WSFS Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. WSFS is a regional banking, wealth management and cash logistics company. Results include Bryn Mawr Bank Corporation (BMBC) from its January 1, 2022 acquisition, making comparisons with Q1 2021 materially affected by the enlarged company and acquisition-related costs.
Financial performance and position
- Income: Net interest income was $138.6 million, up 21% from $114.2 million. Noninterest income was $60.6 million, up from $47.8 million. Net income attributable to WSFS was $3.8 million, or $0.06 per diluted share, versus $65.1 million, or $1.36 per diluted share, a year earlier.
- Drivers and expenses: The $78.8 million increase in noninterest expense to $174.5 million included $34.0 million of corporate development expense and $17.5 million of restructuring expense, primarily related to BMBC. Credit-loss provision was $19.0 million, compared with a $20.2 million recovery in Q1 2021. Net interest income benefited from higher average loan and securities balances; reported net income was weighed down by merger costs and the initial credit-loss provision.
- Margins: Net interest margin was 3.01%, down 58 basis points from 3.59%. Management attributed the decline to lower purchase-accounting accretion, balance-sheet size and mix, and PPP loans.
- Cash flow: Operating activities provided $58.2 million, versus $69.7 million in Q1 2021. Investing activities provided $488.0 million, including $573.7 million of net cash from the BMBC combination; financing activities provided $204.6 million. Cash, cash equivalents and restricted cash rose to $2.28 billion from $1.53 billion at year-end.
- Balance sheet: Total assets were $21.0 billion, up from $15.8 billion at December 31, 2021. Net loans and leases were $11.20 billion, versus $7.79 billion; deposits were $17.62 billion, versus $13.24 billion. The increases principally reflect BMBC.
- Credit quality: The allowance for credit losses was $136.3 million, or 1.19% of loans and leases. Nonperforming assets were $37.8 million, 0.18% of total assets, compared with $33.1 million and 0.21% at year-end. Net charge-offs were $3.3 million for the quarter.
- Capital and liquidity: WSFS reported consolidated total capital of 14.94%, Tier 1 capital of 12.76%, CET1 of 12.76%, and Tier 1 leverage of 9.16%; the Bank and company met the stated well-capitalized thresholds. WSFS reported $5.1 billion of unused FHLB borrowing capacity, $253.4 million available at the Federal Reserve Discount Window and $1.1 billion in overnight fed funds lines. Management said available sources should meet funding needs over the next 12 months and beyond.
- Debt and equity: Borrowed funds were $372.4 million, including $248.5 million of senior and subordinated debt; there were no FHLB advances. WSFS equity was $2.52 billion. Book value per share was $38.94 and tangible book value per share was $22.99, down from $40.73 and $29.24, respectively, at year-end.
Material changes and unusual items
- BMBC was acquired for approximately $908.0 million in WSFS shares and cash. The transaction added approximately $3.5 billion of loans and leases, $4.1 billion of deposits and $23.6 billion of AUM/AUA; $414.3 million of goodwill was recorded. Purchase accounting valuations remained subject to adjustment through January 1, 2023.
- Available-for-sale securities had $411.3 million of gross unrealized losses at quarter-end, attributed by the company to higher market interest rates rather than credit losses. The after-tax securities-related loss contributed to a $276.0 million quarterly other comprehensive loss and increased accumulated other comprehensive loss to $313.8 million.
- WSFS repurchased 938,985 shares for $47.6 million at an average price of $50.66 and declared a $0.13-per-share quarterly dividend.
- After quarter-end, WSFS merged certain trust and equipment-finance subsidiaries and sold KCMI, which had $55.5 million of net loans at March 31. The filing says these actions did not materially affect the reported statements.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. WSFS planned approximately $15 million of 2022 investment in its Delivery Transformation initiative. Management described liquidity as adequate and stated that the allowance for credit losses was adequate, while noting that economic changes and forecast assumptions could materially affect credit estimates and results.
Key exposures identified include interest-rate changes that may affect funding costs, asset yields, securities values and mortgage activity; credit risk in commercial real estate, construction, commercial and industrial lending; inflation and economic weakness; and acquisition integration, customer retention and realization of expected benefits. The company also cited cybersecurity, third-party operational, regulatory, legal and liquidity risks. Estimated uninsured deposits were $10.2 billion at quarter-end. Management reported no material change in the previously disclosed risk factors and no material changes to significant pending legal proceedings.
Important facts for investors to verify
- How much of future earnings improvement depends on BMBC integration, cost savings and purchase-accounting accretion, and how much of Q1 expense is nonrecurring.
- Whether the $411.3 million of unrealized securities losses, the resulting AOCI decline and interest-rate exposure affect capital, liquidity or earnings if securities are sold or rates change further.
- Credit performance of acquired and legacy loan portfolios, including commercial real estate and C&I exposures, and whether the allowance remains adequate as forecasts evolve.
- Deposit stability and funding costs, particularly given $10.2 billion of estimated uninsured deposits and changing interest rates.
- Final BMBC purchase-accounting valuations, integration progress, and the impact of the post-quarter KCMI sale and subsidiary mergers.