WSFS Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 5, 2023. WSFS is a regional banking and financial services company with banking, Cash Connect and wealth management businesses. It reported $20.3 billion of assets and $65.6 billion of assets under management and administration.
Financial results and key metrics
- Earnings: Net income attributable to WSFS was $62.4 million, or $1.01 per diluted share, versus $3.8 million, or $0.06 per share, a year earlier. The comparison reflects unusually high 2022 corporate development and restructuring costs associated with the Bryn Mawr Bank combination.
- Net interest income and margin: Net interest income rose 32% to $182.5 million. Net interest margin increased to 4.25% from 3.01%, which management attributed to higher rates, asset sensitivity, loan growth and mix.
- Noninterest income and expenses: Noninterest income was $63.1 million, up $2.6 million, led by an $8.1 million increase in Cash Connect income. Noninterest expense fell to $133.0 million from $174.5 million, primarily because 2022 included higher merger-related corporate development and restructuring costs.
- Credit costs and quality: Provision for credit losses was $29.0 million, up from $19.0 million, reflecting economic uncertainty, the forecast and loan growth. The allowance for credit losses rose to $169.2 million, or 1.28% of loans and leases, from $151.9 million, or 1.17%. Nonaccruing loans were 0.26% of gross loans; nonperforming assets were 0.16% of total assets. First-quarter net charge-offs were $11.7 million.
- Balance sheet: Total assets were $20.3 billion, up $404.5 million from year-end 2022. Net loans and leases were $12.0 billion, up $216.9 million; deposits were $16.2 billion, approximately flat. Noninterest-bearing deposits declined $440.6 million, while interest-bearing deposits increased $426.7 million.
- Cash flow: Operating activities provided $30.2 million, compared with $58.2 million in Q1 2022. Investing activities used $139.6 million and financing activities provided $375.2 million. Cash, cash equivalents and restricted cash totaled $1.10 billion at quarter-end.
- Debt and capital: Borrowed funds totaled $1.14 billion, including $800 million of FHLB advances. Those advances carried rates of 5.08%–5.17% and original maturities under one year. The company redeemed $30 million of subordinated notes. WSFS and the Bank reported total risk-based capital ratios of 14.71% and 14.56%, respectively, above well-capitalized thresholds.
- Shareholder returns: The quarterly dividend was $0.15 per share. WSFS repurchased 262,000 shares for $12.9 million at an average $49.11 per share.
Material changes and unusual items
- First-quarter 2022 results included $34.0 million of corporate development expense and $17.5 million of restructuring expense; Q1 2023 reported $0.7 million and a $0.8 million recovery, respectively. These items substantially affect year-over-year earnings comparisons.
- Gross unrealized losses on available-for-sale securities were $671.7 million at March 31, 2023, down from $741.5 million at year-end. The securities were principally agency mortgage-backed securities; management said losses reflected interest rates rather than credit deterioration and stated it did not intend, and was not more likely than not required, to sell before recovery. Accumulated other comprehensive loss was $618.4 million.
- WSFS completed the combination and brand conversion of West Capital and Cypress Capital Management into Bryn Mawr Capital Management on January 1, 2023.
- Nonperforming assets declined to $33.1 million from $43.4 million, but the filing notes that adoption of a new troubled-loan accounting standard affected the comparison. Two commercial-and-industrial relationships were among the quarter’s additions to problem assets.
Liquidity, outlook and risks
- Management said available funding sources were sufficient for expected needs over the next 12 months and beyond. At quarter-end, estimated uninsured deposits were $5.8 billion, or 36% of customer deposits; estimated uninsured and uncollateralized deposits were $4.3 billion, or 27%. Available secured borrowing capacity was reported as $4.2 billion from the FHLB, $1.3 billion from the Federal Reserve Discount Window and $0.2 billion through the Bank Term Funding Program, in addition to $1.6 billion of unpledged securities.
- No specific earnings or financial guidance was provided. Management described interest-rate exposure as material: a modeled 100-basis-point rate increase implied a 5.8% increase in net interest margin, while a 100-basis-point decrease implied a 5.9% decline. These are model estimates, not forecasts.
- Key risks include deposit competition and liquidity conditions, rising funding costs, commercial real estate and other credit exposures, economic uncertainty, interest-rate and securities valuation changes, regulatory responses to recent bank failures, and potential FDIC assessment costs. The filing also identifies U.S. debt-limit uncertainty as a risk.
- At March 31, approximately $2.5 billion of loans, $2.0 billion of derivatives used for customer guarantees, and $162.8 million of debt securities were indexed to LIBOR and extended beyond its planned June 2023 cessation. WSFS said it was migrating contracts, primarily to Term SOFR.
- Moody’s reaffirmed the Company’s and Bank’s ratings with a stable outlook, changing from positive after its broader review of the U.S. banking system. Management said the impact of possible regulatory changes following bank failures remained uncertain.
Most important facts for investors to verify
- Whether deposit balances and funding costs stabilize, particularly the decline in noninterest-bearing deposits and use of wholesale funding.
- Whether net interest margin and earnings hold up as rates, deposit pricing and asset yields change; compare reported results with the filing’s rate-sensitivity assumptions.
- Whether credit costs, criticized loans, nonaccruals and commercial real estate performance worsen, and whether the allowance remains adequate.
- How and when the securities portfolio’s unrealized losses recover, and whether liquidity needs could require sales before recovery.
- Whether the stated borrowing capacity and liquidity sources remain available, and how potential regulatory measures or FDIC assessments affect costs and capital.
- Progress and remaining exposure in the LIBOR transition, alongside the effect of the 2022 merger-related items on comparable earnings.