net interest margin is supported by purchase-accounting accretion and nonrecurring or mark-to-market gains, and how these components may change.
- Integration-cost totals, expected remaining restructuring costs, and whether projected acquisition efficiencies and revenue benefits are being realized.
- Credit trends in acquired and legacy portfolios, including the large C&I relationship moved to nonperforming status, charge-offs, and the adequacy of the allowance.
- The eventual CECL allowance and regulatory-capital impact when WSFS completes adoption estimates.
- Liquidity and funding trends, including deposit mix and costs, brokered deposits, cash levels, and contingent swap-guarantee exposures.
- Potential outcomes and financial effects of the Nature’s Healing Trust litigation and other legal matters.