WSFS Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in millions of dollars unless stated otherwise. WSFS is a regional banking and financial-services company with banking, Cash Connect, and wealth-management businesses; it reported $15.1 billion in assets and $26.7 billion in wealth assets under management and administration.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $106.7 | $113.8 | $220.9 | $229.9 |
| Net interest margin | 3.23% | 3.93% | 3.40% | 4.14% |
| Noninterest income | $49.0 | $64.4 | $96.8 | $105.2 |
| Noninterest expense | $96.0 | $93.4 | $191.7 | $181.9 |
| Credit-loss provision (recovery) | $(67.6) | $94.8 | $(87.7) | $151.4 |
| Net income attributable to WSFS | $95.7 | $(7.1) | $160.7 | $3.8 |
| Diluted earnings per share | $2.01 | $(0.14) | $3.37 | $0.07 |
Q2 pretax income was $127.3 million. The substantial year-over-year earnings improvement chiefly reflects the swing from a large credit-loss provision to a recovery, rather than stronger net interest income. Q2 2020 also included a $22.1 million gain on sale of Visa Class B shares; Q2 2021 included $5.3 million of unrealized equity-investment gains, primarily from SoFi. Management said the SoFi investment was liquidated in July for an approximately $4.4 million realized gain.
Management attributed lower net interest income and margin to reduced purchase-accounting accretion, runoff of acquired non-relationship loans, low interest rates, and excess customer deposits held in short-term liquidity. Lower funding costs and PPP income partly offset these effects. Noninterest income also faced lower mortgage-banking activity and reduced debit interchange fees following the Durbin Amendment’s July 2020 applicability to WSFS; trust and fiduciary income increased.
Financial condition, cash flow, and capital
- Balance sheet: Total assets were $15.15 billion at June 30, up $814.9 million from year-end 2020. Deposits were $12.73 billion, up $870.2 million. Cash, cash equivalents, and restricted cash totaled $2.42 billion, up $766.4 million.
- Loans and credit: Net loans and leases were $8.13 billion, down $664.1 million from year-end; declines included $528.3 million from PPP loan forgiveness and runoff in acquired portfolios. The allowance for credit losses fell to $132.4 million from $228.8 million; its ratio to loans and leases declined to 1.59% from 2.51%. Nonperforming assets were $40.1 million, or 0.26% of assets, versus $60.5 million and 0.42% at year-end. Management cited improving credit indicators and economic forecasts.
- Funding and debt: The net-loans-to-customer-deposits ratio was 65%. WSFS redeemed $100 million of 4.50% senior notes due 2026 and recognized a $1.1 million debt-extinguishment loss. At June 30, senior debt was $147.8 million; trust preferred borrowings were $67.0 million, and there were no FHLB advances.
- Cash flows, six months: Operating activities provided $89.1 million; investing activities used $62.6 million; financing activities provided $739.9 million. Financing cash flow mainly reflected deposit growth, partly offset by the note redemption, share repurchases, dividends, and repayment of FHLB advances.
- Capital: WSFS reported consolidated total capital of 15.14%, Tier 1 capital of 13.95%, common equity Tier 1 of 13.32%, and Tier 1 leverage of 9.96%; the Bank and Company met or exceeded well-capitalized thresholds. Book value per share was $39.63 and tangible book value per share was $28.02. A quarterly dividend of $0.13 per share was declared. Share repurchases were suspended while the Bryn Mawr transaction is pending.
Material developments, outlook, and risks
- Bryn Mawr merger: Stockholders of both companies approved the merger. WSFS reported receiving a key OCC approval on July 21, after quarter-end; another required regulatory approval and customary closing conditions remained. Management expected closing early in Q4 2021. Merger completion, timing, integration, transaction costs, customer and employee retention, and pending shareholder lawsuits are significant uncertainties.
- Liquidity and interest rates: Management said available funding sources and liquid investments were sufficient for expected needs over the next 12 months. The filing reports a positive one-year interest-sensitive gap of $2.2 billion and modeled net-interest-margin sensitivity of +7.9% for a 100-basis-point rate increase and −3.6% for a 100-basis-point decrease. Actual results may differ, and management noted mortgage-banking effects are difficult to model.
- Market and credit exposure: Available-for-sale securities had $34.5 million of unrealized losses on $1.7 billion of securities in a loss position; management attributed the losses to interest-rate changes, not credit deterioration, and said it did not expect to sell before recovery. The loan portfolio includes significant commercial real estate, construction, and commercial and industrial exposure. COVID-19 conditions, borrower performance, PPP-related credit and fraud risks, and economic forecasts could affect losses and reserves.
- Other unusual items and contingencies: WSFS contributed $1.0 million to the WSFS CARES Foundation. On August 5, 2021, after quarter-end, WSFS Bank settled the Nature’s Healing Trust proceeding with no damages payable; each side bears its own legal costs. In the Universitas matter, the court granted WSFS summary judgment on liability, but damages had not yet been determined. Management cautioned that forward-looking expectations are subject to risks, including rates, liquidity, regulation, cybersecurity, litigation, and merger execution.
- Guidance: The filing does not provide specific earnings or financial-performance guidance; it states the expected merger timing and management’s view of liquidity for the next 12 months.
Important facts for investors to verify
- Whether the Bryn Mawr merger receives all remaining approvals, closes on the expected schedule, and delivers anticipated benefits without material added costs or disruption.
- Whether the large credit-loss recovery and lower allowance remain appropriate as PPP balances run off and economic and borrower conditions evolve.
- How deposit growth, excess liquidity, asset yields, and funding costs affect net interest margin and earnings.
- Whether loan performance and commercial real estate, construction, and commercial and industrial exposures remain consistent with management’s improving credit assessment.
- How interest-rate movements affect securities values, accumulated other comprehensive income, and earnings; also monitor the disclosed legal proceedings and merger-related litigation.