Business context and reporting period
WSFS Financial Corporation is a Delaware Valley-focused banking and financial services company, with commercial and retail banking, Cash Connect cash logistics, wealth management and equipment leasing businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $113.0 million | $120.8 million | $343.0 million | $327.4 million |
| Net interest margin | 3.66% | 4.38% | 3.97% | 4.47% |
| Provision for credit losses | $2.7 million | $4.1 million | $154.1 million | $24.0 million |
| Noninterest income | $49.2 million | $62.3 million | $154.4 million | $146.3 million |
| Noninterest expense | $93.5 million | $109.6 million | $275.5 million | $315.0 million |
| Net income attributable to WSFS | $51.1 million | $53.9 million | $55.0 million | $103.1 million |
| Diluted earnings per share | $1.01 | $1.02 | $1.08 | $2.12 |
- Q3 net interest income fell $7.8 million, primarily from lower rates and reduced purchase-accounting accretion; $6.4 million of net interest income from PPP loans partly offset the decline. Management attributed the 72-basis-point year-over-year NIM contraction to lower rates and balance-sheet mix, lower accretion, elevated short-term deposits and PPP loan effects.
- Nine-month net income attributable to WSFS declined by about 47%, principally reflecting the $154.1 million credit-loss provision associated with COVID-19 and CECL forecasts. Lower acquisition-related corporate development and restructuring expenses partly offset this impact.
- Q3 noninterest income declined by $13.2 million, mainly because prior-year equity-investment gains were higher and card/ATM income fell. Mortgage banking and trust services revenue increased. Nine-month noninterest income rose $8.1 million, supported by mortgage banking, securities gains and trust services.
- At September 30, total assets were $13.83 billion, versus $12.26 billion at December 31, 2019. Gross loans and leases were $9.34 billion, including $954.2 million of PPP loans; net loans and leases were $9.10 billion. Total deposits were $11.39 billion, up $1.80 billion from year-end.
- Cash, cash equivalents and restricted cash were $1.07 billion. Management reported an 83% loans-to-customer-deposits ratio and stated that available funding sources and liquid investments were expected to meet needs over the next 12 months.
- The allowance for credit losses was $232.7 million, or 2.47% of loans and leases, versus $47.6 million and 0.56% at year-end. The company adopted CECL on January 1, reducing opening retained earnings by $30.4 million. Nonaccrual loans were $25.8 million; nonperforming assets were $44.5 million, or 0.32% of assets.
- Borrowed funds totaled $204.3 million, down from $489.3 million at year-end. The filing lists $16.8 million of FHLB advances, $67.0 million of trust preferred borrowings, $98.8 million of senior debt and $21.8 million of other borrowed funds. WSFS’s total risk-based capital ratio was 14.47%, common equity Tier 1 was 12.57%, and Tier 1 leverage was 10.30%; the company reported exceeding well-capitalized thresholds.
- For the first nine months, operating cash flow was $48.9 million, investing cash flow was negative $1.01 billion, and financing cash flow was positive $1.46 billion. Cash increased $501.2 million, primarily reflecting deposit growth; investing outflows included lending activity and net securities purchases.
Material changes, outlook and risks
- Management attributed the large year-to-date provision to deteriorated COVID-19 economic forecasts and credit migration, particularly in accommodation and food service. Q3 forecasts were described as relatively consistent with the prior quarter, resulting in a modest provision.
- COVID-19 loan modifications outstanding were $282.8 million at September 30, down from $2.02 billion at June 30; the filing gives $232.0 million as of October 15. These modifications generally were not reported as troubled debt restructurings under applicable relief provisions. Management cautioned that borrowers’ conditions may worsen when forbearance ends.
- WSFS recorded a $22.1 million realized gain on Visa Class B share sales during the nine-month period and a $5.9 million gain on sales of available-for-sale securities. It also recorded a $2.3 million loss on early extinguishment of debt in Q3 after terminating fixed-rate FHLB advances. CARES Act tax provisions contributed a $1.7 million tax benefit.
- The company had provided nearly $1.0 billion of PPP loans to more than 5,400 customers and was processing forgiveness applications. Management cited possible further credit losses, economic deterioration, prolonged low rates, collateral-value declines, deposit or liquidity pressures, operational and cyber risks, and uncertainty around government relief programs.
- The Board approved resuming share repurchases in Q4 2020 after suspending them during the first three quarters. A quarterly dividend of $0.12 per share was declared for payment in November 2020. No specific earnings or financial forecast was provided in the supplied filing text.
- LIBOR-linked exposures maturing after 2021 included approximately $1.7 billion of loans, $1.0 billion of customer-guarantee derivatives and $167.0 million of debt securities; management said transition work was ongoing. The filing also describes the pending Nature’s Healing Trust litigation, in which WSFS disputes liability, and ongoing efforts to recover costs related to the Universitas settlement.
Important facts for investors to verify
- How CECL assumptions, COVID-19 developments and post-forbearance borrower performance may affect future provisions, charge-offs and asset quality.
- The composition and risk profile of PPP loans, including forgiveness progress, fee recognition and any exposure to unforgiven balances.
- Whether deposit growth and elevated cash balances persist, and how low rates affect NIM and earnings.
- Capital and liquidity after the planned resumption of share repurchases, dividend payments and any further credit deterioration.
- Developments in the Visa-related derivative valuation, LIBOR contract remediation and disclosed legal proceedings.