WSFS Financial Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Dollar amounts below are in millions unless noted. WSFS is a Delaware-based banking and financial services company with banking, Cash Connect, and trust and wealth management businesses.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Interest income | $39.2 | $39.2 | Broadly unchanged |
| Net interest income | $32.5 | $30.3 | +8% |
| Noninterest income | $16.8 | $13.6 | +23% |
| Noninterest expense | $31.0 | $31.4 | -1% |
| Provision for loan losses | $8.2 | $5.9 | +40% |
| Net income | $6.4 | $4.2 | +53% |
| Net income allocable to common stockholders | $5.8 | $3.5 | +64% |
| Diluted EPS | $0.66 | $0.40 | +65% |
Net interest margin was 3.57% on a tax-equivalent basis, versus 3.56% a year earlier; interest-rate spread was 3.49% versus 3.44%. The filing attributes improved earnings to higher noninterest income and net interest income, with lower expenses partly offset by a larger loan-loss provision. Securities gains were $2.0 million, compared with $0.4 million.
Financial condition, credit, and liquidity
- Total assets were $4.33 billion, up 1% from year-end. Net loans were $2.72 billion, up about $21 million; available-for-sale securities were $890.9 million, up $31.5 million.
- Total deposits were $3.19 billion, up $54.2 million. Borrowed funds were approximately $703.1 million at quarter-end, down from $723.6 million. Total liabilities were $3.93 billion; stockholders’ equity was $396.5 million.
- Cash and cash equivalents were $459.7 million, down $8.3 million during the quarter. Operating cash flow was $18.6 million, compared with $28.7 million in Q1 2011; investing activities used $58.9 million and financing activities provided $31.9 million.
- The Bank reported capital ratios of 13.57% total risk-based, 12.31% Tier 1 risk-based, and 9.34% core capital, and stated it was well-capitalized. The holding company held $12.0 million in cash. Book value per common share was $45.55; tangible common book value was $35.62.
- The allowance for loan losses was $55.8 million, or 2.01% of loans, versus $53.1 million and 1.92% at year-end. Q1 net charge-offs were $5.5 million, down from $10.2 million a year earlier.
- Nonaccrual loans were $74.1 million, or 2.66% of loans, compared with $71.1 million and 2.58% at year-end. Nonperforming assets were $89.6 million, or 2.07% of assets, down from $91.7 million and 2.14%. Troubled debt restructurings totaled $32.0 million, up from $27.7 million at year-end.
Material changes, outlook, and risks
- Management said commercial and industrial lending grew $25.6 million in the quarter, while residential and consumer lending declined as the company continued to change portfolio mix. Loan growth and a larger securities portfolio helped support net interest income; lower deposit funding costs were largely offset by declining mortgage-backed securities yields.
- Credit costs rose: the provision increased to $8.2 million, and management cited risk-rating migration associated with a new risk-rating policy and procedures. The company also revised its allowance methodology; it said the changes had no material effect on the quarter’s allowance or provision.
- Subsequent to quarter-end, WSFS began seeking bids for a possible bulk sale of about $52 million of criticized and nonperforming loans. Any sale was optional, and expected discounts could be significant. WSFS also anticipated selling about $300 million of mortgage-backed securities and reinvesting in shorter-duration securities. Management expected securities gains to offset all or much of the loan-sale loss, and anticipated that lower future securities yield could be offset in 2012 by improved total credit costs; these outcomes were not assured.
- Key risks identified include economic and real-estate conditions, loan losses and workout costs, interest-rate and securities-market changes, regulatory changes including Dodd-Frank implementation, and uncertainty around the proposed asset sales. Management stated Q1 results are not necessarily indicative of full-year results.
- Two disclosed legal matters—a bankruptcy trustee complaint concerning a former customer loan and a putative class action over overdraft fees—had no litigation reserves because potential losses could not yet be reasonably estimated. WSFS said it was defending both matters.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed loan and securities sales closed, at what prices, and how gains or losses affected subsequent results.
- Whether the higher loan-loss provision reflects continued credit deterioration; track nonaccrual loans, TDRs, charge-offs, and allowance coverage.
- Whether margin and earnings remain resilient as securities yields decline and funding costs change.
- Deposit mix and reliance on brokered deposits and wholesale borrowings, alongside reported liquidity and capital levels.
- Developments in the overdraft-fee and bankruptcy-related litigation, and any resulting reserve or expense.