WSFS: Anticipating Continued Loan Growth and Expense Discipline in 2020; Raising EPS Estimates; Maintaining Target Price; Upgrading to Outperform Rating.
WSFS Financial Corporation (WSFS – NASDAQ GS – Recent Price: $41.22)
Rating: Outperform / Buy Price: $42.00 / Target (Sell) Price: $47.00
Overview: WSFS reported 4Q19 net income of $45.7 million, up $16.0 million or 53.8% compared to the $29.7 million posted in 4Q18, but down $8.2 million or 15.2% from 3Q19. The 4Q19 results translate to EPS $0.88 compared to the $1.02 recorded in the preceding quarter. Included in 4Q19 results are $6.1 million of corporate development and restructuring charges related to the Beneficial acquisition, while 3Q19 results include $18.9 million of such expenses, and a $21.3 million unrealized gain on the valuation of the company’s remaining Visa, Inc. Class B stock. These items amounted to a decrease of approximately $0.09 per share in 4Q19 results and an increase of roughly $0.04 per share in 3Q19. Excluding these items “core” EPS was $0.97 in 4Q19 compared to $0.98 in 3Q19. The core results for 4Q19 exceeded our $0.87 “core” estimate and the $0.90 median Street estimate. The main drivers of the positive variance versus our estimate were higher-than-expected net interest income and a lower-than-projected loan loss provision. Highlights from the quarter include:
· Net interest income, at $117.6 million, was down $3.3 million or 2.7% from the prior quarter. Average earning assets decreased 2.2% while the NIM contracted 3 bps to 4.35%. We had expected 23 bps of NIM compression. Average earning asset yields declined 3 bps linked-quarter, driven mainly by decreased yields on CRE and consumer loans (down 18 bps and 29 bps, respectively, linked-quarter). Purchased loan accretion contributed approximately 50 bps to the NIM in 4Q19, roughly 10 bps more than in 3Q19. The cost of average interest bearing liabilities was down 5 bps from the prior quarter, due largely to a 16 bps drop in the average cost of money market deposits.
· Noninterest income of $41.8 million was down $20.6 million or 33.0% compared to 3Q19. Excluding the previously mentioned $21.3 million in unrealized gains from Visa Class B shares recognized in 3Q19, core noninterest income was up $0.5 million or 1.3% linked-quarter. Significant decreases in credit/debit & ATM income (down 7.9%), were largely offset by a 9.6% increase in wealth management income.
· The company’s wealth management business and Cash Connect business both experienced some declines in 4Q19. The Cash Connect business posted a $0.3 million drop in net revenue in 4Q19, while expenses rose $0.3 million, primarily due to nonrecurring items during the quarter. This resulted in a decrease of $0.7 million in pre-tax income for the unit compared to the prior quarter. The wealth management business produced 4Q19 revenue of $15.3 million, down $1.5 million from $16.8 million in 3Q19 due largely to the withdrawal of a $2.0 billion temporary short-term institutional trust deposit during the quarter. Noninterest expenses for the unit were $10.1 million in 4Q19, up $0.8 million from 3Q19. As a result, pre-tax income for the wealth management unit fell to $5.2 million in 4Q19 versus $6.1 million in 4Q18 and $7.6 million in 3Q19.
· WSFS posted 4Q19 noninterest expenses of $98.1 million, up $36.8 million or 59.9% from the year-ago period, but down $11.4 million or 10.4% from 3Q19. Corporate development expenses related to the Beneficial acquisition accounted for $4.6 million of 4Q19 expenses, and $10.5 million in 3Q19, a decrease of $5.9 million. In addition, 4Q19 expenses include $1.5 million of restructuring expenses, down from $8.4 million in the prior quarter. Excluding these items and the 4Q19 recovery of $463k from a previously charged-off fraud loss, adjusted 4Q19 expenses were up $1.8 million or 1.9% sequentially. The bulk of the increase in core noninterest expense was driven by $1.8 million as part of the transition of the Executive Chairman as part of succession planning, coupled with expenses of $1.1 million related to a fire at a branch location during the quarter, partly offset by efficiencies achieved from the Beneficial merger. WSFS’ “core” efficiency ratio for 4Q19 was 58.0% compared to 58.5% in 4Q18 and 55.9% in 3Q19.
· WSFS recorded a $14.2 million tax provision, reflecting an effective tax rate of 23.7%, up from the 22.8% rate posted in 3Q19 and just slightly above our projected 23.4% rate. The higher tax rate in 4Q19 stems from reduced benefits from stock-based compensation activity and higher state income taxes. Management is maintaining guidance of approximately 24% effective “core” tax rate for the full year 2020.
· The provision for loan losses in 4Q19 was $1.6 million, down 61.4% from the $4.1 million recorded in the prior sequential quarter. The provision was driven by lower net charge-offs during the quarter, which fell $0.1 million or 7.1% to $1.7 million. Net charge-offs for the quarter benefitted from a $1.3 million recovery during the quarter on a longstanding C&I relationship. In any case, the provision was slightly less than net charge-offs, resulting in a 0.2% decrease in the allowance for loan losses.
· Asset quality improved in 4Q19. WSFS saw a $15.5 million or 40.3% decrease in NPLs in 4Q19, coupled with a 29.5% drop in OREO. This led to a $16.4 million decline in NPAs. With total assets relatively stable, this led to a 0.32% NPAs/Assets ratio, down from the 0.46% posted in the prior quarter. The NPLs/Loans ratio fell to 0.43% from 0.61% at the prior quarter end. However, total delinquencies decreased $5.5 million to $61.1 million, which translates to 0.72% of gross loans compared to 0.78% at September 30, 2019. Net charge-offs fell 7.1% from the prior quarter, sustaining the net charge-off ratio at 0.08%, unchanged from 0.08% in 3Q19. Reserve coverage of nonaccruals jumped to 208% from 124% three months earlier.
· Gross loans held-for-investment declined $40.6 million or 0.5% from September 30, 2019. The decrease was driven by $60.8 million of intentional runoff in certain segments of the acquired Beneficial portfolio, particularly residential mortgages, auto and student loans, CRE participations and C&I leveraged loan participations. The CRE segment registered the biggest decline, falling by $50.6 million, followed by a $48.0 million drop in C&I loans. In addition, residential mortgage loans fell $17.3 million and consumer loans were down $10.1 million. On the other hand, construction loans advanced $66.6 million and commercial small business loans grew $19.6 million. Management reports that the loan pipeline remains solid. Management anticipates 2020 loan growth in the low- to mid-single digit range, as mid- to high-single digit organic growth is partially offset by continued runoff of non-strategic portfolios acquired in the Beneficial merger.
· Total deposits increased $53.7 million or 0.6% LQ. Noninterest bearing accounts fell $79.0 million or 3.5%, and interest bearing demand accounts declined $47.5 million or 2.2%. However, money market accounts grew $147.9 million or 7.6%. In addition, customer time deposits and brokered deposits rose $31.9 million or 2.0% combined. Core deposits now account for 83.3% of total deposits, down from 83.5% at September 30, 2019.
· Tangible book value per share advanced to $24.85 from $24.50 at September 30, 2019. The company’s regulatory capital ratios advanced modestly compared to 3Q19, including the leverage ratio, which advanced from 11.13% at September 30, 2019 to 11.72% at December 31, 2019. All of the regulatory capital ratios remain well above the minimum levels required to be “well-capitalized”. The tangible common equity ratio dipped to 10.97% from 10.98% at September 30, 2019.
· WSFS repurchased 901,750 shares of its common stock during 4Q19 at an average price of approximately $43.69. We expect management to continue utilizing excess capital for organic growth and to buy back shares, consistent with the target minimum of returning 25% of net income to shareholders through a combination of dividends and buybacks.
Earnings Estimates: WSFS continued to perform well and generally in accordance with the guidance provided by management, after factoring in the impact of the change from an expected rising rate environment to an actual falling rate environment. Loan growth was again dragged down by the planned runoff of some acquired loan portfolios but was still close to our expectations. As the planned runoff has been faster than anticipated, we believe the drag will diminish more quickly than anticipated in 2020, and we have boosted our loan growth forecast to roughly 2.1% from 0.7% in our previous model. Given the better-than-expected NIM performance in 4Q19, and our expectation of static interest rates for most of 2020, we are boosting our NIM projections slightly, modeling a 2020 NIM of 4.12% compared to 4.08% in our last iteration. Management noted a change in strategic investments that will bring forward investments that were planned to occur over a five year span into a more compressed three year period. Accordingly, we have raised our expense projections to reflect this. While asset quality improved in 4Q19, management provided updated guidance on the impact of CECL on the ongoing provision. We have raised our loan loss provision estimate for 2020 to $22.9 million from $18.4 million previously.
After making these changes, we are raising our 2020 EPS estimate from $3.41 to $3.45 and our 2021 EPS estimate from. $3.59 to $3.69.
Stock Price Implications: Peer banks of similar size in the Mid-Atlantic and Northeast regions are currently trading at 13.1x trailing twelve-month EPS and 160.2% of tangible book value. At 13.9x TTM EPS and 167.8% of TBV WSFS is trading at a slight premium to the peers. Our $47.00 price target represents a 13.6x multiple applied to our $3.45 EPS estimate for the next four quarters (1Q20-4Q20). Our target suggests a potential 14.0% gain from the current price. Consequently, we are upgrading our rating on WSFS stock from Neutral to Outperform.