WSFS Financial (WSFS) - 2022 Q3 - Quarterly Report

Part I - Financial Information Financial Statements (Unaudited) The unaudited consolidated financial statements reflect the company's performance for the three and nine months ended September 30, 2022, and its financial position as of that date, significantly impacted by the Bryn Mawr Bank Corporation acquisition Consolidated Statements of Income Net income attributable to WSFS increased to $73.4 million in Q3 2022 but decreased to $137.9 million year-to-date, primarily due to the BMBC merger's impact on net interest income and a large provision for credit losses Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $176,831 | $104,491 | $469,004 | $325,425 | | Provision for (recovery of) credit losses | $7,454 | $(21,310) | $34,693 | $(109,033) | | Noninterest Income | $62,651 | $42,613 | $195,254 | $139,453 | | Noninterest Expense | $132,917 | $96,446 | $441,423 | $288,097 | | Net Income Attributable to WSFS | $73,382 | $54,406 | $137,926 | $215,155 | | Diluted EPS | $1.16 | $1.14 | $2.15 | $4.51 | Consolidated Statements of Financial Condition Total assets grew to $20.0 billion as of September 30, 2022, driven by the BMBC acquisition, which significantly increased loans, deposits, and goodwill, despite unrealized losses on investment securities Key Balance Sheet Data (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $19,985,387 | $15,777,327 | | Loans and leases, net | $11,559,195 | $7,791,482 | | Goodwill | $883,637 | $472,828 | | Total Deposits | $16,725,208 | $13,240,062 | | Total Liabilities | $17,884,556 | $13,840,311 | | Total Stockholders' Equity | $2,100,831 | $1,937,016 | Notes to the Consolidated Financial Statements Detailed disclosures cover the BMBC acquisition's impact on assets, goodwill, and allowance for credit losses, alongside insights into the loan portfolio, credit quality, segment performance, and investment portfolio adjustments Business Combinations The acquisition of Bryn Mawr Bank Corporation for $908.0 million on January 1, 2022, resulted in $410.8 million goodwill and significantly expanded WSFS's regional presence, adding substantial loans and deposits BMBC Acquisition Summary (in thousands) | Item | Value | | :--- | :--- | | Total Consideration Transferred | $908,032 | | Fair Value of Net Assets Acquired | $497,223 | | Goodwill Resulting from Acquisition | $410,809 | | Assets Acquired: | | | Loans and leases | $3,456,748 | | Investment securities | $500,400 | | Liabilities Assumed: | | | Deposits | $4,110,122 | - The BMBC merger resulted in the addition of $49.6 million to the allowance for credit losses, comprising $26.1 million for purchased credit deteriorated (PCD) loans and $23.5 million for non-PCD loans[53] - For the nine months ended September 30, 2022, the company incurred $64.5 million in corporate development and restructuring expenses, primarily related to the BMBC merger, including costs for severance, facility consolidation, and professional fees[61] Investment Securities The company held $4.2 billion in AFS and $1.1 billion in HTM securities as of September 30, 2022, transferring $1.1 billion to HTM in Q2 2022 to mitigate capital impact from rising rates, resulting in $786.5 million gross unrealized AFS losses - During Q2 2022, the company transferred $1.1 billion (book value) of investment securities from available-for-sale to held-to-maturity to limit the impact of the rising interest rate environment on Accumulated Other Comprehensive Income[83] Investment Securities Portfolio (in thousands) | Security Type | Fair Value (Sep 30, 2022) | Fair Value (Dec 31, 2021) | | :--- | :--- | :--- | | Available-for-Sale | $4,153,615 | $5,205,311 | | Held-to-Maturity | $1,041,163 | $94,131 | - At September 30, 2022, the AFS portfolio had gross unrealized losses of $786.5 million. The company determined these losses were due to interest rate changes, not credit issues, and recorded no allowance for credit losses as it does not intend to sell before recovery[77][90] Allowance for Credit Losses and Credit Quality The Allowance for Credit Losses increased to $146.2 million, primarily due to the BMBC acquisition, with nonaccrual loans at 0.17% of total loans and total Troubled Debt Restructurings at $18.2 million Allowance for Credit Losses Activity - YTD 2022 (in thousands) | Description | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2022) | $94,507 | | Initial allowance on acquired PCD loans | $26,103 | | Provision for credit losses | $34,687 | | Net Charge-offs | $(9,102) | | Ending Balance (Sep 30, 2022) | $146,195 | - The increase in the ACL was primarily due to an initial allowance of $49.6 million recorded for the BMBC Merger, which included $23.5 million for non-PCD loans (recorded as provision) and $26.1 million for PCD loans (gross-up of balance sheet)[98] Credit Quality Metrics | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Nonaccrual Loans | $19,369 | $16,609 | | % of Total Loans | 0.17% | 0.21% | | Total TDRs | $18,187 | $14,960 | Goodwill and Intangible Assets Goodwill increased to $883.6 million due to the BMBC acquisition, which also added $73.1 million in intangible assets, with no impairment recorded during the period - Goodwill increased by $410.8 million from the BMBC acquisition, bringing the total to $883.6 million as of September 30, 2022[44][123] - The BMBC merger added $73.1 million in intangible assets, including $10.9 million in core deposit intangibles, $53.0 million in customer relationships, and $2.9 million for the Bryn Mawr Trust tradename[123] - No goodwill impairment was recorded during the nine months ended September 30, 2022, based on qualitative assessments[122] Segment Information The company operates through WSFS Bank, Cash Connect®, and Wealth Management segments, with Wealth Management showing significant growth in revenue and assets post-BMBC acquisition Income Before Taxes by Segment (YTD 2022 vs YTD 2021, in thousands) | Segment | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | | WSFS Bank | $125,466 | $247,910 | | Cash Connect® | $6,153 | $7,771 | | Wealth Management | $56,523 | $30,133 | | Total | $188,142 | $285,814 | Total Segment Assets (in thousands) | Segment | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | WSFS Bank | $18,908,911 | $14,973,045 | | Cash Connect® | $565,974 | $484,591 | | Wealth Management | $510,502 | $319,691 | | Total | $19,985,387 | $15,777,327 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights the successful BMBC merger, increasing total assets to $20.0 billion, strong Q3 net interest income growth, and a well-capitalized position, despite year-to-date net income decline due to credit loss provisions and merger expenses Financial Condition Total assets grew by $4.2 billion to $20.0 billion, primarily driven by the BMBC merger's contribution of $3.8 billion in net loans and leases and $3.5 billion in deposits, diversifying the loan portfolio - The increase in total assets was primarily driven by the BMBC Merger, which contributed $3.5 billion in acquired loans and leases[221] - Total deposits increased by $3.5 billion, mainly from the $4.1 billion in deposits assumed in the BMBC Merger, partially offset by a reduction in customer balances[221] - The company's estimated uninsured deposits were $10.3 billion as of September 30, 2022, up from $7.5 billion at December 31, 2021[224] Liquidity and Capital Resources The company maintains strong capital ratios exceeding 'well-capitalized' minimums and ample liquidity, including $4.9 billion in FHLB borrowing capacity, despite a decrease in tangible book value per share due to merger-related goodwill - As of September 30, 2022, the company and the bank were in compliance with all regulatory capital requirements and met or exceeded the amounts to be considered 'well-capitalized'[228][229] - Tangible book value per share decreased to $17.55 at September 30, 2022, from $29.24 at December 31, 2021, primarily due to the increase in goodwill and intangible assets from the BMBC Merger[227][271] - The company has significant available liquidity, including $4.9 billion in unused borrowing capacity from the FHLB and $1.3 billion in overnight fed funds lines[233] Results of Operations Q3 2022 net income increased to $73.4 million due to higher net interest income and margin expansion, while year-to-date net income decreased to $137.9 million, impacted by increased provision for credit losses and merger expenses - Q3 2022 net interest margin was 3.99%, a 94 basis point increase from Q3 2021, driven by the rising interest rate environment and balance sheet mix from the BMBC merger[253] - The provision for credit losses was an expense of $7.5 million in Q3 2022, compared to a recovery of $21.3 million in Q3 2021, primarily due to the release of reserves in 2021 as the economic outlook improved post-pandemic[258] - Noninterest income for Q3 2022 increased by $20.0 million year-over-year, mainly from a $14.2 million increase in Wealth Management revenue attributable to the Bryn Mawr Trust combination[264] - Noninterest expense for Q3 2022 increased by $36.5 million year-over-year, primarily due to higher costs after the BMBC Merger, including a $19.0 million increase in salaries and benefits[265] Critical Accounting Estimates The Allowance for Credit Losses and Business Combinations are critical accounting estimates, requiring significant judgment in assessing expected losses and fair valuing acquired assets and liabilities, directly impacting goodwill - The determination of the Allowance for Credit Losses (ACL) is a critical estimate requiring significant judgment about expected losses based on historical experience, current conditions, and economic forecasts[273] - Accounting for business combinations requires significant estimates to determine the fair value of net assets acquired, which directly impacts the amount of goodwill recorded[277] Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal control over financial reporting during the third quarter - Management concluded that as of the end of the period, disclosure controls and procedures are effective[290] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[290] Part II - Other Information Legal Proceedings No material changes or additions to significant pending legal or other proceedings were reported, beyond those arising from routine business operations - No material changes or additions to significant pending legal proceedings were reported, other than those arising in the ordinary course of business[212][289] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, were reported - No material changes to the risk factors disclosed in the 2021 Form 10-K were reported[290] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, the company repurchased 1,664,550 shares of common stock at an average price of $48.66 per share, with 6,950,751 shares remaining available under the repurchase program Share Repurchases in Q3 2022 | Month | Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2022 | 84,900 | $40.81 | | August 2022 | 749,465 | $49.72 | | September 2022 | 830,185 | $48.51 | | Total | 1,664,550 | $48.66 | - In Q2 2022, the Board of Directors authorized an additional 6,358,727 shares for repurchase, representing 10% of outstanding shares as of June 30, 2022[291]