WSFS Financial Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless otherwise noted. WSFS is a Delaware-based bank holding company with commercial and consumer banking, ATM services, and trust and wealth management businesses.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $36.5M | $40.1M | $113.5M | $119.1M |
| Noninterest income | $19.7M | $16.9M | $65.5M | $46.6M |
| Net interest income | $30.9M | $32.2M | $95.5M | $93.6M |
| Provision for loan losses | $3.8M | $6.6M | $28.4M | $21.0M |
| Noninterest expense | $32.2M | $32.4M | $96.2M | $94.5M |
| Net income | $10.0M | $6.8M | $23.8M | $16.5M |
| Diluted earnings per share | $1.06 | $0.70 | $2.47 | $1.66 |
Q3 net interest margin was 3.41%, down from 3.63%; the nine-month margin was 3.49%, down from 3.60%. The Q3 decline reflected lower securities yields, the low-rate environment, and interest costs on newly issued senior notes. Nine-month net income growth included $17.8M in securities gains, compared with $3.0M a year earlier; these gains were largely associated with portfolio-management and Asset Strategies activity. Excluding securities gains and specified BOLI effects, management reported underlying noninterest-income growth of 9% for Q3 and 10% for the nine-month period.
Nine-month net cash provided by operations was $63.3M, versus $63.5M. Investing activities used $21.7M, compared with $171.9M, while financing activities used $62.5M, versus providing $195.1M. Cash and cash equivalents ended the period at $447.1M, down $20.9M from year-end 2011.
Financial condition, credit and liquidity
- Total assets were $4.26B at September 30, down $27.7M from December 31, 2011. Net loans were $2.66B, down $46.4M; available-for-sale securities rose $50.7M to $910.1M.
- Total deposits were $3.16B, up $24.5M. Customer deposits increased $50.1M, while brokered deposits declined $25.6M. FHLB advances fell $145.8M to $392.9M; federal funds purchased and repurchase-agreement balances rose $50.0M to $100.0M.
- Total liabilities were $3.84B and stockholders’ equity was $417.8M. The Bank reported capital ratios of 14.28% total risk-based, 13.02% Tier 1 risk-based, and 9.91% core capital, and was classified as well capitalized. The holding company also held $61.2M in cash.
- Nonperforming assets declined to $57.1M from $91.7M at year-end; nonaccrual loans were $39.9M, or 1.48% of loans. The allowance was $45.6M, equal to 114.17% of nonaccrual loans. Nine-month net charge-offs increased to $35.9M from $28.2M, and provision expense rose to $28.4M from $21.0M.
- Troubled debt restructurings totaled $22.3M at quarter-end, including $12.1M on nonaccrual and $10.2M accruing. Management cited asset sales, collections, and other Asset Strategies efforts in the reduction of problem assets.
- Management said liquidity sources—including deposits, loan repayments, borrowings, and liquid securities—were sufficient to maintain prudent liquidity. The one-year interest-sensitive gap was $133.3M; management said the positioning could support margin improvement in a rising-rate environment.
Management commentary, outlook and risks
Management attributed Q3 earnings improvement mainly to lower credit costs and higher fee income, partly offset by lower net interest income. It cited franchise growth across business lines and expense-control efforts, while noting expenses from branch expansion, the operations-center relocation, and performance-related compensation. The filing provides no specific earnings or financial guidance and cautions that interim results are not necessarily indicative of full-year results.
In Q3, WSFS issued $55.0M of senior notes bearing 6.25% interest and repurchased a Treasury common-stock warrant for $1.8M. The $52.6M of preferred stock originally issued to Treasury had been sold by Treasury at auction in March; WSFS continued to accrue and pay its preferred dividends.
A notable contingency concerns an IRS proposed adjustment to a trust’s 2006 tax return: $8.0M of tax plus estimated interest and penalties of $6.0M–$10.0M. WSFS serves as trustee following its acquisition of Christiana Bank & Trust. The company said the IRS had not asserted a claim against the Bank and that it believed any claim against the Bank would lack merit. Separately, the IRS notified WSFS of its intention to audit the company’s 2010 tax return.
Principal risks cited include credit losses and real-estate conditions, interest-rate and securities-market movements, funding costs, regulatory and compliance changes, competition, liquidity and operational risks, and the effects of low rates on loan and mortgage-backed-security prepayments. Management reported no material change to previously disclosed risk factors; disclosure controls were considered effective and no material control change was reported.
Important facts for investors to verify
- How much of nine-month earnings growth depends on securities gains and other nonrecurring items, and the expected effect of the Asset Strategies portfolio changes on future net interest income and margin.
- Whether higher year-to-date net charge-offs, the revised loan-loss methodology, and the reclassification of $4.7M of loans affect future credit costs or reserve adequacy.
- The status and potential exposure, if any, from the IRS trust matter, including whether a claim is made against WSFS as trustee.
- The cost, terms, and refinancing implications of the new senior notes and the company’s ongoing reliance on FHLB and other wholesale funding.
- Whether reported capital, liquidity, and asset-quality improvements persist; reported period-end measures do not guarantee future performance.