WSFS Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results. WSFS is a regional bank holding company with banking, equipment leasing, Cash Connect cash-logistics, and wealth-management businesses. It reported $15.4 billion in assets and $27.6 billion in wealth assets under management and administration at quarter-end.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $104.5 million | $113.0 million | $325.4 million | $343.0 million |
| Net interest margin | 3.05% | 3.66% | 3.28% | 3.97% |
| Noninterest income | $42.6 million | $49.2 million | $139.5 million | $154.4 million |
| Noninterest expense | $96.4 million | $93.5 million | $288.1 million | $275.5 million |
| Credit-loss provision (recovery) | $(21.3) million | $2.7 million | $(109.0) million | $154.1 million |
| Net income attributable to WSFS | $54.4 million | $51.1 million | $215.2 million | $55.0 million |
| Diluted EPS | $1.14 | $1.01 | $4.51 | $1.08 |
Balance sheet and liquidity at September 30, 2021: Total assets were $15.4 billion, up $1.0 billion from December 31, 2020. Deposits were $12.8 billion, up $910.9 million; cash, cash equivalents and restricted cash were $2.0 billion, up $362.2 million. Net loans and leases were $7.9 billion, down $881.6 million excluding loans held for sale. The ratio of net loans and leases, including loans held for sale, to customer deposits was 63%.
Credit and capital: The allowance for credit losses was $104.9 million, or 1.29% of loans and leases, compared with $228.8 million, or 2.51%, at year-end 2020. Nonperforming assets were $51.8 million (0.34% of assets), versus $60.5 million (0.42%) at year-end. WSFS’s consolidated total capital, Tier 1 capital, common equity Tier 1 and leverage ratios were 15.22%, 14.32%, 13.69% and 10.09%, respectively; the company said it met or exceeded “well-capitalized” requirements.
Debt and equity: Borrowed funds totaled $235.9 million at quarter-end, including $147.9 million of senior debt and $67.0 million of trust preferred borrowings; there were no FHLB advances outstanding. WSFS redeemed $100 million of senior notes in June and recorded a $1.1 million extinguishment loss. WSFS stockholders’ equity was $1.9 billion; book value per share was $40.15 and tangible book value per share was $28.59. The quarterly dividend was $0.13 per share. Share repurchases were suspended while the Bryn Mawr merger is pending.
Cash flow for the first nine months: Operating activities provided $289.5 million; investing activities used $701.5 million, primarily reflecting net purchases of available-for-sale securities; financing activities provided $774.1 million, largely from deposit growth. Cash and restricted cash increased $362.2 million.
Material changes and management commentary
- Q3 net income rose 6% year over year, while nine-month net income attributable to WSFS increased to $215.2 million from $55.0 million. The substantial year-to-date increase primarily reflects the shift from a large 2020 credit-loss provision to a 2021 recovery; it should not be read as a comparable increase in recurring operating earnings.
- Net interest income and margin declined in both comparison periods. Management attributed the decline to lower rates, loan-balance and balance-sheet mix changes, and reduced purchase-accounting accretion; PPP income partly offset the decline.
- Noninterest income declined year over year. For the first nine months, the comparison was affected by the $22.1 million Visa Class B share gain recorded in 2020, lower interchange income following the Durbin Amendment, lower securities gains, and softer mortgage banking activity. Higher wealth-management revenue and a $4.4 million net gain on the SoFi investment partly offset those items.
- Management cited improving economic forecasts and credit metrics as the basis for releasing credit reserves. Net charge-offs were $14.9 million for the nine months; the quarter included partial charge-offs on two downgraded relationships.
- WSFS agreed to acquire Bryn Mawr Bank Corporation. Both companies’ shareholders approved the merger, and WSFS had received OCC approval, but Federal Reserve approval and other closing conditions remained. Merger-related corporate development expense was $6.7 million for the nine months.
- Management said available funding sources and liquid investments were expected to meet funding needs and prudent liquidity levels for the next 12 months. The filing provides no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- Merger completion, timing, regulatory approval, integration, transaction costs, possible customer or employee attrition, and pending shareholder litigation could adversely affect WSFS. The filing notes the merger agreement could be terminated if the transaction is not completed by March 9, 2022, subject to its terms.
- COVID-19 and its variants, economic conditions, loan concentration in commercial real estate and commercial lending, credit quality, interest-rate movements, deposit behavior, securities valuations, and regulatory or operational risks remain relevant exposures.
- Available-for-sale securities had $61.5 million of gross unrealized losses at quarter-end, which management attributed to market-rate changes rather than credit losses; accumulated other comprehensive income shifted from $56.0 million at year-end to a $15.5 million loss.
- WSFS settled the Nature’s Healing Trust matter with no damages payable by WSFS. In the Universitas matter, a court granted WSFS summary judgment on liability in its indemnification claim; the damages trial had not been scheduled.
- Management cautioned that actual results could differ from estimates, including credit-loss estimates, if economic conditions were worse than anticipated.
Important facts for investors to verify
- Whether the Bryn Mawr merger received remaining approvals, closed on expected terms, and produced the anticipated benefits without excessive costs or disruption.
- How much of reported earnings depends on credit-reserve releases and investment gains, and whether underlying net interest income and margin stabilize.
- Whether the reduced allowance remains adequate as PPP forgiveness, loan growth, commercial credit exposures, and problem-loan trends evolve.
- Whether deposit growth and excess liquidity persist, and how securities valuation changes affect capital and accumulated other comprehensive income.
- How the redeemed senior debt, suspended repurchases, dividends, and capital levels affect capital deployment and shareholder returns.