WSFS Financial Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Unaudited. WSFS is a Delaware-based bank holding company operating WSFS Bank, Cash Connect and Trust & Wealth Management, with commercial and retail banking, ATM services, and trust and investment management businesses.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $32.2 million | $30.2 million | $93.6 million | $90.2 million |
| Provision for loan losses | $6.6 million | $10.0 million | $21.0 million | $32.0 million |
| Noninterest income | $16.9 million | $14.4 million | $46.6 million | $38.0 million |
| Noninterest expense | $32.4 million | $22.1 million | $94.5 million | $79.5 million |
| Net income | $6.8 million | $8.2 million | $16.5 million | $12.0 million |
| Net income allocable to common shareholders | $6.1 million | $7.5 million | $14.4 million | $10.0 million |
| Diluted EPS | $0.70 | $0.94 | $1.66 | $1.33 |
| Net interest margin | 3.63% | 3.61% | 3.60% | 3.61% |
Third-quarter net income fell year over year despite higher net interest and noninterest income, in part because Q3 2010 included a $4.5 million recovery of a previously recorded Cash Connect fraud loss. Lower loan-loss provision and higher fiduciary and investment management income supported Q3 2011 results. Nine-month net income rose $4.5 million, aided by lower provision, the CB&T acquisition’s trust income and $1.2 million of unanticipated bank-owned life insurance income; higher operating costs partly offset these benefits.
Financial condition, cash flow and capital
- Total assets were $4.19 billion at September 30, 2011, up $235.2 million from December 31, 2010. Net loans were $2.64 billion; loan growth reflected a $159.5 million increase in commercial and industrial loans, partly offset by reductions in residential, construction and commercial real estate loans.
- Total deposits were $2.95 billion, up $141.3 million from year-end; customer deposits rose while brokered deposits declined. Federal Home Loan Bank advances increased $79.8 million to $568.8 million. Total borrowed funds were $805.1 million.
- Cash and cash equivalents were $463.6 million, up $86.8 million. The balance includes $383.4 million of cash in non-owned ATMs associated with Cash Connect.
- For the first nine months, operating cash flow was $63.5 million, investing cash flow was negative $171.8 million and financing cash flow was positive $195.1 million. Net loans increased $118.1 million; investment in premises and equipment was $8.1 million.
- Stockholders’ equity was $387.2 million. The Bank reported capital ratios of 13.52% total risk-based, 12.27% Tier 1 risk-based and 9.35% core capital, and said it was well-capitalized. Book value per common share was $44.97; tangible common book value was $34.88.
Credit quality and material changes
- The allowance for loan losses was $53.2 million, down from $60.3 million at year-end. Nine-month net charge-offs were $28.2 million, compared with $20.9 million in 2010; annualized net charge-offs were 1.41% of average loans versus 1.11%.
- Nonperforming assets totaled $96.7 million, up from $92.9 million at year-end. Nonaccruing loans were $76.1 million; accruing troubled debt restructurings were $8.7 million; foreclosed assets were $11.9 million. The allowance was 69.91% of nonaccruing loans, versus 78.60% at year-end.
- Troubled debt restructurings totaled $27.7 million, compared with $12.0 million at year-end. The balance included $19.0 million nonaccrual and $8.7 million accruing TDRs. The filing reports $25.5 million of loans modified as TDRs during the first nine months.
- Noninterest expense increased $15.0 million year over year for the nine-month period, primarily reflecting Christiana Trust operating costs and franchise growth, including new and relocated branches and added commercial relationship managers. The 2011 period also included a $961,000 marketing campaign and $780,000 of CB&T integration expenses.
- Fiduciary and investment management income increased $5.7 million year over year for the nine months, primarily following the December 2010 CB&T acquisition. The combined trust and wealth business serviced about $9.3 billion in fiduciary assets, including approximately $1 billion under management.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue or other numerical guidance. Management stated that interim results are not necessarily indicative of full-year or future results and described liquidity sources as sufficient for prudent needs.
- Management identified economic conditions, credit losses, securities-market volatility, interest rates, regulatory changes and Dodd-Frank implementation as risks. Estimates for loan-loss reserves, fair values, taxes and goodwill depend on judgment; management cautioned actual economic conditions could be worse than assumed.
- WSFS had a $99.4 million positive one-year interest-sensitive gap at quarter-end. Its modeled net interest margin change was flat under an immediate +100 basis-point rate scenario and down 3% under -100 basis points; larger rate declines were considered not meaningful at the then-low rate level.
- A bankruptcy trustee’s complaint concerning a former customer’s loan remains pending. Management intends to defend the case; no litigation reserve was recorded because loss probability and amount could not be reasonably established. The insurer preliminarily indicated defense costs were covered.
- WSFS guaranteed certain customer interest-rate swaps through third-party institutions. Notional amount was $289.1 million; management said no reserve was needed because a loss was not probable. The filing also notes potential costs and revenue effects from regulatory changes, including debit-card interchange rules effective October 1, 2011.
- WSFS’s primary federal regulators changed on July 21, 2011: the Federal Reserve for the holding company and the OCC for the Bank. Management did not expect a material operational effect but noted regulatory interpretations could differ.
Important facts for investors to verify
- Whether credit performance, charge-offs, TDRs and foreclosed assets improve or deteriorate in subsequent filings.
- Whether commercial loan growth and deposit funding remain sustainable, and how reliance on FHLB advances and other borrowings evolves.
- Whether the increase in operating expenses produces sufficient revenue growth and operating leverage after CB&T integration and branch expansion.
- Whether the $463.6 million reported cash balance, including ATM vault cash, translates into the liquidity available for the Bank’s own funding needs.
- Developments in the bankruptcy litigation, contingent swap guarantees and regulatory implementation costs.