WSFS Financial Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. WSFS is a Delaware Valley banking, cash-services and wealth-management company. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
- Revenue and earnings: Net interest income was $53.1, up 17% from $45.4 in Q1 2016. Noninterest income was $28.1, up 19% from $23.7. Net income rose 20% to $18.9 from $15.8; diluted EPS was $0.59 versus $0.52.
- Margins and costs: Net interest margin increased to 3.90% from 3.87%. Noninterest expense rose 18% to $51.5 from $43.8; management cited acquisition-related costs, added staff and infrastructure. The efficiency ratio was 62.9%, compared with 62.8%.
- Credit costs: Provision for loan losses increased to $2.2 from $0.8. Annualized net charge-offs were 0.19% of average loans, versus 0.03%.
- Cash flow: Operating activities provided $48.2; investing activities used $82.6; financing activities provided $67.7. Cash and cash equivalents ended at $855.3, up $33.3 from year-end.
- Balance sheet and funding: Total assets were $6,852.9, up $87.6 from December 31, 2016. Net loans were $4,552.2, up $107.8. Deposits were $5,376.8, up $638.4; management attributed part of the increase to a $352.4 short-term trust deposit received late in the quarter. FHLB advances fell $556.1 to $298.1. Total liabilities were $6,148.9 and stockholders’ equity was $704.0.
- Capital and debt: WSFS Bank’s total capital, Tier 1, common equity Tier 1 and leverage ratios were 11.97%, 11.25%, 11.25% and 9.60%, respectively; the company said the Bank and holding company exceeded applicable well-capitalized thresholds. Consolidated borrowed funds were $700.8, including $298.1 of FHLB advances, $152.2 of senior debt and $67.0 of trust preferred borrowings. Tangible book value per share was $16.33, up from $15.80 at year-end.
Material changes and management commentary
- Loan growth reflected organic expansion and the inclusion of Penn Liberty, acquired in August 2016. The prior-year comparison also predates the Powdermill and West Capital wealth-management acquisitions.
- Fee growth was led by investment-management and fiduciary income, up $2.8, and card and ATM income, up $1.2. Management linked higher interest income to loan growth and acquisitions, partly offset by increased deposit, FHLB and senior-debt costs.
- Nonperforming assets increased to $60.5 from $40.8 at year-end; nonaccrual loans rose to $39.7 from $22.9. Management attributed much of the increase to a $9.7 commercial-and-industrial participation downgraded after an energy-sector review and several smaller C&I relationships. Management said the $9.7 loan was current and expected near-term resolution without net charge-offs.
- Management expected the efficiency ratio to improve gradually from 62.9% toward the high-50% range in Q4, while targeting a relatively flat full-year 2017 ratio versus 2016. These are forward-looking expectations, not guarantees.
Risks, contingencies and unusual items
- Credit risks include commercial real estate, construction, land-development and C&I exposure. TDRs totaled $28.0, including $17.3 performing and $10.8 nonperforming. The allowance was $39.8, or 0.87% of gross loans; nonaccrual loans were also 0.87% of gross loans.
- A short-term trust deposit contributed materially to quarterly deposit growth; verify whether it remained in place after quarter-end and how funding costs evolve. Cash Connect’s large ATM cash-services operation also carries operational, theft and fraud risks.
- WSFS is defending an arbitration claim related to Christiana Trust seeking approximately $30 million plus interest and costs. Management said it believes it has valid defenses and does not expect a material adverse effect, but noted the outcome is uncertain.
- Investment securities had $14.7 of unrealized losses; the company attributed these to market interest-rate changes and reported no other-than-temporary impairment. Interest-rate changes, funding costs, credit quality, regulation, cybersecurity and acquisition integration are among the disclosed risks.
- The company repurchased 62,000 shares for $2.8 at an average $45.41 and paid a $0.07-per-share dividend. A prior-period 2016 presentation correction for cash-servicing revenue and expense had no effect on EPS or retained earnings.
Most important facts for investors to verify
- Whether the $352.4 short-term trust deposit was retained after quarter-end and the resulting deposit and borrowing mix.
- Subsequent developments in nonaccrual C&I loans, especially the $9.7 energy-related participation, and trends in charge-offs, NPAs and TDRs.
- Progress toward management’s efficiency-ratio outlook and whether revenue growth can offset acquisition, compensation and operating costs.
- Current capital and liquidity positions, including the effects of deposit concentration, interest-rate changes and funding costs.
- Developments in the Universitas arbitration claim and any change in management’s assessment of potential exposure.