Business context and reporting period
WSFS Financial Corporation filed this unaudited Form 10-Q for the quarter ended September 30, 2018. The Delaware-based bank holding company operates community banking, Cash Connect cash logistics, and wealth management businesses. It reported $7.2 billion in assets and $19.7 billion in wealth assets under management and administration.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $63.1 million | $56.1 million | $181.8 million | $163.5 million |
| Provision for loan losses | $3.7 million | $2.9 million | $9.9 million | $6.9 million |
| Noninterest income | $41.9 million | $32.4 million | $124.4 million | $92.2 million |
| Noninterest expense | $52.5 million | $54.2 million | $163.7 million | $158.4 million |
| Income before taxes | $48.8 million | $31.5 million | $132.6 million | $90.5 million |
| Net income | $38.9 million | $20.6 million | $105.0 million | $60.1 million |
| Diluted EPS | $1.20 | $0.64 | $3.26 | $1.86 |
| Net interest margin | 4.11% | 3.95% | 4.07% | 3.93% |
- Q3 net interest income rose 12%; net income rose about 89%. Nine-month net interest income rose 11% and net income rose about 75% year over year.
- For the nine months, operating cash flow was $107.4 million, investing cash flow was negative $194.7 million, and financing cash flow was positive $74.8 million. Cash and cash equivalents declined $12.5 million to $711.4 million.
- At September 30, total assets were $7.16 billion; deposits were $5.72 billion, up $476.3 million (9%) from year-end 2017. Net loans were $4.89 billion, up $109.8 million. Total borrowed funds were $545.1 million, down from $937.8 million at December 31, 2017, primarily reflecting lower FHLB advances.
- Stockholders’ equity was $798.8 million. The Bank’s total capital ratio was 13.09%, common equity Tier 1 ratio 12.37%, and Tier 1 leverage ratio 10.65%; the filing says the Bank exceeded well-capitalized thresholds. Book value per share was $25.08 and tangible book value per share was $19.22.
- The allowance for loan losses was $41.8 million, or 0.85% of gross loans. Nonperforming assets were $53.9 million (0.75% of assets), down from $59.0 million at year-end. Nine-month net charge-offs were $8.7 million, or 0.24% annualized.
Material changes, outlook, and risks
- Earnings benefited from higher net interest income and lower effective taxes following the federal corporate tax rate reduction. The effective tax rate was 20.3% in Q3 2018 versus 34.7% a year earlier.
- Noninterest income included a $3.8 million realized gain from selling Visa Class B shares and a $3.2 million Q3 unrealized gain on remaining shares. The nine-month period included an $18.6 million unrealized Visa valuation gain, largely recorded in Q1, following adoption of new accounting guidance. These gains are unusual and contributed materially to reported earnings.
- Q3 expenses included a $7.9 million insurance recovery related to the Universitas legal settlement. WSFS had paid $12.0 million to settle the matter and said it would continue pursuing additional recovery under an indemnity. The company also recorded merger-related corporate development expense of $3.8 million for the quarter.
- WSFS agreed to acquire Beneficial Bancorp in August 2018. Beneficial shareholders are to receive 0.3013 WSFS shares plus $2.93 cash per share; closing was expected in Q1 2019, subject to regulatory and shareholder approvals and other customary conditions. The filing provides no earnings or cost-savings guidance for the pending transaction.
- Management said available liquidity sources were sufficient for expected needs over the next 12 months. Interest-rate sensitivity modeling estimated that a 300-basis-point rate increase would raise net interest margin 10% and a 100-basis-point decrease would reduce it 6% at September 30, 2018; these are modeled sensitivities, not forecasts.
- Key disclosed risks include loan credit quality and commercial real estate, construction and commercial lending concentrations; deposit funding costs and interest-rate changes; liquidity and regulatory capital; acquisition execution and integration; trust-business legal and reputational exposure; Cash Connect operational controls and fraud; cybersecurity; and market-value changes in securities.
- Management expected adoption of the new lease standard in 2019 to increase assets and liabilities. It stated that the expected-credit-loss standard, planned for adoption in 2020, may materially increase the loan-loss allowance and reduce capital, with the magnitude dependent on portfolio quality and economic conditions.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operating performance versus the Visa gains, insurance recovery, and tax benefits.
- Whether rising deposit costs continue to offset asset-yield gains, and how net interest margin responds to subsequent rate changes.
- Trends in criticized loans, commercial credit exposures, charge-offs, and the adequacy of the allowance, including the effect of three deteriorating large relationships cited by management.
- Beneficial merger approvals, closing timetable, integration costs, and anticipated benefits; the filing does not quantify expected synergies.
- The eventual balance-sheet and capital impact of the lease and expected-credit-loss accounting standards.