WSFS Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; filed November 3, 2023. WSFS is a regional banking and financial services company with banking, Cash Connect, and wealth management businesses. It reported $20.0 billion in assets and $77.6 billion of wealth assets under management and administration.
Financial performance and position
- Q3 earnings: Net income attributable to WSFS was $74.2 million, versus $73.4 million a year earlier. Diluted EPS was $1.22, versus $1.16.
- Revenue and net interest: Interest income was $251.1 million and noninterest income was $72.7 million. Net interest income was $182.6 million, up $5.8 million year over year. Q3 net interest margin was 4.08%, versus 3.99%.
- Credit costs and expenses: Q3 provision for credit losses was $18.4 million, up from $7.5 million. Noninterest expense was $139.7 million, versus $132.9 million. Income before taxes was $97.2 million, versus $99.1 million.
- Nine-month results: Net income attributable to WSFS was $205.2 million, versus $137.9 million; diluted EPS was $3.34, versus $2.15. Net interest income increased to $547.0 million from $469.0 million, and net interest margin rose to 4.15% from 3.46%. Provision for credit losses increased to $63.3 million from $34.7 million.
- Loans and credit quality: Net loans and leases held for investment grew $742.4 million, or 8% annualized, from year-end 2022. The allowance for credit losses was $176.0 million, or 1.28% of loans and leases, versus $151.9 million, or 1.17%, at year-end. Nonaccrual loans increased to $57.5 million from $22.8 million; nonperforming assets rose to $57.8 million from $43.4 million.
- Deposits, liquidity, and debt: Deposits were $16.0 billion, down $217.2 million from year-end; noninterest-bearing deposits declined while interest-bearing deposits increased. Cash, cash equivalents, and restricted cash were $611.5 million, down from $837.3 million. Borrowed funds totaled approximately $917.8 million, including $565.0 million drawn from the Bank Term Funding Program (BTFP); FHLB advances were zero at quarter-end.
- Capital and securities: The Bank’s common equity Tier 1 ratio was 13.26% and total risk-based capital ratio was 14.43%; the Company’s respective ratios were 12.75% and 14.82%. Both were above well-capitalized regulatory thresholds. Accumulated other comprehensive loss was $780.7 million. Available-for-sale securities had $892.6 million of gross unrealized losses; management attributed these primarily to interest-rate changes, not credit losses, and stated it did not intend or expect to be required to sell before recovery.
- Cash flow: For the first nine months, operating cash flow was $287.8 million, investing cash flow was negative $411.9 million, and financing cash flow was negative $101.7 million. Cash and restricted cash declined $225.8 million.
Material changes and management commentary
- Q3 net interest income benefited from higher rates and balance-sheet size and mix; loan growth and mix supported margin, while rising deposit costs partly offset the benefit. Interest expense rose sharply year over year, particularly on deposits and other borrowings.
- Nine-month earnings growth reflected higher net interest income and lower net corporate development and restructuring costs compared with 2022. The nine-month provision for credit losses increased amid economic uncertainty, forecast impacts, loan growth, and credit downgrades.
- Noninterest income rose year over year in Q3, led by Cash Connect, wealth management, and capital markets. For the nine-month period, the comparison also reflects 2022 equity-investment gains and income from the BMT Insurance Advisors business, sold in 2022.
- Management said available liquidity sources were sufficient for funding needs over the next twelve months and beyond. At quarter-end, estimated uninsured deposits were $5.8 billion (37% of deposits); estimated unprotected deposits were $4.4 billion (28%). Readily available secured borrowing capacity was $5.3 billion from FHLB, $0.7 billion from the Federal Reserve Discount Window, and $1.0 billion from BTFP.
- WSFS repurchased 386,900 shares in Q3 for approximately $15.7 million and declared a $0.15-per-share quarterly dividend. Nine-month capital returns were $69.9 million through repurchases and dividends. Management stated an intent to return at least 35% of annual net income to stockholders through dividends and repurchases, subject to maintaining capital above regulatory benchmarks.
Outlook, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management’s statements about liquidity and future performance are subject to economic, market, credit, interest-rate, regulatory, and other risks.
- Key exposures include higher funding costs, possible margin pressure, commercial real estate and commercial lending credit risk, loan losses, securities valuation changes, deposit competition, and the ability to maintain liquidity and capital. Management noted that actual economic conditions could be worse than those assumed in estimates.
- WSFS had $125.8 million of net unrealized losses, at quarter-end, embedded in securities transferred from available-for-sale to held-to-maturity; these are reflected in accumulated other comprehensive loss and are being amortized into income over time.
- The FDIC proposed a special assessment to recover losses from certain bank failures. The filing describes the proposal but does not provide a clear estimate of WSFS’s resulting expense. Regulatory changes following bank failures and small-business lending data requirements also remain potential considerations.
- Cash Connect agreed to add approximately 8,000 bailment ATMs, with closing expected in Q4 2023. WSFS also reported a third-quarter acquisition by its wealth management subsidiary of a registered investment advisory firm.
- The filing reported no material changes to previously disclosed risk factors and no material changes to significant pending legal proceedings.
Important facts for investors to verify
- Whether deposit mix, deposit pricing, and wholesale borrowing needs stabilize, and how this affects net interest margin.
- Whether nonaccrual loans, criticized credits, charge-offs, and the allowance continue to rise, particularly in commercial lending and real estate exposures.
- How much of the securities portfolio’s unrealized loss may ultimately affect tangible capital or liquidity, especially if securities must be sold.
- The cost and timing of the proposed FDIC special assessment and any additional regulatory requirements.
- Whether the planned Cash Connect ATM expansion and wealth management acquisition deliver the anticipated growth and returns.