WSFS Financial Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing was made March 1, 2022. WSFS is a Delaware Valley-focused financial services company operating banking, Cash Connect cash-logistics, and wealth-management businesses. Its year-end balance sheet and results do not include Bryn Mawr Bank Corporation (BMBC), acquired on January 1, 2022.
Financial performance and position
- Profit: Net income attributable to WSFS was $271.4 million, or $5.69 per diluted share, versus $114.8 million, or $2.27, in 2020. Return on assets was 1.82%; management’s non-GAAP core ROA was 1.80%.
- Net interest: Net interest income was $433.6 million, down $32.3 million (7%). Net interest margin fell 73 basis points to 3.23%, reflecting lower rates, balance-sheet mix and reduced purchase-accounting accretion.
- Noninterest income and expenses: Noninterest income declined $15.5 million to $185.5 million, while noninterest expense increased $9.7 million to $378.5 million. Income tax expense was $86.1 million; the effective tax rate was 24.1% versus 21.8%.
- Credit costs and asset quality: WSFS recorded a $117.1 million recovery of credit losses, compared with a $153.2 million provision in 2020. The allowance for credit losses declined to $94.5 million, or 1.19% of gross loans, from $228.8 million, or 2.51%. Nonperforming assets fell to $33.1 million (0.21% of assets) from $60.5 million (0.42%). Net charge-offs were $17.2 million.
- Balance sheet and liquidity: Assets rose 10% to $15.8 billion. Deposits increased 12% to $13.2 billion; net loans and leases were $7.8 billion, down 11%. Available-for-sale securities grew to $5.2 billion from $2.5 billion. Cash, cash equivalents and restricted cash were $1.53 billion. The net-loans-to-customer-deposits ratio was 60%; estimated uninsured deposits were $7.5 billion.
- Cash flow: Operating activities provided $125.6 million; investing activities used $1.49 billion, largely reflecting securities purchases; financing activities provided $1.24 billion, primarily from deposit growth. Cash declined $121.8 million over the year.
- Capital and debt: The Bank’s year-end CET1 and Tier 1 risk-based capital ratios were each 15.11%; total risk-based capital was 15.91%, and Tier 1 leverage was 10.44%. All exceeded well-capitalized benchmarks. WSFS had $147.9 million of senior debt and $67.0 million of trust-preferred borrowings; it redeemed $100 million of 2026 senior notes during 2021 and had no FHLB advances at year-end. Parent-company cash was $103.7 million.
Material changes and unusual items
- The $270.3 million year-over-year swing in credit-loss expense was a principal driver of the increase in earnings, reflecting improved economic forecasts and credit metrics; it is not equivalent to recurring operating growth.
- Noninterest income included a $15.0 million recovery from the Charter Oak indemnity litigation, a $4.4 million net gain on liquidation of the SoFi investment, and $5.1 million of unrealized equity investment gains. Mortgage banking activity and securities gains were lower than in 2020; 2020 included a $22.1 million Visa Class B share gain.
- Available-for-sale securities had $79.2 million of gross unrealized losses at year-end, attributed by management to higher market interest rates rather than credit losses. The portfolio’s market-value decline contributed to a $93.8 million unfavorable change in securities-related accumulated other comprehensive income during 2021.
- WSFS repurchased 267,309 shares in 2021, compared with 3,950,855 in 2020. Repurchases were suspended after the BMBC merger announcement and resumed in the first quarter of 2022.
Outlook, risks and contingencies
- Acquisition: The January 1, 2022 BMBC acquisition had $908 million of purchase consideration and added, at carrying value, $5.0 billion of assets, including $3.5 billion of loans, $4.1 billion of deposits, and $23.6 billion of AUM/AUA. Acquisition accounting was incomplete at filing. Bank technology, branding and branch conversion were planned for later in Q1 2022; trust and wealth integration was expected in late 2022 or early 2023. WSFS recorded $13.0 million of 2021 corporate-development and restructuring expense, primarily related to the transaction. No quantified earnings guidance or synergy target is provided in the filing text presented.
- Management plans: WSFS described continued growth in relationship-based commercial lending, small-business leasing, deposits, wealth management and Cash Connect. It planned approximately $15 million of 2022 investment in its Delivery Transformation initiative. Management said it expected liquidity sources to be adequate for funding needs over the next 12 months and beyond.
- Interest rates and funding: The filing warns that rate changes can affect net interest income, funding costs, securities values and borrower repayment. WSFS had a positive one-year interest-sensitive gap of $1.1 billion; its model estimated an 8.2% increase in net interest income under an immediate +100-basis-point scenario and a 3.8% decrease under -100 basis points. These are model estimates, not forecasts. A significant proportion of deposits were uninsured, making deposit stability and competition relevant liquidity risks.
- Credit and economic risks: Key exposures include commercial real estate, construction/land development and commercial and industrial lending, plus geographic concentration in Delaware and Greater Philadelphia. COVID-19 developments, inflation, supply-chain disruption, unemployment and weaker economic conditions could affect borrowers, collateral, credit reserves and fee income. PPP lending carries potential SBA-guarantee, compliance, fraud and litigation risks.
- Other risks and commitments: The LIBOR transition affected approximately $1.5 billion of loans, $0.9 billion of derivatives used for customer guarantees, and $67.0 million of debt securities indexed to LIBOR that matured after 2021. WSFS had $2.49 billion of commitments to extend credit and $92.0 million of commercial standby letters of credit. It also cited cybersecurity, third-party service, Cash Connect cash-control, regulatory, litigation, acquisition-integration and model risks.
- Legal matters: The Charter Oak indemnity litigation was settled in Q4 2021 for a $15.0 million recovery, completing recovery of the original settlement payment and related litigation costs, plus prejudgment interest. The Nature’s Healing Trust matter was settled in August 2021 with no damages paid by WSFS. The filing states there were no material changes to other significant pending proceedings.
Important facts for investors to verify
- How much of 2021 earnings improvement came from the credit-loss recovery, legal settlement recovery, and investment gains versus recurring operations.
- Post-acquisition BMBC purchase accounting, integration costs, realized cost savings, deposit retention, loan performance and AUM/AUA trends.
- Whether loan quality and the allowance remain appropriate as PPP balances run off and economic conditions or commercial real estate exposures change.
- The sensitivity of net interest income, securities values and deposit costs to actual rate movements, compared with management’s modeled scenarios.
- Uninsured deposit concentration, available liquidity and the use or availability of funding sources as the combined company grows.
- Progress in replacing LIBOR-linked contracts and any resulting basis, operational or counterparty risks.
Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements and an unqualified opinion on internal control over financial reporting. The allowance for credit losses on loans and leases was identified as a critical audit matter.