WSFS Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Comparisons are to the corresponding 2017 periods unless otherwise noted. Amounts are U.S. dollars.
Business context
WSFS is a Delaware-based banking and financial services company, with banking, Cash Connect and wealth management businesses. At June 30, 2018, it reported $7.11 billion in assets, $19.09 billion in wealth assets under management and administration, and 77 offices.
Financial performance and position
| Metric | Q2 / June 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net income | $28.7 million; diluted EPS $0.89 | Q2 2017: $20.6 million; diluted EPS $0.64 |
| Six-month net income | $66.1 million; diluted EPS $2.05 | First half 2017: $39.5 million; diluted EPS $1.22 |
| Net interest income | Q2: $61.0 million; first half: $118.7 million | Q2 2017: $54.3 million; first half 2017: $107.4 million |
| Net interest margin | Q2: 4.10%; first half: 4.06% | Q2 2017: 3.93%; first half 2017: 3.91% |
| Noninterest income | Q2: $35.0 million; first half: $82.5 million | Q2 2017: $31.7 million; first half 2017: $59.8 million |
| Noninterest expense | Q2: $57.8 million; first half: $111.2 million | Q2 2017: $52.7 million; first half 2017: $104.2 million |
| Provision for loan losses | Q2: $2.5 million; first half: $6.1 million | Q2 2017: $1.8 million; first half 2017: $4.0 million |
| Total assets / net loans | $7.11 billion / $4.87 billion | December 31, 2017: $7.00 billion / $4.78 billion |
| Total deposits | $5.37 billion | December 31, 2017: $5.25 billion |
| Cash and cash equivalents | $703.5 million | December 31, 2017: $723.9 million |
| Borrowed funds | $896.4 million | December 31, 2017: $937.8 million |
First-half operating cash flow was $59.8 million, versus $59.9 million in 2017. Investing activities used $152.2 million and financing activities provided $72.0 million; cash decreased $20.4 million during the half. The company reported a $41.0 million allowance for loan losses, equal to 0.84% of gross loans. Six-month net charge-offs were $5.7 million, or 0.24% of average loans annualized, versus $3.8 million, or 0.17%, in 2017.
At June 30, the Bank’s total capital, Tier 1 capital, CET1 and Tier 1 leverage ratios were 12.68%, 11.97%, 11.97% and 10.36%, respectively. The corresponding holding-company ratios were 12.20%, 11.49%, 10.39% and 9.95%. Both were above the filing’s stated well-capitalized thresholds. Book value per share was $24.25; tangible book value per share, a non-GAAP measure, was $18.35.
Material changes versus comparable periods
- Q2 net income rose to $28.7 million from $20.6 million. Management attributed the improvement mainly to higher net interest income from loan growth, higher-yielding mortgage-backed securities and the interest-rate environment, and growth in fee-generating businesses.
- First-half noninterest income increased $22.7 million, including a $15.3 million unrealized gain on Visa Class B shares following adoption of new equity-investment accounting guidance. Excluding that identified item, management cited growth across business lines.
- First-half net interest income increased $11.3 million. The higher margin reflected rates, balance-sheet mix and the prior-year redemption of $55 million of senior notes; higher deposit and FHLB funding costs partly offset these factors.
- Expenses rose with compensation, business-growth costs and Cash Connect activity. First-half expense also included $0.9 million of BOLI-surrender transaction costs and was partly offset by a $1.7 million fraud-loss recovery.
- Net loans increased $92.7 million from year-end, primarily from commercial and consumer lending. Deposits rose $119.0 million, including a $102.9 million increase in brokered deposits; FHLB advances declined $79.7 million.
- Available-for-sale securities had $31.989 million of gross unrealized losses at June 30, compared with $11.648 million at year-end. The filing attributed the losses primarily to market interest-rate changes and reported no other-than-temporary impairment.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management stated that available funding sources and liquid investments should be sufficient for funding needs and prudent liquidity levels over the next 12 months.
- Credit remains a key area to monitor: management increased the loan-loss provision due to portfolio growth and anticipated losses involving several commercial loans. Nonaccrual loans were $36.3 million; reported nonperforming assets were $55.1 million, or 0.78% of assets. Total TDRs increased to $35.8 million from $29.7 million at year-end, including nonperforming TDRs of $19.5 million versus $9.6 million.
- Interest-rate exposure, deposit pricing and funding costs are material risks. The company reported a negative $79.1 million one-year interest-sensitive gap; its modeled net interest margin declined 5% under a 100-basis-point rate decrease and rose 2% under a 100-basis-point increase.
- On August 7, 2018, after quarter-end, WSFS agreed to acquire Beneficial Bancorp in a stock-and-cash merger valued at approximately $1.5 billion. Each Beneficial share is to convert into 0.3013 WSFS shares and $2.93 cash. Closing, expected in Q1 2019, is subject to shareholder and regulatory approvals and other conditions.
- WSFS paid $12.0 million in February 2018 to settle Universitas arbitration claims concerning services predating its 2010 acquisition of Christiana Bank and Trust. It said it would pursue recovery from indemnitors and insurers; recovery is uncertain.
- Management identified possible future increases in credit losses, interest-rate and securities-value changes, regulatory and liquidity requirements, operational and cybersecurity risks, and acquisition integration risks. It also warned that adoption of expected-credit-loss accounting in 2020 may materially increase the loan-loss allowance and reduce capital; the amount was not yet determined.
Important facts for investors to verify
- How much of earnings growth is recurring, given the $15.3 million Visa valuation gain and the reduced 2018 tax rate.
- Whether higher funding costs, including brokered-deposit growth, constrain future net interest margin.
- Trends in commercial loan losses, net charge-offs, nonperforming TDRs and provision adequacy as the loan portfolio grows.
- The value and interest-rate sensitivity of the securities portfolio, and the effect of unrealized losses on equity and capital.
- Regulatory and shareholder approvals, integration costs, financing and expected benefits of the Beneficial transaction.
- Potential recovery of the Universitas settlement payment and related costs, and the eventual impact of expected-credit-loss accounting.