WSFS Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
WSFS is a regional bank and financial services company with banking, Cash Connect, and wealth management businesses. At quarter-end, it reported $14.7 billion in assets, $8.6 billion in loans and leases, and $24.7 billion of wealth assets under management and administration. It operated 111 offices.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net interest income | $114.2 million | $116.2 million |
| Net interest margin | 3.59% | 4.38% |
| Noninterest income | $47.8 million | $40.8 million |
| Noninterest expense | $95.6 million | $88.5 million |
| Recovery of credit losses / (provision) | $20.2 million recovery | $56.6 million provision |
| Income before taxes | $86.5 million | $11.9 million |
| Net income attributable to WSFS | $65.1 million | $10.9 million |
| Diluted earnings per share | $1.36 | $0.21 |
| Operating cash flow | $69.7 million | $62.4 million |
The earnings increase was driven chiefly by the year-over-year swing from credit-loss provision to recovery, not by net interest income growth. Net interest income declined $2.0 million as lower rates and reduced purchase-accounting accretion outweighed PPP contribution. PPP loans contributed $9.4 million of net interest income, including $7.8 million of fee accretion. Net interest margin contracted 79 basis points.
Financial position, liquidity, and capital
- Total assets were $14.73 billion, up $396.5 million from December 31, 2020. Cash, cash equivalents, and restricted cash rose $409.4 million to $2.06 billion; available-for-sale securities increased $458.8 million to $2.99 billion.
- Total deposits increased $427.0 million to $12.28 billion, mainly reflecting PPP-related customer balances, government stimulus, and lower customer spending. The loans-to-customer-deposits ratio was 70%.
- Net loans and leases, excluding loans held for sale, fell $422.2 million during the quarter, reflecting PPP forgiveness, real estate portfolio runoff, and lower commercial loan demand. PPP loans outstanding were $526.8 million at quarter-end.
- Loans and leases were $8.58 billion gross; the allowance for credit losses was $204.8 million, or 2.36% of loans and leases, versus 2.51% at year-end 2020. Net charge-offs were $3.8 million.
- Nonaccruing loans were $31.8 million; nonperforming assets were $49.5 million, or 0.34% of assets, down from $60.5 million and 0.42% at year-end.
- WSFS reported total capital of 14.28%, Tier 1 capital of 13.02%, common equity Tier 1 of 12.38%, and Tier 1 leverage of 9.71%. The company said it exceeded well-capitalized regulatory thresholds. It separately held $223.8 million in cash at the parent level.
- WSFS equity was $1.77 billion. Book value per share was $37.27 and tangible book value per share was $25.60, each down $0.25 from year-end; the latter is a non-GAAP measure.
- Cash provided by operations was $69.7 million; investing activities used $64.1 million, largely reflecting net securities purchases; financing activities provided $403.9 million, primarily from deposit growth.
Material changes and management commentary
- Noninterest income rose $7.0 million, with higher mortgage banking, trust services, and PPP referral fees partly offset by lower card and ATM income. The Durbin Amendment reduced interchange income; Cash Connect revenue also declined with lower interest rates.
- Noninterest expense increased $7.1 million, including higher compensation, equipment costs, and merger-related expenses. Lower other operating expense partly offset these increases.
- Management attributed the $20.2 million credit-loss recovery to improved economic forecasts and credit indicators. It cited lower problem assets, nonperforming assets, and delinquencies. The filing cautions that estimates depend on uncertain economic conditions.
- WSFS signed a merger agreement with Bryn Mawr Bank Corporation on March 9, 2021; closing was expected early in Q4 2021, subject to approvals and other conditions. WSFS recorded $1.8 million of corporate development and restructuring expense, primarily related to the pending merger. Share repurchases were suspended after the merger announcement.
- The board approved a quarterly dividend of $0.13 per share, payable May 21, 2021. The quarter’s equity statement reflects a $0.12-per-share dividend payment.
- On May 7, 2021, the board approved repayment of $100 million of 2016 senior notes, redeemable beginning June 15, 2021. WSFS expected a $1.1 million second-quarter charge to recognize remaining unamortized debt issuance costs.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said available funding sources and liquid investments were expected to meet funding needs and prudent liquidity levels over the next 12 months. Key risks include COVID-19-related economic and credit uncertainty; commercial real estate, construction, and commercial lending exposure; interest-rate and securities-value movements; and PPP-related credit, fraud, and litigation risks.
The Bryn Mawr transaction carries execution, regulatory approval, integration, customer-retention, expense, and litigation risks; shareholder lawsuits filed in Q2 could add cost, distract management, or delay or enjoin the merger. WSFS also identified transition risks for LIBOR-linked contracts: at March 31, it had approximately $2.2 billion of loans, $1.0 billion of derivatives used for customer guarantees, and $167.0 million of debt securities indexed to LIBOR that mature after 2021. The company reported ongoing legal matters, including a dispute brought by Nature’s Healing Trust; the filing does not quantify a clear potential loss for these matters.
Important facts for investors to verify
- Whether credit quality continues to improve and whether the large Q1 credit-loss recovery proves sustainable; review allowance assumptions, criticized loans, and charge-offs.
- How earnings respond to lower net interest margin, deposit growth, interest-rate changes, and the runoff or forgiveness of PPP loans.
- Progress, approvals, costs, litigation, and expected benefits of the Bryn Mawr merger, including the implications of suspended repurchases.
- The effect of the $100 million senior-note repayment and related second-quarter debt-cost charge on funding costs and capital.
- Whether the substantial unrealized securities losses—$63.7 million at quarter-end—remain attributable to market rates and whether liquidity needs could affect the ability to hold those securities.
- Execution of the LIBOR transition and any material developments in pending legal proceedings.