WSFS Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement figures are consolidated and unaudited.
Business context and reporting period
WSFS is a regional bank and financial services company headquartered in Wilmington, Delaware, with banking, Cash Connect and wealth management businesses. On January 1, 2022, it completed its acquisition of Bryn Mawr Bank Corporation (BMBC), materially increasing the scale of the balance sheet and affecting year-over-year comparability. At quarter-end, WSFS reported $20.0 billion of assets and $61.4 billion of wealth management assets under management and administration.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total interest and noninterest income | $249.2 million | $152.1 million | $686.0 million | $483.1 million |
| Net interest income | $176.8 million | $104.5 million | $469.0 million | $325.4 million |
| Net interest margin | 3.99% | 3.05% | 3.46% | 3.28% |
| Provision for (recovery of) credit losses | $7.5 million | $(21.3) million | $34.7 million | $(109.0) million |
| Net income attributable to WSFS | $73.4 million | $54.4 million | $137.9 million | $215.2 million |
| Diluted earnings per share | $1.16 | $1.14 | $2.15 | $4.51 |
At September 30, 2022, total assets were $20.0 billion, gross loans and leases were $11.7 billion, net loans and leases were $11.6 billion, deposits were $16.7 billion, and stockholders’ equity was $2.1 billion. The allowance for credit losses was $146.2 million, or 1.14% of loans and leases. Nonaccrual loans were $19.4 million; nonperforming assets were $37.3 million, or 0.19% of total assets.
For the first nine months, operating cash flow was $406.9 million, investing cash flow was negative $63.6 million, and financing cash flow was negative $844.9 million. Cash, cash equivalents and restricted cash declined $501.5 million to $1.03 billion. WSFS reported total capital ratios of 13.94% for the company and 13.34% for the bank; both met or exceeded regulatory “well-capitalized” thresholds. Book value per share was $33.96 and tangible book value per share was $17.55.
Material changes versus comparable periods
- Q3 net income attributable to WSFS rose to $73.4 million from $54.4 million, while nine-month net income fell to $137.9 million from $215.2 million. Nine-month comparison reflects the prior-year $109.0 million credit-loss recovery, versus a $34.7 million provision in 2022, as well as higher 2022 merger-related costs.
- Q3 net interest income increased $72.3 million year over year. Management attributed the increase chiefly to BMBC-related balance-sheet growth and higher interest rates. Q3 net interest margin increased 94 basis points to 3.99%.
- Nine-month noninterest income increased $55.8 million to $195.3 million, driven substantially by wealth management revenue added through BMBC. Nine-month noninterest expense rose $153.3 million to $441.4 million, including $58.2 million of net corporate development and restructuring costs.
- BMBC added approximately $3.5 billion of loans and leases and $4.1 billion of deposits at acquisition. WSFS issued $908.0 million of common stock consideration and recorded $410.8 million of goodwill.
- Accumulated other comprehensive loss reached $715.5 million, principally reflecting declines in securities market values as interest rates rose. WSFS transferred $1.1 billion of available-for-sale securities to held-to-maturity; at September 30, available-for-sale securities had $786.5 million of gross unrealized losses and held-to-maturity securities had $80.7 million.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management said available liquidity sources were sufficient for anticipated needs over the next twelve months and beyond. At September 30, WSFS reported $1.03 billion of cash and restricted cash, $4.9 billion of unused FHLB borrowing capacity, $213.3 million of Federal Reserve Discount Window availability and $1.3 billion of overnight fed funds lines.
- Interest-rate risk is significant: management reported a positive one-year interest-sensitive gap of $1.8 billion. Its model estimated that an immediate 300-basis-point increase would raise net interest margin by 20.4%, while a 100-basis-point decrease would reduce it by 7.7%; these are modeled sensitivities, not forecasts.
- Key disclosed risks include higher deposit funding costs, economic and credit deterioration, concentrated commercial real estate and commercial lending exposure, market-value changes in securities, acquisition integration and customer retention, and operational, cybersecurity, regulatory and litigation risks.
- Approximately $10.3 billion of deposits were estimated to be uninsured. Total commitments to extend credit were $3.6 billion. WSFS also disclosed $2.9 billion of loans and $2.1 billion of derivatives indexed to LIBOR that mature after planned LIBOR cessation in June 2023; the company had begun transitioning new products to Term SOFR and migrating legacy contracts.
- WSFS repurchased 1.66 million shares for $81.0 million during Q3 and paid a $0.15-per-share quarterly dividend. It repurchased 3.79 million shares for $176.9 million during the first nine months. The company said its capital-return objective was at least 35% of annual net income through dividends and repurchases, while maintaining capital above regulatory well-capitalized levels.
- BMBC integration and restructuring costs, the sales of the KCMI loan portfolio and BMT Insurance Advisors, and the securities transfer were notable items. The filing reported no material change to previously disclosed risk factors and no material changes or additions to significant legal proceedings.
Important facts for investors to verify
- How much of reported earnings growth and net interest margin improvement is sustainable as rates, deposit costs and purchase-accounting accretion change.
- Whether BMBC integration delivers expected synergies, and how final purchase accounting adjustments affect goodwill and intangible assets.
- Credit quality trends and allowance adequacy, particularly in commercial real estate, commercial and industrial, and construction lending.
- The effects of securities unrealized losses and the AFS-to-HTM classification on tangible capital, liquidity and future flexibility.
- Deposit retention, the cost and composition of funding, and whether stated borrowing capacity remains available under stressed conditions.
- Execution of the LIBOR transition for affected loans, derivatives and debt, and the financial or operational effects of any contract conversion issues.