WSFS Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited consolidated results. WSFS is a regional banking and financial-services company. The quarter includes Beneficial Bancorp only from its March 1 acquisition date, making year-over-year comparisons materially affected by the merger.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Interest income | $99.6 million | $67.6 million |
| Net interest income | $83.3 million | $57.7 million |
| Net interest margin | 4.30% | 4.01% |
| Noninterest income | $41.1 million | $47.5 million |
| Noninterest expense | $97.6 million | $53.4 million |
| Provision for loan losses | $7.7 million | $3.7 million |
| Net income attributable to WSFS | $13.0 million | $37.4 million |
| Diluted EPS | $0.33 | $1.16 |
| Operating cash flow | $22.6 million | $62.5 million |
- Net interest income rose 44%, principally reflecting Beneficial, loan growth, improved asset yields and purchase-related accretion. Management said the acquisition added 18 basis points to margin through one month of purchase accretion; other pricing, rate and loan-growth effects added 17 basis points, partly offset by 6 basis points of expected margin compression from Beneficial’s lower-margin balance sheet.
- Noninterest income fell $6.3 million, largely because Visa Class B share unrealized gains were $3.8 million versus $15.3 million a year earlier. Excluding those gains, management reported a $5.2 million increase. Q1 2019 other income also included a nonrecurring transfer of wealth-adviser client accounts.
- Noninterest expense increased $44.2 million. Merger-related corporate development and restructuring costs totaled $31.0 million; ongoing operating costs also increased following the acquisition. The filing does not provide an adjusted earnings figure excluding these items.
- The effective tax rate was 32.6%, versus 22.4%, reflecting, among other factors, nondeductible Beneficial acquisition costs.
Financial position, funding and capital
- Total assets were $12.2 billion at March 31, up $4.9 billion from year-end 2018. Net loans were $8.66 billion, including $3.7 billion of acquired loans; deposits totaled $9.67 billion.
- Cash and cash equivalents were $647.8 million, compared with $620.8 million at year-end. Management said available funding sources and liquid investments were sufficient for expected needs over the next 12 months.
- Total borrowings on the balance sheet were approximately $406.4 million, down from $699.8 million at year-end, mainly as WSFS repaid FHLB advances and federal funds purchased. Deposits and acquired customer funding were the principal funding base.
- WSFS reported consolidated total capital of 13.12%, Tier 1 capital of 12.66%, common equity Tier 1 of 12.02%, and Tier 1 leverage of 15.15%. The Bank and Company exceeded applicable well-capitalized thresholds.
- Book value per share was $33.69 and tangible book value per share, a non-GAAP measure, was $22.77. The company paid a $0.11-per-share dividend and repurchased 77,452 shares under its buyback program; it expected up to $15.4 million of repurchases during 2019.
Asset quality and material changes
- The allowance for loan and lease losses was $46.3 million, or 0.53% of gross loans; excluding acquired loans, the ratio was 1.05%. Net charge-offs were $0.9 million, or 0.06% annualized, versus $3.4 million, or 0.29%, in Q1 2018.
- Nonperforming assets were $49.3 million, up from $47.7 million at year-end; the ratio to total assets declined to 0.40% from 0.66%, largely because the balance sheet expanded. Past-due consumer loans rose to $12.2 million from $0.1 million at year-end; the filing notes that this category includes U.S. government-guaranteed student loans with little credit-loss risk.
- Beneficial was acquired on March 1 for total consideration of approximately $1.2 billion. The preliminary allocation included $3.7 billion of loans, $4.1 billion of deposits, and $309.5 million of goodwill. Valuations remained preliminary and subject to measurement-period adjustments.
- WSFS planned to consolidate 25 banking offices beginning in Q3 2019 and had agreed to sell five Beneficial branches, subject to customary closing conditions. It also announced plans to combine NewLane Finance and Beneficial Equipment Finance later in 2019.
- Adoption of lease accounting added a $180.3 million right-of-use asset and $187.8 million lease liability at quarter-end. Operating lease obligations totaled $296.8 million in undiscounted future payments.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management described expected merger benefits and integration opportunities but noted costs and execution requirements. It expected to surrender Beneficial-acquired bank-owned life insurance policies in Q2 2019.
- Management’s CECL implementation work suggested adoption on January 1, 2020 may materially increase the loan-loss allowance and reduce capital; the amount was not yet determined and depends on portfolio composition, asset quality, economic conditions and estimates.
- WSFS’s one-year interest-sensitive gap was negative $521.6 million. Modeling showed net interest margin increasing 1.5% under a 100-basis-point rate rise and decreasing 2.9% under a 100-basis-point decline, relative to the stable-rate case.
- The Beneficial acquisition took WSFS above $10 billion in assets. The filing said this removes eligibility for certain regulatory relief and could make the company subject to debit-card interchange-fee limits in 2020, based on assets at the December 2019 measurement date.
- Key stated risks include credit exposure to commercial real estate, construction and commercial-and-industrial lending; integration and cost-saving execution; funding costs and interest-rate movements; regulation, cybersecurity, and operational risks. The company also cited LIBOR transition risk for contracts indexed to LIBOR.
- A Delaware trust-services lawsuit seeks the $6.3 million face value of two life-settlement policies; WSFS disputes liability and expected trial in Q4 2019. WSFS was pursuing recovery of additional costs related to a previously settled Universitas matter. No other material changes to significant proceedings were reported.
Investor verification priorities
- Track Beneficial integration expenses, branch closures and sales, and delivery of anticipated cost savings and revenue benefits.
- Review the final purchase accounting, including acquired-loan marks, goodwill and intangible assets, and the effect on future earnings and capital.
- Assess the consumer past-due increase, commercial credit exposures, allowance adequacy and the additional reserve for an existing nonperforming commercial relationship.
- Monitor funding costs, deposit mix, interest-rate sensitivity, and liquidity after debt repayments and balance-sheet optimization.
- Verify CECL’s eventual allowance and capital impact, and the timing and effect of interchange-fee regulation if applicable.
- Follow the trust-services litigation and any recovery of costs from the Universitas matter.