WSFS Financial Corporation — Q2 2012 Form 10-Q
Business context and reporting period. WSFS is a Delaware-based bank holding company focused on commercial and consumer banking, deposits, ATM services, and trust and wealth management. This unaudited filing covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods, or December 31, 2011 for balance-sheet figures.
Key financial metrics
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total interest and noninterest income | $66.8 | $55.8 | $122.7 | $108.6 |
| Net interest income | $32.1 | $31.2 | $64.6 | $61.4 |
| Net interest margin | 3.53% | 3.61% | 3.54% | 3.58% |
| Provision for loan losses | $16.4 | $8.6 | $24.6 | $14.5 |
| Net income | $7.3 | $5.5 | $13.8 | $9.7 |
| Net income allocable to common shareholders | $6.6 | $4.8 | $12.4 | $8.3 |
| Diluted earnings per share | $0.76 | $0.55 | $1.41 | $0.96 |
| Operating cash flow | — | $47.3 | $46.6 |
- Balance sheet and liquidity: Total assets were $4.19 billion, down 2% from year-end 2011. Cash and cash equivalents were $467.3 million. Deposits totaled $3.16 billion, including $286.2 million of brokered deposits. Gross loans were $2.70 billion and net loans were $2.66 billion.
- Borrowings and equity: Borrowed funds totaled $588.7 million, comprising $392.9 million of FHLB advances, $100.0 million of federal funds and repurchase agreements, $67.0 million of trust preferred borrowings, and $28.8 million of other borrowings. Stockholders’ equity was $401.9 million. The Bank reported total risk-based capital of 13.99%, Tier 1 risk-based capital of 12.74%, and core capital of 9.82%, above stated well-capitalized benchmarks.
- Credit quality: The allowance for loan losses was $46.4 million, or 1.71% of loans. Nonaccrual loans were $42.6 million; total nonperforming assets were $62.3 million, or 1.49% of assets. Annualized net charge-offs were 2.25% of average gross loans for the first half.
- Cash flows: Investing activities provided $61.4 million, while financing activities used $109.5 million. Cash and equivalents decreased $0.8 million during the first half.
Material changes versus comparable periods
- Q2 net income rose 33% year over year and diluted EPS rose from $0.55 to $0.76. First-half net income increased from $9.7 million to $13.8 million.
- Net interest income increased, but net interest margin narrowed in both comparisons, reflecting lower yields after securities sales and reinvestment in a low-rate environment. Management cited funding-cost control and loan growth as offsets.
- Noninterest income rose substantially, principally because net securities gains were $13.3 million in Q2 2012 versus $0.6 million a year earlier. Excluding securities gains and the prior-year $1.2 million of unanticipated bank-owned life insurance income, management said noninterest income increased 10% in Q2 and 11% in the first half.
- Noninterest expense increased 8% in Q2 and 3% in the first half. Management cited compensation, branch and operations-center investments, and credit workout and OREO costs.
- Nonperforming assets declined from $91.7 million at year-end 2011 to $62.3 million at June 30, 2012; nonaccrual loans fell from $71.1 million to $42.6 million. The allowance-to-nonaccrual-loan ratio improved from 74.66% to 109.10%.
- Total deposits increased $29.1 million from year-end, while FHLB advances declined $145.8 million and other borrowed funds declined $39.1 million.
Outlook, management commentary, risks, and unusual items
- WSFS completed its previously announced asset strategies in Q2. It sold loans with $42.7 million of recorded balances, reducing pretax income by $14.6 million through additional provision and loan workout/OREO costs. Sales of $419.4 million of mortgage-backed securities generated $13.3 million in net gains, nearly offsetting those costs. Management said the actions reduced credit, prepayment, and price risks; the securities portfolio no longer included RE-REMICs, non-agency MBS, or downgraded securities.
- Management reported classified assets fell $96.4 million, or 30%, from March 31 to $221.1 million at June 30. It also noted that low interest rates continue to pressure loan and securities yields. The filing provides no specific earnings or revenue guidance; management cautioned that interim results are not necessarily indicative of full-year results.
- Credit risk remains significant: the first-half provision was $24.6 million, net charge-offs were $31.3 million, and the bulk loan sales included substantial credit costs. Management’s allowance estimates depend on loan ratings, collateral values, economic conditions, and other judgments; the allowance methodology was revised in Q1, without a material reported effect.
- Interest-rate sensitivity, market values, and liquidity are key risks. At June 30, interest-earning assets exceeded interest-bearing liabilities repricing within one year by $138.6 million. Management stated that liquidity sources were sufficient, including deposits, FHLB borrowing capacity, repurchase agreements, the Federal Reserve discount window, and liquid securities.
- Two previously reported lawsuits were settled and dismissed in Q2 at costs described as immaterial. A bankruptcy-trustee case remained pending, with no material change reported. The company said it knew of no other significant pending proceedings.
- The company identified potential effects from Dodd-Frank implementation and proposed Basel capital rules, which it was still assessing. It also noted risks from economic conditions, securities-market volatility, interest rates, regulation, problem loans, and litigation.
Important facts for investors to verify
- How much future credit cost may arise from the remaining classified, impaired, and restructured loans, and whether the lower nonperforming-asset balance persists after the portfolio sales.
- Whether reported earnings growth is sustainable apart from the $13.3 million Q2 securities gain and the effects of the asset strategies.
- How net interest margin and funding costs respond to persistently low or changing interest rates, including the impact of reinvesting securities proceeds.
- The adequacy of the $46.4 million loan-loss allowance relative to portfolio composition, charge-offs, collateral values, and updated risk estimates.
- The company’s ongoing reliance on wholesale funding and brokered deposits, and the effects of proposed regulatory capital requirements.